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Lithia Motors 10-Q 2009

Documents found in this filing:

  1. 10-Q
  2. Ex-10.4
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2009

OR

 

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

For the transition period from              to             

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)

Registrant’s telephone number, including area code: 541-776-6899

 

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  ¨

 

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class A common stock without par value   22,037,420

Class B common stock without par value

 

3,762,231

(Class)   (Outstanding at October 30, 2009)

 

 

 


Table of Contents

LITHIA MOTORS, INC.

FORM 10-Q

INDEX

 

     Page
PART I - FINANCIAL INFORMATION   

Item 1.

  Financial Statements   
  Consolidated Balance Sheets (Unaudited) – September 30, 2009 and December 31, 2008    2
  Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2009 and 2008    3
  Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended September 30, 2009 and 2008    4
  Condensed Notes to Consolidated Financial Statements (Unaudited)    5

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations    22

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk    37

Item 4.

  Controls and Procedures    37

PART II - OTHER INFORMATION

  

Item 1.

  Legal Proceedings    38

Item 1A.

  Risk Factors    38

Item 6.

  Exhibits    51

Signatures

   52

 

1


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 

     September 30,
2009
    December 31,
2008
 

Assets

    

Current Assets:

    

Cash and cash equivalents

   $ 4,382      $ 10,874   

Contracts in transit

     18,899        27,799   

Trade receivables, net of allowance for doubtful accounts of $236 and $348

     30,788        41,816   

Inventories, net

     255,036        422,812   

Vehicles leased to others, current portion

     6,608        8,308   

Prepaid expenses and other

     2,340        20,979   

Deferred income taxes

     —          2,541   

Assets held for sale

     124,845        161,423   
                

Total Current Assets

     442,898        696,552   

Land and buildings, net of accumulated depreciation of $22,124 and $20,604

     274,435        284,088   

Equipment and other, net of accumulated depreciation of $49,930 and $47,414

     48,836        62,188   

Other intangible assets, net of accumulated amortization of $87 and $68

     40,811        42,008   

Other non-current assets

     4,597        4,616   

Deferred income taxes

     45,644        44,007   
                

Total Assets

   $ 857,221      $ 1,133,459   
                

Liabilities and Stockholders’ Equity

    

Current Liabilities:

    

Floorplan notes payable

   $ 75,062      $ 234,181   

Floorplan notes payable: non-trade

     104,358        103,519   

Current maturities of senior subordinated convertible notes

     —          42,500   

Current maturities of other long-term debt

     16,447        36,134   

Trade payables

     21,996        21,571   

Accrued liabilities

     56,415        50,951   

Deferred income taxes

     963        —     

Liabilities related to assets held for sale

     74,723        108,172   
                

Total Current Liabilities

     349,964        597,028   

Real estate debt, less current maturities

     181,718        163,708   

Other long-term debt, less current maturities

     32,196        101,476   

Deferred revenue

     16,008        4,442   

Other long-term liabilities

     13,580        18,462   
                

Total Liabilities

     593,466        885,116   

Stockholders’ Equity:

    

Preferred stock - no par value; authorized 15,000 shares; none outstanding

     —          —     

Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 17,391 and 16,717

     236,988        234,522   

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

     468        468   

Additional paid-in capital

     10,143        9,275   

Accumulated other comprehensive loss

     (4,437     (5,810

Retained earnings

     20,593        9,888   
                

Total Stockholders’ Equity

     263,755        248,343   
                

Total Liabilities and Stockholders’ Equity

   $ 857,221      $ 1,133,459   
                

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

 

2


Table of Contents

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2009     2008     2009     2008  

Revenues:

        

New vehicle sales

   $ 241,577      $ 282,669      $ 612,138      $ 881,116   

Used vehicle sales

     136,164        137,230        382,242        413,163   

Finance and insurance

     14,685        19,400        41,255        59,735   

Service, body and parts

     64,960        66,728        190,051        199,349   

Fleet and other

     814        846        1,947        3,188   
                                

Total revenues

     458,200        506,873        1,227,633        1,556,551   

Cost of sales:

        

New vehicle sales

     220,247        261,016        559,795        812,762   

Used vehicle sales

     118,073        126,472        334,265        376,355   

Service, body and parts

     33,511        33,864        97,633        102,625   

Fleet and other

     536        482        1,015        2,013   
                                

Total cost of sales

     372,367        421,834        992,708        1,293,755   
                                

Gross profit

     85,833        85,039        234,925        262,796   

Goodwill impairment

     —          —          —          272,503   

Other asset impairment

     —          —          —          21,572   

Selling, general and administrative

     64,492        70,079        188,286        222,381   

Depreciation - buildings

     1,189        1,245        3,590        3,686   

Depreciation and amortization - other

     2,734        2,828        8,398        8,946   
                                

Operating income (loss)

     17,418        10,887        34,651        (266,292

Other income (expense):

        

Floorplan interest expense

     (2,886     (4,300     (8,008     (13,758

Other interest expense

     (2,943     (4,070     (9,545     (12,490

Other income, net

     24        1,881        1,447        3,004   
                                

Total other income (expense)

     (5,805     (6,489     (16,106     (23,244
                                

Income (loss) from continuing operations before income taxes

     11,613        4,398        18,545        (289,536

Income tax (provision) benefit

     (4,631     (1,911     (7,429     90,720   
                                

Income (loss) from continuing operations

     6,982        2,487        11,116        (198,816

Loss from discontinued operations

     (1,269     (4,850     (411     (49,492
                                

Net income (loss)

   $ 5,713      $ (2,363   $ 10,705      $ (248,308
                                

Basic income (loss) per share from continuing operations

   $ 0.33      $ 0.12      $ 0.53      $ (9.90

Basic loss per share from discontinued operations

     (0.06     (0.24     (0.02     (2.46
                                

Basic net income (loss) per share

   $ 0.27      $ (0.12   $ 0.51      $ (12.36
                                

Shares used in basic per share calculations

     21,165        20,311        21,000        20,086   
                                

Diluted income (loss) per share from continuing operations

   $ 0.32      $ 0.12      $ 0.53      $ (9.90

Diluted loss per share from discontinued operations

     (0.06     (0.24     (0.02     (2.46
                                

Diluted net income (loss) per share

   $ 0.26      $ (0.12   $ 0.51      $ (12.36
                                

Shares used in diluted per share calculations

     21,573        20,371        21,595        20,086   
                                

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

 

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Table of Contents

LITHIA MOTORS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine months ended
September 30,
 
     2009     2008  

Cash flows from operating activities:

    

Net income (loss)

   $ 10,705      $ (248,308

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Goodwill impairment

     —          272,503   

Other asset impairments

     —          21,572   

Depreciation and amortization

     11,988        12,632   

Depreciation and amortization within discontinued operations

     464        3,810   

Amortization of debt discount

     48        149   

Stock-based compensation

     1,584        1,477   

Gain on early extinguishment of debt

     (1,317     (1,643

Loss on disposal of other assets

     332        4,761   

(Gain) loss from disposal activities within discontinued operations

     (1,150     68,959   

Deferred income taxes

     1,006        (110,310

Excess tax deficits (benefits) from share-based payment arrangements

     45        (2

(Increase) decrease, net of effect of acquisitions:

    

Trade and installment contract receivables, net

     11,032        11,424   

Contracts in transit

     8,900        18,186   

Inventories

     167,545        66,647   

Vehicles leased to others

     696        (637

Prepaid expenses and other

     19,136        (4,734

Other non-current assets

     7        (712

Increase (decrease), net of effect of acquisitions:

    

Floorplan notes payable

     (170,803     (18,564

Trade payables

     (431     (10,232

Accrued liabilities

     4,680        (1,975

Other long-term liabilities and deferred revenue

     9,016        (2,958
                

Net cash provided by operating activities

     73,483        82,045   

Cash flows from investing activities:

    

Capital expenditures:

    

Non-financeable

     (4,446     (12,255

Financeable

     (14,920     (33,161

Proceeds from sale of other assets

     8,978        18,321   

Cash paid for acquisitions, net of cash acquired

     —          (605

Proceeds from sale of stores

     26,607        13,721   
                

Net cash provided by (used in) investing activities

     16,219        (13,979

Cash flows from financing activities:

    

Borrowings under floorplan notes payable: non-trade

     7,384        (11,786

Borrowings on lines of credit

     44,000        354,000   

Repayments on lines of credit

     (110,000     (454,000

Principal payments on long-term debt, scheduled

     (14,423     (5,431

Principal payments on long-term debt and capital leases, other

     (67,809     (24,054

Proceeds from issuance of long-term debt

     42,904        73,985   

Proceeds from issuance of common stock

     1,796        3,595   

Repurchase of common stock

     (1     (2

Excess tax (deficits) benefits from share-based payment arrangements

     (45     2   

Dividends paid

     —          (8,419
                

Net cash used in financing activities

     (96,194     (72,110
                

Decrease in cash and cash equivalents

     (6,492     (4,044

Cash and cash equivalents:

    

Beginning of period

     10,874        21,665   
                

End of period

   $ 4,382      $ 17,621   
                

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 23,787      $ 38,177   

Cash refunded during the period for income taxes, net

     15,464        2,686   

Supplemental schedule of non-cash investing and financing activities:

    

Floorplan debt acquired in connection with acquisitions

   $ —        $ 566   

Floorplan debt paid in connection with store disposals

     25,895        13,212   

Acquisition of assets with capital leases

     5        3,107   

Common stock received for the exercise price of stock options

     —          2   

Dividends accrued and not yet paid

     —          1,025   

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

 

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Table of Contents

LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Interim Financial Statements

Basis of Presentation

These condensed consolidated financial statements contain unaudited information as of September 30, 2009 and for the three and nine-month periods ended September 30, 2009 and 2008. The unaudited interim financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain disclosures required by accounting principles generally accepted in the United States of America for annual financial statements are not included herein. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with our audited consolidated financial statements and the related notes thereto. The financial information as of December 31, 2008 is derived from our 2008 Annual Report on Form 10-K, as amended by Form 8-K/A dated October 2, 2009. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2008 Annual Report on Form 10-K, as amended by Form 8-K/A dated October 2, 2009. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

Concentrations of Risk and Uncertainties Regarding Manufacturers

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 our new vehicle inventory primarily with automotive manufacturers’ captive finance subsidiaries. Our sales volume could be materially adversely impacted by the manufacturers’ or distributors’ inability to supply the stores with an adequate supply of vehicles and related financing. Our Chrysler, General Motors (“GM”) and Ford (“Domestic Manufacturers”) stores represented approximately 30%, 18% and 5% of our new vehicle sales in the first nine months of 2009, respectively, and approximately 32%, 19% and 4% for all of 2008, respectively.

