e10vq

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


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

For the quarterly period ended June 30, 2005


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

For the transition period from _____ to _____

Commission file number: 1-13461

Group 1 Automotive, Inc.

(Exact Name of Registrant as Specified in Its Charter)


Delaware (State or Other Jurisdiction of Incorporation or Organization)		76-0506313 (I.R.S. Employer Identification No.)

950 Echo Lane, Suite 100
Houston, Texas 77024
(Address of Principal Executive Offices) (Zip Code)

(713) 647-5700
(Registrant’s Telephone Number, Including Area Code)

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

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

As of July 29, 2005, the Company had 24,194,436 shares of common stock, par value $.01, outstanding.

Part I. Financial Information

Item 1. Financial Statements

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)


	June 30,			December 31,
	2005			2004
	(unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	28,449		$	37,750
Contracts-in-transit and vehicle receivables, net		179,651			172,402
Accounts and notes receivable, net		78,839			76,687
Inventories		860,233			877,575
Deferred income taxes		17,322			14,755
Prepaid expenses and other current assets		20,781			26,046

Total current assets		1,185,275			1,205,215

Property and equipment, net		173,914			160,297
Goodwill		373,819			366,673
Intangible franchise rights		171,858			187,135
Deferred costs related to insurance policy and vehicle service contract sales		6,915			7,996
Other assets		18,096			19,904

Total assets	$	1,929,877		$	1,947,220


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Floorplan notes payable	$	819,929		$	848,260
Acquisition line		50,000			—
Current maturities of long-term debt		1,046			1,054
Accounts payable		114,513			108,920
Accrued expenses		104,982			91,528

Total current liabilities		1,090,470			1,049,762

Long-term debt, net of current maturities		158,266			156,747
Acquisition line		—			84,000
Deferred income taxes		26,599			33,197
Other liabilities		27,466			24,288

Total liabilities before deferred revenues		1,302,801			1,347,994

Deferred revenues		28,392			32,052
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued or outstanding		—			—
Common stock, $.01 par value, 50,000 shares authorized; 24,168 and 23,916 issued, respectively		242			239
Additional paid-in capital		267,342			265,645
Retained earnings		335,382			318,931
Accumulated other comprehensive loss		(189	)		(173	)
Deferred stock-based compensation		(4,093	)		—
Treasury stock, at cost; zero and 607 shares, respectively		—			(17,468	)

Total stockholders’ equity		598,684			567,174

Total liabilities and stockholders’ equity	$	1,929,877		$	1,947,220

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
REVENUES:
New vehicle retail sales	$	980,375		$	813,918		$	1,814,320		$	1,489,895
Used vehicle retail sales		278,787			241,342			540,332			471,997
Used vehicle wholesale sales		106,786			87,106			202,980			163,297
Parts and service sales		163,057			131,283			322,517			255,303
Finance, insurance and other, net		48,328			41,252			93,911			81,436

Total revenues		1,577,333			1,314,901			2,974,060			2,461,928

COST OF SALES:
New vehicle retail sales		911,815			756,519			1,686,648			1,384,603
Used vehicle retail sales		244,053			212,154			472,222			414,239
Used vehicle wholesale sales		107,378			88,723			203,454			165,894
Parts and service sales		73,998			58,995			147,157			115,254

Total cost of sales		1,337,244			1,116,391			2,509,481			2,079,990


GROSS PROFIT		240,089			198,510			464,579			381,938

Selling, general and administrative expenses		192,347			159,941			374,637			306,628
Depreciation and amortization expense		4,302			3,607			9,925			7,155

INCOME FROM OPERATIONS		43,440			34,962			80,017			68,155

OTHER INCOME AND (EXPENSE):
Floorplan interest expense		(10,074	)		(5,965	)		(18,739	)		(10,846	)
Other interest expense, net		(4,706	)		(3,793	)		(9,830	)		(8,931	)
Loss on redemption of senior subordinated notes		—			—			—			(6,381	)
Other income (expense), net		11			(62	)		8			(63	)

INCOME BEFORE INCOME TAXES		28,671			25,142			51,456			41,934
Provision for income taxes		10,582			9,428			18,967			15,733

INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE		18,089			15,714			32,489			26,201
Cumulative effect of a change in accounting principle, net of tax benefit of $10,231		—			—			(16,038	)		—

NET INCOME	$	18,089		$	15,714		$	16,451		$	26,201


EARNINGS (LOSS) PER SHARE:
BASIC:
Income before cumulative effect of a change in accounting principle	$	0.76		$	0.70		$	1.38		$	1.16
Cumulative effect of a change in accounting principle		—			—			(0.68	)		—

Net income	$	0.76		$	0.70		$	0.70		$	1.16


DILUTED:
Income before cumulative effect of a change in accounting principle	$	0.75		$	0.67		$	1.36		$	1.12
Cumulative effect of a change in accounting principle		—			—			(0.67	)		—

Net income	$	0.75		$	0.67		$	0.69		$	1.12


WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic		23,737			22,582			23,596			22,553
Diluted		23,985			23,355			23,935			23,372

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,451		$	26,201
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of a change in accounting principle, net of tax		16,038			—
Depreciation and amortization		9,925			7,155
Amortization of debt discount and issue costs		920			1,011
Amortization of deferred compensation		733			—
Deferred income taxes		2,043			1,711
Tax benefit from options exercised		3,080			706
Provision for doubtful accounts and uncollectible notes		1,098			(17	)
Losses on sales of assets		256			79
Loss on repurchase of senior subordinated notes		—			6,381
Changes in operating assets and liabilities, net of effects of acquisitions:
Contracts-in-transit and vehicle receivables		(7,249	)		(4,978	)
Accounts and notes receivable		(2,800	)		(9,644	)
Inventories		31,942			(78,403	)
Prepaid expenses and other assets		7,478			1,536
Floorplan notes payable		(40,300	)		81,535
Accounts payable and accrued expenses		18,409			27,641
Deferred revenues		(3,704	)		(5,504	)

Net cash provided by operating activities		54,320			55,410

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(28,261	)		(27,942	)
Proceeds from sales of property and equipment		8,616			196
Purchases of restricted investments		(814	)		(660	)
Maturities of restricted investments		377			715
Decrease in restricted cash		550			517
Escrow deposits for acquisition of franchises		—			(6,500	)
Cash paid in acquisitions, net of cash received		(18,989	)		(94,540	)

Net cash used in investing activities		(38,521	)		(128,214	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on revolving credit facility		(35,768	)		168,852
Principal payments of long-term debt		(594	)		(449	)
Repurchase of senior subordinated notes		—			(79,479	)
Proceeds from issuance of common stock to benefit plans		11,572			4,063
Repurchase of common stock, amounts based on settlement date		(310	)		(7,019	)

Net cash provided by (used in) financing activities		(25,100	)		85,968

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(9,301	)		13,164
CASH AND CASH EQUIVALENTS, beginning of period		37,750			26,483

CASH AND CASH EQUIVALENTS, end of period	$	28,449		$	39,647

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest	$	28,065		$	30,604
Income taxes, net of refunds received	$	3,904		$	343

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BUSINESS AND ORGANIZATION:

Group 1 Automotive, Inc., a Delaware corporation, is a leading operator in the automotive retailing industry. Group 1 Automotive, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries, which are located in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas. These subsidiaries sell new and used cars and light trucks through their dealerships and Internet sites; 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.”

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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, 2004.

Intangible Franchise Rights

The Company’s only significant identifiable intangible assets, other than goodwill, are rights under franchise agreements with manufacturers, which are recorded at an individual dealership level. The Company expects these franchise agreements to continue for an indefinite period and, when these agreements do not have indefinite terms, the Company believes that renewal of these agreements can be obtained without substantial cost. As such, the Company believes that its franchise agreements will contribute to cash flows for an indefinite period and, therefore, the carrying amount of franchise rights are not amortized. Franchise rights acquired in acquisitions prior to July 1, 2001, were recorded and amortized as part of goodwill and remain as part of goodwill in the accompanying consolidated balance sheets at June 30, 2005 and December 31, 2004. Since July 1, 2001, intangible franchise rights acquired in business combinations have been recorded as distinctly separate intangible assets and, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), the Company evaluates these franchise rights for impairment annually, or more frequently if events or circumstances indicate possible impairment.

At the September 2004 meeting of the Emerging Issues Task Force, the SEC staff issued Staff Announcement No. D-108, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill” (“EITF D-108”) which states that for business combinations after September 29, 2004, the residual method should no longer be used to value intangible assets other than goodwill. Rather, a direct value method should be used to determine the fair value of all intangible assets other than goodwill required to be recognized under SFAS No. 141, “Business Combinations.” Additionally, registrants who have applied a residual method to the valuation of intangible assets for purposes of impairment testing under SFAS No. 142, shall perform an impairment test using a direct value method on all intangible assets that were previously valued using a residual method by no later than the beginning of their first fiscal year beginning after December 15, 2004.

