Back to GetFilings.com
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, 1998
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 (I.R.S. Employer
incorporation Identification No.)
or organization)
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:
CLASS A COMMON STOCK, WITHOUT PAR VALUE
Securities registered pursuant to Section 12(g) of the Act: NONE
(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 $54,895,978 as of February 26, 1999 based upon the last sales
price ($18.44) as reported by the New York Stock Exchange.
The number of shares outstanding of the Registrant's Common Stock as of March
12, 1999 was: Class A: 6,149,688 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 Proxy Statement for its 1999 Annual Meeting of Shareholders.
LITHIA MOTORS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related 12
Stockholder Matters
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and 22
Management
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 23
8-K
Signatures 30
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 following:
- - The cyclical nature of automobile sales;
- - The Company's ability to negotiate profitable, accretive acquisitions;
- - The Company's ability to secure manufacturer approvals for acquisitions; nd
- - The Company's ability to retain existing management.
See Exhibit 99 for a discussion of risk factors.
GENERAL
Lithia is a leading operator and retailer in the highly fragmented automotive
industry. We offer 23 brands of new vehicles, through 56 franchises in 28
locations in the western United States. We currently operate 14 dealerships in
California, 9 in Oregon, 2 in Washington and 3 in Nevada. Lithia 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.
Lithia Motors, Inc. was founded in 1946 and its two senior executives have
managed Lithia for over 28 years. Management has developed and implemented its
acquisition and operating strategies which have enabled Lithia to successfully
identify, acquire and integrate dealerships, achieving financial performance
superior to industry averages. Since December 1996 when we completed our initial
public offering, we have acquired 23 dealerships and are actively pursuing
additional acquisitions. During 1998, the Company's skill in integrating
dealerships resulted in 22% sales growth and 44% pre tax income growth at the
first ten stores that were purchased since Lithia's initial public offering.
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
1998. Currently, the largest 100 dealer groups generate less than 12% of total
industry sales and control approximately 5% of all franchised automobile
dealerships. Based on a current annual revenue run rate of $850 million, we
believe that we are one of the 20 largest automobile retailers in the country.
Further consolidation of the automotive retailing industry is expected due to:
- The high cost of entry into the franchised automobile business;
- Many dealerships owned by individuals who are nearing retirement age;
and
- The desire of manufacturers to strengthen their dealer networks
through consolidation.
2
GROWTH STRATEGY
Lithia has become a leading acquiror and operator of automobile dealerships in
the western and inter-mountain United States. We target acquisitions in markets
where we have the opportunity to build a significant market presence. We
generally try to acquire an entire group at one time (a "Platform") or acquire
one or two stores at a time ("Fill-ins"). Lithia's current core markets are
South-Central Oregon, Northern California, South-Central Valley, California,
Northern Nevada and Eastern Washington. Lithia makes acquisitions on an
opportunistic basis with a keen focus on maximizing its return on investment.
As such, Lithia's acquisition pricing discipline has played a key role in its
acquisition activities. Lithia's strict discipline in purchasing stores,
combined with its ability to rapidly improve profitability by implementing the
Lithia operating model into acquired stores, has effectively allowed Lithia to
build its own dealership groups.
Since our initial public offering in December 1996, we have completed the
purchase of 23 dealerships with pre-acquisition annual revenues of approximately
$684 million.
OPERATING STRATEGY
After acquiring a new store, Lithia implements its proven operating model to
maximize the overall franchise value of each location. Lithia's operating
strategy consists of the following elements:
VALUE PARTNERSHIP WITH MANUFACTURERS. Lithia 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 Lithia'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. Lithia
relies on this help and encourages their assistance as a welcome partner.
Lithia cooperates in facility design, in marketing efforts and in program
support.
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. Lithia 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.
By offering new and used vehicles and an array of complementary services at each
of its locations, Lithia seeks to increase customer traffic and meet specific
customer needs. We believe that offering numerous new vehicle brands appeals to
a variety of customers, minimizes dependence on any one manufacturer, and
reduces our exposure to supply problems and product cycles.
EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. Lithia generates
substantial incremental revenue and net income by arranging the financing for
the sale of vehicles and by selling insurance, extended service contracts and
vehicle maintenance. In 1998, Lithia arranged financing for 74% of its new
vehicle sales and 71% of its used vehicle sales, compared to 42% and 51%,
respectively, for the average automobile dealership in the United States (1997
data).
3
EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. Each dealership is its own profit
center and is managed by an experienced general manager who has primary
responsibility for inventory, advertising, pricing and personnel. In order to
provide additional support towards improving performance, each dealership has
available to it a 5-person team of specialists in new vehicle sales, used
vehicle sales, finance and insurance, service and parts, and back office
administration. Lithia compensates its general managers and department managers
based on the profitability of their dealerships and departments, respectively.
Senior management monitors each dealership's sales, profitability and inventory
on a daily basis.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. Lithia emphasizes customer
satisfaction and a reputation for quality and fairness. Lithia trains its sales
personnel to identify an appropriate vehicle for each of its customers at an
affordable price.
Lithia's "Priority You" customer service plan provides:
- A customer credit check within 10 minutes;
- A used vehicle appraisal within 30 minutes;
- Paper work completed within 90 minutes for a vehicle purchase;
- A 10-day/500-mile "no questions asked" right of exchange on any used
vehicle sold;
- A 60-day/3,000 mile warranty on all used vehicles sold; and
- A donation to a local charity or educational organization for every
vehicle sold.
We believe that "Priority You" helps differentiate us from other dealerships.
We believe the application of this operating strategy provides us with a
competitive advantage over many dealerships and it is critical to our ability to
achieve levels of profitability superior to industry averages.
Lithia has received a number of dealer quality and customer satisfaction awards
from various manufacturers. 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. Most recently, Lithia Dodge
of Eugene, Oregon became a National Charger Club member in recognition of high
sales volume and customer satisfaction. Also, Lithia Isuzu of Reno was
recognized as the number one retail Isuzu dealer in the country and Sendai Club
member as well as receiving the 1998 President's Cup.
4
DEALERSHIP OPERATIONS
Lithia owns and operates 28 dealership locations, 14 in California, 9 in Oregon,
3 in Nevada and 2 in Washington. Each of Lithia's dealerships sell new and used
vehicles and related automotive parts and services.
Lithia's dealerships, brands sold and percentage of current annual revenues by
region are as follows:
Number of % of Current
Region Location Franchises Brands Annual Revenues
- -------------------------- ---------------- ---------- ---------------------------------- ---------------
South-Central Oregon Medford, OR 4 Honda, Suzuki, Isuzu, Volkswagen 34%
Medford, OR 3 Toyota, Lincoln-Mercury
Medford, OR 6 Dodge, Dodge Truck, Chrysler,
Plymouth, Mazda, Jeep
Medford, OR 1 Saturn
Medford, OR 2 Nissan, BMW
Grants Pass, OR 5 Dodge, Dodge Truck, Chrysler,
Plymouth, Jeep
Eugene, OR 2 Dodge, Dodge Trucks
Eugene, OR 1 Toyota
Eugene, OR 1 Nissan
Northern California Vacaville, CA 1 Toyota 27%
Concord, CA 2 Dodge, Dodge Trucks
Concord, CA 2 Volkswagen, Isuzu
Concord, CA 1 Ford
Napa, CA 3 Ford, Lincoln-Mercury
Redding, CA 1 Chevrolet
Redding, CA 1 Toyota
South-Central Valley, CA Bakersfield, CA 1 Nissan 19%
Bakersfield, CA 2 BMW, Acura
Bakersfield, CA 1 Jeep
Fresno, CA 1 Ford
Fresno, CA 2 Mazda, Suzuki
Fresno, CA 1 Nissan
Fresno, CA 2 Jeep, Hyundai
Northern Nevada Reno, NV 5 Isuzu, Lincoln-Mercury, Suzuki, 10%
Audi Volkswagen
Reno, NV 1 Isuzu, Lincoln-Mercury, Suzuki
Sparks, NV -(1)
Eastern Washington Spokane, WA 1 Chevrolet 10%
Spokane, WA 3 Subaru, BMW, Volvo
(1) The Sparks, Nevada location represents satellite franchises of the main Reno
location.
5
NEW VEHICLE SALES. Lithia sells 23 domestic and imported brands ranging
from economy to luxury cars, sport utility vehicles, minivans and light trucks.
The following table sets forth, by manufacturer, the percentage of new vehicle
sales by Lithia during the fourth quarter of 1998.
1998 FOURTH QUARTER
PERCENTAGE OF
MANUFACTURER NEW VEHICLE SALES
- -------------------------------------------------- -------------------
Chrysler (Chrysler, Plymouth, Dodge, Jeep, Dodge 31.2
Trucks)
Ford (Ford, Lincoln, Mercury) 19.3
Toyota 12.0
General Motors (Chevrolet, Saturn) 8.8
Volkswagen, Audi 6.4
Isuzu 5.7
Nissan 5.6
BMW 3.2
Honda (Acura, Honda) 2.8
Subaru 1.8
Suzuki 1.0
Mazda 0.9
Volvo 0.8
Hyundai 0.5
------
100.0%
------
------
The following table sets forth Lithia's unit and dollar sales of new vehicles
for each of the past five years:
(dollars in thousands) 1994 1995 1996 1997 1998
- ----------------------- ------- ------- ------- -------- --------
Units 2,744 2,715 3,274 7,493 17,708
Sales $51,154 $53,277 $65,092 $161,294 $388,431
Lithia 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. Lithia also
exchanges vehicles with other dealers to accommodate customer demand and to
balance inventory.
As is customary in the automobile industry, the final sales price of a new
vehicle is generally negotiated with the customer. However, at Lithia's Saturn
dealership, the final sales price does not deviate from the posted price.
