Attached files

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EX-12 - RATIO OF EARNINGS TO COMBINED FIXED CHARGES - LITHIA MOTORS INCdex12.htm
EX-10.16 - NON EMPLOYEE DIRECTOR COMPENSATION PLAN 2009/2010 SERVICE YEAR. - LITHIA MOTORS INCdex1016.htm
EX-10.18.2 - NINTH AMENDMENT TO REVOLVING CREDIT FACILITY WITH U.S. BANK - LITHIA MOTORS INCdex10182.htm
EX-10.18.1 - EIGHTH AMENDMENT TO REVOLVING CREDIT FACILITY WITH U.S. BANK - LITHIA MOTORS INCdex10181.htm
EX-21 - SUBSIDIARIES OF LITHIA MOTORS, INC. - LITHIA MOTORS INCdex21.htm
EX-32.2 - SECTION 906 CFO CERTIFICATION - LITHIA MOTORS INCdex322.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - LITHIA MOTORS INCdex312.htm
EX-32.1 - SECTION 906 CEO CERTIFICATION - LITHIA MOTORS INCdex321.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - LITHIA MOTORS INCdex311.htm
EX-23 - CONSENT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - LITHIA MOTORS INCdex23.htm
Table of Contents

 

 

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, 2009

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)

 

Oregon   93-0572810

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

360 E. Jackson Street, Medford, Oregon   97501
(Address of principal executive offices)   (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

 

Name of each exchange on which registered

Class A common stock, without par value   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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    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 $157,080,000 computed by reference to the last sales price ($9.24) 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, 2009).

The number of shares outstanding of the Registrant’s common stock as of March 3, 2010 was: Class A: 22,113,006 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 2010 Annual Meeting of Shareholders.

 

 

 


Table of Contents

LITHIA MOTORS, INC.

2009 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

          Page
   PART I   
Item 1.    Business    2
Item 1A.    Risk Factors    11
Item 1B.    Unresolved Staff Comments    25
Item 2.    Properties    25
Item 3.    Legal Proceedings    25
Item 4.    Reserved    27
   PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    27
Item 6.    Selected Financial Data    29
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    30
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk    52
Item 8.    Financial Statements and Supplementary Data    53
Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure    53
Item 9A.    Controls and Procedures    54
Item 9B.    Other Information    54
   PART III   
Item 10.    Directors, Executive Officers and Corporate Governance    54
Item 11.    Executive Compensation    54
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    55
Item 13.    Certain Relationships and Related Transactions, and Director Independence    55
Item 14.    Principal Accountant Fees and Services    55
   PART IV   
Item 15.    Exhibits and Financial Statement Schedules    56
Signatures    60

 

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Table of Contents

PART I

 

Item 1. Business

Forward Looking Statements

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. Generally, 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.

While 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.

Overview

We are a leading operator of automotive franchises and a retailer of new and used vehicles and services. As of March 3, 2010, we offered 26 brands of new vehicles and all brands of used vehicles in 85 stores in the United States and online at Lithia.com. We sell new and used cars and light trucks, replacement parts; provide vehicle maintenance, warranty, paint and repair services and arrange related financing, service contracts, protection products and credit insurance.

Our dealerships are primarily located in small and mid-size regional markets throughout the Western and Midwestern regions of the United States. The majority of our franchises are in “single-point” locations, meaning that these locations do not have directly competing dealerships offering the same brand in the same market.

The following tables set forth information about our stores that were part of operations as of December 31, 2009:

 

State

   Number of
Stores
   Percent of
Annualized
2009 Revenue
 

Texas

   15    24

Oregon

   15    16   

California

   12    12   

Washington

   7    10   

Alaska

   7    10   

Iowa

   7    7   

Montana

   6    7   

Idaho

   6    6   

Nevada

   4    4   

North Dakota

   3    2   

Colorado

   2    1   

New Mexico

   1    1   
           

Total

   85    100
           

 

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Table of Contents

At December 31, 2009, we had two stores classified as held for sale and included as part of discontinued operations.

Business Strategy and Operations

Our mission is to be the preferred provider of cars and trucks and related services in North America. Through an integrated, centralized operating structure, we promote entrepreneurial store management focused on achieving a positive customer experience. With our management information systems, our emphasis on standardized operating practices and our centralized administrative functions, we seek to gain economies of scale from our dealership network.

Operations are structured to promote an entrepreneurial environment at the dealership level. Each store’s general manager, with assistance from regional and corporate management, is ultimately responsible for dealership operations, personnel, store culture and financial performance.

During 2009, we focused on the following key areas to achieve our mission:

 

   

a fully-integrated and centralized operating structure;

 

   

operating profitably through improved margins and reduced costs;

 

   

prudent cash management in the current economic environment; and

 

   

right-sizing our operations to match current demand and to improve per employee productivity.

Centralized administrative functions promote entrepreneurial store management. Accounts payable, accounts receivable, credit and collections, accounting and taxes, information technology, legal, human resources, human development, treasury, cash management, advertising and marketing are all centralized at our corporate headquarters. These efficiencies have allowed us to reduce overall administrative staff, including personnel in our corporate offices, from 6.4 people per store as of December 31, 2007 to 3.1 people per store as of December 31, 2009. The reduction of administrative functions at our stores allows our local managers to focus on customer-facing opportunities to generate increased revenues and gross profit. Our operations are supported by our dedicated training and personnel development program, which shares best practices across our dealership network and seeks to develop our store management talent.

To reduce our dependence on any one manufacturer and our susceptibility to changing consumer preferences, we offer a wide variety of both import and domestic new vehicle brands and models. Encompassing economy and luxury cars, sports utility vehicles, crossovers, minivans and light trucks, we believe our brand mix is well-suited to what people want in the markets we serve. In these rural, agricultural markets, as opposed to metropolitan markets, we believe more consumers need trucks, and a larger percentage of customers choose domestic vehicles. We continuously evaluate our portfolio of franchises, divesting stores that are not expected to meet our financial return requirements while selectively acquiring attractive stores in our target markets.

We have restructured our operations to align our costs with current industry vehicle sales levels. Through various cost cuts and personnel reductions initiated in the second quarter of 2008, we have achieved $65 million of annualized permanent cost reductions. Since the second quarter of 2008 through December 31, 2009, we also generated $71.8 million in cash by divesting stores that were non-essential or that did not meet our financial return expectations. We believe that we are well positioned to benefit from an increase in new vehicle sales above current levels.

New Vehicle Sales

In 2009, we sold 29,109 new vehicles generating 22.4% of our gross profit for the year. New vehicle sales also have the potential to create incremental profit opportunities through manufacturer incentives, resale of trade-in vehicles, sale of third-party financing, vehicle service and insurance contracts, and future service and repair work.

 

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In 2009, we represented 26 domestic and imported brands ranging from economy to luxury cars, sport utility vehicles, crossovers, minivans and light trucks.

 

Manufacturer

   Percent of
Total 2009
Revenue
    Percent of
2009 New
Vehicle Sales
    Percent of
2009 New
Vehicle Gross
Profit
 

Chrysler, Jeep, Dodge

   15.1   30.6   32.7

GMC, Chevrolet, Cadillac, Buick

   8.6      17.1      16.8   

Toyota, Scion

   6.7      13.3      12.8   

BMW

   4.4      8.9      6.7   

Honda, Acura

   3.7      7.4      8.3   

Ford, Lincoln, Mercury

   2.6      5.1      4.2   

Subaru

   2.3      4.6      4.1   

Hyundai

   1.9      3.8      5.2   

Nissan

   1.6      3.1      3.1   

Volkswagen, Audi

   1.5      2.9      3.2   

Mercedes

   1.0      1.9      1.9   

Porsche

   0.3      0.6      0.5   

Mazda

   0.2      0.5      0.4   

Suzuki

   0.1      0.1      *   

Kia

   *      0.1      0.1   

Saab

   *      *      *   
                  

Total

   50.0   100.0   100.0
                  

 

* Less than 0.1%

We purchase our new car inventory directly from manufacturers, who generally allocate new vehicles to stores based on availability, monthly sales and market area. Accordingly, we rely on the manufacturers to provide us with vehicles that meet consumer demand at suitable locations, with appropriate quantities and prices. However, high demand vehicles are often 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. We have certain stores that sell only used vehicles. In 2009, retail used vehicle sales generated 20.0% of our gross profit.

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 finance and insurance revenues and service and parts sales.

Our used vehicles are segregated into three categories: manufacturer certified used vehicles; late model, lower mileage vehicles; and value autos. We offer manufacturer certified used vehicles at most of our franchised dealerships. These vehicles undergo additional reconditioning and receive an extended factory-provided warranty. Late model, lower mileage vehicles are reconditioned to like-new condition and offer a Lithia certified warranty. Value autos are older, higher mileage vehicles that undergo a safety check and some reconditioning. Value autos are offered to customers who require a less expensive vehicle with lower monthly payments.

 

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Table of Contents

In addition, as a complement to our ongoing used vehicle operation at each store, and in response to customer demand, we use personnel in our support services group to identify and acquire a better mix of used vehicles attractive to our markets. We conduct our own internal used vehicle auctions, and centrally manage the sale of used vehicles at public auctions at the corporate level.

In 2009, we focused on increasing retail used vehicle sales. This resulted in the sale of 1.0 retail used vehicles for every retail new vehicle sold. This is compared to approximately 0.7 retail used vehicles for every new vehicle sold in 2008. We believe this improvement was directly related to both our expanded vehicle offerings and an increased focus by our store sales personnel. Furthermore, a declining new vehicle sales environment also contributed to a higher demand for used vehicles. Our longer-term strategy is to maintain a ratio of one retail used vehicle sale to one retail new vehicle sale.

We acquire our used vehicles through customer trade-ins and at closed auctions. We also purchase vehicles directly from customers visiting our stores and from private parties advertising through local newspapers and online.

Additionally, we wholesale used vehicles that are in poor condition, are aged in our inventory, or are not suitable for our brand mix.

Vehicle Financing

We believe that arranging financing is an important part of our ability to sell vehicles and related products and services. Our sales personnel and finance and insurance managers receive training in securing customer financing and possess extensive knowledge of available financing alternatives. We try to arrange financing for every vehicle we sell and we offer customers financing on a “same day” basis, giving us an advantage, particularly over smaller competitors who do not generate enough sales to attract our breadth of finance sources.

Credit markets continued to remain tight in 2009, reducing the number of loans originated, limiting loans to less credit-worthy customers, reducing vehicle leasing programs and increasing overall financing costs. These constraints in financing resulted in fewer consumers in the market and less floor traffic at our stores. The financial crisis has increased the cost of funds and reduced the access to capital for finance companies (including manufacturers’ captive finance companies). This has prevented finance companies from offering certain incentives designed to increase sales and required customers to increase the down payment as a percentage of the sales price of vehicles and ancillary products.

Despite these negative factors, we were able to arrange financing on 69% of the vehicles we sold during 2009, but on a significantly lower volume of sales. In 2008, we arranged financing on 75% of the vehicles we sold. Changes in technology surrounding the credit application process have allowed us to utilize a larger network of lenders across a broader geographic area. Additionally, some smaller, local banks and credit unions have entered the market while larger financial institutions have reduced their lending.

In the third quarter of 2009, the U.S. Government offered the Car Allowance Rebate System (the “CARS Program”) to consumers who traded in older cars for newer, more fuel-efficient models. This program was popular with customers who required less vehicle financing and made more outright cash purchases than is typical in our business. As a result, we believe the penetration rate on vehicle financing was impacted for both the third quarter and full year 2009.

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 2009, we did not directly finance any of our vehicle sales.

 

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Table of Contents

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 for new vehicles provide additional coverage beyond the duration or scope of the manufacturer’s warranty. We sell service contracts to used vehicle buyers, which provide coverage for certain major repairs. We believe the sale of extended warranties and service contracts increase our service and parts business as well, as it can link future repair work to our locations.

When customers finance an automobile purchase, we offer them ‘gap’ coverage that provides protection from loss incurred by the difference in the amount owed and the amount received under a comprehensive insurance claim. We receive a commission on each ‘gap’ policy sold.

We offer a lifetime lube, oil and filter (“LOF”) service, which, in 2009, was purchased by 35% of our total new and used vehicle buyers. This service helps us retain customers and provides opportunities for repeat services and parts business. In the first quarter of 2009, we began retaining the obligation for our lifetime LOF insurance product on most of the contracts we sell. As a result, we defer the revenue on this product and recognize it over the life of the contract as services are provided. This change decreased our finance and insurance revenues by approximately $69 per vehicle in 2009 compared to 2008, when we sold the LOF contracts on a commission basis with income recognized at the time of sale.

Service, Body and Parts

In 2009, our service, body and parts operations generated 40.2% of our gross profit. 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 most makes and models. Our service, body and parts business was less affected by the challenging economic environment in 2009 than our other business lines.

The service and parts business provides important repeat revenues to our stores. We market our parts and service products by notifying owners when their vehicles are due for periodic service. This encourages preventive maintenance rather than post-breakdown repairs. The number of customers who purchase our lifetime LOF product helps to improve customer loyalty and provides opportunities for repeat parts and service business.

Revenues from the service and parts departments are particularly important during economic downturns, as owners tend to repair their existing 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 a recessionary economic environment.

Our service, body and parts operations provide us an opportunity to build the Lithia Automotive brand independent of new vehicle franchises. We have branded our service processes as “Assured Service.” Assured Service provides customer benefits such as 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 improved margin on various commodity items such as tires, filters and batteries.

We believe a future issue will be a reduction in the number of vehicles in operation which we can expect to service, particularly related to domestic manufacturers, due to the declining market share of Chrysler and GM (compared to import manufacturers) and the lower levels of vehicle sales in 2008 and 2009. To counteract the impact of fewer units in operation, we have focused on offering more commodity products, such as wiper blades and tires, with the goal of being a full service provider for all of our customers’ vehicle needs. We believe offering ‘one-stop shopping’ will be an important point of differentiation, particularly to take advantage of additional sales opportunities with customers purchasing a lifetime oil contract. These return customers provide an opportunity to offer more diversified services, and will help to offset the declines in the number of vehicles in operation.

 

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Table of Contents

We operate 13 collision repair centers: four in Texas; two each in Oregon and Idaho; and one each in Alaska, Washington, Montana, Nevada and Iowa.

Marketing

We market ourselves as Lithia Autos Stores-Serving our Communities since 1946. In most markets our stores are identified as Lithia Auto Stores, except where prohibited by franchise requirements.

We emphasize customer satisfaction and we realize that customer retention is critical to our success. We want our customers’ experiences to be so satisfying that they refer us to their families and friends. We utilize an owner marketing strategy consisting of email, traditional mail and phone contact to maintain regular communication, solicit feedback and identify unsatisfactory experiences.

