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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21789
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0572810
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
360 E. JACKSON STREET, MEDFORD, OREGON 97501
(Address of principal executive offices) (Zip Code)
541-776-6899
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
____________________
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $22,921,600 as of February 27, 1998 based upon the last sales
price ($16.00) as reported by the Nasdaq National Market System.
The number of shares outstanding of the Registrant's Common Stock as of February
27, 1998 was: Class A: 2,925,550 shares and Class B: 4,110,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K, by reference,
portions of its Information Statement, relating to the 1998 Annual Meeting of
Shareholders.
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LITHIA MOTORS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 14
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 27
Signatures 33
1
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10-K contains forward-looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward looking statements. These risk
factors include, but are not limited to, the cyclical nature of automobile
sales, the intense competition in the automobile retail industry and the
Company's ability to negotiate profitable acquisitions and secure manufacturer
approvals for such acquisitions.
GENERAL
Lithia Motors is a leading automotive retailer offering a total of 21 brands in
22 locations in the western United States. The Company currently operates 12
dealerships in California, 7 in Oregon and 3 in Nevada. The Company sells new
and used cars and light trucks, sells replacement parts, provides vehicle
maintenance, warranty, paint and repair services, and arranges related financing
and insurance for its automotive customers. Since December 1996 when the
Company completed its initial public offering, Lithia has acquired
17 dealerships and is actively pursuing additional acquisitions.
In 1997, the Company generated record total sales, net income and unit sales of
new and used vehicles. Total sales increased to $319.8 million in 1997 from
$142.8 million in 1996, an increase of 124%. For the same period, net income
increased to $6.0 million from $2.6 million (pro forma), an increase of 129%.
In the fourth quarter of 1997, the Company's total sales and net income were
$113.1 million and $1.9 million, respectively, representing growth of 203% and
234% compared to the same period in 1996. New vehicle unit sales increased to
7,493 in 1997 from 3,274 in 1996, an increase of 129%, and retail used vehicle
unit retail sales increased from 4,156 to 7,148, an increase of 72%.
Lithia was founded in 1946 and its two senior executives have managed the
Company for over 27 years. Management has developed and implemented its
acquisition and operating strategies which have enabled the Company to
successfully identify, acquire and integrate dealerships, achieving
profitability superior to industry averages. In 1997, the Company was able to
achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus
12.9% and 1.5%, respectively, for the industry (latest 1996 data).
The Company intends to continue to take advantage of the consolidation
opportunities in the $640 billion automotive retailing industry. According to
industry data, the number of franchised automobile dealerships has declined from
more than 36,000 dealerships in 1960 to approximately 22,000 in 1997. Currently,
the largest 100 dealer groups generate less than 10% of total industry sales and
control approximately 5% of all franchised automobile dealerships. Several
economic and industry factors are expected to lead to the further consolidation
of the automobile retailing industry, including increasing capital requirements
necessary to operate an automobile dealership, the fact that many dealerships
are owned by individuals nearing retirement age who are seeking exit
opportunities, and the desire of manufacturers to strengthen their dealer
networks through consolidation. The Company believes that it is well positioned
to continue to capitalize on the highly fragmented and consolidating automotive
retail industry.
2
GROWTH STRATEGY
The Company has become a leading acquiror of automobile dealerships in the
western United States. The Company pursues a disciplined acquisition strategy,
targeting acquisitions in certain under-dealered markets where management
believes the Company has the opportunity to acquire a cluster of dealerships
over time and build a significant market presence. This strategy is patterned
after the Company's operations in southern Oregon where, prior to two recent
acquisitions, the Company operated 5 dealerships with annual revenues
approximating $135 million. The Company's current core markets are
South-Central Oregon, the Northeast Bay Area and South-Central Valley regions of
California, and Northern Nevada. Within these markets, the Company's evaluation
of potential acquisitions takes into account a dealership's size and reputation,
and the brand of vehicles sold by the dealership.
Over the last 16 months, the Company has completed the purchase of
17 dealerships with pre-acquisition annual revenues of approximately
$454 million for an aggregate net investment of $48.6 million (excluding real
estate purchases or borrowings on credit lines to finance acquired vehicle
inventories and equipment). In addition, the Company has one pending fill-in
acquisition in an existing core market. The following table sets forth certain
information regarding recent acquisitions:
PRIOR-YEAR
ANNUAL
REVENUES (1) DATE
REGION LOCATION BRANDS (MILLIONS) ACQUIRED
- ------------------------------- ----------------- ------------------------------------ ------------ --------------
South-Central Oregon Eugene, OR Dodge, Dodge Trucks $ 32 December 1996
Medford, OR Nissan, BMW 15 February 1998
Northeast Bay Area, California Vacaville, CA Toyota 28 December 1996
Concord, CA Dodge, Dodge Trucks, Isuzu 39 April 1997
Napa, CA Ford, Lincoln-Mercury 24 July 1997
Concord, CA Ford 70 August 1997
Concord, CA Volkswagen August 1997
South-Central Valley, California Bakersfield, CA Nissan 41 October 1997
Bakersfield, CA BMW, Acura October 1997
Fresno, CA Ford 60 December 1997
Fresno, CA Mazda December 1997
Fresno, CA Nissan 40 January 1998
Fresno, CA Jeep, Hyundai January 1998
Bakersfield, CA Jeep 18 March 1998
Northern Nevada Reno, NV Isuzu, Lincoln-Mercury, Suzuki, Audi 78 October 1997
Sparks, NV Isuzu, Lincoln-Mercury, Suzuki October 1997
Reno, NV Volkswagen 9 February 1998
-------
$ 454
-------
-------
_______________
(1) Revenues taken from dealer statements for the year prior to
acquisition.
3
Based upon its current dealership locations, the percentage share of the
Company's total revenues from each region is approximately: South-Central Oregon
- - 31%; Northeast Bay Area, California - 27%; South-Central Valley, California -
27%; and Northern Nevada - 15%.
OPERATING STRATEGY
Upon completing an acquisition, the Company installs its management information
systems as soon as possible and implements its operating strategy. The
Company's operating strategy consists of the following elements:
VALUE PARTNERSHIP WITH MANUFACTURERS. The Company recognizes that the
manufacturers are true partners through the franchise system. They are all
large well-developed companies with enormous resources committed to the
franchise as the method of retailing their products. They lend support in
training the Company's employees, in allocating vehicles, in designing systems
for operations, in selling slower-moving inventories through incentives and
rebates, and in advertising through regional and national sources. The Company
relies on this help and encourages their assistance as a welcome partner. The
Company cooperates in facility design, in marketing efforts, and in program
support.
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad
range of products and services including a wide selection of new and used cars
and light trucks, vehicle financing and insurance and replacement parts and
service. At its 22 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki,
BMW, Saturn, Pontiac, Mazda and Hyundai. In addition, the Company sells a
variety of used vehicles at a broad range of prices. By offering new and used
vehicles and an array of complementary services at each of its locations, the
Company seeks to increase customer traffic and meet specific customer needs.
The Company believes that offering numerous new vehicle brands appeals to a
variety of customers, minimizes dependence on any one manufacturer and reduces
its exposure to supply problems and product cycles.
FOCUS ON USED VEHICLE SALES. In addition to the sale of new vehicles, a key
element of the Company's operating strategy is to focus on the sale of used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales to improve overall
profitability. To maintain a broad selection of high quality used vehicles and
to meet local demand preferences, the Company acquires used vehicles from
trade-ins and a variety of sources nationwide, including direct purchases and
manufacturers' and independent auctions. The Company's goal is to sell 1.5
retail used vehicles for every new vehicle sold, compared to an industry average
ratio of 0.8-to-1. The Company strives to attract customers and enhance buyer
satisfaction by offering multiple financing options, a 10-day/500-mile "no
questions asked" exchange program and a 60-day/3,000-mile warranty on every used
vehicle sold.
4
EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company generates
substantial incremental revenue and achieves higher profitability through the
sale of certain ancillary products and services such as financing and insurance,
extended service contracts and vehicle maintenance. Employees receive special
training and are compensated on a commission basis to sell such products and
services. In 1997, the Company arranged financing for 71% of its new vehicle
sales and 74% of its used vehicle sales, compared to 42% and 51%, respectively,
for the average automobile dealership in the United States (1996 data). Sales
of these other ancillary products and services represent 14% of Lithia's total
sales, compared to 12% for the average U.S. dealership. The Company also sells
extended service coverage and other vehicle protection packages, which the
Company believes enhances the value of the vehicle and provides a higher level
of customer satisfaction.
EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional
management practices in all aspects of its operations, including information
technology, employee training, profit-based compensation and cash management.
These efforts have been critical in managing the rapid growth in new stores over
the last 16 months. Each dealership is its own profit center and is managed by a
trained and experienced general manager who has primary responsibility for
decisions relating to inventory, advertising, pricing and personnel. The general
manager is assisted by a 5-person operations support team consisting of
specialists in the areas of new vehicle sales, used vehicle sales, finance and
insurance, service and parts, and back office administration (including
accounting and management information systems). The Company compensates its
general managers and department managers based on the profitability of their
dealerships and departments, respectively. Senior management utilizes
computer-based management information systems to monitor each dealership's
sales, profitability and inventory on a daily basis and to identify areas
requiring improvement. The Company believes the application of its professional
management practices provides it with a competitive advantage over many
dealerships and is critical to its ability to achieve levels of profitability
superior to industry averages.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer
satisfaction throughout its organization and continually seeks to maintain its
reputation for quality and fairness. The Company trains its sales personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. In 1996, the Company implemented an innovative customer-oriented
marketing program entitled "Priority You" which provides the Company's retail
customers six value-added services which the Company believes are important to
overall customer satisfaction, including a commitment to (i) provide a customer
credit check within 10 minutes, (ii) complete a used vehicle appraisal within 30
minutes, (iii) complete the paper work within 90 minutes for a vehicle purchase,
(iv) provide a 10-day/500-mile "no questions asked" right of exchange on any
used vehicle sold, (v) provide a warranty on all used vehicles sold for 60
days/3,000 miles and (vi) make a donation to a local charity or educational
organization for every vehicle sold. The Company believes "Priority You" will
help differentiate it from many other dealerships, thereby increasing customer
traffic and developing stronger customer loyalty.
The Company has received a number of dealer quality and customer satisfaction
awards from various manufacturers. Most recently, Lithia's Medford and Grants
Pass, Oregon Chrysler product dealerships achieved Chrysler's highest
recognition for dealer excellence, the Five-Star Certification. The Medford
location was the first to receive this certification in the Pacific Northwest.
5
DEALERSHIP OPERATIONS
The Company owns and operates 12 dealership locations in California, 7 in Oregon
and 3 in Nevada. Each of the Company's dealerships sell new and used vehicles
and related automotive parts and services. The Company's primary target market
comprises middle-income customers seeking moderately-priced vehicles. The
Company offers 21 makes of new vehicles, including Dodge, Dodge Trucks,
Chrysler, Plymouth, Jeep, Ford, Lincoln-Mercury, Toyota, Isuzu, Nissan,
Volkswagen, Audi, Honda, Acura, Suzuki, BMW, Saturn, Pontiac, Mazda and Hyundai.
The operations of each of the Company's locations are overseen by a general
manager, who has primary responsibility for all aspects of the operations of the
dealership, including new and used vehicle inventory, advertising and marketing,
and the selection of personnel. Each location is operated as a profit center and
each general manager's compensation is based on dealership profitability. Each
general manager reports directly to the Company's Chief Operating Officer. In
addition, each dealership's general sales manager, used vehicle manager, parts
manager, service manager and F&I managers report directly to the general manager
and are compensated based on the profitability of their respective departments.
NEW VEHICLE SALES. The Company sells 21 domestic and imported brands
ranging from economy to luxury cars, sport utility vehicles, minivans and light
trucks. In 1997, the Company sold 7,493 new vehicles generating revenues of
$161.3 million, which constituted 50.4% of the Company's total revenues. The
following table sets forth, by manufacturer, the percentage of new vehicle sales
by the Company during the fourth quarter of 1997.
1997 FOURTH QUARTER
PERCENTAGE OF
MANUFACTURER NEW VEHICLE SALES
- ------------ -------------------
Chrysler (Chrysler, Plymouth, Dodge, Jeep, Dodge Trucks) 32%
Ford (Ford, Lincoln, Mercury) 27%
Toyota 12%
Isuzu 8%
Nissan 5%
Volkswagen, Audi 4%
BMW 4%
Honda (Acura, Honda) 3%
General Motors (Saturn, Pontiac) 2%
Suzuki 2%
Mazda 1%
Hyundai *
----
100%
----
----
_______________
* Acquired in 1998.
6
The following table sets forth the Company's sales and gross profit margins for
new vehicle sales for the periods presented.
(dollars in thousands) 1993 1994 1995 1996 1997
------- ------- ------- ------- --------
Units 2,464 2,744 2,715 3,274 7,493
Sales $42,663 $51,154 $53,277 $65,092 $161,294
Gross profit margin 12.8% 12.5% 12.8% 13.1% 11.4%
The Company purchases substantially all of its new car inventory directly from
manufacturers who allocate new vehicles to dealerships based on the amount of
vehicles sold by the dealership and by the dealership's market area. The Company
will also exchange vehicles with other dealers to accommodate customer demand
and to balance inventory.
As required by law, the Company posts the manufacturer's suggested retail price
on every new vehicle. As is customary in the automobile industry, the final
sales price of a new vehicle is generally negotiated with the customer. However,
at the Company's Saturn dealership the Company does not deviate from the posted
price. The Company is continually evaluating its pricing practices and policies
in light of changing consumer preferences and competitive factors.
USED VEHICLE SALES. The Company offers a variety of makes and models of
used cars and light trucks of varying model years and prices. Used vehicle sales
are an important part of the Company's overall profitability. In 1997, the
Company sold 12,138 used vehicles generating revenues of $113.1 million, which
constituted 35.4% of the Company's total revenue. The Company has made a
strategic commitment to emphasize used vehicle sales. As part of its focus on
used vehicle sales, the Company retains a full-time used vehicle manager at each
of its locations and has allocated additional financing and display space to
this effort.