USED VEHICLE SALES. Used vehicle sales are an important part of our overall
profitability. Lithia retains a full-time used vehicle manager at each of its
locations.
Lithia acquires the majority of its used vehicles through customer trade-ins,
but also acquires them 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.
Lithia 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.
6
The following table sets forth Lithia's unit and dollar sales of used vehicles
for each of the past five years:
(dollars in thousands) 1994 1995 1996 1997 1998
- ----------------------- ------- ------- ------- -------- --------
Retail units 3,372 3,302 4,156 7,148 13,645
Retail sales $36,382 $36,997 $48,697 $88,571 $174,223
Wholesale units 1,834 1,842 2,348 4,990 9,532
Wholesale sales $ 5,999 $ 7,064 $ 9,914 $24,528 $46,321
Total units 5,206 5,144 6,504 12,138 23,177
Total sales $42,381 $44,061 $58,611 $113,099 $220,544
Lithia's "Priority You" 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. We generally sell each used vehicle within 60 days of acquisition.
VEHICLE FINANCING AND LEASING. Lithia believes that the availability of
financing at its dealerships is critical to its ability to sell vehicles and
ancillary products and services. Lithia provides a variety of financing and
leasing alternatives to meet the needs of each customer. We believe our ability
to offer customer-tailored financing on a "same day" basis provides us with an
advantage over many of our competitors, particularly smaller competitors who do
not generate sufficient volume to attract the diversity of financing sources
that are available to us.
Because of the high profit margins which are typically generated through sales
of F&I products, Lithia seeks to arrange financing for every vehicle it sells.
Lithia has arranged financing for a larger percentage of its transactions than
the industry average. During 1998, Lithia financed or arranged for financing for
over 74% of its new vehicle sales and 71% of its used vehicle sales, compared to
an industry average of 42% and 51%, respectively (latest 1997 data).
Lithia maintains close relationships with a wide variety of financing sources
that are best suited to satisfy its customers' particular needs and that
maximize income. 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.
Lithia generally arranges financing for its customers from third party sources
to avoid the risk of default. However, if we believe the credit risk is
manageable, we occasionally directly finance or lease the vehicle to the
customer. In these cases, Lithia bears the risk of default. Historically,
Lithia has directly financed only a limited number of vehicle sales.
SERVICE, BODY AND PARTS. Lithia considers its service, body and parts
operations to be an integral part of its customer service program and an
important element of establishing customer loyalty. Lithia provides parts and
service primarily for the new vehicle brands sold by its dealerships but may
also service other vehicles. In 1998, Lithia's service, body and parts
operations generated $72.2 million in revenues, or 10.1% of total revenues.
Lithia uses a variable pricing structure designed to reflect the difficulty and
sophistication of different types of repairs and the cost and availability of
parts.
7
The service, body and parts business provides an important recurring revenue
stream to the dealerships. Lithia 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 service, body and parts departments are countercyclical to new car
sales as owners repair existing vehicles rather than buy new vehicles. We
believe this helps mitigate the effects of a downturn in the new vehicle sales
cycle.
Lithia operates three collision repair centers, one each in Northern California,
Eastern Washington and South-Central Oregon.
ANCILLARY SERVICES AND PRODUCTS. Lithia's F&I managers 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 Lithia's overall profitability.
Lithia sells third-party extended-service contracts, which cover all designated
repairs. 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 can
purchase similar extended-service contracts.
Lithia offers its customers credit life, health and accident insurance when they
finance an automobile purchase. Lithia receives a commission on each policy
sold. The Company also offers other ancillary products such as protective
coatings and automobile alarms.
SALES AND MARKETING
We believe that our "Priority You" program described earlier helps differentiate
us from many other dealerships, thereby increasing customer traffic and
developing stronger customer loyalty.
Advertising and marketing play a significant role in our success. A large
portion of an auto retailers' advertising and marketing expenses are provided
for by the automobile manufacturers. The manufacturers also provide Lithia with
market research, which assists Lithia in developing its own advertising and
marketing campaigns.
Lithia utilizes most forms of media in its advertising, including television,
our internet web site, newspaper, radio and direct mail, including periodic
mailers to previous customers. Lithia uses advertising to develop its image as a
reputable dealer, offering quality service, affordable automobiles and financing
for all buyers. In addition, Lithia's individual dealerships sponsor price
discounts or other promotions designed to attract customers. By owning a
cluster of dealerships in a particular market, we can save money from volume
discounts and other media concessions. Lithia also participates as a member of a
number of advertising cooperatives or associations whose members pool their
resources and expertise together with those of the manufacturer to develop
advertising campaigns.
8
Lithia has dedicated resources to developing and maintaining its web site
(www.lithia.com). We believe that our web site is a valuable lead-generation
tool. A visitor to Lithia's web site is able to do the following at each of
Lithia's locations:
- access the manufacturer sites for product information;
- order a new vehicle;
- view all used vehicle inventory;
- schedule a service appointment;
- order parts and accessories; and
- download customer discount coupons
We believe that regional and national auto retailers, such as Lithia, are best
positioned to take advantage of the internet as an effective marketing tool.
MANAGEMENT INFORMATION SYSTEM
Lithia'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 computers and work
stations.
Senior management is able to access detailed information from all of its
locations regarding:
- inventory;
- total unit sales and mix of new and used vehicle sales;
- lease and finance transactions;
- sales of ancillary products and services;
- key cost items and profit margins; and
- the relative performance of the dealerships.
Each dealership's general manager can access the same information. With this
information, management can quickly analyze the results of operations, identify
trends in the business, and focus on areas that require attention or
improvement. We believe that our management information system also allows our
general managers to quickly respond to changes in consumer preferences and
purchasing patterns, thereby maximizing inventory turnover.
We believe that our management information system is a key factor in
successfully incorporating newly acquired businesses. Following each
acquisition, Lithia immediately installs its management information system at
the dealership location, thereby quickly making the financial, accounting and
other operational data easily accessible throughout the organization. With
access to such data, management can more efficiently execute Lithia's operating
strategy at the newly acquired dealership.
RELATIONSHIPS WITH AUTOMOBILE MANUFACTURERS
Lithia 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 typical automobile franchise agreement specifies the locations within a
designated market area at which the dealer may sell vehicles and related
products and perform certain approved services. 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.
9
A franchise agreement may impose requirements on the dealer concerning such
matters as:
- the showroom;
- service facilities and equipment;
- inventories of vehicles and parts;
- minimum working capital;
- training of personnel; and
- performance standards regarding sales volume and customer
satisfaction.
Each manufacturer closely monitors compliance with these requirements and
requires 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 if there is:
- a 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
- poor sales performance or low customer satisfaction index
Each franchise agreement authorizes at least one person to manage the
dealership's operations. The manufacturer must approve changes in management or
transfers of ownership of the dealership.
COMPETITION
The automobile business 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. Lithia
principally competes with other automobile dealers, both publicly and privately
held, in the same general vicinity of its dealership locations, as well as
automobile "superstores." In addition, certain regional and national car rental
companies operate retail used car lots to dispose of their used rental cars.
REGULATION
Lithia'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 Lithia's dealerships,
service centers, collision repair shops and other operations, with respect to
matters such as consumer protection, workers' safety and laws regarding clean
air and water.
10
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. A manufacturer
may not:
- terminate or fail to renew a franchise without good cause; or
- prevent any reasonable changes in the capital structure or the manner
in which a dealership is financed
Manufacturers may object to a sale or change of management based on 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."
A manufacturer or the dealer must replace a new vehicle or accept it for a full
refund within one 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.
We must provide written disclosures on new vehicles of mileage and pricing
information. In addition, financing and insurance activities are subject to
credit reporting, debt collection, and insurance industry regulation.
Imported automobiles are subject to United States customs duties. Lithia may,
from time to time, have to pay claims for duties, penalties or other charges.
Lithia's business, particularly parts, service and collision repair operations
involves hazardous or toxic substances or wastes. Lithia has been required to
remove storage tanks containing such substances or wastes. Federal, state and
local authorities establishing health and environmental quality standards
regulate the handling and storage of hazardous materials. These governmental
authorities also regulate remediation of contaminated sites, which could be
Lithia facilities or sites to which Lithia sends hazardous or toxic substances
or wastes for treatment, recycling or disposal. We believe that we do not have
any material environmental liabilities and that compliance with environmental
regulations will not, have a material adverse effect on Lithia's results of
operations or financial condition.
EMPLOYEES
As of December 31, 1998, we employed approximately 1,850 persons on a
full-time equivalent basis. The service department employees at Lithia
Concord Dodge and Lithia Sun Valley Ford, Volkswagen, Isuzu are bound by
collective bargaining agreements. The Company believes it has a good
relationship with its employees.
ITEM 2. PROPERTIES
Lithia's dealerships and other facilities consist primarily of automobile
showrooms, display lots, service facilities, three collision repair and paint
shops, rental agencies, supply facilities, automobile storage lots, parking lots
and offices. We believe our facilities are currently adequate for our needs and
are in good repair. Lithia owns some of its properties, but generally prefers to
lease its properties providing future flexibility to relocate its retail stores
as demographics change. Lithia also holds some undeveloped land for future
expansion.
