FORM 10-Q/A

(Amendment No. 1)

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 September 30, 2005

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

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

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

     As of October 31, 2005, the Company had 24,432,321 shares of common stock, par value $.01, outstanding.

 

 

TABLE OF CONTENTS

Amendment No. 1 Explanatory Note			3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures about Market Risk			31
Item 4. Controls and Procedures			31
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3. Defaults Upon Senior Securities			32
Item 4. Submission of Matters to a Vote of Security Holders			32
Item 5. Other Information			32
Item 6. Exhibits			32
Signatures
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

Amendment No. 1 Explanatory Note

     We are filing Amendment No. 1 (this “Amendment”) to the Group 1 Automotive, Inc. Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005, to change the presentation of certain floorplan notes payable information. We finance substantially all of our new, and a portion of our used, vehicle inventories under revolving credit arrangements with a syndicated lending group (which includes both lenders affiliated with manufacturers of new vehicles and non-affiliated lenders) and, for certain new vehicle models, with lenders affiliated with the manufacturers of those vehicles. Consistent with industry practice, we previously reported all amounts outstanding under the caption “Floorplan notes payable” in our consolidated balance sheets and substantially all cash flows arising in connection with changes in floorplan notes payable as an item of cash flows from operating activities in our consolidated statements of cash flows.

     In response to recent comments from the Staff of the Securities and Exchange Commission (the “Staff”) in connection with a customary review of our 2004 Annual Report on Form 10-K, we reevaluated our presentation of this information. On January 30, 2006, our management and the Audit Committee of our Board of Directors concluded to amend and restate our 2004 Annual Report on Form 10-K and our September 30, 2005, Quarterly Report on Form 10-Q to reflect certain information in conformity with guidance under the Securities and Exchange Commission’s rules and regulations and Statement of Financial Accounting Standards No. 95, “Statement of Cash Flows.” This Amendment revises our consolidated balance sheets to reflect floorplan notes payable to the syndicated lending group separately from floorplan notes payable to lenders affiliated with manufacturers. It also revises our consolidated statements of cash flows to reflect borrowings and repayments from the syndicated lending group as an item of cash flows from financing activities with gross borrowings reflected separately from gross repayments.

      The changes in presentation have no effect on previously reported consolidated net income, earnings per share, total assets or liabilities, stockholders’ equity, total cash flows or our conclusion that our disclosure controls and procedures were effective as of September 30, 2005. This Form 10-Q/A contains changes to Part I – Item 1, Item 2 and Item 4 to reflect this restatement. There are no other significant changes to the original Form 10-Q other than those outlined above. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q or modify or update disclosures therein in any way other than as required to reflect the Amendment set forth below. Among other things, forward looking statements made in the original Form 10-Q have not been revised to reflect events that occurred or facts that became known to us after the filing of the original Form 10-Q (other than the restatement), and such forward looking statements should be read in their historical context. In addition, currently-dated certifications from our Chief Executive Officer and Chief Financial Officer have been included as exhibits to this Amendment.

Part I. Financial Information

Item 1. Financial Statements

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Restated)
(in thousands, except per share amounts)

		September 30,				December 31,
		2005				2004
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	33,528			$	37,750
Contracts-in-transit and vehicle receivables, net			137,000				172,402
Accounts and notes receivable, net			89,114				76,687
Inventories			686,694				877,575
Deferred income taxes			17,691				14,755
Prepaid expenses and other current assets			17,395				26,046
Total current assets			981,422				1,205,215
Property and equipment, net			176,033				160,297
Goodwill			373,530				366,673
Intangible franchise rights			169,185				187,135
Deferred costs related to insurance policy and vehicle service contract sales			6,477				7,996
Other assets			19,093				19,904
Total assets		$	1,725,740			$	1,947,220
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Floorplan notes payable - revolving credit facility		$	492,727			$	632,593
Floorplan notes payable - manufacturer affiliates			142,103				215,667
Acquisition line - revolving credit facility			25,000				—
Current maturities of long-term debt			948				1,054
Accounts payable			99,561				108,920
Accrued expenses			99,469				91,528
Total current liabilities			859,808				1,049,762
Long-term debt, net of current maturities			158,185				156,747
Acquisition line			—				84,000
Deferred income taxes			27,030				33,197
Other liabilities			27,156				24,288
Total liabilities before deferred revenues			1,072,179				1,347,994
Deferred revenues			27,040				32,052
Stockholders’ equity:
Preferred stock, 1,000 shares authorized; none issued or outstanding			—				—
Common stock, $.01 par value, 50,000 shares authorized; 24,424 and 23,916 issued, respectively			244				239
Additional paid-in capital			273,112				265,645
Retained earnings			357,008				318,931
Accumulated other comprehensive loss			(218	)			(173	)
Deferred stock-based compensation			(3,625	)			—
Treasury stock, at cost; 0 and 607 shares, respectively			—				(17,468	)
Total stockholders’ equity			626,521				567,174
Total libilities and stockholders’ equity		$	1,725,740			$	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 September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
REVENUES:
New vehicle retail sales		$	977,492			$	962,021			$	2,791,812			$	2,451,916
Used vehicle retail sales			279,484				265,544				819,816				737,541
Used vehicle wholesale sales			98,439				101,551				301,419				264,848
Parts and service sales			165,017				154,285				487,534				409,588
Finance, insurance and other, net			49,737				49,006				143,648				130,442
Total revenues			1,570,169				1,532,407				4,544,229				3,994,335
COST OF SALES:
New vehicle retail sales			907,731				895,634				2,594,379				2,280,237
Used vehicle retail sales			243,756				232,779				715,978				647,018
Used vehicle wholesale sales			100,248				104,132				303,702				270,026
Parts and service sales			75,316				69,978				222,473				185,232
Total cost of sales			1,327,051				1,302,523				3,836,532				3,382,513
GROSS PROFIT			243,118				229,884				707,697				611,822
Selling, general and administrative expenses			186,216				182,682				560,853				489,309
Depreciation and amortization expense			4,597				4,086				14,522				11,241
Asset impairments			4,987				41,373				4,987				41,373
INCOME FROM OPERATIONS			47,318				1,743				127,335				69,899
OTHER INCOME AND (EXPENSE):
Floorplan interest expense			(9,259	)			(6,813	)			(27,998	)			(17,660	)
Other interest expense, net			(4,344	)			(4,697	)			(14,174	)			(13,627	)
Loss on redemption of senior subordinated notes			—				—				—				(6,381	)
Other income (expense), net			87				1				95				(63	)
INCOME (LOSS) BEFORE INCOME TAXES			33,802				(9,766	)			85,258				32,168
Provision (benefit) for income taxes			12,176				(151	)			31,143				15,582
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE			21,626				(9,615	)			54,115				16,586
Cumulative effect of a change in accounting principle, net of tax benefit of $10,231			—				—				(16,038	)			—
NET INCOME (LOSS)		$	21,626			$	(9,615	)		$	38,077			$	16,586
EARNINGS (LOSS) PER SHARE:
BASIC:
Income (loss) before cumulative effect of a change in accounting principle		$	0.89			$	(0.42	)		$	2.27			$	0.73
Cumulative effect of a change in accounting principle			—				—				(0.67	)			—
Net income (loss)		$	0.89			$	(0.42	)		$	1.60			$	0.73
DILUTED:
Income (loss) before cumulative effect of a change in accounting principle		$	0.88			$	(0.42	)		$	2.24			$	0.71
Cumulative effect of a change in accounting principle			—				—				(0.66	)			—
Net income (loss)		$	0.88			$	(0.42	)		$	1.58			$	0.71
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			24,185				22,946				23,794				22,685
Diluted			24,571				22,946				24,150				23,427

