We are subject to federal, state and local laws and regulations in each of the 1112 states in which we have stores. New laws and regulations are enacted on an ongoing basis. With the number of stores we operate, the number of personnel we employ and the large volume of transactions we handle, it is likely that technical mistakes will be made. It is also likely that these regulations may impact our profitability and require ongoing training. Current practices in stores may become prohibited. We are responsible for ensuring that continued compliance with laws is maintained. If there are unauthorized activities of serious magnitude, the state and federal authorities have the power to impose civil penalties and sanctions, suspend or withdraw dealer licenses or take other actions. These actions could materially impair our activities or our ability to acquire new stores in those states where violations occurred. Further, private causes of action on behalf of individuals or a class of individuals could result in significant damages or injunctive relief.

We may be involved in legal proceedings arising from the conduct of our business, including litigation with customers, employee-related lawsuits, class actions, purported class actions and actions brought by governmental authorities. Claims arising out of actual or alleged violations of law may be asserted against us or any of our dealers by individuals, either individually or through class actions, or by governmental entities in civil or criminal investigations and proceedings. Such actions may expose us to substantial monetary damages and legal defense costs, injunctive relief, and criminal and civil fines and penalties.

Federal regulations around fuel economy standards and “greenhouse gas” emissions have continued to increase. New requirements may adversely affect any manufacturer’s ability to profitably design, market, produce and distribute vehicles that comply with such regulations. We could be adversely impacted in our ability to market and sell these vehicles at affordable prices and in our ability to finance these inventories. These regulations could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Government regulations and compliance costs may adversely affect our business, and the failure to comply could have a material adverse effect on our results of operations.

We are, and expect to continue to be, subject to a wide range of federal, state and local laws and regulations, including local licensing requirements. These laws regulate the conduct of our business, including:

In every state in which we operate, we must obtain certain licenses issued by state authorities to operate our businesses, including dealer, sales, finance and insurance-related licenses. State laws also regulate our advertising, operating, financing, employment and sales practices. Other laws and regulations include state franchise laws and regulations and other extensive laws and regulations applicable to new and used automobile dealers. In some states, some of our practices must be approved by regulatory agencies which have broad discretion. The enactment of new laws and regulations that materially impair or restrict our sales, finance and insurance or other operations could have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.

Our financing activities are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations, as well as state and local motor vehicle finance laws, installment finance laws, insurance laws, usury laws and other installment sales laws and regulations. Some states regulate finance, documentation and administrative fees that may be charged in connection with vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines. In recent years, private plaintiffs and state attorneys general in the United States have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. These activities have led many lenders to limit the amounts that may be charged to customers as fee income for these activities. If these or similar activities were to significantly restrict our ability to generate revenue from arranging financing for our customers, we could be adversely affected.

The Dodd-Frank Wall Street Reform and Consumer Protection Act established the Consumer Financial Protection Bureau (CFPB), which has broad regulatory powers. Although the CFPB may not exercise its authority over an automotive dealer that is predominantly engaged in the sale and servicing of motor vehicles, the leasing and servicing of motor vehicles, or both, the Dodd-Frank Act and future regulatory actions by this bureau could lead to additional, indirect regulation of automotive dealers through its regulation of automotive finance companies and other financial institutions, and it could affect our arrangements with lending sources.

In March 2013, the CFPB issued a bulletin suggesting that auto dealers who arrange credit through outside parties may be participating in a credit decision such that they are subject to the Equal Credit Opportunity Act, including its anti-discrimination provisions. In particular, the CFPB highlighted that the payment to a dealer of the excess of the interest rate the dealer negotiates with the customer over the rate at which the lender is willing to provide financing may encourage pricing disparities on the basis of race, national origin, or potentially other prohibited bases. This bulletin may affect the willingness of outsider lenders to continue these practices, and heightened focus on these arrangements may affect our relationships and agreements, including our indemnification obligations, with lenders. The level of commissions paid by lenders to us for arranging financing may change due to this bulletin. These factors could adversely affect our business.

The vehicles we sell are also subject to the National Traffic and Motor Vehicle Safety Act, the Magnuson-Moss Warranty Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and various state motor vehicle regulatory agencies. The imported automobiles we purchase are subject to U.S. customs duties and, in the ordinary course of our business, we may, from time to time, be subject to claims for duties, penalties, liquidated damages or other charges.

If we or any of our employees at any individual dealership violate or are alleged to violate laws and regulations applicable to them or protecting consumers generally, we could be subject to individual claims or consumer class actions, administrative, civil or criminal investigations or actions and adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and criminal and civil fines and penalties, including suspension or revocation of our licenses and franchises to conduct dealership operations.

Likewise, employees and former employees are protected by a variety of employment-related laws and regulations relating to, among other things, wages and discrimination. Allegations of a violation could subject us to individual claims or consumer class actions, administrative investigations or adverse publicity. Such actions could expose us to substantial monetary damages and legal defense costs, injunctive relief and civil fines and penalties, and damage our reputation and sales.

Environmental laws and regulations govern, among other things, discharges into the air and water, storage of petroleum substances and chemicals, the handling and disposal of wastes and remediation of contamination arising from spills and releases. In addition, we may also have liability in connection with materials that were sent to third-party recycling, treatment and/or disposal facilities under federal and state statutes. These federal and state statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Similar to many of our competitors, we have incurred and expect to continue to incur capital and operating expenditures and other costs in complying with such federal and state statutes. In addition, we may be subject to broad liabilities arising out of contamination at our currently and formerly owned or operated facilities, at locations to which hazardous substances were transported from such facilities, and at such locations related to entities formerly affiliated with us. Although for some such potential liabilities we believe we are entitled to indemnification from other entities, we cannot assure you that such entities will view their obligations as we do or will be able or willing to satisfy them. Failure to comply with applicable laws and regulations, or significant additional expenditures required to maintain compliance therewith, may have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.

A significant judgment against us, the loss of a significant license or permit or the imposition of a significant fine could have a material adverse effect on our business, financial condition and future prospects. We further expect that, from time to time, new laws and regulations, particularly in the labor, employment, environmental and consumer protection areas will be enacted, and compliance with such laws, or penalties for failure to comply, could significantly increase our costs.

Failure of our information technology systems to perform adequately or data protection breaches and cyber attacks could disrupt our operations or result in the loss or misuse of customers’ proprietary information. These disruptions could have a material adverse effect on our business, financial results and reputation.

Our information technology systems are important to operating our business efficiently. We employ systems and websites that allow for the secure storage and transmission of customers’ proprietary information. The failure of our information technology systems to perform as we anticipate could disrupt our business and could expose us to a risk of loss or misuse of this information, litigation and potential liability.

In addition, such manufacturers generally require that no other manufacturers’ brands be sold from the same store location, and many manufacturers have site control agreements in place that limit our ability to change the use of the facility without their approval.

A manufacturer also considers our past performance as measured by the Minimum Sales Responsibility (“MSR”) scores, CSI scores and Sales Satisfaction Index (“SSI”) scores at our existing stores. At any point in time, certain stores may have scores below the manufacturers’ sales zone averages or have achieved sales below the targets manufacturers have set. Our failure to maintain satisfactory scores and to achieve market share performance goals could restrict our ability to complete future store acquisitions.

Acquisition risks

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

●

failing to assimilate the operations and personnel of acquired dealerships;

●

failing to achieve predicted sales levels;

●

incurring significantly higher capital expenditures and operating expenses;

●

entering new markets with which we are unfamiliar;

●

encountering undiscovered liabilities and operational difficulties at acquired dealerships;

18

---

●

disrupting our ongoing business;

●

diverting our management resources;

●

failing to maintain uniform standards, controls and policies;

●

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

●

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

●

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

●

incorrectly valuing entities to be acquired.acquired; and

●

Incurring additional facility renovation costs or other expenses required by the manufacturer.

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

Consummation and competition

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

●

the availability of suitable acquisition candidates;

●

competition with other dealer groups for suitable acquisitions;

●

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

●

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

●

our stock price;

●

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

●

the availability of skilled employees to manage the acquired businesses.

Financial condition

The operating and financial condition of acquired businesses cannot be determined accurately until we assume control. Although we conduct what we believe to be a prudent level of investigation regarding the operating and financial condition of the businesses we purchase, in light of the circumstances of each transaction, an unavoidable level of risk remains regarding the actual operating condition of these businesses. Similarly, many of the dealerships we acquire do not have financial statements audited or prepared in accordance with U.S. generally accepted accounting principles. We may not have an accurate understanding of the historical financial condition and performance of our acquired businesses. Until we actually assume control of the business assets and their operations, we may not be able to ascertain the actual value or understand the potential liabilities of the acquired businesses and their earnings potential.

We are subject to substantial risk of loss under our various self-insurance programs including property and casualty, workers’ compensation and employee medical coverage.

We have a significant concentration of our property values at each dealership location, including vehicle and parts inventories and our facilities. Natural disasters, severe weather or extraordinary events subject us to property loss and business interruption. Illegal or unethical conduct by employees, customers, vendors and unaffiliated third parties can also impact our business. Other potential liabilities arising out of our operations may involve claims by employees, customers or third parties for personal injury or property damage and potential fines and penalties in connection with alleged violations of regulatory requirements.

Under our self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims-handling expenses. Costs in excess of these retained risks may be insured under various contracts with third-party insurance carriers. As of December 31, 2013, we had total reserve amounts associated with these programs of $12.0 million. The level of risk we retain may change in the future as insurance market conditions or other factors affecting the economics of our insurance purchasing change. Although we believe we have sufficient insurance, we cannot assure that we will not be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Indefinite-lived intangible assets, which consist of goodwill and franchise value, comprise a meaningful portion of our total assets ($94.5120.7 million at December 31, 2012)2013). We must assess our indefinite-lived intangible assets for impairment at least annually, which may result in a non-cash write-down of franchise rights or goodwill and could have a material adverse impact on our business, results of operations, financial condition and cash flows and impair our ability to comply with loan covenants.

goodwill.

Indefinite-lived intangible assets are subject to impairment assessments at least annually (or more frequently when events or circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal intangible assets are goodwill and our rights under our Franchise Agreements with vehicle manufacturers. The risk of impairment charges associated with goodwill increases if there are declines in our market capitalization, profitability or cash flows. The risk of impairment charges associated with franchise value increases if operating losses are suffered at those stores, if a manufacturer files for bankruptcy or if the stores are closed. Impairment charges result in non-cash write-downs of the affected franchise values or goodwill. Furthermore, impairment charges could have an adverse impact on our ability to satisfy the financial ratios or other covenants under our debt agreements and could have a material adverse impact on our business, results of operations, financial condition and cash flows.

19

---

A net deferred tax asset position comprises a meaningful portion of our total assets (approximately $21.0$11.8 million at December 31, 2012)2013). We are required to assess the recoverability of this asset on an ongoing basis. Future negative operating performance or other unfavorable developments may result in a valuation allowance being recorded against part or all of this amount. This could have a material adverse impact on our business, results of operations, financial condition and cash flows and impair our ability to comply with loan covenants.

Deferred tax assets are evaluated periodically to determine if they are expected to be recoverable in the future. This evaluation considers positive and negative evidence in order to assess whether it is more likely than not that a portion of the asset will not be realized. The risk of a valuation allowance increases if continuing operating losses are incurred. A valuation allowance on our deferred tax asset could have an adverse impact on our ability to satisfy financial ratios or other covenants under our debt agreements and could have a material adverse impact on our business, results of operations, financial condition and cash flows.

Our indebtedness and lease obligations could materially adversely affect our financial health, limit our ability to finance future acquisitions and capital expenditures and prevent us from fulfilling our financial obligations. Much of our debt has a variable interest rate component that may significantly increase our interest costs in a rising rate environment.

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

●

limitations on our ability to make acquisitions;

●

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

●

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

●

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

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

Certain debt agreements contain subjective acceleration clauses based on a lender deeming itself insecure or if a “material adverse change” in our business has occurred. If these clauses are implicated, and the lender declares that an event of default has occurred, the outstanding indebtedness would likely be immediately due and owing.

If these events were to occur, we may not be able to pay our debts or borrow sufficient funds to refinance them. Even if new financing were available, it may not be on terms acceptable to us. As a result of this risk, we could be forced to take actions that we otherwise would not take, or not take actions that we otherwise might take, in order to comply with these agreements.

20

---

Additionally, our real estate debt generally has a five-yearsix-year term, after which the debt needs to be renewed or replaced. A decline in the appraised value of real estate or a reduction in the loan-to-value lending ratios for new or renewed real estate loans could result in our inability to renew maturing real estate loans at the debt level existing at maturity, or on terms acceptable to us, requiring us to find replacement lenders or to refinance at lower loan amounts.

As of December 31, 2012,2013, including the effect of interest rate swaps, approximately 74%84% of our total debt was variable rate. The majority of our variable rate debt is indexed to the one-month LIBOR rate. The current interest rate environment is at historically low levels, and interest rates will likely increase in the future. In the event interest rates increase, our borrowing costs may increase substantially. Additionally, fixed rate debt that matures may be renewed at interest rates significantly higher than current levels. As a result, this could have a material adverse impact on our business, results of operations, financial condition and cash flows.

We have a significant relationship with a third-party warranty insurer and administrator. This third-party is the obligor of service warranty policies sold to our customers. Additionally, we have agreements in place that allow for future income based on the claims experience on policies sold to our customers. If the insurer should be unable to honor our customers’ policies or has a decline in their financial health, such events could negatively impact our business and reputation, results of operations, financial condition and cash flows.

We sell service warranty policies to our customers issued by a third-party obligor. We receive additional fee income if actual claims are less than the amounts reserved for anticipated claims and the costs of administration and administrator profit.  

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

The loss of key personnel or the failure to attract additional qualified management personnel could adversely affect our operations and growth.

Our success depends to a significant degree on the efforts and abilities of our senior management, particularly Bryan B. DeBoer, our Director, President and Chief Executive Officer, and Christopher S. Holzshu, our Senior Vice President and Chief Financial Officer. Further, we have identified Sidney B. DeBoer, our Executive Chairman of the Board, and/or Bryan B. DeBoer in most of our store franchise agreements as the individuals who control the franchises and upon whose financial resources and management expertise the manufacturers may rely when awarding or approving the transfer of any franchise. If we lose these key personnel, our business may suffer.

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

21

---

The sole voting control of our company is currently held by Sidney B. DeBoer, who may have interests different from our other shareholders. Further, 2.82.3 million shares of our Class B common stock held by Lithia Holding Company, LLC (“Lithia Holding”) are pledged with other assets, to secure personal indebtedness of Mr. DeBoer.Lithia Holding. The failure to repay the indebtedness could result in the sale of such shares and the loss of such control, which may violate agreements with certain manufacturers.

Sidney B. DeBoer, our Founder and Executive Chairman, is the sole managing member of Lithia Holdings, which holds all of the outstanding shares of our Class B common stock. A holder of Class B common stock is entitled to ten votes for each share held, while a holder of Class A common stock is entitled to one vote per share held. On most matters, the Class A and Class B common stock vote together as a single class. As of February 22, 2013,21, 2014, Lithia Holding controlled, and Mr. DeBoer had the authority to vote, approximately 55%52% of the aggregate number of votes eligible to be cast by shareholders for the election of directors and most other shareholder actions. In addition, Mr. DeBoer may prevent a change in control of our Company and make certain transactions more difficult or impossible. The interest of Mr. DeBoer may not always coincide with our interests as a Company or the interest of other shareholders. Accordingly, Mr. DeBoer could cause us to enter into transactions or agreement that other shareholders would not approve of or make decisions with which other shareholders may disagree.

Lithia Holding has pledged 2.82.3 million shares of our Class B common stock together with other personal assets of Mr. DeBoer, to secure a personal loan to Mr. DeBoer from U.S. Bank National Association. If heLithia Holding is unable to repay the loan, the bank could foreclose on the Class B common stock, which would result in the automatic conversion of such shares to Class A common stock and a change in control of our Company. If this change is not consented to by the manufacturers, we would have a technical violation under most of the dealer sales and service agreements held by us. In addition, the market price of our Class A common stock could decline materially if the bank foreclosed on such pledged stock and subsequently sold such stock in the open market.

Risks related to investing in our Class A common stock

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

As of February 22, 2013,21, 2014, we had 2,183,1142,903,387 shares of Class A common stock reserved for issuance under our equity plans (including our employee stock purchase plan). As of February 22, 2013,21, 2014, a total of 583,463660,815 shares related to outstanding restricted stock, restricted stock units and options (with the options having a weighted average exercise price of $6.27$6.53 per share and options to purchase 250,49958,884 shares being exercisable). In addition, we had 2,762,2612,562,231 shares of Class B common stock outstanding convertible into 2,762,2612,562,231 shares of Class A common stock.

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

22

---

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

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

●

reports by industry analysts;

●

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

●

actual or anticipated sales of common stock by existing shareholders;shareholders or us;

●

capital commitments;

●

additions or departures of key personnel;

●

developments in our business or in our industry;

●

a prolonged downturn in our industry;

●

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

●

changes in global financial and economic markets;

●

armed conflict, war or terrorism;

●

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

●

changes in market valuations of other companies in our industry;

●

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

●

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

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

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

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

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

Our business is seasonal, and events occurring during seasons in which revenues are typically higher may disproportionately affect our results of operations and financial condition.

Historically, our sales have been lower during the first and fourth quarters of each year due to consumer purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced number of business days during the holiday season. IfMore recently our franchise diversification and cost controls have moderated this seasonality. However, if conditions occur during the second or third quarters that weaken automotive sales, such as severe weather in the geographic areas in which our dealerships operate, war, high fuel costs, depressed economic conditions including unemployment or weakened consumer confidence or similar adverse conditions, our revenues for the year may be disproportionately adversely affected.

Item 1B.  Unresolved Staff Comments

None.

23

---

Item 2.  Properties

Our stores and other facilities consist primarily of automobile showrooms, display lots, service facilities, collision repair and paint shops, supply facilities, automobile storage lots, parking lots and offices located in the states listed under the captionOverview in Item 1. We believe our facilities are currently adequate for our needs and are in good repair. Some of our facilities do not currently meet manufacturer image or size requirements and we are actively working to find a mutually acceptable outcome in terms of timing and overall cost. We own our corporate headquarters in Medford, Oregon and certain properties butused in operations. Certain of these properties are mortgaged. We also lease certain properties, providing future flexibility to relocate our retail stores as demographics, economics, traffic patterns or sales methods change. Most leases provide us the option to renew the lease for one or more lease extension periods. We also hold certain vacant dealerships and undeveloped land for future expansion.

Item 3.  Legal Proceedings

Item 3.Legal Proceedings

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

flows, we cannot predict this with certainty.

Alaska Consumer Protection Act Claims

In December 2006, a class action suit was filed against us (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc,Inc., et al, Case No. 3AN-06-13341 CI,CI), and in April 2007, a second caseclass action suit (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-4815 CI) (now consolidated)),was filed against us, in the Superior Court for the State of Alaska, Third Judicial District at Anchorage. These suits were subsequently consolidated. In the suits,consolidated suit, plaintiffs alleged that we, through our Alaska dealerships, engaged in three practices that purportedly violate Alaska consumer protection laws: (i) charging customers dealer fees and costs (including document preparation fees) not disclosed in the advertised price, (ii) failing to disclose the acquisition, mechanical and accident history of used vehicles or whether the vehicles were originally manufactured for sale in a foreign country, and (iii) engaging in deception, misrepresentation and fraud by providing to customers financing from third parties without disclosing that we receive a fee or discount for placing that loan (a “dealer reserve”).loan. The suit seekssought statutory damages of $500 for each violation (oror three times plaintiff’s actual damages, whichever is greater),was greater, and attorney fees and costs andcosts.

In June2013, the plaintiffs sought class action certification.  Before and duringparties agreed to mediate the pendency of these suits, we engagedclaims. The mediation resulted in a settlement discussions withagreement that received the State of Alaska through its Office of Attorney General with respect to the first two practices enumerated above. As a result of those discussions, we entered into a Consent Judgment subject to courtfinal approval and permitted potential class members to “opt-out” of the proposed settlement. CounselCourt on December 11, 2013. Under the settlement agreement, we agreed to reimburse plaintiffs’ legal fees and to pay (i) $450 in the form of cash and vouchers and (ii) $3,000 for the plaintiffs attemptedeach claim representative. As of December 31, 2013, we estimated costs of $6.2 million to intervenesettle all claims against us and after various motions, hearings and an appeal to the state Court of Appeals, the Consent Judgment became final.

Plaintiffs then filed a motion in November 2010 seeking certification of a class (i) for the 339 customers who “opted-out”pay plaintiffs’ legal fees. The estimated costs are based on our assumptions of the state settlement, (ii) for those customers who did not qualify for recovery underfinal number of approved claims and a voucher redemption rate. We believe that these estimates are reasonable; however, actual costs could differ materially.We recorded this amount as a component of selling, general and administrative expense in our Consolidated Statements of Operations and, as of December 31, 2013, the Consent Judgment but were allegedly eligible for recovery under the plaintiffs’ broader interpretationamount was included as a component of the applicable statutes, and (iii) arguing that since the State’s suit againstaccrued liabilities in our dealerships did not address the loan fee/discount (dealer reserve) claim, for those customers who arranged their vehicle financing through us. On June 14, 2011, the Trial Court granted plaintiffs’ motion to certify a class without addressing either the merits of the claims or the size of the classes. Discovery in this case is ongoing. We intend to defend the claims vigorously and do not believe the novel “dealer reserve” claim has merit.

The ultimate resolution of these matters cannot be predicted with certainty, and an unfavorable resolution of any of the matters could have a material adverse effect on our results of operations, financial condition or cash flows.

24

---

Consolidated Balance Sheets. 

Item 4.Mine Safety Disclosure

Not applicable.

Not applicable.

PART II

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

Stock Prices and Dividends

Our Class A common stock trades on the New York Stock Exchange under the symbol LAD. The following table presents the high and low sale prices for our Class A common stock, as reported on the New York Stock Exchange Composite Tape for each of the quarters in 20112012 and 2012:

2011		High				Low
First quarter		$	16.07			$	13.28
Second quarter			20.31				14.12
Third quarter			23.84				13.80
Fourth quarter			24.85				13.57
2012
First quarter		$	27.51			$	20.62
Second quarter			27.99				21.45
Third quarter			34.00				22.08
Fourth quarter			37.80				31.60

2013:

2012		High				Low
First quarter		$	27.51			$	20.62
Second quarter			27.99				21.45
Third quarter			34.00				22.08
Fourth quarter			37.80				31.60
2013
First quarter		$	47.63			$	37.54
Second quarter			57.04				42.03
Third quarter			73.58				53.60
Fourth quarter			74.94				60.45

The number of shareholders of record and approximate number of beneficial holders of Class A common stock as of February 22, 201321, 2014 was 861784 and 14,072,18,421, respectively. All shares of Lithia’s Class B common stock are held by Lithia Holding Company, LLC.

Dividends declared on our Class A and Class B common stock during 2010, 2011, 2012 and 20122013 were as follows:

Quarter declared:		Dividend amount per share				Total amount of dividend (in thousands)
2010
First quarter		$	-			$	-
Second quarter			0.05				1,300
Third quarter			0.05				1,307
Fourth quarter			0.05				1,312
2011
First quarter		$	0.05			$	1,316
Second quarter			0.07				1,851
Third quarter			0.07				1,838
Fourth quarter			0.07				1,817
2012
First quarter		$	0.07			$	1,815
Second quarter			0.10				2,583
Third quarter			0.10				2,545
Fourth quarter(1)			0.20				5,123

Quarter declared:		Dividend amount per share				Total amount of dividend (in thousands)
2011
First quarter		$	0.05			$	1,316
Second quarter			0.07				1,851
Third quarter			0.07				1,838
Fourth quarter			0.07				1,817
2012
First quarter		$	0.07			$	1,815
Second quarter			0.10				2,583
Third quarter			0.10				2,545
Fourth quarter(1)			0.20				5,123
2013
First quarter		$	-			$	-
Second quarter			0.13				3,356
Third quarter			0.13				3,363
Fourth quarter			0.13				3,366

(1)	In November 2012, we paid dividends of $2.5 million that had been declared in October 2012. An additional dividend payment of $2.6 million was declared and paid in December 2012 in lieu of the dividend typically declared and paid in March of the following year.

25

---

Repurchases of Class A Common Stock

We repurchased the following shares of our Class A common stock during the fourth quarter of 2012:

		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of publicly announced plans or programs(1)				Maximum number of shares that may yet be purchased under the plans or programs(1)
October 1 to October 31			-			$	-				-				1,879,853
November 1 to November 30			70,819				34.28				25,000				1,854,853
December 1 to December 31			6,695				36.64				-				1,854,853
Total			77,514	(2)			34.48				25,000				1,854,853

(1)

In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock. On July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. Through December 31, 2012, we had purchased 1,145,147 shares under these programs at an average price of $22.33 per share. These plans do not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.

(2)	Includes 52,514 shares repurchased in association with tax withholdings on the exercise of stock options.

Equity Compensation Plan Information

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

Stock Performance Graph

The following line-graph shows the annual percentage change in the cumulative total returns for the past five years on an assumed $100 initial investment and reinvestment of dividends, on (a) Lithia Motors, Inc.’s Class A common stock; (b) the Russell 2000; and (c) an auto peer group index composed of Penske Automotive Group, AutoNation, Sonic Automotive, Group 1 Automotive and Asbury Automotive Group, the only other comparable publicly traded automobile dealerships in the United States as of December 31, 2012.2013. The peer group index utilizes the same methods of presentation and assumptions for the total return calculation as does Lithia Motors and the Russell 2000. All companies in the peer group index are weighted in accordance with their market capitalizations.

		Base Period				Indexed Returns for the Year Ended
Company/Index		12/31/2008				12/31/2009				12/31/2010				12/31/2011				12/31/2012				12/31/2013
Lithia Motors, Inc.		$	100.00			$	252.15			$	445.38			$	691.44			$	1,206.33			$	2,252.63
Auto Peer Group			100.00				206.91				288.14				356.47				443.45				600.45
Russell 2000			100.00				127.09				161.17				154.44				179.75				249.53

 

26

---

		Base Period				Indexed Returns for the Year Ended
Company/Index		12/31/2007				12/31/2008				12/31/2009				12/31/2010				12/31/2011				12/31/2012
Lithia Motors, Inc.		$	100.00			$	25.37			$	63.97			$	113.07			$	175.43			$	305.85
Auto Peer Group			100.00				48.43				100.20				139.53				172.62				214.74
Russell 2000			100.00				66.20				84.20				106.81				102.33				119.05

27

---

Item 6.Selected Financial Data

You should read the Selected Financial Data in conjunction with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Consolidated Financial Statements and Notes thereto and other financial information contained elsewhere in this Annual Report on Form 10-K. The results of operations for stores classified as discontinued operations have been presented on a comparable basis for all periods presented.

(In thousands, except per share amounts)		Year Ended December 31,
Consolidated Statements of Operations Data:		2012				2011				2010				2009				2008
Revenues:
New vehicle		$	1,847,603			$	1,391,375			$	1,020,883			$	844,294			$	1,113,477
Used vehicle retail			833,484				678,571				558,105				455,633				443,825
Used vehicle wholesale			139,237				128,329				103,817				69,845				91,263
Finance and insurance			112,234				84,130				64,217				53,898				74,173
Service, body and parts			347,703				315,958				277,945				271,726				283,751
Fleet and other			36,226				34,383				11,655				2,457				4,829
Total revenues		$	3,316,487			$	2,632,746			$	2,036,622			$	1,697,853			$	2,011,318
Gross Profit:
New vehicle		$	134,447			$	107,150			$	83,646			$	70,971			$	87,646
Used vehicle retail			121,721				98,214				78,795				64,167				51,138
Used vehicle wholesale			1,414				597				703				507				(2,961	)
Finance and insurance			112,234				84,130				64,217				53,898				74,173
Service, body and parts			168,070				152,220				133,942				129,242				135,487
Fleet and other			1,414				2,973				1,643				1,232				1,534
Total gross profit		$	539,300			$	445,284			$	362,946			$	320,017			$	347,017
Operating income (loss)(1)		$	148,369			$	110,818			$	46,470			$	34,517			$	(291,415	)
Income (loss) from continuing operations before income taxes(1)		$	128,457			$	88,270			$	22,212			$	11,578			$	(322,182	)
Income (loss) from continuing operations(1)		$	79,395			$	55,210			$	13,587			$	6,606			$	(218,420	)
Basic income (loss) per share from continuing operations		$	3.09			$	2.10			$	0.52			$	0.30			$	(10.82	)
Basic income (loss) per share from discontinued operations			0.04				0.14				0.01				0.12				(1.69	)
Basic net income (loss) per share		$	3.13			$	2.24			$	0.53			$	0.42			$	(12.51	)
Shares used in basic per share			25,696				26,230				26,062				22,037				20,195
Diluted income (loss) per share from continuing operations		$	3.03			$	2.07			$	0.52			$	0.30			$	(10.82	)
Diluted income (loss) per share from discontinued operations			0.04				0.14				0.00				0.11				(1.69	)
Diluted net income (loss) per share		$	3.07			$	2.21			$	0.52			$	0.41			$	(12.51	)
Shares used in diluted per share			26,170				26,664				26,729				22,176				20,195
Cash dividends declared per common share		$	0.47			$	0.26			$	0.15			$	-			$	0.47

(In thousands)		As of December 31,
Consolidated Balance Sheets Data:		2012				2011				2010				2009				2008
Working capital		$	211,905			$	191,607			$	162,675			$	96,886			$	99,524
Inventories			723,326				506,484				415,228				333,628				428,032
Total assets			1,492,702				1,146,133				971,676				895,100				1,133,459
Floor plan notes payable			581,584				343,940				251,257				216,082				343,290
Long-term debt, including current maturities			295,058				286,874				280,774				265,773				338,229
Total stockholders’ equity			428,101				367,121				320,217				307,038				248,343

(In thousands, except per share amounts)		Year Ended December 31,
Consolidated Statements of Operations Data:		2013				2012				2011				2010				2009
Revenues:
New vehicle		$	2,256,598			$	1,847,603			$	1,391,375			$	1,020,883			$	844,294
Used vehicle retail			1,032,224				833,484				678,571				558,105				455,633
Used vehicle wholesale			158,235				139,237				128,329				103,817				69,845
Finance and insurance			139,007				112,234				84,130				64,217				53,898
Service, body and parts			383,483				347,703				315,958				277,945				271,726
Fleet and other			36,202				36,226				34,383				11,655				2,457
Total revenues		$	4,005,749			$	3,316,487			$	2,632,746			$	2,036,622			$	1,697,853
Gross Profit:
New vehicle		$	151,118			$	134,447			$	107,150			$	83,646			$	70,971
Used vehicle retail			150,858				121,721				98,214				78,795				64,167
Used vehicle wholesale			2,711				1,414				597				703				507
Finance and insurance			139,007				112,234				84,130				64,217				53,898
Service, body and parts			185,570				168,070				152,220				133,942				129,242
Fleet and other			1,689				1,414				2,973				1,643				1,232
Total gross profit		$	630,953			$	539,300			$	445,284			$	362,946			$	320,017
Operating income(1)		$	183,518			$	148,369			$	110,818			$	46,470			$	34,517
Income from continuing operations before income taxes(1)		$	165,788			$	128,457			$	88,270			$	22,212			$	11,578
Income from continuing operations(1)		$	105,214			$	79,395			$	55,210			$	13,587			$	6,606
Basic income per share from continuing operations		$	4.08			$	3.09			$	2.10			$	0.52			$	0.30
Basic income per share from discontinued operations			0.03				0.04				0.14				0.01				0.12
Basic net income per share		$	4.11			$	3.13			$	2.24			$	0.53			$	0.42
Shares used in basic per share			25,805				25,696				26,230				26,062				22,037
Diluted income per share from continuing operations		$	4.02			$	3.03			$	2.07			$	0.52			$	0.30
Diluted income per share from discontinued operations			0.03				0.04				0.14				0.00				0.11
Diluted net income per share		$	4.05			$	3.07			$	2.21			$	0.52			$	0.41
Shares used in diluted per share			26,191				26,170				26,664				26,729				22,176
Cash dividends declared per common share(2)		$	0.39			$	0.47			$	0.26			$	0.15			$	-

(In thousands)		As of December 31,
Consolidated Balance Sheets Data:		2013				2012				2011				2010				2009
Working capital		$	209,038			$	211,905			$	191,607			$	162,675			$	96,886
Inventories			859,019				723,326				506,484				415,228				333,628
Total assets			1,725,121				1,492,702				1,146,133				971,676				895,100
Floor plan notes payable			713,855				581,584				343,940				251,257				216,082
Long-term debt, including current maturities			252,554				295,058				286,874				280,774				265,773
Total stockholders’ equity			534,722				428,101				367,121				320,217				307,038

(1)

Includes $0.1 million, $1.4 million, $15.3 million $7.9 million and $330.3$7.9 million of non-cash charges related to asset impairments and terminated construction projects for the years ended 2012, 2011, 2010 and 2009, and 2008, respectively. No non-cash charges related to asset impairments or terminated construction projects were recorded in 2013. See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information.

(2)	In November 2012, we paid dividends of $2.5 million that had been declared in October 2012. An additional dividend payment of $2.6 million was declared and paid in December 2012 in lieu of the dividend typically declared and paid in March of the following year.

 

28

---

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with Item 1. “Business,” Item 1A. “Risk Factors” and our Consolidated Financial Statements and Notes thereto.

