UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-21789
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0572810
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
360 E. Jackson Street, Medford, Oregon 97501
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(Address of principal executive offices) (Zip Code)
541-776-6899
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(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, without par value
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $46,385,756 as of February 28, 2001 based upon the last sales
price ($13.23) as reported by the New York Stock Exchange for the Company's
Class A Common Stock.
The number of shares outstanding of the Registrant's Common Stock as of February
28, 2001 was: Class A: 8,448,213 shares and Class B: 4,087,000 shares.
The number of shares outstanding of the Registrant's Preferred Stock as of
February 28, 2001 was: Series M 2002: 10,360 shares and Series M 2003: 4,499
shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10-K, by reference,
portions of its Proxy Statement for its 2001 Annual Meeting of Shareholders.
LITHIA MOTORS, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
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PART I
Item 1. Business 2
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder 13
Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners
and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 22
Signatures 26
1
PART I
Item 1. BUSINESS
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FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10-K contains forward-looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward-looking statements. These risk
factors include, but are not limited to, the following:
o The cyclical nature of automobile sales;
o Lithia's ability to negotiate profitable, accretive
acquisitions;
o Lithia's ability to secure manufacturer approvals for
acquisitions; and
o Lithia's ability to retain existing management and
successfully manage the stores.
See Exhibit 99 to this Form 10-K for a more complete discussion of risk factors.
GENERAL
Lithia is a leading operator of automotive franchises and retailer of new and
used vehicles and services. As of March 1, 2001, we offered 26 brands of new
vehicles, through 114 franchises in 56 locations in the western United States
and over the Internet. We currently operate 15 stores in Oregon, 14 in
California, 7 in Washington, 6 in Colorado, 6 in Idaho, 5 in Nevada, 2 in South
Dakota and 1 in Alaska. Lithia sells new and used cars and light trucks, sells
replacement parts, provides vehicle maintenance, warranty, paint and repair
services, and arranges related financing and insurance for its automotive
customers.
Lithia Motors, Inc. was founded in 1946 and its two senior executives have
managed Lithia for more than 30 years. Management has developed and implemented
its acquisition and operating strategies, which have enabled Lithia to
successfully identify, acquire and integrate stores, achieving financial
performance superior to industry averages. Lithia has achieved compounded annual
growth rates over the last four years of 85% per year for annual revenues, 75%
per year for net income and 36% per year for earnings per share. Since December
1996, when we completed our initial public offering, we have acquired or opened
51 stores and are actively pursuing additional acquisitions.
According to industry data, the number of franchised automobile stores has
declined from more than 36,000 stores in 1960 to under 22,000 in 2000. As of the
end of 1999, the largest 100 dealer groups generated 12.3% of total industry
sales. Based on our current annual revenue run rate of over $1.7 billion, we
believe that we are one of the 10 largest automobile retailers in the country.
Further consolidation of the automotive retailing industry is expected due to:
o The high cost of entry into the franchised automobile
business;
o Many stores owned by individuals who are nearing retirement
age; and
o The desire of manufacturers to strengthen their dealer
networks through consolidation.
2
GROWTH STRATEGY
Lithia has become a leading acquirer and operator of automobile stores in the
western and inter-mountain United States. We target acquisitions in markets
where we have the opportunity to acquire or build a significant market presence.
Our preference is either to make a strategic acquisition in a new territory and
acquire one or two stores at a time to establish that market presence (via
"Fill-ins"), or to acquire an entire group at one time (a "Platform"). Lithia's
current core markets are South-Central Oregon, Northern California,
South-Central Valley, California, Northern Nevada, Eastern Washington, Denver,
Colorado and Boise, Idaho. Lithia's strict discipline in purchasing stores,
combined with its ability to improve profitability by implementing the Lithia
operating model into acquired stores, has effectively allowed Lithia to build
profitable store groups in each new area.
Since our initial public offering in December 1996, we have completed the
purchase of 47 stores with the following revenues at the time of acquisition:
Number
of stores Revenues
Year acquired (in millions)
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1996 2 $ 60
1997 10 300
1998 11 310
1999 13 585
2000 8 254
2001 3 85
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Total 47 $1,594
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OPERATING STRATEGY
After acquiring a new store, Lithia implements its operating model to maximize
the overall franchise value of each location. Lithia's operating strategy
consists of the following elements:
Value Partnership with Manufacturers Lithia views the manufacturer/franchisee
relationship as a valuable partnership. The manufacturers are large
well-developed companies with enormous resources committed to the franchise as
the method of retailing their products. They lend support in training Lithia's
employees; in allocating vehicles; in designing systems for operations; in
selling slower-moving inventories through incentives and rebates; and in
advertising through regional and national sources. Lithia relies on this help
and encourages their assistance as a welcome partner. Lithia cooperates in
facility design, in marketing efforts, brand realignment and in program support.
Provide a Broad Range of Products and Services Lithia offers a broad range of
products and services including a wide selection of new and used cars and light
trucks, vehicle financing and insurance and replacement parts and service.
Lithia seeks to increase customer traffic and meet specific customer needs by
offering new and used vehicles and an array of complementary services at each of
its locations. We believe that offering numerous new vehicle brands appeals to a
variety of customers, minimizes dependence on any one manufacturer, and reduces
our exposure to supply problems and product cycles.
3
Emphasize Sales of Higher Margin Products and Services Lithia generates
substantial incremental revenue and net income by arranging the financing for
the sale of vehicles and by selling insurance, extended service contracts and
vehicle maintenance. In 2000, Lithia arranged financing for 73% of its new
vehicle sales and 72% of its used vehicle sales, compared to 49% and 59%,
respectively, for the average automobile store in the United States (2000 data).
Employ Professional 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 towards improving performance, each store has available to it
a team of specialists in new vehicle sales, used vehicle sales, finance and
insurance, service and parts, and back office administration. A significant
portion of the compensation of the general managers and department managers is
based on the profitability of their stores and departments, respectively. Senior
management monitors each store's sales, profitability and inventory on a regular
basis.
Focus on Customer Satisfaction and Loyalty Lithia emphasizes customer
satisfaction and works to develop a reputation for quality and fairness. Lithia
trains its sales personnel to identify an appropriate vehicle for each of its
customers at an affordable price.
Lithia's "Priority You" customer centered plan commits to provide:
o A complimentary credit check;
o A complimentary vehicle appraisal;
o A 60-day/3,000 mile warranty on all used vehicles sold; and
o A community donation for every vehicle sold.
We believe that "Priority You" helps differentiate us from other automotive
retail stores.
We believe the application of this operating strategy provides us with a
competitive advantage over many stores and it is critical to our ability to
achieve levels of profitability superior to industry averages.
Lithia has received a number of dealer quality and customer satisfaction awards
from various manufacturers this year and in the past. 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 & President's Cup, each recognizing
high sales volume and customer satisfaction.