We receive incentives and rebates from our manufacturers, including cash allowances, financing programs, discounts, holdbacks and other incentives. These incentives are held as receivables on our balance sheet until payment is received. Our financial condition could be materially adversely impacted by the manufacturers’ or distributors’ inability to continue to offer these incentives and rebates at substantially similar terms, or to pay our outstanding receivables. Total receivables from Domestic Manufacturers were $8.1 million and $12.4 million as of September 30, 2009 and December 31, 2008, respectively.

Most manufacturers have experienced significant declines in sales due to the current economic recession. Many have disclosed substantial operating losses over the recent past. Two of these manufacturers, Chrysler and GM, have 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 its reorganization, the Chrysler entity emerging from bankruptcy protection (“New Chrysler”) assumed most Dealer Sales and Service (franchise) Agreements but elected to reject certain franchise agreements to significantly reduce its dealer count. Two of our Chrysler stores (Omaha, NE Chrysler Jeep Dodge and Colorado Springs, CO Chrysler Jeep) were not assumed and those dealerships have ceased operations. Five of our existing Dodge dealerships were awarded additional franchises to sell either the Chrysler or Jeep brands, or both.

 

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Table of Contents

LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

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

There is legislation pending in Congress which, if passed and signed into law, would require the reinstatement of terminated dealerships and the reopening of certain manufacturing plants. U.S. Administration officials testified in opposition of such legislation. The final outcome is uncertain. While passage of the legislation could result in the reopening of closed Chrysler dealerships and the continuation of the GM dealerships, we would likely lose the recently awarded additional brands at the five Chrysler stores. Further, such reinstatement could add additional costs and burdens on the reorganized manufacturers, reducing their competitiveness. We are unable to predict the outcome of such legislation and the ultimate financial impact on our business, if any.

On April 30, 2009, Chrysler Financial stopped providing advances for new floorplan financing. We utilized Chrysler Financial for floorplan financing at all of our Chrysler locations and certain non-Chrysler locations. Existing floorplan financing from Chrysler Financial is being repaid as inventory is sold. In the third quarter of 2009, General Motors Acceptance Corporation (“GMAC”) agreed to provide permanent floorplan financing to all of our locations previously utilizing Chrysler Financial for floor plan financing.

While New Chrysler and GM have both emerged from bankruptcy protection and completed their reorganizations, and much of the near-term risk to the viability of the suppliers has been mitigated, the future remains uncertain. The success of the reorganization and Chrysler’s integration with Fiat S.p.A., is unknown. The future financial condition of GM and New Chrysler, and their ability to provide products that result in sales and profits consistent with historical results is at risk. Resizing operations could negatively impact the volume of vehicles produced and made 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.

Note 2. Inventories

Inventories are valued at the lower of market value or cost, using a pooled approach for vehicles and the specific identification method for parts. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and transportation. Inventories consisted of the following (in thousands):

 

     September 30,
2009
   December 31,
2008

New and program vehicles

   $ 173,392    $ 338,799

Used vehicles

     64,049      59,407

Parts and accessories

     17,595      24,606
             
   $ 255,036    $ 422,812
             

Note 3. Earnings (Loss) Per Share

We compute net income per share of Class A and Class B common stock using the two-class method. Under this method, basic net income per share is computed using the weighted average number of common shares outstanding during the period excluding unvested common shares subject to repurchase or cancellation. Diluted net income per share is computed using the weighted average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares consist of the incremental common shares issuable upon the exercise of stock options, warrants, conversion of any convertible senior subordinated notes and unvested common shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

and warrants is reflected in diluted earnings per share by application of the treasury stock method. The computation of the diluted net income per share of Class A common stock assumes the conversion of Class B common stock, while the diluted net income per share of Class B common stock does not assume the conversion of those shares.

Except with respect to voting rights, the rights of the holders of our Class A and Class B common stock are identical. Our Articles of Incorporation require that the Class A and Class B common stock must share equally in any dividends, liquidation proceeds or other distribution with respect to our common stock and the Articles of Incorporation can only be amended by a vote of the shareholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation, which would have the effect of adversely altering the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. As the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis. Further, as we assume the conversion of Class B common stock in the computation of the diluted net income per share of Class A common stock, the undistributed earnings are equal to net income for that computation.

We adopted the provisions of FSP EITF 03-6-1 “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” in the quarter ended March 31, 2009. The adoption did not have a material impact on our basic or diluted earnings per share calculation.

Following is a reconciliation of the income (loss) from continuing operations and weighted average shares used for our basic earnings per share (“EPS”) and diluted EPS for the three and nine months ended September 30, 2009 and 2008 (in thousands, except per share amounts):

 

Three Months Ended September 30,

   2009    2008

Basic EPS

   Class A    Class B    Class A    Class B

Numerator:

           

Income from continuing operations applicable to common stockholders

   $ 5,741    $ 1,241    $ 2,026    $ 461

Distributed income applicable to common stockholders

     —        —        861      196
                           

Basic undistributed income from continuing operations applicable to common stockholders

   $ 5,741    $ 1,241    $ 1,165    $ 265
                           

Denominator:

           

Weighted average number of shares outstanding used to calculate basic income per share

     17,403      3,762      16,549      3,762
                           

Basic distributed income per share applicable to common stockholders

   $ —      $ —      $ 0.05    $ 0.05

Basic undistributed income per share applicable to common stockholders

     0.33      0.33      0.07      0.07
                           

Basic income per share applicable to common stockholders

   $ 0.33    $ 0.33    $ 0.12    $ 0.12
                           

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Three Months Ended September 30,

   2009     2008  

Diluted EPS

   Class A    Class B     Class A    Class B  

Numerator:

          

Distributed income applicable to common stockholders

   $ —      $ —        $ 861    $ 196   

Reallocation of distributed income as a result of conversion of dilutive stock options

     —        —          1      (1

Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding

     —        —          195      —     
                              

Diluted distributed income applicable to common stockholders

   $ —      $ —        $ 1,057    $ 195   
                              

Undistributed income from continuing operations applicable to common stockholders

   $ 5,741    $ 1,241      $ 1,165    $ 265   

Reallocation of undistributed income as a result of conversion of dilutive stock options

     23      (23     1      (1

Reallocation of undistributed income due to conversion of Class B to Class A

     1,218      —          264      —     
                              

Diluted undistributed income from continuing operations applicable to common stockholders

   $ 6,982    $ 1,218      $ 1,430    $ 264   
                              

Denominator:

          

Weighted average number of shares outstanding used to calculate basic income per share

     17,403      3,762        16,549      3,762   

Weighted average number of shares from stock options

     408      —          60      —     

Conversion of Class B to Class A common shares outstanding

     3,762      —          3,762      —     
                              

Weighted average number of shares outstanding used to calculate diluted income per share

     21,573      3,762        20,371      3,762   
                              

Diluted distributed income per share applicable to common stockholders

   $ —      $ —        $ 0.05    $ 0.05   

Diluted undistributed income per share applicable to common stockholders

     0.32      0.32        0.07      0.07   
                              

Diluted income per share available to common stockholders

   $ 0.32    $ 0.32      $ 0.12    $ 0.12   
                              

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Three Months Ended September 30,

   2009    2008  

Diluted EPS

   Class A    Class B    Class A     Class B  

Antidilutive Securities

          

2 7/8% convertible senior subordinated notes

     —        —        2,212        —     

Shares issuable pursuant to stock options not included since they were antidilutive

     808      —        1,667        —     

Nine Months Ended September 30,

   2009    2008  

Basic EPS

   Class A    Class B    Class A     Class B  

Numerator:

          

Income (loss) from continuing operations applicable to common stockholders

   $ 9,125    $ 1,991    $ (161,579   $ (37,237

Distributed income applicable to common stockholders

     —        —        7,675        1,769   
                              

Basic undistributed income (loss) from continuing operations applicable to common stockholders

   $ 9,125    $ 1,991    $ (169,254   $ (39,006
                              

Denominator:

          

Weighted average number of shares outstanding used to calculate basic income (loss) per share

     17,238      3,762      16,324        3,762   
                              

Basic distributed income per share applicable to common stockholders

   $ —      $ —      $ 0.47      $ 0.47   

Basic undistributed income (loss) per share applicable to common stockholders

     0.53      0.53      (10.37     (10.37
                              

Basic income (loss) per share applicable to common stockholders

   $ 0.53    $ 0.53    $ (9.90   $ (9.90
                              

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Nine Months Ended September 30,

   2009     2008  

Diluted EPS

   Class A    Class B     Class A     Class B  

Numerator:

         

Distributed income applicable to common stockholders

     —        —        $ 7,675      $ 1,769   

Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding

     —        —          1,769        —     
                               

Diluted distributed income applicable to common stockholders

     —        —        $ 9,444      $ 1,769   
                               

Undistributed income (loss) from continuing operations applicable to common stockholders

   $ 9,125    $ 1,991      $ (169,254   $ (39,006

2 7/8% convertible senior subordinated notes

     218      47        —          —     

Reallocation of undistributed income as a result of conversion of convertible senior subordinated notes

     40      (40     —          —     

Reallocation of undistributed income as a result of conversion of dilutive stock options

     16      (16     —          —     

Reallocation of undistributed income (loss) due to conversion of Class B to Class A

     1,982      —          (39,006     —     
                               

Diluted undistributed income (loss) from continuing operations applicable to common stockholders

   $ 11,381    $ 1,982      $ (208,260   $ (39,006
                               

Denominator:

         

Weighted average number of shares outstanding used to calculate basic income (loss) per share

     17,238      3,762        16,324        3,762   

Weighted average number of shares from assumed conversion of 2 7/8% convertible senior subordinated notes

     429      —          —          —     

Weighted average number of shares from stock options

     166      —          —          —     

Conversion of Class B to Class A common shares outstanding

     3,762      —          3,762        —     
                               

Weighted average number of shares outstanding used to calculate diluted income (loss) per share

     21,595      3,762        20,086        3,762   
                               

Diluted distributed income per share applicable to common stockholders

   $ —      $ —        $ 0.47      $ 0.47   

Diluted undistributed income (loss) per share applicable to common stockholders

     0.53      0.53        (10.37     (10.37
                               

Diluted income (loss) per share available to common stockholders

   $ 0.53    $ 0.53      $ (9.90   $ (9.90
                               

Antidilutive Securities

         

2 7/8% convertible senior subordinated notes

     —        —          2,276        —     

Shares issuable pursuant to stock options not included since they were antidilutive

     1,436      —          1,430        —     

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 4. Comprehensive Income (Loss)

Comprehensive income (loss) for the three and nine-month periods ended September 30, 2009 and 2008 included the change in the fair value of cash flow hedging instruments that are reflected in stockholders’ equity, net of tax, instead of net income (loss). The following table sets forth the calculation of comprehensive income (loss) (in thousands):

 

     Three Months Ended
Sept. 30,
    Nine Months Ended
Sept. 30,
 
     2009     2008     2009    2008  

Net income (loss)

   $ 5,713      $ (2,363   $ 10,705    $ (248,308

Cash flow hedges:

         

Derivative gain (loss), net of tax effect of $380, $210, $(816) and $(283), respectively

     (618     (347     1,373      456   
                               

Total comprehensive income (loss)

   $ 5,095      $ (2,710   $ 12,078    $ (247,852
                               

Note 5. Stock-Based Compensation

In the first quarter of 2009, we issued restricted stock grants covering 68,480 shares of our Class A common stock to certain employees. The restricted stock grants fully vest on the fourth anniversary of the grant date. Total compensation related to these stock-based awards, calculated using a fair value methodology, was $159,000. Of the $159,000, approximately $32,000 will be recognized in 2009.

