Lithia Motors, Inc.
2008 10K
Year Ending December 31, 2008
LAD
Listed
NYSE
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
___________________
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14733
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Oregon
93-0572810
(I.R.S. Employer Identification No.)
360 E. Jackson Street, Medford, Oregon
(Address of principal executive offices)
97501
(Zip Code)
541-776-6899
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common stock, without par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
__________ _________
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:
Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: [ ]
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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] (Do not check if a
smaller reporting company) Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant was
approximately $77,865,790, computed by reference to the last sales price ($4.92) as reported by the New York Stock
Exchange for the Registrant’s Class A common stock, as of the last business day of the Registrant’s most recently
completed second fiscal quarter (June 30, 2008).
The number of shares outstanding of the Registrant’s common stock as of March 16, 2009 was: Class A: 16,918,350 shares
and Class B: 3,762,231 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2009 Annual
Meeting of Shareholders.
LITHIA MOTORS, INC.
2008 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
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Item 1. Business
Forward Looking Statements
PART I
Some of the statements under the sections entitled “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this Form 10-
K constitute forward-looking statements. In some cases, you can identify forward-looking statements by
terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,”
“estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable
terminology. The forward-looking statements contained in this Form 10-K involve known and unknown
risks, uncertainties and situations that may cause our actual results, level of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by these statements. Some of the important factors that could cause
actual results to differ from our expectations are discussed in Item 1A. to this Form 10-K.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or achievements. You should not place
undue reliance on these forward-looking statements.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other information with the Securities
and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 as amended (the
“Exchange Act”). You can inspect and copy our reports, proxy statements, and other information filed with
the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Please call
the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The SEC maintains
an Internet Web site at http://www.sec.gov where you can obtain some of our SEC filings. We also make
available, free of charge on our website at www.lithia.com, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are
filed electronically with the SEC. The information found on our website is not part of this Form 10-K. You
can also obtain copies of these reports by contacting Investor Relations at 541-776-6591.
Compliance with Section 303A of the NYSE Listed Company Manual
As required by the NYSE Corporate Governance Standards, we filed the appropriate certifications with
NYSE in 2008 confirming that our CEO is not aware of any violations of the NYSE Corporate Governance
Standards and we also filed with the SEC in 2008 the Chief Executive Officer and Chief Financial Officer
certifications required under Section 302 of the Sarbanes-Oxley Act.
Overview
We are a leading operator of automotive franchises and retailer of new and used vehicles and services.
As of March 16, 2009, we offered 27 brands of new vehicles and all brands of used vehicles in 92 stores
in the United States and over the Internet. We sell new and used cars and light trucks; sell replacement
parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing,
service contracts, protection products and credit insurance for our automotive customers.
During 2008, overall macroeconomic issues have reduced consumers’ desire and ability to purchase
automobiles. An additional factor negatively impacting auto sales has been a reduction in available
options for consumer auto loans. The manufacturers’ captive financing companies have suffered
additional pressure as the financial crisis has raised their cost of funds and reduced their access to
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capital. This and financial stress on manufacturers has prevented them from offering as many incentives
designed to drive sales, such as subsidized interest rates and the amount of loan to value they are willing
to advance on vehicles.
In addition, both new and used vehicle sales were impacted in 2008 by declining valuations for most used
vehicles. Fewer customers are trading in their used vehicles as the value they could receive may be less
than what they currently owe. This has negatively affected our new vehicle sales as potential customers
are not able to obtain financing in sufficient amounts to absorb the amount owed on their trade in as well
as the cost of the new vehicle.
In October 2008, the domestic automakers approached Congress seeking government assistance. As
part of these hearings, each manufacturer provided an update on their current financial situation as well
as their outlook for 2009 and beyond. In the course of the hearings, it became clear that without
immediate assistance, both Chrysler and General Motors (“GM”) faced the possibility of insolvency as
soon as January 2009.
In December 2008, GMAC received approximately $6 billion in funds from the federal government. Also in
December 2008, the federal government provided $17.4 billion in bridge loans to both Chrysler and GM.
Both manufacturers were required to present to the Treasury in February 2009 a restructuring plan.
At the time of this filing, both Chrysler and GM have provided their plans to the Treasury, requesting up to
$39 billion in total support, including the $17.4 billion already provided, and are acting on those plans.
However, the response by the federal government to these strategies and its willingness to loan
additional funds remains unknown. See Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for additional information.
The Industry
At approximately $1.0 trillion in annual sales, automotive retailing is the largest retail trade sector in the
U.S. and has historically comprised roughly 7% of the GDP. New vehicles are sold through more than
20,000 automotive retail stores franchised by automotive manufacturers. These franchise stores have
designated trade territories under state franchise law protection, which limits the number of new stores for
any one brand that can be opened in any given area. New vehicle sales are highly fragmented with the
100 largest automotive retailers generating less than 15% of total industry revenues. In addition to these
new vehicle outlets, used vehicles are sold by approximately 50,000 independent used vehicle dealers
and through private (person to person) transactions.
Unlike many other retailing segments, automotive manufacturers provide unparalleled support to the
automotive retailer. Manufacturers often bear the burden of markdown risks on slow-moving inventory as
they provide aggressive dealer and customer incentives to clear aged inventory in order to free the
inventory pipeline for new purchases. In addition, an automotive retailer’s cash investment in new vehicle
inventory is relatively small, given floorplan financing from manufacturers’ captive finance companies or
bank lenders. Manufacturer captives have historically provided financing for working capital and
acquisitions and loans to consumers to finance vehicle purchases. In addition, the manufacturers pay
market-rate prices to their dealers for servicing vehicles under manufacturers’ warranties.
Automotive retailers have much lower fixed overhead costs than automobile manufacturers and parts
suppliers. Variable and discretionary costs, such as sales commissions and personnel, advertising and
inventory finance expenses, can be adjusted to more closely match vehicle sales. Variable and
discretionary costs account for an estimated 60-65% of the retail industry’s total expenses. Moreover, an
automotive retailer can enhance its profitability from sales of higher margin products and services. Gross
profit margins for the parts and service business are approximately 47%. Gross profit margins for finance
and insurance are virtually 100% as they are fee driven income items. These supplemental, high margin
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products and services provide substantial incremental revenue, decreasing reliance on the highly
competitive new vehicle sales component.
2008 was an unprecedented year of change in the industry. U.S. new vehicle sales were 13.2 million
units in 2008 compared to 16.1 million units in 2007 and the trend during the year was even weaker as
the year progressed. Early trends in 2009 indicate a continuation of the weak sales environment. We
expect that manufacturers will continue to offer incentives on new vehicle sales during 2009 through a
combination of repricing strategies, rebates, lease programs, early lease cancellation programs and low
interest rate loans to consumers.
Dealerships are expected to close or consolidate at a greater rate in 2009 than has been seen
historically. Given the large capital requirements necessary to operate a dealership, a more challenging
retail environment, and more intense dealer competition the automotive retail industry is experiencing
financial strain. Additionally, wholesale credit lines required to finance new vehicle inventories have
become more expensive, been limited in overall size, and in extreme cases, have been terminated.
Domestic manufacturers are under pressure to reduce their dealer networks for strategic reasons, which
will likely be accomplished through natural attrition. A significant number of dealerships closed in 2008,
with the expectation for more to close in 2009.
New vehicle sales usually decline during a weak economy; however, the higher margin service and parts
businesses typically benefit, because consumers tend to keep their vehicles longer. Automotive retailers
benefit from their designation as an exclusive warranty and recall service provider of a manufacturer. For
the typical manufacturer’s warranty, this provides an automotive retailer with a period of at least 3 years
of repeat business for service covered by warranty. Extended warranties can add two or more years to
this repeat servicing period.
Profitability of automotive retailers will vary and depends in part on local economic conditions, local
competition and product mix, effective management of inventory, marketing, quality control and
responsiveness to customers. In the industry, new vehicles sales typically account for an estimated 59%
of a store’s revenues, used vehicles sales typically account for approximately 29% of revenues and the
remaining 12% is typically derived from service and parts sales. In a recessionary environment, those
revenue percentages typically trend higher toward service and parts, and lower toward new and used
sales as customers are more inclined to service the vehicle they have. Finance and insurance sales are
included in the new and used vehicle sales numbers. Industry gross profit margins were 13.6% in 2007.
Our gross profit margin was 17.3% and 17.0% in 2008 and 2007, respectively.
The macroeconomic challenges the country faces today are expected to continue through most, if not all
of 2009. Constrained credit markets, gas price fluctuations, falling home equity and stock prices, and low
consumer confidence, are all significant factors taken into account when looking forward in the industry.
Conversely, tighter cost structures, a smaller dealer base, and the scrappage of vehicles due to age and
usage are all factors that will have a positive effect on the industry upon the recovery of the broader
economy.
Store Operations
Our store operations are supported by centralized inventory control, centralized processing of
administrative and office functions and centralized marketing. This allows our store management
personnel to concentrate on customer and employee satisfaction.
During 2008, we:
•
•
•
Improved functionality of our centralized vehicle inventory control, pricing and procurement
process;
Implemented IT initiatives related to centralizing back office car deal processing;
Implemented cost-cutting initiatives in our stores reducing staffing and other expenses;
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• Realigned operations and created a ‘flatter’ organization to improve communication and
accountability.
The following tables set forth information about our stores that were part of operations as of December
31, 2008:
State
Oregon ...........................
Texas .............................
California ........................
Washington ....................
Alaska ............................
Iowa……………………..
Idaho ..............................
Colorado ........................
Montana .........................
Nevada...........................
North Dakota ..................
Nebraska........................
New Mexico....................
Total ..........................
Number of
Stores
16
15
12
9
7
7
7
7
6
5
3
1
1
96
Percent of
Annualized
2008 Revenue
14%
25
13
9
8
7
6
5
6
4
1
1
1
100%
At December 31, 2008, we had 18 stores held for sale as part of discontinued operations, three of
which were disposed of in the first quarter of 2009. We also disposed of an additional store in March
2009 that was not part of discontinued operations.
New Vehicle Sales
In 2008, we represented 27 domestic and imported brands ranging from economy to luxury cars, sport
utility vehicles, crossovers, minivans and light trucks.
Percent of
Total
Revenue
17.2%
10.8
8.3
4.5
4.3
2.2
1.8
1.7
1.3
1.2
0.7
0.3
0.2
0.2
0.2
*
54.9%
Percent of
New Vehicle
Sales in 2008
31.1%
19.7
15.2
8.3
7.8
4.1
3.3
3.1
2.4
2.2
1.2
0.5
0.4
0.4
0.3
*
100.0%
Manufacturer
Chrysler (Chrysler, Dodge, Jeep)
General Motors (GMC, Chevrolet, Buick, Saturn, Cadillac)
Toyota, Scion
BMW
Honda, Acura
Ford (Ford, Lincoln, Mercury)
Nissan
Volkswagen, Audi
Hyundai
Subaru
Mercedes
Mazda
Porsche
Kia
Suzuki
Saab
* Less than 0.1%
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Our unit and dollar sales of new vehicles from continuing operations were as follows:
New car units………...……………………
New car sales (in thousands)……………
Average selling price……………………..
2008
16,836
$426,135
$25,311
Year Ended December 31,
2006
20,881
$468,293
$22,427
2007
20,018
$496,025
$24,779
2005
16,845
$379,663
$22,539
New truck units(1)…………………………
New truck sales (in thousands)…………
Average selling price……………………..
23,370
$746,672
$31,950
32,494
$1,032,221
$31,767
31,459
$980,719
$31,175
28,360
$872,944
$30,781
2004
14,718
$327,684
$22,264
25,482
$784,791
$30,798
Total new vehicle units…………………...
40,206
Total new vehicle sales (in thousands)… $1,172,807
$29,170
Average selling price……………………..
52,512
$1,528,246
$29,103
52,340
$1,449,012
$27,685
45,205
$1,252,607
$27,709
40,200
$1,112,475
$27,674
(1) Truck units include trucks, light trucks, vans, SUVs and crossovers.
As discussed above, new vehicle unit sales were negatively affected by the declining economic
conditions and reduced showroom traffic in our stores throughout 2008.
We purchase our new car inventory directly from manufacturers, who generally allocate new vehicles to
stores based on availability, the number of vehicles sold by the store on a monthly basis and by the
store’s market area. Accordingly, we rely on the manufacturers to provide us with vehicles that
consumers desire and to supply us with such vehicles at suitable locations, quantities and prices.
However, high demand vehicles often are in short supply. We attempt to exchange vehicles with other
automotive retailers (and amongst our own stores) to accommodate customer demand and to balance
inventory.
Used Vehicle Sales
At each new vehicle store, we also sell used vehicles, which are significant contributors to our gross
profit. In 2008, retail used vehicle sales generated a gross profit margin of 11.3% compared to a gross
profit margin of 7.8% for new vehicle sales.
As part of our restructuring plan in 2008, our investment in our used vehicle L2 locations was placed on
hold and certain development personnel were terminated as we were unwilling to continue to absorb the
expected startup losses.
Since the beginning of 2002, the used vehicle market has been negatively impacted by strong
competition from the new vehicle market. However, in 2008, a shift towards used vehicle retail sales was
experienced due to primarily to three factors. First, the incentives that have become a mainstay of new
vehicle sales were reduced. Second, due to the reduction in available credit, fewer customers qualified
for new vehicle financing, or the total amount they could finance was reduced, which shifted demand
towards used vehicles which have a lower transaction price and associated monthly payment. Finally,
lower consumer confidence made customers less willing to make a larger investment through a new
vehicle purchase.
In spite of the shift towards used vehicles sales, the challenging retail environment nonetheless led to a
decline in same-store used vehicle combined retail and wholesale sales of 18.4% in 2008 compared to
2007.
The following policies and procedures are utilized for our used vehicle sales:
• Most used vehicles are sold with a sixty-day, 3000 mile bumper-to-bumper warranty. We are
piloting “as-is” vehicles in certain facilities to maximize incremental retail opportunities.
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•
In addition, as a complement to our ongoing used vehicle operation at each store, we use
personnel in our support services group to identify and acquire a better mix of used vehicles
desired by the customer.
• We conduct our own closed used vehicle auctions in select markets and manage the disposal of
used vehicles at larger auctions. The process is centralized and controlled at the corporate level.
During 2008, we implemented a centralized appraisal and redistribution center to help set the purchase
and sales price of our used vehicles and to direct delivery to the appropriate retail location. This center
provides analytical and market information to assist the store personnel in making decisions. We
redistribute cars between Lithia locations based on inventory needs. Centralizing and distributing used
vehicle inventories allows customers access to a greater pool of vehicles.
Our used vehicle operations give us an opportunity to:
• generate sales to customers financially unable or unwilling to purchase a new vehicle;
increase new and used vehicle sales by aggressively pursuing customer trade-ins; and
•
increase service contract sales and provide financing to used vehicle purchasers.
•
In 2008, we sold approximately 0.72 retail used vehicles for every retail new vehicle sold, compared to
approximately 0.62 retail used vehicles for every new vehicle sold in 2007. Our longer-term strategy is to
achieve a ratio of 1:1. In the current year, the improvement in this ratio is primarily due to sharply
declining new vehicle sales and a shift in demand for used vehicles.
We acquire most of our used vehicles through customer trade-ins, but we also buy them at “closed”
auctions, attended only by new vehicle automotive retailers with franchises for the brands offered. These
auctions offer off-lease, rental and fleet vehicles. We also buy used vehicles at traditional “dealer only”
auctions.
In addition to selling used vehicles to retail customers, we wholesale used vehicles that are in poor
condition, are aged in our inventory or are not suitable for our brand mix.
Our used vehicle sales from continuing operations were as follows:
2008
Retail used vehicle units……………………….…
28,853
Retail used vehicle sales (in thousands)……….. $476,720
$16,522
Average selling price...........................................
Year Ended December 31,
2006
33,225
$541,517
$16,298
2005
32,468
$504,990
$15,553
2007
32,700
$552,487
$16,896
2004
29,902
$449,232
$15,023
Wholesale used vehicle units ................... ……..
Wholesale used vehicle sales (in thousands)..…
Average selling price………………………..…….
16,631
$97,653
$5,872
20,264
$134,241
$6,625
19,244
$119,071
$6,187
17,180
$99,139
$5,771
15,824
$83,079
$5,250
Total used vehicle units ............................ …..…
45,484
Total used vehicle sales (in thousands)……...… $574,373
$12,628
Average selling price…………………………..….
52,964
$686,728
$12,966
52,469
$660,588
$12,590
49,648
$604,129
$12,168
45,726
$532,311
$11,641
Vehicle Financing
We believe that arranging financing is critical to our ability to sell vehicles and related products and
services. Our sales personnel and finance and insurance managers possess extensive knowledge of
available financing alternatives and receive training in securing customer financing. We try to arrange
financing for every vehicle we sell and offering customer financing on a “same day” basis gives us an
advantage, particularly over smaller competitors who do not generate enough sales to attract our breadth
of finance sources.
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The tightening of the credit markets experienced in 2008 reduced the number of loans originated,
restricted loans to more credit-worthy customers, reduced vehicle leasing programs and increased the
overall cost of financing. The manufacturers’ captive financing companies have suffered additional
pressure as the financial crisis has raised their cost of funds and reduced their access to capital, which
has prevented them from offering as many incentives designed to drive sales and the level of loan-to-
value they are willing to finance on vehicles.
Despite these negative factors, we were still able to arrange financing on 73% of our vehicles sold during
the fourth quarter of 2008 but on a significantly lower volume of sales. Changes in technology
surrounding the credit application process have allowed us to tap a larger network of lenders across
broader geographic areas. Additionally, some of the smaller, local banks and credit unions are picking up
where some of the larger financial institutions have cut back.
We earn a portion of the financing charge by discounting each finance contract we write and
subsequently sell to a lender. We normally arrange financing for customers by selling the contracts to
outside sources on a non-recourse basis to avoid the risk of default. During 2008, we did not directly
finance any of our vehicle sales.
Service Contracts and Other Products
Our finance and insurance managers also market third-party extended warranty contracts and insurance
contracts to our new and used vehicle buyers. These products and services yield higher profit margins
than vehicle sales and contribute significantly to our profitability. Extended warranty contracts provide
additional coverage for new vehicles beyond the duration or scope of the manufacturer’s warranty. The
service contracts we sell to used vehicle buyers provide coverage for certain major repairs. We believe
the sale of extended warranty and service contracts increases our service and parts business as well.
We also offer our customers GAP coverage when they finance an automobile purchase to cover any loss
the customer might otherwise incur based upon a difference in the amount owed and the proceeds
received under a comprehensive insurance claim. We receive a commission on each policy sold.
Service, Body and Parts
Our service, body and parts operations are an integral part of establishing customer loyalty and contribute
significantly to our overall revenue and profits. We provide parts and service primarily for the new vehicle
brands sold by our stores, but we also service other vehicles. In 2008, our service, body and parts
operations generated $306.7 million, or 14.3% of total revenues.
Our service, body and parts business was less affected by the challenging economic environment in 2008
than our other business lines. This reflects the counter-cyclicality of this segment of our business.
For all service work we perform, we provide a three-year, 50,000 mile warranty, including parts and labor,
and a guaranteed price based on the estimate given at the time the service order is written.
The service and parts business provides important repeat revenues to the stores. We market our parts
and service products by notifying the owners of vehicles when their vehicles are due for periodic service.
This encourages preventive maintenance rather than post-breakdown repairs. We offer a lifetime oil and
filter service, which, in 2008, was purchased by 34% of our new and used vehicle buyers. This service
helps us retain customers and provides opportunities for repeat parts and service business. Revenues
from the service, body and parts departments are particularly important during economic downturns as
owners tend to repair their existing used vehicles rather than buy new vehicles during such periods. This
mitigates some of the effects of a drop in new vehicle sales that may occur in recessionary economic
environment.
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We operate fifteen collision repair centers: four in Texas, two each in Oregon and Idaho, and one each in
Alaska, Washington, Montana, Colorado, Nevada, Nebraska and Iowa.
Marketing
We market ourselves as Lithia Auto Stores-Serving our Communities Since 1946. In most markets our
stores are identified as Lithia Auto Stores; except where prohibited by franchise requirements.
Our Fixed Operations provides us an opportunity to build the Lithia Automotive brand regardless of new
vehicle franchise. In early 2008, we began branding our Service processes as “Assured Service.”
Assured Service provides superior customer benefits like same day service, upfront price guarantees,
and a three-year/50,000 mile warranty on repairs. We have also launched “Assured Automotive
Products,” which provide a higher margin on various commodity items such as tires, filters and batteries.
We emphasize customer satisfaction and we realize that customer retention is critical to our success.
Through a combination of Lithia owner marketing (utilizing direct mail and email) and customer concern
resolution we aim to have customers that refer us to the their families and friends.
To increase consideration and shopping at our stores we employ all the traditional advertising media
including television, newspaper, radio, direct mail, and web sites. Advertising expense, net of
manufacturer credits, was $17.4 million during 2008, with 20% of the total amount used for print media,
26% for television, 21% for radio, 16% for Internet and 17% for direct mail and other sources. All of our
advertising messages seek to differentiate us from our competitors based on pricing, selection and
available financing options.
Some of our advertising and marketing expenditures are offset by manufacturer co-op programs. Our
stores also receive marketing support by our membership in various advertising cooperatives and
associations, whose members pool their resources and expertise with manufacturers to advertise
collectively. In addition, by owning a cluster of stores in a particular market, we are able to advertise as a
group realizing savings through volume discounts and the efficiencies of shared media.
The role of the Internet in automotive retail marketing continues to grow. Most people now shop online
before visiting our stores. We maintain websites for all of our stores and a corporate site (www.lithia.com)
dedicated to generating customer leads for our stores. Today, our web site enables a customer to:
locate our stores and identify the new vehicle brands sold at each store;
•
view new and used vehicle inventory; including current special pricing
•
conduct a live chat for customer assistance
•
submit a credit application
•
•
schedule service appointments;
• obtain Kelley Blue Book values;
•
•
visit our investor relations site; and
view employment opportunities.
We are very active in search engine optimization, search engine marketing, and behavioral targeting of
online advertising to generate traffic to our websites. We also have a number of mobile website pilots
underway as this new platform provides increased convenience to our customers and employees.
Management Information System
We consolidate, process and maintain financial information, operational and accounting data, and other
related statistical information on centralized computers. We have a fully operational intranet with each
store directly connected to headquarters. Our systems are based on an ADP platform for the main
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database, and information is processed and analyzed utilizing customized financial reporting software
from Oracle Corporation.
Senior management can access detailed information from all of our locations regarding:
•
•
•
•
•
•
•
inventory;
cash balances;
total unit sales and mix of new and used vehicle sales;
lease and finance transactions;
sales of ancillary products and services;
key cost items and profit margins; and
the relative performance of the stores.
Each store’s general manager has access to this same information. With this information, we can quickly
analyze the results of operations, identify trends and focus on areas that require attention or
improvement. Our management information system also allows our general managers to respond quickly
to changes in consumer preferences and purchasing patterns, maximizing our inventory turnover.
Our management information system is particularly important to successfully operating acquired stores.
Following each acquisition, we immediately install our management information system at each location.
This quickly makes financial, accounting and other operational data easily available throughout the
company. With this information, we can more efficiently execute our operating strategy at each new store.
Franchise Agreements
Each of our Lithia store subsidiaries operates under a separate franchise agreement with each
manufacturer of the new vehicles it sells.
The typical automobile franchise agreement specifies the locations within a designated market area at
which the store may sell vehicles and related products and perform certain approved services. The
designation of such areas and the allocation of new vehicles among stores are at the discretion of the
manufacturer. Franchise agreements do not guarantee exclusivity within a specified territory, but do have
some protection under state laws.
A franchise agreement may impose requirements on the store with respect to:
facilities and equipment;
inventories of vehicles and parts;
•
•
• minimum working capital;
training of personnel; and
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performance standards for market share and customer satisfaction.
•
Each manufacturer closely monitors compliance with these requirements and requires each store to
submit monthly financial statements. Franchise agreements also grant a store the right to use and display
manufacturers’ trademarks, service marks and designs in the manner approved by each manufacturer.
Most franchise agreements are generally renewed after one to five years, and, in practice, have indefinite
lives. Some franchise agreements, including those with Chrysler, have no termination date. Historically,
all of our agreements have been renewed. In addition, state franchise laws protect franchised automotive
retailers. Under certain of those laws, a manufacturer may not:
•
•
terminate or fail to renew a franchise without good cause; or
prevent any reasonable changes in the capital structure or financing of a store.
The typical franchise agreement provides for early termination or non-renewal by the manufacturer upon:
•
a change of management or ownership without manufacturer consent;
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insolvency or bankruptcy of the dealer;
death or incapacity of the dealer/manager;
conviction of a dealer/manager or owner of certain crimes;
•
•
•
• misrepresentation of certain sales or inventory information by the store, dealer/manager or owner
to the manufacturer;
failure to adequately operate the store;
failure to maintain any license, permit or authorization required for the conduct of business; or
poor market share or low customer satisfaction index scores.
•
•
•
Agreements generally provide for prior written notice before a franchise can be terminated under most
circumstances. We also sign master framework agreements with most manufacturers that impose
additional requirements on our stores. See Item 1A. “Risk Factors.”
In the event of a manufacturer bankruptcy filing, any franchise agreement could be unilaterally rejected by
the manufacturer as part of their plan to reorganize. However, if the agreement was not rejected but was
assumed in a confirmed plan, it could continue with the same rights and conditions that existed prior to
the filing.
In the event of a Chapter 11 bankruptcy filing by a manufacturer, several factors should be considered.
First, franchise points represent a low-cost distribution network for the manufacturer and it is the
automotive dealer that purchases their vehicles for resale to the consumer. Therefore, terminating
franchises reduces the number of outlets selling vehicles to the public and is counter to the broader
objective of keeping factories in operation emerging from reorganization. Second, the majority of our
franchises are in ‘single-point’ locations, meaning there are not multiple franchises in the same market
area. These locations are the only distribution point in the area, and we believe the manufacturers would
endeavor to keep their products widely available to the general public. However, we operate certain
facilities in locations with competing operators holding the same franchise rights in the area or nearby
including five stores with three or more dealers of the same brand in the market. Further, should a
manufacturer in bankruptcy elect to cease producing certain brands, related franchises would be
expected to be terminated. No assurances can be given that our franchise rights would not be terminated
in a manufacturer bankruptcy filing.
Competition
The retail automotive business is highly competitive, consisting of a large number of independent
operators, many of whom are individuals, families and small retail groups. We compete primarily with
other automotive retailers, both public and privately-held.
Vehicle manufacturers have designated specific marketing and sales areas within which only one dealer
of a vehicle brand may operate. In addition, our franchise agreements typically limit our ability to acquire
multiple dealerships of a given brand within a particular market area. Certain state franchise laws also
restrict us from relocating our dealerships or establishing new dealerships of a particular brand within any
area that is served by another dealer with the same brand. Accordingly, to the extent that a market has
multiple dealers of a particular brand, as some of our markets do, we are subject to significant intra-brand
competition.
We are larger and have more financial resources than most private automotive retailers with which we
currently compete in most of our regional markets. We compete directly with retailers like ourselves in our
metropolitan markets in Denver, Colorado, Seattle, Washington and Concord, California. If we enter other
metropolitan markets, we may face competitors that are larger or have access to greater financial
resources. We do not have any cost advantage in purchasing new vehicles from manufacturers. We rely
on advertising and merchandising, pricing, our customer guarantees and sales model, our sales
expertise, service reputation and location of our stores to sell new vehicles.
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Regulation
Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and federal laws and regulations affect our
business. In every state in which we operate, we must obtain various licenses in order to operate our
businesses, including dealer, sales and finance and insurance licenses issued by state regulatory
authorities. Numerous laws and regulations govern our conduct of business, including those relating to
our sales, operations, financing, insurance, advertising and employment practices. These laws and
regulations include state franchise laws and regulations, consumer protection laws, privacy laws,
escheatment laws, anti-money laundering laws and other extensive laws and regulations applicable to
new and used motor vehicle dealers, as well as a variety of other laws and regulations. These laws also
include federal and state wage-hour, anti-discrimination and other employment practices laws.
Our financing activities with customers are subject to numerous federal, state and local laws and
regulations. Claims arising out of actual or alleged violations of law may be asserted against us or our
stores by individuals, a class of individuals, or governmental entities. These claims may expose us to
significant damages or other penalties, including revocation or suspension of our licenses to conduct
store operations and fines.
Our operations are subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle
Safety Standards promulgated by the United States Department of Transportation, and the rules and
regulations of various state motor vehicle regulatory agencies.
Environmental, Health, and Safety Laws and Regulations
Our operations involve the use, handling, storage and contracting for recycling and/or disposal of
materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners,
batteries, cleaning products, lubricants, degreasing agents, tires and fuel. Consequently, our business is
subject to a complex variety of federal, state and local requirements that regulate the environment and
public health and safety.
Most of our stores utilize aboveground storage tanks, and, to a lesser extent, underground storage tanks,
primarily for petroleum-based products. Storage tanks are subject to periodic testing, containment,
upgrading and removal under the Resource Conservation and Recovery Act and its state law
counterparts. Clean-up or other remedial action may be necessary in the event of leaks or other
discharges from storage tanks or other sources. In addition, water quality protection programs under the
federal Water Pollution Control Act (commonly known as the Clean Water Act), the Safe Drinking Water
Act and comparable state and local programs govern certain discharges from our operations. Similarly,
certain air emissions from operations, such as auto body painting, may be subject to the federal Clean Air
Act and related state and local laws. Certain health and safety standards promulgated by the
Occupational Safety and Health Administration of the United States Department of Labor and related
state agencies also apply.
Some of our stores are parties to proceedings under the Comprehensive Environmental Response,
Compensation, and Liability Act, or CERCLA, typically in connection with materials that were sent to
former recycling, treatment and/or disposal facilities owned and operated by independent businesses.
The remediation or clean-up of facilities where the release of a regulated hazardous substance occurred
is required under CERCLA and other laws.
We incur certain costs to comply with applicable environmental, health and safety laws and regulations in
the ordinary course of our business. We do not anticipate, however, that the costs of such compliance will
have a material adverse effect on our business, results of operations, cash flows or financial condition,
although such outcome is possible given the nature of our operations and the extensive environmental,
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public health and safety regulatory framework. We do not have any material known environmental
commitments or contingencies. However, no assurances can be given that material environmental
commitments or contingencies will not arise in the future, or that they do not already exist but are
unknown to us.
Employees
As of December 31, 2008, we employed approximately 4,868 persons on a full-time equivalent basis.
Item 1A. Risk Factors
You should carefully consider the risks described below before making an investment decision. The risks
described below are not the only ones facing our company. Additional risks not presently known to us or
that we currently deem immaterial may also impair our business operations.
A majority of our new vehicles sales are from domestic brands. A restructuring of operations by
any of the three U.S. manufacturers may have an adverse effect on our operations. A cessation of
operations and/or liquidation or a material interruption in operations by any of the three U.S.
manufacturers would likely have a material adverse effect on our operations.
We are subject to a concentration of risk in the event of financial distress, including potential bankruptcy,
of a major vehicle manufacturer. Chrysler accounted for over 31%, General Motors accounted for 20%
and Ford accounted for 4% of our new vehicle sales in 2008.
Particularly with respect to the three domestic manufactures (General Motors, Chrysler and Ford), the
current recession, volatile fuel prices and tightening credit markets have resulted in significantly lower
vehicle sales and a deteriorating financial condition that could affect their ability to survive. Specifically,
both General Motors and Chrysler have publicly announced that they have depleted their available cash
resources and recently received loans from the federal government but in amounts announced to be
inadequate to address their intermediate-term cash needs. The Treasury has conditioned any further
loans upon the presentation of a restructuring plan to reflect the ability of such manufacturer to stabilize
its financial condition and survive in the increasingly competitive industry. It is unknown at this time
whether such funding will be made available or if provided, would be adequate to make them viable and
competitive.
In a Chapter 11 reorganization in Bankruptcy Court: (1) the manufacturer could cease producing certain
makes of vehicles and terminate all or any of our franchises even on continuing brands without
consideration, (2) we may not be able to collect some or all of our significant receivables that are due us
from such manufacturer, (3) we may not be able to obtain financing for our new vehicle inventory, or
arrange financing for our customers for their vehicle purchases and leases and (4) consumer demand for
such manufacturer’s products could be adversely affected.
If any of these events were to occur, our sales and earnings may be adversely impacted. These events
would also result in a partial or complete write-down of our remaining intangible franchise rights with
respect to any affected franchises and would likely cause us to incur valuation allowances related to
receivables due from such manufacturers. Any associated franchise terminations would likely cause us to
incur charges related to operating leases and/or impairment of long-lived assets. Additionally, there is a
continued risk to both the new and used vehicle inventory valuations for the respective brand or
manufacturer. If the impact on us results in a “material adverse change” to our condition, covenants and
cross default provisions in certain debt agreements may be triggered, resulting in the immediate demand
for amounts outstanding under the agreements.
In a Chapter 7 liquidation in Bankruptcy Court, the manufacturer would seek protection from its creditors
and would commence an orderly wind-down of operations. The impact of a liquidation would likely have a
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material adverse effect on our results from operations, cash flows and financial condition unless the
operations were promptly sold to and assumed by another manufacturer.
A continuing recession and tight credit markets can be expected to reduce consumer demand for
new and used vehicles.
In 2008, automotive sales nationwide have dropped significantly. While the sales reduction was felt
mostly by the U.S. domestic manufacturers, sales levels by nearly all manufacturers, including import and
luxury brands, are down as well, some precipitously. Unless and until the economy, credit availability and
consumer confidence improves, it is unlikely that sales will increase significantly, and they may be
reduced further.
Our success depends in large part upon the overall demand for the particular lines of vehicles
that each of our stores sell and the ability of the manufacturers to continue to deliver such
vehicles.
Demand for our primary manufacturers’ vehicles as well as the financial condition, management,
marketing, production and distribution capabilities of these manufacturers can significantly affect our
business. Events that adversely affect a manufacturer’s ability to timely deliver new vehicles may
adversely affect us by reducing our supply of popular new vehicles and leading to lower sales in our
stores during those periods than would otherwise occur.
In addition, vehicle manufacturers would be adversely impacted by economic downturns or recessions,
adverse fluctuations in currency exchange rates, significant declines in the sales of their new vehicles,
increases in interest rates, declines in their credit ratings, labor strikes or similar disruptions (including
within their major suppliers), supply shortages or rising raw material costs, rising employee benefit costs,
adverse publicity that may reduce consumer demand for their products (including due to bankruptcy),
product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, or
other adverse events. These and other risks could materially adversely affect any manufacturer and limit
its ability to profitably design, market, produce or distribute new vehicles, which, in turn, could materially
adversely affect our business, results of operations, financial condition, stockholders’ equity, cash flows
and prospects.
Additionally, federal and certain state’s laws mandate minimum levels of vehicle fuel economy and
establish emission standards which levels and standards could be increased in the future including the
use of renewable energy sources. Such laws often increase the costs of new vehicles, generally, which
would be expected to reduce demand. Further, changes in these laws could result in fewer vehicles
available for sale by manufacturers unwilling or unable to comply with the higher standards.
As part of the restructuring currently underway by the domestic automakers, there could be a reduction in
the makes or models associated with certain franchise agreements. The cessation of any makes for
which we hold a franchise would be expected to result in a termination of that franchise.
