AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 2002
REGISTRATION NO. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LITHIA MOTORS, INC.
(Exact name of Registrant as specified in its charter)
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OREGON 93-0572810
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
360 EAST JACKSON STREET
MEDFORD, OREGON 97501
(541) 776-6401
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
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SIDNEY B. DEBOER
LITHIA MOTORS, INC.
360 EAST JACKSON STREET
MEDFORD, OREGON 97501
(541) 776-6401
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
KENNETH E. ROBERTS, ESQ. BRUCE K. DALLAS, ESQ.
FOSTER PEPPER & SHEFELMAN LLP DAVIS POLK & WARDWELL
101 SW MAIN STREET, 15TH FLOOR 1600 EL CAMINO REAL
PORTLAND, OREGON 97204 MENLO PARK, CALIFORNIA 94025
(503) 221-0607 (650) 752-2000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
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Class A common stock, no par value..... 5,750,000 shares $19.84 $114,080,000 $10,496
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(1) Includes 750,000 shares, which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee required
by Section 6(b) of the Securities Act, and computed pursuant to Rule 457(c)
of the Securities Act. The computation was based on the average of the high
and low prices of our Class A common stock as reported by the NYSE on
January 24, 2002.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued January 25, 2002
5,000,000 Shares
LITHIA LOGO
CLASS A COMMON STOCK
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LITHIA MOTORS, INC. IS OFFERING 4,000,000 SHARES OF ITS CLASS A COMMON STOCK AND
THE SELLING STOCKHOLDER IS OFFERING 1,000,000 SHARES OF CLASS A COMMON STOCK.
LITHIA WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SHARES OF CLASS A COMMON
STOCK SOLD BY SELLING STOCKHOLDERS.
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OUR CLASS A COMMON STOCK IS LISTED ON THE NEW YORK STOCK EXCHANGE UNDER THE
SYMBOL "LAD." ON JANUARY 24, 2002, THE CLOSING PRICE OF OUR CLASS A COMMON STOCK
WAS $19.70 PER SHARE.
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INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
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PRICE $ A SHARE
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UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS SELLING
PUBLIC COMMISSIONS TO LITHIA STOCKHOLDERS
-------- ------------- --------- ------------
Per Share............................... $ $ $ $
Total................................... $ $ $ $
We and certain other selling stockholders have granted the underwriters the
right to purchase up to an additional 750,000 shares of Class A common stock to
cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2002.
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MORGAN STANLEY STEPHENS INC.
, 2002
[INSIDE COVER TO INCLUDE MAP OF THE COMPANY'S STORE LOCATIONS IN THE WESTERN
UNITED STATES]
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 7
Cautionary Statement About Forward-Looking Statements....... 11
Use of Proceeds............................................. 12
Price Range of Common Stock................................. 12
Dividend Policy............................................. 12
Capitalization.............................................. 13
Selected Consolidated Financial Data........................ 14
Management's Discussion and Analysis of Financial Condition 15
and Results of Operations.................................
Business.................................................... 28
Management.................................................. 39
Principal and Selling Stockholders.......................... 41
Description of Capital Stock................................ 44
Underwriters................................................ 48
Legal Matters............................................... 49
Experts..................................................... 50
Where You Can Find More Information......................... 50
Index to Financial Statements............................... F-1
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You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We are offering to
sell shares of common stock and seeking offers to buy shares of common stock
only in jurisdictions where offers and sales are permitted. The information
contained in this prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any sale of the
common stock.
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In this prospectus "Lithia," "we," "us" and "our" refers to Lithia Motors,
Inc. and its subsidiaries, except where the context otherwise requires. Unless
otherwise indicated, all information in this prospectus assumes no exercise of
the underwriters' over-allotment option.
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No automobile manufacturer has been involved, directly or indirectly, in
the preparation of this prospectus or in the offering being made hereby. No
manufacturer has been authorized to make any statements or representations in
connection with the offering, and no manufacturer has any responsibility for the
accuracy or completeness of this prospectus or for the offering.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information concerning our company, the common stock being sold in this offering
and our financial statements and notes thereto appearing or incorporated by
reference in this prospectus. Because this is only a summary, you should
carefully read all of this prospectus, including the risks described under "Risk
Factors," before you invest in our common stock.
LITHIA MOTORS, INC.
Lithia Motors, Inc. is a leading operator of automotive franchise stores in
the western United States. We sell new and used cars, light trucks and sport
utility vehicles. We also provide vehicle maintenance, warranty and repair
services and arrange financing, extended warranty and insurance contracts for
our customers. We achieve gross margins above industry averages by selling a
higher ratio of retail used vehicles to new vehicles and by arranging finance
and extended warranty contracts for a greater percentage of our customers. In
2000, we achieved a gross margin of 16.1% compared with the industry average of
12.7%. We offer 24 brands of new vehicles, through 119 franchises in 63 stores.
Our core markets are concentrated in the fastest growing regions in the United
States with 15 stores in Oregon, 11 in California, 10 in Washington, 7 in
Colorado, 7 in Idaho, 5 in Nevada, 3 in South Dakota, 3 in Texas and 2 in
Alaska. Over 65% of our stores are located in markets where our store does not
compete directly with any other franchised dealer selling the same brand.
We were founded in 1946. Our two senior executives have managed the company
for more than 30 years. Since our initial public offering in 1996, we have grown
from 5 to 63 stores primarily through an aggressive acquisition program,
increasing annual revenues from $143 million in 1996 to $1.7 billion in 2000. We
have achieved five-year compounded annual growth rates through December 31, 2000
of 85% for revenues, 75% for net income and 36% for earnings per share, together
with a 6.9% average same store sales increase.
In 2000, due to the economic outlook at that time, we intentionally slowed
our growth in anticipation of a more favorable acquisition environment. We
believe the current economic environment provides us with an increasing number
of attractive acquisition opportunities. As a result, we have accelerated our
pace of acquisitions. Since July 2001, we have acquired 8 new stores compared
with 9 in the preceding twelve months. We expect the majority of our future
growth to come from acquisitions. Our ability to successfully identify and
integrate acquired stores and to achieve financial performance superior to
industry averages is a result of a focused acquisition strategy and disciplined
operating standards for all departments.
The following factors permit us to experience relatively low earnings
volatility compared with automotive manufacturers:
-- 72% of our gross profits are achieved from the sale of higher margin
used vehicles, service, body and parts and finance, extended warranty
and insurance contracts, which are not as sensitive to economic
downturns as are sales of new vehicles;
-- over one-half of our costs are variable or discretionary, including
personnel, advertising and inventory finance expenses;
-- manufacturers bear the cost of consumer and dealer incentives which
improves our margins and helps offset the effect of new vehicle sales
declines; and
-- we offer a wide variety of new vehicle brands, which minimizes our
dependence on any one manufacturer and reduces our exposure to supply
problems, product cycles and changing consumer preferences.
1
ACQUISITION GROWTH STRATEGY
The highly fragmented U.S. automotive retailing industry is estimated to
generate approximately $1.0 trillion in revenue: $746 billion from sales of new
and used vehicles and $219 billion from repair, service and parts. The
automotive finance industry generates revenues of $493 billion for providing
vehicle loans, leases, extended warranties and credit insurance. The 100 largest
automotive retailers generated only approximately 16% of total new and used
vehicle sales in 2001. Based on reported 2001 revenues and retail units sold, we
are one of the 10 largest automotive retailers in the country. According to
industry data, the number of franchised automotive stores has declined from more
than 36,000 stores in 1960 to approximately 22,000 in 2001, which are operated
by fewer than 14,000 retailers. Most stores are privately held. We expect
further consolidation of the automotive retailing industry due to:
-- the number of owners who are nearing retirement age;
-- the desire of manufacturers to have dealers implement "best" customer
service and operating practices;
-- pressures from manufacturers on automotive retailers to invest in
upgraded facilities and information systems; and
-- the limited availability of new franchise locations.
The enormous size and fragmentation of the industry and the lack of
attractive exit strategies create a favorable environment for us to pursue our
acquisition strategy. We currently target acquisitions in 70 markets west of the
Mississippi River where we have the opportunity to acquire single-point or
well-protected franchise stores. We seek to enter a new territory either by
acquiring one or two stores at a time until we establish significant market
presence or by acquiring an entire group of stores.
We seek to acquire stores where we can apply our operating disciplines to
enhance their profitability. We target stores with zero to 2% pretax margins,
which encompasses over one-half of all U.S. new vehicle stores. Based upon our
experience, our goal is to improve pretax margins to over 3%. As we integrate
newly acquired stores, we improve their profitability by:
-- emphasizing sales of higher margin used vehicles and finance,
warranty and insurance products;
-- utilizing specialized operational support teams to train and motivate
store personnel;
-- increasing new vehicle sales through aggressive marketing and
improved vehicle allocations from manufacturers;
-- standardizing management information systems to identify cost savings
and revenue enhancing opportunities;
-- realizing volume pricing benefits in the cost of advertising, retail
finance contracts, extended warranty and insurance products, flooring
line interest and from other vendors; and
-- improving inventory, receivables and other asset controls.
OPERATING GROWTH STRATEGY
We strive to maximize the overall franchise value of each store by using
our disciplined operating strategy. We believe the application of this operating
strategy provides us with a competitive advantage and is critical to our ability
to achieve levels of profitability superior to industry averages. Our operating
strategy consists of the following elements:
MAINTAIN COOPERATIVE RELATIONSHIPS WITH MANUFACTURERS
We strive to maintain our highly valued manufacturer/franchisee
relationships. Manufacturers commit significant resources to the franchise
system as the exclusive method of retailing their automotive products by:
-- funding dealer and customer incentives and rebates;
2
-- sharing in regional and national advertising expenses;
-- designating the franchise retailer as the exclusive warranty and
recall service provider;
-- providing us with a low cost source of acquisition and working
capital financing;
-- bearing a substantial portion of new vehicle inventory financing
costs;
-- offering our customers low cost financing and lease options; and
-- training many of our employees.
We, in turn, cooperate in facility design, marketing efforts and
manufacturer-preferred brand alignment within our markets. We believe our
cooperative relationship with manufacturers facilitates their approval of new
acquisitions.
EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES
We generate substantial incremental revenue and net income by arranging
financing for the sale of vehicles, selling extended service contracts and other
ancillary products, providing vehicle maintenance and retailing used vehicles.
Revenues and gross profit by product line were as follows for the first
nine months of 2001:
PERCENT OF PERCENT OF TOTAL
TOTAL REVENUES GROSS MARGIN GROSS PROFIT
-------------- ------------ ----------------
New vehicles(1)................................... 51.8% 9.0% 28.1%
Retail used vehicles(2)........................... 26.9 12.8 20.9
Service, body and parts........................... 10.2 46.1 28.5
Finance and insurance(1)(3)....................... 3.8 98.8 22.8
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(1) Does not include fleet sales, representing 2.5% of total revenues and 0.4%
of our total gross profit, which are included in our financial statements on
a net profit basis under finance and insurance.
(2) Excludes wholesale used vehicle sales, representing 4.8% of total revenues
with a negative gross margin contribution of 0.7%.
(3) Reported net of administration fees and anticipated cancellations.
Vehicle financing and leasing. We arrange third-party financing and
leasing alternatives from multiple sources to meet the needs of each customer.
Our ability to offer customer-tailored financing on a "same day" basis provides
us with a competitive advantage, particularly over smaller competitors who do
not generate sufficient volume to attract our breadth of financing sources. In
2000, we arranged financing for 73% of our new vehicle sales and 72% of our used
vehicle sales, compared to the industry averages of 49% and 59%, respectively.
Our average finance and insurance revenue per vehicle totaled $852 in 2000
compared to the industry average of $390. For the first nine months of 2001, we
improved our finance and insurance revenues per vehicle to $917.
Service, body and parts. Our service, body and parts departments generate
recurring, higher margin revenues. We achieved a gross margin of 46.1% for the
first nine months of 2001. Our service, body and parts operation is an integral
part of our customer service program and helps establish customer loyalty.
Approximately 30% of our new and used vehicle buyers purchase a lifetime oil and
filter service, which generates repeat business for our service departments.
Additionally, we perform warranty and recall servicing for manufacturers at
rates similar to our retail rates. Revenues from the service, body and parts
departments are important during economic downturns as owners repair existing
vehicles rather than buy new vehicles during such periods.
3
Used vehicle sales. Retail used vehicle sales are an important part of our
overall profitability. In the first nine months of 2001, retail used vehicle
sales generated a gross margin of 12.8% compared with a gross margin of 9.0% for
new vehicle sales. We currently sell approximately one retail used vehicle for
every new vehicle sold, compared to the industry average ratio of 0.8 to 1. Our
used vehicle operations give us an opportunity to:
-- generate sales to customers financially unable or unwilling to
purchase a new vehicle;
-- increase new and used vehicle sales by aggressively pursuing customer
trade-ins; and
-- increase service contract sales and financing to used vehicle
purchasers.
EMPLOY PROVEN MANAGEMENT TECHNIQUES
Each store 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 for improving
performance, we make available to each store a team of specialists in new
vehicle sales, used vehicle sales, finance and insurance, service and parts, and
back-office administration. These teams utilize a standardized management
information system that helps identify areas of potential cost savings as well
as revenue enhancing opportunities in each department. A significant portion of
the compensation of the general managers and department managers is based on
their profitability. Our senior management monitors each store's sales,
profitability and inventory.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY
We emphasize customer satisfaction and strive to develop a reputation for
quality and fairness. We train our sales personnel to identify an appropriate
vehicle for each of our customers at an affordable price.
We believe that our "Priority You" customer-oriented plan differentiates us
from other automotive retail stores. "Priority You" commits us to provide:
-- a complimentary credit check;
-- a complimentary used vehicle appraisal;
-- a 60-day/3,000 mile warranty on all used vehicles sold; and
-- a community donation for every vehicle sold.
Our stores have received a number of dealer quality, sales volume and
customer satisfaction awards from various manufacturers. These include:
Chrysler's highest recognition for dealer excellence, the Five-Star
Certification; Ford's Blue Oval Certificate; Toyota's President's Cup; Honda's
President's Award; Dodge's National Charger Club membership; Volkswagen of
America's Wolfsburg Crest Club Award; and Isuzu's Sendai Cup and President's
Cup.
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We were incorporated in 1946 in Oregon. Our principal executive offices are
located at 360 East Jackson Street, Medford, Oregon 97501, and our telephone
number at this location is (541) 776-6401. Our World Wide Web address is
www.lithia.com. Information on our website does not constitute a part of this
prospectus.
The Lithia logo is one of our registered trademarks. This prospectus also
includes other trade names, trademarks and service marks of us and of the
manufacturers.
4
THE OFFERING
Class A common stock offered by us................... 4,000,000 shares
Class A common stock offered by the selling
stockholders....................................... 1,000,000 shares
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Total........................................... 5,000,000 shares
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Total common stock to be outstanding after this
offering:
13,344,512 shares
Class A common stock...............................
Class B common stock............................... 3,919,231 shares
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Total........................................... 17,263,743 shares
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750,000 shares
Over-allotment option................................
Voting Rights:
One vote per share
Class A common stock...............................
Ten votes per share
Class B common stock...............................
We will receive net proceeds from the offering
of approximately $74.2 million. We intend to
Use of proceeds...................................... use the proceeds primarily for acquisitions of
additional stores and other general corporate
purposes. Prior to such use, the funds will be
used to reduce borrowings under our credit
lines.
LAD
New York Stock Exchange symbol.......................
The above information is based upon 13,263,743 common shares outstanding as
of January 24, 2002. This information does not include 1,409,745 shares of
common stock subject to outstanding options at a weighted average exercise price
of $14.02 and 402,192 shares of common stock reserved for future issuance under
our stock option and employee purchase plans. See "Capitalization" and
"Description of Capital Stock" for additional information concerning the number
of outstanding shares of our capital stock and stock options.
5
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of Lithia
as of the dates and for the periods indicated. You should read our consolidated
financial statements and related notes together with our "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included or incorporated by reference in this prospectus for more complete
information. The "as adjusted" data gives effect to the sale of 4,000,000 shares
of Class A common stock that we are offering under this prospectus at an assumed
offering price of $19.70 per share, the closing price of our Class A common
stock on January 24, 2002, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,}
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1996(1) 1997 1998 1999 2000 2000 2001
---------- ----------- ----------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AND VEHICLE DATA)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
New vehicle sales........ $ 65,092 $ 161,294 $ 388,431 $ 673,339 $ 898,016 $ 683,217 $ 701,095
Used vehicle sales....... 58,611 113,099 220,544 375,562 480,846 364,935 428,777
Service, body and
parts.................. 13,197 29,828 72,216 120,722 164,002 121,266 138,540
F&I and other(2)......... 5,944 15,574 33,549 73,036 115,747 87,102 85,107
---------- ----------- ----------- ---------- ---------- ---------- ----------
Total revenues......... 142,844 319,795 714,740 1,242,659 1,658,611 1,256,520 1,353,519
========== =========== =========== ========== ========== ========== ==========
Gross profit............... 25,819 54,746 115,361 199,286 267,569 200,968 223,975
Selling, general and
administrative........... 19,830 40,625 85,188 146,381 195,500 146,770 173,517
Operating income........... 4,233 11,638 26,704 47,332 64,464 48,659 43,645
Flooring interest
expense.................. (697) (2,179) (7,108) (11,105) (17,728) (13,894) (11,877)
Income before income
taxes.................... 4,229 9,497 17,782 32,051 39,535 30,721 25,450
Net income................. $ 2,606 $ 5,959 $ 10,789 $ 19,174 $ 24,313 $ 18,681 $ 15,622
Basic net income per
share(3)................. $ 0.56 $ 0.85 $ 1.18 $ 1.67 $ 1.78 $ 1.37 $ 1.16
========== =========== =========== ========== ========== ========== ==========
Diluted net income per
share.................... $ 0.52 $ 0.82 $ 1.14 $ 1.60 $ 1.76 $ 1.36 $ 1.14
========== =========== =========== ========== ========== ========== ==========
OTHER OPERATING DATA:
Operating margin........... 3.0% 3.6% 3.7% 3.8% 3.9% 3.9% 3.2%
Number of stores........... 7 17 28 41 53 49 59
Number of stores acquired,
net...................... 2 10 11 13 8 3 6
Number of franchises....... 15 32 56 98 111 103 117
Same store sales growth.... 18.9% 4.8% 14.7% 6.9% 1.1% 2.3% (4.7)%
New vehicles sold.......... 3,274 7,413 17,708 28,645 37,230 28,555 28,576
Retail used vehicles
sold..................... 4,156 7,147 13,645 23,840 30,896 23,453 27,798
F&I per retail vehicle..... $ 739 $ 935 $ 821 $ 884 $ 852 $ 838 $ 917
AS OF SEPTEMBER 30, 2001
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ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
(UNAUDITED)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $ 89,265 $ 95,428
Inventories............................................... 309,461 309,461
Total assets.............................................. 657,379 657,379
Flooring notes payable.................................... 302,705 236,542
Short-term debt........................................... 9,352 9,352
Long-term debt, less current maturities................... 73,326 65,326
Stockholders' equity...................................... 196,524 270,687
------------
(1) Restated to give effect to the conversion from the LIFO method of accounting
for inventory to the FIFO method, which was effective January 1, 1997. Net
income for 1996 is presented on a pro forma basis to reflect federal and
state income taxes as if we had been a Subchapter C corporation based on the
income tax rates in effect at that time.
(2) F&I and other includes finance, extended warranty and insurance revenues. It
also includes net fleet sales of $456, $1,960, $7,813, $26,615, $57,723,
$43,528, and $33,420 for these reported periods, respectively.
(3) Based on an April 2001 Financial Accounting Standards Board announcement, we
restated basic income per share for the 1999 and 2000 periods to include the
Series M preferred stock as common stock on an as if converted basis.
6
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.
Our business, financial condition or results of operations could be
materially adversely affected by any of these risks. The trading price of our
common stock could decline due to any of these risks, and you may lose all or
part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by us described below and elsewhere in this
prospectus.
RISKS RELATED TO OUR BUSINESS
OUR ABILITY TO INCREASE REVENUES THROUGH OUR ACQUISITION GROWTH STRATEGY
DEPENDS ON OUR ABILITY TO ACQUIRE AND SUCCESSFULLY INTEGRATE ADDITIONAL STORES.
General. The U.S. automobile industry is considered a mature industry in
which minimal growth is expected in unit sales of new vehicles. Accordingly, a
principal component of our growth in sales is to make additional acquisitions in
our existing markets and in new geographic markets. To complete the acquisitions
of additional stores, we need to successfully address each of the following
challenges.
Limitations on our capital resources may prevent us from capitalizing on
acquisition opportunities. Acquisitions of additional stores will require
substantial capital investment. Limitations on our capital resources would
restrict our ability to complete new acquisitions. Further, the use of any
financing source could have the effect of reducing our earnings per share.
In the past, we have financed our acquisitions from a combination of the
cash flow from our operations, borrowings under our credit arrangements and
issuances of our common stock. Although we expect the proceeds from this
offering, together with our other financing resources, to be sufficient for our
currently anticipated acquisition program through 2003, we cannot guarantee that
additional funds would be available in the future if needed. If we are unable to
obtain financing on acceptable terms, we may be required to slow the pace of our
currently anticipated acquisition program, which may materially and adversely
affect our acquisition growth strategy.
On occasion, we finance acquisitions by issuing shares of our common stock
as partial consideration for acquired stores. The extent to which we will be
able or willing to issue our common stock for acquisitions will depend on the
market value of the common stock from time to time and the willingness of
potential acquisition candidates to accept our common stock as part of the
consideration for the sale of their businesses. Accordingly, our ability to make
acquisitions could be adversely affected if the price of our common stock
declines. If potential acquisition candidates are unwilling to accept our common
stock as partial consideration, we will be forced to rely solely on available
cash from operations or debt financing, which could limit our currently
anticipated acquisition program.
Manufacturers may restrict our ability to make new acquisitions. We are
required to obtain consent from the applicable manufacturer prior to the
acquisition of a franchised store. The term "manufacturer" in this prospectus
refers to all of the manufacturers of new vehicles that we sell.
In determining whether to approve an acquisition, a manufacturer considers
many factors including our financial condition, ownership structure, the number
of current stores owned and our performance with those stores. Most major
manufacturers have now established limitations or guidelines on the:
-- number of such manufacturers' stores that may be acquired by a single
owner;
-- number of stores that may be acquired in any market or region;
-- percentage of total sales that may be controlled by one dealer group;
7
-- ownership of stores in contiguous markets;
-- dualing of a franchise with another brand; and
-- frequency of acquisitions.
DaimlerChrysler has issued a policy statement to all of its dealers that it
may disapprove any acquisition if the buyer would own more than ten stores
nationally, six in any Chrysler-defined sales zone or two in the same market.
Although we currently own 21 Chrysler stores, DaimlerChrysler has continued to
approve new acquisitions; however, no assurance can be given that any future
acquisition applications will be approved. There are approximately 4,300
Chrysler stores nationwide.
General Motors currently evaluates our acquisitions of GM stores on a
case-by-case basis. GM, however, limits the maximum number of GM stores that we
may acquire at any time to 50% of the GM stores, by franchise line, in a
GM-defined geographic market area. GM has approximately 7,300 stores nationwide.
Ford currently limits the number of stores that we may own to the greater
of (1) 15 Ford and 15 Lincoln Mercury stores and (2) that number of Ford and
Lincoln Mercury stores accounting for 5% of the preceding year's total Ford,
Lincoln and Mercury retail sales of those brands in the United States. In
addition, Ford limits us to one Ford store in a Ford-defined market area having
two or less authorized Ford stores and one-third of Ford stores in any
Ford-defined market area having three or more authorized Ford stores. Ford has
approximately 4,600 franchised stores nationwide.