11
ITEM 3. LEGAL PROCEEDINGS
Lithia is a party to litigation that arises in the normal course of its business
operations. We do not believe that we are presently a party to litigation that
will have a material adverse effect on our business or operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Lithia's shareholders during the quarter
ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Lithia's Class A Common Stock began trading on the New York Stock Exchange on
January 22, 1999 under the symbol LAD. Prior to that time, the Class A Common
Stock traded on the Nasdaq National Market under the symbol LMTR. The quarterly
high and low sales prices of the Class A Common Stock for the period from
January 1, 1997 through December 31, 1998 were as follows:
1997 High Low
- -------------------------------------------------- ----------- ----------
Quarter 1 $ 13.13 $ 10.50
Quarter 2 12.38 9.50
Quarter 3 14.25 10.50
Quarter 4 19.00 13.63
1998
- ------
Quarter 1 $ 17.25 $ 12.00
Quarter 2 17.00 13.13
Quarter 3 18.25 10.38
Quarter 4 17.88 9.25
The number of shareholders of record and approximate number of beneficial
holders of Class A Common Stock at March 16, 1999 was 1,675 and 1,300,
respectively. All shares of Lithia's Class B Common Stock are held by Lithia
Holding Company LLC. There were no cash dividends declared or paid subsequent
to Lithia's initial public offering in December 1996. Lithia does not intend to
declare or pay cash dividends. Lithia 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
and will depend upon Lithia's results of operations, financial position and
capital requirements, general business conditions, restrictions imposed by
financing arrangements, if any, and legal restrictions on the payment of
dividends. Lithia's agreements with Ford Credit preclude the payment of cash
dividends without the prior consent of Ford Credit.
12
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
(in thousands, except per share amounts) 1994 (1) 1995 (1) 1996 (1) 1997 1998
----------- ----------- ---------- --------- ---------
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
New vehicles $ 51,154 $ 53,277 $ 65,092 $ 161,294 $ 388,431
Used vehicles 42,381 44,061 58,611 113,099 220,544
Service, body and parts 9,972 10,961 13,197 29,828 72,216
Other revenues 5,916 5,897 5,944 15,574 33,549
----------- ----------- ---------- --------- ---------
Total revenues 109,423 114,196 142,844 319,795 714,740
Cost of sales 88,148 92,054 117,025 265,049 599,379
----------- ----------- ---------- --------- ---------
Gross profit 21,275 22,142 25,819 54,746 115,361
Selling, general and administrative 14,781 16,333 19,830 40,625 85,188
Depreciation and amortization 1,954 1,907 1,756 2,483 3,469
----------- ----------- ---------- --------- ---------
Income from operations 4,540 3,902 4,233 11,638 26,704
Floorplan interest expense (535) (957) (697) (2,179) (7,108)
Other interest expense (419) (433) (656) (824) (2,735)
Other income, net 1,001 1,215 1,349 862 921
----------- ----------- ---------- --------- ---------
Income before minority interest
and income taxes 4,587 3,727 4,229 9,497 17,782
Minority interest (458) (778) (687) - -
----------- ----------- ---------- --------- ---------
Income before income taxes (1) $ 4,129 $ 2,949 3,542 9,497 17,782
----------- ----------- ---------- --------- ---------
----------- -----------
Income tax (expense) benefit 813 (3,538) (6,993)
---------- --------- ---------
Net income $ 4,355 $ 5,959 $ 10,789
---------- --------- ---------
---------- --------- ---------
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Income before taxes and minority interest,
as reported $ 4,587 $ 3,727 $ 4,229
Pro forma provision for taxes (2) (1,743) (1,430) (1,623)
----------- ----------- ---------
Pro forma net income $ 2,844 2,297 $ 2,606
----------- ----------- ---------
----------- ----------- ---------
Basic net income per share (3) $ 0.17 $ 0.50 $ 0.56 $ 0.85 $ 1.18
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Diluted net income per share (3) $ 0.16 $ 0.47 $ 0.52 $ 0.82 $ 1.14
----------- ----------- ---------- --------- ---------
----------- ----------- --------- --------- ---------
AS OF DECEMBER 31,
------------------------------------------------------------------------------
(in thousands) 1994 (1) 1995 (1) 1996 (1) 1997 1998
---------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 9,325 $ 10,626 $ 25,431 $ 23,870 $ 53,553
Total assets 41,981 44,117 68,964 166,526 294,398
Short-term debt 23,511 22,300 22,000 85,385 132,310
Long-term debt, less current maturities 6,748 10,743 6,160 26,558 41,420
Total shareholders' equity 6,094 3,716 27,914 37,877 91,511
(1) Effective January 1, 1997, the Company converted from the LIFO method of
accounting for inventories to the FIFO method. Accordingly, the 1994, 1995 and
1996 data has been restated to reflect this change. See Note 1 of Notes to
Consolidated Financial Statements.
(2) 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.
(3) The per share amounts are pro forma for 1994, 1995 and 1996 and actual for
1997 and 1998.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In 1998, Lithia generated record revenues, net income, EBITDA and unit sales of
new and used vehicles as follows (dollars in thousands):
1997 1998 % INCREASE
-------- -------- -----------
Revenues $319,795 $714,740 123%
EBITDA $14,983 $31,094 108%
Net income $5,959 $10,789 81%
Unit sales:
New 7,493 17,708 136%
Retail used 7,148 13,645 91%
The following table shows selected condensed financial data expressed as a
percentage of total revenues for the periods indicated for the average
automotive dealer in the United States.
YEAR ENDED DECEMBER 31,
AVERAGE U.S. DEALERSHIP ---------------------------
STATEMENT OF OPERATIONS DATA: 1996 1997
-------- --------
Revenues:
New vehicles 57.7 % 58.3 %
Used vehicles 30.4 29.8
Parts and service, other 11.9 11.9
-------- --------
100.0 % 100.0 %
Gross profit 12.9 12.7
Total dealership expense 11.3 11.4
Income before taxes 1.5 % 1.4 %
Source: NADA INDUSTRY ANALYSIS DIVISION
The following table sets forth selected condensed financial data for Lithia
expressed as a percentage of total revenues for the periods indicated below.
LITHIA MOTORS, INC. YEAR ENDED DECEMBER 31,
- ---------------------------------- ----------------------------------------
1996 (1) 1997 1998
--------- ------- --------
Revenues:
New vehicles 45.6% 50.4% 54.3%
Used vehicles 41.0% 35.4% 30.9%
Service, body and parts 9.2% 9.3% 10.1%
Other revenues 4.2% 4.9% 4.7%
--------- ------- --------
Total revenues 100.0% 100.0% 100.0%
Gross profit 18.1% 17.1% 16.1%
Selling, general and 13.9% 12.7% 11.9%
administrative
Income from operations 3.0% 3.6% 3.7%
Effective January 1, 1997, the Company converted from the LIFO method of
accounting for inventories to the FIFO method. Accordingly, the 1994, 1995 and
1996 data has been restated to reflect this change. See Note 1 of Notes to
Consolidated Financial Statements.
14
1998 COMPARED TO 1997
REVENUES. Revenues increased $394.9 million, or 123% to $714.7 million for the
year ended December 31, 1998 from $319.8 million in 1997. Total vehicles sold
during 1998 increased by 21,254, or 108%, to 40,885 from 19,631 during 1997.
Same store sales growth was 14.7% in 1998 compared to industry growth for new
vehicles of 2.9% for 1998. During 1998, the Company's skill in integrating
dealerships resulted in 22% sales growth and 44% pre tax income growth at the
first ten stores that were purchased since Lithia's initial public offering.
NEW VEHICLES. In 1998 new vehicle sales of $388.4 million
constituted 54.3% of total revenues compared to $161.3 million,
or 50.4% of new vehicle sales, in 1997. The increase is
primarily a result of acquisitions, strong internal growth and a
1.9% increase in the average selling price of new vehicles during
1998 to $21,935 from $21,526 in 1997.
RETAIL USED VEHICLES. In 1998 and 1997, the Company sold 13,645
and 7,148 retail used vehicles, respectively, generating revenues
of $174.2 million and $88.6 million, respectively. Used vehicle
revenue constituted 24.4% and 27.7% of total revenue in 1998 and
1997, respectively. Average selling prices for retail used
vehicles increased 3.0% to $12,768 in 1998 from $12,391 in 1997.
SERVICE, BODY AND PARTS. Lithia derives additional revenue from
the sale of parts and accessories, maintenance and repair
services and collision repair work. Revenues from these types of
services increased 142% in 1998 to $72.2 million from $29.8
million in 1997. This increase is primarily the result of
internal growth and dealership acquisitions.
OTHER REVENUES. Other revenues consist primarily of financing and
insurance ("F&I") transactions. Other revenues increased 115% to
$33.5 million during 1998, from $15.6 million during 1997, due
primarily to internal growth and dealership acquisitions that
increased total sales.
GROSS PROFIT. Gross profit increased 111% during 1998 to $115.4 million,
compared with $54.7 million for 1997, primarily because of the increase in new
and used vehicle unit sales during the period. The overall gross profit margin
achieved was 16.1% for 1998 compared to 17.1% for 1997. The decrease in gross
profit margin was primarily a result of the acquisition of several new
dealerships during 1997 and 1998, which were generating gross margins lower than
those of Lithia's pre-existing stores. Lithia's overall gross margin percentage
increased throughout 1998 as it integrated its new dealerships into its existing
operations. The overall gross margin in the fourth quarter of 1998 was 16.9%.
Lithia's gross profit margin continues to exceed the average U.S. dealership
gross profit margin of 12.7% for the full year of 1997.
The gross profit margin achieved on new vehicle sales during 1998 and 1997 was
10.1% and 11.4%, respectively. This compares favorably with the average gross
profit margin of 6.4% realized by franchised automobile dealers in the United
States on sales of new vehicles in 1997. Excluding wholesale transactions, the
gross profit margin on used vehicle sales was 11.0% in 1998 and 11.4% in 1997,
as compared to the industry average for 1997 of 10.9%.