The Company sells used vehicles to retail customers and, in the case of vehicles
in poor condition or vehicles which have not sold within a specified period of
time, to other dealers and to wholesalers. As the table below reflects, sales to
other dealers and to wholesalers are frequently at or close to cost and,
therefore, affect the Company's overall gross profit margin on used vehicle
sales. Excluding wholesale transactions, the Company's gross profit margin on
used vehicle sales was 11.4% in 1997, as compared to the industry average for
1996 of 11.0%. The following table reflects used vehicle sale transactions of
the Company from 1993 through December 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(dollars in thousands) 1993 1994 1995 1996 1997
-------- -------- -------- -------- ---------
Retail units 3,076 3,372 3,302 4,156 7,148
Retail sales $29,680 $36,382 $36,997 $48,697 $88,571
Retail gross margin 13.9% 13.5% 13.2% 12.8% 11.4%
Wholesale units 1,642 1,834 1,842 2,348 4,990
Wholesale sales $5,306 $5,999 $7,064 $9,914 $24,528
Wholesale gross margin 3.0% 3.0% 2.4% 1.7% 0.4%
Total units 4,718 5,206 5,144 6,504 12,138
Total sales $34,986 $42,381 $44,061 $58,611 $113,099
Total gross margin 12.3% 12.0% 11.4% 10.9% 9.1%
7
The Company acquires the majority of its used vehicles through customer
trade-ins. The Company also acquires its used vehicles at "closed" auctions
which may be attended only by new vehicle dealers and which offer off-lease,
rental and fleet vehicles, and at "open" auctions which offer repossessed
vehicles and vehicles being sold by other dealers.
The Company sells the majority of its used vehicles to retail purchasers. In an
effort to reach the Company's objective of 1.5 retail used vehicle sales for
every new vehicle sale, the Company employs innovative marketing programs, such
as "Priority You," which offers a 60-day/3,000-mile warranty and a
10-day/500-mile "no questions asked" exchange program on every used vehicle it
sells in order to generate customer confidence in his or her purchasing
decision. Each dealership's used vehicle manager is responsible for the
purchasing and pricing of the used vehicle inventory. The Company strives to
sell each of its used vehicles within 60 days of acquisition and financially
motivates its used vehicle managers to effect such sales within that period.
VEHICLE FINANCING AND LEASING. The Company believes that its customers'
ability to obtain financing at its dealerships is critical to its ability to
sell new and used vehicles and ancillary products and services. The Company
provides a variety of financing and leasing alternatives in order to meet the
specific needs of each potential customer. The Company believes its ability to
obtain customer-tailored financing on a "same day" basis provides it with an
advantage over many of its competitors, particularly smaller competitors who
lack the resources to offer vehicle financing or who do not generate sufficient
volume to attract the diversity of financing sources that are available to the
Company. Because of the high profit margins which are typically generated
through sales of F&I products, the Company employs more than one F&I manager at
its dealership locations. The Company's F&I managers have extensive knowledge
regarding available financing alternatives and sources and are specially trained
to determine the customer's financing needs to enable the customer to purchase
or lease an automobile. The Company seeks to finance or arrange financing for
every vehicle it sells and has financed or arranged financing for a larger
percentage of its transactions than the industry average. During 1997, the
Company financed or arranged for financing for over 71% of its new vehicle sales
and 74% of its used vehicle sales, compared to an industry average of 42% and
51%, respectively (latest 1996 data).
The Company maintains close relationships with a wide variety of financing
sources and arranges financing for its customers with those sources that are
best suited to satisfy its customers' particular needs. The Company also
utilizes financing sources, whenever possible, that maximize the Company's
revenues on the sale of the loan or lease to such source. The interest rates
available and the required down payment, if any, depend to a large extent, upon
the bank or other institution providing the financing and the credit history of
the particular customer. Currently, the Company has relationships with
approximately 30 banks and other financial institutions who are in a position to
provide financing for automobile purchases or leases by the Company's customers.
The Company's F&I managers have close working relationships with third-party
financing sources which enables them to quickly determine a customer's credit
position and confirm the type and level of financing that the third party can
commit to provide. A credit check generally occurs within minutes while the
customer remains at the dealership, allowing the sales manager to assist the
customer in making a fully informed decision regarding the terms of the
transaction.
8
In most cases, the Company arranges financing for its customers from third party
sources, which relieves the Company from any credit risk. However, in certain
circumstances where the Company believes the credit risk is manageable and the
risk-weighted income is expected to exceed the earnings available upon the
immediate sale of the finance contract, the Company will directly finance or
lease the automobile to such customer. In these cases, the Company bears the
risk of default by the borrower or lessee. Historically, the Company has
provided direct financing for a minimal number of its new and used vehicle
sales.
ANCILLARY SERVICES AND PRODUCTS. In addition to arranging for vehicle
financing, the Company's F&I managers also market a number of ancillary products
and services to every purchaser of a new or used vehicle. Typically, these
products and services yield high profit margins and contribute significantly to
the overall profitability of the Company.
The Company offers third party extended service contracts which provide that,
for a predetermined and prepaid price, all designated repairs covered by the
plan during its term will be made at no additional charge above the deductible.
While all new vehicles are sold with the automobile manufacturer's standard
warranty, service plans provide additional coverage beyond the time frame or
scope of the manufacturer's warranty. Purchasers of used vehicles are offered a
similar extended service contract, even if the selected vehicle is no longer
under the manufacturer's warranty.
The Company offers its customers credit life, health and accident insurance when
they finance an automobile purchase. The Company receives a commission on each
policy sold. The Company also offers other ancillary products such as protective
coatings and automobile alarms.
The Company also owns and operates two automobile rental facilities, Avis
Rent-A-Car and Discount Auto & Truck Rental, Inc., both located in Medford,
Oregon.
PARTS AND SERVICE, BODY AND PAINT SHOP. The Company considers its parts
and service and body and paint operations to be an integral part of its customer
service program and an important element of establishing customer loyalty. The
Company provides parts and service primarily for the new vehicle brands sold by
the Company's dealerships but may also service other vehicles. In 1997, the
Company's parts and service operations generated $29.8 million in revenues, or
9.3% of total revenues. The Company uses a variable pricing structure designed
to reflect the difficulty and sophistication of different types of repairs. The
mark-up on a part is based upon the cost and availability of such part.
The parts and service business is relatively stable and provides an important
recurring revenue stream to the Company's dealerships. The Company markets its
parts and service products by notifying the owners of vehicles purchased at its
dealerships when their vehicles are due for periodic service. This practice
encourages preventive maintenance rather than post-breakdown repairs. To a
limited extent, revenues from the parts and service department are
countercyclical to new car sales as owners repair existing vehicles rather than
buy new vehicles. The Company believes this helps mitigate the affects of a
downturn in the new vehicle sales cycle.
The Company has operated a full-service body and paint shop since 1970. In
1997, it completed a body and paint shop to service all of the Company's
dealerships located in southwest Oregon, other dealerships in the area that do
not own a body and paint shop, and a
9
number of major automotive casualty insurance companies that contract with the
Company to perform insurance repairs.
SALES AND MARKETING
The Company places particular emphasis on customer satisfaction throughout its
organization and continually seeks to maintain its reputation for quality and
fairness. The Company's sales force works closely with each customer to identify
an appropriate vehicle at a price affordable to that customer. The Company
believes that its "counseling" approach during the sales process increases the
likelihood that a customer will be satisfied with the vehicle purchased over a
longer time period and enables the Company to sell more vehicles at higher gross
profit margins.
The Company recently implemented a marketing program entitled "Priority You,"
which provides the Company's retail customers six value-added services which the
Company believes are important to the overall satisfaction of the customer,
including a commitment to (i) provide a customer credit check within 10 minutes,
(ii) complete a used vehicle appraisal within 30 minutes, (iii) complete the
paper work within 90 minutes for a vehicle purchase, (iv) provide a
10-day/500-mile "no questions asked" right of exchange on any used vehicle sold,
(v) provide a 60-day/3,000-mile warranty on all used vehicles sold and (vi) make
a donation to a local charity or educational organization for every vehicle
sold. The Company believes "Priority You" will help differentiate it from
traditional dealerships, and thereby increase customer traffic and develop
customer loyalty.
Advertising and marketing play a significant role in the success of the Company.
The competitive environment of the automobile dealership industry requires that
a substantial portion of each sales dollar be allocated to advertising. However,
as is the case with most franchised automobile dealerships, approximately 75% of
the Company's advertising and marketing expenses are paid for by the automobile
manufacturers. The manufacturers also provide the Company with market research,
which assists the Company in developing its own advertising and marketing
campaigns. The Company believes that it receives significant benefit from
manufacturers' advertising, particularly in the medium-sized markets in which
the Company has been the only representative of a manufacturer.
The Company's marketing efforts focus on a wide range of potential buyers. The
Company offers a variety of new and used cars and light trucks at a wide range
of prices and with various financing terms. The Company utilizes most forms of
media in its advertising, including television, newspaper, radio and direct
mail, including periodic mailers to previous customers. The Company primarily
uses advertising that focuses on developing its image as a reputable dealer,
offering quality service, affordable automobiles and financing for all potential
buyers. In addition, the Company's individual dealerships periodically sponsor
price discounts or other promotions designed to attract additional customers.
Each dealership has substantial control over the content and timing of its
promotions, although all advertising is coordinated by the Company. As the
Company owns several dealerships in most of the markets it serves, it realizes
cost savings on its advertising expenses from volume discounts and other media
concessions. The Company also participates as a member of a number of
advertising cooperatives or associations whose members, among other things, pool
their resources and expertise together with that of the manufacturer to develop
advertising aimed at benefiting all of their members.
10
MANAGEMENT INFORMATION SYSTEM
The Company's financial information, operational and accounting data and other
related statistical information are consolidated, processed and maintained at
its headquarters in Medford, Oregon, on a network of server computers and work
stations. The flexible nature of the Company's installed network allows for
accumulation, processing and distribution of information using ADP, Inc. and
Reynolds & Reynolds computing programs. ADP, Inc. and Reynolds & Reynolds are
national software providers for many companies including automotive dealers. All
sales and expense information, and other data related to the operations of each
dealership or other Company facility, are entered at each location. This system
allows senior management to access detailed information on a "real time" basis
from all of the Company's dealerships and other stores regarding, for example,
the makes and models of automobiles in its inventory, the mix of new and used
automobile sales, the number of automobiles being sold or leased, the percentage
of vehicles for which the Company arranged financing or sold ancillary products
and services, the profit margins being obtained on sales and the relative
performances of the Company's dealerships to each other. Such information is
also available to each dealership's general manager. Reports can be generated
that set forth and compare revenue and expense data by department and by store,
allowing management to quickly analyze the results of operations, identify
trends in the business, and focus on areas that require attention or
improvement. The Company believes that its management information system also
allows its general managers to quickly respond to changes in consumer
preferences and purchasing patterns, thereby maximizing inventory turnover.
The Company believes that its management information system is a key factor in
successfully incorporating newly acquired businesses into the Company. Following
each acquisition, the Company installs its management information system at the
dealership location, thereby quickly making the financial, accounting and other
operational data easily accessible to senior management at the Company's
corporate offices. With access to such data, senior management can more
efficiently execute the Company's operating strategy at the newly acquired
dealership.
CASH MANAGEMENT
The Company employs a centralized cash management system designed to maximize
returns and minimize interest expense. The Company's new vehicle flooring line
is supplied by the Company's bank, rather than by automobile manufacturers,
unlike many dealerships that do not have the financial condition or results of
operations that would permit them to obtain bank financing on terms more
favorable than those offered by manufacturers. As a result, the Company's
interest rate for flooring financing is 150 to 200 basis points below the rates
currently available to it from most manufacturers. In addition, in order to
minimize the outstanding balance under the Company's Flooring Line, all
available excess cash in the Company's various checking accounts is
automatically transferred at the end of each weekday to a central collateral
account at U.S. Bank N.A. These funds are used to pay down the balance under the
Flooring Line, thereby reducing interest expense. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
RELATIONSHIPS WITH AUTOMOBILE MANUFACTURERS
The Company has, either directly or through its subsidiaries, entered into
franchise or dealer sales and service agreements with each manufacturer of the
new vehicles it sells. The Company currently has agreements with Chrysler
Corporation (Chrysler, Plymouth, Dodge,
11
Dodge Trucks, Jeep), American Honda Motor Co. Inc. (Honda, Acura), American
Isuzu Motors, Inc. (Isuzu), Ford Motor Company (Ford, Lincoln, Mercury),
General Motors Corporation (Pontiac), Mazda Motor of America, Inc. (Mazda),
Saturn Corporation (Saturn), Toyota Motor Distributors, Inc. (Toyota), Nissan
Motor Corporation, U.S.A. (Nissan), American Suzuki Motor Corporation (Suzuki),
Audi of America, Inc. (Audi), BMW of North America, Inc. (BMW), Hyundai Motor
America (Hyundai), and Volkswagen of America (Volkswagen) (herein collectively
referred to as "manufacturers").
The typical automobile franchise agreement specifies the locations at which the
dealer has the right and the obligation to sell vehicles and related parts and
products and to perform certain approved services in order to serve a specified
market area. The designation of such areas and the allocation of new vehicles
among dealerships are subject to the discretion of the manufacturer, which
(except for Saturn) does not guarantee exclusivity within a specified territory.
A franchise agreement may impose requirements on the dealer concerning such
matters as the showroom, the facilities and equipment for servicing vehicles,
the maintenance of inventories of vehicles and parts, the maintenance of minimum
working capital, the training of personnel and the adherence to certain
performance standards established by the manufacturer regarding sales volume and
customer satisfaction. Compliance with these requirements is closely monitored
by each manufacturer. In addition, manufacturers require each dealership to
submit monthly and annual financial statements of operations. The franchise
agreements also grant the dealer the non-exclusive right to use and display
manufacturers' trademarks, service marks and designs in the form and manner
approved by each manufacturer.
Most franchise agreements expire after a specified period of time, ranging
from one to five years; however, some franchise agreements, including those
with Chrysler, have no termination date. The typical franchise agreement
provides for early termination or non-renewal by the manufacturer under
certain circumstances such as change of management or ownership without
manufacturer consent, insolvency or bankruptcy of the dealership, death or
incapacity of the dealer manager, conviction of a dealer manager or owner of
certain crimes, misrepresentation of certain information by the dealership,
dealer manager or owner to the manufacturer, failure to adequately operate
the dealership, failure to maintain any license, permit or authorization
required for the conduct of business, or a material breach of other
provisions of the franchise agreement including the dealership's poor sales
performance or low customer satisfaction index ("CSI") ratings. The dealer is
typically entitled to terminate the franchise agreement at any time without
cause.
Each franchise agreement sets forth the name of the person approved by the
manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership, and contains provisions requiring the manufacturer's prior approval
of changes in management or transfers of ownership of the dealership.
Accordingly, any significant change in ownership, including the sale of shares
by the Company to the public or the acquisition of a dealership from a third
party, is subject to the consent of the respective manufacturer. Most
manufacturers now have stated public ownership policies which the Company
believes it will be able to satisfy. Some of the policies impose additional
restrictions or conditions on the Company that would not exist under private
ownership.
12
COMPETITION
The new and used automobile dealership business in which the Company operates is
highly competitive. The automobile dealership industry is fragmented and
characterized by a large number of independent operators, many of whom are
individuals, families and small groups. In the sale of new vehicles, the Company
principally competes with other new automobile dealers in the same general
vicinity of the Company's dealership locations. Such competing dealerships may
offer the same or different models and makes of vehicles that the Company sells.
