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EX-23 - CONSENT OF KPMG LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - LITHIA MOTORS INCdex23.htm
EX-12 - RATIO OF EARNINGS TO COMBINED FIXED CHARGES - LITHIA MOTORS INCdex12.htm
EX-21 - SUBSIDIARIES OF LITHIA MOTORS, INC. - LITHIA MOTORS INCdex21.htm
EX-32.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - LITHIA MOTORS INCdex322.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - LITHIA MOTORS INCdex311.htm
EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - LITHIA MOTORS INCdex321.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - LITHIA MOTORS INCdex312.htm
EX-10.4 - FORM OF RESTRICTED STOCK UNIT AGREEMENT FOR SENIOR EXECUTIVES - LITHIA MOTORS INCdex104.htm
EX-10.4.1 - FORM OF RESTRICTED STOCK UNIT AGREEMENT FOR NON-EXECUTIVE OFFICERS - LITHIA MOTORS INCdex1041.htm
EX-10.4.2 - FORM OF RESTRICTED STOCK UNIT AGREEMENT FOR NON-EXECUTIVE DIRECTORS - LITHIA MOTORS INCdex1042.htm
EX-10.22 - EXECUTIVE MANAGEMENT NON-QUALIFIED DEFERRED COMPENSATION AND LONG-TERM INCENTIVE - LITHIA MOTORS INCdex1022.htm
EX-10.16.5 - TWELFTH AMENDMENT TO REVOLVING CREDIT FACILITY WITH U.S. BANK NATIONAL - LITHIA MOTORS INCdex10165.htm
EX-10.22.2 - FORM OF EXECUTIVE MANAGEMENT NON-QUALIFIED DEFERRED COMPENSATION AND LONG-TERM - LITHIA MOTORS INCdex10222.htm
EX-10.22.1 - FORM OF EXECUTIVE MANAGEMENT NON-QUALIFIED DEFERRED COMPENSATION - LITHIA MOTORS INCdex10221.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, 2010

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.  x

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 $137,435,000 computed by reference to the last sales price ($6.18) 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, 2010).

The number of shares outstanding of the Registrant’s common stock as of March 7, 2011 was: Class A: 22,571,272 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 2011 Annual Meeting of Shareholders.

 

 

 


Table of Contents

LITHIA MOTORS, INC.

2010 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      25   
   PART II   
Item 5.    Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      26   
Item 6.    Selected Financial Data      28   
Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      29   
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk      51   
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      53   
Item 9B.    Other Information      54   
   PART III   
Item 10.    Directors, Executive Officers and Corporate Governance      55   
Item 11.    Executive Compensation      55   
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      56   
   PART IV   
Item 15.    Exhibits and Financial Statement Schedules      56   
Signatures      60   

 

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PART I

 

Item 1. Business

Forward Looking Statements

Certain 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 7, 2011, we offered 26(1) brands of new vehicles and all brands of used vehicles in 82(2) 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 mid-size regional markets throughout the Western and Midwestern regions of the United States. The majority of our franchises are in “single-point” locations, enabling brand exclusivity with no other dealership with the same franchise in the market.

The following tables set forth information about our stores that were part of operations as of December 31, 2010:

 

State

   Number of
Stores
     Percent of
2010  Revenue
 

Texas

     14         25

Oregon

     16         15   

California

     11         11   

Washington

     7         10   

Alaska

     7         10   

Montana

     7         8   

Iowa

     7         7   

Idaho

     6         6   

Nevada

     4         4   

North Dakota

     3         2   

Colorado

     1         1   

New Mexico

     1         1   
                 

Total

     84         100
                 

 

(1)

Added a Fiat franchise in March 2011.

(2)

Operations were ceased at one store in Idaho in January 2011 and one store in Oregon in March 2011.

 

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Business Strategy and Operations

Our mission is to be the preferred provider of cars and trucks and related services in North America. We strive for diversification in our products and services, brands and geographic locations to insulate us from market risk and to maintain profitability. We have developed a centralized support structure to reduce store level administrative functions. This allows store personnel to focus on providing a positive customer experience. With our management information systems, our emphasis on standardized operating practices and administrative functions performed centrally in Medford, Oregon, we seek to gain economies of scale from our dealership network.

To reduce our dependence on any one manufacturer and our susceptibility to changing consumer preferences, we offer a variety of luxury, 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. For example, in the rural, agricultural markets, as opposed to metropolitan markets, we believe more consumers prefer trucks or SUVs, and a larger percentage of customers choose domestic vehicles.

We have centralized many administrative functions to streamline store level operations. 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. 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.

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 2010, we focused on the following key areas to achieve our mission:

 

   

increasing revenues in all business lines;

 

   

capturing a greater percentage of overall new vehicle sales in our local markets;

 

   

selling lower-priced used vehicles to reach additional customers;

 

   

reducing exposure to Chrysler through risk management and acquisition of other franchises;

 

   

reducing the amount of non-operating assets by divesting closed facilities and vacant land;

 

   

utilizing prudent cash management, including investing capital to produce accretive returns; and

 

   

reducing our exposure to pending debt maturities by renewing and extending debt instruments.

We believe our cost structure is aligned with current industry sales levels. Through initiatives started in the second quarter of 2008, we have successfully established a cost structure which can be leveraged as vehicle sales levels improve. Our selling, general and administrative expense as a percentage of gross profit has improved to 78.8% in 2010 compared to 86.2% in 2008. In periods of higher revenue, for example the third quarter of 2010, our selling, general and administrative expense as a percentage of gross profit was as low as 73.8%. We believe we are well positioned to improve our selling, general and administrative expense leverage as vehicle sales levels continue to improve.

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. In the past three years, we generated $72.7 million in cash by divesting stores that did not meet our financial return expectations. Additionally, in 2010, we spent $23.7 million in cash on acquisitions which increase revenue and diversify our portfolio.

 

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New Vehicles

In 2010, we sold 33,701 new vehicles, generating 22.9% 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.

In 2010, we represented 25 domestic and imported brands ranging from economy to luxury cars, sport utility vehicles, crossovers, minivans and light trucks.

 

Manufacturer

   Percent of
2010  Total
Revenue
    Percent of
2010 New
Vehicle
Revenue
    Percent of
2010 New
Vehicle Gross
Profit
 

Chrysler, Jeep, Dodge

     15.0     29.9     30.6

GMC, Chevrolet, Cadillac, Buick

     8.7        17.3        18.0   

Toyota, Scion

     5.9        11.8        11.5   

BMW

     4.5        9.0        7.5   

Honda, Acura

     3.5        7.0        7.5   

Ford, Lincoln

     3.0        6.0        4.9   

Subaru

     2.2        4.4        3.7   

Hyundai

     2.0        4.0        5.5   

Volkswagen, Audi

     1.6        3.2        3.2   

Nissan

     1.3        2.7        2.9   

Mercedes

     1.1        2.2        2.1   

Kia

     0.7        1.5        1.4   

Porsche

     0.4        0.7        0.9   

Mazda

     0.2        0.3        0.3   

Suzuki

     *        *        *   

Saab

     *        *        *   
                        

Total

     50.1     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 exchange vehicles with other automotive retailers and between our own stores to accommodate customer demand and to balance inventory.

Used Vehicles

At each new vehicle store, we also sell used vehicles. We have certain stores that sell only used vehicles. In 2010, retail used vehicle sales generated 21.5% 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 longer-term strategy is to maintain a ratio of one retail used vehicle sale to one retail new vehicle sale. For the past two years, we have been able to maintain this ratio. We achieve this through offering three categories of used vehicles: 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

 

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warranty. Late model, lower mileage vehicles are highly reconditioned and offer a Lithia certified warranty. Value autos are older, higher mileage vehicles that undergo a safety check and a lesser degree of reconditioning. Value autos are offered to customers who require a less expensive vehicle with lower monthly payments.

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

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 communicate the optimal mix of used vehicles that are most attractive to our markets. We conduct our own internal used vehicle auctions, and often centrally manage the sale of used vehicles at public auctions at the corporate level.

We wholesale used vehicles that are in poor condition, are aged in our inventory, or are not suitable for our stocking plan. In 2010, we increased the number of late-model used vehicles we wholesaled based on our sales experience with similar cars and as we shifted our mix to increase the number of value autos in inventory.

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 attempt 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.

We earn a commission on each finance, service and insurance contract we write and subsequently sell to a third-party. We normally arrange financing for customers by selling the contracts to outside sources on a non-recourse basis to avoid the risk of default.

We were able to arrange financing on 72% of the vehicles we sold during 2010, compared to 68% in 2009. Our presence in multiple markets and changes in technology surrounding the credit application process have allowed us to utilize a larger network of lenders across a broader geographic area. Additionally, credit markets improved throughout 2010, as the asset-backed securities market for automotive paper improved and banks increased the volume of automotive loans initiated. Sub-prime customers, who comprised approximately 8% of the financing we completed in 2010, continue to experience constraints in obtaining automotive financing. While the market for sub-prime customers improved in 2010, we believe vehicle sales will increase as these customers are able to obtain loans at more attractive terms.

Service Contracts and Other Products

Our finance and insurance managers also market third-party extended warranty contracts, insurance contracts and vehicle and theft protection products 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 also 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, linking future repair work to our locations.

 

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When customers finance an automobile purchase, we offer them guaranteed auto protection (“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 2010, was purchased by 34% of our total new and used vehicle buyers. This service helps us retain customers by building customer loyalty and it provides opportunities for selling additional routine maintenance items and generating repeat service and parts business. In 2010, we sold approximately $51 of additional maintenance on each lifetime LOF service we performed.

Service, Body and Parts

In 2010, our service, body and parts operations generated 37% 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.

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 service 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 partially mitigates 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” on various commodity items such as tires, filters and batteries. These store branded parts provide improved margins as we procure in bulk directly from the manufacturer.