Our business may be adversely affected by unfavorable conditions in our local markets, even if
those conditions are not prominent nationally.
Our performance is also subject to local economic, competitive and other conditions prevailing in our
various geographic areas. Our dealerships currently are located in limited markets in 13 states and the
results of our operations therefore depend substantially on general economic conditions and consumer
spending levels in those markets. In 2008, our markets in Oregon, California, Nebraska and Idaho were
particularly slow, which exacerbated our sales declines.
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The decline of available financing, particularly in the sub-prime lending market and with captive
financing companies, has adversely affected our sales of both new and used vehicles.
A significant portion of vehicle buyers finance their vehicle purchases. Sub-prime finance companies have
historically provided financing for consumers who, for a variety of reasons, including poor credit histories
and lack of a down payment, do not have access to more traditional finance sources. Recent economic
developments have significantly reduced credit availability even for more credit-worthy buyers. Increasing
minimum credit standards of the remaining sub-prime lenders has severely reduced the ability of those
consumers to purchase vehicles, which has and is expected to have a material adverse effect on our new
and used vehicle sales, cash flows and profitability until these conditions abate.
We are dependent on manufacturer affiliated financing companies to provide flooring sources for
our new vehicle inventories. If flooring sources are eliminated, no assurances can be given that
we will be able to secure additional borrowing facilities. Additionally, our flooring debt is due
upon demand, and it may be called at any time.
We currently have relationships with a number of manufacturers or their affiliated finance companies
including Chrysler Financial, Mercedes Financial, Toyota Motor Credit Corporation, Ford Motor Credit
Company, General Motors Acceptance Corporation LLC, Volkswagen Credit, Inc., American Honda
Finance Corporation and BMW Financial Services NA, LLC. Certain of these companies have indicated
current financial constraints. Other companies may currently, or in the future, have additional financial
uncertainty. As a result, credit that has typically been extended to us by the companies may be modified
with terms unacceptable to us or revoked entirely.
If these events were to occur, we may not be able to pay our flooring debts or borrow sufficient funds to
refinance the vehicles. Even if new financing were available, it may not be on terms acceptable to us.
Our restructuring plan to reduce our operating losses, exposure to domestic brands, and level of
debt has resulted in our placing numerous domestic stores in discontinued operations. Our
ability to dispose of such stores without further losses is not assured.
The recent drop in new vehicle sales, particularly with respect to domestic brands, has resulted in an
increased effort to reduce both the number and the percentage of our stores selling domestic brands.
Further, the continuing challenges we have in successfully competing in metropolitan markets that are
heavily concentrated with domestic stores, has resulted in our efforts to dispose of those stores as well.
Currently, we have 15 stores remaining in discontinued operations. The uncertainty surrounding the
strength or survivability of certain domestic manufacturers, the poor financial performance of most of the
stores selected and the tight credit market for the few interested purchasers for those stores, may make it
impossible to sell the remaining stores placed in discontinued operations and could result in further
operating losses and/or the closure of the stores.
If manufacturers discontinue or change sales incentives, warranties and other promotional
programs, our results of operations, cash flows, or financial condition may be materially
adversely affected.
We depend upon the manufacturers for sales incentives, warranties and other programs that are intended
to promote new vehicle sales or support dealership profitability. Manufacturers historically have made
many changes to their incentive programs during each year. Some of the key incentive programs include:
customer rebates;
special rates on certified, pre-owned cars;
•
• dealer incentives on new vehicles;
•
• below-market financing on new vehicles and special leasing terms;
• warranties on new and used vehicles; and
•
sponsorship of used vehicle sales by authorized new vehicle dealers.
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A discontinuation or change in our manufacturers’ incentive programs could adversely affect our
business. Recently, some manufacturers have tightened or eliminated certain financing incentives
including leasing programs which have resulted in the loss of sales. Further, some manufacturers use a
dealership’s CSI scores as a factor governing participation in incentive programs. We may not meet such
minimum scores, and as a consequence, may be precluded from receiving certain incentives.
Volatility in vehicle fuel prices changes consumer demand and significant increases can be
expected to reduce vehicle sales.
Historically, in times of rapid increase in crude oil and fuel prices, sales of vehicles have dropped,
particularly in the short term, as the economy slows, consumer confidence wanes and fuel costs become
more prominent to the consumer’s buying decision. That condition existed in mid-2008 and was a
significant contributor to reduced sales, particularly for less fuel-efficient vehicles. While gasoline prices
significantly abated by year-end 2008, limited supply and an increasing demand over time is expected to
result in significant price increases in the future. In sustained periods of higher fuel costs, consumers who
do purchase vehicles tend to prefer smaller, more fuel efficient vehicles or hybrid powered vehicles
currently in limited supply
The ability of our stores to make new vehicle sales depends in large part upon the manufacturers
and, therefore, any disruption or change in our relationships with manufacturers may materially
and adversely affect our profitability.
We depend on the manufacturers to provide us with a desirable mix of new vehicles. The most popular
vehicles usually produce the highest profit margins and are frequently in short supply. If we cannot obtain
sufficient quantities of the most popular models, our profitability may be adversely affected. Sales of less
desirable models may reduce our profit margins.
Each of our stores operates pursuant to a franchise agreement with each of the respective manufacturers
for which it serves as franchisee. Manufacturers exert significant control over our stores through the terms
and conditions of their franchise agreements, including provisions for termination or non-renewal for a
variety of causes. From time-to-time, certain of our stores have failed to comply with certain provisions of
their franchise agreements. These agreements and state law, however, generally afford us the
opportunity to cure violations and no manufacturer has terminated or failed to renew any franchise
agreement with us. If a manufacturer terminates or fails to renew one or more of our significant franchise
agreements, such action could have a material adverse effect on our results of operations, cash flows
and financial condition.
Our franchise agreements also specify that, in certain situations, we cannot operate a franchise by
another manufacturer in the same building as the manufacturer’s franchised store. This may require us to
build new facilities at a significant cost. In addition, some manufacturers are in the process of realigning
their stores along defined channels, such as combining Chrysler and Jeep in one location. As a result,
manufacturers may require us to move or sell certain stores. Moreover, our manufacturers generally
require that the store meet defined image standards. All of these commitments could require us to make
significant capital expenditures.
Some of our franchise agreements prohibit transfers of ownership interests of a store or, in some cases,
its parent. The most prohibitive restriction, which has been imposed by various manufacturers, provides
that, under certain circumstances, we may lose a franchise if a person or entity acquires an ownership
interest in us above a specified level (ranging from 20% to 50% depending on the particular
manufacturer’s restrictions and falling as low as 5% if another vehicle manufacturer is the entity acquiring
the ownership interest) without the approval of the applicable manufacturer. Violations by our
stockholders or prospective stockholders are generally outside of our control and may result in the
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termination or non-renewal of one or more of our franchises, which may have a material adverse effect on
our results of operations, cash flows and financial condition.
Import product restrictions and foreign trade risks may impair our ability to sell foreign vehicles
profitably.
Certain vehicles we sell, as well as certain major components of vehicles we sell, are manufactured
outside the United States. Accordingly, we are affected by import and export restrictions of various
jurisdictions and are dependent to some extent on general economic conditions in, and political relations
with, a number of foreign countries. Additionally, fluctuations in currency exchange rates may increase
the price and adversely affect our sales of vehicles produced by foreign manufacturers. Imports into the
United States may also be adversely affected by increased transportation costs and tariffs, quotas or
duties, any of which could have a material adverse effect on our results of operations, cash flows and
financial condition.
Environmental, health or safety regulations could have a material adverse effect on our results of
operations, cash flows, or financial condition or cause us to incur significant expenditures.
We are subject to various federal, state and local environmental, health and safety regulations governing,
among other things, the generation, storage, handling, use, treatment, recycling, transportation, disposal
and remediation of hazardous material and the emission and discharge of hazardous material into the
environment. Under certain environmental regulations or pursuant to signed private contracts, we could
be held responsible for all of the costs relating to any contamination at our present or our previously
owned facilities, and at third party waste disposal sites. We are aware of contamination at certain of our
facilities, and we are in the process of conducting investigations and/or remediation at some of these
properties. In certain cases, the current or prior property owner is conducting the investigation and/or
remediation or we have been indemnified by either the current or prior property owner for such
contamination. There can be no assurances that these owners will remediate or continue to remediate
these properties or pay or continue to pay pursuant to these indemnities. We are also required to obtain
permits from governmental authorities for certain operations. If we violate or fail to fully comply with these
regulations or permits, we could be fined or otherwise sanctioned by regulators.
Environmental, health and safety regulations are becoming increasingly more stringent. There can be no
assurances that the costs of compliance with these regulations will not result in a material adverse effect
on our results of operations or financial condition or that additional environmental, health or safety matters
will not arise or new conditions or facts will not develop in the future at our currently or formerly owned or
operated facilities, or at sites that we may acquire in the future, which will require us to incur significant
expenditures.
With the breadth of our operations and volume of transactions, compliance with the many federal
and state laws and regulations cannot be assured. New regulations are enacted on an ongoing
basis. These regulations can impact our profitability and require continued training and vigilance.
Fines, judgments and administrative sanctions can be severe.
We are subject to federal, state and local laws and regulations in each of the 13 states in which we have
stores. New laws and regulations are enacted on an ongoing basis. With the number of stores we
operate, the number of personnel we employ and the large volume of transactions we handle, it is likely
that technical mistakes will be made. It is also likely that these regulations may impact our profitability and
require ongoing training. Current practices in stores may become prohibited. We are responsible for
ensuring that continued compliance with laws is maintained. If there are unauthorized activities of serious
magnitude, the state and federal authorities have the power to impose civil monetary penalties and
sanctions, suspend or withdraw dealer licenses or take other actions. These actions could materially
impair our activities or our ability to acquire new stores in those states where violations occurred. Further,
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private causes of action on behalf of individuals or a class of individuals could result in significant
monetary damages or injunctive relief.
Our ability to increase revenues through acquisitions depends on our ability to acquire and
successfully integrate additional stores.
General. While we are not currently purchasing new stores, when market conditions stabilize, our
financial performance improves and funding is available, we would intend to again renew our growth
strategy. The U.S. automobile industry is considered a mature industry in which minimal growth is
expected in unit sales of new vehicles. Accordingly, a principal component of our growth in sales would
be to make acquisitions in our existing markets and in new geographic markets. To complete the
acquisitions of additional stores, we need to successfully address each of the following challenges.
Limitations on our capital
from capitalizing on acquisition
opportunities. Acquisitions of additional stores will require substantial capital investment. Limitations on
our capital resources would restrict our ability to complete new acquisitions.
resources may prevent us
We have financed our past acquisitions from a combination of the cash flow from our operations,
borrowings under our credit arrangements, issuances of our common stock and proceeds from our
private debt offering. The use of any of these financing sources could have the effect of reducing our
earnings per share.
Manufacturers may restrict our ability to make new acquisitions. We are required to obtain consent from
the applicable manufacturer prior to the acquisition of a franchised store. In determining whether to
approve an acquisition, a manufacturer considers many factors, including our financial condition,
ownership structure, the number of stores currently owned and our performance with those stores. Most
major manufacturers have now established limitations or guidelines on the:
•
•
•
•
•
•
number of such manufacturers’ stores that may be acquired by a single owner;
number of stores that may be acquired in any market or region;
percentage of market share that may be controlled by one automotive retailer group;
ownership of stores in contiguous markets;
frequency of acquisitions; and
requirement that no other manufacturers’ brands be sold from the same store location. In
addition, each manufacturer has site control agreements in place that limit our ability to change
the use of the facility without their approval.
A manufacturer also considers our past performance as measured by their customer satisfaction index, or
CSI, scores and sales performance at our existing stores. At any point in time, some of our stores may
have CSI scores below the manufacturers’ sales zone averages or have achieved sales performances
below the targets manufacturers have set. Our failure to maintain satisfactory CSI scores and to achieve
market share performance goals could restrict our ability to complete future acquisitions. We currently
have, and at any point in the future may have, manufacturers that restrict our ability to complete future
acquisitions.
Competition with other automotive retailers for attractive acquisition targets could restrict our ability to
complete new acquisitions. In the current economic environment, we are presented with an increasing
number of attractive acquisition opportunities. However, when the economy improves, we would expect to
compete with several other public and private national automotive retailers, some of which have greater
financial and managerial resources.
Indefinite-lived intangible assets (franchise value) comprise a meaningful portion of our total
assets ($42.0 million at December 31, 2008). We must test our intangible assets for impairment at
least annually, which may result in a further non-cash write down of franchise rights and could
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have a material adverse impact on our results of operations, shareholders’ equity and loan
covenants.
Indefinite-lived intangibles are subject to impairment assessments at least annually (or more frequently
when events or circumstances indicate that an impairment may have occurred) by applying a fair-value
based test. Our remaining principal intangible assets are our rights under our franchise agreements with
vehicle manufacturers. The risk of impairment losses increases if operating losses are suffered at those
stores, if a manufacturer files for bankruptcy or if the stores are closed. Impairment losses result in a non-
cash write-down of the affected franchise values. Furthermore, impairment losses could have an adverse
impact on our ability to satisfy the financial ratios or other covenants under our debt agreements and
could have a material adverse impact on our results of operations and shareholders’ equity.
A deferred tax asset position comprises a meaningful portion of our total assets (approximately
$46.5 million at December 31, 2008). We are required to assess the recoverability of this asset on
an ongoing basis. Future negative operating performance or other negative evidence may result in
a valuation allowance being recorded against some or all of this amount. This could have a
material adverse impact on our results of operations, shareholder’s equity and loan covenants.
Deferred tax assets are evaluated on a quarterly basis to determine if they are expected to be
recoverable in the future. This evaluation considers positive and negative evidence in order to assess
whether it is more likely than not that a portion of the asset will not be realized. The risk of a valuation
allowance increases if continuing operating losses are incurred. A valuation allowance on our tax asset
could have an adverse impact on our ability to satisfy the financial ratios or other covenants under our
debt agreements and could have a material adverse impact on our results of operations and
shareholders’ equity.
Our operating losses as well as our indebtedness and lease obligations could materially adversely
affect our financial health, limit our ability to finance future acquisitions and capital expenditures,
and prevent us from fulfilling our financial obligations.
Our indebtedness and lease obligations could have important consequences to us, including the
following:
• our ability to obtain additional financing for acquisitions, capital expenditures, working capital or
general corporate purposes may be impaired in the future;
• a substantial portion of our current cash flow from operations must be dedicated to the payment
of principal on our indebtedness, thereby reducing the funds available to us for our operations
and other purposes; and
some of our borrowings are and will continue to be at variable rates of interest, which exposes us
to the risk of increasing interest rates.
•
In addition, our debt instruments contain numerous covenants that limit our discretion with respect to
business matters, including acquisitions, paying dividends, redeeming our convertible notes prior to
maturity, repurchasing our common stock, incurring additional debt or disposing of assets. Other
covenants are financial in nature, including current and fixed-charge ratios or minimum net-worth
requirements. A breach of any of these covenants could result in a default under the applicable
agreement or indenture. In addition, a default under one agreement or indenture could result in a default
and acceleration of our repayment obligations under the other agreements or indentures under the cross
default provisions in those agreements or indentures.
Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself
insecure or if a ‘material adverse change’ in our business has occurred. If these clauses are implicated
and the lender declares that an event of default has occurred, the outstanding indebtedness would likely
be immediately due and owing.
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If these events were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance
them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this
risk, we could be forced to take actions that we otherwise would not take, or not take actions that we
otherwise might take, in order to comply with these agreements and indentures.
The loss of key personnel or the failure to attract additional qualified management personnel
could adversely affect our operations and growth.
Our success depends to a significant degree on the efforts and abilities of our senior management,
particularly Sidney B. DeBoer, our Chairman and Chief Executive Officer, and Bryan B. DeBoer, our
President and Chief Operating Officer. Further, we have identified Sidney B. DeBoer and/or Bryan B.
DeBoer in most of our store franchise agreements as the individuals who control the franchises and upon
whose financial resources and management expertise the manufacturers may rely when awarding or
approving the transfer of any franchise.
The sole voting control of our company is currently held by Sidney B. DeBoer who may have
interests different from your interests. Further, all of the Class B shares of the company held by
Lithia Holdings are pledged, with other assets, to secure personal indebtedness of Mr. DeBoer.
The failure to repay the indebtedness could result in the sale of such shares and the loss of such
control, which may violate agreements with certain manufacturers, including Toyota Motor Sales
USA.
Lithia Holding Company, LLC, of which Sidney B. DeBoer, our Chairman and Chief Executive Officer, is
the sole managing member, holds all of the outstanding shares of our Class B common stock. A holder of
Class B common stock is entitled to ten votes for each share held, while a holder of Class A common
stock is entitled to one vote per share held. On most matters, the Class A and Class B common stock
vote together as a single class. As of March 16, 2009, Lithia Holding controlled approximately 69% of the
aggregate number of votes eligible to be cast by stockholders for the election of directors and most other
stockholder actions. Therefore, Lithia Holding will control the election of our Board of Directors and will be
in a position to control the policies and operations of the company. In addition, because Mr. DeBoer is the
managing member of Lithia Holding, he currently controls and will continue to control, all of the
outstanding Class B common stock, thereby allowing him to control the company. So long as at least 16
2/3% of the total number of shares outstanding are shares of Class B common stock, the holders of
Class B common stock will be able to control all matters requiring approval of 66 2/3% or less of the
aggregate number of votes.
Lithia Holdings has pledged all of the Class B common stock with other personal assets of Mr. DeBoer, to
secure a personal loan to Mr. DeBoer from U S Bank, NA. Should he be unable to repay the loan, the
bank could foreclose against the Class B common stock, which would result in the automatic conversion
of such shares to Class A common stock. In such event, Mr. DeBoer would no longer be in control of the
company and this loss (change) in control, if not consented to by the manufacturers, would be a technical
violation under most of the dealer sales and service agreements held by the company. However,
applicable state franchise laws prohibit manufacturers from unreasonably withholding consent to a
change in control or the appointment of a new individual responsible for the operations of a store should a
loss in control also result in the removal of both Sid DeBoer and Bryan DeBoer who are currently named.
Further, the current pledge of Class B common stock does not comply with the exception to such pledges
provided in the Framework Agreement between the company and Toyota Motor Sales, U.S.A, Inc. Mr.
DeBoer is in the process of seeking from Toyota Motors Sales approval of this pledge. Failure to receive
such approval could result in disallowance of future Toyota store acquisitions by the company but would
not be a violation of any of the sales and service agreements on existing Toyota stores.
20
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our stores and other facilities consist primarily of automobile showrooms, display lots, service facilities,
collision repair and paint shops, supply facilities, automobile storage lots, parking lots and offices. We
believe our facilities are currently adequate for our needs and are in good repair. We own some of our
properties, but also lease many properties, providing future flexibility to relocate our retail stores as
demographics, economics, traffic patterns or sales methods change. Most leases give us the option to
renew the lease for one or more lease extension periods. We also hold some undeveloped land for future
expansion.
Item 3. Legal Proceedings
We are party to numerous legal proceedings arising in the normal course of our business. While we
cannot predict with certainty the outcomes of these matters, we do not anticipate that the resolution of
these proceedings will have a material adverse effect on our business, results of operations, financial
condition, or cash flows.
Phillips/Allen Cases
On November 25, 2003, Aimee Phillips filed a lawsuit in the U.S. District Court for the District of Oregon
(Case No. 03-3109-HO) against Lithia Motors, Inc. and two of its wholly-owned subsidiaries alleging
violations of state and federal RICO laws, the Oregon Unfair Trade Practices Act (“UTPA”) and common
law fraud. Ms. Phillips seeks damages, attorney's fees and injunctive relief. Ms. Phillips' complaint stems
from her purchase of a Toyota Tacoma pick-up truck on July 6, 2002. On May 14, 2004, we filed an
answer to Ms. Phillips' Complaint. This case was consolidated with the Allen case described below and
has a similar current procedural status.
On April 28, 2004, Robert Allen and 29 other plaintiffs (“Allen Plaintiffs”) filed a lawsuit in the U.S. District
Court for the District of Oregon (Case No. 04-3032-HO) against Lithia Motors, Inc. and three of its wholly-
owned subsidiaries alleging violations of state and federal RICO laws, the Oregon UTPA and common
law fraud. The Allen Plaintiffs seek damages, attorney's fees and injunctive relief. The Allen Plaintiffs'
Complaint stems from vehicle purchases made at Lithia stores between July 2000 and April 2001. On
August 27, 2004, we filed a Motion to Dismiss the Complaint. On May 26, 2005, the Court entered an
Order granting Defendants' Motion to Dismiss plaintiffs' state and federal RICO claims with prejudice. The
Court declined to exercise supplemental jurisdiction over plaintiffs' UTPA and fraud claims. Plaintiffs filed
a Motion to Reconsider the dismissal Order. On August 23, 2005, the Court granted Plaintiffs' Motion for
Reconsideration and permitted the filing of a Second Amended Complaint (“SAC”). On September 21,
2005, the Allen Plaintiffs, along with Ms. Phillips, filed the SAC. In this complaint, the Allen plaintiffs seek
actual damages that total less than $500,000, trebled, approximately $3.0 million in mental distress
claims, trebled, punitive damages of $15.0 million, attorney's fees and injunctive relief. The SAC added as
defendants certain officers and employees of Lithia. In addition, the SAC added a claim for relief based
on the Truth in Lending Act (“TILA”). On November 14, 2005 we filed a second Motion to Dismiss the
Complaint and a Motion to Compel Arbitration. In two subsequent rulings, the Court has dismissed all
claims except those under Oregon's Unfair Trade Practices Act and a single fraud claim for a named
individual. We believe the actions of the court have significantly narrowed the claims and potential
damages sought by the plaintiffs. Lithia's motion to Compel Arbitration of Plaintiff's remaining claims was
denied. We have filed a Notice of Appeal relating to the denial of our Motion to Compel Arbitration. This
appeal was argued before the Ninth Circuit Court of Appeals (No. 07-35670) with a ruling anticipated in
Spring 2009.
21
On September 23, 2005, Maria Anabel Aripe and 19 other plaintiffs (“Aripe Plaintiffs”) filed a lawsuit in the
U.S. District Court for the District of Oregon (Case No. 05-3083-HO) against Lithia Motors, Inc., 12 of its
wholly-owned subsidiaries and certain officers and employees of Lithia, alleging violations of state and
federal RICO laws, the Oregon UTPA, common law fraud and TILA. The Aripe Plaintiffs seek actual
damages of less than $600,000, trebled, approximately $3.7 million in mental distress claims, trebled,
punitive damages of $12.6 million, attorney's fees and injunctive relief. The Aripe Plaintiffs' Complaint
stems from vehicle purchases made at Lithia stores between May 2001 and August 2005 and is
substantially similar to the allegations made in the Allen case. On April 18, 2006, the Court stayed the
proceedings in the Aripe case, pending resolution of certain motions in the Allen case. The relevant
motions in the Allen case have now been resolved, and we anticipate that the stay in the Aripe case will
soon be lifted.
Alaska Service and Parts Advisors and Managers Overtime Suit
On March 22, 2006, seven former employees in Alaska brought suit against the company (Dunham, et al.
v. Lithia Support Services, et al., 3AN-06-6338 Civil, Superior Court for the State of Alaska) seeking
overtime wages, additional liquidated damages and attorney fees. The complaint was later amended to
include a total of 11 named plaintiffs. The court ordered the dispute to arbitration. In February 2008, the
arbitrator granted the plaintiffs' request to establish a class of plaintiffs consisting of all present and former
service and parts department employees totaling approximately 150 individuals who were paid on a
commission basis. We have filed a motion requesting reconsideration of this class certification, but the
arbitrator died before issuing his opinion. The reconsideration seeks a ruling whether these employees or
some of these employees are exempt from the applicable state law that provides for the payment of
overtime under certain circumstances. A new arbitrator has now been appointed who has advised he
intends to make an independent opinion with respect to the request by the plaintiff for a class certification.
A supplemental brief was recently filed by the company with respect to this issue but no ruling has yet
been rendered.
Alaska Used Vehicles Sales Disclosures
On May 30, 2006, four of our wholly owned subsidiaries located in Alaska were served with a lawsuit
alleging that the stores failed to comply with Alaska law relating to various disclosures required to be
made during the sale of a used vehicle. The complaint was filed by Jackie Lee Neese, et al. v. Lithia
Chrysler Jeep of Anchorage, Inc., et al. in the Superior Court for the State of Alaska at Anchorage, case
number 3AN-06-04815CI. The complainants seek to represent other similarly situated customers. The
court has not certified the suit as a class action. During the pendency of the Neese case, the State of
Alaska brought charges against Lithia’s subsidiaries alleging the same factual allegations, and also
alleging violations related to the practice of charging document fees. We settled the State action, which
we believe resolves the disputes. However, the plaintiffs in the private action moved to intervene in the
State of Alaska matter, and they also filed a second putative class action lawsuit, Jackie Lee Neese, et al,
v. Lithia Chrysler Jeep of Anchorage, Inc., case number 3AN-06-13341CI, related to the document fee
claims identified in the State of Alaska’s complaint. The second Neese lawsuit was consolidated with the
first case. The court denied the plaintiffs’ request to intervene in the State of Alaska matter and the
plaintiffs have filed an appeal with the Alaska Supreme Court challenging that denial. Oral arguments on
the appeal have been held, but no ruling has been issued. The trial court dismissed two of the stores
involved in the first lawsuit because none of the named plaintiffs had purchased any vehicles from the two
stores. The plaintiffs have also appealed that dismissal to the Alaska Supreme Court. Oral arguments
were held and the parties are awaiting a decision from the Court. Both the private lawsuits, as well as the
implementation of the settlement with the State of Alaska, have been stayed pending a ruling in the
appeal of the State of Alaska case.
Washington State B&O Tax Suit
On October 19, 2005, Marcia Johnson and Theron Johnson (the “Johnsons”), on their own behalf and on
behalf of a proposed plaintiff class of all other similarly situated individuals and entities, filed suit in the
Superior Court for the State of Washington, Spokane County (Case No. 05205059-9). The Johnsons
sued Lithia Motors, Inc., and one of Lithia’s wholly-owned subsidiaries, individually and as representatives
22
of a proposed defendant class of other motor vehicle dealers, asking for an award of declaratory and
injunctive relief, and damages, based on defendants’ allegedly illegal practice of itemizing and collecting
the Washington State Business and Occupation Tax (“B&O Tax”) from customers buying vehicles from
defendants.
The allegations in the Johnson case involve legal issues similar to those that were litigated in the case of
Nelson vs. Appleway Chevrolet, Inc. (the “Nelson case”). By agreement of the parties, the Johnson case
was stayed while the Nelson case, which had been filed in 2004, was appealed to the Washington State
Supreme Court.
In April 2007, the Washington Supreme Court upheld the lower court decisions in favor of the plaintiffs in
the Nelson case. The decision was based on the Appleway dealer’s practice of adding a B&O tax charge
to a vehicle’s purchase price after the customer and the dealer reached agreement on the vehicle’s price.
Because Lithia’s subsidiary negotiated with the Johnsons over a proposed B&O tax charge before
reaching agreement with the Johnsons on a purchase price for the Johnsons’ new vehicle, Lithia and its
subsidiary believe the subsidiary’s actions are permissible under the law as established by the Supreme
Court’s decision in the Nelson case. They moved for summary judgment based on the Washington
Supreme Court’s decision in the Nelson case.
Shortly after the filing of that motion, the Johnsons filed an amended complaint. They added an allegation
that the defendants’ actions also violated Washington’s Consumer Protection Act, and requested an
award of treble damages up to $10,000 for each alleged violation of the Act.
The Johnsons then cross-moved for partial summary judgment, contending that the Supreme Court’s
decision in the Nelson case established that Lithia and its subsidiary had violated Washington’s tax and
Consumer Protection Act laws. After hearing oral argument on the motions, the trial court judge, on
October 12, 2007, issued an oral ruling in favor of the Johnsons and against the Lithia subsidiary. The
court denied Lithia’s and its subsidiary’s summary judgment motion. The court entered its written order to
that effect on November 9, 2007.
Lithia and its subsidiary asked the trial court to certify its order as a final judgment. After the trial court
denied their request, Lithia and its subsidiary petitioned the Washington Court of Appeals for discretionary
review of the summary judgment decision, which was granted in April 2008. In January 2009, the Court of
Appeals reversed the trial court judge’s ruling and directed the entry of a summary dismissal order in the
case. Plaintiff’s may appeal this decision to the Washington Supreme Court or attempt to pursue some
other claims in the trial court proceeding.
VanSyoc Case
On August 14, 2002, Steven H. VanSyoc filed a lawsuit in the Superior Court of California for the County
of Fresno (Case No. 08CECG02785) against a Lithia Motors subsidiary alleging fraud, deceit, intentional
misrepresentation, concealment and failure to disclose, and negligence. Further, plaintiff asserts
violations of California Civil Code § 1770(a)(2),(5),(6), (7), (9), (13), (14), (16) and (19) (a pattern, plan or
scheme with intent to deceive or induce the purchase and increase the cost of vehicles; and California
Civil Code § 17200, et.seq. (Unfair Competition Law)) and seeks an order enjoining the practice, unstated
actual damages and an order certifying the case a class-action. Plaintiff alleges that we failed to disclose
the vehicle he purchased was a former daily rental vehicle and misrepresented the terms and conditions
of the Extended Service Agreement purchased by Plaintiff, and failed to disclose that the time and
mileage limits actually started at a date significantly earlier than the purchase date. We have filed an
answer denying all liability. Preliminary discovery is being undertaken.
We intend to vigorously defend all matters noted above, and to assert available defenses. We cannot
make an estimate of the likelihood of negative judgment in any of these cases at this time. The ultimate
resolution of the above noted cases is not reasonably expected to have a material adverse impact on our
23
results of operations, financial condition or cash flows. However, the results of these matters cannot be
predicted with certainty, and an unfavorable resolution of one or more of these matters could have a
material adverse effect on our results of operations, financial condition or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the quarter ended December 31, 2008.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
Purchases of Equity Securities
Sale of Unregistered Securities
We sold 22,408 shares of Class A Common Stock on July 1, 2008 and 220,499 shares of Class A
Common Stock on October 1, 2008 in a limited non-public offering to certain employees participating in
the shareholder approved 1998 Employee Stock Purchase Plan, as amended. We received proceeds of
$4.58 per share for shares sold on July 1, 2008 and $3.83 per share for those shares sold October 1,
2008 for total consideration of $102,629 and $844,511, respectively. The sales were sold under an
exception from registration afforded by section 4.1 of the Securities Act of 1933.
Stock Prices and Dividends
Our Class A common stock trades on the New York Stock Exchange under the symbol LAD. The following
table presents the high and low sale prices for our Class A common stock, as reported on the New York
Stock Exchange Composite Tape for each of the quarters in 2007 and 2008:
2007
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2008
Quarter 1
Quarter 2
Quarter 3
Quarter 4
$
$
High
31.56
29.02
26.19
21.31
15.72
10.94
6.76
4.99
$
$
Low
26.00
25.22
16.54
13.21
8.91
4.89
3.51
1.53
The number of shareholders of record and approximate number of beneficial holders of Class A common
stock at March 16, 2009 was 1,369 and 5,128, respectively. All shares of Lithia’s Class B common stock
are held by Lithia Holding Company LLC.
Dividends declared and paid on our Class A and Class B common stock during 2007 and 2008 were as
follows:
Quarter related to:
2006
Fourth quarter
2007
First quarter
Second quarter
Third quarter
Fourth quarter
2008
First quarter
Second quarter
Third quarter
Fourth quarter
Dividend
amount per
share
Total amount of
dividend (in
thousands)
$0.14
$2,745
2,749
2,762
2,762
2,776
2,806
2,837
1,025
----
0.14
0.14
0.14
0.14
0.14
0.14
0.05
----
24
Our working capital, acquisition and used vehicle credit facility (the “Credit Facility”) with U.S. Bank
National Association, DaimlerChrysler Financial Services Americas LLC (“Chrysler Financial”), DCFS
U.S.A. LLC (“Mercedes Financial”) and Toyota Motor Credit Corporation (“TMCC”) allows cash dividends
based on a formula. In addition, repurchases by us of our common stock are not permitted without the
prior approval of our lenders.
We reduced our cash dividend in the third quarter and did not declare a dividend related to the fourth
quarter of 2008. While it is our intent to re-instate a quarterly cash dividend once conditions improve and
our bank covenants permit, no assurances can be given that a cash dividend will be resumed. The
payment of any dividends is subject to the discretion of our Board of Directors. Dividends paid in 2008
totaled $9.4 million and stock repurchased due to options exercises in 2008 totaled $2,000.
Equity Compensation Plan Information
Information regarding securities authorized for issuance under equity compensation plans is included in
Item 12.
Stock Performance Graph
The following line-graph shows the annual percentage change in the cumulative total returns for the past
five years on an assumed $100 initial investment and reinvestment of dividends, on (a) Lithia Motors,
Inc.’s Class A common stock; (b) the Russell 2000; and (c) a peer group index composed of United Auto
Group, Inc., AutoNation, Sonic Automotive, Inc., Group 1 Automotive, Inc. and Asbury Automotive Group,
the only other comparable publicly traded automobile dealerships in the United States as of December
31, 2008. The peer group index utilizes the same methods of presentation and assumptions for the total
return calculation as does Lithia Motors and the Russell 2000. All companies in the peer group index are
weighted in accordance with their market capitalizations.
Company/Index
Lithia Motors, Inc.
Auto Peer Group
Russell 2000
Base
Period
12/31/03
$100.00
100.00
100.00
12/31/04
$106.39
100.91
118.33
Indexed Returns for the Year Ended
12/31/07
12/31/06
12/31/05
$54.46
$114.08
$124.71
85.37
125.72
111.02
144.15
146.44
123.72
12/31/08
$12.93
43.18
95.44
25
Item 6. Selected Financial Data
You should read the Selected Financial Data in conjunction with Item 7. “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” our Consolidated Financial Statements and Notes
thereto and other financial information contained elsewhere in this Annual Report on Form 10-K.
