<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH , 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
LITHIA MOTORS, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
OREGON 93-0572810 5511
(State or other jurisdiction (I.R.S. Employer (Primary Standard Industrial
of Identification Classification Code Number)
Incorporation or organization) No.)
</TABLE>
360 E. JACKSON STREET, MEDFORD, OREGON 97501
(541) 776-6899
(Address and telephone number of registrant's principal executive offices)
SIDNEY B. DEBOER, PRESIDENT
360 E. JACKSON STREET
MEDFORD, OREGON 97501
(541) 776-6899
(Name, address and telephone number of agent for service)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
KENNETH E. ROBERTS, ESQ. KENNETH J. BARONSKY, ESQ.
Foster Pepper & Shefelman LLP Milbank, Tweed, Hadley & McCloy
101 S.W. Main St., 15th Floor 601 South Figueroa St., 30th Floor
Portland, Oregon 97204 Los Angeles, California 90017
(503) 221-1151 (213) 892-4000
(800) 601-9234 (FAX) (213) 629-5063 (FAX)
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
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 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, check the following box and
list the Securities Act registration number of 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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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 the Rule
434, please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A Common Stock, no par value........... 3,450,000 $16.50 $56,925,000 $16,793.00
</TABLE>
(1) Based on the average high and low price of the Class A Common Stock on March
2, 1998, as reported by Nasdaq National Market, solely for purposes of
calculating the registration fee in accordance with Rule 457(c).
------------------------
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 OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a) , MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH , 1998.
PROSPECTUS
3,000,000 SHARES
[LOGO]
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, no par value (the "Class A Common
Stock"), offered hereby are being sold by Lithia Motors, Inc. ("Lithia Motors"
or the "Company"). The Class A Common Stock is quoted on the Nasdaq National
Market under the symbol "LMTR." On March , 1998, the last reported transaction
in the Common Stock was at $ per share. See "Common Stock Price Range and
Dividend Policy."
The Company has two classes of authorized Common Stock, Class A Common
Stock, which is offered hereby, and Class B Common Stock, no par value (the
"Class B Common Stock"). Holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to ten votes per
share. Class A Common Stock is not convertible but is freely transferable, while
Class B Common Stock is transferable only to certain limited transferees and is
freely convertible into Class A Common Stock on a share for share basis. All of
the outstanding shares of Class B Common Stock, which will represent
approximately 87.4% of the aggregate voting power of the Company upon completion
of this Offering, are held by Lithia Holding Company, L.L.C. ("Lithia Holding")
and controlled by Sidney B. DeBoer. See "Risk Factors-- Concentration of Voting
Power; Anti-Takeover Provisions," "Description of Capital Stock--Common Stock"
and "Principal Shareholders."
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE .
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share..............................................
Total(3)...............................................
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including the right to reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares will be made against payment therefor at the offices of Furman Selz
LLC in New York, New York or through the facilities of the Depository Trust
Company, on or about , 1998.
FURMAN SELZ
DAIN RAUSCHER INCORPORATED
EVEREN SECURITIES, INC.
---------------
The date of this Prospectus is , 1998
<PAGE>
[MAP OF DEALERSHIPS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND THE SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
AS THE FOLLOWING IS ONLY A SUMMARY, THE READER SHOULD CAREFULLY REVIEW THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING LATER IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
Lithia Motors is a leading automotive retailer offering a total of 21 brands
in 21 locations in the western United States. The Company currently operates 11
dealerships in California, 7 in Oregon and 3 in Nevada. The Company sells new
and used cars and light trucks, sells replacement parts, provides vehicle
maintenance, warranty, paint and repair services, and arranges related financing
and insurance for its automotive customers. Since December 1996 when the Company
completed its initial public offering, Lithia has acquired 16 dealerships and is
actively pursuing additional acquisitions, with one currently pending.
In 1997, the Company generated record total sales, net income and unit sales
of new and used vehicles. Total sales increased to $319.8 million in 1997 from
$142.8 million in 1996, an increase of 124%. For the same period, net income
increased to $6.0 million from $2.6 million (pro forma), an increase of 129%. In
the fourth quarter of 1997, the Company's total sales and net income were $113.1
million and $1.9 million, respectively, representing growth of 203% and 234%
compared to the same period in 1996. New vehicle unit sales increased to 7,493
in 1997 from 3,274 in 1996, an increase of 129%, and retail used vehicle unit
retail sales increased from 4,156 to 7,148, an increase of 72%.