In the sale of used vehicles, the Company principally competes with other used
automobile dealers and with new automobile dealers that operate used automobile
lots in the same general vicinity of the Company's dealership locations. In each
of its markets, the Company competes with numerous other new automobile dealers
selling other brands and a large number of other used automobile stores. In
addition, certain regional and national car rental companies operate retail used
car lots to dispose of their used rental cars.
The Company also may face increased competition from certain automobile
"superstores," such as CarMax, AutoNation USA and Driver's Mart Worldwide Inc.
Such used automobile superstores have emerged recently in various areas of the
United States and are beginning to expand nationally. However, the Company is
not aware of any of such superstores currently located in any region where the
Company operates dealerships. In addition, the Company competes to a lesser
extent with an increasing number of automobile dealers that sell vehicles
through nontraditional methods, such as through direct mail or via the Internet.
The Company believes it is larger and has more financial resources than the
other operators with which it currently competes. However, as it enters other
markets, the Company may face competitors that are more established or have
access to greater financial resources. The Company, however, does not have any
cost advantage in purchasing new vehicles from manufacturers and typically
relies on advertising and merchandising, sales expertise, service reputation and
location of its dealerships to sell new vehicles.
REGULATION
The Company's operations are subject to extensive regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. Various state and federal regulatory agencies, such as the
Occupational Safety and Health Administration and the U.S. Environmental
Protection Agency, have jurisdiction over the operation of the Company's
dealerships, repair shops, body shops and other operations, with respect to
matters such as consumer protection, workers' safety and laws regarding clean
air and water.
The relationship between a franchised automobile dealership and a manufacturer
is governed by various federal and state laws established to protect dealerships
from the generally unequal bargaining power between the parties. Federal laws,
as well as certain state laws, prohibit a manufacturer from terminating or
failing to renew a franchise without good cause. Manufacturers are also
prohibited from preventing or attempting to prevent any reasonable changes in
the capital structure or the manner in which a dealership is financed.
Manufacturers are, however, entitled to object to a sale or change of management
where such an objection is related to material reasons relating to the
character, financial ability or business experience of the proposed transferee.
Automobile dealers and manufacturers are also subject to various federal and
state laws established to protect consumers, including so-called "Lemon Laws"
which require a manufacturer or the dealer to replace a new vehicle or accept it
for a full refund within one
13
year after initial purchase if the vehicle does not conform to the
manufacturer's express warranties and the dealer or manufacturer, after a
reasonable number of attempts, is unable to correct or repair the defect.
Federal laws require certain written disclosures to be provided on new
vehicles, including mileage and pricing information. In addition, the financing
and insurance activities of the Company are subject to certain statutes
governing credit reporting, debt collection, and insurance industry regulation.
The imported automobiles purchased by the Company are subject to United States
customs duties and, in the ordinary course of its business, the Company may,
from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges.
As with automobile dealerships generally, and parts, service and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters, transmission fluid, antifreeze, freon, waste paint and
lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline
and diesel fuels. The Company has also been required to remove aboveground and
underground storage tanks containing such substances or wastes. Accordingly, the
Company is subject to regulation by federal, state and local authorities
establishing health and environmental quality standards, and liability related
thereto, and providing penalties for violations of those standards. The Company
is also subject to laws, ordinances and regulations governing remediation of
contamination at facilities it operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Company believes
that it does not have any material environmental liabilities and that compliance
with environmental laws, ordinances and regulations will not, individually or in
the aggregate, have a material adverse effect on the Company's results of
operations or financial condition.
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,000 persons on a
full-time equivalent basis. The service department employees at Lithia Concord
Dodge, Isuzu and Lithia Sun Valley Ford, Volkswagen, Hyundai are bound by
collective bargaining agreements. The Company believes it has a good
relationship with its employees.
ITEM 2. PROPERTIES
The Company and its various dealerships and other facilities occupy an aggregate
of approximately 100 acres of land, providing approximately 700,000 square feet
of building space. Such properties consist primarily of automobile showrooms,
display lots, service facilities, two body and paint shops, rental agencies,
supply facilities, automobile storage lots, parking lots and offices. The
Company believes its facilities are currently adequate for its needs and are in
good repair.
14
The following table sets forth each of the Company's facilities, the approximate
square footage at each facility, the acreage of each location and whether the
facility is owned or leased.
FACILITY
---------------------------------------
LEASED FROM
TOTAL LEASED LITHIA
BUILDING / TOTAL LAND OWNED BY FROM PROPERTIES
DEALERSHIP/FACILITY SQUARE FEET / ACRES COMPANY THIRD PARTY L.L.C. (1)
- ---------------------------------- ----------- ---------- -------- ----------- -----------
Lithia Motors, Medford, Oregon 5,255 0.51 X
Lithia Honda Pontiac Suzuki Isuzu
Volkswagen, Medford, Oregon 27,114 3.30 X
Lithia Toyota Lincoln-Mercury,
Medford, Oregon 56,658 5.09 X
Lithia Dodge Chrysler Plymouth
Mazda Jeep, Medford, Oregon 64,962 4.35 X
Saturn of Southwest Oregon, Medford,
Oregon 11,226 2.08 X
Grants Pass Auto Center,
Grants Pass, Oregon 32,138 4.12 X
Lithia Toyota of Vacaville, California 22,900 4.18 X
Lithia Dodge of Eugene, Oregon 35,706 5.58 X
Lithia Nissan Acura BMW,
Bakersfield, California 49,000 7.12 X
Lithia Donnelly Lincoln-Mercury Audi
Suzuki Isuzu, Reno, Nevada 38,373 6.00 X
Lithia Donnelly Isuzu Lincoln-Mercury
Suzuki, Sparks, Nevada 8,448 1.78 X
Lithia Sun Valley Ford Volkswagen,
Concord, California 78,240 12.60 X
Lithia Ford, Napa, California 26,900 6.20 X
Lithia Dodge, Concord California 21,722 4.46 X
Lithia Isuzu, Concord, California 2,000 1.50 X
Lithia Ford, Fresno, California 60,577 6.10 X
Lithia Mazda, Fresno, California 27,947 5.00 X
Lithia Body & Paint, Medford, Oregon 42,873 5.01 X
Thrift Auto Supply, Medford, Oregon 11,230 0.46 X
Discount Auto & Truck Rental,
Medford, Oregon 278 - X
Cellular World, Medford, Oregon 1,850 - X
Avis Rent-A-Car, Medford, Oregon 630 - X X
Vacant Parcel, Medford, Oregon (2) - 5.32 X
Lithia Nissan BMW, Medford, Oregon 22,687 4.03 X
Lithia Nissan Jeep, Fresno, California 47,914 6.00 X
Lithia Donnelly Volkswagen,
Reno, Nevada 9,120 4.45 X
Lithia Jeep, Bakersfield, California 12,030 2.06 X
_______________
(1) Lithia Properties L.L.C., an Oregon limited liability company, is owned by
certain affiliates of the Company.
(2) Held for future development.
15
ITEM 3. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation that will have a material adverse effect on its
business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock trades on the Nasdaq National Market under
the symbol LMTR. The quarterly high and low sales prices of the Company's
Common Stock for the period from December 18, 1996 (the date of the Company's
initial public offering) through December 31, 1997 were as follows:
1996 High Low
- ------------------------------------ --------- ---------
Quarter 4 (from December 18, 1996) $ 11.50 $ 10.94
1997
- ------------------------------------
Quarter 1 13.13 10.50
Quarter 2 12.38 9.50
Quarter 3 14.25 10.50
Quarter 4 19.00 13.63
The number of shareholders of record and approximate number of beneficial
holders of the Company's Class A Common Stock at February 27, 1998 was 27 and
628, respectively. All shares of the Company's Class B Common Stock are held by
Lithia Holding Company LLC. There were no cash dividends declared or paid
subsequent to the Company's initial public offering in December 1996. The
Company does not intend to declare or pay cash dividends. The Company intends to
retain any earnings that it may realize in the future to finance its
acquisitions and operations. The payment of any future dividends will be subject
to the discretion of the Board of Directors of the Company and will depend upon
the Company's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal restrictions on the payment of dividends and other
factors the Board of Directors deems relevant.
16
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
(in thousands except per share amounts) 1993 (1) 1994 (1) 1995 (1) 1996 (1) 1997
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles $42,663 $ 51,154 $ 53,277 $ 65,092 $161,294
Used vehicles 34,986 42,381 44,061 58,611 113,099
Other 14,590 15,888 16,858 19,141 45,402
-------- -------- -------- -------- --------
Total sales 92,239 109,423 114,196 142,844 319,795
Cost of sales 74,224 89,709 93,559 118,333 266,363
-------- -------- -------- -------- --------
Gross profit 18,015 19,714 20,637 24,511 53,432
Selling, general and administrative (2) 14,721 14,781 16,333 19,830 40,625
Depreciation and amortization (3) 401 393 402 448 1,169
-------- -------- -------- -------- --------
Operating income 2,893 4,540 3,902 4,233 11,638
Interest income 216 99 179 193 138
Interest expense (1,374) (954) (1,390) (1,353) (3,004)
Other income, net 607 902 1,036 1,156 725
-------- -------- -------- -------- --------
Income before minority interest and income taxes 2,342 4,587 3,727 4,229 9,497
Minority interest (233) (458) (778) (687) -
-------- -------- -------- -------- --------
Income before income taxes (1) (2) $ 2,109 $ 4,129 $ 2,949 3,542 9,497
Income tax (expense) benefit -------- -------- -------- 813 (3,538)
-------- -------- -------- -------- --------
Net income $ 4,355 $ 5,959
-------- --------
-------- --------
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Income before taxes, and minority interest, as reported $ 2,342 $ 4,587 $ 3,727 $ 4,229
Pro forma provision for taxes (4) (890) (1,743) (1,430) (1,623)
-------- -------- -------- --------
Pro forma net income $ 1,452 $ 2,844 $ 2,297 $ 2,606
-------- -------- -------- --------
-------- -------- -------- --------
Basic net income per share (5) $ 0.50 $ 0.56 $ 0.85
-------- -------- --------
-------- -------- --------
Diluted net income per share (5) $ 0.47 $ 0.52 $ 0.82
-------- -------- --------
-------- -------- --------
As of December 31,
-------------------------------------------------------------------
(in thousands) 1993 (1) 1994 (1) 1995 (1) 1996 (1) 1997
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 2,903 $ 9,325 $10,626 $25,431 $ 23,870
Total assets 38,088 41,981 44,117 68,964 166,526
Short-term debt 24,380 23,511 22,300 22,000 85,385
Long-term debt, less current maturities 3,789 6,748 10,743 6,160 26,558
Total shareholders' equity 4,074 6,094 3,716 27,914 37,877
(1) Effective January 1, 1997, the Company converted from the LIFO method
of accounting for inventories to the FIFO method. Accordingly, the
1993, 1994, 1995 and 1996 data has been restated to reflect this
change. See Note 1 of Notes to Consolidated Financial Statements.
(2) Prior to 1994, the Company and its affiliated entities paid cash
bonuses to their shareholders and members in amounts approximating
their respective income tax liability on their undistributed earnings
($532,000 in 1991, $640,000 in 1992, and $1.0 million in 1993), in
addition to their normal salaries. These cash bonuses are reflected in
the selling, general and administrative expense above. In 1994 and
subsequent periods, cash to meet the shareholders' and members' tax
liabilities was distributed to the shareholders and members as
dividends. The Company believes that for a fair evaluation of its
historical performance, results for 1991, 1992 and 1993 should be
adjusted to eliminate such bonus payments.
17
(3) Does not include depreciation included in cost of sales related to
vehicles leased to others. See "Consolidated Statements of Cash
Flows" for total depreciation and amortization.
(4) The Company was an S Corporation and accordingly was not subject to
federal and state income taxes during the periods indicated. Pro forma
net income reflects federal and state income taxes as if the Company
had been a C Corporation, based on the effective tax rates that would
have been in effect during these periods. See "Company Restructuring
and Prior S Corporation Status" and Notes 1 and 8 to the Company's
Consolidated Financial Statements.
(5) The per share amounts are pro forma for 1995 and 1996 and actual for
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Lithia Motors is a leading retailer of new and used vehicles in the western
United States, offering 21 domestic and imported makes of new automobiles and
light trucks at 22 locations: 12 in California, 7 in Oregon and 3 in Nevada.
The Company sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services, and arranges
related financing and insurance for its automotive customers. The Company has
grown primarily by successfully acquiring and integrating dealerships and by
obtaining new dealer franchises. The Company's strategy is to continue as a
leading acquirer and operator of dealerships in the western United States.
The following table sets forth selected condensed financial data expressed as
a percentage of total sales for the periods indicated for the average
automotive dealer in the United States (1997 data is not yet available).
AVERAGE U.S. DEALERSHIP
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
------ ------
Sales:
New vehicles 58.6% 57.7%
Used vehicles 29.0% 30.4%
Parts, service and other 12.4% 11.9%
------ ------
Total sales 100.0% 100.0%
Gross profit 12.9% 12.9%
Income before taxes 1.4% 1.5%
_______________
Source: NADA Industry Analysis Division (latest information available).
18
The following table sets forth selected condensed financial data for the Company
expressed as a percentage of total sales for the periods indicated below.
LITHIA MOTORS, INC.
YEAR ENDED DECEMBER 31,
----------------------------
1995 (1) 1996 (1) 1997
-------- -------- -------
Sales:
New vehicles 46.6% 45.6% 50.4%
Used vehicles 38.6% 41.0% 35.4%
Parts, service and other 14.8% 13.4% 14.2%
------ ------ ------
------ ------ ------
Total sales 100.0% 100.0% 100.0%
Gross profit 18.1% 17.2% 16.7%
Income before taxes 3.2% 3.0% 3.0%
- -------------
(1) Restated to reflect FIFO method of accounting.
Prior to January 1, 1997, the Company utilized the LIFO (Last In-First Out)
method of accounting for inventory ("LIFO Method"). Industry standard is to use
the specific identification method of accounting for vehicles and the FIFO
(First In-First Out) method of accounting for parts (herein collectively
referred to as the "FIFO Method"). Beginning January 1, 1997, the Company began
using the FIFO Method. Prior period statements have been restated to be
consistent with the current year presentation on the FIFO Method.
RECENT ACQUISITIONS
Since December 1996, the Company has completed the acquisition of 17 dealerships
representing 16 makes of new automobiles and light trucks. An additional
acquisition is pending. The Company has accounted for each of its acquisitions
by the purchase method of accounting, and the results of operations of these
dealerships have not been included in the Company's results of operations prior
to the date they were acquired by the Company.
