Long-Term Debt

9 Months Ended

Sep. 30, 2011

10. LONG-TERM DEBT

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


	September 30,		December 31,
	2011		2010
	(Dollars in thousands)
2.25% Convertible Senior Notes due 2036 (principal of $182,753 at September 30, 2011 and December 31, 2010)	$	143,228	$	138,155
3.00% Convertible Senior Notes due 2020 (principal of $115,000 at September 30, 2011 and December 31, 2010)		76,617		74,365
Mortgage Facility		41,535		42,600
Other Real Estate Related and Long-Term Debt		185,998		170,291
Capital lease obligations related to real estate, maturing in varying amounts through November 2032 with a weighted average interest rate of 9.3%		39,818		40,728

		487,196		466,139
Less current maturities of mortgage facility and other long-term debt		14,003		53,189

	$	473,193	$	412,950

2.25% Convertible Senior Notes

The Company’s outstanding 2.25% Convertible Senior Notes due 2036 (the “2.25% Notes”) had a fair value based on quoted market prices utilizing public information, independent external valuations from pricing services or third-party advisors of $179.3 million and $180.0 million as of September 30, 2011 and December 31, 2010, respectively. The Company determined the discount applicable to its 2.25% Notes using the estimated effective interest rate for similar debt with no convertible features. The original effective interest rate of 7.5% was estimated by comparing debt issuances from companies with similar credit ratings during the same annual period as the Company. The effective interest rate differs from the 7.5%, due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount to the 2.25% Notes and are being amortized to interest expense through 2016. The effective interest rate may change in the future as a result of future repurchases of the 2.25% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 2.25% Notes.

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


	September 30,			December 31,
	2011			2010
	(In thousands)
Carrying amount of equity component	$	65,270		$	65,270
Allocated underwriter fees, net of taxes		(1,475	)		(1,475	)
Allocated debt issuance cost, net of taxes		(58	)		(58	)

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


Deferred income tax component	$	14,071		$	15,855


Principal amount of 2.25% Notes	$	182,753		$	182,753
Unamortized discount		(38,035	)		(42,916	)
Unamortized underwriter fees		(1,490	)		(1,682	)

Net carrying amount of liability component	$	143,228		$	138,155


Net impact on retained earnings	$	(40,394	)	$	(37,420	)


Unamortized debt issuance cost	$	59		$	67

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


	Nine Months Ended
	September 30,
	2011			2010
	(Dollars in thousands)
Year-to-date contractual interest expense	$	3,091		$	3,091
Year-to-date discount amortization	$	4,758		$	4,320

Effective interest rate of liability component		7.7	%		7.7	%

3.00% Convertible Senior Notes

The Company’s outstanding 3.00% Convertible Senior Notes due 2020 (the “3.00% Notes”) had a fair value based on quoted market prices utilizing public information, independent external valuations from pricing services or third-party advisors of $128.7 million and $143.3 million as of September 30, 2011 and December 31, 2010, respectively. The Company also determined the discount applicable to its 3.00% Notes using the estimated effective interest rate for similar debt with no convertible features. The interest rate of 8.25% was estimated by receiving a range of quotes from the underwriters of the 3.00% Notes for the estimated rate that the Company could reasonably expect to issue non-convertible debt for the same tenure. The effective interest rate differs from the 8.25%, due to the impact of underwriter fees associated with this issuance that were capitalized as an additional discount to the 3.00% Notes and are being amortized to interest expense through 2020. The effective interest rate may change in the future as a result of future repurchases of the 3.00% Notes. The Company utilized a ten-year term for the assessment of the fair value of its 3.00% Notes.