(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales
Gross profit
Goodwill impairment
Other asset impairments
Selling, general and administrative
Depreciation and amortization
Operating income (loss)
Floorplan interest expense
Other interest expense
Other income, net
Income (loss) from continuing operations before
income taxes
Income tax (provision) benefit
Income (loss) from continuing operations
Income (loss) from discontinued operations, net
of tax
Net income (loss)
Basic income (loss) per share from continuing
operations
Basic income (loss) per share from discontinued
operations
Basic net income (loss) per share
Shares used in basic per share
Diluted income (loss) per share from continuing
operations
Diluted income (loss) per share from
discontinued operations
Diluted net income (loss) per share
Shares used in diluted per share
Cash dividends declared per common share
$
$
$
$
$
$
2008
Year Ended December 31,
2006
2007
2005
2004
$ 1,172,807 $ 1,528,246 $ 1,449,012 $ 1,252,607 $ 1,112,475
532,311
73,719
198,635
6,109
1,923,249
1,591,421
331,828
-
-
249,916
9,931
71,981
(8,680)
(6,792)
562
574,373
78,970
306,743
4,911
2,137,804
1,767,760
370,044
272,503
23,402
316,183
17,732
(259,776)
(20,398)
(17,350)
6,673
660,588
97,036
261,949
5,250
2,473,835
2,048,070
425,765
-
-
319,854
13,383
92,528
(25,156)
(12,081)
798
686,728
99,727
304,302
5,279
2,624,282
2,177,493
446,789
-
-
349,283
16,862
80,644
(24,373)
(15,985)
641
604,129
86,121
227,033
3,626
2,173,516
1,788,206
385,310
-
-
278,713
10,855
95,742
(11,223)
(9,496)
815
(290,851)
91,703
(199,148)
40,927
(16,485)
24,442
56,089
(21,597)
34,492
75,838
(29,372)
46,466
57,071
(22,113)
34,958
(53,438)
(252,586) $
(2,893)
21,549 $
2,812
7,161
37,304 $
53,627 $
10,654
45,612
(9.95)
$
1.25
$
1.77
$
2.42
$
1.86
(2.67)
(12.62) $
20,017
(0.15)
1.10 $
0.14
1.91 $
0.38
2.80 $
19,530
19,485
19,175
0.57
2.43
18,773
(9.95)
$
1.19
$
1.65
$
2.22
$
1.75
(2.67)
(12.62) $
20,017
0.47 $
(0.13)
1.06 $
0.13
1.78 $
0.33
2.55 $
22,082
22,102
21,807
0.56 $
0.54 $
0.44 $
0.52
2.27
20,647
0.31
Factors Affecting Comparability
Stock-based compensation expense included
as a component of selling, general and
administrative expense
Loss (gain) related to undesignated interest rate
swaps included as a component of floorplan
interest expense
Ineffectiveness related to interest rate swaps
included as a component of floorplan interest
expense
(In thousands)
Consolidated Balance Sheet Data:
Working capital
Inventories
Total assets
Flooring notes payable
Current maturities of long-term debt
Long-term debt, less current maturities
Total stockholders’ equity
$
1,725
$
3,384
$
3,534
$
490
$
164
545
363
-
(1,921)
4,081
3,726
73
-
-
-
2007
193,447 $
601,759
1,626,735
451,590
13,327
455,495
508,212
As of December 31,
2006
149,701 $
603,306
1,579,357
499,679
16,557
392,383
493,393
2005
156,446 $
606,047
1,452,714
530,452
6,868
290,551
460,231
2004
124,277
535,347
1,255,720
450,860
6,565
267,311
405,246
2008
99,524 $
$
422,812
1,133,459
337,700
78,634
265,184
248,343
26
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with Item 1. “Business,” Item 1A. “Risk Factors” and
our Consolidated Financial Statements and Notes thereto.
Overview
We are a leading operator of automotive franchises and retailer of new and used vehicles and services.
As of March 16, 2009, we offered 27 brands of new vehicles and all brands of used vehicles in 92 stores
in the United States and over the Internet. We sell new and used cars and light trucks; sell replacement
parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing,
service contracts, protection products and credit insurance for our automotive customers.
While the U.S. has not experienced a slower auto retail environment in 50 years, in January and February
2009, traffic in our stores was up over our December 2008 traffic. In addition, we believe that we are
realizing success from our recent marketing efforts and our continuing cost cutting initiatives to help
mitigate the slowing sales environment.
We believe that adhering to strict cost-cutting measures and improving our balance sheet by reducing
debt and preserving cash, while still focusing on satisfying our customers, should enable us to come
through the tough economic times as a stronger, more viable company. However, no assurances can be
given that industry sales will not experience a further decline, or that our restructuring plan will be of
sufficient magnitude to guarantee success in a declining market.
Economic Environment During 2008
As discussed in Overview in Item 1, “Business,” above, during 2008, overall macroeconomic issues have
reduced consumers’ desire and ability to purchase automobiles. An additional factor negatively impacting
auto sales has been a reduction in available options for consumer auto loans. The manufacturers’ captive
financing companies have suffered additional pressure as the financial crisis has raised their cost of funds
and reduced their access to capital. This has prevented them from offering as many incentives designed
to drive sales, such as subsidized interest rates and the amount of loan to value they are willing to
advance on vehicles.
The number of customers visiting our stores has significantly declined from prior years. We believe one of
the reasons showroom traffic has suffered is that customers are assuming that financing is not available
or that they would not qualify for vehicle financing. One of the main objectives of our recent advertising
has focused on overcoming this obstacle and communicating that consumer vehicle financing continues
to be available. This is evidenced by the fact that we were still able to arrange financing on approximately
73% of the vehicles we sold during the fourth quarter of 2008, although at substantially lower volumes.
In addition, both new and used vehicle sales have been impacted in 2008 by declining valuations for most
used vehicles. Fewer customers are trading in their used vehicles as the value many could receive is less
than what they currently owe. This has negatively affected our new vehicle sales as many potential
customers are not able to obtain financing to absorb the amount owed on their trade in as well as the cost
of the new vehicle.
Restructuring and Cost-Cutting Initiatives
As the economic environment continued to deteriorate in the second half of 2008, we continued to take
steps to achieve profitably in the current adverse market conditions, as well as to position ourselves for
our long-term growth objectives. The restructuring plan we announced on June 2, 2008 was subsequently
expanded to include additional initiatives. As of March 16, 2009, we identified a total of 31 stores for
divestiture and, as of this date, 12 of these stores had been sold, 4 had been closed, and 15 remained for
sale, one of which had a preliminary agreement signed for its sale. These actions will reduce our store
count by approximately one-fourth and will move us closer to our goal of a long term 50/50
domestic/import new vehicle sales mix.
27
Our restructuring plans also included the following cost cutting measures:
• Re-aligning store management personnel and duties;
• Reducing non-production headcount across the company;
• Reducing non-essential store expenses;
• Consolidating vendors and negotiating favorable payment terms;
• Reducing all corporate level expenses where possible; and
• Further centralizing offices by region.
In addition to the store divestitures discussed above, the following restructuring actions are underway to
help preserve capital and improve profitability:
• Deferring all uncommitted capital expenditures;
• Selling certain development property and other assets, including aircraft and excess land;
• Financing certain unfinanced real estate;
• Postponing acquisitions until prices stabilize; and
• Adjusting inventory levels to meet consumers’ shift in demand for new and used vehicles.
The above actions have allowed us to achieve approximately $43 million of annualized savings through
December 31, 2008 and we will continue to identify additional cost savings in the future without impacting
customer service.
As part of our restructuring plan, the investment in additional L2 locations was placed on hold as we were
unwilling to continue to absorb the expected startup losses. After we placed the initiative on hold, certain
personnel associated with the project were terminated and others were re-assigned to other areas.
The existing L2 stores have been integrated into the Lithia platform and we are utilizing all of the Lithia
systems in the locations. We closed our Loveland L2 location in June 2008 and are currently using the
facility in a re-formatted used car operation. In September 2008, we completed the sale of our Cedar
Rapids L2 location. We closed our Amarillo L2 location in November 2008 and are currently using the
facility in a re-formatted used car operation. We currently operate an L2 location in Lubbock, Texas.
However, the Lubbock location has been revamped to essentially operate as a traditional Lithia store to
gain operational efficiencies and to unify selling systems across the organization.
We did not incur any material severance, lease termination or other restructuring charges related to any
of these restructuring actions in 2008.
Manufacturer Information
Historically, manufacturers have offered incentives on new vehicle sales through a combination of
repricing strategies, rebates, lease programs, early lease cancellation programs and low interest rate
loans to consumers. Through the first half of 2008, this strategy continued. However, in response to
tightening in credit markets, in the third quarter of 2008, we saw a shift away from leasing and subsidized
financing to dealer and consumer rebates and repricing strategies.
In July 2008, Chrysler Financial announced the termination of its lease program. We have not seen a
significant impact due to this change as the majority of our transactions with Chrysler Financial are retail
installment contracts, not leases. We have received additional retail incentives as a result of the
termination of its lease program and may receive additional incentives in the future.
In October 2008, the domestic automakers approached Congress seeking government assistance. As
part of these hearings, each manufacturer provided an update on their current financial situation as well
as their outlook for 2009 and beyond. In the course of the hearings, it became clear that without
immediate assistance, both Chrysler and General Motors (“GM”) faced the possibility of insolvency as
early as January 2009.
28
In December 2008, the federal government provided $17.4 billion in bridge loans to both Chrysler and
GM. Stipulated with the loans was the condition that both manufacturers return to the Treasury in
February 2009 and provide a restructuring plan.
At the time of this filing, both Chrysler and GM have provided their plans to the Treasury requesting up to
$39 billion in total support, including the $17.4 billion already provided, and are acting on those plans.
However, the response by the federal government to these strategies remains unknown. We believe that
in the event either or both plans are rejected, a Chapter 11 bankruptcy filing would occur. We have
developed contingency plans to respond in the event of such a filing. No assurances can be given that
our contingency plans will be adequate to address the magnitude of these scenarios.
Goodwill and Other Asset Impairment Charges
Our financial results for 2008 included $301.0 million of goodwill and other asset impairment charges
included as a component of operating loss and an additional $70.1 million as a component of
discontinued operations. See Notes 1, 5, 6 and 19 of Notes to Consolidated Financial Statements for
additional information.
Gain on Early Retirement of Senior Subordinated Convertible Notes
During the third and fourth quarters of 2008, we redeemed a total of half, or $42.5 million principal
amount, of our senior subordinated convertible notes at a discount, which resulted in a gain on early
retirement of $5.2 million, which was included as a component of other income, net on our consolidated
statement of operations. As of December 31, 2008, $42.5 million of our senior subordinated convertible
notes remained outstanding.
Pro Forma Results of Operations
On a non-GAAP basis, the elimination of the effect of the non-cash impairment charges and the gain on
early retirement of debt would have resulted in a net improvement of our net loss before taxes by
approximately $295.8 million to net income before taxes of $4.9 million in 2008. In addition, excluding the
non-cash impairment charges and the gain on early retirement of debt of $(10.10) per share in continuing
operations and $(12.28) per share including discontinued operations, on a non-GAAP basis we had
income of $0.15 per diluted share from continuing operations, and a loss of $(0.34) per diluted share
including discontinued operations. The loss recorded under GAAP was $(9.95) per diluted share from
continuing operations and $(12.62) per diluted share including discontinued operations. For a
reconciliation of the non-GAAP financial data, see “Pro Forma Reconciliations,” below. The financial
tables contain certain non-GAAP financial measures as defined under SEC rules, such as net income and
diluted earnings per share from continuing operations, adjusted in each case to exclude certain disclosed
items. As required by SEC rules, we have provided reconciliations of these measures to the most directly
comparable GAAP measures, which are set forth herein. We believe that the non-GAAP financial
measures improve the transparency of our disclosure, provide a meaningful presentation of our results
from our core business operations excluding the impact of items not related to our ongoing core business
operations, and improve the period-to-period comparability of our results from our core business
operations.
Outlook
We anticipate a continued weak economic environment in 2009. Despite the economic weakness, we
believe the actions discussed in Restructuring and Cost-Cutting Initiatives will help mitigate its impact. As
retailers, we are able to reduce many variable costs, a majority of which are personnel related, and adjust
our inventories relatively quickly. In addition to these variable costs, we have cut fixed costs totaling
approximately $43 million annually. We remain committed to quickly and aggressively responding to any
further decline in the overall economy or the automotive retail environment and are prepared to continue
to reduce costs if current conditions deteriorate.
In 2008, we believe the impact of gasoline prices on the value of trucks and SUVs and reduced industry
sales resulted in below normal profit margins on vehicles. We intend to improve our vehicle margins by
29
improving our inventory mix to meet current demand. This action has resulted in improved margins on
both new and used vehicles in the fourth quarter of 2008. We believe that margins in 2009 will be
consistent with the margins experienced in the fourth quarter of 2008. We also adjusted our used vehicle
inventory mix throughout 2008 and believe that, going into 2009, we are better positioned with a mix of
vehicles that customers are currently demanding. Also, as vehicle sales decline, we are emphasizing the
more stable, higher-margin service, body and parts business, which improves our overall gross profit
margins stated as a percentage of our total revenue.
Results of Continuing Operations
Certain revenue, gross profit margin and gross profit information by product line was as follows for 2008,
2007 and 2006:
2008
New vehicle .....................................................................................................................
Used vehicle, retail ..........................................................................................................
Used vehicle, wholesale ..................................................................................................
Finance and insurance(1)..................................................................................................
Service, body and parts ...................................................................................................
Fleet and other…………………………………………………………….
Percent of
Total Revenues
54.9%
22.3
4.6
3.7
14.3
0.2
2007
New vehicle .....................................................................................................................
Used vehicle, retail ..........................................................................................................
Used vehicle, wholesale ..................................................................................................
Finance and insurance(1)..................................................................................................
Service, body and parts ...................................................................................................
Fleet and other…………………………………………………………….
Percent of
Total Revenues
58.2%
21.1
5.1
3.8
11.6
0.2
2006
New vehicle .....................................................................................................................
Used vehicle, retail ..........................................................................................................
Used vehicle, wholesale ..................................................................................................
Finance and insurance(1)..................................................................................................
Service, body and parts ...................................................................................................
Fleet and other…………………………………………………………….
Percent of
Total Revenues
58.6%
21.9
4.8
3.9
10.6
0.2
(1) Commissions reported net of anticipated cancellations.
Gross
Profit
Margin
7.8%
11.3
(3.1)
100.0
47.9
31.9
Gross
Profit
Margin
7.8%
14.1
2.3
100.0
47.7
27.2
Gross
Profit
Margin
7.9%
14.9
2.8
100.0
48.8
28.8
Percent of Total
Gross Profit
24.8%
14.6
(0.8)
21.3
39.7
0.4
Percent of Total
Gross Profit
26.8%
17.4
0.7
22.3
32.5
0.3
Percent of Total
Gross Profit
27.0%
19.0
0.8
22.8
30.0
0.4
30
The following table sets forth selected financial data expressed as a percentage of total revenues for the
periods indicated:
Year Ended December 31, (1)
2007
2006
2008
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Gross profit
Goodwill impairment
Other asset impairments
Selling, general and administrative expenses
Depreciation and amortization
Operating income (loss)
Floorplan interest expense
Other interest expense
Other income, net
Income (loss) from continuing operations before income taxes
Income tax benefit (expense)
Income (loss) from continuing operations
(1) The percentages may not add due to rounding.
54.9%
26.9
3.7
14.3
0.2
100.0%
17.3
12.7
1.1
14.8
0.8
(12.2)
(1.0)
(0.8)
0.3
(13.6)
4.3
(9.3)%
58.2%
26.2
3.8
11.6
0.2
100.0%
17.0
-
-
13.3
0.7
3.1
(0.9)
(0.6)
0.0
1.6
(0.6)
0.9%
58.6%
26.7
3.9
10.6
0.2
100.0%
17.2
-
-
12.9
0.5
3.7
(1.0)
(0.5)
0.0
2.3
(0.9)
1.4%
The following tables set forth the changes in our operating results from continuing operations in 2008
compared to 2007 and in 2007 compared to 2006:
(In Thousands)
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales:
New vehicle
Used vehicle
Service, body and parts
Fleet and other
Total cost of sales
Gross profit
Goodwill impairment
Other asset impairments
Selling, general and administrative
Depreciation and amortization
Operating income (loss)
Floorplan interest expense
Other interest expense
Other income, net
Income (loss) from continuing operations before
income taxes
Income tax benefit (expense)
Income (loss) from continuing operations
Year Ended
December 31,
2008
2007
Increase
(Decrease)
%
Increase
(Decrease)
$
1,172,807 $
574,373
78,970
306,743
4,911
2,137,804
1,528,246 $
686,728
99,727
304,302
5,279
2,624,282
1,081,032
523,439
159,944
3,345
1,767,760
370,044
272,503
23,402
316,183
17,732
(259,776)
(20,398)
(17,350)
6,673
1,408,496
605,890
159,262
3,845
2,177,493
446,789
-
-
349,283
16,862
80,644
(24,373)
(15,985)
641
(290,851)
91,703
(199,148) $
40,927
(16,485)
24,442 $
$
(355,439)
(112,355)
(20,757)
2,441
(368)
(486,478)
(327,464)
(82,451)
682
(500)
(409,733)
(76,745)
272,503
23,402
(33,100)
870
(340,420)
(3,975)
1,365
6,032
(331,778)
(108,188)
(223,590)
(23.3)%
(16.4)
(20.8)
0.8
(7.0)
(18.5)
(23.2)
(13.6)
0.4
(13.0)
(18.8)
(17.2)
n/a
n/a
(9.5)
5.2
(422.1)
(16.3)
8.5
941.0
(810.7)
(656.3)
(914.8)%
31
New units sold
Average selling price per new vehicle
Used retail units sold
Average selling price per used retail vehicle
Used wholesale units sold
Average selling price per used wholesale vehicle
Finance and insurance sales per retail unit
(In Thousands)
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales:
New vehicle
Used vehicle
Service, body and parts
Fleet and other
Total cost of sales
Gross profit
Selling, general and administrative
Depreciation and amortization
Operating income
Floorplan interest expense
Other interest expense
Other income, net
Income from continuing operations before income
taxes
Income tax expense
Income from continuing operations
New units sold
Average selling price per new vehicle
Used retail units sold
Average selling price per used retail vehicle
Used wholesale units sold
Average selling price per used wholesale vehicle
Finance and insurance sales per retail unit
$
$
$
$
$
$
$
$
$
$
Year Ended
December 31,
2008
40,206
29,170 $
2007
52,512
29,103 $
Increase
(Decrease)
(12,306)
67
%
Increase
(Decrease)
(23.4)%
0.2
28,853
16,522 $
32,700
16,896 $
16,631
20,264
5,872 $
6,625 $
(3,847)
(374)
(3,633)
(753)
1,144 $
1,170 $
(26)
(11.8)
(2.2)
(17.9)
(11.4)
(2.2)
Year Ended
December 31,
2007
2006
Increase
(Decrease)
%
Increase
(Decrease)
1,528,246 $
686,728
99,727
304,302
5,279
2,624,282
1,449,012 $
660,588
97,036
261,949
5,250
2,473,835
1,408,496
605,890
159,262
3,845
2,177,493
446,789
349,283
16,862
80,644
(24,373)
(15,985)
641
1,333,906
576,271
134,153
3,740
2,048,070
425,765
319,854
13,383
92,528
(25,156)
(12,081)
798
40,927
(16,485)
24,442 $
56,089
(21,597)
34,492 $
79,234
26,140
2,691
42,353
29
150,447
74,590
29,619
25,109
105
129,423
21,024
29,429
3,479
(11,884)
(783)
3,904
(157)
(15,162)
(5,112)
(10,050)
5.5%
4.0
2.8
16.2
0.6
6.1
5.6
5.1
18.7
2.8
6.3
4.9
9.2
26.0
(12.8)
(3.1)
32.3
(19.7)
(27.0)
(23.7)
(29.1)%
Year Ended
December 31,
2007
52,512
29,103 $
2006
52,340
27,685 $
Increase
(Decrease)
172
1,418
%
Increase
(Decrease)
0.3%
5.1
32,700
16,896 $
33,225
16,298 $
20,264
19,244
6,625 $
6,187 $
1,170 $
1,134 $
(525)
598
1,020
438
36
(1.6)
3.7
5.3
7.1
3.2%
32
Revenues
Total revenues decreased 18.5% and increased 6.1%, respectively, in 2008 compared to 2007 and in
2007 compared to 2006.
The decrease in 2008 compared to 2007 primarily resulted from reduced demand and decreased same-
store sales, which were brought on by the challenging retail environment, higher fuel prices, tighter credit
environment, declines in available home equity, low consumer confidence and the weak economy.
The increase in 2007 compared to 2006 was a result of acquisitions, partially offset by a 3.2% decrease
in same-store sales, excluding fleet. 2007 faced a difficult comparison with 2006 when total same-store
sales grew by 4.1%. The decrease in same-store sales in 2007 was also impacted by a weak retail sales
environment, especially with our domestic brands.
Same-store sales percentage increases (decreases) were as follows:
New vehicle retail, excluding fleet
Used vehicle, retail
Used vehicle, wholesale
Total vehicle sales, excluding fleet
Finance and insurance
Service, body and parts
Total sales, excluding fleet
2008 compared to 2007
(24.1)%
(15.8)
(29.3)
(22.3)
(20.8)
(0.3)
(19.7)
2007 compared to 2006
(3.6)%
(7.1)
3.6
(4.1)
(3.1)
4.0
(3.2)
Same-store sales are calculated for stores that were in operation as of December 31, 2007, and only
including the months of operations for both comparable periods. For example, a store acquired in June
2007 would be included in same store operating data beginning in July 2007, after its first full complete
comparable month of operation. Thus, operating results for same store comparisons would include only
the periods of July through December of both comparable years.
Penetration rates for certain products were as follows:
Finance and insurance
Service contracts
Lifetime oil change and filter
2008
75%
42
34
2007
77%
43
37
2006
76%
44
39
2008 Compared to 2007
The decline in same-store total vehicle sales, excluding fleet, in 2008 compared to 2007 was primarily a
result of the retail environment, but was exacerbated by our heavier domestic automaker exposure.
Through the second quarter of 2008, increasing gas prices pushed consumer demand towards smaller,
more fuel-efficient vehicles. However, as gas prices have decreased, demand for heavier trucks and
SUVs has returned. However, this trend was more than offset by a decline in the overall macroeconomic
environment, as the majority of automakers experienced double digit declines in sales when compared to
the prior year. The average price of new vehicles sold in 2008 increased slightly over the average prices
for 2007, but the number of vehicles sold was significantly lower. Vehicle prices increased in 2008
compared to 2007 due to a higher average invoice cost and also due to a shift away from the volume
based strategy we adopted in prior years. The average price of used vehicles sold decreased in 2008
compared to 2007 as we worked through an inventory of vehicles that was not in high demand, a shift
towards cars and away from trucks and as a reduction in available credit decreased the amount of
financing customers could obtain, which resulted in lower average transactions.
33
Our finance and insurance sales were down in 2008 compared to 2007, both on an overall basis and a
same-store basis, primarily due to the overall decline in vehicles sold combined with a decline in the
average warranty and other finance product sales per retail unit. As fewer credit challenged customers
were able to receive financing, the overall mix of customers had improved credit quality. As there are
more lenders for stronger credit customers, loans are more competitive and less profitable to us.
Additionally, the tightening of credit markets has limited the payment to income and debt to income ratios
that are required by lenders, reducing the opportunity to add insurance and warranty products as their
impact on payment may exceed financing limits. However, despite the tightening of the credit markets, we
were able to maintain our finance and insurance penetration rate at 75% in 2008.
Our service, body and parts business was less affected by the challenging economic environment in 2008
than our other business lines. This demonstrates the counter-cyclicality of this component of our
business. We focus on customer satisfaction in an effort to keep our customers returning to our facilities
for their service needs. Warranty work accounts for approximately 20% of our same-store service, body
and parts sales. Same-store warranty sales in 2008 were up 2.4% compared to 2007. Our domestic
brand warranty work increased by 4.7%, while import/luxury warranty work decreased by 0.2%. The
customer pay service and parts business, which represented approximately 80% of the total service, body
and parts business in 2008, was down 1.0% on a same-store basis compared to 2007.
2007 Compared to 2006
The decline in new vehicle same-store sales in 2007 compared to 2006 was primarily due to a slowing
sales environment in 2007 and declining sales of domestic manufacturers’ vehicles that represented a
large percentage of our new vehicle sales. Due to aggressive manufacturer incentive programs in 2006,
which were not sustained at the same level in 2007, same-store new vehicle unit sales were down 3.6%
in 2007 compared to 2006. The decrease in same-store unit sales was partially offset by a 3.4% increase
in same-store average selling prices.
The decline in same-store used retail vehicle sales in 2007 compared to 2006 was primarily due to the
slowing sales environment mentioned above. Same-store used retail unit sales decreased 7.1% in 2007
compared to 2006. The same-store unit decrease was partially offset by a 2.0% increase in same-store
average selling prices.
The increase in used wholesale vehicle same-store sales in 2007 compared to 2006 resulted from a 3.6%
increase in same-store average selling prices, partially offset by a 2.9% decrease in same-store unit
sales.
Same-store finance and insurance sales were negatively affected in 2007 compared to 2006 by
decreases in same-store vehicle unit sales, which lowered the overall opportunity for finance and
insurance sales. This was offset by a 4.1% increase in the finance and insurance sales per unit in 2007
compared to 2006.
The increase in same-store service, body and parts sales in 2007 compared to 2006 was primarily due to
a 4.0% increase in the customer-paid portion of the business. The customer-paid portion of the business
excludes warranty and represented approximately 81% of total service, body and parts sales in 2007. In
addition, we realized a 3.7% increase in same-store warranty sales.
34
Gross Profit
Gross profit decreased $76.7 million in 2008 compared to 2007 and increased $21.0 million in 2007
compared to 2006. The decrease in 2008 compared to 2007 primarily resulted from decreased total
revenues, while the increase in 2007 compared to 2006 was primarily due to increased total revenues.
Gross profit margins achieved were as follows:
Year Ended December 31,
New vehicle .....................................................................
Retail used vehicle........................................................... 11.3
Wholesale used vehicles .................................................
(3.1)
Finance and insurance .................................................... 100.0
Service, body and parts ................................................... 47.9
Overall............................................................................. 17.3
7.8%
2008
2007
7.8%
14.1
2.3
100.0
47.7
17.0
Year Ended December 31,
New vehicle .....................................................................
Retail used vehicle........................................................... 14.1
2.3
Wholesale used vehicles .................................................
Finance and insurance .................................................... 100.0
Service, body and parts ................................................... 47.7
Overall............................................................................. 17.0
7.8%
2007
2006
7.9%
14.9
2.8
100.0
48.8
17.2
Basis Point
Change*
- bp
(280)
(540)
-
20
30
Basis Point
Change*
(10)bp
(80)
(50)
-
(110)
(20)
* A basis point is equal to 1/100th of one percent.
2008 Compared to 2007
New vehicle margins were flat in 2008 compared to 2007 as negative effects of the challenging economic
environment were offset by a shift in consumer demand to cars vs. trucks and SUVs. Our stores typically
target a dollar amount of profit on each vehicle sale, rather than a percentage. As such, when the
average vehicle sale price declines but the profit remains consistent, margins are positively affected.
Margins were up on new cars, while they were down on trucks and SUVs as we lowered pricing on these
vehicles in order to clear out older inventory. Given the reduced number of new vehicle sales
transactions, we implemented training and focused our stores on maintaining the profit on each vehicle
retailed. This focus helped to offset the broader impact on revenues and margins due to the declining
economy.
The challenging retail environment led to the declines in gross profit margins in retail and wholesale used
vehicle sales in 2008 compared to 2007. We adjusted the pricing on our used vehicle inventories due to a
shift in the types of used vehicles in demand in an effort to reduce inventory levels and lower amounts
outstanding on our credit facility. Also, the tightening of the credit markets affected the ability of
customers to obtain financing, and reduced the overall amount of credit available to each customer. As
such, customers sought out lower priced used vehicles. This shift, which improves margins as we target a
specific dollar amount of profit per transaction rather than a percentage, helped to offset some of the
pricing adjustments discussed above.
Service, body and parts gross margins increased in 2008 compared to 2007 due to concentration on
maximizing all profit opportunities in the service drive through the sale of additional service work and
fewer consumer discounts and promotions, partially offset by the continued shift to parts and accessories
business and more competitive pricing on service work in order to emphasize volume. As vehicle sales
decline, more expensive service work is required due to the increased average age of vehicles in service.
We expect this trend to positively impact our operations until the new car market recovers.
35
2007 Compared to 2006
Gross profit margins for both new vehicle and retail used vehicle sales decreased in 2007 compared to
2006 primarily as a result of the slowing retail sales environment.
The decrease in wholesale used vehicle gross profit margin in 2007 compared to 2006 was due to
wholesale market conditions and a focus on retailing more used vehicles. Our ability to provide customers
with a better value for their trade-ins, offering closer to their true market value, has been improved by our
use of technology. This improves our ability to retail new vehicles. However, this lowers the gross profit
margin we are able to achieve on the re-sale of the trade-ins we elect to wholesale. In addition, as we
focus on retailing more used vehicles, we are left with the lower-quality used vehicles for wholesaling,
which also contributed to lower gross profit margins. We dispose of our wholesale used vehicles by using
centralized controls, holding our own local used vehicle auctions and managing the disposal of units at
larger third party auctions.
Gross profit margins in the service, body and parts business line decreased in 2007 compared to 2006
partially due to a shift in mix towards selling more parts and accessories, which carry lower margins than
the service side of the business. However, due to an increase in volume, same–store gross profit
increased 0.7% in 2007 compared to 2006.
Goodwill and Other Asset Impairment Charges
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” we are required to test our goodwill
and other indefinite lived intangible assets for impairment at least annually or more frequently if conditions
indicate that an impairment may have occurred. In addition, long-lived assets held and used by us and
intangible assets with determinable lives are reviewed for impairment whenever events or circumstances
indicate that the carrying amount of assets may not be recoverable in accordance with SFAS No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets.”
By the second half of 2007, cracks in the credit market brought about by accelerating defaults on home
mortgages had begun to appear in various forms including:
• The declining availability of consumer credit at commercially viable rates reducing the breadth of
our potential customer base; and
• The willingness (including financial capability) of manufacturers to offer consumer incentives
previously relied upon to reinvigorate car sales to sustainable levels customarily experienced by
the industry.
The proliferation of these issues resulted in a rapid deterioration of business conditions throughout the
second quarter of 2008. Further, rapidly escalating oil prices to unprecedented levels, and the potential
for oil prices to increase even more, dramatically affected the confidence of the American consumer.
Consequently, these factors diminished their willingness to purchase big-ticket items such as automobiles
and, more specifically, the profitable large trucks and SUVs then being offered by many of our
manufacturers.
In response to the deterioration of business conditions and the resultant decline in automobile sales, we
announced a restructuring plan on June 3, 2008. That plan called for a reduction in store and support
personnel, the sale of certain non-essential assets, and the deferral of non-essential expenditures
including administrative centralization and operational initiatives. The most significant component of the
restructuring was our decision to divest 12 locations.
As a result of our decision to dispose of approximately 10% of our stores, an adverse and rapidly
changing business climate, our resultant reduced earnings and cash flow forecast and a significant
decline in our market capitalization, we determined that our goodwill and other indefinite lived intangible
assets, as well as our other long-lived assets, required an interim impairment test. The interim impairment
test required us to update the adjusted present value (“APV”) model used in determining the fair value of
our business, and by extension, the valuation of our goodwill.
36
The unexpected and unprecedented material changes in the economic and credit environment
experienced in the first six months of 2008 caused us to revise certain key assumptions in our
determination of the fair value of our business. Also, we determined that cost savings, particularly those
associated with administrative centralization and operational initiatives could not be realized in the current
environment as the dramatic shift in economic conditions caused us to defer their implementation. The
total impact of the changes to key assumptions materially reduced the estimated value of our business.
Inherent difficulties existed in forecasting the extent and magnitude of the macroeconomic correction
underway, and the effect such a correction would have on our business at the time we were evaluating
the recoverability of our goodwill in connection with the finalization of our 2007 recoverability assessment.
By the end of the second quarter of 2008, the fundamental changes in the economic landscape were
obvious; however, few had the foresight to forecast the degree and speed by which deteriorating credit
markets would significantly undermine the overall health of the U.S. economy.
We believe we acted prudently in concluding our goodwill was permanently impaired in the second
quarter of 2008, consistent with the realization that the state of the automobile industry had suffered and
the effect of the credit crisis had spread throughout the broader economy.
As a result of our analysis, the following impairment charges were recorded within continuing operations
in 2008:
Goodwill
Franchise value and other intangibles
Real estate
Equipment
Terminated construction projects
Other
Total Impairment
$ 272.5 million
16.4 million
4.5 million
1.0 million
4.5 million
2.1 million
$ 301.0 million
After the charge, and the allocation of goodwill to stores classified within discontinued operations, our
remaining balance in goodwill is zero. Following the $16.4 million charge related to our indefinite-lived
intangible assets (franchise value), the remaining value of our indefinite-lived intangible assets was
approximately $42.0 million as of December 31, 2008. See Notes 1, 5 and 6 of Notes to Consolidated
Financial Statements for additional information.
Selling, General and Administrative Expense
Selling, general and administrative expense (“SG&A”) includes salaries and related personnel expenses,
facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal, accounting,
professional services and general corporate expenses.
SG&A decreased $33.1 million in 2008 compared to 2007 and increased $29.4 million in 2007 compared
to 2006. SG&A as a percentage of revenue was 14.8%, 13.3% and 12.9%, respectively, in 2008, 2007
and 2006. The increase in SG&A as a percentage of revenue in 2008 compared to 2007 was primarily
due to lower revenues in 2008 compared to 2007 as discussed above, partially offset by cost reduction
measures in 2008.
37
The changes in dollars spent were primarily due to the following:
Decrease related to salaries, bonuses and benefits
Decrease related to sales compensation
Decrease related to employee benefits
Decrease related to travel expenses
Decrease related to workers’ compensation and other
insurance
Decrease related to stock-based compensation
Increase related to write-off of construction projects and
other assets
Increase related to acquisitions
Increase in other expenses
Increase related to acquisitions
Increase in employee benefits
Decrease related to sales compensation
Decrease related to travel expenses
Decrease related to salaries and bonuses
Decrease in other expenses
2008 compared to 2007
$(19.4) million
(9.6) million
(4.9) million
(3.6) million
(2.8) million
(1.7) million
5.1 million
3.4 million
0.4 million
$(33.1) million
2007 compared to 2006
$33.4 million
2.8 million
(4.0) million
(1.5) million
(0.8) million
(0.5) million
$29.4 million
SG&A as a percentage of gross profit is an industry standard for measuring performance relative to
SG&A. SG&A as a percentage of gross profit was as follows:
Year Ended December 31,
2007
78.2%
2008
85.4%
2006
75.1%
In 2008, SG&A expense included a $5.1 million charge related to terminated construction projects and
other asset write-offs. We endeavored to reduce SG&A expense throughout 2008 as part of our
restructuring and cost-cutting plans, and made significant progress based on overall expenditure
amounts. However, primarily due to a sharply declining revenue base and a reduction in gross profit,
SG&A as a percentage of gross profit increased by 720 basis points in 2008 compared to 2007.
As a result of expenses detailed above, as well as costs related to our investments in personnel for our
centralization efforts, L2 Auto and the other initiatives in 2007, SG&A as a percentage of gross profit
increased by 310 basis points in 2007 compared to 2006.
Depreciation and Amortization
Depreciation – Buildings is comprised of depreciation expense related to buildings and significant
remodels or betterments. Depreciation and Amortization – Other, is comprised of depreciation expense
related to furniture, tools and equipment and signage and amortization of certain intangible assets,
including customer lists and non-compete agreements.
Depreciation and amortization increased $0.9 million and $3.5 million, respectively, in 2008 compared to
2007 and in 2007 compared to 2006 due to the addition of property and equipment primarily related to our
acquisitions, as well as improvements to existing facilities and equipment costs related to our initiatives.
The increase in depreciation and amortization has slowed as we have slowed our acquisition and
improvement projects and disposed of stores during the weak economic environment.
Operating Income (Loss)
Operating margins of a negative 12.2% in 2008 were due primarily to the goodwill and other asset
impairment charges discussed above. In addition, 2008 was negatively affected by increased SG&A and
depreciation and amortization as a percentage of revenues as discussed above.