In performing this transitional impairment test as of January 1, 2005, the Company tested the carrying value of each individual franchise right that had been recorded for impairment by using a discounted cash flow model. Included in this “direct” analysis were assumptions, at a dealership level, regarding which cash flow streams were directly attributable to each dealership’s franchise rights, revenue growth rates, future gross margins and future selling, general and administrative expenses. Using an estimated weighted average cost of capital, estimated residual values at the end of the forecast period and future capital expenditure requirements, the Company calculated the fair value of each dealership’s franchise rights after considering estimated values for tangible assets, working capital and workforce.

For some of the Company’s dealerships, this transitional impairment test resulted in an estimated fair value that was less than the carrying value of their intangible franchise rights. As a result, a non-cash charge of $16.0 million, net of deferred taxes of $10.2 million, was recorded in the first quarter of 2005 as a cumulative effect of a change in accounting principle in accordance

with the transitional rules of EITF D-108. Any future impairment charges will be recorded as a component of operating income in the Company’s consolidated statement of operations.

Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”). Accordingly, compensation expense for stock-based awards is measured as the excess, if any, of the quoted market price of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the common stock. Typically, the Company grants options at prices equal to the market price of its common stock on the date of grant and therefore does not record compensation expense related to these grants. Additionally, no compensation expense is recorded for shares issued pursuant to the employee stock purchase plan as it is a “noncompensatory” plan, as that term is defined in APB No. 25.

During 2005, the Company’s directors and certain employees were granted, at no cost to the recipient, restricted stock awards or, at their election, phantom stock awards, covering a total of 214,712 common shares, pursuant to the Company’s 1996 Stock Incentive Plan, as amended. The shares of restricted stock are considered outstanding at the date of grant, but are restricted from disposition for periods 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. The phantom stock awards will settle in shares of common stock upon the termination of the grantees’ employment or directorship and have vesting periods ranging from six months to five years. As both of these awards are fixed, compensation was measured at the date of grant and recorded as a deferred charge to stockholders’ equity. This deferred stock-based compensation will be amortized ratably to income over the vesting periods of the individual awards.

SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an Amendment of FASB Statement No. 123,” requires companies that continue to account for stock-based compensation in accordance with APB No. 25 to disclose certain information using a tabular presentation. The table presented below illustrates the effect on net income and earnings per share as if the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied to the Company’s stock-based employee compensation plans. Under the provisions of SFAS No. 123, compensation cost for stock-based compensation is determined based on fair values as of the dates of grant and compensation cost is amortized over the applicable vesting period.


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(in thousands, except per share amounts)
Net income, as reported	$	18,089		$	15,714		$	16,451		$	26,201
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		363			—			458			—
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(978	)		(832	)		(1,621	)		(1,856	)

Pro forma net income	$	17,474		$	14,882		$	15,288		$	24,345


Earnings per share:
Basic — as reported	$	0.76		$	0.70		$	0.70		$	1.16
Basic — pro forma	$	0.74		$	0.66		$	0.65		$	1.08

Diluted — as reported	$	0.75		$	0.67		$	0.69		$	1.12
Diluted — pro forma	$	0.73		$	0.64		$	0.64		$	1.04

Income Taxes

The Company operates in 12 states, each of which has unique tax rates and payment calculations. As the amount of income generated in each state varies from period to period, the Company’s estimated effective tax rate varies based on the proportion of taxable income generated in each state.

The effective income tax rate for the three and six months ended June 30, 2005 and 2004, differed from the federal statutory rate of 35% due primarily to the impact of state income taxes.

Self-Insured Medical and Property/Casualty Plans

The Company is self-insured for a portion of the claims related to its employee medical benefits and property/casualty insurance programs. Currently, the portion of claims not covered by insurance are accrued based upon the Company’s estimates of the aggregate liability for claims incurred using the Company’s historical claims experience.

The Company recently engaged a third-party actuary to conduct a study of the Company’s self-insured property and casualty risk exposure. This study may result in the Company recording an adjustment to its current accrual. The Company does not believe any such adjustment will have a material adverse effect on its financial position, results of operations or cash flows. The Company expects to complete its analysis of the results of the study during the third quarter of 2005.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires that companies recognize compensation expense equal to the fair value of stock options and other share-based payments. The standard was initially to be effective beginning in the third quarter of 2005, but on April 15, 2005, the SEC changed the required adoption period to be the first interim period of a registrant’s fiscal year beginning after June 15, 2005. As a result, the Company must adopt the provisions of SFAS No. 123(R) effective January 1, 2006. The impact on the Company’s net income will include the remaining amortization of the fair value of existing stock-based awards currently disclosed as pro forma expense above, and is contingent upon the number and form of future grants and the determination of the appropriate valuation model. The Company is evaluating the requirements of SFAS No. 123(R) and has not yet determined the method of adoption or the effect of adopting SFAS No. 123(R), or whether the adoption will result in amounts that are similar to the current pro forma disclosures required under SFAS No. 123 presented above.

Reclassifications

Certain reclassifications have been made to the prior period to conform to the current period presentation.

EARNINGS (LOSS) PER SHARE:

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:


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005			2004
	(in thousands, except per share amounts)
Income before cumulative effect of a change in accounting principle	$	18,089	$	15,714	$	32,489		$	26,201
Cumulative effect of a change in accounting principle, net of tax benefit		—		—		(16,038	)		—

Net income	$	18,089	$	15,714	$	16,451		$	26,201


Weighted average basic shares outstanding		23,737		22,582		23,596			22,553
Dilutive effect of stock-based awards, net of assumed repurchase of treasury stock		248		773		339			819

Weighted average diluted shares outstanding		23,985		23,355		23,935			23,372


Earnings (loss) per share:
Basic:
Income before cumulative effect of a change in accounting principle	$	0.76	$	0.70	$	1.38		$	1.16
Cumulative effect of a change in accounting principle		—		—		(0.68	)		—

Net income	$	0.76	$	0.70	$	0.70		$	1.16


Diluted:
Income before cumulative effect of a change in accounting principle	$	0.75	$	0.67	$	1.36		$	1.12
Cumulative effect of a change in accounting principle		—		—		(0.67	)		—

Net income	$	0.75	$	0.67	$	0.69		$	1.12

RELATED PARTY TRANSACTIONS:

In February 2005, the Company sold recently acquired real estate to a partnership, some of the partners of which are among the management of one of the Company’s platforms, for approximately $4.2 million, the same amount the Company paid to a third party for the property in November 2004. Upon completion of a new dealership facility on the property, the Company will lease the land and facility back from the partnership under terms to be finalized upon completion of the facility.

In May 2005, in connection with a tuck-in acquisition, the Company assigned its right to buy the related dealership real estate to a partnership, some of the partners of which are among the management of one of the Company’s platforms. The partnership purchased the dealership real estate at appraised value and entered into a 15-year lease with the Company. The lease has three five-year renewal options, solely at the Company’s discretion, and the future minimum lease payments over the initial lease term are approximately $5.1 million. The Company believes that the terms of the lease are at fair market value and are comparable to terms in leases recently executed by the Company with third parties.

Also in May 2005, in connection with the acquisition of a right to acquire a new franchise, the Company assigned its right to acquire related real estate to a partnership, the partners of which are among the management of one of the Company’s platforms. The partnership purchased the real estate at appraised value and entered into an intent to lease agreement with the Company, pursuant to which the Company is expected to lease the property upon completion of a new dealership facility. The lease terms will be finalized upon completion of the facility. In the event that the Company does not enter into a lease agreement with the partnership, the Company is obligated to purchase the real estate at the partnership’s cost basis of $1.9 million.

In June 2005, the Company sold and leased back a dealership facility from a partnership, the partners of which are among the management of one of the Company’s platforms. The total sales price was $2.2 million, which the Company believes represents fair market value. The lease has a 15-year initial term, three five-year renewal options, solely at the Company’s discretion, and future minimum lease payments over the initial lease term of approximately $2.9 million. The Company believes that the terms of the lease are at fair market value and are comparable to terms in leases recently executed by the Company with third parties.

COMPREHENSIVE INCOME (LOSS):


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005			2004
	(in thousands)
Net income	$	18,089	$	15,714	$	16,451		$	26,201
Other comprehensive income (loss):
Change in fair value of interest rate swaps, net of tax		—		506		—			826
Unrealized gains (losses) on available for sale securities, net of tax		14		—		(16	)		—

Comprehensive income	$	18,103	$	16,220	$	16,435		$	27,027

COMMITMENTS AND CONTINGENCIES:

From time to time, our dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business.