Overview

As discussed in Overview in Item 1, “Business” above, weWe are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of February 22, 2013,21, 2014, we offered 2728 brands of new vehicles and all brands of used vehicles in 8796 stores in the United States and online atLithia.comLithia.com. We sell new and used cars and trucks and replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing,financing; and sell service contracts, vehicle 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. In 2013, the top ten automotive retailers only represented 6% of the stores in the United States. We seek exclusive franchises for acquisition and target mid-sized and regional markets for domestic and import franchises and metropolitan markets for luxury franchises. We have completed over 100 acquisitions since our initial public offeringbelieve this strategy enables brand exclusivity with minimal competition from other dealerships with the same franchise in 1996.the market. Our acquisition strategy has been to acquire dealerships at prices that meet our internal investment targets and, through the application of our centralized operating structure, leverage costs and improve store profitability. We believe our disciplined approach and 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 within our general managers and department managers, we strive for continualcontinuous improvement to drive sales and capture market share in our local markets. Our goal is to retail an average of 75 used vehicles per store per month and 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 continue to grow this business through increased marketing efforts, competitive pricing on routine maintenance items and diverse commodity product offerings. In 2012,2013, we continued to experience organic growth and profitability through increasing market share and maintaining a lean cost structure.

We believe

As sales volume increases and we gain leverage in our cost structure, is aligned with current industry sales levels and positioned to be leveraged if vehicle sales levels continue to improve. We target selling, general and administrative (“we anticipate maintaining SG&A”) expense&A as a percentage of gross profit in the highupper 60% range as vehicle sales improve.range. As we focus on maintaining discipline in controlling costs, in 2014 we continue to target retaining, on a same store pre-tax basis, 50% of each incremental gross profit dollar after deducting SG&A expense.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and reported amounts of revenues and expenses at the date of the financial statements. Certain accounting policies require us to make difficult and subjective judgments on matters that are inherently uncertain. The following accounting policies involve critical accounting estimates because they are particularly dependent on assumptions made by management. While we have made our best estimates based on facts and circumstances available to us at the time, different estimates could have been used in the current period. Changes in the accounting estimates we used are reasonably likely to occur from period to period, which may have a material impact on the presentation of our financial condition and results of operations.

 

29

---

Our most critical accounting estimates include those related to goodwill and franchise value, long-lived assets, deferred tax assets, service contracts and other insurance contracts, and lifetime lube, oil changeand filter contracts and self-insurance programs. We also have other key accounting policies for valuation of accounts receivable, expense accruals and revenue recognition. However, these policies either do not meet the definition of critical accounting estimates described above or are not currently material items in our financial statements. We review our estimates, judgments and assumptions periodically and reflect the effects of revisions in the period that they are deemed to be necessary. We believe that these estimates are reasonable. However, actual results could differ materially from these estimates.

Goodwill and Franchise Value

We are required to test our goodwill and franchise value for impairment at least annually, or more frequently if conditions indicate that an impairment may have occurred. We have determined that we operate as one reporting unit for evaluating goodwill. We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2012,2013, evaluated our goodwill using a quantitative assessment process. We test goodwill for impairment using the Adjusted Present Value method (“APV”) to estimate the fair value of our reporting unit. Under the APV method, future cash flows are based on recently prepared budget forecasts and business plans and are used to estimate the future economic benefits that the reporting unit will generate. An estimate of the appropriate discount rate is utilized to convert the future economic benefits to their present value equivalent.

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

As of December 31, 2012,2013, we had $32.0$49.5 million of goodwill on our balance sheet. The first step of our annual goodwill impairment analysis, which we perform as of October 1 of each year, did not result in an indication of impairment in 2013, 2012 2011 or 2010.2011. The fair value of the reporting unit as of December 31, 2012,2013, using the APV method, was 109%132% greater than the carrying value at December 31, 2012.

2013.

We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis. We have the option to early adopt an amendment that allows us to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2012,2013, we evaluated our indefinite-lived intangible assets using a quantitative assessment process. We estimate the fair value of our franchise rights primarily using the Multi-Period Excess Earnings (“MPEE”) model. The forecasted cash flows used in the MPEE model contain inherent uncertainties, including significant estimates and assumptions related to growth rates, margins, general operating expenses, and cost of capital. We use primarily internally-developed forecasts and business plans to estimate the future cash flows that each franchise will generate. We have determined that only certain cash flows of the store are directly attributable to the franchise rights. We estimate the appropriate interest rate to discount future cash flows to their present value equivalent taking into consideration factors such as a risk-free rate, a peer group average beta, an equity risk premium and a small stock risk premium.

We also may use a market approach to determine the fair value of our franchise rights. These market data points include our acquisition and divestiture experience and third-party broker estimates.

As of December 31, 2012,2013, we had $62.4$71.2 million of franchise value on our balance sheet.sheet associated with 57 stores. No individual store accounted for more than 12% of our total franchise value as of December 31, 2013. Our impairment testing of franchise value did not indicate any impairment in 2013, 2012 2011 or 2010.2011. 

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

30

---

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

Long-Lived Assets

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

We determined an asset group is comprised of the long-lived assets used in the operations of an individual store.

We determine a triggering event has occurred by reviewing store forecasted and historical financial performance. A storeAn asset group is evaluated for recoverability if it has an operating loss in the current year and two of the prior three years. Additionally, we may judgmentally evaluate a storean asset group if its financial performance indicates it may not support the carrying amount of the long-lived assets. If a store meets these criteria, we estimate the projected undiscounted cash flows for each asset group based on internally developed forecasts. If the undiscounted cash flows are lower than the carrying value of the asset group, we determine the fair value of the asset group based on additional market data, including recent experience in selling similar assets.

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

Although we believe our property and equipment and assets held and used are appropriately valued, the assumptions and estimates used may change and we may be required to record impairment charges to reduce the value of these assets. A future decline in store performance, decrease in projected growth rates or changes in other operating assumptions could result in an impairment of long-lived asset groups, which could have a material adverse impact on our financial position and results of operations.

Due to the adverse change in the business climate

In 2012 and the commercial real estate market,2011, we performed impairment testing on long-lived assets, mainly related todetermined triggering events had occurred associated with certain property held for future development or investment purposes in 2012, 2011 and 2010.purchases. As a result, we performed impairment testing on those specific long-lived assets and recorded impairments related to long-lived assets of $0.1 million $1.4 million and $15.3$1.4 million in 2012 and 2011, and 2010, respectively.

We did not record any impairments related to long-lived assets in 2013.

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

Deferred Tax Assets

As of December 31, 2012,2013, we had deferred tax assets of approximately $61.1$64.2 million and deferred tax liabilities of $28.5$41.3 million. The principal components of our deferred tax assets are related to goodwill, allowances and accruals, capital loss carryforwards, deferred revenue and cancellation reserves. The principal components of our deferred tax liabilities are related to depreciation on property and equipment and inventories.

We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment.

 

31

---

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

As of December 31, 2012,2013, we had an $11.6$11.1 million valuation allowance against our deferred tax assets. This valuation allowance was mainly associated with losses from the sale of corporate entities. As these amounts are characterized as capital losses, we evaluated the availability of projected capital gains and determined that it would be unlikely these amounts would be fully utilized. If we are unable to meet the projected taxable income levels utilized in our analysis, and depending on the availability of feasible tax planning strategies, we might record an additional valuation allowance on a portion or all of our deferred tax assets in the future. In the event that a manufacturer is unable to remain solvent, our operations may be impacted and we might record a valuation allowance on a portion or all of the deferred tax assets, which could have a material adverse impact on our financial position and results of operations.

Service Contracts and Other Insurance Contracts

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

We record commissions at the time of sale of the vehicles, net of an estimated liability for future charge-backs. We have established a reserve for estimated future charge-backs based on an analysis of historical charge-backs in conjunction with estimated lives of the applicable contracts. If future cancellations are different than expected, we could have additional expense related to the cancellations in future periods, which could have a material adverse impact on our financial position and results of operations.

At December 31, 20122013 and 2011,2012, the reserve for future cancellations totaled $13.5$18.2 million and $10.4$13.5 million, respectively, and is included in accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets. A 10% increase in expected cancellations would result in an additional reserve of approximately $1.3$1.8 million.

Lifetime Lube, Oil Change Self-Insurance

In March 2009, we assumed from a third partyand Filter Contracts

We retain the obligation for lifetime lube, oil and filter service contracts sold to provide futureour customers and assumed the liability of certain existing lifetime, lube, oil service for a pool of existing contracts and began to self-insure the majority of the lifetime oil contracts we sell.

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

If our estimates of future costs to perform under the contracts exceed the existing deferred revenue, we would record a charge in the Consolidated Statements of Operations. We perform our loss contingency analysis separatelyreserve for the pooladditional expected cost. The estimate of assumed contracts andfuture costs to perform under the pool of self-insured contracts sold starting in March 2009. We recorded a charge of $1.0 million in both 2011 and 2010 for expected costs in excess of revenue deferred related to the pool of assumed contracts. We did not record an additional charge in 2012. The analysiscontract are mainly dependent on our self-insured sold contracts did not indicate a loss reserve was needed in 2012, 2011 and 2010.

32

---

We believe the new vehicle purchase cycle has been delayed for many buyers. If the ownership cycle does not accelerate towards pre-recession levels, our estimate of theestimated number of oil changes to be performed over a vehicle’s life may increase, which would adversely affectand our financial position and results of operations. In addition, other changes in assumptions about future costs expected to be incurredincurred. Significant increases to service contracts could result in the recognitioneither of additional charges, whichthese assumptions could have a material adverse impact on our financial position and results of operations.

A 10% change in expected claims costs per contract for the assumed pool of contracts would result in an additional reserve of approximately $0.7 million. A 10% change in expected claims per contract for the self-insured sold contracts would not require any additional reserve.

At December 31, 2012,2013, the remaining deferred revenue related to the assumed obligation and thethese self-insured sold contracts was $4.0 million and $33.9 million, respectively.$50.1 million.

Self Insurance

Self-Insurance Programs

We self-insure a portion of our property and casualty insurance, medical insurance and workers’ compensation insurance. Third-parties are engagedWe engage third-parties to estimateassist in estimating the loss exposure related to the self-retained portion of the risk associated with these insurances. Additionally, we analyze our historical loss and claims experience to estimate the loss exposuretrends associated with these programs. Any changes in assumptionsThe maximum exposure on any single claim under these programs is $1 million. Although we believe we have sufficient insurance, exposure to uninsured or claims experience couldunderinsured losses may result in the recognition of additional charges, which could have a material adverse impact on our financial position and results of operations.

At December 31, 2013 and 2012, and 2011, the total reservewe had liabilities associated with these programs wasof $12.0 million and $12.4 million, and $10.4 million, respectively, and is included inrecorded as a component of accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets. A 10% increase in claims experience would result in an additional reserve of approximately $4.5 million.

Results of Continuing Operations

For the year ended December 31, 2013, we reported income from continuing operations, net of tax, of $105.2 million, or $4.02 per diluted share. For the years ended December 31, 2012 and 2011, we reported income from continuing operations, net of tax, of $79.4 million, or $3.03 per diluted share. For the years ended December 31, 2011share, and 2010, we reported income from continuing operations, net of tax, of $55.2 million, or $2.07 per diluted share, and $13.6 million,respectively.

Discontinued Operations

The results of operations for stores that have been sold, closed, or $0.52 per diluted share, respectively.

Discontinued Operations

Resultsare held for sold or closed stores, qualifying for reclassification under the applicable accounting guidance, have their resultssale are presented as discontinued operations in our Consolidated Statements of Operations.Operations if they qualify for reclassification under the applicable accounting guidance. As a result, our results from continuing operations are presented on a comparable basis for all periods. WithinWe realized income from discontinued operations, we realized a gain, net of income tax expense, of $0.8 million, $1.0 million $3.7 million and $0.1$3.7 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. See Notes 1 and 16 of Notes to Consolidated Financial Statements for additional information.

33

---

Key Performance Metrics

Certain key performance metrics for revenue and gross profit were as follows for 2013, 2012 2011 and 20102011 (dollars in thousands):

2013		Revenues				Percent of Total Revenues				Gross Profit				Gross Profit Margin				Percent of Total Gross Profit
New vehicle		$	2,256,598				56.3	%		$	151,118				6.7	%			24.0	%
Used vehicle retail			1,032,224				25.8				150,858				14.6				23.9
Used vehicle wholesale			158,235				3.9				2,711				1.7				0.4
Finance and insurance(1)			139,007				3.5				139,007				100.0				22.0
Service, body and parts			383,483				9.6				185,570				48.4				29.4
Fleet and other			36,202				0.9				1,689				4.7				0.3
		$	4,005,749				100.0	%		$	630,953				15.8	%			100.0	%

2012		Revenues				Percent of Total Revenues				Gross Profit				Gross Profit Margin				Percent of Total Gross Profit
New vehicle		$	1,847,603				55.7	%		$	134,447				7.3	%			24.9	%
Used vehicle retail			833,484				25.1				121,721				14.6				22.6
Used vehicle wholesale			139,237				4.2				1,414				1.0				0.3
Finance and insurance(1)			112,234				3.4				112,234				100.0				20.8
Service, body and parts			347,703				10.5				168,070				48.3				31.1
Fleet and other			36,226				1.1				1,414				3.9				0.3
		$	3,316,487				100.0	%		$	539,300				16.3	%			100.0	%

2012		Revenues				Percent of Total Revenues				Gross Profit				Gross Profit Margin				Percent of Total Gross Profit
New vehicle		$	1,847,603				55.7	%		$	134,447				7.3	%			24.9	%
Used vehicle, retail			833,484				25.1				121,721				14.6				22.6
Used vehicle, wholesale			139,237				4.2				1,414				1.0				0.3
Finance and insurance(1)			112,234				3.4				112,234				100.0				20.8
Service, body and parts			347,703				10.5				168,070				48.3				31.1
Fleet and other			36,226				1.1				1,414				3.9				0.3
		$	3,316,487				100.0	%		$	539,300				16.3	%			100.0	%

2011		Revenues				Percent of Total Revenues				Gross Profit				Gross Profit Margin				Percent of Total Gross Profit
New vehicle		$	1,391,375				52.8	%		$	107,150				7.7	%			24.1	%
Used vehicle, retail			678,571				25.8				98,214				14.5				22.1
Used vehicle, wholesale			128,329				4.9				597				0.5				0.1
Finance and insurance(1)			84,130				3.2				84,130				100.0				18.9
Service, body and parts			315,958				12.0				152,220				48.2				34.2
Fleet and other			34,383				1.3				2,973				8.6				0.6
		$	2,632,746				100.0	%		$	445,284				16.9	%			100.0	%

2010		Revenues				Percent of Total Revenues				Gross Profit				Gross Profit Margin				Percent of Total Gross Profit
New vehicle		$	1,020,883				50.1	%		$	83,646				8.2	%			23.0	%
Used vehicle, retail			558,105				27.4				78,795				14.1				21.7
Used vehicle, wholesale			103,817				5.1				703				0.7				0.2
Finance and insurance(1)			64,217				3.2				64,217				100.0				17.7
Service, body and parts			277,945				13.6				133,942				48.2				36.9
Fleet and other			11,655				0.6				1,643				14.1				0.5
		$	2,036,622				100.0	%		$	362,946				17.8	%			100.0	%

2011		Revenues				Percent of Total Revenues				Gross Profit				Gross Profit Margin				Percent of Total Gross Profit
New vehicle		$	1,391,375				52.8	%		$	107,150				7.7	%			24.1	%
Used vehicle retail			678,571				25.8				98,214				14.5				22.1
Used vehicle wholesale			128,329				4.9				597				0.5				0.1
Finance and insurance(1)			84,130				3.2				84,130				100.0				18.9
Service, body and parts			315,958				12.0				152,220				48.2				34.2
Fleet and other			34,383				1.3				2,973				8.6				0.6
		$	2,632,746				100.0	%		$	445,284				16.9	%			100.0	%

(1)

(1)

Commissions reported net of anticipated cancellations.

Same Store Operating Data

We believe that same store salescomparisons are a keyan important indicator of our financial performance. Same store metricsmeasures demonstrate our ability to profitably grow our revenue and profitability in our existing locations. As a result, same store salesmeasures have been integrated into the discussion below.

A same

Same store metric representsmeasures reflect results for stores that were operating during 2012,in each comparison period, and only includes the months when operations occuroccurred in both comparable periods. For example, a store acquired in August 20112012 would be included in same store operating data beginning in September 2012,2013, after its first full complete comparable month of operation. Thus,The operating results for the same store comparisons would include only the period ofwouldinclude results for that store in September through December of both comparable years.   

each year.   

New Vehicle Revenue and Gross Profit

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands, except per unit amounts)		2013				2012				(Decrease)				(Decrease)
Reported
Revenue		$	2,256,598			$	1,847,603			$	408,995				22.1	%
Gross profit		$	151,118			$	134,447			$	16,671				12.4
Gross margin			6.7	%			7.3	%			(60	)bp(1)
Retail units sold			66,857				55,666				11,191				20.1
Average selling price per retail unit		$	33,753			$	33,191			$	562				1.7
Average gross profit per retail unit		$	2,260			$	2,415			$	(155	)			(6.4	)
Same store
Revenue		$	2,148,126			$	1,845,273			$	302,853				16.4	%
Gross profit		$	142,874			$	133,878			$	8,996				6.7
Gross margin			6.7	%			7.3	%			(60	)bp(1)
Retail units sold			63,489				55,590				7,899				14.2
Average selling price per retail unit		$	33,835			$	33,194			$	641				1.9
Average gross profit per retail unit		$	2,250			$	2,408			$	(158	)			(6.6	)

 

34

---

New Vehicle Revenues

		Year Ended December 31,												%
(Dollars in thousands)		2012				2011				Increase				Increase
Reported
Revenue		$	1,847,603			$	1,391,375			$	456,228				32.8	%
Retail units sold			55,666				42,139				13,527				32.1
Average selling price per retail unit		$	33,191			$	33,019			$	172				0.5
Same store
Revenue		$	1,776,896			$	1,367,176			$	409,720				30.0	%
Retail units sold			53,590				41,391				12,199				29.5
Average selling price per retail unit		$	33,157			$	33,031			$	126				0.4

		Year Ended December 31,												%
(Dollars in thousands)		2011				2010				Increase				Increase
Reported
Revenue		$	1,391,375			$	1,020,883			$	370,492				36.3	%
Retail units sold			42,139				31,945				10,194				31.9
Average selling price per retail unit		$	33,019			$	31,958			$	1,061				3.3
Same Store
Revenue		$	1,295,001			$	1,005,721			$	289,280				28.8	%
Retail units sold			39,506				31,464				8,042				25.6
Average selling price per retail unit		$	32,780			$	31,964			$	816				2.6

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands, except per unit amounts)		2012				2011				(Decrease)				(Decrease)
Reported
Revenue		$	1,847,603			$	1,391,375			$	456,228				32.8	%
Gross profit		$	134,447			$	107,150			$	27,297				25.5
Gross margin			7.3	%			7.7	%			(40	)bp(1)
Retail units sold			55,666				42,139				13,527				32.1
Average selling price per retail unit		$	33,191			$	33,019			$	172				0.5
Average gross profit per retail unit		$	2,415			$	2,543			$	(128	)			(5.0	)
Same store
Revenue		$	1,776,896			$	1,367,176			$	409,720				30.0	%
Gross profit		$	128,894			$	104,960			$	23,934				22.8
Gross margin			7.3	%			7.7	%			(40	)bp(1)
Retail units sold			53,590				41,391				12,199				29.5
Average selling price per retail unit		$	33,157			$	33,031			$	126				0.4
Average gross profit per retail unit		$	2,405			$	2,536			$	(131	)			(5.2	)

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

New vehicle sales in 2012 improved compared to 2011 primarily due to volume growth as year-over-year same store sales volume increased 29.5% and 25.6%, respectively,14.2% in 2012 and 2011.

The number of new vehicles sold2013 compared to 2012. This growth was in the U.S. in 2012, defined as the seasonally adjusted annual rate, grew approximately 13.4% over 2011. In addition to the overall market recovery, we have increased our share of vehicle29.5% year-over-year same store sales volume increase experienced in several of our markets. Growth in our domestic and import brand sales have outpaced the growth experienced nationally.2012 compared to 2011. Our domestic brand same store unit sales grew 27.2%11.8% in 20122013 compared to 2011.2012. Same store unit sales for import and luxury brands grew 38.3%17.5% and 15.0%, respectively, in 20122013 compared to 2011. Certain of our markets have seen an increase in local market sales volumes exceeding the national average.2012. We remain focusedcontinue to focus on increasing our share of overall new vehicle sales within our markets.

Nationally, the number of new vehicles sold in the U.S. in 2013 grew approximately 8% over 2012. Recovery in some of our specific markets behaved differently than the national average. Certain of our markets saw an increase in local market sales volumes exceeding the national average, while others continued to lag behind the national average. As of the end of 2013, we believe approximately half of our markets continue to be below the pre-recessionary vehicle registration levels experienced in 2006.

New vehicle gross profit dollars increased 12.4% in 2013 compared to 2012. On a same store basis, gross profit increased 6.7% in 2013 compared to 2012. These increases were due to a greater number of vehicles sold, offset by lower gross profit per unit and lower gross margin.

We focus on gross profit dollars earned per unit, not a gross margin percentage. On a same store basis, the average gross profit per new retail unit decreased $158 in 2013 compared to 2012. This decrease was primarily due to the strategic decision to increase market share through lower pricing. Additionally, certain manufacturer incentives are tied to increases in units sold per store, and, given consecutive years of significant unit sales increases, these objectives have been more difficult to achieve in 2013 than in prior years, resulting in lower total incentive dollars earned.

We believe increasing new unit sales creates additional used vehicle trade-in opportunities, finance and insurance sales and future service work. We believe the incremental business generated in future periods will more than offset the lower new vehicle gross profit per unit that has occurred with the pursuit of our volume-based strategy.

New vehicle sales improved throughout 20112012 compared to 20102011 mainly due to a recovery in the U.S. economy and our efforts to increasean overall market recovery. Additionally, we increased our share of the new vehicles sold within each local market. Credit availability continued to improve throughout 2011, although, within the sub-prime market, lending remained constrained.

vehicle sales in several of our markets in 2012.

 

35

---

Used Vehicle Retail Revenues

		Year Ended December 31,												%
(Dollars in thousands)		2012				2011				Increase				Increase
Reported
Retail revenue		$	833,484			$	678,571			$	154,913				22.8	%
Retail units sold			47,965				39,436				8,529				21.6
Average selling price per retail unit		$	17,377			$	17,207			$	170				1.0
Same store
Retail revenue		$	802,169			$	664,292			$	137,877				20.8	%
Retail units sold			46,179				38,628				7,551				19.5
Average selling price per retail unit		$	17,371			$	17,197			$	174				1.0

		Year Ended December 31,												%
(Dollars in thousands)		2011				2010				Increase				Increase
Reported
Retail revenue		$	678,571			$	558,105			$	120,466				21.6	%
Retail units sold			39,436				33,241				6,195				18.6
Average selling price per retail unit		$	17,207			$	16,790			$	417				2.5
Same store
Retail revenue		$	633,912			$	543,106			$	90,806				16.7	%
Retail units sold			37,168				32,325				4,843				15.0
Average selling price per retail unit		$	17,055			$	16,801			$	254				1.5

Revenue and Gross Profit

		Year Ended December 31,
(Dollars in thousands, except per unit amounts)		2013				2012				Increase				% Increase
Reported
Retail revenue		$	1,032,224			$	833,484			$	198,740				23.8	%
Retail gross profit		$	150,858			$	121,721			$	29,137				23.9
Retail gross margin			14.6	%			14.6	%			-
Retail units sold			57,061				47,965				9,096				19.0
Average selling price per retail unit		$	18,090			$	17,377			$	713				4.1
Average gross profit per retail unit		$	2,644			$	2,538			$	106				4.2
Same store
Retail revenue		$	981,536			$	830,435			$	151,101				18.2	%
Retail gross profit		$	144,376			$	121,446			$	22,930				18.9
Retail gross margin			14.7	%			14.6	%		10		bp
Retail units sold			54,334				47,782				6,552				13.7
Average selling price per retail unit		$	18,065			$	17,380			$	685				3.9
Average gross profit per retail unit		$	2,657			$	2,542			$	115				4.5

		Year Ended December 31,
(Dollars in thousands, except per unit amounts)		2012				2011				Increase				% Increase
Reported
Retail revenue		$	833,484			$	678,571			$	154,913				22.8	%
Retail gross profit		$	121,721			$	98,214			$	23,507				23.9
Retail gross margin			14.6	%			14.5	%			10	bp
Retail units sold			47,965				39,436				8,529				21.6
Average selling price per retail unit		$	17,377			$	17,207			$	170				1.0
Average gross profit per retail unit		$	2,538			$	2,490			$	48				1.9
Same store
Retail revenue		$	802,169			$	664,292			$	137,877				20.8	%
Retail gross profit		$	117,817			$	96,126			$	21,691				22.6
Retail gross margin			14.7	%			14.5	%			20	bp
Retail units sold			46,179				38,628				7,551				19.5
Average selling price per retail unit		$	17,371			$	17,197			$	174				1.0
Average gross profit per retail unit		$	2,551			$	2,489			$	62				2.5

Used vehicle retail sales continue to beare a strategic focus as we strive for organic growth. Our strategy is toWe offer three categories of used vehicles: manufacturer certified pre-owned used vehicles; late model, lower-mileage vehicles;core vehicles, or late-model vehicles with lower mileage; and value autos, or vehicles with over 80,000 miles.

Additionally, our volume-based strategy for new vehicle sales increases the organic opportunity to convert vehicles acquired via trade to retail used vehicle sales.

In 2012,2013, sales increased in all three categories of used vehicles compared to 2011.

2012:

●

Same store unit sales for manufacturer certified pre-owned used vehicles increased 22.9%29.6%. This category has higher average sale prices and experiences a lower gross margin than the other categories.

●

Same store unit sales for the late model, lower mileage vehicle category increased 11.3%6.6%. Our performance in this category is still below management’s expectation and we continue to focus on improving our results.

●

Same store unit sales for the value auto category increased 36.9%18.1%. Value auto vehicles have lower average selling prices and experience a higher gross margin than our other used vehicle categories. Additionally, value autos provide an organic opportunity to convert vehicles acquired via trade-in to retail used vehicle sales.

Our retail used to new vehicle sales ratio was 0.9:1 for the year ended December 31, 2012 compared to 0.9:1

On average, in 2011 and 1.0:1 in 2010. On average,2013 each of our stores currently sellssold 53 retail used vehicle units per month. This compares to 46 retail used vehicle units per store per month and wein 2012. We continue to target increasing sales to 75 units per store per month.

Used retail vehicle gross profit dollars increased 23.9% in 2013 compared to 2012. On a same store basis, gross profit increased 18.9% in 2013 compared to 2012. These increases were related to both volume growth and increases in the average gross profit per unit sold. Similar to new vehicle sales, we focus on gross profit dollars earned per unit, not on gross margin percentage, in evaluating our sales performance.

Used vehicle retail unit sales increased in 20112012 compared to 2010 as consumers elected to purchase used vehicles instead of new vehicles, and2011 as we increased the numberour volume of lower-price, higher-margin, older used vehicles we sell.sales. We also increased the saleexperienced growth in all three categories of brands other than the store’s new vehicle franchise. We focused our store personnel on maximizing retail used vehicle retail sales, and reducing the numberespecially in our value auto category which experienced a same store unit sales increase of used vehicles we wholesale after acquiring them via trade-in.

36

---

36.9% in 2012 compared to 2011.

Used Vehicle Wholesale Revenues

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2012				2011				(Decrease)				(Decrease)
Reported
Wholesale revenue		$	139,237			$	128,329			$	10,908				8.5	%
Wholesale units sold			19,144				16,085				3,059				19.0
Average selling price per wholesale unit		$	7,273			$	7,978			$	(705	)			(8.8	)
Same store
Wholesale revenue		$	132,722			$	123,046			$	9,676				7.9	%
Wholesale units sold			18,383				15,613				2,770				17.7
Average selling price per wholesale unit		$	7,220			$	7,881			$	(661	)			(8.4	)

		Year Ended December 31,												%
(Dollars in thousands)		2011				2010				Increase				Increase
Reported
Wholesale revenue		$	128,329			$	103,817			$	24,512				23.6	%
Wholesale units sold			16,085				13,594				2,491				18.3
Average selling price per wholesale unit		$	7,978			$	7,637			$	341				4.5
Same store
Wholesale revenue		$	118,591			$	100,770			$	17,821				17.7	%
Wholesale units sold			15,171				13,239				1,932				14.6
Average selling price per wholesale unit		$	7,817			$	7,612			$	205				2.7

Revenue and Gross Profit

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands, except per unit amounts)		2013				2012				(Decrease)				(Decrease)
Reported
Wholesale revenue		$	158,235			$	139,237			$	18,998				13.6	%
Wholesale gross profit		$	2,711			$	1,414			$	1,297				91.7
Wholesale gross margin			1.7	%			1.0	%			70	bp
Wholesale units sold			22,086				19,144				2,942				15.4
Average selling price per wholesale unit		$	7,164			$	7,273			$	(109	)			(1.5	)
Average gross profit per retail unit		$	123			$	74			$	49				66.2
Same store
Wholesale revenue		$	149,878			$	138,623			$	11,255				8.1	%
Wholesale gross profit		$	2,754			$	1,386			$	1,368				98.7
Wholesale gross margin			1.8	%			1.0	%			80	bp
Wholesale units sold			21,023				19,052				1,971				10.3
Average selling price per wholesale unit		$	7,129			$	7,276			$	(147	)			(2.0	)
Average gross profit per retail unit		$	131			$	73			$	58				79.5

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands, except per unit amounts)		2012				2011				(Decrease)				(Decrease)
Reported
Wholesale revenue		$	139,237			$	128,329			$	10,908				8.5	%
Wholesale gross profit		$	1,414			$	597			$	817				136.9
Wholesale gross margin			1.0	%			0.5	%			50	bp
Wholesale units sold			19,144				16,085				3,059				19.0
Average selling price per wholesale unit		$	7,273			$	7,978			$	(705	)			(8.8	)
Average gross profit per retail unit		$	74			$	37			$	37				100.0
Same store
Wholesale revenue		$	132,722			$	123,046			$	9,676				7.9	%
Wholesale gross profit		$	1,320			$	635			$	685				107.9
Wholesale gross margin			1.0	%			0.5	%			50	bp
Wholesale units sold			18,383				15,613				2,770				17.7
Average selling price per wholesale unit		$	7,220			$	7,881			$	(661	)			(8.4	)
Average gross profit per retail unit		$	72			$	41			$	31				75.6

Wholesale transactions are vehicles we have purchased from customers or vehicles we have attempted to sell via retail that we elect to dispose of due to inventory age or other factors. Wholesale vehicles are typically sold at or near inventory cost and do not comprise a meaningful component of our gross profit. We generated wholesale gross profit of $2.7 million, $1.4 million and $0.6 million in 2013, 2012 and $0.7 million in 2012, 2011, and 2010, respectively.

Finance and Insurance

		Year Ended December 31,												%
(Dollars in thousands)		2012				2011				Increase				Increase
Reported
Revenue		$	112,234			$	84,130			$	28,104				33.4	%
Same store
Revenue		$	107,376			$	81,055			$	26,321				32.5	%

37

---

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2011				2010				(Decrease)				(Decrease)
Reported
Revenue		$	84,130			$	64,217			$	19,913				31.0	%
Same store
Revenue		$	78,619			$	60,440			$	18,179				30.1	%

		Year Ended December 31,												%
(Dollars in thousands, except per unit amounts)		2013				2012				Increase				Increase
Reported
Revenue		$	139,007			$	112,234			$	26,773				23.9	%
Average finance and insurance per retail unit		$	1,122			$	1,083			$	39				3.6	%
Same store
Revenue		$	131,960			$	110,254			$	21,706				19.7	%
Average finance and insurance per retail unit		$	1,120			$	1,067			$	53				5.0	%

		Year Ended December 31,												%
(Dollars in thousands, except per unit amounts)		2012				2011				Increase				Increase
Reported
Revenue		$	112,234			$	84,130			$	28,104				33.4	%
Average finance and insurance per retail unit		$	1,083			$	1,031			$	52				5.0	%
Same store
Revenue		$	107,376			$	81,055			$	26,321				32.5	%
Average finance and insurance per retail unit		$	1,076			$	1,013			$	63				6.2	%

The increases in finance and insurance sales in 2013 compared to 2012 were driven by increased vehicle sales volume. We increased our penetration rate on arranging financing for our customers and the sale of extended service contracts and lifetime lube, oil and filter contracts. As a result, our average revenue per unit increased. We continued to see the availability of consumer credit expand through 2013 with lenders increasing the average loan-to-value amount available to most customers.

The growth experienced in finance and insurance sales in 2012 compared to 2011 and 2011was due to increased volume in retail vehicle sales. Our average revenue per unit increased in 2012 compared to 2010 were driven by increased vehicle sales volume. The availability2011 mainly due to the expansion of consumer credit has expanded since 2010 with lenders increasing the loan-to-value amount availableas we were able to mostarrange financing for more of our customers. Additionally, competition continued to increase among lenders and we saw an increase in finance reserves.  As a result, we experienced annual improvement in the average amount of revenue per unit. These shifts afforded us the opportunity to sell additional or more comprehensive products, while remaining within a loan-to-value framework acceptable to our retail customer lenders.