38
Operating margins decreased by 60 basis points to 3.1% in 2007 compared to 3.7% in 2006 due primarily
to the decrease in gross profit margins and increased SG&A and depreciation and amortization as
discussed above.
Floorplan Interest Expense
Floorplan interest expense decreased $4.0 million in 2008 compared to 2007. Decreases of $7.7 million
due to lower average interest rates and decreases of $0.2 million due to slightly lower average balances
outstanding were partially offset by increases related to our interest rate swaps of $3.9 million.
We discontinued one cash flow hedge in the fourth quarter due to the forecasted transaction no longer
being probable as expected future levels of floorplan debt will decrease related to planned divestiture
activity. Subsequently, the cash flow hedge was re-designated in the fourth quarter. Additionally, we
discontinued two cash flow hedges in the fourth quarter. Changes in the market value of $0.5 million
related to these swaps during the undesignated periods were recognized in earnings as a component of
floorplan interest expense. The remaining increase of $3.4 million related to all other interest rate swaps
activity, including ineffectiveness.
Floorplan interest expense decreased $0.8 million in 2007 compared to 2006. In 2006, we recorded a
$1.9 million charge to floorplan interest expense related to our interest rate swaps. In 2007, we
designated our interest rate swaps as cash flow hedging instruments and, accordingly, changes in the fair
value of our interest rate swaps were recorded in Accumulated Other Comprehensive Income. We
realized a decrease of $0.8 million as a result of a decrease in the average outstanding balances of our
floorplan facilities. In addition, we realized a decrease of $0.6 million as a result of changes in the
average interest rates on our floorplan facilities and an increase of $0.6 million related to our interest rate
swaps.
Other Interest Expense
Other interest expense includes interest on our senior subordinated convertible notes, debt incurred
related to acquisitions, real estate mortgages and our working capital, acquisition and used vehicle line of
credit.
Other interest expense increased $1.4 million in 2008 compared to 2007. Changes in the average
outstanding balances resulted in an increase of approximately $1.5 million and a reduction in the amount of
capitalized interest in 2008 compared to 2007 resulted in a $1.5 million increase. These increases were
partially offset by a $1.6 million decrease due to the weighted average interest rate on our debt. Interest
expense related to our outstanding senior subordinated convertible notes (the “Notes”) that were issued in
May 2004 totaled approximately $2.7 million in 2008 compared to $3.0 million in 2007. During 2008, we
repurchased a total of $42.5 million face value of the Notes on the open market. Following our repurchases,
interest expense on the Notes totals approximately $386,000 per quarter, which currently consists of
$305,000 of contractual interest and $81,000 of amortization of debt issuance costs. The $5.2 million gain
on the early retirement of debt is classified in other income, net on the statement of operations.
Other interest expense increased $3.9 million in 2007 compared to 2006. Changes in the average
outstanding balances resulted in an increase of approximately $6.9 million. A decrease in the weighted
average interest rate on our debt resulted in a $1.3 million decrease in other interest expense and an
increase in the amount of capitalized interest in 2007 compared to 2006 resulted in a $1.7 million
decrease.
Capitalized interest on construction projects totaled $1.7 million, $3.2 million and $1.5 million, respectively,
in 2008, 2007 and 2006.
39
Other Income, net
Other income, net of $6.7 million in 2008 includes a $5.2 million gain on the early retirement of $42.5
million face value of our Notes. Additionally, a gain of approximately $1.0 million is related to the result of
a binding arbitration that was completed in 2008.
Income Tax Expense
Our effective tax rate was (31.5%) in 2008, 40.3% in 2007 and 38.5% in 2006. Our federal income tax rate
is 35% and our state income tax rate is currently 3.0%, which varies with the mix of states where our stores
are located. We also have certain non-deductible expenses and other adjustments that impact our effective
rate. In 2008, a large permanent item related to the impairment of goodwill associated with a prior corporate
acquisition reduced the rate. In 2007, the effect of non-deductible expenses was magnified by a decline in
income due to the slower sales environment.
Pro Forma Reconciliations
Due to the significant non-cash impairment charges and the gain on early debt retirement recorded in
2008, we are providing our results of operations excluding these items. We believe that each of the non-
GAAP financial measures provided improves the transparency of our disclosure, provides a meaningful
presentation of our results from core business operations excluding the impact of items not related to our
ongoing core business operations, and improves the period-to-period comparability of our results from
core business operations.
The following tables reconcile reported GAAP results per the statement of operations to non-GAAP results
(in thousands):
Unaudited – Before Tax
Income (loss) from continuing operations before income taxes –
as reported
Goodwill and other asset impairments
Gain on early retirement of debt
Pretax income from continuing operations – non GAAP
Income (loss) from discontinued operations before income
taxes – as reported
Goodwill and other asset impairments
Pretax income (loss) from discontinued operations – non GAAP
Pretax income (loss) – as reported
Goodwill and other asset impairments
Gain on early retirement of debt
Pretax income (loss) – non GAAP
Year Ended December 31,
2007
2008
2006
$
$
$
$
$
$
(290,851)
301,000
(5,248)
4,901
(85,435)
70,063
(15,372)
(376,286)
371,063
(5,248)
(10,471)
$
$
$
$
$
$
40,927
-
-
40,927
(3,295)
5,923
2,628
37,632
5,923
-
43,555
$
$
$
$
$
$
56,089
-
-
56,089
4,627
911
5,538
60,716
911
-
61,627
40
Unaudited – After Tax
Income (loss) from continuing operations – as reported
Goodwill and other asset impairment, net of tax
Gain on early retirement of debt, net of tax
Income from continuing operations – non GAAP
Income (loss) from discontinued operations, net of tax – as
reported
Goodwill and other asset impairment, net of tax
Income (loss) from discontinued operations – non GAAP
Net income (loss) – as reported
Goodwill and other asset impairment, net of tax
Gain on early retirement of debt, net of tax
Net income (loss) – non GAAP
$
$
$
$
$
$
Year Ended December 31,
2007
24,442
-
-
24,442
2008
(199,148)
204,752
(2,568)
3,036
$
$
$
$
(53,438)
43,540
(9,898)
(252,586)
248,292
(2,568)
(6,862)
$
$
$
$
(2,893)
4,719
1,826
21,549
4,719
-
26,268
$
$
$
$
2006
34,492
-
-
34,492
2,812
554
3,366
37,304
554
-
37,858
The following table reconciles reported GAAP diluted earnings (loss) per share (“EPS”) to non-GAAP diluted
EPS:
Unaudited – EPS
Income (loss) per diluted share from continuing operations – as
reported
Goodwill and other asset impairment, net of tax
Gain on early retirement of debt, net of tax
Income (loss) per diluted share from continuing operations –
non GAAP
Income (loss) per diluted share from discontinued operations –
as reported
Goodwill and other asset impairment, net of tax
Income (loss) per diluted share from discontinued operations –
non GAAP
Net income (loss) per diluted share as reported
Goodwill and other asset impairment, net of tax
Gain on early retirement of debt, net of tax
Net income (loss) per diluted share – non GAAP
Year Ended December 31,
2007
2008
2006
$
$
$
$
$
$
$
(9.95)
10.23
(0.13)
$
1.19
-
-
0.15
$
1.19
$
(2.67)
2.18
(0.49)
(12.62)
12.41
(0.13)
(0.34)
$
$
$
$
(0.13)
0.21
$
0.08
$
1.06
0.21
-
1.27
$
$
1.65
-
-
1.65
0.13
0.02
0.15
1.78
0.02
-
1.80
Discontinued Operations
We perform an internal evaluation of our store performance, on a store-by-store basis, in the last month
of each quarter. If a particular location does not meet certain return on investment criteria established by
our management team, the location is targeted for potential disposition. If a store that has been identified
for potential disposition does not improve its operations for an extended period of time, the decision is
made to divest the location. Additional factors we consider that may result in the disposition of a location
include capital commitment requirements, our estimate of local market and franchise outlook, and the
geographic location of certain stores.
When the decision is made to dispose of a location, we evaluate the store to ensure that it meets the
criteria to be classified as “held for sale,” as defined by paragraph 30 of SFAS No. 144, “Accounting for
the Impairment or Disposal of Long-Lived Assets.” This evaluation includes the following considerations:
• Our executive management group, possessing the necessary authority, commits to a plan to
dispose the store.
41
• The store is available for immediate sale in its present condition. The sale is subject only to terms
that are usual and customary.
• We initiate an active program to locate buyers and take other actions that are required to sell the
store.
• We believe there is a market for the store and that its disposal is likely. We also expect to record
the transfer of the store as a completed sale within one year.
• We actively market the store for sale at a price that is reasonable in relation to current estimated
fair value.
• We believe it is unlikely management will make significant changes to the plan or withdraw the
plan. We have not, to date, withdrawn any plan related to the disposal of store locations.
When a store has been classified as held for sale for a period exceeding one year, we evaluate whether
we continue to meet the criteria of SFAS No. 144, which states that we must evaluate whether we (1)
initiated actions necessary to respond to the poor market conditions during the initial one-year period, (2)
continue to actively market the asset at a price that is reasonable in view of market conditions, and (3)
continue to meet all of the other criteria in paragraph 30 for classifying the asset as held for sale.
In the second quarter of 2008, we had three stores classified as held for sale for a period exceeding one
year. Additionally, as part of the restructuring plan announced on June 3, 2008, we performed an
evaluation of our portfolio of stores, resulting in 12 underperforming stores, mostly consisting of domestic
franchises, being selected for disposal. We also elected to close a facility at that time. Given these facts,
we evaluated whether the classification of all stores as held for sale and presented in discontinued
operations was appropriate under SFAS No. 144.
The three stores identified above represented some of the worst-performing locations in our portfolio.
Their poor performance, coupled with the increasingly negative environment for automotive retailing,
necessitated a longer period to complete the sale of these locations. Over the initial one-year period, we
had entered into multiple preliminary asset sales agreements, confirming that prospective buyers were
interested in these locations. Over the period these stores were available for sale, we continued to lower
the price of the three dealerships. We recorded additional impairment charges to recognize the assets at
estimated fair value based on the outlook for potential sale proceeds. We believe our response to the
declining economic factors, diminishing sources of credit with financially viable terms, and overall
uncertainty surrounding the future demonstrated that we took:
• actions necessary to respond to a change in circumstances; and
•
that the assets were and continue to be actively marketed at a reasonable price given the
continuing changes in circumstances.
Finally, for these three locations, we evaluated the six criteria in paragraph 30 of SFAS No. 144 and
concluded that we continued to meet the required criteria. We determined that the 13 stores targeted for
disposal as a result of our restructuring plan also met the criteria of paragraph 30 of SFAS No. 144.
Therefore, we believe that the stores’ classification in discontinued operations is appropriate.
In addition, during the third quarter of 2008, 15 additional stores were classified as discontinued
operations for a total of 28 stores in 2008. Given the significant number of stores classified as held for
sale, and the fact that the sale of certain stores was not prompt, we considered additional factors prior to
classifying the additional 15 stores as discontinued operations including:
•
•
•
the inherent difficulty in selling three of the worst-performing stores in our portfolio, and the fact
that the other stores targeted for disposal in 2008 would be more desirable to potential buyers.
For example, we closed on the sale of two locations in the third quarter of 2008 that were initially
classified as held for sale in the second quarter of 2008;
that one of the locations classified as held for sale for a period exceeding one year had been sold
in the third quarter of 2008, and another location had been closed;
that three stores classified as held for sale in the second quarter of 2008 were under preliminary
contract to be sold; and
42
•
that 9 of the 15 stores classified in the third quarter of 2008 have been sold or were under
preliminary contract to be sold.
Therefore, we believe that a market continues to exist for the stores we have targeted for disposal, and
that we met the other criteria outlined by paragraph 30 of SFAS 144. As of December 31, 2008, we have
one store that has been classified as held for sale for a period exceeding one year. We believe that this
store’s continued classification in discontinued operations is appropriate.
We disposed of nine stores and closed four stores classified within discontinued operations during 2008.
As of December 31, 2008, 18 stores were classified as held for sale. We disposed of three additional
stores classified within discontinued operations in the first quarter of 2009 through the date of the filing of
this Form 10-K. See Notes 19 and 21 of Notes to Consolidated Financial Statements for additional
information.
Selected Consolidated Quarterly Financial Data
The following tables set forth our unaudited quarterly financial data(1).
2008 (in thousands, except per share data )
Three Months Ended,
March 31
June 30
September 30
December 31
Revenues:
New vehicle sales ................................................................... $318,817
Used vehicle sales .................................................................. 157,323
Finance and insurance………………………………….....
21,876
Service, body and parts .......................................................... 78,433
Fleet and other........................................................................ 930
Total revenues ..................................................................... 577,379
Cost of sales ............................................................................. 478,812
Gross profit ............................................................................... 98,567
-
Goodwill impairment .................................................................
-
Other asset impairments...........................................................
Selling, general and administrative ........................................... 83,746
Depreciation and amortization .................................................. 4,569
Operating income (loss)............................................................ 10,252
(5,134)
Floorplan interest expense........................................................
Other interest expense..............................................................
(4,470)
Other, net .................................................................................. 64
Income (loss) from continuing operations before income
taxes .........................................................................................
712
Income tax (provision) benefit................................................... (404)
Income (loss) before discontinued operations ..........................
308
Discontinued operations, net of tax........................................... (2,469)
Net income (loss) ...................................................................... $ (2,161)
$339,212
151,992
21,936
76,074
1,459
590,673
491,363
99,310
272,503
23,402
85,173
4,526
(286,294)
(5,100)
(4,515)
1,076
(294,833)
93,094
(201,739)
(42,045)
$(243,784)
Basic income (loss) per share from continuing operations ....... $ 0.02
Basic loss per share from discontinued operations .................. (0.13)
Basic net income (loss) per share............................................. $ (0.11)
$ (10.15)
(2.12)
$ (12.27)
$309,447
154,129
21,130
77,586
867
563,159
468,844
94,315
-
-
78,152
4,358
11,805
(4,637)
(4,318)
1,890
4,740
(2,038)
2,702
(5,065)
$ (2,363)
$ 0.13
(0.25)
$ (0.12)
$205,331
110,929
14,028
74,650
1,655
406,593
328,741
77,852
-
-
69,112
4,279
4,461
(5,527)
(4,047)
3,643
(1,470)
1,051
(419)
(3,859)
$ (4,278)
$ (0.02)
(0.19)
$ (0.21)
Diluted income (loss) per share from continuing
operations .................................................................................
$ 0.02
Diluted loss per share from discontinued operations ................ (0.13)
Diluted net income (loss) per share .......................................... $ ( 0.11)
$ (10.15)
(2.12)
$ (12.27)
$ 0.13
(0.25)
$ (0.12)
$ (0.02)
(0.19)
$ (0.21)
43
2007 (in thousands, except per share data )
Three Months Ended,
March 31
June 30
September 30
December 31
Revenues:
New vehicle sales ................................................................... $357,943
Used vehicle sales.................................................................. 169,179
Finance and insurance………………………………….....
24,635
Service, body and parts .......................................................... 73,591
Fleet and other........................................................................ 670
Total revenues ..................................................................... 626,018
Cost of sales ............................................................................. 516,083
Gross profit ............................................................................... 109,935
Selling, general and administrative........................................... 87,684
Depreciation and amortization .................................................. 3,818
Operating income ..................................................................... 18,433
(5,797)
Floorplan interest expense .......................................................
Other interest expense .............................................................
(3,808)
Other, net.................................................................................. 178
Income (loss) from continuing operations before income
taxes .........................................................................................
9,006
Income tax (provision) benefit................................................... (3,539)
Income (loss) before discontinued operations ..........................
5,467
Discontinued operations, net of tax .......................................... 1,608
Net income (loss)...................................................................... $ 7,075
$426,890
190,896
27,612
76,657
1,269
723,324
601,353
121,971
91,700
4,134
26,137
(6,635)
(4,061)
76
15,517
(6,161)
9,356
(1,413)
$ 7,943
$408,084
184,257
27,435
77,990
2,326
700,092
580,994
119,098
87,726
4,271
27,101
(6,503)
(3,851)
108
16,855
(6,827)
10,028
1,209
$ 11,237
$335,329
142,396
20,045
76,064
1,014
574,848
479,063
95,785
82,173
4,639
8,973
(5,438)
(4,265)
279
(451)
42
(409)
(4,297)
$ (4,706)
Basic income (loss) per share from continuing operations ....... $ 0.28
Basic income (loss) per share from discontinued
operations .................................................................................
0.08
Basic net income (loss) per share ............................................ $ 0.36
$ 0.48
$ 0.51
$ (0.02)
(0.07)
$ 0.41
0.07
$ 0.58
(0.22)
$ (0.24)
Diluted income (loss) per share from continuing
operations .................................................................................
Diluted income (loss) per share from discontinued
operations .................................................................................
0.07
Diluted net income (loss) per share .......................................... $ 0.34
$ 0.27
(1) Quarterly data may not add to yearly totals due to rounding.
Seasonality and Quarterly Fluctuations
$ 0.44
$ 0.48
$ (0.02)
(0.06)
$ 0.38
0.05
$ 0.53
(0.22)
$ (0.24)
Historically, our sales have been lower in the first and fourth quarters of each year due to consumer
purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced
number of business days during the holiday season. As a result, financial performance is expected to be
lower during the first and fourth quarters than during the second and third quarters of each fiscal year. We
believe that interest rates, levels of consumer debt, consumer confidence and manufacturer sales
incentives, as well as general economic conditions, also contribute to fluctuations in sales and operating
results. Acquisitions had also been a contributor to fluctuations in our operating results from quarter to
quarter.
However, in 2008, primarily as a result of economic conditions previously described, these historical
trends have not continued. The seasonal improvement typically experienced in the second and third
quarters of 2008 did not occur, as sales levels remained relatively flat compared with levels experienced
in the fourth quarter of 2007 and the first quarter of 2008. We also experienced a decline in sales levels in
the fourth quarter of 2008 from the flat levels experienced in the first three quarters of 2008. We believe
this to be the result of a combination of both seasonal trends and overall macroeconomic issues, and
uncertainty remains as to the impact of both of these factors in the future.
Liquidity and Capital Resources
GMAC Reclassification
On November 30, 2006, General Motors (“GM”) completed the sale of a majority equity stake in GMAC to
an investment consortium. Although GMAC continues to be the exclusive provider of GM financial products
and services and continues to have the relationships with GM, GM has indicated in its public filings that it no
44
longer controls the GMAC entity. As a result, we treat the financing of new vehicles by GMAC after the
change in ownership control as a financing activity.
Repayments of floorplan debt on vehicles financed prior to this change in control continue to be classified as
an operating activity, which reduced cash flows from operating activities by $85.6 million in 2007 and $25.1
million in 2006. The effect in 2008 was immaterial. On a non-GAAP basis, the elimination of the effect of the
change in control would have increased cash flows from operations and decreased cash flows from
financing activities as follows (in thousands):
Net cash provided by (used in) operating activities as reported
Effect of GMAC reclassification
Net cash provided by operating activities, non-GAAP
Net cash provided by financing activities as reported
Effect of GMAC reclassification
Net cash used by financing activities, non-GAAP
Year Ended December 31,
2007
(49,211) $
85,576
36,365
$
2006
37,939
25,061
63,000
124,908
(85,576)
39,332
$
$
114,872
(25,061)
89,911
$
$
$
$
We believe the reader should consider this factor when reviewing our statement of cash flows and related
cash flows from operating activities. Each of the foregoing non-GAAP financial measures improves the
transparency of our disclosure, provides a meaningful presentation of our results from core business
operations excluding the impact of items not related to our ongoing core business operations, and improves
the period-to-period comparability of our results from core business operations. We do not anticipate this
condition to occur in future periods, as floorplan financing does not typically change classification categories
in the statement of cash flows.
Principal Needs
Our principal needs for liquidity and capital resources are for capital expenditures, working capital and debt
repayment. Historically, we have also used capital resources to fund our cash dividend payment and for
acquisitions. We intend to utilize capital resources in the future to pay a dividend and to acquire locations as
part of our long-term growth strategy.
We have relied primarily upon internally generated cash flows from operations, borrowings under our credit
agreements, financing of real estate and the proceeds from public equity and private debt offerings to
finance operations and expansion. During 2008, we generated $151 million through the sale of assets and
stores and the issuance of long-term debt. We believe the continued execution of our restructuring plan will
result in available cash, cash equivalents, available lines of credit, planned asset sales and cash flows from
operations that will be sufficient to meet our anticipated operating expenses, debt maturities and capital
requirements for at least the next 12 months from December 31, 2008. However, no assurances can be
provided that our restructuring plan and our cash flows from operations will be sufficient to meet our
anticipated needs.
At December 31, 2008, we had sufficient availability utilizing both unadvanced floorplan financing and our
Credit Facility to refinance our remaining $42.5 million of outstanding 2.875% Notes which can be put to us
in May 2009 at the option of the holders, and to accommodate our long-term growth strategy.
At December 31, 2008, we also had 18 stores held for sale, for which we estimate net proceeds upon sale
to be approximately $54.4 million. We disposed of three of these stores in the first quarter of 2009 through
the date of the filing of this Form 10-K, generating net proceeds of $3.5 million.
In addition to the above sources of capital, potential sources of additional liquidity include the placement of
subordinated debentures or loans, additional store sales or additional other asset sales. We will evaluate all
of these options and select one or more of them depending on overall capital needs and the availability and
45
cost of capital, although no assurances can be provided that these capital sources will be available to us in
sufficient amounts or with terms acceptable to us.
Summary of Outstanding Balances on Credit Facilities
Interest rates on all of our credit facilities below, excluding the effects of our interest rate swaps, ranged from
1.59% to 4.75% at December 31, 2008. Amounts outstanding on the lines at December 31, 2008, together
with amounts remaining available under such lines were as follows (in thousands):
New and program vehicle lines
Working capital, acquisition and used vehicle credit facility
Outstanding at
December 31,
2008
$337,700
86,000
$423,700
Maximum Availability
at December 31,
2008
$ - (1)
34,747(2)(3)
$34,747
(1) There are no formal limits on the new and program vehicle lines with certain lenders.
(2) Reduced by $349 for outstanding letters of credit.
(3) The amount available on the line is limited based on a borrowing base calculation and fluctuates monthly.
Inventories and Flooring Notes Payable
We maintained a disciplined inventory approach throughout 2008. As a result of the challenging economic
environment, during the second quarter of 2008, we repriced our entire inventory to reflect current demand
and pricing in an effort to move older and less popular vehicles. Our days supply of new vehicles at
December 31, 2008 was 36 days above our five-year average historical days supply and 45 days above our
December 31, 2007 levels. This resulted from the dramatic drop in retail sales in the fourth quarter of 2008.
We continue to reduce new inventories by ordering less vehicles in order to sell through the inventory on
hand. We reduced our days supply of new vehicles by 25 days between December 31, 2008 and February
28, 2009.
Given the disruptions in the credit markets, captive finance companies have experienced increases in
capital cost and decreases in availability of funds. We have not experienced any disruption in our inventory
flooring arrangements. Rates have gone up by 50 to 100 basis points, with certain lending restrictions on
aged inventories. No assurances can be given that we will not experience disruptions in available credit for
new vehicle inventories in the future.
Our days supply of used vehicles was 9 days above our historical December 31 balances at December 31,
2008. Primarily as a result of our used vehicle repricing strategy, we reduced our days supply of used
vehicles by 4 days between June 30, 2008 and December 31, 2008. We reduced our days supply of used
vehicles by 15 days between December 31, 2008 and February 28, 2009. We continue to work to respond
to changes in consumer demand in order to bring our used vehicle inventory in line with historical levels.
While our days supply of new and used vehicles is up, inventories are down in absolute dollars. In
connection with the decreased inventories, our new vehicle flooring notes payable decreased to $337.7
million at December 31, 2008 from $451.6 million at December 31, 2007. New vehicles are financed at
approximately 100% of invoice cost.
Working Capital, Acquisition and Used Vehicle Credit Facility
We have a working capital, acquisition and used vehicle credit facility (the “Credit Facility”) with U.S. Bank
National Association, DaimlerChrysler Financial Services Americas LLC (“Chrysler Financial”), DCFS U.S.A.
LLC (“Mercedes Financial”) and Toyota Motor Credit Corporation (“TMCC”).
In August 2008, we amended the Credit Facility, effective as of June 30, 2008. This amendment reduced
our minimum net worth ratio and lowered our required covenant performance ratios through the second
quarter of 2009, to allow us to operate more effectively in the current economic environment. Beginning in
the third quarter of 2009, the covenant performance ratio requirements increase on a quarterly basis so that
by the fourth quarter of 2009, they will return to the levels mandated in the original agreement.
46
Due to the slowing of our acquisition plans, and in an effort to reduce the fees associated with unutilized
credit, the total amount available on the line was reduced from $300 million to $150 million in connection
with the fourth amendment. As part of the fourth amendment, we received approval to dispose of
approximately $150 million in assets, including assets currently held for sale. The schedule of assets
approved for disposal was updated in a fifth amendment to the Credit Facility in December 2008.
In addition, under the fourth amendment, cash dividends were limited to $0.05 per share in the third quarter
of 2008 and are permitted, based on a formula, beyond that quarter. Although we suspended our dividend
based on fourth quarter results, we would not have been allowed to pay it under the formula stipulated by
the agreement. Repurchases by us of our common stock are not permitted without the prior approval of our
lenders. The interest rate on the agreement increased, which resulted in additional expense of
approximately $0.5 million, or $0.03 per share, in 2008. We were assessed a $0.2 million change fee on the
amendment and the maturity date was revised to April 30, 2010. We believe the Credit Facility continues to
be an attractive source of financing given the current cost and availability of credit alternatives.
Loans are guaranteed by all of our subsidiaries and are secured by new vehicle inventory, used vehicle and
parts inventory, equipment other than fixtures, deposit accounts, accounts receivable, investment property
and other intangible personal property. Capital stock and other equity interests of our subsidiary stores and
certain other subsidiaries are excluded. The lenders’ security interest in new vehicle inventory is
subordinated to the interests of floorplan financing lenders, including Chrysler Financial, Mercedes Financial
and TMCC. The agreement for this facility provides for events of default that include nonpayment, breach of
covenants, a change of control and certain cross-defaults with other indebtedness. In the event of a default,
the agreement provides that the lenders may declare the entire principal balance immediately due, foreclose
on collateral and increase the applicable interest rate to the revolving loan rate plus 3 percent, among other
remedies.
New Vehicle Flooring
Chrysler Financial, Mercedes Financial, TMCC, Ford Motor Credit Company, GMAC LLC, VW Credit, Inc.,
American Honda Finance Corporation and BMW Financial Services NA, LLC have agreed to floor new
vehicles for their respective brands. Chrysler Financial and TMCC serve as the primary lenders for all other
brands. The new vehicle lines are secured by new vehicle inventory of the stores financed by that lender.
Vehicles financed by lenders not directly associated with the manufacturer are classified as floorplan notes
payable: non-trade and are included as a financing activity in our statements of cash flows. Vehicles
financed by lenders directly associated with the manufacturer are classified as floorplan notes payable and
are included as an operating activity.
Debt Covenants
We are subject to certain financial and restrictive covenants for all of our debt agreements. The Credit
Facility agreement includes financial and restrictive covenants typical of such agreements including
requirements to maintain a minimum total net worth, minimum current ratio, fixed charge coverage ratio and
cash flow leverage ratio. The covenants restrict us from incurring additional indebtedness, making
investments, selling or acquiring assets and granting security interests in our assets.
We utilize an internal forecast to project compliance with our covenants. Top line revenue numbers were
significantly worse than our internal forecast had anticipated for the second half of 2008. Despite this
negative development, we were able to improve our vehicle margins and reduce our SG&A and other costs
in-line with these changes. As a result, our overall attainment to forecasted results was near expectation.
We believe our 2009 forecast utilizes assumptions that are conservative.
The fourth amendment to our Credit Facility stipulates a minimum net worth of not less than $245 million,
with an additional reduction of up to $30 million related to any intangible asset impairment charges. This net
worth covenant is adjusted up by 75% of any net income amounts, and is not adjusted down based on net
47
loss amounts. Our fixed charge coverage ratio cannot be less than 1.0:1, and our cash flow leverage ratio
cannot be more than 3.0 to 1. Our minimum current ratio cannot be less than 1.2:1.
As of December 31, 2008, our minimum net worth was approximately $248.3 million, our fixed charge
coverage ratio was 1.10 to 1, our cash flow leverage ratio was 2.45 to 1 and our minimum current ratio was
1.25 to 1. Based on this data, we were in compliance with the four financial covenants set forth in our Credit
Facility.
Based on our most recent forecast for 2009, we have identified the risk of non-compliance with our minimum
current ratio covenant required by our Credit Facility in the quarterly measurement period ending June 30,
2009. In the second quarter of 2009, the Credit Facility will have a remaining term of less than one year and
will therefore become classified as a current obligation on our consolidated balance sheet. We are in
negotiations to amend certain terms and conditions of the Credit Facility, including the minimum current ratio
covenant, to ensure prospective compliance. We believe we will be successful in obtaining the amendment.
However, if we are unsuccessful in obtaining the amendment, we will commence a number of initiatives to
create sufficient liquidity to pay down the required outstanding balance on the Credit Facility.
As previously disclosed, we have identified for sale a number of non-strategic properties and dealerships.
Several dealerships are under executed sale agreements and are expected to close prior to June 30, 2009,
subject to normal terms and conditions in the industry. In addition, we are in the process of financing, or
refinancing, certain real properties with other third party lenders.
In the event sales of identified properties and dealerships and the financing of properties do not result in
sufficient levels of proceeds, or do not occur within the time frame necessary to enable us to comply with
our June 30, 2009 minimum current ratio covenant, we intend to accelerate and expand upon additional
cost-cutting and cash generating initiatives currently being implemented. The acceleration and expansion of
these initiatives is expected to provide additional liquidity in sufficient levels to repay all outstanding amounts
on the Credit Facility by June 30, 2009 and to continue operations without further advances on the Credit
Facility through at least December 31, 2009. These initiatives include reducing the days supply of
inventories of used vehicles and parts, increasing the flooring and/or refinancing of program and employee
operated vehicles, reduction of employee compensation, deferring certain capital expenditures and paying
vendors and service providers pursuant to their maximum stipulated terms or on revised terms. However, no
assurances can be provided that we will be successful in executing these plans, including obtaining an
amendment to the Credit Facility, completing the sale of dealerships and non-strategic properties, financing
or refinancing certain real properties, or achieving liquidity through other initiatives.
In the event that we are unable to meet the financial and restrictive covenants, we would enter into a
discussion with the lenders to remediate the condition. If we were unable to remediate or cure the condition,
a breach would give rise to certain remedies under the agreement, the most severe of which is the
termination of the agreement and acceleration of the amounts owed.
2.875% Senior Subordinated Convertible Notes due 2014
Following our repurchases through the filing date of this Form 10-K, which totaled $42.5 million of face
amount, as of March 16, 2009, we had outstanding $42.5 million of Notes due 2014. We will also pay
contingent interest on the Notes during any six-month interest period beginning May 1, 2009, in which the
trading price of the notes for a specified period of time equals or exceeds 120% of the principal amount of
the notes. The notes are currently convertible into shares of our Class A common stock at a price of $36.09
per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:
•
•
if, prior to May 1, 2009, and during any calendar quarter, the closing sale price of our common stock
exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading
days ending on the last trading day of the preceding calendar quarter;
if, after May 1, 2009, the closing sale price of our common stock exceeds 120% of the conversion
price;
48
•
if, during the five business day period after any five consecutive trading day period in which the
trading price per $1,000 principal amount of notes for each day of such period was less than 98% of
the product of the closing sale price of our common stock and the number of shares issuable upon
conversion of $1,000 principal amount of the notes;
if the notes have been called for redemption; or
•
• upon certain specified corporate events.
A declaration and payment of a dividend in excess of $0.08 per share per quarter will result in additional
adjustments in the conversion rate for the notes if such cumulative adjustment exceeds 1% of the current
conversion rate. The January and July 2008 dividends resulted in changes in the current conversion rate per
$1,000 of notes, which is currently 27.7098.
The notes are redeemable at our option beginning May 6, 2009 at the redemption price of 100% of the
principal amount plus any accrued interest. The holders of the notes can require us to repurchase all or
some of the notes on May 1, 2009 and upon certain events constituting a fundamental change or a
termination of trading. A fundamental change is any transaction or event in which all or substantially all of
our common stock is exchanged for, converted into, acquired for, or constitutes solely the right to receive,
consideration that is not all, or substantially all, common stock that is listed on, or immediately after the
transaction or event, will be listed on, a United States national securities exchange. A termination of trading
will have occurred if our common stock is not listed for trading on a national securities exchange or the
Nasdaq National Market.
The following table summarizes our repurchases to date, all of which were made on the open market:
Purchase
Date
August 2008
October 2008
October 2008
December 2008
Face
Amount
Purchased
16.0 million
17.4 million
4.6 million
4.5 million
42.5 million
$
$
Purchase
Price
per $100
$89.0
$86.5
$81.0
$89.0
Total
Purchase
Price
14.4 million
15.1 million
3.7 million
4.0 million
37.2 million
$
$
Gain on Early
Retirement of
Debt
1.6 million
2.2 million
0.9 million
0.5 million
5.2 million
$
$
The gain of $5.2 million on the early retirement of the debt through December 31, 2008, is recorded as a
component of other income, net on the consolidated statement of operations.
Share Repurchase and Dividends
Our Board of Directors declared dividends of $0.14 per share on our Class A and Class B common stock,
which were paid in January 2008, April 2008 and July 2008 and totaled approximately $2.8 million each
payment period. In addition, our Board of Directors declared a dividend of $0.05 per share on our Class A
and Class B common stock related to third quarter 2008, which totaled $1.0 million and was paid on October
29, 2008. Management evaluates performance and makes a recommendation on dividend payments on a
quarterly basis. Pursuant to our amended credit facility, cash dividends were limited to $0.05 per share in
the third quarter of 2008 and are allowed, based on a formula, beyond that quarter. Based on our fourth
quarter results and the broader economy, we suspended our dividend for the quarter. However, a dividend
would not have been allowed pursuant to our Credit Facility.
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A
common stock. Through December 31, 2008, we have purchased a total of 479,731 shares under this
program, none of which were purchased during 2008. The fourth amendment to the credit facility requires
lender approval prior to any share repurchases. We may continue to repurchase shares from time to time in
the future if permitted by our credit facilities and as conditions warrant. Current tax law tends to equalize the
benefits of dividends and share repurchases as a means to return capital or earnings to shareholders
49
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2008 was as follows (in
thousands):
Contractual Obligation
Floorplan Notes
Lines of Credit and Long-
$
Total
337,700
$
Payments Due By Period
2010 and
2011
$
-
$
2009
337,700
2012 and
2013
-
$
2014 and
beyond
-
Term Debt
Interest on Scheduled
Debt Payments
Fixed Rate Payments on
Interest Rate Swaps
Estimated Chargebacks
on Contracts
Capital Commitments
Operating Leases
343,818
78,634
125,211
52,652
66,414
11,658
18,560
13,918
23,097
4,592
8,655
6,424
13,497
14,603
174,879
974,008
$
8,059
14,603
21,567
476,813
$
4,936
-
33,780
191,142
489
-
26,065
99,548
$
$
$
87,321
22,278
3,426
13
-
93,467
206,505
We had capital commitments of $14.6 million at December 31, 2008 for the construction of two new
facilities, both of which are replacing existing facilities. We already incurred $29.2 million for these projects
and anticipate incurring the remaining $14.6 million in 2009. In the second quarter of 2008, we terminated
approximately $60 million of non-essential construction projects and placed other pending capital
investments on hold. As a result of these actions, we recorded an expense of approximately $4.5 million, of
which $3.0 million was related to invoiced expenditures and $1.5 million was related to capitalized interest
incurred on the expenditures and associated land.