In the second quarter of 2009, we granted 20,570 shares of common stock to non-employee members of our Board of Directors related to their 2008-2009 board service. The fair market value on the date of grant was $3.225 per share and the shares were 100% vested on the date of grant. In addition, we issued to non-employee members of our Board of Directors 8,000 non-qualified stock options with a grant date fair value of $2.343 per share, 1,833 non-qualified stock options with a grant date fair value of $6.424 per share, 41,952 shares of restricted stock with a grant date fair value of $3.225 per share and 3,571 shares of restricted stock with a grant date fair value of $8.78 per share. These awards are related to the 2009-2010 service period and vest on the date of the next annual shareholders’ meeting or upon termination of service with approval by the Board of Directors. Total compensation expense for these stock-based awards was $264,000, and approximately $222,000 of this amount will be recognized in 2009.

Note 6. Discontinued Operations

We perform an internal evaluation of our store performance, on a store-by-store basis, in the last month of each quarter. If a particular location does not meet certain return on investment criteria established by our management team, the location is targeted for potential disposition. If a store that has been identified for potential disposition does not improve its operations for an extended period of time, the decision is made to divest the location. Additional factors we consider that may result in the disposition of a location include capital commitment requirements, our estimate of local market and franchise outlook, and the geographic location of certain stores.

When a store meets the criteria of “held for sale” as defined by ASC 360-10-45 “Property, Plant and Equipment, Overall, Other Presentation Matters,” the results of operations are reclassified into discontinued operations. We anticipate the completion of the sale for each store to occur within 12 months from the date of initial determination.

For stores that remain in discontinued operations for more than 12 months, we perform an evaluation to determine if continued inclusion is appropriate. As of September 30, 2009, we had eleven stores that had been classified as discontinued operations for more than 12 months. Over the period these stores were available for sale, we have continued to lower the price of the dealerships. We recorded additional impairment charges to recognize the assets at estimated fair value based on the outlook for potential sale proceeds. We believe our response to the declining economic factors, diminishing sources of credit with financially viable terms, and overall uncertainty surrounding the future demonstrated that we took actions necessary to respond to a change in circumstances; and that the assets were and continue to be actively marketed at a reasonable price given the continuing changes in circumstances. Finally, for these locations, we evaluated the relevant criteria defined by ASC 360-10-45 and concluded that the stores’ continued classification within discontinued operations is appropriate.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

During the first nine months of 2009, we disposed of five stores and ceased operations at two stores that had been held for sale and classified as discontinued operations at December 31, 2008. We classified four stores to discontinued operations that were sold during the first nine months of 2009. As a result of the Chrysler and GM bankruptcies, we reclassified four additional stores to discontinued operations. Two of these locations were Chrysler franchises that ceased operations in July 2009. The other two locations are GM stores that received notification of their closure and repurchase by GM through a modification of their franchise agreements. The third GM location where we received a notification of termination was already classified in discontinued operations.

Certain financial information related to discontinued operations was as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenue

   $ 63,386      $ 169,775      $ 217,434      $ 543,923   
                                

Pre-tax income (loss) from discontinued operations

   $ 606      $ (2,839   $ (1,917   $ (11,100

Gain (loss) on disposal activities

     (2,765     (5,256     1,150        (68,959
                                
     (2,159     (8,095     (767     (80,059

Income tax benefit

     890        3,245        356        30,567   
                                

Loss from discontinued operations, net of income tax benefit

   $ (1,269   $ (4,850   $ (411   $ (49,492
                                

Amount of goodwill and other intangible assets disposed of

   $ —        $ 7,771      $ —        $ 7,771   
                                

Cash generated from disposal activities

   $ 4,556      $ 13,721      $ 26,607      $ 13,721   
                                

The gain (loss) on disposal activities included the following (in thousands):

 

     Three Months Ended Sept. 30,     Nine Months Ended Sept. 30,  
     2009     2008     2009     2008  

Goodwill and other intangible assets

   $ 261      $ 6,365      $ 10,681      $ (39,511

Property, plant and equipment

     (2,040     (7,120     (7,541     (21,538

Inventory

     (443     (3,257     1,790        (6,248

Other

     (543     (1,244     (3,780     (1,662
                                
   $ (2,765   $ (5,256   $ 1,150      $ (68,959
                                

Interest expense is allocated to stores classified as discontinued operations for actual flooring interest expense directly related to the new vehicles in the store. Interest expense related to our working capital, acquisition and used vehicle credit facility is allocated based on the amount of assets pledged towards the total borrowing base.

As of September 30, 2009 and December 31, 2008, we had 13 and 18 stores, respectively, classified as held for sale. Assets held for sale included the following (in thousands):

 

     September 30,
2009
   December 31,
2008

Inventories

   $ 35,046    $ 65,584

Property, plant and equipment

     88,590      93,871

Intangible assets

     1,209      1,968
             
   $ 124,845    $ 161,423
             

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Liabilities related to assets held for sale included the following (in thousands):

 

     September 30,
2009
   December 31,
2008

Floorplan notes payable

   $ 21,408    $ 56,358

Real estate debt

     53,315      51,814
             
   $ 74,723    $ 108,172
             

Note 7. Goodwill and Indefinite-Lived Intangible Assets

We account for franchise agreements as indefinite-lived intangible assets, which are not amortized, but tested for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred. If estimated future discounted net cash flows are not sufficient to recover the carrying value of the asset, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value. Based on our evaluation, we have concluded that the appropriate unit of accounting for determining franchise value is on an individual store basis.

In the second quarter of 2009, primarily based on macroeconomic events as well as a review of the profitability of our franchises, we tested the carrying value of franchise agreements for impairment on an interim basis for three of our franchises. Based on the results of the interim impairment test, no charges were recorded. We did not identify any conditions indicating an impairment may have occurred in the third quarter of 2009.

Note 8. Asset Impairments

Long-lived assets classified as held and used and definite-lived intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. If estimated future undiscounted net cash flows are not sufficient to recover the carrying value of the assets, an impairment charge is recorded for the amount by which the carrying value of the asset exceeds its fair value.

In the second quarter of 2009, due to the macroeconomic events, we tested certain long-lived assets for recoverability. As a result of the test, one store location indicated an impairment of its long-lived assets and an impairment of $0.2 million was recorded in the second quarter of 2009. In addition, based on recoverability tests, we recorded an impairment of $0.4 million on long-lived assets in the third quarter of 2009.

Note 9. Fair Value Measurements

We adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our financial assets and liabilities on January 1, 2008. Effective January 1, 2009, we adopted the provisions of SFAS No. 157 for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of these provisions did not have a material effect on our financial position, results of operations or cash flows. These provisions apply to the valuation of assets and liabilities including (but not limited to) the valuation of our franchise rights when assessing franchise impairments, the valuation of property and equipment when assessing long-lived asset impairment, the valuation of assets acquired and liabilities assumed in business combinations and the valuation of assets and liabilities held for sale.

Effective June 30, 2009, we adopted the provisions of FASB Staff Position (“FSP”) No. FAS157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” These provisions provide additional guidance for estimating fair value and emphasizes that, even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additionally, the guidance required disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. Companies were also required to define major categories for equity and debt securities. Disclosures related to this guidance are included below.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

 

   

Level 1 – quoted prices in active markets for identical securities;

 

   

Level 2 – other significant observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.; and

 

   

Level 3 – significant unobservable inputs, including our own assumptions in determining fair value.

The inputs or methodology used for valuing financial assets and liabilities are not necessarily an indication of the risk associated with investing in them.

We use the income approach to determine the fair value of our interest rate swaps using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the swap valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term, futures rates for up to two years and LIBOR swap rates beyond the derivative maturity are used to predict future reset rates to discount those future cash flows to present value at measurement date. Inputs are collected from Bloomberg on the last market day of the period. The same rates are used to determine the rate used to discount the future cash flows. The valuation of the interest rate swaps also takes into consideration our own, as well as the counterparty’s, risk of non-performance under the contract.

We estimate the fair value of our assets held for sale and liabilities related to assets held for sale based on a “market” valuation approach, which uses prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets or liabilities, as well as our historical experience in divestitures, acquisitions and real estate transactions. When available, we use inputs from independent valuation experts, such as brokers and real estate appraisers, to corroborate our internal estimates. As these valuations contain unobservable inputs, we classified the assets held for sale and liabilities related to assets held for sale as Level 3.

There were no changes to our valuation techniques during the three or nine-month periods ended September 30, 2009.

The following table summarizes our assets and liabilities measured at fair value (in thousands):

 

     September 30, 2009
     Fair Value    Input Level

Interest rate swap liabilities

   $ 8,109    Level 2

Assets held for sale

     124,845    Level 3

Liabilities related to assets held for sale

     74,723    Level 3

During the first nine months of 2009, as a result of the continuing challenging economic environment, especially as it related to the Domestic Manufacturers, we assessed the fair value of our assets and liabilities held for sale using the valuation methodology described above.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The following table indicates valuation adjustments recorded during the three and nine-month periods ended September 30, 2009 on our assets and liabilities that are measured at fair value on a non-recurring basis (in thousands):

 

     Assets
held for
sale
    Liabilities
related to
assets
held for
sale

Three Months Ended September 30, 2009

   $ (2,633   $ —  
              

Nine Months Ended September 30, 2009

   $ (8,729   $ —  
              

At September 30, 2009, we had $128.3 million of long-term fixed interest rate debt outstanding with maturity dates of between October 2009 and September 2027. We calculate the estimated fair value of our fixed rate debt using a discounted cash flow methodology. Using estimated current interest rates based on a similar risk profile and duration, the fixed cash flows are discounted and summed to compute the fair value of the debt. Based on this analysis, we have determined that the fair value of this long-term fixed interest rate debt was approximately $126.2 million at September 30, 2009. We believe the carrying value of our variable rate debt approximates fair value.