1997 COMPARED TO 1996
SALES. Sales for the Company increased $177.0 million, or 123.9% to $319.8
million for the year ended December 31, 1997 from $142.8 million in 1996. Total
vehicles sold during 1997 increased by 9,853, or 100.8%, to 19,631 from 9,778
during 1996. Dealerships acquired in late 1996 and 1997 accounted for 9,836 of
the total vehicles sold in 1997. Same dealership sales growth was 4.8%, due to
a 3.1% increase in vehicle sales, and a 20.7% increase in other operating sales.
NEW VEHICLES. The Company sells 21 domestic and imported brands
ranging from economy to luxury cars, as well as sport utility
vehicles, minivans and light trucks. In 1997 and 1996, the Company
sold 7,493 and 3,274 new vehicles, generating revenues of $161.3
million and $65.1 million, which constituted 50.4% and 45.6% of the
Company's total sales, respectively.
The Company purchases substantially all of its new car inventory directly
from manufacturers who allocate new vehicles to dealerships based on the
amount of vehicles sold by the dealership and by the dealership's market
area. The Company will also exchange vehicles with other dealers to
accommodate customer demand and to balance inventory.
19
USED VEHICLES. The Company offers a variety of makes and models of used
cars and light trucks of varying model years and prices. Used vehicle sales
are an important part of the Company's overall profitability. In 1997 and
1996, the Company sold 12,138 and 6,504 used vehicles, respectively,
generating revenues of $113.1 million and $58.6 million, which constituted
35.4% and 41.0% of the Company's total revenue, respectively.
OTHER. The Company derives additional revenue from the sale of parts and
accessories, maintenance and repair services, auto body work, and financing
and insurance ("F&I") transactions. Other operating revenue increased
137.7% to $45.4 million during 1997, from $19.1 million during 1996, due to
an increased number of F&I transactions and, to a lesser extent, an
increase in revenues derived from service department maintenance and
repairs. To a limited extent, revenues from the parts and service
department are counter-cyclical to new car sales as owners repair existing
vehicles rather than buy new vehicles. The Company believes this helps
mitigate the effects of a downturn in the new vehicle sales cycle.
GROSS PROFIT. Gross profit increased 118.0% during 1997 to $53.4 million,
compared with $24.5 million for 1996, primarily because of the increase in new
and used vehicle unit sales during the period. The gross profit margin achieved
by the Company on new vehicle sales during 1997 and 1996 was 11.4% and 13.1%,
respectively. This compares favorably with the average gross profit margin of
6.5% realized by franchised automobile dealers in the United States on sales of
new vehicles in 1996. The Company sells used vehicles to retail customers and,
in the case of vehicles in poor condition or vehicles which have not sold within
a specified period of time, to other dealers and to wholesalers. Sales to other
dealers and to wholesalers are frequently at, or close to, cost and therefore
affect the Company's overall gross profit margin on used vehicle sales.
Excluding wholesale transactions, the Company's gross profit margin on used
vehicle sales was 11.4% in 1997 and 12.8% in 1996, as compared to the industry
average for 1996 of 11.0%. Total gross profit margin decreased to 16.7% for
1997 from 17.2% for 1996. The decrease in gross profit margins was primarily a
result of the acquisition of several new dealerships during 1997 which were
generating gross margins lower than those of the Company. The Company's gross
profit margin continues to exceed the average U.S. dealership gross profit
margin of 12.9% for 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's selling, general and
administrative ("SG&A") expense increased $20.8 million, or 104.9%, to $40.6
million for 1997 compared to $19.8 million for 1996. SG&A as a percentage of
sales decreased to 12.7% for 1997 from 13.9% for 1996. The increase in SG&A was
due primarily to increased selling, or variable, expense related to the increase
in sales resulting from the acquisition of additional dealerships, and increased
costs associated with being a public company. The decrease in SG&A as a percent
of total sales is a result of economies of scale gained as the fixed expenses
are spread over a larger revenue base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$721,000 or 160.9% to $1.2 million for the year ended December 31, 1997 compared
to $448,000 for 1996 primarily as a result of increased property and equipment
and goodwill related to acquisitions in 1997. Depreciation and amortization was
0.4% of sales in 1997 compared to 0.3% in 1996. These figures exclude
depreciation related to leased vehicles included in cost of sales.
20
INTEREST EXPENSE. Interest expense increased $1.6 million or 122.0% to
$3.0 million for the year ended December 31, 1997 compared to $1.4 million for
1996, primarily as a result of increased debt in 1997 related to acquisitions,
partly offset by increased cash balances for a majority of the year related to
the Company's initial public offering.
OTHER INCOME, NET. Other income, net, consisting primarily of management fees
from Lithia Properties, equity in the income of Lithia Properties and other
non-dealer service income, decreased 37.3% to $725,000 for 1997 from $1.2
million for 1996. This decrease was primarily due to the one-time benefit of
insurance proceeds received in 1996 related to damage caused by a hail storm.
INCOME TAX EXPENSE. Prior to December 18, 1996, the Company and its affiliated
entities were treated as S Corporations or as partnerships under the Internal
Revenue Code for federal income tax purposes since their inception and, as a
result, have not been subject to federal or certain state income taxes.
Immediately before the completion of the Company's initial public offering on
December 18, 1996, and in connection with its restructuring, the Company and its
affiliated entities that were S Corporations terminated their status as S
Corporations and became subject to federal and state income tax at applicable C
Corporation rates.
The Company's effective tax rate for 1997 was 37.3% compared to 38.4% (on a pro
forma basis) for 1996. The Company's effective tax rate may be affected by the
purchase of new dealerships in jurisdictions with tax rates either higher or
lower than the current estimated rate.
NET INCOME. Net income rose 128.7% to $6.0 million (1.9% of total sales) for
the year ended December 31, 1997 compared to $2.6 million (1.87% of total
sales), on a pro forma basis, for 1996, as a result of the individual line item
changes discussed above.
1996 COMPARED TO 1995
SALES. Sales for the Company increased $28.6 million, or 25% from $114.2
million for 1995, to $142.8 million for the year ended December 31, 1996. Total
vehicles sold increased by 1,919, or 24.4%, from 7,859 during 1995 to 9,778 in
1996. The increase in sales was primarily from increased new and used vehicle
unit sales as a result of increased levels of promotional activity for certain
popular brands, increased availability of late model used vehicles (both retail
and wholesale) which were in high demand and, to a lesser extent, from increased
average per unit sales prices on both new and used vehicles. Sales in the third
and fourth quarters of 1996 were also slightly higher due to a hail storm in
July that mildly damaged vehicles in the Company's lots in and around Medford,
Oregon. Such vehicles were sold at reduced prices, increasing unit sales, and
increasing the gross profit margin due to the receipt of insurance proceeds
applied to increase the gross profit rather than repair the vehicles. Sales in
the fourth quarter of 1996 also increased as a result of the acquisition of two
dealerships late in the quarter.
NEW VEHICLES. In 1996 and 1995, the Company sold 3,274 and 2,715 new
vehicles, respectively, generating revenues of $65.1 million and $53.2
million, which constituted 45.6% and 46.7% of the Company's total revenues,
respectively.
21
USED VEHICLES. In 1996 and 1995, the Company sold 6,504 and 5,144 used
vehicles, respectively, generating revenues of $58.6 million and $44.1
million, constituting 41.0% and 38.6%, respectively, of the Company's total
revenue.
OTHER. Revenue from maintenance and repair service, parts and other
operating revenue increased 13.5% to $19.1 million during 1996, from $16.9
million during 1995, due to an increased number of F&I transactions and to
a lesser extent, an increase in revenues derived from service department
maintenance and repairs.
GROSS PROFIT. Gross profit increased 18.8% during 1996 to $24.5 million,
compared with $20.6 million for 1995, primarily because of the increase in new
and used vehicle unit sales during the period. The gross profit margin achieved
by the Company on new vehicle sales during 1996 and 1995 was 13.1% and 12.8%,
respectively, compared to the average gross profit margin obtained by franchised
automobile dealers in the United States on sales of new vehicles of 6.5% in
1996. Excluding wholesale transactions, the Company's gross profit margin on
used vehicle sales was 12.8% in 1996 and 13.2% in 1995, as compared to the
industry average for 1995 of 11.5%. Gross profit margin decreased to 17.2% for
1996 from 18.1% for 1995. The decrease in gross profit margins is primarily due
to a reduction in gross profit margins on used vehicle sales caused by an
increase in wholesale sales of used vehicles, which typically provide negligible
profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's SG&A expense
increased $3.5 million, or 21.4%, to $19.8 million for 1996 compared to $16.3
million for 1995. SG&A as a percentage of sales decreased to 13.9% for 1996 from
14.3% for 1995. The increase in SG&A expense was due primarily to increased
selling, or variable, expense related to the increase in sales, and to a lesser
extent, an increase in compensation for additional personnel and management in
preparation for acquisitions.
INTEREST EXPENSE. In connection with the reorganization of the Company prior to
its initial public offering, and the termination of the Company's status as an
S Corporation, the Company distributed to the shareholders promissory notes
("Dividend Notes") in the aggregate amount of $3.9 million, representing
approximately all of the previously taxed undistributed earnings of the Company
through December 31, 1995. The Company's interest expense remained stable at
$1.4 million for 1996 and 1995 because the increase in total debt outstanding
for 1996 caused by the distribution of the Dividend Notes was offset by a
decrease in interest rates during 1996.
OTHER INCOME, NET. Other income, net, consisting primarily of management fees
from Lithia Properties, equity in the income of Lithia Properties and other
non-dealer service income, increased 11.6% to $1.2 million for 1996 from $1.0
million for 1995. This increase was primarily due to insurance proceeds received
in 1996 related to damage caused by a hail storm.
INCOME TAX BENEFIT. The Company and its affiliated entities have been treated
for federal income tax purposes as S Corporations or as partnerships under the
Internal Revenue Code since their inception and, as a result, have not been
subject to federal or certain state income taxes. Immediately before the
completion of the Company's initial public offering on December 18, 1996 and in
connection with its restructuring, the Company and its affiliated entities that
were S Corporations terminated their status as S Corporations and became subject
to federal and state income tax at applicable C Corporation rates. As a result
of the
22
conversion from S Corporation status to C Corporation status in December
1996, the Company recorded a deferred tax asset of $906,000 and a
corresponding benefit of $906,000 to income taxes in the fourth quarter of
1996.
Prior to 1994, the shareholders and members of the Company and the
affiliated entities each received substantial year-end tax payment bonuses to
provide the cash to pay income taxes on the Company's and affiliated entities
income which was taxable to the principals. Such payments were reflected in
SG&A expense.
NET INCOME. Net income was $2.6 million (1.8% of total sales) for the year
ended December 31, 1996, on a pro forma basis, compared to $2.3 million (2.0%
of total sales), on a pro forma basis, for 1995, as a result of the individual
line item changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for capital resources are to finance acquisitions,
capital expenditures and increased working capital requirements. Historically,
the Company has relied primarily upon internally generated cash flows from
operations, borrowings under its credit facility and the proceeds from its
initial public offering to finance its operations and expansion.
The Company's credit facility with a syndicate of banks, with U.S. Bank N.A. as
agent, provides for aggregate borrowings of $175 million (the "Credit
Facility"). The Credit Facility consists of (i) a $110 million revolving line
of credit to finance new and used vehicle inventory (the "Flooring Line"),
(ii) a $30 million revolving line of credit for acquisitions (the "Acquisition
Line"), (iii) a $10 million revolving line of credit for leased vehicles (the
"Lease Line"), (iv) a $10 million revolving line of credit for equipment (the
"Equipment Line"), and (v) a $15 million commitment for real estate acquisitions
(the "Real Estate Line").
The Credit Facility has a maturity date of October 1, 1998. At that time, the
Company has the right to elect to convert outstanding loans under the
Acquisition Line and the Equipment Line to a term loan payable over 5 years.
Amounts outstanding at December 31, 1997 were as follows (in thousands):
Flooring Line $82,598
Acquisition Line 5,000
Lease Line 5,211
Equipment and Real Estate Lines 4,827
-------
Total $97,636
-------
-------
Loans under the Credit Facility bear interest at LIBOR (London Interbank Offered
Rate) plus 150 to 275 basis points, equivalent to 7.625% to 8.75% at
December 31, 1997.
The Credit Facility contains financial covenants requiring the Company to
maintain compliance with, among other things, specified ratios of (i) minimum
net worth; (ii) total liabilities to net worth; (iii) funded debt to cash
flow; (iv) fixed charge coverage; and (v) maximum allowable capital
expenditures. The Company is currently in compliance with all such financial
covenants.
23
Since December 1996 when the Company completed its initial public offering,
the Company has acquired 17 dealerships. The aggregate net investment by the
Company was approximately $48.6 million (excluding borrowings on its credit
lines to finance acquired vehicle inventories and equipment and the purchase
of any real estate).
The Company anticipates that it will be able to satisfy its cash requirements
at least through December 31, 1998, including its currently anticipated
growth, primarily with cash flow from operations, borrowings under the
Flooring Line and the Company's other lines of credit, cash currently
available, and the proceeds from its pending secondary offering of its Class
A Common Stock. In addition, the Company is exploring various alternative
financing arrangements with respect to its real estate, the result of which
would be to provide additional available cash. No specific plans have been
made in that regard as of the date of this Form 10-K.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been lower in the first and fourth
quarters of each year largely due to consumer purchasing patterns during the
holiday season, inclement weather and the reduced number of business days
during the holiday season. As a result, financial performance for the Company
is generally lower during the first and fourth quarters than during the other
quarters of each fiscal year; however, this did not hold true for the fourth
quarters of 1996 and 1995. Management believes that interest rates, levels of
consumer debt, consumer buying patterns and confidence, as well as general
economic conditions, also contribute to fluctuations in sales and operating
results. The timing of acquisitions may cause substantial fluctuations of
operating results from quarter to quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. The
objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners. The Company expects to adopt
SFAS 130 in the first quarter of 1998 and does not expect comprehensive
income to be materially different from currently reported net income.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way that public
business enterprises report information about operating segments in interim
and annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The Company expects to adopt SFAS 131 for its fiscal year
beginning January 1, 1998.
INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's revenues or
profitability. In the past, the Company has been able to maintain its profit
margins during inflationary periods.
24
YEAR 2000
The Company has assessed the implications of the Year 2000 issue and has
determined that the cost of making its information systems Year 2000 compliant
will not be material.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No disclosure is required under this item.
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 14 of Part IV of this document.