The Texas Automobile Dealers Association (“TADA”) and certain new vehicle dealerships in Texas that are members of the TADA, including a number of the Company’s Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. In October 2002, the Texas Court of Appeals affirmed the trial court’s order of class certification in the state action. The defendants requested that the Texas Supreme Court review that decision, and the Court declined that request on March 26, 2004. The defendants petitioned the Texas Supreme Court to reconsider its denial, and that petition was denied on September 10, 2004. In the federal antitrust action, in March 2003, the federal district court also certified a class of consumers. Defendants appealed the district court’s certification to the Fifth Circuit Court of Appeals, which on October 5, 2004, reversed the class certification order and remanded the case back to the federal district court for further proceedings. In February 2005, the plaintiffs in the federal action sought a writ of certiorari to the United States Supreme Court in order to obtain review of the Fifth Circuit’s order, which request the Court denied. In June 2005, the Company’s Texas dealerships and certain other defendants in the lawsuits entered settlements with the plaintiffs in each of the cases. The settlements are contingent upon and subject to court approval. Estimated expenses of the proposed settlements include the Company’s dealerships issuing certificates for discounts off future vehicle purchases, refunding cash in some circumstances, and paying attorneys’ fees and certain costs. Dealers participating in the settlements would agree to certain disclosures regarding inventory tax charges when itemizing such charges on customer invoices. Estimated expenses of the proposed settlements of $1.5 million have been included in accrued expenses in the accompanying consolidated balance sheet. If approved, the Company does not believe that these settlements will have a material adverse effect on the Company’s financial position, results of operations or cash flows. If the settlements are not approved, the Company will continue to vigorously assert available defenses in connection with these lawsuits. While the Company does not believe this litigation will have a material adverse effect on its financial position, results of operations or cash flows, no assurance can be given as to its ultimate outcome. A settlement on different terms or an adverse resolution of this matter in litigation could result in the payment of significant costs and damages.

Other than the foregoing cases, there are currently no legal 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 or results of operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.”

Overview

We are a leading operator in the $1 trillion automotive retailing industry. As of June 30, 2005, we owned and operated 143 dealership franchises, representing 33 brands, primarily located in major metropolitan markets in California, Colorado, Florida, Georgia, Louisiana, Massachusetts, New Hampshire, New Jersey, New Mexico, New York, Oklahoma and Texas. Through our dealerships and Internet sites, we 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. We also operate 31 collision service centers.

Our operating results reflect the combined performance of each of our inter-related 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 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.

Our performance, excluding the impact of the cumulative effect of a change in accounting principle discussed below, during the first six months of 2005, and specifically the second quarter, improved on both a Same Store (see term defined in “Results of Operations”) and consolidated basis over the prior year periods. We realized improvements in most Same Store metrics and realized the benefits of our 2004 acquisitions in the current year. For the three and six months ended June 30, 2005, we reported net income of $18.1 million and $16.5 million and diluted earnings per share of $0.75 and $0.69, respectively, compared to net income of $15.7 million and $26.2 million and diluted earnings per share of $0.67 and $1.12, respectively, during the comparable periods of 2004. The following items significantly affected our financial position and results of operations in 2005 and 2004, and may cause our reported results to not be comparable or indicative of our future performance.

	•		*Cumulative Effect of a Change in Accounting Principle:* For some of our dealerships, our adoption of EITF D-108, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill,” resulted in intangible franchise rights having carrying values that were in excess of their fair values. This required us to write-off the excess value of $16.0 million, net of deferred taxes of $10.2 million, or $0.67 per diluted share, as the cumulative effect of a change in accounting principle in the first quarter of this year.

	•		*Loss on Redemption of Senior Subordinated Notes:* In March 2004, we completed the redemption of all of our outstanding 10 7/8% senior subordinated notes and incurred a $6.4 million pretax charge, or $4.0 million and $0.17 per diluted share on an after-tax basis.

For the three months and six months ended June 30, 2005, as compared to the same periods of 2004, our consolidated revenues increased 20.0% and 20.8%, respectively, and our consolidated gross profit increased 20.9% and 21.6%, respectively, primarily because of acquisitions closed during 2004 together with improvements from our Same Store locations. During these same periods of 2005, our Same Store revenues increased 3.9% and 2.1%, respectively, compared to the same periods of 2004, due to increases in all our business lines. Our Same Store gross profit increased 4.5%, during the second quarter, and 3.1%, during the six months ended June 30, 2005, compared to the same periods of 2004, due also to increases in the gross profit realized from each business line other than new vehicles. Our new vehicle gross profit remained relatively unchanged between the periods. On a Same Store basis, during the second quarter of 2005, we realized a slight improvement in total gross margin, to 15.2% from 15.1% in the comparable period in 2004.

During the second quarter and first six months of 2005, as compared to 2004, we had a 20.3% and 22.2% increase in selling, general and administrative (“SG&A”) expense primarily because of acquisitions closed during 2004. Our Same Store SG&A expense as a percentage of gross profit declined approximately 40 basis points during the three months ended June 30, 2005, as compared to 2004, as we continued to address our spending levels.

Finally, during the second quarter and first six months of 2005, as compared to 2004, we had a 68.9% and 72.8% increase in floorplan interest expense and a 24.1% and 10.1% increase in other interest expense. The increases in floorplan interest expense were driven by increases in both the average outstanding floorplan borrowings during the periods, as well as increases in average interest rates. The increase in other interest expense is primarily a result of higher average borrowings outstanding during the periods, as our weighted average interest rate declined in both periods.

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

Critical Accounting Policies and Accounting Estimates

Our condensed 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 2004 Annual Report on Form 10-K. With the exception of the discussion below regarding a change to our method of valuation of intangible franchise rights, no significant changes have occurred since that time.

Intangible Franchise Rights. Our only significant identified intangible assets, other than goodwill, are rights under our franchise agreements with manufacturers. We expect these franchise agreements to continue for an indefinite period but, when these agreements do not have indefinite terms, we believe that renewal of these agreements can be obtained without substantial cost. As such, we believe that our franchise agreements will contribute to cash flows for an indefinite period. Therefore, we do not amortize the carrying amount of our franchise rights. Franchise rights acquired in acquisitions prior to July 1, 2001, were not separately recorded, but were recorded and amortized as part of goodwill and remain a part of goodwill at June 30, 2005 and December 31, 2004 in the accompanying consolidated balance sheets. Like goodwill, and in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we test our franchise rights for impairment annually, or more frequently if events or circumstances indicate possible impairment, using a fair-value method.

At the September 2004 meeting of the Emerging Issues Task Force, the SEC staff issued Staff Announcement No. D-108, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill,” which states that for business combinations after September 29, 2004, the residual method should no longer be used to value intangible assets other than goodwill. Rather, a direct value method should be used to determine the fair value of all intangible assets other than goodwill required to be recognized under SFAS No. 141, “Business Combinations.” Additionally, registrants who have applied a residual method to the valuation of intangible assets for purposes of impairment testing under SFAS No. 142, shall perform an impairment test using a direct value method on all intangible assets that were previously valued using a residual method by no later than the beginning of their first fiscal year beginning after December 15, 2004.

To test the carrying value of each individual franchise right for impairment under EITF D-108, we use a discounted cash flow based approach. Included in this analysis are assumptions, at a dealership level, regarding the cash flows directly attributable to the franchise right, revenue growth rates, future gross margins and future selling, general and administrative expenses. Using an estimated weighted average cost of capital, estimated residual values at the end of the forecast period and future capital expenditure requirements, we calculate the fair value of each dealership’s franchise rights after considering estimated values for tangible assets, working capital and workforce.

For some of the Company’s dealerships, the adoption of the annual impairment provisions as of January 1, 2005 resulted in a fair value that was less than the carrying value of their intangible franchise rights. As a result, a non-cash charge of $16.0 million, net of deferred taxes of $10.2 million, was recorded as a cumulative effect of a change in accounting principle in accordance with the transitional rules of EITF D-108 in the first quarter of 2005. Any future impairment charges will be recorded as a component of operating income in the Company’s consolidated statement of operations.

If any one of the above assumptions changes, including in some cases small changes, or fails to materialize, the resulting decline in our estimated fair value could result in a material impairment charge to the intangible franchise right associated with the applicable dealership. For example, if our assumptions regarding the future interest rates used in our estimate of weighted average cost of capital change by 100 basis points, and all other assumptions remain constant, the non-cash charge would change by $3.9 million.

Self-Insured Property and Casualty Risk Reserves. We are self-insured for a portion of the claims related to our property and casualty insurance programs, requiring us to make estimates regarding expected claims to be incurred. These estimates, for the portion of claims not covered by insurance, are currently based primarily on our historical claims experience and projected inflation in claims costs in future periods. Changes in the frequency or severity of claims from historical levels could influence our reserve for claims and our financial position, results of operations and cash flows. A 10% change in the historical loss history used in determining our estimate of future losses would have changed our reserve at June 30, 2005, by $1.8 million.

Our potential exposure under all of our self-insured property and casualty plans currently totals $41.2 million, before consideration of accruals we have recorded related to our loss projections. After consideration of these accruals, our remaining potential loss exposure under these plans totals approximately $17.6 million at June 30, 2005.

We recently engaged a third-party actuary to conduct a study of our self-insured property and casualty risk exposure. This study may result in us recording an adjustment to our current accrual. We do not believe any such adjustment will have a material adverse effect on our financial position, results of operations or cash flows. We expect to complete our analysis of the results of the study during the third quarter of 2005.