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

GROUP 1 AUTOMOTIVE, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)

																		Accumulated
										Additional								Other
		Common Stock								Paid-in				Retained				Comprehensive				Deferred				Treasury
		Shares				Amount				Capital				Earnings				Loss				Comp				Stock				Total
BALANCE, December 31, 2004			23,916			$	239			$	265,645			$	318,931			$	(173	)		$	—			$	(17,468	)		$	567,174
Comprehensive income:
Net income															38,077																38,077
Unrealized loss on investments, net of income tax benefit of $27																			(45	)											(45	)
Total comprehensive income																															38,032
Issuance of common shares to employee benefit plans			390				4				(1,321	)															17,778				16,461
Issuance of restricted shares			155				2				5,868												(5,870	)							—
Restricted stock amortization																							1,201								1,201
Forfeiture of restricted shares			(37	)			(1	)			(1,043	)											1,044								—
Purchase of treasury stock																											(310	)			(310	)
Tax benefit from options exercised											3,963																				3,963
BALANCE, September 30, 2005			24,424			$	244			$	273,112			$	357,008			$	(218	)		$	(3,625	)		$	—			$	626,521

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
(Restated)
(in thousands)

		Nine Months Ended September 30,
		2005				2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	38,077			$	16,586
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				—
Asset impairments			4,987				41,373
Depreciation and amortization			14,522				11,241
Amortization of debt discount and issue costs			1,384				1,504
Amortization of deferred compensation			1,201				—
Deferred income taxes			2,413				(6,849	)
Tax benefit from options exercised			3,963				1,311
Provision for doubtful accounts and uncollectible notes			3,260				333
Losses on sales of assets			588				184
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			35,402				(18,788	)
Accounts and notes receivable			2,972				(9,580	)
Inventories			191,689				4,998
Prepaid expenses and other assets			11,650				3,976
Floorplan notes payable - manufacturer affiliates			(73,564	)			(2,641	)
Accounts payable and accrued expenses			(3,803	)			35,117
Deferred revenues			(5,081	)			(7,454	)
Net cash provided by operating activities			245,698				77,692
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(45,007	)			(35,445	)
Proceeds from sales of property and equipment			15,423				3,583
Purchases of restricted investments			(1,416	)			(1,464	)
Maturities of restricted investments			642				844
Decrease in restricted cash			168				1,938
Escrow deposits for acquisition of franchises			(500	)			—
Cash paid in acquisitions, net of cash received			(20,456	)			(221,721	)
Net cash used in investing activities			(51,146	)			(252,265	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit facility			2,653,469				2,700,136
Repayments on revolving credit facility			(2,867,507	)			(2,435,495	)
Principal payments of long-term debt			(887	)			(670	)
Repurchase of senior subordinated notes			—				(79,479	)
Proceeds from issuance of common stock to benefit plans			16,461				6,753
Repurchase of common stock, amounts based on settlement date			(310	)			(7,019	)
Net cash provided by (used in) financing activities			(198,774	)			184,226
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(4,222	)			9,653
CASH AND CASH EQUIVALENTS, beginning of period			37,750				26,483
CASH AND CASH EQUIVALENTS, end of period		$	33,528			$	36,136
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest		$	44,899			$	48,921
Income taxes, net of refunds received		$	16,077			$	11,040

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
(Restated)

1. 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; 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.”

2. RESTATEMENT AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Restatement

     Subsequent to the issuance of the Company’s September 30, 2005, consolidated financial statements, the Company’s management determined that certain information in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows should be restated and reclassified for all periods presented to comply with the guidance set forth by the rules and regulations of the Securities and Exchange Commission and Statement of Financial Accounting Standards (“SFAS”) No. 95, “Statement of Cash Flows.” Floorplan notes payable to a party other than the manufacturer of a particular new vehicle, and all floorplan notes payable relating to used vehicles, have been reclassified as floorplan notes payable – credit facility on the Consolidated Balance Sheets, and related cash flows have been reclassified from operating activities to financing activities on the Consolidated Statements of Cash Flows. Consistent with industry practice, the Company previously reported all cash flow information relating to floorplan notes payable as operating cash flows.