15
Sales of used vehicles to other dealers and to wholesalers are frequently at,
or close to, cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("SG&A") expense increased $44.6 million, or 110%, to $85.2
million for 1998 compared to $40.6 million for 1997. SG&A as a percentage of
total revenues decreased to 11.9% for 1998 from 12.7% for 1997. The increase in
SG&A was due primarily to increased selling, or variable, expense related to the
increase in sales and the number of total locations. The decrease in SG&A as a
percent of total revenues is a result of economies of scale gained as the fixed
expenses are spread over a larger revenue base and from economies of scale as
Lithia consolidates multiple stores in a single market.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$1.0 million or 40% to $3.5 million for the year ended December 31, 1998
compared to $2.5 million for 1997 primarily as a result of increased property
and equipment and goodwill related to acquisitions in late 1997 and 1998.
Depreciation and amortization was 0.5% of total revenues in 1998 compared to
0.8% in 1997.
INCOME FROM OPERATIONS. Income from operations increased to $26.7 million (3.7%
of total revenues) for the year ended December 31, 1998 compared to $11.6
million (3.6% of total revenues) in 1997. In addition to gaining efficiencies
related to economies of scale, Lithia has seen improvements in the operating
margins at stores that it has acquired and operated for a full year, bringing
them more in line with its pre-existing stores. Income from operations was 4.4%
of total revenues in the fourth quarter of 1998.
INTEREST EXPENSE. Interest expense increased $6.8 million or 228% to
$9.8 million for the year ended December 31, 1998 compared to $3.0 million for
1997, primarily as a result of increased floorplan notes payable related to
increased inventories as a result of the increase in stores owned and vehicles
sold.
INCOME TAX EXPENSE. Lithia's effective tax rate for 1998 was 39.3% compared to
37.3% for 1997. Lithia'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 effective rate.
NET INCOME. Net income rose 81% to $10.8 million (1.5% of total revenues) for
the year ended December 31, 1998 compared to $6.0 million (1.9% of total
revenues) for 1997, as a result of the individual line item changes discussed
above.
1997 COMPARED TO 1996
REVENUES. Revenues 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. In 1997 and 1996, Lithia 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 total revenues,
respectively.
16
RETAIL USED VEHICLES. In 1997 and 1996, Lithia sold 7,148 and
4,156 retail used vehicles, respectively, generating revenues of
$88.6 million and $48.7 million, which constituted 27.7% and
34.1% of total revenue, respectively. Average selling prices for
retail used vehicles increased 5.8% to $12,391 in 1997 from
$11,717 in 1996.
SERVICE, BODY AND PARTS. Lithia derives additional revenue from
the sale of parts and accessories, maintenance and repair
services and collision repair work. Revenues from these types of
services increased 126% in 1997 to $29.8 million from $13.2
million in 1996, primarily as a result of the increased number of
dealership locations.
OTHER REVENUES. Other revenues consist primarily of financing and
insurance ("F&I") transactions. Other revenues increased 162% to
$15.6 million during 1997, from $5.9 million during 1996, due
primarily to dealership acquisitions that increased total sales.
GROSS PROFIT. Gross profit increased 112% during 1997 to $54.7 million, compared
with $25.8 million for 1996, primarily because of the increase in new and used
vehicle unit sales during the period. Total gross profit margin decreased to
17.1% for 1997 from 18.1% 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 Lithia's existing
stores.
The gross profit margin 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. Excluding wholesale transactions, Lithia's gross
profit margin on used vehicle sales was 11.4% in 1997 and 12.8% in 1996,
compared to the industry average for 1996 of 11.0%.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Lithia'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
$0.7 million, or 41%, to $2.5 million for the year ended December 31, 1997
compared to $1.8 million for 1996 primarily as a result of increased property
and equipment and goodwill related to acquisitions in 1997. Depreciation and
amortization was 0.8% of sales in 1997 compared to 1.2% in 1996.
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
Lithia's initial public offering.
17
INCOME TAX EXPENSE. Prior to December 18, 1996, Lithia 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 its initial public offering on December 18,
1996, and in connection with its restructuring, Lithia 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.
Lithia's effective tax rate for 1997 was 37.3% compared to 38.4% (on a pro forma
basis) for 1996. Lithia'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 effective 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 (1.8% of total
sales), on a pro forma basis, for 1996, as a result of the individual line item
changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Lithia's principal needs for capital resources are to finance acquisitions and
capital expenditures and for working capital. Lithia has relied primarily upon
internally generated cash flows from operations, borrowings under its credit
facilities and the proceeds from public equity offerings to finance its
operations and expansion. In May 1998, Lithia closed an offering of 3.15
million newly issued shares of its Class A Common Stock for net proceeds of
$42.5 million. The proceeds were used to pay down Lithia's lines of credit
until needed for future acquisitions.
Ford Credit, Toyota Motor Credit Corporation, Chrysler Financial Corporation
and General Motors Acceptance Corporation have agreed to floor all of
Lithia's new vehicles for their respective brands with Ford serving as the
primary lender for all other brands. There are no formal limits to these
commitments for new vehicle wholesale financing.
Ford Credit has also extended a $60 million revolving line of credit for used
vehicles and a $75 million acquisition line of credit to purchase dealerships
of any brand. These commitments have an expiration date of November 23, 2000
with interest due monthly. Lithia has the right to elect to extend the term
on these lines of credit for an additional two years at November 23, 1999.
Lithia also has the option to convert the acquisition line into a five-year
term loan on November 23, 1999 or November 23, 2000. In addition, U.S. Bank
N.A. has extended a $10 million revolving line of credit for leased vehicles.
The lines with Ford Credit are cross-collateralized and are secured by
inventory, accounts receivable, intangible assets and equipment. The other
new vehicle lines are secured by new vehicle inventory of the relevant
dealerships.
The Ford Credit lines of credit contain financial covenants requiring Lithia
to maintain compliance with, among other things, specified ratios of (i)
total debt to tangible base capital; (ii) total adjusted debt to tangible
base capital; (iii) current ratio; (iv) fixed charge coverage; and (v) net
cash. lithia is currently in compliance with all such financial
18
covenants. The Ford Credit lines of credit agreements also preclude the
payment of cash dividends without the prior consent of Ford Credit.
Interest rates on all of the above facilities ranged from 6.5% to 8.0% at
december 31, 1998. Amounts outstanding on the lines at december 31, 1998 were
as follows (in thousands):
Acquisition Line $ -
Used Vehicle Line 5,000
New and Program Vehicle Lines 124,167
Leased Vehicle Line 4,000
----------
$ 133,167
----------
----------
Since December 1996 when Lithia completed its initial public offering, it has
acquired 23 dealerships. The aggregate net investment was approximately $74.2
million (excluding borrowings on its credit lines to finance acquired vehicle
inventories and equipment and the purchase of any real estate).
Lithia anticipates that it will be able to satisfy its cash requirements at
least through December 31, 1999, including its currently anticipated growth,
primarily with cash flow from operations, borrowings under available credit
facilities and cash currently available.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, Lithia'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 may be lower during the first and
fourth quarters than during the other quarters of each fiscal year. 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.
YEAR 2000
GENERAL. Lithia has identified three major areas of concern:
(i) The functionality of its internal systems and the Company's
ability to run its daily business after January 1, 2000;
(ii) The visual representation of "2000;" and
(iii) Third party systems.
Lithia expects to be Year 2000 compliant by July 1, 1999. Lithia is utilizing
the NADA dealer guide to assist in resolving its Year 2000 issues and problems.
INTERNAL SYSTEMS. Lithia is in the process of analyzing and updating its
internal systems, including its dealer management systems, dealer communication
systems, personal computer systems, shared port systems and phone systems.
Lithia estimates that it is 90 percent complete with implementing various
manufacturer upgrades to its systems in order to make them Year 2000 compliant.
We estimate that our internal systems we will be fully Year 2000 compliant by
July 1, 1999.
19
Like all businesses, Lithia is at risk from external infrastructure failures
that could arise from Year 2000 failures. It is not clear that electrical
power, telephone and computer networks, for example, will be fully functional
across the nation in the year 2000. Investigation and assessment of
infrastructures, like the nation's power grid, is beyond the scope and resources
of Lithia. Investors should use their own awareness of the issues in the
nation's infrastructure to make ongoing infrastructure risk assessments and
their potential impact to a company's performance.
VISUAL REPRESENTATION. Lithia is currently working on ensuring that all report
date stamps, timekeeping devices, etc. are Year 2000 compliant. We estimate
that we are approximately 95 percent complete with this process.
THIRD PARTIES. Lithia has begun a Year 2000 supplier audit program. It has
contacted all of its critical suppliers to inform them of its Year 2000
expectations, and requests have been made for each vendor's compliance program
and/or Year 2000 compliance assurance. In regard to the automobile
manufacturers, Lithia has received written or other confirmation that they are
Year 2000 compliant, except for Subaru. Subaru has assured Lithia that they
expect to be Year 2000 compliant prior to January 1, 2000.
It should be noted that there have been predictions of failures of key
components in the transportation infrastructure due to the Year 2000 problem.
It is possible that there could be delays in rail, over-the-road and air
shipments due to failure in transportation control systems. Investigation and
validation of the world's transportation infrastructure is beyond the scope and
the resources of Lithia. Investors should use their own awareness of the issues
in the transportation infrastructure to make ongoing infrastructure risk
assessments and their potential impact to a company's performance.
ACQUISITIONS. Acquisitions in 1999 will be subject to strict due diligence for
Year 2000 compliance.
COST. Lithia expects to incur costs totaling approximately $1,054,000 to ensure
Year 2000 compliance, approximately $810,000 of which has already been incurred
since the end of 1997. A majority of the $1,054,000 represents replacement of
non-compliant systems, and therefore will be capitalized and amortized over a
three to five year period. This estimate could change depending on variances not
anticipated in the initial bids.