Quarterly financial data, pro forma for income taxes in 1996, for each of the
eight quarters in the two-year period ended December 31, 1997 is as follows:
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ----------------------------------- ----------- ----------- ----------- ------------
1997
- ----
Net sales $ 54,704 $ 66,422 $ 85,573 $ 113,096
Gross profit 8,949 10,716 14,185 19,582
Income before income taxes 1,864 2,227 2,573 2,833
Income taxes 720 859 994 965
Net income 1,144 1,368 1,579 1,868
Basic net income per share 0.17 0.20 0.23 0.27
Diluted net income per share 0.16 0.19 0.22 0.25
1996 (1)
- --------
Net sales $ 32,446 $ 36,597 $ 36,523 $ 37,278
Gross profit 5,599 6,009 6,566 6,337
Income before minority interest and
taxes as reported (2) 937 1,203 1,205 884
Pro forma income taxes 360 477 462 324
Pro forma net income before
minority interest (2) 577 726 743 560
Pro forma basic net income per
share (2) 0.13 0.16 0.16 0.12
Pro forma diluted net income
per share (2) 0.12 0.15 0.15 0.11
- --------------
(1) The quarterly data for 1996 has been restated to give effect for the
conversion from the LIFO method of accounting for inventory to the
FIFO method, which was effective January 1, 1997.
(2) The quarterly data for 1996 is pro forma in order to be comparable to
1997 data due to S Corporation status in 1996 and C Corporation status
in 1997, as well as the elimination of minority interest pursuant to
the restructuring at the time of the initial public offering.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is included under the captions ELECTION OF
DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE, respectively, in the Company's Information Statement for its 1998
Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption EXECUTIVE
COMPENSATION in the Company's Information Statement for its 1998 Annual Meeting
of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's
Information Statement for its 1998 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Information Statement
for its 1998 Annual Meeting of Shareholders and is incorporated herein by
reference.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS AND SCHEDULES
The Consolidated Financial Statements, together with the report thereon of KPMG
Peat Marwick LLP, are included on the pages indicated below:
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets -- December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years
ended December 31, 1997,1996 and 1995 F-3
Consolidated Statements of Changes in Shareholders'
Equity - December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Cash Flows for the years
ended December 31, 1997, 1996 and 1995 F-5
Notes to Consolidated Financial Statements F-6
There are no schedules required to be filed herewith.
(b) REPORTS ON FORM 8-K
The Company filed the following reports on Form 8-K during the quarter ended
December 31, 1997:
1. Form 8-K/A dated August 8, 1997 under Items 2 and 7, as filed with the
Securities and Exchange Commission on October 14, 1997.
2. Form 8-K dated October 1, 1997 under Items 2 and 7, as filed with the
Securities and Exchange Commission on October 14, 1997.
3. Form 8-K/A dated October 1, 1997 under Items 2 and 7, as filed with
the Securities and Exchange Commission on December 12, 1997.
4. Form 8-K dated December 16, 1997 under Items 2 and 7, as filed with
the Securities and Exchange Commission on December 30, 1997.
27
(c) EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
EXHIBITS DESCRIPTION
- -------- -----------
3.1 (a) Restated Articles of Incorporation of Lithia Motors, Inc.
3.2 (a) Bylaws of Lithia Motors, Inc.
4.1 (a) Specimen Common Stock certificate
10.1.1 (a) 1996 Stock Incentive Plan
10.1.2 (a) Form of Incentive Stock Option Agreement
10.1.3 (a) Form of Non-Qualified Stock Option Agreement
10.1.4 (a) Form of Incentive Stock Option Agreement
10.2.1 (b) 1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
10.3.1 Employee Stock Purchase Plan
10.4.1 (a) Chrysler Corporation Chrysler Sales and Service Agreement, dated
January 10, 1994, between Chrysler Corporation and Lithia
Chrysler Plymouth Jeep Eagle, Inc. (Additional Terms and
Provisions to the Sales and Service Agreements are in Exhibit
10.4.2 hereto) (1)
10.4.2 (a) Chrysler Corporation Dealer Agreement Additional Terms and Provisions
10.5.1 Honda Automobile Dealer Sales and Service Agreement dated October
14, 1997, between American Honda Motor Company, Inc. and Lithia
HPI, Inc. dba Lithia Honda (standard provisions are in Exhibit
10.5.3 hereto).
10.5.2 Acura Automobile Dealer Sales and Service Agreement dated October
2, 1997, between American Honda Motor Company, Inc. and Lithia
BB, Inc. dba Lithia Acura of Bakersfield (standard provisions are
in Exhibit 10.5.3 hereto).
10.5.3 American Honda Automobile Dealer Sales and Service Agreement Standard
Provisions.
10.5.4 Agreement between American Honda Motor Company, Inc. and Lithia
Motors, Inc. et al. dated December 17, 1996.
10.5.5 Amendment dated October 2, 1997, to Agreement between American
Honda Motor Company, Inc. and Lithia Motors, Inc. et al. dated
December 17, 1996.
10.6.1 (a) Isuzu Dealer Sales and Service Agreement, dated June 5, 1996
between American Isuzu Motors, Inc. and Lithia Motors, Inc.
(Additional Provisions to Dealer Sales and Service Agreements are
in Exhibit 10.6.2 hereto) (2)
10.6.2 (a) Isuzu Dealer Sales and Service Agreement Additional Provisions
10.6.3 (c) Supplemental Agreement, dated December 27, 1996 to Isuzu Dealer
Sales and Service Agreement (3)
10.7.1 Mercury Sales and Service Agreement, dated June 1, 1997, between
Ford Motor Company and Lithia TLM, LLC dba Lithia Lincoln Mercury
(general provisions are in Exhibit 10.7.3 hereto) (4)
10.7.2 Supplemental Terms and Conditions agreement between Ford Motor
Company and Lithia Motors, Inc. dated June 12, 1997.
10.7.3 (a) Mercury Sales and Service Agreement General Provisions
10.8.1 Supplemental Agreement dated January 16, 1998, to General Motors
Corporation Dealer Sales and Service Agreement between General
Motors Corporation and Lithia Motors, Inc.
10.8.2 (a) General Motors Corporation Dealer Sales and Service Agreement,
dated March 12, 1993, between General Motors Corporation Pontiac
Division and Lithia Motors, Inc. dba Lithia Pontiac
28
EXHIBITS DESCRIPTION
- -------- -----------
10.8.3 (a) General Motors Dealer Sales and Service Agreement Standard
Provisions
10.9.1 (a) Mazda Dealer Agreement, dated April 11, 1994 between Mazda Motor
of America, Inc. and Lithia Dodge, L.L.C. dba Lithia Mazda
10.10.1 Saturn Distribution Corporation Retailer Agreement, dated June
16, 1997, between Saturn Distribution Corporation and Saturn of
Southwest Oregon, Inc.
10.10.2 Supplemental Agreement to Saturn Retailer Agreement, dated August
26, 1997, between Saturn of Southwest Oregon, Inc., Lithia
Motors, Inc., Sidney B. DeBoer, Lithia Holding, LLC, and Saturn
Distribution Corporation.
10.11.1 (a) Toyota Dealer Agreement, dated January 30, 1990, between Toyota
Motor Distributors, Inc. and Lithia Motors, Inc. dba Medford
Toyota (5)
10.11.2 (a) Toyota Dealer Agreement Standard Provisions
10.11.3 (a) Agreement, dated September 30, 1996, between Toyota Motor
Sales, U.S.A., Inc. and Lithia Motors, Inc.
10.11.4 (c) Addendum dated December 26, 1996, to Section X - additional
provisions to Toyota Dealer Agreement, dated November 15, 1996
between Toyota Motor Sales, USA, Inc. and Lithia TKV, Inc.
10.12.1 Suzuki Term Dealer Sales and Service Agreement, dated May 14,
1997, between American Suzuki Motor Corporation and Lithia HPI,
Inc. dba Lithia Suzuki (standard provisions are in Exhibit
10.12.2 hereto) (6)
10.12.2 Suzuki Dealer Sales and Service Agreement Standard Provisions.
10.13.1 BMW Dealer Agreement, dated October 3, 1997, between BMW of North
America, Inc. and Lithia BB, Inc.
10.14.1 Hyundai Motor America Dealer Sales and Service Agreement, dated
January 26, 1998, between Hyundai Motor America and Lithia JEF,
Inc.
10.15.1 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. (standard
provisions are in Exhibit 10.15.2 hereto) (7)
10.15.2 Nissan Standard Provisions
10.16.1 Volkswagen Dealer Agreement dated April 5, 1996, between
Volkswagen United States, Inc. and Lithia Motors, Inc. dba Lithia
Volkswagen. (standard provisions are in Exhibit 10.16.2 hereto)
10.16.2 Volkswagen Dealer Agreement Standard Provisions *
10.17.1 (a) Commercial Lease, dated September 20, 1996, between Lithia
Properties, L.L.C. and Lithia Motors, Inc. (8)
10.17.2 (a) Form of Commercial Lease, effective January 1, 1997, between
Lithia Properties, L.L.C. and Lithia Motors, Inc. (9)
10.18.1 (a) Asset Purchase Agreement, dated August 2, 1996, between Lithia
Motors, Inc. and Roberts Dodge, Inc.
10.18.2 (a) Land Sale Contract, dated August 2, 1996, between Lithia
Properties, L.L.C. and Milford G. Roberts, Sr. and Sandra L.
Roberts
10.18.3 (a) Assignment of Land Sale Contract, dated November 5, 1996, between
Lithia Properties, LLC and Lithia Motors, Inc.
10.19.1 (a) Commercial Lease, dated April 1, 1992, between Billy J. Wilson et
al and Wilson/Malasoma, Inc. relating to facility in Vacaville,
California.
10.20.1 (d) Agreement for Purchase and Sale of Business Assets between
Magnussen Dodge, Inc. and Lithia Motors, Inc. dated January 21,
1997
10.20.2 (d) Lease between Solano Way Partnership and Lithia Real Estate, Inc.
dated February 14, 1997
29
EXHIBITS DESCRIPTION
- -------- -----------
10.21.1 (c) Agreement for Purchase and Sale of Business Assets between
Magnussen-Barbee Ford, Lincoln-Mercury, Inc. and Lithia Motors,
Inc. dated February 21, 1997
10.21.2 (e) Lease between John Ferrogiaro and Bernard L. Magnussen et al., as
amended by Second Amendment to Lease, dated December 12, 1996,
and Consent to Assignment and Third Amendment to Lease, by and
among John Ferrogiaro, Magnussen Dealership Group and Lithia Real
Estate, Inc.
10.22.1 (f) Agreement for Purchase and Sale of Business Assets between Sun
Valley Ford, Inc. and Lithia Motors, Inc. dated April 2, 1997
10.22.2 (g) Promissory Note for Leasehold Improvements issued by Lithia
Motors, Inc. to Sun Valley Ford, Inc. dated August 8, 1997.
10.22.3 (g) Promissory Note for Intangible Assets issued by Lithia Motors,
Inc. to Sun Valley Ford, Inc. dated August 8, 1997.
10.22.4 (h) Standard Industrial Lease, as amended and assignment thereof,
among Edmund C. Bartlett, Jr., Anna Bartlett, Sun Valley Ford,
Inc. and Lithia Motors, Inc. dated July 16, 1997
10.22.5 (h) Lease Agreement and assignment thereof, among George Valente and
Lena E. Valente as trustees of the George and Lena E. Valente
Trust, Sun Valley Ford, Inc. and Lithia Motors, Inc. dated August
4, 1997.
10.23.1 (f) Agreement for Purchase and Sale of Business Assets between Dick
Donnelly Automotive Enterprises, Inc. dba Dick Donnelly
Lincoln-Mercury, Audi, Suzuki, Isuzu and Lithia Motors, Inc.
dated April 2, 1997
10.23.2 Lease Agreement among Paul H. Snider and Dick Donnelly
Automotive Enterprises, Inc. dated October 17, 1989
10.23.3 Lease Agreement among Richard M. Donnelly and Susan K. Donnelly
and Lithia Real Estate, Inc. dated October 1, 1997
10.24.1 (f) Agreement for Purchase and Sale of Business Assets between Nissan
BMW, Inc. dba Bakersfield Nissan, Acura, BMW and Lithia Motors,
Inc. dated June 26, 1997
10.24.2 Real Propertyt Lease Agreement among Eloy C. Renfrow and Lithia
Real Estate, Inc. dated October 2, 1997
10.25.1 (i) Agreement for Purchase and Sale of Business Assets between
Century Ford, Inc. and Lithia Motors, Inc. dated September 1,
1997
10.25.2 Lease Agreement among BR Enterprise and Lithia Motors, Inc.
dated September 3, 1997
10.26.1 (j) Agreement for Purchase and Sale of Business Assets between Daniel
A. Haus Group, Inc. dba Quality Nissan and Quality Jeep/Eagle
Hyundai and Lithia Motors, Inc. dated October 10, 1997
10.27.1 Agreement for Purchase and Sale of Business Assets between
Medford Nissan, Inc. dba "Medford Nissan BMW Kia", Lithia Motors,
Inc, or its nominee, and James D. Plummer, dated September 8,
1997.
10.27.2 Real Property Lease Agreement among James D. Plummer and Lithia
Real Estate, Inc. dated October 14, 1997
10.28.1 Agreement for Purchase and Sale of Business Assets between United
American Funding, Inc. dba "Reno Volkswagen" and Lithia Motors,
Inc., or its nominee, dated December 31, 1997.
10.28.2 Lease Agreement among Teddy Bear Havas Motors, Inc., and United
American Funding, Inc. dated July 28, 1992
10.29.1 (a) Reorganization Agreement, dated as of October 10, 1996, by and
among Lithia Motors, Inc., LGPAC, Inc., Lithia DM, Inc., Lithia
MTLM, Inc., Lithia HPI, Inc., Lithia SSO, Inc., Lithia Rentals,
Inc., Discount Auto & Truck Rental, Inc., Lithia Auto Services,
Inc., Lithia Holding Company L.L.C., Sidney B. DeBoer, M.L. Dick
Heimann, R. Bradford Gray, and Steve R. Philips
10.30.1 Credit Agreement among U.S. Bank National Association, as Agent
and Lender, and Lithia Motors, Inc. and its Affiliates and
Subsidiaries dated December 22, 1997.
10.30.2 Security Agreement among U.S. Bank National Association, as Agent
and Lender, and Lithia Motors, Inc. and its Affiliates and
Subsidiaries dated December 22, 1997.
30
EXHIBITS DESCRIPTION
- -------- -----------
10.30.3 Guaranty among U.S. Bank National Association, as Agent and
Lender, and Lithia Motors, Inc. and its Affiliates and
Subsidiaries dated December 22, 1997.
10.31.1 (a) Management Contract between Lithia Leasing, Inc. and Lithia
Properties LLC.
10.32.1 (a) Purchase and Sale Agreement, dated December 13, 1996, between
Lithia Properties and Lithia Real Estate, Inc.
10.33.1 Agreement for Purchase and Sale of Business Assets between
E.W.H. Group, Inc. d/b/a Haddad Jeep/Eagle and Lithia Motors,
Inc. dated October 14, 1997 and Addendum to such agreement.
21.1 Subsidiaries of Lithia Motors, Inc.
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
- -------------
(a) Incorporated by reference from 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.
(b) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration Statement No. 333-45553, as filed with the
Securities Exchange Commission on February 4, 1998.