4
STORE OPERATIONS
Lithia's stores, brands sold and the approximate percentage of current annual
revenues are as follows:
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Oregon Stores (15) Franchises (41) 22%
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Lithia Honda (Medford) Honda
Lithia Volkswagen Isuzu (Medford) Volkswagen, Isuzu
Lithia Lincoln Mercury Mazda Suzuki Lincoln/Mercury, Mazda, Suzuki
(Medford)
Lithia Toyota of Medford Toyota
Lithia Dodge Chrysler Plymouth Jeep Dodge, Dodge Truck, Chrysler/Plymouth,
(Medford) Jeep
Saturn of Southwest Oregon (Medford) Saturn
Lithia Nissan BMW (Medford) Nissan, BMW
Lithia's Grants Pass Auto Center Dodge, Dodge Truck, Chrysler/Plymouth,
Jeep
Saturn of Eugene* Saturn
Lithia Dodge of Eugene Dodge, Dodge Truck
Lithia Toyota of Springfield Toyota
Lithia Nissan of Eugene Nissan
Lithia Ford Lincoln Mercury Nissan of Ford, Lincoln/Mercury, Nissan
Roseburg
Lithia Dodge Chrysler/Plymouth Jeep of Dodge, Dodge Truck, Chrysler/Plymouth,
Roseburg Jeep
Lithia Klamath Falls Auto Center Toyota, Dodge, Dodge Truck,
Chrysler/Plymouth, Jeep
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California Stores (14) Franchises (19) 21%
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Lithia Toyota of Vacaville Toyota
Lithia Dodge of Concord Dodge, Dodge Truck
Lithia Volkswagen of Concord Volkswagen, Isuzu
Lithia Ford of Concord Ford
Lithia Ford Lincoln Mercury of Napa Ford, Lincoln/Mercury
Lithia Chevrolet of Redding Chevrolet
Lithia Toyota of Redding Toyota
Lithia Nissan of Bakersfield Nissan
Lithia BMW of Bakersfield BMW
Acura of Bakersfield Acura
Lithia Ford of Fresno Ford
Lithia Mazda Suzuki of Fresno Mazda, Suzuki
Lithia Nissan of Fresno Nissan
Lithia Hyundai of Fresno Hyundai
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Colorado Stores (6) Franchises (18) 20%
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Lithia Centennial Chrysler Plymouth Chrysler/Plymouth, Jeep
Jeep (Denver)
Lithia Cherry Creek Dodge (Denver) Dodge, Dodge Truck
Lithia Colorado Chrysler Plymouth Kia Chrysler/Plymouth, Kia
(Denver)
Lithia Foothills Chrysler Hyundai Dodge, Dodge Truck, Chrysler/Plymouth,
(Fort Collins) Hyundai, Jeep
Lithia Colorado Jeep (Denver) Jeep
Lithia Colorado Springs Jeep Chrysler Jeep, Chrysler/Plymouth
Plymouth
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Washington Stores (7) Franchises (12) 12%
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Lithia Camp Chevrolet (Spokane) Chevrolet
Lithia Camp Imports (Spokane) Subaru, BMW, Volvo
Lithia Dodge of Tri-Cities Dodge, Dodge Truck
Lithia Ford of Tri-Cities* Ford
Honda of Tri-Cities* Honda
Lithia Dodge of Renton* Dodge, Dodge Truck
Lithia Chrysler Jeep of Renton* Chrysler, Jeep
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Idaho Stores (6) Franchises (12) 12%
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Pocatello Dodge Chrysler Honda Hyundai* Dodge, Dodge Truck, Chrysler, Honda,
Hyundai
Roundtree Chevrolet (Boise) Chevrolet
Roundtree Lincoln-Mercury Isuzu (Boise) Lincoln/Mercury, Isuzu
Roundtree Daewoo of Boise Daewoo
Lithia Ford Chrysler of Boise* Ford, Chrysler
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Nevada Stores (5) Franchises (8) 7%
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Lithia Reno Suzuki, Audi, Lincoln/Mercury, Isuzu
Lithia Volkswagen of Reno Volkswagen
Lithia Sparks (satellite of Lithia Suzuki, Lincoln/Mercury, Isuzu
Reno)
Lithia Reno Hyundai Hyundai
Lithia Reno Subaru Subaru
5
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South Dakota Stores (2) Franchises (2) 4%
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Chevrolet of Sioux Falls* Chevrolet
Lithia Subaru of Sioux Falls* Subaru
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Alaska Store (1) Franchises (2) 2%
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Lithia Chrysler Jeep of Anchorage* Chrysler, Jeep
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56 Stores 114 Franchises - 26 Brands 100%
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*Store acquired in 2000 or 2001.
In 2000 and 2001 the following changes were made to our franchises:
o Two shared franchises in Reno, Nevada were split, creating two
separate stores; Lithia Reno Subaru and Lithia Reno Hyundai;
o The Daewoo franchise that was located in Twin Falls, Idaho,
was closed in October 2000;
o The Jeep franchise at our Lithia Jeep/Hyundai store in Fresno,
California was exchanged in July 2000 for Dodge and
Chrysler/Jeep franchises that remain to be opened in other
markets;
o The Lithia Jeep of Bakersfield store and franchise was
exchanged in September 2000 for two new store locations for
Chrysler/Dodge/Jeep and Dodge that remain to be opened in
other markets;
o The Suzuki franchise at our Lithia Foothills Auto Plaza in
Colorado was sold, leaving Chrysler/Plymouth, Dodge, Dodge
Truck, Jeep and Hyundai brands;
o The Jeep, Mitsubishi and Kia franchises in Sioux Falls, South
Dakota were sold, leaving a Chevrolet store and a Subaru
store; and
o The Lithia Toyota Lincoln Mercury franchise in Medford, Oregon
was split with Toyota moving to its own new facility.
NEW VEHICLE SALES. In 2000, Lithia sold 26 domestic and imported brands
ranging from economy to luxury cars, sport utility vehicles, minivans and light
trucks. The following table sets forth, by manufacturer, the percentage of new
vehicle sales by Lithia during 2000.
New Vehicle Sales Percentage of New
as a Percentage of Vehicle Dollar Sales
Manufacturer Total Sales in 2000
- ------------------------------------ ------------------------------------------
DaimlerChrysler (Chrysler,
Plymouth, Dodge, Jeep, Dodge Trucks) 21.4% 39.5%
Ford (Ford, Lincoln, Mercury) 9.0 16.7
General Motors (Chevrolet, Saturn) 6.0 11.0
Toyota 4.8 8.8
Volkswagen, Audi 3.1 5.8
Nissan 2.3 4.3
Subaru 1.8 3.3
Honda (Acura, Honda) 1.5 2.7
Isuzu 1.2 2.2
BMW 1.1 2.1
Hyundai 0.8 1.5
Mazda 0.4 0.7
Suzuki 0.3 0.6
Volvo 0.2 0.3
Daewoo 0.1 0.2
Kia 0.1 0.2
Mitsubishi 0.0 0.1
-------------------- --------------------
54.1% 100.0%
==================== ====================
The following table sets forth Lithia's unit and dollar sales of new vehicles
for each of the past five years:
(dollars in thousands) 1996 1997 1998 1999 2000
- ---------------------- ---------- --------- ----------- ---------- -----------
New units 3,274 7,493 17,708 28,645 37,230
New vehicle sales $65,092 $161,294 $388,431 $673,339 $898,016
6
Lithia purchases substantially all of its new car inventory directly from
manufacturers who allocate new vehicles to stores based on the amount of
vehicles sold by the store and by the store's market area. Lithia also exchanges
vehicles with other dealers to accommodate customer demand and to balance
inventory.
