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 March 31, 2011
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) |
Registrants telephone number, including area code: 541-776-6401
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.
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 issuers classes of common stock, as of the latest practicable date.
Class A common stock without par value |
22,632,406 | |
Class B common stock without par value |
3,762,231 | |
(Class) | (Outstanding at April 29, 2011) |
LITHIA MOTORS, INC.
FORM 10-Q
1
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
(Unaudited)
March 31, 2011 |
December 31, 2010 |
|||||||
Assets |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 13,118 | $ | 9,306 | ||||
Accounts receivable, net of allowance for doubtful accounts of $198 and $190 |
79,659 | 75,011 | ||||||
Inventories, net |
456,945 | 415,228 | ||||||
Deferred income taxes |
2,815 | 2,937 | ||||||
Other current assets |
8,880 | 6,062 | ||||||
Total Current Assets |
561,417 | 508,544 | ||||||
Property and Equipment, net of accumulated depreciation of $97,129 and $93,745 |
357,303 | 362,433 | ||||||
Goodwill |
6,186 | 6,186 | ||||||
Franchise value |
45,193 | 45,193 | ||||||
Deferred income taxes |
39,479 | 39,524 | ||||||
Other non-current assets |
11,212 | 9,796 | ||||||
Total Assets |
$ | 1,020,790 | $ | 971,676 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities: |
||||||||
Floorplan notes payable |
$ | 94,422 | $ | 84,775 | ||||
Floorplan notes payable: non-trade |
205,744 | 166,482 | ||||||
Current maturities of long-term debt |
14,237 | 12,081 | ||||||
Trade payables |
27,043 | 23,747 | ||||||
Accrued liabilities |
68,502 | 58,784 | ||||||
Total Current Liabilities |
409,948 | 345,869 | ||||||
Long-term debt, less current maturities |
245,864 | 268,693 | ||||||
Deferred revenue |
21,064 | 20,158 | ||||||
Other long-term liabilities |
15,047 | 16,739 | ||||||
Total Liabilities |
691,923 | 651,459 | ||||||
Stockholders Equity: |
||||||||
Preferred stock - no par value; authorized |
||||||||
15,000 shares; none outstanding |
| | ||||||
Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 22,564 and 22,523 |
286,295 | 284,807 | ||||||
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 |
10,183 | 10,972 | ||||||
Accumulated other comprehensive loss |
(4,307 | ) | (4,869 | ) | ||||
Retained earnings |
36,228 | 28,839 | ||||||
Total Stockholders Equity |
328,867 | 320,217 | ||||||
Total Liabilities and Stockholders Equity |
$ | 1,020,790 | $ | 971,676 | ||||
See accompanying condensed notes to consolidated financial statements.
2
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Revenues: |
||||||||
New vehicle |
$ | 312,234 | $ | 215,617 | ||||
Used vehicle retail |
160,723 | 135,899 | ||||||
Used vehicle wholesale |
30,386 | 23,465 | ||||||
Finance and insurance |
19,923 | 14,638 | ||||||
Service, body and parts |
76,585 | 68,797 | ||||||
Fleet and other |
3,146 | 803 | ||||||
Total revenues |
602,997 | 459,219 | ||||||
Cost of sales: |
||||||||
New vehicle |
288,904 | 197,213 | ||||||
Used vehicle retail |
137,131 | 117,305 | ||||||
Used vehicle wholesale |
29,966 | 23,094 | ||||||
Service, body and parts |
39,467 | 35,251 | ||||||
Fleet and other |
2,595 | 451 | ||||||
Total cost of sales |
498,063 | 373,314 | ||||||
Gross profit |
104,934 | 85,905 | ||||||
Asset impairment |
382 | 1,491 | ||||||
Selling, general and administrative |
79,741 | 71,039 | ||||||
Depreciation and amortization |
4,193 | 4,749 | ||||||
Operating income |
20,618 | 8,626 | ||||||
Floorplan interest expense |
(2,563 | ) | (2,751 | ) | ||||
Other interest expense |
(3,304 | ) | (3,588 | ) | ||||
Other income, net |
77 | 68 | ||||||
Income from continuing operations before income taxes |
14,828 | 2,355 | ||||||
Income tax provision |
(6,123 | ) | (912 | ) | ||||
Income from continuing operations, net of income tax |
8,705 | 1,443 | ||||||
Loss from discontinued operations, net of income tax |
| (176 | ) | |||||
Net income |
$ | 8,705 | $ | 1,267 | ||||
Basic income per share from continuing operations |
$ | 0.33 | $ | 0.06 | ||||
Basic loss per share from discontinued operations |
| (0.01 | ) | |||||
Basic net income per share |
$ | 0.33 | $ | 0.05 | ||||
Shares used in basic per share calculations |
26,341 | 25,895 | ||||||
Diluted income per share from continuing operations |
$ | 0.33 | $ | 0.06 | ||||
Diluted loss per share from discontinued operations |
| (0.01 | ) | |||||
Diluted net income per share |
$ | 0.33 | $ | 0.05 | ||||
Shares used in diluted per share calculations |
26,694 | 26,019 | ||||||
See accompanying condensed notes to consolidated financial statements.
3
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 8,705 | $ | 1,267 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Asset impairments |
382 | 1,491 | ||||||
Depreciation and amortization |
4,193 | 4,749 | ||||||
Depreciation and amortization within discontinued operations |
| 4 | ||||||
Stock-based compensation |
491 | 441 | ||||||
(Gain) loss on disposal of other assets |
105 | (300 | ) | |||||
Loss from disposal activities within discontinued operations |
| 17 | ||||||
Deferred income taxes |
(394 | ) | (5,264 | ) | ||||
Excess tax benefit from share-based payment arrangements |
(21 | ) | | |||||
(Increase) decrease: |
||||||||
Trade receivables, net |
(4,648 | ) | (8,584 | ) | ||||
Inventories |
(41,769 | ) | (24,744 | ) | ||||
Other current assets |
(888 | ) | 2,332 | |||||
Other non-current assets |
(412 | ) | (987 | ) | ||||
Increase (decrease): |
||||||||
Floorplan notes payable |
9,905 | 4,532 | ||||||
Trade payables |
3,296 | 7,563 | ||||||
Accrued liabilities |
9,683 | 7,234 | ||||||
Other long-term liabilities and deferred revenue |
132 | (160 | ) | |||||
Net cash used in operating activities |
(11,240 | ) | (10,409 | ) | ||||
Cash flows from investing activities: |
||||||||
Principal payments received on notes receivable |
36 | | ||||||
Capital expenditures |
(2,333 | ) | (789 | ) | ||||
Proceeds from sales of assets |
3,084 | 2,144 | ||||||
Payments for life insurance policies |
(1,048 | ) | | |||||
Proceeds from sales of stores |
| 421 | ||||||
Net cash provided by (used in) investing activities |
(261 | ) | 1,776 | |||||
Cash flows from financing activities: |
||||||||
Borrowings on floorplan notes payable: non-trade |
39,262 | 20,615 | ||||||
Repayments on lines of credit |
(9,000 | ) | (24,000 | ) | ||||
Principal payments on long-term debt, scheduled |
(2,233 | ) | (1,329 | ) | ||||
Principal payments on long-term debt and capital leases, other |
(11,870 | ) | (13,361 | ) | ||||
Proceeds from issuance of long-term debt |
| 24,815 | ||||||
Proceeds from issuance of common stock |
590 | 554 | ||||||
Repurchase of common stock |
(141 | ) | (16 | ) | ||||
Excess tax benefit from share-based payment arrangements |
21 | | ||||||
Dividends paid |
(1,316 | ) | | |||||
Net cash provided by financing activities |
15,313 | 7,278 | ||||||
Increase (decrease) in cash and cash equivalents |
3,812 | (1,355 | ) | |||||
Cash and cash equivalents at beginning of period |
9,306 | 12,776 | ||||||
Cash and cash equivalents at end of period |
$ | 13,118 | $ | 11,421 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for interest |
$ | 6,017 | $ | 6,392 | ||||
Cash paid (refunded) during the period for income taxes, net |
927 | (1,180 | ) | |||||
Supplemental schedule of non-cash investing and financing activities: |
||||||||
Debt issued in connection with acquisitions |
$ | 2,430 | $ | |
See accompanying condensed notes to consolidated financial statements.
4
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Interim Financial Statements
Basis of Presentation
These condensed consolidated financial statements contain unaudited information as of March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010. 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 managements opinion, these unaudited financial statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the information when read in conjunction with our 2010 audited consolidated financial statements and the related notes thereto. The financial information as of December 31, 2010 is derived from our 2010 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying consolidated financial statements to maintain consistency and comparability between periods presented.
Revenues and cost of sales associated with used vehicles, previously disclosed on a combined basis, have been reclassified and are disclosed separately as used vehicle retail and used vehicle wholesale in the accompanying consolidated statements of operations for all periods presented.
The results of operations of stores classified as discontinued operations have been presented on a comparable basis for all periods presented in the accompanying consolidated statements of operations. See also Note 12.
These reclassifications had no impact on previously reported net income.
Concentrations of Risk and Uncertainties Regarding Manufacturers
We purchase substantially all of our new vehicles and inventory from various manufacturers at the prevailing prices charged by auto makers to all franchised dealers. Our overall sales could be impacted by the auto manufacturers inability or unwillingness to supply our dealerships with an adequate supply of popular models.
In March 2011, an earthquake, tsunami and subsequent nuclear crisis in Japan impacted automotive manufacturers and automotive suppliers. These events damaged facilities, reduced production of vehicles and parts and destroyed inventory in Japan. Many Japanese manufacturers and suppliers were forced to halt production as they reconfigured production logistics. Many plants in Japan continue to be inoperable and certain plants, which have restarted operations, are running at limited capacity. These events caused a global disruption to the supply of vehicles and automotive parts. We depend on our manufacturers to provide a supply of vehicles which supports expected sales levels. In the event that manufacturers are unable to supply the needed level of vehicles, our financial performance may be adversely impacted. We expect new vehicle supply to be constrained in the second and third quarters of 2011, although the impact of this constraint remains unknown. As of March 31, 2011, and December 31, 2010 we had $338.2 million and $305.7 million, respectively, in new vehicle inventory. We had $22.3 million and $22.2 million in parts and accessories inventory as of March 31, 2011 and December 31, 2010, respectively.
5
A lack of new vehicle supply may increase demand for late-model used vehicles. In 2009 and 2010, production and sales in North America were reduced by the recessionary environment. As a result, used vehicle supply, especially late-model vehicles, may be constrained, resulting in increased supply pressures and limited availability. Our used vehicle sales volume could be adversely impacted if we are unable to maintain an adequate supply of vehicles or if we are unable to obtain the makes and models desired by our customers. As of March 31, 2011, and December 31, 2010, we had $96.4 million and $87.3 million, respectively, in used and program vehicle inventory.
In 2010, Toyota announced vehicle recalls for possible accelerator pedal sticking issues and also halted the sales of eight models of vehicles until potentially defective parts were replaced, both of which reduced sales at our Toyota stores and adversely affected the manufacturers reputation for quality. The long-term effects that these recalls and safety issues will have on the Toyota brands are uncertain. We depend on our manufacturers to deliver high-quality, defect-free vehicles. In the event that manufacturers, including Toyota, experience future quality issues, our financial performance may be adversely impacted.
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. Our sales volume could be materially adversely impacted by the manufacturers or distributors inability to supply the stores with an adequate supply of vehicles. Our Chrysler, General Motors (GM) and Ford (collectively, the Domestic Manufacturers) stores represented approximately 30%, 18% and 6% of our new vehicle sales for the three months ended March 31, 2011, respectively, and approximately 30%, 17% and 6% for all of 2010, respectively.
We receive incentives and rebates from our manufacturers, including cash allowances, financing programs, discounts, holdbacks and other incentives. These incentives are recorded as receivables on our Consolidated Balance Sheets 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 $10.0 million and $8.4 million as of March 31, 2011 and December 31, 2010, respectively.
We currently have relationships with a number of manufacturers, their affiliated finance companies or other finance companies, including Ally Bank, Mercedes-Benz Financial Services USA, LLC, Toyota Financial Services, Ford Motor Credit Company, VW Credit, Inc., American Honda Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC. These companies provide new vehicle floorplan financing for their respective brands. Ally Bank serves as the primary lender for all other brands. Several of the companies also provide mortgage financing. At March 31, 2011, Ally Bank was the floorplan provider on approximately 67% of our total floorplan amount outstanding and the provider of approximately 32% of our outstanding mortgage financing. Certain of these companies have incurred significant losses and are operating under financial constraints. Other companies may incur losses in the future or undergo funding limitations. As a result, credit that has typically been extended to us by these companies may be modified with terms unacceptable to us or revoked entirely. If these events were to occur, we may not be able to pay our floorplan debts or borrow sufficient funds to refinance the vehicles. Even if new financing were available, it may not be on terms acceptable to us.
We enter into Franchise Agreements with manufacturers. The Franchise Agreements generally limit the location of the dealership and provide the auto manufacturer approval rights over changes in dealership management and ownership. The auto manufacturers are also entitled to terminate the Franchise Agreements if the dealership is in material breach of the terms. Our ability to expand operations depends, in part, on obtaining consents of the manufacturers for the acquisition of additional dealerships.
6
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 dealer installed accessories, reconditioning and transportation. Inventories consisted of the following (in thousands):
March 31, 2011 |
December 31, 2010 |
|||||||
New vehicles |
$ | 338,238 | $ | 305,721 | ||||
Used and program vehicles |
96,410 | 87,349 | ||||||
Parts and accessories |
22,297 | 22,158 | ||||||
$ | 456,945 | $ | 415,228 | |||||
Note 3. Comprehensive Income
Comprehensive income for the three-month periods ended March 31, 2011 and 2010 was as follows (in thousands):
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Net income |
$ | 8,705 | $ | 1,267 | ||||
Cash flow hedges: |
||||||||
Derivative gain (loss), net of tax effect of $(320) and $294, respectively |
562 | (478 | ) | |||||
Total comprehensive income |
$ | 9,267 | $ | 789 | ||||
Note 4. Earnings 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 and unvested restricted shares subject to repurchase or cancellation. The dilutive effect of outstanding stock options and other grants 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 Restated 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 period are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the period 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.
7
Following is a reconciliation of the income from continuing operations and weighted average shares used for our basic earnings per share (EPS) and diluted EPS from continuing operations for the three-month periods ended March 31, 2011 and 2010 (in thousands, except per share amounts):
Three Months Ended March 31, |
2011 | 2010 | ||||||||||||||
Basic EPS from Continuing Operations |
Class A | Class B | Class A | Class B | ||||||||||||
Numerator: |
||||||||||||||||
Income from continuing operations applicable to common stockholders |
$ | 7,462 | $ | 1,243 | $ | 1,233 | $ | 210 | ||||||||
Distributed income applicable to common stockholders |
(1,128 | ) | (188 | ) | | | ||||||||||
Basic undistributed income from continuing operations applicable to common stockholders |
$ | 6,334 | $ | 1,055 | $ | 1,233 | $ | 210 | ||||||||
Denominator: |
||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share |
22,579 | 3,762 | 22,133 | 3,762 | ||||||||||||
Basic income per share from continuing operations applicable to common stockholders |
$ | 0.33 | $ | 0.33 | $ | 0.06 | $ | 0.06 | ||||||||
Basic distributed income per share from continuing operations applicable to common stockholders |
(0.05 | ) | (0.05 | ) | | | ||||||||||
Basic undistributed income per share from continuing operations applicable to common stockholders |
$ | 0.28 | $ | 0.28 | $ | 0.06 | $ | 0.06 | ||||||||
8
Three Months Ended March 31, |
2011 | 2010 | ||||||||||||||
Diluted EPS from Continuing Operations |
Class A | Class B | Class A | Class B | ||||||||||||
Numerator: |
||||||||||||||||
Distributed income applicable to common stockholders |
$ | 1,128 | $ | 188 | $ | | $ | | ||||||||
Reallocation of earnings as a result of conversion of dilutive stock options |
3 | (3 | ) | | | |||||||||||
Reallocation of distributed income due to conversion of Class B to Class A common shares outstanding |
185 | | | | ||||||||||||
Diluted distributed income applicable to common stockholders |
$ | 1,316 | $ | 185 | $ | | $ | | ||||||||
Undistributed income from continuing operations applicable to common stockholders |
$ | 6,334 | $ | 1,055 | $ | 1,233 | $ | 210 | ||||||||
Reallocation of earnings as a result of conversion of dilutive stock options |
14 | (14 | ) | 1 | (1 | ) | ||||||||||
Reallocation of undistributed income due to conversion of Class B to Class A |
1,041 | | 209 | | ||||||||||||
Diluted undistributed income from continuing operations applicable to common stockholders |
$ | 7,389 | $ | 1,041 | $ | 1,443 | $ | 209 | ||||||||
Denominator: |
||||||||||||||||
Weighted average number of shares outstanding used to calculate basic income per share from continuing operations |
22,579 | 3,762 | 22,133 | 3,762 | ||||||||||||
Weighted average number of shares from stock options |
353 | | 124 | | ||||||||||||
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 from continuing operations |
26,694 | 3,762 | 26,019 | 3,762 | ||||||||||||
Diluted income per share from continuing operations applicable to common stockholders |
$ | 0.33 | $ | 0.33 | $ | 0.06 | $ | 0.06 | ||||||||
Diluted distributed income per share from continuing operations applicable to common stockholders |
(0.05 | ) | (0.05 | ) | | | ||||||||||
Diluted undistributed income per share from continuing operations applicable to common stockholders |
$ | 0.28 | $ | 0.28 | $ | 0.06 | $ | 0.06 | ||||||||
Three Months Ended March 31, |
2011 | 2010 | ||||||||||||||
Diluted EPS |
Class A | Class B | Class A | Class B | ||||||||||||
Antidilutive Securities |
||||||||||||||||
Shares issuable pursuant to stock options not included since they were antidilutive |
387 | | 734 | |
Note 5. Asset Impairment Charges
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 such assets may not be recoverable. An estimate of future undiscounted net cash flows associated with the long-lived assets is used to determine if the carrying value of the assets is recoverable. An impairment charge is recorded for the amount the carrying value of the asset exceeds its fair value.