Lithia was founded in 1946 and its two senior executives have managed the
Company for over 27 years. Management has developed and implemented its
acquisition and operating strategies which have enabled the Company to
successfully identify, acquire and integrate dealerships, achieving
profitability superior to industry averages. In 1997, the Company was able to
achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus
12.9% and 1.5%, respectively, for the industry (latest 1996 data).
The Company intends to continue to take advantage of the consolidation
opportunities in the $640 billion automotive retailing industry. According to
industry data, the number of franchised automobile dealerships has declined from
more than 36,000 dealerships in 1960 to approximately 22,000 in 1997. Currently,
the largest 100 dealer groups generate less than 10% of total industry sales and
control approximately 5% of all franchised automobile dealerships. Several
economic and industry factors are expected to lead to the further consolidation
of the automobile retailing industry, including increasing capital requirements
necessary to operate an automobile dealership, the fact that many dealerships
are owned by individuals nearing retirement age who are seeking exit
opportunities, and the desire of manufacturers to strengthen their dealer
networks through consolidation. The Company believes that it is well positioned
to continue to capitalize on the highly fragmented and consolidating automotive
retail industry.
GROWTH STRATEGY
The Company has become a leading acquiror of automobile dealerships in the
western United States. The Company pursues a disciplined acquisition strategy,
targeting acquisitions in certain under-dealered markets where management
believes the Company has the opportunity to acquire a cluster of dealerships
over time and build a significant market presence. This strategy is patterned
after the Company's operations in southern Oregon where, prior to two recent
acquisitions, the Company operated 5 dealerships with annual revenues
approximating $135 million. The Company's current core markets are South-Central
Oregon, the Northeast Bay Area and South-Central Valley regions of California,
and Northern Nevada. Within these markets, the Company's evaluation of potential
acquisitions takes into account a dealership's size and reputation, and the
brand of vehicles sold by the dealership.
3
<PAGE>
Over the last 16 months, the Company has completed the purchase of 16
dealerships with pre-acquisition annual revenues of approximately $436 million
for an aggregate net investment of $46.6 million (excluding real estate
purchases or borrowings on credit lines to finance acquired vehicle inventories
and equipment). In addition, the Company has one pending fill-in acquisition in
an existing core market. The following table sets forth certain information
regarding recent acquisitions:
<TABLE>
<CAPTION>
PRIOR-YEAR
ANNUAL
REVENUES(1)
REGION LOCATION BRANDS (MILLIONS) DATE ACQUIRED
- ----------------------------------- ------------------- --------------------- ------------- ------------------
<S> <C> <C> <C> <C>
South-Central Oregon Eugene, OR Dodge, Dodge Trucks $ 32 December 1996
Medford, OR Nissan, BMW 15 February 1998
Northeast Bay Area, California Vacaville, CA Toyota 28 December 1996
Concord, CA Dodge, Dodge Trucks,
Isuzu 39 April 1997
Napa, CA Ford, Lincoln-Mercury 24 July 1997
Concord, CA Ford 70 August 1997
Concord, CA Volkswagen August 1997
South-Central Valley, California Bakersfield, CA Nissan 41 October 1997
Bakersfield, CA BMW, Acura October 1997
Fresno, CA Ford 60 December 1997
Fresno, CA Mazda December 1997
Fresno, CA Nissan 40 January 1998
Fresno, CA Jeep, Hyundai January 1998
Northern Nevada Reno, NV Isuzu, Lincoln-
Mercury, Suzuki,
Audi 78 October 1997
Sparks, NV Isuzu, Lincoln-
Mercury, Suzuki October 1997
Reno, NV Volkswagen 9 February 1998
-----
$ 436
-----
-----
</TABLE>
- ------------------------
(1) Revenues taken from dealer statements for the year prior to acquisition.
Based upon its current dealership locations, the percentage share of the
Company's total revenues from each region is approximately: South-Central
Oregon--32%; Northeast Bay Area, California--28%; South-Central Valley,
California--25%; and Northern Nevada--15%.
OPERATING STRATEGY
Upon completing an acquisition, the Company installs its management
information systems as soon as possible and implements its operating strategy.
The Company's operating strategy consists of the following elements:
VALUE PARTNERSHIP WITH MANUFACTURERS. The Company recognizes that the
manufacturers are true partners through the franchise system. They are all large
well-developed companies with enormous resources committed to the franchise as
the method of retailing their products. They lend support in training the
Company's employees, in allocating vehicles, in designing systems for
operations, in selling slower-moving inventories through incentives and rebates,
and in advertising through regional and national sources. The Company relies on
this help and encourages their assistance as a welcome partner. The Company
cooperates in facility design, in marketing efforts, and in program support.
4
<PAGE>
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad
range of products and services including a wide selection of new and used cars
and light trucks, vehicle financing and insurance and replacement parts and
service. At its 21 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki,
BMW, Saturn, Pontiac, Mazda and Hyundai.