The number of vehicles in operation has been declining over the past several years as the extended challenging economic environment has curtailed vehicle purchases. We believe that this presents a challenge to our service, body and parts business in the foreseeable future as there are fewer vehicles requiring service. We expect this impact to be more severe for domestic brands, as, over time, there will be fewer domestic vehicles in service due to their decline in overall market share over the past few years from the levels seen historically.

To counteract the impact of fewer units in operation, we have increased marketing efforts and lowered prices on routine maintenance items. We have also 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 LOF service. These return customers provide an opportunity to offer more diversified services, and will help to offset the impact from the decline in the number of vehicles in operation.

In 2010, the expected decline in service revenues was partially offset as we serviced a greater percentage of older vehicles than we have historically. We believe this is due to the efforts outlined above as well as our customers keeping their vehicles for longer periods of time, providing us with opportunities to service their vehicles deeper into the ownership cycle.

 

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In 2010, we added collision centers to stores in Iowa and Oregon. We believe body shops provide an attractive opportunity to grow our business, and we continue to evaluate potential locations to expand. We currently operate 15 collision repair centers: four in Texas; three in Oregon; two each in Idaho and Iowa; and one each in Alaska, Washington, Montana and Nevada.

Marketing

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

We emphasize customer satisfaction and we realize that customer retention is critical to our success. We want our customers’ experiences to be satisfying so 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 and solicit feedback.

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 $27.1 million in 2010, $18.4 million in 2009 and $17.6 million in 2008. In 2010, approximately 65% of those funds were spent in traditional media and 35% 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.

Certain advertising and marketing expenditures are offset by manufacturer co-op programs. Advertising credits not tied to specific vehicles are earned as requests for reimbursement are 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 $2.7 million in 2010, $3.8 million in 2009 and $4.3 million in 2008.

Many 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.

 

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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.

Franchise Agreements

Each of our stores operate under a separate agreement (“Franchise Agreement”) with the manufacturer of the new vehicle brand 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.

We have determined the useful life of a Franchise Agreement is indefinite, even though certain Franchise Agreements are renewed after one to five years. In our experience, agreements are routinely renewed without substantial cost and there are legal remedies to help prevent termination. Certain Franchise Agreements, including those with Ford and Chrysler, have no termination date. In addition, state franchise laws protect franchised automotive retailers. Under certain 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;

 

   

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.”

Competition

The retail automotive business is highly competitive. Currently, there are approximately 18,000 dealers in the United States, many of whom are independent operators managed by individuals, families or small retail groups. We compete primarily with other automotive retailers, both publicly and privately-held.

 

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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 certain markets we are in 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 or greater 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.

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

 

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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.

Certain 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, public health and safety regulatory framework. We are aware of minor contamination at certain of our facilities, and we are in the process of conducting investigations and/or remediation at certain 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. The current level of contamination is such that we do not expect to incur significant costs for the remediation. 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, 2010, we employed approximately 4,039 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 may 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 may access copies of our SEC filings. We also make available, 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 may 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 the NYSE in 2010 confirming that our CEO is not aware of any violations of the NYSE Corporate Governance Standards and we also filed with the SEC, in 2010, the Chief Executive Officer and Chief Financial Officer certifications required under Section 302 of the Sarbanes-Oxley Act.

 

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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.

Risks 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 or their affiliated finance companies. Our sales volume could be materially adversely impacted by the manufacturers’, distributors’ or finance companies’ 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 32%, 18% and 6%, respectively, of our sales in both 2010 and 2009.

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.

In connection with these reorganizations, both manufacturers terminated certain franchise agreements nationwide. Two of our Chrysler store franchises were terminated in the bankruptcy and those dealerships have ceased operations. One General Motors store franchise was also terminated. Additionally, in certain markets, we were awarded additional franchises to sell the Chrysler or Jeep brands. As a result of pending litigation, it is possible that we could lose the recently awarded additional brands, or have competing points reinstated in our existing 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.

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.

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 downturn in overall levels of consumer spending has materially and adversely affected our revenues. 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,

 

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as well as the level of discretionary personal income and credit availability. Economic conditions may remain anemic for an extended period of time, or deteriorate in the future. This continuation would have a material adverse effect on our retail business, particularly sales of new and used automobiles.

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 are currently located in limited markets in 12 states, with three states accounting for approximately 51% of our annualized revenue in 2010. 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.

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.

Many new competitors are entering the automotive industry. New companies have recently raised capital to produce fully electric vehicles or to license battery technology to existing manufacturers. Foreign manufacturers from China and India are producing significant volumes of new vehicles and are entering the U.S. and selecting partners to distribute their products. As the automotive market in the U.S. is mature and the overall level of new vehicle sales may not increase in the coming years, the success of new competitors will likely be at the expense of other, established brands. This could have a material adverse impact on our success in the future.

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.

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, manufacturer-affiliated or other financing companies to provide floorplan sources for our new vehicle inventories. If floorplan sources are eliminated or reduced, no assurance can be given that we will be able to secure additional borrowing facilities. Additionally, our floorplan 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 floorplan lines at the location so long as any mortgage debt remains outstanding. Such a commitment subjects us to the prevailing floorplan 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, their affiliated finance companies or other finance companies, including Ally Bank, Mercedes-Benz Financial Services USA, LLC, Toyota Financial Services (“TFS”), 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. Ally Bank (formerly GMAC LLC) serves as the primary lender for all other brands. At December 31, 2010, Ally Bank was the floorplan provider on approximately 65% of the amount of floorplan debt outstanding. Certain of these companies, including Ally Bank, 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 floorplan debts or borrow sufficient funds to refinance the vehicles. Even if new financing were available, it may not be on terms acceptable to us.

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 changes to their incentive programs. 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, certain manufacturers, including BMW and Mercedes, use a dealership’s manufacturer-determined customer satisfaction index, or CSI, score as a factor governing participation in incentive programs. To the extent we cannot meet minimum score requirements, we may be precluded from receiving certain incentives, which could materially adversely affect our business, results of operations, financial condition and cash flows.

 

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Increasing fuel prices change consumer demand. Significant increases in fuel prices 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. These agreements are typically renewed after one to five years, but may also be granted into perpetuity. In our experience, agreements are routinely renewed without substantial cost and there are legal remedies to help prevent termination.

However, 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 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.

 

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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. Certain 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 selected cases, its parent. The most prohibitive restriction which could be imposed by various manufacturers, including Honda/Acura, Hyundai, 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 without prior consent is a violation of our franchise or dealer framework agreement. Transactions in our stock 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.

Our overall liquidity and earnings 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 on customary business terms. The amounts owed to us primarily relate to, but are not limited to, warranty work performed, factory holdback or other manufacturer incentives. Total receivables from manufacturers were $14.2 million and $11.0 million as of December 31, 2010 and 2009, respectively. In the event manufacturers significantly delay or fail to make payments of amounts owed, our overall liquidity and earnings position could be materially and adversely affected.

 

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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, of which certain competitors are larger and have greater financial and marketing resources than we have. 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.

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 vehicles and related finance and insurance services, which may further reduce margins for new and used vehicles 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.

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 a certain 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.

 

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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 which govern items such as 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 minor contamination at certain of our facilities, and we are in the process of conducting investigations and/or remediation at certain properties. The current level of contamination is such that we do not expect to incur significant costs for the remediation. 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 consumer and financing 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 may 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.

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.

 

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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 is 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 timely, if at all, 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;

 

   

performance requirements for existing stores; and

 

   

frequency of acquisitions.

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 Customer Satisfaction Index (“CSI”) scores and Sales Satisfaction Index (“SSI”) scores at our existing stores. At any point in time, certain 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.

 

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Acquisition risks

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

 

   

failing to achieve predicted sales levels

 

   

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

 

   

incorrectly valuing 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 and 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 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 earnings potential.

 

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Indefinite-lived intangible assets, which consist of goodwill and franchise value, comprise a meaningful portion of our total assets ($51.4 million at December 31, 2010). We must test our indefinite-lived intangible assets for impairment at least annually, which may result in a non-cash write-down of franchise rights or goodwill 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 intangible assets 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 principal intangible assets are goodwill and our rights under our Franchise Agreements with vehicle manufacturers. The risk of impairment charges associated with goodwill increases if there are declines in our market capitalization, profitability or cash flows. The risk of impairment charges associated with franchise value 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 non-cash write-downs of the affected franchise values or goodwill. 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 $42.5 million at December 31, 2010). 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 part 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 deferred 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 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. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.

As of December 31, 2010, our total outstanding indebtedness was approximately $532.0 million, including $251.3 million in floorplan financing, $40.0 million in borrowings under our Credit Facility, $234.8 million in mortgage debt and $5.9 million in other long-term debt. 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 eight banks and finance companies which are, or previously were, associated with automobile manufacturers. 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.

 

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

 

   

limitations on our ability to make acquisitions;

 

   

impaired ability to obtain additional financing for acquisitions, capital expenditures, working capital or general corporate purposes;

 

   

reduced funds available for our operations and other purposes, as a portion of our current cash flow from operations would be dedicated to the payment of principal and interest on our indebtedness; and

 

   

exposure to the risk of increasing interest rates as certain borrowings are, and will continue to be, at variable rates of interest.

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 tangible net worth, vehicle equity, fixed charge coverage and liabilities to tangible net worth. 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. 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 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 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 three 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.

We have significant levels of mortgage debt maturing in the coming years. Approximately $46.3 million, $51.8 million and $61.8 million matures in 2013, 2014 and 2015, respectively. There can be no assurance that, if requested by us, our current lenders will be willing or able to extend these maturities, or that we will be able to find other counterparties to provide financing in the future.

 

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As of December 31, 2010, including the effect of interest rate swaps, approximately 59% of our total debt was variable rate. The majority of our variable rate debt is indexed to the 30 day LIBOR rate. The current interest rate environment is at historically low levels, and interest rates will likely increase in the future. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations, financial condition and cash flows.