(c) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, as filed with the Securities
Exchange Commission on March 31, 1997.
(d) Incorporated by reference from the Company's Form 8-K as filed with
the Securities Exchange Commission on June 6, 1997.
(e) Incorporated by reference from the Company's Form 8-K as filed with
the Securities Exchange Commission on July 16, 1997.
(f) Incorporated by reference from the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997, as filed with the Securities
Exchange Commission on August 12, 1997.
(g) Incorporated by reference from the Company's Form 8-K as filed with
the Securities Exchange Commission on August 21, 1997.
(h) Incorporated by reference from the Company's Form 8-K/A as filed with
the Securities Exchange Commission on October 14, 1997.
(i) Incorporated by reference from the Company's Form 8-K as filed with
the Securities Exchange Commission on December 30, 1997.
(j) Incorporated by reference from the Company's Form 8-K as filed with
the Securities Exchange Commission on January 30, 1998.
(1) Substantially identical agreements exist between Chrysler Corporation
and Lithia Chrysler Plymouth Jeep Eagle, Inc., with respect to
Jeep, Eagle, and Plymouth sales and service; between Chrysler
Corporation and Lithia's Grants Pass Auto Mart, with respect to Jeep,
Eagle, Dodge and Plymouth sales and service; between Chrysler
Corporation and Medford Dodge with respect to Dodge sales and service;
and between Chrysler Corporation and Lithia DC, Inc., with respect to
Dodge sales and service.
(2) A substantially identical agreement exists between American Isuzu
Motors, Inc and Lithia SALMIR, Inc. with respect to Isuzu sales and
service.
(3) Substantially identical agreements exist between American Isuzu
Motors, Inc., Lithia Motors, Inc. and Lithia DC, Inc. and between
American Isuzu Motors, Inc., Lithia Motors, Inc. and Lithia SALMIR,
Inc.
31
(4) A substantially identical agreement exists between the same parties
with respect to Lincoln Sales and Services; between Ford Motor Company
and Lithia FN, Inc. with respect to Lincoln and Mercury sales and
service; and between Ford Motor Company and Lithia FVHC with respect
to Ford sales and service.
(5) A substantially identical agreement exists between Toyota Motor Sales,
USA, Inc. and Lithia TKV, Inc. dba Lithia Toyota Vacaville dated
November 15, 1996 with respect to Toyota Sales and Service.
(6) A substantially identical agreement exists between American Suzuki
Motor Corporation and Lithia SALMIR, Inc., dated October 6, 1997, with
respect to Suzuki sales and service.
(7) A substantially identical agreement exists between Nissan Motor
Corporation and Lithia NB, Inc., dated October 2, 1997, with respect
to Nissan sales and service.
(8) Substantially identical leases of the same date exist between Lithia
Properties L.L.C. and (i) Lithia TLM, L.L.C. and Lithia MTLM, Inc.,
relating to the properties located in Medford, Oregon at 360 E.
Jackson St., 400 N. Central Ave., 325 E. Jackson St., 343-345 Apple
St., 440-448 Front St., 3rd & Front St. and 344 Bartlett, collectively
at a lease rate of $42,828 per month; (ii) Lithia Motors, Inc. dba
Lithia Body and Paint, relating to the properties in Medford, Oregon,
located at 4th & Bartlett, 235 Bartlett, 220 N. Bartlett, and 275 E.
5th; and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively at a
lease rate of $16,890 per month; (iii) Discount Auto and Truck
Rental, Inc., relating to properties located in Medford, Oregon, at
326 N. Bartlett, 315 & 321 Apple St., and in Grants Pass, Oregon, at
1470 N.E. 7th, collectively at a lease rate of $2,609 per month;
(iv) Lithia Dodge, L.L.C. and Lithia DM, Inc., relating to properties
located in Medford, Oregon, at 322 E. 4th, 315 & 324 E. 5th St., 225,
319 & 323 E. 6th, Riverside & 4th, Riverside & 6th, and 129 N.
Riverside, collectively at a lease rate of $53,490 per month;
(v) Lithia Grants Pass Auto Center and L.L.C., LGPAC, Inc., relating
to the property located in Grants Pass, Oregon, at 1421 N.E. 6th at a
lease rate of $25,625 per month; (vi) Lithia Motors, Inc. and Lithia
SSO, Inc., relating to properties located in Medford, Oregon, at 400,
705-717 N. Riverside Ave., 712 and 716 Pine St., and 502 Maple St.,
collectively at a lease rate of $20,048 per month; (vii) Lithia
Motors, Inc. dba Thrift Auto Supply, relating to the properties
located in Medford, Oregon, at 801 N. Riverside Ave, and 503 Maple
St., collectively at a lease rate of $6,265 per month; and
(viii) Lithia Motors, Inc. and Lithia HPI, Inc., relating to
properties located in Medford, Oregon, at 700 and 800 N. Central Ave,
217 and 220 N. Beatty St., 710 and 815-817 Niantic St., and 311 & 313
Maple St., collectively at a lease rate of $30,350 per month.
(9) Substantially identical lease will exist between Lithia Properties
L.L.C. and (i) Lithia MTLM, Inc., relating to the properties located
in Medford, Oregon at 360 E. Jackson St., 400 N. Central Ave., 325 E.
Jackson St., 343-345 Apple St., 440-448 Front St., 3rd & Front St. and
344 Bartlett, 315 & 321 Apple St., and 401 E. 4th St., collectively at
a lease rate of $33,728 per month; (ii) Lithia Auto Services, Inc. dba
Lithia Body and Paint, relating to the properties in Medford, Oregon,
located at 401 E. 4th St., 4th & Bartlett, 235 Bartlett, 220 N.
Bartlett, and 275 E. 5th; and in Grants Pass, Oregon, at 1470 N.E.
7th, and 801 N. Riverside Ave, collectively at a lease rate of $17,439
per month; (iii) Lithia Rentals, Inc., dba Discount Auto and Truck
Rental, relating to properties located in Medford, Oregon, at 971
Gilman Rd., and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively
at a lease rate of $962 per month; (iv) Lithia Dodge, L.L.C. and
Lithia DM, Inc., relating to properties located in Medford, Oregon, at
322 E. 4th, 315 & 324 E. 5th St., 225, 319 & 323 E. 6th, Riverside &
4th, Riverside & 6th, and 129 N. Riverside, collectively at a lease
rate of $53,490 per month; (v) LGPAC, Inc., relating to the property
located in Grants Pass, Oregon, at 1421 N.E. 6th and 1470 N.E. 7th,
collectively at a lease rate of $18,023 per month; (vi) Lithia
SSO, Inc., relating to properties located in Medford, Oregon, at 400,
705-717 N. Riverside Ave., collectively at a lease rate of $16,364 per
month; (vii) Lithia DM, Inc., relating to properties located in
Medford, Oregon, at 324 E. 5th, 319 & 323 E. 6th St., 6th & Riverside,
129 N. Riverside, 4th & Riverside, 225 E. 6th, 315 E. 5th, 322 E. 4th,
201 N. Riverside, 309, 315, 333, and 329 N. Riverside, 334 & 346 Apple
St. and 401 E. 4th, collectively at a lease rate of $30,557 per month;
and (viii) Lithia Motors, Inc., relating to properties located in
Medford, Oregon, at 360 E. Jackson, 325 E. Jackson, 345 B. Bartlett,
and 401 E. 4th St., collectively at a lease rate of $5,309 per month.
Substantially identical lease agreements also exist between Lithia Real
Estate, Inc., and (i) Lithia FVHC, Inc. relating to the properties in
Concord, California, located at 1260 Diamond Way and 2285 Diamond Way;
(ii) Lithia BB, Inc., relating to the property in Bakersfield,
California, located at 3201 Cattle Drive; (iii) Lithia DE, Inc.,
relating to the properties in Eugene, Oregon, located at 2121 Centennial
Boulevard and 80 Centennial Loop; (iv) Lithia TKV, Inc. relating to the
property in Vacaville, California, located at 100 Auto Center Drive;
(v) Lithia Auto Services, Inc. relating to the property in Medford,
Oregon, located at 2665 Bullock Road; (vi) Lithia FN, Inc. relating to
the property in Napa, California, located at 300 Sascol Avenue;
(vii) Lithia NB, Inc. relating to the properties in Bakersfield,
California, located at 3101 and 3201 Cattle Drive and 2800 and 2808
Pacheco Road; (viii) Lithia MMF, Inc. relating to the properties in
Fresno, California, located and 155 and 165 East Auto Center Drive;
(ix) Lithia FMF, Inc. relating to the properties in Fresno, California,
located at 175 and 195 East Auto Center Drive; (x) Lithia DC, Inc.
relating to the property in Concord, California, located at 4901 Marsh
Drive; (xi) Lithia SALMIR, Inc. relating to the properties in Reno,
Nevada, located at 7063 and 7175 South Virginia Street and the property
in Sparks, Nevada, located at 40 Victorian Avenue; and (xii) Lithia NF,
Inc., relating to the property in Fresno, California, located at
5580 North Blackstone Avenue.
(10) A substantially indentical agreement (except for the price paid and the
purchase rather than lease of the business property) exists between
Rodway Chevrolet Co., and Lithia Motors, Inc. dated March 19, 1998,
with respect to the purchase and sale of business assets of Rodway
Chevrolet located in Redding, California.
32
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: March 20, 1998 LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
-------------------------
Sidney B. DeBoer
Chairman of the Board 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 March 20, 1998:
SIGNATURE TITLE
- --------- -----
/s/ SIDNEY B. DEBOER Chairman of the Board and
- -------------------------- Chief Executive Officer
Sidney B. DeBoer (Principal Executive Officer)
/s/ BRIAN R. NEILL Senior Vice President and Chief Financial Officer
- -------------------------- (Principal Financial and Accounting Officer)
Brian R. Neill
/s/ M. L. DICK HEIMANN Director, President and
- -------------------------- Chief Operating Officer
M. L. Dick Heimann
/s/ R. BRADFORD GRAY
- -------------------------- Director and Executive Vice President
R. Bradford Gray
/s/ THOMAS BECKER
- -------------------------- Director
Director
/s/ WILLIAM J. YOUNG
- -------------------------- Director
William J. Young
33
Independent Auditors' Report
The Board of Directors and Shareholders
Lithia Motors, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lithia
Motors, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997. 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 generally accepted auditing
standards. 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 consolidated financial position
of Lithia Motors, Inc. and Subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventories, effective January 1, 1997.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 6, 1998
F-1
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
(IN THOUSANDS) ---------------------
1997 1996 (1)
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 18,454 $ 15,413
Trade receivables 7,655 2,260
Notes receivable, current portion 427 414
Notes receivable, related party - 308
Inventories, net 89,845 33,362
Vehicles leased to others, current portion 738 524
Prepaid expenses and other 913 372
Deferred income taxes 1,855 1,646
--------- ---------
Total current assets 119,887 54,299
Property and equipment, net of accumulated
depreciation of $2,822 and $2,073 16,265 4,616
Vehicles leased to others, less current portion 4,588 4,500
Notes receivable, less current portion 309 377
Goodwill, net of accumulated amortization
of $293 and $0 24,062 4,101
Other non-current assets, net 1,415 1,071
--------- ---------
Total assets $ 166,526 $68,964
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $500
Flooring notes payable 82,598 19,645
Current maturities of long-term debt 2,688 1,855
Current portion of capital leases 99 -
Trade payables 3,874 2,434
Accrued liabilities 6,758 2,482
Payable to related parties - 1,952
--------- ---------
Total current liabilities 96,017 28,868
Long-term debt, less current maturities 24,242 6,160
Long-term capital leases, less current portion 2,316 -
Deferred revenue 2,519 3,250
Other long-term liabilities 447 -
Deferred income taxes 3,108 2,772
--------- ---------
Total liabilities 128,649 41,050
--------- ---------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 15,000
shares; issued and outstanding none - -
Class A Common Stock, no par value; authorized
100,000 shares; issued and outstanding 2926
and 2,500 28,117 24,172
Class B Common Stock, no par value; authorized
25,000 shares;
issued and outstanding 4,110 and 4,110 511 511
Additional paid-in capital 59 -
Retained earnings 9,190 3,231
--------- ---------
Total shareholders' equity 37,877 27,914
--------- ---------
Total liabilities and shareholders' equity $166,526 $68,964
--------- ---------
--------- ---------
- ---------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS oF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996(1) 1995(1)
-------- -------- -------
(in thousands, except per share amounts)
Sales:
Vehicles $274,393 $123,703 $ 97,338
Service, body, parts and other 45,402 19,141 16,858
-------- -------- -------
Total sales 319,795 142,844 114,196
-------- -------- -------
Cost of sales
Vehicles 245,812 108,743 85,381
Service, body, parts and other 20,551 9,590 8,178
-------- -------- -------
Cost of sales 266,363 118,333 93,559
-------- -------- -------
Gross profit 53,432 24,511 20,637
Selling, general and administrative 40,625 19,830 16,333
Depreciation and amortization 1,169 448 402
-------- -------- -------
Operating income 11,638 4,233 3,902
-------- -------- -------
Other income (expense)
Equity in income of affiliate 102 44 67
Interest income 138 193 179
Interest expense (3,004) (1,353) (1,390)
Other, net 623 1,112 969
-------- -------- -------
(2,141) (4) (175)
-------- -------- -------
Income before minority interest and income taxes 9,497 4,229 3,727
Minority interest - (687) (778)
-------- -------- -------
Income before income taxes 9,497 3,542 2,949
Income tax (expense) benefit (3,538) 813 -
-------- -------- -------
Net income $ 5,959 $ 4,355 $ 2,949
-------- -------- -------
-------- -------- -------
Basic net income per share $0.85 $0.94(2) $0.64(2)
-------- -------- -------
-------- -------- -------
Diluted net income per share $0.82 $0.88(2) $0.60(2)
-------- -------- -------
-------- -------- -------
PRO FORMA NET INCOME DATA (UNAUDITED)
Income before minority interest and income
taxes, as reported $ 4,229 $ 3,727
Pro forma income taxes (1,623) (1,430)
-------- -------
Pro forma net income $2,606 $2,297
-------- -------
-------- -------
Pro forma basic net income per share $0.56 $0.50
-------- -------
-------- -------
Pro forma diluted net income per share $0.52 $0.47
-------- -------
-------- -------
- -------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
(2) Not comparable to 1997 data due to S Corporation status in 1996;
therefore, this is a pre-tax earnings per share amount. See Note 8
of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-3
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK
-----------------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
----------------------------------------- PAID-IN RETAINED SHAREHOLDERS'
(in thousands) SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS(1) EQUITY(1)
-------- -------- -------- -------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1994 - $ - 3,017 $ 751 $ - $ 5,343 $ 6,094
Net income - - - - - 2,949 2,949
Issuance of Class B Common Stock - - 1,093 50 - - 50
Dividends - - - - - (5,377) (5,377)
-------- -------- -------- -------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1995 - - 4,110 801 - 2,915 3,716
Net income - - - - - 4,355 4,355
Dividends - - - - - (4,460) (4,460)
Contribution of minority interest to Class
B Common Stock pursuant to
restructuring - - - 131 - - 131
Restructuring in connection with initial
public offering - - - (421) - 421 -
Issuance of Class A Common Stock,
net of offering expenses of $3,328 2,500 24,172 - - - - 24,172
-------- -------- -------- -------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1996 2,500 24,172 4,110 511 - 3,231 27,914
Net income - - - - - 5,959 5,959
Underwriters' over-allotment option 375 3,783 - - - - 3,783
Compensation for stock option issuances - - - - 59 - 59
Exercise of stock options 51 162 - - - - 162
-------- -------- -------- -------- ---------- ----------- -------------
BALANCE, DECEMBER 31, 1997 2,926 $28,117 4,110 $ 511 $59 $ 9,190 $37,877
-------- -------- -------- -------- ---------- ----------- -------------
-------- -------- -------- -------- ---------- ----------- -------------
_______________
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-4
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
YEAR ENDED DECEMBER 31,
-----------------------------------------
(in thousands) 1997 1996 1995
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,959 $ 4,355 $ 2,949
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 2,483 1,756 1,907
Compensation related to stock option issuances 59 - -
(Gain) loss on sale of assets (1) (239) (305)
Gain on sale of vehicles leased to others (286) - -
Deferred income taxes 336 (906) -
Minority interest in income - 687 778
Equity in income of affiliate (102) (44) (67)
(Increase) decrease in operating assets:
Trade and installment contract receivables, net (5,087) (852) (692)
Inventories (9,009) (7,120) 1,858
Prepaid expenses and other (678) (19) 30
Other noncurrent assets (486) (196) (277)
Increase (decrease) in operating liabilities:
Flooring notes payable 24,622 (3,283) (1,628)
Trade payables 1,440 979 609
Accrued liabilities 4,252 797 306
Other liabilities (2,274) 3,095 677
Proceeds from sale of vehicles leased to others 5,330 5,760 4,757
Expenditures for vehicles leased to others (6,750) (6,537) (6,308)
-------- -------- -------
Net cash provided by (used in) operating activities 19,808 (1,767) 4,594
-------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable issued (249) (540) (190)
Principal payments received on notes receivable 304 500 83
Capital expenditures (8,801) (395) (524)
Proceeds from sale of assets 16 765 10
Cash paid for acquisitions (25,220) (6,937) -
Distribution from affiliate 204 - -
-------- -------- -------
Net cash used in investing activities (33,746) (6,607) (621)
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes payable - (625) 235
Principal payments on long-term debt (15,917) (25,336) (8,070)
Proceeds from issuance of long-term debt 28,951 21,635 12,529
Proceeds from issuance of common stock 3,945 24,172 50
Proceeds from minority interest share receivable - 676 142
Dividends and distributions - (6,441) (6,105)
-------- -------- -------
Net cash provided by (used in) financing activities 16,979 14,081 (1,219)
-------- -------- -------
Increase in cash and cash equivalents 3,041 5,707 2,754
CASH AND CASH EQUIVALENTS:
Beginning of period 15,413 9,706 6,952
-------- -------- -------
End of period $ 18,454 $ 15,413 $ 9,706
-------- -------- -------
-------- -------- -------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 3,206 $ 1,823 $ 1,828
Cash paid during the period for income taxes 3,011 - -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of notes receivable - minority interest $ - $ - $ 678
Debt extinguishment upon transfer of property - 1,112 -
Contribution of minority interest in S Corporation
earnings upon Restructing to Class B Common Stock - 131 -
Contribution of excess S Corporation retained earnings
upon Restructuring to Class B Common Stock - 421 -
The accompanying notes are an integral part of these consolidated statements.