We expect to pay for the construction out of existing cash balances, construction financing and borrowings
on our line of credit. Upon completion of the projects, we anticipate securing long-term financing and
general borrowings from third party lenders for 70% to 90% of the amounts expended, although no
assurances can be provided that these financings will be available to us in sufficient amounts or with terms
acceptable to us.
We anticipate approximately $16 million in non-financeable capital expenditures in the next one to three
years for various new facilities and other construction projects currently under consideration. Non-
financeable capital expenditures are defined as minor upgrades to existing facilities, minor leasehold
improvements, the percentage of major construction typically not financed by commercial mortgage debt,
and purchases of furniture and equipment. We will continue to evaluate the advisability of the expenditures
given the current weak economic environment, and anticipate a prudent approach to future capital
commitments.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires us to make certain estimates, judgments and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and
reported amounts of revenues and expenses at the date of the financial statements. Some of our
accounting policies require us to make difficult and subjective judgments on matters that are inherently
uncertain. The following accounting policies involve critical accounting estimates because they are
particularly dependent on assumptions made by management. While we have made our best estimates
based on facts and circumstances available to us at the time, different estimates could have been used in
the current period. Changes in the accounting estimates we used are reasonably likely to occur from
period to period, which may have a material impact on the presentation of our financial condition and
results of operations.
50
Our most critical accounting estimates include assessment of recoverability of our deferred tax asset,
indefinite-lived intangible assets, recoverability of long-lived assets, estimates of expected proceeds on
assets held for sale, service contract and lifetime oil contract income recognition and workers’
compensation insurance premium accrual. We also have other key accounting policies, such as our
policies for valuation of accounts receivable, expense accruals and revenue recognition. However, these
policies either do not meet the definition of critical accounting estimates described above or are not
currently material items in our financial statements. We review our estimates, judgments and assumptions
periodically and reflect the effects of revisions in the period that they are deemed to be necessary. We
believe that these estimates are reasonable. However, actual results could differ from these estimates.
Nature of Critical
Estimate Item
Deferred Tax Asset
Due to impairment of
goodwill and franchise
value, we are in a
position where our
future tax deductible
amounts exceed our
future tax payable
amounts.
As of December 31,
2008, we have a net
deferred tax asset of
approximately $46.5
million.
Assumptions/
Approach Used
Effect of a Change in
Assumptions
If we are unable to meet the
projected operational results
utilized in our analysis, and
depending on the nature of our
operations as compared to
available tax planning
strategies, we might record a
valuation allowance on a
portion or all of our deferred tax
asset.
In the event that the domestic
manufacturers are unable to
remain solvent, our operations
may be impacted and we might
record a valuation allowance on
a portion or all of the deferred
tax asset.
In the event that we are forced
to file for bankruptcy protection,
we would be forced to record a
valuation allowance on all of the
deferred tax asset.
Pursuant to SFAS No. 109, “Accounting
for Income Taxes,” we considered
whether it is more likely than not that
some portion or all of the deferred tax
assets will not be realized.
The ultimate realization of deferred tax
assets is dependent upon future taxable
income during the periods in which those
temporary differences become deductible.
We consider the scheduled reversal of
deferred tax liabilities (including the
impact of available carryback and
carryforward periods), projected future
taxable income, and tax-planning
strategies in making this assessment.
Based upon the level of historical taxable
income, projections for future taxable
income over the periods in which the
deferred tax assets are deductible, and
available tax-planning strategies, we
believe it is more likely than not that we
will realize the benefits of these
deductible differences.
At December 31, 2008, we have not
recorded any valuation allowance on
deferred tax assets. However, a valuation
allowance could be recorded in the future
if estimates of taxable income during the
carryforward period are reduced.
51
Nature of Critical
Estimate Item
Indefinite-lived
Intangible Assets
We have determined that
our franchise agreements
with various
manufacturers represent
the most significant
portion of intangible
assets without a definite
life.
We review our indefinite-
lived intangible assets at
least annually by applying
a fair-value based test
using the APV method to
indicate fair value. During
2008, we reviewed our
indefinite-lived intangible
assets in the second
quarter of 2008, as
discussed above. We
also reviewed our
indefinite-lived intangible
assets at the end of the
fourth quarter of 2008.
Additionally, we stipulate
a period of time prior to
testing assets that have
been recently acquired in
order to allow them to be
integrated into our
operations. As we have
not recently acquired any
stand-alone locations, no
assets were excluded
from testing in 2008.
Assumptions/
Approach Used
Effect of a Change in
Assumptions
A future decline in
store performance,
change in projected
growth rates, other
margin assumptions
and changes in
interest rates could
result in a potential
impairment of one or
more of our
franchises.
In the event that the
domestic
manufacturers are
unable to remain
solvent, we may
record a partial or total
impairment on the
remaining franchise
value. As of December
31, 2008, we had
domestic franchise
value totaling $19.1
million.
Future cash flows are based on recently
prepared forecasts and business plans to
estimate the future economic benefits that the
store will generate. We estimate the appropriate
discount rate to convert the future economic
benefits to their present value equivalent.
We have determined that only certain cash flows
of the store are attributable to the Franchise
Value.
According to Emerging Issues Task Force
(“EITF”) 02-7, “Unit of Accounting for Testing
Impairment of Indefinite-Lived Intangible Assets,”
we have concluded that the appropriate unit of
accounting for determining franchise value is on
an individual store basis.
Growth rates are calculated for five years based
on management’s forecasted sales projections.
The growth rates used for periods beyond five
years are calculated based on the U.S.
Department of Labor, Bureau of Labor Statistics
for historical consumer
price index data.
The discount rate applied to the future cash flows
is derived from an APV Model which factors in an
equity risk premium, small stock risk premium, a
beta and a risk free rate.
We also evaluate each franchise based on
Management’s judgment and have recorded
impairments on certain domestic locations based
on this evaluation.
During 2008, we recorded impairments to
franchises, which totaled $16.4 million as a
component of continuing operations and $5.7
million as a component of discontinued
operations. There were no impairments to
franchises as a component of continuing
operations in 2007 or 2006. At December 31,
2008 and 2007, other indefinite-lived intangible
assets were $42.0 million and $68.9 million,
respectively.
52
Nature of Critical
Estimate Item
Long Lived Assets Held
and Used
We review our long-lived
assets held and used at
least annually by
calculating the projected
undiscounted cash flows
the assets are projected
to generate over the life
of the major asset within
the group.
During 2008, we
reviewed our long-lived
assets held and used in
the second quarter of
2008, as discussed
above. We also reviewed
our long-lived assets held
and used at the end of
the fourth quarter of 2008.
Assumptions/
Approach Used
Effect of a Change in
Assumptions
We evaluate the current and prior two years
operating results. If a store has an operating loss
in the current year and one of the prior two, it is
evaluated for impairment. Additionally, certain
locations near breakeven are also included in the
evaluation based on Management judgment.
We calculate the projected undiscounted cash
flows for each asset group based on internally
developed forecasts incorporating historical
results for prior periods.
If the undiscounted cash flows do not exceed the
carrying value of the asset, we obtain market
data to determine the fair value of the asset
group.
If the fair value of the asset is lower than the
carrying value, an impairment is indicated.
We recorded impairment charges of $5.5 million
in 2008 as a component of continuing operations
where fair value was less than carrying value.
A future decline in
store performance,
change in projected
growth rates, and
other margin
assumptions could
result in a potential
impairment of long-
lived asset groups.
In the event that the
domestic
manufacturers are
unable to remain
solvent, we may
record an impairment
charge on the long-
lived assets
associated with the
franchise.
Currently, 45.3% of
our long-lived assets
are associated with
domestic franchises
and 54.7% of our long-
lived assets are
associated with
corporate operations
or import / luxury
locations.
A continued decline in
the commercial real
estate market could
result in a potential
impairment of certain
investment properties
not currently used in
operations.
53
Nature of Critical
Estimate Item
Assets Held for Sale
Under the requirements
of SFAS 144, when
assets are classified as
held for sale, an estimate
of the proceeds that will
be received is used to
determine the amount of
impairment to be
recorded, if any.
During 2008, we
classified approximately
25% of our locations as
held for sale. As a result,
we recorded impairment
charges of approximately
$70.1 million based on
our estimate of the
proceeds that would be
received.
Assumptions/
Approach Used
Effect of a Change in
Assumptions
We have a group of personnel who
specialize in the purchase and sale of
dealership operations. We also enlist the
services of brokers to assist in developing
leads and ensuring that our dealership
properties are priced competitively. The
ultimate decision on the estimated proceeds
to be received is made by management.
We utilize historical experience, current
asset purchase agreements, feedback from
prospective buyers and third party
estimates of value to determine the
proceeds we will receive for locations. We
also evaluate the gross margin of our
locations and calculate the average
percentage of margin used to pay rents for
our operations. This evaluation is compared
to the gross margin at locations we are
divesting to support the carrying value of
real property.
We utilize Manheim auction data to
determine the wholesale value of our used
inventories. This evaluation is updated
quarterly as our used vehicle inventories
change.
A future decline in store
performance, change in
market conditions for
commercial real estate, or
the potential insolvency of a
manufacturer could reduce
the proceeds that will be
received for the assets.
Additionally, if locations are
unable to be sold as
operating dealerships and
are closed, the remaining
assets, such as real estate
and equipment would need
to be sold in the open
market. This could reduce
the proceeds that will be
received for the assets.
Utilizing a valuation guide
such as NADA or Kelly Blue
Book could result in a
different result in our used
vehicle analysis.
If Manheim auction data is
not accurate, or market
valuations depart from the
historical margins Manheim
has experienced, we could
experience losses not
indicated in the analysis.
At December 31, 2008, we
have approximately $9.8
million in used vehicle
inventory, $93.9 million in
property and equipment,
and $2.0 million in
intangible asset value.
54
Nature of Critical
Estimate Item
Service Contract, Lifetime
Oil Change, and Other
Insurance Contract
Income Recognition
We receive fees from the sale
of vehicle service contracts
and lifetime oil contracts to
customers. The contracts are
sold through an unrelated
third party, but we may be
charged back for a portion of
the fees in the event of early
termination of the contracts by
customers.
Assumptions/
Approach Used
Effect of a Change in
Assumptions
A 10% increase in
cancellations would result
in an additional reserve of
approximately $1.4 million.
We have established a reserve for
estimated future charge-backs based
on an analysis of historical charge-
backs in conjunction with estimated
lives of the applicable contracts. If
future cancellations are different than
expected based on historical
experience, we could have additional
expense or income related to the
cancellations in future periods
We may also participate in
future underwriting profit
pursuant to retrospective
commission arrangements,
which are recognized as
income upon receipt.
At December 31, 2008 and 2007, this
reserve totaled $13.5 million and $15.7
million, respectively, and is included in
accrued liabilities and other long-term
liabilities on our consolidated balance
sheets.
A 10% increase in claims
experience would result in
additional reserves of
approximately $1.6 million.
As of December 31, 2008 and 2007, the
reserve for workers compensation
insurance premiums was $4.3 million
and $5.5 million, respectively, and is
included in accrued liabilities and other
long-term liabilities on our consolidated
balance sheets.
We expect that the retrospective cost
policy, as opposed to a guaranteed cost
with a flat premium, will be the most
cost-effective over time.
Workers’ Compensation
Insurance Premium Accrual
Insurance premiums are
determined under a five-year
retrospective cost policy,
whereby premium cost
depends on experience. We
accrue premiums based on
our historical experience
rating, although the actual
claims can be something
greater or less than the
historical experience, which
could create our estimated
liability to either be under or
over accrued.
Premiums are based on
actual claims plus an
insurance component. We
have a maximum exposure to
claims in a given year, at
which point additional claims
are paid by the carrier.
55
Recent Accounting Pronouncements
See Note 20 of Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material
current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt
We use variable-rate debt to finance our new and program vehicle inventory and certain real estate
holdings. The interest rates on our variable rate debt are tied to either the one or three-month LIBOR or
the prime rate. These debt obligations therefore expose us to variability in interest payments due to
changes in these rates. The flooring debt is based on open-ended lines of credit tied to each individual
store from the various manufacturer finance companies. If interest rates increase, interest expense
increases. Conversely, if interest rates decrease, interest expense decreases.
Our variable-rate flooring notes payable, variable rate mortgage notes payable and other credit line
borrowings subject us to market risk exposure. At December 31, 2008, we had $497.4 million outstanding
under such agreements at interest rates ranging from 1.59% to 4.75% per annum. A 10% increase in
interest rates would increase annual interest expense by approximately $0.3 million, net of tax, based on
amounts outstanding at December 31, 2008.
Fixed Rate Debt
The fair market value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the
fair market value of fixed interest rate debt will increase as interest rates fall because we could refinance
for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise.
The interest rate changes affect the fair market value but do not impact earnings or cash flows.
Based on open market trades, we determined that our $42.5 million of long-term convertible fixed interest
rate debt outstanding had a fair market value of approximately $37.0 million at December 31, 2008. In
addition, at December 31, 2008, we had $141.7 million of other long-term fixed interest rate debt
outstanding with maturity dates of between January 2009 and September 2027. Based on discounted
cash flows, we have determined that the fair market value of this long-term fixed interest rate debt was
approximately $154.0 million at December 31, 2008.
Hedging Strategies
We believe it is prudent to limit the variability of a portion of our interest payments. Accordingly, we have
entered into interest rate swaps to manage the variability of our interest rate exposure, thus leveling a
portion of our interest expense in a rising or falling rate environment.
We have effectively changed the variable-rate cash flow exposure on a portion of our flooring debt to
fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest
rate swaps, we receive variable interest rate payments and make fixed interest rate payments, thereby
creating fixed rate flooring debt.
We do not enter into derivative instruments for any purpose other than to manage interest rate exposure.
That is, we do not engage in interest rate speculation using derivative instruments. Typically, we
designate all interest rate swaps as cash flow hedges.
56
As of December 31, 2008, we had outstanding the following interest rate swaps with U.S. Bank Dealer
Commercial Services:
• effective March 9, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.25% per
annum, variable rate adjusted on the 1st and 16th of each month;
• effective March 18, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.10% per
annum, variable rate adjusted on the 1st and 16th of each month;
• effective June 16, 2006 – a ten year, $25 million interest rate swap at a fixed rate of 5.587% per
annum, variable rate adjusted on the 1st and 16th of each month;
• effective January 26, 2008 – a five-year, $25 million interest rate swap at a fixed rate of 4.495%
per annum, variable rate adjusted on the 26th of each month;
• effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495% per
annum, variable rate adjusted on the 1st and 16th of each month; and
• effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495% per
annum, variable rate adjusted on the 1st and 16th of each month.
We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month LIBOR
rate at December 31, 2008 was 0.44% per annum as reported in the Wall Street Journal.
The fair value of our interest rate swap agreements represents the estimated receipts or payments that
would be made to terminate the agreements. These amounts related to our cash flow hedges are
recorded as deferred gains or losses in our consolidated balance sheet with the offset recorded in
accumulated other comprehensive income, net of tax. Changes to the fair value of discontinued cash flow
hedges are recognized into earnings as a component of floorplan interest expense. At December 31,
2008, the fair values of all of our agreements was a liability of $10.8 million. The estimated amount
expected to be reclassified into earnings within the next twelve months is $4.9 million at December 31,
2008.
As inventory levels fell and future levels of floorplan debt were expected to decrease, one cash flow hedge
was discontinued at the end of the third quarter of 2008 due to the forecasted transaction no longer being
probable. Additionally, in response to expected decreases in debt levels, we discontinued two cash flow
hedges and de-designated and re-designated certain other swaps in the fourth quarter of 2008. The
change in the market value of undesignated swaps resulted in a $0.5 million loss, which was recognized in
earnings as a component of floorplan interest expense in the fourth quarter of 2008. Following the
discontinuation and de-designation of cash flow hedges, approximately $1.2 million remained a component
of accumulated other comprehensive income (loss) at December 31, 2008, which will be recognized over
the remaining life of these swaps.
Ineffectiveness occurs when the amount of change in fair market value of the swap is greater than the
change in fair market value of the hypothetical derivative. Any ineffectiveness will be reflected in the
floorplan interest expense in our statement of operation in the period in which it occurs. In 2008 and 2007,
we recorded $363,000 and $73,000, respectively, of
ineffectiveness. We did not record any
ineffectiveness in 2006.
Risk Management Policies
We assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate
exposures that may adversely impact expected future cash flows and by evaluating hedging
opportunities.
We maintain risk management control systems to monitor interest rate cash flow attributable to both our
outstanding and forecasted debt obligations as well as our offsetting hedge positions. The risk
management control systems involve the use of analytical techniques, including cash flow sensitivity
analysis, to estimate the expected impact of changes in interest rates on our future cash flows.
57
Item 8. Financial Statements and Supplementary Financial Data
The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 15 of
Part IV of this document. Quarterly financial data for each of the eight quarters in the two-year period
ended December 31, 2008 is included in Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information we are required to disclose in reports that we file or submit under
the Securities Exchange Act of 1934 is accumulated and communicated to our management, including
our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure and that such information is recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our last fiscal
quarter that has materially affected or is reasonably likely to materially affect our internal control over
financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2008. In making this assessment, we used the criteria set forth in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment using those criteria, our management concluded that, as of
December 31, 2008, our internal control over financial reporting was effective.
KPMG LLP, our Independent Registered Public Accounting Firm, has issued an attestation report on our
internal control over financial reporting as of December 31, 2008, which is included in Item 8 of this Form
10-K.
Item 9B. Other Information
None.
58
Item 10. Directors, Executive Officers and Corporate Governance
PART III
Information required by this item will be included under the captions Election of Directors, Meetings and
Committees of the Board of Directors, Audit Committee Financial Expert, Code of Ethics, Executive
Officers and Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for our
2009 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item will be included under the captions Compensation of Directors,
Compensation Committee Report, Compensation Discussion and Analysis, Executive Compensation,
Potential Payments Upon Termination or Change-in-Control, and Compensation Committee Interlocks
and Insider Participation in our Proxy Statement for our 2009 Annual Meeting of Shareholders and, upon
filing, is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Equity Compensation Plan Information
The following table summarizes equity securities authorized for issuance as of December 31, 2008.
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (a)
Weighted average
exercise price of
outstanding options,
warrants and rights (b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a) (c)
2,007,257
$13.81
962,780(1)
-
2,007,257
-
$13.81
-
962,780
Plan Category
Equity compensation
plans approved by
shareholders
Equity compensation
plans not approved by
shareholders
Total
(1)
Includes 205,687 shares available pursuant to our 2003 Stock Incentive Plan and 757,093 shares available pursuant to our
Employee Stock Purchase Plan.
The additional information required by this item will be included under the caption Security Ownership of
Certain Beneficial Owners and Management in our Proxy Statement for our 2009 Annual Meeting of
Shareholders and, upon filing, is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item will be included under the captions Certain Relationships and
Related Transactions and Director Independence in our Proxy Statement for our 2009 Annual Meeting of
Shareholders and, upon filing, is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by this item will be included under the caption Independent Registered Public
Accounting Firm in our Proxy Statement for our 2009 Annual Meeting of Shareholders and, upon filing, is
incorporated herein by reference.
59
Item 15. Exhibits and Financial Statement Schedules
PART IV
Financial Statements and Schedules
The Consolidated Financial Statements, together with the report thereon of KPMG LLP, Independent
Registered Public Accounting Firm, are included on the pages indicated below:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Operations for the years ended December 31, 2008,
2007 and 2006
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive
Income (Loss) for the years ended December 31, 2008, 2007 and 2006
Consolidated Statements of Cash Flows for the years ended December 31, 2008,
2007 and 2006
Notes to Consolidated Financial Statements
There are no schedules required to be filed herewith.
Page
F-1, F-2
F-3
F-4
F-5
F-6
F-7
Exhibits
The following exhibits are filed herewith and this list is intended to constitute the exhibit index. An asterisk
(*) beside the exhibit number indicates the exhibits containing a management contract, compensatory
plan or arrangement, which are required to be identified in this report.
Exhibit
3.1
3.2
4.1
4.2
10.1*
10.2*
10.2.1*
10.3*
10.4*
10.5*
10.6*
10.6.1*
10.6.2*
10.7.1*
10.7.2*
10.8*
10.9*
Description
(a) Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999.
Amended and Restated Bylaws of Lithia Motors, Inc. (Corrected)
(b) Specimen Common Stock certificate
(j)
(b)
(c)
(b)
(b)
(d)
(l)
(f)
(g)
(g)
(k)
(k)
Indenture dated May 4, 2004, between Lithia Motors, Inc. and U.S. Bank National Association, as Trustee, relating
to 2.875% Convertible Senior Subordinated Notes due 2014.
1996 Stock Incentive Plan
Amendment No. 1 to the Lithia Motors, Inc. 1996 Stock Incentive Plan
Form of Incentive Stock Option Agreement (1)
Form of Non-Qualified Stock Option Agreement (1)
1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
1998 Employee Stock Purchase Plan, as amended
Lithia Motors, Inc. 2001 Stock Option Plan
Form of Incentive Stock Option Agreement for 2001 Stock Option Plan
Form of Non-Qualified Stock Option Agreement for 2001 Stock Option Plan
2003 Stock Incentive Plan, as amended and restated
Form of Restricted Share Grant for 2003 Stock Incentive Plan, as amended and restated
(o) Summary 2008 Discretionary Support Services Bonus Program
(o)
2008 L2 Performance Objectives and Bonus Program
60
Exhibit
10.10
10.10.1
Description
(a) Chrysler Corporation Sales and Service Agreement General Provisions
(h) Chrysler Corporation Chrysler Sales and Service Agreement, dated September 28, 1999, between Chrysler
Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc. (Additional Terms and Provisions to the Sales and
Service Agreements are in Exhibit 10.9) (2)
10.11
(b) Mercury Sales and Service Agreement General Provisions
10.11.1
(e) Supplemental Terms and Conditions agreement between Ford Motor Company and Lithia Motors, Inc. dated June
12, 1997.
10.11.2
(e) Mercury Sales and Service Agreement, dated June 1, 1997, between Ford Motor Company and Lithia TLM, LLC
dba Lithia Lincoln Mercury (general provisions are in Exhibit 10.10) (3)
10.12
(e) Volkswagen Dealer Agreement Standard Provisions
10.12.1
(a) Volkswagen Dealer Agreement dated September 17, 1998, between Volkswagen of America, Inc. and Lithia HPI,
Inc. dba Lithia Volkswagen. (standard provisions are in Exhibit 10.11) (4)
10.13
(b) General Motors Dealer Sales and Service Agreement Standard Provisions
10.13.1
(a) Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement dated January 16,
1998.
10.13.2
10.14
10.14.1
(i)
(b)
(a)
Chevrolet Dealer Sales and Service Agreement dated October 13, 1998 between General Motors Corporation,
Chevrolet Motor Division and Camp Automotive, Inc. (5)
Toyota Dealer Agreement Standard Provisions
Toyota Dealer Agreement, between Toyota Motor Sales, USA, Inc. and Lithia Motors, Inc., dba Lithia Toyota,
dated February 15, 1996. (6)
10.15
(e) Nissan Standard Provisions
10.15.1
(a) Nissan Public Ownership Addendum dated August 30, 1999 (identical documents executed by each Nissan store).
10.15.2
(e) Nissan Dealer Term Sales and Service Agreement between Lithia Motors, Inc., Lithia NF, Inc., and the Nissan
Division of Nissan Motor Corporation In USA dated January 2, 1998. (standard provisions are in Exhibit 10.14) (7)
10.16
10.17
(a)
(m)
Lease Agreement between CAR LIT, L.L.C. and Lithia Real Estate, Inc. relating to properties in Medford,
Oregon.(8)
2007 Board of Directors’ Compensation Package
10.17.1
Non-Employee Director Compensation Plan for 2008/2009 Service Year
(k)
(m)
(n)
10.18
10.19
10.19.1
10.19.2
Form of Outside Director Nonqualified Deferred Compensation Agreement
Loan Agreement and Amendments for revolving credit facility with U.S. Bank National Association, as Agent
Fourth Amendment to revolving credit facility with U.S. Bank National Association, as Agent
Fifth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, Dated December 12,
2008.
10.20
(m) Split Dollar Agreement dated November 7, 2006 with Sidney B. DeBoer
10.21
(m) Split Dollar Insurance Agreement dated December 20, 2007 with Sidney B. DeBoer
10.22*
Terms of Amended Employment and Change in Control Agreement between Lithia Motors, Inc. and Sidney B.
DeBoer dated January 15, 2009. Substantially similar agreements exist between Lithia Motors, Inc. and each of
M.L. Dick Heimann, Bryan B. DeBoer and Jeffrey B. DeBoer.
21
Subsidiaries of Lithia Motors, Inc.
61
Exhibit
23
31.1
31.2
32.1
32.2
Description
Consent of KPMG LLP, Independent Registered Public Accounting Firm
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange
Act of 1934.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act
of 1934.
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange
Act of 1934 and 18 U.S.C. Section 1350.
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act
of 1934 and 18 U.S.C. Section 1350.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 1999 as filed with the Securities
and Exchange Commission on March 30, 2000.
Incorporated by reference from the Company's Registration Statement on Form S-1, Registration Statement No. 333-14031, as
declared effective by the Securities Exchange Commission on December 18, 1996.
Incorporated by reference from the Company’s Form 10-Q for the quarter ended June 30, 1998 as filed with the Securities and
Exchange Commission on August 13, 1998.
Incorporated by reference from the Company's Registration Statement on Form S-8, Registration Statement No. 333-45553, as
filed with the Securities Exchange Commission on February 4, 1998.
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 1997 as filed with the Securities
and Exchange Commission on March 31, 1998.
Incorporated by reference from Appendix B to the Company’s Proxy Statement for its 2001 Annual Meeting as filed with the
Securities and Exchange Commission on May 8, 2001.
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2001 as filed with the Securities
and Exchange Commission on February 22, 2002.
Incorporated by reference from the Company’s Form 10-Q for the quarter ended September 30, 2001 as filed with the
Securities and Exchange Commission on November 14, 2001.
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 1998 as filed with the Securities
and Exchange Commission on March 31, 1999.
Incorporated by reference from the Company’s Form 10-Q for the quarter ended March 31, 2004 as filed with the Securities
and Exchange Commission on May 10, 2004.
Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2005 as filed with the Securities
and Exchange Commission on March 8, 2006.
Incorporated by reference from the Company’s Form 8-K filed November 15, 2007.
(l)
(m) Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2007 as filed with the Securities
(n)
(o)
and Exchange Commission on April 11, 2008.
Incorporated by reference from the Company’s Form 10-Q for the quarter ended June 30, 2008 as filed with the Securities and
Exchange Commission on August 18, 2008.
Incorporated by reference from the Company’s Proxy Statement for its 2008 Annual Meeting as filed with the Securities and
Exchange Commission on April 29, 2008.
(1) The board of directors adopted the new stock option agreement forms when it adopted the 2001 Stock Option Plan; and,
although no longer being used to grant new stock options, these option agreements remain in effect as there are outstanding
stock options issued under these stock option agreements.
(2) Substantially identical agreements exist between DaimlerChrysler Motor Company, LLC and those other subsidiaries operating
Dodge, Chrysler, Plymouth or Jeep dealerships.
(3) Substantially identical agreements exist for its Ford and Lincoln-Mercury lines between Ford Motor Company and those other
subsidiaries operating Ford or Lincoln-Mercury dealerships.
(4) Substantially identical agreements exist between Volkswagen of America, Inc. and those subsidiaries operating Volkswagen
dealerships.
(5) Substantially identical agreements exist between Chevrolet Motor Division, GM Corporation and those other subsidiaries
operating General Motors dealerships.
(6) Substantially identical agreements exist (except the terms are all 2 years) between Toyota Motor Sales, USA, Inc. and those
other subsidiaries operating Toyota dealerships.
(7) Substantially identical agreements exist between Nissan Motor Corporation and those other subsidiaries operating Nissan
dealerships.
(8) Lithia Real Estate, Inc. leases all the property in Medford, Oregon sold to CAR LIT, LLC under substantially identical leases
covering six separate blocks of property.
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: March 16, 2009
LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities indicated on March 16, 2009:
Signature
Title
/s/ SIDNEY B. DEBOER
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ JEFFREY B. DEBOER
Jeffrey B. DeBoer
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ BRYAN B. DEBOER
Bryan B. DeBoer
/s/ THOMAS BECKER
Thomas Becker
/s/ WILLIAM L. GLICK
William L. Glick
/s/ CHARLES R. HUGHES
Charles R. Hughes
/s/ MARYANN KELLER
Maryann Keller
/s/ A.J. WAGNER
A.J. Wagner
Director
Director
Director
Director
Director
Director
63
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lithia Motors, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Lithia Motors, Inc. and subsidiaries
as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in
stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the
three-year period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Lithia Motors, Inc. and subsidiaries as of December 31, 2008 and 2007,
and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Lithia Motors, Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
March 16, 2009 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
/s/ KPMG LLP
Portland, Oregon
March 16, 2009
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Lithia Motors, Inc. and subsidiaries:
We have audited Lithia Motors Inc. and subsidiaries’ internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lithia Motors, Inc.
and subsidiaries’ management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Lithia Motors Inc. and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Lithia Motors Inc. and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of operations, changes in
stockholders’ equity and comprehensive income (loss), and cash flows for each of the years in the three-
year period ended December 31, 2008, and our report dated March 16, 2009 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Portland, Oregon
March 16, 2009
F-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
December 31,
2008
2007
$
10,874
27,799
$
Assets
Current Assets:
Cash and cash equivalents
Contracts in transit
Trade receivables, net of allowance for doubtful
accounts of $348 and $391
Inventories, net
Vehicles leased to others, current portion
Prepaid expenses and other
Deferred income taxes
Assets held for sale
Total Current Assets
Land and buildings, net of accumulated
depreciation of $20,604 and $20,628
Equipment and other, net of accumulated
depreciation of $47,414 and $46,126
Goodwill
Other intangible assets, net of accumulated
amortization of $68 and $52
Other non-current assets
Deferred income taxes
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities:
Floorplan notes payable
Floorplan notes payable: non-trade
Current maturities of senior subordinated convertible notes
Current maturities of other long-term debt
Trade payables
Accrued liabilities
Liabilities held for sale
Total Current Liabilities
Real estate debt, less current maturities
Other long-term debt, less current maturities
Other long-term liabilities
Deferred income taxes
Total Liabilities
Stockholders' Equity:
Preferred stock - no par value; authorized
15,000 shares; none outstanding
Class A common stock - no par value;
authorized 100,000 shares; issued and
outstanding 16,717 and 15,960
Class B common stock - no par value;
authorized 25,000 shares; issued and
outstanding 3,762 and 3,762
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
21,665
48,474
60,913
601,759
9,498
10,647
1,775
23,807
778,538
363,391
98,355
311,527
68,946
5,978
-
1,626,735
311,824
139,766
-
13,327
38,715
63,602
17,857
585,091
179,160
276,335
14,647
63,290
1,118,523
41,816
422,812
8,308
20,979
2,541
161,423
696,552
284,088
62,188
-
42,008
4,616
44,007
1,133,459
234,181
103,519
42,500
36,134
21,571
50,951
108,172
597,028
163,708
101,476
22,904
-
885,116
$
$
-
-
234,522
229,151
468
9,275
(5,810)
9,888
248,343
1,133,459
$
468
8,112
(1,437)
271,918
508,212
1,626,735
$
$
$
See accompanying notes to consolidated financial statements.
F-3
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenues:
New vehicle sales
Used vehicle sales
Finance and insurance
Service, body and parts
Fleet and other
Total revenues
Cost of sales:
New vehicle sales
Used vehicle sales
Service, body and parts
Fleet and other
Total cost of sales
Gross profit
Goodwill impairment
Other asset impairments
Selling, general and administrative
Depreciation - buildings
Depreciation and amortization - other
Operating income (loss)
Other income (expense):
Floorplan interest expense
Other interest expense
Other income, net
Total other income (expense)
Income (loss) from continuing operations before income taxes
Income tax (provision) benefit
Income (loss) from continuing operations
Discontinued operations:
Income (loss) from operations, net of income taxes
Loss from disposal activities, net of income taxes
Net income (loss)
Basic income (loss)per share from continuing operations
Basic income (loss) per share from discontinued operations
Basic net income (loss) per share
Class A shares used in basic per share calculations
Class B shares used in basic per share calculations
Diluted income (loss) per share from continuing operations
Diluted income (loss) per share from discontinued operations
Diluted net income (loss) per share
Class A shares used in diluted per share calculations
Class B shares used in diluted per share calculations
$
$
$
$
$
$
2008
Year Ended December 31,
2007
2006
$
$
$
$
$
$
1,172,807
574,373
78,970
306,743
4,911
2,137,804
1,081,032
523,439
159,944
3,345
1,767,760
370,044
272,503
23,402
316,183
4,847
12,885
(259,776)
(20,398)
(17,350)
6,673
(31,075)
(290,851)
91,703
(199,148)
(9,898)
(43,540)
(252,586)
(9.95)
(2.67)
(12.62)
16,255
3,762
(9.95)
(2.67)
(12.62)
16,255
3,762
$
$
$
$
$
$
1,528,246
686,728
99,727
304,302
5,279
2,624,282
1,408,496
605,890
159,262
3,845
2,177,493
446,789
-
-
349,283
4,200
12,662
80,644
(24,373)
(15,985)
641
(39,717)
40,927
(16,485)
24,442
1,826
(4,719)
21,549
1.25
(2.67)
1.10
15,768
3,762
1.19
(0.13)
1.06
18,320
3,762
1,449,012
660,588
97,036
261,949
5,250
2,473,835
1,333,906
576,271
134,153
3,740
2,048,070
425,765
-
-
319,854
3,325
10,058
92,528
(25,156)
(12,081)
798
(36,439)
56,089
(21,597)
34,492
3,366
(554)
37,304
1.77
(2.67)
1.91
15,723
3,762
1.65
0.12
1.77
18,340
3,762
See accompanying notes to consolidated financial statements.