Toyota restricts the number of stores that we may own and the time frame
over which we may acquire them, and imposes specific performance criteria on
existing stores as a condition to any future acquisitions. In order for us to
acquire more than seven stores, we must execute Toyota's standard Level Two
Multiple Ownership Agreement. Under the Level Two Multiple Ownership Agreement,
we may acquire more than seven stores over a minimum of seven semi-annual
periods, up to a maximum number of stores equal to 5% of Toyota's aggregate
national annual retail sale volume. In addition, Toyota restricts the number of
Toyota stores that we may acquire in any Toyota-defined region and Metro market,
as well as any contiguous market. Toyota has approximately 1,200 stores
nationwide.
We currently own 21 Chrysler, 8 General Motors, 6 Ford and 5 Toyota stores.
As noted above, we currently own more Chrysler stores than provided in its
policy guidelines and further acquisitions of Chrysler stores may be prohibited
or severely limited. With respect to other manufacturers, we do not believe
existing numerical limitations will materially restrict our acquisition program
for a number of years.
A manufacturer also considers our past performance as measured by their
customer satisfaction index, or CSI, scores and sales performance at our
existing stores. At any point in time, some of our stores may have CSI scores
below the manufacturers' sales zone averages or have achieved sales performances
below the targets they have set. Our failure to maintain satisfactory CSI scores
and to achieve sales performance goals could restrict our ability to complete
future acquisitions. In particular, our current Nissan and Lincoln/ Mercury
stores have not achieved manufacturer established sales goals and we do not
believe we would receive approval to acquire any new Nissan or Lincoln/Mercury
stores until our sales levels improve for a sustained period of time.
We may be unable to improve profitability of newly acquired stores. We
target stores with pretax margins below our historical pretax margin. Our
ability to improve the profitability of newly acquired stores depends in large
part on our ability at such stores to:
-- increase new vehicle sales;
-- improve sales of higher margin used vehicles and finance and
insurance products;
-- train and motivate store management;
-- achieve cost savings and realize revenue enhancing opportunities; and
-- improve inventory, receivable and other controls.
8
If we fail to improve the profitability of newly acquired stores, we may be
unable to maintain our historical pretax margin. Further, failure to improve the
performance of under-performing stores could preclude us from receiving
manufacturer approval for any new acquisitions of that brand.
Competition with other automotive retailers for attractive acquisition
targets could restrict our ability to complete new acquisitions. In the current
economic environment, we are presented with an increasing number of attractive
acquisition opportunities. However, we compete with several other national
automotive retailers, some of which have greater financial and managerial
resources. Competition with existing automotive retailers and those formed in
the future may result in fewer attractive acquisition opportunities and
increased acquisition costs. If we cannot negotiate acquisitions on acceptable
terms, our future revenue growth will be significantly limited.
THE LOSS OF KEY PERSONNEL AND THE FAILURE TO ATTRACT ADDITIONAL PROVEN
MANAGEMENT PERSONNEL COULD ADVERSELY AFFECT OUR OPERATIONS AND GROWTH.
Our success depends to a significant degree on the efforts and abilities of
our senior management, particularly Sidney B. DeBoer, our Chairman and Chief
Executive Officer, M. L. Dick Heimann, our President and Chief Operating
Officer, and R. Bradford Gray, our Executive Vice President. Further, we have
identified Mr. DeBoer and/or Mr. Heimann in most of our store franchise
agreements as the individuals who control the franchises and upon whose
financial resources and management expertise the manufacturers may consider when
awarding or approving the transfer of any franchise. The loss of either of those
individuals could have a material adverse effect on our on-going relationship
with the manufacturers.
In addition, we place substantial responsibility on our general managers
for the profitability of their stores. We have increased our number of stores
from 5 in 1996 to 63 as of January 2002. Many stores are offered for sale to us
to enable the owner/manager to retire. These potential acquisitions are viable
to us only if we are able to obtain replacement management. This has resulted in
the need to hire many additional managers. As we continue to expand, the need
for additional experienced managers will become even more critical. The market
for qualified general managers is highly competitive. The loss of the services
of key management personnel or the inability to attract additional qualified
general managers could have a material adverse effect on our business and the
execution of our acquisition growth strategy.
OUR STORES DEPEND ON VEHICLE SALES AND, THEREFORE, OUR SUCCESS DEPENDS IN
LARGE PART UPON THE OVERALL DEMAND FOR THE PARTICULAR LINES OF VEHICLES THAT
EACH OF OUR STORES SELLS.
Our Chrysler, GM, Ford and Toyota stores represent approximately
three-fourths of our total new vehicle retail sales. Demand for our primary
manufacturers' vehicles as well as the financial condition, management,
marketing, production and distribution capabilities of these manufacturers can
significantly affect our business. Events that adversely affect a manufacturer's
ability to timely deliver new vehicles, such as labor disputes and other
production disruptions, including those which sometimes occur during periods of
new product introductions, may adversely affect us by reducing our supply of
popular new vehicles and leading to lower sales in our stores during those
periods than would otherwise occur. Further, any event that causes adverse
publicity involving any of our manufacturers or their vehicles could reduce
sales of those vehicles and adversely affect our sales and profits.
CYCLICAL DOWNTURNS IN THE AUTOMOBILE INDUSTRY, THAT REDUCE OUR VEHICLE
SALES, MAY ADVERSELY AFFECT OUR PROFITABILITY.
The automobile industry is cyclical and historically has experienced
downturns characterized by oversupply and weak demand. Many factors affect the
industry, including general economic conditions, consumer confidence, personal
discretionary spending levels, interest rates and credit availability. We cannot
guarantee that the industry will not experience sustained periods of decline in
vehicle sales in the future. Any such decline could have an adverse effect on
our business.
The automobile industry also experiences seasonal variations in revenue.
Demand for automobiles is generally lower during the winter months than in other
seasons, particularly in our market areas that experience harsh winters.
Accordingly, we expect revenues and operating results generally to be lower in
our
9
first and fourth quarters than in our second and third quarters for existing
stores. With respect to our company, the timing and volume of our acquisitions
has had a greater effect on our revenues than seasonal sales variations.
THE ABILITY OF OUR STORES TO MAKE NEW VEHICLE SALES DEPENDS IN LARGE PART
ON THE MANUFACTURERS AND, THEREFORE, ANY DISRUPTION OR CHANGE IN OUR
RELATIONSHIPS WITH MANUFACTURERS MAY MATERIALLY AND ADVERSELY AFFECT OUR
PROFITABILITY.
We depend on the manufacturers to provide us with a desirable mix of new
vehicles. The most popular vehicles usually produce the highest profit margins
and are frequently in short supply. If we cannot obtain sufficient quantities of
the most popular models, our profitability may be adversely affected. Sales of
less desirable models may reduce our profit margins.
We depend on the manufacturers for sales incentives and other programs that
are intended to promote sales or support our profitability. Manufacturers
historically have made many changes to their incentive programs during each
year. A discontinuation or change in manufacturers' incentive programs could
adversely affect our business. Moreover, some manufacturers use a store's CSI
scores as a factor for participating in incentive programs. Accordingly, failure
to meet CSI standards could have a material adverse effect on us.
Each of our stores operates pursuant to a franchise agreement with each of
the respective manufacturers for which it serves as franchisee. Manufacturers
exert significant control over our stores through the terms and conditions of
their franchise agreements, including provisions for termination or non-renewal
for a variety of causes. From time-to-time, certain of our stores have failed to
comply with certain provisions of their franchise agreements. These agreements
and state law, however, generally afford us the opportunity to cure violations
and no manufacturer has terminated or failed to renew any franchise agreement
with us. If a manufacturer terminates or declines to renew one or more of our
significant franchise agreements, such action could have a material adverse
effect on us.
Our franchise agreements also specify that, in certain situations, we
cannot operate a franchise by another manufacturer in the same building as the
manufacturer's franchised store. This may require us to build new facilities at
a significant cost. In addition, some manufacturers are in the process of
realigning their stores along defined channels, such as combining Chrysler and
Jeep in one location. As a result, manufacturers may require us to move or sell
some stores. Moreover, our manufacturers generally require that the store meet
defined image standards. All of these commitments could require us to make
significant capital expenditures.
Some of our franchise agreements prohibit transfers of ownership interests
of a store or, in some cases, its parent. The most prohibitive restriction,
which has been imposed by various manufacturers, provides that, under certain
circumstances, we may lose a franchise if a person or entity acquires an
ownership interest in us above a specified level (ranging from 20% to 50%
depending on the particular manufacturer's restrictions and falling as low as 5%
if another vehicle manufacturer is the entity acquiring the ownership interest)
without the approval of the applicable manufacturer. Violations by our
stockholders or prospective stockholders are generally outside of our control
and may result in the termination or non-renewal of one or more of our
franchises, which may have a material adverse effect on us.
IMPORT PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS MAY IMPAIR OUR ABILITY
TO SELL FOREIGN VEHICLES PROFITABLY.
Certain vehicles we sell, as well as certain major components of vehicles
we sell, are manufactured outside the United States. Accordingly, we are subject
to import and export restrictions of various jurisdictions and are dependent to
some extent on general economic conditions in, and political relations with, a
number of foreign countries. Additionally, fluctuations in currency exchange
rates may adversely affect our sales of vehicles produced by foreign
manufacturers. Imports into the United States may also be adversely affected by
increased transportation costs and tariffs, quotas or duties, any of which could
have a material adverse effect on us.
10
RISKS RELATED TO THIS OFFERING
THE SOLE VOTING CONTROL OF OUR COMPANY IS HELD BY SIDNEY B. DEBOER, WHO MAY
HAVE INTERESTS DIFFERENT FROM YOUR INTERESTS.
Lithia Holding Company, LLC, of which Sidney B. DeBoer, our Chairman and
Chief Executive Officer, is the sole managing member, holds all of the
outstanding shares of Class B common stock. A holder of Class B common stock is
entitled to ten votes for each share held, while a holder of Class A common
stock is entitled to one vote per share held. On most matters, the Class A and
Class B common stock vote together as a single class. Even after completion of
the offering, Lithia Holding will control 75.0% of the aggregate number of votes
eligible to be cast by stockholders for the election of directors and most other
stockholder actions assuming no exercise of the over-allotment option and 74.3%
if the underwriters exercise their over-allotment option in full. Therefore,
Lithia Holding will control the election of our Board of Directors and will be
in a position to control the policies and operations of the company. In
addition, because Mr. DeBoer is the managing member of Lithia Holding, he
currently controls and will continue to control, all of the outstanding Class B
common stock, thereby allowing him to control the company. See "Principal and
Selling Stockholders." So long as at least 16 2/3% of the total number of shares
outstanding are shares of Class B common stock, the holders of Class B common
stock will be able to control all matters requiring approval of 66 2/3% or less
of the aggregate number of votes. Absent a significant increase in the number of
shares of Class A common stock outstanding or conversion of Class B common stock
into Class A common stock, the holders of shares of Class B common stock will be
entitled to elect all members of the Board of Directors and control all matters
subject to stockholder approval that do not require a class vote. See
"Description of Capital Stock."
IF AMERICAN HONDA MOTOR CO. DOES NOT APPROVE OF THIS OFFERING, IT COULD
TERMINATE OUR FRANCHISE AGREEMENTS AND PURCHASE OUR THREE HONDA STORES.
We are subject to an agreement with American Honda Motor Co., which
requires us to secure prior approval of any public offering of our common stock
or any reduction in the control held by Class B common stock owned by Lithia
Holding Company. Although we have requested approval of this offering and the
conversion and sale of some of the Class B common stock held by Lithia Holding
Company, no assurance can be given such approval will be received. Failure to
secure such approval would be a violation of our agreement with Honda and could
permit Honda to terminate our existing Honda franchises and exercise its right
to purchase those stores at a fair market value determined by the agreement.
Although Honda did not approve our secondary public offering in 1998, it did not
terminate our existing franchise and has since approved the acquisition of two
new Honda stores. Nonetheless, no assurance can be given that Honda will not
withhold its approval and attempt to terminate our existing franchise
agreements. We currently operate three Honda stores with annual revenues of
approximately $55 million.
CAUTIONARY STATEMENT ABOUT FORWARD-LOOKING STATEMENTS
Some of the statements under the sections entitled "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" and elsewhere in this prospectus and in
the documents incorporated by reference in this prospectus constitute
forward-looking statements. In some cases, you can identify forward-looking
statements by terms such as "may," "will," "should," "expect," "plan," "intend,"
"forecast," "anticipate," "believe," "estimate," "predict," "potential,"
"continue" or the negative of these terms or other comparable terminology. The
forward-looking statements contained in this prospectus involve known and
unknown risks, uncertainties and situations that may cause our actual results,
level of activity, performance or achievements to be materially different from
any future results, levels of activity, performance or achievements expressed or
implied by these statements. Some of the important factors that could cause
actual results to differ from our expectations are discussed in the "Risk
Factors" section of this prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.
11
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the 4,000,000 shares of
Class A common stock we are offering, based on an assumed public offering price
of $19.70 per share which equals the closing price of our Class A common stock
on January 24, 2002, will be approximately $74.2 million after deducting
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters exercise their over-allotment option in full, we
estimate the net proceeds from this offering will be approximately $83.5
million. We will not receive any proceeds from the Class A common stock being
offered by the selling stockholders.
We intend to use the net proceeds from our sale of Class A common stock
primarily to finance future acquisitions and other general corporate purposes.
Prior to such use, we intend to reduce our outstanding borrowings under credit
agreements with Ford Motor Credit and others. These credit lines currently bear
interest at rates ranging from 3.4% to 4.6% per annum and expire in December
2003. We borrowed under these lines to purchase new and used vehicles and to
fund some of our acquisitions.
PRICE RANGE OF COMMON STOCK
The following table presents the high and low sale prices for our Class A
common stock, as reported on the New York Stock Exchange Composite Tape, for the
periods indicated.
CLASS A
COMMON STOCK
PRICE
----------------
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $18.19 $13.00
Second Quarter............................................ 17.13 11.63
Third Quarter............................................. 13.50 11.75
Fourth Quarter............................................ 14.13 11.38
YEAR ENDED DECEMBER 31, 2001
First Quarter............................................. $15.05 $12.06
Second Quarter............................................ 21.38 14.00
Third Quarter............................................. 19.06 12.50
Fourth Quarter............................................ 20.70 11.85
YEAR ENDED DECEMBER 31, 2002
First Quarter (through January 24)........................ $21.75 $19.70
A recent closing price per share for our common stock as reported by the
NYSE is set forth on the cover of this prospectus. On January 24, 2002, there
were approximately 1,700 holders of record of our Class A common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying dividends for the foreseeable future. We intend to
retain future earnings for acquisitions and operations. Our credit agreement
with Ford Motor Credit Company precludes the payment of cash dividends without
their prior consent. The payment of future dividends is also subject to the
discretion of our Board of Directors.
12
CAPITALIZATION
The following table sets forth our short-term debt and capitalization as of
September 30, 2001 and as adjusted to give effect to the conversion in January
2002 of 5,177 shares of Series M preferred stock into 249,034 shares of Class A
common stock and the sale of the 4,000,000 shares of Class A common stock we are
offering under this prospectus. For purposes of preparing this table, we have
assumed a public offering price of $19.70 per share and have reduced the net
proceeds received by the estimated underwriting discounts and commissions and
the estimated offering expenses payable by us.
AS OF SEPTEMBER 30, 2001
-------------------------
ACTUAL AS ADJUSTED
--------- ------------
{(IN THOUSANDS)}
Short-term debt:
Flooring notes payable.................................... $242,705 $236,542
Current maturities of long-term debt...................... 9,334 9,334
Current portion of capital leases......................... 18 18
-------- --------
Total short-term debt................................ $252,057 $245,894
======== ========
Long-term debt:
Used vehicle flooring facility............................ $ 60,000 $ --
Real estate debt, less current maturities................. 32,218 32,218
Long-term debt, less current maturities................... 41,088 33,088
Long-term capital leases, less current portion............ 20 20
-------- --------
Total long-term debt, less current maturities........ 133,326 65,326
-------- --------
Stockholders' equity:
Preferred Stock, no par value
15,000,000 shares authorized;
15,000 shares designated Series M Preferred;
issued and outstanding 9,676 actual and 4,499 as
adjusted............................................... 5,806 2,699
Common Stock
Class A common stock, no par value
100,000,000 shares authorized;
issued and outstanding 8,802,076 actual and
13,051,110 as adjusted............................... 113,014 190,284
Class B common stock, no par value
25,000,000 shares authorized;
issued and outstanding 4,087,000 actual and
as adjusted.......................................... 508 508
Additional paid-in capital.................................. 456 456
Accumulated other comprehensive loss........................ (2,348) (2,348)
Retained earnings........................................... 79,088 79,088
-------- --------
Total stockholders' equity............................. 196,524 270,687
-------- --------
Total capitalization.............................. $329,850 $336,013
======== ========
The above information is based upon 13,263,743 common shares outstanding as
of January 24, 2002. This information does not include 1,409,745 shares of
common stock subject to outstanding options at a weighted average exercise price
of $14.02 and 402,192 shares of common stock reserved for future issuance under
our stock option and employee purchase plans. See "Description of Capital Stock"
for additional information concerning the number of outstanding shares of our
capital stock and stock options.
13
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents consolidated balance sheet data and
consolidated statements of operations data as of and for the years ended
December 31, 1996 through 2000, which is derived from our audited consolidated
financial statements. The consolidated financial data as of September 30, 2001
and for the nine months ended September 30, 2000 and 2001 are derived from our
unaudited consolidated financial statements. You should read this data in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes thereto contained or incorporated by reference in this prospectus. The
information as of September 30, 2001 and for the nine month periods ended
September 30, 2000 and 2001 is unaudited and has been prepared on the same basis
as our annual consolidated financial statements. In the opinion of management,
this quarterly information reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented. The results of operations for the nine month period ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2001, or any future period.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ------------------------
1996(1) 1997 1998 1999 2000 2000 2001
-------- -------- -------- ---------- ---------- ---------- ----------
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues
New vehicle sales............... $ 65,092 $161,294 $388,431 $ 673,339 $ 898,016 $ 683,217 $ 701,095
Used vehicle sales.............. 58,611 113,099 220,544 375,562 480,846 364,935 428,777
Service, body and parts......... 13,197 29,828 72,216 120,722 164,002 121,266 138,540
F&I and other(2)................ 5,944 15,574 33,549 73,036 115,747 87,102 85,107
-------- -------- -------- ---------- ---------- ---------- ----------
Total revenues................ 142,844 319,795 714,740 1,242,659 1,658,611 1,256,520 1,353,519
Cost of sales..................... 117,025 265,049 599,379 1,043,373 1,391,042 1,055,552 1,129,544
-------- -------- -------- ---------- ---------- ---------- ----------
Gross profit...................... 25,819 54,746 115,361 199,286 267,569 200,968 223,975
Selling, general and
administrative.................. 19,830 40,625 85,188 146,381 195,500 146,770 173,517
Depreciation and amortization..... 1,756 2,483 3,469 5,573 7,605 5,539 6,813
-------- -------- -------- ---------- ---------- ---------- ----------
Operating income.................. 4,233 11,638 26,704 47,332 64,464 48,659 43,645
Flooring interest expense......... (697) (2,179) (7,108) (11,105) (17,728) (13,894) (11,877)
Other interest expense............ (656) (824) (2,735) (4,250) (7,917) (4,928) (5,953)
Other income (expense), net....... 1,349 862 921 74 716 884 (365)
-------- -------- -------- ---------- ---------- ---------- ----------
Income before income taxes........ 4,229 9,497 17,782 32,051 39,535 30,721 25,450
Income taxes(3)................... (1,623) (3,538) (6,993) (12,877) (15,222) (12,040) (9,828)
-------- -------- -------- ---------- ---------- ---------- ----------
Net income(3)..................... $ 2,606 $ 5,959 $ 10,789 $ 19,174 $ 24,313 $ 18,681 $ 15,622
======== ======== ======== ========== ========== ========== ==========
Basic net income per share(4)..... $ 0.56 $ 0.85 $ 1.18 $ 1.67 $ 1.78 $ 1.37 $ 1.16
======== ======== ======== ========== ========== ========== ==========
Shares used in calculating basic
net income per share............ 4,657 6,988 9,147 11,506 13,652 13,515 13,589
Diluted net income per share...... $ 0.52 $ 0.82 $ 1.14 $ 1.60 $ 1.76 $ 1.36 $ 1.14
======== ======== ======== ========== ========== ========== ==========
Shares used in calculating diluted
net income per share............ 4,973 7,303 9,470 11,998 13,804 13,754 13,746
AS OF DECEMBER 31,
------------------------------------------------------- AS OF SEPTEMBER 30,
1996(1) 1997 1998 1999 2000 2001
------- -------- -------- -------- -------- -------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................... $25,431 $ 23,870 $ 53,553 $ 74,999 $ 98,917 $ 89,265
Inventories............................... 33,362 89,845 157,455 268,281 314,290 309,461
Total assets.............................. 68,964 166,526 294,398 506,433 628,003 657,379
Flooring notes payable.................... 19,645 82,598 129,167 243,903 314,137 302,705
Short-term debt........................... 2,355 2,787 3,143 7,132 5,342 9,352
Long-term debt, less current maturities... 6,160 26,558 41,420 38,411 72,586 73,326
Stockholders' equity...................... 27,914 37,877 91,511 155,638 181,775 196,524
------------
(1) Restated to give effect to the conversion from the LIFO method of accounting
for inventory to the FIFO method, which was effective January 1, 1997.
(2) F&I and other includes finance, extended warranty and insurance revenues. It
also includes net fleet sales of $456, $1,960, $7,813, $26,615, $57,723,
$43,528, and $33,420 for these reported periods, respectively.
(3) Income taxes and net income for 1996 are presented on a pro forma basis to
reflect federal and state income taxes as if we had been a Subchapter C
corporation, based on the income tax rates that would have been in effect at
that time.
(4) Based on an April 2001 Financial Accounting Standards Board announcement, we
restated basic income per share for the 1999 and 2000 periods to include the
Series M preferred stock as common stock on an as if converted basis.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading operator of automotive franchises and retailer of new and
used vehicles and services. As of September 30, 2001, we offered 26 brands of
new vehicles through 119 franchises in 61 stores in the western United States
and over the internet. As of September 30, 2001, we operate 15 stores in Oregon,
14 in California, 8 in Washington, 7 in Colorado, 7 in Idaho, 5 in Nevada, 3 in
South Dakota and 2 in Alaska. We sell new and used cars and light trucks; sell
replacement parts; provide vehicle maintenance, warranty, paint and repair
services; and arrange related financing and insurance for our automotive
customers.
During an economic downturn, customers tend to shift towards the purchase
of more reasonably priced new vehicle models or used vehicles. Many customers
decide to delay purchasing a new vehicle and instead repair existing vehicles.
In addition, manufacturers typically offer increased dealer and customer
incentives during an economic downturn in order to support new vehicle sales
volume. These factors lead to less cyclicality for automobile retailers than for
automobile manufacturers.
Historically, new vehicle sales account for approximately 50% of our total
revenues but less than 30% of total gross profit. We emphasize sales of higher
margin products, which generate over 70% of our gross profits. Revenues and
gross profit by product line were as follows for the first nine months of 2001:
PERCENT OF GROSS PERCENT OF TOTAL
TOTAL REVENUES MARGIN GROSS PROFIT
-------------- ------ ----------------
New vehicles(1)................................ 51.8% 9.0% 28.1%
Retail used vehicles(2)........................ 26.9 12.8 20.9
Service, body and parts........................ 10.2 46.1 28.5
Finance and insurance(1)(3).................... 3.8 98.8 22.8
------------
(1) Does not include fleet sales, representing 2.5% of total revenues and 0.4%
of our total gross profit, which are included in our financial statements on
a net profit basis under finance and insurance.