Results of Operations

The following tables present comparative financial and non-financial data for the three and six months ended June 30, 2005 and 2004, 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.


*New Vehicle Retail Data*
(dollars in thousands,
except per unit amounts)
	Three Months Ended June 30,									Six Months Ended June 30,
	2005			% Change			2004			2005			% Change			2004
Retail Unit Sales
Same Stores		29,942			1.7	%		29,441			54,028			0.3	%		53,873
Transactions		3,779						—			8,526						—

Total		33,721			14.5	%		29,441			62,554			16.1	%		53,873

Retail Sales Revenues
Same Stores	$	840,431			3.3	%	$	813,918		$	1,515,936			1.7	%	$	1,489,895
Transactions		139,944						—			298,384						—

Total	$	980,375			20.5	%	$	813,918		$	1,814,320			21.8	%	$	1,489,895

Gross Profit
Same Stores	$	57,134			(0.5	)%	$	57,399		$	105,167			(0.1	)%	$	105,292
Transactions		11,426						—			22,505						—

Total	$	68,560			19.4	%	$	57,399		$	127,672			21.3	%	$	105,292

Gross Profit per Retail Unit Sold
Same Stores	$	1,908			(2.2	)%	$	1,950		$	1,947			(0.4	)%	$	1,954
Transactions	$	3,024								$	2,640
Total	$	2,033			4.3	%	$	1,950		$	2,041			4.5	%	$	1,954

Gross Margin
Same Stores		6.8	%					7.1	%		6.9	%					7.1	%
Transactions		8.2	%								7.5	%
Total		7.0	%					7.1	%		7.0	%					7.1	%

Inventory Days Supply⁽¹⁾
Same Stores		63			(19.2	)%		78			63			(19.2	)%		78
Transactions		46									46
Total		62			(20.5	)%		78			62			(20.5	)%		78


(1)		Inventory days supply equals units in inventory at the end of the period, divided by unit sales for the month then ended, multiplied by 30 days.

Our new vehicle unit sales, revenues and gross profit during the three and six months ended June 30, 2005, outpaced the same periods in 2004 due primarily to the current year contribution of our acquisitions completed throughout 2004 plus modest Same Store growth in unit sales and revenue. The 3.3% increase in Same Store revenue for the three months ended was due in equal part to increases in sales volume and in our average selling price per unit, while the 1.7% increase during the six months ended was primarily attributable to increases in our average selling price per unit. Sizeable increases in sales volume in most of our General Motors brands, due to the manufacturer’s recent incentive program, as well as Toyota, Nissan and Chrysler were

partially offset by decreases in volume in our Ford and Dodge dealerships. The following table sets forth our top ten Same Store brands, based on retail unit sales volume.


Same Store New Vehicle Unit Sales
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		% Change			2004		2005		% Change			2004
Toyota/Scion		6,978		8.2	%		6,450		12,343		6.2	%		11,617
Ford		5,073		(6.2	)		5,409		9,435		(7.6	)		10,210
Nissan		2,724		9.9			2,479		5,378		10.0			4,890
Chevrolet		2,613		11.8			2,337		4,440		6.6			4,165
Honda		2,573		0.5			2,560		4,639		(0.3	)		4,653
Dodge		1,833		(12.0	)		2,084		3,180		(17.1	)		3,838
Lexus		1,441		1.1			1,425		2,631		(0.9	)		2,654
Chrysler		1,033		15.0			898		1,809		24.2			1,456
Jeep		741		(2.2	)		758		1,375		(5.2	)		1,450
GMC		719		17.1			614		1,136		8.6			1,046
Other		4,214		(4.8	)		4,427		7,662		(2.9	)		7,894

Total		29,942		1.7			29,441		54,028		0.3			53,873

With the recent influx of other manufacturer incentives countering General Motors’ popular employee discount program, we expect our near-term new vehicle sales volumes to continue to exceed prior year levels. We also expect new vehicle gross margin to continue to reflect the highly competitive environment created by these programs.

Our consolidated new vehicle gross margin declined from 7.1% for the three and six months ended June 30, 2004, to 7.0% for the three months and six months ended June 30, 2005. The favorable impact of luxury franchises acquired last year, which generally yield higher gross margins than domestic or import non-luxury franchises, was offset by decreases in our Same Store gross margin.

Most manufacturers offer interest assistance to offset floorplan interest charges incurred in connection with inventory purchases. Although certain of our manufacturers offer assistance that varies with changes in interest rates, albeit on a lag from changes in the underlying interest rates, other of our manufacturers’ assistance is relatively fixed. This assistance has ranged from approximately 77% to 158% of our total floorplan interest expense over the past five years. For the second quarter of 2005 as compared to 2004, this ratio declined from 138% to 96%, primarily due to rising interest rates. We record these incentives as a reduction of new vehicle cost of sales as the vehicles are sold, which impacts the gross profit and gross margin detailed above. The total assistance recognized in cost of goods sold during the three months ended June 30, 2005 and 2004, was $9.7 million and $8.3 million, respectively, while the assistance for the six months ended June 30, 2005 and 2004, was $17.8 million and $15.0 million, respectively.

Finally, our days’ supply of new vehicle inventory continues to decrease, from 78 days’ supply at June 30, 2004, to 62 days’ supply at June 30, 2005, as we work towards our target level of 60 days’ supply. Our 62 days’ supply at June 30, 2005, was negatively impacted by our domestic inventory, which stood at 83 days’ supply, versus our import and luxury brands in which we had 46 and 47 days’ supply, respectively.


*Used Vehicle Retail Data*
(dollars in thousands,
except per unit amounts)
	Three Months Ended June 30,									Six Months Ended June 30,
	2005			% Change			2004			2005			% Change			2004
Retail Unit Sales
Same Stores		15,976			(2.7	)%		16,425			31,198			(4.3	)%		32,611
Transactions		1,465						—			3,485						—

Total		17,441			6.2	%		16,425			34,683			6.4	%		32,611

Retail Sales Revenues
Same Stores	$	247,894			2.7	%	$	241,342		$	471,565			(0.1	)%	$	471,997
Transactions		30,893						—			68,767						—

Total	$	278,787			15.5	%	$	241,342		$	540,332			14.5	%	$	471,997

Gross Profit
Same Stores	$	31,395			7.6	%	$	29,188		$	60,042			4.0	%	$	57,758
Transactions		3,339						—			8,068						—

Total	$	34,734			19.0	%	$	29,188		$	68,110			17.9	%	$	57,758

Gross Profit per Retail Unit Sold
Same Stores	$	1,965			10.6	%	$	1,777		$	1,925			8.7	%	$	1,771
Transactions	$	2,279								$	2,315
Total	$	1,992			12.1	%	$	1,777		$	1,964			10.9	%	$	1,771

Gross Margin
Same Stores		12.7	%					12.1	%		12.7	%					12.2	%
Transactions		10.8	%								11.7	%
Total		12.5	%					12.1	%		12.6	%					12.2	%


Used Vehicle Wholesale Data
(dollars in thousands,
except per unit amounts)
	Three Months Ended June 30,									Six Months Ended June 30,
	2005			% Change			2004			2005			% Change			2004
Wholesale Unit Sales
Same Stores		12,182			2.4	%		11,894			22,878			0.9	%		22,684
Transactions		1,058						—			2,810						—

Total		13,240			11.3	%		11,894			25,688			13.2	%		22,684

Wholesale Sales Revenues
Same Stores	$	94,507			8.5	%	$	87,106		$	174,509			6.9	%	$	163,297
Transactions		12,279						—			28,471						—

Total	$	106,786			22.6	%	$	87,106		$	202,980			24.3	%	$	163,297

Gross Profit (Loss)
Same Stores	$	(681	)		57.9	%	$	(1,617	)	$	(532	)		79.5	%	$	(2,597	)
Transactions		89						—			58						—

Total	$	(592	)		63.4	%	$	(1,617	)	$	(474	)		81.7	%	$	(2,597	)

Wholesale Profit (Loss) per Wholesale Unit Sold
Same Stores	$	(56	)		58.8	%	$	(136	)	$	(23	)		79.8	%	$	(114	)
Transactions	$	85								$	21
Total	$	(45	)		66.9	%	$	(136	)	$	(18	)		84.2	%	$	(114	)

Gross Margin
Same Stores		(0.7	)%					(1.9	)%		(0.3	)%					(1.6	)%
Transactions		0.7	%								0.2	%
Total		(0.6	)%					(1.9	)%		(0.2	)%					(1.6	)%


Total Used Vehicle Data
(dollars in thousands,
except per unit amounts)
	Three Months Ended June 30,									Six Months Ended June 30,
	2005			% Change			2004			2005			% Change			2004
Used Vehicle Unit Sales
Same Stores		28,158			(0.6	)%		28,319			54,076			(2.2	)%		55,295
Transactions		2,523						—			6,295						—

Total		30,681			8.3	%		28,319			60,371			9.2	%		55,295

Sales Revenues
Same Stores	$	342,401			4.2	%	$	328,448		$	646,074			1.7	%	$	635,294
Transactions		43,172						—			97,238						—