F-4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income (Loss)
For the years ended December 31, 2005, 2006 and 2007
(In thousands)
Common Stock
Class A
Class B
Shares
3,762
-
$
Amount
468
-
$
Additional
Paid In
Capital
2,559
-
$
Unearned
Compensation
(1,132)
-
$
Accumulated
Other
Compre-
hensive
Income
(Loss)
-
-
Retained
Earnings
$
233,561
37,304
$
Balance at December 31, 2005
Net income
Issuance of stock in connection with employee
stock plans
Issuance of restricted stock to employees
Reversal of unearned compensation upon adoption
of SFAS No. 123R
Shares forfeited by employees
Repurchase of Class A common stock
Compensation for stock and stock option issuances
and tax benefits from option exercises
Dividends paid
Balance at December 31, 2006
Net income
Fair value of interest rate swap agreements, net of
tax benefit of $881
Comprehensive income
Issuance of stock in connection with employee
stock plans
Issuance of restricted stock to employees and directors
Shares forfeited by employees
Repurchase of Class A common stock
Compensation for stock and stock option issuances
and tax benefits from option exercises
Adoption of FIN 48
Dividends paid
Balance at December 31, 2007
Net loss
Fair value of interest rate swap agreements, net of
tax benefit of $2,662
Comprehensive loss
Issuance of stock in connection with employee
stock plans
Issuance of restricted stock to employees and directors
Shares forfeited by employees
Repurchase of Class A common stock
Compensation for stock and stock option issuances
and tax benefits from option exercises
Dividends paid
Balance at December 31, 2008
Shares
15,629
-
299
73
-
(15)
(197)
-
-
15,789
-
-
349
66
(18)
(226)
-
-
-
15,960
-
-
739
84
(66)
-
-
-
16,717
Amount
224,775
$
-
6,844
-
(1,132)
-
(4,720)
903
-
226,670
-
-
6,500
-
-
(5,247)
1,228
-
-
229,151
-
-
4,441
-
-
(2)
932
-
$
234,522
-
-
-
-
-
-
-
3,762
-
-
-
-
-
-
-
-
-
3,762
-
-
-
-
-
-
-
-
-
-
-
-
-
468
-
-
-
-
-
-
-
-
-
468
-
-
-
-
-
-
-
-
(134)
-
-
3,149
-
5,574
-
-
-
-
-
-
2,538
-
-
8,112
-
-
-
-
-
-
-
-
3,762
$
-
-
468
$
1,163
-
9,275
$
-
-
1,132
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
Stock-
holders'
Equity
460,231
37,304
6,844
-
(134)
-
(4,720)
4,052
(10,184)
493,393
21,549
(1,437)
20,112
6,500
-
-
(5,247)
3,766
706
(11,018)
508,212
(252,586)
(4,373)
(256,959)
4,441
-
-
(2)
-
-
-
-
-
-
-
-
-
(1,437)
-
-
-
-
-
-
-
(1,437)
-
(4,373)
-
-
-
-
-
-
-
-
-
-
(10,184)
260,681
21,549
-
-
-
-
-
-
706
(11,018)
271,918
(252,586)
-
-
-
-
-
-
-
(5,810)
$
-
(9,444)
9,888
$
2,095
(9,444)
248,343
$
See accompanying notes to consolidated financial statements.
F-5
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
2008
Year Ended December 31,
2007
2006
$
(252,586)
$
21,549
$
37,304
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Goodwill impairment
Other asset impairments
Depreciation and amortization
Depreciation and amortization within discontinued operations
Amortization of debt discount
Stock-based compensation
Gain on early extinguishment of debt
(Gain) loss on disposal of assets
Loss from disposal activities within discontinued operations
Deferred income taxes
Excess tax benefits from share-based payment arrangements
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net
Contracts in transit
Inventories
Vehicles leased to others
Prepaid expenses and other
Other non-current assets
Increase (decrease), net of effect of acquisitions:
Floorplan notes payable
Trade payables
Accrued liabilities
Other long-term liabilities and deferred revenue
Net cash provided by (used in) operating activities
272,503
23,402
17,732
2,986
197
1,725
(5,248)
(3,546)
70,063
(105,033)
(368)
19,096
20,675
79,173
(508)
(11,189)
(910)
(16,888)
(18,915)
(12,653)
5,457
85,165
-
-
16,862
4,270
210
3,384
-
(8)
5,923
14,450
(283)
1,607
7,737
(13,843)
(3,461)
(2,545)
(1,688)
(100,128)
(3,948)
1,015
(314)
(49,211)
(Please refer to Liquidity and Capital Resources on Page 44 in Management's Discussion and Analysis)
Cash flows from investing activities:
Capital expenditures:
Non-financeable
Financeable
Proceeds from sale of assets
Cash paid for acquisitions, net of cash acquired
Proceeds from sale of stores
Net cash provided by (used in) investing activities
Cash flows from financing activities:
Borrowings (repayments) on Floorplan notes payable: non-trade
Borrowings on lines of credit
Repayments on lines of credit
Principal payments on long-term debt, scheduled
Principal payments on long-term debt and capital leases, other
Proceeds from issuance of long-term debt
Proceeds from issuance of common stock
Repurchase of common stock
Excess tax benefits from share-based payment arrangements
Dividends paid
Net cash provided by (used in) financing activities
Decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure of cash flow information:
Cash paid during the period for interest
Cash paid (refunded) during the period for income taxes, net
Supplemental schedule of non-cash investing and financing
activities:
Debt issued in connection with acquisitions
Floorplan debt acquired in connection with acquisitions
Floorplan debt paid in connection with store disposals
Acquisition of assets with capital leases
Common stock received for the exercise price of stock options
Assets acquired through store exchange
(15,566)
(41,857)
18,229
(605)
44,085
4,286
(16,803)
402,000
(500,000)
(7,335)
(62,597)
89,130
4,441
(2)
368
(9,444)
(100,242)
(10,791)
(23,024)
(68,917)
8,129
(13,315)
16,495
(80,632)
69,540
721,319
(681,319)
(5,497)
(14,570)
44,917
6,500
(5,247)
283
(11,018)
124,908
(4,935)
$
$
$
21,665
10,874
$
26,600
21,665
$
$
$
50,498
(4,199)
-
566
23,565
3,198
2
-
$
$
57,079
5,667
-
14,797
16,976
262
87
3,820
See accompanying notes to consolidated financial statements.
F-6
-
-
13,383
3,940
145
3,534
-
193
911
6,312
(369)
(8,137)
(3,758)
45,360
(2,701)
2,158
(1,993)
(75,041)
8,839
4,415
3,444
37,939
(28,690)
(45,009)
512
(105,505)
3,915
(174,777)
16,005
230,402
(136,402)
(5,057)
(3,951)
21,566
6,844
(4,720)
369
(10,184)
114,872
(21,966)
48,566
26,600
49,779
17,697
6,822
48,450
19,407
102
-
-
LITHIA MOTORS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1)
Summary of Significant Accounting Policies
Organization and Business
We are a leading operator of automotive franchises and retailer of new and used vehicles and
services. As of December 31, 2008, we offered 27 brands of new vehicles and all brands of used
vehicles in 96 stores in the United States and over the Internet. Of these stores, 18 were held for sale at
December 31, 2008. We sell new and used cars and light trucks; sell replacement parts; provide vehicle
maintenance, warranty, paint and repair services; and arrange related financing, service contracts,
protection products and credit insurance for our automotive customers.
Principles of Consolidation
The accompanying financial statements reflect the results of operations, the financial position and
the cash flows for Lithia Motors, Inc. and its directly and indirectly wholly-owned subsidiaries. All
significant intercompany accounts and transactions, consisting principally of intercompany sales, have
been eliminated upon consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank accounts without
restrictions.
Contracts in Transit
Contracts in transit relate to amounts due from various lenders for the financing of vehicles sold
and are typically received within five days of selling a vehicle.
Trade Receivables
Trade receivables include amounts due from the following:
•
•
•
from customers for vehicles and service and parts business;
from manufacturers for factory rebates, dealer incentives and warranty reimbursement; and
from insurance companies, finance companies and other miscellaneous receivables.
Receivables are recorded at invoice cost and do not bear interest until such time as they are 60
days past due. Reserves for uncollectible accounts are estimated based on our historical write-off
experience and are reviewed on a monthly basis. Account balances are charged off against the reserve
after all appropriate means of collection have been exhausted and the potential for recovery is considered
remote. We do not have any off-balance sheet credit exposure related to our customers. A roll-forward of
our allowance for doubtful accounts was as follows (in thousands):
Year Ended December 31,
Balance, beginning of year
Bad debt expense
Write-offs
Recoveries
Balance, end of year
2008
391
1,060
(3,745)
2,642
348
$
$
2007
390
1,159
(3,301)
2,143
391
$
$
2006
406
1,088
(2,623)
1,519
390
$
$
Inventories
Inventories are valued at the lower of market value or cost, using a pooled approach for vehicles
and the specific identification method for parts. The cost of new and used vehicle inventories includes the
cost of any equipment added, reconditioning and transportation.
F-7
Vehicles Leased to Others and Related Lease Receivables
Vehicles leased to others are stated at cost and depreciated over their estimated useful lives
(5 years) on a straight-line basis. Lease receivables result from customer, employee and fleet leases of
vehicles under agreements that qualify as operating leases. Leases are cancelable at the option of the
lessee after providing 30 days written notice. Vehicles leased to others are classified as current or non-
current based on the remaining lease term.
Assets and Liabilities Held for Sale
At December 31, 2008 and 2007, assets held for sale of $161.4 million and $23.8 million,
respectively, related to stores held for sale and were recorded at the lower of book value or estimated fair
market value less applicable selling costs. At December 31, 2008 and 2007, liabilities held for sale of
$108.2 million and $17.9 million, respectively, were recorded at book value. See also Note 19.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are being depreciated over their estimated
useful lives, on the straight-line basis. The range of estimated useful lives is as follows:
Buildings and improvements
Service equipment
Furniture, signs and fixtures
5 to 40 years
5 to 15 years
5 to 10 years
The cost for maintenance, repairs and minor renewals is expensed as incurred, while significant
remodels and betterments are capitalized. In addition, interest on borrowings for major capital projects,
significant remodels and betterments are capitalized. Capitalized interest becomes a part of the cost of
the depreciable asset and is depreciated according to the estimated useful lives as previously stated.
Capitalized interest totaled $1.7 million, $3.2 million and $1.5 million, respectively, in 2008, 2007 and
2006.
When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts, and any gain or loss is credited or charged to income from continuing
operations.
Leased property meeting certain criteria is capitalized and the present value of the related lease
payments is recorded as a liability. Amortization of capitalized leased assets is computed on a straight-
line basis over the term of the lease, unless the lease transfers title or it contains a bargain purchase
option, in which case, it is amortized over the asset’s useful life, and is included in depreciation expense.
Long-lived assets held and used by us are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of assets may not be recoverable in accordance with
SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” During 2008, we
recorded asset impairment charges totaling $12.1 million against assets to be held and used. We did not
record any impairments on assets to be held and used in 2007 or 2006. See also Note 5.
through 2066. Certain
Operating Leases
We lease certain of our facilities under non-cancelable operating leases. These leases expire at
increases at
various dates
lease commitments contain
predetermined intervals over the life of the lease, while other lease commitments are subject to escalation
clauses of an amount equal to the increase in the cost of living based on the “Consumer Price Index -
U.S. Cities Average - All Items for all Urban Consumers” published by the U.S. Department of Labor, or a
substantially equivalent regional index. Lease expense is recognized on a straight-line basis over the life
of the lease. See also Note 17.
fixed payment
Leasehold improvements made at the inception of the lease or during the term of the lease are
amortized on a straight-line basis over the shorter of the life of the improvement or the remaining term of
the lease.
F-8
Goodwill and Other Intangible Assets
Goodwill represents the excess purchase price over fair value of net assets acquired, which is not
allocable to separately identifiable intangible assets. Other identifiable intangible assets represent the
franchise value of stores acquired since July 1, 2001, non-compete agreements and customer lists.
We evaluated the useful lives of our franchise agreements based on the following factors:
• Certain of our franchise agreements continue indefinitely by their terms;
• Certain of our franchise agreements have limited terms, but are routinely renewed without
•
substantial cost to us;
In the established retail automotive franchise industry, we are not aware of manufacturers
terminating franchise agreements against the wishes of the franchise owners, except under
extraordinary circumstances, and we have never had a franchise agreement terminated against
our wishes. A manufacturer may pressure a franchise owner to sell a franchise when they are in
breach of the franchise agreement over an extended period of time.
• State dealership franchise laws typically limit the rights of the manufacturer to terminate or not
renew a franchise;
• We are not aware of any legislation or other factors that would materially change the retail
automotive franchise system; and
• As evidenced by our acquisition and disposition history, there is an active market for automotive
dealership franchises within the United States. We attribute value to the franchise agreements
acquired with the dealerships we purchase based on the understanding and industry practice that
the franchise agreements will be renewed indefinitely by the manufacturer.
Accordingly, we have determined that our franchise agreements will continue to contribute to our
cash flows indefinitely and, therefore, have indefinite lives. Non-compete agreements are amortized using
the straight-line method over the contractual life of the agreement and customer lists are amortized using
the straight-line method over their estimated lives of approximately five years.
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and indefinite-lived
intangible assets are not amortized but are tested for impairment at least annually, and more frequently if
events or circumstances indicate their carrying value may exceed fair value. In accordance with the
provisions of SFAS No. 142, we have determined that we operate as one reporting unit. According to
Emerging Issues Task Force (“EITF”) 02-7, “Unit of Accounting for Testing Impairment of Indefinite-Lived
Intangible Assets,” we have concluded that the appropriate unit of accounting for determining franchise
value is on an individual store basis.
During 2008, we recorded goodwill and other intangible asset impairment charges totaling $288.9
million as a component of continuing operations. We did not record any impairment charges on goodwill
or other intangible assets in 2007 or 2006. See also Note 6.
Incentives, Credits and Floorplan Assistance
Manufacturers reimburse us for holdbacks, floorplan interest and advertising credits, which are
earned when each vehicle is purchased by us. The manufacturers reimburse us weekly, monthly or
quarterly depending on the manufacturer and the type of program. The manufacturers determine the
amount of the reimbursements based on many factors including the value and make of the vehicles
purchased. Pursuant to EITF 02-16 “Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor,” we recognize advertising credits, floorplan interest credits,
holdbacks, cash incentives and other rebates received from manufacturers that are tied to specific
vehicles as a reduction to cost of goods sold as the related vehicles are sold. When amounts are received
prior to the sale of the vehicle, such amounts are netted against inventory until the vehicle is sold.
We earn certain other cash incentives and rebates from the manufacturer when the vehicles are
sold to the customer. The amount of cash incentives and other rebates can vary based on the type and
number of models sold.
F-9
Advertising credits that are not tied to specific vehicles are earned from the manufacturer when
we submit reimbursement for qualifying advertising expenditures and are recognized as a reduction of
advertising expense upon manufacturer confirmation that our submitted expenditures qualify for such
credits.
Parts purchase discounts that we receive from the manufacturer are earned when certain parts or
volume of parts are purchased from the manufacturer and are recognized as a reduction to cost of good
sold as the related inventory is sold.
Advertising
We expense production and other costs of advertising as incurred as a component of selling,
general and administrative expense. Advertising expense, net of manufacturer cooperative advertising
credits, was $17.4 million, $14.7 million and $13.8 million for the years ended December 31, 2008, 2007
and 2006, respectively. Manufacturer cooperative advertising credits were $4.3 million in 2008, $5.0
million in 2007 and $5.1 million in 2006.
Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded in operating expenses when it is
probable that a liability has been incurred and the amount of the liability can be reasonably estimated.
Accrued liabilities are exclusive of claims against third parties and are not discounted. In general, ongoing
costs related to environmental remediation are charged to expense. However, environmental costs are
capitalized if such costs increase the value of the property and/or mitigate or prevent contamination from
future operations.
We are aware of limited contamination at certain of our current and former facilities, and are in
the process of conducting investigations and/or remediation at some of these properties. Based on our
current information, we do not believe that any costs or liabilities relating to such contamination, other
environmental matters or compliance with environmental regulations will have a material adverse effect
on our cash flows, results of operations or financial condition. There can be no assurances, however, that
additional environmental matters will not arise or that new conditions or facts will not develop in the future
at our current or formerly owned or operated facilities, or at sites that we may acquire in the future, that
will result in a material adverse effect on our cash flows, results of operations or financial condition.
Income Taxes
Income taxes are accounted for under the asset and liability method as prescribed by SFAS No.
109 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No.
48, “Accounting for Uncertainty in Income Taxes,” which is an interpretation of FASB Statement No. 109,
effective January 1, 2007. Interpretation No. 48 applies to all tax positions accounted for under SFAS No.
109. The interpretation applies to situations where the uncertainty is to the timing of the deduction, the
amount of the deduction, or the validity of the deduction. At adoption, companies must adjust their
financial statements to reflect only those tax positions that are more-likely-than-not to be sustained as of
the adoption date. Positions that meet this criterion should be measured using the largest benefit that is
more than 50 percent likely to be realized. The necessary adjustment should be recorded directly to the
beginning balance of retained earnings in the period of adoption and reported as a change in accounting
principle, if material. However, because of the immaterial nature of the adjustment, we have not
presented this item separately on the face of the balance sheet. At adoption, and at December 31, 2008,
we did not have any unrecognized tax benefits, nor any accrued interest or penalties related to
unrecognized tax benefits. Interest and penalties are recorded as tax expense in the period incurred.
F-10
Taxes Assessed by a Governmental Authority
We account for all taxes assessed by a governmental authority that are directly imposed on a
revenue-producing transaction (i.e., sales, use, value-added) on a net (excluded from revenues) basis.
Concentrations of Risk and Uncertainties
We are subject to a concentration of risk in the event of financial distress, including potential
bankruptcy, of a major vehicle manufacturer. Our Chrysler, General Motors and Ford stores represented
approximately 31%, 20%, and 4% of our new vehicle sales in 2008, respectively, and approximately 35%,
18%, and 5% in 2007, respectively.
We had receivables from manufacturers or distributors of $16.5 million at December 31, 2008,
and $21.5 million at December 31, 2007. Additionally, a large portion of our Contracts-in-Transit are due
from automotive manufacturers’ captive finance subsidiaries which provide financing directly to our new
and used vehicle customers.
We purchase substantially all of our new vehicles from various manufacturers or distributors at
the prevailing prices available to all franchised dealers. Additionally, we finance our new vehicle inventory
primarily with automotive manufacturers’ captive finance subsidiaries. Our sales volume could be
materially adversely impacted by the manufacturers’ or distributors’ inability to supply the stores with an
adequate supply of vehicles and related financing.
Particularly with respect to the three domestic manufactures (General Motors, Chrysler and Ford),
the current recession, volatile fuel prices and tightening credit markets have resulted in significantly lower
vehicle sales and a deteriorating financial condition that could affect their ability to survive. Specifically,
both General Motors and Chrysler have publicly announced that they have depleted their available cash
resources and recently received loans from the federal government but in amounts announced to be
inadequate to address their intermediate-term cash needs. Congress has conditioned any further loans
upon the presentation of a restructuring plan to reflect the ability of such manufacturer to stabilize its
financial condition and survive in the increasingly competitive industry. It is unknown at this time whether
such funding will be made available or if provided, would be adequate to make them viable and
competitive.
In a Chapter 11 reorganization in Bankruptcy Court: (1) the manufacturer could cease producing
certain makes of vehicles and terminate all or any of our franchises even on continuing brands without
consideration, (2) we may not be able to collect some or all of our significant receivables that are due us
from such manufacturer, (3) we may not be able to obtain financing for our new vehicle inventory, or
arrange financing for our customers for their vehicle purchases and leases and (4) consumer demand for
such manufacturer’s products could be adversely affected.
If any of these events were to occur, our sales and earnings may be adversely impacted. These
events would also result in a partial or complete write-down of our remaining intangible franchise rights
with respect to any affected franchises and would likely cause us to incur valuation allowances related to
receivables due from such manufacturers. Any associated franchise terminations would likely cause us to
incur charges related to operating leases and/or impairment of long-lived assets. Additionally, there is a
continued risk to both the new and used vehicle inventory valuations for the respective brand or
manufacturer. At December 31, 2008, we had approximately $12.4 million in manufacturer receivables,
$226.2 million of inventory, $156.1 million of long-lived assets, and $19.2 million of intangible assets
related to our domestic franchises. If the impact on us results in a “material adverse change” to our
condition, covenants and cross default provisions in certain debt agreements may be triggered, resulting
in the immediate demand for amounts outstanding under the agreements.
In a Chapter 7 liquidation in Bankruptcy Court, the manufacturer would seek protection from its
creditors and would commence an orderly wind-down of operations. The impact of a liquidation would
likely have a material adverse effect on our results from operations, cash flows and financial condition
unless the operations were promptly sold to, and assumed by, another manufacturer.
F-11
Concentrations of credit risk with respect to trade receivables are limited due to the large number
of customers comprising our customer base as well as their dispersion across many different geographic
areas in the United States. Consequently, at December 31, 2008, we do not believe we have any
significant non-manufacturer concentrations of credit risk.
Financial instruments, which potentially subject us to concentrations of credit risk, consist
principally of cash deposits. We generally are exposed to credit risk from balances on deposit in financial
institutions in excess of the FDIC-insured limit.
Based on our most recent forecast for 2009, we have identified the risk of non-compliance with
our minimum current ratio covenant required by our Credit Facility in the quarterly measurement period
ending June 30, 2009. In the second quarter of 2009, the Credit Facility will have a remaining term of less
than one year and will therefore become classified as a current obligation on our consolidated balance
sheet. We are in negotiations to amend certain terms and conditions of the Credit Facility, including the
minimum current ratio covenant, to ensure prospective compliance. If we are unsuccessful in obtaining
the amendment, we will commence a number of initiatives to create sufficient liquidity to pay down the
required outstanding balance on the Credit Facility.
As previously disclosed, we have identified for sale a number of non-strategic properties and
dealerships. Several dealerships are under executed sale agreements and are expected to close prior to
June 30, 2009, subject to normal terms and conditions in the industry. In addition, we are in the process
of financing or refinancing certain real properties with other third party lenders.
In the event sales of identified properties and dealerships and the financing of properties do not
result in sufficient levels of proceeds, or do not occur within the time frame necessary to enable us to
comply with our June 30, 2009 minimum current ratio covenant, we intend to accelerate and expand upon
additional cost-cutting and cash generating initiatives currently being implemented. The acceleration and
expansion of these initiatives is expected to provide additional liquidity in sufficient levels to repay all
outstanding amounts on the Credit Facility by June 30, 2009 and to continue operations without further
advances on the Credit Facility through at least December 31, 2009. These initiatives include reducing
the days supply of inventories of used vehicles and parts, increasing the flooring and/or refinancing of
program and employee operated vehicles, reduction of employee compensation, deferring certain capital
expenditures and paying vendors and service providers pursuant to their maximum stipulated terms or on
revised terms. However, no assurances can be provided that we will be successful in executing these
plans, including obtaining an amendment to the Credit Facility, completing the sale of dealerships and
non-strategic properties, financing or refinancing certain real properties, or achieving liquidity through
other initiatives.
Financial Instruments and Market Risks
The carrying amount of cash equivalents, contracts in transit, trade receivables, trade payables,
accrued liabilities and short-term borrowings approximates fair value because of the short-term nature
and current market rates of these instruments.
Fair value estimates are made at a specific point in time, based on relevant market information
about the financial instrument. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. See also Note 9.
We have variable rate floorplan notes payable and other credit line borrowings that subject us to
market risk exposure. At December 31, 2008 we had $497.4 million outstanding under such facilities at
interest rates ranging from 1.59% to 4.75% per annum, $337.7 million of which was outstanding under
our floorplan facilities. An increase or decrease in the interest rates would affect interest expense for the
period accordingly.
F-12
The fair market value of long-term fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt will increase as interest rates fall because we
could refinance for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as
interest rates rise. The interest rate changes affect the fair market value but do not impact earnings or
cash flows. We monitor our fixed rate debt regularly, refinancing debt that is materially above market
rates, if permitted by its terms.
Based on open market trades, we determined that our $42.5 million of long-term convertible fixed
interest rate debt had a fair market value of approximately $37.0 million at December 31, 2008. In
addition, at December 31, 2008, we had $141.7 million of other long-term fixed interest rate debt
outstanding. Based on discounted cash flows, we have determined that the fair market value of this long-
term fixed interest rate debt was approximately $154.0 million at December 31, 2008.
We are also subjected to credit risk and market risk by entering into interest rate swaps. See
below and also Note 8. We are generally exposed to credit or repayment risk based on our relationship
with the counterparty to the transaction. We minimize the credit or repayment risk on our derivative
instruments by entering into transactions with institutions whose credit rating is Aa or higher.
Derivative Financial Instruments
We enter into interest rate swap agreements to reduce our exposure to market risks from
changing interest rates on our new vehicle floorplan lines of credit. The difference between interest paid
and interest received, which may change as market interest rates change, is accrued and recognized as
either additional floorplan interest expense, or a reduction thereof. If a swap is no longer accounted for as
a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring,
the gain or loss recorded in accumulated other comprehensive income (loss) is recognized as the
forecasted transaction occurs. If the forecasted transaction is not probable of occurring, the gain or loss
recorded in accumulated other comprehensive income (loss) is recognized immediately.
We account for our derivative financial instruments in accordance with SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB
Statement No. 133” and SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities”
(collectively, “the Standards”). The Standards require that all derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset
or liability measured at its fair value, and that changes in the derivatives fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. See also Note 8.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and related notes to financial
statements. Changes in such estimates may affect amounts reported in future periods.
Estimates are used in the calculation of certain reserves maintained for charge backs on
estimated cancellations of service contracts, life, accident and disability insurance policies, and finance
fees from customer financing contracts. We also use estimates in the calculation of various expenses,
accruals and reserves including anticipated workers compensation premium expenses related to a
retrospective cost policy, estimated uncollectible accounts and notes receivable, discretionary employee
bonus, environmental matters, warranty claims for our used vehicles, gross profit on service work
performed on vehicles in inventory, estimate of revenue recognition on discounts received on parts
inventory and stock-based compensation. We also make certain estimates regarding the assessment of
the recoverability of long-lived assets, indefinite-lived intangible assets and deferred tax assets.
F-13
Revenue Recognition
Revenue from the sale of vehicles is recognized when a contract is signed by the customer, a
preliminary bank agreement is obtained, and the delivery of the vehicles to the customer is made. Fleet
sales of vehicles, whereby we do not take possession of the vehicles, are shown on a net basis in fleet
and other revenue.
Revenue from parts and service is recognized upon delivery of the parts or service to the
customer.
Finance fees earned for notes placed with financial institutions in connection with customer
vehicle financing are recognized, net of estimated charge-backs, as finance and insurance revenue upon
acceptance of the credit by the financial institution.
Insurance income from third party insurance companies for commissions earned on credit life,
accident and disability insurance policies sold in connection with the sale of a vehicle are recognized, net
of anticipated cancellations, as finance and insurance revenue upon execution of the insurance contract.
Commissions from third party service contracts are recognized, net of anticipated cancellations,
as finance and insurance revenue upon sale of the contracts.
We also participate
in
future underwriting profit, pursuant
to retrospective commission
arrangements, recognized in income as earned.
Sales Returns
We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most
parts returns generally occur within one to two weeks from the time of sale, and are not significant. At
December 31, 2008 and 2007, our allowance for parts sales returns totaled $87,000 and $89,000,
respectively. We do not allow the return of new or used vehicles, except where mandated by state law.
Legal Costs
We are a party to numerous legal proceedings arising in the normal course of business. We
accrue for certain legal costs and potential settlement claims related to various proceedings that are
estimable and probable in accordance with SFAS No. 5, “Accounting for Contingencies.”
Debt Issuance Costs and Loan Origination Fees
Debt issuance costs and loan origination fees paid, including incremental direct costs of
completed loan agreements, are deferred and amortized over the life of the debt to which it relates and
are shown as an increase to the related interest expense. During 2008, we wrote off $194,000 of debt
issuance costs as a component of other interest expense in connection with the early retirement of $42.5
million of our senior subordinated convertible notes. See also Note 11.
Warranty
We offer a 60-day, 3000 mile limited warranty on the sale of most retail used vehicles. We
estimate our warranty liability based on the number of vehicles sold and an estimated claim cost per
vehicle based on past experience. Each year, we analyze the warranty charges related to our used
vehicle sales and update our per used vehicle warranty estimate. The estimated warranty is added to cost
of sales upon sale of the related vehicle. At December 31, 2008 and 2007, accrued warranty totaled
$73,000 and $144,000, respectively, and is included in other current liabilities on the consolidated
balance sheets. A roll-forward of our warranty liability for the years ended December 31, 2008, 2007 and
2006 was as follows (in thousands):
Year Ended December 31,
Balance, beginning of period
Warranties issued
Reductions for warranty payments made
Adjustments and changes in estimates
Balance, end of period
2008
144
1,141
(1,212)
-
73
$
$
2007
215
2,737
(2,808)
-
144
$
$
2006
176
2,494
(3,025)
570
215
F-14
Major Supplier and Franchise Agreements
We purchase substantially all of our new vehicles and inventory from various manufacturers at
the prevailing prices charged by auto makers to all franchised dealers. Our overall sales could be
impacted by the auto manufacturers’ inability or unwillingness to supply the dealership with an adequate
supply of popular models.
We enter into agreements (the “Franchise Agreements”) with the manufacturers. The Franchise
Agreements generally limit the location of the dealership and provide the auto manufacturer approval
rights over changes in dealership management and ownership. The auto manufacturers are also entitled
to terminate the Franchise Agreements if the dealership is in material breach of the terms. Our ability to
expand operations depends, in part, on obtaining consents of the manufacturers for the acquisition of
additional dealerships. See also “Goodwill and Other Identifiable Intangible Assets” above.
Stock-Based Compensation
We account for equity instruments exchanged for employee services pursuant to SFAS No.
123R, “Share-Based Payment.” Under the provisions of SFAS No. 123R, stock-based compensation cost
for equity classified awards is measured at the grant date, based on the fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally the vesting period of
the equity award).
The provisions of SFAS No. 123R apply to all awards granted or modified after the date of
adoption, which was January 1, 2006, as well as to the unrecognized expense of awards not yet vested at
the date of adoption. Such expense will be recognized as compensation expense in the periods after the
date of adoption using the Black-Scholes valuation method over the remainder of the requisite service
period. Our unearned compensation balance of $1.1 million as of December 31, 2005 was reclassified
into our Class A common stock upon the adoption of SFAS No. 123R. The cumulative effect of the
change in accounting principle upon adoption of SFAS No. 123R was not material.
Segment Reporting
Based upon definitions contained within SFAS No. 131 “Disclosures about Segments of an
Enterprise and Related Information,” an operating segment is a component of an enterprise:
that engages in business activities from which it may earn revenues and incur expenses;
•
• whose operating results are regularly reviewed by the enterprise’s chief operating
decision maker to make decisions about resources to be allocated to the segment and
assess its performance; and
for which discrete financial information is available.
•
We define the term ‘chief operating decision maker’ to be our executive management group.
Currently, all operations are reviewed on a consolidated basis for budget and business plan performance
by our executive team. Additionally, operational performance at the end of each reporting period is
viewed in the aggregate by our management group. Any decisions related to changes in personnel,
dispatching corporate employees to assist in operational improvement or training, or to allocate other
company resources are made based on the combined results.
We operate in a single operating and reporting segment, automotive retailing. We sell new and
used vehicles, vehicle maintenance and repair services, vehicle parts and financing and insurance
products.
Reclassifications
Reclassifications related to discontinued operations were made to the prior period financial
statements to conform to the current period presentation in accordance with SFAS No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets.” Certain other immaterial reclassifications were also
made to conform to the current period presentation.
F-15
(2)
Net Income Per Share of Class A and Class B Common Stock
We compute net income per share of Class A and Class B common stock in accordance with
SFAS No. 128, “Earnings per Share,” using the two-class method. Under the provisions of SFAS No. 128,
basic net income per share is computed using the weighted average number of common shares
outstanding during the period except that it does not include unvested common shares subject to
repurchase or cancellation. Diluted net income per share is computed using the weighted average
number of common shares and, if dilutive, potential common shares outstanding during the period.
Potential common shares consist of the incremental common shares issuable upon the exercise of stock
options, warrants, restricted shares, restricted stock units, conversion of any convertible senior
subordinated notes and unvested common shares subject to repurchase or cancellation. The dilutive
effect of outstanding stock options, restricted shares, restricted stock units and warrants is reflected in
diluted earnings per share by application of the treasury stock method. The computation of the diluted net
income per share of Class A common stock assumes the conversion of Class B common stock, while the
diluted net income per share of Class B common stock does not assume the conversion of those shares.
Except with respect to voting rights, the rights of the holders of our Class A and Class B common
stock are identical. Our Articles of Incorporation require that the Class A and Class B common stock must
share equally in any dividends, liquidation proceeds or other distribution with respect our common stock
and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon
law provides that amendments to our Articles of Incorporation, which would have the effect of adversely
altering the rights, powers or preferences of a given class of stock, must be approved by the class of
stock adversely affected by the proposed amendment. As a result, and in accordance with EITF Issue No.
03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128,” the
undistributed earnings for each year are allocated based on the contractual participation rights of the
Class A and Class B common shares as if the earnings for the year had been distributed. As the
liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate
basis. Further, as we assume the conversion of Class B common stock in the computation of the diluted
net income per share of Class A common stock, the undistributed earnings are equal to net income for
that computation.
F-16
The following table sets forth the computation of basic and diluted net income (loss) per share of
Class A and Class B common stock (in thousands, except per share amounts):
Year Ended December 31,
Basic EPS
Numerator:
Undistributed basic net
income (loss) from
continuing operations
applicable to common
stockholders
Denominator:
Weighted average number of
shares outstanding used to
calculate basic net income
(loss) per share
Basic undistributed net
income (loss) per share
applicable to common
stockholders
Diluted EPS
Numerator:
Undistributed net income
(loss) from continuing
operations applicable to
common stockholders
2 7/8% convertible senior
subordinated notes
Reallocation of undistributed
earnings as a result of
conversion of convertible
senior subordinated notes
Reallocation of earnings due
to conversion of Class B to
Class A common shares
outstanding
Undistributed diluted net
income (los) applicable to
common stockholders
Denominator
Weighted average number of
shares outstanding used to
calculate diluted net income
(loss) per share
Weighted average number of
shares from assumed
conversion of 2 7/8%
convertible senior
subordinated notes
Weighted average number of
shares from stock options
Conversion of Class B to
Class A common shares
outstanding
Weighted average number of
shares outstanding used to
calculate diluted net income
(loss) per share
Diluted net income (loss) per
share applicable to common
stockholders
Antidilutive Securities
2 7/8% convertible senior
subordinated notes
Shares issuable pursuant to
stock options not included
since they were antidilutive
2008
2007
2006
Class A
Class B
Class A
Class B
Class A
Class B
$(161,720)
$(37,428)
$19,734
$4,708
$27,833
$6,659
16,255
3,762
15,768
3,762
15,723
3,762
$(9.95)
$(9.95)
$1.25
$1.25
$1.77
$1.77
$(161,720)
$(37,428)
$19,734
$4,708
$27,833
$6,659
-
-
(37,428)
-
-
1,517
362
1,530
366
-
585
(585)
831
(831)
4,485
-
6,194
-
$(199,148)
$(37,428)
$26,321
$4,485
$36,388
$6,194
16,255
3,762
15,768
3,762
15,723
3,762
-
-
3,762
-
-
-
2,281
271
3,762
-
-
-
2,255
362
3,762
-
-
-
20,017
3,762
22,082
3,762
22,102
3,762
$(9.95)
$(9.95)
$1.19
$1.19
$1.65
$1.65
2,037
1,892
-
-
-
621
-
-
-
356
-
-
F-17
(3)
Trade Receivables
Trade receivables consisted of the following (in thousands):
December 31,
Trade receivables
Vehicle receivables
Manufacturer receivables
Other
Less: Allowances
Total receivables, net
2008
10,876
13,111
16,492
1,685
42,164
(348)
41,816
$
$
2007
13,234
23,878
21,514
2,678
61,304
(391)
60,913
$
$
Vehicle receivables represent receivables from financial institutions for the portion of the vehicle
sales price financed by the customer.