Note 10. Repurchases of Debt

Senior Subordinated Convertible Notes

The following table summarizes our repurchases and redemptions of our senior subordinated convertible notes during the first nine months of 2009:

 

Purchase Date

   Face
Amount
Purchased
   Purchase
Price
per $100
   Total
Purchase
Price
   Gain on Early
Retirement of
Debt

March 2009

   $ 3.2 million    $ 95.8    $ 3.1 million    $ 0.1 million

April 2009

     4.0 million    $ 99.2      4.0 million      —  

April 2009

     16.8 million    $ 99.3      16.7 million      0.1 million

April 2009

     0.9 million    $ 99.3      0.9 million      —  

April 2009

     10.7 million    $ 99.2      10.6 million      0.1 million

May 2009

     6.9 million    $ 100.0      6.9 million      —  
                       
   $  42.5 million       $  42.2 million    $  0.3 million
                       

The gain of $0.3 million on the retirement of the debt in the nine-month period ended September 30, 2009 is recorded as a component of Other income, net, on the consolidated statements of operations. As of September 30, 2009, none of our senior subordinated convertible notes remained outstanding.

Other Debt Instruments

During the nine-month period ended September 30, 2009, we repurchased a $3.9 million zero coupon note related to an acquisition completed in 2006. As a result of the repurchase, we recorded a gain of approximately $1.0 million, which was classified in Other Income, net, in the consolidated statements of operations.

Note 11. Credit Facility Amendment

On March 31, 2009, we executed the sixth amendment to our working capital, acquisition and used vehicle credit facility (the “Credit Facility”) with U.S. Bank National Association, DaimlerChrysler Financial Services Americas LLC (“Chrysler Financial”), DCFS U.S.A. LLC (“Mercedes Financial”) and Toyota Motor Credit Corporation (“TMCC”). This amendment reduced our minimum net worth requirement to $175 million and lowered our required current ratio to 1.05:1.0 at June 30, 2009 and September 30, 2009 and 1.1:1.0 at December 31, 2009 and beyond. Additionally, the Credit Facility was reduced from $150 million to $100 million upon execution. Further reductions are required under the amendment, including to $75 million on May 1, 2009, to $50 million on September 30, 2009 and to $25 million on December 31, 2009. The amendment also stipulated a 50 basis point increase in the interest rate spread added to the 1-month LIBOR. At September 30, 2009, there was $20.0 million outstanding on the Credit Facility.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

On October 28, 2009, we executed the seventh amendment to the Credit Facility. In conjunction with the seventh amendment, Chrysler Financial, Mercedes Financial and TMCC assigned their interest in the facility to US Bank National Association. The seventh amendment to the Credit Facility relaxes restrictions on acquisitions, share repurchases and dividend payments. It fixes available credit at $50 million through maturity, which is October 28, 2010. It stipulates certain financial covenants including a minimum tangible net worth requirement of $200 million; a minimum vehicle equity requirement of $45 million; a fixed charge coverage ratio of 1.05:1 through December 31, 2009, 1.15:1 through June 30, 2010 and 1.2:1 for periods thereafter; and a liabilities to tangible net worth ratio not to exceed 4:1. Finally, it decreases the interest rate on the line to the 1-month LIBOR plus 3.25%.

Note 12. Acquisition of Service Contracts

In March 2009, we entered into a transaction related to existing Lifetime Oil Change contracts with First Extended Service Corporation, in which we assumed the obligation to provide future services under the purchased contracts. The assets acquired and liabilities assumed in this transaction consist of cash of approximately $16.1 million and deferred revenue in the same amount. Costs to perform the future service under the contracts are estimated to be approximately $16.1 million. No gain or loss was recorded on this transaction.

Note 13. Derivative Instruments

We enter into interest rate swaps to manage the variability of our interest rate exposure, thus fixing a portion of our interest expense in a rising or falling rate environment. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure of the 1-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.

Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value of these interest rate swaps in other comprehensive income (loss) rather than net income (loss) until the underlying hedged transaction affects net income. At September 30, 2009 and December 31, 2008, the net fair value of all of our agreements totaled a loss of $8.1 million and $10.8 million, respectively, which was recorded on our balance sheet as a component of accrued liabilities and other long-term liabilities. The estimated amount expected to be reclassified into earnings within the next twelve months was $2.6 million at September 30, 2009.

As of September 30, 2009, we had outstanding the following interest rate swaps with U.S. Bank Dealer Commercial Services:

 

   

effective June 16, 2006 – a ten year, $25 million interest rate swap at a fixed rate of 5.587% per annum, variable rate adjusted on the 1st and 16th of each month;

 

   

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

 

   

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

 

   

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

We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month LIBOR rate at September 30, 2009 was 0.25% per annum as reported in the Wall Street Journal.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

At September 30, 2009 the fair value of our derivative instruments was included in our balance sheet as follows:

 

Balance Sheet Information

(in thousands)

   Fair Value of Asset Derivatives    Fair Value of Liability Derivatives

Derivatives Designated as Hedging Instruments

   Location in
Balance Sheet
   September 30,
2009
   Location in
Balance Sheet
   September 30,
2009
Interest Rate Swap Contracts    Prepaid expenses
and other
   $ —      Accrued

liabilities

   $ 1,827
   Other non-current

assets

     —      Other long-term
liabilities
     6,282
                   
      $ —         $ 8,109
                   

In the fourth quarter of 2008, as inventory levels fell and future levels of floorplan debt were expected to decrease, we discontinued a cash flow hedge. Subsequently, we de-designated four other cash flow hedges and re-designated certain other swaps. As a result of these adjustments, a net loss balance of approximately $1.2 million remained as a component of accumulated other comprehensive income (loss) to be recognized over the remaining life of the swaps. In the second quarter of 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 interest expense in the quarter ended June 30, 2009.

The effect of derivative instruments on our Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2009 was as follows (in thousands):

 

Derivatives in Cash Flow Hedging Relationships

   Amount of
Gain/(Loss)
Recognized
in OCI
(Effective
Portion)
   

Location of

Gain/(Loss)

Reclassified

from

Accumulated

OCI into

Income

(Effective

Portion)

   Amount of
Gain/(Loss)
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)
   

Location of

Gain/(Loss)

Recognized in
Income on

Derivative

(Ineffective

Portion and

Amount

Excluded from

Effectiveness

Testing)

   Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Three Months Ended September 30, 2009

                            

Interest Rate Swap Contracts

   $ (2,018   Floorplan Interest expense    $ (1,020   Floorplan Interest expense    $ (76
                              

 

Derivatives Not Designated as Hedging Instruments

   Location of
Gain/(Loss)
Recognized in Income
on Derivative
   Amount of
Gain/(Loss)
Recognized in
Income on
Derivative

Three Months Ended September 30, 2009

         

Interest Rate Swap Contracts

   Floorplan

Interest

expense

   $ —  
         

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Derivatives in Cash Flow Hedging Relationships

   Amount of
Gain/(Loss)
Recognized
in OCI
(Effective
Portion)
    Location of
Gain/(Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
   Amount of
Gain/(Loss)
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)
    Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
   Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)

Nine Months Ended September 30, 2009

                          

Interest Rate Swap Contracts

   $ (748   Floorplan

Interest
expense

   $ (2,937   Floorplan

Interest
expense

   $ 320
                            

 

Derivatives Not Designated as Hedging Instruments

  

Location of

Gain/(Loss)

Recognized in Income

on Derivative

   Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
 

Nine Months Ended September 30, 2009

           

Interest Rate Swap Contracts

  

Floorplan

interest

expense

   $ (6
           

See also Notes 4 and 9.

Note 14. 2009 Employee Stock Purchase Plan

At our 2009 Annual Meeting of Shareholders in May 2009, our shareholders approved the 2009 Employee Stock Purchase Plan (the “2009 ESPP”) and the reservation of 1,500,000 shares of our Class A common stock thereunder. The 2009 ESPP replaced the 1998 Employee Stock Purchase Plan, which was terminated.

Note 15. Reclassifications

Certain reclassifications related to our discontinued operations were made to the prior period financial statements to conform to the current period presentation. Certain other immaterial reclassifications were made to conform to the current period presentation.

Note 16. Contingencies

Litigation

We are party to numerous legal proceedings arising in the normal course of our business. While we cannot predict with certainty the outcomes of these matters, we do not anticipate that the resolution of these proceedings will have a material adverse effect on our business, results of operations, financial condition, or cash flows.

Phillips/Allen/Aripe Cases

On November 25, 2003, Aimee Phillips filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 03-3109-HO) against Lithia Motors, Inc. and two of its wholly-owned subsidiaries alleging violations of state and federal RICO laws, the Oregon Unfair Trade Practices Act (“UTPA”) and common law fraud. Ms. Phillips seeks damages, attorney’s fees and injunctive relief. Ms. Phillips’ complaint stems from her purchase of a Toyota Tacoma pick-up truck on July 6, 2002. On May 14, 2004, we filed an answer to Ms. Phillips’ Complaint. This case was consolidated with the Allen case described below and has a similar current procedural status.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

On April 28, 2004, Robert Allen and 29 other plaintiffs (“Allen Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 04-3032-HO) against Lithia Motors, Inc. and three of its wholly-owned subsidiaries alleging violations of state and federal RICO laws, the Oregon UTPA and common law fraud. The Allen Plaintiffs seek damages, attorney’s fees and injunctive relief. The Allen Plaintiffs’ Complaint stems from vehicle purchases made at Lithia stores between July 2000 and April 2001. On August 27, 2004, we filed a Motion to Dismiss the Complaint. On May 26, 2005, the Court entered an Order granting Defendants’ Motion to Dismiss plaintiffs’ state and federal RICO claims with prejudice. The Court declined to exercise supplemental jurisdiction over plaintiffs’ UTPA and fraud claims. Plaintiffs filed a Motion to Reconsider the dismissal Order. On August 23, 2005, the Court granted Plaintiffs’ Motion for Reconsideration and permitted the filing of a Second Amended Complaint (“SAC”). On September 21, 2005, the Allen Plaintiffs, along with Ms. Phillips, filed the SAC. In this complaint, the Allen plaintiffs seek actual damages that total less than $500,000, trebled, approximately $3.0 million in mental distress claims, trebled, punitive damages of $15.0 million, attorney’s fees and injunctive relief. The SAC added as defendants certain officers and employees of Lithia. In addition, the SAC added a claim for relief based on the Truth in Lending Act (“TILA”). On November 14, 2005 we filed a second Motion to Dismiss the Complaint and a Motion to Compel Arbitration. In two subsequent rulings, the Court has dismissed all claims except those under Oregon’s Unfair Trade Practices Act and a single fraud claim for a named individual. We believe the actions of the court have significantly narrowed the claims and potential damages sought by the plaintiffs. Lithia’s motion to Compel Arbitration of Plaintiff’s remaining claims was denied and we filed an Answer to the Complaint on July 31, 2009. Discovery is now proceeding.