RISK. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect Lithia's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, Lithia is
unable to determine, at this time, whether the consequences of Year 2000
failures will have a material impact on the its results of operations, liquidity
or financial condition. Lithia's efforts to help ensure Year 2000 preparedness
have, and will continue to, significantly reduce its level of uncertainty about
the Year 2000 problem. We believe that, with completion of the above mentioned
plans, the possibility of significant interruptions of normal operations should
be reduced.
Lithia is currently developing contingency plans in regard to its internal
systems and supplier issues, as well as for the more global infrastructure
issues.
20
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities (SFAS 133).
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. Lithia does not have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on its financial position or results of
operations.
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 for each of the eight quarters in the two-year period
ended December 31, 1998 is as follows:
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------------------- ----------- ----------- ----------- -----------
1997
- -----
Total revenues $ 54,704 $ 66,422 $ 85,573 $ 113,096
Gross profit (1) 9,255 11,043 14,568 19,880
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
1998
- -----
Total Revenues $ 146,198 $ 173,541 $ 195,914 $ 199,087
Gross profit (1) 22,946 27,098 31,752 33,565
Income before income taxes 2,466 3,629 5,965 5,722
Income taxes 947 1,407 2,307 2,333
Net income 1,519 2,222 3,658 3,390
Basic net income per share 0.22 0.24 0.36 0.33
Diluted net income per share 0.21 0.24 0.35 0.32
(1) Restated to conform with current presentation.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
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 Proxy Statement for its
1999 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 Proxy Statement for its 1999 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 Proxy
Statement for its 1999 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 1999 Annual Meeting of Shareholders and is incorporated herein by
reference.
22
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, 1998 and 1997 F-2
Consolidated Statements of Operations for the years ended
December 31, 1998,1997 and 1996 F-3
Consolidated Statements of Changes in Shareholders' Equity -
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 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, 1998:
1. Form 8-K dated October 15, 1998 under Items 2 and 7, as filed with the
Securities and Exchange Commission on October 28, 1998.
2. Form 8-K dated November 2, 1998 under Items 2 and 7, as filed with the
Securities and Exchange Commission on November 12, 1998.
3. Form 8-K/A dated October 15, 1998 under Items 2 and 7, as filed with
the Securities and Exchange Commission on December 30, 1998.
23
(c) EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
Exhibits Description
- -------- -----------
2.1 (d) Agreement for Purchase and Sale of Business Assets
between Magnussen Dodge, Inc. and Lithia Motors,
Inc. dated January 21, 1997
2.2 (c) Agreement for Purchase and Sale of Business Assets
between Magnussen-Barbee Ford, Lincoln-Mercury, Inc.
and Lithia Motors, Inc. dated February 21, 1997
2.3 (f) Agreement for Purchase and Sale of Business Assets
between Sun Valley Ford, Inc. and Lithia Motors,
Inc. dated April 2, 1997
2.4 (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
2.5 (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
2.6 (i) Agreement for Purchase and Sale of Business Assets
between Century Ford, Inc. and Lithia Motors, Inc.
dated September 1, 1997
2.7 (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
2.8 (k) 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.
2.9 (k) 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.
2.10 (m) Agreement for Purchase and Sale of Business Assets between
Boyland Auto Group dba Boyland Toyota, Dorian Boyland and
Lithia Motors, Inc.
2.11 (l) Agreement for Purchase and Sale of Business Assets between
Rodway Chevrolet Co. and Lithia Motors, Inc., dated
March 19, 1998.
2.12 (l) Stock Purchase Agreement between William N. Hutchins,
Hutchins Eugene Nissan, Inc. and Hutchins Imported Motors
and Lithia Motors, Inc., dated June 18, 1998.
2.13 (n) First, Second and Third Addenda to Stock Purchase Agreement
by and between William N. Hutchins, Hutchins Imported
Motors, Inc. and Hutchins Eugene Nissan, Inc. and Lithia
Motors, Inc., dated June 18, 1998.
2.14 (o) Restated Stock Purchase Agreement, by and between Phil S.
Camp, Jerry W. Camp, Jr., Julie A. Camp McKay, Chris E.
Camp, Travis W. Camp, Carter B. Camp and Camp Automotive,
Inc. and Lithia Motors, Inc., dated August 1, 1998.
3.1 (a) Restated Articles of Incorporation of Lithia Motors,
Inc.
3.2 (a) Bylaws of Lithia Motors, Inc.
4 (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
10.1.5 (l) Amendment No. 1 to the Lithia Motors, Inc. 1996
Stock Incentive Plan
10.2 (b) 1997 Non-Discretionary Stock Option Plan for
Non-Employee Directors
10.3 (k) 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
24
Exhibits Description
- -------- -----------
10.5.1 (k) 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 (k) 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 (k) American Honda Automobile Dealer Sales and Service
Agreement Standard Provisions.
10.5.4 (k) Agreement between American Honda Motor Company, Inc.
and Lithia Motors, Inc. et al. dated December 17,
1996.
10.5.5 (k) 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 (k) 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 (k) 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 (a) General Motors Dealer Sales and Service Agreement
Standard Provisions
10.9 (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 (k) Saturn Distribution Corporation Retailer Agreement,
dated June 16, 1997, between Saturn Distribution
Corporation and Saturn of Southwest Oregon, Inc.
10.10.2 (k) 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 [cad 229]
additional provisions to Toyota Dealer Agreement,
dated November 15, 1996 between Toyota Motor Sales,
USA, Inc. and Lithia TKV, Inc.
10.12.1 (k) 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 (k) Suzuki Dealer Sales and Service Agreement Standard
Provisions.
10.13 (k) BMW Dealer Agreement, dated October 3, 1997, between
BMW of North America, Inc. and Lithia BB, Inc.
10.14 (k) Hyundai Motor America Dealer Sales and Service
Agreement, dated January 26, 1998, between Hyundai
Motor America and Lithia JEF, Inc.
10.15.1 (k) 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 (k) Nissan Standard Provisions
25
Exhibits Description
- -------- -----------
10.16.1 (k) 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 (k) 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 (a) Commercial Lease, dated April 1, 1992, between Billy
J. Wilson et al and Wilson/Malasoma, Inc. relating
to facility in Vacaville, California.
10.19 (d) Lease between Solano Way Partnership and Lithia Real
Estate, Inc. dated February 14, 1997
10.20 (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.
10.21.1 (g) Promissory Note for Leasehold Improvements issued by
Lithia Motors, Inc. to Sun Valley Ford, Inc. dated
August 8, 1997.
10.21.2 (g) Promissory Note for Intangible Assets issued by
Lithia Motors, Inc. to Sun Valley Ford, Inc. dated
August 8, 1997.
10.21.3 (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
10.21.4 (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.
10.22.1 (k) Lease Agreement among Paul H. Snider and Dick
Donnelly Automotive Enterprises, Inc. dated October
17, 1989
10.22.2 (k) Lease Agreement among Richard M. Donnelly and Susan
K. Donnelly and Lithia Real Estate, Inc. dated
October 1, 1997
10.23 (k) Real Property Lease Agreement among Eloy C. Renfrow
and Lithia Real Estate, Inc. dated October 2, 1997
10.24 (k) Lease Agreement among BR Enterprises and Lithia
Motors, Inc. dated September 3, 1997
10.25 (k) Real Property Lease Agreement among James D. Plummer
and Lithia Real Estate, Inc. dated October 14, 1997
10.26 (k) Lease Agreement among Teddy Bear Havas Motors, Inc.
and United American Funding, Inc. dated July 28, 1992
10.27 (a) Management Contract between Lithia Leasing, Inc. and
Lithia Properties LLC.
10.28 (a) Purchase and Sale Agreement, dated December 13,
1996, between Lithia Properties and Lithia Real
Estate, Inc.
10.29 $75,000,000 Credit Agreement dated November 23, 1998
between Ford Motor Credit Company and Lithia Motors,
Inc.
10.30 $60,000,000 Credit Agreement dated November 23, 1998
between Ford Motor Credit Company and Lithia Motors,
Inc.
10.31 Chevrolet Dealer Sales and Service Agreement dated
October 13, 1998 between General Motors Corporation,
Chevrolet Motor Division and Camp Automotive, Inc.
10.32 Subaru Dealership Agreement dated October 16, 1998
by and between Subaru of America, Inc./Western
Region and Camp Automotive, Inc.
21 Subsidiaries of Lithia Motors, Inc.
23 Consent of KPMG Peat Marwick LLP
27 Financial Data Schedule
99 Risk Factors
26
(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.
(k) Incorporated by reference from the Company's Form 10-K for
the year ended December 31, 1997 as filed with the
Securities and Exchange Commission on March 31, 1998.
(l) Incorporated by reference from the Company's Form 10-Q for
the quarter ended June 30, 1998 as filed with the
Securities and Exchange Commission on August 13, 1998.
(m) Incorporated by reference from the Company's Registration
Statement No. 333-47525 on Form S-1 dated May 1, 1998.
(n) Incorporated by reference from the Company's Form 10-Q for
the quarter ended September 30, 1998 as filed with the
Securities and Exchange Commission on November 12, 1998.
(o) Incorporated by reference from the Company's Form 8-K dated
October 15, 1998 as filed with the Securities and
Exchange Commission on October 28, 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.
(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.
27
(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 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 Soscol 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 at 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
28
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 identical agreement (except for the
price paid and the purchase rather than the 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.