Penetration rates for certain products were as follows:

		2013				2012				2011
Finance and insurance			78	%			76	%			72	%
Service contracts			42				41				41
Lifetime lube, oil and filter contracts			36				35				36

		2012				2011				2010
Finance and insurance			76	%			72	%			68	%
Service contracts			41				41				41
Lifetime oil change and filter			35				36				34

Service, Body and Parts Revenue

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2012				2011				(Decrease)				(Decrease)
Reported
Customer pay		$	196,077			$	176,879			$	19,198				10.9	%
Warranty			52,713				52,041				672				1.3
Wholesale parts			64,139				56,826				7,313				12.9
Body shop			34,774				30,212				4,562				15.1
Total service, body and parts		$	347,703			$	315,958			$	31,745				10.0	%
Same store
Customer pay		$	185,047			$	173,074			$	11,973				6.9	%
Warranty			49,056				50,408				(1,352	)			(2.7	)
Wholesale parts			60,931				56,111				4,820				8.6
Body shop			34,769				30,212				4,557				15.1
Total service, body and parts		$	329,803			$	309,805			$	19,998				6.5	%

38

---

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2011				2010				(Decrease)				(Decrease)
Reported
Customer pay		$	176,879			$	155,569			$	21,310				13.7	%
Warranty			52,041				48,633				3,408				7.0
Wholesale parts			56,826				47,670				9,156				19.2
Body shop			30,212				26,073				4,139				15.9
Total service, body and parts		$	315,958			$	277,945			$	38,013				13.7	%
Same store
Customer pay		$	158,451			$	152,451			$	6,000				3.9	%
Warranty			45,411				47,397				(1,986	)			(4.2	)
Wholesale parts			51,894				47,072				4,822				10.2
Body shop			29,689				26,040				3,649				14.0
Total service, body and parts		$	285,445			$	272,960			$	12,485				4.6	%

and Gross Profit

		Year Ended December 31,
(Dollars in thousands)		2013				2012				Increase				% Increase
Reported
Customer pay		$	214,173			$	196,077			$	18,096				9.2	%
Warranty			62,580				52,713				9,867				18.7
Wholesale parts			70,655				64,139				6,516				10.2
Body shop			36,075				34,774				1,301				3.7
Total service, body and parts		$	383,483			$	347,703			$	35,780				10.3	%
Service, body and parts gross profit		$	185,570			$	168,070			$	17,500				10.4	%
Service, body and parts gross margin			48.4	%			48.3	%		10		bp
Same store
Customer pay		$	205,463			$	195,262			$	10,201				5.2	%
Warranty			59,746				52,437				7,309				13.9
Wholesale parts			68,505				63,934				4,571				7.1
Body shop			36,075				34,769				1,306				3.8
Total service, body and parts		$	369,789			$	346,402			$	23,387				6.8	%
Service, body and parts gross profit		$	175,667			$	164,072			$	11,595				7.1	%
Service, body and parts gross margin			47.5	%			47.4	%		10		bp

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2012				2011				(Decrease)				(Decrease)
Reported
Customer pay		$	196,077			$	176,879			$	19,198				10.9	%
Warranty			52,713				52,041				672				1.3
Wholesale parts			64,139				56,826				7,313				12.9
Body shop			34,774				30,212				4,562				15.1
Total service, body and parts		$	347,703			$	315,958			$	31,745				10.0	%
Service, body and parts gross profit		$	168,070			$	152,220			$	15,850				10.4	%
Service, body and parts gross margin			48.3	%			48.2	%			10	bp
Same store
Customer pay		$	185,047			$	173,074			$	11,973				6.9	%
Warranty			49,056				50,408				(1,352	)			(2.7	)
Wholesale parts			60,931				56,111				4,820				8.6
Body shop			34,769				30,212				4,557				15.1
Total service, body and parts		$	329,803			$	309,805			$	19,998				6.5	%
Service, body and parts gross profit		$	155,813			$	146,827			$	8,986				6.1	%
Service, body and parts gross margin			47.2	%			47.4	%			(20	)bp

Our service, body and parts business improvedsales grew in all areas in 2013 compared to 2012 and in 2012 compared to 2011 and in 2011 compared to 2010. Our customer pay business has increased as we maintained our2011. We focus on retaining customers through competitively-pricedby offering competitively priced routine maintenance offerings and increasedincreasing our marketing efforts. The same store customer pay service and parts business represented 56.1% and 55.9% of the total same store service, body and parts business in 2012 and 2011, respectively. As a result ofWe increased our increased focus and marketing efforts, same store customer pay business increased5.2% in 2013 compared to 2012 and 6.9% in 2012 compared to 2011 and 3.9% in 20112011.

In 2013 compared to 2010.

Warranty work accounted for approximately 14.9% of our same store service, body and parts sales in 2012, compared to 16.3% in 2011. In 2012 compared to 2011, same store warranty sales decreased 2.7%increased 13.9%. This increase is due to the increased vehicles in operation as vehicle sales volumes have increased from 2010 to 2013. Additionally, certain franchises provide routine maintenance, such as oil changes, for two to four years after a vehicle is sold, which provides for future work. Domestic brand warranty work decreasedincreased by 3.7%4.8%, while import/import and luxury warranty work decreasedincreased by 1.8%25.7% and 18.3%, respectively, in 20122013 compared to 2011. Same store2012. Import and luxury warranty work declined 4.2%also increased due to recent recalls on certain models in 2011 compared to 2010. Warranty work continues to be impacted by declining units in operation from 2008, 2009 and 2010 and increased vehicle reliability, particularly in domestic brands.2013.

We continued to grow our wholesale

Wholesale parts and body shop sales in 2012, which represented 29.0%18.5% of our same store service, body and parts revenue mix in 20122013 and 2012. Wholesale parts grew 10.9%7.1% on a same store basis in 2013 compared to 2012.

Body shop represented 9.8% of our same store service, body and parts revenue mix in 2013 compared to 10.0% in 2012. Body shop grew 3.8% in 2013 compared to 2012.

Service, body and parts gross profit increased 10.4% in 2013 compared to 2012, in line with our revenue growth. Our gross margins were consistent in 2013 compared to 2012 as margin pressures in our body shop sales were outpaced by the growth in our warranty sales.

Sales in service, body and parts revenue grew 10.0% in 2012 compared to 2011. These categories allow for incremental organic growth. Because bothThis growth was mainly experienced in customer pay, wholesale parts and body shop margins are lower than service work, we expect gross margins may modestly declinesales as these areas of the business comprise a larger portion of the total.

Gross Profit

Gross profit increased $94.0 millionvehicle sales volumes have resulted in 2012 compared to 2011 and increased $82.3 millionmore vehicles in 2011 compared to 2010. The increases in 2012 and 2011 were primarily due to increased revenues, partially offset by declines in our overall gross profit margin.

Our gross profit margins by business line were as follows:

										Basis
		Year Ended December 31,								Point Change*
		2012				2011
New vehicle			7.3	%			7.7	%			(40	)bp
Retail used vehicle			14.6				14.5				10
Wholesale used vehicle			1.0				0.5				50
Finance and insurance			100.0				100.0				-
Service, body and parts			48.3				48.2				10
Fleet and other			3.9				8.6				(470	)
Overall			16.3	%			16.9	%			(60	)

39

---

										Basis
		Year Ended December 31,								Point Change*
		2011				2010
New vehicle			7.7	%			8.2	%			(50	)bp
Retail used vehicle			14.5				14.1				40
Wholesale used vehicle			0.5				0.7				(20	)
Finance and insurance			100.0				100.0				-
Service, body and parts			48.2				48.2				-
Fleet and other			8.6				14.1				(550	)
Overall			16.9	%			17.8	%			(90	)

operations.

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

Our overall gross profit margin decreased 60 basis points in 2012 compared to 2011. New vehicle margins decreased compared to 2011. This decrease was due to higher gross margins in 2011 as new vehicle supply had been limited due to the earthquake and tsunami in Japan. Additionally, in 2012, to gain market share in certain markets, we priced vehicles lower, negatively impacting margins. Used vehicle margins and service, body and parts margins were relatively unchanged in 2012 compared to 2011. 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.

Asset Impairment Charges

Asset impairments recorded as a component of continuing operations consist of the following (in thousands):

Year Ended December 31,		2012				2011				2010
Asset Impairments
Long-lived assets		$	115			$	1,376			$	15,301

Year Ended December 31,		2013				2012				2011
Asset Impairments
Long-lived assets		$	-			$	115			$	1,376

During 2012 and 2011, we recorded impairment charges associated with certain properties. As the expected future use of these facilities changed, the long-lived assets were tested for recoverability. As a result, we determined the carrying value exceeded the fair value of these properties and asset impairment charges were recorded.

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

●

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

●

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

●

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

Based on the results of those tests, we recorded assetdid not record impairment charges associated with certain properties during 2010.

in 2013.

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

40

---

Selling, General and Administrative Expense (“SG&A”)

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

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2013				2012				(Decrease)				(Decrease)
Personnel		$	278,497			$	243,249			$	35,248				14.5	%
Advertising			39,598				31,913				7,685				24.1
Rent			13,962				15,162				(1,200	)			(7.9	)
Facility costs			24,443				24,172				271				1.1
Other			70,900				59,192				11,708				19.8
Total SG&A		$	427,400			$	373,688			$	53,712				14.4

		Year Ended December 31,								Increase
As a % of gross profit		2013				2012				(Decrease)
Personnel			44.1	%			45.1	%			(100	)bps
Advertising			6.3				5.9				40
Rent			2.2				2.8				(60	)
Facility costs			3.9				4.5				(60	)
Other			11.2				11.0				20
Total SG&A			67.7	%			69.3	%			(160	)bps

		Year Ended December 31,												%
(Dollars in thousands)		2012				2011				Increase				Increase
Personnel		$	243,249			$	210,996			$	32,253				15.3	%
Advertising			31,913				23,875				8,038				33.7
Rent			15,162				13,256				1,906				14.4
Facility costs			24,172				17,260				6,912				40.0
Other			59,192				51,276				7,916				15.4
Total SG&A		$	373,688			$	316,663			$	57,025				18.0

		Year Ended December 31,								Increase
As a % of gross profit		2012				2011				(Decrease)
Personnel			45.1	%			47.4	%			(230	)bps
Advertising			5.9				5.4				50
Rent			2.8				3.0				(20	)
Facility costs			4.5				3.8				70
Other			11.0				11.5				(50	)
Total SG&A			69.3	%			71.1	%			(180	)bps

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2011				2010				(Decrease)				(Decrease)
Personnel		$	210,996			$	176,938			$	34,058				19.2	%
Advertising			23,875				25,398				(1,523	)			(6.0	)
Rent			13,256				12,569				687				5.5
Facility costs			17,260				22,335				(5,075	)			(22.7	)
Other			51,276				46,923				4,353				9.3
Total SG&A		$	316,663			$	284,163			$	32,500				11.4

		Year Ended December 31,								Increase
As a % of gross profit		2011				2010				(Decrease)
Personnel			47.4	%			48.8	%			(140	)bps
Advertising			5.4				7.0				(160	)
Rent			3.0				3.5				(50	)
Facility costs			3.8				6.1				(230	)
Other			11.5				12.9				(140	)
Total SG&A			71.1	%			78.3	%			(720	)bps

SG&A expense increased $57.0$53.7 million in 20122013 compared to 2011, and $32.5 million in 2011 compared to 2010.2012. These increases were primarily driven by increased variable costs associated with improved sales and an increaseincreases in advertising as we focused on gaining market share. These increasesAdditionally, in costs were2013, we recorded a $6.2 million expense in other associated with a non-core legal reserve related to the settlement of a claim filed in 2006. This was offset by a continued focus to reduce or maintain fixed costs and effectively manage variable costs. In 2011, a $6.3$2.5 million non-core gain on the sale of property, in Californiawhich was recorded as a component of facility costs.

In 2012, SG&A expense increased $57.0 million as variable costs increased associated with sales growth. These increases in cost were offset by a continued focus on maintaining fixed costs. Additionally, we recorded a non-core gain of $6.9 million on the sale of property as a component of facility costs in 2011.

SG&A as a percentage of gross profit was 67.7% in 2013 compared to 69.3% in 2012 compared toand 71.1% in 20112011. Excluding the non-core legal reserve and 78.3%gain on the sale of property in 2010. Adjusting for2013 and the gain on the sale of property in California and other pro forma items, our adjusted2011, SG&A expense as a percentage of gross profit was 69.3%67.2% in 2013 compared to 69.4% in 2012 compared toand 72.5% in 2011 and 77.8% in 2010.2011. See Non-GAAP Reconciliations“Non-GAAP Reconciliations” in Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information regarding pro forma SG&A expense.more details. As sales volume increases and we gainfurther leverage in our cost structure, we anticipate achieving metrics ofmaintaining SG&A as a percentage of gross profit in the highupper 60% range with improved sales volumes.

41

---

in 2014.

We also measure the leverage of our cost structure by evaluating throughput, which is the incremental percentage of gross profit retained after deducting SG&A expense.

		Year Ended December 31,												% of Change in
(Dollars in thousands)		2012				2011				Change				Gross Profit
Gross profit		$	539,300			$	445,284			$	94,016				100.0	%
SG&A expense			(373,688	)			(316,663	)			(57,025	)			(60.7	)
Throughput contribution										$	36,991				39.3	%

		Year Ended December 31,												% of Change in
(Dollars in thousands)			2011			2010				Change				Gross Profit
Gross profit		$	445,284			$	362,946			$	82,338				100.0	%
SG&A expense			(316,663	)			(284,163	)			(32,500	)			(39.5	)
Throughput contribution										$	49,838				60.5	%

		Year Ended December 31,												% of Change in
(Dollars in thousands)		2013				2012				Change				Gross Profit
Gross profit		$	630,953			$	539,300			$	91,653				100.0	%
SG&A expense			(427,400	)			(373,688	)			(53,712	)			(58.6	)
Throughput contribution										$	37,941				41.4	%

		Year Ended December 31,												% of Change in
(Dollars in thousands)		2012				2011				Change				Gross Profit
Gross profit		$	539,300			$	445,284			$	94,016				100.0	%
SG&A expense			(373,688	)			(316,663	)			(57,025	)			(60.7	)
Throughput contribution										$	36,991				39.3	%

Throughput contributions for newly opened or acquired stores are on a ”first dollar” basis forreduce overall throughput as in the first twelve monthsyear of operations. operation, a store’s throughput is equal to the inverse of their SG&A as a percentage of gross profit. For example, a store which achieves SG&A as a percentage of gross profit of 70% will have throughput of 30% in the first year of operation.

We acquired six stores and opened one new store in 2013 and acquired four stores and opened two new stores in 2012 and, adjusting2012. Adjusting for these locations and the non-core adjustments discussed above, our throughput contribution on a same store basis was 51.2%51.4% for the year ended December 31, 20122013 compared to 2011.2012. Our throughput contribution on a same store basis for 20112012 compared to 20102011 was 59.9%51.2%. We continue to target a same store throughput contribution of approximately 50%.

Depreciation and Amortization

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

		Year Ended December 31,												%
(Dollars in thousands)		2013				2012				Increase				Increase
Depreciation and amortization		$	20,035			$	17,128			$	2,907				17.0	%

		Year Ended December 31,												%
(Dollars in thousands)		2012				2011				Increase				Increase
Depreciation and amortization		$	17,128			$	16,427			$	701				4.3	%

		Year Ended December 31,												%
(Dollars in thousands)		2011				2010				Decrease				Decrease
Depreciation and amortization		$	16,427			$	17,012			$	(585	)			(3.4	)%

Depreciation and amortization increased $2.9 million in 2013 compared to 2012, and $0.7 million in 2012 compared to 2011, dueas we purchased previously leased facilities, built new facilities subsequent to increased capital expendituresthe acquisition of $32.9 millionstores and invested in 2012. These expenditures were for the improvement of storeimprovements at our facilities purchases of new store locations,and replacement of equipmentequipment. These investments increase the amount of depreciable assets and construction of a new headquarters building.

Depreciation and amortization decreased $0.6 million in 2011 compared to 2010. The decrease in 2011 compared to 2010 was due primarily to the sale of facilities in the second half of 2010 and early 2011.

amortizable expenses.

Operating Income

Operating income was 4.5%4.6%, 4.2%4.5% and 2.3%4.2% of revenue, respectively, in 2013, 2012 2011 and 2010.2011. The increases in 2013 compared to 2012, and 2012 compared to 2011 and 2011 compared to 2010 were primarily due to improved sales and continued cost control.

Floor Plan Interest Expense and Floor Plan Assistance

Floor plan interest expense decreased $0.4 million in 2013 compared to 2012. Changes in the average outstanding balances on our floor plan facilities increased the expense $2.6 million, changes in the interest rates on our floor plan facilities decreased the expense $0.7 million and the maturity of three interest rate swaps decreased the expense $2.3 million.

Floor plan interest expense increased $2.5 million in 2012 compared to 2011. This increase is due to higher inventory levelsChanges in the average outstanding balances on our floor plan facilities increased the expense $3.5 million and changes in the interest rates on our floor plan facilities decreased the expense $1.8 million during 2012 compared to 2011. Ineffectiveness from hedging interest rate swaps increased the prior year. Floor plan interest expense increased $0.2 million in 2011 compared to 2010.

42

---

$0.8 million.

Floor plan assistance is provided by manufacturers to support store financing of new vehicle inventory. Under accounting standards, floor plan assistance is recorded as a component of new vehicle gross profit when the specific vehicle is sold. However, because manufacturers provide this assistance to offset inventory carrying costs, we believe a comparison of floor plan interest expense to floor plan assistance is a useful measure of the efficiency of our new vehicle sales relative to stocking levels.

The following tables detail the carrying costs for new vehicles and include new vehicle floor plan interest net of floor plan assistance earned.

		Year Ended December 31,												%
(Dollars in thousands)		2013				2012				Increase (Decrease)				Increase (Decrease)
Floor plan interest expense (new vehicles)		$	12,373			$	12,816			$	(443	)			(3.5	)%
Floor plan assistance (included as an offset to cost of sales)			(20,967	)			(16,633	)			4,334				26.1
Net new vehicle carrying costs (benefit)		$	(8,594	)		$	(3,817	)		$	4,777				125.2	%

		Year Ended December 31,												%
(Dollars in thousands)		2012				2011				Increase				Increase
Floor plan interest expense (new vehicles)		$	12,816			$	10,364			$	2,452				23.7	%
Floor plan assistance (included as an offset to cost of sales)			(16,633	)			(12,582	)			4,051				32.2
Net new vehicle carrying costs (benefit)		$	(3,817	)		$	(2,218	)		$	1,599				72.1	%

		Year Ended December 31,												%
(Dollars in thousands)		2011				2010				Increase				Increase
Floor plan interest expense (new vehicles)		$	10,364			$	10,155			$	209				2.1	%
Floor plan assistance (included as an offset to cost of sales)			(12,582	)			(9,362	)			3,220				34.4
Net new vehicle carrying costs (benefit)		$	(2,218	)		$	793			$	3,011				379.7	%

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 inventory financing facility and our revolving line of credit.

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2013				2012				(Decrease)				(Decrease)
Mortgage interest		$	6,519			$	8,148			$	(1,629	)			(20.0	)%
Other interest			1,916				1,767				149				8.4
Capitalized interest			(85	)			(294	)			(209	)			(71.1	)
Total other interest expense		$	8,350			$	9,621			$	(1,271	)			(13.2	)%

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2012				2011				(Decrease)				(Decrease)
Mortgage interest		$	8,148			$	11,395			$	(3,247	)			(28.5	)%
Other interest			1,767				1,646				121				7.4
Capitalized interest			(294	)			(163	)			131				80.4
Total other interest expense		$	9,621			$	12,878			$	(3,257	)			(25.3	)%

For 2013 compared to 2012, other interest decreased $1.3 million primarily due to net mortgage reductions of $28.1 million in 2013. In addition, we refinanced mortgages at lower interest rates, which lowered interest expense. Total other interest expense also decreased due to lower volumes of borrowing on our credit facility.

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2012				2011				(Decrease)				(Decrease)
Mortgage interest		$	8,148			$	11,395			$	(3,247	)			(28.5	)%
Other interest			1,767				1,646				121				7.4
Capitalized interest			(294	)			(163	)			131				80.4
Total other interest expense		$	9,621			$	12,878			$	(3,257	)			(25.3	)%

		Year Ended December 31,								Increase				% Increase
(Dollars in thousands)		2011				2010				(Decrease)				(Decrease)
Mortgage interest		$	11,395			$	13,593			$	(2,198	)			(16.2	)%
Other interest			1,646				930				716				77.0
Capitalized interest			(163	)			-				(163	)			-
Total other interest expense		$	12,878			$	14,523			$	(1,645	)			(11.3	)%

For

Other interest expense decreased $3.3 million in 2012 compared to 2011 other interest decreased $3.3 million primarily due to the retirement of approximately $36.4 million in mortgages mainly in the first half of 2012. We also refinanced mortgages resulting in reduced interest rates. We had $42.3 million in mortgage issuances, mainly occurring in the fourth quarter of 2012, which had minimal impact on interest expense for the full year. This decrease related to mortgage interest was offset by higher volumes of borrowing on our credit facility.

Other interest expense decreased $1.6 million in 2011 compared to 2010 primarily due to decreases in outstanding real estate mortgage debt, partially 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 2010.  Additionally, we recorded $0.2 million in capitalized interest in 2011 associated with construction projects, further reducing our overall interest expense.

43

---

Other Income, net

Other income, net primarily includes interest income and, beginning in 2012, the gains related to an equity investment. Other income, net was $3.0 million, $2.5 million and $0.7 million for 2013, 2012 and $0.4 million for 2012, 2011, and 2010, respectively.

 

Income Tax Expense

Our effective income tax rate was 36.5% in 2013, 38.2% in 2012 and 37.5% in 2011 and 38.8% in 2010.2011. Our federal income tax rate is 35.0% and our state income tax rate is currently 3.4%, which varies with the mix of states where our stores are located. In 2013, we experienced beneficial tax treatment associated with certain state tax credits, capital gains as well as tax benefits associated with the American Taxpayer Relief Act of 2012 enacted at the beginning of 2013. We also have certain non-deductible expenses and other adjustments that impact our effective rate.

Excluding the non-core tax attributes associated with the treatment of our capital gains and adjusting for other non-core items, our effective income tax rate was 38.2% in 2013. See “Non-GAAP Reconciliations” for more details.

Non-GAAP 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 excludingbecause they exclude adjustments for items not related to our ongoing core business operations orand other non-cash adjustments, and improves the period-to-period comparability of our results from the core business operations. Our management uses these measures in conjunction with GAAP financial measures as part of our assessment ofto assess our business, including our compliance with covenants in our credit facility and in communications with our board of directors concerning financial performance. These measures should not be considered an alternative to GAAP measures.

44

---

The following tables reconcile certain reported non-GAAP measures to the most comparable GAAP measure from our Consolidated Statements of Operations (dollars in thousands, except per share amounts):

		Year Ended December 31, 2013
		As reported				Disposal Gain				Reserve adjustments				Tax attribute				Adjusted
Selling, general and administrative		$	427,400			$	2,531				(6,153	)		$	-			$	423,778
Operating income		$	183,518			$	(2,531	)			6,153			$	-			$	187,140
Income from continuing operations before income taxes		$	165,788			$	(2,531	)			6,153			$	-			$	169,410
Income tax provision			(60,574	)			968				(2,353	)			(2,832	)			(64,791	)
Income from continuing operations, net of income tax		$	105,214			$	(1,563	)			3,800			$	(2,832	)		$	104,619
Diluted income per share from continuing operations		$	4.02			$	(0.06	)			0.14			$	(0.11	)		$	3.99
Diluted income per share from discontinued operations			0.03				-				-				-				0.03
Diluted net income per share		$	4.05			$	(0.06	)		$	0.14			$	(0.11	)		$	4.02
Diluted share count			26,191

		Year Ended December 31, 2012
		As reported				Asset impairment and disposal gain				Equity investment				Tax attribute				Adjusted
Asset impairments		$	115			$	(115	)		$	-			$	-			$	-
Selling, general and administrative		$	373,688			$	739			$	-			$	-			$	374,427
Income from operations		$	148,369			$	(624	)		$	-			$	-			$	147,745
Other income, net		$	2,525			$	-			$	(244	)		$	-			$	2,281
Income from continuing operations before income taxes		$	128,457			$	(624	)		$	(244	)		$	-			$	127,589
Income tax provision			(49,062	)			244				95				(1,440	)			(50,163	)
Income from continuing operations, net of income tax		$	79,395			$	(380	)		$	(149	)		$	(1,440	)		$	77,426
Income from discontinued operations, net of income tax			967				(172	)			-				-				795
Net income		$	80,362			$	(552	)		$	(149	)		$	(1,440	)		$	78,221
Diluted income per share from continuing operations		$	3.03			$	(0.01	)		$	(0.01	)		$	(0.05	)		$	2.96
Diluted income per share from discontinued operations			0.04				(0.01	)			-				-				0.03
Diluted net income per share		$	3.07			$	(0.02	)		$	(0.01	)		$	(0.05	)		$	2.99
Diluted share count			26,170

		Year Ended December 31, 2012
		As reported				Asset impairment and disposal gain				Equity investment				Tax attribute				Adjusted
Asset impairments		$	115			$	(115	)		$	-			$	-			$	-
Selling, general and administrative		$	373,688			$	739			$	-			$	-			$	374,427
Income from operations		$	148,369			$	(624	)		$	-			$	-			$	147,745
Other income, net		$	2,525			$	-			$	(244	)		$	-			$	2,281
Income from continuing operations before income taxes		$	128,457			$	(624	)		$	(244	)		$	-			$	127,589
Income tax provision			(49,062	)			249				97				(1,447	)			(50,163	)
Income from continuing operations, net of income tax		$	79,395			$	(375	)		$	(147	)		$	(1,447	)		$	77,426
Income from discontinued operations, net of income tax		$	967			$	(172	)		$	-			$	-			$	795
Net income		$	80,362			$	(547	)		$	(147	)		$	(1447	)		$	78,221
Diluted income (loss) per share from continuing operations		$	3.03			$	(0.01	)		$	(0.01	)		$	(0.05	)		$	2.96
Diluted income (loss) per share from discontinued operations		$	0.04			$	(0.01	)		$	-			$	-			$	0.03
Diluted net income per share		$	3.07			$	(0.02	)		$	(0.01	)		$	(0.05	)		$	2.99
Diluted share count			26,170

 

45

---

		Year Ended December 31, 2011
		As reported				Asset impairment and disposal gain				Reserve adjustments				Adjusted
Cost of Sales – service, body and parts		$	163,738			$	-			$	(950	)		$	162,788
Gross Profit		$	445,284			$	-			$	950			$	446,234
Asset impairments		$	1,376			$	(1,376	)		$	-			$	-
Selling, general and administrative		$	316,663			$	6,881			$	-			$	323,544
Income from operations		$	110,818			$	(5,505	)		$	950			$	106,263
Income from continuing operations before income taxes		$	88,270			$	(5,505	)		$	950			$	83,715
Income tax provision			(33,060	)			1,724				(360	)			(31,696	)
Income from continuing operations, net of income tax		$	55,210			(3,781		)		$	590			$	52,019
Income from discontinued operations, net of income tax		$	3,650			$	(2,616	)		$	-			$	1,034
Net income		$	58,860			(6,397		)		$	590			$	53,053
Diluted income per share from continuing operations		$	2.07			$	(0.14	)		$	0.02			$	1.95
Diluted income per share from discontinued operations		$	0.14			$	(0.10	)		$	-			$	0.04
Diluted net income per share		$	2.21			$	(0.24	)		$	0.02			$	1.99
Diluted share count			26,664

		Year Ended December 31, 2010
		As reported				Asset impairment and disposal  gain				Reserve  adjustment				Adjusted
Gross Profit		$	362,946			$	-			$	1,040			$	363,986
Asset impairments		$	15,301			$	(15,301	)		$	-			$	-
Selling, general and administrative		$	284,163			$	419			$	(1,238	)		$	283,344
Income from operations		$	46,470			$	14,882			$	2,278			$	63,630
Income from continuing operations before income taxes		$	22,212			$	14,882			$	2,278			$	39,372
Income tax provision			(8,625	)			(5,716	)			(782	)			(15,123	)
Income from continuing operations, net of income tax		$	13,587			$	9,166			$	1,496			$	24,249
Income from discontinued operations, net of income tax		$	132			$	181			$	-			$	313
Income from continuing operations, net of income tax		$	13,719			$	9,347			$	1,496			$	24,562
Diluted income (loss) per share from continuing operations		$	0.52			$	0.35			$	0.05			0.92
Diluted income (loss) per share from discontinued operations		$	-			$	0.01			$	-			$	0.01
Diluted net income per share		$	0.52			$	0.36			$	0.05			$	0.93
Diluted share count			26,279

46

---

		Year Ended December 31, 2011
		As reported				Asset impairment and disposal gain				Reserve adjustments				Adjusted
Cost of Sales – service, body and parts		$	163,738			$	-			$	(950	)		$	162,788
Gross Profit		$	445,284			$	-			$	950			$	446,234
Asset impairments		$	1,376			$	(1,376	)		$	-			$	-
Selling, general and administrative		$	316,663			$	6,881			$	-			$	323,544
Income from operations		$	110,818			$	(5,505	)		$	950			$	106,263
Income from continuing operations before income taxes		$	88,270			$	(5,505	)		$	950			$	83,715
Income tax provision			(33,060	)			1,724				(360	)			(31,696	)
Income from continuing operations, net of income tax		$	55,210			$	(3,781	)		$	590			$	52,019
Income from discontinued operations, net of income tax			3,650				(2,616	)			-				1,034
Net income		$	58,860			$	(6,397	)		$	590			$	53,053
Diluted income per share from continuing operations		$	2.07			$	(0.14	)		$	0.02			$	1.95
Diluted income per share from discontinued operations			0.14				(0.10	)			-				0.04
Diluted net income per share		$	2.21			$	(0.24	)		$	0.02			$	1.99
Diluted share count			26,664

Liquidity and Capital Resources

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

Available Sources

financing activities. We have reliedrely primarily on cash flows from operations and borrowings under our credit agreements financingas the main sources for liquidity. We use those funds to invest in capital expenditures, increase working capital and fulfill contractual obligations. Funds available for reinvestment in our business are used for acquisitions as well as management of real estateour capital structure through debt retirement, cash dividends 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.

share repurchases.

Available Sources

Below is a summary and discussion of our immediately available funds (in thousands):

		As of December 31,								Increase				% Increase
		2013				2012				(Decrease)				(Decrease)
Cash and cash equivalents		$	23,686			$	42,839			$	(19,153	)			(44.7	)%
Available credit on the Credit Facility			159,596				120,536				39,060				32.4
Total current available funds		$	183,282			$	163,375			$	19,907				12.2	%
Estimated funds from unfinanced real estate			135,749				76,589				59,160
Total estimated available funds		$	319,031			$	239,964			$	79,067

Our cash flows generated by operating activities and our credit facility are our most significant sources of liquidity. We have a $1.0 billion revolving syndicated credit facility which matures in December 2018. This facility provides new vehicle inventory floor plan financing, used vehicle inventory financing and a revolving line of credit for general corporate purposes.

		As of December 31,								Increase				% Increase
		2012				2011				(Decrease)				(Decrease)
Cash and cash equivalents		$	42,839			$	20,851			$	21,988				105.5	%
Available credit on the Credit Facility			120,536				10,449				110,087				1,053.6
Unfinanced new vehicles			-				65,857				(65,857	)			(100.0	)
Total available funds		$	163,375			$	97,157			$	66,218				68.2	%

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 2012, 2011 and 2010, we raised $14.2 million, $23.5 million and $18.3 million, respectively, through the sale of assets and stores and the issuance of long-term debt (primarily related to the financing of certain real estate), net of debt repayments in excess of scheduled amounts.

Wealso have the ability to raise funds through the financing of ownedmortgaging real estate. As of December 31, 2012, we2013, our unencumbered owned operating real estate had a book value of $102.1 million in unfinanced owned real estate.$181.0 million. Assuming we can obtain financing on 75% of this value, we estimate we could obtainhave obtained additional funds of approximately $76.6 million;$135.8 million at December 31, 2013; however, no assurances can be providedprovidedthat the appraised value of this property will match or exceed its book value or that this capital source will be available in sufficient amounts or withon terms acceptable to us.

While we have no immediate plans to access such funds, we have an effective shelf registration statement with the SEC that allows us to offer for sale, from time to time and as the capital markets permit, up to $100 million in various forms of debt or equity securities.

In addition to the above sources of liquidity, potential sources include the placement of subordinated debentures or loans, additionalthe sale of equity securities and the sale of store sales or additional other asset sales.asset. 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.

47

---

Summary

Information about our cash flows, by category, are presented in our Consolidated Statement of Outstanding Balances on Credit FacilitiesCash Flows. The following table summarizes our cash flows for the twelve months ended December 31, 2013, 2012 and Long-term Debt

2011:

		Year Ended December 31,
		2013				2012				2011
Net cash provided by (used in) operating activities		$	32,059			$	(212,476	)		$	(766	)
Net cash used in investing activities			(130,322	)			(98,997	)			(39,422	)
Net cash provided by financing activities			79,110				333,461				51,733

Operating Activities

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

		Outstanding as of December 31, 2012				Remaining Available as of December 31, 2012
New vehicle floor plan commitment		$	568,130			$	-		(1),(4)
Floor plan notes payable			13,454				-		(4)
Used vehicle inventory financing facility			78,309				-		(3)
Revolving line of credit			21,045				120,536		(2),(3)
Real estate mortgages			192,928				-
Other debt			2,776				-
Liabilities related to assets held for sale			8,347				-		(4)
Total debt		$	884,989			$	120,536

(1)	We have a $575 million new vehicle floor plan commitment as part of our credit facility.

(2)	Available credit is based on the borrowing base amount effective as of December 31, 2012. This amount is reduced by $3.4 million for outstanding letters of credit.

(3)	The amount available on the credit facility is limited based on a borrowing base calculation and fluctuates monthly.

(4)

At December 31, 2012, an additional $6.9 million of floor plan notes payable outstanding on our new vehicle floor plan commitment and $1.4 million of floor plan notes payable on vehicles designated as service loaners are recorded as liabilities relatedcash flow from operating activities:     Year Ended December 31,     Increase   (Dollars in thousands)   2013     2012     (Decrease)   Net cash provided by (used in) operating activity – as reported   $ 32,059     $ (212,476 )   $ 244,535   Add: Net borrowings on floor plan notes payable, non-trade     128,636       348,477       (219,841 ) Net cash provided by operating activity – adjusted     160,695       136,001       24,694       Year Ended December 31,     Increase   (Dollars in thousands)   2012     2011     (Decrease)   Net cash used in operating activity – as reported   $ (212,476 )   $ (766 )   $ (211,710 ) Add: Net borrowings on floor plan notes payable, non-trade     348,477       63,145       285,332   Net cash provided by operating activity - adjusted     136,001       62,379       73,622   Cash provided by operating activities for 2013 compared to assets held for sale.