On September 23, 2005, Maria Anabel Aripe and 19 other plaintiffs (“Aripe Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Oregon (Case No. 05-3083-HO) against Lithia Motors, Inc., 12 of its wholly-owned subsidiaries and certain officers and employees of Lithia, alleging violations of state and federal RICO laws, the Oregon UTPA, common law fraud and TILA. The Aripe Plaintiffs seek actual damages of less than $600,000, trebled, approximately $3.7 million in mental distress claims, trebled, punitive damages of $12.6 million, attorney’s fees and injunctive relief. The Aripe Plaintiffs’ Complaint stems from vehicle purchases made at Lithia stores between May 2001 and August 2005 and is substantially similar to the allegations made in the Allen case. On July 27, 2009, we filed a Motion to Dismiss all claims with the Arbitrators hearing the dispute. On September 30, 2009, the Chief Arbitrator issued an Order acknowledging the voluntary withdrawal of the federal RICO claims by the Plaintiff and dismissed the claim for emotional distress damages. Further motions are pending, but the most significant monetary exposures have been removed from the case.

Alaska Service and Parts Advisors and Managers Overtime Suit

On March 22, 2006, seven former employees in Alaska brought suit against the company (Dunham, et al. v. Lithia Support Services, et al., 3AN-06-6338 Civil, Superior Court for the State of Alaska) seeking overtime wages, additional liquidated damages and attorney’s fees. The complaint was later amended to include a total of 11 named plaintiffs. The court ordered the dispute to arbitration. In February 2008, the arbitrator granted the plaintiffs’ request to establish a class of plaintiffs consisting of all present and former service and parts department employees totaling approximately 150 individuals who were paid on a commission basis. We have filed a motion requesting reconsideration of this class certification, but the arbitrator died before issuing his opinion. The reconsideration sought a ruling whether these employees or some of these employees are exempt from the applicable state law that provides for the payment of overtime under certain circumstances. The replacement arbitrator has now been appointed and recently ruled to remove all service and parts managers from the case. A class action opt-out notice was mailed to the service and parts employees in October 2009. No arbitration date has been set.

Washington State B&O Tax Suit

On October 19, 2005, Marcia Johnson and Theron Johnson (the “Johnsons”), on their own behalf and on behalf of a proposed plaintiff class of all other similarly situated individuals and entities, filed suit in the Superior Court for the State of Washington, Spokane County (Case No. 05205059-9). The Johnsons sued Lithia Motors, Inc., and one of Lithia’s wholly-owned subsidiaries, individually and as representatives of a proposed defendant class of other motor vehicle dealers, asking for an award of declaratory and injunctive relief, and damages, based on defendants’ allegedly illegal practice of itemizing and collecting the Washington State Business and Occupation Tax (“B&O Tax”) from customers buying vehicles from defendants.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

The allegations in the Johnson case involve legal issues similar to those that were litigated in the case of Nelson vs. Appleway Chevrolet, Inc. (the “Nelson case”). By agreement of the parties, the Johnson case was stayed while the Nelson case, which had been filed in 2004, was appealed to the Washington State Supreme Court.

In April 2007, the Washington Supreme Court upheld the lower court decisions in favor of the plaintiffs in the Nelson case. The decision was based on the Appleway dealer’s practice of adding a B&O tax charge to a vehicle’s purchase price after the customer and the dealer reached agreement on the vehicle’s price. Because Lithia’s subsidiary negotiated with the Johnsons over a proposed B&O tax charge before reaching agreement with the Johnsons on a purchase price for the Johnsons’ new vehicle, Lithia and its subsidiary believe the subsidiary’s actions are permissible under the law as established by the Supreme Court’s decision in the Nelson case. They moved for summary judgment based on the Washington Supreme Court’s decision in the Nelson case.

Shortly after the filing of that motion, the Johnsons filed an amended complaint. They added an allegation that the defendants’ actions also violated Washington’s Consumer Protection Act, and requested an award of treble damages up to $10,000 for each alleged violation of the Act.

The Johnsons then cross-moved for partial summary judgment, contending that the Supreme Court’s decision in the Nelson case established that Lithia and its subsidiary had violated Washington’s tax and Consumer Protection Act laws. After hearing oral argument on the motions, the trial court judge, on October 12, 2007, issued an oral ruling in favor of the Johnsons and against the Lithia subsidiary. The court denied Lithia’s and its subsidiary’s summary judgment motion. The court entered its written order to that effect on November 9, 2007.

Lithia and its subsidiary asked the trial court to certify its order as a final judgment. After the trial court denied their request, Lithia and its subsidiary petitioned the Washington Court of Appeals for discretionary review of the summary judgment decision, which was granted in April 2008. In January 2009, the Court of Appeals reversed the trial court judge’s ruling and directed the entry of a summary dismissal order in the case. Plaintiff then appealed this decision to the Washington Supreme Court which recently affirmed the dismissal order effectively eliminating any material claims.

VanSyoc Case

On August 14, 2002, Steven H. VanSyoc filed a lawsuit in the Superior Court of California for the County of Fresno (Case No. 08CECG02785) against a Lithia Motors subsidiary alleging fraud, deceit, intentional misrepresentation, concealment and failure to disclose, and negligence. Further, plaintiff asserts violations of California Civil Code § 1770(a)(2),(5),(6), (7), (9), (13), (14), (16) and (19) (a pattern, plan or scheme with intent to deceive or induce the purchase and increase the cost of vehicles; and California Civil Code § 17200, et.seq. (Unfair Competition Law)) and seeks an order enjoining the practice, unstated actual damages and an order certifying the case a class-action. Plaintiff alleges that we failed to disclose the vehicle he purchased was a former daily rental vehicle and misrepresented the terms and conditions of the Extended Service Agreement purchased by Plaintiff, and failed to disclose that the time and mileage limits actually started at a date significantly earlier than the purchase date. We have filed an answer denying all liability. Preliminary discovery has been undertaken which suggests the number of potential class members is insignificant.

We intend to vigorously defend all matters noted above, and to assert available defenses. We cannot make an estimate of the likelihood of negative judgment in any of these cases at this time. The ultimate resolution of the above noted cases is not expected to result in any significant settlement amounts. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition or cash flows.

 

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LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

Note 17. Recent Accounting Pronouncements

SFAS No. 168

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168 “FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” SFAS No. 168 will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009. On the effective date, the Accounting Standards Codification (ASC) will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. As we believe that our accounting practices are consistent with the Codification, we do not believe that the adoption of SFAS No. 168 will have a material effect on our financial position, results of operations or cash flows.

SFAS No. 165 (ASC 855-10)

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.” SFAS No. 165 defines subsequent events as transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, nonrecognized subsequent events). In addition, SFAS No. 165 requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. The adoption of SFAS No. 165 effective June 30, 2009 did not have any effect on our financial position, results of operations or cash flows.

Note 18. Subsequent Events

We have considered all events that have occurred subsequent to September 30, 2009 and through October 30, 2009, the issuance date of these financial statements.

Sale of Class A Common Stock

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 for 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, of $43.5 million.

Disposal of Stores

In October 2009, we disposed of the Reno Lincoln Mercury Audi Suzuki store. The disposal generated cash of approximately $1.1 million and resulted in a gain of $0.6 million.

Amendment to Credit Facility

On October 28, 2009, we executed the seventh amendment to the Credit Facility. In conjunction with the seventh amendment, Chrysler Financial, Mercedes Financial, and TMCC assigned their interest in the facility to US Bank National Association. The seventh amendment to the Credit Facility relaxes restrictions on acquisitions, share repurchases and dividend payments. It fixes available credit at $50 million through maturity, which is October 28, 2010. It stipulates certain financial covenants including a minimum tangible net worth requirement of $200 million; a minimum vehicle equity requirement of $45 million; a fixed charge coverage ratio of 1.05:1 through December 31, 2009, 1.15:1 through June 30, 2010, and 1.2:1 for periods thereafter; and a liabilities to tangible net worth ratio not to exceed 4:1. Finally it decreases the interest rate on the line to 1 month LIBOR plus 3.25%.

 

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Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Risk Factors

Some of the statements in this Form 10-Q constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q 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 of this Form 10-Q.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Overview

We are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of October 30, 2009, we offered 27 brands of new vehicles and all brands of used vehicles in 87 stores in the United States and over the Internet. We sell new and used cars and light trucks, sell replacement parts, provide vehicle maintenance, warranty, paint and repair services and arrange related financing, service contracts, protection products and credit insurance for our automotive customers. Our dealerships are geographically diverse and are primarily located in small and mid-size regional markets in the Western and Midwestern regions of the United States. The majority of our franchises are in “single-point” locations, meaning that these locations do not have competing dealerships offering the same brand as our dealerships offer.

As compared to automobile manufacturers, we believe that Lithia, like other automotive retailers, has a higher ratio of variable and discretionary costs to fixed costs. These variable and discretionary costs include sales commissions, personnel, advertising and inventory financing expenses, which can be adjusted to more closely match vehicle sales demand. In addition to adjusting costs, we seek to diversify our sources of revenue to mitigate the cyclicality of new vehicle sales. For example, our Service, Body and Parts business line generates substantially higher gross margins than vehicle sales and, historically, has been less affected by economic cycles. Similarly, through our used vehicle sales business line, we seek to utilize our existing dealership footprint to generate incremental sales free of any manufacturer restrictions.