(2) Excludes wholesale used vehicle sales, representing 4.8% of total revenues
with a negative gross margin contribution of 0.7%.
(3) Reported net of administration fees and anticipated cancellations.
15
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO 2001
{NINE MONTHS ENDED
SEPTEMBER 30,}
----------------------- INCREASE % INCREASE
2000 2001 (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT VEHICLE INFORMATION)
Revenues:
New vehicle sales......................... $ 683,217 $ 701,095 $17,878 2.6%
Used vehicle sales........................ 364,935 428,777 63,842 17.5
Service, body and parts................... 121,266 138,540 17,274 14.2
Finance and insurance and other
revenues............................... 87,102 85,107 (1,995) (2.3)
---------- ---------- ------- ------
Total revenues......................... 1,256,520 1,353,519 96,999 7.7
Cost of sales............................... 1,055,552 1,129,544 73,992 7.0
---------- ---------- ------- ------
Gross profit................................ 200,968 223,975 23,007 11.4
Selling, general and administrative......... 146,770 173,517 26,747 18.2
Depreciation and amortization............... 5,539 6,813 1,274 23.0
---------- ---------- ------- ------
Income from operations...................... 48,659 43,645 (5,014) (10.3)
Floorplan interest expense.................. (13,894) (11,877) (2,017) (14.5)
Other interest expense...................... (4,928) (5,953) 1,025 20.8
Other, net.................................. 884 (365) (1,249) (141.3)
---------- ---------- ------- ------
Income before income taxes.................. 30,721 25,450 (5,271) (17.2)
Income tax expense.......................... (12,040) (9,828) (2,212) (18.4)
---------- ---------- ------- ------
Net income.................................. $ 18,681 $ 15,622 $(3,059) (16.4)%
========== ========== ======= ======
New vehicles sold........................... 28,555 28,576 21 0.1%
Average selling price....................... $ 23,926 $ 24,534 $ 608 2.5%
Used vehicles sold--retail.................. 23,453 27,798 4,345 18.5%
Average selling price....................... $ 13,161 $ 13,118 $ (43) (0.3)%
Used vehicles sold--wholesale............... 12,637 13,881 1,244 9.8%
Average selling price....................... $ 4,452 $ 4,619 $ 167 3.8%
16
The following tables set forth, for the periods indicated, historical
condensed financial data expressed as a percentage of total revenues.
{NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
2000 2001
----- -----
STATEMENT OF OPERATIONS DATA:
Revenues:
New vehicles.............................................. 54.4% 51.8%
Used vehicles............................................. 29.0 31.7
Service, body and parts................................... 9.7 10.2
Finance and insurance and other........................... 6.9 6.3
----- -----
Total revenues......................................... 100.0% 100.0%
===== =====
Gross profit................................................ 16.0% 16.5%
Selling, general and administrative......................... 11.7% 12.8%
Depreciation and amortization............................... 0.4% 0.5%
Income from operations...................................... 3.9% 3.2%
Floorplan interest expense.................................. 1.1% 0.9%
Other interest expense...................................... 0.4% 0.4%
Other income (expense), net................................. 0.1% 0.0%
Income before income tax.................................... 2.5% 1.9%
Income tax expense.......................................... 1.0% 0.7%
Net income.................................................. 1.5% 1.2%
Revenues. Total revenues increased 7.7% to record levels for the nine
month period ended September 30, 2001 compared to the same period of 2000 due to
acquisitions, which were partially offset by same store retail sales decreasing
4.7%. The decrease in same store retail sales was due to a slower new vehicle
sales environment, offset in part by same store increases in used vehicle and
finance and insurance sales. Manufacturers are currently offering incentives,
including low interest rates and rebates, in order to attract new vehicle
buyers. We expect these incentives to increase same store new vehicle sales in
the fourth quarter of 2001. The availability of cash rebates and zero percent
financing is expected to enhance our ability to sell finance, warranty and
insurance products and services and not adversely affect our finance and
insurance income.
Other revenues include sales of finance, extended warranty and insurance
contracts, presented net of administration fees and anticipated cancellations.
It also includes fleet sales generally presented on a net basis.
Gross profit. Gross profit increased primarily due to increased total
revenues and increased used vehicle and service, body and parts revenues as a
percentage of total revenues. Incentives and rebates, including floorplan
interest credit, received from manufacturers are recorded as a reduction to cost
of goods sold. Gross margin expansion is common in the auto retailing industry
as new vehicle sales slow and higher margin product lines become a larger
percentage of total revenues. Gross profit margins achieved in the nine month
periods ended September 30, 2000 and 2001 were as follows:
NINE MONTHS
ENDED,
SEPTEMBER 30,
------------- LITHIA
2000 2001 MARGIN CHANGE*
---- ---- --------------
New vehicles....................................... 8.9% 9.0% +10 bp
Retail used vehicles............................... 13.6 12.8 -80
Service and parts.................................. 45.2 46.1 +90
Overall............................................ 16.0 16.5 +50
------------
* "bp" stands for basis points (one hundred basis points equals one percent)
17
The increase in the overall gross profit margin is primarily a result of a
shift in mix to the more profitable used vehicle, service, body and parts and
finance and insurance product lines, as well as lower cost of sales for new
vehicles due to manufacturer incentives paid to us.
Selling, general and administrative expense. Selling, general and
administrative expense ("SG&A") includes salaries and related personnel
expenses, facility lease expense, advertising, legal, accounting, professional
services and general corporate expenses. SG&A expense increased due primarily to
increased selling, or variable, expenses related to the increase in revenues and
the number of locations. As a percentage of revenue, SG&A expense increased in
the nine month period ended September 30, 2001 compared to the same period of
2000 due to a shift in mix to more parts and service business, which has a
higher SG&A expense component, and continued investments in acquisition
integration and operational support teams in preparation for continued growth.
Depreciation and amortization. Depreciation and amortization expense
increased primarily as a result of increased property and equipment and
intangible assets related to acquisitions.
Income from operations. Operating margins decreased 70 basis points, or
seven-tenths of one percent, in the nine month period ended September 30, 2001
compared to the same period of 2000 due to the increased operating expenses as a
percentage of revenue as discussed above, partially offset by higher gross
margins as a percentage of revenue.
Floorplan interest expense. The decrease in floorplan interest expense is
primarily due to recent decreases in the effective interest rates on the
floating rate credit lines as well as an overall decrease in the amount of
flooring debt outstanding. We have been able to decrease our inventory levels
despite the acquisition of several stores during 2001.
Other interest expense. The increase in other interest expense is due to
higher debt levels as a result of acquisitions, offset in part by lower interest
rates.
Income tax expense. Our effective tax rate declined to 38.6 percent in the
first nine months of 2001 from 39.2 percent in the first nine months of 2000 as
a result of an increasing mix of asset acquisitions compared to corporate
acquisitions, which resulted in an increased weighting of deductible goodwill,
as well as an increase in the mix of states with lower or no state income taxes.
Net income. Net income decreased to $15.6 million, a 16.4% decrease, for
the nine months ended September 30, 2001 compared to the same period of 2000 as
a result of the net effect of the changes discussed above.
18
RESULTS OF OPERATIONS
1999 COMPARED TO 2000
YEAR ENDED DECEMBER 31,
-------------------------- INCREASE % INCREASE
1999 2000 (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT VEHICLE INFORMATION)
Revenues:
New vehicle sales.................... $ 673,339 $ 898,016 $224,677 33.4%
Used vehicle sales................... 375,562 480,846 105,284 28.0
Service, body and parts.............. 120,722 164,002 43,280 35.9
Other revenues....................... 73,036 115,747 42,711 58.5
---------- ---------- -------- -----
Total revenues.................... 1,242,659 1,658,611 415,952 33.5
Cost of sales.......................... 1,043,373 1,391,042 347,669 33.3
---------- ---------- -------- -----
Gross profit........................... 199,286 267,569 68,283 34.3
Selling, general and administrative.... 146,381 195,500 49,119 33.6
Depreciation and amortization.......... 5,573 7,605 2,032 36.5
---------- ---------- -------- -----
Income from operations................. 47,332 64,464 17,132 36.2
Floorplan interest expense............. (11,105) (17,728) 6,623 59.6
Other interest expense................. (4,250) (7,917) 3,667 86.3
Other, net............................. 74 716 642 867.6
---------- ---------- -------- -----
Income before income taxes............. 32,051 39,535 7,484 23.4
Income tax expense..................... (12,877) (15,222) 2,345 18.2
---------- ---------- -------- -----
Net income............................. $ 19,174 $ 24,313 $ 5,139 26.8%
========== ========== ======== =====
New vehicles sold...................... 28,645 37,230 8,585 30.0%
Average selling price.................. $ 23,506 $ 24,121 $ 615 2.6%
Used vehicles sold--retail............. 23,840 30,896 7,056 29.6%
Average selling price.................. $ 13,148 $ 13,149 $ 1 --
Used vehicles sold--wholesale.......... 13,424 16,751 3,327 24.8%
Average selling price.................. $ 4,627 $ 4,454 $ (173) (3.7)%
Revenues. Same store retail sales increased 1.1% in 2000 compared to 1999.
The increases in units sold and revenue from all sources are a result of
acquisitions and internal growth.
Gross profit. Gross profit increased primarily due to increased total
revenues and increased other revenues as a percentage of total revenues. Gross
profit margins achieved in 1999 and 2000 were as follows:
2000 LITHIA
INDUSTRY AVERAGE(1) LITHIA 1999 LITHIA 2000 MARGIN CHANGE(2)
------------------- ----------- ----------- ----------------
New vehicles......... 6.1% 8.7% 9.0% +30 bp
Retail used
vehicles........... 10.9 12.8 13.6 +80
Service and parts.... n/a 44.8 44.9 +10
Overall.............. 12.7 16.0 16.1 +10
------------
(1) Based on National Automotive Dealer Association data.
(2) "bp" stands for basis points (one hundred basis points equals one percent).
The increases in the gross profit margins are primarily a result of
operational improvements at our newly acquired stores, as we implemented our
business model.
19
Selling, general and administrative expense. Selling, general and
administrative expense increased due primarily to increased selling, or
variable, expense related to the increase in revenues and the number of total
locations. Selling, general and administrative expense, as a percentage of
revenue, remained constant in 2000 compared to 1999.
Depreciation and amortization. Depreciation and amortization expense
increased primarily as a result of increased property and equipment and goodwill
related to acquisitions in 1999 and 2000.
Income from operations. Operating margins improved ten basis points in
2000 compared to 1999. In addition to gaining efficiencies related to economies
of scale, we have improved the operating margins at acquired stores that we have
operated for a full year, bringing them more in line with our pre-existing
stores.
Floorplan interest expense. Seventy-five percent of the increase in
floorplan interest expense is due to additional flooring notes payable as a
result of higher inventory levels from acquisitions. Twenty-five percent of the
increase is due to an overall rise in borrowing rates during 2000.
Other interest expense. Eighty percent of the increase in other interest
expense is due to higher debt levels as a result of acquisitions. Twenty percent
of the increase is due to an overall rise in borrowing rates during 2000.
Income tax expense. Our effective tax rate declined to 38.5 percent in
2000 from 40.2 percent in 1999 as a result of an increasing mix of asset
acquisitions compared to corporate acquisitions and the increased weighting of
deductible goodwill, as well as an increase in the mix of states with lower or
no state income taxes.
Net income. Net income increased primarily as a result of increased
revenues as discussed above.
20
RESULTS OF OPERATIONS
1998 COMPARED TO 1999
YEAR ENDED DECEMBER 31,
------------------------ INCREASE % INCREASE
1998 1999 (DECREASE) (DECREASE)
-------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT VEHICLE INFORMATION)
Revenues:
New vehicle sales..................... $388,431 $ 673,339 $284,908 73.3%
Used vehicle sales.................... 220,544 375,562 155,018 70.3
Service, body and parts............... 72,216 120,722 48,506 67.2
Other revenues........................ 33,549 73,036 39,487 117.7
-------- ---------- -------- -----
Total revenues..................... 714,740 1,242,659 527,919 73.9
Cost of sales........................... 599,379 1,043,373 443,994 74.1
-------- ---------- -------- -----
Gross profit............................ 115,361 199,286 83,925 72.8
Selling, general and administrative..... 85,188 146,381 61,193 71.8
Depreciation and amortization........... 3,469 5,573 2,104 60.7
-------- ---------- -------- -----
Income from operations.................. 26,704 47,332 20,628 77.2
Floorplan interest expense.............. (7,108) (11,105) 3,997 56.2
Other interest expense.................. (2,735) (4,250) 1,515 55.4
Other, net.............................. 921 74 (847) (92.0)
-------- ---------- -------- -----
Income before income taxes.............. 17,782 32,051 14,269 80.2
Income tax expense...................... (6,993) (12,877) 5,884 84.1
-------- ---------- -------- -----
Net income.............................. $ 10,789 $ 19,174 $ 8,385 77.7%
======== ========== ======== =====
New vehicles sold....................... $ 17,708 $ 28,645 $ 10,937 61.8%
Average selling price................... 21,935 23,506 1,571 7.2
Used vehicles sold--retail.............. $ 13,645 $ 23,840 $ 10,195 74.7%
Average selling price................... 12,768 13,148 380 3.0
Used vehicles sold--wholesale........... $ 9,532 $ 13,424 $ 3,892 40.8%
Average selling price................... 4,860 4,627 (233) (4.8)
Revenues. Same store sales growth was 6.9% in 1999, with a 17.8% increase
in same store finance and insurance revenue. Same store sales growth was 14.7%
in 1998. The increases in units sold and revenue from all sources are a result
of acquisitions and internal growth.
Gross profit. Gross profit increased primarily due to increased revenues
as indicated above. Gross profit margins achieved in 1998 and 1999 were as
follows:
1999 LITHIA
INDUSTRY AVERAGE(1) LITHIA 1998 LITHIA 1999 MARGIN CHANGE(2)
------------------- ----------- ----------- ----------------
New vehicles......... 6.4% 8.9% 8.7% -20 bp
Retail used
vehicles........... 10.7 12.7 12.8 +10
Service and parts.... n/a 45.5 44.8 -70
Overall.............. 12.6 16.1 16.0 -10
------------
(1) Based on National Automotive Dealer Association data.
(2) "bp" stands for basis points (one hundred basis points equals one percent).
The decrease in the new vehicle gross profit margins is primarily due to
the mix of stores added due to acquisitions. These stores have lower selling,
general and administrative costs as a percentage of revenues than our
preexisting stores, lending themselves to a high volume, low cost strategy of
retailing vehicles. The
21
increase in the retail used vehicle gross profit margin is primarily due to
improved inventory management company wide and operational improvements at newly
acquired stores, as we implemented our business model.
Selling, general and administrative expense. Selling, general and
administrative expense ("SG&A") increased due primarily to increased selling, or
variable, expense related to the increase in revenues 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 we consolidate multiple stores in a single
market.
Depreciation and amortization. Depreciation and amortization expense
increased primarily as a result of increased property and equipment and goodwill
related to acquisitions in 1998 and 1999.
Income from operations. In addition to gaining efficiencies related to
economies of scale, we improved the operating margins at acquired stores that we
have operated for a full year, bringing them more in line with our pre-existing
stores.
Floorplan interest expense. Floorplan interest expense increased as a
result of increased flooring notes payable related to increased inventories as a
result of the increase in stores owned and vehicles sold. We reduced our
floorplan interest expense as a percentage of total revenues by successfully
managing inventory levels.
Net income. Net income increased as a result of the net effect of the
individual line item changes discussed above.
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
The following tables set forth the company's unaudited quarterly financial
data for the quarterly periods presented. This presentation should be read in
conjunction with the consolidated financial statements of the company and the
notes thereto contained or incorporated by reference in this prospectus.
THREE MONTHS ENDED,
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA )
1999
Revenues:
New vehicle sales.................... $116,853 $167,222 $199,107 $190,157
Used vehicle sales................... 71,809 93,049 105,434 105,270
Service, body and parts.............. 23,430 28,477 33,898 34,917
Other revenues....................... 12,053 19,005 18,930 23,048
-------- -------- -------- --------
Total revenues.................... 224,145 307,753 357,369 353,392
Cost of sales.......................... 188,945 258,967 300,124 295,337
-------- -------- -------- --------
Gross profit........................... 35,200 48,786 57,245 58,055
Selling, general and administrative.... 26,648 36,061 41,564 42,108
Depreciation and amortization.......... 1,075 1,364 1,560 1,574
-------- -------- -------- --------
Income from operations................. 7,477 11,361 14,121 14,373
Flooring interest expense.............. (2,109) (2,179) (3,090) (3,727)
Other interest expense and other,
net.................................. (363) (1,403) (1,107) (1,303)
-------- -------- -------- --------
Income before income taxes............. 5,005 7,779 9,924 9,343
Income taxes........................... (1,976) (3,202) (4,071) (3,628)
-------- -------- -------- --------
Net income............................. $ 3,029 $ 4,577 $ 5,853 $ 5,715
======== ======== ======== ========
Basic net income per share(1).......... $ 0.30 $ 0.41 $ 0.48 $ 0.46
======== ======== ======== ========
Diluted net income per share........... $ 0.29 $ 0.40 $ 0.47 $ 0.43
======== ======== ======== ========
22
THREE MONTHS ENDED,
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS EXCEPT PER SHARE DATA )
2000
Revenues:
New vehicle sales.................... $218,009 $222,039 $243,169 $214,799
Used vehicle sales................... 116,698 119,277 128,960 115,911
Service, body and parts.............. 38,457 40,476 42,333 42,736
Other revenues....................... 22,439 36,059 28,604 28,645
-------- -------- -------- --------
Total revenues.................... 395,603 417,851 443,066 402,091
Cost of sales.......................... 332,739 350,667 372,146 335,490
-------- -------- -------- --------
Gross profit........................... 62,864 67,184 70,920 66,601
Selling, general and administrative.... 47,201 48,528 51,041 48,730
Depreciation and amortization.......... 1,720 1,887 1,932 2,066
-------- -------- -------- --------
Income from operations................. 13,943 16,769 17,947 15,805
Flooring interest expense.............. (3,861) (4,712) (5,321) (3,834)
Other interest expense and other,
net.................................. (1,667) (1,557) (820) (3,157)
-------- -------- -------- --------
Income before income taxes............. 8,415 10,500 11,806 8,814
Income taxes........................... (3,451) (4,306) (4,283) (3,182)
-------- -------- -------- --------
Net income............................. $ 4,964 $ 6,194 $ 7,523 $ 5,632
======== ======== ======== ========
Basic net income per share(1).......... $ 0.37 $ 0.45 $ 0.55 $ 0.41
======== ======== ======== ========
Diluted net income per share........... $ 0.37 $ 0.45 $ 0.55 $ 0.41
======== ======== ======== ========
2001
Revenues:
New vehicle sales.................... $214,957 $238,651 $247,487
Used vehicle sales................... 136,939 142,043 149,795
Service, body and parts.............. 45,145 45,511 47,884
Other revenues....................... 23,110 35,845 26,152
-------- -------- --------
Total revenues.................... 420,151 462,050 471,318
Cost of sales.......................... 351,254 386,840 391,450
-------- -------- --------
Gross profit........................... 68,897 75,210 79,868
Selling, general and administrative.... 55,038 58,783 59,696
Depreciation and amortization.......... 2,215 2,226 2,372
-------- -------- --------
Income from operations................. 11,644 14,201 17,800
Flooring interest expense.............. (4,655) (3,832) (3,390)
Other interest expense and other,
net.................................. (2,346) (2,123) (1,849)
-------- -------- --------
Income before income taxes............. 4,643 8,246 12,561
Income taxes........................... (1,788) (3,175) (4,865)
-------- -------- --------
Net income............................. $ 2,855 $ 5,071 $ 7,696
======== ======== ========
Basic net income per share(1).......... $ 0.21 $ 0.38 $ 0.57
======== ======== ========
Diluted net income per share........... $ 0.21 $ 0.37 $ 0.56
======== ======== ========
------------
(1) Pursuant to an April 2001 Financial Accounting Standards Board announcement,
the company has restated its basic EPS for the second, third and fourth
quarters of 1999, for each quarter of 2000 and for the first quarter of 2001
to include its Series M preferred stock as common stock on an as if
converted basis.
23
LIQUIDITY AND CAPITAL RESOURCES
Our principal needs for capital resources are to finance acquisitions and
capital expenditures, as well as for working capital. We have relied primarily
upon internally generated cash flows from operations, borrowings under our
credit agreements and the proceeds from public equity offerings to finance
operations and expansion. We believe that our available cash, cash equivalents,
available lines of credit and cash flows from operations will be sufficient to
meet our anticipated operating expenses and capital requirements for at least
twelve months. These resources and anticipated net proceeds from this offering
will be sufficient to fund our anticipated acquisitions through 2003.
In June 2000, our Board of Directors authorized the repurchase of up to
1,000,000 shares of Class A common stock. We have purchased 40,000 shares under
this program and may continue to do so from time to time in the future as
conditions warrant.
We have credit facilities with Ford Motor Credit Company totaling $580
million, which expire December 1, 2003 with interest due monthly. The facilities
include $250 million for new and program vehicle flooring, $150 million for used
vehicle flooring, $130 million for franchise acquisitions and $50 million for
mortgage financing. We also have the option to convert the acquisition line into
a five-year term loan.
Toyota Financial Services, DaimlerChrysler Financial Corporation and
General Motors Acceptance Corporation have agreed to floor all of our new
vehicles for their respective brands with Ford Credit serving as the primary
lender for all other brands.
The credit lines with Ford Motor Credit are cross-collateralized and are
secured by inventory, accounts receivable, intangible assets and equipment. We
pledged to Ford Motor Credit the stock of all of our subsidiaries except
entities operating BMW, Honda, Nissan or Toyota stores. The mortgage line is
secured by related property. The other new vehicle lines are secured by new
vehicle inventory of the relevant brands.
The financial covenants in our agreement with Ford Motor Credit require us
to maintain compliance with, among other things, specified ratios of (1) total
debt to tangible base capital; (2) total adjusted debt to tangible base capital;
(3) current ratio; (4) fixed charge coverage; and (5) net cash. In addition, we
have pledged substantially all the shares of our subsidiaries in connection with
our credit lines with Ford Motor Credit. The Ford Motor Credit agreements also
preclude the payment of cash dividends without prior consent. Lithia was in
compliance with all such covenants at September 30, 2001.
We also have a real estate line of credit with Toyota Financial Services
totaling $18 million, which expires July 2, 2006. This line of credit is secured
by the real estate financed under this line of credit.
In addition, U.S. Bank N.A. has extended a $27.5 million revolving line of
credit for leased vehicles and equipment purchases, which expires January 31,
2004.
Interest rates on all of the above facilities ranged from 4.09% to 5.34% at
September 30, 2001. Amounts outstanding on the lines at September 30, 2001 and
December 31, 2001 together with amounts remaining available under such lines
were as follows:
OUTSTANDING
-------------------------------------- REMAINING AVAILABILITY AS OF
SEPTEMBER 30, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001
------------------ ----------------- ----------------------------
(IN THOUSANDS)
New and Program Vehicle
Lines...................... $242,705 $211,947 *
Used Vehicle Line............ 60,000 69,000 81,000
Acquisition Line............. 8,000 22,000 108,000
Real Estate Lines............ 8,610 13,740 4,260
Equipment/Leased Vehicle
Line....................... 27,500 27,500 0
-------- -------- -------
$346,815 $344,187 193,260
======== ======== =======
---------------
* There are no formal limits on the new and program vehicle lines.
