Long-Term Debt

6 Months Ended

Jun. 30, 2011


10.	LONG-TERM DEBT

The Company carries its long-term debt at face value, net of applicable discounts. Long-term debt consists of the following:


	June 30,		December 31,
	2011		2010
	(Dollars in thousands)

2.25% Convertible Senior Notes due 2036 (principal of $182,753 at June 30, 2011 and December 31, 2010)	$	141,505	$	138,155
3.00% Convertible Senior Notes due 2020 (principal of $115,000 at June 30, 2011 and December 31, 2010)		75,850		74,365
Mortgage Facility		42,068		42,600
Other Real Estate Related and Long-Term Debt		166,452		170,291
Capital lease obligations related to real estate, maturing in varying amounts through November 2032 with a weighted average interest rate of 8.94%		40,716		40,728

		466,591		466,139
Less current maturities of mortgage facility and other long-term debt		12,874		53,189

	$	453,717	$	412,950

2.25% Convertible Senior Notes

The Company’s outstanding 2.25% Convertible Senior Notes due 2036 (the “2.25% Notes”), which had a face value of $182.8 million, had a fair value based on quoted market prices of $185.6 million and $180.0 million as of June 30, 2011 and December 31, 2010, respectively. The Company determined the discount applicable to its 2.25% Notes using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 7.5% was estimated by comparing debt issuances from companies with similar credit ratings during the same annual period as the Company. The effective interest rate differs from the 7.5%, due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount to the 2.25% Notes and are being amortized to interest expense through 2016. The effective interest rate may change in the future as a result of future repurchases of the 2.25% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 2.25% Notes.

As of June 30, 2011 and December 31, 2010, the carrying value of the 2.25% Notes, related discount and equity component consisted of the following:


	June 30,			December 31,
	2011			2010
	(In thousands)

Carrying amount of equity component	$	65,270		$	65,270
Allocated underwriter fees, net of taxes		(1,475	)		(1,475	)
Allocated debt issuance cost, net of taxes		(58	)		(58	)

Total net equity component	$	63,737		$	63,737

Deferred income tax component	$	14,678		$	15,855

Principal amount of 2.25% Notes	$	182,753		$	182,753

Unamortized discount		(39,693	)		(42,916	)
Unamortized underwriter fees		(1,555	)		(1,682	)

Net carrying amount of liability component	$	141,505		$	138,155

Net impact on retained earnings	$	(39,383	)	$	(37,420	)

Unamortized debt issuance cost	$	62		$	67

For the six months ended June 30, 2011 and 2010, the contractual interest expense and the discount amortization, which is recorded as interest expense in the accompanying Consolidated Statements of Operations, were as follows:


	Six Months Ended
	June 30,
	2011			2010
	(Dollars in thousands)

Year-to-date contractual interest expense	$	2,056		$	2,056
Year-to-date discount amortization	$	3,140		$	2,851
Effective interest rate of liability component		7.7	%		7.7	%

3.00% Convertible Senior Notes

The Company’s outstanding 3.00% Convertible Senior Notes due 2020 (the “3.00% Notes”), which had a face value of $115.0 million, had a fair value based on quoted market prices of $142.9 million and $143.3 million as of June 30, 2011 and December 31, 2010, respectively. The Company also determined the discount applicable to its 3.00% Notes using the estimated effective interest rate for similar debt with no convertible features. The interest rate of 8.25% was estimated by receiving a range of quotes from the underwriters of the 3.00% Notes for the estimated rate that the Company could reasonably expect to issue non-convertible debt for the same tenure. The effective interest rate differs from the 8.25%, due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount to the 3.00% Notes and are being amortized to interest expense through 2020. The effective interest rate may change in the future as a result of future repurchases of the 3.00% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 3.00% Notes. As of June 30, 2011 and December 31, 2010, the carrying value of the 3.00% Notes, related discount and equity component consisted of the following:


	June 30,			December 31,
	2011			2010
	(In thousands)

Carrying amount of equity component	$	25,359		$	25,359
Allocated underwriter fees, net of taxes		(760	)		(760	)
Allocated debt issuance cost, net of taxes		(112	)		(112	)

Total net equity component	$	24,487		$	24,487

Deferred income tax component	$	13,475		$	13,971

Principal amount of 3.00% Notes	$	115,000		$	115,000

Unamortized discount		(37,108	)		(38,516	)
Unamortized underwriter fees		(2,042	)		(2,119	)