To reduce our exposure to any one manufacturer and to changing consumer preferences, we offer a wide variety of both import and domestic new vehicle brands and models, including economy, luxury, sports utility vehicles, crossovers, minivans and light trucks. We believe our brand mix is well-suited to consumer preferences in the small and mid-size geographic markets we serve. We continuously evaluate our portfolio of franchises, divesting dealerships that are not expected to meet our financial return requirements while selectively acquiring attractive dealerships in our target markets.

We believe that the reorganization of Chrysler and General Motors did not materially impact our sales levels relative to the overall market sales environment. Overall, while the new vehicle market remains weak, our Chrysler and General Motors locations are not experiencing materially different results than our other franchise locations.

 

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Table of Contents

Our operating philosophy is based on an integrated, centralized operating structure. Through our management information system, our emphasis on standardized operating practices and the centralized processing of administrative and office functions, we seek to gain economies of scale from our dealership network. For example, accounts payable, accounts receivable, credit and collections, accounting and taxes, information technology, legal, human resources, human development, treasury, cash management, advertising and marketing functions are centralized at our corporate headquarters. These efficiencies have allowed us to reduce overall administrative personnel from 6.4 people per dealership in 2007 to 3.2 people per dealership as of August 31, 2009. The reduction of administrative functions at our dealerships allows our local store managers to focus on customer-facing opportunities in order to generate incremental revenues and gross profit. Our operations are supported by our formalized training and personal development program, which shares best practices across our dealership network and seeks to develop our store management talent.

We have restructured our operations to align our cost base with current industry vehicle sales levels. Through various cost cuts and personnel reductions, initiated in the second quarter of 2008, we have achieved $65 million of annualized permanent cost reductions. Since the second quarter of 2008 through September 30, 2009, we also generated $71 million in cash by divesting stores that were non-core or that did not meet our financial return expectations. We believe that we are well positioned to benefit from an increase in new vehicle sales above current levels.

We believe the actions we have taken over the past nine months demonstrate the resiliency of our company. However, no assurances can be given that industry sales will not experience a further decline, or that our restructuring plan will be of sufficient magnitude to meet our operating objectives in a declining market.

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

Outlook

The overall macroeconomic issues that affected us in 2008 continued in the first nine months of 2009 and have reduced consumers’ desire and ability to purchase automobiles. An additional factor negatively impacting auto sales has been a reduction in available options for consumer auto loans. The manufacturers’ captive financing companies have suffered additional pressure as the financial crisis has raised their cost of funds and reduced their access to capital. This has prevented them from offering as many incentives designed to drive sales, such as subsidized interest rates, and reduced the amount of loan to value they are willing to advance on vehicles.

The magnitude of the seasonal improvement we have typically experienced in March did not occur in the first quarter of 2009. This is similar to our experience in 2008, where the seasonally strong second and third quarters of the year were relatively flat compared with the first quarter of 2008. The third quarter of 2009 experienced an incremental improvement in new vehicle sales as a result of the Car Allowance Rebate System (“CARS”) program. Our current operational plan assumes vehicle sales do not decline as dramatically in the fourth quarter of 2009 as they did in 2008 given the already historically low sales levels. However, given the incremental improvement in the third quarter results, new vehicle sales in subsequent quarters may trend lower than sales levels in the comparable prior year periods. No assurances can be provided that our plan will be achieved, or that a further deterioration in the economic environment will not occur.

 

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Table of Contents

Results of Continuing Operations

Certain revenue, gross margin and gross profit information by product line was as follows:

 

Three Months Ended September 30, 2009

   Percent of
Total Revenues
    Gross
Margin
    Percent of Total
Gross Profit
 

New vehicle

   52.7   8.8   24.9

Used vehicle, retail

   25.7      15.3      21.0   

Used vehicle, wholesale

   4.0      0.4      0.1   

Finance and insurance(1)

   3.2      100.0      17.1   

Service, body and parts

   14.2      48.4      36.6   

Fleet and other

   0.2      34.2      0.3   

Three Months Ended September 30, 2008

   Percent of
Total Revenues
    Gross
Margin
    Percent of Total
Gross Profit
 

New vehicle

   55.8   7.7   25.5

Used vehicle, retail

   22.5      10.4      13.9   

Used vehicle, wholesale

   4.5      (4.7   (1.2

Finance and insurance(1)

   3.8      100.0      22.8   

Service, body and parts

   13.2      49.3      38.6   

Fleet and other

   0.2      43.0      0.4   

Nine Months Ended September 30, 2009

   Percent of
Total Revenues
    Gross
Margin
    Percent of Total
Gross Profit
 

New vehicle

   49.9   8.6   22.3

Used vehicle, retail

   27.1      14.3      20.2   

Used vehicle, wholesale

   3.9      0.9      0.2   

Finance and insurance(1)

   3.4      100.0      17.6   

Service, body and parts

   15.5      48.6      39.3   

Fleet and other

   0.2      47.9      0.4   

Nine Months Ended September 30, 2008

   Percent of
Total Revenues
    Gross
Margin
    Percent of Total
Gross Profit
 

New vehicle

   56.6   7.8   26.0

Used vehicle, retail

   21.7      11.5      14.8   

Used vehicle, wholesale

   4.9      (2.8   (0.7

Finance and insurance(1)

   3.8      100.0      22.7   

Service, body and parts

   12.8      48.5      36.8   

Fleet and other

   0.2      36.9      0.4   

 

(1) Commissions reported net of anticipated cancellations.

The following table sets forth selected condensed financial data, expressed as a percentage of total revenues for the periods indicated.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009(1)     2008(1)     2009(1)     2008(1)  

Revenues:

        

New vehicle

   52.7   55.8   49.9   56.6

Used vehicle retail

   25.7      22.5      27.1      21.7   

Used vehicle wholesale

   4.0      4.5      3.9      4.9   

Finance and insurance

   3.2      3.8      3.4      3.8   

Service, body and parts

   14.2      13.2      15.5      12.8   

Fleet and other

   0.2      0.2      0.2      0.2   
                        

Total revenues

   100.0   100.0   100.0   100.0

Gross profit

   18.7      16.8      19.1      16.9   

Goodwill and other asset impairment charges

   —        —        —        18.9   

Selling, general and administrative expenses

   14.1      13.8      15.3      14.3   

Depreciation and amortization

   0.9      0.8      1.0      0.8   
                        

Operating income (loss)

   3.8      2.1      2.8      (17.1

Floorplan interest expense

   0.6      0.8      0.7      0.9   

Other interest expense

   0.6      0.8      0.8      0.8   

Other, net

   —        (0.4   (0.1   (0.2
                        

Income (loss) from continuing operations before taxes

   2.5      0.9      1.5      (18.6

Income tax (expense) benefit

   (1.0   (0.4   (0.6   5.8   
                        

Income (loss) from continuing operations

   1.5   0.5   0.9   (12.8 )% 
                        

 

(1)

The percentages may not add due to rounding.

 

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The following tables set forth the changes in our operating results from continuing operations in the three and nine-month periods ended September 30, 2009 compared to the three and nine-month periods ended September 30, 2008:

 

(Dollars in thousands)

   Three Months Ended
September 30,
    Increase     %
Increase
 
     2009     2008     (Decrease)     (Decrease)  

Revenues:

        

New vehicle

   $ 241,577      $ 282,669      $ (41,092   (14.5 )% 

Used vehicle retail

     117,678        114,118        3,560      3.1   

Used vehicle wholesale

     18,486        23,112        (4,626   (20.0

Finance and insurance

     14,685        19,400        (4,715   (24.3

Service, body and parts

     64,960        66,728        (1,768   (2.6

Fleet and other

     814        846        (32   (3.8
                              

Total revenues

     458,200        506,873        (48,673   (9.6

Cost of sales:

        

New vehicle

     220,247        261,016        (40,769   (15.6

Used vehicle retail

     99,654        102,274        (2,620   (2.6

Used vehicle wholesale

     18,419        24,198        (5,779   (23.9

Service, body and parts

     33,511        33,864        (353   (1.0

Fleet and other

     536        482        54      11.2   
                              

Total cost of sales

     372,367        421,834        (49,467   (11.7
                              

Gross profit

     85,833        85,039        794      0.9   

Selling, general and administrative

     64,492        70,079        (5,587   (8.0

Depreciation and amortization

     3,923        4,073        (150   (3.7
                              

Operating income

     17,418        10,887        6,531      60.0   

Floorplan interest expense

     (2,886     (4,300     (1,414   (32.9

Other interest expense

     (2,943     (4,070     (1,127   (27.7

Other income, net

     24        1,881        (1,857   (98.7
                              

Income from continuing operations before taxes

     11,613        4,398        7,215      164.1   

Income tax expense

     (4,631     (1,911     2,720      142.3   
                              

Income from continuing operations

   $ 6,982      $ 2,487      $ 4,495      180.7
                              
      Three Months Ended
September 30,
    Increase     %
Increase
 
     2009     2008     (Decrease)     (Decrease)  

New units sold

     8,364        9,450        (1,086   (11.5 )% 

Average selling price per new vehicle

   $ 28,883      $ 29,912      $ (1,029   (3.4

Used retail units sold

     7,156        7,059        97      1.4   

Average selling price per used retail vehicle

   $ 16,445      $ 16,166      $ 279      1.7   

Used wholesale units sold

     3,817        3,884        (67   (1.7

Average selling price per used wholesale vehicle

   $ 4,843      $ 5,951      $ (1,108   (18.6

Finance and insurance sales per retail unit

   $ 946      $ 1,175      $ (229   (19.5

 

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(Dollars in thousands)

   Nine Months Ended
September 30,
    Increase     %
Increase
 
     2009     2008     (Decrease)     (Decrease)  

Revenues:

        

New vehicle

   $ 612,138      $ 881,116      $ (268,978   (30.5 )% 

Used vehicle retail

     332,082        338,509        (6,427   (1.9

Used vehicle wholesale

     50,160        74,654        (24,494   (32.8

Finance and insurance

     41,255        59,735        (18,480   (30.9

Service, body and parts

     190,051        199,349        (9,298   (4.7

Fleet and other

     1,947        3,188        (1,241   (38.9
                              

Total revenues

     1,227,633        1,556,551        (328,918   (21.1

Cost of sales:

        