24
At September 30, 2001, we had capital commitments of approximately $10.5
million for the construction of five new store facilities and additions to two
existing facilities, of which $6.4 million is anticipated to be incurred through
the end of 2001 and the balance in 2002. Approximately $5.8 million has already
been paid for these commitments from available cash balances. We expect to pay
for the construction out of existing cash balances until completion of the
projects, at which time we anticipate securing long-term financing and general
borrowings from third party lenders for 85% to 100% of the amounts expended.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, our sales have been lower in the first and fourth quarters of
each year due to consumer purchasing patterns during the holiday season,
inclement weather 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. We believe
that interest rates, levels of consumer debt, consumer confidence and buying
patterns, as well as general economic conditions, also contribute to
fluctuations in sales and operating results. Historically, the timing and
frequency of acquisitions has been the largest contributor to fluctuations in
our operating results from quarter to quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
We adopted the provisions of SFAS No. 141 on July 1, 2001, and SFAS No. 142
on January 1, 2002. Furthermore, goodwill and intangible assets determined to
have an indeterminable useful life acquired in a purchase business combination
completed after June 30, 2001 but before SFAS No. 142 was adopted in full, were
not amortized, but evaluated for impairment in accordance with the appropriate
pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 continued to be amortized
and tested for impairment in accordance with the appropriate pre-SFAS No. 142
accounting requirements prior to the adoption of SFAS No. 142.
SFAS No. 141 requires, upon adoption of SFAS No. 142, that we evaluate our
existing intangible assets and goodwill that we acquired in prior purchase
business combinations, and make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. We do not anticipate reclassifying any intangibles to intangibles with
determinable useful lives. For intangible assets identified as having indefinite
useful lives, we are required to test them for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period and recognize any
impairment losses as the cumulative effect of a change in accounting principle
in the first interim period. We do not anticipate incurring any impairment loss
charges upon adoption of SFAS No. 142.
The adoption of SFAS No. 141 did not have a significant impact on our
financial condition or results of operations. As of September 30, 2001, we
expect a reduction in annual amortization expense of approximately $3.7 million
in 2002 upon adoption of SFAS No. 142.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
VARIABLE RATE DEBT
We use variable-rate debt to finance our new and program vehicle inventory.
The interest rate on the flooring debt is tied to the one month LIBOR. These
debt obligations therefore expose us to variability in
25
interest payments due to changes in the one month LIBOR. The flooring debt is
based on open-ended lines of credit tied to each individual store from the
various manufacturer finance companies. If interest rates increase, interest
expense increases. Conversely, if interest rates decrease, interest expense
decreases.
Our variable rate flooring notes payable and other credit line borrowings
subject us to market risk exposure. At September 30, 2001, we had $346.8 million
outstanding under such agreements at interest rates ranging from 4.09% to 5.34%
per annum. A 10% increase in interest rates would increase interest expense by
approximately $212,000, net of tax, for the remaining three months of 2001 based
on amounts outstanding on the lines of credit at September 30, 2001.
HEDGING STRATEGIES
We believe it is prudent to limit the variability of a portion of our
interest payments. Accordingly, we have entered into interest rate swaps to
manage the variability of our interest rate exposure, thus leveling a portion of
our interest expense in a rising or falling rate environment. We currently have
hedged approximately 16.5% of our flooring debt.
The interest rate swaps change the variable-rate cash flow exposure on a
portion of the flooring debt to fixed rate cash flows by entering into
receive-variable, pay-fixed interest rate swaps. Under the interest rate swaps,
we receive variable interest rate payments and make fixed interest rate
payments, thereby creating fixed rate flooring debt.
We have entered into the following interest rate swaps with U.S. Bank
Dealer Commercial Services:
-- effective September 1, 2000--a five year, $25 million interest rate
swap at a fixed rate of 6.88% per annum.
-- effective November 1, 2000--a three year, $25 million interest rate
swap at a fixed rate of 6.47% per annum.
We earn interest on both of the $25 million interest rate swaps at the one
month LIBOR rate adjusted on the first and sixteenth of every month and we are
obligated to pay interest at the fixed rate set for each swap (6.88% or 6.47%
per annum) on the same amount. The difference between interest earned and the
interest obligation accrued is received or paid each month and is recorded in
the statement of operations as flooring interest expense. The one month LIBOR
rate at September 30, 2001 was 2.63% per annum.
We do not enter into derivative instruments for any purpose other than to
manage interest rate exposure. That is, we do not speculate using derivative
instruments.
The fair value of interest rate swap agreements and the amount of hedging
losses deferred on interest rate swaps was $3.8 million at September 30, 2001.
Changes in the fair value of the interest rate swaps are reported, net of
related income taxes, in accumulated other comprehensive income. These amounts
are subsequently reclassified into interest expense as a yield adjustment in the
same period in which the related interest on the flooring debt affects earnings.
Because the critical terms of the interest rate swap and the underlying debt
obligation are the same, there was no ineffectiveness recorded in interest
expense.
Incremental interest expense incurred as a result of the interest rate
swaps was $789,000 for the nine month period ended September 30, 2001. Interest
expense savings on un-hedged debt as a result of decreasing interest rates from
December 31, 2000 through September 30, 2001 was approximately $3.8 million.
At current interest rates, we estimate that we will incur additional
interest expense of $510,000 related to interest rate swaps during the last
quarter of 2001. We expect to save approximately $2.0 million on our un-hedged
debt during the last quarter of 2001 due to lower interest rates, assuming debt
levels and interest rates consistent with those at September 30, 2001 compared
to December 31, 2000.
RISK MANAGEMENT POLICIES
We assess interest rate cash flow risk by continually identifying and
monitoring changes in interest rate exposures that may adversely impact expected
future cash flows and by evaluating hedging opportunities.
26
We maintain risk management control systems to monitor interest rate cash
flow attributable to both our outstanding and forecasted debt obligations as
well as our offsetting hedge positions. The risk management control systems
involve the use of analytical techniques, including cash flow sensitivity
analysis, to estimate the expected impact of changes in interest rates on our
future cash flows.
As of September 30, 2001, approximately 77% of our total debt outstanding
was subject to un-hedged variable rates of interest. As a result, recent
interest rate declines have resulted in a net reduction of our interest expense
compared to what it would have been at similar debt levels with interest rates
unchanged. We intend to continue to gradually hedge our interest rate exposure
if market rates continue to decline.
27
BUSINESS
OVERVIEW
We are a leading operator of automotive franchise stores in the western
United States. We sell new and used cars, light trucks and sport utility
vehicles. We also provide vehicle maintenance, warranty and repair services and
arrange financing, extended warranty and insurance contracts for our customers.
We achieve gross margins above industry averages by selling a higher ratio of
retail used vehicles to new vehicles and by arranging finance and extended
warranty contracts for a greater percentage of our customers. In 2000 we
achieved a gross margin of 16.1% compared with the industry average of 12.7%. We
offer 24 brands of new vehicles, through 119 franchises in 63 stores. Our core
markets are concentrated in the fastest growing regions in the United States
with 15 stores in Oregon, 11 in California, 10 in Washington, 7 in Colorado, 7
in Idaho, 5 in Nevada, 3 in South Dakota, 3 in Texas and 2 in Alaska. Over 65%
of our stores are located in markets where our store does not compete directly
with any other franchised dealer selling the same brand.
We were founded in 1946. Our two senior executives have managed the company
for more than 30 years. Since our initial public offering in 1996, we have grown
from 5 to 63 stores primarily through an aggressive acquisition program,
increasing annual revenues from $143 million in 1996 to $1.7 billion in 2000. We
have achieved five-year compounded annual growth rates through December 31, 2000
of 85% for revenues, 75% for net income and 36% for earnings per share, together
with a 6.9% average same store sales increase.
THE INDUSTRY
At approximately $1.0 trillion in annual sales, automotive retailing is the
largest retail trade sector in the United States and comprises roughly 10% of
the GDP. The industry is highly fragmented with the 10 largest automotive
retailers generating approximately 4.0% of total industry revenues in 2000. The
number of franchised stores has declined significantly since 1960 from more than
36,000 stores to approximately 22,000 in 2001. In the U.S., vehicles can be
purchased from approximately 22,000 franchised dealers, 53,000 independent used
vehicle dealers, or through casual (person to person) transactions. New vehicles
can only be sold through automotive retail stores franchised by auto
manufacturers. These franchise stores have designated trade territories under
state franchise law protection which limits the number of new stores that can be
opened in any given area.
Consolidation is expected to continue as many smaller dealerships are now
being forced to consider selling or joining forces with larger dealership
groups, given the large capital requirements necessary to operate in today's
retail environment. With many dealer/owners reaching retirement age, many of
whom have no clear succession plans, larger, well-capitalized automotive retail
operators provide an attractive exit strategy. We believe these factors, in
conjunction with an uncertain economic forecast, provide an attractive
environment for continuing consolidation.
Unlike other retailing segments, auto manufacturers provide unparalleled
support to the auto retailer. Manufacturers often bear the burden of markdown
risks on slow-moving inventory as they provide aggressive dealer incentives to
clear aged inventory in order to free the inventory pipeline for new dealer
purchases. In addition, an auto retailer's net inventory investment is
relatively small, given floor plan financing from manufacturers. Furthermore,
manufacturers provide low-cost financing for working capital and acquisitions,
credit to consumers to finance vehicle purchases as well as pay retail prices to
dealers for servicing vehicles under manufacturers' warranties.
Sales in the automotive sector are affected by general economic conditions
including rates of employment, income growth, interest rates, and general
consumer sentiment. Since 1990, new vehicle revenues have grown at a 5.3%
compound annual rate and used vehicles at a 4.7% compound annual rate. New and
used unit sales however, have increased at a slower compound annual rate of 2.3%
and 0.6%, respectively. Slower unit volume growth over this time period has been
offset by rising prices associated with new vehicles and the higher prices paid
for later model used vehicles, which now comprise a growing portion of the used
vehicle market. New vehicle sales usually decline during a weak economy;
however, the higher margin service and parts business typically benefits in the
same environment because consumers tend to keep their vehicles
28
longer. Strong sales of new vehicles in recent years have provided a population
of vehicles for future service and parts revenues. Automotive retailers benefit
from their designation as an exclusive warranty and recall service provider of a
manufacturer. For the typical manufacturer's warranty, this provides an
automotive retailer with a period of at least 3 years of repeated business for
service covered by warranty. Extended warranties can add two or more years to
this repeat servicing period.
Automotive retailers' profitability varies widely and depends in part on
product mix, effective management of inventory, marketing, quality control and
responsiveness to customers. New vehicles account for an estimated 60% of
industry revenues, but only 35% of gross profits. The remaining 40% of revenues
are derived from used vehicles sales (26%), service and parts (10%) and finance
and insurance (4%), which combine to contribute 65% of the sector's gross
profits. Gross margins on new vehicles typically average approximately 8.5%,
versus 11.3% for retail used vehicles. The difference is primarily a function of
the non-comparability among used vehicles and lack of standardized pricing.
Automotive retailers have much lower fixed overhead costs than the
automobile manufacturers and parts suppliers and most specialty retailers.
Variable and discretionary costs, such as sales commission, personnel,
advertising and inventory finance expenses, can be adjusted to match new vehicle
sales. Variable and discretionary costs account for an estimated 60-65% of the
industry's total expenses. Moreover, the auto retailer can enhance its
profitability from sales of higher margin products and services. Gross margins
for the parts and service business are significantly higher at approximately
47%, given the labor-intensive nature of the product category. Gross margins for
finance and insurance are virtually 100%. These supplemental, high margin
products and services provide substantial incremental revenue and net income,
decreasing the reliance on the highly competitive new vehicle sales.
STORE OPERATIONS
Each store 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 for improving
performance, we make available to each store a team of specialists in new
vehicle sales, used vehicle sales, finance and insurance, service and parts, and
back-office administration. The following tables set forth information about our
stores:
PERCENTAGE OF
TOTAL REVENUE
IN THE
NUMBER OF NUMBER OF FIRST NINE MONTHS
STATE STORES FRANCHISES OF 2001
------------------------------------------------- --------- ---------- -----------------
Oregon........................................... 15 36 23%
California....................................... 11 15 24
Colorado......................................... 7 15 19
Washington....................................... 10 16 12
Idaho............................................ 7 12 11
Nevada........................................... 5 8 4
South Dakota..................................... 3 3 5
Texas............................................ 3 10 --*
Alaska........................................... 2 4 2
-- --- ---
Total....................................... 63 119 100%
== === ===
------------
* Texas stores were acquired after January 1, 2002.
29
--------------------------------------------------------------------------------------------
YEAR OPENED/
LOCATION STORE FRANCHISES ACQUIRED
--------------------------------------------------------------------------------------------
OREGON
Eugene Lithia Dodge of Eugene Dodge, Dodge Truck 1996
Lithia Nissan of Eugene Nissan 1998
Saturn of Eugene Saturn 2000
Grants Pass Lithia's Grants Pass Auto Dodge, Dodge Truck, Pre-IPO
Center Chrysler, Jeep
Klamath Falls Lithia Klamath Falls Auto Toyota, Dodge, Dodge 1999
Center Truck, Chrysler, Jeep
Medford Lithia Dodge Chrysler Dodge, Dodge Truck, Pre-IPO
Jeep Chrysler, Jeep
Lithia Honda Honda Pre-IPO
Lithia Lincoln Mercury Lincoln, Mercury, Mazda, Pre-IPO
Suzuki Mazda Suzuki
Lithia Nissan BMW Nissan, BMW 1998
Lithia Toyota Toyota Pre-IPO (1)
Lithia Volkswagen Volkswagen Pre-IPO (2)
Saturn of Southwest Saturn Pre-IPO
Oregon
Roseburg Lithia Ford Lincoln Ford, Lincoln, Mercury, 1999
Mercury Nissan of Nissan
Roseburg
Lithia Dodge Chrysler Dodge, Dodge Truck, 1999
Jeep Roseburg Chrysler, Jeep
Springfield (Eugene) Lithia Toyota of Toyota 1998
Springfield
------------------------
CALIFORNIA
Concord Lithia Dodge of Concord Dodge, Dodge Truck 1997
Lithia Ford of Concord Ford 1997
Lithia Volkswagen of Volkswagen 1997
Concord
Fresno Lithia Ford of Fresno Ford 1997
Lithia Hyundai of Fresno Hyundai 1998
Lithia Mazda Suzuki of Mazda, Suzuki 1997
Fresno
Lithia Nissan of Fresno Nissan 1998
Napa Lithia Ford Lincoln Ford, Lincoln, Mercury 1997
Mercury of Napa
Redding Lithia Chevrolet of Chevrolet 1998
Redding
Lithia Toyota of Redding Toyota 1998
Vacaville Lithia Toyota of Toyota 1996
Vacaville
------------------------
30
--------------------------------------------------------------------------------------------
YEAR OPENED/
LOCATION STORE FRANCHISES ACQUIRED
--------------------------------------------------------------------------------------------
COLORADO
Aurora (Denver) Lithia Cherry Creek Dodge Dodge, Dodge Truck 1999
Lithia Colorado Chrysler Chrysler, Kia 1999
Kia
Lithia Colorado Jeep Jeep 1999
Colorado Springs Lithia Colorado Springs Jeep, Chrysler 1999
Jeep Chrysler
Englewood (Denver) Lithia Centennial Chrysler, Jeep 1999
Chrysler Jeep
Lithia Cherry Creek Kia Kia 1999
Fort Collins Lithia Foothills Chrysler Dodge, Dodge Truck, 1999
Hyundai Chrysler, Hyundai, Jeep
------------------------
WASHINGTON
Bellevue (Seattle) Chevrolet of Bellevue Chevrolet 2001
Issaquah (Seattle) Chevrolet of Issaquah Chevrolet 2001
Kennewick Honda of Tri-Cities Honda 2000
Lithia Dodge of Dodge, Dodge Truck 1999
Tri-Cities
Renton Lithia Chrysler Jeep of Chrysler, Jeep 2000
Renton
Lithia Dodge of Renton Dodge, Dodge Truck 2000
Richland Lithia Ford of Tri-Cities Ford 2000
Seattle Seattle BMW BMW 2001
Spokane Lithia Camp Chevrolet Chevrolet, Cadillac 1998
Lithia Camp Imports Subaru, BMW, Volvo 1998
------------------------
IDAHO
Boise Lithia Ford of Boise Ford 2000
Chevrolet of Boise Chevrolet 1999
Lithia Daewoo of Boise Daewoo 1999
Lincoln-Mercury Isuzu of Lincoln, Mercury, Isuzu 1999
Boise
Caldwell Chevrolet of Caldwell Chevrolet 2001
Pocatello Honda of Pocatello Honda 2001
Lithia Chrysler Dodge Chrysler, Dodge, Dodge 2001
Hyundai of Pocatello Truck, Hyundai
------------------------
NEVADA
Reno Lithia Reno Suzuki, Audi, Lincoln, 1997
Mercury, Isuzu
Lithia Reno Hyundai Hyundai 1997
Lithia Reno Subaru Subaru 1999
Lithia Volkswagen of Reno Volkswagen 1998
Sparks Lithia Sparks (satellite (Suzuki, Lincoln, 1997
of Lithia Reno) Mercury, Isuzu)
------------------------
31
--------------------------------------------------------------------------------------------
YEAR OPENED/
LOCATION STORE FRANCHISES ACQUIRED
--------------------------------------------------------------------------------------------
SOUTH DAKOTA
Sioux Falls Chevrolet of Sioux Falls Chevrolet 2000
Lithia Dodge of Sioux Dodge 2001
Falls
Lithia Subaru of Sioux Subaru 2000
Falls
------------------------
TEXAS
Big Spring All American Chrysler Dodge, Dodge Truck, Jeep, 2002
Jeep Dodge of Big Spring Chrysler
San Angelo All American Chrysler Dodge, Dodge Truck, Jeep, 2002
Jeep Dodge of San Angelo Chrysler
All American Chevrolet Chevrolet, Daewoo 2002
Daewoo of San Angelo
------------------------
ALASKA
Anchorage Lithia Chrysler Jeep of Chrysler, Jeep 2001
Anchorage
Lithia Dodge of South Dodge, Dodge Truck 2001
Anchorage
------------------------
(1) Prior to moving to its own store in 2001, Lithia Toyota was part of the
Lithia Lincoln Mercury store in Medford.
(2) Prior to moving to its own store in 2000, Lithia Volkswagen was part of the
Lithia Honda store in Medford.
NEW VEHICLE SALES
In 2001, we sold 24 domestic and imported brands ranging from economy to
luxury cars, sport utility vehicles, minivans and light trucks.
PERCENTAGE OF
NEW VEHICLE DOLLAR
SALES IN THE FIRST
NINE MONTHS OF % OF
MANUFACTURER 2001 TOTAL SALES
---------------------------------------------------- ------------------ -----------
DaimlerChrysler (Chrysler, Dodge, Jeep, Dodge
Trucks)........................................... 36.3% 18.8%
Ford (Ford, Lincoln/Mercury)........................ 16.7 8.8
General Motors (Chevrolet, Cadillac, Saturn)........ 12.1 6.3
Toyota.............................................. 8.7 4.5
Volkswagen, Audi.................................... 5.6 2.9
Nissan.............................................. 4.0 2.1
Subaru.............................................. 3.8 2.0
Honda............................................... 3.7 1.7
BMW................................................. 2.9 1.5
Hyundai............................................. 2.4 1.2
Isuzu............................................... 1.0 0.5
Mazda............................................... 1.0 0.5
Suzuki.............................................. 0.7 0.4
Kia................................................. 0.7 0.4
Volvo............................................... 0.3 0.1
Daewoo.............................................. 0.1 0.1
----- ----
100.0% 51.8%
===== ====
32
Our unit and dollar sales of new vehicles were as follows:
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
New vehicle units......... 3,274 7,413 17,708 28,645 37,230 28,555 28,576
New vehicle sales (in
thousands).............. $65,092 $161,294 $388,431 $673,339 $898,016 $683,217 $701,095
Average selling price..... $19,881 $ 21,758 $ 21,935 $ 23,506 $ 24,121 $ 23,926 $ 24,534
We purchase our new car inventory directly from manufacturers, who allocate
new vehicles to stores based on the number of vehicles sold by the store on a
monthly basis and by the store's market area. We attempt to exchange vehicles
with other dealers to accommodate customer demand and to balance inventory.
We post the manufacturer's suggested retail price on every vehicle, as
required by law. We negotiate the final sales price of a new vehicle
individually with the customer except at our Saturn stores, where the final
sales price does not deviate from the posted price.
USED VEHICLE SALES
At each new vehicle store, we also sell used vehicles. We employ a used
vehicle manager at each location.
Retail used vehicle sales are an important part of our overall
profitability. In the first nine months of 2001, retail used vehicle sales
generated a gross margin of 12.8% compared with a gross margin of 9.0% for new
vehicle sales. Our used vehicle operation gives us an opportunity to:
-- generate sales to customers financially unable or unwilling to
purchase a new vehicle;
-- increase new and used vehicle sales by aggressively pursuing customer
trade-ins; and
-- increase service contract sales and provide financing to used vehicle
purchasers.
We currently sell approximately one retail used vehicle for every new
vehicle sold, compared to the industry average ratio of 0.8 to 1.
In addition to selling late model used cars, as do other new vehicle
dealers, our stores emphasize sales of used vehicles three to ten years old.
These vehicles sell for lower prices, but generate greater margins for us.
Selling a larger number of used vehicles makes us less susceptible to the
effects of changes in the volume of new vehicle sales that result from economic
conditions.
We acquire most of our used vehicles through customer trade-ins, but we
also buy them at "closed" auctions, attended only by new vehicle dealers with
franchises for the brands offered. These auctions offer off-lease, rental and
fleet vehicles. We also buy used vehicles at "open" auctions of repossessed
vehicles and vehicles being sold by other automotive retailers.
In addition to selling used vehicles to retail customers, we sell vehicles
in poor condition and vehicles that have not sold promptly to other dealers and
to wholesalers.
33
Our used vehicle sales are as follows:
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -------------------
1996 1997 1998 1999 2000 2000 2001
------- -------- -------- -------- -------- -------- --------
Retail used vehicles...... 4,156 7,148 13,645 23,840 30,896 23,453 27,798
Retail used vehicle sales
(in thousands).......... $48,697 $ 88,571 $174,223 $313,455 $406,244 $308,676 $364,665
Average selling price..... $11,717 $ 12,393 $ 12,768 $ 13,148 $ 13,149 $ 13,161 $ 13,118
Wholesale used vehicles... 2,348 4,990 9,532 13,424 16,751 12,637 13,881
Wholesale used vehicle
sales (in thousands).... $ 9,914 $ 24,528 $ 46,321 $ 62,107 $ 74,602 $ 56,259 $ 64,112
Average selling price..... $ 4,222 $ 4,915 $ 4,860 $ 4,627 $ 4,454 $ 4,452 $ 4,619
Total used vehicles....... 6,504 12,138 23,177 37,264 47,647 36,090 41,679
Total used vehicle sales
(in thousands).......... $58,611 $113,099 $220,544 $375,562 $480,846 $364,935 $428,777
VEHICLE FINANCING, EXTENDED WARRANTY AND INSURANCE
We believe that arranging financing is critical to our ability to sell
vehicles and related products and services. We provide a variety of financing
and leasing alternatives to meet customer needs. Offering customer financing on
a "same day" basis gives us an advantage, particularly over smaller competitors
who do not generate enough sales to attract the many financing sources that are
available to us.