To increase awareness and traffic at our stores, we employ a combination of traditional and digital media to reach potential customers. Total advertising expense, net of manufacturer credits, was $18.1 million during 2009. Approximately 70% of those funds were spent in traditional media and 30% were spent in digital and owner communications. In all of our communications, we seek to differentiate ourselves from competitors by conveying price, selection and finance benefits unique to Lithia.

Some of our advertising and marketing expenditures are offset by manufacturer co-op programs. Advertising credits not tied to specific vehicles are earned as reimbursement submitted to manufacturers for qualifying advertising expenditures. These reimbursements are recognized as a reduction of advertising expense upon manufacturer confirmation of submitted expenditures. Manufacturer cooperative advertising credits were $3.7 million in 2009, $3.9 million in 2008 and $4.8 million in 2007.

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 (Lithia.com) dedicated to generating customer leads for our stores. Today, our websites enable our customers to:

 

   

locate our stores and identify the new vehicle brands sold at each store;

 

   

search new and pre-owned vehicle inventory;

 

   

view current pricing and specials;

 

   

obtain Kelley Blue Book values;

 

   

submit credit applications;

 

   

shop for and order manufacturers’ vehicle parts;

 

   

schedule service appointments;

 

   

pay for service; and

 

   

provide feedback about their Lithia experience.

We also have mobile versions of our websites in anticipation of greater adoption of mobile technology.

We post our inventory on major new and used vehicle listing services (cars.com, autotrader.com, kbb.com, ebay, craigslist, etc.) to reach online shoppers. We also employ search engine optimization, search engine marketing and online display advertising to reach more online prospects.

Social influence marketing represents a very cost effective method to enhance our corporate reputation and increase vehicle sales and service. We are deploying tools and training to our employees in ways that will help us listen to our customers and create more ambassadors for Lithia.

 

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Table of Contents

Franchise Agreements

Each of our Lithia store subsidiaries operates under a separate franchise agreement with each manufacturer of the new vehicles it sells.

Typical automobile franchise agreements specify 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, however, guarantee exclusivity within a specified territory.

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

 

   

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, but, in practice, have indefinite lives. Some franchise agreements, including those with Ford and Chrysler, have no termination date. In addition, state franchise laws protect franchised automotive retailers. Under some 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;

 

   

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 2009, both Chrysler and General Motors underwent reorganizations while in bankruptcy protection, and as part of these reorganizations, both manufacturers terminated select franchises. In connection with its reorganization, the Chrysler entity emerging from bankruptcy protection, New Chrysler, assumed most Dealer Sales and Service (franchise) Agreements but elected to terminate certain franchise agreements to significantly reduce its dealer count. Two of our Chrysler stores (Omaha, NE Chrysler Jeep Dodge and Colorado Springs, CO Chrysler Jeep) were not assumed and those dealerships have ceased operations. After the reorganization, five of our existing Dodge dealerships were awarded additional franchises to sell either the Chrysler or Jeep brands, or both.

 

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GM undertook a similar process in its reorganization and selected certain dealerships within its network for termination. The terminated dealerships were offered agreements winding down their operations with a final termination no later than October 2010. The GM closure list was not made public, and each terminated dealership signed a non-disclosure agreement with respect to its closure. We received franchise agreement modification documents that terminate all operations at three locations, terminate Cadillac franchises at two Chevrolet/Cadillac stores, and terminate heavy truck franchises at two Chevrolet stores. We have also received notification that our one Saturn franchise will not be continued by GM.

Federal legislation was passed in December 2009 which provides terminated Chrysler dealers and GM dealers who have closed or have signed wind-down letters, the opportunity to pursue reinstatement through an arbitration proceeding. The legislation provides that the arbitrator, under the auspices of the American Arbitration Association, shall balance the economic interest of the covered dealership, the economic interest of the manufacturer and the economic interest of the public at large and shall decide based upon that balancing, whether or not the covered dealership should be reinstated in the dealer network.

We have filed notice of arbitration with respect to our previous Colorado Springs Chrysler Jeep store and for all of the GM stores except the Cadillac and heavy truck franchises. At this time, we are unable to assess the likelihood of successful arbitration results.

While the arbitrations could result in the reopening of the Colorado Springs Chrysler dealership and the continuation of the GM dealerships subject to challenge, it is possible that we could lose the recently awarded additional brands at the five Chrysler stores, or have competing points reinstated in these markets. Further, significant reinstatements by Chrysler or GM could add additional costs and burdens on the reorganized manufacturers, reducing their competitiveness. We are unable to predict the ultimate financial impact on our business, if any.

Competition

The retail automotive business is highly competitive. It consists 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 publicly 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 the majority of our regional markets. We compete directly with retailers with similar resources in our metropolitan markets in 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 the 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, 2009, we employed approximately 3,930 persons on a full-time equivalent basis.

Available Information and NYSE Compliance

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.

As required by the NYSE Corporate Governance Standards, we filed the appropriate certifications with NYSE in 2009 confirming that our CEO is not aware of any violations of the NYSE Corporate Governance Standards and we also filed with the SEC in 2009 the Chief Executive Officer and Chief Financial Officer certifications required under Section 302 of the Sarbanes-Oxley Act.

 

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.

Risk related to our business

Adverse conditions affecting one or more key manufacturers may negatively impact our business, results of operations, financial condition and cash flows.

We are subject to a concentration of risk in the event of financial distress, including potential reorganization or bankruptcy, of a major vehicle manufacturer. We purchase substantially all of our new vehicles from various manufacturers or distributors at the prevailing prices available to all franchised dealers. We finance certain new vehicle inventory with automotive manufacturers’ captive finance subsidiaries. Our sales volume could be materially adversely impacted by the manufacturers’ or distributors’ inability to supply our stores with an adequate supply of vehicles and related financing. Our Chrysler, GM and Ford (which we refer to as the domestic manufacturers) stores represented approximately 31%, 17% and 5% of our new vehicle sales in 2009, respectively, and approximately 35%, 18%, and 4% for all of 2008, respectively.

Most manufacturers have experienced significant declines in sales due to the recent economic recession. Many have disclosed substantial operating losses over the recent past. Two of these manufacturers, Chrysler and GM, filed a petition for Chapter 11 bankruptcy protection in the second quarter of 2009. Both succeeded in receiving approval for the transfer and sale of key operating assets into new companies with reduced debt, improved operating efficiencies, new ownership and resized operations.

 

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In connection with its reorganization, the Chrysler entity emerging from bankruptcy protection (“New Chrysler”), assumed most franchise agreements but elected to terminate certain franchise agreements to significantly reduce its dealer count. Two of our Chrysler stores were not assumed and those dealerships have ceased operations. Five of our existing Dodge dealerships were awarded additional franchises to sell the Chrysler or Jeep brands.

GM undertook a similar process in its reorganization. With respect to the dealerships it elected to terminate, the cancellation is not immediate but, rather, the dealers were offered agreements limiting their current operations, with a final termination of these selected locations to be effective no later than October 2010. The GM closure list is not made public, and no individual dealership may disclose whether it will be retained or terminated. We received franchise agreement modification documents that terminate all operations at three locations, terminate Cadillac franchises at two Chevrolet/Cadillac stores and terminate heavy truck franchises at two Chevrolet stores. We have also received notification that our one Saturn franchise will not be continued as GM was unable to find a purchaser of the Saturn brand.

Federal legislation was passed in December 2009 which provides terminated Chrysler dealers and GM dealers who have closed or have signed wind-down letters, the opportunity to pursue reinstatement through an arbitration proceeding. The legislation provides that the arbitrator, under the auspices of the American Arbitration Association, shall balance the economic interest of the covered dealership, the economic interest of the manufacturer and the economic interest of the public at large and shall decide based upon that balancing, whether or not the covered dealership should be reinstated in the dealer network.

We have filed notice of arbitration with respect to our previous Colorado Springs Chrysler Jeep store and for all of the GM stores except the Cadillac and heavy truck franchises. At this time, we are unable to assess the likelihood of successful arbitration results.

While the arbitrations could result in the reopening of the Colorado Springs Chrysler dealership and the continuation of the GM dealerships subject to challenge, it is possible that we could lose the recently awarded additional brands at the five Chrysler stores, or have competing points reinstated in these markets. Further, significant reinstatement by Chrysler or GM could add additional costs and burdens on the reorganized manufacturers, reducing their competitiveness. We are unable to predict the ultimate financial impact on our business, if any.

On April 30, 2009, Chrysler Financial discontinued providing advances for new floorplan financing. We utilized Chrysler Financial for floorplan financing at all of our Chrysler locations and certain non-Chrysler locations. We completed the transition to permanent floorplan facilities with GMAC for all of our affected dealerships. However, our floorplan financing with GMAC imposes certain obligations on us, including maintaining a deposit relationship. If we are unable to continue to comply with those obligations, we could lose our floorplan financing with GMAC.

While New Chrysler and GM have both emerged from bankruptcy protection and completed their reorganizations, the future remains uncertain. The success of the reorganizations and Chrysler’s integration with Fiat S.p.A. is unknown. The future financial condition of GM and New Chrysler, and their ability to provide products that result in sales and profits consistent with historical results, is at risk. Resizing operations could negatively impact the volume of vehicles produced and available to dealers. As such, no assurances can be given that our financial condition, results of operations and cash flows will not be adversely impacted in the future.

 

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The circumstances surrounding the manufacturers’ continued viability and the success of the reorganized companies remain fluid and uncertain. There can be no assurance that we will be able to successfully address the risks described above or those of the current economic circumstances and weak sales environment.

Our business will be harmed if overall consumer demand continues to suffer from a severe or sustained downturn.

Our business is heavily dependent on consumer demand and preferences. The recent downturn in overall levels of consumer spending has materially and adversely affected our revenues. We expect this downturn to continue through at least 2010. Retail vehicle sales are cyclical and historically have experienced periodic downturns characterized by oversupply and weak demand. These cycles are often dependent on general economic conditions and consumer confidence, as well as the level of discretionary personal income and credit availability. Economic conditions may continue in a severe, prolonged downturn, and continue to have a material adverse effect on our retail business, particularly sales of new and used automobiles.

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 high quality, defect-free 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, the discontinuance of a particular brand could negatively impact our revenues and profitability.

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, 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 and cash flows.

The recent announcement by Toyota, of not only its recall of approximately 8.5 million vehicles for possible accelerator pedal sticking issues, but to cease selling 8 models of vehicles until potentially defective parts have been replaced, has reduced sales at our Toyota stores and has adversely effected the manufacturer’s reputation for quality. It is uncertain how long repairs and replacements will take and the long term effects these recalls and safety issues will have on the Toyota brands.

Additionally, federal and certain state laws mandate minimum levels of vehicle fuel economy and establish emission standards which levels and standards could be increased in the future, including requiring 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.

 

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A decline of available financing in the lending market has, and may continue to, adversely affect our vehicle sales volume.

A significant portion of vehicle buyers, particularly in the used car market, finance their purchases of automobiles. Sub-prime lenders have historically provided financing for consumers who, for a variety of reasons including poor credit histories and lack of down payment, do not have access to more traditional finance sources. Lenders have generally tightened their credit standards. In the event lenders maintain or further tighten their credit standards or there is a further decline in the availability of credit in the lending market, the ability of these consumers to purchase vehicles could be limited which could have a material adverse effect on our business, results of operations, financial condition and cash flows.

We are dependent on manufacturer-affiliated financing companies to provide flooring sources for our new vehicle inventories. If flooring sources are eliminated or reduced, no assurance 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 secure real estate financing from certain lenders with a commitment that we continue to maintain associated flooring lines at the location so long as any mortgage debt remains outstanding. Such a commitment subjects us to the prevailing flooring line rate and terms offered by the lender, unless we are able to refinance our real estate debt placed with them.

We currently have relationships with a number of manufacturers or their affiliated finance companies, including GMAC LLC, Daimler Financial, TMCC, Ford Motor Credit Company, VW Credit, Inc., American Honda Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC. These companies provide new vehicle floorplan financing for their respective brands. GMAC LLC serves as the primary lenders for all other brands. At December 31, 2009, GMAC was the flooring provider on approximately 66% of the amount outstanding. Certain of these companies have incurred significant losses and are operating under financial constraints. Other companies may incur losses in the future or undergo funding limitations. 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 business may be adversely affected by unfavorable conditions in our local markets, even if those conditions are not prominent nationally.

Our performance is subject to local economic, competitive and other conditions prevailing in our various geographic areas. Our dealerships currently are located in limited markets in 12 states, with three states accounting for approximately 52% of our annualized revenue in 2009. Our results of operations, therefore, depend substantially on general economic conditions and consumer spending levels in those markets and could be materially adversely affected to the extent these markets experience sustained economic downturns regardless of improvements in the U.S. economy overall.

 

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If manufacturers or distributors discontinue or change sales incentives, warranties and other promotional programs, our business, results of operations, financial condition and cash flows may be materially adversely affected.

We depend upon the manufacturers and distributors for sales incentives, warranties and other programs that are intended to promote new vehicle sales or support dealership profitability. Manufacturers and distributors routinely make many changes to their incentive programs. Some of the key incentive programs include:

 

   

customer rebates;

 

   

dealer incentives on new vehicles;

 

   

special rates on certified, pre-owned cars;

 

   

below-market financing on new vehicles and special leasing terms; and

 

   

sponsorship of used vehicle sales by authorized new vehicle dealers.

Our financial condition could be materially adversely impacted by a discontinuation or change in our manufacturers’ or distributors’ incentive programs. In addition, some manufacturers, including BMW and Mercedes, use a dealership’s manufacturer-determined customer satisfaction index, or CSI, scores as a factor governing participation in incentive programs. To the extent we cannot meet such minimum scores, we may be precluded from receiving certain incentives, which could materially adversely affect our business, results of operations, financial condition and cash flows.

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. Limited supply of, and an increasing demand for, crude oil over time are 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 (which typically have lower margins) or hybrid vehicles (which can be in limited supply during these periods).

Additionally, a significant portion of our new vehicle revenue and gross profit is derived from domestic manufacturers. These manufacturers have historically sold a higher percentage of trucks and SUVs than import or luxury brands. As such, they may experience a more significant decline in sales in the event that fuel prices increase.

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 business, results of operations, financial condition and cash flows.

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. Such agreements contain provisions for termination or non-renewal for a variety of causes, including CSI scores and sales and financial performance. From time to time, certain of our stores have failed to comply with certain provisions of their franchise agreements, and

 

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we cannot assure you that our stores will be able to comply with these provisions in the future. In addition, actions taken by a manufacturer to exploit its bargaining position in negotiating the terms of renewals of franchise agreements or otherwise could also have a material adverse effect on our revenues and profitability. If a manufacturer terminates or fails to renew one or more of our significant franchise agreements or a large number of our franchise agreements, such action could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Our franchise agreements also specify that, except 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. Moreover, our manufacturers generally require that the store meet defined image standards. These commitments could require us to make significant capital expenditures.