As of September 30, 2011 and December 31, 2010, the carrying value of the 3.00% Notes, related discount and equity component consisted of the following:


	September 30,			December 31,
	2011			2010
	(In thousands)
Carrying amount of equity component	$	25,359		$	25,359
Allocated underwriter fees, net of taxes		(760	)		(760	)
Allocated debt issuance cost, net of taxes		(112	)		(112	)

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


Deferred income tax component	$	13,219		$	13,971


Principal amount of 3.00% Notes	$	115,000		$	115,000
Unamortized discount		(36,381	)		(38,516	)
Unamortized underwriter fees		(2,002	)		(2,119	)

Net carrying amount of liability component	$	76,617		$	74,365


Net impact on retained earnings	$	(2,456	)	$	(1,202	)


Unamortized debt issuance cost	$	295		$	313


	Nine Months Ended
	September 30,
	2011			2010
	(Dollars in thousands)
Year-to-date contractual interest expense	$	2,588		$	1,822
Year-to-date discount amortization	$	2,006		$	1,285

Effective interest rate of liability component		8.6	%		8.6	%

The 3.00% Notes are convertible into cash and, if applicable, common stock based on the conversion rate, subject to adjustment, on the business day preceding September 15, 2019, under the following circumstances: (1) during any fiscal quarter (and only during such fiscal quarter) beginning after June 30, 2010, if the last reported sale price of the Company’s common stock for at least 20 trading days in the period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is equal to or more than 130% of the applicable conversion price per share (or $49.641 as of September 30, 2011); (2) during the five business day period after any ten consecutive trading day period in which the trading price per $1,000 principal amount of 3.00% Notes for each day of the ten day trading period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate of the 3.00% Notes on that day; and (3) upon the occurrence of specified corporate transactions set forth in the 3.00% Notes Indenture. Upon conversion, a holder will receive an amount in cash and common shares of the Company’s common stock, determined in the manner set forth in the 3.00% Notes Indenture. None of the conversion features of the Company’s 3.00% Notes were triggered in the three months ended September 30, 2011.

As of September 30, 2011, the conversion rate was 26.1885 shares of common stock per $1,000 principal amount of 3.00% Notes, with a conversion price of $38.19 per share, which was reduced during the third quarter of 2011 as the result of the Company’s decision to pay a cash dividend of $0.13 per share of common stock for the second quarter of 2011 to holders of record on September 1, 2011. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in the future, the conversion rate will be adjusted based on the formula defined in the 3.00% Notes Indenture.

As of September 30, 2011, the exercise price of the 3.00% Warrants, which are related to the issuance of the 3.00% Notes, was $56.11 due to the Company’s decision to pay a cash dividend of $0.13 per share of common stock for the second quarter of 2011 to holders of record on September 1, 2011. If any cash dividend or distribution is made to all, or substantially all, holders of the Company’s common stock in the future, the conversion rate will be adjusted based on the formula defined in the 3.00% Notes Indenture.

Under the terms of the 3.00% Purchased Options, which become exercisable upon conversion of the 3.00% Notes, the Company has the right to purchase a total of 3.0 million shares of its common stock at a purchase price of $38.19 per share, the conversion price, as of September 30, 2011. The exercise price is subject to certain adjustments that mirror the adjustments to the conversion price of the 3.00% Notes (including payments of cash dividends).

Real Estate Credit Facility

On December 29, 2010, the Company amended and restated its $235.0 million five-year real estate credit facility with Bank of America, N.A. and Comerica Bank. As amended and restated, the Real Estate Credit Facility (the “Mortgage Facility”) provides for $42.6 million of term loans with the right to expand to $75.0 million provided that (i) no default or event of default exists under the Mortgage Facility; (ii) the Company obtains commitments from the lenders who would qualify as assignees for such increased amounts; and (iii) certain other agreed upon terms and conditions have been satisfied. This facility is guaranteed by the Company and substantially all of the domestic subsidiaries of the Company and is secured by the relevant real property owned by the Company that is mortgaged under the Mortgage Facility. The Company capitalized $0.9 million of debt issuance costs related to the Mortgage Facility that are being amortized over the term of the facility, $0.8 million of which are still unamortized as of September 30, 2011.

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

The Company is required to make quarterly principal payments equal to 1.25% of the principal amount outstanding, which began in April 2011, and is required to repay the aggregate principal amount outstanding on the maturity date December 29, 2015. During the nine months ended September 30, 2011, the Company made principal payments of $1.1 million on outstanding borrowings from the Mortgage Facility. As of September 30, 2011, borrowings under the amended and restated Mortgage Facility totaled $41.5 million, with $2.1 million recorded as a current maturity of long-term debt in the accompanying Consolidated Balance Sheet.