As is customary in the automobile industry, the final sales price of a new
vehicle is generally negotiated with the customer. However, at Lithia's Saturn
stores, the final sales price does not deviate from the posted price.
USED VEHICLE SALES. Used vehicle sales are an important part of our
overall profitability. Lithia retains a used vehicle manager at each of its
locations.
Lithia acquires the majority of its used vehicles through customer trade-ins,
but also acquires them at "closed" auctions, which may be attended only by new
vehicle dealers with franchises for the brands offered. These auctions offer
off-lease, rental and fleet vehicles. Lithia also acquires vehicles at "open"
auctions, which offer repossessed vehicles and vehicles being sold by other
dealers.
Lithia sells used vehicles to retail customers and, in the case of vehicles in
poor condition, or vehicles that have not sold within a specified period of
time, to other dealers and to wholesalers.
The following table sets forth Lithia's unit and dollar sales of used vehicles
for each of the past five years:
(dollars in thousands) 1996 1997 1998 1999 2000
- ------------------------- ---------- ---------- ---------- ----------- ----------
Retail used units 4,156 7,148 13,645 23,840 30,896
Retail used sales $ 48,697 $88,571 $174,223 $313,449 $406,244
Wholesale used units 2,348 4,990 9,532 13,424 16,751
Wholesale used sales $ 9,914 $ 24,528 $46,321 $62,113 $74,602
Total used units 6,504 12,138 23,177 37,264 47,647
Total used sales $ 58,611 $113,099 $220,544 $375,562 $480,846
VEHICLE FINANCING AND LEASING. Lithia believes that the availability of
financing at its stores is critical to its ability to sell vehicles and
ancillary products and services. Lithia provides a variety of financing and
leasing alternatives to meet the needs of each customer. We believe our ability
to offer customer-tailored financing on a "same day" basis provides us with an
advantage over many of our competitors, particularly smaller competitors who do
not generate sufficient volume to attract the diversity of financing sources
that are available to us.
Because of the high profit margins that are typically generated through sales of
finance and insurance ("F&I") products, Lithia seeks to arrange financing
for every vehicle it sells. We have arranged financing for a larger percentage
of our transactions than the industry average. During 2000, Lithia financed or
arranged financing for over 73% of its new vehicle sales and 72% of its used
vehicle sales, compared to an industry average of 49% and 59%, respectively
(latest 2000 data).
7
Lithia maintains close relationships with a wide variety of financing sources
that are best suited to satisfy its customers' particular needs and that
maximize income. The interest rates available and the required down payment, if
any, depend to a large extent, upon the bank or other institution providing the
financing and the credit history of the particular customer.
Lithia generally arranges financing for its customers from third party sources
to avoid the risk of default. However, if we believe the credit risk is
manageable, we occasionally directly finance or lease the vehicle to the
customer. In these cases, we bear the risk of default. Historically, Lithia has
directly financed only a limited number of vehicle sales.
SERVICE, BODY AND PARTS. We consider our auto service, body, paint and
parts operations to be an integral part of our customer service program and an
important element of establishing customer loyalty. Lithia provides parts and
service primarily for the new vehicle brands sold by its stores but may also
service other vehicles. In 2000, Lithia's service, body and parts operations
generated $164.0 million in revenues, or 9.9% of total revenues. Lithia uses a
variable pricing structure designed to reflect the difficulty and sophistication
of different types of repairs and the cost and availability of parts.
Additionally, Lithia offers a lifetime lube, oil and filter service, which is
purchased by 30% of its new and used vehicle buyers. This service helps retain
customers, and provides opportunities for incremental parts and service
business.
The service, body and parts business provides an important recurring revenue
stream to the stores. Lithia markets its parts and service products by notifying
the owners of vehicles purchased at its stores when their vehicles are due for
periodic service. This practice encourages preventive maintenance rather than
post-breakdown repairs. To a limited extent, revenues from the service, body and
parts departments are counter-cyclical to new car sales as owners repair
existing vehicles rather than buy new vehicles. We believe this helps mitigate
the effects of a downturn in the new vehicle sales cycle.
Lithia operates ten collision repair centers, two in Oregon, two in Idaho and
one each in California, Washington, Colorado, Nevada, South Dakota and Alaska.
ANCILLARY SERVICES AND PRODUCTS. Lithia's F&I managers market a number of
ancillary products and services to every purchaser of a new or used vehicle.
Typically, these products and services yield high profit margins and contribute
significantly to Lithia's overall profitability.
Lithia sells third-party extended-service contracts, which cover many designated
repairs. While all new vehicles are sold with the automobile manufacturer's
standard warranty, service plans provide additional coverage beyond the time
frame or scope of the manufacturer's warranty. Purchasers of used vehicles can
purchase similar extended-service contracts.
We also offer our customers credit life, health and accident insurance when they
finance an automobile purchase. Lithia receives a commission on each policy
sold. We also offer other ancillary products such as protective coatings and
automobile alarms.
8
SALES AND MARKETING
We believe that our "Priority You" program described earlier helps differentiate
us from many other stores, thereby increasing customer traffic and developing
stronger customer loyalty. Lithia also defines itself as "America's Car and
Truck Store."
Advertising and marketing play a significant role in our success. A large
portion of an auto retailers' advertising and marketing expenses are provided
for by the automobile manufacturers. The manufacturers also provide Lithia with
market research, which assists Lithia in developing its own advertising and
marketing campaigns.
Lithia utilizes most forms of media in its advertising, including television, an
internet web site, newspaper, radio and direct mail, which includes periodic
mailers to previous customers. Lithia uses advertising to develop its image as a
reputable dealer, offering quality service, affordable automobiles and financing
for all buyers. In addition, Lithia's individual stores sponsor price discounts
or other promotions designed to attract customers. By owning a cluster of stores
in a particular market, we can save money from volume discounts and other media
concessions. Lithia also participates as a member of a number of advertising
cooperatives and associations whose members pool their resources and expertise
together with those of the manufacturer to develop advertising campaigns.
Lithia has dedicated resources to developing and maintaining its web site
(www.lithia.com). We believe that our web site is a valuable lead-generation
tool and information source for our customers. A visitor to Lithia's web site is
able to do the following at each of Lithia's locations:
o View new and used vehicle inventory;
o Schedule service appointments;
o View Kelley Blue Book values;
o View the NADA Value Guide;
o Visit our investor relations site; and
o View employment opportunities
We believe that regional and national auto retailers, such as Lithia, are best
positioned to take advantage of the internet as an effective marketing tool.
MANAGEMENT INFORMATION SYSTEM
Lithia's financial information, operational and accounting data, and other
related statistical information are consolidated, processed and maintained at
its headquarters in Medford, Oregon, on a network of computers and work
stations. Senior management is able to access detailed information from all of
its locations regarding:
o inventory;
o cash balances;
o total unit sales and mix of new and used vehicle sales;
o lease and finance transactions;
o sales of ancillary products and services;
o key cost items and profit margins; and
o the relative performance of the stores.