9
In the first quarter of 2011, a triggering event was determined to have occurred associated with a property due to changes in its expected future use. We evaluated the future undiscounted net cash flows for the property and determined the carrying value was not recoverable. As a result, we recorded an asset impairment charge of $0.4 million on our Consolidated Statements of Operations.
In the first quarter of 2010, due to changes in specific facts and circumstances on three properties held for future development, we tested certain long-lived assets for recoverability. We recorded asset impairment charges of $1.5 million on our Consolidated Statements of Operations primarily related to a property for which a preliminary agreement to sell was entered into in March 2010.
Note 6. Stock-Based Compensation
In the first quarter of 2011, we issued restricted stock units (RSUs) covering 181,000 shares of our Class A common stock to certain employees. The RSUs are not participating securities and fully vest on the fourth anniversary of the grant date. We estimated compensation expense, based on a fair value methodology, of $2.0 million related to the RSUs, which will be recognized over the vesting period. Of this amount, approximately $0.4 million will be recognized in 2011.
Note 7. Deferred Compensation and Long-term Incentive Plan
Beginning in March 2011, we offered a deferred compensation plan (the Plan) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. Participants are allowed to defer a portion of their compensation and are 100% vested in their respective deferrals and earnings. We may also make discretionary contributions the Plan. The vesting terms of the discretionary contribution are determined at the time of contribution. Participants receive a guaranteed return on vested deferrals and earnings. We retain discretion to set the guaranteed rate each year. We also have existing deferred compensation plans for our Board of Directors and selected executives.
In March 2011, we made a discretionary contribution of $1.3 million. The vesting term ranges between one and seven years, based on the employees position. Participants will receive a guaranteed return of 6% in 2011. As of March 31, 2011, the balance due to participants was $388,000 and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.
Note 8. Fair Value Measurements
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 each measurement date and an income approach to convert estimated future cash flows to a single present value 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
10
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 methodology is 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 counterpartys, risk of non-performance under the contract.
We estimate the fair value of long-lived assets that are recorded at fair value based on a market valuation approach. We use 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. Additionally, we may use a cost valuation approach to value long-lived assets when a market valuation approach is unavailable. Under this approach, we determine the cost to replace the service capacity of an asset, adjusted for physical and economic obsolescence. When available, we use valuation inputs from independent valuation experts, such as real estate appraisers and brokers, to corroborate our estimates of fair value. Real estate appraisers and brokers valuations are typically developed using one or more valuation techniques including market, income and replacement cost approaches. As these valuations contain unobservable inputs, we classified the measurement of fair value of long-lived assets as Level 3.
There were no changes to our valuation techniques during the three-month period ended March 31, 2011.
Assets and Liabilities Measured at Fair Value
Following are the disclosures related to our assets and (liabilities) that are measured at fair value (in thousands):
Fair Value at March 31, 2011 |
Level 1 | Level 2 | Level 3 | |||||||||
Measured on a recurring basis: |
||||||||||||
Derivative contracts, net |
$ | | $ | (7,714 | ) | $ | | |||||
Measured on a non-recurring basis: |
||||||||||||
Long-lived assets held and used: |
||||||||||||
Certain buildings and improvements |
$ | | $ | | $ | 1,500 | ||||||
Fair Value at December 31, 2010 |
Level 1 | Level 2 | Level 3 | |||||||||
Measured on a recurring basis: |
||||||||||||
Derivative contracts, net |
$ | | $ | (8,692 | ) | $ | | |||||
Measured on a non-recurring basis: |
||||||||||||
Long-lived assets held and used: |
||||||||||||
Certain buildings and improvements |
$ | | $ | | $ | 23,400 | ||||||
Certain parcels of land |
| | 13,511 | |||||||||
Total |
$ | | $ | | $ | 36,911 | ||||||
See Note 9 for more details regarding our derivative contracts.
Financial Assets and Liabilities Not Recorded at Fair Value
We had $108.1 million and $118.5 million of fixed interest rate debt outstanding as of March 31, 2011 and December 31, 2010, respectively. As of March 31, 2011, this debt had maturity dates between November 2011 and October 2029. 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 $116.2 million and $127.4 million at March 31, 2011 and December 31, 2010, respectively.
11
We believe the carrying value of our variable rate debt approximates fair value.
Note 9. 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 one-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 rather than net income until the underlying hedged transaction affects net income. If a swap is no longer accounted for as a cash flow hedge and the forecasted transaction remains probable or reasonably possible of occurring, the gain or loss recorded in accumulated other comprehensive income is recognized in income as the forecasted transaction occurs. If the forecasted transaction is probable of not occurring, the gain or loss recorded in accumulated other comprehensive income (loss) is recognized in income immediately.
At March 31, 2011 and December 31, 2010, the net fair value of all of our agreements totaled a loss of $7.7 million and $8.7 million, respectively, which was recorded on our Consolidated Balance Sheets 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 $3.2 million at March 31, 2011.
As of March 31, 2011, we had outstanding the following interest rate swaps with U.S. Bank Dealer Commercial Services:
| effective June 16, 2006 a ten year, $25 million interest rate swap at a fixed rate of 5.587% per annum, variable rate adjusted on the 1st and 16th of each month; |
| effective January 26, 2008 a five year, $25 million interest rate swap at a fixed rate of 4.495% per annum, variable rate adjusted on the 26th of each month; |
| effective May 1, 2008 a five year, $25 million interest rate swap at a fixed rate of 3.495% per annum, variable rate adjusted on the 1st and 16th of each month; and |
| effective May 1, 2008 a five year, $25 million interest rate swap at a fixed rate of 3.495% per annum, variable rate adjusted on the 1st and 16th of each month. |
We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month LIBOR rate at March 31, 2011 was 0.2% per annum, as reported in the Wall Street Journal.
The fair value of our derivative instruments was included in our Consolidated Balance Sheets as follows:
Balance Sheet Information (in thousands) |
Fair Value of Asset Derivatives | Fair Value of Liability Derivatives | ||||||||||||
Location in Balance Sheet |
March 31, 2011 | Location in Balance Sheet |
March 31, 2011 | |||||||||||
Derivatives Designated as Hedging Instruments |
||||||||||||||
Interest Rate Swap Contracts |
Prepaid expenses and other |
$ | |
|
Accrued liabilities |
|
$ | 2,800 | ||||||
Other non-current assets |
|
|
Other long-term liabilities |
|
4,914 | |||||||||
$ | | $ | 7,714 | |||||||||||
12
Balance Sheet Information (in thousands) |
Fair Value of Asset Derivatives | Fair Value of Liability Derivatives | ||||||||||||||
Location in Balance Sheet |
December 31, 2010 |
Location in Balance Sheet |
December 31, 2010 |
|||||||||||||
Derivatives Designated as Hedging Instruments |
||||||||||||||||
Interest Rate Swap Contracts |
|
Prepaid expenses and other |
|
$ | |
|
Accrued liabilities |
|
$ | 2,862 | ||||||
|
Other non-current assets |
|
| |
Other long-term liabilities |
|
5,830 | |||||||||
$ | | $ | 8,692 | |||||||||||||
The effect of derivative instruments on our Consolidated Statements of Operations for the three-month periods ended March 31, 2011 and 2010 was as follows (in thousands):
Derivatives in Cash Flow Hedging Relationships |
Amount
of Gain/(Loss) Recognized in OCI (Effective Portion) |
Location
of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
Location
of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
Amount
of Loss Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) |
|||||||||||
Three Months Ended March 31, 2011 |
||||||||||||||||
Interest Rate Swap Contracts |
$ | 388 | Floorplan Interest expense |
$ | (494 | ) | Floorplan Interest expense |
$ | (412 | ) | ||||||
Three Months Ended March 31, 2010 |
||||||||||||||||
Interest Rate Swap Contracts |
$ | (1,534 | ) | Floorplan Interest |
$ | (762 | ) | Floorplan Interest expense |
$ | (318 | ) |
See also Note 8.
Note 10. Purchase Option
On December 31, 2009, we entered into an option agreement with our Vice Chairman, Dick Heimann, who is a related party. Under the terms of the option agreement, Mr. Heimann may purchase our Volkswagen and Nissan franchises in Medford, Oregon, and acquire their operations, including inventories and equipment, at valuations set forth in our standard form of agreement, which we believe will approximate fair value at the time of exercise. Any purchased real estate will be priced at the then fair market value. Existing leases, if any, will be assumed at the time of exercise of the option. The purchase price for the intangible assets (manufacturers franchise rights) is set at $10 in the agreement. The option may be exercised by Mr. Heimann at any time prior to December 31, 2012. No consideration was received in exchange for this option.
We estimate the fair value of the option at the end of each period using a discounted cash flow analysis, valuation inputs from independent third parties and the use of a Black-Scholes option valuation model. As of March 31, 2011 and December 31, 2010, we had $0.6 million recorded as a liability in other long-term liabilities in our Consolidated Balance Sheets associated with this option.
Any changes in the fair value of the option are recorded each period as a component of selling, general and administrative expenses in our Consolidated Statements of Operations. No expense was recorded in the three-month periods ended March 31, 2011 or 2010 associated with this option.
13
Note 11. Share Repurchase Program
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. Through March 31, 2011, we have purchased a total of 583,224 shares under this program, of which 2,600 were purchased in 2011 at an average price of $13.52 per share. As of March 31, 2011, 416,776 shares remained available for purchase pursuant to this program. We may continue to purchase shares from time to time in the future as conditions warrant.
Note 12. Discontinued Operations
We classify a store as discontinued operations if the location has been sold, operations have been ceased at that location or if management has committed to a plan to dispose of the store. Additionally, the store must meet the criteria as required by U.S. generally accepted accounting standards:
| our management team, possessing the necessary authority, commits to a plan to sell the store; |
| the store is available for immediate sale in its present condition; |
| an active program to locate buyers and other actions that are required to sell the store are initiated; |
| a market for the store exists and we believe its sale is likely. We also expect to record the transfer of the store as a completed sale within one year; |
| active marketing of the store commences at a price that is reasonable in relation to the estimated fair market value; and |
| our management team believes it is unlikely changes will be made to the plan or withdrawal of the plan to dispose of the store will occur. |
We reclassify the stores operations to discontinued operations in our Consolidated Statement of Operations, on a comparable basis for all periods presented, provided we do not expect to have any significant continuing involvement in the stores operations after its disposal.
Certain financial information related to discontinued operations was as follows (in thousands):
Three Months Ended March 31, |
2010 | |||
Revenue |
$ | 4,158 | ||
Loss from discontinued operations |
$ | (274 | ) | |
Net loss on disposal activities |
(17 | ) | ||
(291 | ) | |||
Income tax benefit |
115 | |||
Loss from discontinued operations, net of income taxes |
$ | (176 | ) | |
Cash generated from disposal activities |
$ | 421 | ||
The loss on disposal activities included the following impairment charges (in thousands):
Three Months Ended March 31, |
2010 | |||
Property, plant and equipment |
$ | (11 | ) | |
Other |
(6 | ) | ||
$ | (17 | ) | ||
Note 13. Subsequent Events
Acquisition
On April 18, 2011, we acquired the inventory, equipment, real estate and intangible assets of, and assumed certain liabilities related to, Mercedes-Benz of Portland, Oregon, Mercedes Benz of Wilsonville, Oregon and Rasmussen BMW/MINI in Portland, Oregon from the Don Rasmussen Group. These stores generated approximately $160 million in revenues for the full year of 2010. We paid a purchase price of $69.2 million, of which $53.3 million was paid in cash and $15.9 million was financed through a floorplan credit facility. As of April 29, 2011, the initial accounting for determining the acquisition-date fair value for each major class of assets acquired, including goodwill, and liabilities assumed was not yet complete.
14
Common Stock Dividend
On April 27, 2011, we announced that our Board of Directors approved a dividend of $0.07 per share on our Class A and Class B common stock related to our first quarter 2011 financial results. The dividend will total approximately $1.8 million and will be paid on May 25, 2011 to shareholders of record on May 11, 2011.
15
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward Looking Statements and Risk Factors
Some of the statements under the sections entitled Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors and elsewhere in this Form 10-Q constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Generally, you can identify forward-looking statements by terms such as may, will, should, expect, plan, intend, forecast, anticipate, believe, estimate, predict, potential, and continue or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-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 Part II - Other Information, Item 1A. in this Form 10-Q and in the Risk Factors section of our Annual Report on Form 10-K, as supplemented and amended from time to time in Quarterly Reports on Form 10-Q and the Companys other filings with the SEC.
While we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. We assume no obligation to update or revise any forward-looking statements.
Overview
We are a leading operator of automotive franchises and a retailer of new and used vehicles and services. As of April 29, 2011, we offered 26 brands of new vehicles and all brands of used vehicles in 86 stores in the United States and online at Lithia.com. We sell new and used cars and light trucks, replacement parts; provide vehicle maintenance, warranty, paint and repair services and arrange related financing, service contracts, protection products and credit insurance.
We continue to believe that the fragmented nature of the automotive dealership sector provides us with the opportunity to achieve growth through consolidation. We seek exclusive franchises for acquisition, where we are the only representative of the brand within a market. We have completed over 100 acquisitions since our initial public offering in 1996. Our acquisition strategy has been to acquire underperforming dealerships and, through the application of our centralized operating structure, leverage costs and improve store profitability. We believe the current economic environment provides us with attractive acquisition opportunities.
We also believe that we can continue to improve operations at our existing stores. By promoting entrepreneurial leadership in our general manager position, we anticipate continuing improvement in the percentage of new vehicle sales we capture in our local markets. While we retail approximately one used vehicle for every new vehicle sold, we believe we can make additional improvements in our used vehicle sales performance by offering lower-priced value vehicles and selling brands other than the new vehicle franchise at each location. Our service, body and parts operations provide important repeat business for our stores. We have increased our marketing efforts, lowered prices on routine maintenance items and focused on offering more commodity products to offset the impact of fewer units in operations. Overall, organic growth through improved operations is a goal in 2011.
16
We believe our cost structure is aligned with current industry sales levels. Through initiatives started in the second quarter of 2008, we have successfully established a cost structure which can be leveraged as vehicle sales levels improve. As we focus on maintaining discipline in controlling costs, we target retaining, on a pre-tax basis, 50% to 55% of each incremental gross profit dollar after subtracting SG&A expense.
Results of Continuing Operations
For the three months ended March 31, 2011 and 2010, we reported income from continuing operations, net of tax of $8.7 million, or $0.33 per diluted share, and $1.4 million, or $0.06 per diluted share, respectively.
Discontinued Operations
Results for sold or closed stores qualifying for reclassification under the applicable accounting guidance are presented as discontinued operations in our Consolidated Statements of Operations. As a result, our results from continuing operations are presented on a comparable basis for all periods. We did not have any stores classified as discontinued operations during the quarter ended March 31, 2011. The loss from discontinued operations for the quarter ended March 31, 2010 totaled $0.2 million.