(4)
Inventories and Related Notes Payable
The new and used vehicle inventory, collateralizing related notes payable, and other inventory
were as follows (in thousands):
December 31,
New and program vehicles
Used vehicles
Parts and accessories
2008
Notes
Payable
337,700
$
Inventory
Cost
338,799
59,407
24,606
422,812
$
$
Inventory
Cost
432,718
136,239
32,802
601,759
$
$
2007
Notes
Payable
451,590
$
The inventory cost is generally reduced by manufacturer holdbacks and incentives, while the
related floorplan notes payable are reflective of the gross cost of the vehicle. The floorplan notes payable,
as shown in the above table, will generally also be higher than the inventory cost due to the timing of the
sale of a vehicle and payment of the related liability.
All new vehicles are pledged to collateralize floorplan notes payable to floorplan providers. The
floorplan notes payable bear interest, payable monthly on the outstanding balance, at a rate of interest
that varies by provider. The new vehicle floorplan notes are payable on demand and are typically paid
upon the sale of the related vehicle. As such, these floorplan notes payable are shown as current
liabilities in the accompanying consolidated balance sheets.
Chrysler Financial, Mercedes Financial, TMCC, Ford Motor Credit Company, GMAC LLC, VW
Credit, Inc., American Honda Finance Corporation and BMW Financial Services NA, LLC have agreed to
floor new vehicles for their respective brands. Chrysler Financial and TMCC serve as the primary lenders
for all other brands. The new vehicle lines are secured by new vehicle inventory of the stores financed by
that lender. Vehicles financed by lenders not directly associated with the manufacturer are classified as
floorplan notes payable: non-trade and are included as a financing activity in our statements of cash
flows. Vehicles financed by lenders directly associated with the manufacturer are classified as floorplan
notes payable and are included as an operating activity.
At December 31, 2008 and 2007, used vehicles and parts and accessories inventory were
pledged to collateralize our working capital, acquisition and used vehicle flooring credit facility.
We evaluate our vehicles at the lower of market value or cost under the pooled approach for
vehicles. In 2008, due to a shift in consumer demand, we determined certain used vehicle aging
categories were in unbalanced quantities. Based on this determination, we recorded a used vehicle
impairment of $0.5 million at December 31, 2008. We did not record any impairment charges on used
vehicle inventories in 2007 and 2006. If the book value of our used vehicles is more than fair value, we
could experience losses on our used vehicles in future periods.
F-18
On November 30, 2006, General Motors (“GM”) completed the sale of a majority equity stake in
GMAC to an investment consortium. Although GMAC continues to be the exclusive provider of GM
financial products and services and continues to have the relationships with GM, GM has indicated in its
public filings that it no longer controls the GMAC entity. As a result, we treat the financing of new vehicles
by GMAC after the change in ownership control as a financing activity.
(5)
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
December 31,
Buildings and improvements
Service equipment
Furniture, signs and fixtures
Less accumulated depreciation – buildings
Less accumulated depreciation – equipment and other
Land
Construction in progress, buildings
Construction in progress, other
2008
162,747
32,259
77,232
272,238
(20,604)
(47,414)
204,220
104,875
37,070
111
346,276
$
$
$
$
2007
222,413
41,077
99,532
363,022
(20,628)
(46,126)
296,268
148,086
13,520
3,872
461,746
As discussed in Note 1, these assets, considered long-lived assets held and used, are reviewed
for impairment whenever events or circumstances indicate that the carrying amount of assets may not be
recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets.” We evaluate recoverability of assets to be held and used by comparing the carrying amount of
an asset to future net undiscounted cash flows, including possible disposition, associated with the asset.
If such assets are considered to be impaired, the impairment to be recognized is measured as the
amount by which the carrying amount of the assets exceeds the fair value of the assets. In order to
determine the fair value of the assets, we utilize market data, including appraisals and comparable sales,
or our disposition history of similar assets.
As a result of the adverse change in the business climate and our reduced earnings and cash
flow forecast, we tested certain long-lived assets for recoverability in the second quarter of 2008. This
impairment test was performed just prior to performing the first step of the goodwill impairment test as
discussed in Note 6. We also performed the test on certain long-lived assets in the fourth quarter of 2008.
During 2008, we recorded impairment charges totaling $7.0 million against long-lived assets held
and used. We also recorded $5.1 million of impairment charges as a component of selling, general and
administrative, for total long-lived asset impairment charges of $12.1 million in 2008 as follows:
Real estate
Equipment
Terminated construction projects
Other
$
$
4,503
977
4,527
2,081
12,088
We did not record any impairment charges on assets to be held and used in 2007 or 2006.
Depending upon economic conditions, ongoing store performance, manufacturer financial viability, cash
flows from operations and overall market capitalization, we may be required to record additional asset
impairment charges in future periods.
F-19
As part of our restructuring plan announced in the second quarter of 2008, we identified certain
non-operating property held for future development and our company airplane as assets targeted for sale.
In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we
concurrently determined that these assets met the criteria to be classified as ‘held for sale.’ We evaluated
these assets in the third quarter of 2008 and concluded that the classification as ‘held for sale’ remained
appropriate.
However, as a result of the declining economic environment, our success in generating cash
through other transactions and our unwillingness to continue to reduce the price of the assets to affect a
sale, in the fourth quarter of 2008, we determined that we no longer continued to meet the criteria of
SFAS No. 144. Therefore, we reclassified the assets as ‘held and used’ on our balance sheet. Pursuant
to the requirements of changes to a plan of sale under SFAS No. 144, we individually measured the
assets at the lower of their carrying amount before classification as ‘held for sale,’ adjusted for any
depreciation expense or impairment losses that would have been recognized had the assets been
continuously recognized as ‘held and used,’ or fair value at the date of the subsequent decision not to
sell. As a result of this evaluation, depreciation expense of approximately $0.1 million was recorded. No
additional impairment charges were recorded.
(6)
Goodwill and Other Intangible Assets
Goodwill
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” we review our
goodwill on October 1 of each year. The impairment test is a two-step process. The first step identifies
potential impairments by comparing the calculated fair value of a reporting unit with its book value. If the
fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step
is not necessary. If the carrying value exceeds the fair value, the second step includes determining the
implied fair value through further market research. The implied fair value of goodwill is then compared
with the carrying amount to determine if an impairment loss is recorded.
We calculate the fair value of our reporting unit by applying a fair-value based test using the
Adjusted Present Value method (“APV”). Under the APV method, future cash flows are based on recently
prepared budget forecasts and business plans to estimate the future economic benefits that the reporting
unit will generate. An estimate of the appropriate discount rate is utilized to convert the future economic
benefits to their present value equivalent. Growth rates are calculated for five years based on
management’s forecasted sales projections. The growth rates used for periods beyond five years are
calculated based on the U.S. Department of Labor, Bureau of Labor Statistics for historical consumer
price index data. The discount rate applied to the future cash flows factors in an equity risk premium,
small stock risk premium, a beta, and a risk-free rate. Market values for real estate are estimated based
on information available on each piece of real estate, including historical outside appraisals obtained on
the real estate and an estimate of market value based on various factors including property tax
assessments, local and regional rent factors, or other information to determine fair market value.
During the second quarter of 2008, we elected to place 13 stores in discontinued operations,
closing one location and marketing 12 for disposal. As part of this election, we reclassified into
discontinued operations $39.5 million of goodwill assigned to the 12 stores. The amount of goodwill
assigned to a discontinued operation is generally determined based on the subject dealership’s fair value
as measured by discounted cash flows as it relates to the discounted cash flows of the reporting unit.
After this reclassification, and based on our decision to dispose of approximately 10% of our
stores, an adverse change in the business climate, our reduced earnings and cash flow forecast and a
significant continuing decline in our market capitalization, we determined that our goodwill required an
interim impairment test.
F-20
The first step of the impairment test showed that the fair value of our reporting unit was less than
its carrying amount, indicating a potential impairment. We performed the second step of the impairment
test, concluding that the implied fair value of goodwill was reduced to zero. This resulted in an impairment
of the entire balance of goodwill totaling $272.5 million.
The roll-forward of goodwill was as follows (in thousands):
Year Ended December 31,
Balance, beginning of year
Goodwill acquired and post acquisition adjustments
Goodwill transferred to discontinued operations
Goodwill impairments
Balance, end of year
2008
311,527
428
(39,452)
(272,503)
-
$
$
2007
307,424
12,608
(8,505)
-
311,527
$
$
Other Intangible Assets
At December 31, 2008 and 2007, other intangible assets included the value of franchise
agreements, non-compete agreements and customer lists. The value attributed to franchise agreements
has an indefinite useful life and non-compete agreements and customer lists are amortized on a straight-
line basis over the life of the agreements, typically 3 to 5 years.
The gross amount of other intangible assets and the related accumulated amortization for non-
compete agreements and customer lists were as follows (in thousands):
December 31,
Franchise value
Non-compete agreements and customer lists
Accumulated amortization
Net non-compete agreements and customer lists
Total other intangible assets, net
2008
41,931
$
2007
68,863
145
(68)
77
42,008
$
135
(52)
83
68,946
$
$
Amortization expense related to the non-compete agreements and customer lists is not material.
Based on the same triggering events discussed above for goodwill, we determined that an
impairment test for franchise values was required in the second quarter of 2008. We also performed an
impairment test in the fourth quarter of 2008. We test our franchise values in accordance with SFAS No.
142, “Goodwill and Other Intangible Assets.”
We use an APV method to calculate the fair value of future cash flows associated with our
franchises. Future cash flows are based on recently prepared forecasts and business plans to estimate
the future economic benefits that the store will generate. We estimate the appropriate discount rate to
convert the future economic benefits to their present value equivalent. Growth rates are calculated for five
years based on management’s forecasted sales projections. The growth rates used for periods beyond
five years are calculated based on the U.S. Department of Labor, Bureau of Labor Statistics for historical
consumer price index data. The discount rate applied to the future cash flows factors in an equity risk
premium, small stock risk premium, a beta and a risk-free rate.
Consideration is also given to the value that market participants attribute to each type of franchise
(domestic, import or luxury store) based on current market transactions. The market value of domestic
stores has been negatively impacted by market conditions and a historically high truck and SUV mix,
while the market value of import or luxury stores continues to support the carrying amount of franchise
value, where applicable.
F-21
In cases where the estimated fair value of the franchise was less than its carrying value, an
impairment charge was taken. A partial or full impairment of the franchise value totaling $16.4 million was
recorded in the second quarter of 2008 on 14 franchises, including seven Chrysler, six General Motors
and one Kia. This charge is recorded in other asset impairments in the consolidated statement of
operations.
A roll-forward of our other intangible assets was as follows (in thousands):
Year Ended December 31,
Balance, beginning of year
Intangible assets acquired
Amortization expense
Intangible assets transferred to discontinued operations
Intangible asset impairments
Balance, end of year
$
$
2008
68,946
175
(34)
(10,670)
(16,409)
42,008
$
$
2007
69,054
4,222
(33)
(4,297)
-
68,946
At December 31, 2008 and 2007, other identifiable intangible assets were $42.0 million and $68.9
million, respectively, which included $41.9 million and $68.9 million, respectively, of franchise value. A
future decline in store performance, change in projected growth rates, manufacturer insolvency, brand
termination, other margin assumptions or changes in interest rates could result in a potential impairment
of one or more of our franchises.
(7)
Trade Payables
Trade payables consisted of the following (in thousands):
December 31,
Trade payables
Lien payables
Manufacturer payables
Other
Total trade payables
2008
7,613
5,560
3,940
4,458
21,571
$
$
2007
11,976
14,005
6,119
6,615
38,715
$
$
Lien payables represent amounts owed to financial institutions for customer vehicle trade-ins.
(8)
Derivative Financial Instruments
We have entered into interest rate swaps to manage the variability of our interest rate exposure,
thus fixing a portion of our interest expense in a rising or falling rate environment. We do not enter into
derivative instruments for any purpose other than to manage interest rate exposure. That is, we do not
engage in interest rate speculation using derivative instruments. Typically, we designate all interest rate
swaps as cash flow hedges.
As of December 31, 2008, we had outstanding the following interest rate swaps with U.S. Bank
Dealer Commercial Services:
• effective March 9, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.25%
per annum, variable rate adjusted on the 1st and 16th of each month;
• effective March 18, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.10%
per annum, variable rate adjusted on the 1st and 16th of each month;
• effective June 16, 2006 – a ten year, $25 million interest rate swap at a fixed rate of 5.587%
per annum, variable rate adjusted on the 1st and 16th of each month;
• effective January 26, 2008 – a five-year, $25 million interest rate swap at a fixed rate of
4.495% per annum, variable rate adjusted on the 26th of each month;
• effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495%
per annum, variable rate adjusted on the 1st and 16th of each month; and
• effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495%
per annum, variable rate adjusted on the 1st and 16th of each month.
F-22
We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month
LIBOR rate at December 31, 2008 was 0.44% per annum as reported in the Wall Street Journal.
We apply hedge accounting based upon the criteria established by SFAS No. 133, ‘‘Accounting
for Derivative Instruments and Hedging Activities,’’ and record all derivative instruments on the balance
sheet at fair value. The fair value of our interest rate swap agreements represents the estimated receipts
or payments that would be made to terminate the agreements. These amounts related to our cash flow
hedges are recorded as deferred gains or losses in our consolidated balance sheet with the offset
recorded in accumulated other comprehensive income, net of tax. Changes to the fair value of
discontinued cash flow hedges are recognized into earnings as a component of floorplan interest
expense. At December 31, 2008 and 2007, the net fair values of all of our agreements totaled $(10.8)
million and $(1.7) million, respectively, which were recorded on our balance sheet as components of other
assets and liabilities. The estimated amount expected to be reclassified into earnings within the next
twelve months is $4.9 million at December 31, 2008.
As inventory levels fell and future levels of floorplan debt were expected to decrease, one cash
flow hedge was discontinued at the end of the third quarter of 2008 due to the forecasted transaction no
longer being probable. Additionally, in response to expected decreases in debt levels, we discontinued two
cash flow hedges and de-designated and re-designated certain other swaps in the fourth quarter of 2008.
The change in the market value of undesignated swaps resulted in a $0.5 million loss which was
recognized in earnings as a component of floorplan interest expense in the fourth quarter of 2008.
Following the discontinuation and de-designation of cash flow hedges, approximately $1.2 million remains
as a component of accumulated other comprehensive income (loss) to be recognized over the remaining
life of these swaps
During 2006, interest rate swaps were not designated as cash flow hedges and changes in
market value of the interest rate swaps were included in floorplan interest expense and totaled a loss of
$1.9 million. Although these interest rate swaps were not designated as cash flow hedges, they did serve
to economically hedge interest costs.
On a quarterly basis, we assess the effectiveness of our hedges both retrospectively and
prospectively using regression analysis under the hypothetical derivative method. Additional qualitative
considerations are given to assess effectiveness prospectively and support the expectation of the hedge to
be highly effective. Ineffectiveness occurs when the amount of change in fair market value of the swap is
greater than the change in fair market value of the hypothetical derivative. Any ineffectiveness will be
reflected in the floorplan interest expense in our statement of operation in the period in which it occurs. In
2008 and 2007, we recorded $363,000 and $73,000, respectively, of ineffectiveness. We did not record
any ineffectiveness in 2006.
(9)
Fair Value Measurements
Effective January 1, 2008, we adopted the provisions of SFAS No. 157, “Fair Value
Measurements,” for our financial assets and liabilities measured at fair value. In February 2008, the FASB
issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delayed the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis. We are currently evaluating the potential impact of applying the provisions of SFAS No. 157 to our
nonfinancial assets and liabilities beginning in 2009, including (but not limited to) the valuation of our
single reporting unit for the purpose of assessing goodwill impairment should we recognize goodwill
following subsequent store purchases, the valuation of our franchise rights when assessing franchise
impairments, the valuation of property and equipment when assessing long-lived asset impairment, and
the valuation of assets acquired and liabilities assumed in future business combinations.
F-23
Under SFAS No. 157, the fair value is the price that would be received to sell an asset or paid to
transfer a liability assuming an orderly transaction in the most advantageous market at the measurement
date. The price that would be received or paid must be explained in terms of valuation methodology and
the most advantageous market must consider transaction costs (but not include them in the fair value).
SFAS No. 157 also establishes a fair value hierarchy, which requires an entity to maximize the use of
observable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
•
•
•
Level 1 – quoted prices in active markets for identical securities;
Level 2 – other significant observable inputs, including quoted prices for similar securities,
interest rates, prepayment speeds, credit risk, etc.; and
Level 3 – significant unobservable inputs, including our own assumptions in determining fair
value.
The inputs or methodology used for valuing financial assets and liabilities are not necessarily an
indication of the risk associated with investing in them.
We value our interest rate swaps pursuant to SFAS No. 157. For recognizing the most
appropriate value, the highest and best use of our interest rate swaps are measured using an in-
exchange valuation premise that considers the assumptions that market participants would use in pricing
the swaps.
We use the income approach to determine the fair value of our interest rate swaps using
observable Level 2 market expectations at measurement date and standard valuation techniques to
convert future amounts to a single present amount (discounted) assuming that participants are motivated,
but not compelled to transact. Level 2 inputs for the swap valuations are limited to quoted prices for
similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years)
and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash
and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical
expedient for fair value measurements. Key inputs, including the cash rates for very short term, futures
rates for up to two years and LIBOR swap rates beyond the derivative maturity are used to predict future
reset rates to discount those future cash flows to present value at measurement date. Inputs are collected
from Bloomberg on the last market day of the period. The same rates are used to determine the rate used
to discount the future cash flows. The valuation of the interest rate swaps also takes into consideration
our own as well as the counterparty’s risk of non-performance under the contract.
Following are the disclosures related to our financial assets and liabilities pursuant to SFAS No.
157 (in thousands):
Interest rate swap liabilities
December 31, 2008
Fair Value
10,835
$
Input Level
Level 2
Our adoption of the provisions of SFAS No. 157 on January 1, 2008, with respect to our interest
rate swaps measured at fair value, did not have a material impact on our fair value measurements or our
financial statements for 2008.
Effective January 1, 2008, we also adopted the provisions of SFAS No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many
financial instruments and certain other items at fair value. We have elected not to measure any of our
current eligible financial assets or liabilities at fair value upon adoption.
F-24
(10)
Financing Transactions
During 2008, we received proceeds of $91.2 million through mortgage financing and sale-
leaseback transactions of real estate. Two financing transactions were sale-leasebacks. As of December
31, 2008, one of these transactions does not qualify for sale recognition under SFAS No. 66, “Accounting
for Sales of Real Estate,” due to continuing involvement by us related to certain environmental
remediation. See Note 17.
(11)
Lines of Credit and Long-Term Debt
Working Capital, Acquisition and Used Vehicle Credit Facility
We have a working capital, acquisition and used vehicle credit facility (the “Credit Facility”) with
U.S. Bank National Association, DaimlerChrysler Financial Services Americas LLC (“Chrysler Financial”),
DCFS U.S.A. LLC (“Mercedes Financial”) and Toyota Motor Credit Corporation (“TMCC”).
In August 2008, we amended the Credit Facility, effective as of June 30, 2008. This amendment
reduced our minimum net worth ratio and lowered our required covenant performance ratios through the
second quarter of 2009, to allow us to operate more effectively in the current economic environment.
Beginning in the third quarter of 2009, the covenant performance ratio requirements increase on a
quarterly basis so that by the fourth quarter of 2009, they will return to the levels mandated in the original
agreement.
Due to the temporary slowing of our acquisition plans, and in an effort to reduce the fees
associated with unutilized credit, the total amount available on the line was reduced from $300 million to
$150 million in connection with the fourth amendment. As part of the fourth amendment, we received
approval to dispose of approximately $150 million in assets, including assets currently held for sale. The
schedule of assets approved for disposal was updated in a fifth amendment to the Credit Facility in
December 2008.
In addition, under the fourth amendment, cash dividends were limited to $0.05 per share in the
third quarter of 2008 and are permitted, based on a formula, beyond that quarter. Repurchases by us of
our common stock are not permitted without the prior approval of our lenders. The interest rate, which is
variable based on the one month LIBOR plus a spread, increased. This increase resulted in additional
interest expense of approximately $0.5 million, or $0.03 per share, in 2008. We were assessed a $0.2
million change fee on the amendment and the maturity date was revised to April 30, 2010.
Loans are guaranteed by all of our subsidiaries and are secured by new vehicle inventory, used
vehicle and parts inventory, equipment other than fixtures, deposit accounts, accounts receivable,
investment property and other intangible personal property. Capital stock and other equity interests of our
subsidiary stores and certain other subsidiaries are excluded. The lenders’ security interest in new vehicle
inventory is subordinated to the interests of floorplan financing lenders, including Chrysler Financial,
Mercedes Financial and TMCC. The agreement for this facility provides for events of default that include
nonpayment, breach of covenants, a change of control and certain cross-defaults with other
indebtedness. In the event of a default, the agreement provides that the lenders may declare the entire
principal balance immediately due, foreclose on collateral and increase the applicable interest rate to the
Credit Facility rate plus 3 percent, among other remedies.
New Vehicle Flooring
Chrysler Financial, Mercedes Financial, TMCC, Ford Motor Credit Company, GMAC LLC, VW
Credit, Inc., American Honda Finance Corporation and BMW Financial Services NA, LLC have agreed to
floor new vehicles for their respective brands. Chrysler Financial and TMCC serve as the primary lenders
for all other brands. The new vehicle lines are secured by new vehicle inventory of the stores financed by
that lender. Vehicles financed by lenders not directly associated with the manufacturer are classified as
floorplan notes payable: non-trade and are included as a financing activity in our statements of cash
flows. Vehicles financed by lenders directly associated with the manufacturer are classified as floorplan
notes payable and are included as an operating activity.
F-25
Debt Covenants
We are subject to certain financial and restrictive covenants for all of our debt agreements. The
Credit Facility agreement includes financial and restrictive covenants typical of such agreements including
requirements to maintain a minimum total net worth, minimum current ratio, fixed charge coverage ratio
and cash flow leverage ratio. The covenants restrict us from incurring additional indebtedness, making
investments, selling or acquiring assets and granting security interests in our assets.
We utilize an internal forecast to project compliance with our covenants. Top line revenue
numbers were significantly worse than our internal forecast had anticipated for the second half of 2008.
Despite this negative development, we were able to improve our vehicle margins and reduce our SG&A
and other variable costs in-line with these changes. As a result, our overall attainment to forecasted
results was near expectation.
The fourth amendment to our Credit Facility stipulates a minimum net worth of not less than $245
million, with an additional reduction of up to $30 million related to any intangible asset impairment
charges. This net worth covenant is adjusted up by 75% of any net income amounts, and is not adjusted
down based on net loss amounts. Our fixed charge coverage ratio cannot be less than 1.0 to 1, and our
cash flow leverage ratio cannot be more than 3.0 to 1.
As of December 31, 2008, our minimum net worth was approximately $248.3 million, our fixed
charge coverage ratio was 1.10 to 1, our cash flow leverage ratio was 2.45 to 1 and our minimum current
ratio was 1.25 to 1. Based on this data, we were in compliance with the four financial covenants set forth
in our Credit Facility. There is a risk of prospective non-compliance with our minimum current ratio
requirement. See “Concentrations of Risk and Uncertainties” in Note 1.
Sale of GMAC
On November 30, 2006, General Motors (“GM”) completed the sale of a majority equity stake in
GMAC to an investment consortium. Although GMAC continues to be the exclusive provider of GM
financial products and services and continues to have the relationships with GM, a majority equity stake
in GMAC has been sold to an independent third-party and GM has indicated in its public filings that it no
longer controls the GMAC entity. As a result, we are treating new vehicles financed by GMAC after the
change in ownership control as floorplan notes payable: non-trade and related changes as a financing
activity in our statements of cash flows. Vehicles financed prior to this change in control continue to be
classified as floorplan notes payable: trade, with related changes reflected as operating activities in our
statements of cash flows, since these GMAC vehicle financings occurred while GM retained control of
GMAC as its captive finance subsidiary.
Amounts Outstanding and Availability
Interest rates on all of the above facilities ranged from 1.59% to 4.75% at December 31, 2008.
Amounts outstanding on the lines at December 31, 2008, together with amounts remaining available
under such lines were as follows (in thousands):
New and program vehicle lines
Working capital, acquisition and used vehicle line
Outstanding at
December 31, 2008
$337,700
86,000
$423,700
Remaining Availability as
of December 31, 2008
$ - (1)
34,747(2) (3)
$34,747
(1) There are no formal limits on the new and program vehicle lines with certain lenders.
(2) Reduced by $349 for outstanding letters of credit.
(3) The amount available on the line is limited based on a borrowing base calculation and fluctuates monthly.
F-26
•
2.875% Senior Subordinated Convertible Notes due 2014
At December 31, 2008 and 2007, we had outstanding 2.875% senior subordinated convertible
notes (the “Notes”) due in 2014 of $42.5 million and $85.0 million, respectively. We will pay contingent
interest on the Notes during any six-month interest period beginning May 1, 2009, in which the trading
price of the notes for a specified period of time equals or exceeds 120% of the principal amount of the
notes. The notes are currently convertible into shares of our Class A common stock at a price of $36.09
per share upon the satisfaction of certain conditions and upon the occurrence of certain events as follows:
if, prior to May 1, 2009, and during any calendar quarter, the closing sale price of our
common stock exceeds 120% of the conversion price for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the preceding calendar quarter;
if, after May 1, 2009, the closing sale price of our common stock exceeds 120% of the
conversion price;
if, during the five business day period after any five consecutive trading day period in which
the trading price per $1,000 principal amount of notes for each day of such period was less
than 98% of the product of the closing sale price of our common stock and the number of
shares issuable upon conversion of $1,000 principal amount of the notes;
if the notes have been called for redemption; or
•
•
•
• upon certain specified corporate events.
A declaration and payment of a dividend in excess of $0.08 per share per quarter will result in
additional adjustments in the conversion rate for the notes if such cumulative adjustment exceeds 1% of
the current conversion rate. The January and July 2008 dividends resulted in changes in the current
conversion rate per $1,000 of notes, which is currently 27.7098.
The notes are redeemable at our option beginning May 6, 2009 at the redemption price of 100%
of the principal amount plus any accrued interest. The holders of the notes can require us to repurchase
all or some of the notes on May 1, 2009 and upon certain events constituting a fundamental change or a
termination of trading. A fundamental change is any transaction or event in which all or substantially all of
our common stock is exchanged for, converted into, acquired for, or constitutes solely the right to receive,
consideration that is not all, or substantially all, common stock that is listed on, or immediately after the
transaction or event, will be listed on, a United States national securities exchange. A termination of
trading will have occurred if our common stock is not listed for trading on a national securities exchange
or the Nasdaq National Market.
The following table summarizes our repurchases to date, all of which were made on the open
market:
Purchase
Date
August 2008
October 2008
October 2008
December 2008
$
$
Face
Amount
Purchased
16.0 million
17.4 million
4.6 million
4.5 million
42.5 million
Purchase
Price
per $100
$89.0
$86.5
$81.0
$89.0
Total
Purchase
Price
14.4 million
15.1 million
3.7 million
4.0 million
37.2 million
$
$
Gain on Early
Retirement
of Debt
1.6 million
2.2 million
0.9 million
0.5 million
5.2 million
$
$
The gain of $5.2 million on the retirement of the debt through December 31, 2008, is recorded as
a component of other income, net on the consolidated statement of operations.
F-27
Summary
Long-term debt consisted of the following (in thousands):
December 31,
Variable Rate Debt:
Working capital, acquisition and used vehicle floorplan line of credit, expiring April 30, 2010
Mortgages payable in monthly installments of $455, including interest between 2.2% and 3.7%,
maturing through September 2028; secured by land and buildings
Notes payable in monthly installments of $19, including interest between 0.0% and 7.5%, maturing
at various dates through 2009; secured by vehicles leased to others
Total Variable Rate Debt
Fixed Rate Debt:
2.875% senior subordinated convertible notes, due May 2014 with interest due semi-annually in
May and November of each year
Mortgages payable in monthly installments of $916, including interest between 4.7% and 8.2%,
maturing through September 2027; secured by land and buildings
Notes payable related to acquisitions, with interest rates between 5.0% and 7.0%, maturing at
various dates through May 2018
Sale-leasebacks accounted for as financings, net of interest of $2,493, with monthly lease
payments of $69
Capital lease obligations, net of interest of $156, with monthly lease payments of $25
Total Fixed Rate Debt
Total Long-Term Debt
Less current maturities
2008
2007
$
86,000 $
184,000
68,063
31,109
5,590
159,653
4,646
219,755
42,500
85,000
124,767
156,359
6,652
6,941
9,493
753
184,165
343,818
(78,634)
265,184 $
-
767
249,067
468,822
(13,327)
455,495
$
In addition to the amounts discussed above, we have $48.7 million of mortgages payable, $3.1
million of capital lease obligations and $56.4 million of floorplan notes payable that are included as a
component of liabilities held for sale at December 31, 2008. See Note 19.
The schedule of future principal payments on long-term debt as of December 31, 2008 was as
follows (in thousands):
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total principal payments
$
$
78,634
106,956
18,255
21,239
31,413
87,321
343,818
(12) Stockholders’ Equity
Class A and Class B Common Stock
The shares of Class A common stock are not convertible into any other series or class of our
securities. Each share of Class B common stock, however, is freely convertible into one share of Class A
common stock at the option of the holder of the Class B common stock. All shares of Class B common
stock shall automatically convert to shares of Class A common stock (on a share-for-share basis, subject
to the adjustments) on the earliest record date for an annual meeting of our stockholders on which the
number of shares of Class B common stock outstanding is less than 1% of the total number of shares of
common stock outstanding. Shares of Class B common stock may not be transferred to third parties,
except for transfers to certain family members and in other limited circumstances.
Holders of Class A common stock are entitled to one vote for each share held of record and
holders of Class B common stock are entitled to ten votes for each share held of record. The Class A
common stock and Class B common stock vote together as a single class on all matters submitted to a
vote of stockholders.
F-28
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our
Class A common stock. Through December 31, 2008, we have purchased a total of 479,731 shares
under the repurchase program, none of which were purchased during 2008. We may continue to
repurchase shares from time to time in the future as conditions warrant and subject to approval by our
lenders.
(13)
Income Taxes
Income tax expense (benefit) from continuing operations was as follows (in thousands):
Year Ended December 31,
Current:
Federal
State
Deferred:
Federal
State
Total
2008
2007
2006
$
$
7,010
961
7,971
(87,342)
(12,332)
(99,674)
(91,703)
$
$
3,752
622
4,374
10,836
1,275
12,111
16,485
$
$
14,638
1,909
16,547
4,427
623
5,050
21,597
At December 31, 2008, we had income taxes receivable totaling $18.2 million and, at December
31, 2007, we had income taxes receivable totaling $3.5 million.
Individually significant components of the deferred tax assets and liabilities are presented below
(in thousands):
December 31,
Deferred tax assets:
Deferred revenue and cancellation reserves
Allowance and accruals
Goodwill
Total deferred tax assets
Deferred tax liabilities:
Inventories
Interest expense
Goodwill
Property and equipment, principally due to
differences in depreciation
Prepaids and property taxes
Total deferred tax liabilities
Total
2008
7,391
7,822
61,363
76,576
(4,693)
(1,188)
-
(22,234)
(1,913)
(30,028)
46,548
$
$
2007
6,510
7,308
-
13,818
(5,292)
(7,765)
(40,301)
(20,150)
(1,824)
(75,332)
(61,514)
$
$
In 2008, 2007 and 2006, income tax benefits attributable to employee stock option transactions of
$368,000, $283,000 and $382,000, respectively, were allocated to stockholders’ equity.
In connection with our reduced operating performance, goodwill impairment and other asset
impairment charges in 2008, we had a total of $46.5 million of deferred tax assets, net at December 31,
2008.
F-29
Pursuant to SFAS No. 109, “Accounting for Income Taxes,” we considered whether it is more
likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon future taxable income during the periods in which
those temporary differences become deductible. We consider the scheduled reversal of deferred tax
liabilities (including the impact of available carryback and carryforward periods), projected future taxable
income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable
income, projections for future taxable income over the periods in which the deferred tax assets are
deductible, and available tax-planning strategies, we believe it is more likely than not that we will realize
the benefits of these deductible differences. At December 31, 2008, we have not recorded any valuation
allowance on deferred tax assets. However, a valuation allowance could be recorded in the future if
estimates of taxable income during the carryforward period are reduced.
In addition, our 2008 reported gross earnings on federal and state income tax filings will be a
loss. We have utilized the two year carryback provided by federal tax law. For state tax purposes, certain
states either prohibit carryback claims, or our gross losses for state tax purposes eclipse the allowable
carryback amount. Therefore, we have a number of state tax carryforward amounts totaling approximately
$723,000, tax affected, with expiration dates through 2029.
The reconciliation between amounts computed using the federal income tax rate of 35% and our
income tax benefit (expense) from continuing operations for 2008, 2007 and 2006 is shown in the
following tabulation (in thousands):
Year Ended December 31,
Computed “expected” tax (benefit) expense
State taxes, net of federal income tax benefit
Permanent goodwill impairment
Other
Income tax (benefit) expense
2008
(101,798) $
(8,745)
18,939
(99)
(91,703) $
2007
14,324
1,244
-
917
16,485
$
$
$
$
2006
19,631
1,610
-
356
21,597
We did not have any unrecognized tax benefits at December 31, 2008 or 2007. No interest or
penalties were included in our results of operations during 2008, 2007 or 2006, and we had no accrued
interest or penalties at December 31, 2008 or 2007.
Open tax years at December 31, 2008 included the following:
Federal
15 states
2004 - 2007
2003 - 2007
(14)
401(k) Profit Sharing Plan
We have a defined contribution 401(k) plan and trust covering substantially all full-time
employees. The annual contribution to the plan is at the discretion of our Board of Directors. Contributions
of $0.2 million, $1.3 million and $1.2 million were recognized for the years ended December 31, 2008,
2007 and 2006, respectively. Employees may contribute to the plan as they meet certain eligibility
requirements.
(15)
Stock Incentive Plans
2003 Stock Incentive Plan
Our 2003 Stock Incentive Plan (the “2003 Plan”) allows for the granting of up to a total of 2.2
million nonqualified stock options and shares of restricted stock to our officers, key employees and
consultants. We also have options outstanding and exercisable pursuant to their original terms pursuant
to prior plans. Options canceled under prior plans do not return to the pool of options available for grant
under the 2003 Plan. All of our option plans are administered by the Compensation Committee of the
F-30
Board and permit accelerated vesting of outstanding options upon the occurrence of certain changes in
control. Options become exercisable over a period of up to five years from the date of grant with
expiration dates up to ten years from the date of grant and at exercise prices of not less than market
value, as determined by the Board. Beginning in 2004, the expiration date of options granted was
reduced to six years. At December 31, 2008, 205,687 shares of Class A common stock were available for
future grants.