9
Each store's general manager can also access the same information. With this
information, management can quickly analyze the results of operations, identify
trends in the business, and focus on areas that require attention or
improvement. We believe that our management information system also allows our
general managers to quickly respond to changes in consumer preferences and
purchasing patterns, thereby maximizing inventory turnover.
We believe that our management information system is a key factor in
successfully incorporating newly acquired businesses. Following each
acquisition, Lithia immediately installs its management information system at
the store location, thereby quickly making the financial, accounting and other
operational data easily accessible throughout the organization. With access to
such data, management can more efficiently execute Lithia's operating strategy
at the newly acquired store.
RELATIONSHIPS WITH AUTOMOBILE MANUFACTURERS
Lithia, through its subsidiaries, has entered into franchise or dealer sales and
service agreements with each manufacturer of the new vehicles it sells.
The typical automobile franchise agreement specifies the locations within a
designated market area at which the dealer may sell vehicles and related
products and perform certain approved services. The designation of such areas
and the allocation of new vehicles among stores are subject to the discretion of
the manufacturer, which (except for Saturn) does not guarantee exclusivity
within a specified territory.
A franchise agreement may impose requirements on the dealer concerning such
matters as:
o the showroom;
o service facilities and equipment;
o inventories of vehicles and parts;
o minimum working capital;
o training of personnel; and
o performance standards regarding sales volume and customer
satisfaction.
Each manufacturer closely monitors compliance with these requirements and
requires each store to submit monthly and annual financial statements of
operations. The franchise agreements also grant the dealer the non-exclusive
right to use and display manufacturers' trademarks, service marks and designs in
the form and manner approved by each manufacturer.
Most franchise agreements expire after a specified period of time, ranging from
one to five years; however, some franchise agreements, including those with
Chrysler, have no termination date. 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 if there is:
o a change of management or ownership without manufacturer
consent;
o insolvency or bankruptcy of the store;
o death or incapacity of the dealer manager;
o conviction of a dealer manager or owner of certain crimes;
o misrepresentation of certain information by the store, dealer
manager or owner to the manufacturer;
o failure to adequately operate the store;
o failure to maintain any license, permit or authorization
required for the conduct of business; or
o poor sales performance or low customer satisfaction index.
10
However, state franchise laws significantly limit the ability of manufactures to
cancel or terminate automotive dealership franchises.
Lithia has entered into master framework agreements with most of its
manufacturers that impose additional requirements on its stores. See Exhibit 99
"Risk Factors" for further details.
COMPETITION
The automobile business is highly competitive. The automobile store industry is
fragmented and characterized by a large number of independent operators, many of
whom are individuals, families, and small groups. Lithia principally competes
with other automobile dealers, both publicly and privately held, in the same
general vicinity of its store locations. In addition, certain regional and
national car rental companies operate retail used car lots to dispose of their
used rental cars.
REGULATION
Lithia's operations are subject to extensive regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. Various state and federal regulatory agencies, such as the
Occupational Safety and Health Administration and the U.S. Environmental
Protection Agency, have jurisdiction over the operation of Lithia's stores,
service centers, collision repair shops and other operations, with respect to
matters such as consumer protection, workers' safety and laws regarding clean
air and water.
The relationship between a franchised automobile store and a manufacturer is
governed by various federal and state laws established to protect stores from
the generally unequal bargaining power between the parties. A manufacturer may
not:
o terminate or fail to renew a franchise without good cause; or
o prevent any reasonable changes in the capital structure or the
manner in which a store is financed.
Manufacturers may object to a sale or change of management based on character,
financial ability or business experience of the proposed transferee.
Automobile dealers and manufacturers are also subject to various federal and
state laws established to protect consumers, including so-called "Lemon Laws." A
manufacturer must replace a new vehicle or accept it for a full refund within
one year after initial purchase if:
o the vehicle does not conform to the manufacturer's express
warranties; and
o the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect.
We must provide written disclosures on new vehicles of mileage and pricing
information. In addition, financing and insurance activities are subject to
credit reporting, debt collection, and insurance industry regulation.
11
Lithia's business, particularly parts, service and collision repair operations,
involves hazardous or toxic substances or wastes. Lithia has been required to
remove storage tanks containing such substances or wastes. Federal, state and
local authorities establishing health and environmental quality standards
regulate the handling and storage of hazardous materials. These governmental
authorities also regulate remediation of contaminated sites, which could be
Lithia facilities or sites to which Lithia sends hazardous or toxic substances
or wastes for treatment, recycling or disposal. We believe that we do not have
any material environmental liabilities and that compliance with environmental
regulations will not have a material adverse effect on Lithia's results of
operations or financial condition.
EMPLOYEES
As of December 31, 2000, we employed approximately 3,400 persons on a full-time
equivalent basis. The service department employees at Lithia Dodge and Lithia
Ford of Concord and Lithia Volkswagen and Isuzu of Concord are bound by
collective bargaining agreements. The Company believes it has a good
relationship with its employees.
Item 2. PROPERTIES
- ------ ----------
Lithia's stores and other facilities consist primarily of automobile showrooms,
display lots, service facilities, ten collision repair and paint shops, rental
agencies, supply facilities, automobile storage lots, parking lots and offices.
We believe our facilities are currently adequate for our needs and are in good
repair. Lithia owns some of its properties, but leases many properties,
providing future flexibility to relocate its retail stores as demographics
change. Lithia also holds some undeveloped land for future expansion.
Item 3. LEGAL PROCEEDINGS
- ------- -----------------
Lithia is a party to litigation that arises in the normal course of its business
operations. We do not believe that we are presently a party to litigation that
will have a material adverse effect on our business or operations.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of Lithia's shareholders during the quarter
ended December 31, 2000.
12
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
Lithia's Class A Common Stock began trading on the New York Stock Exchange on
January 22, 1999 under the symbol LAD. From the time of the Company's initial
public offering in December 1996 until the move to the New York Stock Exchange,
the Class A Common Stock traded on the Nasdaq National Market under the symbol
LMTR. The quarterly high and low sales prices of the Class A Common Stock for
the period from January 1, 1999 through December 31, 2000 were as follows:
1999 High Low
- -------------------------------------------- -------- -------
Quarter 1 $ 20.50 $ 15.00
Quarter 2 20.50 15.13
Quarter 3 23.56 17.75
Quarter 4 22.94 15.75
2000
- --------------------------------------------
Quarter 1 $ 18.19 $ 13.00
Quarter 2 17.13 11.63
Quarter 3 13.50 11.75
Quarter 4 14.13 11.38
The number of shareholders of record and approximate number of beneficial
holders of Class A Common Stock at February 28, 2001 was 1,693 and 2,025
respectively. All shares of Lithia's Class B Common Stock are held by Lithia
Holding Company LLC.
DIVIDENDS
There were no cash dividends declared or paid in the last two fiscal years and
Lithia does not intend to declare or pay cash dividends in the future. Lithia
intends to retain any earnings that it may realize in the future to finance its
acquisitions and operations. The payment of any future dividends will be subject
to the discretion of the Board of Directors and will depend upon Lithia's
results of operations, financial position and capital requirements, general
business conditions, restrictions imposed by financing arrangements, if any, and
legal restrictions on the payment of dividends. Lithia's agreements with Ford
Motor Credit Company preclude the payment of cash dividends without the prior
consent of Ford Credit.