     A summary of the significant effects of the restatement are as follows:

Consolidated Balance Sheets

		At September 30, 2005								At December 31, 2004
		Reported				Restated				Reported				Restated
						(in thousands)
Floorplan notes payable		$	634,830			$	—			$	848,260			$	—
Floorplan notes payable - credit facility			—				492,727				—				632,593
Floorplan notes payable - manufacturer affiliates			—				142,103				—				215,667

Consolidated Statements of Cash Flows

		For the Nine Months Ended,
		September 30, 2005								September 30, 2004
		Reported				Restated				Reported				Restated
		(in thousands)
Floorplan notes payable		$	(220,525	)		$	—			$	(19,502	)		$	—
Floorplan notes payable - manufacturer affiliates			—				(73,564	)			—				(2,641	)
Net cash provided by operating activities			98,737				245,698				60,831				77,692
Net borrowings (payments) on revolving credit facility			(67,077	)			—				281,502				—
Borrowings on revolving credit facility			—				2,653,469				—				2,700,136
Repayments on revolving credit facility			—				(2,867,507	)			—				(2,435,495	)
Net cash provided by (used in) financing activities			(51,813	)			(198,774	)			201,087				184,226

     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 amended Annual Report on Form 10-K/A for the year ended December 31, 2004.

     Goodwill

     Goodwill represents the excess, at the date of acquisition, of the purchase price of businesses acquired over the fair value of the net tangible and intangible assets acquired. In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” Prior to the adoption of SFAS No. 141 on January 1, 2002, the Company did not separately record intangible assets apart from goodwill as all were amortized over similar lives. In 2001, the FASB also issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which changed the treatment of goodwill. SFAS No. 142 no longer permits the amortization of goodwill, but instead requires, at least annually, an assessment for impairment of goodwill by reporting unit, defined by the Company as each of its platforms, using a fair-value based, two-step test. The Company performs the annual impairment assessment at the end of each calendar year, and performs an impairment assessment more frequently if events or circumstances occur at a reporting unit between annual assessments that would more likely than not reduce the fair value of the reporting unit below its carrying value. See Note 5.

     In evaluating goodwill for impairment, the Company compares the carrying value of the net assets of each reporting unit, its platforms, to each platform’s respective fair value. This represents the first step of the impairment test. If the fair value of a platform is less than the carrying value of the net assets of the platform, the Company is then required to proceed to step two of the impairment test. The second step involves allocating the calculated fair value to all of the tangible and identifiable intangible assets of the respective platform as if the calculated fair value was the purchase price of the business combination. This allocation could result in assigning value to intangible assets not previously recorded separately from goodwill prior to the adoption of SFAS No. 141, which could result in less implied residual value assigned to goodwill (see discussion regarding franchise rights acquired prior to July 1, 2001, in “Intangible Franchise Rights” below). The Company then compares the value of the implied goodwill resulting from this second step to the carrying value of the goodwill in the respective platform. To the extent the carrying value of the goodwill exceeds the implied fair value, an impairment charge equal to the difference is recorded.

     In completing step one of the impairment analysis, the Company uses a discounted cash flow approach to estimate the fair value of each platform. Included in this analysis are assumptions regarding revenue growth rates, future gross margin estimates, future selling, general and administrative expense rates and the Company’s weighted average cost of capital. The Company also estimates residual values at the end of the forecast period and future capital expenditure requirements.

     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 September 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 SFAS No. 142, the Company evaluates these franchise rights for impairment annually, or more frequently if events or circumstances indicate possible impairment. See Note 5.

     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.

     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, pursuant to the Company’s 1996 Stock Incentive Plan, as amended. During the nine months ended September 30, 2005, 117,002 shares of restricted stock were granted and remain outstanding as of September 30, 2005. These shares 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. During the nine months ended September 30, 2005, 60,210 phantom stock awards were issued and remain outstanding at September 30, 2005. 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 (loss) and earnings (loss) 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 September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
		(in thousands, except per share amounts)
Net income (loss), as reported		$	21,626			$	(9,615	)		$	38,077			$	16,586
Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects			297				—				755				—
Deduct: Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(967	)			(840	)			(2,588	)			(2,697	)
Pro forma net income (loss)		$	20,956			$	(10,455	)		$	36,244			$	13,889
Earnings (loss) per share:
Basic — as reported		$	0.89			$	(0.42	)		$	1.60			$	0.73
Basic — pro forma		$	0.87			$	(0.46	)		$	1.52			$	0.61
Diluted — as reported		$	0.88			$	(0.42	)		$	1.58			$	0.71
Diluted — pro forma		$	0.85			$	(0.46	)		$	1.50			$	0.59

     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 nine months ended September 30, 2005, differed from the federal statutory rate of 35% due primarily to the impact of state income taxes. In addition to the impact of state income taxes, the effective income tax rate of 1.5% of pretax loss for the three months, and 48.4% of pretax income for the nine months, ended September 30, 2004, differed from the federal statutory rate due primarily to the non-deductibility for tax purposes of certain portions of the goodwill impairment charge taken in the third quarter of 2004 (see Note 5).

     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 and 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. See Note 4 for a discussion of the effects of Hurricanes Katrina and Rita on the Company’s results during the third quarter of 2005.

     During the third quarter of 2005, the Company completed its analysis of the results compiled by a third-party actuary with respect to its general liability policy exposures for all open policy years. Based on the results of this analysis, the Company recorded a $1.4 million reduction to its general liability accrual. The Company intends to obtain an updated actuarial study on an annual basis and will make the appropriate adjustments to its accrual accordingly.

     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.

     In October 2005, the FASB staff issued FASB Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period,” which, starting in the first reporting period beginning after December 15, 2005, will require companies to expense, versus capitalizing into the carrying costs, rental costs associated with ground or building operating leases that are incurred during a construction period. During the three and nine months ended September 30, 2005, the Company capitalized rental costs incurred during construction of approximately $0.3 million and $1.1 million, respectively. During the three and nine months ended September 30, 2004, the Company capitalized rental costs incurred during construction of approximately $0.3 million and $0.6 million, respectively.