We have a significant relationship with a third-party warranty insurer and administrator. If the insurer should be unable to meet claims under our customers’ policies, such events could negatively impact our business, results of operations, financial condition and cash flows.

We sell service warranty policies to our customers issued by a third-party obligor. We receive additional fee income if actual claims are less than the amounts reserved for anticipated claims and the costs of administration and administrator profit. As such, the service contracts must expire before the ultimate claims experience on the service contracts are known and the profit component can be calculated.

A decline in the financial health of the third-party insurer could jeopardize the claims reserves held by the administrator, and prevent us from collecting the experience payments anticipated to be earned in future years. While the amount we receive varies annually, the loss of this income could negatively impact our business, results of operations, financial condition and cash flows. Further, the inability of the insurer to honor service warranty claims would likely result in reputational risk to us and might result in claims to cover any default by the insurer.

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 7, 2011, Lithia Holding controlled approximately 63% of the

 

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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 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 Sidney 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 7, 2011, we had 3,187,672 shares of Class A common stock reserved for issuance under our equity plans (including our employee stock purchase plan). As of March 7, 2011, a total of 1,376,262 shares were outstanding related to outstanding restricted stock units and options (with the options having a weighted average exercise price of $13.24 per share and options to purchase 385,245 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 issue additional shares of our Class A common stock to raise capital or effect acquisitions. We cannot predict the size of future sales or issuance 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 the 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 over the last five years, could continue to fluctuate significantly for many reasons, including in response to the risks described herein or 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;

 

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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;

 

   

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 a 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.

 

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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. Some of our facilities do not currently meet manufacturer image or size requirements and we are actively working to find a mutually acceptable outcome in terms of timing and overall cost. We own certain properties, but also lease certain properties, providing future flexibility to relocate our retail stores as demographics, economics, traffic patterns or sales methods change. Most leases provide us the option to renew the lease for one or more lease extension periods. We also hold certain vacant dealerships and 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 legal proceedings arising in the normal course of business or the proceeding described below will have a material adverse effect on our business, results of operations, financial condition, or cash flows.

Alaska Service and Parts Advisors and Managers Overtime Suit

On March 22, 2006, seven former employees in Alaska brought suit against Lithia (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. Lithia filed a motion requesting reconsideration of this class certification. The arbitrator granted our motion in part and removed approximately 30 service and parts managers from the case. A class action opt-out notice was mailed to the remaining class members in October 2009. Lithia and the plaintiffs agreed to conduct the arbitration in two parts. The first part of arbitration determined if liability existed for Lithia. This arbitration was conducted from September 27 to 29, 2010. The arbitrator ruled in Lithia’s favor and determined that there were no valid claims. The plaintiff has appealed the decision, but we believe the likelihood of overturning the decision is remote, as the appeal is to the arbitrator who made the initial ruling. Therefore, Lithia believes the exposure on this case is now immaterial.

 

Item 4. Reserved

 

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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 2009 and 2010:

 

2009

   High      Low  

Quarter 1

   $ 3.90       $ 1.98   

Quarter 2

     9.58         1.85   

Quarter 3

     16.49         8.43   

Quarter 4

     15.42         7.04   

2010

             

Quarter 1

   $ 9.55       $ 5.18   

Quarter 2

     9.36         6.09   

Quarter 3

     9.94         5.87   

Quarter 4

     14.45         9.45   

The number of shareholders of record and approximate number of beneficial holders of Class A common stock at March 7, 2011 was 1,229 and 7,777, respectively. All shares of Lithia’s Class B common stock are held by Lithia Holding Company, LLC.

Dividends declared on our Class A and Class B common stock during 2010 were as follows:

 

Quarter declared:    Dividend
amount per
share
     Total amount of
dividend (in
thousands)
 

2010

     

First quarter

   $ —         $ —     

Second quarter

     0.05         1,300   

Third quarter

     0.05         1,307   

Fourth quarter

     0.05         1,312   

We did not declare nor pay any dividends on our Class A and Class B common stock in 2009.

Equity Compensation Plan Information

Information regarding securities authorized for issuance under equity compensation plans is included in Item 12.

 

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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, AutoNation, Sonic Automotive, Group 1 Automotive and Asbury Automotive Group, the only other comparable publicly traded automobile dealerships in the United States as of December 31, 2010. 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
12/31/2005
     12/31/2006      Indexed Returns for the Year Ended      12/31/2010  
             

Company/Index

         12/31/2007      12/31/2008      12/31/2009     

Lithia Motors, Inc.

   $ 100.00       $ 93.10       $ 45.57       $ 11.56       $ 29.15       $ 51.52   

Auto Peer Group

     100.00         114.40         79.20         38.35         79.36         110.51   

Russell 2000

     100.00         118.35         116.52         77.14         98.11         124.45   

 

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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.

 

(In thousands, except per share amounts)    Year Ended December 31,  
Consolidated Statement of Operations Data:    2010     2009      2008     2007      2006  

Revenues:

            

New vehicle

   $ 1,067,648      $ 881,329       $ 1,167,532      $ 1,544,417       $ 1,448,866   

Used retail vehicle

     581,185        477,253         469,603        555,429         537,984   

Used wholesale vehicle

     108,113        72,699         96,476        133,862         117,868   

Finance and insurance

     67,107        56,397         77,503        100,037         97,111   

Service, body and parts

     295,823        291,075         303,596        303,412         257,942   

Fleet and other

     11,722        2,614         4,867        5,185         5,174   
                                          

Total revenues

   $ 2,131,598      $ 1,781,367       $ 2,119,577      $ 2,642,342       $ 2,464,945   

Gross Profit:

            

New vehicle

   $ 87,384      $ 74,417       $ 91,791      $ 120,628       $ 113,552   

Used retail vehicle

     82,003        67,166         53,458        78,388         80,697   

Used wholesale vehicle

     645        411         (3,136     3,073         3,554   

Finance and insurance

     67,107        56,397         77,503        100,037         97,111   

Service, body and parts

     142,584        138,543         144,795        144,381         124,628   

Fleet and other

     1,707        1,331         1,572        1,357         1,454   
                                          

Total gross profit

   $ 381,430      $ 338,265       $ 365,983      $ 447,864       $ 420,996   

Operating income (loss)(1)

   $ 47,940      $ 35,713       $ (300,753   $ 79,438       $ 89,636   

Income (loss) from continuing operations before income taxes(1)

   $ 23,193      $ 12,078       $ (333,010   $ 38,606       $ 52,481   

Income (loss) from continuing operations

   $ 14,100      $ 6,916       $ (225,132   $ 21,722       $ 32,256   

Basic income (loss) per share from continuing operations

   $ 0.54      $ 0.31       $ (11.15   $ 1.10       $ 1.65   

Basic income (loss) per share from discontinued operations

     (0.01     0.11         (1.36     —           0.25   
                                          

Basic net income (loss) per share

   $ 0.53      $ 0.42       $ (12.51   $ 1.10       $ 1.90   
                                          

Shares used in basic per share

     26,062        22,037         20,195        19,675         19,583   

Diluted income (loss) per share from continuing operations

   $ 0.53      $ 0.31       $ (11.15   $ 1.06       $ 1.53   

Diluted income (loss) per share from discontinued operations

     (0.01     0.10         (1.36     —           0.23   
                                          

Diluted net income (loss) per share

   $ 0.52      $ 0.41       $ (12.51   $ 1.06       $ 1.76   
                                          

Shares used in diluted per share

     26,279        22,176         20,195        22,204         22,207   

Cash dividends declared per common share

   $ 0.15      $ —         $ 0.47      $ 0.56       $ 0.54   
(In thousands)    As of December 31,  
Consolidated Balance Sheet Data:    2010     2009      2008     2007      2006  

Working capital

   $ 162,675      $ 96,886       $ 99,524      $ 193,447       $ 149,701   

Inventories

     415,228        333,628         428,032        606,056         606,567   

Total assets

     971,676        895,100         1,133,459        1,626,735         1,579,357   

Floorplan notes payable

     251,257        216,082         343,290        456,237         503,219   

Long-term debt, including current maturities

     280,774        265,773         338,229        464,175         405,399   

Total stockholders’ equity

     320,217        307,038         248,343        508,212         493,393   

 

(1) Includes $15.3 million, $8.3 million and $338.7 million of non-cash charges related to asset impairments and terminated construction projects for the years ended 2010, 2009 and 2008, respectively. See Notes 1, 4 and 5 of Notes to Consolidated Financial Statements for additional information.

 

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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 7, 2011, we offered 26 brands of new vehicles and all brands of used vehicles in 82 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 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, leverage costs and improve store profitability. We believe the current economic environment provides us with attractive acquisition opportunities.

We also believe that we can continue to improve operations at our existing stores. By promoting entrepreneurial leadership in our general manager position, we anticipate continuing improvement in the percentage of new vehicle sales we capture in our local markets. While we retail approximately one used vehicle for every new vehicle sold, we believe we can make additional improvements in our used vehicle sales performance by offering lower-priced value vehicles and selling brands other than the new vehicle franchise at each location. Overall, organic growth through improved operations is a goal in 2011.

We believe our cost structure is aligned with current industry sales levels. Through initiatives started in the second quarter of 2008, we have successfully established a cost structure which can be leveraged as vehicle sales levels improve. However, no assurances can be given that industry sales will not experience a further decline, or that our restructuring efforts were sufficient to meet our operating objectives in a declining market.

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. Certain 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 goodwill and franchise value, long-lived assets, deferred tax assets, service contracts and other insurance contracts, and lifetime oil change and self insurance programs. 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.

 

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Goodwill and Franchise Value

We are required to test our goodwill and franchise value for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred.