Because of greater profit margins from sales of finance and insurance
products, we try to arrange financing for every vehicle we sell. Our finance and
insurance managers possess extensive knowledge of available financing
alternatives and receive training in how to determine each customer's financing
needs so that the customer can purchase or lease a vehicle. The finance and
insurance managers work closely with financing sources to quickly determine a
customer's credit status and to confirm the type and amount of financing
available to each customer.
In 2000, we arranged financing for 73% of our new vehicle sales and 72% of
our used vehicle sales, compared to the industry averages of 49% and 59%,
respectively. Our average finance and insurance revenue per vehicle totaled $852
in 2000 compared to the industry average of $390. For the first nine months of
2001, we improved our finance and insurance revenues per vehicle to $917.
We receive a portion of the financing charge as fee income for each sale we
finance. In 2001 and 2002, automobile manufacturers have offered zero percent
financing as sales incentives to new vehicle purchasers. Zero percent financing
reduces, but does not eliminate, our per unit fee income from arranging
financing, as we receive a payment from the manufacturers in connection with
such financing. Many customers do not qualify for zero percent financing, either
because of their credit standing or because they require longer financing terms
than offered for zero percent financing. Incentive financing programs, including
zero percent programs, usually offer cash rebates as an alternative to reduced
interest rates. A majority of eligible customers elect to receive cash rebates
instead of incentive financing, usually using the cash rebate as a down payment
to complete the purchase of a new vehicle without any cash out of pocket.
We usually arrange financing for customers from outside sources on a
non-recourse basis to avoid the risk of default. During 2000, we directly
financed less than 0.01% of our vehicle sales.
Our finance and insurance managers also market third-party extended
warranty contracts and insurance contracts to our new and used vehicle buyers.
These products and services yield higher profit margins than vehicle sales and
contribute significantly to our profitability. Extended warranty contracts
provide additional coverage for new vehicles beyond the duration or scope of the
manufacturer's warranty. The service contracts we sell to used vehicle buyers
provide coverage for certain major repairs.
34
We also offer our customers credit life, and health and accident insurance
when they finance an automobile purchase and receive a commission on each policy
sold. We also offer other products, such as protective coatings and automobile
alarms.
SERVICE, BODY AND PARTS
Our automotive service, body and parts operations are an integral part of
establishing customer loyalty and contribute significantly to our overall
revenue and profits. We provide parts and service primarily for the new vehicle
brands sold by our stores, but we also service other vehicles. In 2000, our
service, body and parts operations generated $164.0 million in revenues, or 9.9%
of total revenues. We set prices to reflect the difficulty of the types of
repair and the cost and availability of parts.
The service, body and parts businesses provide important repeat revenues to
the stores. We market our parts and service products by notifying the owners of
vehicles purchased at our stores when their vehicles are due for periodic
service. This encourages preventive maintenance rather than post-breakdown
repairs. We offer a lifetime oil and filter service, which in 2000 was purchased
by 29% of our new and used vehicle buyers. This service retains customers, and
provides opportunities for more parts and service business. Revenues from the
service, body and parts departments are important during economic downturns as
owners repair existing used vehicles rather than buy new vehicles during such
periods. This limits the effects of a drop in new vehicle sales.
We operate twelve collision repair centers: two each in Oregon, Idaho and
South Dakota and one each in California, Washington, Colorado, Nevada, Texas and
Alaska. We work closely with the automobile insurance companies to provide
collision repair services on claims at preferred rates based on the high volume
of business. At our Medford, Oregon body shop, we provide office space to
casualty insurers to process automobile claims. This helps generate further
repair business.
MARKETING
We market ourselves as "America's Car & Truck Store." We use most types of
advertising, including television, newspaper, radio and direct mail, and an
internet web site. We advertise to develop our image as a reputable dealer,
offering quality service, affordable automobiles and financing for all buyers.
The automobile manufacturers pay for many of our advertising and marketing
expenses. The manufacturers also provide us with market research, which assists
us in developing our own advertising and marketing campaigns. In addition, our
stores advertise discounts or other promotions to attract customers. By owning a
cluster of stores in a particular market, we save money from volume discounts
and other media concessions. We also participate as a member of advertising
cooperatives and associations whose members pool their resources and expertise
together with manufacturers to develop advertising campaigns.
We maintain a web site (www.lithia.com) that generates leads and provides
information for our customers. We use the internet site as a marketing tool to
familiarize customers with us, our stores and the products we sell, rather than
to complete purchases. Although many customers use the internet to research
information about new vehicles, nearly all ultimately visit the store to
complete the sale and take delivery of the vehicle. Our web site enables a
customer to:
-- locate our stores and identify the new vehicle brands sold at each
store;
-- view new and used vehicle inventory;
-- schedule service appointments;
-- view Kelley Blue Book values;
-- visit our investor relations site; and
-- view employment opportunities.
35
We emphasize customer satisfaction and strive to develop a reputation for
quality and fairness. We train our sales personnel to identify an appropriate
vehicle for each of our customers at an affordable price.
We believe that our "Priority You" customer-oriented plan differentiates us
from other automotive retail stores. "Priority You" commits us to provide:
-- a complimentary credit check;
-- a complimentary used vehicle appraisal;
-- a 60-day/3,000 mile warranty on all used vehicles sold; and
-- a community donation for every vehicle sold.
MANAGEMENT INFORMATION SYSTEM
We consolidate, process and maintain financial information, operational and
accounting data, and other related statistical information on computers at our
headquarters. Our systems are based on an ADP platform for the main database,
and information is processed and analyzed utilizing customized financial
reporting software from Hyperian Solutions. Senior management can access
detailed information from all of our locations regarding:
-- inventory;
-- cash balances;
-- 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 stores.
Each store's general manager has access to this same information. With this
information, we can quickly analyze the results of operations, identify trends,
and focus on areas that require attention or improvement. Our management
information system also allows our general managers to respond quickly to
changes in consumer preferences and purchasing patterns, maximizing our
inventory turnover.
Our management information system is particularly important to successfully
operating new stores. Following each acquisition, we immediately install our
management information system at each location. This quickly makes financial,
accounting and other operational data easily available throughout the company.
With this information, we can more efficiently execute our operating strategy at
the new store.
FRANCHISE AGREEMENTS
Each of our store subsidiaries signs a franchise or dealer sales and
service agreement 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 stores are at the discretion of the
manufacturer. Except for Saturn franchises, franchise agreements do not
guarantee exclusivity within a specified territory.
A franchise agreement may impose requirements on the dealer about:
-- the showroom;
-- service facilities and equipment;
36
-- inventories of vehicles and parts;
-- minimum working capital;
-- training of personnel; and
-- performance standards for sales volume and customer satisfaction.
Each manufacturer closely monitors compliance with these requirements and
requires each store to submit monthly and annual financial statements. Franchise
agreements also grant a dealer the right to use and display manufacturers'
trademarks, service marks and designs in the manner approved by each
manufacturer.
Most franchise agreements expire after one to five years. However, all of
our agreements have been renewed and we expect that manufacturers will continue
to renew them in the future. In addition, state franchise laws limit the ability
of manufacturers to terminate or fail to renew automotive franchises. Some
franchise agreements, including those with DaimlerChrysler, have no termination
date. Each franchise agreement authorizes at least one person to manage the
store's operations. The typical franchise agreement provides for early
termination or non-renewal by the manufacturer upon:
-- a change of management or ownership without manufacturer consent;
-- insolvency or bankruptcy of the dealer;
-- death or incapacity of the dealer manager;
-- conviction of a dealer manager or owner of certain crimes;
-- misrepresentation of certain information by the store, dealer manager
or owner to the manufacturer;
-- failure to adequately operate the store;
-- failure to maintain any license, permit or authorization required for
the conduct of business; or
-- poor sales performance or low customer satisfaction index scores.
We sign master framework agreements with most manufacturers that impose
additional requirements on our stores. See "Risk Factors" for further details.
COMPETITION
The automobile business is highly competitive. The retail automobile sales
business has a large number of independent operators, many of whom are
individuals, families, and small groups. We compete primarily with other
automobile dealers, both publicly and privately held, near our store locations.
In addition, regional and national car rental companies operate retail used car
lots to dispose of their used rental cars.
We are larger and have more financial resources than the other automotive
retailers with which we currently compete in most markets. As we enter other
markets, we may face competitors that are larger or have access to greater
financial resources. We do not have any cost advantage in purchasing new
vehicles from manufacturers. We rely on advertising and merchandising, sales
expertise, service reputation and location of our stores to sell new vehicles.
In addition to competition for the sale of vehicles, we expect increased
competition for the acquisition of other stores. We faced only limited
competition with respect to our acquisitions to date, primarily from privately
held automotive retailers. Other publicly-owned automotive retailers with
significant capital resources may enter our current and targeted market areas in
the future.
REGULATION
Our business is subject to extensive regulation, supervision and licensing
under federal, state and local laws, ordinances and regulations. 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
37
our stores, service centers, collision repair shops and other operations. They
regulate matters such as consumer protection, workers' safety and air and water
quality.
Laws also protect franchised automobile stores from the unequal bargaining
power held by the manufacturers. Under those laws, a manufacturer may not:
-- Terminate or fail to renew a franchise without good cause; or
-- Prevent any reasonable changes in the capital structure or financing
of a store.
Manufacturers may object to a sale of a store or change of management based
on character, financial ability or business experience of the proposed new
operator.
Automobile dealers and manufacturers are also subject to laws to protect
consumers, including so-called "Lemon Laws." A manufacturer 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. Financing and insurance activities are subject to credit reporting,
debt collection, and insurance industry regulation.
Our business, particularly parts, service and collision repair operations,
involves hazardous or toxic substances or wastes, such as motor oil, waste motor
oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer
thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel
fuels. Federal, state and local authorities establishing health and
environmental quality standards regulate the handling, storage, treatment,
recycling and disposal of hazardous substances and wastes and remediation of
contaminated sites, both at our facilities and at sites to which we send
hazardous or toxic substances or wastes for treatment, recycling or disposal. We
are aware of contamination at certain of our current and former facilities, and
we are in the process of conducting investigation and/or remediation at some of
these properties. Based on our current information, any costs or liabilities
relating to such contamination, other environmental matters or compliance with
environmental regulations are not expected to have a material adverse effect on
our results of operations or financial condition. There can be no assurances,
however, that additional environmental matters will not arise or that new
conditions or facts will not develop in the future at our current or formerly
owned or operated facilities, or at sites that we may acquire in the future,
that will result in a material adverse effect on our results of operations or
financial condition.
REAL ESTATE
We currently own or lease the land and facilities at each of our stores and
support facilities. We also own certain parcels held for future store locations.
Most leases give us the option to renew the lease for one or more lease
extension periods. We believe our owned and leased facilities are generally
adequate for our needs and are in good repair.
EMPLOYEES
As of December 31, 2001, we employed approximately 3,800 persons on a
full-time equivalent basis. The service department employees at our Dodge, Ford
and Volkswagen stores in Concord, California are unionized. We believe we have
good relationships with our employees.
38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our bylaws provide for not less than two and not more than seven directors.
The Board of Directors has currently established the number of directors at
seven. Directors are elected by the stockholders at our annual meeting and serve
until the next annual meeting or until their successors are elected and
qualified. Our stockholders elected the directors listed below to serve until
the 2002 annual meeting. Officers are elected by the Board of Directors to hold
office until their successors are elected and qualified. The following table
identifies our current directors and executive officers.
NAME AGE CURRENT POSITION(S)
------------------------------------- --- --------------------------------------------------------
Sidney B. DeBoer..................... 58 Chairman, Chief Executive Officer and Secretary
M. L. Dick Heimann................... 58 President, Chief Operating Officer and Director
R. Bradford Gray..................... 49 Executive Vice President and Director
Bryan B. DeBoer...................... 35 Senior Vice President, Mergers and
Acquisitions/Operations
Don Jones, Jr. ...................... 38 Senior Vice President, Retail Operations
Jeffrey B. DeBoer.................... 36 Senior Vice President and Chief Financial Officer
W. Douglas Moreland.................. 53 Senior Vice President, Regional Operations--Colorado and
Director
Thomas Becker........................ 50 Director
Gerald F. Taylor..................... 61 Director
William J. Young..................... 59 Director
Sid DeBoer has served as the Chairman, Chief Executive Officer and
Secretary since 1968. He also is a member of various automobile industry
organizations, including the President's Club of the National Automobile Dealers
Association, Oregon Auto Dealers Association, Medford New Car Dealers
Association, Chrysler Dealer Council, Toyota Dealer Council and Honda Dealer
Council. Mr. DeBoer has earned several awards including the Time Magazine
Quality Dealer Award in 1997, the Sports Illustrated All-Star Dealer Award in
1990 and Medford Chamber of Commerce Awards in 1986, 1991, 1993 and 1998. Mr.
DeBoer is active with several community and charitable organizations, including
Oregon Community Foundation, Oregon Shakespeare Festival, Ashland Community
Hospital and Rogue Valley Medical Center Foundation. Mr. DeBoer is the father of
executive officers Bryan B. DeBoer and Jeffrey B. DeBoer.
Dick Heimann has served as the Chief Operating Officer and Director since
1970 and was appointed President in 1997. Prior to joining us, he served as a
district manager of Chrysler Corporation from 1967 to 1970. He is a member of
various automobile industry organizations including the Oregon Auto Dealers
Association, the Jeep Dealer Council and the Medford New Car Dealers
Association, for which he has previously served as president. Mr. Heimann is a
graduate of University of Colorado with a Bachelor of Science degree in Biology
and Languages.
Brad Gray has served as Executive Vice President since 1996 and became a
Director in 1997. From 1981 to 1995, he served in various capacities including
as General Manager of our Grants Pass (1991-1995) and Lithia Dodge (1989-1991)
stores. Since 1975, Mr. Gray has held various positions in the automobile sales
industry, including sales representative, sales manager and general manager.
Bryan DeBoer joined us in 1989 working in various capacities including
General Manager of certain stores, Finance Manager and General Sales Manager. In
1996, Mr. DeBoer began serving on the acquisition team and was promoted to Vice
President, Acquisitions in 1997. In March 2000, Mr. DeBoer was promoted to
Senior Vice President, Mergers and Acquisitions/Operations. Mr. DeBoer has a
B.S. degree from Southern Oregon University. Mr. DeBoer also graduated from the
National Auto Dealers Association Dealer Academy in 1990, where he was trained
in all operational aspects of auto retailing.
Don Jones joined us in 1989 as a General Sales Manager after 13 years of
auto retailing experience outside of Lithia. Mr. Jones has held various other
positions including General Manager, Executive Manager
39
and Regional Manager. In 1997, Mr. Jones was promoted to Vice President,
Operations and in March 2000, he was promoted to Senior Vice President of Retail
Operations. Mr. Jones holds degrees from Menlo College in Atherton, California
and the University of Oregon.
Jeff DeBoer joined us in March 1997 as Vice President, Finance and Investor
Relations. In March 2000, Mr. DeBoer was promoted to Senior Vice President and
Chief Financial Officer. Prior to joining Lithia, Mr. DeBoer was an equity
analyst and sector fund manager at Fidelity Investments Japan from 1994 to 1997
and a Credit Officer at Fuji Bank, Ltd., in Tokyo, Japan from 1988 to 1992. Mr.
DeBoer holds an undergraduate degree from Pomona College and an M.B.A. degree
with a specialty in finance and investment management from London Business
School. Mr. DeBoer also attended the National Auto Dealers Association Dealer
Academy in 1998, where he was trained in all operational aspects of auto
retailing.
Tom Becker became a Director in March 1997. Mr. Becker is the Executive
Director of Pacific Retirement Services, Inc. and Rogue Valley Manor in Medford,
Oregon. Pacific Retirement Services, Inc. is the parent corporation of a number
of retirement centers and related operations in Oregon, California and Texas.
Mr. Becker began his career with Rogue Valley Manor in January 1978. Mr. Becker
holds a Bachelor of Science degree from the University of Oregon.
Doug Moreland became a Director and Regional Vice President--Intermountain
Region in May 1999 when we acquired the Moreland Automotive Group. In March
2000, Mr. Moreland was promoted to Senior Vice President, Regional
Operations--Colorado. Prior to joining our company, Mr. Moreland owned Moreland
Automotive Group. Mr. Moreland began his auto retailing career in 1969 and
became a primary dealer and owner in January 1980.
Jerry Taylor became a Director in April 2000. Mr. Taylor served in the
position of Senior Vice President and CFO of Applied Materials, Inc., a
manufacturer of semi-conductor equipment, from 1984 until 1998. Mr. Taylor
currently serves as a senior advisor to the CEO of Applied Materials, Inc., and
is a member of the Board of Directors of Electro Scientific Industries, Inc.,
WebTrax, Inc. (a private company) and MicroBar, Inc. (a private company).
Bill Young became a Director in March 1997. Mr. Young is the Chairman of
the Board, President and Chief Executive Officer of ARC Capital, a holding
company with three wholly owned subsidiaries operating in the machine vision
industry. Mr. Young has been with ARC Capital since 1994. Prior to 1994, Mr.
Young served with Volkswagen of America for 18 years, most recently as President
and Chief Executive Officer. During his tenure as President and CEO of
Volkswagen of America, Mr. Young also served as President of V-Crest Systems,
Inc., a computer services company serving 1,200 auto dealer agencies, and
director of VCI, Inc., a $2 billion financial services company.
40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of January 24, 2002, information with
respect to the ownership of Lithia's Class A and Class B common stock and Series
M preferred stock by (1) each director; (2) our Chief Executive Officer and our
other five most highly compensated executive officers; (3) all persons known by
us to be beneficial owners of more than 5 percent of our common stock; and (4)
all executive officers and directors as a group and other selling stockholders.
The table also sets forth the shares to be sold by the selling stockholder and
his holdings following the offering.
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE THE OWNED AFTER THE
OFFERING NUMBER OF OFFERING
------------------------- SHARES TO BE SOLD IN -----------------------
STOCKHOLDER CLASS(1) NUMBER(2) % OF CLASS(3) THE OFFERING NUMBER % OF CLASS
--------------------------------------- -------- --------- ------------- -------------------- ---------- ----------
Lithia Holding Company, LLC(4)(5)...... Class B 4,039,719 100.0% --** 4,039,719 100.0%
Sidney B. DeBoer(4)(5)(6).............. Class A 180,916 1.9% --** 180,916 1.4%
Class B 4,039,719 100.0% --** 4,039,719 100.0%
W. Douglas Moreland(4)(7).............. Class A 1,681,732 18.2% 1,000,000 681,732 5.1%
Series M 3,904 86.8% -- 3,904 86.8%
Fidelity Management and Research
Corp.(8)............................. Class A 739,470 8.0% -- 739,470 5.6%
82 Devonshire Street
Boston, MA 02109
Capital Guardian Trust Company(9)...... Class A 775,700 8.4% -- 775,700 5.9%
11100 Santa Monica Blvd.
Los Angeles, CA 90025
J.P. Morgan Chase & Co.(10)............ Class A 528,325 5.7% -- 528,325 4.0%
270 Park Avenue
New York, NY 10017
Wellington Management Company,
LLP(11).............................. Class A 526,700 5.7% -- 526,700 4.0%
75 State Street
Boston, MA 02109
M. L. Dick Heimann(12)................. Class A 184,274 2.0% -- 184,274 1.4%
R. Bradford Gray....................... Class A 83,299 * --** 83,299 *
Don Jones, Jr.(13)..................... Class A 42,988 * -- 42,988 *
Bryan B. DeBoer........................ Class A 30,005 * -- 30,005 *
Jeffrey B. DeBoer(14).................. Class A 30,191 * -- 30,191 *
Thomas Becker(15)...................... Class A 15,200 * -- 15,200 *
Gerald F. Taylor....................... Class A 12,000 * -- 12,000 *
William J. Young....................... Class A 5,000 * -- 5,000 *
All current executive officers and
directors as a group (10
persons)(16)......................... Class A 2,265,605 23.8% 1,265,605 9.5%
Class B 4,039,719 100.0% 4,039,719 100.0%
Series M 3,904 86.9% 3,904 100.0%
------------
* Less than one percent
** If the underwriters' overallotment option is exercised in full, the
following stockholders will sell 250,000 shares of Class A common stock:
SHARES BENEFICIALLY
OWNED AFTER THE
OVERALLOTMENT OPTION
IS EXERCISED IN FULL
NUMBER OF ----------------------
CLASS SHARES TO BE SOLD NUMBER % OF CLASS
------- ----------------- --------- ----------
Lithia Holding Company LLC .................... Class B 120,488 3,919,231 100.0%
Sidney B. DeBoer............................... Class A 108,962 71,954 0.5%
Class B 120,488 3,919,231 100.0%
R. Bradford Gray............................... Class A 20,550 62,749 0.5%
(footnotes on next page)
41
(1) The Class A common stock is entitled to one vote per share, the Class B
common stock is entitled to 10 votes per share and is convertible into
Class A common stock on a share for share basis at the option of the holder
thereof or under certain other circumstances and the Series M preferred
stock is entitled to 54.3 votes per share.
(2) Includes shares subject to options exercisable within 60 days of January
24, 2002 as follows:
NAME NUMBER OF OPTIONS
------------------------------------------------------------ -----------------
Sidney B. DeBoer............................................ 61,902
W. Douglas Moreland......................................... 18,512
M. L. Dick Heimann.......................................... 64,810
R. Bradford Gray............................................ 62,749]
Don Jones, Jr. ............................................. 21,404
Bryan B. DeBoer............................................. 21,675
Jeffrey B. DeBoer........................................... 22,727
Thomas Becker............................................... 5,000
Gerald F. Taylor............................................ 2,000
William Young............................................... 5,000
All current executive officers and directors as a group..... 285,779
(3) Applicable percentage of ownership is based on 9,224,024 shares of Class A
common stock outstanding, 4,039,719 shares of Class B common stock
outstanding and 4,499 shares of Series M preferred stock outstanding as of
January 24, 2002, together with applicable options for such stockholders.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting and investment
power with respect to shares. Shares of common stock subject to options or
warrants currently exercisable or exercisable within 60 days after January
24, 2002 are deemed outstanding for computing the percentage ownership of
the person holding such options or warrants, but are not deemed outstanding
for computing the percentage of any other person.
(4) Such person can be reached c/o 360 E. Jackson Street, Medford, Oregon
97501.
(5) Sidney DeBoer, as the manager of Lithia Holding Company and pursuant to the
terms of its operating agreement, has the sole voting and investment power
with respect to all of the Class B common stock. Accordingly all shares
held by Lithia Holding Company are deemed beneficially owned by him. The
following table gives tabular information regarding the ownership of Lithia
Holding Company, LLC:
UNITS OWNED
----------------
UNIT HOLDER NUMBER PERCENT
------------------------------------------------------------ ------ -------
DeBoer Family LLC........................................... 50,000 50.9%
Heimann Family LLC.......................................... 34,875 35.5%
R. Bradford Gray............................................ 7,000 7.1%
DeBoer Insurance, LLC. ..................................... 4,990 5.1%
Sidney B. DeBoer Trust...................................... 1,425 1.4%
Sidney B. DeBoer is the manager of the DeBoer Family LLC whose members
include Mr. DeBoer, his spouse and other family members. M.L. Dick Heimann
is the manager of the Heimann Family LLC whose members include Mr. Heimann
and other family members. Bryan B. DeBoer is the manager of DeBoer
Insurance, LLC, whose members are Bryan B. DeBoer, Jeffrey B. DeBoer and
Mark D. DeBoer. Sidney B. DeBoer is the trustee and owner of the Sidney B.