F-5
LITHIA MOTORS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Lithia Motors is one of the larger retailers of new and used vehicles in
the western United States, offering 21 domestic and imported makes of new
automobiles and light trucks at 22 locations, 12 in California, seven in
Oregon and three in Nevada. As an integral part of its operations, the
Company arranges related financing (non-recourse) and insurance and sells
parts, service and ancillary products. The Company's headquarters are
currently located in Medford, Oregon, where it has a market share of over
40%. The Company has grown primarily by successfully acquiring and
integrating dealerships and by obtaining new dealer franchises. The Company's
strategy is to become a leading acquirer and operator of dealerships in the
western United States.
At its 22 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura,
Suzuki, BMW, Saturn, Pontiac, Mazda and Hyundai.
PRINCIPLES OF CONSOLIDATION
The accompanying 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 significant
intercompany accounts and transactions, consisting principally of
intercompany sales, have been eliminated upon consolidation.
The financial results presented for periods prior to the Restructuring
(see note 11) have been restated to reflect the consolidated results of
operations, financial position and cash flows of the Company's dealerships
and those of its affiliated entities under common control whose operations
were combined under the Restructuring, using "as if" pooling of interest
basis of accounting.
Lithia TLM LLC, Lithia Dodge LLC and Lithia Grants Pass Auto Center LLC
were limited liability corporations majority owned by Lithia Motors, Inc. The
20%, 25% and 25% minority interests in Lithia TLM LLC, Lithia Dodge LLC and
Lithia Grants Pass Auto Center LLC, respectively, have been recorded in the
accompanying financial statements to the date of Restructuring.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers contracts in
transit and all highly liquid debt instruments with a maturity of three
months or less when purchased to be cash equivalents.
F-6
INVENTORIES
Effective January 1, 1997, the Company changed its method of accounting
for inventories from the last-in first-out (LIFO) method to the specific
identification method for vehicles and the first-in first-out (FIFO) method
of accounting for parts (collectively, the FIFO method). Management believes
the FIFO method is preferable because the FIFO method of valuing inventories
more accurately presents the Company's financial position as it reflects more
recent costs at the balance sheet date, more accurately matches revenues with
costs reported during the period presented and provides comparability to
industry information. The financial statements of prior periods have been
restated to apply the new method of accounting for inventories retroactively.
The effect of this restatement was to increase retained earnings as of
January 1, 1996 by $4,896. The restatement increased (decreased) net income
by $314, or $0.06 per diluted share and $(426), or $(0.09) per diluted share,
for the years ended December 31, 1995 and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and being depreciated
over their estimated useful lives, principally on the straight-line basis.
The range of estimated useful lives are as follows:
Building and improvements 40 years
Service equipment 5 to 10 years
Furniture, signs and fixtures 5 to 10 years
The cost for maintenance, repairs and minor renewals is expensed as incurred,
while significant renewals and betterments are capitalized. 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.
INVESTMENT IN AFFILIATE
The Company has a 20% interest in Lithia Properties, LLC, of which the
other members are Sidney DeBoer (35%), M. L. Dick Heimann (30%) and three of
Mr. DeBoer's children (5% each). The investment is accounted for using the
equity method, with a carrying value of $571 and $468 at December 31, 1996
and 1997, respectively.
INCOME TAXES
Prior to the Company's initial public offering of its Common Stock in
December 1996 (see note 11), the Company was an S Corporation for federal and
state income tax reporting purposes. Federal and state income taxes on the
income of an S Corporation were payable by the individual stockholders rather
than the corporation.
The Company's S Corporation status terminated immediately prior to the
effectiveness of the Company's initial public offering. At that time, the
Company established a net deferred tax asset and recorded an accompanying
credit to income tax expense. The accompanying statements of operations for
the years ended December 31, 1995 and 1996, reflect provisions for income
taxes on an unaudited pro forma basis, using the asset and liability method,
as if the Company had been a C Corporation, fully subject to federal and
state income taxes for those periods.
Under the asset and liability method, deferred income 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.
F-7
Deferred income 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 income tax assets and liabilities of changes in tax rates is
recognized in income in the period that includes the enactment date.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. Accrued liabilities are
exclusive of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.
COMPUTATION OF PER SHARE AMOUNTS
Beginning December 31, 1997, basic earnings per share (EPS) and diluted
EPS are computed using the methods prescribed by Statement of Financial
Accounting Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic EPS is
calculated using the weighted average number of common shares outstanding for
the period and diluted EPS is computed using the weighted average number of
common shares and dilutive common equivalent shares outstanding. Prior
period amounts have been restated to conform with the presentation
requirements of SFAS 128. Following is a reconciliation of basic EPS and
diluted EPS:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995
------------------------- -------------------------- ---------------------------
PER PER PER
SHARE SHARE SHARE
BASIC EPS INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------ ------ ------ ------ ------ ------ ------ ------ ------
Common
Sharholders $5,959 6,988 $0.85 $4,355 4,657 $0.94 $2,949 4,577 $0.64
------ ------ ------
------ ------ ------
EFFECT OF DILUTIVE SECURITIES
Stock Options - 315 - 316 - 316
------ ------ ------ ------ ------ ------
DILUTED EPS
Income available to Common
Shareholders $5,959 7,303 $0.82 $4,355 4,973 $0.88 $2,949 4,893 $0.60
------ ------ ------
------ ------ ------
In accordance with certain Securities and Exchange Commission (SEC)
Staff Accounting Bulletins, the above computations include all common and
common equivalent shares issued within 12 months of the offering date as if
they were outstanding for all periods presented using the treasury stock
method.
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables, trade
payables, accrued liabilities and short term borrowings approximate fair value
because of the short-term nature of these instruments. The fair value of
long-term debt was estimated by discounting the future cash flows using
market interest rates and does not differ significantly from that reflected
in the financial statements.
F-8
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.
ADVERTISING
The Company expenses production and other costs of advertising as
incurred. Advertising expense was $2,678, $1,297 and $1,136 for the years
ended December 31, 1997, 1996 and 1995, respectively.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets of $136 and $176, net of accumulated amortization of
$63 and $23, at December 31, 1997 and 1996, respectively, represents a
non-compete agreement being amortized on a straight-line basis over 5 years.
This intangible asset is included in other non-current assets and is
evaluated for impairment each period by determining its net realizable value.
Goodwill, which represents the excess purchase price over fair value of
net assets acquired, is amortized on the straight-line basis over the
expected period to be benefited of forty years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the acquired operation.
The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits. The
Company generally is exposed to credit risk from balances on deposit in
financial institutions in excess of the FDIC-insured limit.
USE OF ESTIMATES
The preparation of financial statements in conformity with 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.
REVENUE RECOGNITION
Finance fees represent revenue earned by the Company for notes placed
with financial institutions in connection with customer vehicle financing.
Finance fees are recognized in income upon acceptance of the credit by the
financial institution. Insurance income represents commissions earned on
credit life, accident and disability insurance sold in connection with the
vehicle on behalf of third party insurance companies. Commissions from third
party service contracts are recognized upon sale. Insurance commissions are
recognized in income upon customer acceptance of the insurance terms as
evidenced by contract execution. Finance fees and insurance commissions, net
of charge-backs, are classified as other operating revenue in the
accompanying consolidated statements of operations.
F-9
Revenue from the sale of vehicles is recognized upon delivery, when the
sales contract is signed and down payment has been received. Fleet sales of
vehicles whereby the Company does not take title are shown on a net basis in
other revenue.
MAJOR SUPPLIER AND DEALER AGREEMENTS
The Company purchases substantially all of its new vehicles and
inventory from various manufacturers at the prevailing prices charged by the
auto maker to all franchised dealers. The Company's overall sales could be
impacted by the auto maker's inability or unwillingness to supply the
dealership with an adequate supply of popular models.
The Company enters into agreements (Dealer Agreements) with the
manufacturer. The Dealer Agreements generally limit the location of the
dealership and retain auto maker approval rights over changes in dealership
management and ownership. The auto makers are also entitled to terminate the
Dealer Agreements if the dealership is in material breach of the terms.
The Company's ability to expand operations depends, in part, on
obtaining consents of the manufacturers for the acquisition of additional
dealerships.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plan under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). Effective January 1, 1996, the Company adopted the
disclosure option of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation and
the assumptions used to determine the pro forma effects of SFAS 123.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement
captions have been reclassified to conform with the 1997 presentation.
(2) INVENTORIES AND RELATED NOTES PAYABLE
Inventories are valued at cost, using the specific identification method
for vehicles and the first-in first-out (FIFO) method of accounting for parts
(collectively, the FIFO method).
The new and used vehicle inventory, collateralizing related notes
payable, and other inventory were as follows:
DECEMBER 31,
-----------------------------------------------------
1997 1996
----------------------- -----------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
--------- ------- --------- --------
New and demonstrator vehicles $63,457 $67,098 $19,402 $19,645
Used vehicles 21,524 15,500 12,199 -
Parts and accessories 4,864 - 1,761 -
--------- ------- --------- --------
Total inventories $89,845 $82,598 $33,362 $19,645
--------- ------- --------- --------
--------- ------- --------- --------
F-10
Flooring notes payable consist of flooring notes from a bank secured by
new and used vehicles. The flooring arrangements permit the Company to
borrow up to $27.9 million in 1996 and $110 million in 1997, restricted by
new and used vehicle levels. The notes are due within 5 days of the vehicle
being sold or after the vehicle has been in inventory for 1 year for new
vehicles, 6 months for program vehicles, and on a revolving basis for used
vehicles.
(3) PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------------
1997 1996
------- ------
Buildings and improvements $7,449 $1,131
Service equipment 3,992 1,641
Furniture, signs and fixtures 4,340 2,545
------- ------
15,781 5,317
Less accumulated depreciation (2,822) (2,073)
------- ------
12,959 3,244
Land 2,924 1,272
Construction in progress 382 100
------- ------
$16,265 $4,616
------- ------
------- ------
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
DECEMBER 31,
---------------------
1997 1996
------ ------
Vehicles leased to others $6,531 $6,378
Less accumulated depreciation (1,205) (1,354)
------ ------
5,326 5,024
Less current portion (738) (524)
------ ------
$4,588 $4,500
------ ------
------ ------
Vehicles leased to others are stated at cost and depreciated over their
estimated useful lives (5 years) on a straight-line basis. Lease receivables
result from customer, employee and fleet leases of vehicles under agreements
which qualify as operating leases. Leases are cancelable at the option of
the lessee after providing 30 days written notice.
(5) NOTES PAYABLE
Notes payable at December 31, 1996 consisted of an 8.5% note payable in
connection with the Robert's Dodge acquisition.
(6) LINES OF CREDIT AND LONG-TERM DEBT
In September 1997, the Company announced an agreement with U.S. Bank N.A.
for $175 million in credit lines, including $110 million in new, used and
program flooring lines, $30 million in acquisition capital and $35 million
for other corporate purposes. The lines bear interest at LIBOR plus 150 to
275 basis points, 7.625% to 8.75% at December 31, 1997. The limits and
interest rates associated with the lines are reviewed annually, with the
current term expiring on October 1, 1998. Upon expiring on October 1, 1998,
the acquisition line and the equipment line convert to 5-year term notes.
