In response to the challenging operating environment, we have undertaken significant cost saving initiatives. In 2008, we eliminated approximately 1,400 positions, representing approximately 10.0% of our worldwide workforce, and amended pay plans for certain other employees to better align our workforce for current business levels and to reduce compensation expense generally. Other cost curtailment initiatives include a reduction in advertising activities, a suspension of matching contributions to our defined contribution plans, and the suspension of our quarterly cash dividends to stockholders. We will continue to monitor the business climate, and take such further actions as needed to respond to business conditions.
Operating Overview
New and used vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, fees for facilitating the sale of third-party finance and lease contracts and the sale of certain other products. Service and parts revenues include fees paid for repair, maintenance and collision services, and the sale of replacement parts and the sale of aftermarket accessories. During the three months ended March 31, 2009, we experienced a year over year decline on a same store basis of new and used vehicle unit sales, coupled with a corresponding decrease in finance and insurance revenues. Our same store service and parts business also experienced a decline during this period, although less so than vehicle sales. We expect a continuation of this difficult operating environment throughout 2009.
Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, service and parts transactions, and the distribution of the smart fortwo. Our gross profit varies across product lines, with vehicle sales usually resulting in lower gross profit margins and our other revenues resulting in higher gross profit margins. Factors such as customer demand, consumer sentiment, general economic conditions, seasonality, weather, credit availability, fuel prices and manufacturers' advertising and incentives may impact the mix of our revenues, and therefore influence our gross profit margin. During the three months ended March 31, 2009, we experienced year over year margin declines relating to our new vehicle sales and service and parts operations, and an increase in used vehicle sales margins. We expect such margin pressure to continue throughout 2009.
Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other outside services. A significant portion of our selling expenses are variable, and we believe a significant portion of our general and administrative expenses are subject to our control, allowing us to adjust them over time to reflect economic trends. Our selling, general, and administrative expenses for compensation and advertising have decreased during the three months ended March 31, 2009, due in part to lower vehicle sales volumes, coupled with the cost savings initiatives outlined above. Our rent expense is expected to grow as a result of cost of living indexes outlined in our lease agreements. As outlined in "Outlook" above, we will continue to monitor the business climate, and take such further actions as needed to respond to business conditions.
Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that is secured by those vehicles. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing. The cost of our variable rate indebtedness is typically based on benchmark lending rates, which are based in large part upon national inter-bank lending rates set by local governments. During the latter part of 2008, such benchmark rates were significantly reduced as a result of government actions designed to spur liquidity and bank lending activities. As a result, our cost of capital on variable rate indebtedness has declined during the first quarter 2009; however, the significance of this decrease is limited somewhat by the increases in rate spreads being charged by our vehicle finance partners outlined in "Outlook" above.
Equity in earnings of affiliates represents our share of the earnings relating to investments in various joint ventures and other non-consolidated investments, notably PTL. It is our expectation that difficult operating conditions outlined above will similarly impact these businesses throughout 2009.
The future success of our business will likely be dependent on, among other things, general economic and industry conditions, our ability to consummate and integrate acquisitions, our ability to increase sales of higher margin products, especially service and parts services, our ability to realize returns on our significant capital investment in new and upgraded dealerships, the success of our distribution of the smart fortwo, and the return realized from our investments in various joint ventures and other non-consolidated investments, notably PTL. See "Forward-Looking Statements."

Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.
The following are the accounting policies applied in the preparation of our financial statements that management believes are most dependent upon the use of estimates and assumptions.
Revenue Recognition
Vehicle, Parts and Service Sales
We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is performed and when parts are delivered to our customers. Sales promotions that we offer to customers are accounted for as a reduction of revenues at the time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as a reduction of cost of sales. Reimbursements of qualified advertising expenses are treated as a reduction of selling, general and administrative expenses. The amounts received under various manufacturer rebate and incentive programs are based on the attainment of program objectives, and such earnings are recognized either upon the sale of the vehicle for which the award was received, or upon attainment of the particular program goals if not associated with individual vehicles. During the three months ended March 31, 2009 and 2008, we earned $67.8 million and $85.3 million, respectively, of rebates, incentives and reimbursements from manufacturers, of which $66.3 million and $83.5 million was recorded as a reduction of cost of sales. Finance and Insurance Sales
Subsequent to the sale of a vehicle to a customer, we sell our installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various third-party insurance products to customers, including credit and life insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. Intangible Assets
Our principal intangible assets relate to our franchise agreements with vehicle manufacturers, which represent the estimated value of franchises acquired in business combinations, and goodwill, which represents the excess of cost over the fair value of tangible and identified intangible assets acquired in business combinations. We believe the franchise value of our dealerships have an indefinite useful life based on the following facts:
• Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers;

• There are no known changes or events that would alter the automotive retailing franchise environment;

• Certain franchise agreement terms are indefinite;

• Franchise agreements that have limited terms have historically been renewed by us without substantial cost; and

• Our history shows that manufacturers have not terminated our franchise agreements.