Credit Facility

On April 17, 2012 we executed a new five-year $650 million credit facility with a syndicate of 10 financial institutions, including four manufacturer-affiliated finance companies. On December 19, 2012 we entered into an amendment to the loan agreement that expanded the available loan commitment to $800increased $244.5 million. The amendment to loan agreement amended the allocation of the financing commitment to $575 million in new vehicle inventory floor plan financing, $80 million in used vehicle inventory floor plan financing and $145 million in a revolving line of credit for general corporate purposes, including acquisitions and working capital. All borrowingsBorrowings from and repayments to our syndicated lending group related to our new vehicle inventory floor plan financing are presented in the Consolidated Statements of Cash Flows as financing activities.

The interest rate onactivity. To better understand the credit facility varies based onimpact of changes in inventory and the type of debtassociated financing, we also consider our net cash provided by operating activities adjusted to include cash activity associated with the rate ranging from the one-month LIBOR plus 1.50% to the one-month LIBOR plus 2.0%. The interest rates on the credit facility at December 31, 2012 ranged from 1.7% to 2.2%. Our financial covenants related to this credit facility include maintaining a current ratio of not less than 1.20x, a fixed charge coverage ratio of not less than 1.20x and a leverage ratio of not more than 5.0x.

New Vehicle Lines

We finance substantially all of our new vehicles throughvehicle credit facility. Adjusted net cash provided by operating activities increased $24.7 million in 2013 compared to 2012. This increase was primarily driven by increased net income as well as growth in our accrued liabilities and deferred revenues.

Inventories are the new vehicle floor plan commitmentmost significant component of our credit facility. We also have additional floor plan agreements with manufacturer-affiliated finance companies for vehicles that are designated for use as service loaners. Borrowingscash flow from and repayments to, manufacturer-affiliated finance companies are classified as operating activities on the Consolidated Statements of Cash Flows.

Real Estate Mortgages and Other Debt

We have mortgagesoperations. Net cash used associated with inventory decreased $123.5 million in 2013 compared to 2012 and increased $152.2 million in 2012 compared to 2011.As of December 31, 2013, our owned real estate and leasehold improvements. Interest rates related to this debt ranged from 1.8% to 5.9% atnew vehicle days supply was 74, or 2 days lower than our days supply as of December 31, 2012. The mortgages are payable in various installments through May 2031. AsOur days supply of used vehicles was 63 days as of December 31, 2012, we had fixed interest rates on 66%2013, or 7 days higher than our days supply as of our outstanding mortgages.

Our other debt includes various notes, capital leases and obligations assumed as a result of acquisitions and other agreements and had interest rates that ranged from 2.0% to 9.0% at December 31, 2012. This debt, which totaled $2.8 million at December 31, 2012, is due in various installments through May 2019.

48

---

Debt Covenants

Under the terms of our credit facility and other debt agreements, we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.

Under our credit facility, we are required to maintain the ratios detailed in the following table:

Debt Covenant Ratio		Requirement					As of December 31, 2012
Current ratio		Not less than 1.20	to	1			1.43	to	1
Fixed charge coverage ratio		Not less than 1.20	to	1			2.35	to	1
Liabilities to tangible net worth ratio		Not more than 5.00	to	1			2.08	to	1
Funded debt restriction		Not to exceed $375 million					$195.7 million

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.

If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. We also would trigger cross-defaults under other debt agreements.

Inventories

We calculate days supply of inventory based on current inventory levels, excluding in-transit vehicles, and a 30-day historical cost of sales level. As of December 31, 2012, our new vehicle days supply was 76, or 14 days higher than our days supply as of December 31, 2011. The increase in our 2012 new vehicle inventory levels is partly related to the building of certain truck models prior to manufacturer planned platform changes, when production is halted and additional vehicles will not be available for several months. Additionally, 2011 new vehicle inventory levels were lower than normal as inventory supply was recovering from the effects of the earthquake and tsunami in Japan in the last half of 2011. Our days supply of used vehicles was 56 days as of December 31, 2012, or 4 days higher than our days supply as of December 31, 2011. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.

 

49

---

Contractual Payment Obligations

A summaryInvesting Activities

Below are highlights of significant activity related to our contractual commitments and obligations as of December 31, 2012, was as follows (in thousands):

		Payments Due By Period
Contractual Obligation		Total				2013				2014 and 2015				2016 and 2017				2018 and beyond
New vehicle floor plan commitment(1)		$	568,130			$	568,130			$	-			$	-			$	-
Floor plan notes payable(1)			13,454				13,454				-				-				-
Used vehicle inventory financing facility			78,309				-				-				78,309				-
Revolving line of credit			21,045				-				-				21,045				-
Liabilities related to assets held for sale			8,347				8,347				-				-				-
Real estate debt, including interest			230,854				14,463				28,902				52,207				135,282
Other debt, including capital leases and interest			3,871				258				503				409				2,701
Charge-backs on various contracts			13,504				7,540				5,345				609				10
Operating leases(2)			139,965				16,930				29,562				23,205				70,268
Fixed rate payments on interest rate swaps			5,511				2,085				2,832				594				-
		$	1,082,990			$	631,207			$	67,144			$	176,378			$	208,261

(1)

Amounts for floor plan notes payable, the used vehicle inventory financing facility and the revolving line of credit do not include estimated interest payments. See Notes 1 and 6 in the Notes to Consolidated Financial Statements.

(2)

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

cash flows from investing activities:

		Year Ended December 31,
(Dollars in thousands)		2013				2012				Increase (Decrease)
Capital expenditures		$	(50,025	)		$	(64,584	)		$	(14,559	)
Cash paid for acquisitions, net of cash acquired			(81,105	)			(44,716	)			36,389

		Year Ended December 31,
(Dollars in thousands)		2012				2011				Increase (Decrease)
Capital expenditures		$	(64,584	)		$	(31,673	)		$	32,911
Cash paid for acquisitions, net of cash acquired			(44,716	)			(60,485	)			(15,769	)

Capital Expenditures

expenditures

Capital expenditures were $50.0 million, $64.6 million and $31.7 million for 2013, 2012 and $7.6 million2011, respectively. Capital expenditures in 2013 were associated with capital improvements at recently acquired stores, purchases of land for 2012, 2011expansion of existing stores, image improvements, purchases of store facilities, purchases of previously leased facilities and 2010, respectively.replacement of equipment. The increase in capital expenditures in 2012 compared to 2011 was mainly related to the building of facilities for an awarded open point, the purchase of previously leased facilities, image improvements and the construction of, and relocation to, a new headquarters building. The increase in 2011 compared to 2010 was related to improvements at certain of our store facilities, the purchase of new store locations, replacement of equipment and construction of a new headquarters building.

Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. We believe it is an attractive time to invest in certainCertain facility upgrades and remodels that will generate additional manufacturer incentive payments. Also, recently enacted tax law changes that accelerate deductions forWe expect a portion of our future capital expenditures have accelerated project timelines to ensure completion beforebe associated with facility upgrades at recently completed acquisitions. This additional capital investment is contemplated in our initial evaluation of the law expires.investment return metrics applied to each acquisition and is usually associated with manufacturer image standards and requirements.

Acquisitions

We acquired six stores, one franchise and one stand-alone body shop in 2013. The combined estimated steady-state annual revenues for these acquisitions are $150 million. In 2012 we acquired four stores. These acquisitions diversify our brand and geographic mix as we continue to evaluate our portfolio to minimize exposure to any one manufacturer and achieve financial returns.

We focus on purchasing underperforming stores and use common systems and measurements to improve their financial results. Our investment metrics for acquisitions are as follows:

●

a 75-100% after tax return on equity after five years

●

an investment in economic value of three to five times earnings before interest, taxes, depreciation and amortization (EBITDA)

●

an equity investment of 10%-20% of revenues.

In the event

Financing Activities

Below are highlights of significant activity related to our cash flows from financing activities:

		Year Ended December 31,
(Dollars in thousands)		2013				2012				(Decrease)
Net borrowings (repayments) on lines of credit		$	(14,355	)		$	12,354			$	(26,709	)
Principal payments on long-term debt, unscheduled			(25,770	)			(40,765	)			(14,995	)
Proceeds from the issuance of long-term debt			4,720				42,333				(37,613	)
Repurchases of common stock			(7,903	)			(23,279	)			(15,376	)
Dividends paid			(10,085	)			(12,066	)			(1,981	)

		Year Ended December 31,								Increase
(Dollars in thousands)		2012				2011				(Decrease)
Net borrowings on lines of credit		$	12,354			$	47,000			$	(34,646	)
Principal payments on long-term debt, unscheduled			(40,765	)			(55,666	)			(14,901	)
Proceeds from the issuance of long-term debt			42,333				25,674				16,659
Repurchases of common stock			(23,279	)			(13,568	)			9,711
Dividends paid			(12,066	)			(6,822	)			5,244

Borrowing and Repayment Activity

During 2013, we undertakehad a significantnet repayment of $14.4 million associated with our used vehicle financing facility and our revolving line of credit. Additionally, we strategically paid off $25.8 million in outstanding mortgages and had proceeds from mortgage financing of $4.7 million. This activity extends our near-term maturities and reduces our interest expense.

We continue to deleverage our balance sheet, which provides us with liquidity for future reinvestment into our business as accretive opportunities arise. As of December 31, 2013 our debt to total capital, commitment in the future, we expectexcluding floor plan notes payable, was 32.0% compared to pay40.8% for the commitment out of existing cash balances, construction financing and borrowings onsame period a year ago.

Equity Transactions

Under the share repurchase program authorized by 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.

50

---

Dividends

Our Board of Directors and repurchases associated with stock compensation activity, we repurchased 187,621 shares of common stock at an average price of $42.12 per share in 2013. As of December 31, 2013, we have 1,726,953 shares available for repurchase under the plan. The plan does not have an expiration date and we may continue to repurchase shared from time to time as conditions warrant.

For the period January 1, 2013 through December 31, 2013, we declared and paid dividends on our Class A and Class B common stockCommon Stock as follows:

Dividend paid:		Dividend amount per share				Total amount of dividend (in thousands)
March 2013		$	*			$	*
May 2013			0.13				3,356
August 2013			0.13				3,363
November 2013			0.13				3,366

* A dividend payment of $0.10 per share was declared and paid in December 2012 as follows:

Dividend paid:		Dividend amount per share				Total amount of dividend (in thousands)
March 2012		$	0.07			$	1,815
May 2012			0.10				2,583
August 2012			0.10				2,545
November 2012			0.10				2,556
December 2012			0.10				2,567

in lieu of the dividend typically declared and paid in March of the following year.

Management evaluates performance and makes a recommendation to the Board of Directors on dividend payments on a quarterly basis. An additional dividend payment was paid in December 2012 in lieu of the dividend typically declared and paid in March of the following year.

Share Repurchase ProgramContractual Payment Obligations

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares

A summary of our Class A common stock. Ascontractual commitments and obligations as of December 31, 2011, we had purchased all available shares under this program, 419,376 of which were purchased during 2011 at an average price of $17.92 per share.2013, was as follows (in thousands):

		Payments Due By Period
Contractual Obligation		Total				2014				2015 and 2016				2017 and 2018				2019 and beyond
New vehicle floor plan commitment(1)		$	695,066			$	695,066			$	-			$	-			$	-
Floor plan notes payable(1)			18,789				18,789				-				-				-
Used vehicle inventoryfinancing facility			85,000				-				-				85,000				-
Revolving line of credit			-				-				-				-				-
Liabilities related toassets held for sale			6,271				6,271				-				-				-
Real estate debt, including interest			197,444				12,844				49,116				38,601				96,883
Other debt, including capital leases and interest			3,647				268				485				369				2,525
Charge-backs on various contracts			18,182				10,223				7,252				685				22
Operating leases(2)			135,542				17,458				29,979				23,582				64,523
Fixed rate payments on interest rate swaps			3,426				1,416				2,010				-				-
		$	1,163,367			$	762,335			$	88,842			$	148,237			$	163,953

(1)

Amounts for floor plan notes payable, the used vehicle inventory financing facility and the revolving line of credit do not include estimated interest payments. See Notes 1 and 6 in the Notes to Consolidated Financial Statements.

(2)

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

In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock. On July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock. Through December 31, 2012, we had purchased 1,145,147 shares under these programs at an average price of $22.33 per share.

As of December 31, 2012, 1,854,853 shares remained available for repurchase. These plans do not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.

51

---

Selected Consolidated Quarterly Financial Data

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

2012 (in thousands, except per share data )		Three Months Ended,
		March 31				June 30				September 30				December 31
Revenues:
New vehicle		$	392,946			$	455,939			$	491,847			$	506,871
Used vehicle retail			190,619				207,341				227,157				208,367
Used vehicle wholesale			33,357				35,106				35,006				35,768
Finance and insurance			24,877				27,183				30,930				29,244
Service, body and parts			83,544				85,456				89,038				89,665
Fleet and other			12,903				11,317				4,548				7,458
Total revenues			738,246				822,342				878,526				877,373
Cost of sales			613,912				688,246				736,016				739,013
Gross profit			124,334				134,096				142,510				138,360
Asset impairments			115				-				-				-
Selling, general and administrative			88,440				92,990				95,132				97,126
Depreciation and amortization			4,138				4,198				4,351				4,441
Operating income			31,641				36,908				43,027				36,793
Floor plan interest expense			(2,902	)			(3,054	)			(3,370	)			(3,490	)
Other interest expense			(2,726	)			(2,531	)			(2,125	)			(2,239	)
Other, net			498				820				453				754
Income from continuing operations before income taxes			26,511				32,143				37,985				31,818
Income tax provision			(9,877	)			(12,138	)			(14,893	)			(12,154	)
Income before discontinued operations			16,634				20,005				23,092				19,664
Discontinued operations, net of tax			162				486				150				169
Net income		$	16,796			$	20,491			$	23,242			$	19,833
Basic income per share from continuing operations		$	0.64			$	0.78			$	0.91			$	0.77
Basic income per share from discontinued operations			0.01				0.02				-				-
Basic net income per share		$	0.65			$	0.80			$	0.91			$	0.77
Diluted income per share from continuing operations		$	0.63			$	0.76			$	0.90			$	0.76
Diluted income per share from discontinued operations			-				0.02				-				-
Diluted net income per share		$	0.63			$	0.78			$	0.90			$	0.76

52

---

2013 (in thousands, except per share data )		Three Months Ended,
		March 31				June 30				September 30				December 31
Revenues:
New vehicle		$	493,441			$	569,487			$	604,135			$	589,535
Used vehicle retail			239,228				258,465				280,734				253,797
Used vehicle wholesale			39,506				37,691				43,396				37,642
Finance and insurance			31,663				34,218				37,132				35,994
Service, body and parts			90,440				94,462				97,784				100,797
Fleet and other			8,802				14,182				6,109				7,109
Total revenues			903,080				1,008,505				1,069,290				1,024,874
Cost of sales			756,642				848,672				903,901				865,581
Gross profit			146,438				159,833				165,389				159,293
Selling, general and administrative			101,131				109,283				108,570				108,416
Depreciation and amortization			4,721				4,899				5,099				5,316
Operating income			40,586				45,651				51,720				45,561
Floor plan interest expense			(3,449	)			(3,036	)			(2,909	)			(2,979	)
Other interest expense			(2,361	)			(1,941	)			(1,933	)			(2,115	)
Other, net			801				584				835				773
Income from continuing operations before income taxes			35,577				41,258				47,713				41,240
Income tax provision			(13,695	)			(15,977	)			(16,822	)			(14,080	)
Income before discontinued operations			21,882				25,281				30,891				27,160
Discontinued operations, net of tax			173				274				127				212
Net income		$	22,055			$	25,555			$	31,018			$	27,372
Basic income per share from continuing operations		$	0.85			$	0.98			$	1.20			$	1.05
Basic income per share from discontinued operations			0.01				0.01			-					0.01
Basic net income per share		$	0.86			$	0.99			$	1.20			$	1.06
Diluted income per share from continuing operations		$	0.84			$	0.97			$	1.18			$	1.03
Diluted income per share from discontinued operations			0.01				0.01				-				0.01
Diluted net income per share		$	0.85			$	0.98			$	1.18			$	1.04

 

2011 (in thousands, except per share data)		Three Months Ended,
		March 31					June 30			September 30				December 31
Revenues:
New vehicle		$	295,533			$	339,378			$	374,460			$	382,004
Used vehicle retail			153,803				172,283				182,432				170,053
Used vehicle wholesale			29,327				28,852				35,288				34,862
Finance and insurance			18,939				20,492				22,302				22,397
Service, body and parts			72,199				78,410				83,296				82,053
Fleet and other			3,128				17,168				10,108				3,979
Total revenues			572,929				656,583				707,886				695,348
Cost of sales			473,270				542,607				589,089				582,496
Gross profit			99,659				113,976				118,797				112,852
Asset impairments			383				489				-				504
Selling, general and administrative			75,294				79,903				83,135				78,331
Depreciation and amortization			4,059				4,170				4,103				4,095
Operating income			19,923				29,414				31,559				29,922
Floor plan interest expense			(2,423	)			(3,281	)			(1,954	)			(2,706	)
Other interest expense			(3,284	)			(2,999	)			(3,063	)			(3,532	)
Other, net			76				171				214				233
Income from continuing operations before income taxes			14,292				23,305				26,756				23,917
Income tax provision			(5,914	)			(8,716	)			(10,534	)			(7,896	)
Income before discontinued operations			8,378				14,589				16,222				16,021
Discontinued operations, net of tax			327				237				341				2,745
Net income		$	8,705			$	14,826			$	16,563			$	18,766
Basic income per share from continuing operations		$	0.32			$	0.55			$	0.62			$	0.62
Basic income per share from discontinued operations			0.01				0.01				0.01				0.10
Basic net income per share		$	0.33			$	0.56			$	0.63			$	0.72
Diluted income per share from continuing operations		$	0.31			$	0.54			$	0.61			$	0.61
Diluted income per share from discontinued operations			0.02				0.01				0.01				0.10
Diluted net income per share		$	0.33			$	0.55			$	0.62			$	0.71

2012 (in thousands, except per share data )		Three Months Ended,
		March 31				June 30				September 30				December 31
Revenues:
New vehicle		$	392,946			$	455,939			$	491,847			$	506,871
Used vehicle retail			190,619				207,341				227,157				208,367
Used vehicle wholesale			33,357				35,106				35,006				35,768
Finance and insurance			24,877				27,183				30,930				29,244
Service, body and parts			83,544				85,456				89,038				89,665
Fleet and other			12,903				11,317				4,548				7,458
Total revenues			738,246				822,342				878,526				877,373
Cost of sales			613,912				688,246				736,016				739,013
Gross profit			124,334				134,096				142,510				138,360
Asset impairments			115				-				-				-
Selling, general and administrative			88,440				92,990				95,132				97,126
Depreciation and amortization			4,138				4,198				4,351				4,441
Operating income			31,641				36,908				43,027				36,793
Floor plan interest expense			(2,902	)			(3,054	)			(3,370	)			(3,490	)
Other interest expense			(2,726	)			(2,531	)			(2,125	)			(2,239	)
Other, net			498				820				453				754
Income from continuing operations before income taxes			26,511				32,143				37,985				31,818
Income tax provision			(9,877	)			(12,138	)			(14,893	)			(12,154	)
Income before discontinued operations			16,634				20,005				23,092				19,664
Discontinued operations, net of tax			162				486				150				169
Net income		$	16,796			$	20,491			$	23,242			$	19,833
Basic income per share from continuing operations		$	0.64			$	0.78			$	0.91			$	0.77
Basic income per share from discontinued operations			0.01				0.02				-				-
Basic net income per share		$	0.65			$	0.80			$	0.91			$	0.77
Diluted income per share from continuing operations		$	0.63			$	0.76			$	0.90			$	0.76
Diluted income per share from discontinued operations			-				0.02				-				-
Diluted net income per share		$	0.63			$	0.78			$	0.90			$	0.76

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

(2)	Certain reclassifications of amounts previously reported have been made to the quarterly financial data to maintain consistency and comparability between periods presented.

Seasonality and Quarterly Fluctuations

Historically, our sales have been lower in the first and fourth quarters of each year due to consumer purchasing patterns during the holiday season, inclement weather in certain of our markets and the reduced number of business days during the holiday season. As a result, financial performance is expected to be lower during the first and fourth quarters than during the second and third quarters of each fiscal year. We believe that interest rates, levels of consumer debt, consumer confidence and manufacturer sales incentives, as well as general economic conditions, also contribute to fluctuations in sales and operating results.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Inflation

The effects of inflation were insignificant and Changing Prices

Inflation and changing prices did not have a material impact on our revenues or income from continuing operations in the years ended December 31, 2013, 2012 2011 and 2010.

53

---

2011.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Variable Rate Debt

Our credit facility, other floor plan notes payable and certain real estate mortgages are structured as variable rate debt. The interest rates on our variable rate debt are tied to either the one- or three-monthone-month LIBOR or the prime rate. These debt obligations, therefore, expose us to variability in interest payments due to changes in these rates. Certain floor plan debt is based on open-ended lines of credit tied to each individual store from the various manufacturer finance companies.

Our variable-rate floor plan notes payable, variable rate mortgage notes payable and other credit line borrowings subject us to market risk exposure. At December 31, 2012,2013, we had $746.2$833.8 million outstanding under such agreements at a weighted average interest rate of 1.9%1.5% per annum. A 10% increase in interest rates, or 15 basis points, would increase annual interest expense by approximately $1.4$0.8 million, net of tax, based on amounts outstanding at December 31, 2012.

2013.

Fixed Rate Debt

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

At December 31, 2012,2013, we had $130.5$132.6 million of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates between November 2016 and May 2031. Based on discounted cash flows using current interest rates for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $134.7$126.8 million at December 31, 2012.

2013.

Hedging Strategies

We believe it is prudent to limit the variability of a portion of our interest payments. Accordingly, from time to time we have entered into interest rate swaps to manage the variability of our interest rate exposure, thus leveling a portion of our interest expense in a rising or fallingchanging rate environment.

We have effectively changed the variable-rate cash flow exposure on a portion of our floor plan debt to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps, we receive variable interest rate payments and make fixed interest rate payments, thereby creating fixed rate floor plan debt.

We do not enter into derivative instruments for any purpose other than to manage interest rate exposure. That is, we do not engage in interest rate speculation using derivative instruments. Typically, we designate all interest rate swaps as cash flow hedges.

As of December 31, 2012,2013, we had outstanding the followinga $25 million interest rate swapsswap outstanding with U.S. Bank Dealer Commercial Services:

●

$25 million interest rate swap at a fixed rate of 4.495% per annum,Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate adjusted on the 26th of each month, matures January 25, 2013;

●

$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, matures April 30, 2013;

●

$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, matures April 30, 2013 and

●

$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, matures June 15, 2016.

54

---

We receive interest on all of the interest rate swaps atswap is the one-month LIBOR rate. TheAt December 31, 2013, the one-month LIBOR rate at December 31, 2012 was 0.21%0.17% per annum, as reported in the Wall Street Journal.

The fair value of our interest rate swap agreementsagreement represents the estimated receipts or payments that would be made to terminate the agreements.agreement. These amounts related to our cash flow hedges are recorded as deferred gains or losses in our Consolidated Balance Sheets with the offset recorded in accumulated other comprehensive income, net of tax. Changes to the fair value of discontinued cash flow hedges are recognized into earnings as a component of floor plan interest expense. At December 31, 2012,2013, the fair value of all of our agreements was a liability of $4.7$2.9 million. The estimated amount expected to be reclassified into earnings within the next twelve months was $1.9$1.2 million at December 31, 2012.

2013.

Risk Management Policies

We assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our policy is to manage this risk through a mix of fixed rate and variable rate debt structures and interest rate swaps.

We maintain risk management control systemscontrols to monitor interest rate cash flow attributable to both our outstanding and forecasted debt obligations, as well as our offsetting hedge positions. The risk management control systems involvecontrols include assessing the use of analytical techniques, includingimpact to future cash flow sensitivity analysis, to estimate the expected impactflows of changes in interest rates on our future cash flows.rates.

Item 8.Financial Statements and Supplementary Financial Data

The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 15 of Part IV of this document. Quarterly financial data fordatafor each of the eight quarters in the two-year period ended December 31, 20122013 is included in Item 7.

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

None.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

.

55

---

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.2013. In making this assessment, we used the criteria set forth inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal controls over financial reporting during the year of the acquisition while integrating the acquired operations. Management’s evaluation of internal control over financial reporting excludes the operations of the seven acquisitions completed in 2013. These acquisitions represent approximately 3% of consolidated total assets and approximately 2% of consolidated revenues for the year ended December 31, 2013. 

Based on our assessment, using those criteria, our management concluded that, as of December 31, 2012,2013, our internal control over financial reporting was effective.

KPMG LLP, our Independent Registered Public Accounting Firm, has issued an attestation report on our internal control over financial reporting as of December 31, 2012,2013, which is included in Item 8 of this Form 10-K.

Item 9B.Other Information

None.

PART III

Item 10.Directors, Executive Officers and Corporate Governance

Information required by this item will be included under the captionsElection of Directors,Committees of the Board of Directors,Audit Committee Independence and Financial Expert,Code of Business Conduct and Ethics, Named Executive Officers andSection 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for our 20132014 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

Item 11.Executive Compensation

The information required by this item will be included under the captionsCompensation of Directors, Compensation Committee Report, Compensation Discussion and Analysis,Executive Compensation, Potential Payments Upon Termination or Change-in-Control, Company Compensation Policies and Practices, Risk Analysisand Compensation Committee Interlocks and Insider Participationin our Proxy Statement for our 20132014 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

56

---

Item 12.Security Ownership of Certain Beneficial Owners and Management

Equity Compensation Plan Information

The following table summarizes equity securities authorized for issuance as of DecemberofDecember 31, 2012.

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) (2)
Equity compensation plans approved by shareholders											1,349,152
Options			253,499			$	6.26
Restricted stock units			583,463			NA(1)
Equity compensation plans not approved by shareholders			-				-				-
Total			836,962			$	6.26	(1)			1,349,152

2013.

Plan Category		Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)				Weighted average exercise price of outstanding options, warrants and rights (b)				Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)(2)
Equity compensation plans approved by shareholders											2,177,368
Options			58,884			$	6.53
Restricted stock units			677,358			NA		(1)
Equity compensation plans not approved by shareholders			-				-				-
Total			736,242			$	6.53	(1)			2,177,368

(1)	There is no exercise price associated with our restricted stock units. The total weighted average exercise price is shown with respect to options only.

(2)	Includes 667,8591,573,080 shares available pursuant to our 20032013 Amended and Restated Stock Incentive Plan and 681,293604,288 shares available pursuant to our Employee Stock Purchase Plan.

The additional information required by this item will be included under the captionSecurity Ownership of Certain Beneficial Owners and Managementin our Proxy Statement for our 20132014 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

Item 13.Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be included under the captionsCertain Relationships and Related Transactions andDirector Independence in our Proxy Statement for our 20132014 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

Item 14.Principal Accountant Fees and Services

Information required by this item will be included under the captionFees Paid to KPMG LLP Related to Fiscal 20122013 and 20112012 and Pre-Approval Policiesin our Proxy Statement for our 20132014 Annual Meeting of Shareholders and, upon filing, is incorporated herein by reference.

57

---

PART IV

Item 15.Exhibits and Financial Statement Schedules

Financial Statements and Schedules

The Consolidated Financial Statements, together with the report thereon of KPMG LLP, Independent Registered Public Accounting Firm, are included on the pages indicated below:

	Page
Reports of Independent Registered Public Accounting Firm	F-1, F-2
Consolidated Balance Sheets as of December 31, 20122013 and 20112012	F-3
Consolidated Statements of Operations for the years ended December 31, 2013, 2012 2011 and 20102011	F-4
Consolidated Statements of Comprehensive Income for the years ended December 31, 2013, 2012 2011 and 20102011	F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012 2011 and 20102011	F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 2011 and 20102011	F-7
Notes to Consolidated Financial Statements	F-8

There are no schedules required to be filed herewith.

Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index. An asterisk (*) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement, which are required to be identified in this report.

Exhibit	Description
3.1	Restated Articles of Incorporation of Lithia Motors, Inc., as amended May 13, 1999 (incorporated by reference to exhibit 3.1 to the Company’s Form 10-K for the year ended December 31, 1999)
3.2	2013 Amended and Restated Bylaws of Lithia Motors, Inc. (Corrected) (incorporated by reference to exhibit 3.23.1 to the Company’s Form 10-K for the year ended December 31, 2008)8-K filed August 26, 2013)
10.1*	2009 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Company’s Proxy Statement for its 2009 annual meeting of shareholders filed on March 20, 2009)
10.2*	Lithia Motors, Inc. 2001 Stock Option Plan (incorporated by reference to Appendix B to the Company’s Proxy Statement for its 2001 annual meeting of shareholders filed on May 8, 2001)
10.2.1*	Form of Incentive Stock Option Agreement for 2001 Stock Option Plan (incorporated by reference to exhibit 10.6.1 to the Company’s Form 10-K for the year ended December 31, 2001)
10.2.2*	Form of Non-Qualified Stock Option Agreement for 2001 Stock Option Plan (incorporated by reference to exhibit 10.6.2 to the Company’s Form 10-K for the year ended December 31, 2001)
10.3	Lithia Motors, Inc. 2013 Amended and Restated 2003 Stock Incentive Plan (incorporated by reference to exhibit 10.1 to the Company’s Form 10-Q for the quarter ended March 31, 2011)8-K filed May 2, 2013)
10.3.1	RSU Deferral Plan (incorporated by reference to exhibit 10.3.1 to the Company’s Form 10-K for the year ended December 31, 2011)
10.4*	Form of Restricted Stock Unit Agreement (Performance and Time Vesting) (incorporated by reference to exhibit 10.1 to the Company’s Form 10-Q for Senior Executivesthe quarter ended March 31, 2013)
10.4.1*	Form of Restricted Stock Unit Agreement (Long Term Performance Vesting)
10.4.2*	Form of Restricted Stock Unit Agreement (Time Vesting) (for mid-level executives) (incorporated by reference to exhibit 10.3 to the Company’s Form 10-Q for the quarter ended March 31, 2013)
10.4.3*	Form of Restricted Stock Unit Agreement (Time Vesting) (for non-employee directors) (incorporated by reference to exhibit 10.4 to the Company’s Form 10-K10-Q for the yearquarter ended DecemberMarch 31, 2010)2013)
10.4.1*10.4.4*	Form of Restricted Stock Unit Agreement for Non-Executive Officers (incorporated by reference to exhibit 10.4.1 to the Company’s Form 10-K for the year ended December 31, 2010)(Performance and Time Vesting)
10.4.2* 10.5*	Form of Restricted Stock Unit Agreement for Non-Executive Directors (incorporated by reference to exhibit 10.4.2  to the Company’s Form 10-K for the year ended December 31, 2010)
10.5*	Written description of Lithia Motors, Inc. 2013 Discretionary Support Services Variable Performance Compensation Plan (incorporated by reference fromto exhibit 10.2 to the Company’s Proxy Statement for the 2013 Annual Meeting under the caption Compensation Discussion and Analysis - Elements of Compensation Program) Form 8-K filed May 2, 2013)
10.6	Chrysler Corporation Sales and Service Agreement Additional Terms and Provisions (incorporated by reference to exhibit 10.3.2 to the Company’s Registration Statement on Form S-1, Registration Statement No. 333-14031, as declared effective by the Securities Exchange Commission on December 18, 1996)

58

---

Exhibit	Description
10.6.1
10.6.1	Chrysler Corporation Chrysler Sales and Service Agreement, dated September 28, 1999, between Chrysler Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc. (incorporated by reference to exhibit 10.15.1 to the Company’s Form 10-K for the year ended December 31, 1999 (Additional Terms and Provisions to the Sales and Service Agreements are in Exhibit 10.9) (1))
10.7	Mercury Sales and Service Agreement General Provisions (incorporated by reference to exhibit 10.6.5 to the Company’s Registration Statement on Form S-1, Reg. No. 333-14031)
10.7.1	Supplemental Terms and Conditions agreement between Ford Motor Company and Lithia Motors, Inc. dated June 12, 1997 (incorporated by reference to exhibit 10.7.2 to the Company’s Form 10-K for the year ended December 31, 1997)
10.7.2	Mercury Sales and Service Agreement, dated June 1, 1997, between Ford Motor Company and Lithia TLM, LLC dba Lithia Lincoln Mercury (incorporated by reference to exhibit 10.7.1 to the Company’s Form 10-K for the year ended December 31, 1997) (general provisions are in Exhibit 10.10) (2)

Exhibit	Description
10.8
10.8	Volkswagen Dealer Agreement Standard Provisions (incorporated by reference to exhibit 10.16.2 to the Company’s Form 10-K for the year ended December 31, 1997)
10.8.1	Volkswagen Dealer Agreement dated September 17, 1998, between Volkswagen of America, Inc. and Lithia HPI, Inc. dba Lithia Volkswagen (incorporated by reference to exhibit 10.17.1 to the Company’s Form 10-K for the year ended December 31, 1999 (standard provisions are in Exhibit 10.11) (3)
10.9	General Motors Dealer Sales and Service Agreement Standard Provisions (incorporated by reference to exhibit 10.7.2 to the Company’s Registration Statement on Form S-1, Reg. No. 333-14031)
10.9.1	Supplemental Agreement to General Motors Corporation Dealer Sales and Service Agreement dated January 16, 1998 (incorporated by reference to exhibit 10.18.1 to the Company’s Form 10-K for the year ended December 31, 1999)
10.9.2	Chevrolet Dealer Sales and Service Agreement dated October 13, 1998 between General Motors Corporation, Chevrolet Motor Division and Camp Automotive, Inc. (incorporated by reference to exhibit 10.31 to the Company’s Form 10-K for the year ended December 31, 1998) (4)
10.10	Toyota Dealer Agreement Standard Provisions (incorporated by reference to exhibit 10.10.2 to the Company’s Registration Statement on Form S-1, Reg. No. 333-14031)
10.10.1	Toyota Dealer Agreement, between Toyota Motor Sales, USA, Inc. and Lithia Motors, Inc., dba Lithia Toyota, dated February 15, 1996 (incorporated by reference to exhibit 10.20.1 to the Company’s Form 10-K for the year ended December 31, 1999) (5)
10.11	Nissan Standard Provisions (incorporated by reference to exhibit 10.15.2 to the Company’s Form 10-K for the year ended December 31, 1997)
10.11.1	Nissan Public Ownership Addendum dated August 30, 1999 (incorporated by reference to exhibit 10.22.1 to the Company’s Form 10-K for the year ended December 31, 1999) (6)