Net carrying amount of liability component	$	75,850		$	74,365

Net impact on retained earnings	$	(2,028	)	$	(1,202	)

Unamortized debt issuance cost	$	301		$	313


	Six Months Ended
	June 30,
	2011			2010
	(Dollars in thousands)

Year-to-date contractual interest expense	$	1,725		$	957
Year-to-date discount amortization	$	1,322		$	661
Effective interest rate of liability component		8.6	%		8.6	%

The 3.00% Notes are convertible into cash and, if applicable, common stock based on the conversion rate, subject to adjustment, on the business day preceding September 15, 2019, under the following circumstances: (1) during any fiscal quarter (and only during such fiscal quarter) beginning after June 30, 2010, if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the applicable conversion price per share (or $49.8033 as of June 30, 2011); (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of 3.00% Notes for each day of the ten day trading period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the 3.00% Notes on that day; and (3) upon the occurrence of specified corporate transactions set forth in the 3.00% Notes Indenture. Upon conversion, a holder will receive an amount in cash and common shares of the Company’s common stock, determined in the manner set forth in the 3.00% Notes Indenture. Although none of the conversion features of the Company’s 3.00% Notes were triggered in the three months ended June 30, 2011, the if-converted value exceeded the principal amount of the 3.00% Notes by $9.8 million as of June 30, 2011.

As of June 30, 2011, the conversion rate was 26.1058 shares of common stock per $1,000 principal amount of 3.00% Notes, with a conversion price of $38.31 per share, which was reduced during the second quarter of 2011 as the result of the Company’s decision to pay a cash dividend of $0.11 per share of common stock for the first quarter of 2011 to holders of record on June 1, 2011. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in the future, the conversion rate will be adjusted based on the formula defined in the 3.00% Notes Indenture.

As of June 30, 2011, the exercise price of the 3.00% Warrants, which are related to the issuance of the 3.00% Notes, was $56.29 due to the Company’s decision to pay a cash dividend of $0.11 per share of common stock for the first quarter of 2011 to holders of record on June 1, 2011. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in the future, the conversion rate will be adjusted based on the formula defined in the 3.00% Notes Indenture.

Under the terms of the 3.00% Purchased Options, which become exercisable upon conversion of the 3.00% Notes, the Company has the right to purchase a total of 3.0 million shares of its common stock at a purchase price of $38.31 per share, the conversion price, as of June 30, 2011. The exercise price is subject to certain adjustments that mirror the adjustments to the conversion price of the 3.00% Notes (including payments of cash dividends).

Real Estate Credit Facility

On December 29, 2010, the Company amended and restated its $235.0 million five-year real estate credit facility with Bank of America, N.A. and Comerica Bank. As amended and restated, the Real Estate Credit Facility (the “Mortgage Facility”) provides for $42.6 million of term loans with the right to expand to $75.0 million provided that (i) no default or event of default exists under the Mortgage Facility; (ii) the Company obtains commitments from the lenders who would qualify as assignees for such increased amounts; and (iii) certain other agreed upon terms and conditions have been satisfied. This facility is guaranteed by the Company and substantially all of the domestic subsidiaries of the Company and is secured by the relevant real property owned by the Company that is mortgaged under the Mortgage Facility. The Company capitalized $0.9 million of debt issuance costs related to the Mortgage Facility that are being amortized over the term of the facility.

As amended and restated, the Mortgage Facility now provides for only term loans and no longer has a revolving feature. The interest rate is now equal to (i) the per annum rate equal to one-month LIBOR plus 3.00% per annum, determined on the first day of each month, or (ii) 1.95% per annum in excess of the higher of (a) the Bank of America prime rate (adjusted daily on the day specified in the public announcement of such price rate), (b) the Federal Funds Rate adjusted daily, plus 0.5% or (c) the per annum rate equal to one-month LIBOR plus 1.05% per annum. The Federal Funds Rate is the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the business day succeeding such day.

The Company is required to make quarterly principal payments equal to 1.25% of the principal amount outstanding, which began in April 2011, and is required to repay the aggregate principal amount outstanding on the maturity date December 29, 2015. During the six months ended June 30, 2011, the Company made a principal payment of $0.5 million on outstanding borrowings from the Mortgage Facility. As of June 30, 2011, borrowings under the amended and restated Mortgage Facility totaled $42.1 million, with $2.1 million recorded as a current maturity of long-term debt in the accompanying Consolidated Balance Sheet.