Key Performance Metrics
Certain key performance metrics for revenue and gross profit were as follows for the three months ended March 31, 2011 and 2010 (dollars in thousands):
Three months ended March 31, 2011 |
Revenues | Percent of Total Revenues |
Gross Profit |
Gross Profit Margin |
Percent of Total Gross Profit |
|||||||||||||||
New vehicle |
$ | 312,234 | 51.8 | % | $ | 23,330 | 7.5 | % | 22.2 | % | ||||||||||
Used vehicle retail |
160,723 | 26.7 | 23,592 | 14.7 | 22.5 | |||||||||||||||
Used vehicle wholesale |
30,386 | 5.0 | 420 | 1.4 | 0.4 | |||||||||||||||
Finance and insurance(1) |
19,923 | 3.3 | 19,923 | 100.0 | 19.0 | |||||||||||||||
Service, body and parts |
76,585 | 12.7 | 37,118 | 48.5 | 35.4 | |||||||||||||||
Fleet and other |
3,146 | 0.5 | 551 | 17.5 | 0.5 | |||||||||||||||
$ | 602,997 | 100.0 | % | $ | 104,934 | 17.4 | % | 100.0 | % | |||||||||||
Three months ended March 31, 2010 |
Revenues | Percent of Total Revenues |
Gross Profit |
Gross Profit Margin |
Percent of Total Gross Profit |
|||||||||||||||
New vehicle |
$ | 215,617 | 47.0 | % | $ | 18,404 | 8.5 | % | 21.4 | % | ||||||||||
Used vehicle retail |
135,899 | 29.6 | 18,594 | 13.7 | 21.6 | |||||||||||||||
Used vehicle wholesale |
23,465 | 5.0 | 371 | 1.6 | 0.5 | |||||||||||||||
Finance and insurance(1) |
14,638 | 3.2 | 14,638 | 100.0 | 17.0 | |||||||||||||||
Service, body and parts |
68,797 | 15.0 | 33,546 | 48.8 | 39.1 | |||||||||||||||
Fleet and other |
803 | 0.2 | 352 | 43.8 | 0.4 | |||||||||||||||
$ | 459,219 | 100.0 | % | $ | 85,905 | 18.7 | % | 100.0 | % | |||||||||||
(1) | Commissions reported net of anticipated cancellations. |
Same Store Operating Data
We believe that same store comparisons are a key indicator of our financial performance. Same store metrics demonstrate our ability to grow our revenue and profitability in our existing locations. As a result, same store comparisons have been integrated into the discussion below.
17
A same store basis represents stores that were operating as of March 31, 2011, and only includes the months of operations for both comparable periods. For example, a store acquired in February 2010 would be included in same store operating data beginning in March 2011, after its first full complete comparable month of operation. Thus, operating results for same store comparisons would include only the period of March for both comparable periods.
New Vehicle Revenues
Three Months
Ended March 31, |
% | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | Increase | Increase | ||||||||||||
Reported |
||||||||||||||||
Revenue |
$ | 312,234 | $ | 215,617 | $ | 96,617 | 44.8 | % | ||||||||
Retail units sold |
9,929 | 6,884 | 3,045 | 44.2 | ||||||||||||
Average selling price per retail unit |
$ | 31,447 | $ | 31,321 | $ | 126 | 0.4 | |||||||||
Same store |
||||||||||||||||
Revenue |
$ | 305,345 | $ | 215,981 | $ | 89,364 | 41.4 | % | ||||||||
Retail units sold |
9,708 | 6,897 | 2,811 | 40.8 | ||||||||||||
Average selling price per retail unit |
$ | 31,453 | $ | 31,315 | $ | 138 | 0.4 |
New vehicle sales in the first quarter of 2011 improved compared to the first quarter of 2010 as volume increased and average selling prices remained consistent. We remain focused on increasing our share of overall new vehicle sales within our markets, and have targeted increased market share as an operational objective in 2011. As a result of this initiative, as well as increased consumer perception, domestic brand new vehicle same store sales increased 53.3% in the three months ended March 31, 2011 compared to the same period of 2010. Import and luxury brands had a same store sales improvement of 29.2% for the three months ended March 31, 2011 compared to the same period of 2010.
Overall, sales in the first quarter of 2011 were not impacted by the effects of the events in Japan and the subsequent disruption to new vehicle supply as we had adequate inventory on hand. However, it is likely sales will be impacted by the shortages anticipated to begin in the second quarter of 2011, although the extent of the impact is unknown.
Used Vehicle Retail Revenues
Three Months
Ended March 31, |
Increase | % Increase |
||||||||||||||
(Dollars in thousands) | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Reported |
||||||||||||||||
Retail revenue |
$ | 160,723 | $ | 135,899 | $ | 24,824 | 18.3 | % | ||||||||
Retail units sold |
9,812 | 8,211 | 1,601 | 19.5 | ||||||||||||
Average selling price per retail unit |
$ | 16,380 | $ | 16,551 | $ | (171 | ) | (1.0 | ) | |||||||
Same store |
||||||||||||||||
Retail revenue |
$ | 157,130 | $ | 134,402 | $ | 22,728 | 16.9 | % | ||||||||
Retail units sold |
9,598 | 8,109 | 1,489 | 18.4 | ||||||||||||
Average selling price per retail unit |
$ | 16,371 | $ | 16,574 | $ | (203 | ) | (1.2 | ) |
We continue to emphasize used vehicle retail sales. The initiatives started in 2010 focused on increasing the number of lower-price, higher-margin, older used vehicles we sell. We have expanded sales of these vehicles to comprise a larger part of our used vehicle retail business. As a result, we have seen a decrease in the average selling price per unit of our used vehicles retailed. We continue to maintain a retail used to new vehicle sales ratio of 1.0:1.
We anticipate potential supply constraints in late-model used vehicles, as a result of the lower new vehicle sales in 2009 and 2010. To counteract this trend, we will continue to focus on growing our sales of older used vehicles and increase the conversion of vehicles acquired via trade-in to retail used vehicle sales.
18
Used Vehicle Wholesale Revenues
Three Months
Ended March 31, |
% | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | Increase | Increase | ||||||||||||
Reported |
||||||||||||||||
Wholesale revenue |
$ | 30,386 | $ | 23,465 | $ | 6,921 | 29.5 | % | ||||||||
Wholesale units sold |
3,883 | 3,286 | 597 | 18.2 | ||||||||||||
Average selling price per wholesale unit |
$ | 7,825 | $ | 7,141 | $ | 684 | 9.6 | |||||||||
Same store |
||||||||||||||||
Wholesale revenue |
$ | 29,929 | $ | 22,880 | $ | 7,049 | 30.8 | % | ||||||||
Wholesale units sold |
3,814 | 3,228 | 586 | 18.2 | ||||||||||||
Average selling price per wholesale unit |
$ | 7,847 | $ | 7,088 | $ | 759 | 10.7 |
Wholesale transactions are a result of vehicles we have purchased from customers, or from vehicles we have attempted to sell via retail that we elect to dispose of due to time in inventory or other factors. We have concentrated on directing more lower-priced, older vehicles to retail sale rather than wholesale disposal. As a result, we have seen an increase in the average selling price per wholesale unit, and have increased wholesale revenues by a larger percentage than wholesale units.
Finance and Insurance
Three Months
Ended March 31, |
% | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | Increase | Increase | ||||||||||||
Reported |
||||||||||||||||
Revenue |
$ | 19,923 | $ | 14,638 | $ | 5,285 | 36.1 | % | ||||||||
Revenue per retail unit |
$ | 1,009 | $ | 970 | $ | 39 | 4.0 | |||||||||
Same store |
||||||||||||||||
Revenue |
$ | 19,045 | $ | 13,778 | $ | 5,267 | 38.2 | % | ||||||||
Revenue per retail unit |
$ | 986 | $ | 918 | $ | 68 | 7.4 |
The increase in finance and insurance sales was primarily due to more vehicles sold in the first three months of 2011 compared to the same period of 2010. The availability of consumer credit has improved and lenders have increased the loan-to-value amount available to most customers. These shifts afford us the opportunity to sell additional or more comprehensive products, while remaining within a framework acceptable to our lenders.
Penetration rates for certain products were as follows:
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Finance and insurance |
73 | % | 70 | % | ||||
Service contracts |
40 | 42 | ||||||
Lifetime oil change and filter |
37 | 35 |
19
Service, Body and Parts Revenue
Three Months
Ended March 31, |
% | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | Increase | Increase | ||||||||||||
Reported |
||||||||||||||||
Customer pay |
$ | 41,368 | $ | 37,494 | $ | 3,874 | 10.3 | % | ||||||||
Warranty |
13,491 | 12,776 | 715 | 5.6 | ||||||||||||
Wholesale parts |
13,782 | 11,845 | 1,937 | 16.4 | ||||||||||||
Body shop |
7,944 | 6,682 | 1,262 | 18.9 | ||||||||||||
Total service, body and parts |
$ | 76,585 | $ | 68,797 | $ | 7,788 | 11.3 | % | ||||||||
Same store |
||||||||||||||||
Customer pay |
$ | 40,137 | $ | 37,432 | $ | 2,705 | 7.2 | % | ||||||||
Warranty |
13,077 | 12,771 | 306 | 2.4 | ||||||||||||
Wholesale parts |
13,536 | 11,843 | 1,693 | 14.3 | ||||||||||||
Body shop |
7,717 | 6,682 | 1,035 | 15.5 | ||||||||||||
Total service, body and parts |
$ | 74,467 | $ | 68,728 | $ | 5,739 | 8.3 | % | ||||||||
Our service, body and parts business has continued to improve in the first quarter of 2011. We saw a steady increase in our customer pay business as we continued to focus on retaining customers through competitively-priced routine maintenance offerings and increased marketing efforts.
The improvement in same store warranty sales was primarily driven by import and luxury brand work, which increased 6.6% on a same store basis in the three months ended March 31, 2011 compared to the same period in 2010. As Toyota had significant recall warranty work in 2010, this increase is partially offset by a decrease in Toyota warranty claims. Domestic brand warranty work continues to be negatively impacted by the decline in units in operation associated with the lower Seasonally Adjusted Annual Rate (SAAR) levels in 2008 and 2009 and increased vehicle reliability. Domestic brand warranty work declined 1.7% in the three-month period ended March 31, 2011 compared to the same period in 2010.
We continue to grow our wholesale parts and body shop sales in 2011. These businesses represent 28.5% of our service, body and parts business and have grown 14.7% on a same store basis in the three months ended March 31, 2011 compared to the same period in 2010. We have implemented initiatives in our wholesale parts business to aggressively pursue revenue increases. As both wholesale parts and body shop margins are lower than service work, we expect gross margins may continue to decline as these areas of the business comprise a larger portion of the total.
Gross Profit
Gross profit increased $19.0 million in the three-month period ended March 31, 2011 compared to the same period in 2010 due to increases in total revenues, offset by a decrease in our overall gross profit margin. Our gross profit margin by business line was as follows:
Basis | ||||||||||||
Three Months Ended March 31, | Point Change* | |||||||||||
2011 | 2010 | |||||||||||
New vehicle |
7.5 | % | 8.5 | % | (100 | ) bp | ||||||
Used vehicle retail |
14.7 | 13.7 | 100 | |||||||||
Used vehicle wholesale |
1.4 | 1.6 | (20 | ) | ||||||||
Finance and insurance |
100.0 | 100.0 | 0 | |||||||||
Service, body and parts |
48.5 | 48.8 | (30 | ) | ||||||||
Overall |
17.4 | % | 18.7 | % | (130 | ) |
* | One basis point is equal to 1/100th of one percent. |
Our overall gross profit margin decreased primarily due to a mix shift as we sold a greater number of new vehicles, which have lower margins than our other businesses. New vehicle margins were negatively impacted during the first quarter of 2011 by changes in manufacturer incentive programs, which resulted in higher cost of sales. Offsetting this effect was an increase in used vehicle retail sales gross profit margins, which resulted from the increased sales of lower-price, higher-margin older vehicles. We believe our single-point strategy of maintaining franchise exclusivity within the market we serve protects profitability and allows us to minimize impacts and strive to maintain margin levels.
20
Asset Impairment Charges
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. An estimate of future undiscounted net cash flows associated with the long-lived assets is used to determine if the carrying value of the assets is recoverable. An impairment charge is recorded for the amount the carrying value of the asset exceeds its fair value.
Asset impairments recorded as a component of continuing operations consisted of the following (in thousands):
Three Months Ended March 31, |
||||||||
2011 | 2010 | |||||||
Long-lived assets |
$ | 382 | $ | 1,491 |
In the first quarter of 2011, we recorded an impairment charge associated with one of our operating locations. As the expected future use of this facility had changed, the long-lived assets were tested for recoverability. As a result, we determined the carrying value exceeded the fair value of the property and an asset impairment charge of $0.4 million was recorded.
In the first quarter of 2010, due to changes in specific facts and circumstances on three properties held for future development, we tested these long-lived assets for recoverability and determined the carrying values exceeded the fair values of the properties. As a result, an asset impairment charge of $1.5 million was recorded.
As additional market information becomes available and negotiations with prospective buyers continue, estimated fair market values of our properties may change. These changes may result in the recognition of additional asset impairment charges in future periods.
Selling, General and Administrative Expense
Selling, general and administrative expense (SG&A) includes salaries and related personnel expenses, advertising (net of manufacturer cooperative advertising credits), rent, facility costs, and other general corporate expenses.
Three Months
Ended March 31, |
Increase | % Increase |
||||||||||||||
(Dollars in thousands) | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Personnel |
$ | 50,891 | $ | 43,781 | $ | 7,110 | 16.2 | % | ||||||||
Advertising |
5,897 | 5,841 | 56 | 1.0 | ||||||||||||
Rent |
3,573 | 3,899 | (326 | ) | (8.4 | ) | ||||||||||
Facility costs |
6,821 | 6,175 | 646 | 10.5 | ||||||||||||
Other |
12,559 | 11,343 | 1,216 | 10.7 | ||||||||||||
Total SG&A |
$ | 79,741 | $ | 71,039 | $ | 8,702 | 12.2 | % | ||||||||
SG&A expense increased $8.7 million in the three months ended March 31, 2011 compared to the same period in 2010, primarily due to increased sales volumes resulting in increased variable costs, offset by a continued focus to reduce or maintain fixed costs. Reflecting the leverage gained in our cost structure as volumes grow, SG&A as a percentage of gross profit was 76.0% compared to 82.7%, respectively, for the three months ended March 31, 2011 and 2010.
We also measure the leverage of our cost structure by evaluating throughput, which is calculated as the incremental percentage of gross profit retained after subtracting SG&A expense. For the three months ended March 31, 2011 and 2010, our incremental throughput was 54.3% and 64.0%, respectively.
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As sales volume increases and we gain leverage in our cost structure, we anticipate achieving metrics of SG&A as a percentage of gross profit in the low 70% range and incremental throughput between 50% and 55%.
Depreciation and Amortization
Depreciation is comprised of depreciation expense related to buildings, significant remodels or betterments, furniture, tools, equipment and signage and amortization of certain intangible assets, including customer lists and non-compete agreements.
Three Months Ended March 31, |
% | |||||||||||||||
(Dollars in thousands) | 2011 | 2010 | Decrease | Decrease | ||||||||||||
Depreciation and amortization |
$ | 4,193 | $ | 4,749 | $ | (556 | ) | (11.7 | )% |
Depreciation and amortization decreased $0.6 million in the three-month period ended March 31, 2011 compared to the same period of 2010 due primarily to the sale of vacant facilities in the last half of 2010 and first quarter of 2011.
Operating Income
Operating income in the three-month period ended March 31, 2011 was 3.4% of revenue compared to 1.9% in the comparable period of 2010. This improvement was primarily due to improved sales and continued cost control.
Floorplan Interest Expense and Floorplan Assistance
Floorplan interest expense decreased $0.2 million in the three-month period ended March 31, 2011 compared to the same period of 2010. An increase of $0.3 million resulted from changes in the average outstanding balances of our floorplan facilities. Changes in the average interest rates on our floorplan facilities decreased the expense $0.3 million and changes related to our interest rate swaps resulted in a decrease of $0.2 million.
Floorplan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floorplan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, as manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floorplan interest expense to floorplan assistance may be used to evaluate the efficiency of our new vehicle sales relative to stocking levels. The following tables detail the carrying costs for new vehicles and include new and program vehicle floorplan interest net of floorplan assistance earned.
Three Months
Ended March 31, |
Increase | % Increase |
||||||||||||||
(Dollars in thousands) | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Floorplan interest expense (new vehicles) |
$ | 2,563 | $ | 2,751 | $ | (188 | ) | (6.8 | )% | |||||||
Floorplan assistance (included as an offset to cost of sales) |
(2,920 | ) | (2,127 | ) | 793 | 37.3 | ||||||||||
Net new vehicle carrying costs |
$ | (357 | ) | $ | 624 | $ | (981 | ) | (157.2 | )% | ||||||
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Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages and our working capital, acquisition and used vehicle credit facility.
Three Months Ended March 31, |
Increase | % Increase |
||||||||||||||
(Dollars in thousands) | 2011 | 2010 | (Decrease) | (Decrease) | ||||||||||||
Mortgage interest |
$ | 2,925 | $ | 3,432 | $ | (507 | ) | (14.8 | )% | |||||||
Other interest |
395 | 156 | 239 | 153.2 | ||||||||||||
Capitalized interest |
(16 | ) | | 16 | | |||||||||||
Total other interest expense |
$ | 3,304 | $ | 3,588 | $ | (284 | ) | (7.9 | )% | |||||||
For the three months ended March 31, 2011, other interest expense decreased $0.3 million, primarily due to a decrease in outstanding real estate mortgages offset by an increase in interest on our working capital, acquisition and used vehicle credit facility due to a higher volume of borrowing compared to the same period in 2010.
Income Tax Expense
Our effective income tax rate was 41.3% for the three-month period ended March 31, 2011, compared to 38.7% in the comparable period of 2010. This increase in the effective income tax rate was related to a tax shortfall associated with our stock-based compensation. A tax shortfall occurs when the tax benefit recorded for stock-based compensation expense determined at the time of issuance is larger than the actual benefit received upon exercise of the option. Additional tax expense of $0.2 million was recorded related to the tax shortfall for the three-month period ended March 31, 2011. For the full year 2011, we anticipate our income tax rate to be approximately 40.3%.