     Reclassifications

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

3. EARNINGS (LOSS) PER SHARE:

     Basic earnings (loss) per share is computed based on weighted average shares outstanding and excludes dilutive securities. Diluted earnings (loss) per share is computed including the impact of all potentially dilutive securities. The following table sets forth the calculation of earnings (loss) per share:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
		(in thousands, except per share amounts)
Income (loss) before cumulative effect of a change in accounting principle		$	21,626			$	(9,615	)		$	54,115			$	16,586
Cumulative effect of a change in accounting principle, net of tax benefit			—				—				(16,038	)			—
Net income (loss)		$	21,626			$	(9,615	)		$	38,077			$	16,586
Weighted average basic shares outstanding			24,185				22,946				23,794				22,685
Dilutive effect of stock-based awards, net of assumed repurchase of treasury stock			386				—				356				742
Weighted average diluted shares outstanding			24,571				22,946				24,150				23,427
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of a change in accounting principle		$	0.89			$	(0.42	)		$	2.27			$	0.73
Cumulative effect of a change in accounting principle			—				—				(0.67	)			—
Net income (loss)		$	0.89			$	(0.42	)		$	1.60			$	0.73
Diluted:
Income (loss) before cumulative effect of a change in accounting principle		$	0.88			$	(0.42	)		$	2.24			$	0.71
Cumulative effect of a change in accounting principle			—				—				(0.66	)			—
Net income (loss)		$	0.88			$	(0.42	)		$	1.58			$	0.71

4. HURRICANES KATRINA AND RITA:

     On August 29, 2005, Hurricane Katrina struck the Gulf Coast of the United States, including New Orleans, Louisiana. At that time, the Company operated six dealerships in the New Orleans area, consisting of nine franchises. Two of the dealerships are located in the heavily flooded East Bank area of New Orleans and nearby Metairie, while the other four are located on the West Bank of New Orleans, where flood-related damage was less severe. The East Bank stores suffered significant damage and loss of business and remain closed. The West Bank stores reopened after approximately two weeks, but are still feeling the lingering effects of a recovering local economy.

     On September 24, 2005, Hurricane Rita came ashore along the Texas/Louisiana border, near Houston and Beaumont, Texas. The Company operates two dealerships in Beaumont, Texas, consisting of eleven franchises and nine dealerships in the Houston area consisting of seven franchises. As a result of the evacuation by many residents in Houston, and the aftermath of the storm in Beaumont, all of these dealerships were closed several days ahead of the storm and for several days thereafter. All of these dealerships have since resumed operations, although operations in Beaumont have been hampered by limited municipal services.

     The Company is self-insured for a portion of the claims related to its property and casualty insurance programs. As a result of insurable events that occurred earlier in 2005, the Company had exhausted most of its self-insurance exposure on its physical damage policies prior to the start of the third quarter. Therefore, the physical losses sustained as a result of Hurricanes Katrina and Rita were generally limited to deductibles required under the Company’s various insurance policies. Based on preliminary estimates of the damage sustained to its New Orleans-area and Beaumont dealership facilities and its inventory of new and used vehicles at those locations, the Company’s total projected loss for such damage is expected to range from $22.3 million to $23.4 million. As the Company cannot determine with more certainty the actual loss within this range, it has accrued the low end of this range of $22.3 million as a component of its selling, general and administrative expenses within its Consolidated Statements of

Operations in accordance with the requirements of FASB Interpretation No. 14, “Reasonable Estimation of the Amount of a Loss, an Interpretation of FASB Statement No. 5.” After the Company’s application of the terms of its underlying property and casualty insurance policies, the Company has established an insurance recovery receivable totaling $18.2 million and reduced the above-noted estimated loss accordingly. This receivable was established based on the determination of management, given their experience with these type claims and discussions to date with its insurance carriers, that it is probable that recovery will occur for the amount of these write-offs and the cost to repair its leased facilities in excess of insurance policy deductibles. The Company made the determination of whether recovery was “probable” in accordance with the requirements of SFAS No. 5, “Accounting for Contingencies,” which defines “probable” as being likely to occur. The Company’s net loss recorded during the third quarter related to damage sustained due to the hurricanes was therefore $4.1 million.

     The Company also maintains business interruption insurance coverage and has recorded a receivable of approximately $0.2 million in expected recoveries, net of required deductibles, related to covered payroll and fixed cost expenditures at its East Bank dealerships incurred prior to September 30, 2005. This amount was recorded as a reduction to the above noted loss accrual, resulting in a net loss during the period of $3.9 million. Although the Company believes it may be eligible for greater amounts of recovery for loss of operations at all of its New Orleans-area and Beaumont dealerships, it is at this time unable to determine either the amount of, or nature of, covered items with any certainty. Any future recoveries under this coverage will be recognized in the period in which all contingencies have been resolved.

     All of the amounts reflected to date are estimates based on information currently available to the Company. These estimates are preliminary and subject to change until the Company has finalized all amounts with its insurance carriers. Although the Company believes that any increase in total loss above the high-end of the exposure range noted above would be offset by increases to the above-noted receivables, there can be no assurance that such offsetting occurs and any difference could be material to the Company’s financial position, results of operations or cash flows. The Company is unable to estimate what the effect on its fourth-quarter results will be or what insurance recoveries may ultimately be received to offset any such impact.

5. ASSET IMPAIRMENTS:

     In connection with the preparation and review of its third-quarter interim financial statements, the Company determined that recent events and circumstances in New Orleans indicated that an impairment of goodwill and/or other long-lived assets may have occurred in the three months ended September 30, 2005. As a result, the Company performed interim impairment assessments of certain of its asset groups (dealerships) in the New Orleans area, followed by an interim impairment assessment of the New Orleans platform’s goodwill, in connection with the preparation of its financial statements for the period ended September 30, 2005.

     As a result of these assessments, the Company recorded a pretax impairment charge of $1.3 million during the third quarter of 2005 relating to the franchise value of its Dodge store located in Metairie, Louisiana, whose book value exceeded its fair value. Based on the Company’s goodwill assessment, no impairment of the carrying value of the recorded goodwill associated with the Company’s New Orleans platform is required. The Company’s goodwill impairment analysis included an assumption that the Company’s business interruption insurance proceeds would allow the platform to maintain a level cash flow rate consistent with past operating performance until those operations return to normal. The Company is unable to determine at this time, and therefore has made no assumption regarding, whether a permanent decline in the New Orleans business economy has occurred. Such a permanent decline could have a material adverse effect on the Company’s operations and could result in the fair value of the Company’s New Orleans platform not exceeding the carrying value of the respective net assets of the platform.