F-11
Long-term debt consists of the following:
DECEMBER 31,
------------------------
1997 1996
-------- -------
Lease Line $ 5,211 $ 5,196
Acquisition Line 5,000 -
Equipment and Real Estate Lines 4,827 1,019
Notes payable in monthly installments of $35, including interest
between 8.27% and 10.63%, maturing fully December 2009;
secured by land and buildings 11,892 1,800
-------- -------
26,930 8,015
Less current maturities (2,688) (1,855)
-------- -------
$ 24,242 $ 6,160
-------- -------
-------- -------
The schedule of future principal payments on long-term debt after
December 31, 1997 is as follows:
YEAR ENDING DECEMBER 31,
-----------------------------------
1998 $ 2,688
1999 8,531
2000 3,905
2001 3,160
2002 3,471
Thereafter 5,175
-------
Total principal payments $26,930
-------
-------
(7) SHAREHOLDERS' EQUITY
The shares of Class A common stock are not convertible into any other
series or class of the Company's securities. However, each share of Class B
common stock 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 the adjustments) on the earliest record date
for an annual meeting of the Company shareholders 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.
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
shareholders.
F-12
(8) INCOME TAXES
At the date of the Company's restructuring (see note 11), the Company
terminated its S Corporation election and is now taxed as a C Corporation in
accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES. Income taxes for 1997
and pro forma income taxes on the Company's earnings for 1996 (unaudited) and
1995 (unaudited) are as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
------ ------ ------
Current:
Federal $2,967 $1,860 $1,487
State 444 387 309
------ ------ ------
3,411 2,247 1,796
------ ------ ------
Deferred:
Federal 114 (517) (303)
State 13 (107) (63)
------ ------ ------
127 (624) (366)
------ ------ ------
Total $3,538 $1,623 $1,430
------ ------ ------
------ ------ ------
Individually significant components of the deferred tax assets and
liabilities are presented below:
DECEMBER 31,
----------------------
1997 1996
------- -------
Deferred tax assets:
Allowance and accruals $ 470 $ 277
Deferred revenue 1,126 1,244
------- -------
Total deferred tax assets 1,596 1,521
------- -------
Deferred tax liabilities:
LIFO recapture (1,841) (2,032)
Property and equipment, principally due to
differences in depreciation (1,008) (615)
------- -------
Total deferred tax liabilities (2,849) (2,647)
------- -------
Total $(1,253) $(1,126)
------- -------
------- -------
The reconciliation between the statutory federal income tax expense at 34%
and the Company's income tax expense for 1997 is shown in the following
tabulation. The following tabulation also reconciles the expected corporate
federal income tax expense for 1995 and 1996 (computed by multiplying the
Company's income before minority interest by 34%) with the Company's unaudited
pro forma income tax expense:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
------ ------ ------
Statutory federal taxes at 34% $3,229 $1,438 $1,267
State taxes, net of federal income tax benefit 278 184 162
Other 31 1 1
------ ------ ------
Income tax expense $3,538 $1,623 $1,430
------ ------ ------
------ ------ ------
F-13
(9) COMMITMENTS AND CONTINGENCIES
RECOURSE PAPER
The Company is contingently liable to banks for recourse paper from the
financing of vehicle sales. The contingent liability at December 31, 1997, 1996
and 1995 was approximately $64, $88 and $206, respectively.
OPERATING LEASES
Substantially all of the Company's operations are conducted in leased
facilities under noncancelable operating leases. These leases expire at various
dates through 2012. Beginning in 1998, certain lease commitments are subject to
escalation clauses of an amount equal to the cost of living based on the
"Consumer Price Index - U.S. Cities Average - All stems for all Urban Consumers"
published by the U.S. Department of Labor.
The minimum rental commitments under operating leases after December 31,
1997 are as follows:
YEAR ENDING DECEMBER 31,
-----------------------------------
1998 $ 4,815
1999 4,753
2000 4,449
2001 4,447
2002 4,012
Thereafter 34,378
-------
Total principal payments $56,854
-------
-------
Rental expense for all operating leases was $2,764, $2,353 and $1,993 for
the years ended December 31, 1997, 1996 and 1995, respectively.
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(10) PROFIT SHARING PLAN
The Company has a defined contribution plan and trust covering
substantially all full-time employees. The annual contribution to the plan is
at the discretion of the Board of Directors of Lithia Motors, Inc.
Contributions of $138, $100 and $84 were recognized for the years ended
December 31, 1997, 1996 and 1995, respectively. Employees may contribute to the
plan under certain circumstances.
(11) RESTRUCTURING AND OFFERING
On December 18, 1996, the Company offered 2,500 shares of its Class A
common stock to the public (the "Offering"). Prior to the Offering, the Company
consummated a restructuring (the Restructuring) which resulted in each of the
Company's dealerships and operating divisions becoming direct or indirect
wholly-owned subsidiaries of the Company with Lithia Holding Company, LLC owning
all the outstanding Class B common stock of the Company. All shareholders prior
to the Restructuring exchanged their interests in the Company and its affiliated
entities for shares of Lithia Holding Company, LLC with the
F-14
exception of (i) one shareholder who exchanged his interest in one entity for
cancellation of a note due to Lithia TLM, LLC and cash and (ii) Lithia TKV,
Inc. whose stock was purchased by the Company from the Company's principals
subsequent to the Offering.
(12) STOCK INCENTIVE PLANS
In April 1996, the Board of Directors (the Board) and the Company's
shareholders adopted the Company's 1996 Stock Incentive Plan for the granting of
up to 670 incentive and nonqualified stock options to officers, key employees
and consultants of the Company and its subsidiaries, and in 1997, the Board
adopted a Non-Discretionary Stock Option Plan for Non-Employee Directors and
reserved 15 shares under that plan (collectively, the "Plan"). The Plan is
administered by the Board or by a Compensation Committee of the Board and
permits accelerated vesting of outstanding options upon the occurrence of
certain changes in control of the Company. Options become exercisable over a
period of up to ten years from the date of grant as determined by the Board, at
prices generally not less than the fair market value at the date of grant. At
December 31, 1997, 634 shares of Class A common stock were reserved for issuance
under the Plan and 201 shares were available for future grant.
Activity under the Plan is as follows:
SHARES SHARES WEIGHTED
AVAILABLE SUBJECT TO AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
--------- ---------- --------------
Balances, December 31, 1995 - - $ -
Shares reserved 685
Options granted (439) 439 3.11
Options canceled - - -
Options exercised - - -
------ ----- ------
Balances, December 31, 1996 246 439 3.11
Options granted (45) 45 6.05
Options canceled - - -
Options exercised - (51) 3.20
------ ----- ------
Balances, December 31, 1997 201 433 $ 3.41
------ -----
------ -----
The Company issued non-qualified options during 1997 to certain members of
management at an exercise price of $1.00 per share. Compensation expense is
recognized ratably in accordance with the 5-year vesting schedule.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS 123), which defines a fair value based method of accounting for employee
stock options and similar equity instruments. As permitted under SFAS 123, the
Company has elected to continue to account for its stock-based compensation plan
under Accounting Principal Board Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES (APB 25), and related interpretations. Accordingly, no compensation
expense has been recognized for the Plan.
F-15
The Company has computed, for pro forma disclosure purposes, the value
of options granted under the Plan, using the Black-Scholes option pricing
model as prescribed by SFAS 123, using the weighted average assumptions for
grants as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
------------ -------------
Risk-free interest rate 6.25% 6.50%
Expected dividend yield 0.0% 0.0%
Expected lives 6.8 years 6.5 years
Expected volatility 45.5% 60.0%
Using the Black-Scholes methodology, the total value of options granted
during 1996 and 1997 was $709 and $320, respectively, which would be
amortized on a pro forma basis over the vesting period of the options,
typically five years. The weighted average fair value of options granted
during 1996 and 1997 was $1.62 per share and $7.20 per share, respectively.
If the Company had accounted for its stock-based compensation plan in
accordance with SFAS 123, the Company's net income and net income per share
would approximate the pro forma disclosures below:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
Net income $5,959 $5,723 $4,355 $3,612
Basic net income per share $0.85 $0.82 $0.94 $0.78
Diluted net income per share $0.82 $0.79 $0.88 $0.73
The following table summarizes stock options outstanding at December 31,
1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
----------- ----------- ------------ -------- ----------- --------
$ 1.00 21 8.0 $1.00 4 $1.00
3.02 282 6.3 3.02 64 3.02
3.32 107 3.3 3.32 80 3.32
10.75 20 7.2 10.75 - -
10.88 3 9.2 10.88 3 10.88
----------- ----------- ------------ -------- ----------- --------
$1.00-10.88 433 5.6 $3.41 151 $3.28
----------- ----------- ------------ -------- ----------- --------
----------- ----------- ------------ -------- ----------- --------
At December 31, 1996, 167 shares were exercisable at a weighted average
exercise price of $3.27.
F-16
(13) RELATED PARTY TRANSACTIONS
Certain of the real property on which the Company's business is located
is owned by Lithia Properties, LLC. The Company leases such facilities under
various lease agreements from Lithia Properties, LLC (Note 9). Selling,
general and administrative expense includes rental expense of $1,442, $2,132
and $1,929 for the years ended December 31, 1997, 1996 and 1995, respectively
relating to these properties.
The Company provides management services to Lithia Properties, LLC.
Other income includes management fees of $12, $477 and $288 for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company has guaranteed certain indebtedness of Lithia Properties, LLC
incurred in connection with purchases of real property which secures the
loan. This indebtedness amounts to approximately $9,266 at December 31, 1997.
Through December 1996, the Company and Lithia Properties, LLC share a
"pooled" cash account in the Company's name. At December 31, 1996, amounts
due to Lithia Properties, LLC related to this arrangement amounted to $1,703,
and are included in payable to related parties. Also included in payable to
related parties at December 31, 1996 is $249 due to former S Corporation
minority interest shareholders for distributions of their investment in the
Company prior to the Restructuring. There were no amounts due to related
parties at December 31, 1997.
Receivable from related parties at December 31, 1996 represents amounts
due to the Company for overpayments on distributions to shareholders in
connection with the Restructuring.
(14) ACQUISITIONS
During the fourth quarter of 1996, the Company acquired two new and used
car dealerships, Roberts Dodge, Inc. and Melody Vacaville, Inc., now Lithia
TKV and Lithia DE, respectively.
In April 1997, the Company closed its acquisition of Magnussen Dodge and
Magnussen Isuzu in Concord, California. The Company invested $3.8 million to
acquire this store, which includes goodwill, working capital, notes issued to
seller and other initial investments.
In July 1997, the Company closed its acquisition of Magnussen-Barbee
Ford of Napa, California. The Company invested $3.7 million to acquire this
store, which includes goodwill, working capital, notes issued to seller and
other initial investments.
In August 1997, the Company closed its acquisition of Sun Valley Ford, a
California corporation, dba "Sun Valley Ford Volkswagen Hyundai", located in
Concord, California. The Company invested $7.6 million to acquire the two
stores, which includes goodwill, working capital, notes issued to seller and
other initial investments.
On October 1, 1997, the Company closed its acquisition of Dick Donnelly
Automotive Enterprises, Inc., dba Dick Donnelly Lincoln, Mercury, Audi,
Suzuki, Isuzu, located in Reno and Sparks, Nevada. The Company invested $5.8
million to acquire the two stores, which includes goodwill, working capital,
notes issued to seller and other initial investments.
On October 3, 1997, the Company closed its acquisition of Nissan-BMW,
Inc., dba Bakersfield Nissan, Acura, BMW ("Bakersfield Nissan-BMW"), located
in Bakersfield, California. The Company invested $6.7 million to acquire
this store, which includes goodwill, working capital, notes issued to seller
and other initial investments. The Company is leasing the land and facilities
from the sellers of Bakersfield Nissan-BMW.
F-17
On December 16, 1997 the Company closed its acquisition of Century Ford
and Century Mazda in Fresno, California. The Company invested $4.1 million
to acquire the two stores, which includes goodwill, working capital, notes
issued to seller and other initial investments. The Company is leasing the
land and facilities from the sellers of Century Ford and Century Mazda.
All of the above acquisitions were accounted for as purchase
transactions. The aggregate purchase price of the dealerships acquired in
the respective periods has been allocated to the assets and liabilities
acquired at their estimated fair market value at the acquisition dates as
follows:
1997 1996
------------ -------------
Assets acquired $ 51,953 $ 9,542
Good will 19,944 4,101
Less liabilities assumed or incurred (46,190) (6,206)
------------ -------------
Total consideration $ 25,707 $ 7,437
------------ -------------
------------ -------------
The unaudited pro forma results of operations including Roberts Dodge,
Inc., Melody Vacaville, Inc., Sun Valley Ford, Inc. and Dick Donnelly
Automotive Enterprises, Inc., are as follows. The results of operations for
the remaining acquisitions are not included in the unaudited pro forma
information as they are not materially different from actual results of the
Company.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996
------------- -------------
Total revenues $419,675 $361,195
Net income 6,919 3,429
Basic earnings per share 0.99 0.74
Diluted earnings per share 0.95 0.69
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred had the acquisitions been in effect for the
entire periods presented. In addition, they are not intended to be a
projection of future results that may be achieved from the combined
operations.
(15) OTHER INCOME
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
------- ------- -------
Management fees $ 12 $ 477 $288
Hail damage settlement 281 206 -
Lawsuit settlement - - 160
Miscellaneous, net 330 429 521
------- ------- -------
Other income, net $623 $1,112 $969
------- ------- -------
------- ------- -------
F-18
(16) SUBSEQUENT EVENTS
On January 20, 1998, the Company closed its acquisition of Quality Jeep
in Fresno, California. The Company invested $4,400 to acquire the two stores,
which includes goodwill, working capital, notes issued to seller and other
initial investments.
On February 4, 1998 and February 10, 1998, the Company closed its
acquisitions of Reno Volkswagen and Medford Nissan, respectively. The Company
invested $3,100 to acquire the two stores, which includes goodwill, working
capital, notes issued to seller and other initial investments.
In February 1998, subject to shareholder approval, the Board of
Directors approved the reservation of 250 shares of Class A Common Stock for
issuance under an employee stock purchase plan.
In March 1998, subject to shareholder approval, the Board of Directors
of the Company approved the reservation of an additional 415 shares of Class
A Common Stock under its 1996 Stock Incentive Plan.
Also in March 1998, the Company filed a registration statement on Form
S-1 with the Securities and Exchange Commission for the sale of 3,000 shares
(3,450 shares with the Underwriters' over-allotment option) of Class A Common
Stock.
Also in March 1998, the Company closed its acquisition of Haddad Jeep/Eagle
in Bakersfield, California. The Company invested $2,020 to acquire the store,
which includes goodwill, working capital and other initial investments.
F-19