If state dealer laws are repealed or weakened, our dealerships will be more susceptible to termination, non-renewal or renegotiation of their franchise agreements. Additionally, federal bankruptcy law can override protections afforded under state dealer laws.

State dealer laws generally provide that a manufacturer may not terminate or refuse to renew a franchise agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Some state dealer laws allow dealers to file protests or petitions or attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. If dealer laws are repealed in the states in which we operate, manufacturers may be able to terminate our franchises without providing advance notice, an opportunity to cure or a showing of good cause. Without the protection of state dealer laws, it may also be more difficult for our dealers to renew their franchise agreements upon expiration.

In addition, these laws restrict the ability of automobile manufacturers to directly enter the retail market in the future. If manufacturers obtain the ability to directly retail vehicles and do so in our markets, such competition could have a material adverse effect on our business, results of operations, financial condition and cash flows.

As evidenced by the recent bankruptcy proceedings of both Chrysler and GM, state dealer laws do not afford continued protection from manufacturer terminations or non-renewal of franchise agreements. While we do not believe additional bankruptcy filings are probable, no assurances can be given that a manufacturer will not seek protection under bankruptcy laws, or that, in this event, they will not seek to terminate franchise rights held by us.

Manufacturer stock ownership restrictions may impair our ability to maintain or renew franchise agreements or issue additional equity.

Certain of our franchise agreements prohibit transfers of ownership interests of a store or, in some cases, its parent. The most prohibitive restriction which could be imposed by various manufacturers, including Honda/Acura, Hyundai, Isuzu, Mazda and Nissan, 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. Other restrictions in certain franchise agreements with manufacturers, including Ford, GM, Honda/Acura and Toyota, provide that a change in control in the Company is a violation of the agreement. Violations by our shareholders or prospective shareholders are generally outside of our control and may result in the termination or non-renewal of one or more of our franchises or impair our ability to negotiate new franchise agreements for dealerships we desire to acquire in the future, which may have a material adverse effect on our business, results of operations, financial condition and cash flows. These restrictions may also prevent or deter a prospective acquirer from acquiring control of us or otherwise adversely affect the market price of our Class A common stock or limit our ability to restructure our debt obligations.

 

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Our overall liquidity may be materially adversely affected by failures of or delays by manufacturers in remitting payments to us.

We rely on our manufacturer partners to pay amounts owed to us under customary business terms. These amounts owed to us relate to, but are not limited to, warranty work performed, factory holdback or other manufacturer incentives. Total receivables from manufacturers were $11.0 million and $16.5 million as of December 31, 2009 and 2008, respectively. In the event manufacturers significantly delay or fail to make payments of amounts owed, our overall liquidity position could be materially and adversely affected.

Increasing competition among automotive retailers reduces our profit margins on vehicle sales and related businesses. Further, the use of the Internet in the car purchasing process could materially adversely affect us.

Automobile retailing is a highly competitive business. Our competitors include publicly and privately-owned dealerships, some of which are larger and have greater financial and marketing resources than we do. Many of our competitors sell the same or similar makes of new and used vehicles that we offer in our markets at competitive prices. We do not have any cost advantage in purchasing new vehicles from manufacturers due to economies of scale or otherwise. In addition, the popularity of short-term vehicle leasing in the past few years has resulted, as these leases expire, in a large increase in the number of late model used vehicles available in the market, which puts added pressure on new and used vehicle margins.

Our finance and insurance business and other related businesses, which have higher margins than sales of new and used vehicles, are subject to strong competition from various financial institutions and other third parties.

The Internet has become a significant part of the sales process in our industry. Customers are using the Internet to compare pricing for cars and related finance and insurance services, which may further reduce margins for new and used cars and profits for related finance and insurance services. If Internet new vehicle sales are allowed to be conducted without the involvement of franchised dealers, our business could be materially adversely affected. In addition, other franchise groups have aligned themselves with services offered on the Internet or are investing heavily in the development of their own Internet capabilities, which could materially adversely affect our business, results of operations, financial condition and cash flows.

Our franchise agreements do not grant us the exclusive right to sell a manufacturer’s product within a given geographic area. Our revenues or profitability could be materially adversely affected if any of our manufacturers award franchises to others in the same markets where we operate or if existing franchised dealers increase their market share in our markets.

In addition, we may face increasingly significant competition as we strive to gain market share through acquisitions or otherwise. Our operating margins may decline over time as we expand into markets where we do not have a leading position.

 

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Import product restrictions and foreign trade risks may impair our ability to sell foreign vehicles profitably.

A significant portion of the vehicles we sell, as well as certain major components of such vehicles, 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 socio-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 business, results of operations, financial condition and cash flows.

Environmental, health or safety regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows 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 assurance 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 stringent. There can be no assurance that the costs of compliance with these regulations will not result in a material adverse effect on our results of operations or financial condition. Further, no assurances can be given 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 applicable 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 continuous 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 12 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 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, private causes of action on behalf of individuals or a class of individuals could result in significant damages or injunctive relief.

 

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The seasonality of our business magnifies the importance of second and third quarter operating results.

Our business is subject to seasonal variations in revenues. In our experience, demand for automobiles is generally lower during the first and fourth quarters of each year and this variance is even more pronounced in stores located in cold-weather states. We, therefore, generally receive a disproportionate amount of revenues in the second and third quarters and expect our revenues and operating results to be generally lower in the first and fourth quarters. Consequently, if conditions surface during the second and third quarters that impair vehicle sales, such as higher fuel costs, depressed economic conditions or similar adverse conditions, our revenues for the full year could be materially adversely affected.

Our ability to increase revenues through acquisitions depends on our ability to acquire and successfully integrate additional stores.

General

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 acquisition of additional stores, we need to successfully address each of the following challenges.

Limitations on our capital resources

The acquisition of additional stores will require substantial capital investment. Limitations on our capital resources would restrict our ability to complete new acquisitions.

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 private debt offerings. The use of any of these financing sources could have the effect of reducing our earnings per share. We may not be able to obtain financing in the future due to the market price of our Class A common stock and overall market conditions. Furthermore, using cash to complete acquisitions could substantially limit our operating or financial flexibility.

Substantially all of the assets of our dealerships are pledged to secure the indebtedness under our Credit Facility and our floorplan financing indebtedness. These pledges may limit our ability to borrow from other sources in order to fund our acquisitions.

Manufacturers

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. Obtaining manufacturer approval of acquisitions also takes a significant amount of time, typically 60 to 90 days. We cannot assure you that manufacturers will approve future acquisitions or do so on a timely basis, which could significantly impair the execution of our acquisition strategy.

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; and

 

   

frequency of acquisitions.

 

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In addition, such manufacturers generally require that no other manufacturers’ brands be sold from the same store location, and many manufacturers have 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 the 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 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.

Acquisition risks

We will face risks commonly encountered with growth through acquisitions. These risks include, without limitation:

 

   

incurring significantly higher capital expenditures and operating expenses;

 

   

failing to assimilate the operations and personnel of acquired dealerships;

 

   

entering new markets with which we are unfamiliar;

 

   

encountering undiscovered liabilities and operational difficulties at acquired dealerships;

 

   

disrupting our ongoing business;

 

   

diverting our management resources;

 

   

failing to maintain uniform standards, controls and policies;

 

   

impairing relationships with employees, manufacturers and customers as a result of changes in management;

 

   

incurring increased expenses for accounting and computer systems, as well as integration difficulties;

 

   

failing to obtain a manufacturer’s consent to the acquisition of one or more of its dealership franchises or renew the franchise agreement on terms acceptable to us; and

 

   

valuing incorrectly entities to be acquired.

In addition, we may not adequately anticipate all of the demands that growth will impose on our systems, procedures and structures.

Consummation; competition

We may not be able to consummate any future acquisitions at acceptable prices and terms or identify suitable candidates. In addition, increased competition in the future for acquisition candidates could result in fewer acquisition opportunities for us and higher acquisition prices. The magnitude, timing, pricing and nature of future acquisitions will depend upon various factors, including:

 

   

the availability of suitable acquisition candidates;

 

   

competition with other dealer groups for suitable acquisitions;

 

   

the negotiation of acceptable terms with the seller and with the manufacturer;

 

   

our financial capabilities and ability to obtain financing on acceptable terms;

 

   

our stock price;

 

   

our ability to maintain required financial covenant levels after the acquisition; and

 

   

the availability of skilled employees to manage the acquired businesses.

Financial condition

The operating and financial condition of acquired businesses cannot be determined accurately until we assume control. Although we conduct what we believe to be a prudent level of investigation regarding the operating and financial condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these

 

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businesses. Similarly, many of the dealerships we acquire do not have financial statements audited or prepared in accordance with U.S. generally accepted accounting principles. We may not have an accurate understanding of the historical financial condition and performance of our acquired businesses. Until we actually assume control of the business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired businesses and their operations.

Indefinite-lived intangible assets (franchise value) comprise a meaningful portion of our total assets ($42.5 million at December 31, 2009). We must test our intangible assets for impairment at least annually, which may result in a non-cash write down of franchise rights and could have a material adverse impact on our business, results of operations, financial condition and cash flows and impair our ability to comply with 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 charges increases if operating losses are suffered at those stores, if a manufacturer files for bankruptcy or if the stores are closed. Impairment charges result in a non-cash write-down of the affected franchise values. Furthermore, impairment charges 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 business, results of operations, financial condition and cash flows.

A net deferred tax asset position comprises a meaningful portion of our total assets (approximately $39.7 million at December 31, 2009). We are required to assess the recoverability of this asset on an ongoing basis. Future negative operating performance or other unfavorable developments may result in a valuation allowance being recorded against some or all of this amount. This could have a material adverse impact on our business, results of operations, financial condition and cash flows and impair our ability to comply with loan covenants.

Deferred tax assets are evaluated periodically 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 financial ratios or other covenants under our debt agreements and could have a material adverse impact on our business, results of operations, financial condition and cash flows.

Our Credit Facility expires in October 2010. If we are unable to extend or replace our Credit Facility, our overall liquidity position may be materially adversely affected.

We rely on our Credit Facility for working capital requirements, portions of our used vehicle inventory, acquisitions and for general corporate purposes. We recently amended our Credit Facility, which extended it to October 2010 and relaxed certain restrictions governing acquisitions, dividend payments and share repurchases. As of December 31, 2009, we had $24.0 million drawn under our Credit Facility. We intend to amend, extend or replace the Credit Facility. However, we can provide no assurance that we will be able to amend, extend or replace our Credit Facility on terms acceptable to us, or at all, prior to its maturity. A failure to amend, extend or replace our Credit Facility could materially adversely affect our liquidity and our business, results of operations, financial condition and cash flows.

 

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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.

As of December 31, 2009, our total outstanding indebtedness was approximately $486.9 million, including $210.5 million in floor plan financing, $24.0 million in borrowings under our Credit Facility, $238.8 million in mortgage debt, $8.5 million in other long term debt, $2.9 million in floorplan financing and $2.2 million in mortgage debt in liabilities related to assets held for sale. Mortgage indebtedness consists primarily of real estate loans on individual properties from thirteen different banks and finance companies at fixed and variable rates.

Our floorplan financing is provided by nine banks and finance companies that are or previously were associated with automobile manufactures. For new vehicles and vehicles purchased at dealer auctions, advances are made at the time such vehicles are purchased and are typically required to be repaid no later than upon sale or lease of the vehicle.

Most of our floorplan financing may be terminated at any time by the lender and is due on demand.

Our indebtedness and lease obligations could have important consequences to us, including the following:

 

   

limitations on our ability to make acquisitions;

 

   

our ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes may be impaired in the future;

 

   

a 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 loan agreements contain covenants that limit our discretion with respect to business matters, including incurring additional debt or disposing of assets. Other covenants are financial in nature, including current and fixed-charge ratios and minimum net-worth requirements. A breach of any of these covenants could result in a default under the applicable agreement. In addition, a default under one agreement could result in a default and acceleration of our repayment obligations under the other agreements under the cross-default provisions in such other agreements.

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.

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.

The global credit and capital markets are undergoing a period of substantial volatility and disruption, and the global economy is experiencing a recession. There can be no assurance that this credit environment will not worsen or further impact the availability and cost of debt financing, including the refinancing of our indebtedness. If we are unable to refinance or renegotiate our debt, we cannot guarantee that we will be able to generate enough cash flow from operations or that we will be able to obtain enough capital to

 

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service our debt, make acquisitions or fund our planned capital expenditures. In such an event, we could face substantial liquidity issues and might be required to issue equity securities or sell some of our assets to meet our debt payments and other obligations. There can be no assurance that we will be able to effect refinancing of our indebtedness on terms acceptable to us, if at all.

Additionally, our real estate debt generally has a five year term after which the debt needs to be renewed or replaced. Over the last two years, the appraised value of commercial real estate, generally, and much of our real estate, specifically, has declined. Further, many lenders are reducing the loan-to-value lending ratios for new or renewed real estate loans. The effect of these developments could result in our inability to renew maturing real estate loans at the debt level existing at maturity, or on terms acceptable to us, requiring us to find replacement lenders or to refinance at lower loan amounts.

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.

In addition, as we expand we may need to hire additional managers. The market for qualified employees in the industry and in the regions in which we operate, particularly for general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. The loss of the services of key employees or the inability to attract additional qualified managers could have a material adverse effect on our business, results of operations, financial condition and cash flows. In addition, the lack of qualified management or employees employed by potential acquisition candidates may limit our ability to consummate future acquisitions.

The sole voting control of our company is currently held by Sidney B. DeBoer, who may have interests different from our other shareholders. Further, 3.8 million shares of our Class B common stock held by Lithia Holding Company, LLC (“Lithia Holding”) 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.

Lithia Holding, 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 3, 2010, Lithia Holding controlled approximately 63% of the aggregate number of votes eligible to be cast by shareholders for the election of directors and most other shareholder actions. 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.

Lithia Holding has pledged 3.8 million shares of our Class B common stock, together with other personal assets of Mr. DeBoer, to secure a personal loan to Mr. DeBoer from U.S. Bank National Association. 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

 

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consented to by the manufacturers, would be a technical violation under most of the dealer sales and service agreements held by us. While 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 result in the removal of both Sid DeBoer and Bryan DeBoer, there can be no assurance that such laws will not change. In addition, the market price of our Class A common stock could decline materially if the bank foreclosed on such pledged stock and subsequently sold such stock in the open market.

Risks related to investing in our Class A common stock

Future sales of our Class A common stock in the public market could adversely impact the market price of our Class A common stock.

As of March 3, 2010, we had 1,560,777 shares of Class A common stock reserved for issuance under our equity plans (including our employee stock purchase plan). As of March 3, 2010, a total of 1,744,387 shares were outstanding related to outstanding restricted stock units and options (with the options having a weighted average exercise price of $13.66 per share and options to purchase 518,187 shares being exercisable). In addition, we had 3,762,231 shares of Class B common stock outstanding convertible into 3,762,231 shares of Class A common stock.