Pro Forma Reconciliations
We believe each of the non-GAAP financial measures below improves the transparency of our disclosures, provides a meaningful presentation of our results from the core business operations excluding adjustments for items not related to our ongoing core business operations or other non-cash adjustments, and improves the period-to-period comparability of our results from the core business operations. These presentations are not intended to provide selling, general and administrative expense, income from operations, income from continuing operations before income taxes, income from continuing operations or diluted income per share from continuing operations in accordance with GAAP and should not be considered an alternative to GAAP measures.
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The following table reconciles certain reported GAAP amounts per the Consolidated Statements of Operations to the comparable non-GAAP amounts (dollars in thousands, except per share amounts):
Three Months
Ended March 31, |
||||||||
2011 | 2010 | |||||||
Selling, general and administrative expense |
||||||||
As reported |
$ | 79,741 | $ | 71,039 | ||||
Impairments and disposal gain |
| 367 | ||||||
Reserve adjustments |
| (258 | ) | |||||
Adjusted |
$ | 79,741 | $ | 71,148 | ||||
SG&A as a % of gross profit |
||||||||
As reported |
76.0 | % | 82.7 | % | ||||
Adjusted |
76.0 | 82.8 | ||||||
Income from operations |
||||||||
As reported |
$ | 20,618 | $ | 8,626 | ||||
Impairments and disposal gain |
382 | 1,190 | ||||||
Reserve adjustments |
| 258 | ||||||
Adjusted |
$ | 21,000 | $ | 10,074 | ||||
Operating profit |
||||||||
As reported |
3.4 | % | 1.9 | % | ||||
Adjusted |
3.5 | 2.2 | ||||||
Income from continuing operations before income taxes |
||||||||
As reported |
$ | 14,828 | $ | 2,355 | ||||
Impairments and disposal gain |
382 | 1,190 | ||||||
Reserve adjustments |
| 258 | ||||||
Adjusted |
$ | 15,210 | $ | 3,803 | ||||
Pre-tax margin |
||||||||
As reported |
2.5 | % | 0.5 | % | ||||
Adjusted |
2.5 | 0.8 | ||||||
Income from continuing operations |
||||||||
As reported |
$ | 8,705 | $ | 1,443 | ||||
Impairments and disposal gain |
229 | 732 | ||||||
Reserve adjustments |
| 164 | ||||||
Stock-based compensation tax shortfall |
186 | | ||||||
Adjusted |
$ | 9,120 | $ | 2,339 | ||||
Diluted income per share from continuing operations |
||||||||
As reported |
$ | 0.33 | $ | 0.06 | ||||
Impairments and disposal gain |
0.01 | 0.03 | ||||||
Reserve adjustments |
| | ||||||
Stock-based compensation tax shortfall |
| | ||||||
Adjusted |
$ | 0.34 | $ | 0.09 | ||||
Liquidity and Capital Resources
We manage our liquidity and capital resources to be able to fund future capital expenditures, working capital requirements and contractual obligations. Additionally, we use capital resources to fund cash dividend payments, share repurchases and acquisitions.
Available Sources
We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements, financing of real estate and the proceeds from equity and debt offerings to finance operations and expansion. Based on these factors and our normal operational cash flow, we believe we have sufficient availability to accommodate both our short- and long-term capital needs.
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Below is a summary and discussion of our available funds:
As of March 31, |
As of December 31, |
Increase | Increase | |||||||||||||
2011 | 2010 | (Decrease) | (Decrease) | |||||||||||||
Cash and cash equivalents |
$ | 13,118 | $ | 9,306 | $ | 3,812 | 41.0 | % | ||||||||
Available credit on the Credit Facility |
37,549 | 23,332 | 14,217 | 60.9 | ||||||||||||
Unfinanced new vehicles |
52,228 | 65,601 | (13,373 | ) | (20.4 | ) | ||||||||||
Total available funds |
$ | 102,895 | $ | 98,239 | $ | 4,656 | 4.7 | % | ||||||||
Historically, we have raised capital through the sale of assets, sale of stores, issuance of stock and the issuance of debt. We may strategically use excess cash to reduce the amount of debt outstanding when appropriate. During the three months ended March 31, 2011, we used proceeds from the sale of assets to repay outstanding debt, resulting in a net cash usage of $8.8 million. During the three months ended March 31, 2010, we generated $14.0 million through the sale of assets and stores and the issuance of long-term debt, net of debt repayment.
In addition to the above sources of liquidity, potential sources include the placement of subordinated debentures or loans, additional store sales or additional other asset sales. We will evaluate all of these options and may select one or more of them depending on overall capital needs and the availability and cost of capital, although no assurances can be provided that these capital sources will be available in sufficient amounts or with terms acceptable to us.
Summary of Outstanding Balances on Credit Facilities and Long-Term Debt
Below is a summary of our outstanding balances on credit facilities and long-term debt:
Outstanding as of March 31, 2011 |
Remaining Available as of March 31, 2011 |
|||||||
New and program floorplan notes payable |
$ | 300,166 | $ | | (1)(2) | |||
Credit facility |
31,000 | 37,549 | (3)(4) | |||||
Real estate mortgages |
220,856 | | ||||||
Other debt |
8,245 | | ||||||
Total debt |
$ | 560,267 | $ | 37,549 | ||||
(1) | Certain new and program floorplan lines have maximum availability limits. Depending on the provider, these limits are applied in the aggregate, individually or on a unit basis. |
(2) | We had approximately $52.2 million in unfloored new vehicles at March 31, 2011. |
(3) | Reduced by $2.2 million for outstanding letters of credit. |
(4) | The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly. |
New and Program Vehicle Floorplan Lines
Ally Bank, Mercedes-Benz Financial Services USA, LLC, Toyota Financial Services, Ford Motor Credit Company, VW Credit, Inc., American Honda Finance Corporation, Nissan Motor Acceptance Corporation and BMW Financial Services NA, LLC provide new vehicle floorplan financing for their respective brands. Ally Bank serves as the primary lenders for all other brands. The new and program vehicle lines are secured by new and program vehicle inventory of the stores financed by that lender. The weighted average interest rate associated with our new and program vehicle lines, excluding the effects of our interest rate swaps, was 3.2% at March 31, 2011.
Vehicles financed by lenders not directly associated with the manufacturer are classified as floorplan notes payable: non-trade and are included as a financing activity in our Consolidated Statements of Cash Flows. Vehicles financed by lenders directly associated with the manufacturer are classified as floorplan notes payable and are included as an operating activity in our Consolidated Statements of Cash Flows.
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To improve the visibility of cash flows related to vehicle financing, which is a core part of our business, the non-GAAP financial measures below demonstrate cash flows assuming all floorplan notes payable are included as an operating activity. We believe that this non-GAAP financial measure improves the transparency of our disclosure by considering all cash flows to finance our inventory.
For the three months ended March 31, | ||||||||
(In thousands) | 2011 | 2010 | ||||||
Cash flow from (used in) operations |
||||||||
As Reported |
$ | (11,240 | ) | $ | (10,409 | ) | ||
Change in floorplan notes payable: non-trade |
39,262 | 20,615 | ||||||
Adjusted |
$ | 28,022 | $ | 10,206 | ||||
Cash flow from (used in) financing |
||||||||
As Reported |
$ | 15,313 | $ | 7,278 | ||||
Change in floorplan notes payable: non-trade |
(39,262 | ) | (20,615 | ) | ||||
Adjusted |
$ | (23,949 | ) | $ | (13,337 | ) | ||
Working Capital, Acquisition and Used Vehicle Credit Facility
We have a $75 million Credit Facility with U.S. Bank National Association, which expires June 30, 2013. As of March 31, 2011, approximately $37.5 million was available on the Credit Facility. We believe the Credit Facility continues to be an attractive source of financing given the current cost and availability of credit alternatives. The interest rate on the Credit Facility is the one-month LIBOR plus 2.35%, which totaled 2.59% at March 31, 2011.
Real Estate Mortgages and Other Debt
We have mortgages associated with our owned real estate and leasehold improvements. Interest rates related to this debt ranged from 2.06% to 7.55% at March 31, 2011. The mortgages are payable in various installments through October 2029 with no significant maturities until 2013.
Our other debt includes various notes, capital leases and obligations assumed as a result of acquisitions and other agreements and have interest rates that ranged from 3.5% to 10.0% at March 31, 2011.
Debt Covenants
We are subject to certain financial and restrictive covenants for all of our debt agreements. The covenants restrict us from incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.
Debt Covenant Ratio |
Requirement |
As of March 31, 2011 | ||
Minimum tangible net worth |
Not less than $200 million | $275.7 million | ||
Vehicle equity |
Not less than $65 million | $185.7 million | ||
Fixed charge coverage ratio |
Not less than 1.20 to 1 | 1.83 to 1 | ||
Liabilities to tangible net worth ratio |
Not more than 4.00 to 1 | 2.51 to 1 |
Accordingly, we were in compliance with the financial covenants in our Credit Facility and other debt agreements as of March 31, 2011.
We expect to remain in compliance with the financial and restrictive covenants in our Credit Facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.
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In the event that we are unable to meet the financial and restrictive covenants, we would enter into a discussion with the lender to remediate the condition. If we were unable to remediate or cure the condition, a breach would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed, including the triggering of cross-default provisions to other debt agreements.
Inventories
We calculate days supply based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. As of March 31, 2011, our new vehicle days supply was 61 days, or eight days lower than our days supply level as of March 31, 2010. This decrease compared to 2010 was a result of increased new vehicle sales levels. Our days supply of used vehicles was 47 days as of March 31, 2011. This is the same level as March 31, 2010. We have continued to focus on managing and maintaining an appropriate level of used vehicle inventory.
Capital Expenditures
Capital expenditures were $2.3 million and $0.8 million for the three months ended March 31, 2011 and 2010, respectively. The increase in capital expenditures in the first quarter of 2011 compared to the same period of 2010 was related to improvements at certain of our store facilities, replacement of equipment and construction of a new headquarters building.
We anticipate approximately $28.0 million in capital expenditures for all of 2011. Of those amount $26.0 million is associated with improvements to certain store facilities, replacement of equipment and construction of a new headquarters building. The remaining anticipated amount of $2.0 million is for the remodel of facilities acquired from the Don Rasmussen Group in April 2011.
Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. Accordingly, we believe it is an attractive time to invest in certain facility upgrades and remodels that will generate additional manufacturer incentive payments. Also, recently enacted tax law changes that accelerate deductions for capital expenditures have accelerated project timelines to ensure completion before the law expires.
In the event we undertake a significant capital commitment in the future, we expect to pay for the construction out of existing cash balances, construction financing and borrowings on our Credit Facility. Upon completion of the projects, we would anticipate securing long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended, although no assurances can be provided that these financings will be available to us in sufficient amounts or on terms acceptable to us.
Dividends
Our Board of Directors approved a dividend of $0.07 per share on our Class A and Class B common stock related to our first quarter 2011 financial results. The dividend will total approximately $1.8 million and will be paid on May 25, 2011 to shareholders of record on May 11, 2011.
Share Repurchase Program
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. Through March 31, 2011, we have purchased a total of 583,224 shares under this program, 2,600 of which were purchased during 2011 at an average price of $13.52 per share. At March 31, 2011, 416,776 shares remained available for purchase pursuant to this program. We may continue to purchase shares from time to time in the future as conditions warrant.
Critical Accounting Policies and Use of Estimates
Beginning in March 2011, we offer a deferred compensation plan (the Plan) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. Participants are allowed to defer a portion of their compensation and are 100% vested in their respective deferrals
27
and earnings. We may also make discretionary contributions the Plan. The vesting terms of the discretionary contribution are determined at the time of contribution. Participants receive a guaranteed return on vested deferrals and earnings. We retain discretion to set the guaranteed rate each year. We also have existing deferred compensation plans for our Board of Directors and selected executives.
In March 2011, we made a discretionary contribution of $1.3 million. The vesting term ranges between one and seven years, based on the employees position. Participants will receive a guaranteed return of 6% in 2011. As of March 31, 2011, the balance due to participants was $388,000 and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.
With the addition of the above, we reaffirm our critical accounting policies and use of estimates as described in our 2010 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 7, 2011.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our reported market risks or risk management policies since the filing of our 2010 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 7, 2011.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
Adverse conditions resulting from the natural disaster in Japan may negatively impact our business, results of operations, financial condition and cash flows.
In March 2011, an earthquake, tsunami and subsequent nuclear crisis in Japan impacted automotive manufacturers and automotive suppliers. These events damaged facilities, reduced production of vehicles and parts and destroyed inventory in Japan. Many Japanese manufacturers and suppliers were forced to halt production as they reconfigured production logistics. Many plants in Japan continue to be inoperable and certain plants, which have restarted operations, are running at limited capacity. These events caused a global disruption to the supply of vehicles and automotive parts.
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We depend on our manufacturers to provide a supply of vehicles which supports expected sales levels. In the event that manufacturers are unable to supply the needed level of vehicles, our financial performance may be adversely impacted. We expect new vehicle supply to be constrained in the second and third quarters of 2011, although the impact of this constraint remains unknown. As of March 31, 2011, and December 31, 2010 we had $338.2 million and $305.7 million, respectively, in a new vehicle inventory. We had $22.3 million and $22.2 million in parts and accessories inventory as of March 31, 2011 and December 31, 2010, respectively.
A lack of new vehicle supply may increase demand for late model used vehicles. In 2009 and 2010, production and sales in North America were reduced by the recessionary environment. As a result, used vehicle supply may be constrained resulting in increased supply pressures and limited availability. Our used vehicle sales volume could be adversely impacted if we are unable to maintain a supply of vehicles or if we are unable to obtain makes and models desired by our customers. As of March 31, 2011, and December 31, 2011, we had $96.4 million and $87.3 million, respectively, in used and program vehicle inventory.
With the addition of the above, there have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010. Accordingly, the information in this Form 10-Q should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 7, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We repurchased the following shares of our Class A common stock during the first quarter of 2011:
Total number of shares purchased |
Average price paid per share |
Total number of shares purchased as part of publicly announced plan |
Maximum number of shares that may yet be purchased under the plan |
|||||||||||||
January 1 to January 31 |
| $ | | 580,624 | 419,376 | |||||||||||
February 1 to February 28 |
| | 580,624 | 419,376 | ||||||||||||
March 1 to March 31 |
2,600 | 13.52 | 583,224 | 416,776 | ||||||||||||
Total |
2,600 | 13.52 | 583,224 | 416,776 | ||||||||||||
The plan to repurchase up to a total of 1.0 million shares of our Class A common stock was approved by our Board of Directors in June 2000 and renewed in August 2005 and does not have an expiration date.
The following exhibits are filed herewith and this list is intended to constitute the exhibit index:
3.1 | Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (filed as Exhibit 3.1 to Form 10-K filed March 30, 2000 and incorporated herein by reference). | |
3.2 | Amended and Restated Bylaws of Lithia Motors, Inc. - Corrected (filed as Exhibit 3.2 to Form 10-K filed March 16, 2009 and incorporated herein by reference). | |
10.1 | Lithia Motors, Inc. Amended and Restated 2003 Stock Incentive Plan. | |
31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. | |
31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934. | |
32.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. | |
32.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
29
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 29, 2011 | LITHIA MOTORS, INC. | |||||
By: | /s/ Christopher S. Holzshu | |||||
Christopher S. Holzshu | ||||||
Senior Vice President and | ||||||
Chief Financial Officer | ||||||
(Principal Financial Officer) | ||||||
By: | /s/ John F. North III | |||||
John F. North III | ||||||
Vice President and | ||||||
Corporate Controller | ||||||
(Principal Accounting Officer) |
30
Exhibit 10.1
LITHIA MOTORS, INC.
AMENDED AND RESTATED
2003 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSE OF THE PLAN
The purposes of this Stock Incentive Plan (the Plan) are to attract, retain and provide incentive compensation to employees, non-employee directors and others who contribute to the long-term financial success of LITHIA MOTORS, INC., an Oregon corporation (the Company) and to more closely align their interests with those of the Company and its shareholders. This Plan amends and restates in its entirety the 2003 Stock Incentive Plan.