DeBoer Trust.
(6) Includes 10,325 Class A shares held in Mr. DeBoer's 401(k) account. Also
includes all shares held by Lithia Holding Company, LLC which he controls.
(7) All Class A shares and all of the Series M shares beneficially owned by Mr.
Moreland are held by several limited partnerships of which Mr. Moreland and
his wife are the limited partners and Mr. Moreland is the President of the
corporate general partner of each of the partnerships.
(8) Based solely on information as of December 31, 2001 provided on Schedule
13G filed with the Securities and Exchange Commission by FMR Corp. FMR is
the parent holding company of Fidelity Management Trust Company, which has
beneficial ownership of 739,470 of the reported shares. FMR has sole voting
power with respect to 329,100 shares and sole dispositive power with
respect to all 739,470 shares.
(9) Based solely on information as of December 31, 2001 provided on Schedule
13G filed with the Securities and Exchange Commission by Capital Guardian
Trust Company. Capital Guardian serves as an investment manager for several
institutional customers. Capital Guardian has sole voting power with
respect to 402,500 shares and sole dispositive power with respect to all
775,700 shares.
(10) Based solely on information as of December 31, 2001 provided on Schedule
13G filed with the Securities and Exchange Commission by J. P. Morgan Chase
& Co. J.P. Morgan Chase has sole voting power with respect to 524,825
shares and sole dispositive power with respect to all 528,325 shares.
42
(11) Based solely on information as of December 31, 2001 provided on Schedule
13G filed with the Securities and Exchange Commission by Wellington
Management Company, LLP. WMC has shared voting power with respect to
270,800 shares and shared dispositive power with respect to all 526,700
shares.
(12) Includes 15,964 shares held by Mr. Heimann's spouse.
(13) Includes 7,504 Class A shares held in Mr. Jones' 401(k) account.
(14) Includes 664 Class A shares held in Mr. DeBoer's 401(k) account.
(15) Includes 200 shares held in a custodial account for Mr. Becker's daughter.
(16) Class A includes 15,964 shares held by Mr. Heimann's spouse, 200 shares
held in a custodial account for Mr. Becker's daughter, 10,325 shares held
in Sidney DeBoer's 401(k) account, 7,504 shares held in Mr. Jones' 401(k)
account and 664 shares held in Jeffrey B. DeBoer's 401(k) account.
43
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of Class A
common stock, 25,000,000 shares of Class B common stock and 15,000,000 shares of
preferred stock, each with no par value.
COMMON STOCK
Each share of common stock is designated as either Class A common stock or
Class B common stock. As of January 24, 2002, there were 9,224,024 shares of
Class A common stock outstanding and 4,039,719 shares of Class B common stock
outstanding. All of the outstanding Class B common stock is held by Lithia
Holding Company, LLC. Upon completion of this offering, there will be 13,224,024
shares (13,844,512 shares if the underwriters' over-allotment option is
exercised) of Class A common stock outstanding and 4,039,719 shares (3,919,231
shares if the underwriters' over-allotment option is exercised) of Class B
common stock outstanding.
VOTING
Holders of Class B common stock are entitled to ten votes for each share
held, while holders of Class A common stock are entitled to one vote per share
held. 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 including the
election of directors.
The Oregon Business Corporation Act, however, entitles either the Class A
common stock or the Class B common stock to vote as a separate voting group on
any proposed amendment of our Articles of Incorporation otherwise requiring
shareholder approval if the proposed amendment would:
-- increase or decrease the aggregate number of authorized shares of the
class;
-- effect an exchange or reclassification of all or part of the shares
of the class into shares of another class or create a right to do so;
-- change the shares of all or part of the class into a different number
of shares of the same class;
-- create a new class having rights or preferences with respect to
distributions or dissolution that are prior to superior or
substantially equal to shares of the class; or
-- otherwise alter the rights, preferences or limitations of all or part
of the shares of the class.
In these circumstances, the class of common stock to be altered has the
right to vote on the amendment as a separate class. Shares of the two classes of
common stock do not have cumulative voting rights with respect to the election
of directors.
Immediately after this offering, Lithia Holding Company, LLC will hold
shares of Class B common stock constituting approximately 75.0%, assuming no
exercise of the over-allotment option and 74.3% if the underwriters' exercise
their over-allotment option in full of the voting power of the outstanding
common stock, which in each case will allow it to control all actions to be
taken by the shareholders, except as noted above, including the election of all
directors to the Board of Directors.
DIVIDENDS AND OTHER RIGHTS
Subject to the preferences applicable to any preferred stock outstanding at
the time, holders of shares of common stock are entitled to dividends if, when
and as declared by the Board of Directors from funds legally available therefor,
and are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and preferred stock preferences, if any.
Each share of Class A common stock and Class B common stock will be treated
equally with respect to dividends and distributions.
No additional shares of Class B common stock can be issued without the
prior approval of shareholders holding a majority of all Class A common stock
outstanding, except in conjunction with stock splits, stock dividends,
reclassification and similar transactions and events regarding the Class A
common stock that would otherwise have the effect of changing conversion rights
of the Class B common stock relative to the Class A common stock.
44
Holders of common stock have no preemptive rights nor rights to subscribe
for additional securities. Shares of common stock are not redeemable and there
are no sinking fund provisions. Shares of Class A common stock are not
convertible into any other series or class of our securities. Subject to
adjustments for stock splits, stock dividends, reclassification and similar
transactions and events, each share of Class B common stock is freely
convertible into one share of Class A common stock at the option of the holder.
Each share of Class B common stock shall automatically convert to shares of
Class A common stock on a share-for-share basis on the earliest record date for
an annual meeting of our 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. Any purported transfer of Class B common stock to a person who is
not a permitted transferee under our Articles of Incorporation is automatically
void.
PREFERRED STOCK
In 1999, we authorized 15,000 shares of Series M Redeemable Convertible
Preferred Stock. The Series M preferred stock votes with Class A common stock on
an as if converted basis. The Series M preferred stock is convertible into Class
A common stock at our option at any time and at the option of the holder under
limited circumstances. The Series M preferred stock is redeemable at our option.
The Series M preferred stock converts into Class A common stock based on a
formula that divides the average Class A common stock price for a 15-day period
into one thousand and then multiplies such amount by the number of Series M
preferred shares being converted. The Series M preferred stock does not have a
dividend preference, but participates in any dividends on an as if converted
basis. The Series M preferred stock has a $1 per share liquidation preference.
The Board of Directors may, without further action of our shareholders,
issue shares of preferred stock in one or more series and fix the rights and
preferences thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, rights and terms of redemption and sinking fund
provisions, redemption price or prices, liquidation preferences and the number
of shares constituting any series or the designations of such series, and
increase or decrease the number of shares of any such series (but not below the
number of such shares then outstanding). The rights of the holders of common
stock will be subject to, and may be adversely affected by, the rights of
holders of any preferred stock that may be issued in the future. Issuance of
preferred stock provides desirable flexibility in connection with possible
acquisitions and other corporate purposes. However, the Board of Directors,
without further shareholder approval, can issue preferred stock with voting and
conversion rights that would adversely affect the voting power and other rights
of the holders of common stock. In addition, the Board of Directors can issue
and sell shares of preferred stock to designated persons, the impact of which
could make it more difficult for a holder of a substantial block of common stock
to remove incumbent directors or otherwise gain control of Lithia. We have no
present plans to issue any shares of preferred stock.
OREGON CORPORATE LAW
We are subject to the Oregon Control Share Act, under which a person who
acquires voting stock in a transaction which results in such person holding more
than 20%, 33 1/3% or 50% of the total voting power cannot vote the shares it
acquires in the acquisition unless voting rights are accorded to such control
shares by the holders of a majority of the outstanding voting shares, excluding
the control shares held by such person and shares held by our officers and
inside directors, and by the holders of a majority of the outstanding voting
shares, including shares held by our officers and inside directors. This vote
would be required at the time an acquiring person's holdings exceed 20% of the
total voting power, and again at the time the acquiring person's holdings exceed
33 1/3% and 50%, respectively. An acquiring person can include persons acting as
a group. A transaction in which voting power is acquired solely by receipt of an
immediately revocable proxy does not constitute an acquisition covered by the
provisions of the Oregon Business Corporation Act described here. The acquiring
person may, but is not required to, submit to us an "Acquiring Person Statement"
setting forth certain information about the acquiring person and its plans with
respect to us. The Acquiring Person
45
Statement may also request that we call a special meeting of shareholders to
determine whether the control shares will be allowed to retain voting rights. If
the acquiring person does not request a special meeting of shareholders, the
issue of voting rights of control shares will be considered at the next annual
meeting or special meeting of shareholders that is held more than 60 days after
the date of the acquisition of control shares. If the acquiring person's control
shares are accorded voting rights and represent a majority or more of all voting
power, shareholders who do not vote in favor of the restoration of such voting
rights will have the right to receive the appraised "fair value" of their
shares, which may not be less than the highest price paid per share by the
acquiring person for the control shares.
We are also subject to the Oregon Business Combination Act, which generally
provides that in the event a person or entity acquires 15% or more of our voting
stock, we and such person or entity, or any affiliated entity, may not engage in
the following business combination transactions for a period of three years
following the date the person became acquired 15% or more of the voting stock:
-- a merger or plan of share exchange;
-- any sale, lease, mortgage or other disposition of the assets of the
corporation where the assets have an aggregate market value equal to
10% or more of the aggregate market value of our assets or
outstanding capital stock; and
-- transactions that result in the issuance of our capital stock to the
shareholder that acquired 15% or more of the voting stock
These restrictions do not apply if:
-- the shareholder that acquired 15% or more of the voting stock, as a
result of such acquisition, owns at least 85% of our outstanding
voting stock disregarding shares owned by directors who are also
officers and certain employee benefit plans;
-- the Board of Directors approves the share acquisition or business
combination before the shareholder acquired 15% or more of our voting
stock; or
-- the Board of Directors and the holders of at least two-thirds of our
outstanding voting stock, disregarding shares owned by the Interested
Shareholder, approve the transaction after the shareholder acquires
15% or more of our voting stock.
The Oregon Control Share Act and the Oregon Business Combination Act will
have the effect of encouraging any potential acquiror to negotiate with our
Board of Directors and will also discourage potential acquirors unwilling to
comply with the provisions of these laws. An Oregon corporation may provide in
its articles of incorporation or bylaws that the laws described above do not
apply to its shares. We have not adopted such a provision and do not currently
intend to do so. These laws may make us less attractive for takeover, and thus
shareholders may not benefit from a rise in the price of our Class A common
stock that a takeover could cause.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As allowed by the Oregon Business Corporation Act, our Articles of
Incorporation provide that the liability of our directors for monetary damages
will be eliminated to the fullest extent permissible under Oregon law. This is
intended to eliminate the personal liability of a director for monetary damages
in an action brought by or in the right of Lithia for breach of a director's
duties to us or our shareholders except for liability:
-- for any breach of the director's duty of loyalty to us or our
shareholders;
-- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
-- for any unlawful distribution to shareholders; or
-- for any transaction from which the director derived an improper
personal benefit.
46
This provision does not limit or eliminate our rights or any shareholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of a director's duty of care. This provision also does not
affect the director's responsibilities under any other laws, such as the federal
or state securities or environmental laws.
Our Articles of Incorporation and the Bylaws also provide that we shall
indemnify, to the fullest extent permitted under Oregon law, any person who has
been made, or is threatened to be made, a party to an action, suit or legal
proceeding by reason of the fact that the person is or was a director or officer
of ours. Our Articles provide that we shall indemnify directors and officers
against certain liabilities that may arise by reason of their status or service
as a director or officer and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
TRANSFER AGENT
The transfer agent and registrar for the Class A common stock is
ComputerShare Trust Company, Lakewood, Colorado.
47
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated and Stephens Inc. are acting as
representatives, have severally agreed to purchase, and we and the selling
stockholders have agreed to sell to them, severally, the number of shares of
Class A common stock set forth opposite their names below:
NUMBER OF
NAME SHARES
------------------------------------------------------------ ---------
Morgan Stanley & Co. Incorporated...........................
Stephens Inc. ..............................................
---------
Total............................................. 5,000,000
=========
The underwriters are offering the shares of Class A common stock subject to
their acceptance of the shares from us and the selling stockholders and subject
to prior sale. The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the shares of common
stock offered by this prospectus are subject to the approval of legal matters by
their counsel and to other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered by this prospectus if any
such shares are taken. However, the underwriters are not required to take or pay
for the shares covered by the underwriters' over-allotment option described
below.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price listed on the
cover page of this prospectus and part to certain dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. No underwriter or dealer may reallow a concession. After the
initial offering of the shares of Class A common stock, the offering price and
other selling terms may from time to time be varied by the representatives.
We and certain other selling stockholders have granted to the underwriters
an option, exercisable for 30 days from the date of this prospectus, to purchase
up to an aggregate of 750,000 additional shares of Class A common stock at the
public offering price set forth on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of Class A common stock offered by
this prospectus. To the extent the option is exercised, each underwriter will
become obligated, subject to certain conditions, to purchase about the same
percentage of the additional shares of Class A common stock as the number listed
next to the underwriter's name in the preceding table bears to the total number
of shares of Class A common stock listed next to the names of all underwriters
in the preceding table. If the underwriters' option is exercised in full, the
total price to the public would be $ , the total underwriters'
discounts and commissions would be $ , total proceeds to us would be
$ and total proceeds to the selling stockholders would be $ .
The underwriting discounts and commissions were determined by negotiations
among us, the selling stockholders and the representatives and are a percentage
of the offering price to the public. The primary factors considered in
determining the discounts and commissions were the size of the offering, the
nature of the securities offered and the discounts and commissions charged in
comparable transactions. The estimated offering expenses payable by us, in
addition to the underwriting discounts and commissions, are approximately
, which includes legal, consulting, accounting and printing costs and
various other fees associated with registering and listing the Class A common
stock.
48
Each of us, the selling stockholders, our directors, executive officers and
certain other stockholders have agreed that, without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the underwriters, we will not,
during the period ending 180 days after the date of this prospectus:
-- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend, or otherwise transfer or dispose
of directly or indirectly, any shares of Class A common stock or any
securities convertible into or exercisable or exchangeable for Class
A common stock; or
-- enter into any swap or other arrangement that transfers to another,
in whole or in part, any of the economic consequences of ownership of
the Class A common stock;
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply to:
-- the sale of shares to the underwriters;
-- the issuance by us of shares of Class A common stock upon the
exercise of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the underwriters
have been advised in writing;
-- the grant or exercise of options to purchase Class A common stock
under our employee benefit plans; or
-- transactions by any person other than us relating to shares of Class
A common stock or other securities acquired in open market
transactions after the completion of the offering of the shares.
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters may
sell more shares than they are obligated to purchase under the underwriting
agreement, creating a short position. A short sale is covered if the short
position is no greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters can close out a
covered short sale by exercising the over-allotment option or purchasing shares
in the open market. In determining the source of shares to close out a covered
short sale, the underwriters will consider, among other things, the open market
price of shares compared to the price available under the over-allotment option.
The underwriters may also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the Class A common stock in the open market
after pricing that could adversely affect investors who purchase in the
offering. As an additional means of facilitating the offering, the underwriters
may bid for, and purchase, shares of Class A common stock in the open market to
stabilize the price of the Class A common stock. The underwriting syndicate may
also reclaim selling concessions allowed to an underwriter or a dealer for
distributing the Class A common stock in the offering, if the syndicate
repurchases previously distributed Class A common stock to cover syndicate short
positions or to stabilize the price of the Class A common stock. These
activities may raise or maintain the market price of the Class A common stock
above independent market levels or prevent or retard a decline in the market
price of the Class A common stock. The underwriters are not required to engage
in these activities, and may end any of these activities at any time.
We, the selling stockholders and the underwriters have agreed to indemnify
each other against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of common stock we are offering by this
prospectus will be passed upon for us by Foster Pepper & Shefelman LLP,
Portland, Oregon. As of January 17, 2002, lawyers of Foster Pepper & Shefelman
LLP owned approximately 66,000 shares of our Class A common stock. Davis Polk &
Wardwell, Menlo Park, California, represents the underwriters.
49
EXPERTS
Our consolidated financial statements as of December 31, 1999 and 2000, and
for each of the three years in the period ended December 31, 2000, have been
included or incorporated by reference herein and in the registration statement
in reliance on the report of KPMG LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission, or SEC. You may read and copy any document we file with the SEC at
its public reference facility at 450 Fifth Street, N.W., Washington, D.C. 20549.
You can request copies of these documents by writing to the SEC and paying a fee
for the copying costs. Please call the SEC at 1-800-SEC-0330 for further
information regarding its public facilities. Our SEC filings are also available
to the public from the SEC's web site at http://www.sec.gov. In addition, you
can read and copy our SEC filings at the office of the National Association of
Securities Dealers, Inc. at 1735 K Street, Washington, D.C. 20006.
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to previously filed documents. The information incorporated by
reference in this prospectus is considered to be part of this prospectus, and
information that we file later with the SEC will automatically update and
supersede this information. We incorporate by reference the documents listed
below and any future filings made with the SEC under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, until our offering is
completed:
-- Our Annual Report on Form 10-K for the fiscal year ended December 31,
2000, as amended on Form 10-K/A on January 17, 2002;
-- Our Quarterly Reports on Form 10-Q for the quarters ended September
30, 2001, June 30, 2001 and March 31, 2001;
-- The description of our capital stock in our Registration Statement on
Form S-1 filed on March 6, 1998 as amended on April 28, 1998; and
-- Our current reports on Form 8-K as filed on August 3, 2001 (Item 7
only), July 25, 2001 (Item 7 only) and June 11, 2001.
You may request a copy of all of the information incorporated by reference
at no cost, by writing or calling us at:
Lithia Motors, Inc.
Attention: Dan Retzlaff, Investor Relations
360 East Jackson Street
Medford, OR 97501
(541) 776-6819
50
LITHIA MOTORS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Stockholders'
Equity.................................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Lithia Motors, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lithia
Motors, Inc. and Subsidiaries as of December 31, 1999 and 2000, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2000.
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 auditing standards generally
accepted in the United States of America. 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, 1999 and 2000, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Portland, Oregon
February 9, 2001
F-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------- SEPTEMBER 30,
1999 2000 2001
-------- -------- -------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 30,364 $ 38,789 $ 43,508
Trade receivables, net of allowance for doubtful accounts
of $851, $346 and $505.................................. 25,683 32,273 32,214
Notes receivable, current portion, net of allowance for
doubtful accounts of $677, $988 and $907................ 2,777 1,933 1,388
Inventories, net.......................................... 268,281 314,290 309,461
Vehicles leased to others, current portion................ 3,000 4,961 5,597
Prepaid expenses and other................................ 3,815 4,276 2,641
Deferred income taxes..................................... 724 -- 306
-------- -------- --------
Total current assets............................... 334,644 396,522 395,115
Land and buildings, net of accumulated depreciation of $646,
$1,261 and $1,910......................................... 31,301 60,788 71,380
Equipment and other, net of accumulated depreciation of
$5,037, $7,173 and $9,173................................. 21,067 29,452 32,647
Notes receivable, less current portion...................... 4,095 1,485 615
Vehicles leased to others, less current portion............. 2,808 2,962 2,813
Goodwill, net of accumulated amortization of $3,073, $6,219
and $8,872................................................ 110,677 133,871 151,117
Other non-current Assets, net of accumulated amortization of
$143, $182 and $244....................................... 1,841 2,923 3,692
-------- -------- --------
Total assets....................................... $506,433 $628,003 $657,379
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Flooring notes payable.................................... $208,403 $255,137 $242,705
Current maturities of long-term debt...................... 7,039 5,257 9,334
Current portion of capital leases......................... 93 85 18
Trade payables............................................ 11,873 13,651 16,944
Payable to related party.................................. 9,000 -- --
Accrued liabilities....................................... 23,237 22,086 36,849
Deferred income taxes..................................... -- 1,389 --
-------- -------- --------
Total current liabilities.......................... 259,645 297,605 305,850
Used vehicle flooring facility.............................. 35,500 59,000 60,000
Real estate debt, less current maturities................... 18,963 28,898 32,218
Other long-term debt, less current maturities............... 19,252 43,566 41,088
Long-term capital lease obligation, less current
maturities................................................ 196 122 20
Deferred revenue............................................ 2,262 1,993 1,610
Other long-term liabilities................................. 5,456 6,900 11,413
Deferred income taxes....................................... 9,521 8,144 8,656
-------- -------- --------
Total liabilities.................................. 350,795 446,228 460,855
-------- -------- --------
Stockholders' Equity:
Preferred stock--no par value; authorized 15,000 shares;
15 shares designated Series M Preferred; issued and
outstanding 10.4, 14.9 and 9.7 shares................... 6,216 8,915 5,806
Class A common stock--no par value; authorized 100,000
shares; issued and outstanding 7,824, 8,412 and 8,802
shares.................................................. 102,333 108,565 113,014
Class B common stock authorized 25,000 shares; issued and
outstanding 4,087 shares................................ 508 508 508
Additional paid-in capital................................ 7,428 306 456
Accumulated other comprehensive income.................... -- 15 (2,348)
Retained earnings......................................... 39,153 63,466 79,088
-------- -------- --------
Total stockholders' equity......................... 155,638 181,775 196,524
-------- -------- --------
Total liabilities and stockholders' equity......... $506,433 $628,003 $657,379
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ------------------------
1998 1999 2000 2000 2001
-------- ---------- ---------- ---------- ----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
New vehicle sales........... $388,431 $ 673,339 $ 898,016 $ 683,217 $ 701,095
Used vehicle sales.......... 220,544 375,562 480,846 364,935 428,777
Service, body and parts..... 72,216 120,722 164,002 121,266 138,540
Other revenues.............. 33,549 73,036 115,747 87,102 85,107
-------- ---------- ---------- ---------- ----------
Total revenues...... 714,740 1,242,659 1,658,611 1,256,520 1,353,519
Cost of sales................. 599,379 1,043,373 1,391,042 1,055,552 1,129,544
-------- ---------- ---------- ---------- ----------
Gross profit.................. 115,361 199,286 267,569 200,968 223,975
Selling, general and
administrative.............. 85,188 146,381 195,500 146,770 173,517
Depreciation--buildings....... 410 366 994 430 948
Depreciation--equipment and
other....................... 2,132 3,274 3,425 2,808 3,056
Amortization.................. 927 1,933 3,186 2,301 2,809
-------- ---------- ---------- ---------- ----------
Income from operations...... 26,704 47,332 64,464 48,659 43,645
Other income (expense):
Flooring interest expense... (7,108) (11,105) (17,728) (13,894) (11,877)
Other interest expense...... (2,735) (4,250) (7,917) (4,928) (5,953)
Other income (expense),
net...................... 921 74 716 884 (365)
-------- ---------- ---------- ---------- ----------
(8,922) (15,281) (24,929) (17,938) (18,195)
-------- ---------- ---------- ---------- ----------
Income before income taxes.... 17,782 32,051 39,535 30,721 25,450
Income tax expense............ (6,993) (12,877) (15,222) (12,040) (9,828)
-------- ---------- ---------- ---------- ----------
Net income.................... $ 10,789 $ 19,174 $ 24,313 $ 18,681 $ 15,622
======== ========== ========== ========== ==========
Basic net income per share.... $ 1.18 $ 1.67 $ 1.78 $ 1.37 $ 1.16
======== ========== ========== ========== ==========
Shares used in basic net
income per share............ 9,147 11,506 13,652 13,589 13,515
======== ========== ========== ========== ==========
Diluted net income per
share....................... $ 1.14 $ 1.60 $ 1.76 $ 1.36 $ 1.14
======== ========== ========== ========== ==========
Shares used in diluted net
income per share............ 9,470 11,998 13,804 13,746 13,754
======== ========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
F-4
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 (UNAUDITED)
ACCUMULATED
OTHER
COMMON STOCK
SERIES M -----------------------------------------
PREFERRED STOCK CLASS A CLASS B ADDITIONAL COMPRE-
---------------- -------------------- ------------------ PAID IN HENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME
------ ------- --------- -------- --------- ------ ---------- -----------
(DOLLARS IN THOUSANDS)
BALANCE AT DECEMBER 31, 1997....... -- $ -- 2,925,550 $ 28,117 4,110,000 $511 $ 59 $ --
Net income......................... -- -- -- -- -- -- -- --
Issuance of Class A Common Stock,
net of offering expenses of
$594............................. -- -- 3,150,000 42,498 -- -- -- --
Compensation for stock option
issuances........................ -- -- -- -- -- -- 78 --
Tax benefit of disqualifying
dispositions..................... -- -- -- -- -- -- 13 --
Issuance of Class A Common Stock in
connection with acquisition...... -- -- 12,850 125 -- -- -- --
Issuance of stock in connection
with employee stock plans........ -- -- 16,837 131 -- -- -- --
------ ------- --------- -------- --------- ---- ------- -------
BALANCE AT DECEMBER 31, 1998....... -- -- 6,105,237 70,871 4,110,000 511 150 --
Net income......................... -- -- -- -- -- -- -- --
Issuance of Class A Common Stock in
connection with acquisitions..... -- -- 1,611,173 30,638 -- -- 4,500 --
Issuance of stock in connection
with employee stock plans........ -- -- 85,053 821 -- -- -- --
Compensation for stock option
issuances........................ -- -- -- -- -- -- 78 --
Conversion of Class B Common Stock
into Class A Common Stock........ -- -- 23,000 3 (23,000) (3) -- --
Issuance of Series M Preferred
Stock in connection with
acquisition...................... 10,360 6,216 -- -- -- -- 2,700 --
------ ------- --------- -------- --------- ---- ------- -------
BALANCE AT DECEMBER 31, 1999....... 10,360 6,216 7,824,463 102,333 4,087,000 508 7,428 --
Comprehensive income:
Net income....................... -- -- -- -- -- -- -- --
Unrealized gain on investments... -- -- -- -- -- -- -- 15
Total comprehensive
income..................