Total	$	385,573			17.4	%	$	328,448		$	743,312			17.0	%	$	635,294

Gross Profit
Same Stores	$	30,714			11.4	%	$	27,571		$	59,510			7.9	%	$	55,161
Transactions		3,428						—			8,126						—

Total	$	34,142			23.8	%	$	27,571		$	67,636			22.6	%	$	55,161

Gross Profit per Used Vehicle Unit Sold
Same Stores	$	1,091			12.0	%	$	974		$	1,100			10.2	%	$	998
Transactions	$	1,359								$	1,291
Total	$	1,113			14.3	%	$	974		$	1,120			12.2	%	$	998

Gross Margin
Same Stores		9.0	%					8.4	%		9.2	%					8.7	%
Transactions		7.9	%								8.4	%
Total		8.9	%					8.4	%		9.1	%					8.7	%

Inventory Days Supply ⁽¹⁾
Same Stores		29			(3.3	)%		30			29			(3.3	)%		30
Transactions		35									35
Total		29			(3.3	)%		30			29			(3.3	)%		30

Adjusted Used Gross Profit per Retail Unit Sold ⁽²⁾
Same Stores	$	1,923			14.5	%	$	1,679		$	1,907			12.8	%	$	1,691
Transactions	$	2,340								$	2,332
Total	$	1,958			16.6	%	$	1,679		$	1,950			15.3	%	$	1,691

Adjusted Used Gross Margin ⁽³⁾
Same Stores		12.4	%					11.4	%		12.6	%					11.7	%
Transactions		11.1	%								11.8	%
Total		12.2	%					11.4	%		12.5	%					11.7	%


(1)		Inventory days supply equals units in inventory at the end of the period, divided by unit sales for the month then ended, multiplied by 30 days.

(2)		Adjusted used gross profit per retail unit sold equals total gross profit, which includes net wholesale profit or loss, divided by retail unit sales. The net profit or loss on wholesale vehicle sales is included in this number, as these transactions facilitate retail vehicle sales and management of inventory levels.

(3)		Adjusted used gross margin equals total gross profit, which includes net wholesale profit or loss, divided by retail sales revenues. The net profit or loss on wholesale vehicle sales is included in this number, as these transactions facilitate retail vehicle sales and management of inventory levels.

Our used vehicle results are directly affected by the level of manufacturer incentives on new vehicles, the number and quality of trade-ins and lease turn-ins, and the availability of consumer credit. During the three and six months ended June 30, 2005, we saw increases in Same Store average sales price and gross profit per unit, offset by a slight decline in Same Store used vehicle volume, that resulted in increases in revenues and gross profit. We realized improved margins in both retail and wholesale sales for the three and six months ended June 30, 2005 relative to the same periods last year, though the continued shift of used vehicle sales toward more wholesale sales tempered this overall improvement.

The dealerships we acquired during 2004, although yielding a lower used vehicle retail gross margin than our Same Stores, realized a higher average gross profit per retail vehicle sold than our Same Stores. We believe both of these factors result from the impact of luxury dealerships acquired, whose used vehicle businesses typically have higher retail sales prices and higher gross profit per unit sold.

Finally, our days’ supply of used vehicle inventory decreased from 30 days at June 30, 2004, to 29 days’ supply at June 30, 2005. We have recently increased our target from 30 to 37 days. We believe this new target effectively balances the increased risk in the used car business as a result of continuing new car incentive programs with the need to give our operators more latitude with which to manage their used car inventories, taking into consideration the time required to refurbish a used vehicle and provide for sufficient inventory on display at any one time.


Parts and Service Data
(dollars in thousands)
	Three Months Ended June 30,									Six Months Ended June 30,
	2005			% Change			2004			2005			% Change			2004
Parts and Service Revenues
Same Stores	$	138,635			5.6	%	$	131,283		$	267,211			4.7	%	$	255,303
Transactions		24,422						—			55,306						—

Total	$	163,057			24.2	%	$	131,283		$	322,517			26.3	%	$	255,303

Gross Profit
Same Stores	$	75,412			4.3	%	$	72,288		$	144,970			3.5	%	$	140,049
Transactions		13,647						—			30,390						—

Total	$	89,059			23.2	%	$	72,288		$	175,360			25.2	%	$	140,049

Gross Margin
Same Stores		54.4	%					55.1	%		54.3	%					54.9	%
Transactions		55.9	%								54.9	%
Total		54.6	%					55.1	%		54.4	%					54.9	%

Our Same Store parts and service revenues increased 5.6% and 4.7%, respectively, and gross profit increased 4.3% and 3.5%, respectively, for the three and six month periods ended June 30, 2005, versus the same periods in 2004. These increases were primarily driven by improvements in our retail and wholesale parts businesses, as well as our customer pay service business.

Our Same Store parts sales increased $5.5 million, or 7.2%, for the three months ended June 30, 2005, and increased $9.6 million, or 6.5%, for the six months then ended versus the comparable periods in 2004. These increases were driven by increases in retail sales of 5.1% and 3.6% for the three and six month periods, respectively, and increases in our lower margin wholesale sales of 11.0% and 11.7%, respectively. Despite increases in Same Store gross profit in both periods, this change in sales mix led to declines in our overall parts gross margin as our individual retail and wholesale parts margins were relatively constant between the periods.

Our Same Store service business also saw improvements in both revenues and gross profit. During the second quarter and first six months of 2005, as compared to 2004, our service revenue increased 3.7% and 2.4%, respectively, while our gross profit increased 3.7% in the second quarter of 2005, as compared to the same period of 2004, and increased 2.7% during the six-month period. These increases were driven by increased customer pay sales, as warranty sales were relatively constant.

The inclusion of our 2004 acquisitions in our 2005 results helped bolster our total parts and service gross margin as these franchises realized margins of 55.9% and 54.9% for the three and six month periods, respectively.


Finance and Insurance Data
(dollars in thousands,
except per unit amounts)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		% Change			2004		2005		% Change			2004
Retail New and Used Unit Sales
Same Stores		45,918		0.1	%		45,866		85,226		(1.5	)%		86,484
Transactions		5,244					—		12,011					—

Total		51,162		11.5	%		45,866		97,237		12.4	%		86,484

Retail Finance Fees
Same Stores	$	17,088		2.9	%	$	16,608	$	31,194		(3.0	)%	$	32,170
Transactions		2,018					—		4,151					—

Total	$	19,106		15.0	%	$	16,608	$	35,345		9.9	%	$	32,170

Vehicle Service Contract Fees
Same Stores	$	15,970		5.3	%	$	15,166	$	32,712		6.5	%	$	30,712
Transactions		1,278					—		3,365					—

Total	$	17,248		13.7	%	$	15,166	$	36,077		17.5	%	$	30,712

Insurance and Other
Same Stores	$	11,031		16.4	%	$	9,478	$	20,322		9.5	%	$	18,554
Transactions		943					—		2,167					—

Total	$	11,974		26.3	%	$	9,478	$	22,489		21.2	%	$	18,554

Total
Same Stores	$	44,089		6.9	%	$	41,252	$	84,228		3.4	%	$	81,436
Transactions		4,239					—		9,683					—

Total	$	48,328		17.2	%	$	41,252	$	93,911		15.3	%	$	81,436


Finance and Insurance Revenues per Unit Sold
Same Stores	$	960		6.8	%	$	899	$	988		4.9	%	$	942
Transactions	$	808						$	806
Total	$	945		5.1	%	$	899	$	966		2.5	%	$	942

Total finance, insurance and other revenues increased 17.2% and 15.3% during the three and six months ended June 30, 2005, respectively, as compared to 2004, due to Same Store growth of 6.9% and 3.4%, respectively, plus the impact of our 2004 acquisitions. Total average finance and insurance revenues per retail unit sold improved during the three and six month periods, despite the addition of our 2004 acquisitions, which generally had lower penetration of finance and insurance products on sales of new and used vehicles than our existing stores.

With respect to Same Store retail finance fees, during the second quarter of 2005, as compared to 2004, we saw a 2.9% increase in fee income on relatively flat total retail vehicle sales. This increase was primarily attributable to a $0.6 million increase from higher revenue per contract on new and used vehicle financings. For the six months ended June 30, 2005, we experienced a 3.0% decrease in finance fee income primarily due to a $0.7 million increase in chargeback expense and a 1.5% decline in total retail vehicle sales. The increase in chargeback expense is due to an increase in customer refinancing activity, in which a customer obtains a new, lower rate loan from a third-party source in order to replace the original loan chosen by the customer to obtain upfront manufacturer incentives.