13
Item 6. SELECTED FINANCIAL DATA
- ------- -----------------------
Year Ended December 31,
-------------------------------------------------------
(In thousands, except per share 1996 (1) 1997 1998 1999 2000
amounts)
-------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
New vehicles $ 65,092 $ $388,431 $ $898,016
161,294 673,339
Used vehicles 58,611 113,099 220,544 375,562 480,846
Service, body and parts 13,197 29,828 72,216 120,722 164,002
Other revenues 5,944 15,574 33,549 73,036 115,747
-------- -------- -------- -------- --------
Total revenues 142,844 319,795 714,740 1,242,659 1,658,611
Cost of sales 117,025 265,049 599,379 1,043,373 1,391,042
-------- -------- -------- -------- --------
Gross profit 25,819 54,746 115,361 199,286 267,569
Selling, general and 19,830 40,625 85,188 146,381 195,500
administrative
Depreciation and amortization 1,756 2,483 3,469 5,573 7,605
-------- -------- -------- -------- --------
Income from operations 4,233 11,638 26,704 47,332 64,464
Floorplan interest expense (697) (2,179) (7,108) (11,105) (17,728)
Other interest expense (656) (824) (2,735) (4,250) (7,917)
Other income, net 1,349 862 921 74 716
-------- -------- -------- -------- --------
Income before minority interest
and income taxes 4,229 9,497 17,782 32,051 39,535
Minority interest (687) - - - -
-------- -------- -------- --------
-------- --------
Income before income taxes (1) 3,542 9,497 17,782 32,051 39,535
Income tax (expense) benefit 813 (3,538) (6,993) (12,877) (15,222)
-------- -------- -------- -------- --------
Net income $ 4,355 $ 5,959 $ 10,789 $19,174 $ 24,313
======== ======== ======== ======== ========
PRO FORMA CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Income before taxes and
minority interest, as reported $ 4,229
Pro forma provision for taxes (2) (1,623)
--------
Pro forma net income $ 2,606
========
Basic net income per share (3) $ 0.56 $ 0.85 $ 1.18 $ 1.72 $ 1.95
======== ======== ======== ======== ========
Shares used in basic net income 4,657 6,988 9,147 11,137 12,447
per share
======== ======== ======== ======== ========
Diluted net income per share (3) $ 0.52 $ 0.82 $ 1.14 $ 1.60 $ 1.76
======== ======== ======== ======== ========
Shares used in diluted net income
per share 4,973 7,303 9,470 11,998 13,804
======== ======== ======== ======== ========
As of December 31,
-------------------------------------------------------
(In thousands) 1996 (1) 1997 1998 1999 2000
-------- -------- -------- -------- --------
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 25,431 $ 23,870 $ 53,553 $ 74,999 $ 98,917
Total assets 68,964 166,526 294,398 506,433 628,003
Short-term debt 22,000 85,385 132,310 215,535 260,479
Long-term debt, less current 6,160 26,558 41,420 73,911 131,586
maturities
Total shareholders' equity 27,914 37,877 91,511 155,638 181,775
(1) Effective January 1, 1997, the Company converted from the LIFO method
of accounting for inventories to the FIFO method. Accordingly, the 1996
data has been restated to reflect this change. See Note 1 of Notes to
Consolidated Financial Statements.
(2) The Company was an S Corporation and accordingly was not subject to
federal and state income taxes during 1996. Pro forma net income
reflects federal and state income taxes as if the Company had been a C
Corporation, based on the effective tax rates that would have been in
effect during 1996.
(3) The per share amounts are pro forma for 1996 and actual for 1997, 1998,
1999 and 2000.
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- ------- ----------------------------------------------------------------------
GENERAL
In 2000, Lithia generated record revenues, EBITDA (earnings before interest,
taxes, depreciation and amortization), net income and unit sales of new and used
vehicles as follows (dollars in thousands):
2000 1999 % Increase
------------- ------------- ---------------
Revenues $1,658,611 $1,242,659 33.5%
EBITDA $72,785 $52,979 37.4%
Cash flow from operations $36,287 $22,381 62.1%
Net income $24,313 $19,174 26.8%
Unit sales:
New 37,230 28,645 30.0%
Retail used 30,896 23,840 29.6%
The following table shows selected condensed financial data expressed as a
percentage of total revenues for the periods indicated for the average
automotive dealer in the United States.
Average U.S. Store Year Ended December 31,
----------------------------
Statement of Operations Data: 2000 1999
--------- -------
Revenues:
New vehicles 60.0 % 59.9 %
Used vehicles 28.6 28.9
Parts and service, other 11.4 11.2
------- -------
100.0 % 100.0 %
Total sales
Gross profit 12.7 12.6
Total store expense 11.2 10.8
Income before taxes 1.6 % 1.8 %
Source: NADA Industry Analysis Division
The following table sets forth selected condensed financial data for Lithia
expressed as a percentage of total revenues for the periods indicated below.
Lithia Motors, Inc. Year Ended December 31,
- ----------------------------------------------- ------------------------------------------
2000 1999 1998
------------ ----------- -----------
Revenues:
New vehicles 54.1% 54.2% 54.3%
Used vehicles 29.0% 30.2% 30.9%
Service, body and parts 9.9% 9.7% 10.1%
Other 7.0% 5.9% 4.7%
------------ ----------- -----------
Total revenues 100.0% 100.0% 100.0%
Gross profit 16.1% 16.0% 16.1%
Selling, general and administrative expenses 11.8% 11.8% 11.9%
Depreciation and amortization 0.5% 0.4% 0.5%
Income from operations 3.9% 3.8% 3.7%
Floorplan interest expense 1.1% 0.9% 1.0%
Other interest expense 0.5% 0.3% 0.4%
Other, net 0.0% 0.0% 0.1%
Income before tax 2.4% 2.6% 2.5%
Income tax expense 0.9% 1.0% 1.0%
Net income 1.5% 1.5% 1.5%
15
RESULTS OF OPERATIONS - 2000 COMPARED TO 1999
Year Ended %
December 31, Increase Increase
-----------------------
2000 1999 (Decrease) (Decrease)
--------- ---------- ---------- -----------
Revenues:
New vehicle sales $898,016 $673,339 $224,677 33.4%
Used vehicle sales 480,846 375,562 105,284 28.0
Service, body and parts 164,002 120,722 43,280 35.9
Other revenues 115,747 73,036 42,711 58.5
--------- ---------- ---------- -----------
Total revenues 1,658,611 1,242,659 415,952 33.5
Cost of sales 1,391,042 1,043,373 347,669 33.3
--------- ---------- ---------- -----------
Gross profit 267,569 199,286 68,283 34.3
Selling, general and 195,500 146,381 49,119 33.6
administrative
Depreciation and amortization 7,605 5,573 2,032 36.5
--------- ---------- ---------- -----------
Income from operations 64,464 47,332 17,132 36.2
Floorplan interest expense (17,728) (11,105) 6,623 59.6
Other interest expense (7,917) (4,250) 3,667 86.3
Other, net 716 74 642 867.6
--------- ---------- ---------- -----------
Income before income taxes 39,535 32,051 7,484 23.4
Income tax expense (15,222) (12,877) 2,345 18.2
--------- ---------- ---------- -----------
Net income $24,313 $19,174 $ 5,139 26.8%
========= ========== ========== ===========
New units sold 37,230 28,645 8,585 30.0%
Average selling price $24,121 $23,506 $615 2.6%
Used units sold - retail 30,896 23,840 7,056 29.6%
Average selling price $13,149 $13,148 $1 -
Used units sold - wholesale 16,751 13,424 3,327 24.8%
Average selling price $4,454 $4,627 $(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 2000 and 1999 were as follows:
2000 Lithia
Industry Lithia Lithia Margin
Average 2000 1999 Change
--------- ------------- ------------- -----------------
New vehicles 6.1% 9.0% 8.7% +30 bp*
Retail used vehicles 10.9% 13.6% 12.8% +80 bp
Service and parts n/a 44.9% 44.8% +10 bp
Overall 12.7% 16.1% 16.0% +10 bp
*bp stands for basis point (ten basis points equals one-tenth of one percent)
The increases in the gross profit margins are primarily a result of operational
improvements at its newly acquired stores, as the Lithia model was implemented.