In the future, we may sell additional shares of our Class A common stock to raise capital. We cannot predict the size of future sales or the effect, if any, they may have on the market price of our Class A common stock. The sale of substantial amounts of Class A common stock, or the perception that such sales may occur, could adversely affect the market price of our Class A common stock and impair our ability to raise capital through the sale of additional equity securities, or to sell equity at a price acceptable to us.

Volatility in the market price and trading volume of our Class A common stock could adversely impact the value of your shares of our Class A common stock.

The stock market in recent years has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like ours. These broad market factors may materially reduce the market price of our Class A common stock, regardless of our operating performance. The market price of our Class A common stock, which has experienced large price and volume fluctuations in recent months, could continue to fluctuate significantly for many reasons, including in response to the risks described herein for reasons unrelated to our operations, such as:

 

   

reports by industry analysts;

 

   

changes in financial estimates by securities analysts or us, or our inability to meet or exceed securities analysts’, investors’ or our own estimates or expectations;

 

   

actual or anticipated sales of common stock by existing shareholders;

 

   

capital commitments;

 

   

additions or departures of key personnel;

 

   

developments in our business or in our industry;

 

   

a prolonged downturn in our industry;

 

   

general market conditions, such as interest or foreign exchange rates, commodity and equity prices, availability of credit, asset valuations and volatility;

 

   

changes in global financial and economic markets;

 

   

armed conflict, war or terrorism;

 

   

regulatory changes affecting our industry generally or our business and operations in particular;

 

   

changes in market valuations of other companies in our industry;

 

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the operating and securities price performance of companies that investors consider to be comparable to us; and

 

   

announcements of strategic developments, acquisitions and other material events by us, our competitors or our suppliers.

Oregon law and our Restated Articles of Incorporation may impede or discourage a takeover, which could impair the market price of our Class A common stock.

We are an Oregon corporation, and certain provisions of Oregon law and our Restated Articles of Incorporation may have anti-takeover effects. These provisions could delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider to be in his or her best interest. These provisions may also affect attempts that might result in a premium over the market price for the shares held by shareholders, and may make removal of the incumbent management and directors more difficult, which, under certain circumstances, could reduce the market price of our Class A common stock.

Our issuance of preferred stock could adversely affect holders of Class A common stock.

Our Board of Directors is authorized to issue series of preferred stock without any action on the part of our holders of Class A common stock. Our Board of Directors also has the power, without shareholder approval, to set the terms of any such series of preferred stock that may be issued, including voting powers, preferences over our Class A common stock with respect to dividends or if we voluntarily or involuntarily dissolve or distribute our assets, and other terms. If we issue preferred stock in the future that has preference over our Class A common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our Class A common stock, the rights of holders of our Class A common stock or the price of our Class A common stock could be adversely affected.

 

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 certain 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 two proceedings will have a material adverse effect on our business, results of operations, financial condition, or cash flows.

 

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Phillips/Allen/Aripe 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. Discovery is completed and a resolution of the case is expected by the end of 2010.

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 July 27, 2009, we filed a Motion to Dismiss all claims with the Arbitrators hearing the dispute. On September 30, 2009, the Chief Arbitrator issued an Order acknowledging the voluntary withdrawal of the federal RICO claims by the Plaintiff and dismissed the claim for emotional distress damages. Further motions are pending, but the most significant monetary exposures have been removed from the case. The parties have agreed to delay discovery or other activity with respect to this case until the resolution of the Allen case.

Alaska Service and Parts Advisors and Managers’ Overtime Suit

On March 22, 2006, seven former employees in Alaska brought suit against us (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’s 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 sought 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. The replacement arbitrator has now been appointed and recently ruled to remove all service and parts managers from the case. A class action opt-out notice was mailed to the service and parts employees in October 2009. No arbitration date has been set.

 

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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 expected to result in any significant settlement amounts. 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. Reserved

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

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 2008 and 2009:

 

2008

       High            Low    

Quarter 1

   $ 15.72    $ 8.91

Quarter 2

     10.94      4.89

Quarter 3

     6.76      3.51

Quarter 4

     4.99      1.53

2009

         

Quarter 1

   $ 3.90    $ 1.98

Quarter 2

     9.58      1.85

Quarter 3

     16.49      8.43

Quarter 4

     15.42      7.04

The number of shareholders of record and approximate number of beneficial holders of Class A common stock at March 3, 2010 was 1,288 and 6,646, respectively. All shares of Lithia’s Class B common stock are held by Lithia Holding Company, LLC.

Dividends declared or paid on our Class A and Class B common stock during 2008 were as follows:

 

      Dividend
    amount per    

share
       Total amount of    
dividend (in
thousands)

Quarter related to:

     

2007

     

Fourth quarter

   $ 0.14    $ 2,776

2008

     

First quarter

     0.14      2,806

Second quarter

     0.14      2,837

Third quarter

     0.05      1,025

We did not declare nor pay any dividends on our Class A and Class B common stock related to the fourth quarter of 2008 or all of 2009.

 

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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 Penske Automotive 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, 2009. 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.

LOGO

 

    

Base

Period

   Indexed Returns for the Year Ended

Company/Index

   12/31/2004    12/31/2005    12/31/2006    12/31/2007    12/31/2008    12/31/2009

Lithia Motors, Inc.

   $ 100.00    $ 118.92    $ 110.72    $ 54.19    $ 13.75    $ 34.67

Auto Peer Group

     100.00      112.63      128.85      89.20      43.20      89.38

Russell 2000

     100.00      104.56      123.75      121.83      80.66      102.59

 

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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. The results of operations for stores classified as discontinued operations have been presented on a comparable basis for all periods presented.

 

      Year Ended December 31,  

(In thousands, except per share amounts)

   2009     2008     2007     2006     2005  

Consolidated Statement of Operations Data:

          

Revenues:

          

New vehicle

   $ 874,701      $ 1,147,418      $ 1,526,559      $ 1,447,662      $ 1,233,456   

Used vehicle

     539,352        547,706        669,912        645,038        584,078   

Finance and insurance

     56,010        76,679        99,207        96,518        84,655   

Service, body and parts

     276,690        286,326        284,769        247,242        212,297   

Fleet and other

     2,562        4,871        4,653        5,183        3,577   
                                        

Total revenues

     1,749,315        2,063,000        2,585,100        2,441,643        2,118,063   

Cost of sales

     1,419,696        1,706,525        2,149,283        2,026,462        1,745,374   
                                        

Gross profit

     329,619        356,475        435,817        415,181        372,689   

Asset impairments

     6,976        335,672        1,215        19        —     

Selling, general and administrative

     270,245        307,316        341,406        313,959        270,301   

Depreciation and amortization

     18,248        16,943        16,485        13,169        10,776   
                                        

Operating income (loss)

     34,150        (303,456     76,711        88,034        91,612   

Floorplan interest expense

     (10,878     (20,517     (24,415     (25,671     (11,519

Other interest expense

     (14,063     (17,878     (16,273     (12,206     (9,763

Other income, net

     1,494        6,624        612        764        841   
                                        

Income (loss) from continuing operations before income taxes

     10,703        (335,227     36,635        50,921        71,171   

Income tax (provision) benefit

     (4,639     108,720        (14,865     (19,626     (27,524
                                        

Income (loss) from continuing operations

     6,064        (226,507     21,770        31,295        43,647   

Income (loss) from discontinued operations, net of tax

     3,087        (26,079     (221     6,009        9,980   
                                        

Net income (loss)

   $ 9,151      $ (252,586   $ 21,549      $ 37,304      $ 53,627   
                                        

Basic income (loss) per share from continuing operations

   $ 0.28      $ (11.22   $ 1.11      $ 1.60      $ 2.27   

Basic income (loss) per share from discontinued operations

     0.14        (1.29     (0.01     0.30        0.52   
                                        

Basic net income (loss) per share

   $ 0.42      $ (12.51   $ 1.10      $ 1.90      $ 2.79   
                                        

Shares used in basic per share

     22,037        20,195        19,675        19,583        19,223   
                                        

Diluted income (loss) per share from continuing operations

   $ 0.27      $ (11.22   $ 1.07      $ 1.49      $ 2.08   

Diluted income (loss) per share from discontinued operations

     0.14        (1.29     (0.01     0.27        0.46   
                                        

Diluted net income (loss) per share

   $ 0.41      $ (12.51   $ 1.06      $ 1.76      $ 2.54   
                                        

Shares used in diluted per share

     22,176        20,195        22,204        22,207        21,854   
                                        

Cash dividends declared per common share

   $ —        $ 0.47      $ 0.56      $ 0.54      $ 0.44   
                                        

Factors Affecting Comparability

          

Stock-based compensation expense included as a component of selling, general and administrative expense

   $ 2,054      $ 1,725      $ 3,384      $ 3,534      $ 490   

Loss (gain) related to undesignated interest rate swaps included as a component of floorplan interest expense

     (502     545        —          (1,921     4,081   

Ineffectiveness loss (gain) related to interest rate swaps included as a component of floorplan interest expense

     (411     363        73        —          —     
     As of December 31,  

(In thousands)

   2009     2008     2007     2006     2005  

Consolidated Balance Sheet Data:

          

Working capital

   $ 96,886      $ 99,524      $ 193,447      $ 149,701      $ 156,446   

Inventories

     328,726        422,812        601,759        603,306        606,047   

Total assets

     895,100        1,133,459        1,626,735        1,579,357        1,452,714   

Flooring notes payable

     210,488        337,700        451,590        499,679        530,452   

Current maturities of long-term debt

     38,303        78,634        13,327        16,557        6,868   

Long-term debt, less current maturities

     233,065        265,184        455,495        392,383        290,551   

Total stockholders’ equity

     307,038        248,343        508,212        493,393        460,231   

 

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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

As discussed in Overview in Item 1, “Business” above, we are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of March 3, 2010, we offered 26 brands of new vehicles and all brands of used vehicles in 85 stores in the United States and online at Lithia.com. We sell new and used cars and light trucks, replacement parts, provide vehicle maintenance, warranty, paint and repair services and arrange related financing, service contracts, protection products and credit insurance.

We believe that the reorganization of Chrysler and General Motors (“GM”) impacted our sales levels relative to the overall market sales environment, particularly in the fourth quarter of 2009. The production shutdowns both manufacturers implemented over the summer, coupled with the high demand for vehicles due to the CARS Program, left inventories in extremely short supply. Popular vehicles such as Ram pickup trucks and four-door Jeep Wranglers were not available in sufficient quantities to match consumer demand. Additionally, Chrysler has continued to experience declining market share in North America, providing fewer retail sales opportunities for our stores. We believe the inventory shortages will be quickly corrected. However, no assurances can be given that these issues will be contained to the near term, or that other problems related to the financial condition and product offering of these or our other manufacturers will not arise.

We have restructured our operations to align our costs with current industry vehicle sales levels. We believe that we are well positioned to benefit from an increase in new vehicle sales above current levels. We believe the actions we have taken over the past two years demonstrate the resiliency of our company. However, no assurances can be given that industry sales will not experience a further decline, or that our restructuring plan was sufficient to meet our operating objectives in a declining market.

We continue to believe that the fragmented nature of the automotive dealership sector provides us with the opportunity to achieve growth through consolidation. We have completed over 100 acquisitions since our initial public offering in 1996. Our acquisition strategy has been to acquire underperforming dealerships and, through the application of our centralized operating structure, improve store profitability. We believe the current economic environment provides us with attractive acquisition opportunities. Additionally, our management team possesses substantial experience, with our key management executives having an average of over 25 years experience in automotive retailing, and has demonstrated the ability to profitably operate stores and successfully integrate acquisitions.

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, we have seen a shift away from leasing and subsidized financing to dealer and consumer rebates and repricing strategies.

In 2009, manufacturers reduced the number of vehicles being produced, including an idling of production at both Chrysler and GM, to better match consumer demand. As a result of this, as well as the weaker financial condition of manufacturers, fewer incentives were offered, and demand for vehicles declined. Consumers who had grown accustomed to large rebates to subsidize negative equity in their automotive loans were prevented from purchasing new cars, and demand for other models traditionally dependent on rebates to incentivize purchases was relatively weak.

 

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In the second half of 2009, financing companies such as banks and manufacturer captives gradually relaxed lending terms as used vehicle prices improved and defaults did not dramatically increase. This increased support allowed more customers with lower credit scores to access auto loans than in late 2008 and early 2009.

In the fourth quarter of 2009, Chrysler dramatically cut the level of both marketing and rebates on its vehicles, particularly as they began to re-brand their cars to reflect the new identity of the company. These reductions in dealer support, coupled with short supplies of vehicles, particularly of high demand models, impacted our operating results at the end of 2009. While we believe this to be a temporary issue that will be quickly corrected, no assurances can be provided that support levels and an improved supply of attractive vehicles will be adequate to reach previous sales levels.

Reclassification of Stores Previously Classified as Held for Sale

In the fourth quarter of 2009, our management team re-evaluated the decision to continue to classify certain stores as held for sale in light of the then current market conditions, prospects for economic recovery, improved company-wide and individual store operating performance and overall capital needs. Specific factors taken into consideration were as follows:

 

   

a lack of available credit continued to prove challenging to prospective purchasers of our stores. One of the primary problems was the lack of vehicle inventory floorplan financing, which is a basic requirement of the franchise agreement. Even for prospective purchasers with existing floorplan financing, obtaining mortgage financing on dealership real estate or committing to other significant capital investment proved exceedingly difficult.

 

   

continued economic uncertainty, including increasing unemployment, resulting in low consumer confidence and a prolonged reluctance to purchase big ticket items such as automobiles.

 

   

the dramatically decreased pool of potential purchasers further extended our store disposition time line. The absence of qualified buyers reduced expected proceeds to levels significantly below the range of what we considered to be reasonable.

 

   

a restructuring of store operations in 2008 and accelerated in 2009 aligned our costs with current industry vehicle sales levels, and enhanced our liquidity position. This restructuring improved operational performance at all locations, including those slated for divestiture. Improved operating performance at the stores held for sale, even on a constant valuation multiple, increased expected selling prices, which proved unobtainable given market conditions.

 

   

the reorganization of Chrysler and GM resulted in the closure of four domestic stores that we had not selected for divestiture. One of the original considerations for the restructuring we initiated in 2008 involved diversifying our portfolio to reduce dependence on domestic manufacturers, particularly Chrysler and GM. The unexpected closure of locations not selected for disposition accelerated this portfolio diversification and made some divestitures less critical.

 

   

throughout 2008 and 2009, we generated cash through asset sales, mortgage financing and operational cash flows. In 2009, we retired our outstanding convertible notes as they matured. Also, in late 2009, we completed a follow-on equity offering raising approximately $43 million. We extended the maturity on our Credit Facility into late 2010. These actions reduced the immediate need for liquidity to ensure our ongoing operations and eliminated the need to dispose of assets to raise cash.