With respect to Same Store vehicle service contract fees, during the second quarter of 2005, as compared to 2004, we saw a 5.3% increase in income on, again, relatively flat total retail vehicle sales. This increase was primarily attributable to a $0.8 million increase from higher revenue per contract on new and used vehicle transactions along with a $0.3 million increase from higher penetration of contract sales in new vehicle transactions. For the six months ended June 30, 2005, we experienced a 6.5% increase in income on a 1.5% decrease in total retail vehicle sales. This increase was primarily attributable to a $2.4 million increase from higher revenue per contract on new and used vehicle transactions and a $0.8 million increase from higher penetration of contract sales in new vehicle transactions. These increases were partially offset by a $0.5 million impact from a 4.3% decline in used vehicle unit sales and a $0.4 million impact from a decline in the penetration rate of contract sales in used vehicle transactions.

With respect to Same Store insurance and other sales revenue, we saw increases during the first six months of 2005, due primarily to increases in the second quarter of 2005, as compared to 2004, of $0.7 million in revenue associated with the sale of guaranteed asset protection insurance products.


Selling, General and Administrative Data
(dollars in thousands)
	Three Months Ended June 30,									Six Months Ended June 30,
	2005			% Change			2004			2005			% Change			2004
Personnel
Same Stores	$	100,682			6.3	%	$	94,712		$	192,938			5.1	%	$	183,609
Transactions		15,743						—			34,521						—

Total	$	116,425			22.9	%	$	94,712		$	227,459			23.9	%	$	183,609

Advertising
Same Stores	$	15,480			(8.6	)%	$	16,931		$	29,137			(8.1	)%	$	31,707
Transactions		2,255						—			5,168						—

Total	$	17,735			4.7	%	$	16,931		$	34,305			8.2	%	$	31,707

Rent and Facility Costs
Same Stores	$	18,928			3.0	%	$	18,373		$	37,266			2.1	%	$	36,489
Transactions		3,472						—			7,491						—

Total	$	22,400			21.9	%	$	18,373		$	44,757			22.7	%	$	36,489

Other SG&A
Same Stores	$	31,276			4.5	%	$	29,925		$	58,021			5.8	%	$	54,823
Transactions		4,511						—			10,095						—

Total	$	35,787			19.6	%	$	29,925		$	68,116			24.2	%	$	54,823

Total SG&A
Same Stores	$	166,366			4.0	%	$	159,941		$	317,362			3.5	%	$	306,628
Transactions		25,981						—			57,275						—

Total	$	192,347			20.3	%	$	159,941		$	374,637			22.2	%	$	306,628


Total Gross Profit
Same Stores	$	207,349			4.5	%	$	198,510		$	393,875			3.1	%	$	381,938
Transactions		32,740						—			70,704						—

Total	$	240,089			20.9	%	$	198,510		$	464,579			21.6	%	$	381,938


SG&A as % of Gross Profit
Same Stores		80.2	%					80.6	%		80.6	%					80.3	%
Transactions		79.4	%								81.0	%
Total		80.1	%					80.6	%		80.6	%					80.3	%

Our selling, general and administrative (SG&A) expenses consist primarily of salaries, commissions and incentive-based compensation, as well as advertising, rent and other miscellaneous expenses. We believe that our personnel and advertising expenses are variable and can be adjusted in response to changing business conditions. In such a case, however, it may take us several months to adjust our cost structure, or we may elect not to fully adjust a variable component, such as advertising expenses.

For the three months ended June 30, 2005, SG&A expenses decreased as a percentage of gross profit on a Same Store basis to 80.2% from 80.6% during 2004, and increased slightly for the comparable six-month period. The decrease in the three months ended June 30, 2005, as compared to 2004, resulted primarily from a reduction in advertising expenses, as well as a reduction in our dealership-level personnel related costs as a percentage of gross profit. Excluding costs associated with the transition of our Chief Executive Officer position, including signing bonus, relocation fees, executive search and legal fees, and other miscellaneous costs, Same Store SG&A would have been 79.4% and 80.2% of gross profit for the three and six month periods.

Same Store personnel expenses slightly outpaced the growth in gross profit due to the compensation component of the Chief Executive Officer transitional expenses noted above and other corporate-level expenses. Excluding the Chief Executive Officer transitional expenses, our Same Store personnel expenses would have increased approximately 4.5% quarter over quarter and 4.2% year over year, more consistent with the increases noted in Same Store gross profit. We had increases in dealership level compensation, as the variable compensation of our commissioned salespeople and platform management is closely tied to dealership

gross profit; however for the three and six months ended June 30, 2005, these increased only 3.8% and 2.7%, respectively, which were below the increases in gross profit noted above.

Our advertising programs are managed locally and expense varies period to period based upon current trends, market factors and other circumstances in each individual market. We have closely scrutinized our levels and types of advertising expenditures over the last six months, resulting in the above noted decreases.

The increases in Same Store rent and facility costs for the quarter and year-to-date periods are primarily due to rent increases associated with new facilities and index-based rent increases on existing facilities.

Other SG&A consists primarily of insurance, freight, supplies, professional fees, loaner car expenses, vehicle delivery expenses, software licenses and other data processing costs, and miscellaneous other operating costs not related to personnel, advertising or facilities. For the three months ended June 30, 2005, as compared to the same period of 2004, we had increases totaling $2.7 million in a number of areas partially offset by a $1.4 million decrease due to lower losses from our property and casualty retained risk program. The largest causes of the $2.7 million increase were:

	•		a $0.7 million increase in professional fees, primarily consisting of legal fees and expenses, executive search fees, and board of director fees and expenses;

	•		a $0.7 million increase in bad debt expense;

	•		a $0.3 million increase in delivery-related expenses, primarily as a result of higher fuel costs; and

	•		a $0.3 million increase in travel-related expenditures.

For the six months ended June 30, 2005, as compared to the same period of 2004, we had increases totaling $3.9 million in a number of areas partially offset by a $0.7 million decrease due to lower losses from our property and casualty retained risk program. The largest causes of the $3.9 million increase were:

	•		a $1.5 million increase in professional fees, primarily consisting of legal fees and expenses, executive search fees, and board of director fees and expenses;

	•		a $1.0 million increase in delivery related expenses, primarily as a result of higher fuel costs; and

	•		a $0.9 million increase in bad debt expense.


Depreciation and Amortization Expense
(dollars in thousands)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		% Change			2004		2005		% Change			2004
Same Stores	$	3,830		6.2	%	$	3,607	$	8,764		22.5	%	$	7,155
Transactions		472					—		1,161					—

Total	$	4,302		19.3	%	$	3,607	$	9,925		38.7	%	$	7,155

Our year-to-date Same Store depreciation and amortization expense increased primarily because of a $1.0 million charge, during the first quarter of 2005, resulting from an adjustment to the depreciable lives of certain of our leasehold improvements to reflect better their remaining useful lives. The remainder of the year-to-date increase and the increase in the quarter are due to a number of facility additions, including service bay expansions, facility upgrades and manufacturer required image renovations completed during the last twelve months.


Floorplan Interest Expense
(dollars in thousands)
	Three Months Ended June 30,							Six Months Ended June 30,
	2005		% Change			2004		2005		% Change			2004
Same Stores	$	8,842		48.2	%	$	5,965	$	15,996		47.5	%	$	10,846
Transactions		1,232					—		2,743					—

Total	$	10,074		68.9	%	$	5,965	$	18,739		72.8	%	$	10,846

Our floorplan interest expense fluctuates based on changes in borrowings outstanding and interest rates, which are based on LIBOR (or Prime in some cases) plus a spread. Our Same Store floorplan interest expense increased during the three months ended June 30, 2005, compared to 2004, because of an approximate 200 basis point increase in weighted average interest rates. Partially offsetting this increase was an approximate $14.1 million decrease in weighted average borrowings outstanding between the periods and the maturity of an interest rate swap that accounted for approximately $0.7 million of the expense in the second quarter of 2004.

Our Same Store floorplan interest expense for the first six months of 2005 suffered from an approximate 175 basis point increase in weighted average interest rates and a $39.5 million increase in our weighted average borrowings outstanding. These increases were tempered by the maturity of our interest rate swap that accounted for approximately $1.3 million of the expense for the six months ended June 30, 2004. The increase in weighted average borrowings was primarily a result of the use of the proceeds from our 8 1/4% senior subordinated notes offering in August 2003 to temporarily pay down our floorplan notes payable in 2004. These funds were partially redrawn in March 2004 to fund the redemption of our 10 7/8% senior subordinated notes, and fully used by the end of 2004 for acquisitions.

Other Interest Expense, net

Other net interest expense, which consists of interest charges on our long-term debt and our acquisition line, partially offset by interest income, increased during the second quarter and first six months of 2005, as compared to 2004. These increases were the result of increases of approximately $56.9 million and $44.7 million in weighted average borrowings outstanding for the three and six months ended June 30, 2005, respectively, partially offset by 70 basis point and 105 basis point decreases in weighted average interest rates during the periods. During 2005, our average debt outstanding increased, as compared to the comparable periods in 2004, due to a number of acquisitions funded through our acquisition line in the latter half of 2004. This increase in acquisition borrowings drove the decrease in our weighted average interest rates during the periods, as this line carries a lower interest rate than the 10 7/8% senior subordinated notes that were redeemed in March 2004 and our other senior subordinated debt outstanding.