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, remain constant
in 2000 compared to 1999.
16
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, or one
tenth of one percent, in 2000 compared to 1999. In addition to gaining
efficiencies related to economies of scale, Lithia has seen improvements in the
operating margins at stores that it has acquired and operated for a full year,
bringing them more in line with its pre-existing stores.
FLOORPLAN INTEREST EXPENSE. Seventy-five percent of the increase in floorplan
interest expense is due to additional flooring notes payable as a result of new
inventory 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 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. Lithia's 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.
RESULTS OF OPERATIONS - 1999 COMPARED TO 1998
Year Ended
December 31, %
----------------------- Increase Increase
1999 1998 (Decrease) (Decrease)
--------- ---------- ---------- -----------
Revenues:
New vehicle sales $673,339 $388,431 $284,908 73.3%
Used vehicle sales 375,562 220,544 155,018 70.3
Service, body and parts 120,722 72,216 48,506 67.2
Other revenues 73,036 33,549 39,487 117.7
--------- ---------- ---------- -----------
Total revenues 1,242,659 714,740 527,919 73.9
Cost of sales 1,043,373 599,379 443,994 74.1
--------- ---------- ---------- -----------
Gross profit 199,286 115,361 83,925 72.8
Selling, general and 146,381 85,188 61,193 71.8
administrative
Depreciation and amortization 5,573 3,469 2,104 60.7
--------- ---------- ---------- -----------
Income from operations 47,332 26,704 20,628 77.2
Floorplan interest expense (11,105) (7,108) 3,997 56.2
Other interest expense (4,250) (2,735) 1,515 55.4
Other, net 74 921 (847) (92.0)
--------- ---------- ---------- -----------
Income before income taxes 32,051 17,782 14,269 80.2
Income tax expense (12,877) (6,993) 5,884 84.1
--------- ---------- ---------- -----------
Net income $19,174 $10,789 $ 8,385 77.7%
========= ========== ========== ===========
New units sold 28,645 17,708 10,937 61.8%
Average selling price $23,506 $21,935 $1,571 7.2%
Used units sold 23,840 13,645 10,195 74.7%
Average selling price $13,148 $12,768 $380 3.0%
Used units sold - wholesale 13,424 9,532 3,892 40.8%
Average selling price $4,627 $4,860 $(233) (4.8)%
17
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 1999 and 1998 were as follows:
1999 Lithia
Industry Lithia Lithia Margin
Average 1999 1998 Change
------------- ------------ ---------- ------------
New vehicles 6.4% 8.7% 8.9% -20 bp*
Retail used vehicles 10.7% 12.8% 12.7% +10 bp
Service and parts n/a 44.8% 45.5% -70 bp
Overall 12.6% 16.0% 16.1% -10 bp
*bp stands for basis point (ten basis points equals one-tenth of one percent)
The decrease in the new vehicle gross profit percentage 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 Lithia's
preexisting stores, lending themselves to a high volume, low cost strategy of
retailing vehicles. The increase in the retail used vehicle gross profit margin
is primarily due to improved inventory management company wide and operational
improvements at its newly acquired stores, as the Lithia model was implemented.
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 Lithia consolidates 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 1999 and 1998.
INCOME FROM OPERATIONS. In addition to gaining efficiencies related to economies
of scale, Lithia has seen improvements in the operating margins at stores that
it has acquired and operated for a full year, bringing them more in line with
its pre-existing stores.
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. Lithia was been able to reduce
its floorplan interest expense as a percentage of total revenues by successfully
managing inventory levels.
NET INCOME. Net income increased as a result of the individual line item changes
discussed above.
18
LIQUIDITY AND CAPITAL RESOURCES
Lithia's principal needs for capital resources are to finance acquisitions and
capital expenditures, as well as for working capital. Lithia has relied
primarily upon internally generated cash flows from operations, borrowings under
its credit facilities and the proceeds from public equity offerings to finance
its operations and expansion.
In June 2000, Lithia's Board of Directors authorized the repurchase of up to
1,000,000 shares of Lithia's Class A Common Stock. Lithia has purchased shares
under this program and may continue to do so from time to time in the future as
conditions warrant.
In December 2000, Lithia's existing credit facility with Ford Credit was
increased by $130 million to a total of $580 million and the expiration date was
extended to November 2003 with interest due monthly. The facility includes $250
million for new and program vehicle flooring, $150 million for used vehicle
flooring, $130 million for franchise acquisitions and $50 million 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.
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 Credit 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 $27.5 million revolving line of
credit for leased vehicles and equipment purchases.
Interest rates on all of the above facilities ranged from 7.90% to 9.15% at
December 31, 2000. Amounts outstanding on the lines at December 31, 2000 were as
follows (in thousands):
New and Program Vehicle Lines $255,137
Used Vehicle Line 59,000
Acquisition Line 8,000
Equipment and Leased Vehicle Line 27,500
---------------
$349,637
===============
The $9.0 million related party payable at December 31, 1999 was related to the
additional purchase price for the Moreland acquisition as a result of contingent
payouts that were earned during 1999. In addition to the $9.0 million of cash,
the Company accrued for the issuance of $4.5 million of its Class A Common Stock
and $4.5 million redemption value of its Series M Preferred Stock to satisfy the
contingent payout requirements. The cash was paid and the stock was issued in
the first quarter of 2000.
19
At December 31, 2000, Lithia had capital commitments of approximately $14.9
million for the construction of six new store facilities, of which $14.2 million
is anticipated to be incurred through the end of 2001 and the balance in 2002.
Approximately $2.7 million has already been paid out of existing cash balances.