We have determined that we operate as one reporting unit for evaluating goodwill. For the goodwill impairment testing, we apply a fair-value based test using the Adjusted Present Value method (“APV”) to indicate the fair value of our reporting unit. Under the APV method, future cash flows are based on recently prepared budget forecasts and business plans to estimate the future economic benefits that the reporting unit will generate. An estimate of the appropriate discount rate is utilized to convert the future economic benefits to their present value equivalent.

The goodwill impairment test is a two step process. The first step identifies potential impairments by comparing the calculated fair value of a reporting unit with its book value. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step includes determining the implied fair value through further market research. The implied fair value of goodwill is then compared with the carrying amount to determine if an impairment loss is recorded.

As of December 31, 2010, we had $6.2 million of goodwill on our balance sheet. The first step of our annual goodwill impairment analysis, which we performed as of October 1, 2010, did not result in an indication of impairment. The fair value at December 31, 2010, using the APV method, was 54% greater than the carrying value at December 31, 2010. Our impairment testing of goodwill in 2008 resulted in impairment charges of $299.3 million to fully write-off our goodwill, primarily due to the adverse change in the business climate and our reduced earnings and cash flow forecast. We did not have any goodwill on our balance sheet at December 31, 2009.

We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis. For the franchise value impairment testing, we estimate the fair value of our franchise rights primarily using the APV model. The forecasted cash flows used in the APV 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 transactions involving franchise rights.

As of December 31, 2010, we had $45.2 million of franchise value on our balance sheet. Our impairment testing of franchise value in 2010 did not indicate any impairment. Our impairment testing of franchise value in 2009 and 2008 resulted in impairment charges of $0.3 million and $16.0 million, respectively, primarily due to the adverse change in the business climate and our reduced earnings and cash flow forecast.

We are subject to financial statement risk to the extent that our goodwill or franchise rights become impaired due to decreases in the fair value. A future decline in performance, decreases in projected growth rates or margin assumptions or changes in discount rates could result in a potential impairment, 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 related to that manufacturer.

 

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See Notes 1 and 5 of Notes to Consolidated Financial Statements for additional information.

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 the 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, decrease in projected growth rates or changes in other operating 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. A continued decline in the commercial real estate market could result in a potential impairment of certain investment properties not currently used in operations. Currently, $28.9 million of our long-lived assets are considered held for future development or investment purposes. Of the remaining assets used in operations, $142.7 million are associated with stores operating domestic franchises and $190.8 million are associated with corporate operations and stores operating import/luxury franchises.

Due to the adverse change in the business climate and our reduced earnings and cash flow forecast, we performed impairment testing on long-lived assets during 2010, 2009 and 2008. As a result, we recorded impairments related to long-lived assets of $15.3 million, $10.4 million and $13.9 million in 2010, 2009 and 2008, respectively.

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

Deferred Tax Assets

As of December 31, 2010, we had deferred tax assets of approximately $59.1 million and deferred tax liabilities of $16.6 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.

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.

 

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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, 2010, 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 unrelated third parties, 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, 2010 and 2009, the reserve for future cancellations totaled $9.4 million and $10.3 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. We recorded a charge of $1.0 million and $1.4 million in 2010 and 2009, respectively, for expected costs in excess of revenue deferred related to the pool of assumed contracts. We believe the new vehicle purchase cycle has been delayed for many buyers. If the ownership cycle does not accelerate towards pre-recession levels, our estimate of the number of oil changes to be performed over a vehicles life may require upward revisions, which may adversely affect our financial position and results of operations. In addition, other 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.

 

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A 10% change in expected claims costs per contract for the assumed pool of contracts would result in additional reserves of approximately $1.0 million. A 10% change in expected claims per contract for the self-insured sold contracts would not require any reserve. At December 31, 2010 and 2009, the remaining deferred revenue related to the assumed obligation and the self-insured sold contracts was $7.5 million and $13.9 million, respectively.

Self Insurance Programs

We self-insure a portion of our property and casualty insurance, medical insurance and workers’ compensation insurance. A third-party is engaged to estimate the loss exposure related to the self-retained portion of the risk associated with these insurances. Additionally, we analyze our historical loss and claims experience to estimate the loss exposure associated with these programs. Any changes in assumptions or claim experience could result in the recognition of additional charges, which could have a material adverse impact on our financial position and results of operations.

At December 31, 2010 and 2009, the total reserve associated with these programs was $7.3 million and $3.2 million, respectively, and is included in accrued liabilities and other long-term liabilities on our consolidated balance sheets. A 10% increase in claims experience would result in additional reserves of approximately $3.3 million.

Results of Continuing Operations

For the year ended December 31, 2010, we reported income from continuing operations, net of tax, of $14.1 million, or $0.53 per diluted share. For the years ended December 31, 2009 and 2008, we reported income from continuing operations, net of tax, of $6.9 million, or $0.31 per diluted share, and net loss from continuing operations, net of tax, of $225.1 million, or $11.15 per diluted share, respectively.

Discontinued Operations

As a result of the restructuring we began in 2008, we have sold or closed certain stores in 2008, 2009 and 2010. Results for sold or closed stores, qualifying for reclassification under the applicable accounting guidance, have their results presented as discontinued operations in our consolidated statements of operations. As a result, our results from continuing operations are presented on a comparable basis for all periods. Within discontinued operations, we realized a net gain (loss) of $(0.4) million, $2.2 million and $(27.5) million for the years ended December 31, 2010, 2009 and 2008, respectively. See Notes 1 and 16 of Notes to Consolidated Financial Statements for additional information.

 

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Key Performance Metrics

Certain key performance metrics for revenue and gross profit were as follows for 2010, 2009 and 2008 (dollars in thousands):

 

2010

   Revenues      Percent of
Total  Revenues
    Gross
Profit
    Gross
Profit

Margin
    Percent of Total
Gross Profit
 

New vehicle

   $ 1,067,648         50.1   $ 87,384        8.2     22.9

Used vehicle, retail

     581,185         27.3        82,003        14.1        21.5   

Used vehicle, wholesale

     108,113         5.1        645        0.6        0.2   

Finance and insurance(1)

     67,107         3.1        67,107        100.0        17.6   

Service, body and parts

     295,823         13.9        142,584        48.2        37.4   

Fleet and other

     11,722         0.5        1,707        14.6        0.4   
                                   
   $ 2,131,598         100.0   $ 381,430        17.9     100.0
                                   

2009

   Revenues      Percent of
Total Revenues
    Gross
Profit
    Gross
Profit

Margin
    Percent of Total
Gross Profit
 

New vehicle

   $ 881,329         49.5   $ 74,417        8.4     22.0

Used vehicle, retail

     477,253         26.8        67,166        14.1        19.8   

Used vehicle, wholesale

     72,699         4.1        411        0.6        0.1   

Finance and insurance(1)

     56,397         3.2        56,397        100.0        16.7   

Service, body and parts

     291,075         16.3        138,543        47.6        41.0   

Fleet and other

     2,614         0.1        1,331        50.9        0.4   
                                   
   $ 1,781,367         100.0   $ 338,265        19.0     100.0
                                   

2008

   Revenues      Percent of
Total Revenues
    Gross
Profit
    Gross
Profit

Margin
    Percent of Total
Gross Profit
 

New vehicle

   $ 1,167,532         55.1   $ 91,791        7.9     25.1

Used vehicle, retail

     469,603         22.2        53,458        11.4        14.6   

Used vehicle, wholesale

     96,476         4.5        (3,136     (3.3     (0.9

Finance and insurance(1)

     77,503         3.7        77,503        100.0        21.2   

Service, body and parts

     303,596         14.3        144,795        47.7        39.6   

Fleet and other

     4,867         0.2        1,572        32.3        0.4   
                                   
   $ 2,119,577         100.0   $ 365,983        17.3     100.0
                                   

 

(1) Commissions reported net of anticipated cancellations.

Same Store Operating Data

We believe that same store sales are a key indicator of our financial performance. Same store metrics demonstrate our ability to grow our revenue and profitability in our existing locations. As a result, same store sales have been integrated into the discussion below.

Same store sales are calculated for stores that were in operation as of December 31, 2010, and only including the months of operations for both comparable periods. For example, a store acquired in June 2009 would be included in same store operating data beginning in July 2010, 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.

 

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New Vehicle Revenues

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Reported

          

Revenue

   $ 1,067,648       $ 881,329       $ 186,319        21.1

Retail units sold

     33,701         29,316         4,385        15.0   

Average selling price per retail unit

   $ 31,680       $ 30,063       $ 1,617        5.4   

Same store

          

Revenue

   $ 1,053,411       $ 881,290       $ 172,121        19.5

Retail units sold

     33,173         29,302         3,871        13.2   

Average selling price per retail unit

   $ 31,755       $ 30,076       $ 1,679        5.6   
     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Reported

          

Revenue

   $ 881,329       $ 1,167,532       $ (286,203     (24.5 )% 

Retail units sold

     29,316         39,756         (10,440     (26.3

Average selling price per retail unit

   $ 30,063       $ 29,367       $ 696        2.4   

Same Store

          

Revenue

   $ 880,845       $ 1,161,162       $ (280,317     (24.1 )% 

Retail units sold

     29,280         39,523         (10,243     (25.9

Average selling price per retail unit

   $ 30,084       $ 29,379       $ 705        2.4   

New vehicle sales have improved throughout 2010 compared to 2009 due to a recovery in the U.S. economy and our efforts to increase our share of the new vehicles sold within each local market. Credit availability has continued to improve throughout 2010, although within the sub-prime market, lending remains constrained. Additionally, domestic brands experienced a recovery of market share due to improved product, increased consumer confidence as Chrysler and GM emerged from their restructuring, and as Toyota lost share due to perceived quality issues and recall campaigns.

2009, new vehicle sales compared to 2008 were impacted severely by the recessionary environment. Weak consumer confidence and a lack of available credit 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 further adversely 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.