ARTICLE II
DEFINITIONS
As used herein, the following definitions will apply:
(a) | Acquired Company means any corporation or other entity that becomes a majority owned subsidiary of the Company, after the Effective Date, by merger, consolidation, acquisition of all or substantially all of its assets or otherwise. |
(b) | Authorized Shares means the number of shares of Common Stock authorized for issuance pursuant to Section 3.1 of this Plan. |
(c) | Available Shares means the number of shares of Common Stock available under this Plan at any time for future issuance under Stock Options, Stock-Settled SARs, Performance Share Awards, Restricted Share Awards or Restricted Stock Unit Awards, as provided in Section 3.2 of this Plan. |
(d) | Award means any agreement to issue a Stock Option, a Stock-Settled SAR, or to make a Performance Share Award, a Restricted Share Award or a Restricted Stock Unit Award pursuant to this Plan. An Award shall, for all purposes, be deemed to have been made on the later of (i) the date when the Company completes all necessary corporate action necessary to authorize the Award or such later date as specified in such corporate action or (ii) when the maximum number of shares covered by the Award can be determined (excluding from such determination the effects of any vesting provisions including Performance Goals and excluding provisions adjusting the number of shares pursuant to Section 12.1 of Article XII of this Plan) regardless of the date on which the written agreement evidencing the Award is prepared or executed by the Company or the Recipient. |
(e) | Board of Directors means the Board of Directors of the Company. |
(f) | Code means the Internal Revenue Code of 1986, as amended. |
(g) | Committee means any committee appointed by the Board of Directors in accordance with Article V of this Plan, or, the Board of Directors, if no such committee is then in existence. |
(h) | Common Stock means the common stock of the Company. |
(i) | Company means Lithia Motors, Inc. and, unless the context requires otherwise, any successor or assignee of the Company by merger, consolidation, acquisition of all or substantially all of the assets of the Company or otherwise. As used in connection with either the term Employee or Service, it includes Subsidiaries of the Company. |
(j) | Corporate Transaction means (i) the adoption of a plan of dissolution or liquidation with respect to the Company, (ii) the consummation of any plan of exchange, merger or consolidation with one or more corporations in which the Company is not the surviving entity (other than a merger of the Company into a wholly-owned subsidiary of the Company or a reincorporation of the Company in a different jurisdiction), or in which the security holders of the Company prior to such transaction do not receive in the transaction securities with voting rights with respect to the election of directors equal to 50% or more of the votes of all classes of securities of the surviving corporation or (iii) the |
1
consummation of a sale of all of substantially all of the assets of the Company following a shareholder vote on such sale. Notwithstanding the foregoing to the contrary, for purposes of Restricted Stock Unit Awards, a Corporate Transaction for Restricted Stock Unit Award purposes also must be a change in the ownership, (ii) a change in the effective control, or (ii) a change in the ownership of a substantial portion of the assets (as those terms are defined in Section Treas. Reg. 1.409A-3(i)(5)) of the Company. |
(k) | Disabled means having a mental or physical impairment that has lasted or is expected to last for a continuous period of 12 months or more and, in the Committees sole discretion, renders a Recipient unable to perform the duties that were assigned to the Recipient during the 12 month period prior to such determination. Notwithstanding the foregoing to the contrary, for purposes of Restricted Stock Unit Awards, Disabled shall be determined in accordance with the requirements of Code Section 409A. The Committees determination of the existence of an individuals disability will be effective when communicated in writing to the Recipient and will be conclusive on all of the parties. |
(l) | Employee means any person employed by the Company or a Subsidiary of the Company. |
(m) | Exercise Price means the price per share at which shares of Common Stock may be purchased upon exercise of a Stock Option or a Stock-Settled SAR. |
(n) | Fair Market Value with respect to shares of Common Stock for any date means: |
1) If the Common Stock is traded on a national securities exchange or on either the NASDAQ National Market or NASDAQ SmallCap Market, the Fair Market Value of a share of Common Stock will be the closing price of the Common Stock for such date, or if no transactions occurred on such date, on the last date on which trades occurred;
2) If the Common Stock is not traded on a national securities exchange or on NASDAQ but bid and asked prices are regularly quoted on the OTC Bulletin Board Service, by the National Quotation Bureau or any other comparable service, the Fair Market Value of a share of Common Stock will be the average between the highest bid and lowest asked prices of the Common Stock as reported by such service at the close of trading for such date or, if such date was not a business day, on the preceding business day; or
3) If there is no public trading of the Common Stock within the terms of subparagraphs 1 or 2 of this subsection, the Fair Market Value of a share of Common Stock will be as determined by the Committee in its good faith discretion.
(o) | Option Agreement means the written agreement between the Company and a Recipient that evidences a Stock Option awarded pursuant to this Plan. Each Option Agreement shall be subject to the terms and conditions of this Plan. |
(p) | Outstanding Stock Options means all Stock Options awarded pursuant to this Plan that, at such time, have not yet expired and have not either been terminated or cancelled. |
(q) | Performance Goals means any of the following performance criteria or combination of the following performance criteria applied either to the Company as a whole, as to any Subsidiary or as to any business unit of the Company or any Subsidiary and measured on an actual or as adjusted basis applied on a quarterly, annual or cumulative basis or relative to pre-established targets, previous period results or a designated comparison group, in each case as specified by the Committee in the agreement evidencing an Award: (i) net revenue, (ii) net margin, (iii) operating income, (iv) operating cash flow, (v) earnings before interest, taxes, depreciation and amortization, (vi) earnings before interest and taxes, (vii) net income before income taxes, (viii) net income, (ix) new product introduction, (x) product release schedules, (xi) market segment share, (xii) product cost reduction, (xiii) customer satisfaction, (xiv) quality criteria, or (xv) other business objectives. The Committee shall determine whether or the extent to which any Performance Goal is achieved and may appropriately adjust any evaluation of performance to exclude, in whole or in part, any extraordinary non-recurring items, accruals for reorganization or restructuring events, asset write-downs, judgments, settlement amounts and expenses associated with litigation, and the effect of changes in tax law or accounting principles. |
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(r) | Performance Share Award means an Award of shares of Common Stock pursuant to Article IX of this Plan subject to the terms of a Share Vesting Agreement in which vesting is based, either in whole or in part, to the achievement of certain Performance Goals. |
(s) | Recipient means any individual who is awarded a Stock Option, a Stock-Settled SAR, a Performance Share Award, a Restricted Share Award or a Restricted Stock Unit Award pursuant to this Plan. |
(t) | Restricted Share Award means an Award of shares of Common Stock pursuant to Article X of this Plan, regardless of whether the Recipient receives the shares covered by such Award solely for services or for a combination of services and cash payment to the Company, pursuant to a Share Vesting Agreement. |
(u) | Restricted Stock Unit Award means an Award of a right granted to receive Common Stock at the end of a specified deferral period pursuant to Article XI of this Plan, which right may be conditioned on the satisfaction of certain requirements (including the satisfaction of certain performance goals). |
(v) | Securities Act means the Securities Act of 1933, as amended. |
(w) | Service means the continued employment of an Employee, service as director of the Company, service as a director of a Subsidiary of the Company or the regular provision of services to the Company or a Subsidiary of the Company under an independent contractor arrangement. If a recipient ceases to provide Service with the Company or a Subsidiary of the Company in one capacity but continues to provide Service in another capacity or contemporaneously begins to provide Service in another capacity, the recipient shall, for purposes of this Plan, be deemed to have continued in Service without interruption. |
(x) | Share Vesting Agreement means the written agreement between the Company and a Recipient that evidences either a Performance Share Award or a Restricted Share Award made pursuant to this Plan. Each Share Vesting Agreement shall be subject to the terms and conditions of this Plan. |
(y) | Stock-Settled SAR means the right to acquire shares of Common Stock in an amount equal to the difference between the Fair Market Value of a share of Common Stock on the date of exercise and the Exercise Price per share multiplied by the number of shares covered by the right awarded under Article VII of this Plan. |
(z) | Stock-Settled SAR Agreement means the written agreement between the Company and a Recipient that evidences a Stock-Settled SAR pursuant to this Plan. Each Stock-Settled SAR Agreement shall be subject to the terms and conditions of this Plan. |
(aa) | Subsidiary of the Company means any corporation or other entity owned or controlled by the Company in an unbroken chain of corporations or other entities in which each of the corporations or other entities other than last corporation or other entity owns 50 percent or more of the total combined voting power of all classes of equity ownership interests in the other corporations or other entities in such chain. |
(bb) | Stock Option means a Stock Option awarded pursuant to Article VI of this Plan. |
(cc) | Tax Withholding means all amounts determined by the Company to be required to satisfy applicable federal, state and local tax withholding requirements (including but not limited to payroll taxes) upon the exercise of a Stock Option, the disqualifying disposition of shares of Common Stock acquired by exercise of a Stock Option, the vesting of shares under a Performance Share Award or Restricted Share Award or the vesting of a Restricted Share Unit Award, a Recipient making an election under Code Section 83(b) with respect to a Performance Share Award or Restricted Share Award or as otherwise may be required under applicable tax laws. |
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ARTICLE III
STOCK SUBJECT TO THE PLAN
3.1 Aggregate Number of Authorized Shares. Subject to adjustment in accordance with Section 10.1, the total number of shares of Common Stock authorized for issuance under all Awards pursuant to this Plan is established at 2,800,000 shares.
3.2 Number of Available Shares. At any point in time, the number of Available Shares shall be the number of Authorized Shares at such time minus:
(a) | the number of shares of Common Stock issued prior to such time upon the exercise of Stock Options and Stock-Settled SARs that were awarded pursuant to this Plan; and |
(b) | the number of shares covered by outstanding Stock Options and Stock-Settled SARs that were awarded pursuant to this Plan to the extent that such Stock Options and/or Stock-Settled SARs have not been exercised at such time; |
(c) | the number of shares of Common Stock covered by Restricted Stock Unit Awards made pursuant to this Plan prior to such time except to the extent that the Restricted Stock Unit Awards are forfeited prior to being settled in Common Stock; and |
(d) | the number of shares of Common Stock covered by Performance Share Awards and Restricted Share Awards made pursuant to this Plan prior to such time except to the extent that unvested shares have been forfeited and repurchased by the Company pursuant to the terms of a Share Vesting Agreement. |
As a result of the foregoing, if a Stock Option, Stock-Settled SAR or Restricted Stock Unit expires, terminates or is cancelled for any reason without having been exercised and/or settled in full, the shares of Common Stock covered by such Stock Option, Stock-Settled SAR or Restricted Stock Unit that were not acquired through the exercise of such Award will again become Available Shares. Upon the exercise in full of a Stock-Settled SAR, all shares covered by that Award other than the shares actually issued upon such exercise, will again become Available Shares. Similarly, upon the settlement of a vested Restricted Stock Unit Award, all shares covered by that Award other than the shares actually issued in settlement thereof will again become Available Shares. If shares of Common Stock covered by a Performance Share Award or Restricted Share Award are repurchased by the Company pursuant to the terms of a Share Vesting Agreement, those shares will again become Available Shares. If shares of Common Stock covered by an Award are surrendered by a Recipient to satisfy any Tax Withholding obligations, those shares will again become Available Shares.
3.3 Reservation of Shares. Available Shares shall consist of authorized but unissued shares of Common Stock of the Company. By appropriate resolution of the Board of Directors, the Company at all times will reserve for issuance shares of Common Stock equal to the sum of (i) the number of shares covered by Outstanding Stock Options to the extent that such Stock Options have not been exercised at such time and (ii) the number of Available Shares. By action of the Board of Directors, the Company may repurchase issued and outstanding shares for purposes of providing Available Shares under this Plan but the Company is not required to make such repurchases and any such repurchases shall not effect the calculation of the number of Authorized Shares or Available Shares.
3.4 Annual Limit on Number of Shares to Any One Person. No person will be eligible to receive Awards pursuant to this Plan which, in the aggregate, exceed 75,000 shares in any calendar year except in connection with the hiring or commencement of services from such person in which case such limit shall be 100,000 shares during such calendar year. However, the foregoing limitation shall not apply to Awards of Stock Options in substitution for outstanding stock options of an Acquired Company that are cancelled in connection with the acquisition of such Acquired Company. The foregoing limitations shall apply to Restricted Stock Unit Awards, with no person being eligible to receive such awards which, in the aggregate, exceed 75,000 Restricted Stock Units in any calendar year except in connection with the hiring or commencement of services from such person in which case such limit shall be 100,000 Restricted Stock Units during such calendar year.
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ARTICLE IV
COMMENCEMENT AND DURATION OF THE PLAN
4.1 Effective Date of the Plan. This Plan will be effective as of the date on which it was adopted by the Board of Directors. However, the implementation of this Plan shall be subject to the provisions of Section 4.2.
4.2 Shareholder Approval of the Plan. Within twelve (12) months of the date on which this Plan was adopted by the Board of Directors, this Plan will be submitted to the shareholders of the Company for their approval. This Plan will be deemed approved by the shareholders if approved by a majority of the votes cast at a duly held meeting of the Companys shareholders at which a quorum is present in person or by proxy. Awards may be made pursuant to this Plan prior to such shareholder approval provided that such Awards are conditioned upon such approval and state by their terms that they will be null and void if shareholder approval is not obtained.
4.3 Termination of the Plan. This Plan will terminate March 4, 2013. In addition, the Board of Directors will have the right to suspend or terminate this Plan at any time. Termination of the Plan will not terminate or otherwise affect any outstanding Stock Option, Stock-Settled SAR, Performance Share Award, Restricted Share Award, Restricted Stock Unit Award, Option Agreement, Stock-Settled SAR Agreement or Share Vesting Agreement.
ARTICLE V
ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Committee. The Board of Directors shall appoint the members of the Committee, which shall consist of at least two directors from the Board of Directors. The appointment to the Committee of one or more directors who are not outside directors as such term is defined in Treasury Regulation §1.162-27(e)(3), one or more directors who are not non-employee directors as such term is defined in Rule 16b-3 issued by the Securities and Exchange Commission under Section 16 of the Securities Exchange Act of 1934, as amended, (Rule 16b-3) or one or more directors that fail to meet the requirements for service on a compensation committee as set forth in the listing standards of the exchange or market on which the Common Stock primarily trades shall not invalidate any of the actions of the Committee. Any member of the Committee that is not an outside director, as such term is defined, is referred to in this paragraph as an Abstaining Director with respect to any action by the Committee, for which Code Section 162(m) requires the approval of a committee consisting solely of outside directors. Any member of the Committee that is not a non-employee director, as such term is defined, is referred to in this paragraph as an Abstaining Director with respect to any action by the Committee for which Rule 16b-3 requires the approval of a committee consisting solely of non-employee directors. Any member of the Committee that fails to meet the requirements of the listing standards of the exchange or market on which the Common Stock primarily trades is referred to in this paragraph as an Abstaining Director with respect to any action by the Committee that requires the approval of a committee consisting solely of directors meeting those requirements. An Abstaining Director shall be deemed to have abstained from such action (notwithstanding any statement to the contrary which may be contained in minutes of a meeting of the Committee) and the assent of any such director shall be ignored for purposes of determining whether or not any such actions were approved by the Committee. If the Committee proposes to take an action by unanimous consent in lieu of a meeting, an Abstaining Director shall be deemed to not be a member of the Committee for the purpose of such consent with respect to any actions for which such member is deemed to be an Abstaining Director. A majority of the members of the Committee may determine its actions and fix the time and place of its meetings.
If no Committee is appointed, the Board of Directors will have all the powers, duties and responsibilities of the Committee as set forth in this Plan. In addition, the Board of Directors may abolish a Committee and assume the duties and responsibilities of the Committee at any time by resolution duly adopted by the Board of Directors.
The Committee shall have full power and authority, subject to such orders or resolutions not inconsistent with the provisions of the Plan as may from time to time be adopted by the Board, to (a) select the Employees of the Company to whom Awards may from time to time be granted hereunder; (b) determine the type or types of Award to be granted to each Recipient hereunder; (c) determine the number of Common Stock to be covered by or relating to each Award granted hereunder; (d) determine the terms and conditions, not inconsistent with the provisions of the Plan, of any Award granted hereunder; (e) determine whether, to what extent and under what circumstances Awards may be settled in cash, Shares or other property or canceled or suspended, consistent with the terms of the Plan; (f) determine whether, to what extent, and under what circumstances payment of cash, Shares, other property and other amounts payable with respect to an Award made under the Plan shall be deferred either automatically or at the
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election of the Participant, consistent with the terms of the Plan; (g) interpret and administer the Plan and any instrument or agreement entered into under the Plan; (h) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan; and (i) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. The Committee may, in its sole and absolute discretion, and subject to the provisions of the Plan, from time to time delegate any or all of its authority to administer the Plan to any other persons or committee as it deems necessary or appropriate for the proper administration of the Plan, except that no such delegation shall be made in the case of Awards intended to be qualified under Code Section 162(m). The decisions of the Committee shall be final, conclusive and binding with respect to the interpretation and administration of the Plan and any grant made under it. The Committee shall make, in its sole discretion, all determinations arising in the administration, construction or interpretation of the Plan and Awards under the Plan, including the right to construe disputed or doubtful Plan or Award terms and provisions, and any such determination shall be conclusive and binding on all persons, except as otherwise provided by law.
Except as may disqualify the applicability of Code Section 162(m), the Committee shall be authorized to make adjustments in Performance Goals criteria or in the terms and conditions of other Awards in recognition of unusual or nonrecurring events affecting the Company or its financial statements or changes in applicable laws, regulations or accounting principles. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event that the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of or combination with another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate.
ARTICLE VI
STOCK OPTION TERMS AND CONDITIONS
Stock Options may be awarded pursuant to this Plan in accordance with the following terms and conditions.
6.1 Requirement for a Written Option Agreement. Each Stock Option will be evidenced by a written Option Agreement. The Committee, from time to time, will determine the form of Option Agreement to be used for purposes of evidencing Stock Options awarded pursuant to this Plan. Except as provided in Section 12.2 of Article XII, the terms of the Option Agreement evidencing a Stock Option must be consistent with this Plan, including but not limited to this Article VI. Any inconsistencies between any Option Agreement and this Plan will be resolved in accordance with the terms and conditions specified in this Plan. Except as expressly required by this Article VI, the terms and conditions of each Stock Option do not need to be identical.