10.11.2	Nissan Dealer Term Sales and Service Agreement between Lithia Motors, Inc., Lithia NF, Inc., and the Nissan Division of Nissan Motor Corporation In USA dated January 2, 1998 (incorporated by reference to exhibit 10.15.1 to the Company’s Form 10-K for the year ended December 31, 1997) (standard provisions are in Exhibit 10.14) (7)
10.12	Lease Agreement between CAR LIT, LLC and Lithia Real Estate, Inc. relating to properties in Medford, Oregon (incorporated by reference to exhibit 10.36 to the Company’s Form 10-K for the year ended December 31, 1999) (8)
10.13* 10.14*	Non Employee Director Compensation Plan 2010/2011 Service Year (incorporated by reference to exhibit 10.13 to the Company’s Form 10-K for the year ended December 31, 2011)
10.13.1*	Non Employee Director Compensation Plan 2012/2013 Service Year
10.14*	Form of Outside Director Nonqualified Deferred Compensation Agreement (incorporated by reference to exhibit 10.20 to the Company’s Form 10-K for the year ended December 31, 2005)
10.15 10.15*	Option Agreement between the Company and M. L. Dick Heimann dated December 31, 2009 (incorporated by reference to exhibit 99.1 to the Company’s Form 8-K filed January 5, 2010)
10.15.1*	Executive Nonqualified Deferred Compensation Agreement between the Company and M. L. Dick Heimann dated December 31, 2009 (incorporated by reference to exhibit 99.2 to the Company’s Form 8-K filed January 5, 2010)

59

---

Exhibit	Description
10.16
10.16	Loan Agreement dated as of April 17, 2012 between Lithia Motors, Inc., and U.S. Bank National Association, as agent for the lenders, and U.S. Bank National Association, JPMorgan Chase Bank, N.A., Mercedes-Benz Financial Services USA LLC, Toyota Motor Credit Corporation, BMW Financial Services N.A., LLC, Nissan Motor Acceptance Corporation, Bank of America, N.A., Wells Fargo Bank, N.A., Bank of the West and Key Bank National Association, as lenders (incorporated by reference to exhibit 99.1 to the Company’s Form 8-K filed April 20, 2012)
10.16.1	Amendment to Loan Agreement dated December 19, 2012 with U.S. Bank National Association as agent for the lenders, and U.S. Bank National Association, JPMorgan Chase Bank, N.A., Mercedes-Benz Financial Services USA LLC, Toyota Motor Credit Corporation, BMW Financial Services N.A., LLC, Nissan Motor Acceptance Corporation, Bank of America, N.A., Wells Fargo Bank, N.A., Bank of the West and KeyBank National Association, as lenders (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed December 24, 2012)

10.17*	Amended and Restated Split-Dollar Agreement
10.18* 10.16.2	Second Amendment to Loan Agreement dated December 16, 2013 with U.S. Bank National Association as agent for the lenders, and U.S. Bank National Association, JPMorgan Chase Bank, N.A., Mercedes-Benz Financial Services USA LLC, Toyota Motor Credit Corporation, BMW Financial Services NA, LLC, Bank of America, NA, Bank of the West, KeyBank National Association, Nissan Motor Acceptance Corporation, TD Bank, NA, VW Credit, Inc., Hyundai Capital America, American Honda Finance Corporation and Wells Fargo Bank, NA, as lenders (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed December 18, 2013)
10.17*	Amended and Restated Split-Dollar Agreement (incorporated by reference to exhibit 10.17 to the Company’s Form 10-K for the year ended December 31, 2012)

Exhibit	Description
10.18*	Terms of Amended Employment and Change in Control Agreement between Lithia Motors, Inc. and Sidney B. DeBoer dated January 15, 2009 (incorporated by reference to exhibit 10.22 to the Company’s Form 10-K for the year ended December 31, 2008) (9)
10.19*	Form of Indemnity Agreement for each Named Executive Officer (incorporated by reference to exhibit 10.1 to the Company’s Form 8-K filed May 29, 2009)
10.20*	Form of Indemnity Agreement for each non-management Director (incorporated by reference to exhibit 10.2 to the Company’s Form 8-K filed May 29, 2009)
10.21*	Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan (incorporated by reference to exhibit 10.22 to the Company’s Form 10-K for the year ended December 31, 2010)
10.21.1*	Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of Discretionary Contribution Award for Sidney DeBoer (incorporated by reference to exhibit 10.22.1 to the Company’s Form 10-K for the year ended December 31, 2010)
10.21.2*	Form of Executive Management Non-Qualified Deferred Compensation and Long-Term Incentive Plan – Notice of Discretionary Contribution Award (incorporated by reference to exhibit 10.22.2 to the Company’s Form 10-K for the year ended December 31, 2010)
10.22 10.23*	Acquisition and Option Termination Agreement with M.L. Dick Heimann dated December 16, 2011 (incorporated by reference to exhibit 99.1 to the Company’s Form 8-K filed December 22, 2011)
10.22.1*	Form of Membership Purchase Agreement with M.L. Dick Heimann (incorporated by reference to exhibit 99.2 to the Company’s Form 8-K filed December 22, 2011)
10.23*	Employment Agreement with Executive Vice President Brad Gray dated March 1, 2012 (incorporated by reference to exhibit 10.2 to the Company’s Form 10-Q for the quarter ended March 31, 2012); Amendment to Terms of Employment Agreement dated April 30, 2013.
10.24*	Form of Amended Employment and Change in Control Agreement dated February 22, 2013 between the Company and each of Scott Hillier, Bryan B. DeBoer, John F. North III and Chris Holzshu (incorporated by reference to exhibit 10.24 to the Company’s Form 10-K for the year ended December 31, 2012)
12 10.25*	Real Estate Purchase and Sale Agreement between Lithia Real Estate, Inc. and Dick Heimann dated October 25, 2013 (incorporated by reference to exhibit 10.1 to the Company’s Form 10-Q for the quarter ended September 30, 2013)
12	Ratio of Earnings to Combined Fixed Charges
21	Subsidiaries of Lithia Motors, Inc.

23	Consent of KPMG LLP, Independent Registered Public Accounting Firm
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

60

---

Exhibit	Description
101.INS
101.INS	XBRL Instance Document.
101.SCH	XBRL Taxonomy Extension Schema Document.
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document.

(1)	Substantially identical agreements exist between DaimlerChrysler Motor Company,Chrysler Group, LLC and those other subsidiaries operating Dodge, Chrysler Plymouth or Jeep dealerships.

(2)	Substantially identical agreements exist for its Ford and Lincoln-Mercury lines between Ford Motor Company and those other subsidiaries operating Ford or Lincoln-Mercury dealerships.

(3)	Substantially identical agreements exist between Volkswagen of America, Inc. and those subsidiaries operating Volkswagen dealerships.

(4)	Substantially identical agreements exist between Chevrolet Motor Division, GM Corporation and those other subsidiaries operating General Motors dealerships.

(5)	Substantially identical agreements exist (except the terms are all 2 years) between Toyota Motor Sales, USA, Inc. and those other subsidiaries operating Toyota dealerships.

(6)	Substantially identical documents exist with each Nissan store.

(7)	Substantially identical agreements exist between Nissan Motor Corporation and those other subsidiaries operating Nissan dealerships.

(8)	Lithia Real Estate, Inc. leases all the property in Medford, Oregon sold to CAR LIT, LLC under substantially identical leases covering six separate blocks of property.

(9)	Substantially similar agreements exist between Lithia Motors, Inc. and each of M.L. Dick Heimann, Bryan B. DeBoer, Christopher S. Holzshu and John F. North III.

 

61

---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 22, 2013      21, 2014		LITHIA MOTORS, INC.		INC
	By: By	/s/Bryan B. DeBoer
		Bryan B. DeBoer
		Director, President and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 22, 2013:

21, 2014:

Signature		Title
/s/
/s/ Bryan B. DeBoer		Director, President and Chief Executive Officer
Bryan B. DeBoer		(Principal Executive Officer)
/s/ Christopher S. Holzshu		Senior Vice President, Chief Financial Officer and Secretary
Christopher S. Holzshu		and Secretary (Principal (Principal Financial Officer)
/s/John F. North III		Vice President and Corporate Controller
John F. North III		(Principal Accounting Officer)
/s/Thomas Becker Sidney B. DeBoer		Director and Executive Chairman
Thomas Becker Sidney B. DeBoer
/s/ M.L. Dick Heimann		Director and Vice Chairman
M.L. Dick Heimann
/s/ Thomas Becker		Director
Thomas Becker
/s/ Susan O. Cain		Director
Susan O. Cain
/s/Sidney B. DeBoer		Director
Sidney B. DeBoer
/s/M.L. Dick Heimann		Director
M.L. Dick Heimann
/s/Kenneth E. Roberts		Director
Kenneth E. Roberts
/s/William J. Young		Director
William J. Young

 

62

---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Lithia Motors, Inc.:

We have audited the accompanying Consolidated Balance Sheets of Lithia Motors, Inc. and subsidiaries as of December 31, 20122013 and 2011,2012, and the related Consolidated Statements of Operations, Comprehensive Income, Changes in Stockholders’ Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2012.2013. These Consolidated Financial Statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these Consolidated Financial Statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the Consolidated Financial Statements referred to above present fairly, in all material respects, the financial position of Lithia Motors, Inc. and subsidiaries as of December 31, 20122013 and 2011,2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012,2013, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Lithia Motors, Inc.’s internal control over financial reporting as of December 31, 2012,2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 201321, 2014 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon
February 21, 2014

 

Portland, Oregon

February 22, 2013

F-1

---

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Lithia Motors, Inc.:

We have audited Lithia Motors, Inc.’s internal control over financial reporting as of December 31, 2012,2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lithia Motors, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Lithia Motors, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2013, based on criteria established inInternal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Lithia Motors, Inc. completed seven acquisitions during 2013 and, as permitted, management elected to exclude the acquisitions from its assessment of internal control over financial reporting as of December 31, 2013. The total assets of these seven acquisitions represented approximately 3% of consolidated total assets as of December 31, 2013 and approximately 2% of consolidated revenues for the year ended December 31,2013. Our audit of internal control over financial reporting of Lithia Motors, Inc. also excluded an evaluation of the internal control over financial reporting of these seven acquisitions.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of Lithia Motors, Inc. and subsidiaries as of December 31, 20122013 and 2011,2012, and the related Consolidated Statements of Operations, Comprehensive Income, Changes in Stockholders’ Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2012,2013, and our report dated February 22, 201321, 2014 expressed an unqualified opinion on those Consolidated Financial Statements.

/s/ KPMG LLP

Portland, Oregon
February 21, 2014

 

Portland, Oregon

February 22, 2013

F-2

---

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands)

		December 31,
		2012				2011
Assets
Current Assets:
Cash and cash equivalents		$	42,839			$	20,851
Accounts receivable, net of allowance for doubtful accounts of $336 and $261			133,149				99,407
Inventories, net			723,326				506,484
Deferred income taxes			3,832				4,730
Other current assets			17,484				16,719
Assets held for sale			12,579				-
Total Current Assets			933,209				648,191
Property and equipment, net of accumulated depreciation of $97,883 and $99,115			425,086				373,779
Goodwill			32,047				18,958
Franchise value			62,429				59,095
Deferred income taxes			17,123				29,270
Other non-current assets			22,808				16,840
Total Assets		$	1,492,702			$	1,146,133
Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable		$	13,454			$	114,760
Floor plan notes payable: non-trade			568,130				229,180
Current maturities of long-term debt			8,182				8,221
Trade payables			41,589				31,712
Accrued liabilities			81,602				72,711
Liabilities related to assets held for sale			8,347				-
Total Current Liabilities			721,304				456,584
Long-term debt, less current maturities			286,876				278,653
Deferred revenue			33,589				25,146
Other long-term liabilities			22,832				18,629
Total Liabilities			1,064,601				779,012
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 22,916 and 22,195			268,801				279,366
Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 2,762 and 3,762			343				468
Additional paid-in capital			12,399				10,918
Accumulated other comprehensive loss			(2,615	)			(4,508	)
Retained earnings			149,173				80,877
Total Stockholders' Equity			428,101				367,121
Total Liabilities and Stockholders' Equity		$	1,492,702			$	1,146,133

		December 31,
		2013				2012
Assets
Current Assets:
Cash and cash equivalents		$	23,686			$	42,839
Accounts receivable, net of allowance for doubtfulaccounts of $173 and $336			170,519				133,149
Inventories, net			859,019				723,326
Deferred income taxes			1,548				3,832
Other current assets			15,251				17,484
Assets held for sale			11,526				12,579
Total Current Assets			1,081,549				933,209
Property and equipment, net of accumulateddepreciation of $106,871 and $97,883			481,212				425,086
Goodwill			49,511				32,047
Franchise value			71,199				62,429
Deferred income taxes			10,256				17,123
Other non-current assets			31,394				22,808
Total Assets		$	1,725,121			$	1,492,702
Liabilities and Stockholders' Equity
Current Liabilities:
Floor plan notes payable		$	18,789			$	13,454
Floor plan notes payable: non-trade			695,066				568,130
Current maturities of long-term debt			7,083				8,182
Trade payables			51,159				41,589
Accrued liabilities			94,143				81,602
Liabilities related to assets held for sale			6,271				8,347
Total Current Liabilities			872,511				721,304
Long-term debt, less current maturities			245,471				286,876
Deferred revenue			44,005				33,589
Other long-term liabilities			28,412				22,832
Total Liabilities			1,190,399				1,064,601
Stockholders' Equity:
Preferred stock - no par value; authorized15,000 shares; none outstanding			-				-
Class A common stock - no par value;authorized 100,000 shares; issued andoutstanding 23,329 and 22,916			268,255				268,801
Class B common stock - no par value;authorized 25,000 shares; issued andoutstanding 2,562 and 2,762			319				343
Additional paid-in capital			22,598				12,399
Accumulated other comprehensive loss			(1,538	)			(2,615	)
Retained earnings			245,088				149,173
Total Stockholders' Equity			534,722				428,101
Total Liabilities and Stockholders' Equity		$	1,725,121			$	1,492,702

See accompanying notes to consolidated financial statements.

 

F-3

---

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(In thousands, except per share amounts)

		Year Ended December 31,
		2012				2011				2010
Revenues:
New vehicle		$	1,847,603			$	1,391,375			$	1,020,883
Used vehicle retail			833,484				678,571				558,105
Used vehicle wholesale			139,237				128,329				103,817
Finance and insurance			112,234				84,130				64,217
Service, body and parts			347,703				315,958				277,945
Fleet and other			36,226				34,383				11,655
Total revenues			3,316,487				2,632,746				2,036,622
Cost of sales:
New vehicle			1,713,156				1,284,225				937,237
Used vehicle retail			711,763				580,357				479,310
Used vehicle wholesale			137,823				127,732				103,114
Service, body and parts			179,633				163,738				144,003
Fleet and other			34,812				31,410				10,012
Total cost of sales			2,777,187				2,187,462				1,673,676
Gross profit			539,300				445,284				362,946
Asset impairments			115				1,376				15,301
Selling, general and administrative			373,688				316,663				284,163
Depreciation and amortization			17,128				16,427				17,012
Operating income			148,369				110,818				46,470
Floor plan interest expense			(12,816	)			(10,364	)			(10,155	)
Other interest expense			(9,621	)			(12,878	)			(14,523	)
Other income, net			2,525				694				420
Income from continuing operations before income taxes			128,457				88,270				22,212
Income tax provision			(49,062	)			(33,060	)			(8,625	)
Income from continuing operations, net of income tax			79,395				55,210				13,587
Income from discontinued operations, net of income tax			967				3,650				132
Net income		$	80,362			$	58,860			$	13,719
Basic income per share from continuing operations		$	3.09			$	2.10			$	0.52
Basic income per share from discontinued operations			0.04				0.14				0.01
Basic net income per share		$	3.13			$	2.24			$	0.53
Shares used in basic per share calculations			25,696				26,230				26,062
Diluted income per share from continuing operations		$	3.03			$	2.07			$	0.52
Diluted income per share from discontinued operations			0.04				0.14				-
Diluted net income per share		$	3.07			$	2.21			$	0.52
Shares used in diluted per share calculations			26,170				26,664				26,279

		Year Ended December 31,
		2013				2012				2011
Revenues:
New vehicle		$	2,256,598			$	1,847,603			$	1,391,375
Used vehicle retail			1,032,224				833,484				678,571
Used vehicle wholesale			158,235				139,237				128,329
Finance and insurance			139,007				112,234				84,130
Service, body and parts			383,483				347,703				315,958
Fleet and other			36,202				36,226				34,383
Total revenues			4,005,749				3,316,487				2,632,746
Cost of sales:
New vehicle			2,105,480				1,713,156				1,284,225
Used vehicle retail			881,366				711,763				580,357
Used vehicle wholesale			155,524				137,823				127,732
Service, body and parts			197,913				179,633				163,738
Fleet and other			34,513				34,812				31,410
Total cost of sales			3,374,796				2,777,187				2,187,462
Gross profit			630,953				539,300				445,284
Asset impairments			-				115				1,376
Selling, general and administrative			427,400				373,688				316,663
Depreciation and amortization			20,035				17,128				16,427
Operating income			183,518				148,369				110,818
Floor plan interest expense			(12,373	)			(12,816	)			(10,364	)
Other interest expense			(8,350	)			(9,621	)			(12,878	)
Other income, net			2,993				2,525				694
Income from continuing operations before income taxes			165,788				128,457				88,270
Income tax provision			(60,574	)			(49,062	)			(33,060	)
Income from continuing operations, net of income tax			105,214				79,395				55,210
Income from discontinued operations, net of income tax			786				967				3,650
Net income		$	106,000			$	80,362			$	58,860
Basic income per share from continuing operations		$	4.08			$	3.09			$	2.10
Basic income per share from discontinued operations			0.03				0.04				0.14
Basic net income per share		$	4.11			$	3.13			$	2.24
Shares used in basic per share calculations			25,805				25,696				26,230
Diluted income per share from continuing operations		$	4.02			$	3.03			$	2.07
Diluted income per share from discontinued operations			0.03				0.04				0.14
Diluted net income per share		$	4.05			$	3.07			$	2.21
Shares used in diluted per share calculations			26,191				26,170				26,664

See accompanying notes to consolidated financial statements.

F-4

---

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

		Year Ended December 31,
		2012				2011				2010
Net income		$	80,362			$	58,860			$	13,719
Other comprehensive income (loss), net of tax:
Gain (loss) on cash flow hedges, net of tax expense (benefit) of $1,175, $195 and $(626)			1,893				361				(1,019	)
Comprehensive income		$	82,255			$	59,221			$	12,700

		Year Ended December 31,
		2013				2012				2011
Net income		$	106,000			$	80,362			$	58,860
Other comprehensive income, net of tax:
Gain on cash flow hedges, net of tax expenseof $668, $1,175 and $195			1,077				1,893				361
Comprehensive income		$	107,077			$	82,255			$	59,221

See accompanying notes to consolidated financial statements.

F-5

---

 

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

(In thousands)

		Common Stock																Additional				Accumulated Other Compre- hensive								Total Stock-
		Class A								Class B								Paid In				Income				Retained				holders'
		Shares				Amount				Shares				Amount				Capital				(Loss)				Earnings				Equity
Balance at December 31, 2009			22,036			$	280,880				3,762			$	468			$	10,501			$	(3,850	)		$	19,039			$	307,038
Net income			-				-				-				-				-				-				13,719				13,719
Fair value of interest rate swap agreements, net of tax benefit of $626			-				-				-				-				-				(1,019	)			-				(1,019	)
Issuance of stock in connection with employee stock plans			658				4,192				-				-				-				-				-				4,192
Shares forfeited by employees			(9	)			-				-				-				-				-				-				-
Repurchase of Class A common stock			(162	)			(1,626	)			-				-				-				-				-				(1,626	)
Compensation for stock and stock option issuances and excess tax benefits from option exercises			-				1,361				-				-				471				-				-				1,832
Dividends paid			-				-				-				-				-				-				(3,919	)			(3,919	)
Balance at December 31, 2010			22,523				284,807				3,762				468				10,972				(4,869	)			28,839				320,217
Net income			-				-				-				-				-				-				58,860				58,860
Fair value of interest rate swap agreements, net of tax expense of $195			-				-				-				-				-				361				-				361
Issuance of stock in connection with employee stock plans			438				5,654				-				-				-				-				-				5,654
Issuance of restricted stock to employees			11				-				-				-				-				-				-				-
Shares forfeited by employees			(5	)			-				-				-				-				-				-				-
Repurchase of Class A common stock			(772	)			(13,568	)			-				-				-				-				-				(13,568	)
Compensation for stock and stock option issuances and excess tax benefits from option exercises			-				2,473				-				-				(54	)			-				-				2,419
Dividends paid			-				-				-				-				-				-				(6,822	)			(6,822	)
Balance at December 31, 2011			22,195				279,366				3,762				468				10,918				(4,508	)			80,877				367,121
Net income			-				-				-				-				-				-				80,362				80,362
Fair value of interest rate swap agreements, net of tax expense of $1,175			-				-				-				-				-				1,893				-				1,893
Issuance of stock in connection with employee stock plans			647				8,652				-				-				-				-				-				8,652
Issuance of restricted stock to employees			3				-				-				-				-				-				-				-
Repurchase of Class A common stock			(929	)			(23,279	)			-				-				-				-				-				(23,279	)
Class B commons stock converted to Class A common stock			1,000				125				(1,000	)			(125	)															-
Compensation for stock and stock option issuances and excess tax benefits from option exercises			-				3,937				-				-				1,481				-				-				5,418
Dividends paid			-				-				-				-				-				-				(12,066	)			(12,066	)
Balance at December 31, 2012			22,916			$	268,801				2,762			$	343			$	12,399			$	(2,615	)		$	149,173			$	428,101

																						Accumulated
																						Other
																						Compre-								Total
		Common Stock																Additional				hensive								Stock-
		Class A								Class B								Paid In				Income				Retained				holders'
		Shares				Amount				Shares				Amount				Capital				(Loss)				Earnings				Equity
Balance at December 31, 2010			22,523				284,807				3,762				468				10,972				(4,869	)			28,839				320,217
Net income			-				-				-				-				-				-				58,860				58,860
Fair value of interest rate swap agreements, net oftax expense of $195			-				-				-				-				-				361				-				361
Issuance of stock in connection with employeestock plans			438				5,654				-				-				-				-				-				5,654
Issuance of restricted stock to employees			11				-				-				-				-				-				-				-
Shares forfeited by employees			(5	)			-				-				-				-				-				-				-
Repurchase of Class A common stock			(772	)			(13,568	)			-				-				-				-				-				(13,568	)
Compensation for stock and stock option issuancesand excess tax benefits from option exercises			-				2,473				-				-				(54	)			-				-				2,419
Dividends paid			-				-				-				-				-				-				(6,822	)			(6,822	)
Balance at December 31, 2011			22,195				279,366				3,762				468				10,918				(4,508	)			80,877				367,121
Net income			-				-				-				-				-				-				80,362				80,362
Fair value of interest rate swap agreements, net oftax expense of $1,175			-				-				-				-				-				1,893				-				1,893
Issuance of stock in connection with employeestock plans			647				8,652				-				-				-				-				-				8,652
Issuance of restricted stock to employees			3				-				-				-				-				-				-				-
Repurchase of Class A common stock			(929	)			(23,279	)			-				-				-				-				-				(23,279	)
Class B common stock converted to Class Acommon stock			1,000				125				(1,000	)			(125	)											-
Compensation for stock and stock option issuancesand excess tax benefits from option exercises			-				3,937				-				-				1,481				-				-				5,418
Dividends paid			-				-				-				-				-				-				(12,066	)			(12,066	)
Balance at December 31, 2012			22,916				268,801				2,762				343				12,399				(2,615	)			149,173				428,101
Net income			-				-				-				-				-				-				106,000				106,000
Fair value of interest rate swap agreements, net oftax expense of $668			-				-				-				-				-				1,077				-				1,077
Issuance of stock in connection with employeestock plans			283				5,149				-				-				-				-				-				5,149
Issuance of restricted stock to employees			117				-				-				-				-				-				-				-
Repurchase of Class A common stock			(187	)			(7,903	)			-				-				-				-				-				(7,903	)
Class B common stock converted to Class Acommon stock			200				24				(200	)			(24	)			-				-				-				-
Compensation for stock and stock option issuancesand excess tax benefits from option exercises			-				2,184				-				-				10,199				-				-				12,383
Dividends paid			-				-				-				-				-				-				(10,085	)			(10,085	)
Balance at December 31, 2013			23,329			$	268,255				2,562			$	319			$	22,598			$	(1,538	)		$	245,088			$	534,722

See accompanying notes to consolidated financial statements.

 

F-6

---

LITHIA MOTORS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

		Year Ended December 31,
		2012				2011				2010
Cash flows from operating activities:
Net income		$	80,362			$	58,860			$	13,719
Adjustments to reconcile net income to net cash used in operating activities:
Asset impairments			115				1,376				15,301
Depreciation and amortization			17,128				16,427				17,012
Depreciation and amortization within discontinued operations			186				521				574
Stock-based compensation			3,116				2,001				2,419
Gain on disposal of other assets			(747	)			(6,495	)			(107	)
(Gain) loss from disposal activities within discontinued operations			621				(4,396	)			301
Deferred income taxes			14,172				8,093				(2,131	)
Excess tax benefit from share-based payment arrangements			(2,802	)			(525	)			(264	)
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net			(33,704	)			(22,503	)			(22,881	)
Inventories			(230,442	)			(78,202	)			(68,305	)
Other current assets			(4,194	)			(13,111	)			(1,633	)
Other non-current assets			(6,176	)			(1,108	)			(2,029	)
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable			(82,109	)			13,510				10,550
Trade payables			8,001				5,998				4,960
Accrued liabilities			10,538				11,605				10,029
Other long-term liabilities and deferred revenue			13,459				7,183				1,155
Net cash used in operating activities			(212,476	)			(766	)			(21,330	)
Cash flows from investing activities:
Principal payments received on notes receivable			946				121				85
Capital expenditures			(64,584	)			(31,673	)			(7,589	)
Proceeds from sales of assets			6,027				29,677				10,288
Cash paid for acquisitions, net of cash acquired			(44,716	)			(60,485	)			(23,691	)
Payments for life insurance policies			(3,288	)			(900	)			-
Proceeds from sales of stores			6,618				23,838				941
Net cash used in investing activities			(98,997	)			(39,422	)			(19,966	)
Cash flows from financing activities:
Borrowings on floor plan notes payable: non-trade			348,477				63,145				24,090
Borrowings on lines of credit			592,623				56,000				40,000
Repayments on lines of credit			(580,269	)			(9,000	)			(24,000	)
Principal payments on long-term debt, scheduled			(8,347	)			(10,909	)			(8,248	)
Principal payments on long-term debt and capital leases, other			(40,765	)			(55,666	)			(40,146	)
Proceeds from issuance of long-term debt			42,333				25,674				47,219
Proceeds from issuance of common stock			8,652				5,654				4,192
Repurchase of common stock			(23,279	)			(13,568	)			(1,626	)
Excess tax benefit from share-based payment arrangements			2,802				525				264
Decrease (increase) in restricted cash			3,300				(3,300	)			-
Dividends paid			(12,066	)			(6,822	)			(3,919	)
Net cash provided by financing activities			333,461				51,733				37,826
Increase (decrease) in cash and cash equivalents			21,988				11,545				(3,470	)
Cash and cash equivalents at beginning of year			20,851				9,306				12,776
Cash and cash equivalents at end of year		$	42,839			$	20,851			$	9,306
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	22,976			$	24,961			$	25,357
Cash paid during the period for income taxes, net			36,579				33,722				8,000
Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions			2,609				-				63
Floor plan debt acquired in connection with acquisitions			-				19,348				1,856
Acquisition of assets with capital leases			2,609				-				77
Floor plan debt paid in connection with store disposals			6,712				1,784				2,134

		Year Ended December 31,
		2013				2012				2011
Cash flows from operating activities:
Net income		$	106,000			$	80,362			$	58,860
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Asset impairments			-				115				1,376
Depreciation and amortization			20,035				17,128				16,427
Depreciation and amortization within discontinued operations			-				186				521
Stock-based compensation			6,565				3,116				2,001
Gain on disposal of other assets			(2,339	)			(747	)			(6,495	)
(Gain) loss from disposal activities within discontinued operations			-				621				(4,396	)
Deferred income taxes			14,477				14,172				8,093
Excess tax benefit from share-based payment arrangements			(5,994	)			(2,802	)			(525	)
(Increase) decrease (net of acquisitions and dispositions):
Trade receivables, net			(37,370	)			(33,704	)			(22,503	)
Inventories			(106,896	)			(230,442	)			(78,202	)
Other current assets			(901	)			(4,194	)			(13,111	)
Other non-current assets			(4,754	)			(6,176	)			(1,108	)
Increase (decrease) (net of acquisitions and dispositions):
Floor plan notes payable			5,300				(82,109	)			13,510
Trade payables			8,480				8,001				5,998
Accrued liabilities			12,304				10,538				11,605
Other long-term liabilities and deferred revenue			17,152				13,459				7,183
Net cash provided by (used in) operating activities			32,059				(212,476	)			(766	)
Cash flows from investing activities:
Principal payments received on notes receivable			91				946				121
Capital expenditures			(50,025	)			(64,584	)			(31,673	)
Proceeds from sales of assets			4,632				6,027				29,677
Cash paid for acquisitions, net of cash acquired			(81,105	)			(44,716	)			(60,485	)
Payments for life insurance policies			(3,915	)			(3,288	)			(900	)
Proceeds from sales of stores			-				6,618				23,838
Net cash used in investing activities			(130,322	)			(98,997	)			(39,422	)
Cash flows from financing activities:
Borrowings on floor plan notes payable: non-trade			128,636				348,477				63,145
Borrowings on lines of credit			800,000				592,623				56,000
Repayments on lines of credit			(814,355	)			(580,269	)			(9,000	)
Principal payments on long-term debt, scheduled			(7,100	)			(8,347	)			(10,909	)
Principal payments on long-term debt and capital leases, other			(25,770	)			(40,765	)			(55,666	)
Proceeds from issuance of long-term debt			4,720				42,333				25,674
Proceeds from issuance of common stock			4,973				8,652				5,654
Repurchase of common stock			(7,903	)			(23,279	)			(13,568	)
Excess tax benefit from share-based payment arrangements			5,994				2,802				525
Decrease (increase) in restricted cash			-				3,300				(3,300	)
Dividends paid			(10,085	)			(12,066	)			(6,822	)
Net cash provided by financing activities			79,110				333,461				51,733
Increase (decrease) in cash and cash equivalents			(19,153	)			21,988				11,545
Cash and cash equivalents at beginning of year			42,839				20,851				9,306
Cash and cash equivalents at end of year		$	23,686			$	42,839			$	20,851
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	21,002			$	22,976			$	24,961
Cash paid during the period for income taxes, net			42,682				36,579				33,722
Supplemental schedule of non-cash activities:
Debt issued in connection with acquisitions			-				2,609				-
Floor plan debt acquired in connection with acquisitions			-				-				19,348
Acquisition of assets with capital leases			36				2,609				-
Floor plan debt paid in connection with store disposals			-				6,712				1,784

See accompanying notes to consolidated financial statements.

 

F-7

---

LITHIA MOTORS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)           Summary of Significant Accounting Policies

Organization and Business

We are a leading operator of automotive franchises and a retailer of new and used vehicles and related services. As of December 31, 2012,2013, we offered 2728 brands of new vehicles and all brands of used vehicles in 8794 stores in the United States and online atLithia.comLithia.com. We sell new and used cars and trucks and replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing,financing; and sell service contracts, vehicle protection products and credit insurance.

Our dealerships are primarily located throughout the Western and Midwestern regions of the United States. We target mid-sized regional markets for domestic and import franchises and metropolitan markets for luxury franchises. We believe thisThis strategy enables brand exclusivity with minimal competition from other dealerships with the same franchise in the market.

Basis of Presentation

The accompanying Consolidated Financial Statements reflect the results of operations, the financial position and the cash flows for Lithia Motors, Inc. and its directly and indirectly wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. 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 Note 16.

15.

Cash and Cash Equivalents

Cash and cash equivalents are defined as cash on hand and cash in bank accounts without restrictions.

Accounts Receivable

Accounts receivable include amounts due from the following:

· ●

various lenders for the financing of vehicles sold;

· ●

customers for vehicles sold and service and parts sales;

· ●

manufacturers for factory rebates, dealer incentives and warranty reimbursement; and

· ●

insurance companies, finance companies and other miscellaneous receivables.

Receivables are recorded at invoice and do not bear interest until such time as they are 60 days past due. The allowance for doubtful accounts is estimated based on our historical write-off experience and is reviewed on a monthly basis.monthly. Account balances are charged off against the allowance after all appropriate means of collection have been exhausted and the potential for recovery is considered remote. The annual activity for charges and subsequent recoveries areis immaterial. See Note 2.

Inventories

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

Manufacturers reimburse us for holdbacks, floor plan interest assistance and advertising assistance, which are reflected as a reduction in the carrying value of each vehicle purchased. We recognize advertising assistance, floor plan interest assistance, holdbacks, cash incentives and other rebates received from manufacturers that are tied to specific vehicles as a reduction to cost of sales as the related vehicles are sold.

Parts purchase discounts that we receive from the manufacturer are reflected as a reduction in the carrying value of the parts purchased from the manufacturer and are recognized as a reduction to cost of goods sold as the related inventory is sold. See Note 3.