Loss on Redemption of Senior Subordinated Notes

On March 1, 2004, we completed the redemption of all of our 10 7/8% senior subordinated notes. We incurred a $6.4 million pretax charge in completing the redemption, consisting of a $4.1 million redemption premium and a $2.3 million non-cash write-off of unamortized bond discount and deferred financing costs.

Provision for Income Taxes

Our provision for income taxes increased $1.2 million, to $10.6 million, for the three months ended June 30, 2005, from $9.4 million for the three months ended June 30, 2004. For the six months ended June 30, 2005, our provision, excluding the tax benefit associated with the cumulative effect of a change in accounting principle discussed below, increased $3.2 million, to $19.0 million from $15.7 million, as compared to the six months ended June 30, 2004. For the three and six months ended June 30, 2005, our effective tax rate decreased to 36.9%, from 37.5% for the comparative periods of 2004, due primarily to varying state income tax rates and changes to the distribution of our earnings in those states.

Cumulative Effect of a Change in Accounting Principle

At the September 2004 meeting of the Emerging Issues Task Force, the SEC staff issued Staff Announcement No. D-108, “Use of the Residual Method to Value Acquired Assets Other Than Goodwill,” which states that a residual method should no longer be used to value intangible assets other than goodwill. Rather, a direct value method should be used to determine the fair value of all intangible assets other than goodwill required to be recognized under SFAS No. 141, “Business Combinations.” Registrants who have applied a residual method to the valuation of intangible assets other than goodwill for purposes of impairment testing under SFAS No. 142, “Goodwill and Other Intangible Assets,” shall perform a transitional impairment test using a direct value method on all intangible assets other than goodwill that were previously valued using another method by no later than the beginning of their first fiscal year beginning after December 15, 2004.

Our adoption of EITF D-108 in the first quarter of 2005 resulted in some of our dealerships having intangible franchise rights carrying values that were in excess of their estimated fair values. This required us to record the excess of the carrying value over the fair value of $16.0 million, net of deferred taxes of $10.2 million, as a cumulative effect of a change in accounting principle.

Liquidity and Capital Resources

Our liquidity and capital resources are primarily derived from cash on hand, cash from operations, borrowings under our credit facilities, which provide floorplan, working capital and acquisition financing, and proceeds from debt and equity offerings. While we cannot guarantee it, based on current facts and circumstances we believe we have adequate cash flow, coupled with available borrowing capacity, to fund our current operations, capital expenditures and acquisition program for 2005. If our capital

expenditures or acquisition plans for 2005 change, we may need to access the private or public capital markets to obtain additional funding.

Sources of Liquidity and Capital Resources

As of June 30, 2005, our total cash on hand was $28.4 million.

Cash Flows. The following is a discussion of our cash flows for the six months ended June 30, 2005 and 2004.

Operating activities. For the six months ended June 30, 2005, we generated $54.3 million in net cash from operating activities, primarily driven by net income, after adding back depreciation and amortization and other non-cash charges, including the $16.0 million after-tax charge related to the change in accounting principle.

For the six months ended June 30, 2004, we generated $55.4 million of cash flow from operations, primarily driven by net income, after adding back depreciation and amortization and the $6.4 million pretax loss on the redemption of our 10 7/8% senior subordinated notes.

Investing activities. During the first six months of 2005, we used approximately $38.5 million in investing activities. We used $19.0 million for acquisitions, net of cash received, and $28.3 million for purchases of property and equipment. Approximately $22.1 million of the property and equipment purchases was for the purchase of land and construction of new or expanded facilities. Partially offsetting these uses was approximately $8.6 million in proceeds from sales of property and equipment.

During the first six months of 2004, the $128.2 million of cash used in investing activities included $94.5 million of cash used in acquisitions, net of cash received, and $27.9 million for purchases of property and equipment, of which approximately $17.2 million was for the purchase of land and construction of new or expanded facilities.

Financing activities. We used approximately $25.1 million in financing activities during the six months ended June 30, 2005, primarily to repay borrowings under our revolving credit facility. We received $11.6 million from financing activities during this period in connection with the exercise of stock options and the sale of shares pursuant to our employee stock purchase plan.

We obtained approximately $86.0 million from financing activities during the first six months of 2004, primarily from borrowings under our revolving credit facility. Partially offsetting the funds obtained through borrowings was the use of $79.5 million to complete the redemption of all of our 10 7/8% senior subordinated notes. We also spent $7.0 million repurchasing our common stock in the first quarter of 2004.

Working Capital. At June 30, 2005, we had working capital of $94.8 million. Changes in our working capital are generally a function of changes in the percentage of our vehicle inventory that is financed. Borrowings on our new vehicle floorplan notes payable, subject to agreed upon pay-off terms, are equal to 100% of the factory invoice of the vehicles. Borrowings on our used vehicle floorplan notes payable, subject to agreed upon pay-off terms, are limited to 55% of the aggregate book value of our used vehicle inventory. At times, we have made payments on our floorplan notes payable using excess cash flow from operations and the proceeds of debt and equity offerings. As needed, we reborrow the amounts later, up to the limits on the floorplan notes payable discussed below, for working capital, acquisitions, capital expenditures or general corporate purposes.

In addition, the classification of the outstanding balance under our acquisition line of credit as a current liability affected our working capital at June 30, 2005, as the underlying facility matures in June 2006.

Credit Facilities. Our various credit facilities are used to finance the purchase of inventory, provide acquisition funding and provide working capital for general corporate purposes. Our two facilities currently provide us with a total of $1.2 billion of borrowing capacity.

Revolving Credit Facility. This facility matures in June 2006 and provides a total of $937.0 million of financing. We can further expand the facility to its maximum commitment of $1.0 billion, subject to participating lender approval. This facility consists of two tranches: $769.2 million for floorplan financing, which we refer to as the floorplan tranche, and $162.8 million for acquisitions, capital expenditures and general corporate purposes, including the issuance of letters of credit. We refer to this tranche as the acquisition line. The floorplan tranche bears interest at rates equal to LIBOR plus 112.5 basis points for new vehicle inventory and LIBOR plus 125 basis points for used vehicle inventory. The acquisition line bears interest at LIBOR plus a margin that ranges from 175 to 325 basis points, depending on our leverage ratio.

At the present time, borrowings under our acquisition line are recorded as current liabilities because our facility matures within the next twelve months. Absent this circumstance, these borrowings typically would be recorded as long-term debt. We plan to enter into a new revolving credit facility prior to the maturity of our current facility in June 2006.

Our revolving credit facility contains various covenants including financial ratios, such as fixed-charge coverage and interest coverage, and a minimum net worth requirement, among others, as well as additional maintenance requirements. We were in compliance with these covenants at June 30, 2005.

Our group of lenders is comprised of 13 major financial institutions, including two manufacturer captive finance companies. As of June 30, 2005, $103.2 million was available, after deducting $9.5 million for outstanding letters of credit, to be drawn under the acquisition line, and $162.9 million was available to be drawn under the floorplan tranche for inventory purchases.

Ford Motor Credit Facility. We have a separate floorplan financing arrangement with Ford Motor Credit Company, which we refer to as the FMCC facility, to provide financing for our entire Ford, Lincoln and Mercury new vehicle inventory. The FMCC facility, which matures in June 2006, provides for up to $300.0 million of financing for inventory at an interest rate equal to Prime plus 100 basis points minus certain incentives. As of June 30, 2005, $107.8 million was available for inventory purchases under the FMCC facility. We expect the net cost of our borrowings under the FMCC facility, after all incentives, to be slightly higher than the cost of borrowing under the floorplan tranche of our revolving credit facility.

The following table summarizes the current status of our credit facilities as of June 30, 2005:


	Total
Credit Facility	Commitment		Outstanding		Available
			(in thousands)
Floorplan Tranche	$	769,247	$	606,494	$	162,753
Acquisition Line ⁽¹⁾⁽²⁾		162,753		59,519		103,234

Total Revolving Credit Facility		932,000		666,013		265,987
FMCC Facility		300,000		192,203		107,797

Total Credit Facilities	$	1,232,000	$	858,216	$	373,784


(1)		The outstanding balance at June 30, 2005, includes $9.5 million of letters of credit.

(2)		The total commitment reflects the aggregate commitment of $167.8 million less $5.0 million of reserves as required by the lenders.

Uses of Liquidity and Capital Resources

Senior Subordinated Notes Redemption. On March 1, 2004, we completed the redemption of all of our 10 7/8% senior subordinated notes. Total cash used in completing the redemption, excluding accrued interest of $4.1 million, was $79.5 million.

Capital Expenditures. Our capital expenditures include expenditures to extend the useful lives of current facilities and expenditures to start or expand operations. Historically, our annual capital expenditures, exclusive of new or expanded operations, have approximately equaled our annual depreciation charge. In general, expenditures relating to the construction or expansion of dealership facilities are driven by new franchises being granted to us by a manufacturer, significant growth in sales at an existing facility, or manufacturer imaging programs.