6.2 Who may be Awarded a Stock Option. A Stock Option may be awarded to any Employee, any director of the Company or of any Subsidiary and any other individual who, in the judgment of the Committee, has performed or will perform, in whatever capacity, services important to the management, operation and development of the business of the Company or an of its Subsidiaries. The Committee, in its sole discretion, shall determine when and to whom Stock Options are awarded pursuant to this Plan. In addition, substitute Stock Options may be awarded pursuant to Section 12.2 of Article XII to persons who were employees, directors, or independent contractors or former employees, directors or independent contractors of an Acquired Company.
6.3 Number of Shares Covered by a Stock Option. The Committee, in its sole discretion, shall determine the number of shares of Common Stock covered by each Stock Option awarded pursuant to this Plan. The number of shares covered by each Stock Option shall be specified in the Option Agreement.
6.4 Vesting Under a Stock Option. The Committee, in its sole discretion, shall determine whether a Stock Option is immediately exercisable as to all of the shares of Common Stock covered by such option or whether it is exercisable only in accordance with a time-based vesting schedule, Performance Goals or a combination of the foregoing, all as determined by the Committee. Any such vesting terms and conditions shall be specified in the Option Agreement. Notwithstanding any term to the contrary in any Option Agreement, a Stock Option that is awarded to a person who, at the time of the Award, was an executive officer of the Company will not become exercisable until after six (6) months from the date of such Award unless the Award was approved either by (i) a committee of non-employee directors within the requirements of Rule 16b-3 or (ii) the full Board of Directors.
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6.5 Exercise Price of a Stock Option. The Exercise Price for each Stock Option will be at least 100% of the Fair Market Value of a share of Common Stock as of the date on which the Stock Option was awarded. However, if it is subsequently determined that the Exercise Price as stated in the Option Agreement evidencing a Stock Option is less than 100% of the Fair Market Value of a share of Common Stock as of the date on which an option was awarded, such fact will not invalidate the Stock Option.
6.6 Duration of a Stock OptionGenerally. The Committee, in its sole discretion, will determine the term of each Stock Option provided that such term will not exceed 10 years from the date on which such option was awarded. The term of each Stock Option shall be set forth in the Option Agreement. The Recipient shall have no further right to exercise a Stock Option following the expiration of such term.
6.7 The Effect of Termination of the Recipients Service with the Company on the Term of a Stock Option. If a Recipients Service with the Company terminates for any reason other than as a result of the Recipient dying or becoming Disabled (as provided for in Section 6.9 and Section 6.10, respectively), all Stock Options that have been awarded to such Recipient shall terminate to the extent that they are not exercised within 30 days following the date the Recipient ceased to be in Service with the Company, unless provided otherwise in the Option Agreement. The foregoing provision will not extend the time within which a Stock Option may be exercised beyond the expiration of the term of such option and no additional vesting shall occur after the date the Recipients Service with the Company terminated.
6.8 The Effect of a Leave of Absence on a Stock Option. Unless otherwise provided in the Option Agreement evidencing a Stock Option, a Recipients Service shall not be deemed to have terminated if the Recipient is on sick leave, family leave, military leave or any other leave of absence that is approved by the Committee. The Committee, in its sole discretion, may determine whether a Stock Option shall continue to vest during any sick leave, family leave, military leave or other approved leave of absence.
6.9 The Effect of the Death of a Recipient on the Term of a Stock Option. If a Recipients Service with the Company terminates as a result of the Recipients death, all Stock Options that have been awarded to such Recipient will terminate to the extent that they are not previously exercised within 12 months following the date of the Recipients death. The foregoing provision will not extend the time within which a Stock Option may be exercised beyond the expiration of the term of such option and no additional vesting shall occur after the date the Recipients death.
6.10 The Effect of the Disability of a Recipient on the Term of a Stock Option. If a Recipients Service with the Company terminates as a result of the Recipient becoming Disabled, all Stock Options that have been awarded to such Recipient shall terminate to the extent that they are not exercised within 12 months following the date of the Recipient becoming Disabled. The foregoing provision will not extend the time within which a Stock Option may be exercised beyond the expiration of the term of such option and no additional vesting shall occur after the date the Recipient became Disabled.
6.11 Options Intended Not to Qualify as Incentive Stock Options. Stock Options issued pursuant to this Plan are not intended to qualify as incentive stock options within the meaning of Code Section 422 .
ARTICLE VII
STOCK-SETTLED SARS TERMS AND CONDITIONS
Stock-Settled SARS may be awarded pursuant to this Plan in accordance with the following terms and conditions.
7.1 Requirement for a Written Stock-Settled SAR Agreement. Each Stock-Settled SAR will be evidenced by a written Stock-Settled SAR Agreement. The Committee, from time to time, will determine the form of Stock-Settled SAR Agreement to be used for purposes of evidencing Stock-Settled SARs awarded pursuant to this Plan. Except as provided in Section 12.2 of Article XII, the terms of the Stock-Settled SAR Agreement must be consistent with this Plan, including but not limited to this Article VII. Any inconsistencies between any Stock-Settled SAR Agreement and this Plan will be resolved in accordance with the terms and conditions specified in this Plan. Except as expressly required by this Article VII, the terms and conditions of each Stock-Settled SAR do not need to be identical.
7.2 Who may be Awarded a Stock-Settled SAR. A Stock-Settled SAR may be awarded to any Employee, any director of the Company or of a Subsidiary and any other individual who, in the judgment of the Committee, has performed or will perform, in whatever capacity, services important to the management, operation and development of the business of the Company or any of Subsidiaries. The Committee, in its sole discretion, shall determine when and to whom Stock-Settled SARs are awarded pursuant to this Plan. In addition, substitute Stock Settled SARs may be awarded pursuant to Section 12.2 of Article XII to persons who were employees, directors, or independent contractors or former employees, directors or independent contractors of an Acquired Company.
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7.3 Number of Shares Covered by a Stock-Settled SAR. The Committee, in its sole discretion, shall determine the number of shares of Common Stock covered by each Stock-Settled SAR awarded pursuant to this Plan. The number of shares covered by each Stock-Settled SAR shall be specified in the Stock-Settled SAR Agreement.
7.4 Vesting Under a Stock-Settled SAR. The Committee, in its sole discretion, shall determine whether a Stock-Settled SAR is immediately exercisable as to all of the shares of Common Stock covered by the Stock-Settled SAR or whether it is exercisable only in accordance with a time-based vesting schedule, Performance Goals or a combination of the foregoing, all as determined by the Committee. Any such vesting terms and conditions shall be specified in the Stock-Settled SAR Agreement. Notwithstanding any term to the contrary in any Stock-Settled SAR Agreement, a Stock-Settled SAR that is awarded to a person who, at the time of the Award, was an executive officer of the Company will not become exercisable until after six (6) months from the date of such Award unless the Award was approved either by (i) a committee of non-employee directors within the requirements of Rule 16b-3 or (ii) the full Board of Directors.
7.5 Exercise Price of a Stock-Settled SAR. The Exercise Price for each Stock-Settled SAR will be at least 100% of the Fair Market Value of a share of Common Stock as of the date on which the Stock-Settled SAR was awarded. However, if it is subsequently determined that the Exercise Price as stated in the Stock-Settled SAR Agreement evidencing a Stock-Settled SAR is less than 100% of the Fair Market Value of a share of Common Stock as of the date on which an option was awarded, such fact will not invalidate the Stock-Settled SAR.
7.6 Effect of Exercise of a Stock-Settled SAR. Exercise of a Stock-Settled SAR results in the Recipient receiving net shares of Common Stock with an aggregate Fair Market Value as of the date of such exercise equal to (i) the difference between the Fair Market Value of a share of Common Stock as of the exercise date minus the Exercise Price of the SAR, multiplied by (ii) the number of shares covered by the Stock-Settled SAR as to which it is being exercised, rounded down to the nearest whole number. A Stock-Settled SAR may be exercised as to all of the shares covered by it or may be exercised only in part.
7.7 Duration of a Stock-Settled SARGenerally. The Committee, in its sole discretion, will determine the term of each Stock-Settled SAR provided that such term will not exceed 10 years from the date on which such option was awarded. The term of each Stock-Settled SAR shall be set forth in the Stock-Settled SAR Agreement. The Recipient shall have no further right to exercise a Stock-Settled SAR following the expiration of such term.
7.8 The Effect of Termination of the Recipients Service with the Company on the Term of a Stock-Settled SAR. If a Recipients Service with the Company terminates for any reason other than as a result of the Recipient dying or becoming Disabled (as provided for in Section 7.10 and Section 7.11, respectively), all Stock-Settled SARs that have been awarded to such Recipient shall terminate to the extent that they are not exercised within 30 days following the date the Recipient ceased to be in Service with the Company, unless provided otherwise in the Stock-Settled SAR Agreement. The foregoing provision will not extend the time within which a Stock-Settled SAR may be exercised beyond the expiration of the term of such option and no additional vesting shall occur after the date the Recipients Service with the Company terminated.
7.9 The Effect of a Leave of Absence on a Stock-Settled SAR. Unless otherwise provided in the Stock-Settled SAR Agreement evidencing a Stock Option, a Recipients Service shall not be deemed to have terminated if the Recipient is on sick leave, family leave, military leave or any other leave of absence that is approved by the Committee. The Committee, in its sole discretion, may determine whether a Stock-Settled SAR shall continue to vest during any sick leave, family leave, military leave or other approved leave of absence.
7.10 The Effect of the Death of a Recipient on the Term of a Stock-Settled SAR. If a Recipients Service with the Company terminates as a result of the Recipients death, all Stock-Settled SARs that have been awarded to such Recipient will terminate to the extent that they are not previously exercised within 12 months following the date of the Recipients death. The foregoing provision will not extend the time within which a Stock-Settled SAR may be exercised beyond the expiration of the term of such option and no additional vesting shall occur after the date the Recipients death.
7.11 The Effect of the Disability of a Recipient on the Term of a Stock-Settled SAR. If a Recipients Service with the Company terminates as a result of the Recipient becoming Disabled, all Stock-Settled SARs that have been awarded to such Recipient shall terminate to the extent that they are not exercised within 12 months
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following the date of the Recipient becoming Disabled. The foregoing provision will not extend the time within which a Stock-Settled SAR may be exercised beyond the expiration of the term of such option and no additional vesting shall occur after the date the Recipient became Disabled.
ARTICLE VIII
EXERCISE OF STOCK OPTIONS AND STOCK SETTLED SARS
8.1 Notice of Exercise. A Stock Option or a Stock-Settled SAR may be exercised only by delivery to the Company of written notice directed to the President of the Company (or such other person as the Company may designate) at the principal business office of the Company. The notice will specify (i) the number of shares of Common Stock being purchased, (ii) the method of payment of the Exercise Price of a Stock Option, (iii) the method of payment of the Tax Withholding if required, and (iv), unless a registration under the Securities Act is in effect with respect to the Plan at the time of such exercise, the notice of exercise shall contain such representations as the Company determines to be necessary or appropriate in order for the sale of shares of Common Stock being purchased pursuant to such exercise to qualify for exemptions from registration under the Securities Act and other applicable state securities laws. If the date of expiration or termination of a Stock Option or Stock-Settled SAR falls on a day on which the principal business office of the Company is not open for business, the notice of exercise must be delivered to the Company no later than the last business day prior to such expiration or termination date in order for the notice of exercise to be timely.
8.2 Payment of Exercise Price. No shares of Common Stock will be issued upon the exercise of any Stock Option unless and until payment or adequate provision for payment of the Exercise Price of such shares has been made in accordance with this subsection. The Committee, in its sole discretion, may provide in any Option Agreement for the payment of the Exercise Price in cash (including by check), by delivery of a full-recourse promissory note, by the delivery of shares of Common Stock or other securities issued by the Company in accordance with Section 13.7, by the application of shares that could be received upon exercise of the Stock Option in accordance with Section 13.7, or by any combination of the foregoing. In the absence of such terms in the Option Agreement, the Exercise Price shall be paid in cash (including by check). The Committee, in its sole discretion, may permit a Recipient to elect to pay the Exercise Price by authorizing a duly registered and licensed broker-dealer to sell the shares of Common Stock to be issued upon such exercise (or, at least, a sufficient portion thereof) and instructing such broker-dealer to immediately remit to the Company a sufficient portion of the proceeds from such sale to pay the entire Exercise Price.
8.3 Payment of Tax Withholding Amounts. Upon the exercise of any Stock Option (except Incentive Stock Options issued under previous plans) or Stock-Settled SAR (including any Stock Option or Stock-Settled SAR transferred by the Recipient pursuant to Section 13.5), either with the delivery of the notice of exercise or upon notification of the amount due, each Recipient must pay to the Company or make adequate provision for the payment of all Tax Withholding, if any. The Option Agreement or Stock-Settled SAR Agreement may provide for, or the Committee, in its sole discretion, may allow, the Recipient to pay the Tax Withholding (i) in cash (including by check), (ii) by the Company withholding such amount from other amounts payable by the Company to the Recipient, including salary, (iii) by delivery of shares of Common Stock or other securities of the Company in accordance with Section 13.7, (iv) by the application of shares that could be received upon exercise of the Stock Option or Stock-Settled SAR in accordance with Section 13.7 but only up to the minimum statutorily required tax withholding amounts, or (v) any combination of the foregoing. In the absence of such terms in the Option Agreement or Stock Settled SAR Agreement, the Tax Withholding shall be paid in cash (including by check) or the Committee may authorize payment or provision for the Tax Withholding by any other means permitted by this Section 8.3.
By receiving and upon exercise of a Stock Option or a Stock-Settled SAR, the Recipient shall be deemed to have consented to the Company withholding the amount of any Tax Withholding from any amounts payable by the Company to the Recipient. The Committee, in its sole discretion, may permit a Recipient to elect to pay the Tax Withholding by authorizing a duly registered and licensed broker-dealer to sell the shares to be issued upon such exercise (or, at least, a sufficient portion thereof) and instructing such broker-dealer to immediately remit to the Company a sufficient portion of the proceeds from such sale to pay the Tax Withholding. No shares will be issued upon an exercise of a Stock Option or a Stock-Settled SAR unless and until payment or adequate provision for payment of the Tax Withholding has been made. If, either as a result of the exercise of a Stock Option or a Stock-Settled SAR or the subsequent disqualifying disposition of shares acquired through such exercise, the Company determines that additional Tax Withholding was or has become required beyond any amount paid or provided for by the Recipient, the Recipient will pay such additional amount to the Company immediately upon demand by the Company. If the Recipient fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the Recipient, including salary.
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8.4 Issuance of Shares. Notwithstanding the good faith compliance by the Recipient with all of the terms and conditions of an Option Agreement and with this Article VIII, the Recipient will not become a shareholder and will have no rights as a shareholder with respect to the shares covered by such Stock Option until the issuance of shares pursuant to the exercise of such Stock Option is recorded on the stock transfer record of the Company. The Company will not unreasonably delay the issuance of a stock certificate and shall exercise reasonable efforts to cause such stock certificate to be issued to the Recipient as soon as is practicable after the compliance by the Recipient with all of the terms and conditions of the Option Agreement and with this Article VIII. In addition, when the payment of the Exercise Price is permitted under Section 8.2 to be remitted to the Company by a broker-dealer in connection with the sale of some or all of the shares covered by the Stock Option, the Recipient shall be considered a shareholder and to own the shares being purchased by such exercise upon the Company receiving both the Recipients notice of exercise and the broker-dealers agreement to remit to the Company the Exercise Price in a form satisfactory to the Company in its sole discretion.
ARTICLE IX
PERFORMANCE SHARE AWARDS
Performance Share Awards may be made pursuant to this Plan in accordance with the following terms and conditions.
9.1 Requirement for a Written Share Vesting Agreement. Each Performance Share Award will be evidenced by a Share Vesting Agreement. The Committee will determine from time to time the form of Share Vesting Agreement to be used to evidence Performance Share Awards made pursuant to this Plan. Except as provided in Section 12.2 of Article XII, the terms of each Share Vesting Agreement must be consistent with this Plan. Any inconsistencies between any Share Vesting Agreement and this Plan will be resolved in accordance with the terms and conditions specified in this Plan. Except as otherwise required by this Article IX, the terms and conditions of each Performance Share Award do not need to be identical.
9.2 Who May Receive a Performance Share Award. A Performance Share Award may be made to any Employee, any director of the Company or of a Subsidiary and any other individual who, in the judgment of the Committee, has performed or will perform, in whatever capacity, services important to the management, operation and development of the business of the Company or any of Subsidiaries. The Committee, in its sole discretion, shall determine when and to whom Performance Share Awards are awarded pursuant to this Plan. In addition, substitute Performance Share Awards may be awarded pursuant to Section 12.2 of Article XII to persons who were employees, directors, or independent contractors or former employees, directors or independent contractors of an Acquired Company.
9.3 Number of Shares Covered by a Performance Share Award. The Committee, in its sole discretion, shall determine the number of shares of Common Stock covered by each Performance Restricted Share Award made pursuant to this Plan. The Share Vesting Agreement shall specify the number of shares of Common Stock covered by such Performance Share Award.