 

F-8

---

Property and Equipment

Property and equipment are stated at cost and are depreciated over their estimated useful lives on the straight-line basis. Leasehold improvements made at the inception of the lease or during the term of the lease are amortized on a straight-line basis over the shorter of the life of the improvement or the remaining term of the lease.

The range of estimated useful lives is as follows:

Buildings and improvements (years)			5	to	40
Service equipment (years)			5	to	15
Furniture, office equipment, signs and fixtures (years)			3	to	10

The cost for maintenance, repairs and minor renewals is expensed as incurred, while significant remodels and betterments are capitalized. In addition, interest on borrowings for major capital projects, significant remodels and betterments are capitalized. Capitalized interest becomes a part of the cost of the depreciable asset and is depreciated according to the estimated useful lives as previously stated. For the years ended December 31, 2013, 2012 and 2011, we recorded capitalized interest of $0.1 million, $0.3 million and $0.2 million, respectively. We recorded no capitalized interest in 2010.

When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income from continuing operations.

Leased property meeting certain criteria is capitalized and the present value of the related lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on a straight-line basis over the term of the lease, unless the lease transfers title or it contains a bargain purchase option, in which case, it is amortized over the asset’s useful life, and is included in depreciation expense.

Long-lived assets held and used by us are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider several factors when evaluating whether there are indications of potential impairment related to our long-lived assets, including store profitability, overall macroeconomic factors and impact of our strategic management decisions. If recoverability testing is performed, we evaluate assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows associated with the asset, including its disposition. If such assets are considered to be impaired, the amount by which the carrying amount of the assets exceeds the fair value of the assets is recognized as a charge to income from continuing operations. See Note 4.

Franchise Value

We enter into agreements (“Franchise Agreements”) with the manufacturers. Franchise value represents a right received under Franchise Agreements with manufacturers and is identified on an individual store basis.

We evaluated the useful lives of our Franchise Agreements based on the following factors:

●

certain of our Franchise Agreements continue indefinitely by their terms;

●

certain of our Franchise Agreements have limited terms, but are routinely renewed without substantial cost to us;

●

other than franchise terminations related to the unprecedented reorganizations of Chrysler and General Motors, and allowed by bankruptcy law, we are not aware of manufacturers terminating Franchise Agreements against the wishes of the franchise owners in the ordinary course of business. A manufacturer may pressure a franchise owner to sell a franchise when the owner is in breach of the franchise agreement over an extended period of time;

●

state dealership franchise laws typically limit the rights of the manufacturer to terminate or not renew a franchise;

●

we are not aware of any legislation or other factors that would materially change the retail automotive franchise system; and

●

as evidenced by our acquisition and disposition history, there is an active market for most automotive dealership franchises within the United States. We attribute value to the Franchise Agreements acquired with the dealerships we purchase based on the understanding and industry practice that the Franchise Agreements will be renewed indefinitely by the manufacturer.

Accordingly, we have determined that our Franchise Agreements will continue to contribute to our cash flows indefinitely and, therefore, have indefinite lives.

As an indefinite-lived intangible asset, franchise value is tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying value may exceed fair value. The impairment test for indefinite-lived intangible assets requires the comparison of estimated fair value to carrying value. An impairment charge is recorded to the extent the fair value is less than the carrying value. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2013 we evaluated our indefinite-lived intangible assets using a quantitative assessment process. We have determined the appropriate unit of accounting for testing franchise value for impairment is on an individual store basis.

We test our franchise value for impairment on October 1 of each year. The quantitative assessment uses a multi-period excess earnings (“MPEE”) model to estimate the fair value of our franchises. We have determined that only certain cash flows of the store are directly attributable to franchise rights. Future cash flows are based on recently prepared operating forecasts and business plans to estimate the future economic benefits that the store will generate. Operating forecasts and cash flows include estimated revenue growth rates that are calculated based on management’s forecasted sales projections and on the U.S. Department of Labor, Bureau of Labor Statistics for historical consumer price index data. Additionally, we use a contributory asset charge to represent working capital, personal property and assembled workforce costs. A discount rate is utilized to convert the forecasted cash flows to their present value equivalent. The discount rate applied to the future cash flows factors an equity market risk premium, small stock risk premium, an average peer group beta and a risk-free interest rate. See Note 5.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately identifiable intangible assets. Other identifiable intangible assets, such as franchise rights, are separately recognized if the intangible asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged.

Goodwill is not amortized but tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying value of the reporting unit more likely than not exceeds fair value. We have the option to qualitatively or quantitatively assess goodwill for impairment and in 20122013 evaluated our goodwill using a quantitative assessment process. We have determined that we operate as one reporting unit for the goodwill impairment test.

We test our goodwill for impairment on October 1 of each year. We used an Adjusted Present Value (“APV”) method, a fair-value based test, to indicate the fair value of our reporting unit. Under the APV method, future cash flows based on recently prepared operating forecasts and business plans are used to estimate the future economic benefits generated by the reporting unit. Operating forecasts and cash flows include estimated revenue growth rates based on management’s forecasted sales projections and on U.S. Department of Labor, Bureau of Labor Statistics for historical consumer price index data. A discount rate is utilized to convert the forecasted cash flows to their present value equivalent representing the indicated fair value of our reporting unit. The discount rate applied to the future cash flows factors an equity market risk premium, small stock risk premium, an average peer group beta and a risk-free interest rate. We compare the indicated fair value of our reporting unit to our market capitalization, including consideration of a control premium. The control premium represents the estimated amount an investor would pay to obtain a controlling interest. We believe this reconciliation is consistent with a market participant perspective.

 

F-9

---

The quantitative impairment test of goodwill is a two step process. The first step identifies potential impairment by comparing the estimated fair value of a reporting unit with its book value. If the fair value of the reporting unit exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step includes determining the implied fair value in the same manner as the amount of goodwill recognized in a business combination is determined. The implied fair value of goodwill is then compared with the carrying amount of goodwill to determine if an impairment loss is necessary. See Note 5.

Franchise Value

We enter into agreements (“Franchise Agreements”) with the manufacturers. Franchise value represents a right received under Franchise Agreements with manufacturers and is identified on an individual store basis.

We evaluated the useful lives of our Franchise Agreements based on the following factors:

●

certain of our Franchise Agreements continue indefinitely by their terms;

●

certain of our Franchise Agreements have limited terms, but are routinely renewed without substantial cost to us;

●

other than franchise terminations related to the unprecedented reorganizations of Chrysler and General Motors, and allowed by bankruptcy law, we are not aware of manufacturers terminating Franchise Agreements against the wishes of the franchise owners under the ordinary course of business. A manufacturer may pressure a franchise owner to sell a franchise when the owner is in breach of the franchise agreement over an extended period of time;

●

state dealership franchise laws typically limit the rights of the manufacturer to terminate or not renew a franchise;

●

we are not aware of any legislation or other factors that would materially change the retail automotive franchise system; and

●

as evidenced by our acquisition and disposition history, there is an active market for most automotive dealership franchises within the United States. We attribute value to the Franchise Agreements acquired with the dealerships we purchase based on the understanding and industry practice that the Franchise Agreements will be renewed indefinitely by the manufacturer.

Accordingly, we have determined that our Franchise Agreements will continue to contribute to our cash flows indefinitely and, therefore, have indefinite lives.

As an indefinite-lived intangible asset, franchise value is tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying value may exceed fair value. The impairment test for indefinite-lived intangible assets requires the comparison of estimated fair value to carrying value. An impairment charge is recorded to the extent the fair value is less than the carrying value. We have the option to early adopt an accounting amendment that allows us to qualitatively assess indefinite-lived intangible assets for impairment. In 2012 we evaluated our indefinite-lived intangible assets using a quantitative assessment process. We have determined the appropriate unit of accounting for testing franchise value for impairment is on an individual store basis.

We test our franchise value for impairment on October 1 of each year. The quantitative assessment uses a multi-period excess earnings (“MPEE”) model to estimate the fair value of our franchises. We have determined that only certain cash flows of the store are directly attributable to franchise rights. Future cash flows are based on recently prepared operating forecasts and business plans to estimate the future economic benefits that the store will generate. Operating forecasts and cash flows include estimated revenue growth rates that are calculated based on management’s forecasted sales projections and on the U.S. Department of Labor, Bureau of Labor Statistics for historical consumer price index data. Additionally, we use a contributory asset charge to represent working capital, personal property and assembled workforce costs. A discount rate is utilized to convert the forecasted cash flows to their present value equivalent. The discount rate applied to the future cash flows factors an equity market risk premium, small stock risk premium, an average peer group beta and a risk-free interest rate. See Note 5.

F-10

---

Advertising

We expense production and other costs of advertising as incurred as a component of selling, general and administrative expense. Additionally, manufacturer cooperative advertising credits for qualifying, specifically-identified advertising expenditures are recognized as a reduction of advertising expense.

Advertising expense, net of manufacturer cooperative advertising credits, was $39.6 million, $31.9 million $23.9 million and $25.4$23.9 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. Manufacturer cooperative advertising credits were $11.8 million in 2013, $9.6 million in 2012 and $7.8 million in 20112011.

Contract Origination Costs

Contract origination commissions paid to our employees directly related to the sale of our self-insured lifetime lube, oil and $2.5 millionfilter service contracts are deferred and charged to expense in 2010.

proportion to the associated revenue to be recognized.

Legal Costs

We are a party to numerous legal proceedings arising in the normal course of business. We accrue for certain legal costs, including attorney fees and potential settlement claims related to various legal proceedings that are estimable and probable. See Note 7.

Stock-Based Compensation

Compensation costs associated with equity instruments exchanged for employee and director services are measured at the grant date, based on the fair value of the award, and recognized as an expense over the individual’s requisite service period (generally the vesting period of the equity award). If there is a performance-based element to the award, the expense is recognized based on the estimated attainment level, estimated time to achieve the attainment level and/or the vesting period. See Note 10.

Income and Other Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized.

When there are situations with uncertainty as to the timing of the deduction, the amount of the deduction, or the validity of the deduction, we adjust our financial statements to reflect only those tax positions that are more-likely-than-not to be sustained. Positions that meet this criterion are measured using the largest benefit that is more than 50% likely to be realized. Interest and penalties are recorded in the period incurred or accrued when related to an uncertain tax position. See Note 14.

13.

We account for all taxes assessed by a governmental authority that are directly imposed on a revenue-producing transaction (i.e., sales, use, value-added) on a net (excluded from revenues) basis.

Concentration of Risk and Uncertainties

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 the dealershipdealerships with an adequate supply of popular models.

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 depend on our manufacturers to deliver high-quality, defect-free vehicles. In the event that manufacturers 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. Our sales volume could be materially adversely impacted by the manufacturers’ or distributors’ inability to supply the stores with an adequate supply of vehicles. We also 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.

F-11

---

We enter into Franchise Agreements with the 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 Agreement 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. See also “Goodwill” and “Franchise Value” above.

We have a credit facility with a syndicate of 1013 financial institutions, including fourseven manufacturer-affiliated finance companies. Several of these financial institutions also provide mortgage financing. This credit facility is the primary source of floor plan financing for our new vehicle inventory and also provides used vehicle financing and a revolving line of credit. The term of the facility extends through April 2017,December 2018, which provides a financing commitment for the next fourfive years. At maturity our financial condition could be materially adversely impacted if lenders are unable to provide credit that has typically been extended to us or with terms unacceptable to us.

Our financial condition could be materially adversely impacted if these providers incur losses in the future or undergo funding limitations. Additionally, we exercised an option to increase the size of the credit facility within the first eight months of the agreement.

We anticipate continued organic growth and growth through acquisitions. This growth will require additional credit which may be unavailable or with terms unacceptable to us. If these events were to occur, we may not be able to borrow sufficient funds to facilitate our growth.

Financial Instruments, Fair Value and Market Risks

The carrying amounts of cash equivalents, accounts receivables,receivable, trade payables, accrued liabilities and short-term borrowings approximate fair value because of the short-term nature and current market rates of these instruments.

Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 13.

12.

We have variable rate floor plan notes payable, mortgages and other credit line borrowings that subject us to market risk exposure. At December 31, 2012,2013, we had $746.2$833.8 million outstanding in variable rate debt. These borrowings had interest rates ranging from 1.7%1.4% to 3.2%3.0% per annum. An increase or decrease in the interest rates would affect interest expense for the period accordingly.

The fair value of long-term, fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall because we could refinance for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise. The interest rate changes affect the fair value, but do not impact earnings or cash flows. We monitor our fixed interest rate debt regularly, refinancing debt that is materially above market rates if permitted. See Note 13.

12.

We are also subject to creditmarket risk andfrom changing interest rates. From time to time, we reduce our exposure to this market risk by entering into interest rate swaps. See belowswaps and Note 12.designating the swaps as cash flow hedges. We are generally exposed to credit or repayment risk based on our relationship with the counterparty to the transaction.derivative financial instrument. We minimize the credit or repayment risk on our derivative instruments by entering into transactions with institutions whose credit rating is Aa or higher.

Derivative Financial Instruments

We enter into interest rate swap agreements to reduce our exposure to market risks from changing interest rates on our new vehicle floor plan lines of credit. All derivative instruments are recorded on the Consolidated Balance Sheets as an asset or liability at fair value. The related gains and losses on these instruments are deferred as a component of stockholders’ equity, provided specific hedge accounting criteria are met. Recognition of the deferred gains and losses occurs in the period the related cash flow item hedged is recognized as a component of floor plan interest expense. To the extent the derivative contract is determined to be ineffective, the ineffective portion is immediately recognized in earnings. See Note 12.

F-12

---

11.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and related notes to financial statements. Changes in such estimates may affect amounts reported in future periods.

Estimates are used in the calculation of certain reserves maintained for charge-backs on estimated cancellations of service contracts; life, accident and disability insurance policies; and finance fees from customer financing contracts. contracts and uncollectible accounts receivable.

We also use estimates in the calculation of various expenses, accruals and reserves, including anticipated losses related to workersworkers’ compensation insurance, anticipated losses related to self-insurance components of our property and casualty and medical insurance, self-insured lifetime lube, oil and filter service contracts, discretionary employee bonuses, warranties provided on certain products and services, legal reserves and stock-based compensation. We also make certain estimates regarding the assessment of the recoverability of long-lived assets, indefinite-lived intangible assets and deferred tax assets.

Revenue Recognition

Revenue from the sale of a vehicle is recognized when a contract is signed by the customer, financing has been arranged or collectability is reasonably assured and the delivery of the vehicle to the customer is made. We do not allow the return of new or used vehicles, except where mandated by state law.

Revenue from parts and service is recognized upon delivery of the parts or service to the customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale, and are not significant.

Finance fees earned for notes placed with financial institutions in connection with customer vehicle financing are recognized, net of estimated charge-backs, as finance and insurance revenue upon acceptance of the credit by the financial institution.

Insurance income from third party insurance companies for commissions earned on credit life, accident and disability insurance policies sold in connection with the sale of a vehicle are recognized, net of anticipated cancellations, as finance and insurance revenue upon execution of the insurance contract.

Commissions from third party service contracts are recognized, net of anticipated cancellations, as finance and insurance revenue upon sale of the contracts. We also participate in future underwriting profit, pursuant to retrospective commission arrangements, which is recognized in income as earned.

Revenue related to self-insured lifetime lube, oil and filter service contracts is deferred and recognized based on expected future claims for service. The expected future claims experience is evaluated periodically to ensure it remains appropriate given actual claims history.

Asset Impairments

We perform periodic impairment tests for goodwill and franchise value and recoverability tests for long-lived assets.

As a result of these tests, we recorded asset impairments against long-lived assets totaling $0.1 million, $1.4 million and $15.3 million, respectively, in 2012, 2011 and 2010.

See Notes 4 and 16.

F-13

---

Stock-Based Compensation

Compensation costs associated with equity instruments exchanged for employee and director services are measured at the grant date, based on the fair value of the award, and recognized as an expense over the individual’s requisite service period (generally the vesting period of the equity award).  See Note 11.

Legal Costs

We are a party to numerous legal proceedings arising in the normal course of business. We accrue for certain legal costs, including attorney fees, and potential settlement claims related to various legal proceedings that are estimable and probable. See Note 7.

Contract Origination Costs

Contract origination commissions paid to our employees directly related to the sale of our self-insured lifetime lube, oil and filter service contracts are deferred and charged to expense in proportion to the associated revenue to be recognized.

Segment Reporting

We define an operating segment as a component of an enterprise that meets the following criteria:

·

engages in business activities from which it may earn revenues and incur expenses;

·

operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and

·

discrete financial information is available.

Based on this definition, we believe we operate as a single operating and reporting segment, automotive retailing. Our chief operating decision maker (“CODM”), defined to be our executive management group, evaluates our performance on a consolidated basis. Historical and forecasted operational performance is evaluated on a consolidated basis by the CODM. Additionally, allocation of future resources is evaluated on a consolidated basis as several of our functions are centralized.

Warranty

We offer a 60-day, 3,000 mile limited warranty on the sale of most retail used vehicles. This warranty is based on mileage and time. We also offer a 3-year, 50,000 milemileage and time based warranty on parts used in our service repair work and a 2-year warranty on tire purchases. The cost that may be incurred for these warranties is estimated at the time the related revenue is recorded. A reserve for these warranty liabilities is estimated based on current sales levels, warranty experience rates and estimated costs per claim. The annual activity for reserve increases and claims are immaterial. As of December 31, 20122013 and 2011,2012, the accrued warranty balance was $0.5 million and $0.3 million, respectively.

Fair Value of Assets Acquired and $0.5 million, respectively.Liabilities Assumed

We estimate the fair value of the assets acquired and liabilities assumed in a business combination using various assumptions. The most significant assumptions used relate to determining the fair value of property and equipment and intangible franchise rights.

We estimate the fair value of property and equipment based on a market valuation approach. We use prices and other relevant information generated primarily by recent market transactions involving similar or comparable assets, 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.

We use a multi-period excess earnings (“MPEE”) model to determine the fair value of intangible franchise rights. Future cash flows are estimated based on the acquired business’s preacquisition performance, management’s forecasted sales projections and historical consumer price index data provided by the U.S. Department of Labor, Bureau of Labor Statistics. Additionally, we use a contributory asset charge to represent working capital, personal property and assembled workforce costs. A discount rate is utilized to convert the forecasted cash flows to their present value equivalent. The discount rate applied to the future cash flows factors an equity market risk premium, small stock risk premium, an average peer group beta, a risk-free interest rate and a premium for forecast risk.

Revenue Recognition

Revenue from the sale of a vehicle is recognized when a contract is signed by the customer, financing has been arranged or collectability is reasonably assured and the delivery of the vehicle to the customer is made.We do not allow the return of new or used vehicles, except where mandated by state law.

Revenue from parts and service is recognized upon delivery of the parts or service to the customer. We allow for customer returns on sales of our parts inventory up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time of sale, and are not significant.

Finance fees earned for notes placed with financial institutions in connection with customer vehicle financing are recognized, net of estimated charge-backs, as finance and insurance revenue upon acceptance of the credit by the financial institution and recognition of the sale of the vehicle.

Insurance income from third party insurance companies for commissions earned on credit life, accident and disability insurance policies sold in connection with the sale of a vehicle are recognized, net of anticipated cancellations, as finance and insurance revenue upon execution of the insurance contract and recognition of the sale of the vehicle.

Commissions from third party service contracts are recognized, net of anticipated cancellations, as finance and insurance revenue upon sale of the contracts and recognition of the sale of the vehicle. We also participate in future underwriting profit, pursuant to retrospective commission arrangements, which is recognized in income as earned.

Revenue related to self-insured lifetime lube, oil and filter service contracts is deferred and recognized based on expected future claims for service. The expected future claims experience is evaluated periodically to ensure it remains appropriate given actual claims history. 

Segment Reporting

We define an operating segment as a component of an enterprise that meets the following criteria:

●

engages in business activities from which it may earn revenues and incur expenses;

●

operating results are regularly reviewed by the enterprise’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and

●

discrete financial information is available.

Based on this definition, we believe we operate as a single operating and reporting segment, automotive retailing. We define our chief operating decision maker (“CODM”) to be certain members of our executive management group. Historical and forecasted operational performance is evaluated on a store-by-store basis and consolidated basis by the CODM to assess performance. We have determined that no individual store is significant enough to meet the definition of a segment. Allocation of future resources occurs on a consolidated basis as our cash management is performed centrally and performance of capital investments is evaluated on a consolidated basis.

(2)           Accounts Receivable

Accounts receivable consisted of the following (in thousands):

December 31,		2012				2011
Contracts in transit		$	65,597			$	47,867
Trade receivables			20,932				16,418
Vehicle receivables			21,298				15,930
Manufacturer receivables			25,658				19,453
			133,485				99,668
Less: Allowance			(336	)			(261	)
Total accounts receivables, net		$	133,149			$	99,407

December 31,		2013				2012
Contracts in transit		$	85,272			$	65,597
Trade receivables			38,600				25,885
Vehicle receivables			23,606				21,298
Manufacturer receivables			31,662				25,658
			179,140				138,438
Less: Allowance			(173	)			(336	)
Less: Long-term portion of accounts receivable, net			(8,448	)			(4,953	)
Total accounts receivable, net		$	170,519			$	133,149

Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received within five to ten days of selling a vehicle. Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and third parties for commissions earned on service contracts and insurance products. Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.

F-14

---

Manufacturer receivables represent amounts due from manufacturers including holdbacks, rebates, incentives and warranty claims.

The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets.

(3)           Inventories

Inventories

The components of inventories consisted of the following (in thousands):

December 31,		2012				2011
New vehicles		$	563,275			$	372,838
Used vehicles			130,529				106,622
Parts and accessories			29,522				27,024
Total inventories		$	723,326			$	506,484

December 31,		2013				2012
New vehicles		$	657,043			$	563,275
Used vehicles			167,814				130,529
Parts and accessories			34,162				29,522
Total inventories		$	859,019			$	723,326

The new vehicle inventory cost is generally reduced by manufacturer holdbacks and incentives, while the related floor plan notes payable are reflective of the gross cost of the vehicle. As of December 31, 20122013 and 2011,2012, the carrying value of inventory had been reduced by $4.8$6.0 million and $3.2$4.8 million, respectively, for assistance received from manufacturers as discussed in Note 1.

(4)           Property and Equipment

Property and equipment consisted of the following (in thousands):

December 31,		2012				2011
Land		$	128,653			$	120,092
Building and improvements			279,084				232,478
Service equipment			39,374				36,895
Furniture, office equipment, signs and fixtures			70,082				71,313
			517,193				460,778
Less accumulated depreciation			(97,883	)			(99,115	)
			419,310				361,663
Construction in progress			5,776				12,116
		$	425,086			$	373,779

December 31,		2013				2012
Land		$	146,126			$	128,653
Building and improvements			316,261				279,084
Service equipment			42,980				39,374
Furniture, office equipment, signs and fixtures			73,565				70,082
			578,932				517,193
Less accumulated depreciation			(106,871	)			(97,883	)
			472,061				419,310
Construction in progress			9,151				5,776
		$	481,212			$	425,086

Long-Lived Asset Impairment Charges

In 2012 and 2011, triggering events were determined to have occurred related to certain properties due to changes in the expected future use. In 2010, we changed our strategy related to real estate held for future development to focus on more immediate disposition to a broader market of potential buyers and allowing for the redeployment of the invested capital to higher-growth potential opportunities within our business. With this change, we received offers at prices significantly lower than the value of these properties from a long-term income approach at their highest and best use. However, given the prospect of accepting these offers and effecting a quick sale or alternatively continuing the capital investment in these non-operational properties, we decided to accept certain offers and redeploy the capital elsewhere.

As a result of these events, we tested certain long-lived assets for recovery. Based on these tests, we recorded asset impairment charges of $0.1 million $1.4 million and $15.3$1.4 million in 2012 and 2011, and 2010, respectively, onin our Consolidated Statements of Operations.

We did not record asset impairment charges in 2013.

 

F-15

---

(5)           Goodwill and Franchise Value

The following is a roll-forward of goodwill (in thousands):

		Goodwill
Balance as of December, 31, 2010, gross		$	305,452
Accumulated impairment losses			(299,266	)
Balance as of December 31, 2010, net			6,186
Additions through acquisitions			12,869
Goodwill allocation to dispositions			(97	)
Balance as of December 31, 2011, net			18,958
Additions through acquisitions			13,710
Goodwill allocation to dispositions			(621	)
Balance as of December 31, 2012, net		$	32,047

		Goodwill
Balance as of December, 31, 2011, gross		$	318,224
Accumulated impairment losses			(299,266	)
Balance as of December 31, 2011, net			18,958
Additions through acquisitions			13,710
Goodwill allocation to dispositions			(621	)
Balance as of December 31, 2012, net			32,047
Additions through acquisitions			17,464
Balance as of December 31, 2013, net		$	49,511

The following is a roll-forward of franchise value (in thousands):

		Franchise Value
Balance as of December 31, 2010		$	45,193
Additions through acquisitions			14,517
Transfers to discontinued operations			(615	)
Balance as of December 31, 2011			59,095
Additions through acquisitions			5,174
Transfers to discontinued operations			(1,840	)
Balance as of December 31, 2012		$	62,429

		Franchise Value
Balance as of December 31, 2011		$	59,095
Additions through acquisitions			5,174
Transfers to discontinued operations			(1,840	)
Balance as of December 31, 2012			62,429
Additions through acquisitions			8,770
Balance as of December 31, 2013		$	71,199

(6)          Credit Facilities and Long-Term Debt

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

December 31,		2012				2011
New vehicle floor plan commitment (1) (2)		$	568,130			$	229,180
Floor plan notes payable (2)			13,454				114,760
Total floor plan debt			581,584				343,940
Used vehicle inventory financing facility			78,309				-
Revolving line of credit			21,045				87,000
Real estate mortgages			192,928				194,404
Other debt			2,776				5,470
Total debt		$	876,642			$	630,814

December 31,		2013				2012
New vehicle floor plan commitment(1) (2)		$	695,066			$	568,130
Floor plan notes payable(2)			18,789				13,454
Total floor plan debt			713,855				581,584
Used vehicle inventory financing facility			85,000				78,309
Revolving line of credit			-				21,045
Real estate mortgages			164,827				192,928
Other debt			2,727				2,776
Total debt		$	966,409			$	876,642

(1)	We have As of December 31, 2013 and 2012, we had a $575 million new vehicle floor plan commitment of $700 million and $575 million, respectively, as part of our credit facility.

(2)	At December 31, 2012,2013, an additional $6.9$4.8 million of floor plan notes payable outstanding on our new vehicle floor plan commitment and $1.4$1.5 million of floor plan notes payable on vehicles designated as service loaners are recorded as liabilities related to assets held for sale.

Credit Facility

On April 17, 2012,December 16, 2013, we executedcompleted a new$1.0 billion, five-year $650 millionrevolving syndicated credit facility. This syndicated credit facility with a syndicateis comprised of 1013 financial institutions, including fourseven manufacturer-affiliated finance companies. On December 19, 2012, we amended the loan agreement to expand the available loan commitment to $800 million, allocating the financing commitment to $575 million inOur credit facility provides a new vehicle inventory floor plan financing, $80 million incommitment, a used vehicle inventory financing facility and $145 million on a revolving line of credit for general corporate purposes, including acquisitions and working capital. This credit facility may be expanded to $1.25 billion total availability, subject to lender approval.

We may request a reallocation of up to $250 million of any unused portion of our credit facility as long as no event of default has occurred. A reallocation may be requested monthly and cannot result in a change in either our used vehicle inventory financing facility or the revolving line of credit exceeding the lesser of 20% of the aggregate commitment or $200 million. All borrowings from, and repayments to, our syndicated lending group are presented in the Consolidated Statements of Cash Flows as financing activities.

 

F-16

---

The new vehicle floor plan financing commitment is collateralized by our new vehicle inventory. Our used vehicle inventory financing facility is collateralized by our used vehicle inventory that is less than 180 days old. Our revolving line of credit is collateralizedsecured by our outstanding contracts in transit,receivables related to vehicle sales, unencumbered vehicle inventory, other eligible receivables, parts and accessories and equipment.

We have the ability to deposit up to $50 million in cash in Principal Reduction “PR” accounts associated with our new vehicle inventory floor plan commitment. The PR accounts are recognized as offsetting credits against outstanding amounts on our new vehicle floor plan commitment and would reduce interest expense associated with outstanding amounts. As of December 31, 2013, we had no amounts deposited in our PR accounts.

If the outstanding principal balance on our new vehicle inventory floor plan facility,commitment, plus requests on any day, exceeds 95% of the loan commitment, a portion of the revolving loan commitmentline of credit must be reserved. The reserve amount is equal to the lesser of $15.0 million or the maximum revolving loanline of credit commitment less the outstanding balance on the loanline less outstanding letters of credit. The reserve amount will decrease the revolving loanline of credit availability and may be used to repay the new vehicle floor plan commitment balance.

The interest rate on the credit facility varies based on the type of debt and the calculated leverage ratio, with the rate ranging from the one-month LIBOR plus 1.5%1.25% to the one-month LIBOR plus 2.0%2.5%. Our financial covenants related to this credit facility include maintaining a current ratio of not less than 1.20x, a fixed charge coverage ratio of not less than 1.20x and a leverage ratio of not more than 5.0x.

The annual interest rate associated with our new vehicle floor plan commitment, excluding the effects of our interest rate swaps, was 1.7%1.4% at December 31, 2012.

New Vehicle 2013. The annual interest rate associated with our used vehicle inventory financing facility and our revolving line of credit was 1.7% and 1.4%, respectively, at December 31, 2013.

Under the terms of our credit facility we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.

Under our credit facility, we are required to maintain the ratios detailed in the following table:

Debt Covenant Ratio		Requirement		As of December 31, 2013
Current ratio		Not less than 1.20 to 1			1.41	to	1
Fixed charge coverage ratio		Not less than 1.20 to 1			3.94	to	1
Leverage ratio		Not more than 5.00 to 1			1.38	to	1
Funded debt restriction (millions)		Not to exceed $375				$167.6

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.

If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. We also would trigger cross-defaults under other debt agreements.

Floor Plan Lines

Notes Payable

We have additional floor plan agreements with manufacturer-affiliated finance companies for vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are variable rates. At December 31, 2012, $13.52013, $18.8 million was outstanding on these agreements. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities on the Consolidated Statements of Cash Flows.

 

Real Estate Mortgages and Other Debt

We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.8%1.7% to 5.9%4.4% at December 31, 2012 with fixed interest rates on 66% of our outstanding mortgages.2013. The mortgages are payable in various installments through May 2031.

As of December 31, 2013, we had fixed interest rates on 79% of our outstanding mortgage debt.

Our other debt includes various notes, capital leases and obligations assumed as a result of acquisitions and other agreements and had interest rates that ranged from 2.0% to 9.0%9.4% at December 31, 2012.2013. This debt, which totaled $2.8$2.7 million at December 31, 2012,2013, is due in various installments through May 2019.

Future Principal Payments

The schedule of future principal payments on long-term debt as of December 31, 20122013 was as follows (in thousands):

Year Ending December 31,
2013		$	8,182
2014			8,459
2015			8,713
2016			32,885
2017			109,216
Thereafter			127,603
Total principal payments		$	295,058

Year Ending December 31,
2014		$	7,083
2015			7,311
2016			31,409
2017			6,174
2018			109,412
Thereafter			91,165
Total principal payments		$	252,554

(7)     Commitments and Contingencies

Leases

We lease certain facilities under non-cancelable operating and capital leases. These leases expire at various dates through 2066. Certain lease commitments contain fixed payment increases at predetermined intervals over the life of the lease, while other lease commitments are subject to escalation clauses of an amount equal to the increase in the cost of living based on the “Consumer Price Index - U.S. Cities Average - All Items for all Urban Consumers” published by the U.S. Department of Labor, or a substantially equivalent regional index. Lease expense related to operating leases is recognized on a straight-line basis over the life of the lease.

F-17

---

The minimum lease payments under our operating and capital leases after December 31, 20122013 are as follows (in thousands):

Year Ending December 31,
2013		$	17,188
2014			15,749
2015			14,317
2016			12,948
2017			10,666
Thereafter			72,968
Total minimum lease payments			143,836
Less: sublease rentals			(7,785	)
		$	136,051

Year Ending December 31,
2014		$	17,726
2015			15,655
2016			14,810
2017			12,874
2018			11,076
Thereafter			67,048
Total minimum lease payments			139,189
Less: sublease rentals			(7,025	)
		$	132,164

Rent expense, net of sublease income, for all operating leases was $14.0 million, $15.2 million $13.3 million and $12.6$13.3 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. These amounts are included as a component of selling, general and administrative expenses in our Consolidated Statements of Operations.

In connection with dispositions of dealerships, we occasionally assign or sublet our interests in any real property leases associated with such dealerships to the purchaser. We often retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee does not perform. Additionally, we may remain subject to the terms of any guarantees and have correlating indemnification rights against the assignee or sublessee in the event of non-performance, as well as certain other defenses. We may also be called upon to perform other obligations under these leases, such as environmental remediation of the premises or repairs upon termination of the lease. We currently have no reason to believe that we will be called upon to perform any such services; however, there can be no assurance that any future performance required by us under these leases will not have a material adverse effect on our financial condition or results of operations.

Certain of our facilities where a lease obligation still exists have been vacated for business reasons. In these instances, we make efforts to find qualified tenants to sublease the facilities and assume financial responsibility. However, due to the specific nature and size of theour dealership facilities, used in our dealerships, tenants are not always available. Liabilities have beenavailable or the amount tenants are willing to pay does not recover the full lease obligation. When an exposure exists related to vacating certain leases, liabilities are accrued to reflect our estimate of future lease obligations. These amountsobligations, net of estimated sublease income.

Capital Expenditures

Capital expenditures were not material to our Consolidated Statements of Operations during 2012, 2011$50.0 million, $64.6 million and 2010 and the amounts accrued at December 31,$31.7 million for 2013, 2012 and 2011, were not material.