29
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 29, 1999 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 29, 1999:
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
Brian R. Neill (Principal Financial and Accounting
Officer)
/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
- -----------------
Thomas Becker
/s/ WILLIAM J. YOUNG Director
- --------------------
William J. Young
30
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, 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 19, 1999
F-1
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands)
December 31,
----------------------------------------
1998 1997
------------------ ------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 20,879 $ 18,454
Trade receivables 17,287 7,655
Notes receivable, current portion, net of allowance
for doubtful accounts of $714 and zero 3,074 427
Inventories, net 157,455 89,845
Vehicles leased to others, current portion 861 738
Prepaid expenses and other 1,933 913
Deferred income taxes 2,707 1,855
------------------ ------------------
Total Current Assets 204,196 119,887
Property and Equipment, net of accumulated
depreciation of $3,907 and $2,822 32,933 16,265
Vehicles Leased to Others, less current portion 5,647 4,588
Notes Receivable, less current portion 7,173 309
Goodwill, net of accumulated amortization of
$1,180 and $293 42,951 24,062
Other Non-Current Assets, net of accumulated
amortization of $103 and $63 1,498 1,415
------------------ ------------------
Total Assets $ 294,398 $ 166,526
------------------ ------------------
------------------ ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 515 $ -
Flooring notes payable 124,167 82,598
Current maturities of long-term debt 7,601 2,688
Current portion of capital leases 27 99
Trade payables 6,313 3,874
Accrued liabilities 12,020 6,758
------------------ ------------------
Total Current Liabilities 150,643 96,017
Long-Term Debt, less current maturities 38,994 24,242
Long-Term Capital Lease Obligation, less current
portion 2,426 2,316
Deferred Revenue 2,076 2,519
Other Long-Term Liabilities 1,606 447
Deferred Income Taxes 7,142 3,108
------------------ ------------------
Total Liabilities 202,887 128,649
------------------ ------------------
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 6,105 and 2,926 70,871 28,117
Class B common stock
authorized 25,000 shares; issued and
outstanding 4,110 and 4,110 511 511
Additional paid-in capital 150 59
Retained earnings 19,979 9,190
------------------ ------------------
Total Shareholders' Equity 91,511 37,877
------------------ ------------------
Total Liabilities and Shareholders' Equity $ 294,398 $ 166,526
------------------ ------------------
------------------ ------------------
See accompanying notes to consolidated financial statements.
F-2
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share amounts)
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996(1)
----------------- ----------------- ----------------
Revenues:
New vehicle sales $ 388,431 $ 161,294 $ 65,092
Used vehicle sales 220,544 113,099 58,611
Service, body and parts 72,216 29,828 13,197
Other revenues 33,549 15,574 5,944
----------------- ----------------- ----------------
Total revenues 714,740 319,795 142,844
Cost of sales 599,379 265,049 117,025
----------------- ----------------- ----------------
Gross profit 115,361 54,746 25,819
Selling, general and administrative 85,188 40,625 19,830
Depreciation and amortization 3,469 2,483 1,756
----------------- ----------------- ----------------
Income from operations 26,704 11,638 4,233
Other income (expense)
Floorplan interest expense (7,108) (2,179) (697)
Other interest expense (2,735) (824) (656)
Other income, net 921 862 1,349
----------------- ----------------- ----------------
(8,922) (2,141) (4)
----------------- ----------------- ----------------
Income before minority interest and income taxes 17,782 9,497 4,229
Minority interest - - (687)
----------------- ----------------- ----------------
Income before income taxes 17,782 9,497 3,542
Income tax (expense) benefit (6,993) (3,538) 813
----------------- ----------------- ----------------
Net income $ 10,789 $ 5,959 $ 4,355
----------------- ----------------- ----------------
----------------- ----------------- ----------------
Basic net income per share $ 1.18 $ 0.85 $ 0.94 (2)
----------------- ----------------- ----------------
----------------- ----------------- ----------------
Diluted net income per share $ 1.14 $ 0.82 $ 0.88 (2)
----------------- ----------------- ----------------
----------------- ----------------- ----------------
Pro Forma Net Income Data (unaudited)
- ------------------------------------------------------------------------------
Income before minority interest and income taxes, as reported $ 4,229
Pro forma income taxes (1,623)
----------------
----------------
Pro forma net income $ 2,606
----------------
Pro forma basic net income per share $ 0.56
----------------
----------------
Pro forma diluted net income per share $ 0.52
----------------
----------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
(2) Not comparable to 1998 and 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.
See accompanying notes to consolidated financial statements.
F-3
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
(in thousands)
Common Stock
--------------------------------------
Class A Class B Additional Total
------------------ ------------------ Paid In Retained Shareholders'
Shares Amount Shares Amount Capital Earnings (1) Equity
-------- -------- -------- -------- --------- ------------- --------
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' overallotment option 375 3,783 - - - - 3,783
Compensation for stock option issuances - - - - 59 - 59
Exercise of stock options 51 162 - - - - 162
-------- -------- -------- -------- --------- ------------- --------
Balance at December 31, 1997 2,926 28,117 4,110 511 59 9,190 37,877
Net income - - - - - 10,789 10,789
Issuance of Class A Common Stock,
net of offering expenses of $594 3,151 42,498 - - - - 42,498
Compensation for stock option issuances - - - - 78 - 78
Tax benefit of disqualifying dispositions - - - - 13 13
Issuance of Class A Common Stock in
connection with acquisition 13 125 - - - - 125
Exercise of stock options 15 131 - - - - 131
-------- -------- -------- -------- --------- ------------- --------
Balance at December 31, 1998 6,105 $ 70,871 4,110 $ 511 $ 150 $ 19,979 $ 91,511
-------- -------- -------- -------- --------- ------------- --------
-------- -------- -------- -------- --------- ------------- --------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
See accompanying notes to consolidated financial statements.
F-4
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31,
--------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Cash flows from operating activities:
Net income $ 10,789 $ 5,959 $ 4,355
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 3,469 2,483 1,756
Compensation related to stock option issuances 78 59 -
(Gain) loss on sale of assets 30 (1) (239)
(Gain) loss on sale of vehicles leased to others 33 (286) -
Deferred income taxes 565 336 (906)
Minority interest in income - - 687
Equity in income of affiliate (7) (102) (44)
(Increase) decrease net of effect of acquisitions, in:
Trade and installment contract receivables, net (6,714) (5,087) (852)
Inventories (17,614) (9,009) (7,120)
Prepaid expenses and other (1,614) (678) (19)
Other noncurrent assets 204 (486) (196)
Increase (decrease) net of effect of acquisitions, in:
Floorplan notes payable 21,425 9,122 (3,283)
Trade payables (2,759) 1,440 979
Accrued liabilities 2,500 4,252 797
Other liabilities (1,039) (2,274) 3,095
------------------ ----------------- -----------------
Net cash provided by (used in) operating activities 9,346 5,728 (990)
Cash flows from investing activities:
Notes receivable issued (639) (249) (540)
Principal payments received on notes receivable 3,456 304 500
Capital expenditures (3,934) (8,801) (395)
Proceeds from sale of assets 223 16 765
Expenditures for vehicles leased to others (9,322) (6,750) (6,537)
Proceeds from sale of vehicles leased to others 8,481 5,330 5,760
Cash paid for acquisitions (36,531) (25,220) (6,937)
Distribution from affiliate - 204 -
------------------ ----------------- -----------------
Net cash used in investing activities (38,266) (35,166) (7,384)
Cash flows from financing activities:
Net borrowings on notes payable - - (625)
Net borrowings (repayments) on used vehicle line of credit (15,500) 15,500 -
Principal payments on long-term debt (39,083) (15,917) (25,336)
Proceeds from issuance of long-term debt 43,287 28,951 21,635
Proceeds from issuance of common stock and minority interest 42,641 3,945 24,172
Proceeds from minority interest share receivable - - 676
Dividends and distributions - - (6,441)
------------------ ----------------- -----------------
Net cash provided by financing activities 31,345 32,479 14,081
------------------ ----------------- -----------------
Increase in cash and cash equivalents 2,425 3,041 5,707
Cash and cash equivalents:
Beginning of period 18,454 15,413 9,706
------------------ ----------------- -----------------
End of period $ 20,879 $ 18,454 $ 15,413
------------------ ----------------- -----------------
------------------ ----------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 9,728 $ 3,206 $ 1,823
Cash paid during the period for income taxes 6,482 3,011 -
Supplemental schedule of noncash investing and financing
activities:
Debt extinguishment upon transfer of property $ - $ - $ 1,112
Contribution of minority interest in S Corporation
earnings upon Restructuring to Class B Common Stock - - 131
Contribution of excess S Corporation retained earnings
upon Restructuring to Class B Common Stock - - 421
Stock issued in connection with acquisition 125 - -
Assumption of mortgage related to acquisition 1,345 - -
See accompanying notes to consolidated financial statements.
F-5
LITHIA MOTORS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(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 23 domestic and imported makes of new
automobiles and light trucks at 28 locations, 14 in California, nine in Oregon,
three in Nevada and two in Washington. 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 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 28 locations, the Company offers, collectively, 23 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Volkswagen, Audi, Isuzu, Chevrolet, Saturn, Nissan,
Honda, Acura, BMW, Mazda, Suzuki, Hyundai, Subaru and Volvo.
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 and to decrease net income by $426, or $0.09 per diluted share for the
year ended December 31, 1996.
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.
Leased property meeting certain criteria is capitalized and the present
value of the related lease payments is recorded as a liability. Amortization of
capitalized leased assets is computed on a straight-line basis over the term of
the lease.
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 $476 and $468 at December 31, 1998 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 statement of operations for the year
ended December 31, 1996 reflects a provision 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 that
period.