     As the Company does not have any recorded intangible franchise value associated with any of its Beaumont franchises and does not believe Hurricane Rita will have any lasting effect on its combined Houston/Beaumont operations, the Company does not believe that an interim assessment of its Houston/Beaumont platform is required.

     Due to the pending disposals of two of the Company’s California franchises, a Kia and a Nissan franchise, the Company tested the respective asset groups (dealerships) of such franchises for impairment during the third quarter of 2005. These tests resulted in impairments of long-lived assets totaling $3.7 million.

     During October 2004, in connection with the preparation and review of the 2004 third-quarter interim financial statements, the Company determined that recent events and circumstances at its Atlanta platform, including further deterioration of the platform’s financial results and recent changes in platform management, indicated that an impairment of goodwill may have occurred in the three months ended September 30, 2004. As a result, the Company performed an interim impairment assessment of the Atlanta platform’s goodwill in accordance with SFAS No. 142. After analyzing the long-term potential of the Atlanta market and the expected future operating results of its dealership franchises in Atlanta, the Company estimated the fair value of the reporting unit as of September 30, 2004. As a result of the required evaluation, the Company determined that the carrying amount of the reporting unit’s goodwill exceeded its implied fair value as of September 30, 2004, and recorded a goodwill impairment charge of $40.3 million. In connection with this evaluation, the Company determined that impairment of certain long-lived assets of the Atlanta platform may have occurred requiring an impairment assessment of these assets in accordance with SFAS No. 144. As a result of this assessment, the Company recorded a $1.1 million pretax impairment charge during the third quarter of 2004.

6. RELATED PARTY TRANSACTIONS:

     During 2005, the Company entered into the following real estate transactions with various entities, some of the partners of which are among the management of several of the Company’s platforms, on terms comparable to those in recent transactions between the Company and unrelated third parties and that the Company believes represent fair market value:

     In Milford, Massachusetts, the Company sold recently acquired real estate for approximately $4.2 million and executed a 15-year lease, to begin upon the completion of construction of a new Toyota dealership facility for one of its existing franchises. The lease has three five-year renewal options, exercisable at the Company’s sole discretion. Upon completion, the Company contemplates selling the facility to the landowner and amending the lease accordingly. Prior to completion of construction, the Company is reimbursing the lessor for approximately $0.3 million per year of interest and other related land carrying costs.

     In Stratham, New Hampshire, the Company assigned its right to buy dealership land and facilities associated with its acquisition of a BMW franchise. The assignee purchased the dealership facility and related real estate at appraised value and entered into a 15-year lease with the Company. The lease has three five-year renewal options, exercisable at the Company’s sole discretion. Future minimum lease payments total approximately $5.1 million over the initial lease term.

     In Rockwall, Texas, the Company assigned its right to buy undeveloped land in connection with the acquisition of Chrysler and Jeep franchises. The assignee 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 and a dealership facility to be constructed by the Company and sold to the landowner upon completion. The lease terms will be finalized upon completion of the facility. In the event the Company does not ultimately 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 Amarillo, Texas, the Company sold for $2.2 million and leased back a dealership facility housing Lincoln and Mercury franchises. The lease has a 15-year initial term, three five-year renewal options, exercisable at the Company’s sole discretion, and future minimum lease payments of approximately $2.9 million over the initial lease term.

     In Danvers, Massachusetts, the Company executed a 15-year lease, to begin upon the completion of construction by the Company of a new collision center and service facility for an existing Audi franchise. The lease has three five-year renewal options, exercisable at the Company’s sole discretion. Upon completion, the Company contemplates selling the facility to the landowner and amending the lease accordingly. Prior to completion of construction, the Company is reimbursing the lessor for approximately $0.4 million per year of interest and other related land carrying costs.

     In Oklahoma City, Oklahoma, the Company entered into a lease for undeveloped land with an entity in which Robert E. Howard II, a director of the Company, is majority partner, upon which the Company intends to construct a new dealership facility for its Toyota franchise. The lease has a 15-year initial term, three five-year renewal options, exercisable at the Company’s sole discretion, and future minimum lease payments of $3.6 million (based solely on the value of the undeveloped land under lease). Upon completion, the Company contemplates selling the facility to the landowner and amending the lease accordingly.

7. COMPREHENSIVE INCOME (LOSS):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2005				2004				2005				2004
		(in thousands)
Net income (loss)		$	21,626			$	(9,615	)		$	38,077			$	16,586
Other comprehensive income (loss):
Change in fair value of interest rate swaps, net of tax			—				353				—				1,179
Unrealized losses on available for sale securities, net of tax			(29	)			—				(45	)			—
Comprehensive income (loss)		$	21,597			$	(9,262	)		$	38,032			$	17,765

8. 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 (Restated)

     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.”

Restatement

     As discussed under the heading “Amendment No. 1 Explanatory Note” on page 3 and further described in the Notes to Consolidated Financial Statements we have restated our consolidated financial statements and other financial information.

Overview

     We are a leading operator in the $1 trillion automotive retailing industry. As of September 30, 2005, we owned and operated 144 dealership franchises, representing 32 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, 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 30 collision service centers.

     Our operating results reflect the combined performance of each of our interrelated business activities, which include the sale of new vehicles, used vehicles, finance and insurance products, and parts, service and collision repair services. Historically, each of these activities has been directly or indirectly impacted by a variety of supply/demand factors, including vehicle inventories, consumer confidence, discretionary spending, availability and affordability of consumer credit, manufacturer incentives, weather patterns, fuel prices and interest rates. For example, during periods of sustained economic downturn or significant supply/demand imbalances, new vehicle sales may be negatively impacted as consumers 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 during the first nine months of 2005, and specifically the third 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 nine months ended September 30, 2005, we reported net income of $21.6 million and $38.1 million and diluted earnings per share of $0.88 and $1.58, respectively, compared to net loss of $9.6 million and net income of $16.6 million and diluted loss per share of $0.42 and diluted earnings per share of $0.71, respectively, during the comparable periods of 2004. The following items significantly affected our financial position and results of operations in 2005 or 2004, and may cause our reported results to not be comparable to or indicative of our future performance.