Lithia expects to pay for the construction out of existing cash balances until
completion of the projects, at which time Lithia anticipates securing long-term
financing and general borrowings for 85% to 100% of the amounts from third party
lenders.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, Lithia's sales have been lower in the first and fourth quarters of
each year largely due to consumer purchasing patterns during the holiday season,
inclement weather and the reduced number of business days during the holiday
season. As a result, financial performance may be lower during the first and
fourth quarters than during the other quarters of each fiscal year. Management
believes that interest rates, levels of consumer debt, consumer buying patterns
and confidence, as well as general economic conditions, also contribute to
fluctuations in sales and operating results. The timing of acquisitions may
cause substantial fluctuations of operating results from quarter to quarter.
RECENT ACCOUNTING PRONOUNCEMENTS
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". SFAS 137 and 138 establish
accounting and reporting standards for all derivative instruments. SFAS 137 and
138 are effective for fiscal years beginning after June 15, 2000. The adoption
of SFAS 137 and 138 in January 2001 resulted in the recognition of a liability
of $1.5 million and a corresponding charge to accumulated other comprehensive
income for the fair value of rate swapping agreements.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 summarized certain areas of the Staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. In June 2000, SAB 101B was issued which
defers the implementation date of SAB 101 until October 1, 2000. The
implementation of SAB 101 did not have a significant impact on the Company's
financial condition or results of operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
Lithia has variable rate floor plan notes payable and other credit line
borrowings that subject it to market risk exposure. At December 31, 2000 Lithia
had $349.6 million outstanding under such facilities at interest rates ranging
from 7.9% to 9.2% per annum. An increase or decrease in the interest rates would
affect interest expense for the period accordingly.
20
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:
o Effective September 1, 2000, Lithia entered into a five year, $25
million interest rate swap with U.S. Bank Dealer Commercial Services at
a fixed rate of 6.88% per annum.
o Effective November 1, 2000 Lithia entered into a three year, $25
million interest rate swap with 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 was 6.56% per annum.
The fair value of interest rate swap agreements and the amount of hedging losses
deferred on interest rate swaps was $1,542 at December 31, 2000. As of December
31, 2000, approximately 76% 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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
- ------- -----------------------------------------------------
The financial statements and notes thereto required by this item begin on page
F-1 as listed in Item 14 of Part IV of this document. Quarterly financial data
for each of the eight quarters in the two-year period ended December 31, 2000 is
as follows:
In thousands, except per share
data 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------- ----------- ----------- ----------- -----------
1999
- ----
Total revenues $ 224,145 $ 307,753 357,369 $ 353,392 $
Gross profit 35,200 48,786 57,245 58,055
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 0.30 0.42 0.50 0.49
Diluted net income per share 0.29 0.40 0.47 0.43
2000
- ----
Total revenues $ 395,603 $ 417,851 443,066 $ 402,091 $
Gross profit 62,864 67,184 70,920 66,601
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 0.40 0.50 0.60 0.45
Diluted net income per share 0.37 0.45 0.55 0.41
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ------- ----------------------------------------------------------------------
None.
21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Information required by this item is included under the captions Election of
Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting
Compliance, respectively, in the Company's Proxy Statement for its 2001 Annual
Meeting of Shareholders and is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required by this item is included under the caption Executive
Compensation in the Company's Proxy Statement for its 2001 Annual Meeting of
Shareholders and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
The information required by this item is included under the caption Security
Ownership of Certain Beneficial Owners and Management in the Company's Proxy
Statement for its 2001 Annual Meeting of Shareholders and is incorporated herein
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required by this item is included under the caption Certain
Relationships and Related Transactions in the Company's Information Statement
for its 2000 Annual Meeting of Shareholders and is incorporated herein by
reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES
The Consolidated Financial Statements, together with the report thereon of KPMG
LLP, are included on the pages indicated below:
Page
----
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-2
Consolidated Statements of Operations for the years ended December
31, 2000, 1999 and 1998 F-3
Consolidated Statements of Changes in Shareholders' Equity -
December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the years ended December
31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
There are no schedules required to be filed herewith.
22
(b) REPORTS ON FORM 8-K
The Company filed one report on Form 8-K during the quarter ended December 31,
2000 under Item 9. Regulation FD Disclosure, dated October 23, 2000, relating to
Lithia's third quarter 2000 press release and conference call.
(c) EXHIBITS
The following exhibits are filed herewith and this list is intended to
constitute the exhibit index:
Exhibit Description
- ------- -----------
3.1 (a)Restated Articles of Incorporation of Lithia Motors, Inc., as
amended May 13, 1999.
3.2 (b)Bylaws of Lithia Motors, Inc.
4 (b)Specimen Common Stock certificate
10.1 (c)Agreement and Plan of Reorganization dated January 1, 1999 by and
between Lithia Motors, Inc. and Cherry Creek Dodge Limited Partnership,
RLLLP and Cherry Creek Dodge, Incorporated. (1)
10.2 (b)1996 Stock Incentive Plan
10.2.1 (d)Amendment No. 1 to the Lithia Motors, Inc. 1996 Stock Incentive Plan
10.3 (b)Form of Incentive Stock Option Agreement
10.4 (b)Form of Non-Qualified Stock Option Agreement
10.5 (e)1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
10.6 (f)Employee Stock Purchase Plan
10.7 (a)Chrysler Corporation Sales and Service Agreement General Provisions
10.7.1 (a)Chrysler Corporation Chrysler Sales and Service Agreement, dated
September 28, 1999, between Chrysler Corporation and Lithia Chrysler
Plymouth Jeep Eagle, Inc. (Additional Terms and Provisions to the Sales
and Service Agreements are in Exhibit 10.7) (2)
10.8 (b)Mercury Sales and Service Agreement General Provisions
10.8.1 (f)Supplemental Terms and Conditions agreement between Ford Motor
Company and Lithia Motors, Inc. dated June 12, 1997.
10.8.2 (f)Mercury Sales and Service Agreement, dated June 1, 1997, between
Ford Motor Company and Lithia TLM, LLC dba Lithia Lincoln Mercury
(general provisions are in Exhibit 10.8) (3)
10.9 (f)Volkswagen Dealer Agreement Standard Provisions
10.9.1 (a)Volkswagen Dealer Agreement dated September 17, 1998, between
Volkswagen of America, Inc. and Lithia HPI, Inc. dba Lithia Volkswagen.
(standard provisions are in Exhibit 10.9) (4)
10.10 (b)General Motors Dealer Sales and Service Agreement Standard
Provisions
10.10.1 (a)Supplemental Agreement to General Motors Corporation Dealer Sales
and Service Agreement dated January 16, 1998.
10.10.2 (g)Chevrolet Dealer Sales and Service Agreement dated October 13, 1998
between General Motors Corporation, Chevrolet Motor Division and Camp
Automotive, Inc. (5)
23
Exhibit Description
- ------- -----------
10.11 (b)Toyota Dealer Agreement Standard Provisions
10.11.1 (a)Toyota Dealer Agreement, between Toyota Motor Sales, USA, Inc. and
Lithia Motors, Inc., dba Lithia Toyota, dated February 15, 1996. (6)
10.12 (f)Nissan Standard Provisions
10.12.1 (a)Nissan Public Ownership Addendum dated August 30, 1999 (identical
documents executed by each Nissan store).