9.4 What the Recipient Must Deliver to Receive a Performance Share Award. The Committee, in its sole discretion, will determine whether the Recipient, in order to receive the Performance Share Award, must make a payment, either in cash (including by check), by delivery of a promissory note or by delivery of other securities of the Company (including options to purchase securities of the Company), to the Company of all or some portion of the Fair Market Value of the shares of Common Stock covered by the Performance Share Award. To the extent that the sum of any cash payment, any promissory note and any other securities received by the Company from the Recipient in connection with a Performance Share Award is less than the Fair Market Value of the shares of Common Stock covered by such Performance Share Award determined as of the date of such Award, the shares of Common Stock covered by the Performance Share Award shall be deemed to have been issued by the Company for services rendered by the Recipient.
9.5 Vesting Under a Performance Share Award. The Committee, in its sole discretion, shall determine the Performance Goals and other terms and conditions, if any, upon which shares covered by any Performance Share Award shall vest. The Share Vesting Agreement evidencing a Performance Share Award shall specify the Performance Goals and other vesting terms and conditions. Unvested shares covered by a Performance Share Award may not be transferred by the Recipient under any condition without the prior written consent of the Committee, which consent may be withheld in its sole discretion.
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9.6 Right to Repurchase Unvested Shares upon Certain Conditions. The Share Vesting Agreement shall specify the events upon the occurrence of which the Company shall have the right to repurchase from the Recipient any or all of the Recipients unvested shares and the period during which the Company must exercise this right following the occurrence of the event. The Share Vesting Agreement shall also specify the Repurchase Price Per Share that the Company shall pay to the Recipient upon exercise of its right to repurchase unvested shares and the terms of such payment. If not otherwise specified in the Share Vesting Agreement, the right to repurchase must be exercised within forty-five (45) days after the Company receives from the Recipient written notice of the occurrence of the event, the repurchase price shall be $0.001 per share and the repurchase price shall be payable to the Recipient in cash (including by check) within ten (10) days after the date on which the right to repurchase the shares is exercised. Any right of the Company to repurchase unvested shares may be assigned by the Company in its sole discretion without notice to, or the prior consent of, the Recipient. Every Share Vesting Agreement evidencing a Performance Share Award shall contain or shall be deemed to contain a blank stock power pursuant to which the Recipient authorizes the Company or its transfer agent to transfer ownership of unvested shares from the Recipient to the Company or its assigns upon the right to repurchase being exercised.
9.7 Payment of Tax Withholding Amounts. Upon the vesting of shares under a Performance Share Award (including any Performance Share Award transferred by the Recipient pursuant to Section 13.5) or upon the Recipient making a valid election under Code Section 83(b), each Recipient must pay to the Company or make adequate provision for the payment of all Tax Withholding, if any. The Share Vesting Agreement may provide for, or the Committee, in its sole discretion, may allow the Recipient to pay the Tax Withholding (i) in cash (including by check), (ii) by the Company withholding such amount from other amounts payable by the Company to the Recipient, including salary, (iii) by delivery of shares of Common Stock or other securities of the Company in accordance with Section 13.7, (iv) by the application of vested shares under the Performance Share Award in accordance with Section 13.7 but only up to the minimum statutorily required tax withholding amounts, or (v) any combination of the foregoing. In the absence of such terms in the Share Vesting Agreement, the Tax Withholding shall be paid in cash (including by check) or the Committee may authorize payment or provision for the Tax Withholding by any other means permitted by this Section 9.7.
By receiving and upon exercise of a Performance Share Award, the Recipient shall be deemed to have consented to the Company withholding the amount of any Tax Withholding from any amounts payable by the Company to the Recipient. The Committee, in its sole discretion, may permit a Recipient to elect to pay the Tax Withholding by authorizing a duly registered and licensed broker-dealer to sell the shares to be issued upon such exercise (or, at least, a sufficient portion thereof) and instructing such broker-dealer to immediately remit to the Company a sufficient portion of the proceeds from such sale to pay the Tax Withholding. No shares will be delivered in response to a request to deliver vested shares unless and until payment or adequate provision for payment of the Tax Withholding has been made. If the Company later determines that additional Tax Withholding was or has become required beyond any amount paid or provided for by the Recipient, the Recipient will pay such additional amount to the Company immediately upon demand by the Company. If the Recipient fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the Recipient, including salary.
9.8 Rights as a Shareholder, Legends on Certificates, Escrow of Unvested Shares and Delivery of Vested Shares Covered by a Performance Share Award. As soon as is practicable after a Performance Stock Award is awarded by the Company, the Company will issue one or more stock certificates in the name of the Recipient for the shares covered by a Performance Share Award. For such time as and to the extent that the shares covered by a Performance Share Award remain unvested, the Company may place a restrictive legend on any stock certificate evidencing such shares, may give stop transfer instructions to the Companys transfer agent and may place the stock certificates in escrow with the Company or an agent of the Company. Upon the vesting of shares covered by a Performance Share Award, the Recipient by notice, in such form as the Company may reasonably request, directed to the President of the Company (or such other person as the Company may designate) at the principal business office of the Company request that a stock certificate covering such vested shares be issued in the name of the Recipient and delivered in accordance with such instructions as the Recipient may reasonably request.
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ARTICLE X
RESTRICTED SHARE AWARDS
Restricted Share Awards may be made pursuant to this Plan in accordance with the following terms and conditions.
10.1 Requirement for a Written Share Vesting Agreement. Each Restricted Share Award will be evidenced by a Share Vesting Agreement. The Committee will determine from time to time the form of Share Vesting Agreement to be used to evidence Restricted Share Awards made pursuant to this Plan. Except as provided in Section 12.2 of Article XII, the terms of each Share Vesting Agreement must be consistent with this Plan. Any inconsistencies between any Share Vesting Agreement and this Plan will be resolved in accordance with the terms and conditions specified in this Plan. Except as otherwise required by this Article X, the terms and conditions of each Restricted Share Award do not need to be identical.
10.2 Who May Receive a Restricted Share Award. A Restricted Share Award may be made to any Employee, any director of the Company or of a Subsidiary and any other individual who, in the judgment of the Committee, has performed or will perform, in whatever capacity, services important to the management, operation and development of the business of the Company or any of Subsidiaries. The Committee, in its sole discretion, shall determine when and to whom Restricted Share Awards are awarded pursuant to this Plan. In addition, substitute Restricted Share Awards may be awarded pursuant to Section 12.2 of Article XII to persons who were employees, directors, or independent contractors or former employees, directors or independent contractors of an Acquired Company.
10.3 Number of Shares Covered by a Restricted Share Award. The Committee, in its sole discretion, shall determine the number of shares of Common Stock covered by each Restricted Share Award made pursuant to this Plan. The Share Vesting Agreement shall specify the number of shares of Common Stock covered by such Restricted Share Award.
10.4 What the Recipient Must Deliver to Receive a Restricted Share Award. The Committee, in its sole discretion, will determine whether the Recipient, in order to receive the Restricted Share Award, must make a payment, either in cash (including by check), by delivery of a promissory note or by delivery of other securities of the Company (including options to purchase securities of the Company), to the Company of all or some portion of the Fair Market Value of the shares of Common Stock covered by the Restricted Share Award. To the extent that the sum of any cash payment, any promissory note and any other securities received by the Company from the Recipient in connection with a Restricted Share Award is less than the Fair Market Value of the shares of Common Stock covered by such Restricted Share Award determined as of the date of such Award, the shares of Common Stock covered by the Restricted Share Award shall be deemed to have been issued by the Company for services rendered by the Recipient.
10.5 Vesting Under a Restricted Share Award. The Committee, in its sole discretion, shall determine the terms and conditions upon which shares covered by any Restricted Share Award shall vest. The Share Vesting Agreement shall specify the vesting schedule. Unvested shares covered by a Restricted Share Award may not be transferred by the Recipient under any condition without the prior written consent of the Committee, which consent may be withheld in its sole discretion.
10.6 Right to Repurchase Unvested Shares upon Certain Conditions. The Share Vesting Agreement shall specify the events upon the occurrence of which the Company shall have the right to repurchase from the Recipient any or all of the Recipients unvested shares and the period during which the Company must exercise this right following the occurrence of the event. The Share Vesting Agreement shall also specify the Repurchase Price Per Share that the Company shall pay to the Recipient upon exercise of its right to repurchase unvested shares and the terms of such payment. If not otherwise specified in the Share Vesting Agreement, the right to repurchase must be exercised within forty-five (45) days after the Company receives from the Recipient written notice of the occurrence of the event, the repurchase price shall be $0.001 per share and the repurchase price shall be payable to the Recipient in cash (including by check) within ten (10) days after the date on which the right to repurchase the shares is exercised. Any right of the Company to repurchase unvested shares may be assigned by the Company in its sole discretion without notice to, or the prior consent of, the Recipient. Every Share Vesting Agreement evidencing a Restricted Share Award shall contain or shall be deemed to contain a blank stock power pursuant to which the Recipient authorizes the Company or its transfer agent to transfer ownership of unvested shares from the Recipient to the Company or its assigns upon the right to repurchase being exercised.
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10.7 Payment of Tax Withholding Amounts. Upon the vesting of shares under a Restricted Share Award (including any Restricted Share Award transferred by the Recipient pursuant to Section 13.5) or upon the Recipient making a valid election under Code Section 83(b), each Recipient must pay to the Company or make adequate provision for the payment of all Tax Withholding, if any. The Share Vesting Agreement may provide for, or the Committee, in its sole discretion, may allow the Recipient to pay the Tax Withholding (i) in cash (including by check), (ii) by the Company withholding such amount from other amounts payable by the Company to the Recipient, including salary, (iii) by delivery of shares of Common Stock or other securities of the Company in accordance with Section 13.7, (iv) by the application of vested shares under the Restricted Share Award in accordance with Section 13.7 but only up to the minimum statutorily required tax withholding amounts, or (v) any combination of the foregoing. In the absence of such terms in the Share Vesting Agreement, the Tax Withholding shall be paid in cash (including by check) or the Committee may authorize payment or provision for the Tax Withholding by any other means permitted by this Section 10.7.
By receiving and upon exercise of a Restricted Share Award, the Recipient shall be deemed to have consented to the Company withholding the amount of any Tax Withholding from any amounts payable by the Company to the Recipient. The Committee, in its sole discretion, may permit a Recipient to elect to pay the Tax Withholding by authorizing a duly registered and licensed broker-dealer to sell the shares to be issued upon such exercise (or, at least, a sufficient portion thereof) and instructing such broker-dealer to immediately remit to the Company a sufficient portion of the proceeds from such sale to pay the Tax Withholding. No shares will be delivered in response to a request to deliver vested shares unless and until payment or adequate provision for payment of the Tax Withholding has been made. If the Company later determines that additional Tax Withholding was or has become required beyond any amount paid or provided for by the Recipient, the Recipient will pay such additional amount to the Company immediately upon demand by the Company. If the Recipient fails to pay the amount demanded, the Company may withhold that amount from other amounts payable by the Company to the Recipient, including salary.
10.8 Rights as a Shareholder, Legends on Certificates, Escrow of Unvested Shares and Delivery of Vested Shares Covered by a Restricted Share Award. As soon as is practicable after a Restricted Stock Award is awarded by the Company, the Company will issue one or more stock certificates in the name of the Recipient for the shares covered by a Restricted Share Award. For such time as and to the extent that the shares covered by a Restricted Share Award remain unvested, the Company may place a restrictive legend on any stock certificate evidencing such shares, may give stop transfer instructions to the Companys transfer agent and may place the stock certificates in escrow with the Company or an agent of the Company. Upon the vesting of shares covered by a Restricted Share Award, the Recipient by notice, in such form as the Company may reasonably request, directed to the President of the Company (or such other person as the Company may designate) at the principal business office of the Company request that a stock certificate covering such vested shares be issued in the name of the Recipient and delivered in accordance with such instructions as the Recipient may reasonably request.
ARTICLE XII
RESTRICTED STOCK UNIT AWARDS
Restricted Stock Unit Awards may be made pursuant to this Plan in accordance with the following terms and conditions.
11.1 Restricted Stock Units. Restricted Stock Units are designated in shares of Common Stock.
11.2 Restricted Stock Unit Agreement. Each Restricted Stock Unit Award under the Plan shall be evidenced by a Restricted Stock Unit Agreement between the recipient and the Company. Such Restricted Stock Units shall be subject to all applicable terms of the Plan and may be subject to any other terms of the applicable Restricted Stock Unit Agreement that are not inconsistent with the Plan. Any inconsistencies between any Restricted Stock Unit Agreement and this Plan will be resolved in accordance with the terms and conditions specified in this Plan. Except as otherwise required by this Article XI, the terms and conditions of each Restricted Stock Unit Award do not need to be identical.
11.3 Who May Receive a Restricted Stock Unit Award. A Restricted Stock Unit Award may be made to any Employee, any director of the Company or of a Subsidiary and any other individual who, in the judgment of the Committee, has performed or will perform, in whatever capacity, services important to the management, operation and development of the business of the Company or any of Subsidiaries. The Committee, in its sole discretion, shall determine when and to whom Restricted Stock Unit Awards are awarded pursuant to this Plan. In addition, substitute Restricted Stock Unit Awards may be awarded pursuant to Section 12.2 of Article XII to persons who were employees, directors, or independent contractors or former employees, directors or independent contractors of an Acquired Company.
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11.4 Number of Shares Covered by a Restricted Stock Unit Award. The Committee, in its sole discretion, shall determine the number of shares of Common Stock covered by each Restricted Stock Unit Award made pursuant to this Plan. The Restricted Stock Unit Agreement shall specify the number Restricted Stock Units covered by such Restricted Stock Unit Award.
11.5 Payment for Awards. No cash consideration shall be required of any Recipient of a Restricted Stock Unit Award.
11.6 Vesting Under a Restricted Stock Unit Award. The Committee, in its sole discretion, shall determine the terms and conditions upon which shares covered by any Restricted Stock Unit Award shall vest. The Restricted Stock Unit Agreement shall specify the vesting schedule. Unvested Restricted Stock Units covered by a Restricted Stock Unit Award may not be transferred by the Recipient under any condition. Vesting may be based on service or on performance, or on any combination of service and performance.
11.7 Dividend Equivalent Rights. Shares underlying an Award of Restricted Stock Units shall be entitled to dividend equivalent rights if and as provided for under a Restricted Stock Unit Agreement.
11.8 No Voting Rights. Shares underlying an Award of Restricted Stock Units shall have no voting rights with respect to such Restricted Stock Units.
11.9 Form and Time of Settlement of Restricted Stock Unit Awards. Settlement of vested Restricted Stock Units shall be made in the form of shares of Common Stock. Vested Restricted Stock Units generally shall be fully settled as soon as practicable after they become vested, but not later than the later of (i) two and one half (2 1/2) months after the end of the Companys fiscal year during in which all vesting conditions applicable to the Restricted Stock Units have been satisfied or have lapsed or (ii) March 15 following the calendar year in which all vesting conditions applicable to the Restricted Stock Units have been satisfied or have lapsed. Until an Award of Restricted Stock Units is settled, the number of such Restricted Stock Units shall be subject to adjustment pursuant to Article 12.
11.10 Creditors Rights. A holder of Restricted Stock Units shall have no rights other than those of a general creditor of the Company. Restricted Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Restricted Stock Unit Agreement.
11.11 Payment of Tax Withholding Amounts. Upon the vesting of shares under a Restricted Stock Unit Award (including any Restricted Stock Unit Award transferred by the Recipient pursuant to Section 13.5), each Recipient must pay to the Company or make adequate provision for the payment of all Tax Withholding, if any. By receiving and upon exercise of a Restricted Stock Unit Award, the Recipient shall be deemed to have consented to the Company withholding the amount of any Tax Withholding from any amounts payable by the Company to the Recipient under such Restricted Stock Unit Award. The Committee may condition the delivery of any shares or other benefits under the Restricted Stock Unit Award on satisfaction of the applicable Tax Withholding obligations. If permitted by the Committee (in its sole discretion), such Tax Withholding obligations may be satisfied (i) through cash payment by the Recipient; (ii) through the surrender of shares of Stock which the Recipient already owns; (iii) through the surrender of shares of Stock to which the Recipient is otherwise entitled under the Plan, which will be sold on behalf of the Recipient to satisfy the applicable withholding tax, provided, however, that such shares under the preceding clause (ii) and this clause (iii) may be used to satisfy not more than the Companys statutory Tax Withholding obligation (based on minimum statutory withholding rates for federal, state, local and foreign tax purposes, including payroll taxes, that are applicable to such supplemental taxable income) or (iv) by such other method as specified by the Committee.