Nine Months Ended September 30, 2005:

	•		Hurricane Katrina: On August 29, 2005, Hurricane Katrina struck the Gulf Coast of the United States, including New Orleans, Louisiana. At that time, the Company operated six dealerships in the New Orleans area consisting of nine franchises. Two of the dealerships are located in the heavily flooded East Bank of New Orleans and nearby Metairie areas, while the other four are located on the West Bank of New Orleans, where flood-related damage was less severe. The East Bank stores suffered significant damage and loss of business and remain closed. The West Bank stores reopened after approximately two weeks, but are still feeling the lingering effects of a recovering local economy. Our third quarter 2005 results reflect the adverse impact from the loss of business during this time period, as well as an estimated pretax charge of $3.5 million, net of certain estimated insurance recoveries of $18.3 million, related primarily to our insurance deductibles for incurred losses. We have estimated the total adverse effect on our third-quarter results (including actual operating losses, estimated lost profits, some of which may ultimately be recoverable under our business interruption insurance coverages, uninsured losses noted above and the asset impairment charge noted below) to be approximately $6.7 million on a pretax basis.
	•		Hurricane Rita: On September 24, 2005, Hurricane Rita came ashore along the Texas/Louisiana border, near Houston and Beaumont, Texas. The Company operates two dealerships in Beaumont, Texas, consisting of eleven franchises and nine dealerships in the Houston area consisting of seven franchises. As a result of the evacuation by many residents of Houston, and the aftermath of the storm in Beaumont, all of these dealerships were closed several days ahead of the storm and for several days thereafter. All of these dealerships have since resumed operations, although operations in Beaumont have been hampered by limited municipal services. Our third quarter 2005 results reflect the adverse impact from the loss of business during this time period, as well as an estimated pretax charge of $0.4 million, net of estimated insurance recoveries of $0.1 million, related to our insurance deductibles for incurred losses. We have estimated the total adverse effect on our third-quarter results (including actual operating losses and estimated lost profits, some of which may ultimately be recoverable under our business interruption insurance coverages and the uninsured losses noted above) to be approximately $1.9 million on a pretax basis.

	•		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 $0.66 per diluted share, as the cumulative effect of a change in accounting principle in the first quarter of 2005.
	•		Asset Impairments: In connection with the preparation and review of our third-quarter interim financial statements, we determined that recent events and circumstances in New Orleans indicated that an impairment of goodwill and/or other long-lived assets may have occurred in the three months ended September 30, 2005. Therefore, we performed an interim impairment assessments of certain asset groups followed by an interim impairment assessment of the New Orleans platform’s goodwill. As a result of these assessments, the Company recorded a pretax impairment charge of $1.3 million during the third quarter of 2005 relating to one asset group whose book value exceeded its fair value.
			Due to the pending disposals of two of our California franchises, a Kia and a Nissan franchise, the Company tested the respective asset groups for impairment during the third quarter of 2005. These tests resulted in impairments of long-lived assets totaling $3.7 million.

Nine Months Ended September 30, 2004:

	•		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.
	•		Asset Impairments: In the third quarter of 2004, as a result of the further deterioration of our Atlanta platform’s financial results throughout 2004, we concluded that the carrying amount of the reporting unit exceeded its fair value as of September 30, 2004. Accordingly, we recorded a total pretax charge of $41.4 million, or $29.4 million on an after-tax basis or $1.25 per diluted share, related to the impairment of the carrying of its goodwill and certain long-lived assets.

     For the three months and nine months ended September 30, 2005, as compared to the same periods of 2004, our consolidated revenues increased 2.5% and 13.8%, respectively, and our consolidated gross profit increased 5.8% and 15.7%, respectively, primarily because of acquisitions closed during 2004, together with improvements from our Same Store locations. During the same periods of 2005, our Same Store revenues increased 1.6% and 2.2%, respectively, compared to the same periods of 2004, due to increases in each business line. Our Same Store gross profit increased 5.0% during the third quarter and 3.9% during the nine months ended September 30, 2005, compared to the same periods of 2004, due to increases in the gross profit realized from all our lines of business. Our Same Store gross margins during the three- and nine-month periods of 15.6% and 15.7%, respectively, reflected improvement over margins of 15.1% and 15.4%, respectively, in the corresponding prior year periods.

     During the third quarter and first nine months of 2005, as compared to 2004, we had increases of 1.9% and 14.6%, respectively, in our consolidated selling, general and administrative (“SG&A”) expenses primarily because of acquisitions closed during 2004. Our Same Store SG&A expense as a percentage of gross profit declined approximately 490 basis points during the three months ended September 30, 2005, as compared to 2004, due to our continued focus on overhead and the above noted increase in gross profit.

     During the third quarter and first nine months of 2005, as compared to 2004, we had 35.9% and 58.5% increases in floorplan interest expense. Both increases were due in large part to significant increases in our weighted average interest rate. During the quarter, this increase was offset by a reduction in weighted average outstanding borrowings and the maturity of an interest rate swap that accounted for approximately $0.6 million of the expense in the third quarter of 2004. For the year-to-date period, increases in weighted average outstanding borrowings, due primarily to acquisitions, added to this increase, partially offset by the maturity of our interest rate swap that accounted for approximately $1.9 million of the expense for the nine months ended September 30, 2004.

     Finally, our other interest expense decreased 7.5% during the quarter versus the prior year quarter, due to a decrease in our weighted average borrowings, as we have continued to pay down the borrowings under our acquisition line of credit. This decrease was offset by an increase in our weighted average interest rate during the period. Other interest expense increased 4.0% for the year-to-date period as our weighted average outstanding borrowings and our weighted average interest rate increased over the prior-year period. Our weighted average borrowings increased because of the timing of our borrowings in 2004, most of which occurred in the second half of that year.