Issuance of stock in connection
with acquisitions................ 4,499 2,699 303,542 4,500 -- -- (7,200) --
Issuance of stock in connection
with employee stock plans........ -- -- 324,082 2,213 -- -- -- --
Repurchase of Class A Common
Stock............................ -- -- (40,000) (481) -- -- -- --
Compensation for stock option
issuances........................ -- -- -- -- -- -- 78 --
------ ------- --------- -------- --------- ---- ------- -------
BALANCE AT DECEMBER 31, 2000....... 14,859 8,915 8,412,087 108,565 4,087,000 508 306 15
Comprehensive income:
Net income....................... -- -- -- -- -- -- -- --
Unrealized gain on investments,
net............................ -- -- -- -- -- -- -- (15)
Cash flow hedges:
Cumulative effect of adoption
of SFAS 133, net of tax
effect of $594............... -- -- -- -- -- -- -- (948)
Net derivative losses, net of
tax effect of $1,181......... -- -- -- -- -- -- -- (1,884)
Reclassification adjustment,
net of tax effect of
$(305)....................... -- -- -- -- -- -- -- 484
Total comprehensive
income..................
Issuance of stock in connection
with employee stock plans........ -- -- 124,742 1,340 -- -- -- --
Conversion of Series M Preferred
Stock............................ (5,183) (3,109) 265,247 3,109 -- -- (16) --
Compensation for stock option
issuances........................ -- -- -- -- -- -- 166 --
------ ------- --------- -------- --------- ---- ------- -------
BALANCE AT SEPTEMBER 30, 2001
(UNAUDITED)...................... 9,676 $5,806 8,802,076 $113,014 4,087,000 $508 $ 456 $(2,348)
====== ======= ========= ======== ========= ==== ======= =======
TOTAL
RETAINED STOCKHOLDERS'
EARNINGS EQUITY
-------- -------------
(DOLLARS IN THOUSANDS)
BALANCE AT DECEMBER 31, 1997....... $ 9,190 $ 37,877
Net income......................... 10,789 10,789
Issuance of Class A Common Stock,
net of offering expenses of
$594............................. -- 42,498
Compensation for stock option
issuances........................ -- 78
Tax benefit of disqualifying
dispositions..................... -- 13
Issuance of Class A Common Stock in
connection with acquisition...... -- 125
Issuance of stock in connection
with employee stock plans........ -- 131
------- --------
BALANCE AT DECEMBER 31, 1998....... 19,979 91,511
Net income......................... 19,174 19,174
Issuance of Class A Common Stock in
connection with acquisitions..... -- 35,138
Issuance of stock in connection
with employee stock plans........ -- 821
Compensation for stock option
issuances........................ -- 78
Conversion of Class B Common Stock
into Class A Common Stock........ -- --
Issuance of Series M Preferred
Stock in connection with
acquisition...................... -- 8,916
------- --------
BALANCE AT DECEMBER 31, 1999....... 39,153 155,638
Comprehensive income:
Net income....................... 24,313 24,313
Unrealized gain on investments... -- 15
--------
Total comprehensive
income.................. 24,328
Issuance of stock in connection
with acquisitions................ -- (1)
Issuance of stock in connection
with employee stock plans........ -- 2,213
Repurchase of Class A Common
Stock............................ -- (481)
Compensation for stock option
issuances........................ -- 78
------- --------
BALANCE AT DECEMBER 31, 2000....... 63,466 181,775
Comprehensive income:
Net income....................... 15,622 15,622
Unrealized gain on investments,
net............................ -- (15)
Cash flow hedges:
Cumulative effect of adoption
of SFAS 133, net of tax
effect of $594............... -- (948)
Net derivative losses, net of
tax effect of $1,181......... -- (1,884)
Reclassification adjustment,
net of tax effect of
$(305)....................... -- 484
--------
Total comprehensive
income.................. 13,259
Issuance of stock in connection
with employee stock plans........ -- 1,340
Conversion of Series M Preferred
Stock............................ -- (16)
Compensation for stock option
issuances........................ -- 166
------- --------
BALANCE AT SEPTEMBER 30, 2001
(UNAUDITED)...................... $79,088 $196,524
======= ========
See accompanying notes to consolidated financial statements.
F-5
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1998 1999 2000 2000 2001
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 10,789 $ 19,174 $ 24,313 $ 18,681 $ 15,622
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 3,469 5,573 7,605 5,539 6,813
Compensation related to stock option issuances.......... 78 78 78 59 166
(Gain) loss on sale of assets........................... 30 (4) 55 53 46
(Gain) loss on sale of vehicles leased to others........ 33 253 13 88 (14)
Deferred income taxes................................... 565 (1,673) 196 (422) 287
Equity in income of affiliate........................... (7) (61) (30) (28) 96
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net....... (6,714) 2,940 (3,701) (8,313) 59
Inventories........................................... (17,614) (20,094) 1,814 18,978 23,238
Prepaid expenses and other............................ (1,614) 845 (391) 1,236 1,714
Other noncurrent assets............................... 204 (378) (1,426) (278) (942)
Increase (decrease), net of effect of acquisitions:
Floorplan notes payable............................... 21,425 16,012 7,083 (14,549) (24,618)
Trade payables........................................ (2,759) (13,570) 814 1,417 3,293
Accrued liabilities................................... 2,500 4,492 (1,368) 1,910 10,940
Other liabilities..................................... (1,039) 8,794 1,232 1,193 2,657
-------- -------- -------- -------- --------
Net cash provided by operating activities........... 9,346 22,381 36,287 25,564 39,357
Cash flows from investing activities:
Notes receivable issued................................... (639) (806) (734) (523) (567)
Principal payments received on notes receivable........... 3,456 6,977 4,197 3,398 1,982
Capital expenditures:
Maintenance............................................. (797) (1,812) (3,599) (2,345) (3,186)
Financeable real estate and other....................... (3,137) (12,774) (22,384) (18,772) (15,079)
Proceeds from sale of assets.............................. 223 1,779 1,140 1,035 4,797
Proceeds from sale of vehicles leased to others........... 8,481 7,805 6,597 5,247 3,397
Expenditures for vehicles leased to others................ (9,322) (8,102) (9,701) (8,037) (4,703)
Cash paid for acquisitions, net of cash acquired.......... (36,531) (35,020) (56,660) (31,187) (29,952)
Cash from sale of franchises.............................. -- -- 1,287 1,287 1,541
Distribution from affiliate............................... -- 1,268 380 379 --
-------- -------- -------- -------- --------
Net cash used in investing activities............... (38,266) (40,685) (79,477) (49,518) (41,770)
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit............ (15,500) 31,380 54,120 47,620 9,610
Payments on capital lease obligations..................... -- (1,018) (107) (71) (111)
Principal payments on long-term debt...................... (39,083) (13,175) (13,560) (12,050) (4,328)
Proceeds from issuance of long-term debt.................. 43,287 9,781 9,430 9,261 637
Repurchase of common stock................................ -- -- (481) (443) --
Proceeds from issuance of common stock.................... 42,641 821 2,213 1,793 1,324
-------- -------- -------- -------- --------
Net cash provided by financing activities........... 31,345 27,789 51,615 46,110 7,132
-------- -------- -------- -------- --------
Increase in cash and cash equivalents....................... 2,425 9,485 8,425 22,156 4,719
Cash and cash equivalents:
Beginning of period....................................... 18,454 20,879 30,364 30,364 38,789
-------- -------- -------- -------- --------
End of period............................................. $ 20,879 $ 30,364 $ 38,789 $ 52,520 $ 43,508
======== ======== ======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................. $ 9,728 $ 15,330 $ 25,580 $ 19,047 $ 18,575
Cash paid during the period for income taxes.............. 6,482 11,469 15,266 9,896 3,231
Supplemental schedule of noncash investing and financing
activities:
Stock issued in connection with acquisitions.............. $ 125 $ 44,053 $ -- $ -- $ --
Debt assumed/issued in connection with acquisitions....... 16,610 5,657 5,978 -- --
Termination of capital lease.............................. -- 2,431 -- -- --
See accompanying notes to consolidated financial statements.
F-6
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
SEPTEMBER 30, 2000 AND 2001
(INFORMATION FOR THE NINE-MONTH PERIODS ENDING SEPTEMBER 30, 2000 AND 2001 IS
UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
The information as of September 30, 2001 and for the nine months ended
September 30, 2000 and 2001 is unaudited and has been prepared on the same basis
as our annual consolidated financial statements. In the opinion of management,
this quarterly information reflects all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented. The results of operations for the nine month period ended
September 30, 2001 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 2001, or any future periods.
Selected unaudited quarterly financial data for the two years ended
December 31, 2000 and for the nine months ended September 30, 2001 is included
elsewhere in this prospectus under the heading "Selected Consolidated Financial
Data."
Lithia is a leading operator of automotive franchises and retailer of new
and used vehicles and services through a well developed franchise system with
its automotive manufacturer partners. As of December 31, 2000, we offered 26
brands of new vehicles, through 111 franchises in 52 locations in the western
United States and over the Internet. At December 31, 2000, we operated 14
dealerships in California, 14 in Oregon, 7 in Washington, 6 in Colorado, 5 in
Nevada, 4 in Idaho and 2 in South Dakota. As of September 30, 2001, we had 119
franchises in 61 locations. 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.
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.
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.
INVENTORIES
The Company accounts for inventories using the specific identification
method for vehicles and the first-in first-out (FIFO) method for parts
(collectively, the FIFO method).
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are being depreciated
over their estimated useful lives, principally on the straight-line basis. The
range of estimated useful lives is as follows:
Building and improvements................................... 40 years
Service equipment........................................... 5 to 10 years
Furniture, signs and fixtures............................... 5 to 10 years
F-7
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 shorter
of the useful life or the term of the lease and is included in depreciation
expense.
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 $481 and $131 at December 31, 1999 and 2000,
respectively.
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.
INCOME TAXES
Income taxes are accounted for under the asset and liability method as
prescribed by Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes." Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
COMPUTATION OF PER SHARE AMOUNTS
Basic earnings per share (EPS) and diluted EPS are computed using the
methods prescribed by Statement of Financial Accounting Standards No. 128,
Earnings per Share (SFAS 128). Based on an April 2001 Financial Accounting
Standards Board announcement, the Company has restated its basic EPS for
F-8
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1999 and 2000 to include its Series M Preferred Stock as a common stock
equivalent on an as if converted basis. Following is a reconciliation of basic
EPS and diluted EPS:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1998 1999 2000
---------------------------- ---------------------------- ----------------------------
PER SHARE PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------- ------ --------- ------- ------ ---------
BASIC EPS
Net income available to
Common Stockholders..... $10,789 9,147 $1.18 $19,174 11,506 $1.67 $24,313 13,652 $1.78
===== ===== =====
DILUTED EPS
Dilutive stock options.... -- 323 -- 364 -- 152
Contingent issuances.... -- -- -- 128 -- --
------- ----- ------- ------ ------- ------
Net income available to
Common Stockholders..... $10,789 9,470 $1.14 $19,174 11,998 $1.60 $24,313 13,804 $1.76
===== ===== =====
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------
2000 2001
---------------------------- ----------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
------- ------ --------- ------- ------ ---------
BASIC EPS
Net income available to Common Stockholders..... $18,681 13,589 $1.37 $15,622 13,515 $1.16
===== =====
DILUTED EPS
Dilutive stock options.......................... -- 157 -- 239
------- ----- ------- ------
Net income available to Common Stockholders..... $18,681 13,746 $1.36 $15,622 13,754 $1.14
===== =====
108, 34 and 683 shares issuable pursuant to stock options have not been
included in the above calculations for 1998, 1999 and 2000, respectively, since
they would have been antidilutive, or "not in the money." Shares excluded for
the nine months ended September 30, 2000 and 2001 are 711 and 1,110,
respectively.
ADVERTISING
The Company expenses production and other costs of advertising as incurred.
Advertising expense was $5,749, $11,189 and $15,332 for the years ended December
31, 1998, 1999 and 2000, 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.
Receivables from all manufacturers accounted for 36.4%
F-9
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of total accounts receivable at December 31, 2000. Included in the 36.4% are two
manufacturers who accounted for 12.5% and 10.3%, respectively, of the total
accounts receivable balance at December 31, 2000.
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.
FINANCIAL INSTRUMENTS AND MARKET RISKS
The carrying amount of cash equivalents, trade receivables, trade payables,
accrued liabilities and short term borrowings approximates 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.
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.
Lithia has variable rate floor plan notes payable and other credit line
borrowings that subject it to market risk exposure. At December 31, 2000 and
September 30, 2001, Lithia had $349,637 and $346,815, respectively, outstanding
under such facilities at interest rates ranging from 7.90% to 9.15% per annum at
December 31, 2000 and 4.09% to 5.34% per annum at September 30, 2001. An
increase or decrease in the interest rates would affect interest expense for the
period accordingly.
Lithia also subjects itself to credit risk and market risk by entering into
interest rate swaps. See Note 5. The Company minimizes the credit or repayment
risk in derivative instruments by entering into transactions with high quality
institutions, whose credit rating is higher than Aa.
DERIVATIVE FINANCIAL INSTRUMENTS
Lithia enters into interest rate swap agreements to reduce its exposure to
market risks from changing interest rates. Through December 31, 2000, the
difference between interest paid and interest received, which may change as
market interest rates change, is accrued and recognized as interest expense or
interest income. If a swap is terminated prior to its maturity, the gain or loss
is recognized over the remaining original life of the swap if the item hedged
remains outstanding, or immediately if the item hedged does not remain
outstanding. If the swap is not terminated prior to maturity, but the underlying
hedged item is no longer outstanding, the interest rate swap is marked to
market, and any unrealized gain or loss is recognized immediately.
In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an
amendment to Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" (collectively "the
standards"). The standards require that all derivative instruments (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value, and
that changes in the derivatives fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS 133, 137 and 138 are
effective for fiscal years beginning after June 15, 2000. Lithia adopted the
standards effective January 1, 2001. On that date, in accordance with the
transition provisions of SFAS 133, the Company recorded a liability of $1.5
million and a corresponding, net-of-tax, cumulative-effect-type adjustment of
$0.9 million in accumu-
F-10
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
lated other comprehensive income to recognize, at fair value, all derivatives
that are designated as cash-flow hedging instruments.
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, down payment has been received and funding has been
approved from the lending agent. 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 charge-backs and sales commissions. 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 administration fees and anticipated cancellations,
are classified as other operating revenue in the accompanying consolidated
statements of operations.
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 store 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 store
and provide the auto maker approval rights over changes in store management and
ownership. The automakers are also entitled to terminate the Dealer Agreements
if the store 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 stores.
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). 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.
F-11
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, auto
retailing.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the current presentation.
2. INVENTORIES AND RELATED NOTES PAYABLE
The new and used vehicle inventory, collateralizing related notes payable,
and other inventory were as follows:
DECEMBER 31,
------------------------------------------- SEPTEMBER 30,
1999 2000 2001
-------------------- -------------------- --------------------
INVENTORY NOTES INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE COST PAYABLE
--------- -------- --------- -------- --------- --------
New and program vehicles.......... $198,812 $208,403 $239,185 $255,137 $230,778 $242,705
Used vehicles..................... 56,292 35,500 58,136 59,000 61,355 60,000
Parts and accessories............. 13,177 -- 16,969 -- 17,328 --
-------- -------- -------- -------- -------- --------
Total inventories............ $268,281 $243,903 $314,290 $314,137 $309,461 $302,705
======== ======== ======== ======== ======== ========
The inventory balance is generally reduced by manufacturer's purchase
discounts. Such reductions are 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 new vehicle 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 $150,000 line of credit. The
line of credit expires in the fourth quarter of 2003.
F-12
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------
1999 2000
------- -------
Buildings and improvements.................................. $15,427 $28,365
Service equipment........................................... 6,953 8,522
Furniture, signs and fixtures............................... 19,151 24,857
------- -------
41,531 61,744
Less accumulated depreciation............................... (5,683) (8,434)
------- -------
35,848 53,310
Land........................................................ 12,872 28,659
Construction in progress, buildings......................... 3,648 5,025
Construction in progress, other............................. -- 3,246
------- -------
$52,368 $90,240
======= =======
4. VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
DECEMBER 31,
------------------
1999 2000
------- -------
Vehicles leased to others................................... $ 6,696 $ 8,684
Less accumulated depreciation............................... (888) (761)
------- -------
5,808 7,923
Less current portion........................................ (3,000) (4,961)
------- -------
$ 2,808 $ 2,962
======= =======
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
that qualify as operating leases. Leases are cancelable at the option of the
lessee after providing 30 days written notice.
5. DERIVATIVE FINANCIAL INSTRUMENTS
In order to reduce the variability of interest payments, Lithia has fixed a
portion of its interest expense by utilizing interest rate swaps as follows:
-- Effective September 1, 2000, Lithia entered into a five year, $25,000
interest rate swap with U.S. Bank Dealer Commercial Services at a
fixed rate of 6.88% per annum.
-- Effective November 1, 2000 Lithia entered into a three year, $25,000
interest rate swap U.S. Bank Dealer Commercial Services at a fixed
rate of 6.47% per annum.
Lithia earns interest on both of the $25 million interest rate swaps at the
one month LIBOR rate adjusted on the first and sixteenth of every month and is
obligated to pay interest at the fixed rate set for each swap (6.88% or 6.47%
per annum) on the same amount. The difference between interest earned and the
interest obligation accrued is received or paid each month and is recorded in
the statement of operations as interest income or interest expense. The one
month LIBOR rate at December 31, 2000 and September 30, 2001 was 6.56% and 2.63%
per annum, respectively.
F-13
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The fair value of interest rate swap agreements and the amount of hedging
losses deferred on interest rate swaps was $1,542 and $3,800 at December 31,
2000 and September 30, 2001, respectively. Lithia did not have any hedging
contracts at December 31, 1999. As of December 31, 2000 and September 30, 2001,
approximately 76% and 77%, respectively, of Lithia's total debt outstanding was
subject to un-hedged variable rates of interest. As a result, recent interest
rate declines have resulted in a net reduction of Lithia's interest expense. The
Company intends to continue to gradually hedge its interest rate exposure if
market rates continue to decline.
6. 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,
-----------------
1999 2000
------- ------
Total minimum lease payments to be received................. $ 7,376 $3,681
Allowance for uncollectible notes and repossession losses... (209) (599)
------- ------
7,167 3,082
Unearned interest income.................................... (1,039) (405)
------- ------
$ 6,128 $2,677
======= ======
Future minimum lease payments to be received on the notes receivable after
December 31, 2000 are as follows:
Year ending December 31,
2001........................................................ $1,485
2002........................................................ 906
2003........................................................ 222
2004........................................................ 64
------
Total.................................................. $2,677
======
7. LINES OF CREDIT AND LONG-TERM DEBT
In December 2000, Lithia's existing credit facility with Ford Credit was
increased by $130,000 to a total of $580,000 and the expiration date was
extended to November 2003 with interest due monthly. The facility includes
$250,000 for new and program vehicle flooring, $150,000 for used vehicle
flooring, $130,000 for franchise acquisitions and $50,000 in mortgage financing.
Lithia also has the option to convert the acquisition line into a five-year term
loan.
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 stores.
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. Lithia was in compliance
with all such covenants at December 31, 2000 and September 30, 2001.
F-14
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In addition, U.S. Bank N.A. has extended a $27,500 revolving line of credit
for leased vehicles and equipment purchases.
The above facilities have variable interest rates, which ranged from 7.90%
to 9.15% per annum at December 31, 2000 and 4.09% to 5.34% per annum at
September 30, 2001. Amounts outstanding on the lines at December 31, 2000 and
September 30, 2001 were as follows (in thousands):
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
New and program vehicle lines......................... $255,137 $242,705
Used vehicle line..................................... 59,000 60,000
Acquisition line...................................... 8,000 8,000
Real estate lines..................................... -- 8,610
Equipment & leased vehicle line....................... 27,500 27,500
-------- --------
$349,637 $346,815
======== ========
Long-term debt consists of the following:
DECEMBER 31,
-------------------
1999 2000
------- --------
Equipment & lease vehicle line of credit.................... $ 4,880 $ 27,500
Acquisition line of credit.................................. 0 8,000
Used vehicle flooring line of credit........................ 35,500 59,000
Mortgages payable in monthly installments of $287, including
interest between 7.00% and 9.50%, maturing fully December
2019; secured by land and buildings....................... 19,893 30,571
Notes payable in monthly installments of $144 plus interest
calculated daily at LIBOR plus 2.20%, refinanced during
2000 as part of the equipment and lease vehicle line of
credit.................................................... 6,605 0
Notes payable in monthly installments of $80 plus interest
between 6.96% and 9.50%, maturing at various dates through
2004; secured by vehicles leased to others................ 4,514 1,819
Notes payable related to acquisitions, with interest rates
between 5.50% and 9.50%, maturing at various dates between
April 2001 and December 2010.............................. 9,342 9,831
Note payable in monthly installments of $3, including
interest at 10.25%, maturing fully August 2000............ 20 0
------- --------
80,754 136,721
Less current maturities..................................... (7,039) (5,257)
------- --------
$73,715 $131,464
======= ========
F-15
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The schedule of future principal payments on long-term debt after December
31, 2000 is as follows:
Year ending December 31,
2001.................................................... $ 5,257
2002.................................................... 36,059
2003.................................................... 71,837
2004.................................................... 1,531
2005.................................................... 6,588
Thereafter.............................................. 15,449
--------
Total principal payments........................... $136,721
========
8. STOCKHOLDERS' 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 stockholders on which the number of shares
of Class B Common Stock outstanding is less than 1% of the total number of
shares of Common Stock outstanding. Shares of Class B Common Stock may not be
transferred to third parties, except for transfers to certain family members and
in other limited circumstances.