Based on these factors, in the fourth quarter of 2009, circumstances previously considered unlikely were deemed to have occurred, and our management team concluded that we no longer were committed to sell certain stores. Therefore, we no longer met the criteria necessary to continue to classify the stores as held for sale. Assets and related liabilities associated with 10 stores were subsequently reclassified out of assets held for sale. Their associated results of operations were retrospectively reclassified from discontinued operations to continuing operations for all periods presented.

 

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Certain locations we had closed in 2008 and 2009 continued to have assets, primarily real estate, classified as held for sale. Given the evaluation of overall market conditions, including commercial real estate, and our improved liquidity, we reclassified seven properties where operations had ceased to held and used in the fourth quarter of 2009. Impairment charges associated with these assets were reclassified from discontinued operations to continuing operations as a component of Other Asset Impairment for all periods presented. See Note 15 of Notes to Consolidated Financial Statements for additional information.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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.

Our most critical accounting estimates include those related to assets held for sale, indefinite-lived intangible assets, long-lived assets, deferred tax assets, service contracts and other insurance contracts, and lifetime oil change and workers’ compensation self insurance. We also have other key accounting 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 materially from these estimates.

Classification and Valuation of Assets and Related Liabilities Held for Sale

An asset or disposal group, comprising of assets and related liabilities of a store expected to be disposed of in one transaction, is evaluated to determine if it meets the criteria for classification as held for sale. If the required criteria are met, the asset or disposal group is reclassified to held for sale.

At each period end, we evaluate whether the criteria for continued classification as held for sale are met for each asset and disposal group. The evaluation of these criteria involves judgment, including the period required to complete the disposition and the likelihood the plan for disposition will change.

The results of operations of our stores that have either been disposed of or are classified as held for sale are reported in discontinued operations if the operations of the stores have been or will be eliminated from the ongoing operations as a result of the disposal transaction, and we will not have significant continuing involvement in its operations after its disposal.

When an asset or disposal group is classified as held for sale, it is measured at the lower of its carrying amount or fair value less costs to sell. The fair value of a disposal group is determined for the group in the aggregate. An impairment is recorded when the carrying amount of an asset or disposal group exceeds its fair value.

 

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We utilize historical experience, current asset purchase agreements, feedback from prospective buyers and third party broker estimates of value to determine the proceeds we expect to receive for a disposal group. For the real property component of a disposal group, we also consider fair value estimates based on a methodology utilizing gross profit generated by the disposal group in comparison to the percentage of average rent to gross profit for comparable asset groups elsewhere in the organization.

A future decline in store performance, changes in market conditions for commercial real estate, or the potential insolvency of a manufacturer could reduce the proceeds that will be received for the disposal group. Additionally, if disposal groups related to operations which are subsequently 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, as their highest and best use is predominantly as an operating new vehicle dealership. Any reduction in the expected proceeds for the eventual disposition of our assets held for sale could result in the recognition of additional impairment charges, which could have a material adverse impact on our financial position and results of operations.

At December 31, 2009, two stores were classified as held for sale. Both are GM stores that have been classified as held for sale for less than twelve months, and we believe it is probable that their divestiture will be completed, as they are currently under contract to be sold. Assets held for sale at December 31, 2009 included $8.1 million in vehicle inventory and $3.6 million in property and equipment. See Note 15 of Notes to Consolidated Financial Statements for additional information.

Indefinite-Lived Intangible Assets

We are required to test our indefinite-lived intangible assets, consisting primarily of franchise rights, for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred. We have determined that the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis.

We estimate the fair value of our franchise rights primarily using a discounted cash flow (“DCF”) model. The forecasted cash flows used in the DCF model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, general operating expenses, and cost of capital. We use primarily internally-developed forecasts and business plans to estimate the future cash flows that each franchise will generate. We have determined that only certain cash flows of the store are directly attributable to the franchise rights. We estimate the appropriate interest rate to discount future cash flows to their present value equivalent taking into consideration factors such as a risk-free rate, a beta, an equity risk premium, a small stock risk premium, and a store-specific risk premium.

We also use third-party brokers’ estimates to assist us in determining the fair value of our franchise rights, which are developed using marketplace data related to current actual transactions involving franchise rights.

We are subject to financial statement risk to the extent that our franchise rights become impaired due to decreases in the fair value of the related underlying business. A future decline in store performance, change in projected growth rates, or margin assumptions and changes in discount rates could result in a potential impairment of one or more of our franchise rights, which could have a material adverse impact on our financial position and results of operations. Furthermore, in the event that a manufacturer is unable to remain solvent, we may be required to record a partial or total impairment on the remaining franchise value.

As of December 31, 2009, we had domestic franchise value totaling $19.6 million and total franchise value of $42.4 million.

As a result of the reorganization in bankruptcy of both Chrysler and GM, we evaluated our franchise value rights for impairment in the second quarter of 2009. We performed our annual impairment test in the fourth quarter of 2009. No impairment charges were recorded based on our tests. With the decision to reclassify certain assets from held for sale, impairment charges in the amount of $0.3 million related to franchise value recorded while classified in held for sale have been reclassified to continuing operations.

 

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In the second quarter of 2008, 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 decline in our market capitalization, we determined that our franchise value required an interim impairment test. As a result of this impairment test, we recorded an impairment charge of $14.6 million. Additionally, we performed our annual impairment test in the fourth quarter of 2008. No additional impairment charges were recorded based on the results of our annual impairment test. With the decision to reclassify certain assets from held for sale, impairment charges in the amount of $3.6 million related to franchise value recorded while in held for sale have been reclassified to continuing operations.

Long-Lived Assets

We estimate the depreciable lives of our property and equipment, including leasehold improvements, and review them for impairment when events or circumstances indicate that their carrying amounts may not be recoverable.

A store is evaluated for recoverability if it has an operating loss in the current year and one of the prior two years. If it meets this criterion, we estimate the projected undiscounted cash flows for each asset group based on internally developed forecasts. If the undiscounted cash flows are lower than the carrying value of the asset group, we determine the fair value of the asset group based on additional market data, including recent experience in selling similar assets.

We hold certain property for future development or investment purposes. If a triggering event is deemed to have occurred, we evaluate this property for impairment by comparing its estimated fair value based on listing price less costs to sell and other market data including similar property that is for sale or has been recently sold, to the current carrying value. If the carrying value is less than the estimated fair value, an impairment is recorded.

Although we believe our property and equipment and assets held and used are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets. A future decline in store performance, change in projected growth rates, and changes in other margin assumptions could result in an impairment of long-lived asset groups, which could have a material adverse impact on our financial position and results of operations. Currently, 40% of our long-lived assets are associated with stores operating domestic franchises and 60% of our long-lived assets are associated with corporate operations and stores operating import/luxury franchises. A continued decline in the commercial real estate market could result in a potential impairment of certain investment properties not currently used in operations.

Due to the adverse change in the business climate, our reduced earnings and cash flow forecast, we performed impairment testing on long-lived assets in both 2009 and 2008. As a result, we recorded the following impairments:

 

Year Ended December 31,

   2009    2008    2007

Long-lived assets

   $ 9,054    $ 13,080    $ —  

Other assets

     —        2,081      —  

Impairments within selling, general and administrative

     956      5,095      —  
                    

Total asset impairments

   $ 10,010    $ 20,256    $ —  
                    

See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information.

Deferred Tax Assets

As of December 31, 2009, we had deferred tax assets of approximately $67.2 million and deferred tax liabilities of $27.5 million. The principal components of our deferred tax assets are related to goodwill, allowances and accruals, deferred revenue and cancellation reserves. The principal components of our deferred tax liabilities are related to depreciation on property and equipment, and inventories.

 

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We consider 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 scheduled reversal of deferred tax liabilities, and our projections of future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences.

At December 31, 2009, we have not recorded any valuation allowance on deferred tax assets. If we are unable to meet the projected taxable income levels utilized in our analysis, and depending on the availability of feasible tax planning strategies, we might record a valuation allowance on a portion or all of our deferred tax assets in the future. In the event that a manufacturer is 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 assets, which could have a material adverse impact on our financial position and results of operations.

Service Contract and Other Insurance Contracts

We receive commissions from the sale of vehicle service contracts and certain other insurance contracts. The contracts are sold through an unrelated third party, but we may be charged back for a portion of the commissions in the event of early termination of the contracts by customers. We sell these contracts on a straight commission basis; in addition, we may also participate in future underwriting profit pursuant to retrospective commission arrangements, which are recognized as income upon receipt.

We record commissions at the time of sale of the vehicles, net of an estimated liability for future charge-backs. 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, we could have additional expense or income related to the cancellations in future periods, which could have a material adverse impact on our financial position and results of operations.

At December 31, 2009 and 2008, the reserve for future cancellations totaled $10.3 million and $13.5 million, respectively, and is included in accrued liabilities and other long-term liabilities on our consolidated balance sheets. A 10% increase in expected cancellations would result in an additional reserve of approximately $1.0 million.

Lifetime Oil Change Self-Insurance

In March 2009, we assumed from a third party the obligation to provide future lifetime oil service for a pool of existing contracts and began to self insure the majority of the lifetime oil contracts we sell.

Payments we receive upon sale of the lifetime oil contracts are deferred and recognized in revenue over the expected life of the service agreement to best match the expected timing of the costs to be incurred to perform the service. We estimate the timing and amount of future costs for claims and cancellations related to our lifetime oil contracts using historical experience rates and estimated future costs.

If our estimates of future costs to perform under the contracts exceed the existing deferred revenue, we record a charge in the statement of operations. We perform our loss contingency analysis separately for the pool of assumed contracts and the pool of self-insured contracts sold starting in March 2009. At December 31, 2009, we recorded a charge of $1.4 million for expected costs in excess of revenue

 

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deferred related to the pool of assumed contracts. Any changes in assumptions about future costs expected to be incurred to service contracts could result in the recognition of additional charges, which could have a material adverse impact on our financial position and results of operations.

A 10% change in expected claims costs per contract for the assumed pool of contracts would result in additional reserves of approximately $1.2 million. A 10% change in expected claims per contract for the self-insured sold contracts would not require any reserve. At December 31, 2009, the remaining deferred revenue related to the assumed obligation and the new self-insured sold contracts was $10.6 million and $7.0 million, respectively.

Workers’ Compensation Self Insurance

We self-insure a portion of our workers’ compensation insurance. Workers’ compensation insurance premiums are determined under a five-year retrospective cost policy with our insurance carrier, whereby premium cost depends on claims experience. We accrue premiums based on our historical experience rating and number of employees, although the actual claims can be something greater or less than the historical experience, which could cause 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 insurance carrier. Any changes in assumptions and claim experience could result in the recognition of additional charges, which could have a material adverse impact on our financial position and results from operations.

At December 31, 2009 and 2008, the workers’ compensation reserve totaled $3.0 million and $4.3 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 workers compensation reserves of approximately $1.6 million.

Selected Operating Data

The following tables set forth the changes in our operating results from continuing operations in 2009 compared to 2008 and in 2008 compared to 2007:

 

     Year Ended
December 31,
    Increase     %
Increase
 

(In Thousands)

   2009     2008     (Decrease)     (Decrease)  

Revenues:

        

New vehicle

   $ 874,701      $ 1,147,418      $ (272,717   (23.8 )% 

Used vehicle

     539,352        547,706        (8,354   (1.5

Finance and insurance

     56,010        76,679        (20,669   (27.0

Service, body and parts

     276,690        286,326        (9,636   (3.4

Fleet and other

     2,562        4,871        (2,309   (47.4
                              

Total revenues

     1,749,315        2,063,000        (313,685   (15.2

Cost of sales:

        

New vehicle

     800,969        1,056,533        (255,564   (24.2

Used vehicle

     473,289        498,339        (25,050   (5.0

Service, body and parts

     144,213        148,358        (4,145   (2.8

Fleet and other

     1,225        3,295        (2,070   (62.8
                              

Total cost of sales

     1,419,696        1,706,525        (286,829   (16.8
                              

Gross profit

     329,619        356,475        (26,856   (7.5

Asset impairments

     6,976        335,672        (328,696   (97.9

Selling, general and administrative

     270,245        307,316        (37,071   (12.1

Depreciation and amortization

     18,248        16,943        1,305      7.7   
                              

Operating income (loss)

     34,150        (303,456     337,606      111.3   

Floorplan interest expense

     (10,878     (20,517     (9,639   (47.0

Other interest expense

     (14,063     (17,878     (3,815   (21.3

Other income, net

     1,494        6,624        (5,130   (77.4
                              

Income (loss) from continuing operations before income taxes

     10,703        (335,227     345,930      103.2   

Income tax benefit (expense)

     (4,639     108,720        (113,359   (104.3
                              

Income (loss) from continuing operations

   $ 6,064      $ (226,507   $ 232,571      102.7
                              

 

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     Year Ended
December 31,
    Increase    

%

Increase

 

(In Thousands)

   2008     2007     (Decrease)     (Decrease)  

Revenues:

        

New vehicle

   $ 1,147,418      $ 1,526,559      $ (379,141   (24.8 )% 

Used vehicle

     547,706        669,912        (122,206   (18.2

Finance and insurance

     76,679        99,207        (22,528   (22.7

Service, body and parts

     286,326        284,769        1,557      0.5   

Fleet and other

     4,871        4,653        218      4.7   
                              

Total revenues

     2,063,000        2,585,100        (522,100   (20.2

Cost of sales:

        

New vehicle

     1,056,533        1,407,199        (350,666   (24.9

Used vehicle

     498,339        591,011        (92,672   (15.7

Service, body and parts

     148,358        147,790        568      0.4   

Fleet and other

     3,295        3,283        12      0.4   
                              

Total cost of sales

     1,706,525        2,149,283        (442,758   (20.6
                              

Gross profit

     356,475        435,817        (79,342   (18.2

Asset impairments

     335,672        1,215        334,457      27,527.3   

Selling, general and administrative

     307,316        341,406        (34,090   (10.0

Depreciation and amortization

     16,943        16,485        458      2.8   
                              

Operating income (loss)

     (303,456     76,711        (380,167   (495.6

Floorplan interest expense

     (20,517     (24,415     (3,898   (16.0

Other interest expense

     (17,878     (16,273     1,605      9.9   

Other income, net

     6,624        612        6,012      982.4   
                              

Income (loss) from continuing operations before income taxes

     (335,227     36,635        (371,862   (1,015.0

Income tax (expense) benefit

     108,720        (14,865     (123,585   (831.4
                              

Income (loss) from continuing operations

   $ (226,507   $ 21,770      $ (248,277   (1,140.5
                              

Certain key performance metrics used to manage our business were as follows for 2009, 2008 and 2007:

 

2009

   Percent of
Total Revenues
    Gross
Profit

Margin
    Percent of Total
Gross Profit
 

New vehicle

   50.0   8.4   22.4

Used vehicle, retail

   26.7      14.1      20.0   

Used vehicle, wholesale

   4.2      0.3      0.0   

Finance and insurance(1)

   3.2      100.0      17.0   

Service, body and parts

   15.8      47.9      40.2   

Fleet and other

   0.1      52.2      0.4   

 

2008

   Percent of
Total Revenues
    Gross
Profit

Margin
    Percent of Total
Gross Profit
 

New vehicle

   55.6   7.9   25.5

Used vehicle, retail

   22.0      11.5      14.7   

Used vehicle, wholesale

   4.6      (3.2   (0.8

Finance and insurance(1)

   3.7      100.0      21.5   

Service, body and parts

   13.9      48.2      38.7   

Fleet and other

   0.2      32.4      0.4   

 

2007

   Percent of
Total Revenues
    Gross
Profit

Margin
    Percent of Total
Gross Profit
 

New vehicle

   59.1   7.8   27.4

Used vehicle, retail

   20.8      14.1      17.4   

Used vehicle, wholesale

   5.1      2.3      0.7   

Finance and insurance(1)

   3.8      100.0      22.8   

Service, body and parts

   11.0      48.1      31.4   

Fleet and other

   0.2      29.4      0.3   

 

(1) Commissions reported net of anticipated cancellations.