     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 amended Annual Report on Form 10-K/A. With the exception of the discussion below regarding a change to our method of valuation of intangible franchise rights and a change in how we estimate our liability for self-insured property and casualty risk reserves, no significant changes have occurred since that time. See also Note 2 to our Condensed Consolidated Financial Statements for further discussion.

     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 September 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.

     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. During the third quarter of 2005, we completed our analysis of the results compiled by a third-party actuary with respect to our workers compensation and general liability policy exposures for all open policy years. Based on the results of this analysis, we recorded a $1.4 million reduction to our general liability accrual. We intend to obtain an updated actuarial study on an annual basis and will make the appropriate adjustments to our accrual accordingly.

     Actuarial estimates for the portion of claims not covered by insurance are based on our historical claims experience adjusted for loss trending and loss development factors. 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 September 30, 2005, by $1.9 million.

     Our potential exposure under all of our self-insured property and casualty plans currently totals $45.0 million, before consideration of accruals we have recorded related to our loss projections or future deductibles we may be required to absorb

under our insurance policies. After consideration of these accruals, our remaining potential loss exposure under these plans totals approximately $16.7 million at September 30, 2005.

Results of Operations

     The following tables present comparative financial and non-financial data for the three and nine months ended September 30, 2005 and 2004, of (a) our “Same Store” locations, (b) our New Orleans operations consisting of our Bohn platform, (c) those locations acquired or disposed of (“Transactions”) during the periods, and (d) the total Company. Same Store amounts include the results of dealerships for the identical months in each period presented in the comparison, excluding our Bohn platform dealerships, 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.

     Due to the adverse impact of Hurricane Katrina on the results of our Bohn platform (including insurance and other hurricane-related charges), we have excluded its results from Same Store results throughout the following discussion for all periods presented. We believe this more clearly reflects the results of our unaffected operations and provides greater clarity as to the ongoing impact on our New Orleans operations. Two of the six dealerships that make up our Bohn platform have been closed since August 29, 2005. The remaining four dealerships on the West Bank of New Orleans were opened for business in mid-September, but are still suffering from the lingering effects of a recovering local economy. We have not excluded from our Same Store results the adverse impact of Hurricane Rita on our Houston/Beaumont platform as we do not believe it to be of a nature warranting such separate presentation.

New Vehicle Retail Data
(dollars in thousands, except per unit amounts)

		Three Months Ended September 30,													Nine Months Ended September 30,
		2005				% Change				2004					2005				% Change				2004
Retail Unit Sales
Same Stores			32,151				0.7	%			31,933					82,705				0.8	%			82,021
Bohn Platform			1,492				(27.5	)%			2,058					4,966				(15.0	)%			5,843
Transactions			712								—					9,238								—
Total			34,355				1.1	%			33,991					96,909				10.3	%			87,864
Retail Sales Revenues
Same Stores		$	912,024				0.5	%		$	907,146				$	2,336,781				1.7	%		$	2,297,323
Bohn Platform			40,559				(26.1	)%			54,875					131,738				(14.8	)%			154,593
Transactions			24,909								—					323,293								—
Total		$	977,492				1.6	%		$	962,021				$	2,791,812				13.9	%		$	2,451,916
Gross Profit
Same Stores		$	65,389				2.5	%		$	63,769				$	165,424				1.0	%		$	163,813
Bohn Platform			2,336				(10.8	)%			2,618					7,468				(5.1	)%			7,866
Transactions			2,036								—					24,541								—
Total		$	69,761				5.1	%		$	66,387				$	197,433				15.0	%		$	171,679
Gross Profit per Retail Unit Sold
Same Stores		$	2,034				1.9	%		$	1,997				$	2,000				0.2	%		$	1,997
Bohn Platform		$	1,566				23.1	%		$	1,272				$	1,504				11.7	%		$	1,346
Transactions		$	2,860												$	2,657
Total		$	2,031				4.0	%		$	1,953				$	2,037				4.2	%		$	1,954
Gross Margin
Same Stores			7.2	%							7.0	%				7.1	%							7.1	%
Bohn Platform			5.8	%							4.8	%				5.7	%							5.1	%
Transactions			8.2	%												7.6	%
Total			7.1	%							6.9	%				7.1	%							7.0	%
Inventory Days Supply (1)
Same Stores			57				(9.5	)%			63					57				(9.5	)%			63
Bohn Platform			69				(2.8	)%			71					69				(2.8	)%			71
Transactions			69													69
Total			57				(10.9	)%			64					57				(10.9	)%			64

     Our new vehicle unit sales, revenues and gross profit during the three and nine months ended September 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. 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 September 30,													Nine Months Ended September 30,
		2005				% Change				2004					2005				% Change				2004
Toyota/Scion			7,991				6.2	%			7,526					20,111				7.9	%			18,638
Ford			5,010				5.2				4,761					13,247				(2.2	)			13,549
Nissan			3,120				(3.0	)			3,215					8,498				4.8				8,105
Honda			2,807				11.8				2,511					7,446				3.9				7,164
Chevrolet			2,098				(19.6	)			2,610					6,538				(3.5	)			6,775
Dodge			1,994				2.9				1,938					4,730				(8.6	)			5,175
Lexus			1,443				6.2				1,359					4,074				1.5				4,013
Chrysler			1,261				31.1				962					3,039				25.7				2,418
Jeep			967				8.0				895					2,342				(0.1	)			2,345
Mercedes-Benz			833				8.2				770					1,410				4.4				1,350
Other			4,627				(14.1	)			5,386					11,270				(9.8	)			12,489
Total			32,151				0.7				31,933					82,705				0.8				82,021

     The decrease in our other brands during the quarter was concentrated primarily in Kia, Hyundai, Mitsubishi and GMC. For the nine months ended September 30, 2005, as compared to the same period of 2004, the decrease in other brands resulted primarily from declines in Mitsubishi, Kia, Isuzu and Lincoln.