 

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Used Vehicle Retail Revenues

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Reported

          

Retail revenue

   $ 581,185       $ 477,253       $ 103,932        21.8

Retail units sold

     34,969         29,453         5,516        18.7   

Average selling price per retail unit

   $ 16,620       $ 16,204       $ 416        2.6   

Same store

          

Retail revenue

   $ 568,532       $ 476,395       $ 92,137        19.3

Retail units sold

     34,173         29,386         4,787        16.3   

Average selling price per retail unit

   $ 16,637       $ 16,212       $ 425        2.6   
     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Reported

          

Retail revenue

   $ 477,253       $ 469,603       $ 7,650        1.6

Retail units sold

     29,453         28,339         1,114        3.9   

Average selling price per retail unit

   $ 16,204       $ 16,571       $ (367     (2.2

Same store

          

Retail revenue

   $ 476,076       $ 467,218       $ 8,858        1.9

Retail units sold

     29,366         28,164         1,202        4.3   

Average selling price per retail unit

   $ 16,212       $ 16,589       $ (377     (2.3

Used vehicle retail unit sales have increased as consumers elect to purchase used vehicles instead of new vehicles, and as we increase the number of lower-price, higher-margin, older used vehicles 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 them via trade-in. Despite an improving new vehicle sales market in 2010, we have continued to focus on increasing used vehicles sales, particularly older, less expensive vehicles. As a result, our used retail to new vehicle sales ratio is up slightly from 1.00:1 in 2009 to 1.04:1 in 2010.

The average price of used vehicles sold decreased in 2009 compared to 2008 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 transaction prices.

 

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Used Vehicle Wholesale Revenues

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Reported

          

Wholesale revenue

   $ 108,113       $ 72,699       $ 35,414        48.7

Wholesale units sold

     14,365         13,623         742        5.4   

Average selling price per wholesale unit

   $ 7,526       $ 5,336       $ 2,190        41.0   

Same store

          

Wholesale revenue

   $ 105,701       $ 71,936       $ 33,765        46.9

Wholesale units sold

     14,043         13,562         481        3.5   

Average selling price per wholesale unit

   $ 7,527       $ 5,304       $ 2,223        41.9   
     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Reported

          

Wholesale revenue

   $ 72,699       $ 96,476       $ (23,777     (24.6 )% 

Wholesale units sold

     13,623         16,477         (2,854     (17.3

Average selling price per wholesale unit

   $ 5,336       $ 5,855       $ (519     (8.9

Same store

          

Wholesale revenue

   $ 71,905       $ 94,887       $ (22,982     (24.2 )% 

Wholesale units sold

     13,545         16,288         (2,743     (16.8

Average selling price per wholesale unit

   $ 5,309       $ 5,826       $ (517     (8.9

Wholesale transactions are a result of vehicles we have purchased from customers buying vehicles from us, or from vehicles we have attempted to sell via retail that we elect to dispose of due to time in inventory or other factors. Throughout 2010, we have concentrated on directing more lower-priced, older vehicles to retail sale rather than wholesale disposal. As a result, we have seen an increase in average wholesale price, and have increased wholesale revenues by a larger percentage than wholesale units.

Wholesale vehicle sales were down in 2009 compared to 2008 mainly due to changes in vehicle mix as we kept more 3 to 7 year old vehicles than in previous years, resulting in fewer units sold via wholesale. The units sold via wholesale in 2009 had lower average selling prices as they represented a larger percentage of older, less expensive vehicles not suitable for retail sale.

Wholesale vehicle sales are typically done at or near inventory cost and do not comprise a meaningful component of our gross profit. We generated wholesale profit (loss) of $0.6 million, $0.4 million and $(3.1) million in 2010, 2009 and 2008, respectively.

 

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Finance and Insurance

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Reported

          

Revenue

   $ 67,107       $ 56,397       $ 10,710        19.0

Revenue per retail unit

   $ 977       $ 960       $ 17        1.8   

Same store

          

Revenue

   $ 63,096       $ 53,843       $ 9,253        17.2

Revenue per retail unit

   $ 937       $ 917       $ 20        2.2   
     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Reported

          

Revenue

   $ 56,397       $ 77,503       $ (21,106     (27.2 )% 

Revenue per retail unit

   $ 960       $ 1,138       $ (178     (15.6

Same store

          

Revenue

   $ 53,808       $ 72,771       $ (18,963     (26.1 )% 

Revenue per retail unit

   $ 918       $ 1,075       $ (157     (14.6

In 2010, finance and insurance sales increased as we sold a greater number of new and used vehicles than in 2009 and had more opportunity to present our product offerings to consumers. Additionally, banks returned to the auto finance market in 2010, providing alternate financing options to customers that we had primarily shifted to credit unions in 2009. Banks typically pay a higher commission for arranging retail automotive financing and our revenue per retail unit increased as a result. Lenders also increased the loan-to-value amount available to most customers, affording us the opportunity to sell additional or more comprehensive products while still remaining within an acceptable lending framework.

In 2009, 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.

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.

Penetration rates for certain products were as follows:

 

     2010     2009     2008  

Finance and insurance

     72     68     74

Service contracts

     41        41        42   

Lifetime oil change and filter

     34        35        34   

 

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Service, Body and Parts Revenue

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Reported

          

Customer pay

   $ 166,941       $ 158,018       $ 8,923        5.6

Warranty

     51,432         55,539         (4,107     (7.4

Wholesale parts

     49,404         49,486         (82     (0.2

Body shop

     28,046         28,032         14        —     
                            

Total service, body and parts

   $ 295,823       $ 291,075       $ 4,748        1.6   
                            

Same store

          

Customer pay

   $ 164,597       $ 157,652       $ 6,945        4.4

Warranty

     50,688         55,433         (4,745     (8.6

Wholesale parts

     48,690         49,267         (577     (1.2

Body shop

     27,574         28,032         (458     (1.6
                            

Total service, body and parts

   $ 291,549       $ 290,384       $ 1,165        0.4   
                            
      Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Reported

          

Customer pay

   $ 158,018       $ 159,405       $ (1,387     (0.9 )% 

Warranty

     55,539         59,676         (4,137     (6.9

Wholesale parts

     49,486         54,083         (4,597     (8.5

Body shop

     28,032         30,432         (2,400     (7.9
                            

Total service, body and parts

   $ 291,075       $ 303,596       $ (12,521     (4.1
                            

Same store

          

Customer pay

   $ 157,627       $ 158,329       $ (702     (0.4 )% 

Warranty

     55,431         59,260         (3,829     (6.5

Wholesale parts

     49,253         53,817         (4,564     (8.5

Body shop

     28,032         30,432         (2,400     (7.9
                            

Total service, body and parts

   $ 290,343       $ 301,838       $ (11,495     (3.8
                            

Our service, body and parts business was also affected, albeit at a lesser magnitude than vehicle sales, by the challenging economic environment. Declining consumer confidence has caused customers to defer maintenance work and routine servicing for longer periods of time. Declining units in operation have impacted the overall available pool of vehicles to service and warranty opportunities.

Warranty work accounted for approximately 17.4% of our same store service, body and parts sales in 2010 compared to 19.1% in 2009, which resulted in an 8.6% decrease in same store warranty sales in 2010 compared to 2009. Domestic brand warranty work decreased by 1.6%, while import/luxury warranty work decreased by 4.0% in 2010 compared to 2009. To offset the trends in warranty work, we have emphasized the customer pay portion of our business through competitively priced routine maintenance offerings and increased marketing efforts. The customer pay service and parts business, which represented 56.5% of the total service, body and parts business in 2010 on a same store basis, was up 4.4% compared to 2009.

Warranty work accounted for approximately 19.1% of our same store service, body and parts sales in 2009 and declined 6.5% compared to 2008. The customer pay service and parts business represented 54.3% of the total service, body and parts business in 2009, which was 0.4% lower compared to 2008. As discussed above, these changes in mix resulted from lower consumer confidence, deferred maintenance on vehicles and fewer warranty opportunities. As a result, overall same store sales declined 3.8%.

Gross Profit

Gross profit increased $43.2 million in 2010 compared to 2009 and decreased $27.7 million in 2009 compared to 2008. The increase in 2010 was primarily due to increased revenues, partially offset by a decline in our overall gross profit margin. The decrease in 2009 compared to 2008 was due to decreased total revenues, partially offset by an increase in our overall gross profit margin.

 

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Gross profit margins achieved were as follows:

 

     Year Ended December 31,     Basis  Point
Change
 
     2010     2009    

New vehicle

     8.2     8.4     (20 )bp 

Retail used vehicle

     14.1        14.1        —     

Wholesale used vehicles

     0.6        0.6        —     

Finance and insurance

     100.0        100.0        —     

Service, body and parts

     48.2        47.6        60   

Overall

     17.9        19.0        (110
     Year Ended December 31,     Basis Point
Change*
 
     2009     2008    

New vehicle

     8.4     7.9     50  bp 

Retail used vehicle

     14.1        11.4        270   

Wholesale used vehicles

     0.6        (3.3     390   

Finance and insurance

     100.0        100.0        —     

Service, body and parts

     47.6        47.7        (10

Overall

     19.0        17.3        170   

 

*

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

In 2010, our overall gross profit margin decreased primarily due to a mix shift as we sold a greater number of new vehicles, which have lower margins than our other businesses. We have worked to maintain our gross profit margin in the face of rising product costs. We believe our “single-point” strategy of maintaining franchise exclusivity within the market we serve protects profitability and allows us to maintain margin levels.

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.

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.