10.12.2 (f)Nissan Dealer Term Sales and Service Agreement between Lithia
Motors, Inc., Lithia NF, Inc., and the Nissan Division of Nissan Motor
Corporation In USA dated January 2, 1998. (standard provisions are in
Exhibit 10.12) (7)
10.13 (g)Credit Agreement dated November 23, 1998 between Ford Motor Credit
Company and Lithia Motors, Inc. (Acquisition Revolving Line of Credit).
10.13.1 (a)Amendment to Credit Agreement dated November 23, 1998 between Ford
Motor Credit Company and Lithia Motors, Inc. (Acquisition Revolving
Line of Credit), effective December 1, 1999.
10.13.2 Second Amendment to Credit Agreement dated November 23, 1998 between
Ford Motor Credit Company and Lithia Motors, Inc. (Acquisition
Revolving Line of Credit), effective December 1, 2000.
10.14 (g)Credit Agreement dated November 23, 1998 between Ford Motor Credit
Company and Lithia Motors, Inc. (Used Vehicle Revolving Line of
Credit).
10.14.1 (a)Amendment to Credit Agreement dated November 23, 1998 between Ford
Motor Credit Company and Lithia Motors, Inc. (Used Vehicle Revolving
Line of Credit), effective December 1, 1999.
10.14.2 Second Amendment to Credit Agreement dated November 23, 1998 between
Ford Motor Credit Company and Lithia Motors, Inc. (Used Vehicle
Revolving Line of Credit), effective December 1, 2000.
10.15 (h)$10.0 million vehicle lease line and $15.0 million equipment line of
credit Loan Agreement between Lithia Financial Corporation, Lithia
Motors, Inc. and Lithia SALMIR, Inc. and U.S. Bank National
Association.
10.15.1 Amendment No. 1 dated March 6, 2000 to Loan Agreement dated September
20, 1999 between Lithia Financial Corporation, Lithia Motors, Inc.,
Lithia SALMIR, Inc. and Lithia Aircraft, Inc. and U.S. Bank National
Association.
10.15.2 (i)Amendment No. 2 dated July 26, 2000 to Loan Agreement dated
September 20, 1999 between Lithia Financial Corporation, Lithia Motors,
Inc., Lithia SALMIR, Inc. and Lithia Aircraft, Inc. and U.S. Bank
National Association.
10.15.3 Amendment No. 3 dated November 9, 2000 to Loan Agreement dated
September 20, 1999 between Lithia Financial Corporation, Lithia Motors,
Inc., Lithia SALMIR, Inc. and Lithia Aircraft, Inc. and U.S. Bank
National Association.
10.16 (a)Lease Agreement between Moreland Properties, LLC and Lithia Real
Estate, Inc., dated May 14, 1999, relating to properties located at 350
S. Havana, Aurora, CO. (8)
10.17 (a)Sublease between Moreland Properties, LLC and Lithia Real Estate,
Inc. dated May 14, 1999, relating to properties located at 4940 S.
Broadway and 50 E. Chenango, Englewood, CO. (9)
24
Exhibit Description
- ------ -----------
10.18 (a)Lease Agreement between CAR LIT, L.L.C. and Lithia Real Estate, Inc.
relating to properties in Medford, OR. (10)
21 Subsidiaries of Lithia Motors, Inc.
23 Consent of KPMG LLP
99 Risk Factors
(a) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1999 as filed with the Securities and Exchange
Commission on March 30, 2000.
(b) Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration Statement No. 333-14031, as declared effective
by the Securities Exchange Commission on December 18, 1996.
(c) Incorporated by reference from the Company's Form 10-Q for the quarter
ended March 31, 1999 as filed with the Securities and Exchange
Commission on May 12, 1999.
(d) Incorporated by reference from the Company's Form 10-Q for the quarter
ended June 30, 1998 as filed with the Securities and Exchange
Commission on August 13, 1998.
(e) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration Statement No. 333-45553, as filed with the
Securities Exchange Commission on February 4, 1998.
(f) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1997 as filed with the Securities and Exchange
Commission on March 31, 1998.
(g) Incorporated by reference from the Company's Form 10-K for the year
ended December 31, 1998 as filed with the Securities and Exchange
Commission on March 31, 1999.
(h) Incorporated by reference from the Company's Form 10-Q for the quarter
ended March 31, 2000 as filed with the Securities and Exchange
Commission on May 11, 2000.
(i) Incorporated by reference from the Company's Form 10-Q for the quarter
ended September 30, 2000 as filed with the Securities and Exchange
Commission on November 14, 2000.
(1) Substantially similar agreements of the same date exist between Lithia
Motors, Inc. and the six other corporations controlled by W. Douglas
Moreland and acquired in the Moreland acquisition.
(2) Substantially identical agreements exist between Chrysler Corporation
and those other subsidiaries operating Dodge, Chrysler, Plymouth or
Jeep dealerships.
(3) Substantially identical agreements exist for its Ford and
Lincoln-Mercury lines between Ford Motor Company and those other
subsidiaries operating Ford or Lincoln-Mercury dealerships.
(4) Substantially identical agreements exist between Volkswagen of America,
Inc. and those subsidiaries operating Volkswagen dealerships.
(5) Substantially identical agreements exist between Chevrolet Motor
Division, GM Corporation and those other subsidiaries operating General
Motors dealerships.
(6) Substantially identical agreements exist (except the terms are all 2
years) between Toyota Motor Sales, USA, Inc. and those other
subsidiaries operating Toyota dealerships.
(7) Substantially identical agreements exist between Nissan Motor
Corporation and those other subsidiaries operating Nissan dealerships.
(8) Substantially identical leases of the same date exist between: between
Lithia Real Estate, Inc. and various entities controlled by W. Douglas
Moreland relating to certain owned properties associated with the
Moreland acquisition.
(9) Substantially identical subleases of the same date exist between Lithia
Real Estate, Inc. and various entities controlled by W. Douglas
Moreland relating to certain leased properties associated with the
Moreland acquisition.
(10) Lithia Real Estate, Inc. leases all the property in Medford, Oregon
sold to CAR LIT, LLC under substantially identical leases covering six
separate blocks of property.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 20, 2001 LITHIA MOTORS, INC.
By: /s/ Sidney B. DeBoer
---------------------------------
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 20, 2001:
Signature Title
- --------- -----
/s/ Sidney B. DeBoer Chairman of the Board and
- --------------------------------------- Chief Executive Officer
Sidney B. DeBoer (Principal Executive Officer)
/s/ Jeffrey B. DeBoer Senior Vice President
- --------------------------------------- and Chief Financial Officer
Jeffrey B. DeBoer (Principal Financial and
Accounting Officer)
/s/ M.L. Dick Heimann Director, President and
- --------------------------------------- Chief Operating Officer
M. L. Dick Heimann
/s/ R. Bradford Gray Director and
- --------------------------------------- Executive Vice President
R. Bradford Gray
/s/ Thomas Becker Director
- ---------------------------------------
Thomas Becker
/s/ W. Douglas Moreland Director
- ---------------------------------------
W. Douglas Moreland
/s/ Gerald F. Taylor Director
- ---------------------------------------
Gerald F. Taylor
/s/ William J. Young Director
- ---------------------------------------
William J. Young
26