F-7
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. 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, 1998 1997 1996
- ------------------------------ ----------------------------- ---------------------------- ------------------------------
Per Share Per Share Per Share
BASIC EPS Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------- ---------------------------- ------------------------------
Income available to Common
Shareholders $ 10,789 9,147 $ 1.18 $ 5,959 6,988 $0.85 $4,355 4,657 $0.94
------- --------- -------
------- --------- -------
EFFECT OF DILUTIVE SECURITIES
Stock Options - 323 - 315 - 316
---------------- ------------------ -------------------
DILUTED EPS
Income available to Common
Shareholders $ 10,789 9,470 $ 1.14 $ 5,959 7,303 $0.82 $4,355 4,973 $0.88
------- --------- -------
------- --------- -------
108, zero and zero shares issuable pursuant to stock options have not been
included in the above calculations for 1998, 1997 and 1996, respectively, since
they would have been antidilutive.
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 values
of long-term debt and notes receivable for leased vehicles accounted for as
sales-type leases were estimated by discounting the future cash flows using
market interest rates and do 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 $5,749, $2,678 and $1,297 for the years
ended December 31, 1998, 1997 and 1996, respectively.
GOODWILL
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
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.
Finance fees represent revenue earned by the Company for notes placed with
financial institutions in connection with customer vehicle financing net of
estimated chargebacks. 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
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
manufacturers. 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.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131
(SFAS 131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
for the year ended December 31, 1998. Based upon definitions contained within
SFAS 131, the Company has determined that it operates in one segment.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the current presentation.
F-10
(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). Certain inventories of dealerships acquired in
1998 amounting to $13,529 at December 31, 1998 are valued using the last-in
first-out (LIFO) method of accounting and have an insignificant LIFO reserve at
December 31, 1998.
The new and used vehicle inventory, collateralizing related notes payable,
and other inventory were as follows:
DECEMBER 31,
----------------------------------------------------------
1998 1997
--------------------------- ---------------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
--------- ----------- --------- ----------
New and program vehicles $ 112,990 $ 124,167 $ 63,457 $ 67,098
Used vehicles 34,599 5,000 21,524 15,500
Parts and accessories 9,866 - 4,864 -
--------- ----------- --------- ----------
Total inventories $ 157,455 $ 129,167 $ 89,845 $ 82,598
--------- ----------- --------- ----------
--------- ----------- --------- ----------
The inventory balance is generally reduced by manufacturer's purchase
discounts. Such reduction is not reflected in the related floor plan liability.
All new vehicles are pledged to collateralize floor plan notes payable to
financial institutions. The floor plan notes payable bear interest, payable
monthly on the outstanding balance, at a rate of interest determined by the
lender, subject to incentives. The floor plan notes are due when the related
vehicle is sold. As such, these floor plan notes payable are shown as a current
liability in the accompanying consolidated balance sheets.
Used vehicles are pledged to collateralize a $60 million line of credit.
(3) PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1998 1997
----------------------------- ----------- ------------
Buildings and improvements $ 17,107 $ 7,449
Service equipment 5,566 3,992
Furniture, signs and fixtures 5,077 4,340
----------- ------------
27,750 15,781
Less accumulated depreciation (3,907) (2,822)
----------- ------------
23,843 12,959
Land 8,648 2,924
Construction in progress 442 382
----------- ------------
$ 32,933 $ 16,265
----------- ------------
----------- ------------
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
DECEMBER 31, 1998 1997
----------------------------- ---------- ---------
Vehicles leased to others $ 7,267 $ 6,531
Less accumulated depreciation (759) (1,205)
----------- ------------
6,508 5,326
Less current portion (861) (738)
----------- ------------
$ 5,647 $ 4,588
----------- ------------
----------- ------------
F-11
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 RECEIVABLE UNDER SALES-TYPE LEASES
At one of its locations, the Company leases vehicles to customers under
sales-type leases. The following lists the components of the net investment in
sales-type leases, classified as notes receivable in the consolidated balance
sheets.
DECEMBER 31, 1998 1997
- -------------------------------------------- ---------- ---------
Total minimum lease payments to be received $11,796 $ -
Allowance for uncollectible notes and
repossession losses (599) -
---------- ---------
11,197 -
Unearned interest income (1,960) -
---------- ---------
$ 9,237 $ -
---------- ---------
---------- ---------
(6) LINES OF CREDIT AND LONG-TERM DEBT
Ford Credit, Toyota Motor Credit Corporation, Chrysler Financial
Corporation and General Motors Acceptance Corporation have agreed to floor all
of Lithia's new vehicles for their respective brands with Ford serving as the
primary lender for all other brands. There are no formal limits to these
commitments for new vehicle wholesale financing.
Ford Credit has also extended a $60 million revolving line of credit for
used vehicles and a $75 million acquisition line of credit to purchase
dealerships of any brand. These commitments have an expiration date of
November 23, 2000 with interest due monthly. Lithia has the right to elect
to extend the term on these lines of credit for an additional two years at
November 23, 1999. Lithia also has the option to convert the acquisition line
into a five-year term loan on November 23, 1999 or November 23, 2000. In
addition, U.S. Bank N.A. has extended a $10 million revolving line of credit
for leased vehicles.
The lines with Ford Credit are cross-collateralized and are secured by
inventory, accounts receivable, intangible assets and equipment. The other
new vehicle lines are secured by new vehicle inventory of the relevant
dealerships.
The Ford Credit lines of credit contain financial covenants requiring
Lithia to maintain compliance with, among other things, specified ratios of
(i) total debt to tangible base capital; (ii) total adjusted debt to tangible
base capital; (iii) current ratio; (iv) fixed charge coverage; and (v) net
cash. The Ford Credit lines of credit agreements also preclude the payment of
cash dividends without the prior consent of Ford Credit.
F-12
Interest rates on all of the above facilities ranged from 6.5% to 8.0% at
December 31, 1998. Amounts outstanding on the lines at December 31, 1998 were
as follows (in thousands):
Acquisition Line $ -
Used Vehicle Line 5,000
New and Program Vehicle Lines 124,167
Leased Vehicle Line 4,000
--------------
$ 133,167
--------------
--------------
Long-term debt consists of the following:
DECEMBER 31, 1998 1997
------------------------------------ ----------- -----------
Lease vehicle line of credit $ 4,000 $ 5,211
Acquisition line of credit - 5,000
Used vehicle flooring line of credit 5,000 -
General corporate line of credit - 4,827
Mortgages payable in monthly
installments of $83, including
interest between 8.18% and 9.375%,
maturing fully September 2010; secured
by land and buildings 9,499 4,102
Notes payable in monthly installments
of $144 plus interest calculated daily
at LIBOR plus 2.20%, maturing fully
November 2003; secured by equipment 8,328 -
Notes payable in monthly installments
of $225 plus interest between 7.21%
and 8.50%, maturing at various dates
through 2004; secured by vehicles
leased to others 7,584 -
Notes payable related to acquisitions,
with interest rates between 7.00% and
9.00%, maturing at various dates
between November 1999 and November
2008 12,679 7,782
Note payable in monthly installments
of $3, including interest at 10.25%,
maturing fully August 2000 20 8
------------ -----------
47,110 26,930
Less current maturities (8,116) (2,688)
------------ -----------
$ 38,994 $ 24,242
------------ -----------
------------ -----------
The schedule of future principal payments on long-term debt after
December 31, 1998 is as follows:
YEAR ENDING DECEMBER 31,
-------------------------
1999 $ 8,116
2000 15,407
2001 5,469
2002 4,694
2003 2,774
Thereafter 10,650
---------
Total principal payments $ 47,110
---------
---------
F-13
(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.
(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 1998
and 1997 and pro forma income taxes on the Company's earnings for 1996
(unaudited) are as follows:
(unaudited
pro forma)
DECEMBER 31, 1998 1997 1996
-------------------- --------- --------- ----------
Current:
Federal $ 5,387 $ 2,967 $ 1,860
State 1,041 444 387
--------- --------- ----------
6,428 3,411 2,247
--------- --------- ----------
Deferred:
Federal 436 114 (517)
State 129 13 (107)
--------- --------- ----------
565 127 (624)
--------- --------- ----------
Total $ 6,993 $ 3,538 $ 1,623
--------- --------- ----------
--------- --------- ----------
Individually significant components of the deferred tax assets and
liabilities are presented below:
DECEMBER 31, 1998 1997
----------------------------------- ------------ ------------
Deferred tax assets:
Allowance and accruals $ 1,425 $ 470
Deferred revenue 1,282 1,126
------------ ------------
Total deferred tax assets 2,707 1,596
------------ ------------
Deferred tax liabilities:
LIFO recapture and acquired LIFO
inventories (4,398) (1,841)
Property and equipment,
principally due to
differences in depreciation (2,744) (1,008)
------------ ------------
Total deferred tax
liabilities (7,142) (2,849)
------------ ------------
Total $ (4,435) $ (1,253)
------------ ------------
------------ ------------
F-14
The reconciliation between the statutory federal income tax expense at
35% in 1998 and 34% in 1997 and 1996 and the Company's income tax expense for
1998, 1997 and 1996 is shown in the following tabulation. The following
tabulation also reconciles the expected corporate federal income tax expense
for 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, 1998 1997 1996
-------------------------------------- ------- ------- -------
Statutory federal taxes $ 6,224 $ 3,229 $ 1,438
State taxes, net of federal income 751 278 184
tax benefit
Other 18 31 1
------- ------- -------
Income tax expense $ 6,993 $ 3,538 $ 1,623
------- ------- -------
------- ------- -------
(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, 1998,
1997 and 1996 was approximately $3,824, $64 and $88, respectively.