 

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We recorded asset impairment charges in 2010, 2009 and 2008. Asset impairments recorded as a component of continuing operations consist of the following (in thousands):

 

December 31,

   2010      2009     2008  

Goodwill

   $ —         $ —        $ 299,266   
                         

Asset Impairments

       

Intangible assets

   $ —         $ 250      $ 16,028   

Long-lived assets

     15,301         10,350        13,876   

Other assets

     —           (2,328     4,995   
                         

Total asset impairments

   $ 15,301       $ 8,272      $ 34,899   
                         

Selling, general and administrative

   $ —         $ —        $ 4,527   
                         

During 2010, we believed events and circumstances indicated the carrying amount of our non-operational long-lived assets may no longer be recoverable, triggering interim impairment tests. We determined a triggering event had occurred based on the following factors:

 

   

slower industry recovery for retail vehicle sales than originally projected at the end of 2009;

 

   

oversupply of vacant dealership properties due to the economic downturn and bankruptcy proceedings for Chrysler and GM; and

 

   

the broader economic recovery, including the availability of credit, remained gradual, limiting the potential buyers of these types of properties.

Based on the results of those tests, we recorded asset impairment charges of $15.3 million associated with these properties during 2010.

In 2009, as a result of the reorganization in bankruptcy of both Chrysler and GM, and the decline in commercial real estate values, we tested our long-lived assets for recoverability. Additionally, operational results for certain locations have been retrospectively reclassified from discontinued operations to continuing operations in the consolidated statement of operations, including prior period impairments. As these assets were no longer expected to be sold, a reversal of estimated costs to sell was recorded in 2009. Total asset impairment charges were $8.3 million in 2009.

As a result of the adverse change in the business climate and our reduced earnings and cash flow forecast, we tested certain goodwill, franchise value and long-lived assets for recoverability in 2008. Based on the results of these tests, we recorded asset impairment charges totaling $334.2 million in 2008. In addition, we recorded impairment charges on certain cancelled construction projects of $4.5 million in 2008 as a component of selling, general and administrative expense.

See Notes 1, 4 and 5 of Notes to Consolidated Financial Statements for additional information.

 

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Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Personnel

   $ 185,557       $ 171,289       $ 14,268        8.3

Advertising

     27,134         18,402         8,732        47.5   

Rent

     14,715         15,464         (749     (4.8

Facility costs

     23,860         23,614         246        1.0   

Other

     49,346         47,252         2,094        4.4   
                            

Total SG&A

   $ 300,612       $ 276,021       $ 24,591        8.9   
                            
     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Personnel

   $ 171,289       $ 193,090       $ (21,801     (11.3 )% 

Advertising

     18,402         17,577         825        4.7   

Rent

     15,464         17,161         (1,697     (9.9

Facility costs

     23,614         24,524         (910     (3.7

Other

     47,252         63,160         (15,908     (25.2
                            

Total SG&A

   $ 276,021       $ 315,512       $ (39,491     (12.5
                            

SG&A increased $24.6 million in 2010 compared to 2009, primarily due to increased sales volumes and increased advertising expense to gain market share, offset by savings in other areas as we continued to focus on reducing costs. SG&A as a percentage of gross profit was 78.8% in 2010 compared to 81.6% in 2009.

SG&A decreased $39.5 million in 2009 compared to 2008, primarily due to reduced sales volumes and cost cutting efforts. Additionally, SG&A in 2008 included $4.5 million of impairment charges on certain cancelled construction projects. SG&A as a percentage of gross profit was 81.6% in 2009 compared to 86.2% in 2008.

Depreciation and Amortization

Depreciation is comprised of depreciation expense related to buildings, significant remodels or betterments, furniture, tools, equipment and signage and amortization of certain intangible assets, including customer lists and non-compete agreements.

 

     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010      2009       

Depreciation and amortization

   $ 17,577       $ 18,259       $ (682     (3.7 )% 
     Year Ended
December 31,
     Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009      2008       

Depreciation and amortization

   $ 18,259       $ 17,059       $ 1,200        7.0

Depreciation and amortization decreased $0.7 million and increased $1.2 million, respectively, in 2010 compared to 2009 and in 2009 compared to 2008. 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. Depreciation and amortization in 2009 included a $2.2 million charge to record depreciation related to assets reclassified from held for sale, including approximately $0.7 million that would have been recorded in 2008 if the assets had not been classified in discontinued operations at that time.

 

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Operating Income (Loss)

Operating income (loss) was 2.2%, 2.0% and (14.2)% of revenue, respectively, in 2010, 2009 and 2008. The increase in 2010 compared to 2009 was primarily due to improved sales and continued cost control. 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

Floorplan interest expense decreased $0.4 million in 2010 compared to 2009. A decrease of $0.1 million resulted from declines in the average benchmark interest rates on our floorplan facilities and a decrease of $1.1 million resulted from decreases in the average outstanding balances of our floorplan facilities. At the end of 2009 and throughout 2010, we had paid down our floorplan notes with excess cash. Ineffectiveness from hedging interest rate swaps resulted in an increase of $0.8 million.

Floorplan interest expense decreased $9.8 million in 2009 compared to 2008. A decrease of $3.0 million resulted from lower average interest rates and a decrease of $6.3 million resulted from lower average balances outstanding. In addition there was a decrease of $0.5 million related to our interest rate swaps.

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 tables detail the carrying costs for new vehicles and include new and program vehicle floorplan interest net of floorplan assistance earned.

 

     Year Ended
December 31,
    Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2010     2009      

Floorplan interest expense (new vehicles)

   $ 10,597      $ 11,015      $ (418     (3.8 )% 

Floorplan assistance (included in cost of sales)

     (9,753     (9,245     (508     (5.5
                          

Net new vehicle carrying costs

   $ 844      $ 1,770      $ (926     (52.3 )% 
                          
     Year Ended
December 31,
    Increase
(Decrease)
    %
Increase
(Decrease)
 
(Dollars in thousands)    2009     2008      

Floorplan interest expense (new vehicles)

   $ 11,015      $ 20,808      $ (9,793     (47.1 )% 

Floorplan assistance (included in cost of sales)

     (9,245     (15,519     6,274        40.4   
                          

Net new vehicle carrying costs

   $ 1,770      $ 5,289      $ (3,519     (66.5 )% 
                          

Other Interest Expense

Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages and our working capital, acquisition and used vehicle line of credit. It also included interest on our senior subordinated convertible notes in the first three quarters of 2009 and all of 2008.

In 2009 and 2008, other interest expense contained interest associated with our convertible notes. With the repurchase of our convertible notes in 2009, other interest expense mainly related to mortgages in 2010. Mortgage interest expense totaled $13.6 million, $11.6 million and $10.0 million in 2010, 2009 and 2008, respectively.

There was no capitalized interest on construction projects in 2010. Capitalized interest on construction projects totaled $0.9 million and $1.7 million, respectively, in 2009 and 2008.

 

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Other Income, net

Other income, net was $0.4 million, $1.5 million and $6.6 million for 2010, 2009 and 2008, 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 Provision (Benefit)

Our effective tax rate was 39.2% in 2010, 42.7% in 2009 and (32.4)% in 2008. Our federal income tax rate is 35% and our state income tax rate is currently 3.4%, 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, the impact 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.

Pro Forma Reconciliations

Due to the non-core nature of certain non-cash charges related to asset impairments, lease termination, lifetime oil change and severance reserves (“reserve adjustments”), disposal gains 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 these items that affect the period-to-period comparability of our core operations. These presentations are not intended to provide SG&A, operating income, income from continuing operations before taxes or net income in accordance with GAAP and should not be considered an alternative to GAAP measures.

 

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The following table reconciles certain reported GAAP amounts per the Consolidated Statements of Operations to the comparable non-GAAP income (loss) amounts (dollars in thousands, except per share amounts):

 

     Year Ended December 31  
Selling, general and administrative expense    2010     2009     2008  

As reported

   $ 300,612      $ 276,021      $ 315,512   

Impairments and disposal gain

     413        —          (4,527

Reserve adjustments

     (1,238     (454     —     
                        

Adjusted

   $ 299,787      $ 275,567      $ 310,985   
                        

SG&A as a % of gross profit

      

As reported

     78.8     81.6     86.2

Adjusted

     78.4        81.1        85.0   

Income from operations

      

As reported

   $ 47,940      $ 35,713      $ (300,753

Impairments and disposal gain

     14,954        7,842        338,692   

Reserve adjustments

     2,278        1,854        —     
                        

Adjusted

   $ 65,172      $ 45,409      $ 37,939   
                        

Operating profit

      

As reported

     2.2     2.0     (14.2 )% 

Adjusted

     3.1        2.5        1.8   

Income (loss) from continuing operations before income taxes

      

As reported

   $ 23,193      $ 12,078      $ (333,010

Impairments and disposal gain

     14,954        7,842        338,692   

Reserve adjustments

     2,278        1,854        —     

Gain on extinguishment of debt

     —          (1,317     (5,248
                        

Adjusted

   $ 40,425      $ 20,457      $ 434   
                        

Pre-tax margin

      

As reported

     1.1     0.7     (15.7 )% 

Adjusted

     1.9        1.1        —     

Net income (loss) from continuing operations

      

As reported

   $ 14,100      $ 6,916      $ (225,132

Impairments and disposal gain

     9,178        4,967        229,080   

Reserve adjustments

     1,532        1,103        —     

Gain on extinguishment of debt

     —          (812     (3,646
                        

Adjusted

   $ 24,810      $ 12,174      $ 302   
                        

Diluted net income (loss) per share from continuing operations

      

As reported

   $ 0.53      $ 0.31      $ (11.15

Impairments and disposal gain

     0.35        0.23        11.34   

Reserve adjustments

     0.06        0.05        —     

Gain on extinguishment of debt

     —          (0.04     (0.18
                        

Adjusted

   $ 0.94      $ 0.55      $ 0.01   
                        

Liquidity and Capital Resources

We manage our liquidity and capital resources to be able to fund future capital expenditures, working capital requirements and contractual obligations. Additionally, we use capital resources to fund cash dividend payments, share repurchases and acquisitions.