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ARTICLE XII
CHANGES IN CAPITAL STRUCTURE, ACQUISITIONS AND CORPORATE TRANSACTIONS
12.1 Effect of Changes in Capital Structure of the Company on the Number of Shares and Exercise Price. If the outstanding shares of Common Stock are hereafter increased, decreased, changed into or exchanged for a different number or kind of shares of Common Stock or for other securities of the Company or of another corporation, by reason of any reorganization, merger, consolidation, reclassification, stock split-up, combination of shares of Common Stock, or dividend payable in shares of Common Stock or other securities of the Company, the Committee will make such adjustment as it deems appropriate in the number and kind of Authorized Shares. In addition, the Committee will make such adjustment in the number and kind of shares of Common Stock or other securities covered by outstanding Stock Options and outstanding Stock-Settled SARs and Restricted Stock Units as well as make an adjustment in the Exercise Price of each outstanding Stock Option and Stock-Settled SAR as the Committee deems appropriate. The vesting terms of all Stock Option Agreements, Stock-Settled SAR Agreements, Restricted Stock Unit Agreements and Share Vesting Agreements will also be adjusted as the Committee deems appropriate. Any determination by the Committee as to what adjustments may be made, and the extent thereof, will be final, binding on all parties and conclusive.
12.2 Issuance of Substitute Awards in Connection with an Acquisition by the Company. In the event of the acquisition of an Acquired Company by the Company or any Subsidiary, Awards (in any form) may be awarded by the Company in substitution for any outstanding unexercised stock options and any unvested share grants or unvested stock unit grants of the Acquired Company. Such substitute Awards may deviate from the terms otherwise required by Article VI, Article VII, Article VIII, Article IX, Article X and Article XI of this Plan to the extent that the Committee, in its sole discretion upon the advise of its advisors, determines that such non-conforming terms are required under applicable tax law, accounting principles or contractual requirements or are otherwise appropriate.
12.3 Effect of the Occurrence of a Corporate Transaction on Continuing Rights. In the event of the occurrence of any Corporate Transaction, all outstanding Stock Options and Stock-Settled SARs that were awarded pursuant to this Plan shall terminate effective as of the effective date of such transaction, unless and only to the extent that the terms and conditions of the transaction expressly provide either (i) for the assumption of this Plan and the continuation of such Stock Options and Stock-Settled SARs or (ii) the issuance of substitute similar Awards under a plan of the acquiring or surviving entity in such transaction. Each Recipient shall be provided written notice of the expected occurrence of any Corporate Transaction at least fifteen (15) days prior to the effective date and shall be permitted to tender a notice of exercise of any Stock Option or Stock-Settled SAR in which exercise is conditioned upon the transaction actually occurring and, notwithstanding any provision of Article VIII or term of any Option Agreement, shall not be required to tender payment of the Exercise Price or amounts that the Company may be required to withhold for tax purposes until after the occurrence of the transaction. The terms and conditions of the transaction may provide for the assumption of this Plan with respect only to outstanding Performance Share Awards, Restricted Share Awards and Restricted Stock Unit Awards that have not fully vested and the assignment to and assumption by the surviving corporation of the rights and obligation of the Company under each outstanding Share Vesting Agreement. The Option Agreements, Stock-Settled SAR Agreements, Share Vesting Agreements and Restricted Stock Unit Agreements that evidence Awards made under this Plan may, in the sole discretion of Committee, provide for the acceleration of vesting, either in whole or in part, under the Award. In addition, the Committee shall have the power to accelerate the vesting of any Stock Option, Stock-Settled SAR, Performance Share Award, Restricted Share Award or Restricted Stock Unit Award in its sole discretion at the time of a Corporate Transaction or conditioned upon the occurrence of an expected Corporate Transaction.
ARTICLE XIII
OTHER TERMS APPLICABLE TO ALL AWARDS
13.1 Underwriters Lock-up. Each written agreement evidencing an Award will specify that the Recipient, by accepting the Award agrees that whenever the Company undertakes a firmly underwritten public offering of its securities, the Recipient will, if requested to do so by the managing underwriter in such offering, enter into an agreement not to sell or dispose of any securities of the Company owned or controlled by the Recipient provided that such restriction will not extend beyond 12 months from the effective date of the registration statement filed in connection with such offering and provided that all of the then directors and executive officers of the Company are also requested to and do enter into a similarly restrictive agreement with the managing underwriter.
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13.2 No Rights to Continued Service. Nothing in this Plan nor in any written agreement evidencing an Award will confer upon any Recipient any right to continued employment with the Company or to limit or affect in any way the right of the Company, in its sole discretion, to (a) terminate the employment of such Recipient at any time, with or without cause, (b) change the duties of such Recipient, or (c) increase or decrease the compensation of the Recipient at any time, subject, in each instance to the terms of any written employment agreement between the Company and such Recipient. Unless the written agreement evidencing an Award expressly provides otherwise, vesting under such agreement shall be conditioned upon:
1) | for Employees of the Company, the continued employment of the Recipient; |
2) | for independent contractors, the Recipient continuing to provide services to the Company on substantially the same terms and conditions as such services were provided at the time of the Award; or |
3) | for directors who are not Employees, the Recipient continuing to serve as a director of the Company or a Subsidiary. |
Nothing in this Plan shall be construed as creating a contractual or implied right or covenant by the Company to continue such employment, service as an independent contractor or service as a director.
13.3 Who May Exercise Rights with Respect to Awards. During a Recipients lifetime, all rights with respect to an Award may only be exercised by the Recipient (including a legally appointed guardian or representative for the Recipient).
13.4 Beneficiary Designations. Any Recipient of an Award may, during his or her lifetime, designate a person or persons who may exercise the rights of that Recipient as to any Award made to such Recipient after the Recipients death. Any such designation shall be effective only if given in writing in a form and manner acceptable to the Committee and shall supercede and revoke all prior designations. In the absence of an effective designation, any vested benefits with respect to Awards under this Plan that remain unpaid at the time of Recipients death shall be paid to the Recipients estate and, subjected to the terms of this Plan and the applicable written agreement evidencing such Award, any unexercised rights of the Recipient with respect to an Award may be exercised by the administrator or executor of the Recipients estate.
13.5 Limited Transferability of Awards. Unless the written agreement evidencing an Award expressly states that the Award is transferable as provided in this Section 13.5, no Award granted under this Plan nor any interest therein may be sold, assigned, conveyed, gifted, pledge or otherwise transferred in any manner other than by will or the laws of descent and distribution after the death of the Recipient. The foregoing prohibition on transferability is not intended to and shall not prohibit (i) the transfer of an Award to a trust in which the Recipient is considered the sole beneficial owner under both Code Section 671 and applicable state law, (ii) a pledge of shares to be received upon exercise of a Stock Option as security for a loan that is used to pay the Exercise Price or the (iii) transfer of shares covered by an Award after those shares are issued to the Recipient upon exercise of a Stock Option or Stock-Settled SAR or the delivery of the shares to the Recipient upon vesting of a Performance Share Award, a Restricted Share Award or a Restricted Stock Unit Award provided, in each instance, that all other applicable restrictions on transfer of such shares (whether imposed by law, the listing requirements of an exchange on which shares of Common Stock are traded, the terms of this Plan, the written agreement evidencing the Award or any share retention policy or share ownership guidelines of the Company that are applicable to the Recipient) have lapsed. Notwithstanding the foregoing, the Committee may make an Award of or amend the terms of an outstanding Stock Option, Stock-Settled SAR, Performance Share Award, Restricted Share Award or Restricted Stock Unit Award to permit the transfer or assignment of an Award by means of a gift or court approved domestic relations order provided that the transferees are limited to (x) any combination of the Recipient, the Recipients spouse or former spouse, or the Recipients children, (y) is made to a trust established for the exclusive benefit of one or more of the persons identified in clause (x) in which the beneficiaries are prohibited from transferring or assigning their interests except for transfers to other persons identified in clause (x), or (z) a partnership, limited liability company or other entity in which all equity ownership interests are owned by persons identified in clause (x) and in which such equity ownership interests cannot be transferred or assigned except for transfers to other persons identified in clause (x). Any transfer of an Award permitted by this Section 13.5 shall be conditioned upon the Recipient and the transferee of such Award executing and delivering to the Company a form of Transfer and Assumption as the Committee may request.
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Notwithstanding any transfer of an Award, the Recipient shall remain liable to the Company for any income tax withholding amounts that the Company is required to withhold at the time the Award vests or is exercised or the shares subject to the Award are sold by the transferee. The Committee shall have sole discretion in determining whether or not an Award is transferable within the limitations set forth in this Section 13.5 and may exercise that discretion with respect to certain Awards or certain Recipients without being bound to exercise that discretion in the same manner with respect to other similar Awards or other Recipients. Any purported assignment, transfer or encumbrance that does not comply with the requirements of this Section 13.5 shall be void and unenforceable against the Company.
13.6 Repurchase of Awards. With the consent of the Recipient and upon approval of the Committee, the Company may from time-to-time repurchase Awards by payment in cash in an amount equal to the net Fair Market Value of the vested shares covered by the Award less any Exercise Price. Although the Committee is authorized by this Plan to make such repurchases, Awards shall not be made with the expectation that they will be repurchased for cash and no Recipient shall have the right to cause the Company to repurchase any Award without the consent of the Committee, which consent can be withheld by the Committee in its sole discretion.
13.7 Payment of Exercise Price or Tax Withholding with Other Securities. To the extent permitted in Section 8.2, the Exercise Price and, to the extent permitted by Section 8.3, Section 9.7 and Section 10.7, above, the Tax Withholding may be paid by the surrender of shares of Common Stock or other securities of the Company. Payment shall be made by either (i) delivering to the Company the certificates or instruments representing such shares of Common Stock or other securities, duly endorsed for transfer, or (ii) delivering to the Company an attestation in such form as the Company may deem appropriate with respect to the Recipients ownership of the shares of Common Stock or other securities of the Company. For purposes of this Section 13.7, shares of Common Stock shall be valued at their Fair Market Value as of the last business day preceding the day the Company receives the Recipients notice of exercise with respect to the exercise of a Stock Option or Stock-Settled SAR or as of the day on which a Performance Share Award, Restricted Share Award or Restricted Stock Unit Award vests. In addition to the foregoing, to the extent permitted by Section 8.3, Section 9.7 and Section 10.7, above, the Tax Withholding may be paid by the application of shares which could be received upon exercise of a Stock Option or Stock-Settled SAR or the application of shares which would otherwise be vesting under a Performance Share Award, Restricted Share Award or Restricted Stock Unit Award, provided, however, that this net withholding of shares shall only be permitted up to minimum legally required tax withholding amount required under federal, state and local income and payroll taxes and Tax Withholding in excess of the minimum legally required tax withholding amount may only be satisfied in the manner previously provided in this Section 13.7. This net withholding of shares shall be accomplished by crediting toward the Recipients Tax Withholding obligation either (i) the difference between the Fair Market Value of a share of Common Stock and the Exercise Price of the Stock Option or Stock-Settled SAR or (ii) the Fair Market Value of a share of Common Stock with respect to a Performance Share Award, Restricted Share Award or Restricted Stock Unit Award, in each instance rounded down to the nearest whole share. Any such net withholding of shares shall be considered an exercise of the Stock Option or Stock-Settled SAR to the extent that shares are so applied.
13.8 Suspension or Termination of Awards for Misconduct of the Recipient. If at any time (including after receipt of a notice of exercise or a request for delivery of vested shares) the Committee reasonably believes that a Recipient has committed an act of misconduct as described in this Section 13.8, the Committee may suspend the Recipients right to exercise and Stock Option or Stock-Settled SAR or to receive delivery of vested shares under a Performance Share Award, Restricted Stock Award or Restricted Stock Unit Award pending a determination of whether an act of misconduct has been committed by such Recipient. For purposes of this Section 13.8, acts of misconduct shall mean (i) an act of embezzlement, fraud, dishonesty, breach of fiduciary duty, violation of securities laws involving the Company, any of its Subsidiaries or any entity or person with whom the Company or any of its Subsidiaries does business, (ii) nonpayment of any obligation to the Company or any Subsidiary, misappropriation or wrongful disclosure of any trade secret of the Company or any Subsidiary, (iii) engaging in any conduct constituting unfair competition or inducing any entity or person with whom the Company or any of its Subsidiaries does business to discontinue or materially reduce such business with the Company or its Subsidiaries and (iv) any similar conduct that materially aversely impacts or reflects on the Company. A Recipient accused of engaging in any such misconduct shall be provided the opportunity to explain the Recipients conduct in writing. Any determination by the Committee as to whether or not a Recipient did engage in misconduct within the meaning of this Section 13.8 shall be final, conclusive and binding on the all interested parties. If the Committee determines that the Recipient did not engage in misconduct, the Company shall immediately give effect to any notice of exercise or request for delivery of vested shares received prior to or during any period of suspension. The Company shall not have any liability to the Recipient for any loss which the Recipient may have sustained as a result of any delay in delivering shares as a result of any suspension.
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13.9 Compliance with Legal Requirements. No shares of Common Stock will be issued with respect to any Performance Share Award, Restricted Stock Award or Restricted Stock Unit Award or upon the exercise of any Stock Option or Stock-Settled SAR unless the exercise and issuance of the shares of Common Stock will comply with (i) all relevant provisions of law, including, without limitation, the Securities Act, the Securities Exchange Act of 1934, all applicable state securities laws and the Code, each as amended and including the respective rules and regulations promulgated under each of the foregoing, (ii) any registration under the Securities Act in effect with respect to the Plan, and (iii) the requirements of any stock exchange or market upon which the Common Stock may then be listed. Compliance with such provisions shall be subject to the approval of legal counsel for the Company. The Company will not be liable to any Recipient or any other person for any delay in issuing or failure to issue shares of Common Stock where such delay or failure is due to the inability of the Company to obtain all permits, exemptions or approvals from regulatory authorities which are deemed necessary by the Companys legal counsel. The Board may require any action or agreement by a Recipient as may be necessary, from time to time, to comply with the federal and state securities laws. The Company will not be obliged to prepare, file or maintain a registration under the Securities Act with respect to the Plan or to take any actions with respect to any state securities laws.
ARTICLE XIV
AMENDMENT OF PLAN
The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, but no such amendment shall (a) materially impair the rights of any Recipient without his or her consent, (b) except for adjustments made pursuant to Section 12.1 or in connection with substitute Awards, reduce the exercise price of outstanding Options or Stock Settled SARs or cancel or amend outstanding Options or Stock Settled SARs for the purpose of repricing, replacing or regranting such Options or Stock Settled SARs with an exercise price that is less than the exercise price of the original Options or Stock Settled SARs or cancel or amend outstanding Options or Stock Settled SARs with an exercise price that is greater than the Fair Market Value of a share of Common Stock for the purpose of exchanging such Options or Stock Settled SARs for cash or any other Awards without stockholder approval or (c) cause any Award intended to be exempt from Code Section 409A to become subject to Code Section 409A. Notwithstanding the foregoing, the Committee may amend the terms of any Award heretofore granted, prospectively or retroactively, in order to cure any potential defects under Code Section 409A, in a manner deemed appropriate by the Committee in it sole discretion, without the consent of the Recipient, provided that such amendment shall be accomplished in a manner calculated to avoid causing such amendment to constitute an extension, renewal or modification (each within the meaning of Codes Section 409A) of any Award that would cause such Award to be considered nonqualified deferred compensation within the meaning of Code Section 409A. Notwithstanding the foregoing, any adjustments made pursuant to Section 12.1 shall not be subject to these restrictions.
Neither the Board, the Committee nor the Company make any representations that any Awards granted under this Plan shall be exempt from Code Section 409A and makes no undertaking to preclude Code Section 409A from applying to the Plan or Awards granted thereunder. Moreover, for purposes of applying the provisions of Code Section 409A to this Plan, each separately identified amount to which a Recipient is entitled under this Plan shall be treated as a separate payment.
Further, notwithstanding the foregoing, no amendment of the Plan shall apply to amounts that were earned and vested (within the meaning of Code Section 409A) under the Plan prior to 2005, unless the amendment specifically provides that it applies to such amounts. The purpose of this restriction is to prevent a Plan amendment from resulting in an inadvertent material modification to amounts that are grandfathered benefits.
This Amended and Restated Plan is dated as of and approved and adopted by the Board of Directors of the Company at a meeting held on February 17, 2005 and ratified by shareholders on May 5, 2005, and further amended by the Board of Directors May 1, 2009, and further amended by shareholders and the Board of Directors April 28, 2010, and further amended by the Board of Directors April 27, 2011.
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Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Sidney B. DeBoer, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: April 29, 2011
/s/ Sidney B. DeBoer |
Sidney B. DeBoer |
Chairman of the Board, Chief Executive Officer and Secretary |
Lithia Motors, Inc. |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(a) OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
I, Christopher S. Holzshu, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: April 29, 2011
/s/ Christopher S. Holzshu |
Christopher S. Holzshu |
Senior Vice President and Chief Financial Officer |
Lithia Motors, Inc. |
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Lithia Motors, Inc. (the Company) on Form 10-Q for the period ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Sidney B. DeBoer, Chairman of the Board, Chief Executive Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Sidney B. DeBoer |
Sidney B. DeBoer |
Chairman of the Board, |
Chief Executive Officer and Secretary |
Lithia Motors, Inc. |
April 29, 2011 |
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Lithia Motors, Inc. (the Company) on Form 10-Q for the period ended March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Christopher S. Holzshu, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Christopher S. Holzshu |
Christopher S. Holzshu |
Senior Vice President and Chief Financial Officer |
Lithia Motors, Inc. |
April 29, 2011 |