Note 19 - Related Party Transactions

12 Months Ended

Dec. 31, 2011

Related Party Transactions Disclosure [Text Block]

(19)        Related Party Transactions

On December 31, 2009, we entered into an option agreement with our Vice Chairman, Dick Heimann, who is a related party. Under the terms of the option agreement, Mr. Heimann may purchase our Volkswagen and Nissan franchises in Medford, Oregon, and acquire their operations, including inventories and equipment, at valuations set forth in our standard form of agreement, which we believe approximate fair value at the time of exercise. Any purchased real estate will be priced at the then fair market value. Existing leases, if any, will be assumed at the time of exercise of the option. The purchase price for the intangible assets (manufacturers’ franchise rights) is set at $10 in the agreement. The option can be exercised by Mr. Heimann at any time prior to December 31, 2012. No consideration was received in exchange for this option.

On December 16, 2011, we agreed with Mr. Heimann to terminate the option agreement and entered into an Acquisition and Option Termination Agreement (the “Agreement”). Under the Agreement, Mr. Heimann will purchase 80% of the Nissan, Volkswagen and BMW stores in Medford, Oregon. The purchase price for the intangible assets of the Nissan and Volkswagen stores was set at $10, based on the original terms of the option agreement. The purchase price of the BMW store’s intangible assets was set at fair value at the time of the agreement based on independent third party broker opinions and corroborated by financial projections using a fair value income approach.

As Mr. Heimann terminated the option and concurrently entered into agreements to purchase the Volkswagen and Nissan franchises in Medford, Oregon, we determined the transaction should be accounted for as an option exercise.  We evaluated the fair value of the option as of the date of exercise, recording a $0.3 million reduction in the value as a component of selling, general and administrative expenses on our Consolidated Statements of Operations.

For the year ended December 31, 2009, we estimated the fair value of the option using a discounted cash flow analysis and by considering valuation inputs from independent third parties. Based on these inputs, we determined the value of the option to be insignificant as of December 31, 2009. We estimated the fair value of the option at each reporting period subsequent to December 31, 2009 and at the time of settlement using the same methodology. The fair value analysis included the use of the Black-Scholes option valuation model with the following assumptions as of December 31, 2010:

Year Ended December 31,	2010
Risk-free interest rate(1)		0.34%
Expected term(2)	2.17 years
Volatility(3)		50%

(1)   The risk-free interest rate for the option is based on the U.S. Treasury 2-year constant maturities rate for the 2010 valuation.

(2)   The expected term is calculated based on the remaining term of the option.

(3)   The expected volatility is estimated based on the historical volatilities of our and comparable public companies’ common stock, as well as implied volatilities based on the prices of currently traded options of our company and the comparable public companies.

We valued the option as of the exercise date of December 16, 2011 and determined the intrinsic value based on a discounted cash flow analysis. Additionally, we corroborated this value with valuation inputs from independent third parties.

Based on our valuation analysis, we recorded (income) expense of $(0.3) million and $0.6 million, respectively, as a component of selling, general and administrative expenses in our Consolidated Statements of Operations in the years ended December 31, 2011 and 2010. As the option was exercised and settled through the entering into of agreements to purchase the stores, an increase to additional paid in capital was recorded for the change in fair value of the option in 2011.