Capital Expenditures

respectively. Capital expenditures in 2013 were $64.6 million, $31.7 millionassociated with image improvements, purchases of store facilities, purchases of previously leased facilities and $7.6 million for 2012, 2011 and 2010, respectively.replacement of equipment. The increase in capital expenditures in 2012 compared to 2011 and 2011 compared to 2010 was related to improvements at certain of our store facilities, the purchase of previously leased facilities, the purchase of new store locations, replacement of equipment and construction of, and relocation to, a new headquarters building.

Many manufacturers provide assistance in the form of additional vehicle incentives if facilities meet image standards and requirements. We believe it is an attractive time to invest in certain internal initiativesfacility upgrades and remodels that will generate additional manufacturer incentive payments, particularly from our domestic partners.payments. Also, recently enacted tax law changes that acceleratelaws allowing accelerated deductions for capital expenditures havereduce the overall investment needed and encourage accelerated project timelines to ensure completion before the law expires.

In the eventtimelines.

If we undertake a significant capital commitment in the future, we expect to pay for the commitment out of existing cash balances, construction financing and borrowings on our credit facility. Upon completion of the projects, we believe we would anticipate securinghave the ability to secure 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.

F-18

---

Charge-Backs for Various Contracts

We have recorded a liability of $13.5$18.2 million as of December 31, 20122013 for our estimated contractual obligations related to potential charge-backs for vehicle service contracts, lifetime oil change contracts and other various insurance contracts that are terminated early by the customer. We estimate that the charge-backs will be paid out as follows (in thousands):

Year Ending December 31,
2014		$	10,223
2015			5,218
2016			2,034
2017			554
2018			131
Thereafter			22
Total		$	18,182

Year Ending December 31,
2013		$	7,540
2014			3,792
2015			1,553
2016			491
2017			118
Thereafter			10
Total		$	13,504

Lifetime Lube, Oil and Filter Contracts

In March 2009, we entered into a transaction related to existing lifetime lube, oil and filter contracts, in which we assumed the obligation to provide future services under the purchased contracts. As of December 31, 2012, we had a remaining balance of $4.0 million. We estimate the deferred revenue associated with this assumed obligation will be recognized as follows (in thousands):

Year Ending December 31,
2013		$	1,090
2014			850
2015			654
2016			488
2017			349
Thereafter			559
Total		$	3,990

We periodically evaluate the estimated future costs of these contracts and record a charge if future expected claim and cancellation costs exceed the deferred revenue to be recognized. In 2011 and 2010, our analysis indicated expected costs had increased as experience rates changed due to customers retaining their cars for longer periods of time compared to our historical experience. We recorded a charge of $1.0 million in both 2011 and 2010, as a component of cost of sales in our Consolidated Statements of Operations. As of December 31, 2012, we had a reserve balance of $4.0 million recorded as a component of accrued liabilities and other long-term liabilities on our Consolidates Balance Sheet.

We retain the obligation for lifetime lube, oil and filter service contracts sold to our customers and recordassumed the liability of certain existing lifetime lube, oil and filter contracts. These amounts are recorded as deferred revenues related to these contracts.revenues. At the time of sale, we defer the full sale price and recognize the revenue based on the rate we expect future costs to be incurred. As of December 31, 2012,2013, we had a deferred revenue balance of $33.9$50.1 million associated with these contracts and estimate the deferred revenue will be recognized as follows (in thousands):

Year Ending December 31,
2013		$	8,448
2014			5,839
2015			4,541
2016			3,547
2017			2,827
Thereafter			8,721
Total		$	33,923

Year Ending December 31,
2014		$	10,888
2015			8,527
2016			6,760
2017			5,411
2018			4,315
Thereafter			14,157
Total		$	50,058

We periodically evaluate the estimated future costs of these assumed contracts and record a charge if future expected claim and cancellation costs exceed the deferred revenue to be recognized. As of December 31, 2013, we had a reserve balance of $3.4 million recorded as a component of accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets. The charges associated with this reserve had been recognized in 2011 and earlier.

Self-insurance Programs

We self-insure a portion of our property and casualty insurance, medical insurance and workers’ compensation insurance. A third-party isThird-parties are engaged to assist in estimating the loss exposure related to the self-retained portion of the risk associated with these insurances. Additionally, we analyze our historical loss and claims experience to estimate the loss exposure associated with these programs. As of December 31, 20122013 and 2011,2012, we had liabilities associated with these programs of $12.4$12.0 million and $10.4$12.4 million, respectively, recorded as a component of accrued liabilities and other long-term liabilities on our Consolidated Balance Sheets.

F-19

---

Regulatory Compliance

We are subject to numerous state and federal regulations common in the automotive sector that cover retail transactions with customers and employment and trade practices. We do not anticipate that compliance with these regulations will have an adverse effect on our business, consolidated results of operations, financial condition or cash flows, although such outcome is possible given the nature of our operations and the legal and regulatory environment affecting our business.

Litigation

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

Alaska Consumer Protection Act Claims

In December 2006, a class action suit was filed against us (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc,Inc., et al, Case No. 3AN-06-13341 CI,CI), and in April 2007, a second caseclass action suit (Jackie Neese, et al vs. Lithia Chrysler Jeep of Anchorage, Inc, et al, Case No. 3AN-06-4815 CI) (now consolidated)),was filed against us, in the Superior Court for the State of Alaska, Third Judicial District at Anchorage. These suits were subsequently consolidated. In the suits,consolidated suit, plaintiffs alleged that we, through our Alaska dealerships, engaged in three practices that purportedly violate Alaska consumer protection laws: (i) charging customers dealer fees and costs (including document preparation fees) not disclosed in the advertised price, (ii) failing to disclose the acquisition, mechanical and accident history of used vehicles or whether the vehicles were originally manufactured for sale in a foreign country, and (iii) engaging in deception, misrepresentation and fraud by providing to customers financing from third parties without disclosing that we receive a fee or discount for placing that loan (a “dealer reserve”).loan. The suit seekssought statutory damages of $500 for each violation (oror three times plaintiff’s actual damages, whichever is greater),was greater, and attorney fees and costs andcosts.

In June2013, the plaintiffs sought class action certification.  Before and duringparties agreed to mediate the pendency of these suits, we engagedclaims. The mediation resulted in a settlement discussions withagreement that received the State of Alaska through its Office of Attorney General with respect to the first two practices enumerated above. As a result of those discussions, we entered into a Consent Judgment subject to courtfinal approval and permitted potential class members to “opt-out” of the proposed settlement. CounselCourt on December 11, 2013. Under the settlement agreement, we agreed to reimburse plaintiffs’ legal fees and to pay (i) $450 in the form of cash and vouchers and (ii) $3,000 for each claim representative. As of December 31, 2013, we estimated costs of $6.2 million to settle all claims against us and to pay plaintiffs’ legal fees. The estimated costs are based on our assumptions of the plaintiffs attempted to intervenefinal number of approved claims and after various motions, hearingsa voucher redemption rate. We believe that these estimates are reasonable; however, actual cost could differ materially.We recorded this amount as a component of selling, general and an appeal toadministrative expense in our Consolidated Statements of Operations and, as of December 31, 2013, the state Courtamount was included as a component of Appeals, the Consent Judgment became final.accrued liabilities in our Consolidated Balance Sheets. 

 

Plaintiffs then filed a motion in November 2010 seeking certification of a class (i) for the 339 customers who “opted-out” of the state settlement, (ii) for those customers who did not qualify for recovery under the Consent Judgment but were allegedly eligible for recovery under the plaintiffs’ broader interpretation of the applicable statutes, and (iii) arguing that since the State’s suit against our dealerships did not address the loan fee/discount (dealer reserve) claim, for those customers who arranged their vehicle financing through us. On June 14, 2011, the Trial Court granted plaintiffs’ motion to certify a class without addressing either the merits of the claims or the size of the classes. Discovery in this case is ongoing. We intend to defend the claims vigorously and do not believe the novel “dealer reserve” claim has merit.

The ultimate resolution of these matters cannot be predicted with certainty, and an unfavorable resolution of any of the matters could have a material adverse effect on our results of operations, financial condition or cash flows.

(8)           Stockholders’ Equity

Class A and Class B Common Stock

The shares of Class A common stock are not convertible into any other series or class of our securities. Each share of Class B common stock, however, is freely convertible into one share of Class A common stock at the option of the holder of the Class B common stock. All shares of Class B common stock shall automatically convert to shares of Class A common stock (on a share-for-share basis, subject to adjustment) on the earliest record date for an annual meeting of our stockholders on which the number of shares of Class B common stock outstanding is less than 1% of the total number of shares of common stock outstanding. Shares of Class B common stock may not be transferred to third parties, except for transfers to certain family members and in other limited circumstances.

F-20

---

Holders of Class A common stock are entitled to one vote for each share held of record and holders of Class B common stock are entitled to ten votes for each share held of record. The Class A common stock and Class B common stock vote together as a single class on all matters submitted to a vote of stockholders.

shareholders.

Repurchases of Class A Common Stock

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. As of December 31, 2011, we had purchased all available shares under this program.

program, of which 419,376 shares were repurchased in 2011.

In August 2011, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our Class A common stock and, on July 20, 2012, our Board of Directors authorized the repurchase of 1,000,000 additional shares of our Class A common stock.Through December 31, 2012,2013, we had purchased 1,145,1471,273,047 shares under these programs at an average price of $22.33$24.18 per share. As of December 31, 2012, 1,854,8532013, 1,726,953 shares remained available for purchase pursuant to these programs. Theseprograms.These plans do not have an expiration date and we may continue to repurchase shares from time to time as conditions warrant.

The following is a summary of our repurchases in the years ended December 31, 2013, 2012 2011 and 2010.

2011.

		Year Ended December 31,
		2013				2012				2011
Shares repurchased (1)			127,900				848,092				716,431
Total purchase price (in thousands)		$	5,213			$	20,698			$	12,389
Average purchase price per share		$	40.76			$	24.41			$	17.29

		Year Ended December 31,
		2012				2011				2010
Shares repurchased (1)			848,092				716,431				100,893
Total purchase price (in thousands)		$	20,698			$	12,389			$	795
Average purchase price per share		$	24.41			$	17.29			$	7.88

(1)	Includes only shares repurchased under repurchase plans. An additional 59,721, 80,687 56,012 and 61,15356,012 shares were repurchased in association with tax withholdings on the exercise of stock options in 2013, 2012 and 2011, and 2010, respectively.

Dividends

For the period January 1, 20102011 through December 31, 2012,2013, we declared and paid dividends on our Class A and Class B Common Stock as follows:

Quarter declared		Dividend amount per Class A and Class B share				Total amount of dividend (in thousands)
2010
First quarter		$	-			$	-
Second quarter			0.05				1,300
Third quarter			0.05				1,307
Fourth quarter			0.05				1,312
2011
First quarter		$	0.05			$	1,316
Second quarter			0.07				1,851
Third quarter			0.07				1,838
Fourth quarter			0.07				1,817
2012
First quarter		$	0.07			$	1,815
Second quarter			0.10				2,583
Third quarter			0.10				2,545
Fourth quarter			0.20				5,123	(1)

Quarter declared		Dividend amount per Class A and Class B share				Total amount of dividend (in thousands)
2011
First quarter		$	0.05			$	1,316
Second quarter			0.07				1,851
Third quarter			0.07				1,838
Fourth quarter			0.07				1,817
2012
First quarter		$	0.07			$	1,815
Second quarter			0.10				2,583
Third quarter			0.10				2,545
Fourth quarter(1)			0.20				5,123
2013
First quarter		$	-			$	-
Second quarter			0.13				3,356
Third quarter			0.13				3,363
Fourth quarter			0.13				3,366

(1)	In November 2012, we paid dividends of $2.5 million that had been declared in October 2012. An additional dividend payment of $2.6 million was declared and paid in December 2012 in lieu of the dividend typically declared and paid in March of the following year.

 

Reclassification From Accumulated Other Comprehensive Loss

The reclassification from accumulated other comprehensive loss was as follows (in thousands):

		Year Ended December 31,											Affected Line Item in the Consolidated
		2013				2012				2011			Statement of Operations
Loss on cash flow hedges		$	(740	)		$	(1,413	)		$	(1,899	)	Floor plan interest expense
Income tax benefits			283				541				727		Income tax provision
Loss on cash flow hedges, net		$	(457	)		$	(872	)		$	(1,172	)

See Note 11 for more details regarding our derivative contracts.

(9)          401(k) Profit Sharing, Deferred Compensation and Long-term Incentive Plans

We have a defined contribution 401(k) plan and trust covering substantially all full-time employees. The annual contribution to the plan is at the discretion of our Board of Directors. Contributions of $2.1 million, $1.9 million and $1.7 million were recognized for the years ended December 31, 2013, 2012 and 2011, respectively. Employees may contribute to the plan if they meet certain eligibility requirements.

We offer a deferred compensation and long-term incentive plan (the “LTIP”) to provide certain employees the ability to accumulate assets for retirement on a tax deferred basis. We may make discretionary contributions to the LTIP. Discretionary contributions vest between one and seven years based on the employee’s age and position. Additionally, a participant may defer a portion of his or her compensation and receive the deferred amount upon certain events, including termination or retirement.

The following is a summary related to our LTIP:

		Year Ended December 31,
		2013				2012				2011
Compensation expense (millions)		$	1.4			$	1.2			$	0.9
Total discretionary contribution (millions)		$	2.1			$	1.9			$	1.3
Guaranteed annual return			5.25	%			5.90	%			6.00	%

As of December 31, 2013, the balance due to participants was $7.1 million and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.

(10)         Stock Based Compensation

2009 Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) allows for the issuance of 1,500,000 shares of our Class A common stock. The 2009 ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the Compensation Committee of the Board of Directors.

 

F-21

---

Eligible employees are entitled to defer up to 10% of their base pay for the purchase of stock, up to $25,000 of fair market value of our Class A common stock annually. The purchase price is equal to 85% of the fair market value at the end of the purchase period. During 2013, a total of 77,005 shares were purchased under the 2009 ESPP at a weighted average price of $49.94 per share, which represented a weighted average discount from the fair market value of $8.81 per share. As of December 31, 2013, 604,288 shares remained available for purchase under the 2009 ESPP.

Compensation expense related to our 2009 ESPP is calculated based on the 15% discount from the per share market price on the date of grant.

2013 Stock Incentive Plan

Our 2013 Stock Incentive Plan, as amended, (the “2013 Plan”) allows for the granting of up to a total of 3.8 million nonqualified stock options and shares of restricted stock to our officers, key employees, directors and consultants. Our plan is administered by the Compensation Committee of the Board of Directors and permits accelerated vesting of outstanding awards upon the occurrence of certain changes in control. As of December 31, 2013, 1,573,080 shares of Class A common stock were available for future grants.

Restricted Stock Units (“RSUs”)

Restricted stock grants vest over a period up to six years from the date of grant. Restricted stock activity under our stock incentive plans was as follows:

		Non-vested stock grants				Weighted average grant date fair value
Balance, December 31, 2012			651,943			$	13.35
Granted			239,324				43.13
Vested			(185,462	)			7.97
Forfeited			(28,447	)			19.12
Balance, December 31, 2013			677,358			$	25.10

In 2013, we granted 77,736 time-vesting RSUs to members of our Board of Directors and employees. Each grant entitles the holder to receive shares of our Class A common stock upon vesting. A quarter of the RSUs vest on each of the four anniversaries of the grant date.

Certain key employees were granted 52,820 performance and time-vesting RSUs in 2013. The RSUs entitled the holder to receive shares based on attaining a target level of adjusted net income per share for 2013. The RSUs are subject to forfeiture, in whole or in part, based on 2013 minimum performance measures and continuation of employment. RSUs that are not forfeited vest over four years from the grant date. The table below summarizes the percentage of granted RSUs earned based on the attainment thresholds:

		Adjusted earnings per share attainment level				% of earned RSUs
Less than minimum		$0.00 or negative					0	%
Minimum			$0.01				30
Median			$3.21				60
Maximum			$3.53				100

The final attainment was calculated as 100% based on the 2013 adjusted net income per share of $4.02. We estimate a total compensation expense of $2.2 million associated with these performance and time-vesting RSUs, of which $0.5 million was recognized in 2013.

 

Eight senior executives were also granted 108,768 long-term RSUs which vest based on attaining a target level of adjusted net income per share in any fiscal year ending on December 31, 2013 through December 31, 2018, which meets or exceeds specified attainment thresholds. The table below summarizes the percentage of granted RSUs earned based on the attainment thresholds:

Adjusted fiscal earnings per share attainment level				% of earned RSUs
	$4.00				33%
	$5.00				33
	$6.00				34

If more than one adjusted net income per share attainment threshold is met or exceeded that was not met or exceeded previously, the corresponding vesting percentages for each adjusted net income per share attainment threshold met or exceeded may be added together. Once the adjusted net income per share meets or exceeds any particular threshold and RSUs are vested accordingly, no additional RSUs may vest in connection with adjusted net income per share meeting or exceeding that particular threshold again. Any of these RSUs that do not vest within the six year period would be forfeited.

We estimate a total compensation expense of $4.7 million associated with these long-term RSUs. In 2013, the attainment level of $4.00 per share was achieved based on the 2013 adjusted net income per share of $4.02 and expense associated with the vesting of 33% of the award was recognized in the twelve month period ended December 31, 2013. We recognized $2.4 million in compensation expense associated with this grant in 2013.

Stock Options

Options become exercisable over a period of up to five years from the date of grant with expiration dates up to ten years from the date of grant and at exercise prices of not less than market value, as determined by the Board of Directors. Beginning in 2004, the expiration date of options granted was reduced to six years.

Option activity under our stock incentive plans was as follows:

		Shares subject to options				Weighted average exercise price				Aggregate intrinsic value(millions)				Weighted average remaining contractual term (years)
Balance, December 31, 2012			253,499			$	6.26
Granted			-				-
Forfeited			-				-
Expired			-				-
Exercised			(194,615	)			6.17
Balance, December 31, 2013			58,884			$	6.53			$	3.7				0.7
Exercisable, December 31, 2013			58,884			$	6.53			$	3.7				0.7

We estimate the fair value of stock options using the Black-Scholes valuation model. This valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Stock-Based Compensation

Compensation expense related to non-vested stock is based on the intrinsic value on the date of grant as if the stock is vested. We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

As of December 31, 2013, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $9.2 million, which will be recognized over the remaining weighted average vesting period of 1.9 years.

Certain information regarding our stock-based compensation was as follows:

Year Ended December 31,		2013				2012				2011
Weighted average grant-date fair value per share of stock options granted		$	-			$	-			$	-
Per share intrinsic value of non-vested stock granted			43.13				23.82				13.58
Weighted average per share discount for compensation expense recognized under the 2009 ESPP			8.81				4.29				2.56
Total intrinsic value of stock options exercised (millions)			8.7				7.2				1.5
Fair value of non-vested stock that vested during the period (millions)			8.4				3.5				0.7
Stock-based compensation recognized in results of operations, as a component of selling, general and administrative expense - excludes compensation expense related to an option granted to one of our executives. See Note 16. (millions)			6.6				3.1				2.3
Tax benefit recognized in Consolidated Statements of Operations (millions)			2.3				1.0				0.7
Cash received from options exercised and shares purchased under all share-based arrangements (millions)			5.2				8.8				5.8
Tax deduction realized related to stock options exercised (millions)			6.5				4.1				0.9

(11)        Derivative Financial Instruments

From time to time, we enter into interest rate swaps to fix a portion of our interest expense. We do not enter into derivative instruments for any purpose other than to manage interest rate exposure to fluctuations in the one-month LIBOR benchmark. That is, we do not engage in interest rate speculation using derivative instruments.

As of December 31, 2013, we had a $25 million interest rate swap outstanding with U.S. Bank Dealer Commercial Services. This interest rate swap matures on June 15, 2016 and has a fixed rate of 5.587% per annum. The variable rate on the interest rate swap is the one-month LIBOR rate. At December 31, 2013, the one-month LIBOR rate was 0.17% per annum, as reported in the Wall Street Journal.

Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in comprehensive income rather than net income until the underlying hedged transaction affects net income. If a swap is no longer designated 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 loss 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 loss is recognized in income immediately.See Note12.

The estimated amount that we expect to reclassify from accumulated other comprehensive loss to net income within the next twelve months is $1.2 million at December 31, 2013.

At December 31, 2013 and 2012, the fair value of our derivative instruments was included in our Consolidated Balance Sheets as follows (in thousands):

Balance Sheet Information (in thousands)		Fair Value of Liability Derivatives
		Location in Balance Sheet		December 31, 2013
Derivatives designated ashedging instruments
Interest rate swap contract		Accrued liabilities		$	1,215
		Other long-term liabilities			1,685
				$	2,900

(9)

Balance Sheet Information (in thousands)		Fair Value of Liability Derivatives
		Location in Balance Sheet		December 31, 2012
Derivatives designated ashedging instruments
Interest rate swap contract		Accrued liabilities		$	1,839
		Other long-term liabilities			2,840
				$	4,679

The effect of derivative instruments on our Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 was as follows (in thousands):

Derivatives in Cash Flow Hedging Relationships		Amount of gain (loss) recognized in Accumulated 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)
For the Year Ended December 31, 2013					Floor plan					Floor plan
Interest rate swap contract		$	1,005		Interest expense		$	(740	)	Interest expense		$	(1,235	)
For the Year Ended December 31, 2012					Floor plan					Floor plan
Interest rate swap contracts		$	1,655		Interest expense		$	(1,413	)	Interest expense		$	(2,900	)
For the Year Ended December 31, 2011					Floor plan					Floor plan
Interest rate swap contracts		$	(1,343	)	Interest expense		$	(1,899	)	Interest expense		$	(1,587	)

(12)        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 spreads, credit risk; 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 swap 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 valuation are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates and credit risk at commonly quoted intervals). Mid-market pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term borrowings, 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 the 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 swap also takes into consideration our own, as well as the counterparty’s, risk of non-performance under the contract.

There were no changes to our valuation techniques during the year ended December 31, 2013.

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 December 31, 2013		Level 1				Level 2				Level 3
Measured on a recurring basis:
Derivative contract, net		$	-			$	(2,900	)		$	-

Fair Value at December 31, 2012		Level 1				Level 2				Level 3
Measured on a recurring basis:
Derivative contract, net		$	-			$	(4,679	)		$	-

See Note 11 for more details regarding our derivative contracts.

Fair Value Disclosures for Financial Assets and Liabilities

We have fixed rate debt and 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 (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt. As of December 31, 2013, this debt had maturity dates between November 2016 and May 2031. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

		December 31, 2013				December 31, 2012
Carrying value		$	132,616			$	130,469
Fair value			126,786				134,688

We believe the carrying value of our variable rate debt approximates fair value.

(13)     Income Taxes

Income tax provision (benefit) from continuing operations was as follows (in thousands):

Year Ended December 31,		2013				2012				2011
Current:
Federal		$	46,727			$	31,438			$	21,779
State			5,539				3,626				3,561
			52,266				35,064				25,340
Deferred:
Federal			9,010				10,888				7,046
State			(702	)			3,110				674
			8,308				13,998				7,720
Total		$	60,574			$	49,062			$	33,060

At December 31, 2013 and 2012, we had income taxes receivable of $3.4 million and $7.3 million, respectively, included as a component of other current assets on the Consolidated Balance Sheets.

Individually significant components of the deferred tax assets and liabilities are presented below (in thousands):

December 31,		2013				2012
Deferred tax assets:
Deferred revenue and cancellation reserves		$	8,857			$	7,597
Allowances and accruals, including state tax carryforward amounts			31,060				21,340
Interest on derivatives			1,113				1,796
Credits and other			1,937				-
Goodwill			10,331				18,139
Capital loss carryforward			10,893				12,248
Valuation allowance			(11,087	)			(11,641	)
Total deferred tax assets			53,104				49,479
Deferred tax liabilities:
Inventories			(6,722	)			(4,684	)
Property and equipment, principally due to differences in depreciation			(32,563	)			(22,484	)
Prepaid expenses and other			(2,015	)			(1,356	)
Total deferred tax liabilities			(41,300	)			(28,524	)
Total		$	11,804			$	20,955

We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.

As of December 31, 2013, we had a $11.1 million valuation allowance recorded associated with our deferred tax assets. The majority of this allowance is associated with capital losses from the sale of corporate entities in prior years. The valuation allowance decreased $0.6 million in the current year.

During 2013, release of the valuation allowance related to the utilization of our capital loss carryforward resulted in a tax benefit of $1.5 million. As of the end of 2013, we evaluated the availability of projected capital gains and determined that it continues to be unlikely the remaining capital loss carryforward would be fully utilized. We will continue to evaluate if it is more likely than not that we will realize the benefits of these deductible differences. However, additional valuation allowance amounts could be recorded in the future if estimates of taxable income during the carryforward period are reduced.

At December 31, 2013, we had a number of state tax carryforward amounts totaling approximately $0.9 million, tax affected, with expiration dates through 2033. We believe that it is more likely than not that the benefit from certain state NOL carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $0.9 million on the deferred tax assets relating to these state NOL carryforwards.

The reconciliation between amounts computed using the federal income tax rate of 35% and our income tax provision from continuing operations for 2013, 2012 and 2011 is shown in the following tabulation (in thousands):

Year Ended December 31,		2013				2012				2011
Federal tax provision at statutory rate		$	58,026			$	44,723			$	30,895
State taxes, net of federal income tax benefit			3,141				4,772				3,021
Non-deductible expenses			1,010				618				208
Permanent differences related to the employee stock purchase program			55				52				105
Net change in valuation allowance			(554	)			(1,200	)			(346	)
General business credits			(440	)			-				-
Other			(664	)			97				(823	)
Income tax provision		$	60,574			$	49,062			$	33,060

We did not have any activity during 2013 or 2012 related to unrecognized tax benefits and did not have any amounts of unrecognized tax benefits as of December 31, 2013 or 2012. No interest or penalties were included in our results of operations during 2013, 2012 or 2011, and we had no accrued interest or penalties at December 31, 2013 or 2012.

Open tax years at December 31, 2013 included the following:

Federal		2010	-	2013
12 states		2009	-	2013

(14)        Acquisitions

In 2013, we completed the following acquisitions, which contributed revenues of $64.7 million for the year ended December 31, 2013:

●

On June 10, 2013, we acquired OB Salem Auto Group, Inc. in Salem, Oregon, including BMW, Honda and Volkswagen franchises.

●

On October 7, 2013, we acquired Stockton Nissan Kia in Stockton, California.

●

On October 24, 2013, we acquired Fresno Lincoln Volvo in Fresno, California.

●

On November 1, 2013, we acquired Howard’s Body Shop in Klamath Falls, Oregon.

●

On November 4, 2013, we acquired Geweke Motors, Inc. a Toyota Scion store in Lodi, California.

●

On December 2, 2013, we acquired Diablo Subaru in Walnut Creek, California.

We completed the following acquisitions in 2012:

●

On April 30, 2012, we acquired Bellingham Chevrolet and Cadillac in Bellingham, Washington.

●

On June 12, 2012, we acquired Fairbanks GMC Buick in Fairbanks, Alaska.

●

On August 27, 2012, we acquired Killeen Chevrolet in Killeen, Texas.

●

On October 23, 2012, we acquired Bitterroot Toyota in Missoula, Montana.

We completed the following acquisitions in 2011:

●

On April 18, 2011, we acquired Mercedes-Benz of Portland, Oregon, Mercedes Benz of Wilsonville, Oregon and Rasmussen BMW/MINI in Portland, Oregon.

●

On October 7, 2011, we acquired Fresno Subaru in Fresno, California.

All acquisitions were accounted for as business combinations under the acquisition method of accounting. The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition

No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for material acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):

Consideration paid for year ended December 31,		2013				2012
Cash paid, net of cash acquired		$	81,105			$	44,716

Assets acquired and liabilities assumed for year ended December 31,		2013				2012
Inventories		$	30,624			$	17,541
Franchise value			8,770				5,174
Property, plant and equipment			24,741				11,097
Real estate lease reserves			(221	)			-
Other assets			264				110
Reserves			(344	)			-
Capital lease obligations			(37	)			(2,609	)
Other liabilities			(156	)			(307	)
			63,641				31,006
Goodwill			17,464				13,710
		$	81,105			$	44,716

We account for franchise value as an indefinite-lived intangible asset. We expect the full amount of the goodwill recognized to be deductible for tax purposes. We did not have any material acquisition-related expenses in 2013, 2012 or 2011.

The following unaudited pro forma summary presents consolidated information as if the 2013 and 2012 acquisitions had occurred on January 1 of the prior year (in thousands, except for per share amounts):

Year Ended December 31,		2013				2012				2011
Revenue		$	4,144,945			$	3,571,853			$	2,789,436
Income from continuing operations, net of tax			105,783				81,531				56,904
Basic income per share from continuing operations, net of tax			4.10				3.17				2.17
Diluted income per share from continuing operations, net of tax			4.04				3.12				2.13

These amounts have been calculated by applying our accounting policies and estimates. The results of the acquired stores have been adjusted to reflect the following: depreciation on a straight-line basis over the expected lives for property, plant and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to the acquisitions are included in the reported pro forma revenues and earnings.

In July 2011, we were awarded a Ford franchise in Klamath Falls, Oregon which was accounted for as an asset acquisition. Consideration of $5.1 million was paid for the inventory, equipment and associated real estate.

(15)         Discontinued Operations

We classify a store as discontinued operations if the location has been sold, we have ceased operations at that location or the store meets the criteria 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 to be completed 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 that changes will be made to the plan or the plan to dispose of the store will be withdrawn.

We reclassify the store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we do not expect to have any significant continuing involvement in the store’s operations after its disposal.

In 2011, we sold three stores: a Chrysler Jeep Dodge store in Concord, California; a Volkswagen store in Thornton, Colorado and a GMC Buick and a Kia store in Cedar Rapids, Iowa. The associated results of operations for these locations are classified as discontinued operations. As of December 31, 2011, we had no stores and no properties classified as held for sale.

In October 2012, we sold two stores: a Chrysler Jeep Dodge store and a Hyundai store, both located in Renton, Washington. The associated results of operations for these locations are classified as discontinued operations.

Additionally, in October 2012, we determined that one of our stores met the criteria for classification of the assets and related liabilities as held for sale. As of December 31, 2013, the store has been classified as held for sale for more than one year.

As this store has been classified as held for sale beyond one year, we continually evaluated whether (i) we had taken all necessary actions to respond to the change in circumstances; (ii) we were actively marketing the store at a price that was reasonable; and (iii) we continued to meet all of the criteria discussed above to continue to classify the stores as held for sale.

Since the end of 2012, we have actively marketed this store for sale and continue to identify interested parties. Throughout the past year, we have had both signed letters of intent and contracts for the sale of the property. However, these sales have not been consummated for various reasons including the potential buyers being unable to obtain manufacturer approval. We believe the classification continues to be appropriate as all criteria to classify the store as held for sale are still met as of December 31, 2013. The store’s assets and related liabilities are classified as held for sale and its associated operating results are classified as discontinued operations as of December 31, 2013.

As of December 31, 2013, we have one store and no properties classified as held for sale. Assets held for sale included the following (in thousands):

December 31,		2013
Inventories		$	8,260
Property, plant and equipment			1,194
Intangible assets			2,072
		$	11,526

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

December 31,		2013
Floor plan notes payable		$	6,271

Actual floor plan interest expense for the store classified as discontinued operations is directly related to the store’s new vehicles. Interest expense related to our used vehicle inventory financing and revolving line of credit is allocated based on the working capital level of the store. Interest expense included as a component of discontinued operations was as follows (in thousands):

Year Ended December 31,		2013				2012				2011
Floor plan interest		$	117			$	217			$	520
Other interest			21				69				108
Total interest		$	138			$	286			$	628

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

Year Ended December 31,		2013				2012				2011
Revenue		$	38,978			$	82,150			$	131,380
Pre-tax gain from discontinued operations		$	1,310			$	2,186			$	1,516
Net gain (loss) on disposal activities			-				(621	)			4,396
			1,310				1,565				5,912
Income tax expense			(524	)			(598	)			(2,262	)
Income from discontinued operations, net of income tax expense		$	786			$	967			$	3,650
Goodwill and other intangible assets disposed of		$	-			$	169			$	712

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

Year Ended December 31,		2013				2012				2011
Goodwill and other intangible assets		$	-			$	(169	)		$	3,168
Property, plant and equipment			-				(299	)			1,357
Inventory			-				(82	)			(88	)
Other			-				(71	)			(41	)
		$	-			$	(621	)		$	4,396

(16)        Related Party Transactions

Sale of Nissan, Volkswagen and BMW Stores

On March 27, 2012, we completed the sale of an 80% interest in our Nissan, Volkswagen and BMW stores in Medford, Oregon to Dick Heimann, a director and our Vice Chairman. We received proceeds of $9.6 million, of which $2.9 million was received in cash and $6.7 million was received through the payoff of floor plan financing. The sale of the 80% interest in the stores resulted in a gain of $0.7 million and was recorded as a component of selling, general and administrative expense on our Consolidated Statements of Operations.

The Nissan and Volkswagen stores were purchased for the book value of the inventory as defined by the original terms of an option agreement provided to Mr. Heimann in 2009. The price of the intangible assets of $1.2 million was based on the fair value of the intangible assets related to the BMW store. We corroborated the fair value of the BMW store’s intangible assets with independent third party broker opinions and financial projections using a fair value income approach.

When we sold the three stores, we entered into a shared service agreement with the stores. This agreement allows the stores to lease our employees, use the Lithia name, utilize accounting support functions and receive consulting services. The services provided and the costs of the services are structured the same as the shared services provide to our wholly owned stores.

We retained a 20% interest in the stores as of the transaction date. We determined that we are not the primary beneficiary of the stores and the risk and rewards associated with our investment are based on ownership percentages. We determined we maintained significant influence over the operations. As a result, our 20% interest is accounted for under the equity method. We recorded the equity investment at fair value of $0.8 million as of the transaction date that resulted in a gain of $0.2 million. The gain was recorded as a component of other income on our Consolidated Statements of Operations. We determined the fair value of our equity investment based on independent third party broker opinions and financial projections using a fair value income approach.