 

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     Year Ended December 31, (1)  
     2009     2008     2007  

Total gross margin

   18.8   17.3   16.9

Selling, general and administrative expenses as a % of gross profit

   82.0      86.2      78.3   

Operating margin

   2.0      (14.7   3.0   

Pre-tax margin

   0.6      (16.2   1.4   

Same-store sales percentage increases (decreases) were as follows:

 

     2009 compared to 2008     2008 compared to 2007  

New vehicle retail, excluding fleet

   (23.6 )%    (25.4 )% 

Used vehicle, retail

   3.1      (17.0

Used vehicle, wholesale

   (23.1   (30.2

Total vehicle sales, excluding fleet

   (16.4   (23.6

Finance and insurance

   (26.2   (22.5

Service, body and parts

   (3.3   0.1   

Total sales, excluding fleet

   (14.9   (20.9

Same-store sales are calculated for stores that were in operation as of December 31, 2009, and only including the months of operations for both comparable periods. For example, a store acquired in June 2008 would be included in same store operating data beginning in July 2009, 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.

Floorplan assistance is provided by manufacturers to specifically support store financing of new vehicle inventory. Under accounting standards, floorplan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, as manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floorplan interest expense to floorplan assistance can be used to evaluate the efficiency of our new vehicle sales relative to stocking levels. The following table details the carrying costs for new vehicles and includes new and program vehicle floorplan interest net of floor plan assistance earned.

 

     Year Ended
December 31,
    Increase    

%

Increase

 
     2009     2008     (Decrease)     (Decrease)  

Floorplan interest expense (new vehicles)

   $ 10,878      $ 20,517      $ (9,639   (47.0 )% 

Floorplan assistance (included in cost of sales)

     (9,132     (15,324     (6,192   (40.4
                              

Net new vehicle carrying costs

   $ 1,746      $ 5,193      $ (3,447   (66.4 )% 
                              
     Year Ended
December 31,
    Increase    

%

Increase

 
     2008     2007     (Decrease)     (Decrease)  

Floorplan interest expense (new vehicles)

   $ 20,517      $ 24,415      $ (3,898   (16.0 )% 

Floorplan assistance (included in cost of sales)

     (15,324     (17,130     (1,806   (10.5
                              

Net new vehicle carrying costs

   $ 5,193      $ 7,285      $ (2,092   (28.7 )% 
                              

Results of Continuing Operations

For the year ended December 31, 2009, we realized a reported net income of $9.2 million, or $0.41 per diluted share. For the years ended December 31, 2008 and 2007, we realized a reported net loss of $252.6 million, or $(12.51) per diluted share, and a reported net income of $21.5 million, or $1.06 per diluted share, respectively.

Pro Forma Reconciliations

Due to the non-cash charges related to asset impairments, reserve adjustments recorded and gains on extinguishment of debt, 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, by presenting our results that exclude the impact of certain items that affect their period-to-period comparability.

 

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The following table reconciles certain reported GAAP income (loss) amounts per the statements of operations to the comparable non-GAAP income (loss) amounts:

 

     Year Ended December 31,  
     Net Income (Loss)     Diluted Net Income (Loss) per Share  

Continuing Operations

   2009     2008     2007     2009     2008     2007  

As reported

   $ 6,064      $ (226,507   $ 21,770      $ 0.27      $ (11.22   $ 1.07   

Asset impairments

     4,618        230,241        1,007        0.22        11.40        0.04   

Reserve adjustments

     1,145        —          —          0.05        —          —     

Gain on extinguishment of debt

     (791     (3,479     —          (0.04     (0.17     —     
                                                

Adjusted

   $ 11,036      $ 255      $ 22,777      $ 0.50      $ 0.01      $ 1.11   
                                                

Discontinued Operations

                                    

As reported

   $ 3,087      $ (26,079   $ (221   $ 0.14      $ (1.29   $ (0.01

Impairments and disposal (gain) loss

     (6,378     18,962        2,658        (0.29     0.94        0.12   
                                                

Adjusted

   $ (3,291   $ (7,117   $ 2,437      $ (0.15   $ (0.35   $ 0.11   
                                                

Consolidated Operations

                                    

As reported

   $ 9,151      $ (252,586   $ 21,549      $ 0.41      $ (12.51   $ 1.06   
                                                

Adjusted

   $ 7,745      $ (6,862   $ 25,214      $ 0.35      $ (0.34   $ 1.22   
                                                

The following further discusses the results of our operations in 2009, 2008 and 2007.

New Vehicle Revenues

 

     Year Ended
December 31,
   Increase    

%

Increase

 
     2009    2008    (Decrease)     (Decrease)  

Revenue

   $ 874,701    $ 1,147,418    $ (272,717   (23.8 )% 

Retail units sold

     29,109      39,091      (9,982   (25.5

Average selling price per retail unit

   $ 30,049    $ 29,352    $ 697      2.4   
     Year Ended
December 31,
   Increase    

%

Increase

 
     2008    2007    (Decrease)     (Decrease)  

Revenue

   $ 1,147,418    $ 1,526,559    $ (379,141   (24.8 )% 

Retail units sold

     39,091      52,139      (13,048   (25.0

Average selling price per retail unit

   $ 29,352    $ 29,279    $ 73      0.2   

Within our business lines, new vehicle sales have been impacted most severely by the current recessionary environment. Weak consumer confidence and a lack of available credit have reduced demand for new vehicles. The third quarter of 2009 experienced incremental improvement as a result of the CARS program, which provided government sponsored rebates for consumers who elected to purchase a new vehicle with improved fuel economy. Throughout 2009, Chrysler experienced declining market share, from approximately 12% at the beginning of the year to approximately 8.5% at the end of the year. Given our significant exposure to Chrysler stores, our new vehicle sales levels were impacted as competing brands commanded more of the overall market. Also in the fourth quarter of 2009, a shortage of available Chrysler product negatively impacted new vehicle sales levels.

The decline in new 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. As gas prices decreased in the second half of 2008, demand for heavier trucks and SUVs returned. However, this trend was more than offset by a decline in the overall macroeconomic

 

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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.

Used Vehicle Revenues

 

     Year Ended
December 31,
   Increase    

%

Increase

 
     2009    2008    (Decrease)     (Decrease)  

Retail revenue

   $ 467,661    $ 454,301    $ 13,360      2.9

Retail units sold

     28,750      27,305      1,445      5.3   

Average selling price per retail unit

   $ 16,266    $ 16,638    $ (372   (2.2

Wholesale revenue

   $ 71,691    $ 93,405    $ (21,714   (23.2

Wholesale units sold

     13,413      15,840      (2,427   (15.3

Average selling price per wholesale unit

   $ 5,345    $ 5,897    $ (552   (9.4
     Year Ended
December 31,
   Increase    

%

Increase

 
     2008    2007    (Decrease)     (Decrease)  

Retail revenue

   $ 454,301    $ 538,965    $ (84,664   (15.7 )% 

Retail units sold

     27,305      31,741      (4,436   (14.0

Average selling price per retail unit

   $ 16,638    $ 16,980    $ (342   (2.0

Wholesale revenue

   $ 93,405    $ 130,947    $ (37,542   (28.7

Wholesale units sold

     15,840      19,753      (3,913   (19.8

Average selling price per wholesale unit

   $ 5,897    $ 6,629    $ (732   (11.0

Used vehicle retail unit sales have increased as consumers opt to purchase used vehicles instead of new vehicles, and as we increase the number of lower price, higher-margin older used cars we sell. We have focused our store personnel on maximizing retail used vehicle sales and reducing the number of used vehicles we wholesale after acquiring via trade-in. As a result of the shift in mix to more used vehicles and fewer new vehicles sold, our used retail to new vehicle sales ratio has improved from 0.7:1 in 2008 to 1:1 in 2009.

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.

Finance and Insurance

 

     Year Ended
December 31,
   Increase    

%

Increase

 
     2009    2008    (Decrease)     (Decrease)  

Revenue

   $ 56,010    $ 76,679    $ (20,669   (27.0 )% 

Revenue per retail unit

   $ 968    $ 1,155    $ (187   (16.2
     Year Ended
December 31,
   Increase    

%

Increase

 
     2008    2007    (Decrease)     (Decrease)  

Revenue

   $ 76,679    $ 99,207    $ (22,528   (22.7 )% 

Revenue per retail unit

   $ 1,155    $ 1,183    $ (28   (2.4

The declines in finance and insurance sales were primarily due to fewer vehicles sold in 2009 compared to 2008, as well as a decline in our penetration rate for finance and insurance products and the impact of restrictions on the overall loan amount to vehicle invoice cost, which can impact the ability of customers to finance the ancillary products we offer. Additionally, customers participating in the CARS Program elected to pay cash for their vehicle at a higher rate and purchased fewer extended warranties and other ancillary products than our traditional customers.

 

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Additionally, in the first quarter of 2009, we discontinued the transfer of the obligation related to most of our lifetime lube, oil and filter insurance contracts to a third party. As a result, beginning March 1, 2009, we no longer recognize revenue related to earned commissions at the inception of the contract but, instead, defer the full sale price of the contract and recognize the revenue over the expected life of the contract as services are provided. This change improves our cash position as we retain 100% of the contract sales price, but decreased our finance and insurance revenues by approximately $69 per vehicle in 2009 compared to 2008.

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. This decline is primarily due to the tightening of credit markets, which limited the payment to income and debt to income ratios that are required by lenders, reducing the opportunity to add insurance and warranty products.

Penetration rates for certain products were as follows:

 

     2009     2008     2007  

Finance and insurance

   69   75   76

Service contracts

   41      42      43   

Lifetime oil change and filter

   35      35      37   

Service, Body and Parts Revenue

 

     Year Ended
December 31,
   Increase
(Decrease)
    %
Increase
(Decrease)
 
     2009    2008     

Revenue

   $ 276,690    $ 286,326    $ (9,636   (3.4 )% 
     Year Ended
December 31,
   Increase
(Decrease)
    %
Increase
(Decrease)
 
     2008    2007     

Revenue

   $ 286,326    $ 284,769    $ 1,557      0.5

Our service, body and parts business was also affected, albeit at a lesser magnitude than vehicle sales, by the challenging economic environment in 2009 and 2008. Declining consumer confidence has caused customers to defer maintenance work and routine servicing for longer periods of time. Warranty work accounted for approximately 19.8% of our same-store service, body and parts sales in 2009 compared to 20.5% in 2008, which resulted in a 6.2% decrease in same-store warranty sales in 2009 compared to 2008. Domestic brand warranty work decreased by 4.8%, while import/luxury warranty work decreased by 8.1% in 2009 compared to 2008. The customer pay service and parts business, which represented 80.2% of the total service, body and parts business in 2009, was down 2.6% on a same-store basis compared to 2008.

Warranty work accounted for approximately 20.4% of our same-store service, body and parts sales in 2008, which was 0.7% higher than 2007. The customer pay service and parts business represented 79.6% of the total service, body and parts business in 2008, which was 0.7% lower compared to 2007. These changes in mix resulted in relatively flat year-to-year comparisons.

Gross Profit

Gross profit decreased $26.9 million in 2009 compared to 2008 and decreased $79.3 million in 2008 compared to 2007. The decreases in 2009 compared to 2008 and in 2008 compared to 2007 were due to decreased total revenues, partially offset by increases in our overall gross profit margins.

 

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Gross profit margins achieved were as follows:

 

     Year Ended December 31,     Basis Point
Change
 
     2009     2008    

New vehicle

   8.4   7.9   50 bp 

Retail used vehicle

   14.1      11.5      260   

Wholesale used vehicles

   0.3      (3.2   350   

Finance and insurance

   100.0      100.0      —     

Service, body and parts

   47.9      48.2      (30

Overall

   18.8      17.3      150   

 

     Year Ended December 31,     Basis Point
Change*
 
     2008     2007    

New vehicle

   7.9   7.8   10 bp 

Retail used vehicle

   11.5      14.1      (260

Wholesale used vehicles

   (3.2   2.3      (550

Finance and insurance

   100.0      100.0      —     

Service, body and parts

   48.2      48.1      10   

Overall

   17.3      16.9      40   

 

*

A basis point is equal to 1/100th of one percent.

During 2009, we focused attention on maximizing retail profit opportunities on each transaction in order to offset the decline in overall sales levels. We also continued to adjust our vehicle inventories to respond to shifts in consumer demand driven by fuel prices and macroeconomic conditions. These factors led to improved gross profit margins in most of our business lines. We also focused on increasing the number of commodity sales in our service, body and parts business, including batteries, tires and wiper blades. These sales, although at a lower gross profit margin, present an opportunity to offset declining revenues in future periods. As discussed above, the decline in revenues is attributable to decreased units in operation from fewer vehicle sales in 2008 and 2009 and lower market share by our more prevalent domestic brands.

New vehicle gross profit 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 versus trucks and SUVs. Our stores typically target a dollar amount of gross profit on each vehicle sale, rather than a percentage. As such, when the average vehicle sale price declines but the gross profit remains consistent, gross profit margins are positively affected. Gross profit 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 gross profit on each vehicle retailed. This focus helped to offset the broader impact on revenues and gross margins due to the declining economy.

The challenging retail environment also 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 gross profit margins as we target a specific dollar amount of gross profit per transaction rather than a percentage, helped to offset some of the pricing adjustments discussed above.

Service, body and parts gross profit margins increased in 2008 compared to 2007 due to concentration on maximizing all profit opportunities 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.

 

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Goodwill and Other Asset Impairment Charges

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.