Activity under our stock incentive plans was as follows:
Balance, December 31, 2007
Granted
Forfeited
Expired
Exercised
Balance, December 31, 2008
Balance, December 31, 2007
Granted
Vested
Forfeited
Balance, December 31, 2008
Shares Subject
to Options
1,248,915
1,113,580
(186,285)
(141,953)
(27,000)
2,007,257
Non-Vested
Stock Grants
145,667
102,066
(7,915)
(75,110)
164,708
Weighted Average
Exercise Price
$21.14
6.60
17.55
19.25
1.00
13.81
Weighted Average
Grant Date Fair Value
$29.37
8.98
16.01
21.79
20.83
Certain information regarding options outstanding as of December 31, 2008 was as follows:
Number
Weighted average per share
exercise price
Aggregate intrinsic value
Weighted average remaining
contractual term
Options
Outstanding
2,007,257
$13.81
$63,000
3.9 years
Options
Exercisable
608,577
$16.01
$63,000
2.2 years
As of December 31, 2008, unrecognized stock-based compensation related to outstanding, but
unvested stock option and stock awards was $3.4 million, which will be recognized over the weighted
average remaining vesting period of 2.2 years.
1998 Employee Stock Purchase Plan
In 1998, the Board of Directors and the stockholders approved the implementation of an
Employee Stock Purchase Plan (the “Purchase Plan”), and, as amended in May 2008, have reserved a
total of 3.45 million shares of Class A common stock for issuance thereunder. The Purchase Plan expires
December 31, 2012. The Purchase Plan is intended to qualify as an “Employee Stock Purchase Plan”
under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the
Compensation Committee of the Board. Eligible employees are entitled to defer up to 10% of their base
pay for the purchase of stock up to $25,000 of fair market value of our Class A common stock annually.
The purchase price is equal to 85% of the fair market value at the end of the purchase period.
During 2008, a total of 708,128 shares were purchased under the Purchase Plan at a weighted average
price of $6.24 per share, which represented a weighted average discount from the fair market value of
$1.10 per share. As of December 31, 2008, 757,093 shares remained available for purchase under the
Purchase Plan.
F-31
Stock-Based Compensation
We estimate the fair value of stock options using the Black-Scholes valuation model. This
valuation model takes into account the exercise price of the award, as well as a variety of significant
assumptions. We believe that the valuation technique and the approach utilized to develop the underlying
assumptions are appropriate in calculating the fair values of our stock options. Estimates of fair value are
not intended to predict actual future events or the value ultimately realized by persons who receive equity
awards.
Compensation expense related to our Purchase Plan is calculated based on the 15% discount
from the per share market price on the date of grant. Compensation expense related to non-vested stock
is based on the intrinsic value on the date of grant as if the stock is vested. Compensation expense
related to stock options is valued using the Black-Scholes valuation model with following assumptions:
Year Ended December 31,
Risk-free interest rates(1)
Dividend yield(2)
Expected term(3)
Volatility(4)
Discount for post vesting restrictions
2008
2.37% - 3.27%
3.21% - 7.43%
4.6 – 5.8 years
42.41% - 47.93%
0.0%
2007
4.55%
1.98%
5.8 years
33.53%
0.0%
2006
4.77%
1.51%
4.7 – 5.3 years
35.31%
0.0%
(1) The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for a period
equal to the expected term of the stock option.
(2) The dividend yield is calculated as a ratio of annualized expected dividend per share to the market value of our common stock
on the date of grant.
(3) The expected term is calculated based on the observed and expected time to post-vesting exercise behavior of separate
identifiable employee groups.
(4) The expected volatility is estimated based on a weighted average of historical volatility of our common stock.
We amortize stock-based compensation on a straight-line basis over the vesting period of the
individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock
options will come from newly issued shares.
Certain information regarding our stock-based compensation was as follows:
Year Ended December 31,
Weighted average grant-date per share fair value of share options granted
Per share intrinsic value of non-vested stock granted
Weighted average per share discount
for compensation expense
$
recognized under the Purchase Plan
Total intrinsic value of share options exercised
Fair value of non-vested shares that vested during the period
Stock-based compensation recognized in results of operations (all as a
component of selling, general and administrative expense)
Tax benefit recognized in statement of operations
Cash received from options exercised and shares purchased under all
share-based arrangements
Tax deduction realized related to stock options exercised
2008
2007
1.56 $
8.98
9.26 $
28.24
0.82
73,000
63,000
1.7 million
378,000
4.4 million
208,000
2.92
0.9 million
152,000
3.4 million
769,000
6.5 million
314,000
2006
10.93
31.73
4.37
1.1 million
142,000
3.5 million
714,000
6.8 million
424,000
F-32
(16)
Dividend Payments
For the period January 1, 2006 through December 31, 2008, we declared and paid dividends as
follows:
Quarter related to:
2005
Fourth quarter
2006
First quarter
Second quarter
Third quarter
Fourth quarter
2007
First quarter
Second quarter
Third quarter
Fourth quarter
2008
First quarter
Second quarter
Third quarter
Dividend
amount per
share
Total
amount of
dividend (in
thousands)
$0.12
$2,338
$0.12
0.14
0.14
0.14
$0.14
0.14
0.14
0.14
$0.14
0.14
0.05
$2,354
2,754
2,738
2,745
$2,749
2,762
2,762
2,776
$2,806
2,837
1,025
No dividends were declared or paid related to the fourth quarter of 2008.
(17)
Commitments and Contingencies
Leases
The minimum lease payments under our operating leases after December 31, 2008 are as
follows (in thousands):
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total minimum lease payments
Less: sublease rentals
$
21,567
18,247
15,533
13,334
12,731
93,467
174,879
(4,121)
$ 170,758
Rental expense, net of rent income, for all operating leases was $17.0 million, $17.0 million and
$14.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. These amounts are
included as a component of selling, general and administrative expenses in our statements of operations.
Primarily in connection with dispositions of dealerships, we occasionally assign or sublet our
interests in any real property leases associated with such dealerships to the purchaser. We often retain
responsibility for the performance of certain obligations under such leases to the extent that the assignee
or sublessee does not perform, whether such performance is required prior to or following the assignment
of subletting of the lease. Additionally, we generally remain subject to the terms of any guarantees made
by us in connection with such leases. However, we generally have indemnification rights against the
F-33
assignee or sublessee in the event of non-performance, as well as certain other defenses. We may also
be called upon to perform other obligations under these leases, such as environmental remediation of the
premises or repairs upon termination of the lease. Although we currently have no reason to believe that
we will be called upon to perform any such services, there can be no assurance that any future
performance required by us under these leases will not have a material adverse effect on our financial
condition or results of operations.
Certain of our facilities where a lease obligation still exists have been vacated for a variety of
business reasons. In these instances, we make efforts to find qualified tenants to sublease the facilities
and assume financial responsibility. However, due to the specific nature and size of the facilities used in
our dealership, tenants are not always available. In light of this, reserves have been accrued pursuant to
SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” to offset our potential
future lease obligations. These amounts were not material to our consolidated statements of operations
during 2008, 2007 or 2006 and the amount accrued at December 31, 2008 and 2007 was not material.
In the second quarter of 2008, we entered into two sale-leaseback transactions involving
dealership facilities. Each transaction called for an initial term of 15 years with eight successive five year
renewal options. Rents are subject to increases based on year over year CPI changes with a maximum
percentage rate cap. As of December 31, 2008, one of these transactions does not qualify for sale
recognition under SFAS No. 66, “Accounting for Sales of Real Estate,” due to continuing involvement by
us related to certain environmental remediation. This transaction has been accounted for as a financing.
The minimum lease payments to be made under the financing after December 31, 2008 are as follows (in
thousands):
$
Year Ending December 31,
2009
2010
2011
2012
2013
Thereafter
Total minimum lease payments $
829
829
829
829
829
7,842
11,987
See Notes 10 and 11.
Capital Commitments
We had capital commitments of $14.6 million at December 31, 2008 for the construction of two
new facilities, both of which will replace existing facilities. We already incurred $29.2 million for these
projects and anticipate incurring the remaining $14.6 million in 2009.
Charge-Backs for Various Contracts
We have recorded a reserve for our estimated contractual obligations related to potential charge-
backs for vehicle service contracts, lifetime oil change contracts and other various insurance contracts
that are terminated early by the customer. At December 31, 2008, this reserve totaled $13.5 million.
Based on past experience, we estimate that the $13.5 million will be paid out as follows: $8.1 million in
2009; $3.6 million in 2010; $1.3 million in 2011; $0.4 million in 2012; and $0.1 million thereafter.
Regulatory Compliance
We are subject to numerous state and federal regulations common in the automotive sector that
cover retail transactions with customers and employment and trade practices. We do not anticipate that
compliance with these regulations will have an adverse effect on our business, consolidated results of
operations, financial condition or cash flows, although such outcome is possible given the nature of our
operations and the legal and regulatory environment affecting our business.
F-34
Litigation
We are party to numerous legal proceedings arising in the normal course of our business. While
we cannot predict with certainty the outcomes of these matters, we do not anticipate that the resolution of
these proceedings will have a material adverse effect on our business, results of operations, financial
condition, or cash flows.
Phillips/Allen Cases
On November 25, 2003, Aimee Phillips filed a lawsuit in the U.S. District Court for the District of
Oregon (Case No. 03-3109-HO) against Lithia Motors, Inc. and two of its wholly-owned subsidiaries
alleging violations of state and federal RICO laws, the Oregon Unfair Trade Practices Act (“UTPA”) and
common law fraud. Ms. Phillips seeks damages, attorney's fees and injunctive relief. Ms. Phillips'
complaint stems from her purchase of a Toyota Tacoma pick-up truck on July 6, 2002. On May 14, 2004,
we filed an answer to Ms. Phillips' Complaint. This case was consolidated with the Allen case described
below and has a similar current procedural status.
On April 28, 2004, Robert Allen and 29 other plaintiffs (“Allen Plaintiffs”) filed a lawsuit in the U.S.
District Court for the District of Oregon (Case No. 04-3032-HO) against Lithia Motors, Inc. and three of its
wholly-owned subsidiaries alleging violations of state and federal RICO laws, the Oregon UTPA and
common law fraud. The Allen Plaintiffs seek damages, attorney's fees and injunctive relief. The Allen
Plaintiffs' Complaint stems from vehicle purchases made at Lithia stores between July 2000 and April
2001. On August 27, 2004, we filed a Motion to Dismiss the Complaint. On May 26, 2005, the Court
entered an Order granting Defendants' Motion to Dismiss plaintiffs' state and federal RICO claims with
prejudice. The Court declined to exercise supplemental jurisdiction over plaintiffs' UTPA and fraud claims.
Plaintiffs filed a Motion to Reconsider the dismissal Order. On August 23, 2005, the Court granted
Plaintiffs' Motion for Reconsideration and permitted the filing of a Second Amended Complaint (“SAC”).
On September 21, 2005, the Allen Plaintiffs, along with Ms. Phillips, filed the SAC. In this complaint, the
Allen plaintiffs seek actual damages that total less than $500,000, trebled, approximately $3.0 million in
mental distress claims, trebled, punitive damages of $15.0 million, attorney's fees and injunctive relief.
The SAC added as defendants certain officers and employees of Lithia. In addition, the SAC added a
claim for relief based on the Truth in Lending Act (“TILA”). On November 14, 2005 we filed a second
Motion to Dismiss the Complaint and a Motion to Compel Arbitration. In two subsequent rulings, the Court
has dismissed all claims except those under Oregon's Unfair Trade Practices Act and a single fraud claim
for a named individual. We believe the actions of the court have significantly narrowed the claims and
potential damages sought by the plaintiffs. Lithia's motion to Compel Arbitration of Plaintiff's remaining
claims was denied. We have filed a Notice of Appeal relating to the denial of our Motion to Compel
Arbitration. This appeal was argued before the Ninth Circuit Court of Appeals (No. 07-35670) with a ruling
anticipated in Spring 2009.
On September 23, 2005, Maria Anabel Aripe and 19 other plaintiffs (“Aripe Plaintiffs”) filed a
lawsuit in the U.S. District Court for the District of Oregon (Case No. 05-3083-HO) against Lithia Motors,
Inc., 12 of its wholly-owned subsidiaries and certain officers and employees of Lithia, alleging violations of
state and federal RICO laws, the Oregon UTPA, common law fraud and TILA. The Aripe Plaintiffs seek
actual damages of less than $600,000, trebled, approximately $3.7 million in mental distress claims,
trebled, punitive damages of $12.6 million, attorney's fees and injunctive relief. The Aripe Plaintiffs'
Complaint stems from vehicle purchases made at Lithia stores between May 2001 and August 2005 and
is substantially similar to the allegations made in the Allen case. On April 18, 2006, the Court stayed the
proceedings in the Aripe case, pending resolution of certain motions in the Allen case. The relevant
motions in the Allen case have now been resolved, and we anticipate that the stay in the Aripe case will
soon be lifted.
F-35
Alaska Service and Parts Advisors and Managers Overtime Suit
On March 22, 2006, seven former employees in Alaska brought suit against the company
(Dunham, et al. v. Lithia Support Services, et al., 3AN-06-6338 Civil, Superior Court for the State of
Alaska) seeking overtime wages, additional liquidated damages and attorney fees. The complaint was
later amended to include a total of 11 named plaintiffs. The court ordered the dispute to arbitration. In
February 2008, the arbitrator granted the plaintiffs' request to establish a class of plaintiffs consisting of all
present and former service and parts department employees totaling approximately 150 individuals who
were paid on a commission basis. We have filed a motion requesting reconsideration of this class
certification, but the arbitrator died before issuing his opinion. The reconsideration seeks a ruling whether
these employees or some of these employees are exempt from the applicable state law that provides for
the payment of overtime under certain circumstances. A new arbitrator has now been appointed who has
advised he intends to make an independent opinion with respect to the request by the plaintiff for a class
certification. A supplemental brief was recently filed by the company with respect to this issue but no
ruling has yet been rendered.
Alaska Used Vehicles Sales Disclosures
On May 30, 2006, four of our wholly owned subsidiaries located in Alaska were served with a
lawsuit alleging that the stores failed to comply with Alaska law relating to various disclosures required to
be made during the sale of a used vehicle. The complaint was filed by Jackie Lee Neese, et al. v. Lithia
Chrysler Jeep of Anchorage, Inc., et al. in the Superior Court for the State of Alaska at Anchorage, case
number 3AN-06-04815CI. The complainants seek to represent other similarly situated customers. The
court has not certified the suit as a class action. During the pendency of the Neese case, the State of
Alaska brought charges against Lithia’s subsidiaries alleging the same factual allegations, and also
alleging violations related to the practice of charging document fees. We settled the State action, which
we believe resolves the disputes. However, the plaintiffs in the private action moved to intervene in the
State of Alaska matter, and they also filed a second putative class action lawsuit, Jackie Lee Neese, et al,
v. Lithia Chrysler Jeep of Anchorage, Inc., case number 3AN-06-13341CI, related to the document fee
claims identified in the State of Alaska’s complaint. The second Neese lawsuit was consolidated with the
first case. The court denied the plaintiffs’ request to intervene in the State of Alaska matter and the
plaintiffs have filed an appeal with the Alaska Supreme Court challenging that denial. Oral arguments on
the appeal have been held, but no ruling has been issued. The trial court dismissed two of the stores
involved in the first lawsuit because none of the named plaintiffs had purchased any vehicles from the two
stores. The plaintiffs have also appealed that dismissal to the Alaska Supreme Court. Oral arguments
were held and the parties are awaiting a decision from the Court. Both the private lawsuits, as well as the
implementation of the settlement with the State of Alaska, have been stayed pending a ruling in the
appeal of the State of Alaska case.
Washington State B&O Tax Suit
On October 19, 2005, Marcia Johnson and Theron Johnson (the “Johnsons”), on their own behalf
and on behalf of a proposed plaintiff class of all other similarly situated individuals and entities, filed suit in
the Superior Court for the State of Washington, Spokane County (Case No. 05205059-9). The Johnsons
sued Lithia Motors, Inc., and one of Lithia’s wholly-owned subsidiaries, individually and as representatives
of a proposed defendant class of other motor vehicle dealers, asking for an award of declaratory and
injunctive relief, and damages, based on defendants’ allegedly illegal practice of itemizing and collecting
the Washington State Business and Occupation Tax (“B&O Tax”) from customers buying vehicles from
defendants.
The allegations in the Johnson case involve legal issues similar to those that were litigated in the
case of Nelson vs. Appleway Chevrolet, Inc. (the “Nelson case”). By agreement of the parties, the
Johnson case was stayed while the Nelson case, which had been filed in 2004, was appealed to the
Washington State Supreme Court.
In April 2007, the Washington Supreme Court upheld the lower court decisions in favor of the
plaintiffs in the Nelson case. The decision was based on the Appleway dealer’s practice of adding a B&O
tax charge to a vehicle’s purchase price after the customer and the dealer reached agreement on the
vehicle’s price.
F-36
Because Lithia’s subsidiary negotiated with the Johnsons over a proposed B&O tax charge
before reaching agreement with the Johnsons on a purchase price for the Johnsons’ new vehicle, Lithia
and its subsidiary believe the subsidiary’s actions are permissible under the law as established by the
Supreme Court’s decision in the Nelson case. They moved for summary judgment based on the
Washington Supreme Court’s decision in the Nelson case.
Shortly after the filing of that motion, the Johnsons filed an amended complaint. They added an
allegation that the defendants’ actions also violated Washington’s Consumer Protection Act, and
requested an award of treble damages up to $10,000 for each alleged violation of the Act.
The Johnsons then cross-moved for partial summary judgment, contending that the Supreme
Court’s decision in the Nelson case established that Lithia and its subsidiary had violated Washington’s
tax and Consumer Protection Act laws. After hearing oral argument on the motions, the trial court judge,
on October 12, 2007, issued an oral ruling in favor of the Johnsons and against the Lithia subsidiary. The
court denied Lithia’s and its subsidiary’s summary judgment motion. The court entered its written order to
that effect on November 9, 2007.
Lithia and its subsidiary asked the trial court to certify its order as a final judgment. After the trial
court denied their request, Lithia and its subsidiary petitioned the Washington Court of Appeals for
discretionary review of the summary judgment decision, which was granted in April 2008. In January
2009, the Court of Appeals reversed the trial court judge’s ruling and directed the entry of a summary
dismissal order in the case. Plaintiff’s may appeal this decision to the Washington Supreme Court or
attempt to pursue some other claims in the trial court proceeding.
VanSyoc Case
On August 14, 2002, Steven H. VanSyoc filed a lawsuit in the Superior Court of California for the
County of Fresno (Case No. 08CECG02785) against a Lithia Motors subsidiary alleging fraud, deceit,
intentional misrepresentation, concealment and failure to disclose, and negligence. Further, plaintiff
asserts violations of California Civil Code § 1770(a)(2),(5),(6), (7), (9), (13), (14), (16) and (19) (a pattern,
plan or scheme with intent to deceive or induce the purchase and increase the cost of vehicles; and
California Civil Code § 17200, et.seq. (Unfair Competition Law)) and seeks an order enjoining the
practice, unstated actual damages and an order certifying the case a class-action. Plaintiff alleges that we
failed to disclose the vehicle he purchased was a former daily rental vehicle and misrepresented the
terms and conditions of the Extended Service Agreement purchased by Plaintiff, and failed to disclose
that the time and mileage limits actually started at a date significantly earlier than the purchase date. We
have filed an answer denying all liability. Preliminary discovery is being undertaken.
We intend to vigorously defend all matters noted above, and to assert available defenses. We
cannot make an estimate of the likelihood of negative judgment in any of these cases at this time. The
ultimate resolution of the above noted cases is not reasonably expected to have a material adverse
impact on our results of operations, financial condition or cash flows. However, the results of these
matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters
could have a material adverse effect on our results of operations, financial condition or cash flows.
F-37
(18)
Acquisitions
The following acquisition was made in 2008:
•
In February 2008, we acquired the operations of a Jeep franchise in Helena, Montana that
was added to our existing Chrysler store.
The following acquisitions were made in 2007:
•
In February 2007, we acquired Jordan Motors, Inc., which was comprised of four stores, in
Ames, Johnston and Des Moines, Iowa. The stores had annualized combined revenues of
approximately $100 million. The stores were renamed Honda of Ames, Lithia Nissan of
Ames, Acura of Johnston, Lithia Infiniti of Des Moines, Lithia Volkswagen of Des Moines and
Audi Des Moines. The three stores in Des Moines are considered one location;
In May 2007, we acquired the operations of a Jeep franchise in Pocatello, Idaho that was
added to our existing Chrysler store; and
In August 2007, we acquired a Volkswagen and Audi store from Peterson Motor Company in
Boise, Idaho. The acquisition is considered one store and has anticipated annualized
revenues of $15 million. The store was renamed Lithia Volkswagen of Boise and Audi Boise.
•
•
The above acquisitions were all accounted for under the purchase method of accounting. Pro
forma results of operations for 2008 are not materially different from actual results of operations.
Unaudited pro forma results of operations (including discontinued operations) for the year ended
December 31, 2007 assuming all of the above acquisitions occurred as of January 1, 2007 were as
follows (in thousands, except per share amounts).
Year Ended December 31,
Total revenues
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
2007
3,239,820
21,359
1.09
1.05
The Volkswagen/Audi store in Boise, Idaho was acquired through an exchange with Peterson
Motor Company in which we traded a Chevrolet store and, in addition to the Volkswagen/Audi store,
received $1.6 million in cash.
There are no future contingent payouts related to the 2008 and 2007 acquisitions and no portion
of the purchase price was paid with our equity securities. During 2007, we acquired the five stores and
the Jeep franchise discussed above for $17.1 million in cash and value of exchanged franchise, which
included $10.3 million of goodwill and $4.2 million of other, primarily indefinite lived, intangible assets. In
addition, we acquired new vehicle inventory and associated floorplan debt in the amount of $14.8 million
in connection with the 2007 acquisitions. The purchase price for the balance of the assets acquired in
2007 was funded by borrowings.
Within one year from the purchase date of each store, we may update the value allocated to its
purchased assets and the resulting goodwill balances as a result of information received regarding the
valuation of such assets and liabilities that was not available at the time of purchase in accordance with
SFAS No. 141, “Business Combinations.” All of the goodwill from the above acquisitions was written off in
the second quarter of 2008. See Notes 1 and 6.
F-38
(19)
Discontinued Operations
We perform an internal evaluation of our store performance, on a store-by-store basis, in the
last month of each quarter. If a particular location does not meet certain return on investment criteria
established by our management team, the location is targeted for potential disposition. If a store that
has been identified for potential disposition does not improve its operations for an extended period of
time, the decision is made to divest the location. Additional factors we consider that may result in the
disposition of a location include capital commitment requirements, our estimate of local market and
franchise outlook, and the geographic location of certain stores.
When the decision is made to dispose of a location, we evaluate the store to ensure that it
meets the criteria to be classified as “held for sale,” as defined by paragraph 30 of SFAS No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets.” This evaluation includes the
following considerations:
• Our executive management group, possessing the necessary authority, commits to a plan to
dispose the store.
• The store is available for immediate sale in its present condition. The sale is subject only to
terms that are usual and customary.
• We initiate an active program to locate buyers and take other actions that are required to sell
the store.
• We believe there is a market for the store and that its disposal is likely. We also expect to
record the transfer of the store as a completed sale within one year.
• We actively market the store for sale at a price that is reasonable in relation to current
estimated fair value.
• We believe it is unlikely management will make significant changes to the plan or withdraw
the plan. We have not, to date, withdrawn any plan related to the disposal of store locations.
When a store has been classified as held for sale for a period exceeding one year, we evaluate
whether we continue to meet the criteria of SFAS No. 144, which states that we must evaluate whether
we (1) initiated actions necessary to respond to the poor market conditions during the initial one-year
period, (2) continue to actively market the asset at a price that is reasonable in view of market conditions,
and (3) continue to meet all of the other criteria in paragraph 30 for classifying the asset as held for sale.
In the second quarter of 2008, we had three stores classified as held for sale for a period
exceeding one year. Additionally, as part of the restructuring plan announced on June 3, 2008, we
performed an evaluation of our portfolio of stores, resulting in 12 underperforming stores, mostly
consisting of domestic franchises, being selected for disposal. We also elected to close a facility at that
time. Given these facts, we evaluated whether the classification of all stores as held for sale and
presented in discontinued operations was appropriate under SFAS No. 144.
The three stores identified above represented some of the worst-performing locations in our
portfolio. Their poor performance, coupled with the increasingly negative environment for automotive
retailing, necessitated a longer period to complete the sale of these locations. Over the initial one-year
period, we had entered into multiple preliminary asset sales agreements, confirming that prospective
buyers were interested in these locations. Over the period these stores were available for sale, we
continued to lower the price of the three stores. We recorded additional impairment charges to recognize
the assets at estimated fair value based on the outlook for potential sale proceeds. We believe our
response to the declining economic factors, diminishing sources of credit with financially viable terms, and
overall uncertainty surrounding the future demonstrated that we took:
• actions necessary to respond to a change in circumstances; and
•
that the assets were and continue to be actively marketed at a reasonable price given the
continuing changes in circumstances.
F-39
Finally, for these three locations, we evaluated the six criteria in paragraph 30 of SFAS No. 144
and concluded that we continued to meet the required criteria. We determined that the 12 stores targeted
for disposal as a result of our restructuring plan also met the criteria of paragraph 30 of SFAS No. 144.
Therefore, we believe that the stores’ classification in discontinued operations is appropriate.
In addition, during the third quarter of 2008, 15 additional stores were classified as discontinued
operations for a total of 28 stores in 2008. Given the significant number of stores classified as held for
sale, and the fact that the sale of certain stores was not prompt, we considered additional factors prior to
classifying the additional 15 stores as discontinued operations including:
•
•
•
•
the inherent difficulty in selling three of the worst-performing stores in our portfolio, and the
fact that the other stores targeted for disposal in 2008 would be more desirable to potential
buyers. For example, we closed on the sale of two locations in the third quarter of 2008 that
were initially classified as held for sale in the second quarter of 2008;
that one of the locations classified as held for sale for a period exceeding one year had been
sold in the third quarter of 2008, and another location had been closed;
that three stores classified as held for sale in the second quarter of 2008 were under
preliminary contract to be sold; and
that 9 of the 14 stores classified in the third quarter of 2008 have been sold or are under
preliminary contract to be sold.
Therefore, we believe that a market continues to exist for the stores we have targeted for
disposal, and that we met the other criteria outlined by paragraph 30 of SFAS 144. As of December 31,
2008, we have one store that has been classified as held for sale for a period exceeding one year. We
believe that this store’s continued classification in discontinued operations is appropriate.
We disposed of nine stores and closed four stores classified within discontinued operations
during 2008. As of December 31, 2008, 18 stores were classified as held for sale.
Certain financial information related to discontinued operations was as follows (in thousands):
Year Ended December 31,
Revenue
Pre-tax gain (loss) from discontinued operations
Net loss on disposal activities
Income tax benefit (expense)
Gain (loss) from discontinued operations, net of income
2008
$ 434,729
$
(15,372) $
(70,063)
(85,435)
31,997
2007
$ 707,573 $
2,628 $
(5,923)
(3,295)
402
2006
759,705
5,538
(911)
4,627
(1,815)
taxes
Goodwill and other intangible assets disposed of
Cash generated from disposal activities
$
$
$
(53,438)
19,117
44,085
$
$
$
(2,893)
$
8,722 $
16,495 $
2,812
3,552
3,915
The pre-tax gain in 2006 was offset by legal settlements related to dealerships in California that
were sold in prior years.
The loss on disposal activities included the following impairment charges (in thousands):
Year Ended December 31,
Goodwill
Franchise value
Property, plant and equipment
Inventory
Other
2008
35,432
5,664
23,200
4,905
862
70,063
$
$
$
$
2007
2006
2,903 $
2,649
211
126
34
5,923 $
258
609
-
-
44
911
F-40
Interest expense is allocated to stores classified as discontinued operations for actual flooring
interest expense directly related to the new vehicles in the store. Interest expense related to our working
capital, acquisition and used vehicle credit facility is allocated based on the amount of assets pledged
towards the total borrowing base.
Assets and liabilities held for sale are valued at the lower of cost or fair value less costs to sell.
Estimates of fair value are based on the proceeds we expect to realize on the sale of the disposal groups.
Inventory losses primarily related to prior model year new and used vehicles that had carrying values in
excess of estimated proceeds to be generated through wholesale distribution.
As additional market information becomes available and negotiations with prospective buyers
continue, estimated fair market values may change for the assets and liabilities held for sale. These
changes may require the recognition of additional losses in future periods.
As of December 31, 2008, we had 18 stores held for sale. As of December 31, 2007, we had
three stores held for sale. Assets held for sale included the following (in thousands):
December 31,
Inventories
Property, plant and equipment
Intangible assets
$
2008
2007
65,584 $ 12,550
10,459
93,871
798
1,968
$ 161,423 $ 23,807
Liabilities held for sale related to stores and development properties included the following (in
thousands):
December 31,
Floorplan notes payable
Real estate debt
$
2008
2007
56,358 $ 10,391
7,466
51,814
$ 108,172 $ 17,857
(20)
Recent Accounting Pronouncements
SFAS No. 141R and SFAS No. 160
In December 2007, the FASB issued SFAS No. 141 (Revised), “Business Combinations,” (SFAS
No. 141(R)) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an
amendment of ARB No. 51” (SFAS No. 160). SFAS No. 141(R) and SFAS No. 160 revise the method of
accounting for a number of aspects of business combinations and noncontrolling interests, including
acquisition costs, contingencies (including contingent assets, contingent liabilities and contingent
purchase price), the impacts of partial and step-acquisitions (including the valuation of net assets
attributable to non-acquired minority interests), and post acquisition exit activities of acquired businesses.
SFAS No. 141(R) and SFAS No. 160 are effective for fiscal years beginning after December 15, 2008.
We are still evaluating the effects that the adoption of SFAS No. 141R and SFAS No. 160 will have on our
financial position, cash flows and results of operations.
F-41
SFAS No. 157
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157
defines fair value and applies to other accounting pronouncements that require or permit fair value
measurements and expands disclosures about fair value measurements. SFAS No. 157 was effective for
financial assets and liabilities in fiscal years beginning after November 15, 2007. In February 2008, the
FASB amended SFAS No. 157 by issuing FASB Staff Position (“FSP”) FAS 157-1, “Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13,” which
states that SFAS No. 157 does not address fair value measurements for purposes of lease classification
or measurement. FSP FAS 157-1 does not apply to assets acquired and liabilities assumed in a business
combination that are required to be measured at fair value under SFAS No. 141 or SFAS No. 141R,
regardless of whether those assets and liabilities are related to leases. In February 2008, the FASB also
issued FSP FAS 157-2, “Effective Date of FASB Statement No. 157,” which delayed the effective date of
SFAS No. 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis. In October 2008, the FASB also issued FSP FAS 157-3, “Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active,” which clarifies the application of SFAS No. 157 in a
market that is not active.
Our adoption of the provisions of SFAS No. 157 on January 1, 2008, with respect to financial
assets and liabilities measured at fair value, did not have a material impact on our fair value
measurements or our financial statements for the year ended December 31, 2008. In accordance with
FSP FAS 157-2, we are currently evaluating the potential impact of applying the provisions of SFAS No.
157 to our nonfinancial assets and liabilities beginning in 2009, including (but not limited to) the valuation
of our franchise rights when assessing franchise impairments, the valuation of property and equipment
when assessing long-lived asset impairment, and the valuation of assets acquired and liabilities assumed
in business combinations.
SFAS No. 161
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities.” SFAS No. 161 changes the disclosure requirements for derivative instruments and
hedging activities by requiring enhanced disclosures about how and why an entity uses derivative
instruments, how derivative instruments and related hedged items are accounted for under SFAS No.
133, and how derivative instruments and related hedged items affect an entity’s operating results,
financial position and cash flows. SFAS No. 161 is effective for fiscal years beginning after November 15,
2008. Early adoption is permitted. We are currently reviewing the provisions of SFAS No. 161 and have
not yet adopted the statement. However, as the provisions of SFAS No. 161 are only related to disclosure
of derivative and hedging activities, the adoption of SFAS No. 161 will not have any impact on our
financial position, cash flows or results of operations.
FSP No. APB 14-1
In May 2008, the FASB issued Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible
Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),”
which clarifies that convertible debt instruments that may be settled in cash upon conversion (including
partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 12, “Accounting for
Convertible Debt and Debt Issued with Stock Purchase Warrants.” Additionally, this FSP specifies that
such instruments should separately account for the liability and equity components in a manner that
reflects the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent
periods. This FSP is effective for financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those fiscal years. We are still evaluating the effects that the adoption
of this FSP will have on our financial position, cash flows and results of operations.
F-42
FSP No. 142-3
In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible
Assets,” which amends the factors that should be considered in developing the renewal or extension
assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
“Goodwill and Other Intangible Assets.” This FSP also adds certain disclosure requirements for intangible
assets with definite useful lives. This FSP is applicable to fiscal years beginning after December 15, 2008
and interim statements within that fiscal year. We are still evaluating the effects that the adoption of this
FSP will have on our financial position, cash flows and results of operations.
(21)
Subsequent Events
Disposal of Stores
In January 2009, we disposed of Centennial Chrysler Jeep. The disposal generated cash of
approximately $2.2 million and did not result in a material gain or loss.
In February 2009, we disposed of two additional stores, Fort Collins Chrysler Jeep Dodge and Fort
Collins Hyundai. These disposals generated cash of approximately $1.3 million and did not result in a
material gain or loss.
In March 2009, we disposed of Vacaville Toyota. The disposal generated cash of approximately
$7.1 million and resulted in a gain of approximately $6.1 million.
Assumption of Liability
In March 2009, we assumed a liability of approximately $15.0 million related to the remaining
reserves on certain Lifetime Oil Change contracts from First Extended Service Corporation. In exchange
for assuming the liability, we received a cash payment of approximately $15.0 million.
F-43
CORPORATE INFORMATION
Annual Meeting
The Company’s Annual Meeting of Shareholders will be held at 8:00 A.M., Thursday, April 30,
Lithia Motors’ Headquarters, 360 East Jackson Street, Apple Street Conference Room, Medford,
Oregon 97501. Notice and Access of the meeting and proxy statement materials are being sent to all
shareholders. The Company’s Annual Report on Form 10-K for the year ended December 31, 2008,
includes all information as filed with the Securities and Exchange Commission, except exhibits.
Shareholder Communications
The Company welcomes your comments about its operations or any aspect of its business. Please
contact our Investor Relations Group at 1-541-776-6591.
Description of Business:
Automobile sales and service
Corporate Headquarters:
360 East Jackson Street, Medford, Oregon 97501
Trading Information
(As of December 31, 2008):
(NYSE - LAD)
20,479,652 shares issued and outstanding
Class A
Class B
16,717,421
3,762,231
Auditors:
KPMG LLP, Portland, Oregon
Legal Counsel:
Foster Pepper LLP, Portland, Oregon
Transfer Agent:
Executive Officers:
Lithia Board of Directors:
Computershare Trust Company
350 Indian St., Suite 800
Golden, Colorado 80401
Sidney B. DeBoer, Chairman and Chief Executive Officer
M.L. Dick Heimann, Vice-Chairman
Bryan B. DeBoer, President and Chief Operating Officer
R. Bradford Gray, Executive Vice President
Jeffrey B. DeBoer, Senior Vice President and Chief
Financial Officer
Sidney B. DeBoer
Bryan B. DeBoer
Thomas R. Becker
Maryann Keller
AJ Wagner
Charlie Hughes
William Glick