Impairment Testing
Franchise value impairment is assessed as of October 1 every year and upon the occurrence of an indicator of impairment through a comparison of its carrying amounts and estimated fair values. An indicator of impairment exists if the carrying value of a franchise exceeds its estimated fair value and an impairment loss may be recognized up to that excess. We also evaluate our franchises in connection with the annual impairment testing to determine whether events and circumstances continue to support its assessment that the franchise has an indefinite life.
Goodwill impairment is assessed at the reporting unit level as of October 1 every year and upon the occurrence of an indicator of impairment. We have determined that the dealerships in each of our operating segments within the Retail reportable segment, which are organized by geography, are components that are aggregated into five reporting units as they (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). Accordingly, our operating segments are also considered our reporting units for the purpose of goodwill impairment testing relating to our Retail segment. There is no goodwill recorded in our Distribution or PAG Investments reportable segments. An indicator of goodwill impairment exists if the carrying amount of the reporting unit, including goodwill, is determined to exceed its estimated fair value. If an indication of goodwill impairment exists, an analysis reflecting the allocation of the fair value of the reporting unit to all assets and liabilities, including previously unrecognized intangible assets, is performed. The impairment is measured by comparing the implied fair value of the reporting unit goodwill with its carrying amount, and an impairment loss may be recognized up to that excess.

The fair values of franchise rights and goodwill are determined using a discounted cash flow approach, which includes assumptions that include revenue and profitability growth, franchise profit margins, residual values and our cost of capital.
Investments
Investments include marketable securities and investments in businesses accounted for under the equity method. A majority of our investments are in joint ventures that are more fully described in "Joint Venture Relationships" below. Such joint venture relationships are accounted for under the equity method, pursuant to which we record our proportionate share of the joint venture's income each period.
Investments in marketable securities held by us are typically classified as available for sale and are stated at fair value, determined by the use of Level 1 inputs as described under SFAS No. 157, on our balance sheet with unrealized gains and losses included in accumulated other comprehensive income, a separate component of stockholders' equity.
The net book value of our investments was $285.3 million and $297.8 million as of March 31, 2009 and December 31, 2008, respectively. Investments for which there is not a liquid, actively traded market are reviewed periodically by management for indicators of impairment. If an indicator of impairment were to be identified, management would estimate the fair value of the investment using a discounted cash flow approach, which would include assumptions relating to revenue and profitability growth, profit margins, residual values and our cost of capital. Declines in investment values that are deemed to be other than temporary may result in an impairment charge reducing the investments' carrying value to fair value.
Self-Insurance
We retain risk relating to certain of our general liability insurance, workers' compensation insurance, auto physical damage insurance, property insurance, employment practices liability insurance, directors' and officers' insurance and employee medical benefits in the U.S. As a result, we are likely to be responsible for a majority of the claims and losses incurred under these programs. The amount of risk we retain varies by program, and, for certain exposures, we have pre-determined maximum loss limits for certain individual claims and/or insurance periods. Losses, if any, above such pre-determined loss limits are paid by third-party insurance carriers. Our estimate of future losses is prepared by management using our historical loss experience and industry-based development factors. Aggregate reserves relating to retained risk were $22.3 million and $19.2 million as of March 31, 2009 and December 31, 2008, respectively. Changes in the reserve estimate during 2009 relate primarily to the inclusion of additional participants in our employee medical benefit plans and reserves for current year activity in our general liability and workers compensation programs.
Income Taxes
Tax regulations may require items to be included in our tax return at different times than the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax return in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax return that have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit. A valuation allowance of $3.4 million has been recorded relating to net operating losses and credit carryforwards in the U.S. based on our determination that it is more likely than not that they will not be utilized.
Classification of Franchises in Continuing and Discontinued Operations We classify the results of our operations in our consolidated financial statements based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, which requires judgment in determining whether a franchise will be reported within continuing or discontinued operations. Such judgments include whether a franchise will be divested, the period required to complete the divestiture, and the likelihood of changes to the divestiture plans. If we determine that a franchise should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, our consolidated financial statements for prior periods are revised to reflect such reclassification.