     Our consolidated new vehicle gross margin improved from 6.9% and 7.0% for the three and nine months ended September 30, 2004, respectively, to 7.1% for both the three months and nine months ended September 30, 2005. These improvements reflect the favorable impact of luxury franchises acquired last year, which generally yield higher gross margins than domestic or import non-luxury franchises. We expect new vehicle gross margins to continue to reflect the highly competitive environment of new vehicle sales.

     Most manufacturers offer interest assistance to offset floorplan interest charges incurred in connection with inventory purchases. This assistance varies by manufacturer, but in general provides for a defined amount to be paid regardless of our actual floorplan rate or the length of time for which the inventory is financed. The amount of interest assistance we recognize in a given period is primarily a function of the specific terms of the respective manufacturers’ interest assistance programs and wholesale interest rates, the average wholesale price of inventory sold, and our level of inventory turn. 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, our other manufacturers’ assistance is relatively fixed. For these reasons, this assistance has ranged from approximately 77% to 158% of our total floorplan interest expense over the past five years. For the third quarter of 2005 as compared to 2004, this ratio, on a consolidated basis, declined from 139% to 105%, 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. On a consolidated basis, the total assistance recognized in cost of goods sold during the three months ended September 30, 2005 and 2004, was $9.7 million and $9.5 million, respectively, while the assistance for the nine months ended September 30, 2005 and 2004, was $27.5 million and $24.5 million, respectively.

     Finally, our consolidated days’ supply of new vehicle inventory continues to decrease, from 64 days’ supply at September 30, 2004, to 57 days’ supply at September 30, 2005. This improvement reflects our efforts to control inventory levels in this period of rising interest rates and is slightly below our target level of 60 days’ supply. Our 57 days’ supply at September 30, 2005, was negatively impacted by our domestic inventory, which stood at 79 days’ supply, versus our import and luxury brands of which we had 41 and 52 days’ supply, respectively.

Used Vehicle Retail Data
(dollars in thousands,
except per unit amounts)

		Three Months Ended September 30,													Nine Months Ended September 30,
		2005				% Change				2004					2005				% Change				2004
Retail Unit Sales
Same Stores			16,804				0.6	%			16,705					45,876				(2.8	)%			47,202
Bohn Platform			686				(31.5	)%			1,002					2,812				(9.8	)%			3,116
Transactions			336								—					3,821								—
Total			17,826				0.7	%			17,707					52,509				4.4	%			50,318
Retail Sales Revenues
Same Stores		$	263,536				4.6	%		$	251,999				$	706,509				1.6	%		$	695,456
Bohn Platform			9,329				(31.1	)%			13,545					37,921				(9.9	)%			42,085
Transactions			6,619								—					75,386								—
Total		$	279,484				5.2	%		$	265,544				$	819,816				11.2	%		$	737,541
Gross Profit
Same Stores		$	33,773				8.8	%		$	31,031				$	90,146				5.3	%		$	85,589
Bohn Platform			1,290				(25.6	)%			1,734					4,958				0.5	%			4,934
Transactions			665								—					8,734								—
Total		$	35,728				9.0	%		$	32,765				$	103,838				14.7	%		$	90,523
Gross Profit per Retail Unit Sold
Same Stores		$	2,010				8.2	%		$	1,858				$	1,965				8.4	%		$	1,813
Bohn Platform		$	1,880				8.6	%		$	1,731				$	1,763				11.4	%		$	1,583
Transactions		$	1,979												$	2,286
Total		$	2,004				8.3	%		$	1,850				$	1,978				9.9	%		$	1,799
Gross Margin
Same Stores			12.8	%							12.3	%				12.8	%							12.3	%
Bohn Platform			13.8	%							12.8	%				13.1	%							11.7	%
Transactions			10.0	%												11.6	%
Total			12.8	%							12.3	%				12.7	%							12.3	%

Used Vehicle Wholesale Data
(dollars in thousands,
except per unit amounts)

		Three Months Ended September 30,													Nine Months Ended September 30,
		2005				% Change				2004					2005				% Change				2004
Wholesale Unit Sales
Same Stores			12,978				0.4	%			12,931					34,161				0.5	%			33,988
Bohn Platform			647				(28.1	)%			900					2,342				(7.3	)%			2,527
Transactions			207								—					3,017								—
Total			13,832				0.0	%			13,831					39,520				8.2	%			36,515
Wholesale Sales Revenues
Same Stores		$	93,122				(3.8	)%		$	96,771				$	257,453				2.5	%		$	251,195
Bohn Platform			3,661				(23.4	)%			4,780					13,839				1.4	%			13,653
Transactions			1,656								—					30,127								—
Total		$	98,439				(3.1	)%		$	101,551				$	301,419				13.8	%		$	264,848
Gross Profit (Loss)
Same Stores		$	(1,751	)			27.6	%		$	(2,419	)			$	(2,228	)			53.2	%		$	(4,757	)
Bohn Platform			(8	)			95.1	%			(162	)				(62	)			85.3	%			(421	)
Transactions			(50	)							—					7								—
Total		$	(1,809	)			29.9	%		$	(2,581	)			$	(2,283	)			55.9	%		$	(5,178	)
Wholesale Profit (Loss) per Wholesale Unit Sold
Same Stores		$	(135	)			27.8	%		$	(187	)			$	(65	)			53.6	%		$	(140	)
Bohn Platform		$	(12	)			93.3	%		$	(180	)			$	(26	)			84.4	%		$	(167	)
Transactions		$	(242	)											$	2
Total		$	(131	)			29.9	%		$	(187	)			$	(58	)			59.2	%		$	(142	)
Gross Margin
Same Stores			(1.9	)%							(2.5	)%				(0.9	)%							(1.9	)%
Bohn Platform			(0.2	)%							(3.4	)%				(0.4	)%							(3.1	)%
Transactions			(3.0	)%												0.0	%
Total			(1.8	)%							(2.5	)%				(0.8	)%							(2.0	)%