During 2005, we plan to invest a total of approximately $52.8 million to expand or relocate 11 existing facilities, prepare six new facilities for operations, perform manufacturer required imaging projects at four locations, and purchase equipment for new and expanded facilities. We have agreed to sell and leaseback two of the projects scheduled for completion during 2005. In addition, during the quarter, we sold and leased back one project previously completed during 2004. We also sold one parcel of land purchased during 2004 in connection with a planned facility relocation. This land will be leased back together with a newly constructed dealership facility upon completion, which is expected in 2006. Expected total proceeds for the year from the sales of construction projects is estimated at approximately $21.4 million, resulting in net capital expenditures for new and expanded operations of $31.4 million.

Acquisitions. Our acquisition target for 2005 is to complete strategic acquisitions that have approximately $300.0 million in expected annual revenues. We expect the cash needed to complete our acquisitions will come from excess working capital, operating cash flows of our dealerships, and borrowings under our credit facility. Depending on the market value of our common stock, we may issue common stock to fund a portion of the purchase price of acquisitions. We purchase businesses based on expected return on investment. Generally, the purchase price is approximately 15% to 20% of the expected annual revenues. Thus, our targeted acquisition budget of $300.0 million is expected to cost between $45.0 and $60.0 million.

Stock Repurchases. In March 2004, our board of directors authorized us to repurchase up to $25.0 million of our stock, subject to management’s judgment and the restrictions of our various debt agreements. As of June 30, 2005, $18.9 million remained under the board of directors’ March 2004 authorization.

Cautionary Statement about Forward-Looking Statements

This quarterly report includes certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements include statements regarding our plans, goals, beliefs or current expectations with respect to, among other things:

	•		our future operating performance;

	•		our ability to improve our margins;

	•		operating cash flows and availability of capital;

	•		the completion of future acquisitions;

	•		the future revenues of acquired dealerships;

	•		future stock repurchases;

	•		net capital expenditures;

	•		changes in sales volumes in the new and used vehicle and parts and service markets;

	•		business trends in the retail automotive industry, including the level of manufacturer incentives, new and used vehicle retail sales volume, customer demand, interest rates and changes in industrywide inventory levels; and

	•		availability of financing for inventory and working capital.

Any such forward-looking statements are not assurances of future performance and involve risks and uncertainties. Actual results may differ materially from anticipated results in the forward-looking statements for a number of reasons, including:

	•		the future economic environment, including consumer confidence, interest rates, the price of gasoline, the level of manufacturer incentives and the availability of consumer credit may affect the demand for new and used vehicles, replacement parts, maintenance and repair services and finance and insurance products;

	•		adverse international developments such as war, terrorism, political conflicts or other hostilities may adversely affect the demand for our products and services;

	•		the future regulatory environment, unexpected litigation or adverse legislation, including changes in state franchise laws, may impose additional costs on us or otherwise adversely affect us;

	•		our principal automobile manufacturers, especially Toyota/Lexus, Ford, DaimlerChrysler, General Motors, Honda/Acura and Nissan/Infiniti, may not continue to produce or make available to us vehicles that are in high demand by our customers;

	•		requirements imposed on us by our manufacturers may limit our acquisitions and require us to increase the level of capital expenditures related to our dealership facilities;

	•		our dealership operations may not perform at expected levels or achieve expected improvements;

	•		our failure to achieve expected future cost savings or future costs being higher than we expect;

	•		available capital resources and various debt agreements may limit our ability to complete acquisitions, complete construction of new or expanded facilities and repurchase shares;

	•		our cost of financing could increase significantly;

	•		new accounting standards could materially impact our reported earnings per share;

	•		our inability to complete additional acquisitions or changes in the pace of acquisitions;

	•		the inability to adjust our cost structure to offset any reduction in the demand for our products and services;

	•		our loss of key personnel;

	•		competition in our industry may impact our operations or our ability to complete acquisitions;

	•		the failure to achieve expected sales volumes from our new franchises;

	•		insurance costs could increase significantly and all of our losses may not be covered by insurance; and

	•		our inability to obtain inventory of new and used vehicles and parts, including imported inventory, at the cost, or in the volume, we expect.

These factors, as well as additional factors that could affect our operating results and performance are described in our Form 10-K under the headings “Business — Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We urge you to carefully consider those factors.

All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. We undertake no duty to update the forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Information about our market sensitive financial instruments was provided as of December 31, 2004, in our Annual Report on Form 10-K. There have been no significant changes in our market risk from those disclosed at that time during the three months ended June 30, 2005.

Item 4. Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2005, to ensure that material information was accumulated, and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

During the three months ended June 30, 2005, we have made no change in our internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

From time to time, our dealerships are named in claims involving the manufacture of automobiles, contractual disputes and other matters arising in the ordinary course of business.

The Texas Automobile Dealers Association (“TADA”) and certain new vehicle dealerships in Texas that are members of the TADA, including a number of our Texas dealership subsidiaries, have been named in two state court class action lawsuits and one federal court class action lawsuit. The three actions allege that since January 1994, Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws. In April 2002, the state court in which two of the actions are pending certified classes of consumers on whose behalf the action would proceed. In October 2002, the Texas Court of Appeals affirmed the trial court’s order of class certification in the state action. The defendants requested that the Texas Supreme Court review that decision, and the Court declined that request on March 26, 2004. The defendants petitioned the Texas Supreme Court to reconsider its denial, and that petition was denied on September 10, 2004. In the federal antitrust action, in March 2003, the federal district court also certified a class of consumers. Defendants appealed the district court’s certification to the Fifth Circuit Court of Appeals, which on October 5, 2004, reversed the class certification order and remanded the case back to the federal district court for further proceedings. In February 2005, the plaintiffs in the federal action sought a writ of certiorari to the United States Supreme Court in order to obtain review of the Fifth Circuit’s order, which request the Court denied. In June, our Texas dealerships and certain other defendants in the lawsuits entered settlements with the plaintiffs in each of the cases. The settlements are contingent upon and subject to court approval. Estimated expense of the proposed settlements include our dealerships issuing certificates for discounts off future vehicle purchases, refunding cash in some circumstances, and paying attorneys’ fees and certain costs. Dealers participating in the settlements would agree to certain disclosures regarding inventory tax charges when itemizing such charges on customer invoices. If approved, we do not believe that these settlements will have a material adverse effect on our financial position, results of operations or cash flows. If the settlements are not approved, we will continue to vigorously assert available defenses in connection with these lawsuits. While we do not believe this litigation will have a material adverse effect on our financial condition or results of operations, no assurance can be given as to its ultimate outcome. A settlement on different terms or an adverse resolution of this matter in litigation could result in the payment of significant costs and damages.

In addition to the foregoing cases, there are currently no legal proceedings pending against or involving us that, in our opinion, based on current known facts and circumstances, are expected to have a material adverse effect on our financial position or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

From time to time, the board of directors authorizes management to repurchase shares of its common stock, subject to the restrictions of various debt agreements and management’s judgment. The first such authorization occurred in October 2000, and was disclosed in our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000. We have reported subsequent changes to the authorization in our SEC filings since that date. In March 2004, the board of directors authorized management to repurchase up to $25.0 million of its common stock. As of June 30, 2005, $18.9 million remained under the board of directors’ March 2004 authorization.

During the three months ended June 30, 2005, we acquired 11,588 shares of our common stock, valued at $310,000, from the Company’s former Chairman, Chief Executive Officer and President in payment of the exercise price of vested stock options.


	Votes Cast:
Nominees Elected	For		Withheld
Louis E. Lataif		21,889,809		475,946
Stephen D. Quinn		21,605,103		760,652
Our other continuing directors are: John L. Adams Earl J. Hesterberg Robert E. Howard II J. Terry Strange Max P. Watson, Jr.


For			22,355,473
Against			7,482
Abstain			2,800


10.1*		Separation Agreement and General Release by and between Group 1 Automotive, Inc. and B.B. Hollingsworth, Jr.

11.1		Statement re: computation of earnings per share is included under Note 3 to the financial statements.

31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.


	Group 1 Automotive, Inc.

	By:	/s/ Robert T. Ray

Date: August 9, 2005		Robert T. Ray, Senior Vice President,
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)

Exhibits		INDEX TO EXHIBITS

10.1		Separation Agreement and General Release by and between Group 1 Automotive, Inc. and B.B. Hollingsworth, Jr.

11.1		Statement re: computation of earnings per share is included under Note 3 to the financial statements.

31.1		Certification of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			24
Item 4. Controls and Procedures			24

PART II. OTHER INFORMATION

Item 1. Legal Proceedings			24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			24
Item 3. Defaults Upon Senior Securities			25
Item 4. Submission of Matters to a Vote of Security Holders			25
Item 5. Other Information			25
Item 6. Exhibits			25

Signatures			26
Separation Agreement & General Release - B.B. Hollingsworth, Jr.
Certification of CEO under Section 302
Certification of CFO under Section 302
Certification of CEO under Section 906
Certification of CFO under Section 906