Holders of Class A Common Stock are entitled to one vote for each share
held of record, and holders of Class B Common Stock are entitled to ten votes
for each share held of record. The Class A Common Stock and Class B Common Stock
vote together as a single class on all matters submitted to a vote of
stockholders.
In May 1998, the Company closed an offering of 3,151 newly issued shares of
its Class A Common Stock for net proceeds of $42,498. In 1999, the Company
authorized 15 shares of Series M, Redeemable, Convertible Preferred Stock
("Series M Preferred Stock"). In May 1999, in connection with the acquisition of
Moreland Automotive Group, the Company issued 10.4 shares of Series M Preferred
Stock. The Series M Preferred Stock votes with Class A Common Stock on an as if
converted basis. The Series M Preferred Stock is convertible into Class A Common
Stock at the option of the Company at any time and at the option of the holder
under limited circumstances. The Series M Preferred Stock is redeemable at the
option of the Company. The Series M Preferred Stock converts into Class A Common
Stock based on a formula that divides the average Class A Common Stock price for
a certain 15-day period into one thousand and then multiplies such amount by the
number of Series M Preferred Shares being converted. The Series M Preferred
Stock does not have a dividend preference, but participates in any dividends on
an as if converted basis. The Series M Preferred Stock has a $1 per share
liquidation preference.
In the first quarter of 2000, the Company issued 304 shares of Class A
Common Stock and 4.5 shares of Series M Preferred Stock in order to satisfy
contingent payout requirements related to the Moreland acquisition.
Effective June 4, 2001, the Company converted 5.2 shares of Series M 2002
Preferred Stock with an aggregate conversion price of $5,200 into an aggregate
of 265 shares of Class A Common Stock. Following this conversion, 5.2 shares of
Series M 2002 Preferred Stock and 4.5 shares of Series M 2003 Preferred Stock
remained outstanding.
F-16
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
Income tax expense for 1998, 1999 and 2000 was as follows:
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999 2000
------ ------- -------
Current:
Federal................................................ $5,387 $10,382 $12,705
State.................................................. 1,041 1,979 2,194
------ ------- -------
6,428 12,361 14,899
------ ------- -------
Deferred:
Federal................................................ 436 411 328
State.................................................. 129 105 (5)
------ ------- -------
565 516 323
------ ------- -------
Total............................................... $6,993 $12,877 $15,222
====== ======= =======
Individually significant components of the deferred tax assets and
liabilities are presented below:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Deferred tax assets:
Allowance and accruals.................................... $ 2,457 $ 2,164
Deferred revenue.......................................... 2,931 2,786
-------- --------
Total deferred tax assets.............................. 5,388 4,950
-------- --------
Deferred tax liabilities:
LIFO recapture and acquired LIFO inventories
differences............................................ (8,657) (7,555)
Employee benefit plans.................................... (625) (1,084)
Goodwill.................................................. (2,797) (4,544)
Property and equipment, principally due to differences in
depreciation........................................... (2,106) (1,300)
-------- --------
Total deferred tax liabilities......................... (14,185) (14,483)
-------- --------
Total.................................................. $ (8,797) $ (9,533)
======== ========
The reconciliation between amounts computed using the federal income tax
rate of 35% and the Company's income tax expense for 1998, 1999 and 2000 is
shown in the following tabulation.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
------ ------- -------
Computed "expected" tax expense.................... $6,224 $11,218 $13,837
State taxes, net of federal income tax benefit..... 751 1,311 1,464
Nondeductible goodwill............................. -- 261 443
Other.............................................. 18 87 (522)
------ ------- -------
Income tax expense................................. $6,993 $12,877 $15,222
====== ======= =======
F-17
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
RECOURSE PAPER
The Company is contingently liable to banks for recourse paper assumed at
the time of acquisition when the Company does a corporate purchase. Following
the acquisition, the Company does not enter into further recourse transactions.
The contingent liability at December 31, 1999 and 2000 was approximately $3,421
and $907, 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 $668 and $540 is reflected in the
Company's consolidated balance sheets as of December 31, 1999 and 2000,
respectively. The reserves were established as a purchase price adjustment as
the result of several acquisitions.
LEASES
Substantially all of the Company's operations are conducted in leased
facilities under noncancelable operating leases. These leases expire at various
dates through 2020. 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 Items 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, 2000 are as follows:
OPERATING CAPITAL
Year ending December 31, --------- -------
2001.................................................... $ 12,618 $ 99
2002.................................................... 12,039 76
2003.................................................... 11,230 54
2004.................................................... 10,897 0
2005.................................................... 10,495 0
Thereafter.............................................. 48,947 0
-------- ----
Total minimum lease payments............................ $106,226 229
========
Less amounts representing interest...................... (22)
----
Present value of future minimum lease payments.......... $207
====
Rental expense for all operating leases was $5,659, $9,639 and $13,757 for
the years ended December 31, 1998, 1999 and 2000, respectively.
CAPITAL COMMITMENTS
At December 31, 2000, the Company had capital commitments of approximately
$14,900 for the construction of six new store facilities, of which $14,200 is
anticipated to be incurred through the end of 2001 and the balance in 2002.
Approximately $2,700 has already been paid out of existing cash balances. The
Company expects to pay for the construction out of existing cash balances until
completion of the projects, at which time it anticipates securing long-term
financing for 90% to 100% of the amounts from third party lenders.
At September 30, 2001, the Company had capital commitments of approximately
$10,500, of which $6,400 is expected to be incurred through the end of 2001 and
the balance in 2002.
F-18
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
11. 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 the Company. Contributions of $285,
$591 and $166 were recognized for the years ended December 31, 1998, 1999 and
2000, respectively. Employees may contribute to the plan under certain
circumstances.
12. STOCK INCENTIVE PLANS
The Company's 1996 Stock Incentive Plan, as amended (the "1996 Plan"),
allows for the granting of up to 1,700 incentive and nonqualified stock options
to officers, key employees and consultants of the Company and its subsidiaries.
The Company's Non-Discretionary Stock Option Plan for Non-Employee Directors
(the "Directors' Plan") allows for the granting of 15 shares. The plans are
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 and at exercise prices as
determined by the Board. At December 31, 2000, 1,433 shares of Class A Common
Stock were reserved for issuance under the plans, of which 227 shares were
available for future grant. At the Annual Meeting of Shareholders held on May
17, 2001, the shareholders approved the adoption of the 2001 Stock Option Plan
(the "2001 Plan") and the reservation of 600 shares of the Company's Common
Stock for issuance thereunder. In conjunction with the adoption of the 2001
Plan, all shares available for grant under the 1996 Plan and the Directors' Plan
were canceled.
Activity under the plans is as follows:
SHARES SHARES WEIGHTED
AVAILABLE SUBJECT TO AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
--------- ---------- --------------
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
Additional shares reserved.................. 615 -- --
Options granted............................. (257) 257 17.84
Options canceled............................ 9 (9) 15.89
Options exercised........................... -- (35) 3.98
---- ----- ------
BALANCES, DECEMBER 31, 1999................. 862 761 9.84
Options granted............................. (708) 708 13.27
Options canceled............................ 73 (73) 14.05
Options exercised........................... -- (190) 3.20
---- ----- ------
BALANCES, DECEMBER 31, 2000................. 227 1,206 $12.65
==== ===== ======
F-19
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Board of Directors approved the issuance of non-qualified options
during 2000 to certain members of senior management at an exercise price of
$1.00 per share. These options were issued with five-year cliff vesting as a
means to encourage long-term employment from certain members of the senior
management group. Compensation expense, which is equal to the difference between
the market price and the exercise price, is recognized ratably in accordance
with the vesting schedules.
In 1998, the Board of Directors of the Company and the stockholders
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. In 2000, the stockholders approved an increase in the
total number of shares of Class A Common Stock reserved for issuance under the
Purchase Plan to 500 shares. 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 invest 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, 50 and 134 shares of the
Company's Class A Common Stock were issued under the Purchase Plan during 1998,
1999 and 2000, respectively, and 307 remained available for issuance at December
31, 2000.
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").
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 1999 2000
--------- --------- ---------
Risk-free interest rate.................... 5.50% 5.50% 6.50%
Expected dividend yield.................... 0.00% 0.00% 0.00%
Expected lives............................. 6.7 years 7.0 years 7.0 years
Expected volatility........................ 53.41% 49.91% 47.47%
Using the Black-Scholes methodology, the total value of options granted
during 1998, 1999 and 2000 was $1,119, $2,910 and $6,486, 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, 1999 and 2000 was $8.61, $9.17 and $7.79 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 1999 2000
------------------ ------------------ ------------------
AS PRO AS PRO AS PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- ------- -------- ------- -------- -------
Net income........................... $10,789 $10,227 $19,174 $17,965 $24,313 $22,028
Basic net income per share........... $ 1.18 $ 1.12 $ 1.67 $ 1.56 $ 1.78 $ 1.61
Diluted net income per share......... $ 1.14 $ 1.09 $ 1.60 $ 1.52 $ 1.76 $ 1.61
F-20
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock options outstanding at December 31,
2000:
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 12/31/00 LIFE (YEARS) PRICE AT 12/31/00 PRICE
-------------- ----------- ------------ -------- ----------- --------
$ 1.00 93 8.9 $ 1.00 18 $ 1.00
3.02 150 3.3 3.02 103 3.02
10.75 - 11.82 257 9.5 11.72 30 11.40
12.68 - 14.32 49 7.8 13.46 18 13.21
14.68 - 16.50 293 6.8 15.71 83 15.74
16.75 - 18.43 273 8.1 16.99 13 16.81
18.94 - 20.83 91 7.0 19.66 28 19.76
-------------- ----- --- ------ --- ------
$1.00 - 20.83.. 1,206 7.5 $12.65 293 $10.17
============== ===== === ====== === ======
At December 31, 1998 and 1999, 239 and 296 shares were exercisable at
weighted average exercise prices of $3.44 and $4.60, respectively.
13. RELATED PARTY TRANSACTIONS
Lithia Properties, LLC, owned certain of the real property on which the
Company's business is located. The Company owns a 20% interest in Lithia
Properties, LLC. The Company leased such facilities under various lease
agreements from Lithia Properties, LLC. Selling, general and administrative
expense includes rental expense of $1,464, $706 and $19 for the years ended
December 31, 1998, 1999 and 2000, respectively relating to these properties.
In June 1999, Lithia Properties, LLC completed its sale of certain real
estate holdings in the Southern Oregon region to Capital Automotive Real Estate
Investment Trust ("Capital"), an unrelated party, for $18,300. As a result of
this sale, the Company received a distribution for its portion of the realized
gain, totaling approximately $1,246, which is being realized ratably over the
12-year life of the new lease. The Company now leases such properties from
Capital for amounts that are not materially different from the lease amounts
under the previous lease agreements.
The Company provides management services to Lithia Properties, LLC. Other
income includes management fees of $12, $7 and $1 for the years ended December
31, 1998, 1999 and 2000, respectively.
During 1998, 1999 and 2000, Lithia Real Estate, Inc. paid Mark DeBoer
Construction, Inc. $314, $2,649 and $6,796, respectively, for remodeling certain
of the Company's facilities. These amounts included $281, $2,252 and $6,140,
respectively, paid for subcontractors and materials, $7, $171 and $32,
respectively for permits, licenses, travel and various miscellaneous fees, and
$26, $226 and $624, respectively, for contractor fees. The Company believes the
amount paid is fair in comparison with fees negotiated with independent third
parties.
In May 1999, the Company purchased certain stores owned by W. Douglas
Moreland for total consideration of approximately $66,000, at which time, Mr.
Moreland became a member of the Company's Board of Directors. During the normal
course of business, these stores paid $672 and $2,848 in 1999 and 2000,
respectively, to other companies owned by Mr. Moreland for vehicle purchases,
recourse paid to a financial lender and management fees. The Company also paid
rental expense of $1,589 and $3,207 in 1999 and 2000, respectively, to other
companies owned by Mr. Moreland.
F-21
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The terms of the acquisition agreement with Mr. Moreland provided for
additional consideration to be paid if the acquired entity results of operations
exceeded certain targeted levels in 1999. Targeted levels were set substantially
above the historical experience of the acquired entity at the time of
acquisition. Such additional consideration was paid in cash and with shares of
the Company's stock and was recorded when earned in the fourth quarter of 1999
as additional purchase price. Additional consideration totaled $18,000,
including $9,000 in cash, $4,500 in Class A Common Stock and $4,500 in stated
value Series M Restricted Preferred Stock with a fair value of $2,700.
14. ACQUISITIONS
The following acquisitions were made in the first nine months of 2001:
-- In January 2001, Lithia acquired the Johnson Chrysler/Jeep store in
Anchorage, Alaska. The store had estimated 2000 revenues of
approximately $35,000.
-- In February 2001, Lithia acquired two stores in Pocatello, Idaho with
the Honda, Dodge/Chrysler and Hyundai brands. The stores have
estimated 2000 revenues of approximately $48,000.
-- In July 2001, Lithia acquired Barton Cadillac in Spokane Washington.
The franchise was added to Lithia Camp Chevrolet.
-- In August 2001, Lithia acquired the Lanny Berg Chevrolet store in
Caldwell, Idaho. The store has estimated 2001 revenues of $22,000.
-- In September 2001, Lithia acquired Ted Tuffy Dodge in Sioux Falls,
South Dakota, which has estimated 2001 revenues of approximately
$35,000.
-- In September 2001, Lithia acquired Seattle BMW in Seattle,
Washington, which has estimated 2001 revenues of approximately
$50,000.
The above acquisitions were accounted for under the purchase method of
accounting. Pro forma results of operations are not materially different from
actual results of operations.
In addition to the above acquisitions, also in August 2001, Lithia
completed the construction of and opened Lithia Dodge of Anchorage.
The Company acquired eight stores during 2000, with total estimated 1999
revenues of approximately $254,000. None of acquisitions were individually
significant and all of them were accounted for as purchase transactions.
Significant acquisitions in 1998 and 1999 were as follows:
In October 1998, the Company acquired the net assets of Camp Automotive for
total consideration of $11,535, including $8,000 in cash and $3,535 of assumed
debt.
In May 1999, the Company acquired all of the stock of seven commonly
controlled stores constituting the Moreland Automotive Group ("Moreland") for
approximately $19,689 in cash (which is net of $16,007 of cash acquired), 1,273
shares of the Company's Class A Common Stock with a value of approximately
$24,100 at the time of issuance, and 10 shares of Lithia's newly created Series
M Preferred Stock with a value of approximately $6,200 at the time of issuance.
At closing, Moreland had approximately $18,200 of used vehicles available for
flooring under the Company's used vehicle line of credit, reducing the net
investment in the acquired stores by that amount to a total of $47,800. Based on
the Moreland stores achieving certain performance targets for 1999, additional
consideration totaling $18,000, including $9,000 in cash, $4,500 in Class A
Common Stock and $4,500 in stated value Series M Preferred Stock with a fair
value of $2,700 was paid and recorded as additional purchase price.
F-22
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unaudited pro forma results of operations including Camp Automotive, Inc.
and Moreland Automotive are as follows. The results of operations for other
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 1999
---------- ----------
Total revenues............................................ $1,157,345 $1,409,404
Net income................................................ 12,176 21,009
Basic earnings per share.................................. 1.17 1.69
Diluted earnings per share................................ 1.07 1.65
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. The 1998 pro
forma results of operations include bonuses paid by Moreland to its owners.
Excluding such bonuses, which would not have been paid under Lithia's ownership,
the acquisition would have been accretive to Lithia's 1998 earnings.
15. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that the purchase method of accounting be used
for all business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
We adopted the provisions of SFAS No. 141 on July 1, 2001, and SFAS No. 142
on January 1, 2002. Furthermore, goodwill and intangible assets determined to
have an indeterminable useful life acquired in a purchase business combination
completed after June 30, 2001 but before SFAS No. 142 was adopted in full, were
not amortized, but evaluated for impairment in accordance with the appropriate
pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired
in business combinations completed before July 1, 2001 continued to be amortized
and tested for impairment in accordance with the appropriate pre-SFAS No. 142
accounting requirements prior to the adoption of SFAS No. 142.
SFAS No. 141 requires, upon adoption of SFAS No. 142, that we evaluate our
existing intangible assets and goodwill that we acquired in prior purchase
business combinations, and make any necessary reclassifications in order to
conform with the new criteria in SFAS No. 141 for recognition apart from
goodwill. We do not anticipate reclassifying any intangibles to intangibles with
determinable useful lives. For intangible assets identified as having indefinite
useful lives, we are required to test them for impairment in accordance with the
provisions of SFAS No. 142 within the first interim period and recognize any
impairment losses as the cumulative effect of a change in accounting principle
in the first interim period. We do not anticipate incurring any impairment loss
charges upon adoption of SFAS No. 142.
The adoption of SFAS 141 did not have a significant impact on our financial
condition or results of operations. As of September 30, 2001, we expect a
reduction in annual amortization expense of approximately $3,700 in 2002 upon
adoption of SFAS No. 142.
F-23
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the costs and expenses, other
than underwriting discounts and commissions, incurred and to be incurred by us
in connection with the issuance and distribution of the securities registered
hereby. All amounts are estimates except the SEC registration fee, NASD filing
fee and NYSE listing fee.
AMOUNT
--------
SEC registration fee........................................ $ 10,496
NASD filing fee............................................. 11,908
NYSE listing fee............................................ 14,000
Printing and engraving fees and expenses.................... 75,000
Legal and consulting fees and expenses...................... 175,000
Accounting fees and expenses................................ 100,000
Trustee and transfer agent fees............................. 2,500
Miscellaneous............................................... 111,096
--------
Total............................................. $500,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Oregon Business Corporation Act (Oregon Revised Statutes Sections
60.387 to 60.414), a person who is made a party to a proceeding because such
person is or was an officer or director of a corporation may be indemnified by
the corporation against liability incurred by such person in connection with the
proceeding if (1) the person's conduct was in good faith and in a manner he or
she reasonably believed was in the corporation's best interest or at least not
opposed to its best interests and (2) if the proceeding was a criminal
proceeding, the Indemnitee had no reasonable cause to believe his or her conduct
was unlawful. Indemnification is not permitted if the person was adjudged liable
to the corporation in a proceeding by or in the right of the corporation, or if
the Indemnitee was adjudged liable on the basis that he or she improperly
received a personal benefit. Unless a company's Articles of Incorporation
provide otherwise, such indemnification is mandatory if the Indemnitee is wholly
successful on the merits or otherwise, or if ordered by a court of competent
jurisdiction.
The Oregon Business Corporation Act also provides that a company's Articles
of Incorporation may limit or eliminate the personal liability of a director to
the corporation or its shareholders for monetary damages for conduct as a
director, provided that no such provision shall eliminate the liability of a
director for (1) any breach of the directors' duty of loyalty to the corporation
or its shareholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (3) any unlawful
distribution; or (4) any transaction from which the director derived an improper
personal benefit.
Our Articles of Incorporation provide that we will indemnify our directors
and officers, to the fullest extent permissible under the Oregon Business
Corporation Act against all expense liability and loss (including attorney fees)
incurred or suffered by reason of service as a director or officer or is or was
serving at our request as a director, officer, partner, trustee, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise.
The effect of these provisions is to limit the liability of directors for
monetary damages, and to indemnify our directors and officers for all costs and
expenses for liability incurred by them in connection with any action, suit or
proceeding in which they may become involved by reason of their affiliation with
us, to the fullest extent permitted by law. These provisions do not limit our
rights or any shareholder's rights to seek non-monetary relief, and do not
affect a director's or officer's responsibilities under any other laws, such as
securities or environmental laws.
II-1
We have obtained a directors' and officers' liability insurance policy
insuring our directors and officers against certain losses resulting from
wrongful acts committed by them as our directors and officers, including
liabilities arising under the Securities Act.
ITEM 16. EXHIBITS
The following exhibits are filed herewith or incorporated by reference
herein:
EXHIBIT EXHIBIT NAME
NUMBER- ------------
1.1 Form of Underwriting Agreement
*4.1 Specimen Stock Certificate
**5.1 Opinion of Foster Pepper & Shefelman LLP
23.1 Consent of KPMG LLP
23.2 Consent of Foster Pepper & Shefelman LLP (included in 5.1)
24.1 Power of Attorney (filed herewith on the signature page of
the Registration Statement)
------------
* Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (No. 333-14031), declared effective by the SEC on
December 18, 1996.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrants pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by a registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of their counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by them is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Lithia Motors,
Inc. certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Medford, State of Oregon, on January 21, 2002.
LITHIA MOTORS, INC.
By: /s/ SIDNEY B. DEBOER
------------------------------------
Sidney B. DeBoer,
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
each of Sidney B. DeBoer and Jeffrey B. DeBoer or any of them, each acting
alone, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for such person and in his or her name, place
and stead, in any and all capacities, in connection with this Registration
Statement, including to sign and file in the name and on behalf of the
undersigned as director or officer of the Registrant (1) any and all amendments
or supplements (including any and all stickers and post-effective amendments) to
this Registration Statement, with all exhibits thereto, and other documents in
connection therewith, and (2) any and all additional registration statements,
and any and all amendments thereto, relating to the same offering of securities
as those that are covered by this Registration Statement that are filed pursuant
to Rule 462(b) under the Securities Act of 1933, with the Securities and
Exchange Commission and any applicable securities exchange or securities self-
regulatory body, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his or her substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ SIDNEY B. DEBOER Chief Executive Officer and January 21, 2002
------------------------------------------ Chairman of the Board of
Sidney B. DeBoer Directors (principal executive
officer)
By: /s/ M.L. DICK HEIMANN President, Chief Operating January 21, 2002
------------------------------------------ Officer, Director
M.L. Dick Heimann
By: /s/ W. DOUGLAS MORELAND Senior Vice President, Regional January 22, 2002
------------------------------------------ Operations-Colorado and Director
W. Douglas Moreland
By: /s/ R. BRADFORD GRAY Executive Vice President and January 21, 2002
------------------------------------------ Director
R. Bradford Gray
By: /s/ THOMAS BECKER Director January 21, 2002
------------------------------------------
Thomas Becker
II-3
SIGNATURE TITLE DATE
--------- ----- ----
By: /s/ WILLIAM YOUNG Director January 22, 2002
------------------------------------------
William Young
By: /s/ GERALD F. TAYLOR Director January 23, 2002
------------------------------------------
Gerald F. Taylor
By: /s/ JEFFREY B. DEBOER Senior Vice President and January 21, 2002
------------------------------------------ Chief Financial Officer
Jeffrey B. DeBoer (principal financial officer and
principal accounting officer)
II-4
EXHIBIT INDEX
EXHIBIT EXHIBIT NAME
NUMBER- ------------
1.1 -- Form of Underwriting Agreement
*4.1 -- Specimen Stock Certificate
**5.1 -- Opinion of Foster Pepper & Shefelman LLP
23.1 -- Consent of KPMG LLP
23.2 -- Consent of Foster Pepper & Shefelman LLP (included in 5.1)
24.1 -- Power of Attorney (filed herewith on the signature page of
the Registration Statement)
---------------
* Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (No. 333-14031), declared effective by the SEC on
December 18, 1996.
** To be filed by amendment.