New vehicle

     559,795        812,762        (252,967   (31.1

Used vehicle retail

     284,568        299,595        (15,027   (5.0

Used vehicle wholesale

     49,697        76,760        (27,063   (35.3

Service, body and parts

     97,633        102,625        (4,992   (4.9

Fleet and other

     1,015        2,013        (998   (49.6
                              

Total cost of sales

     992,708        1,293,755        (301,047   (23.3
                              

Gross profit

     234,925        262,796        (27,871   (10.6

Asset impairment charges

     —          294,075        (294,075   (100.0

Selling, general and administrative

     188,286        222,381        (34,095   (15.3

Depreciation and amortization

     11,988        12,632        (644   (5.1
                              

Operating income (loss)

     34,651        (266,292     300,943      (113.0

Floorplan interest expense

     (8,008     (13,758     (5,750   (41.8

Other interest expense

     (9,545     (12,490     (2,945   (23.6

Other income, net

     1,447        3,004        (1,557   (51.8
                              

Income (loss) from continuing operations before taxes

     18,545        (289,536     308,081      106.4   

Income tax (expense) benefit

     (7,429     90,720        98,149      108.2   
                              

Income (loss) from continuing operations

   $ 11,116      $ (198,816   $ 209,932      105.6
                              
     Nine Months Ended
September 30,
    Increase     %
Increase
 
     2009     2008     (Decrease)     (Decrease)  

New units sold

     20,746        30,167        (9,421   (31.2 )% 

Average selling price per new vehicle

   $ 29,506      $ 29,208      $ 298      1.0   

Used retail units sold

     20,568        19,970        598      3.0   

Average selling price per used retail vehicle

   $ 16,146      $ 16,951      $ (805   (4.7

Used wholesale units sold

     9,557        12,153        (2,596   (21.4

Average selling price per used wholesale vehicle

   $ 5,249      $ 6,143      $ (894   (14.6

Finance and insurance sales per retail unit

   $ 999      $ 1,191      $ (192   (16.1

Revenues

Total revenues decreased 9.6% and 21.1%, respectively, in the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008, primarily as a result of a 9.2% and a 20.8% decrease, respectively, in same-store sales, excluding fleet. The decreases in same-store sales reflected the continuing challenging retail environment, led by declining credit availability and deteriorating consumer confidence. In the third quarter of 2009, some of the macroeconomic pressures were temporarily counteracted through the CARS program, which provided government sponsored rebates for consumers who elected to purchase a new vehicle with improved fuel economy. In the fourth quarter of 2009, the revenue declines on a year-over-year basis are expected to slow. This is a result of less drastic prior year comparisons due to the lower sales in the recessionary environment experienced in the second half of 2008.

 

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

 

     Three months ended
September 30, 2009 vs.
three months ended
September 30, 2008
    Nine months ended
September 30, 2009 vs.
nine months ended
September 30, 2008
 

New vehicle retail, excluding fleet

   (14.3 )%    (30.3 )% 

Used vehicle retail

   3.9      (1.6

Used vehicle wholesale

   (19.1   (33.2

Total vehicle sales, excluding fleet

   (9.6   (23.0

Finance and insurance

   (23.3   (30.2

Service, body and parts

   (2.8   (4.6

Total sales, excluding fleet

   (9.2   (20.8

Same-store sales are calculated for stores that were in operation as of September 30, 2009, and only including the months of operations for both comparable periods. For example, a store acquired in July 2008 would be included in same-store operating data beginning in August 2008, after its first full complete comparable month of operation. Thus, operating results for same-store comparisons would include only the periods of August through September of both comparable years.

Within our business lines, vehicle sales have been impacted most severely by the current recessionary environment. Weak consumer confidence and a lack of available credit have reduced demand for 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.

While same-store new vehicle unit sales have declined, same-store used vehicle retail unit sales have increased as consumers seek out lower-priced vehicles when making a purchase, and as we have focused on increasing higher-margin used car sales. We have focused our store personnel on maximizing retail used vehicle sales and reducing the number of used vehicles acquired via trade-in that have historically been wholesaled. As a result of the shift in mix to more used vehicles and fewer new vehicles sold, our used to new vehicle sales ratio has improved from 0.7:1 in the first nine months of 2008 to 1.0:1 in the first nine months of 2009.

The declines in finance and insurance same-store sales were primarily due to fewer vehicles sold in the 2009 periods compared to the 2008 periods, 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 financing of ancillary products. 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 our lifetime lube, oil and filter insurance product 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 $91 and $70 per vehicle, respectively, in the three and nine-months periods ended September 30, 2009 compared to the same periods of 2008.

Penetration rates for certain products were as follows:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Finance and insurance

   68   72   69   74

Service contracts

   42      42      42      43   

Lifetime oil change and filter

   37      34      36      36   

 

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Our same-store service, body and parts business was also affected, albeit at a lesser magnitude than vehicle sales, by the challenging economic environment in the first nine months of 2009. Declining consumer confidence has caused customers to defer maintenance work and routine servicing for longer periods of time. Warranty work accounted for approximately 20.0% and 20.6%, respectively, of our same-store service, body and parts sales in the three and nine-month periods ended September 30, 2009. Same-store warranty sales were down 12.3% and 4.1%, respectively, in the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008. Domestic brand warranty work decreased by 9.4% and 1.0%, respectively, while import/luxury warranty work decreased by 15.7% and 8.0%, respectively, during the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008. The customer pay service and parts business, which represented 80.0% and 79.4%, respectively, of the total service, body and parts business in the three and nine-month periods ended September 30, 2009, was down 0.1% and 4.7%, respectively, on a same-store basis compared to the same periods of 2008.

Gross Profit

Gross profit increased $0.8 million and decreased $27.9 million, respectively, in the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008 due to decreased total revenues, offset by increases in our overall gross profit margins. Our gross profit margin by business line was as follows:

 

     Three Months Ended
September 30,
    Basis
Point Change*
 
     2009     2008        

New vehicle

   8.8   7.7   110 bp 

Retail used vehicle

   15.3      10.4      490   

Wholesale used vehicle

   0.4      (4.7   510   

Finance and insurance

   100.0      100.0      —     

Service, body and parts

   48.4      49.3      (90

Overall

   18.7      16.8      190   
     Nine Months Ended
September 30,
    Basis
Point Change*
 
     2009     2008        

New vehicle

   8.6   7.8   80 bp 

Retail used vehicle

   14.3      11.5      280   

Wholesale used vehicle

   0.9      (2.8   370   

Finance and insurance

   100.0      100.0      —     

Service, body and parts

   48.6      48.5      10   

Overall

   19.1      16.9      220   

 

*

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

We have focused attention on maximizing retail profit opportunities on each transaction in order to offset the decline in overall sales levels. We have also continued to adjust our vehicle inventories to respond to shifts in consumer demand driven by fuel prices and macroeconomic conditions. These factors have led to improved gross margins in all of our business lines.

Goodwill and Other Asset Impairment Charges

We are required to test our goodwill and other indefinite lived intangible assets for impairment at least annually or more frequently if conditions indicate that an impairment may have occurred. In addition, long-lived assets held and used by us and intangible assets with determinable lives are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable.

As a result of the reorganization in bankruptcy by both Chrysler and GM, we evaluated our indefinite-lived intangible assets and our long-lived assets for impairment in the second quarter of 2009. Based our analysis, there was no indicated impairment of our franchise value. We recorded an impairment charge of approximately $0.4 million and $0.6 million, respectively, for the three and nine-months ended September 30, 2009, related to certain long-lived assets.

 

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During the second quarter of 2008, based on the decision to dispose of approximately 10% of our stores, an adverse change in the business climate, our reduced earnings and cash flow forecast and a significant decline in our market capitalization, we determined that our goodwill and other indefinite lived intangible assets, as well as our other long-lived assets, required an interim impairment test.

Based on the results of this analysis, we recorded the following impairment charges within continuing operations in the second quarter of 2008.

 

Goodwill

   $  272.5 million

Franchise value and other intangibles

     14.6 million

Real estate

     4.5 million

Other

     2.5 million
      
   $ 294.1 million
      

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

Selling, General and Administrative Expense

Selling, general and administrative expense (“SG&A”) includes salaries and related personnel expenses, facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal, accounting, professional services and general corporate expenses.

SG&A decreased $5.6 million and $34.1 million, respectively, in the three and nine-month periods ended September 30, 2009 compared to same periods of 2008. SG&A increased to 14.1% and 15.3% of revenue, respectively, in the three and nine-month periods ended September 30, 2009 compared to 13.8% and 14.3%, respectively, in the comparable periods of 2008. The increases in SG&A as a percentage of revenue were primarily due to a lower revenue base.

The increases (decreases) in dollars spent were primarily due to the following:

 

     Three months ended
September 30, 2009 vs.
three months ended
September 30, 2008
   Nine months ended
September 30, 2009 vs.
nine months ended
September 30, 2008

Decrease related to salaries, bonuses and benefits

   $ (3.3) million    $ (19.4) million

Decrease related to legal and professional fees

     —        (2.6) million

Decrease related to asset impairments

     —        (4.5) million

Decrease related to travel expenses

     (0.7) million      (2.2) million

Increase related to advertising expenses

     0.7 million      1.5 million

Increase (decrease) related to insurance expenses

     (0.3) million      1.0 million

Decrease in other general expenses

     (2.0) million      (7.9) million
             
   $ (5.6) million    $ (34.1) million
             

SG&A as a percentage of gross profit is an industry standard for measuring performance relative to SG&A. SG&A as a percentage of gross profit improved by 730 basis points and 450 basis points to 75.1% and 80.1%, respectively, in the three and nine-month periods ended September 30, 2009 compared to 82.4% and 84.6%, respectively, in the comparable periods of 2008. While we have achieved improvements as a result of better matching our cost structure with our current revenue levels, we anticipate further improvements in the future as new vehicle sales levels improve, generating more gross profit. The third quarter of 2009 also 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.

 

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In the nine-month period ended September 30, 2008, SG&A expense included a $4.5 million charge related to terminated construction projects. On a non-GAAP basis, the elimination of this charge would have reduced SG&A as a percentage of gross profit to 82.9% in the nine-month period ended September 30, 2008.

Depreciation and Amortization

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

Depreciation and amortization decreased $0.2 million and $0.6 million, respectively, in the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008 due primarily to lower property and equipment balances as a result of the disposition of stores and the impairment of property and equipment during 2008 and 2009.

Operating Income (Loss)

Operating income (loss) in the three and nine-month periods ended September 30, 2009 were 3.8% and 2.8% of revenue, respectively, compared to 2.1% and (17.1)% of revenue, respectively, in the comparable periods of 2008. The operating losses in the nine-month period of 2008 were due primarily to the asset impairment charges discussed above. The 2009 periods were negatively affected by lower revenues over which to spread our selling, general and administrative expenses, partially offset by higher gross margins due to a shift in revenue sources and our improved cost structure.