New Accounting Pronouncements
See Note 1 of the Notes to the Consolidated Condensed Financial Statements for a summary of the accounting changes impacting our operating results, financial position and cash flows.
Results of Operations
The following tables present comparative financial data relating to our operating performance in the aggregate and on a "same store" basis. Dealership results are only included in same store comparisons when we have consolidated the acquired entity during the entirety of both periods being compared. As an example, if a dealership was acquired on January 15, 2007, the results of the acquired entity would be included in annual same store comparisons beginning with the year ended December 31, 2009 and in quarterly same store comparisons beginning with the quarter ended June 30, 2008.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
(dollars in millions, except per unit amounts)
Our results for the three months ended March 31, 2009 include a gain of $10.4 million ($6.5 million after-tax), or $0.07 per share, relating to the repurchase of $68.7 million aggregate principal amount of our 3.5% senior subordinated convertible notes.

New Vehicle Data

                                                                           2009 vs. 2008
                                         2009           2008          Change          % Change
New retail unit sales                     30,668         45,188        (14,520 )          (32.1 %)
Same store new retail unit sales          28,963         44,645        (15,682 )          (35.1 %)
New retail sales revenue               $   972.1      $ 1,626.0      $  (653.9 )          (40.2 %)
Same store new retail sales revenue    $   918.2      $ 1,607.0      $  (688.8 )          (42.9 %)
New retail sales revenue per unit      $  31,698      $  35,982      $  (4,284 )          (11.9 %)
Same store new retail sales revenue
per unit                               $  31,703      $  35,994      $  (4,291 )          (11.9 %)
Gross profit - new                     $    71.4      $   136.6      $   (65.2 )          (47.7 %)
Same store gross profit - new          $    67.0      $   134.9      $   (67.9 )          (50.3 %)
Average gross profit per new
vehicle retailed                       $   2,327      $   3,023      $    (696 )          (23.0 %)
Same store average gross profit per
new vehicle retailed                   $   2,315      $   3,021      $    (706 )          (23.4 %)
Gross margin % - new                         7.3 %          8.4 %         (1.1 %)         (13.1 %)
Same store gross margin % - new              7.3 %          8.4 %         (1.1 %)         (13.1 %)

Units
Retail unit sales of new vehicles decreased 14,520 units, or 32.1%, from 2008 to 2009. The decrease is due a 15,682 unit, or 35.1%, decrease in same store retail unit sales during the period, offset by a 1,162 unit increase from net dealership acquisitions. The same store decrease was due primarily to unit sales decreases in our volume foreign brand stores in the U.S. and premium and domestic brand stores in the U.S. and U.K. Revenues
New vehicle retail sales revenue decreased $653.9 million, or 40.2%, from 2008 to 2009. The decrease is due to a $688.8 million, or 42.9%, decrease in same store revenues, offset by a $34.9 million increase from net dealership acquisitions. The same store revenue decrease is due primarily to the 35.1% decrease in retail unit sales, which reduced revenue by $564.5 million, coupled with the $4,291, or 11.9%, decrease in average selling prices per unit, which decreased revenue by $124.3 million.
Gross Profit
Retail gross profit from new vehicle sales decreased $65.2 million, or 47.7%, from 2008 to 2009. The decrease is due to a $67.9 million, or 50.3%, decrease in same store gross profit, offset by a $2.7 million increase from net dealership acquisitions. The same store decrease is due primarily to the 35.1% decrease in retail unit sales, which reduced gross profit by $47.4 million, coupled with the $706, or 23.4%, decrease in the average gross profit per new vehicle retailed, which decreased gross profit by $20.5 million.

Used Vehicle Data

                                                                           2009 vs. 2008
                                         2009           2008          Change         % Change
Used retail unit sales                    26,811         26,402            409             1.5 %
Same store used retail unit sales         25,113         26,208         (1,095 )          (4.2 %)
Used retail sales revenue              $   614.6      $   794.1      $  (179.5 )         (22.6 %)
Same store used retail sales
revenue                                $   574.7      $   788.9      $  (214.2 )         (27.2 %)
Used retail sales revenue per unit     $  22,925      $  30,076      $  (7,151 )         (23.8 %)
Same store used retail sales
revenue per unit                       $  22,883      $  30,103      $  (7,220 )         (24.0 %)
Gross profit - used                    $    56.0      $    65.8      $    (9.8 )         (14.9 %)
Same store gross profit - used         $    52.1      $    65.3      $   (13.2 )         (20.2 %)
. . .