 

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Available Sources

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

Below is a summary and discussion of our available funds:

 

     As of December 31,      Increase
(Decrease)
    %
Increase
(Decrease)
 
     2010      2009       

Cash and cash equivalents

   $ 9,306       $ 12,776       $ (3,470     (27.2 )% 

Available credit on the Credit Facility

     23,332         25,682         (2,350     (9.2

Unfinanced new vehicles

     65,601         35,728         29,873        83.6   
                            

Total available funds

   $ 98,239       $ 74,186       $ 24,053        32.4
                            

During 2010, 2009 and 2008, we generated $18.3 million, $11.4 million and $82.9 million, respectively, through the sale of assets and stores and the issuance of long-term debt, net of debt repayment.

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.

In addition to the above sources of liquidity, potential sources 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 in sufficient amounts or with terms acceptable to us.

Summary of Outstanding Balances on Credit Facilities and Long-term Debt

Below is a summary of our outstanding balances on credit facilities and long-term debt:

 

     Outstanding as
of December 31,
2010
     Remaining
Available as of
December 31,
2010
 

New and program floorplan notes payable

   $ 251,257       $ —   (1) 

Credit facility

     40,000         23,332  (2),(3) 

Real estate mortgages

     234,850         —     

Other debt

     5,924         —     
                 

Total debt

   $ 532,031       $ 23,332   
                 

 

(1) There are no formal limits on the new and program vehicle lines with certain lenders, and we had approximately $65.6 million in unfloored new vehicles at December 31, 2010.
(2) Reduced by $2.3 million for outstanding letters of credit.
(3) The amount available on the line is limited based on a borrowing base calculation and fluctuates monthly.

New and Program Vehicle Lines

Ally Bank, Mercedes-Benz Financial Services USA, LLC, TFS, 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. Ally Bank serves as the primary lenders for all other brands. The new and program vehicle lines are secured by new and program vehicle inventory of the stores financed by that lender. The weighted average interest rates associated with our new and program vehicle lines, excluding the effects of our interest rate swaps, was 3.1% at December 31, 2010.

 

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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 in our statements of cash flows.

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,  
(In thousands)    2010     2009     2008  

As Reported

      

Cash flow from (used in) operations

   $ (21,330   $ 9,939      $ 86,108   

Change in floorplan notes payable: non-trade

     24,090        31,417        (16,803
                        

Adjusted

   $ 2,760      $ 41,356      $ 69,305   
                        

As Reported

      

Cash flow from (used in) financing

   $ 37,826      $ (29,127   $ (101,185

Change in floorplan notes payable: non-trade

     (24,090     (31,417     16,803   
                        

Adjusted

   $ 13,736      $ (60,544   $ (84,382
                        

Working Capital, Acquisition and Used Vehicle Credit Facility

We have a $75 million Credit Facility with U.S. Bank National Association, which expires June 30, 2013. As of December 31, 2010, approximately $23.3 million was available on the facility. 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 2.35%, which totaled 2.6% at December 31, 2010.

Real Estate Mortgages and Other Debt

We have mortgages associated with our owned real estate and leasehold improvements. Interest rates related to this debt ranged from 2.1% to 7.9% at December 31, 2010. The mortgages are payable in various installments through January 2018 with no significant maturities until 2013.

Our other debt includes various notes, capital leases and obligations assumed as a result of acquisitions and other agreements and have interest rates that ranged from 3.5% to 10.0% at December 31, 2010.

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.

 

Debt Covenant Ratios

   Requirement      As of December 31, 2010  

Minimum tangible net worth

     Not less than $200 million       $ 267.1 million   

Vehicle equity

     Not less than $65 million       $ 187.7 million   

Fixed charge coverage ratio

     Not less than 1.20 to 1         1.68 to 1   

Liabilities to tangible net worth ratio

     Not more than 4.00 to 1         2.44 to 1   

Accordingly, we were in compliance with the Credit Facility financial covenants as of December 31, 2010.

 

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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 lender 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

We calculate days supply based on a forward looking projection of expected sales levels. We believe this better aligns our days supply with seasonal fluctuations in our business. For example, using a trailing days supply would overstate inventory in the fourth quarter as we approach the stronger spring selling season, and understate inventory in the third quarter as we approach the slower fall and winter selling season. Our days supply of new vehicles at December 31, 2010 is nine days below our historical December 31 balances and seven days below our December 31, 2009 levels. This decrease compared to 2009 is a result of increased new vehicle sales levels and efforts to reduce the amount of new inventory available.

Our days supply of used vehicles at December 31, 2010 was down ten days compared to our historical December 31 balances and eight days below our December 31, 2009 balances. We have continued to focus on managing inventory levels in 2010 resulting in a decrease compared to historical periods.

Contractual Payment Obligations

A summary of our contractual commitments and obligations as of December 31, 2010 was as follows (in thousands):

 

     Payments Due By Period  

Contractual Obligation

   Total      2011      2012 and
2013
     2014 and
2015
     2016 and
beyond
 

Floorplan notes payable(1)

   $ 251,257       $ 251,257       $ —         $ —         $ —     

Credit Facility(1)

     40,000         —           40,000         —           —     

Real estate debt, including interest

     282,762         23,234         78,808         118,403         62,317   

Other debt, including interest

     7,022         702         1,329         2,916         2,075   

Charge-backs on various contracts

     9,365         5,273         3,689         392         11   

Operating and capital leases(2)

     148,770         17,184         30,381         25,541         75,664   

Fixed rate payments on interest rate swaps

     14,177         4,327         8,666         590         594   
                                            
   $ 753,353       $ 301,977       $ 162,873       $ 147,842       $ 140,661   
                                            

 

(1)

Amounts for floorplan notes payable and the Credit Facility do not include estimated interest payments. See Notes 2 and 6 in the Notes to Consolidated Financial Statements.

(2)

Amounts for operating and capital lease commitments do not include sublease income, and certain operating expenses such as maintenance, insurance and real estate taxes. See Note 7 in the Notes to Consolidated Financial Statements.

Capital Expenditures

Capital expenditures were $7.6 million, $21.1 million and $57.4 million for 2010, 2009 and 2008, respectively. The decrease in capital expenditures over the past two years reflected our cash management efforts and our desire to reduce the aggregate level of debt outstanding. In 2011, we anticipate approximately $26.0 million in capital expenditures, mainly related to the improvement of our store facilities, replacement of equipment and construction of a new headquarters building.

 

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Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. Accordingly, we believe it is an attractive time to invest in certain facility upgrades and remodels that will generate additional manufacturer incentive payments. Also, recently enacted tax law changes that accelerate deductions for capital expenditures have accelerated project timelines to ensure completion before the law expires.

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.

Dividends

Our Board of Directors declared dividends of $0.05 per share on our Class A and Class B common stock, which were paid in April 2010, July 2010 and October 2010 and totaled approximately $1.3 million each payment period. Management evaluates performance and makes a recommendation to the Board of Directors on dividend payments on a quarterly basis.

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, 2010, we have purchased a total of 580,624 shares under this program, 100,893 of which were purchased during 2010 for an average price of $7.88 per share. We may continue to repurchase shares from time to time in the future, if permitted by our credit facilities, and as conditions warrant.

 

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Selected Consolidated Quarterly Financial Data

The following tables set forth our unaudited quarterly financial data(1) (2).

 

2010 (in thousands, except per share data )    Three Months Ended,  
     March 31     June 30     September 30     December 31  

Revenues:

  

New vehicle

   $ 215,617      $ 268,721      $ 293,237      $ 290,073   

Used vehicle retail

     135,899        146,836        158,798        139,652   

Used vehicle wholesale

     23,465        25,570        30,869        28,209   

Finance and insurance

     14,638        16,274        18,928        17,267   

Service, body and parts

     68,797        71,996        77,733        77,297   

Fleet and other

     803        4,704        3,122        3,093   
                                

Total revenues

     459,219        534,101        582,687        555,591   

Cost of sales

     373,314        438,358        477,743        460,753   
                                

Gross profit

     85,905        95,743        104,944        94,838   

Asset impairments

     1,491        13,260        —          550   

Selling, general and administrative

     71,039        74,813        77,468        77,292   

Depreciation and amortization

     4,749        4,401        4,239        4,188   
                                

Operating income

     8,626        3,269        23,237        12,808   

Floorplan interest expense

     (2,751     (2,567     (3,085     (2,194

Other interest expense

     (3,588     (3,529     (3,725     (3,730

Other, net

     68        214        74        66   
                                

Income (loss) from continuing operations before income taxes

     2,355        (2,613     16,501        6,950   

Income tax (provision) benefit

     (912     1,099        (6,709     (2,571
                                

Income (loss) before discontinued operations

     1,443        (1,514     9,792        4,379   

Discontinued operations, net of tax

     (176     (205     —          —     
                                

Net income (loss)

   $ 1,267      $ (1,719   $ 9,792      $ 4,379   
                                

Basic income (loss) per share from continuing operations

   $ 0.06      $ (0.06   $ 0.37      $ 0.17   

Basic loss per share from discontinued operations

     (0.01     (0.01     —          —     
                                

Basic net income (loss) per share

   $ 0.05      $ (0.07   $ 0.37      $ 0.17   
                                

Diluted income (loss) per share from continuing operations

   $ 0.06      $ (0.06   $ 0.37      $ 0.16   

Diluted loss per share from discontinued operations

     (0.01     (0.01     —          —     
                                

Diluted net income (loss) per share

   $ 0.05      $ (0.07   $ 0.37      $ 0.16   
                                

 

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2009 (in thousands, except per share data )    Three Months Ended,  
     March 31     June 30     September 30     December 31  

Revenues:

  