As discussed above, we recorded asset impairment charges in 2009, 2008 and 2007. Asset impairments recorded as a component of continuing operations consist of the following (in thousands):

 

December 31,

   2009     2008    2007

Goodwill

   $ —        $ 299,266    $  

Intangible assets

     250        18,132      1,190

Long-lived assets

     9,054        13,080      —  

Other assets

     —          2,081      —  

Costs to sell

     (2,328     3,113      25
                     

Total asset impairments

   $ 6,976      $ 335,672    $ 1,215
                     

In addition, we recorded impairment charges on certain other assets of $1 million and $5.1 million in 2009 and 2008, respectively, as a component of selling, general and administrative expense.

After the above charges, and the allocation of goodwill based on the stores classified in discontinued operations, our remaining balance in goodwill was zero.

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.

 

     Year Ended December 31,  
     2009     2008     2007  

SG&A as a % of revenue

   15.4   14.9   13.2

SG&A as a % of gross profit

   82.0      86.2      78.3   

SG&A decreased $37.1 million in 2009 compared to 2008 and decreased $34.1 million in 2008 compared to 2007. The changes in SG&A as a percentage of revenue and gross profit were primarily due to a lower basis, offset by cost reduction measures.

While we have improved SG&A as a percentage of gross profit in 2009 as a result of better matching our cost structure with our current revenue levels, we anticipate further improvements in the future as new vehicle sales levels improve, generating more gross profit. The third quarter of 2009 also benefited as a result of the CARS Program, which provided government sponsored rebates for consumers who elected to purchase a new vehicle.

 

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The changes in dollars spent were primarily due to the following (in millions):

 

     2009 compared to 2008  

Decrease related to salaries, bonuses and benefits

   $ (21.2

Decrease related to write-off of construction projects and other assets

     (4.5

Decrease related to travel expenses

     (2.5

Decrease related to legal and professional fees

     (2.4

Decrease related to outside services

     (3.0

Decrease related to rent expense

     (1.6

Decrease in other general expenses

     (1.9
        
   $ (37.1
        

 

     2008 compared to 2007  

Decrease related to salaries, bonuses and benefits

   $ (27.8

Decrease related to employee benefits

     (4.7

Decrease related to travel expenses

     (3.7

Decrease related to insurance expenses

     (2.6

Decrease related to stock-based compensation

     (1.7

Increase related to write-off of construction projects and other assets

     4.5   

Increase related to legal and professional fees

     2.2   

Increase related to advertising expense

     2.3   

Decrease in other expenses

     (2.6
        
   $ (34.1
        

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 $1.3 million and $0.5 million, respectively, in 2009 compared to 2008 and in 2008 compared to 2007. The increase in 2009 was due primarily to a $2.2 million charge to record depreciation related to assets reclassified from held for sale. Assets classified as held for sale are not depreciated. When assets previously classified as held for sale are reclassified to held and used, they are valued at the lower of their fair value or their net book value assuming depreciation had not been halted. This $2.2 million charge is offset by lower property and equipment balances as a result of the disposition of stores and the impairment of property and equipment during 2008 and 2009.

Operating Income (Loss)

Operating income (loss) was 0.6%, (16.2)% and 1.4% of revenue, respectively, in 2009, 2008 and 2007. 2009 was negatively affected by lower revenues over which to spread our SG&A, partially offset by higher gross profit margins due to a shift in revenue sources and our improved cost structure. The operating losses in 2008 were due primarily to the asset impairment charges discussed above.

Floorplan Interest Expense

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. Floorplan interest is typically tied to a benchmark rate such as LIBOR or prime, plus a credit spread. Credit spreads have increased by 50 to 100 basis points in 2009, 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.

Floorplan interest expense decreased $9.6 million in 2009 compared to 2008. A decrease of $2.9 million resulted from declines in the average benchmark interest rates on our floorplan facilities and a decrease of $6.2 million resulted from decreases in the average outstanding balances of our floorplan facilities. Ineffectiveness from hedging interest rate swaps resulted in a decrease of $0.5 million.

 

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Floorplan interest expense decreased $3.9 million in 2008 compared to 2007. A decrease of $6.6 million resulted from lower average interest rates and a decrease of $1.2 million resulted from slightly lower average balances outstanding. These factors were partially offset by an increase of $3.9 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 decreased $3.8 million in 2009 compared to 2008. A decrease of $0.3 million related to a decrease in the weighted average interest rate on our debt in 2009 compared to 2008 and a decrease of $4.3 million related to a decrease in the average outstanding balances. The decrease in the average outstanding balances resulted primarily from the repayment of $42.5 million of our senior subordinated notes in the third and fourth quarters of 2008 and the remaining $42.5 million in the first and second quarters of 2009. Offsetting these decreases was a reduction in the amount of capitalized interest in 2009 compared to 2008 of $0.8 million.

Other interest expense increased $1.6 million in 2008 compared to 2007. Changes in the average outstanding balances resulted in an increase of approximately $0.8 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 $0.7 million decrease due to the weighted average interest rate on our debt.

Capitalized interest on construction projects totaled $0.9 million, $1.7 million and $3.2 million, respectively, in 2009, 2008 and 2007.

Other Income, net

Other income, net was $1.5 million, $6.6 million and $0.6 million for 2009, 2008 and 2007, respectively. A gain in 2009 and 2008 of $0.3 million and $5.3 million, respectively, was due to the early retirement of our convertible notes. Additionally, a gain of approximately $1.0 million in 2009 is related to the result of a binding arbitration.

Income Tax Expense

Our effective tax rate was 43.3% in 2009, (32.4)% in 2008 and 40.6% in 2007. 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 2009 and 2007, the effect of non-deductible expenses was magnified by a decline in income due to the slower sales environment. In 2008, a large permanent item related to the impairment of goodwill associated with a prior corporate acquisition reduced the rate.

Liquidity and Capital Resources

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 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. In addition, during 2009, 2008 and 2007 we generated $15.1 million, $88.8 million and $55.0 million, respectively, through the sale of assets and stores and the issuance of long-term debt, net of debt repayments.

 

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On October 15, 2009, we sold 4,000,000 shares of our Class A common stock in a public offering at a price of $10.00 per share for gross proceeds of $40.0 million and net proceeds, after underwriting commissions, of $37.9 million. We also granted to the underwriters of the public offering a 30-day option to purchase up to an additional 600,000 shares to cover over-allotments, if any. The option to purchase the shares was exercised by the underwriters in its entirety, resulting in total gross proceeds of $46.0 million and net proceeds, after underwriting commissions and other expenses, of $43.2 million. We intend to use the net proceeds from the offering for general corporate purposes, including working capital and potential acquisitions of additional dealerships and related businesses. Prior to such use, we are using the proceeds to pay down amounts outstanding under our working capital, acquisition and used vehicle credit facility (the “Credit Facility”), one or more flooring lines of credit or selected mortgage debt.

We have a $50 million Credit Facility with U.S. Bank National Association, which expires October 28, 2010. We currently have $24.0 million outstanding under this facility. We are pursuing an extension of the maturity date on the Credit Facility and believe we will be successful in this endeavor. At December 31, 2009, we had approximately $12.8 million in cash and cash equivalents and $35.7 million in unfloored new vehicles that could be financed immediately for cash. These amounts, combined with projections for future cash flows, are expected to be more than sufficient to retire the outstanding balance on the Credit Facility in the event we are unable to extend the maturity date beyond 2010.

Based on these factors and our normal operational cash flow, we believe we have sufficient availability to accommodate our capital needs.

In addition to the above sources of liquidity, 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 may select one or more of them depending on overall capital needs and the availability and 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 1.75% to 5.0% at December 31, 2009. Amounts outstanding on the lines at December 31, 2009, together with amounts remaining available under such lines were as follows (in thousands):

 

     Outstanding at
December 31,
2009
   Remaining
Availability at

December 31,
2009
 

New and program vehicle lines

   $ 210,488    $ —   (1) 

Working capital, acquisition and used vehicle credit facility

     24,000      25,682 (2)(3) 
               
   $ 234,488    $ 25,682   
               

 

(1) There are no formal limits on the new and program vehicle lines with certain lenders, and we had approximately $35.7 million in unfloored new vehicles at December 31, 2009.
(2) Reduced by $318,000 for outstanding letters of credit.
(3) The amount available on the line is limited based on a borrowing base calculation and fluctuates monthly.

 

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Working Capital, Acquisition and Used Vehicle Credit Facility

We have a $50 million Credit Facility with U.S. Bank National Association, which expires October 28, 2010. We believe the Credit Facility continues to be an attractive source of financing given the current cost and availability of credit alternatives. The interest rate on the Credit Facility is the 1-month LIBOR plus 3.25%.

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 GMAC LLC, Daimler Financial, TMCC, Ford Motor Credit Company, VW Credit, Inc., American Honda Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC.

The Credit Facility agreement 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%, among other remedies.

New Vehicle Flooring

GMAC LLC, Daimler Financial, TMCC, Ford Motor Credit Company, VW Credit, Inc., American Honda Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC provide new vehicle floorplan financing for their respective brands. GMAC LLC serves 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.

To improve the visibility of cash flows related to vehicle financing, which is a core part of our business, the non-GAAP financial measures below demonstrate cash flows assuming all floorplan notes payable are included as an operating activity. We believe that this non-GAAP financial measure improves the transparency of our disclosure, by providing period-to-period comparability of our results from core business operations.

 

     Year Ended December 31,  
     2009     2008     2007  

As Reported

      

Cash flow from (used in) operations

   $ 9,934      $ 85,166      $ (49,211

Change in flooring notes payable: non-trade

     31,417        (16,803     69,540   
                        

Adjusted

   $ 41,351      $ 68,363      $ 20,329   
                        

As Reported

      

Cash flow from (used in) financing

   $ (29,122   $ (100,242   $ 124,908   

Change in flooring notes payable: non-trade

     (31,417     16,803        (69,540
                        

Adjusted

   $ (60,539   $ (83,439   $ 55,368   
                        

 

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Debt Covenants

We are subject to certain financial and restrictive covenants for all of our debt agreements. The covenants restrict us from incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.

The Credit Facility stipulates the following financial covenants:

 

   

a minimum tangible net worth requirement of $200 million;

 

   

a minimum vehicle equity requirement of $45 million;

 

   

a fixed charge coverage ratio of 1.05:1 through December 31, 2009, 1.15:1 through June 30, 2010 and 1.20:1 for periods thereafter; and

 

   

a liabilities to tangible net worth ratio not to exceed 4.00:1.

As of December 31, 2009, our tangible net worth was approximately $263.4 million, our vehicle equity was $138.7 million, our fixed charge coverage ratio was 1.35:1 and our liabilities to tangible net worth was 2.23:1. We were in compliance with the Credit Facility financial covenants.

We expect to remain in compliance with the financial and restrictive covenants in our Credit Facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.

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, including the triggering of cross-default provisions to other debt agreements.

Inventories and Flooring Notes Payable

Our days supply of new vehicles is six days below our historical December 31 balances and 33 days below our December 31, 2008 levels. This decrease compared to last year is a result of our divestiture activity and efforts to bring new inventory levels down. In connection with the decreased inventories, our new vehicle flooring notes payable decreased to $210.5 million at December 31, 2009 from $337.7 million at December 31, 2008. New vehicles are financed at approximately 100% of invoice cost.

Our days supply of used vehicles was down three days compared to our historical December 31 balances at December 31, 2009, and nine days below our December 31, 2008 balances. Used vehicle sales have not experienced the severe decline that new vehicle sales have. We believe our current used vehicle inventory levels are appropriate given our projected sales volumes and the shift in consumer demand away from new vehicles.

 

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Contractual Payment Obligations

A summary of our contractual commitments and obligations as of December 31, 2009 was as follows (in thousands):

 

     Payments Due By Period

Contractual Obligation

   Total    2010    2011 and
2012
   2013 and
2014
   2015 and
beyond

Floorplan Notes

   $ 210,488    $ 210,488    $ —      $ —      $ —  

Lines of Credit and Long-Term Debt

     271,368      38,303      53,957      107,441      71,667

Interest on Scheduled Debt Payments

     60,459      13,151      22,127      13,799      11,382

Fixed Rate Payments on Interest Rate Swaps

     18,504      4,327      8,666      3,501      2,010

Estimated Chargebacks on Contracts

     10,218      5,953      3,891      361      13

Operating Leases

     162,325      19,090      30,857      26,612      85,766
                                  
   $ 733,362    $ 291,312    $ 119,498    $ 151,714    $ 170,838
                                  

We had no significant capital commitments at December 31, 2009. Our anticipated future capital expenditures are associated with maintenance and repair requirements due to normal use of our facilities.

In the event we undertake a significant capital commitment in the future, we expect to pay for the construction out of existing cash balances, construction financing and borrowings on our Credit Facility. Upon completion of the projects, we would 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 on terms acceptable to us.

We anticipate approximately $5.2 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.

Share Repurchase Plan

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, 2009, we have purchased a total of 479,731 shares under this program, none of which were purchased during 2009. We may continue to repurchase shares from time to time in the future, if permitted by our credit facilities, and as conditions warrant.

Dividends

We did not declare or pay any dividends on our common stock during 2009. Dividends may be declared and paid in future periods as determined and approved by our Board of Directors.

 

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Selected Consolidated Quarterly Financial Data

The following tables set forth our unaudited quarterly financial data(1).