The Mortgage Facility also contains usual and customary provisions limiting the Company’s ability to engage in certain transactions, including limitations on the Company’s ability to incur additional debt, additional liens, make investments, and pay distributions to its stockholders. As amended, the Mortgage Facility contains certain covenants, including financial ratios that must be complied with, including: fixed charge coverage ratio, total funded lease adjusted indebtedness to proforma EBITDAR ratio, and current ratio. For covenant calculation purposes, EBITDAR is defined as earnings before non-floorplan interest expense, taxes, depreciation and amortization and rent expense. EBITDAR also includes interest income and is further adjusted for certain non-cash income charges. Additionally, the Company is limited under the terms of the Mortgage Facility in its ability to make cash dividend payments to its stockholders and to repurchase shares of its outstanding common stock, based primarily on the quarterly net income or loss of the Company (the “Mortgage Facility Restricted Payment Basket”). As of June 30, 2011, the Mortgage Facility Restricted Payment Basket was $105.1 million and will increase in the future periods by 50.0% of the Company’s cumulative net income (as defined in terms of the Mortgage Facility), as well as the net proceeds from stock option exercises, and decrease by subsequent payments for cash dividends and share repurchases. As of June 30, 2011, the Company was in compliance with all of these covenants. Based upon current operating and financial projections, the Company believes that it will remain compliant with such covenants in the future.

Real Estate Related Debt

In addition to the amended and restated Mortgage Facility, the Company entered into separate term loans in 2010, totaling $146.0 million, with three of its manufacturer-affiliated finance partners, Toyota Motor Credit Corporation (“TMCC”), Mercedes-Benz Financial Services USA, LLC (“MBFS”) and BMW Financial Services NA, LLC (“BMWFS”) (collectively, the “Real Estate Notes”). The Company used $116.4 million of these borrowings to refinance a portion of its Mortgage Facility and the remaining amount to finance owned or purchased real estate to be utilized in existing dealership operations. The Real Estate Notes may be expanded, are on specific buildings and/or properties and are guaranteed by the Company. Each loan was made in connection with, and is secured by mortgage liens on, the relevant real property owned by the Company that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest at fixed rates between 4.62% and 5.47%, and at variable rates of three-month LIBOR plus between 3.15% and 3.35% per annum. The Company capitalized $1.3 million of related debt issuance costs related to the Real Estate Notes that are being amortized over the terms of the notes, $1.2 million of which are still unamortized as of June 30, 2011.

The loan agreements with TMCC consist of four term loans. As of June 30, 2011, $27.1 million remained outstanding with $0.5 million classified as current and the remainder in long-term debt. The maturity dates vary from two to seven years and provide for monthly payments based on a 20-year amortization schedule. These four loans are cross-collateralized and cross-defaulted with each other. During the first three months of 2011, the loan agreements were amended to also be cross-defaulted with the Revolving Credit Facility.

The loan agreements with MBFS consist of three term loans. As of June 30, 2011, $49.4 million remained outstanding with $1.5 million classified as current and the remainder in long-term debt. The agreements provide for monthly payments based on a 20-year amortization schedule and have a maturity date of five years. These three loans are cross-collateralized and cross-defaulted with each other. They are also cross-defaulted with the Revolving Credit Facility.

The loan agreements with BMWFS consist of twelve term loans. As of June 30, 2011, $66.7 million remained outstanding with $3.1 million classified as current and the remainder in long-term debt. The agreements provide for monthly payments based on a 15-year amortization schedule and have a maturity date of seven years. In the case of three properties owned by subsidiaries, the applicable loan is also guaranteed by the subsidiary real property owner. These twelve loans are cross-collateralized with each other. In addition, they are cross-defaulted with each other, the Revolving Credit Facility, and certain dealership franchising agreements with BMW of North America, LLC.

On July 6, 2011, the Company entered into another loan agreement with BMWFS for $5.4 million. The loan agreement matures in seven years and is subject to certain financial covenants such as capital expenditures related to the real estate being purchased. The loan agreement is also cross-collateralized and cross-defaulted with the other BMWFS loans mentioned in the preceding paragraph and the Revolving Credit Facility.

In October 2008, the Company executed a note agreement with a third-party financial institution for an aggregate principal amount of £10.0 million (the “Foreign Note”), which is secured by the Company’s foreign subsidiary properties. The Foreign Note is being repaid in monthly installments which began in March 2010 and matures in August 2018. As of June 30, 2011, borrowings under the Foreign Note totaled $13.5 million, with $1.9 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.