New vehicle

   $ 192,306      $ 211,760      $ 266,769      $ 210,494   

Used vehicle retail

     109,089        126,256        129,857        112,051   

Used vehicle wholesale

     16,513        17,751        20,223        18,212   

Finance and insurance

     13,537        14,857        15,704        12,299   

Service, body and parts

     72,957        72,312        74,538        71,268   

Fleet and other

     570        625        895        524   
                                

Total revenues

     404,972        443,561        507,986        424,848   

Cost of sales

     325,691        357,272        412,493        347,646   
                                

Gross profit

     79,281        86,289        95,493        77,202   

Asset impairments

     2,080        3,680        2,359        153   

Selling, general and administrative

     68,655        68,694        71,165        67,507   

Depreciation and amortization

     4,091        3,969        3,883        6,316   
                                

Operating income (loss)

     4,455        9,946        18,086        3,226   

Floorplan interest expense

     (2,911     (2,664     (3,053     (2,387

Other interest expense

     (3,981     (3,367     (3,291     (3,476

Other, net

     1,164        258        25        48   
                                

Income (loss) from continuing operations before income taxes

     (1,273     4,173        11,767        (2,589

Income tax (provision) benefit

     489        (1,634     (4,792     775   
                                

Income (loss) before discontinued operations

     (784     2,539        6,975        (1,814

Discontinued operations, net of tax

     2,113        1,124        (1,262     260   
                                

Net income (loss)

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

Basic income (loss) per share from continuing operations

   $ (0.04   $ 0.12      $ 0.33      $ (0.07

Basic loss per share from discontinued operations

     0.10        0.05        (0.06     0.01   
                                

Basic net loss per share

   $ 0.06      $ 0.17      $ 0.27      $ (0.06
                                

Diluted income (loss) per share from continuing operations

   $ (0.04   $ 0.12      $ 0.33      $ (0.07

Diluted loss per share from discontinued operations

     0.10        0.05        (0.06     0.01   
                                

Diluted net loss per share

   $ 0.06      $ 0.17      $ 0.27      $ (0.06
                                

 

(1) Quarterly data may not add to yearly totals due to rounding.
(2) Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented.

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.

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 floorplan debt is based on open-ended lines of credit tied to each individual store from the various manufacturer finance companies.

 

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Our variable-rate floorplan notes payable, variable rate mortgage notes payable and other credit line borrowings subject us to market risk exposure. At December 31, 2010, we had $413.6 million outstanding under such agreements at a weighted average interest rate of 3.1% 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, 2010.

Fixed Rate Debt

The fair value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall because we would expect to be able 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 value but do not impact earnings or cash flows.

At December 31, 2010, we had $118.5 million of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates of between October 2011 and October 2029. Based on discounted cash flows using current interest rates for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $127.4 million at December 31, 2010.

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, 2010, 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;

 

   

effective January 26, 2008 – a five year, $25 million interest rate swap at a fixed rate of 4.495% per annum, variable rate adjusted on the 26th of each month;

 

   

effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495% per annum, variable rate adjusted on the 1st and 16th of each month; and

 

   

effective May 1, 2008 – a five year, $25 million interest rate swap at a fixed rate of 3.495% per annum, variable rate adjusted on the 1st and 16th of each month.

We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month LIBOR rate at December 31, 2010 was 0.3% 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

 

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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, 2010, the fair value of all of our agreements was a liability of $8.7 million. The estimated amount expected to be reclassified into earnings within the next twelve months was $3.2 million at December 31, 2010.

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, 2010 is included in Item 7.

 

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

None.

 

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

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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, 2010. 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, 2010, 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, 2010, which is included in Item 8 of this Form 10-K.

 

Item 9B. Other Information

None.

 

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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 Independence and Financial Expert, Code of Business Conduct and Ethics, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for our 2011 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 2011 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management

Equity Compensation Plan Information

The following table summarizes equity securities authorized for issuance as of December 31, 2010.

 

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

     1,185,241       $ 13.56         1,752,708 (1) 

Equity compensation plans not approved by shareholders

     —           —           —     
                          

Total

     1,185,241       $ 13.56         1,752,708   
                          

 

(1) Includes 756,730 shares available pursuant to our 2003 Stock Incentive Plan and 995,978 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 2011 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 2011 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

 

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Item 14. Principal Accountant Fees and Services

Information required by this item will be included under the caption Fees Paid to KPMG LLP Related to Years 2010 and 2009 and Pre-approval Policies in our Proxy Statement for our 2011 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

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, 2010 and 2009

   F-3

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

   F-4

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008

   F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

   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    (l)    Amended and Restated Bylaws of Lithia Motors, Inc. (Corrected)
4.1    (b)    Specimen Common Stock certificate
10.1*    (i)    2009 Employee Stock Purchase Plan
10.2*    (d)    Lithia Motors, Inc. 2001 Stock Option Plan
  10.2.1*    (e)    Form of Incentive Stock Option Agreement for 2001 Stock Option Plan
  10.2.2*    (e)    Form of Non-Qualified Stock Option Agreement for 2001 Stock Option Plan
10.3      (q)    Lithia Motors, Inc. Amended and Restated 2003 Stock Incentive Plan
10.4*       Form of Restricted Stock Unit Agreement for Senior Executives
  10.4.1*       Form of Restricted Stock Unit Agreement for Non-Executive Officers
  10.4.2*       Form of Restricted Stock Unit Agreement for Non-Executive Directors
10.5*    (k)    Summary 2008 Discretionary Support Services Bonus Program

 

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Exhibit

        

Description

10.6    (a)    Chrysler Corporation Sales and Service Agreement General Provisions
10.6.1    (f)    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) (1)
10.7    (b)    Mercury Sales and Service Agreement General Provisions
10.7.1    (c)    Supplemental Terms and Conditions agreement between Ford Motor Company and Lithia Motors, Inc. dated June 12, 1997
10.7.2    (c)    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) (2)
10.8    (c)    Volkswagen Dealer Agreement Standard Provisions
10.8.1    (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) (3)
10.9    (b)    General Motors Dealer Sales and Service Agreement Standard Provisions
10.9.1    (a)    Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement dated January 16, 1998
10.9.2    (g)    Chevrolet Dealer Sales and Service Agreement dated October 13, 1998 between General Motors Corporation, Chevrolet Motor Division and Camp Automotive, Inc. (4)
10.10    (b)    Toyota Dealer Agreement Standard Provisions
10.10.1    (a)    Toyota Dealer Agreement, between Toyota Motor Sales, USA, Inc. and Lithia Motors, Inc., dba Lithia Toyota, dated February 15, 1996 (5)
10.11    (c)    Nissan Standard Provisions
10.11.1    (a)    Nissan Public Ownership Addendum dated August 30, 1999 (identical documents executed by each Nissan store)
10.11.2    (c)    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) (6)
10.12    (a)    Lease Agreement between CAR LIT, LLC and Lithia Real Estate, Inc. relating to properties in Medford, Oregon (7)
10.13*    (p)    Non Employee Director Compensation Plan 2009/2010 Service Year.
10.14*    (h)    Form of Outside Director Nonqualified Deferred Compensation Agreement
10.15*    (o)    Form of Executive Nonqualified Deferred Compensation Plan
10.16    (m)    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
10.16.1    (p)    Eighth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated January 14, 2010
10.16.2    (p)    Ninth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated February 17, 2010
10.16.3    (r)    Tenth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated June 29, 2010
10.16.4    (s)    Eleventh Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated July 16, 2010

 

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Exhibit

        

Description

10.16.5       Twelfth Amendment to revolving credit facility with U.S. Bank National Association, as Agent, dated December 21, 2010
10.17*    (j)    Split Dollar Agreement dated November 7, 2006 with Sidney B. DeBoer
10.18*    (j)    Split Dollar Insurance Agreement dated December 20, 2007 with Sidney B. DeBoer
10.19*    (l)    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, Christopher S. Holzshu and John F. North III
10.20*    (n)    Form of Indemnity Agreement for each Named Executive Officer.
10.21*    (q)    Form of Indemnity Agreement for each non-management Director
10.22*       Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan
10.22.1*       Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of Discretionary Contribution Award for Sidney DeBoer
10.22.2*       Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of Discretionary Contribution Award
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-K for the year ended December 31, 1997 as filed with the Securities and Exchange Commission on March 31, 1998.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) 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.
(i) 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.
(j) 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.
(k) 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.

 

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(l) 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.
(m) 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.
(n) Incorporated by reference from the Company’s Form 8-K as filed with the Securities and Exchange Commission on May 28, 2009.
(o) Incorporated by reference from the Company’s Form 8-K as filed with the Securities and Exchange Commission on January 5, 2010.
(p) Incorporated by reference from the Company’s Form 10-K for the year ended December 31, 2009 as filed with the Securities and Exchange Commission on March 3, 2010.
(q) Incorporated by reference from the Company’s Form 10-Q for the quarter ended March 31, 2010 as filed with the Securities and Exchange Commission on April 30, 2010.
(r) Incorporated by reference from the Company’s Form 8-K as filed with the Securities and Exchange Commission on June 30, 2010.
(s) Incorporated by reference from the Company’s Form 10-Q for the quarter ended June 30, 2010 as filed with the Securities and Exchange Commission on August 5, 2010.

 

(1) Substantially identical agreements exist between DaimlerChrysler Motor Company, LLC and those other subsidiaries operating Dodge, Chrysler, Plymouth or Jeep dealerships.
(2) 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.
(3) Substantially identical agreements exist between Volkswagen of America, Inc. and those subsidiaries operating Volkswagen dealerships.
(4) Substantially identical agreements exist between Chevrolet Motor Division, GM Corporation and those other subsidiaries operating General Motors dealerships.
(5) Substantially identical agreements exist (except the terms are all 2 years) between Toyota Motor Sales, USA, Inc. and those other subsidiaries operating Toyota dealerships.
(6) Substantially identical agreements exist between Nissan Motor Corporation and those other subsidiaries operating Nissan dealerships.
(7) 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 7, 2011     LITHIA MOTORS, INC.
    By  

/s/ Sidney B. DeBoer

    Sidney B. DeBoer
    Chairman of the Board and