The Mortgage Facility also contains usual and customary provisions limiting the Company’s ability to engage in certain transactions, including limitations on the Company’s ability to incur additional debt, additional liens, make investments, and pay distributions to its stockholders. As amended, the Mortgage Facility contains certain covenants, including financial ratios that must be complied with, including: fixed charge coverage ratio, total funded lease adjusted indebtedness to proforma EBITDAR ratio, and current ratio. For covenant calculation purposes, EBITDAR is defined as earnings before non-floorplan interest expense, taxes, depreciation and amortization and rent expense. EBITDAR also includes interest income and is further adjusted for certain non-cash income charges. In addition, congruent with the Revolving Credit Facility, the Mortgage Facility restricts the Company’s ability to make certain payments, such as dividends or other distributions of assets, properties, cash, rights, obligations or securities. As of September 30, 2011, the Company was in compliance with all of these covenants and the Mortgage Facility’s Restricted Payment Basket totaled $79.7 million. Based upon current operating and financial projections, the Company believes that it will remain compliant with such covenants for the remainder of the fiscal year.

Real Estate Related Debt

In addition to the amended and restated Mortgage Facility, the Company entered into separate term loans in 2010 and 2011, totaling $162.5 million, with three of its manufacturer-affiliated finance partners, Toyota Motor Credit Corporation (“TMCC”), Mercedes-Benz Financial Services USA, LLC (“MBFS”), BMW Financial Services NA, LLC (“BMWFS”) and a third-party financial institution (collectively, the “Real Estate Notes”). The Company used $116.4 million of these borrowings to refinance a portion of its Mortgage Facility and the remaining amount to finance owned or purchased real estate to be utilized in existing dealership operations. The Real Estate Notes may be expanded, are on specific buildings and/or properties and are guaranteed by the Company. Each loan was made in connection with, and is secured by mortgage liens on, the relevant real property owned by the Company that is mortgaged under the Real Estate Notes. The Real Estate Notes bear interest at fixed rates between 4.62% and 5.47%, and at variable indexed rates plus between 2.25% and 3.35% per annum. The Company capitalized $1.3 million of related debt issuance costs related to the Real Estate Notes that are being amortized over the terms of the notes, $1.1 million of which are still unamortized as of September 30, 2011.

The loan agreements with TMCC consist of four term loans. As of September 30, 2011, $27.0 million remained outstanding with $0.6 million classified as current and the remainder in long-term debt. The maturity dates vary from two to seven years and provide for monthly payments based on a 20-year amortization schedule. These four loans are cross-collateralized and cross-defaulted with each other. During the first three months of 2011, the loan agreements were amended to also be cross-defaulted with the Revolving Credit Facility.

The loan agreements with MBFS consist of three term loans. As of September 30, 2011, $49.0 million remained outstanding with $1.5 million classified as current and the remainder in long-term debt. The agreements provide for monthly payments based on a 20-year amortization schedule and have a maturity date of five years. These three loans are cross-collateralized and cross-defaulted with each other. They are also cross-defaulted with the Revolving Credit Facility.

The loan agreements with BMWFS consist of 13 term loans. As of September 30, 2011, $71.3 million remained outstanding with $3.4 million classified as current and the remainder in long-term debt. The agreements provide for monthly payments based on a 15-year amortization schedule and have a maturity date of seven years. In the case of three properties owned by subsidiaries, the applicable loan is also guaranteed by the subsidiary real property owner. These 13 loans are cross-collateralized with each other. In addition, they are cross-defaulted with each other, the Revolving Credit Facility, and certain dealership franchising agreements with BMW of North America, LLC.

The loan agreements with a third party financial institution consist of three term loans for an aggregate principal amount of $16.5 million, to finance real estate associated with three of the Company’s dealerships. The loans are repaid in monthly installments which began in September 2011, and mature in August 2016. As of September 30, 2011, borrowings under these notes totaled $16.4 million, with $0.8 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.

In October 2008, the Company executed a note agreement with a third-party financial institution for an aggregate principal amount of £10.0 million (the “Foreign Note”), which is secured by the Company’s foreign subsidiary properties. The Foreign Note is being repaid in monthly installments that began in March 2010 and matures in August 2018. As of September 30, 2011, borrowings under the Foreign Note totaled $12.7 million, with $1.8 million classified as a current maturity of long-term debt in the accompanying Consolidated Balance Sheets.