As of December 31, 2013, the carrying value of our equity investment was $1.2 million and was recorded as a component of other non-current assets in our Consolidated Balance Sheets.

Sale of Land

In the fourth quarter of 2013, we completed the sale of land in Medford, Oregon to Dick Heimann for $4.2 million. Mr. Heimann intends to relocate the stores he purchased in 2012 to this location. We determined the fair value of the land based on a third party appraisal for the property. The sale resulted in a gain of $2.5 million, recorded as a component of selling, general and administrative expenses.

(17)         Net Income Per Share of Class A and Class B Common Stock

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 and transfer 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 stockholders. Additionally, Oregon law provides that amendments to our Articles of Incorporation, which would have the effect of adversely altering the rights, powers or preferences of a given class of stock, must be approved by the class of stock adversely affected by the proposed amendment. As a result, the undistributed earnings for each year are allocated based on the contractual participation rights of the Class A and Class B common shares as if the earnings for the year had been distributed. Because the liquidation and dividend rights are identical, the undistributed earnings are allocated on a proportionate basis.

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 for the years ended December 31, 2013, 2012 2011 and 20102011 (in thousands, except per share amounts):

 

Year Ended December 31,		2012								2011								2010
Basic EPS		Class A				Class B				Class A				Class B				Class A				Class B
Numerator:
Income from continuing operations applicable to common stockholders		$	69,069			$	10,326			$	47,292			$	7,918			$	11,626			$	1,961
Distributed income applicable to common stockholders			(10,497	)			(1,569	)			(5,844	)			(978	)			(3,353	)			(566	)
Basic undistributed income from continuing operations applicable to common stockholders		$	58,572			$	8,757			$	41,448			$	6,940			$	8,273			$	1,395
Denominator:
Weighted average number of shares out-standing used to calculate basic income per share			22,354				3,342				22,468				3,762				22,300				3,762
Basic income from continuing operations per share applicable to common stockholders		$	3.09			$	3.09			$	2.10			$	2.10			$	0.52			$	0.52
Basic distributed income per share applicable to common stockholders			(0.47	)			(0.47	)			(0.26	)			(0.26	)			(0.15	)			(0.15	)
Basic undistributed income from continuing operations per share applicable to common stockholders		$	2.62			$	2.62			$	1.84			$	1.84			$	0.37			$	0.37

Year Ended December 31,		2013								2012								2011
Basic EPS		Class A				Class B				Class A				Class B				Class A				Class B
Numerator:
Income from continuing operations applicable to common stockholders		$	94,532			$	10,682			$	69,069			$	10,326			$	47,292			$	7,918
Distributed income applicable to common stockholders			(9,061	)			(1,024	)			(10,497	)			(1,569	)			(5,844	)			(978	)
Basic undistributed income from continuing operations applicable to common stockholders		$	85,471			$	9,658			$	58,572			$	8,757			$	41,448			$	6,940
Denominator:
Weighted average number of shares out-standing used to calculate basic income per share			23,185				2,620				22,354				3,342				22,468				3,762
Basic income from continuing operations per share applicable to common stockholders		$	4.08			$	4.08			$	3.09			$	3.09			$	2.10			$	2.10
Basic distributed income per share applicable to common stockholders			(0.39	)			(0.39	)			(0.47	)			(0.47	)			(0.26	)			(0.26	)
Basic undistributed income from continuing operations per share applicable to common stockholders		$	3.69			$	3.69			$	2.62			$	2.62			$	1.84			$	1.84

 

Year Ended December 31,		2013								2012								2011
Diluted EPS		Class A				Class B				Class A				Class B				Class A				Class B
Numerator:
Distributed income applicable to common stockholders		$	9,061			$	1,024			$	10,497			$	1,569			$	5,844			$	978
Reallocation of distributed income as a result of conversion of dilutive stock options			15				(15	)			28				(28	)			15				(15	)
Reallocation of distributed income due to conversion of Class B to Class A			1,009				-				1,541				-				963				-
Diluted distributed income applicable to common stockholders		$	10,085			$	1,009			$	12,066			$	1,541			$	6,822			$	963
Undistributed income from continuing operations applicable to common stockholders		$	85,471			$	9,658			$	58,572			$	8,757			$	41,448			$	6,940
Reallocation of undistributed income as a result of conversion of dilutive stock options			142				(142	)			159				(159	)			113				(113	)
Reallocation of undistributed income due to conversion of Class B to Class A			9,516				-				8,598				-				6,827				-
Diluted undistributed income from continuing operations applicable to common stockholders		$	95,129			$	9,516			$	67,329			$	8,598			$	48,388			$	6,827
Denominator:
Weighted average number of shares outstanding used to calculate basic income per share			23,185				2,620				22,354				3,342				22,468				3,762
Weighted average number of shares from stock options			386				-				474				-				434				-
Conversion of Class B to Class A			2,620				-				3,342				-				3,762				-
Weighted average number of shares outstanding used to calculate diluted income per share			26,191				2,620				26,170				3,342				26,664				3,762

Year Ended December 31,		2013								2012								2011
Diluted EPS		Class A				Class B				Class A				Class B				Class A				Class B
Diluted income from continuing operations per share available to common stockholders		$	4.02			$	4.02			$	3.03			$	3.03			$	2.07			$	2.07
Diluted distributed income from continuing operations per share applicable to common stockholders			(0.39	)			(0.39	)			(0.47	)			(0.47	)			(0.26	)			(0.26	)
Diluted undistributed income from continuing operations per share applicable to common stockholders		$	3.63			$	3.63			$	2.56			$	2.56			$	1.81			$	1.81
Antidilutive Securities:
Shares issuable pursuant to stock options not included since they were antidilutive			16				-				45				-				280				-

 

F-22

---

Year Ended December 31,		2012								2011								2010
Diluted EPS		Class A				Class B				Class A				Class B				Class A				Class B
Numerator:
Distributed income applicable to common stockholders		$	10,497			$	1,569			$	5,844			$	978			$	3,353			$	566
Reallocation of distributed income as a result of conversion of dilutive stock options			28				(28	)			15				(15	)			5				(5	)
Reallocation of distributed income due to conversion of Class B to Class A			1,541				-				963				-				561				-
Diluted distributed income applicable to common stockholders		$	12,066			$	1,541			$	6,822			$	963			$	3,919			$	561
Undistributed income from continuing operations applicable to common stockholders		$	58,572			$	8,757			$	41,448			$	6,940			$	8,273			$	1,395
Reallocation of undistributed income as a result of conversion of dilutive stock options			159				(159	)			113				(113	)			11				(11	)
Reallocation of undistributed income due to conversion of Class B to Class A			8,598				-				6,827				-				1,384				-
Diluted undistributed income from continuing operations applicable to common stockholders		$	67,329			$	8,598			$	48,388			$	6,827			$	9,668			$	1,384
Denominator:
Weighted average number of shares outstanding used to calculate basic income per share			22,354				3,342				22,468				3,762				22,300				3,762
Weighted average number of shares from stock options			474				-				434				-				217				-
Conversion of Class B to Class A			3,342				-				3,762				-				3,762				-
Weighted average number of shares outstanding used to calculate diluted income per share			26,170				3,342				26,664				3,762				26,279				3,762

Year Ended December 31,		2012								2011								2010
Diluted EPS		Class A				Class B				Class A				Class B				Class A				Class B
Diluted income from continuing operations per share available to common stockholders		$	3.03			$	3.03			$	2.07			$	2.07			$	0.52			$	0.52
Diluted distributed income from continuing operations per share applicable to common stockholders			(0.47	)			(0.47	)			(0.26	)			(0.26	)			(0.15	)			(0.15	)
Diluted undistributed income from continuing operations per share applicable to common stockholders		$	2.56			$	2.56			$	1.81			$	1.81			$	0.37			$	0.37
Antidilutive Securities:
Shares issuable pursuant to stock options not included since they were antidilutive			45				-				280				-				661				-

F-23

---

(10)         401(k) Profit Sharing, Deferred Compensation and Long-term Incentive Plans

We have a defined contribution 401(k) plan and trust covering substantially all full-time employees. The annual contribution to the plan is at the discretion of

(18)         Subsequent Events

Dividend

On February 17, 2014, our Board of Directors. ContributionsDirectors approved a dividend of $1.9 million, $1.7 million and $0.6 million were recognized for the years ended December 31, 2012, 2011 and 2010, respectively. Employees may contribute to the plan if they meet certain eligibility requirements.

We offer a deferred compensation and long-term incentive plan (the “Plan”) to provide certain employees the ability to accumulate assets for retirement$0.13 per share on a tax deferred basis. We may make discretionary contributions to the Plan. Discretionary contributions vest between one and seven years based on the employee’s age and position. Additionally, participants may defer a portion of their compensation and are fully vested in their respective deferrals.

We made a discretionary contribution of $1.9 million and $1.3 million in 2012 and 2011, respectively, to the Plan. No discretionary contribution was made in 2010. Participants received a guaranteed return of 5.9% in 2012 and 6.0% in 2011. We recognized compensation expense related to the Plan of $1.2 million and $0.9 million in 2012 and 2011, respectively. We did not recognize any compensation expense in 2010 associated with the Plan. As of December 31, 2012, the balance due to participants was $3.6 million and was included as a component of other long-term liabilities in the Consolidated Balance Sheets.

(11)         Stock Based Compensation

2003 Stock Incentive Plan

Our 2003 Stock Incentive Plan, as amended, (the “2003 Plan”) allows for the granting of up to a total of 2.8 million nonqualified stock options and shares of restricted stock to our officers, key employees, directors and consultants. Our plan is administered by the Compensation Committee of the Board of Directors and permit accelerated vesting of outstanding awards upon the occurrence of certain changes in control. Options become exercisable over a period of up to five years from the date of grant with expiration dates up to ten years from the date of grant and at exercise prices of not less than market value, as determined by the Board of Directors. Restricted stock grants vest over a period up to five years from the date of grant. Beginning in 2004, the expiration date of options granted was reduced to six years.

At December 31, 2012, 667,859 shares of Class A common stock were available for future grants.

Activity under our stock incentive plans was as follows:

		Shares subject to options				Weighted average exercise price				Aggregate intrinsic value (in millions)				Weighted average remaining contractual term (in years)
Balance, December 31, 2011			811,176			$	12.69
Granted			-				-
Forfeited			(59,793	)			9.12
Expired			(90,000	)			31.67
Exercised			(407,884	)			13.02
Balance, December 31, 2012			253,499			$	6.26			$	7.9			1.6
Exercisable, December 31, 2012			253,499			$	6.26			$	7.9			1.6

F-24

---

		Non-vested stock grants				Weighted average grant date fair value
Balance, December 31, 2011			590,550			$	8.72
Granted			225,664				23.82
Vested			(144,591	)			11.19
Forfeited			(19,680	)			10.25
Balance, December 31, 2012			651,943			$	13.35

We estimate the fair value of stock options using the Black-Scholes valuation model. This valuation model takes into account the exercise price of the award, as well as a variety of significant assumptions. We believe that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of our stock options. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Compensation expense related to stock options granted in 2010 is based on values calculated using the Black-Scholes valuation model. No stock options were granted in 2011 or 2012. Below are the significant assumptions used in the Black-Scholes valuation model:

Year Ended December 31,		2010
Risk-free interest rate(1)			2.53	%
Dividend yield(2)			2.54	%
Expected term(3) (in years)		4.2
Volatility(4)			81.22	%
Discount for post-vesting restrictions			0.0	%

(1)	The risk-free interest rate for each grant is based on the U.S. Treasury yield curve in effect at the time of grant for a period equal to the expected term of the stock option.

(2)	The dividend yield is calculated as a ratio of annualized expected dividends per share to the market value of our common stock on the date of grant.

(3)	The expected term is calculated based on the observed and expected time to post-vesting exercise behavior of identifiable employee groups.

(4)	The expected volatility is estimated based on a weighted average of historical volatility of our common stock.

Compensation expense related to non-vested stock is based on the intrinsic value on the date of grant as if the stock is vested.

We amortize stock-based compensation on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Shares to be issued upon the exercise of stock options will come from newly issued shares.

As of December 31, 2012, unrecognized stock-based compensation related to outstanding, but unvested stock options and stock awards was $5.1 million, which will be recognized over the remaining weighted average vesting period of 2.0 years.

2009 Employee Stock Purchase Plan

The 2009 Employee Stock Purchase Plan (the “2009 ESPP”) allows for the issuance of 1,500,000 shares of our Class A common stock. The 2009 ESPP replaced the 1998 Employee Stock Purchase Plan, which was terminated. The 2009 ESPP is intended to qualify as an “Employee Stock Purchase Plan” under Section 423 of the Internal Revenue Code of 1986, as amended, and is administered by the Compensation Committee of the Board of Directors.

Eligible employees are entitled to defer up to 10% of their base pay for the purchase ofClass B Common stock up to $25,000 of fair market value of our Class A common stock annually. The purchase price is equal to 85% of the fair market value at the end of the purchase period. During 2012, a total of 143,071 shares were purchased under the 2009 ESPP at a weighted average price of $24.28 per share, which represented a weighted average discount from the fair market value of $4.29 per share. As of December 31, 2012, 681,293 shares remained available for purchase under the 2009 ESPP.

F-25

---

Compensation expense related to our 2009 ESPP is calculated based on the 15% discount from the per share market price on the date of grant.

RSU Grants

In the firstfourth quarter of 2012, we granted 168,000 restricted stock units (“RSUs”) to certain employees, of which grants to executives and other key employees are subject to performance measures discussed below. Each grant entitles the holder to receive shares of our Class A common stock upon vesting. A quarter of the RSUs vest on each of the second and third anniversaries of the grant date and the remaining RSUs vest on the fourth anniversary of the grant date.

Our executives and other key employees received 89,000 of the 168,000 RSUs granted based on attaining a target level of earnings per share for 2012.2013 financial results. The RSUs are subject to forfeiture, in whole or in part, based upon 2012 minimum performance measures and continuation of employment. If minimum performance measures were met, the number of RSUs received under these grants was subject to attainment of specific earnings per share thresholds. Each earnings per share threshold specified an attainment level ranging from 75% to 150% of the base number of units identified in the grant.  Failure to achieve the minimum performance threshold in 2012 would have resulted in forfeiture of the entire grant. The final attainment was calculated at 150% using the 2012 adjusted net income per share from continuing operations for adividend will total award of 133,500 RSUs. After final attainment, these RSUs vest over four years. We initially estimated compensation expense, based on a fair value methodology and a 133% attainment level, of $4.2 million related to the RSUs. We increased the estimated compensation expense to $4.6 million based on the final attainment level of 150%. Total compensation expense is being recognized over the vesting period. Of this amount, $1.0 million was recognized in 2012.

In the second quarter of 2012, we granted RSUs covering 12,870 shares of our Class A common stock to members of our Board of Directors. These awards vest 25% on the first day of each month following our quarterly board meetings. We estimated compensation expense, based on a fair value methodology, of $0.4 million related to these RSUs, which is being recognized over the vesting period. Of this amount, $0.3 million was recognized in 2012.

Stock-Based Compensation

Certain information regarding our stock-based compensation was as follows:

Year Ended December 31,		2012				2011				2010
Weighted average grant-date fair value per share of stock options granted		$	-			$	-			$	4.19
Per share intrinsic value of non-vested stock granted			23.82				13.58				6.02
Weighted average per share discount for compensation expense recognized under the 2009 ESPP			4.29				2.56				1.11
Total intrinsic value of stock options exercised (in millions)		7.2				1.5				1.1
Fair value of non-vested stock that vested during the period (in millions)		3.5				0.7				0.4
Stock-based compensation recognized in results of operations, as a component of selling, general and administrative expense - excludes compensation expense related to an option granted to one of our executives.  See Note 18. (in millions)		3.1				2.3				1.8
Tax benefit recognized in Consolidated Statements of Operations (in millions)		1.0				0.7				0.5
Cash received from options exercised and shares purchased under all share-based arrangements (in millions)		8.8				5.8				4.2
Tax deduction realized related to stock options exercised (in millions)		4.1				0.9				0.5

(12)         Derivative Financial 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.

F-26

---

Typically, we designate all interest rate swaps as cash flow hedges and, accordingly, we record the change in fair value for the effective portion of these interest rate swaps in 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 loss 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 loss is recognized in income immediately. See Note 13.

At December 31, 2012 and 2011, the net fair value of all of our agreements totaled a loss of $4.7approximately $3.4 million and $7.5 million, respectively, which was recordedwill be paid on our Consolidated Balance Sheets as a componentMarch 21, 2014 to shareholders of accrued liabilities and other long-term liabilities. The estimated amount expected to be reclassified into earnings within the next twelve months was $1.9 million at Decemberrecord on March 7, 2014.

Acquisition

On January 31, 2012.

As of December 31, 2012,2014, we had outstanding the following interest rate swaps with U.S. Bank Dealer Commercial Services:

●

$25 million interest rate swap at a fixed rate of 4.495% per annum, variable rate adjusted on the 26th of each month, matures January 25, 2013;

●

$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, matures April 30, 2013;

●

$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, matures April 30, 2013 and

●

$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, matures June 15, 2016.

We receive interest on all of the interest rate swaps at the one-month LIBOR rate. The one-month LIBOR rate at December 31, 2012 was 0.21% per annum, as reported in the Wall Street Journal.

At December 31, 2012 and 2011, the fair value of our derivative instruments was included in our Consolidated Balance Sheets as follows (in thousands):

Balance Sheet Information (in thousands)		Fair Value of Liability Derivatives
		Location in Balance Sheet		December 31, 2012
Derivatives designated as hedging instruments
Interest rate swap contracts		Accrued liabilities		$	1,839
		Other long-term liabilities			2,840
				$	4,679

Balance Sheet Information (in thousands)		Fair Value of Liability Derivatives
		Location in Balance Sheet		December 31, 2011
Derivatives designated as hedging instruments
Interest rate swap contracts		Accrued liabilities		$	3,522
		Other long-term liabilities			4,008
				$	7,530

F-27

---

The effect of derivative instruments on our Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010 was as follows (in thousands):

Derivatives in Cash Flow Hedging Relationships		Amount of gain (loss) recognized in Accumulated 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 gain (loss) recognized in Income on derivative (ineffective portion and amount excluded from effectiveness testing)		Amount of gain (loss) recognized in Income on derivative (ineffective portion and amount excluded from effectiveness testing)
For the Year Ended December 31, 2012
Interest rate swap contracts		$	1,655			Floor plan Interest expense		$	(1,413	)		Floor plan Interest expense		$	(2,900	)
For the Year Ended December 31, 2011
Interest rate swap contracts		$	(1,343	)		Floor plan Interest expense		$	(1,899	)		Floor plan Interest expense		$	(1,587	)
For the Year Ended December 31, 2010
Interest rate swap contracts		$	(4,459	)		Floor plan Interest expense		$	(2,814	)		Floor plan Interest expense		$	(1,483	)

 (13)        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 spreads, credit risk; 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 pricing is used as a practical expedient for fair value measurements. Key inputs, including the cash rates for very short term borrowings, 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 the 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 counterparty’s, risk of non-performance under the contract.

F-28

---

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

We estimate the 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, 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 year ended December 31, 2012.

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 December 31, 2012		Level 1				Level 2				Level 3
Measured on a recurring basis:
Derivative contracts, net		$	-			$	(4,679	)		$	-

Fair Value at December 31, 2011		Level 1				Level 2				Level 3
Measured on a recurring basis:
Derivative contracts, net		$	-			$	(7,530	)		$	-
Measured on a non-recurring basis:
Long-lived assets held and used:
Certain buildings and improvements		$	-			$	-			$	2,500

See Note 12 for more details regarding our derivative contracts.

Fair Value Disclosures for Financial Assets and Liabilities

We have fixed rate debt and 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 (Level 2), the fixed cash flows are discounted and summed to compute the fair value of the debt. As of December 31, 2012, this debt had maturity dates between November 2016 and May 2031. A summary of the aggregate carrying values and fair values of our long-term fixed interest rate debt is as follows (in thousands):

		December 31, 2012				December 31, 2011
Carrying value		$	130,469			$	64,463
Fair value			134,688				73,551

We believe the carrying value of our variable rate debt approximates fair value.

F-29

---

 (14)        Income Taxes

Income tax provision (benefit) from continuing operations was as follows (in thousands):

Year Ended December 31,		2012				2011				2010
Current:
Federal		$	31,438			$	21,779			$	9,093
State			3,626				3,561				1,619
			35,064				25,340				10,712
Deferred:
Federal			10,888				7,046				(1,670	)
State			3,110				674				(417	)
			13,998				7,720				(2,087	)
Total		$	49,062			$	33,060			$	8,625

At December 31, 2012 and 2011, we had income taxes receivable of $7.3 million and $6.2 million, respectively, included as a component of other current assets on the Consolidated Balance Sheets.

Individually significant components of the deferred tax assets and liabilities are presented below (in thousands):

December 31,		2012				2011
Deferred tax assets:
Deferred revenue and cancellation reserves		$	7,597			$	6,369
Allowances and accruals, including state tax carryforward amounts			21,340				20,234
Interest on derivatives			1,796				2,889
Goodwill			18,139				26,817
Capital loss carryforward			12,248				12,841
Total deferred tax assets			61,120				69,150
Deferred tax liabilities:
Inventories			(4,684	)			(4,351	)
Property and equipment, principally due to differences in depreciation			(22,484	)			(16,418	)
Prepaids and property taxes			(1,356	)			(1,540	)
Total deferred tax liabilities			(28,524	)			(22,309	)
Valuation allowance			(11,641	)			(12,841	)
Total		$	20,955			$	34,000

We consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income and tax-planning strategies in making this assessment.

The change in our valuation allowance was $1.2 million in 2012. At December 31, 2012, we had an $11.6 million valuation allowance recorded associated with our deferred tax assets. We recorded this allowance in association with losses from the sale of corporate entities. As these amounts are characterized as capital losses, we evaluated the availability of projected capital gains and determined that it would be unlikely these amounts would be fully utilized. We will continue to evaluate if it is more likely than not that we will realize the benefits of these deductible differences. However, additional valuation allowance amounts could be recorded in the future if estimates of taxable income during the carryforward period are reduced.

At December 31, 2012, we had a number of state tax carryforward amounts totaling approximately $0.3 million, tax affected, with expiration dates through 2029.

F-30

---

The reconciliation between amounts computed using the federal income tax rate of 35% and our income tax provision from continuing operations for 2012, 2011 and 2010 is shown in the following tabulation (in thousands):

Year Ended December 31,		2012				2011				2010
Federal tax provision at statutory rate		$	44,723			$	30,895			$	7,774
State taxes, net of federal income tax benefit			4,772				3,021				973
Non-deductible expenses			618				208				223
Permanent differences related to the employee stock purchase program			52				105				164
Release of valuation allowance			(1,200	)			(346	)			-
Other			97				(823	)			(509	)
Income tax provision		$	49,062			$	33,060			$	8,625

We did not have any activity during 2012 or  2011 related to unrecognized tax benefits and did not have any amounts of unrecognized tax benefits as of December 31, 2012 or 2011. No interest or penalties were included in our results of operations during 2012, 2011 or 2010, and we had no accrued interest or penalties at December 31, 2012 or 2011.

Open tax years at December 31, 2012 included the following:

Federal			2009-2012
13 states			2008-2012

(15)         Acquisitions

We completed the following acquisitions in 2012:

●

On April 30, 2012, we acquired the inventory, equipment and intangible assets and assumed certain liabilities of Bellingham Chevrolet and Cadillac in Bellingham, Washington from Jerry Chambers Chevrolet.

●

On June 12, 2012, we acquired the inventory, equipment and intangible assets and assumed certain liabilities of Fairbanks GMC Buick from Gene’s GMC, LLC.

●

On August 27, 2012, we acquired the inventory, equipment and intangible assets and assumed certain liabilities of Killeen Chevrolet in Killeen, Texas from Connell Chevrolet, Inc.

●

On October 23, 2012, we acquired the inventory, equipment, real estate and intangible assets of, and assumed certain liabilities related to Bitterroot Toyota of Missoula, Montana from Bitterroot Motors, Inc.

These acquisitions contributed revenues of $32.2 million for the year ended December 31, 2012.

We completed the following acquisitions in 2011:

●

In April 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.

●

In October 2011 we acquired the inventory, equipment, real estate and intangible assets of Fresno Subaru from Herwaldt Automotive Group.

We completed the following acquisitions in 2010:

●

In July 2010, we acquired the inventory, equipment and intangible assets and assumed certain liabilities related to Honda of Bend and agreed to the transfer of Chevrolet and Cadillac brands from Bob Thomas Chevrolet Cadillac, both located in Bend, Oregon.

F-31

---

●

In August 2010, we acquired the inventory, equipment, real estate and intangible assets and assumed certain liabilities related to Toyota of Billings from Prestige Toyota, located in Billings, Montana.

The results of operations of the acquired stores are included in our Consolidated Financial Statements from the date of acquisition.

Pro forma results of operations are not materially different than actual results of operations for the 2010 acquisitions. The following unaudited pro forma summary presents consolidated information as if the 2012 and 2011 acquisitions had occurred on January 1 of the prior year (in thousands, except for per share amounts):

Year Ended December 31,		2012				2011				2010
Revenue		$	3,386,066			$	2,789,436			$	2,210,073
Income from continuing operations, net of tax			80,064				56,904				14,779
Basic income per share from continuing operations, net of tax			3.12				2.17				0.57
Diluted income per share from continuing operations, net of tax			3.06				2.13				0.57

These amounts have been calculated by estimating and applying our accounting policies. The results of these stores have been adjusted to reflect depreciation on a straight-line basis over our expected lives for property, plant and equipment; accounting for inventory on a specific identification method; and recognition of interest expense for real estate financing related to stores where we purchased the facility. No nonrecurring pro forma adjustments directly attributable to these business combinations are included in the reported pro forma revenues and earnings.

All acquisitions were accounted for as business combinations under the acquisition method of accounting. No portion of the purchase price was paid with our equity securities. The following table summarizes the consideration paid for material acquisitions and the amount of identified assets acquired and liabilities assumed as of the acquisition date (in thousands):

Consideration paid for year ended December 31,		2012				2011
Cash paid, net of cash acquired		$	44,716			$	55,368
Floor plan financing assumed			-				19,348
		$	44 ,716			$	74,716

Assets acquired and liabilities assumed for year ended ended December 31,			2012				2011
Inventories		$	17,541			$	29,268
Franchise value			5,174				14,517
Property, plant and equipment			11,097				17,351
Real estate lease reserves			-				325
Other assets			110				1,475
Reserves			-				(663	)
Capital lease obligations			(2,609	)			-
Other liabilities			(307	)			(426	)
			31,006				61,847
Goodwill			13,710				12,869
		$	44,716			$	74,716

The fair values of assets acquired and liabilities assumed in our 2010 acquisitions are not material to our Consolidated Balance Sheets.

In July 2011, we were awarded a Ford franchise in Klamath Falls, Oregon which was accounted for as an asset acquisition. Consideration of $5.1 million was paid for the inventory, equipment and associated real estate.

We account for franchise value as an indefinite-lived intangible asset. We expect the full amountassets of, the goodwill recognized to be deductible for tax purposes. We did not have any material acquisition related expenses in 2012, 2011 or 2010.

F-32

---

(16)        Discontinued Operations

We classify a store as discontinued operations if the location has been sold, we have ceased operations 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 to be completed 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 that changes will be made to the plan or the plan to dispose of the store will be withdrawn.

We reclassify the store’s operations to discontinued operations in our Consolidated Statements of Operations, on a comparable basis for all periods presented, provided we do not expect to have any significant continuing involvement in the store’s operations after its disposal.

At December 31, 2009, two operating stores and three properties were classified as held for sale.  The two operating stores were under contract to sell at that time.

Based on subsequent negotiations with the buyer in the first quarter of 2010, management concluded that it was no longer probable that the sale of the remaining two stores would be effected, resulting in the determination that these two operating stores no longer met all of the criteria for classification as held for sale at March 31, 2010. Therefore, in the first quarter of 2010, assets and relatedassumed certain liabilities associated with two stores were reclassified from assets held for sale to assets held and used. Their associated results of operations were retrospectively reclassified from discontinued operations to continuing operations for all periods presented.

In the second quarter of 2010, we classified the operating results of Fresno Dodge, which was sold during the quarter, as discontinued operations. Additionally, one of the properties classified as held for sale as of December 31, 2009 was sold. Management evaluated the remaining two properties to determine if classification remained appropriate. Based on new facts and circumstances previously considered unlikely, management no longer believed the sales were probable. As a result the properties were reclassified to assets held and used in June 2010. As of December 31, 2010, we had no stores or properties classified as held for sale.

In 2011, we sold three stores:  a Chrysler Jeep Dodge store in Concord, California; a Volkswagen store in Thornton, Colorado and a GMC Buick and a Kia store in Cedar Rapids, Iowa. The associated results of operations for these locations are classified as discontinued operations. As of December 31, 2011, we had no stores and no properties classified as held for sale.

In October 2012, we sold two stores: a Chrysler Jeep Dodge store and a Hyundai store, both located in Renton, Washington. The associated results of operations for these locations are classified as discontinued operations. Additionally, in October 2012, we determined that one of our stores met the criteria for classification of the assets and related liabilities as held for sale.

F-33

---

As of December 31, 2012, we have one store and no properties classified as held for sale. Assets held for sale included the following (in thousands):

December 31,		2012
Inventories		$	9,412
Property, plant and equipment			1,102
Intangible assets			2,065
		$	12,579

Liabilities related to, assets heldIsland Honda in Kahului, Hawaii. Total consideration for sale included the following (in thousands):

December 31,		2012
Floor plan notes payable		$	8,347

Interest expense is allocated to stores classified as discontinued operations for actual floor plan interest expense directly related to the new vehicles in the store. Interest expense related to our working capital,this acquisition and used vehicle credit facility is allocated based on the amount of assets pledged towards the total borrowing base. Interest expense included as a component of discontinued operations was as follows (in thousands):

Year Ended December 31,		2012				2011				2010
Floor plan interest		$	217			$	520			$	493
Other interest			69				108				117
Total interest		$	286			$	628			$	610

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

Year Ended December 31,		2012				2011				2010
Revenue		$	82,150			$	131,380			$	100,979
Gain from discontinued operations		$	2,186			$	1,516			$	648
Net gain (loss) on disposal activities			(621	)			4,396				(301	)
			1,565				5,912				347
Income tax expense			(598	)			(2,262	)			(215	)
Income from discontinued operations, net of income taxes		$	967			$	3,650			$	132
Goodwill and other intangible assets disposed of		$	169			$	712			$	-
Cash generated from disposal activities		$	6,618			$	23,838			$	941
Floor plan debt paid in connection with disposal activities		$	6,712			$	1,784			$	2,134

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

Year Ended December 31,		2012				2011				2010
Goodwill and other intangible assets		$	(169	)		$	3,168			$	-
Property, plant and equipment			(299	)			1,357				(217	)
Inventory			(82	)			(88	)			-
Other			(71	)			(41	)			(84	)
		$	(621	)		$	4,396			$	(301	)

(17)         Recent Accounting Pronouncements

In July 2012, the FASB issued an accounting standard update that amends the accounting guidance on testing for impairment on indefinite-lived intangible assets. This amendment allows an entity to assess qualitative factors to determine the likelihood of indefinite-lived intangible asset impairments, reducing the cost and complexity of performing an impairment test. This amendment also improves consistency in impairment testing guidance for long-lived asset categories. The amendments in$9.5 million. We financed this accounting standard update are effective for interim and annual impairment tests performed for fiscal years beginning after September 15, 2012 and could be early adopted. In 2012, we used a quantitative assessment to test for impairment on indefinite-lived intangible assets. The accounting standard update is intended to simplify the assessment for indefinite-lived asset impairments and will not affect our consolidated financial position, results of operations, or cash flows.

F-34

---

In December 2011, the FASB issued an accounting standard update that requires disclosure about offsetting and related arrangements of certain financial instruments and derivative instruments. These disclosures enable users to understand the effect of these arrangements on financial position. The amendments in this accounting standard update are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. The accounting standard update affects disclosure requirements only and will not affect our consolidated financial position, results of operations, or cash flows.

(18)       Related Party Transactions

On March 27, 2012, we completed the sale of an 80% interest in our Nissan, Volkswagen and BMW stores in Medford, Oregon to Dick Heimann, a director and our Vice Chairman. We received proceeds of $9.6acquisition with $5.7 million of which $2.9 million was received in cash and $6.7$3.8 million was received through the payoff of floor plan financing. The sale of the 80% interest in the stores resulted in a gain of $0.7 million and was recorded as a component of selling, general and administrative expense on our Consolidated Statements of Operations.

The Nissan and Volkswagen stores were purchased for the book value oflong-term debt.

On February 3, 2014, we acquired the inventory, as defined by the original terms of an option agreement provided to Mr. Heimann in 2009. The price of theequipment and intangible assets of, $1.2 million was based on the fair value of the intangible assetsand assumed certain liabilities related to, the BMW store. We corroborated the fair value of the BMW store’s intangible assets with independent third party broker opinions and financial projections using a fair value income approach.

When we sold the three stores, we entered into a shared service agreement with the stores. This agreement allows the stores to lease our employees, use the Lithia name, utilize accounting support functions and receive consulting services. The services provided and the costs of the services are structured the same as the shared services provide to our wholly owned stores.

We retained a 20% interestStockton Volkswagen in the stores as of the transaction date. We determined that we are not the primary beneficiary of the stores and the risk and rewards associated with our investment are based on ownership percentages. As a result, the stores do not qualifyStockton, California. Total consideration for consolidation and our 20% interest is accounted for under the equity method. We determined we maintained significant influence over the operations. We recorded the equity investment at fair value of $0.8 million as of the transaction date that resulted in a gain of $0.2this acquisition was $3.6 million. The gain was recorded as a component of other income on our Consolidated Statements of Operations. We determined the fair value of our equity investment based on independent third party broker opinions and financial projections using a fair value income approach.

As of December 31, 2012, the carrying value of our equity investment was $1.1 million and was recorded as a component of other non-current assets in our Consolidated Balance Sheets.

F-35

F-36