Floorplan Interest Expense

Floorplan interest expense decreased $1.4 million and $5.8 million, respectively, in the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008. A decrease of $0.1 million and $2.4 million, respectively, resulted from changes in the average interest rates on our floorplan facilities. In addition, decreases of $1.5 million and $3.8 million, respectively, resulted from decreases in the average outstanding balances of our floorplan facilities. Changes from interest rate swaps resulted in increases of $0.2 million and $0.4 million, respectively, in the three and nine-month periods ended September 30, 2009.

Other Interest Expense

Other interest expense includes interest on our senior subordinated convertible notes, debt incurred related to acquisitions, real estate mortgages and our working capital, acquisition and used vehicle lines of credit.

Other interest expense decreased $1.1 million and $2.9 million, respectively, in the three and nine-month periods ended September 30, 2009 compared to the same periods of 2008. Decreases of $0.1 million and $0.6 million in the three and nine-month periods ended September 30, 2009 were related to decreases in the weighted average interest rate on our debt in the 2009 periods compared to the 2008 periods. Decreases in the average outstanding balances resulted in decreases of approximately $1.2 million and $2.6 million, respectively. The decreases in the average outstanding balances resulted primarily from the repayment of $42.5 million of our senior subordinated notes in the third and fourth quarters of 2008 and the remaining $42.5 million in the first and second quarters of 2009.

Other interest expense was increased by a reduction in capitalized interest recorded on construction projects of $0.2 million and $0.9 million, respectively, for the three and nine-month periods ended September 30, 2009 compared to $0.5 million and $1.2 million, respectively, for the three and nine-month periods in 2008.

 

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Income Tax Expense

Our effective income tax rate was 39.9% and 40.1%, respectively, in the three and nine-month periods ended September 30, 2009 compared to an effective income tax rate of 43.5% and a benefit of 31.3%, respectively, in the comparable periods of 2008. For the full year 2009, we anticipate our income tax rate to be approximately 40.0%.

Pro Forma Reconciliations

Due to the non-cash impairment charges recorded and gains on extinguishment of debt, we are providing our results of operations excluding these items. We believe that each of the non-GAAP financial measures provided improves the transparency of our disclosure, provides a meaningful presentation of our results from core business operations excluding the impact of items not related to our ongoing core business operations and improves the period-to-period comparability of our results from core business operations.

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

 

     Three Months Ended September 30,  
     Income (loss)     Diluted income (loss)
per share
 
     2009     2008     2009     2008  

Continuing Operations

        

As reported

   $ 6,982      $ 2,487      $ 0.32      $ 0.12   

Asset impairments

     227        75        0.01        —     

Gain on extinguishment of debt

     —          (1,111     —          (0.05
                                

Adjusted

   $ 7,209      $ 1,451      $ 0.33      $ 0.07   
                                

Discontinued Operations

        

As reported

   $ (1,269   $ (4,850   $ (0.06   $ (0.24

Impairments and disposal loss

     1,668        3,103        0.08        0.15   
                                

Adjusted

   $ 399      $ (1,747   $ 0.02      $ (0.09
                                

Consolidated Operations

        

As reported

   $ 5,713      $ (2,363   $ 0.26      $ (0.12
                                

Adjusted

   $ 7,608      $ (296   $ 0.35      $ (0.02
                                

 

     Nine Months Ended September 30,  
     Income (loss)     Diluted income (loss)
per share
 
     2009     2008     2009     2008  

Continuing Operations

        

As reported

   $ 11,116      $ (198,816   $ 0.53      $ (9.90

Asset impairments

     572        203,920        0.03        10.15   

Gain on extinguishment of debt

     (700     (1,111     (0.03     (0.06
                                

Adjusted

   $ 10,988      $ 3,993      $ 0.53      $ 0.19   
                                

Discontinued Operations

        

As reported

   $ (411   $ (49,492   $ (0.02   $ (2.46

Impairments and disposal (gain) loss

     (715     42,658        (0.03     2.12   
                                

Adjusted

   $ (1,126   $ (6,834   $ (0.05   $ (0.34
                                

Consolidated Operations

        

As reported

   $ 10,705      $ (248,308   $ 0.51      $ (12.36
                                

Adjusted

   $ 9,862      $ (2,841   $ 0.48      $ (0.15
                                

 

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Table of Contents

Discontinued Operations

We perform an internal evaluation of our store performance, on a store-by-store basis, in the last month of each quarter. If a particular location does not meet certain return on investment criteria established by our management team, the location is targeted for potential disposition. If a store that has been identified for potential disposition does not improve its operations for an extended period of time, the decision is made to divest the location. Additional factors we consider that may result in the disposition of a location include capital commitment requirements, our estimate of local market and franchise outlook, and the geographic location of certain stores.

When a store meets the criteria of “held for sale” as defined by ASC 360-10-45 “Property, Plant and Equipment, Overall, Other Presentation Matters”, the results of operations are reclassified into discontinued operations. We anticipate the completion of the sale for each store to occur within 12 months from the date of initial determination.

For stores that remain in discontinued operations for more than 12 months, we perform an evaluation to determine if continued inclusion is appropriate. As of September 30, 2009, we had eleven stores that had been classified as discontinued operations for more than 12 months. Over the period these stores were available for sale, we have continued to lower the price of the dealerships. We recorded additional impairment charges to recognize the assets at estimated fair value based on the outlook for potential sale proceeds. We believe our response to the declining economic factors, diminishing sources of credit with financially viable terms, and overall uncertainty surrounding the future demonstrated that we took actions necessary to respond to a change in circumstances; and that the assets were and continue to be actively marketed at a reasonable price given the continuing changes in circumstances. Finally, for these locations, we evaluated the relevant criteria as defined by ASC 360-10-45 and concluded that the stores’ continued classification within discontinued operations is appropriate.

During the first nine months of 2009, we disposed of five stores and ceased operations at two stores that had been held for sale and classified as discontinued operations at December 31, 2008. We classified four stores to discontinued operations that were sold during the first nine months of 2009. As a result of the Chrysler and GM bankruptcies, we reclassified four additional stores to discontinued operations. Two of these locations were Chrysler franchises that ceased operations in July 2009. The other two locations are GM stores that received notification of their closure and repurchase by GM through a modification of their franchise agreements. The third GM location where we received a notification of termination was already classified in discontinued operations.

Certain financial information related to discontinued operations was as follows (in thousands):

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Revenue

   $ 63,386      $ 169,775      $ 217,434      $ 543,923   
                                

Pre-tax income (loss) from discontinued operations

   $ 606      $ (2,839   $ (1,917   $ (11,100

Gain (loss) on disposal activities

     (2,765     (5,256     1,150        (68,959
                                
     (2,159     (8,095     (767     (80,059

Income tax benefit

     890        3,245        356        30,567   
                                

Loss from discontinued operations, net of income tax benefit

   $ (1,269   $ (4,850   $ (411   $ (49,492
                                

Amount of goodwill and other intangible assets disposed of

   $ —        $ 7,771      $ —        $ 7,771   
                                

Cash generated from disposal activities

   $ 4,556      $ 13,721      $ 26,607      $ 13,721   
                                

 

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The gain (loss) on disposal activities included the following (in thousands):

 

     Three Months Ended Sept. 30,     Nine Months Ended Sept. 30,  
     2009     2008     2009     2008  

Goodwill and other intangible assets

   $ 261      $ 6,365      $ 10,681      $ (39,511

Property, plant and equipment

     (2,040     (7,120     (7,541     (21,538

Inventory

     (443     (3,257     1,790        (6,248

Other

     (543     (1,244     (3,780     (1,662
                                
   $ (2,765   $ (5,256   $ 1,150      $ (68,959
                                

Interest expense is allocated to stores classified as discontinued operations for actual flooring interest expense directly related to the new vehicles in the store. Interest expense related to our working capital, acquisition and used vehicle credit facility is allocated based on the amount of assets pledged towards the total borrowing base.

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.

As discussed in the Overview, the magnitude of the seasonal improvement we have typically experienced in March did not occur in the first quarter of 2009. This is similar to our experience in 2008, where the seasonally strong second and third quarters of the year were relatively flat compared with the first quarter of 2008. The third quarter of 2009 experienced an incremental improvement as a result of the CARS program. Our current operational plan assumes vehicle sales do not decline as dramatically in the fourth quarter of 2009 as they did in the fourth quarter of 2008 given the already historically low sales levels. However, no assurances can be provided that our plan will be achieved, or that a further deterioration in the economic environment will not occur.

Liquidity and Capital Resources

Principal Needs

Our principal needs for liquidity and capital resources are for capital expenditures, working capital and debt repayment. Historically, we have also used capital resources to fund our cash dividend payment and for acquisitions.

Historically, we have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements, financing of real estate and the proceeds from public equity and private debt offerings to finance operations and expansion. In addition, during the first nine months of 2009 and all of 2008, we generated $10.7 million and $88.8 million, respectively, through the sale of assets and stores and the issuance of long-term debt, net of debt repayments.

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 for 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, of $43.5 million. We intend to use the net proceeds from the offering for general corporate purposes, including working capital and potential acquisitions of additional dealerships and related businesses. Prior to such use, we are using the proceeds to pay down amounts outstanding under our Credit Facility, one or more flooring lines of credit or selected mortgage debt.

 

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We have sufficient availability to accommodate our near-term capital needs. We executed the seventh amendment to our Credit Facility on October 28, 2009. The seventh amendment fixes credit availability at $50 million through the term of the agreement. We currently do not have any borrowings on the Credit Facility as a portion of the proceeds from the equity offering were used to pay down the remaining outstanding balance.

At September 30, 2009, we also had 13 stores held for sale. We disposed of 14 stores during 2009 through the date of the filing of this Form 10-Q, generating proceeds of $27.7 million, net of mortgages repaid.

In addition to the above sources of liquidity, potential sources of additional liquidity include the placement of subordinated debentures or loans, additional store sales or additional other asset sales. We will evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available to us in sufficient amounts or with terms acceptable to us.

Summary of Outstanding Balances on Credit Facilities

Interest rates on all of our credit facilities below, excluding the effects of our interest rate swaps, ranged from 1.79% to 6.00% at September 30, 2009. Amounts outstanding on the lines at September 30, 2009, together with amounts remaining available under such lines were as follows (in thousands):

 

     Outstanding at
September 30,
2009
   Maximum
Availability at
September 30,
2009
 

New and program vehicle lines

   $ 179,420    $ —   (1)