The Company's potential loss is limited to the difference between the
present value of the installment contract at the date of the repossession and
the amount for which the vehicle is resold. Based upon historical loss
percentages, an estimated loss reserve of $255, $0 and $0 is reflected in the
Company's consolidated balance sheets as of December 31, 1998, 1997 and 1996.
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 Company also
leases certain equipment under capital leases.
The minimum lease payments under the operating and capital leases after
December 31, 1998 are as follows:
YEAR ENDING DECEMBER 31, OPERATING CAPITAL
------------------------------------------- ------------- -------------
1999 $ 6,315 $ 309
2000 5,878 312
2001 5,832 312
2002 5,367 312
2003 4,942 312
Thereafter 36,573 5,200
------------- -------------
Total minimum lease payments $ 64,907 6,757
-------------
-------------
Less amounts representing interest (4,304)
-------------
Present value of future minimum lease $ 2,453
payments -------------
-------------
Rental expense for all operating leases was $5,659, $2,764 and $2,353
for the years ended December 31, 1998, 1997 and 1996, respectively.
F-15
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 $285, $138 and $100 were recognized for the years ended
December 31, 1998, 1997 and 1996, respectively. Employees may contribute to
the plan under certain circumstances.
(11) RESTRUCTURING AND OFFERINGS
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 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.
In May 1998, the Company closed an offering of 3.15 million newly issued
shares of its Class A Common Stock for net proceeds of $42.5 million. The
proceeds have been used to pay down the Company's lines of credit until
needed for future acquisitions.
(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, as amended, for
the granting of up to 1,085 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"). Subject to shareholder approval at the Company's 1999 Annual
Meeting of Shareholders to be held in May 1999, the total number of options
that may be issued under the 1996 Stock Incentive Plan will be increased by
915, to a total of 2,000. 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, 1998, 1,043
shares of Class A common stock were reserved for issuance under the Plan and
495 shares were available for future grant.
F-16
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
Additional shares reserved 415 - -
Options granted (155) 155 14.65
Options canceled 34 (34) 16.22
Options exercised - (6) 3.02
---------- ----------- --------------
Balances, December 31, 1998 495 548 $ 5.80
---------- ----------- --------------
---------- ----------- --------------
The Company issued non-qualified options during 1998 and 1997 to certain
members of management at an exercise price of $1.00 per share. Compensation
expense, which is equal to the difference between the market price
and the exercise price, is recognized ratably in accordance with the 4-year
vesting schedule.
In 1998, the Board of Directors of the Company and the shareholders
approved the implementation of an Employee Stock Purchase Plan (the "Purchase
Plan"), and reserved a total of 250 shares of Class A Common Stock for
issuance under the Purchase Plan. The Purchase Plan is intended to qualify
as an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code of 1986, as amended, and is administered by the Compensation
Committee of the Board. Eligible employees are entitled to contribute up to
10 percent of their base pay for the purchase of stock. The purchase price
for shares purchased under the Purchase Plan is 85 percent of the lesser of
the fair market value at the beginning or end of the purchase period. A
total of 9 shares of the Company's Class A common stock were issued under the
Purchase Plan during 1998.
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 plans 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 or the Purchase Plan (collectively the "Plans").
F-17
The Company has computed, for pro forma disclosure purposes, the value
of options granted under the Plans, 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, 1998 1997 1996
-------------------------------- ----------- ----------- -----------
Risk-free interest rate 5.50% 6.25% 6.50%
Expected dividend yield 0.00% 0.00% 0.00%
Expected lives 6.7 years 6.8 years 6.5 years
Expected volatility 53.41% 45.50% 60.00%
Using the Black-Scholes methodology, the total value of options granted
during 1998, 1997 and 1996 was $1,119, $320 and $709, respectively, which
would be amortized on a pro forma basis over the vesting period of the
options, typically four to five years. The weighted average fair value of
options granted during 1998, 1997 and 1996 was $8.61, $7.20 per share and
$1.62 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, 1998 1997 1996
- ------------------------------- ----------------- ----------------- -----------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------- -------- ------- -------- -------
Net income $10,789 $10,227 $ 5,959 $ 5,723 $ 4,355 $ 3,612
Basic net income per share $1.18 $1.12 $0.85 $0.82 $0.94 $0.78
Diluted net income per share $1.14 $1.09 $0.82 $0.79 $0.88 $0.73
The following table summarizes stock options outstanding at December 31,
1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------ -----------------------
WEIGHTED
AVERAGE WEIGHTED NUMBER OF WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE SHARES AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
- -------------- ----------- ----------- -------- ----------- ---------
$ 1.00 28 7.7 $ 1.00 10 $ 1.00
3.02 - 3.32 382 4.4 3.11 219 3.17
10.75 - 11.00 27 6.9 10.80 7 10.80
14.31 - 14.75 87 7.1 14.73 3 14.31
16.23 24 4.0 16.23 - -
- -------------- ----------- ----------- -------- ----------- ---------
$1.00 - 16.23 548 5.1 $ 5.80 239 $ 3.44
- -------------- ----------- ----------- -------- ----------- ---------
- -------------- ----------- ----------- -------- ----------- ---------
At December 31, 1997 and 1996, respectively, 151 and 167 shares were
exercisable at weighted average exercise prices of $3.28 and $3.27,
respectively.
F-18
(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 $1,464, $1,442
and $2,132 for the years ended December 31, 1998, 1997 and 1996, respectively
relating to these properties.
The Company provides management services to Lithia Properties, LLC.
Other income includes management fees of $12, $12 and $477 for the years
ended December 31, 1998, 1997 and 1996, 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 $9,201 at December 31, 1998.
Lithia Properties constructed a new body and paint shop for use by the
Company, which was completed in April 1997. The Company purchased the
facility and improvements together with a 5.3 acre parcel held for future
development in Medford, Oregon, in 1997. The total purchase price for these
properties was $2.7 million. Lithia Properties retained and after purchase of
the facility, the Company continued to retain, Mark DeBoer Construction, Inc.
as the general contractor for the project. Mark DeBoer, the owner of Mark
DeBoer Construction, Inc., is the son of Sidney B. DeBoer and is one of the
members of Lithia Properties. The general contractor fee was $128, an
arrangement the Company believes is fair in comparison with fees negotiated
with independent third parties.
During 1998, Lithia Properties paid Mark DeBoer Construction, Inc. $821
for remodeling certain of the Company's facilities. The Company believes the
amount paid is fair in comparison with fees negotiated with independent third
parties.
F-19
(14) ACQUISITIONS
The following table sets forth the total purchase price, cash paid, debt
incurred and the net investment for acquisitions made by the Company during
1996, 1997 and 1998:
TOTAL CASH DEBT NET
NAME DATE PAID PAID INCURRED INVESTMENT (1)
- ------------------------------- ------------- ------- ------- -------- --------------
Roberts Dodge(2) December 1996 $ 5,751 $ 1,913 $ 3,838 $ 3,507
Melody Vacaville Toyota December 1996 5,740 2,946 2,794 3,854
------- ------- ------- -------
1996 TOTAL $11,491 $ 4,859 $ 6,632 $ 7,361
------- ------- ------- -------
------- ------- ------- -------
Magnussen Dodge Isuzu April 1997 $10,905 $ 2,822 $ 8,083 $ 3,760
Magnussen-Barbee Ford, L/M July 1997 7,916 3,093 4,823 3,720
Sun Valley Ford, Volkswagen August 1997 17,962 5,356 12,606 7,573
Dick Donnelly Lincoln/Mercury, October 1997 12,916 6,139 6,777 6,676
Isuzu, Suzuki, Audi
Bakersfield Nissan-BMW October 1997 9,240 4,274 4,966 5,814
Century Ford Mazda December 1997 12,915 4,023 8,892 5,314
------- ------- ------- -------
1997 TOTAL $71,854 $25,707 $46,147 $32,857
------- ------- ------- -------
------- ------- ------- -------
Quality Nissan Jeep(2) January 1998 $ 8,404 $ 7,097 $ 1,307 $ 4,405
Reno Volkswagen February 1998 1,400 411 989 293
Medford Nissan, BMW February 1998 3,231 546 2,685 2,326
Haddad Jeep/Eagle March 1998 4,912 1,528 3,384 2,063
Rodway Chevrolet(2) June 1998 11,488 5,094 6,394 3,783
Boyland Toyota(2) July 1998 3,919 2,300 1,619 2,588
Camp Automotive October 1998 11,535 8,000 3,535 11,535
Hutchins Toyota(2) November 1998 6,955 5,000 1,955 6,955
------- ------- ------- -------
1998 TOTAL $51,844 $29,976 $21,868 $33,948
------- ------- ------- -------
------- ------- ------- -------
(1) Net investment consists of the amount of goodwill, working capital, notes
issued to sellers and other initial investments.
(2) Excludes real property purchased for $2,330, $5,560, $4,050, $1,650 and
$1,750, respectively.
The unaudited pro forma results of operations including Camp Automotive,
Inc., 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.
YEAR ENDED DECEMBER 31, 1998 1997 1996
---------------------------- ------------ ------------ ------------
Total revenues $ 790,151 508,720 $ 440,058
Net income 12,118 8,682 3,429
Basic earnings per share 1.32 1.24 0.74
Diluted earnings per share 1.28 1.19 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.
F-20
(15) SUBSEQUENT EVENT (UNAUDITED)
In March 1999, the Company announced that it entered into definitive
agreements with the Moreland Automotive Group to acquire a seven-dealership
platform in four Colorado and Nevada markets. Lithia's net investment will be
approximately $50 million, paid for with a combination of cash, Class A Common
Stock and a new series of redeemable Preferred Stock. Upon completion of this
acquisition, which is expected in the second quarter of 1999, the Company will
have annualized revenues of over $1.2 billion.
F-21