 

2009 (in thousands, except per share data)

   Three Months Ended,  
     March 31     June 30     September 30     December 31  

Revenues:

  

New vehicle sales

   $ 190,860      $ 209,560      $ 264,574      $ 209,707   

Used vehicle sales

     123,372        140,970        147,016        127,994   

Finance and insurance

     13,427        14,745        15,618        12,220   

Service, body and parts

     68,545        68,637        71,287        68,221   

Fleet and other

     572        625        837        528   
                                

Total revenues

     396,776        434,537        499,332        418,670   

Cost of sales

     319,831        350,516        406,084        343,265   
                                

Gross profit

     76,945        84,021        93,248        75,405   

Asset impairments

     1,350        3,487        1,962        177   

Selling, general and administrative

     67,169        67,108        69,885        66,083   

Depreciation and amortization

     4,064        3,950        3,903        6,331   
                                

Operating income

     4,362        9,476        17,498        2,814   

Floorplan interest expense

     (2,848     (2,624     (3,026     (2,380

Other interest expense

     (3,961     (3,347     (3,281     (3,474

Other, net

     1,163        258        26        47   
                                

Income (loss) from continuing operations before income taxes

     (1,284     3,763        11,217        (2,993

Income tax (provision) benefit

     568        (1,540     (4,590     923   
                                

Income (loss) before discontinued operations

     (716     2,223        6,627        (2,070

Discontinued operations, net of tax

     2,045        1,440        (914     516   
                                

Net income (loss)

   $ 1,329      $ 3,663      $ 5,713      $ (1,554
                                

Basic income (loss) per share from continuing operations

   $ (0.03   $ 0.11      $ 0.31      $ (0.08

Basic income (loss) per share from discontinued operations

     0.09        0.06        (0.04     0.02   
                                

Basic net income (loss) per share

   $ 0.06      $ 0.17      $ 0.27      $ (0.06
                                

Diluted income (loss) per share from continuing operations

   $ (0.03   $ 0.11      $ 0.31      $ (0.08

Diluted income (loss) per share from discontinued operations

     0.09        0.06        (0.04     0.02   
                                

Diluted net income (loss) per share

   $ 0.06      $ 0.17      $ 0.27      $ (0.06
                                

 

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2008 (in thousands, except per share data)

   Three Months Ended,  
     March 31     June 30     September 30     December 31  

Revenues:

  

New vehicle sales

   $ 311,032      $ 326,493      $ 303,686      $ 206,207   

Used vehicle sales

     150,422        144,103        145,777        107,404   

Finance and insurance

     21,239        21,211        20,513        13,716   

Service, body and parts

     72,614        71,363        72,216        70,133   

Fleet and other

     917        1,442        848        1,664   
                                

Total revenues

     556,224        564,612        543,040        399,124   

Cost of sales

     462,122        469,650        451,626        323,127   
                                

Gross profit

     94,102        94,962        91,414        75,997   

Asset impairments

     —          332,570        1,955        1,147   

Selling, general and administrative

     81,468        82,582        75,829        67,437   

Depreciation and amortization

     4,461        4,404        4,098        3,980   
                                

Operating income (loss)

     8,173        (324,594     9,532        3,433   

Floorplan interest expense

     (5,160     (5,167     (4,679     (5,511

Other interest expense

     (4,584     (4,625     (4,454     (4,215

Other, net

     56        1,069        1,880        3,619   
                                

Income (loss) from continuing operations before income taxes

     (1,515     (333,317     2,279        (2,674

Income tax (provision) benefit

     622        107,509        (1,079     1,668   
                                

Income (loss) before discontinued operations

     (893     (225,808     1,200        (1,006

Discontinued operations, net of tax

     (1,268     (17,976     (3,563     (3,272
                                

Net loss

   $ (2,161   $ (243,784   $ (2,363   $ (4,278
                                

Basic income (loss) per share from continuing operations

   $ (0.04   $ (11.25   $ 0.06      $ (0.05

Basic loss per share from discontinued operations

     (0.07     (0.89     (0.18     (0.16
                                

Basic net loss per share

   $ (0.11   $ (12.14   $ (0.12   $ (0.21
                                

Diluted income (loss) per share from continuing operations

   $ (0.04   $ (11.25   $ 0.06      $ (0.05

Diluted loss per share from discontinued operations

     (0.07     (0.89     (0.18     (0.16
                                

Diluted net loss per share

   $ (0.11   $ (12.14   $ (0.12   $ (0.21
                                

 

(1) Quarterly data may not add to yearly totals due to rounding.

Seasonality and Quarterly Fluctuations

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.

The magnitude of the seasonal improvement we have typically experienced in March did not occur in the first quarter of 2009. This is similar to our experience in 2008, where the seasonally strong second and third quarters of the year were relatively flat compared with the first quarter of 2008. The third quarter of 2009 experienced an incremental improvement as a result of the CARS Program. The fourth quarter of 2009 experienced a decline in sales due to both normal seasonal weakness, as well as a lack of inventory availability at our Chrysler locations.

Our current operational plan assumes that vehicle sales in 2010 will remain consistent with 2009 levels, and that Chrysler’s market share will remain consistent with 2009 levels. However, no assurances can be provided that our plan will be achieved, or that a further deterioration in the economic environment will not occur.

Recent Accounting Pronouncements

See Note 16 of Notes to Consolidated Financial Statements.

 

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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, 2009, we had $319.4 million outstanding under such agreements at interest rates ranging from 1.75% to 7.31% per annum. A 10% increase in interest rates would increase annual interest expense by approximately $0.1 million, net of tax, based on amounts outstanding at December 31, 2009.

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.

At December 31, 2009, we had $162.4 million of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates of between April 2010 and October 2029. Based on discounted cash flows, we have determined that the fair market value of this long-term fixed interest rate debt was approximately $166.8 million at December 31, 2009.

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.

As of December 31, 2009, we had outstanding the following interest rate swaps with U.S. Bank Dealer Commercial Services:

 

   

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;

 

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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 1 st 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 1 st 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, 2009 was 0.23% 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, 2009, the fair values of all of our agreements was a liability of $6.9 million. The estimated amount expected to be reclassified into earnings within the next twelve months was $2.7 million at December 31, 2009.

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 operations in the period in which it occurs. In 2009, 2008 and 2007, we recorded a (gain) loss related to ineffectiveness of $(0.4) million, $0.4 million and $0.1 million, respectively.

In 2009, we determined that the original forecasted transaction for certain of the de-designated cash flow hedges became probable of not occurring. Therefore, we reclassified into earnings a gain of approximately $0.5 million as a reduction of flooring interest expense at that time. Additionally, we de-designated and re-designated all of our outstanding interest rate swaps when significant changes in our underlying floorplan debt occurred with the Chrysler and GM restructuring. This de-designation and re-designation did not have an impact on earnings at the time, but may increase ineffectiveness in the future.

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.

 

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, 2009 is included in Item 7.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

 

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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, 2009. 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, 2009, 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, 2009, which is included in Item 8 of this Form 10-K.

 

Item 9B. Other Information

None.

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

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 2010 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 2010 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

 

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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, 2009.

 

Plan Category

   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)
 

Equity compensation plans approved by shareholders

   1,864,255    $ 13.89    1,562,561 (1) 

Equity compensation plans not approved by shareholders

   —        —      —     
                  

Total

   1,864,255    $ 13.89    1,562,561   
                  

 

(1) Includes 180,986 shares available pursuant to our 2003 Stock Incentive Plan and 1,381,575 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 2010 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 2010 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 2010 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

 

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PART IV

 

Item 15. Exhibits and Financial Statement Schedules

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:

 

      Page

Reports of Independent Registered Public Accounting Firm

   F-1, F-2

Consolidated Balance Sheets as of December 31, 2009 and 2008

   F-3

Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007

   F-4

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2009, 2008 and 2007

   F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   F-6

Notes to Consolidated Financial Statements

   F-7

There are no schedules required to be filed herewith.

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

       

Description

3.1    (a)    Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999.
3.2    (o)    Amended and Restated Bylaws of Lithia Motors, Inc. (Corrected).
4.1    (b)    Specimen Common Stock certificate
4.2    (j)    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.
10.1*    (b)    1996 Stock Incentive Plan.
10.2*    (c)    Amendment No. 1 to the Lithia Motors, Inc. 1996 Stock Incentive Plan
10.2.1*    (b)    Form of Incentive Stock Option Agreement (1)
10.3*    (b)    Form of Non-Qualified Stock Option Agreement (1)
10.4*    (d)    1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
10.5*    (l)    2009 Employee Stock Purchase Plan
10.6*    (f)    Lithia Motors, Inc. 2001 Stock Option Plan
10.6.1*    (g)    Form of Incentive Stock Option Agreement for 2001 Stock Option Plan
10.6.2*    (g)    Form of Non-Qualified Stock Option Agreement for 2001 Stock Option Plan
10.7.1*    (p)    Amended and Restated 2003 Stock Incentive Plan of Lithia Motors, Inc., as amended May 1, 2009.
10.7.2*    (k)    Form of Restricted Share Grant for 2003 Stock Incentive Plan, as amended and restated

 

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Exhibit

       

Description

10.8*    (n)    Summary 2008 Discretionary Support Services Bonus Program
10.9    (a)    Chrysler Corporation Sales and Service Agreement General Provisions
10.9.1    (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)
10.10    (b)    Mercury Sales and Service Agreement General Provisions
10.10.1    (e)    Supplemental Terms and Conditions agreement between Ford Motor Company and Lithia Motors, Inc. dated June 12, 1997.
10.10.2    (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)
10.11    (e)    Volkswagen Dealer Agreement Standard Provisions
10.11.1    (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)
10.12    (b)    General Motors Dealer Sales and Service Agreement Standard Provisions
10.12.1    (a)    Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement dated January 16, 1998.
10.12.2    (i)    Chevrolet Dealer Sales and Service Agreement dated October 13, 1998 between General Motors Corporation, Chevrolet Motor Division and Camp Automotive, Inc. (5)
10.13    (b)    Toyota Dealer Agreement Standard Provisions
10.13.1    (a)    Toyota Dealer Agreement, between Toyota Motor Sales, USA, Inc. and Lithia Motors, Inc., dba Lithia Toyota, dated February 15, 1996. (6)
10.14    (e)    Nissan Standard Provisions
10.14.1    (a)    Nissan Public Ownership Addendum dated August 30, 1999 (identical documents executed by each Nissan store).
10.14.2    (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)
10.15    (a)    Lease Agreement between CAR LIT, LLC and Lithia Real Estate, Inc. relating to properties in Medford, Oregon.(8)
10.16       Non Employee Director Compensation Plan 2009/2010 Service Year.
10.17    (k)    Form of Outside Director Nonqualified Deferred Compensation Agreement
10.17.1    (s)    Form of Executive Nonqualified Deferred Compensation Plan
10.18    (q)    Loan Agreement with First through Seventh Amendments dated as of August 31, 2006 between Lithia Motors, Inc., an Oregon corporation; the lenders, which are from time to time parties to the Loan Agreement, and U.S. Bank National Association, as agent for the Lenders.
10.18.1       Eighth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated January 14, 2010.
10.18.2       Ninth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated February 17, 2010.
10.19    (m)    Split Dollar Agreement dated November 7, 2006 with Sidney B. DeBoer

 

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Exhibit

       

Description

10.20    (m)    Split Dollar Insurance Agreement dated December 20, 2007 with Sidney B. DeBoer
10.21*    (o)    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.
10.22    (r)    Form of Indemnity Agreement for each Named Executive Officer.
10.23    (r)    Form of Indemnity Agreement for each non-management Director.
12       Ratio of Earnings to Combined Fixed Charges
21       Subsidiaries of Lithia Motors, Inc.
23       Consent of KPMG LLP, Independent Registered Public Accounting Firm
31.1       Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2       Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1       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.
32.2       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) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) 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.
(l) Incorporated by reference from the Company’s Proxy Statement for its 2009 Annual Meeting as filed with the Securities and Exchange Commission on March 20, 2009.
(m) Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on April 11, 2008.
(n) 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.
(o) Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on March 16, 2009.
(p) Incorporated by reference from the Company’s Form 10-Q for the quarter ended June 30, 2009 as filed with the Securities and Exchange Commission on August 5, 2009.
(q) Incorporated by reference from the Company’s Form 10-Q for the quarter ended September 30, 2009 as filed with the Securities and Exchange Commission on October 30, 2009.
(r) Incorporated by reference from the Company’s Form 8-K as filed with the Securities and Exchange Commission on May 28, 2009.

 

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(s) Incorporated by reference from the Company’s Form 8-K as filed with the Securities and Exchange Commission on January 5, 2010.

 

(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.

 

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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 3, 2010   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 3, 2010:

 

Signature

       

Title

/s/ SIDNEY B. DEBOER

     Chairman of the Board and
Sidney B. DeBoer      Chief Executive Officer
     (Principal Executive Officer)

/s/ JEFFREY B. DEBOER

     Senior Vice President and Chief Financial Officer
Jeffrey B. DeBoer      (Principal Financial and Accounting Officer)

/s/ BRYAN B. DEBOER

     Director
Bryan B. DeBoer     

/s/ THOMAS BECKER

     Director
Thomas Becker     

/s/ SUSAN O. CAIN

     Director
Susan O. Cain     

 

     Director
William L. Glick     

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Lithia Motors, Inc.:

We have audited the accompanying consolidated balance sheets of Lithia Motors, Inc. and subsidiaries as of December 31, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, 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.’s internal control over financial reporting as of December 31, 2009, 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 3, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

Portland, Oregon

March 3, 2010

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Lithia Motors, Inc.:

We have audited Lithia Motors, Inc.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lithia Motors, Inc.’s 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. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, 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, 2009 and 2008, 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, 2009, and our report dated March 3, 2010 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP

Portland, Oregon

March 3, 2010

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

 

     December 31,  
     2009     2008  

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 12,776      $ 10,874   

Contracts in transit

     21,940        27,799   

Trade receivables, net of allowance for doubtful accounts of $218 and $348

     30,157        41,816   

Inventories, net

     328,726        422,812   

Vehicles leased to others, current portion

     7,384        8,308   

Prepaid expenses and other

     5,387        20,979   

Deferred income taxes

     —          2,541   

Assets held for sale

     11,693        161,423   
                

Total Current Assets

     418,063        696,552   

Land and buildings, net of accumulated depreciation of $25,495 and $20,604

     326,625        284,088   

Equipment and other, net of accumulated depreciation of $57,979 and $47,414

     59,429        62,188   

Other intangible assets, net of accumulated amortization of $93 and $68

     42,496        42,008   

Other non-current assets

     7,752        4,616   

Deferred income taxes

     40,735        44,007   
                

Total Assets

   $ 895,100      $ 1,133,459   
                

Liabilities and Stockholders’ Equity

    

Current Liabilities:

    

Floorplan notes payable

   $ 68,907      $ 234,181   

Floorplan notes payable: non-trade

     141,581        103,519   

Current maturities of senior subordinated convertible notes

     —          42,500   

Current maturities of line of credit

     24,000        —     

Current maturities of other long-term debt

     14,303        36,134   

Trade payables

     18,782        21,571   

Accrued liabilities

     47,518        50,951   

Deferred income taxes

     1,036        —     

Liabilities related to assets held for sale

     5,050        108,172   
                

Total Current Liabilities

     321,177        597,028   

Real estate debt, less current maturities

     230,265        163,708   

Other long-term debt, less current maturities

     2,800        101,476   

Deferred revenue

     17,981        4,442   

Other long-term liabilities

     15,839        18,462   
                

Total Liabilities

     588,062        885,116   

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 22,036 and 16,717

     280,880        234,522   

Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 3,762 and 3,762

     468        468   

Additional paid-in capital

     10,501        9,275   

Accumulated other comprehensive loss

     (3,850     (5,810

Retained earnings

     19,039        9,888   
                

Total Stockholders’ Equity

     307,038        248,343   
                

Total Liabilities and Stockholders’ Equity

   $ 895,100      $ 1,133,459   
                

See accompanying notes to consolidated financial statements.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

 

     Year Ended December 31,  
     2009     2008     2007  

Revenues:

      

New vehicle sales

   $ 874,701      $ 1,147,418      $ 1,526,559   

Used vehicle sales

     539,352        547,706        669,912   

Finance and insurance

     56,010        76,679        99,207   

Service, body and parts

     276,690        286,326        284,769   

Fleet and other

     2,562        4,871        4,653   
                        

Total revenues

     1,749,315        2,063,000        2,585,100   

Cost of sales:

      

New vehicle sales

     800,969        1,056,5