FOCUS ON USED VEHICLE SALES. In addition to the sale of new vehicles, a key
element of the Company's operating strategy is to focus on the sale of used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales to improve overall
profitability. The Company's goal is to sell 1.5 retail used vehicles for every
new vehicle sold, compared to an industry average ratio of 0.8-to-1. The Company
strives to attract customers and enhance buyer satisfaction by offering multiple
financing options, a 10-day/500-mile "no questions asked" exchange program and a
60-day/3,000-mile warranty on every used vehicle sold.
EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company
generates substantial incremental revenue and achieves higher profitability
through the sale of certain ancillary products and services such as financing
and insurance, extended service contracts and vehicle maintenance. In 1997, the
Company arranged financing for 71% of its new vehicle sales and 74% of its used
vehicle sales, compared to 42% and 51%, respectively, for the average automobile
dealership in the United States (1996 data). Sales of these other ancillary
products and services represent 14% of Lithia's total sales, compared to 12% for
the average U.S. dealership.
EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional
management practices in all aspects of its operations, including information
technology, employee training, profit-based compensation and centralized cash
management. These efforts have been critical in managing the rapid growth in new
stores over the last 16 months. Each dealership is its own profit center and is
managed by a trained and experienced general manager who has primary
responsibility for decisions relating to inventory, advertising, pricing and
personnel. Each dealership is supported by one of the Company's operations teams
consisting of specialists in the areas of new vehicle sales, used vehicle sales,
finance and insurance, service and parts, and back office administration
(including accounting and management information systems). In addition, the
Company has an extensive internal audit program.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer
satisfaction throughout its organization and continually seeks to maintain its
reputation for quality and fairness. The Company trains its sales personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. In 1996, the Company implemented an innovative customer-oriented
marketing program entitled "Priority You" which provides the Company's retail
customers six value-added services which the Company believes are important to
overall customer satisfaction.
The Company has received a number of dealer quality and customer
satisfaction awards from various manufacturers. Most recently, Lithia's Medford
and Grants Pass, Oregon Chrysler product dealerships achieved Chrysler's highest
recognition for dealer excellence, the Five-Star Certification. The Medford
location was one of the first to receive this certification in the Pacific
Northwest.
The Company maintains its principal executive offices at 360 E. Jackson
Street, Medford, Oregon 97501, and its telephone number is (541) 776-6899.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 3,000,000 shares of Class A Common Stock
Common Stock to be outstanding after
the Offering.......................... 5,925,550 shares of Class A Common Stock(1)
4,110,000 shares of Class B Common Stock
Use of proceeds....................... Aquisitions of additional automobile dealerships
and for general corporate purposes. Prior to such
use, the funds will be used to reduce borrowings
under the Company's lines of credit. See "Use of
Proceeds."
Nasdaq National Market symbol......... LMTR
</TABLE>
- ------------------------
(1) Does not include (i) an aggregate of 619,450 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 545,839
of which were subject to outstanding options as of March 1, 1998 (see
"Management--1996 Stock Incentive Plan"); (ii) an aggregate of 15,000 shares
of Class A Common Stock reserved for issuance under the Company's 1997
Non-Discretionary Stock Option Plan for Non-Employee Directors, 3,000 of
which were subject to outstanding options as of March 1, 1998 (see
"Management--Director's Compensation"); (iii) an aggregate of 250,000 shares
of Class A Common Stock reserved for issuance under the Company's Employee
Stock Purchase Plan (see "Management--Employee Stock Purchase Plan"); and
(iv) an additional 415,000 shares of Class A Common Stock to be reserved for
issuance under the Company's 1996 Stock Incentive Plan, which have been
approved by the Board of Directors, subject to completion of this Offering.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company as of the dates and for the periods indicated. The summary consolidated
financial data should not be construed as representative of future operating
results or financial position. The summary consolidated financial data should be
read in conjunction with the consolidated financial statements and related notes
thereto of the Company and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total sales................................................. $ 92,239 $ 109,423 $ 114,196 $ 142,844 $ 319,795
Cost of sales............................................... 74,224 89,709 93,559 118,333 266,363
--------- --------- --------- --------- ---------
Gross profit................................................ 18,015 19,714 20,637 24,511 53,432
Selling, general and administrative......................... 14,721 14,781 16,333 19,830 40,625
Depreciation and amortization(2)............................ 401 393 402 448 1,169
--------- --------- --------- --------- ---------
Operating income............................................ 2,893 4,540 3,902 4,233 11,638
Other income (expense), net................................. (551) 47 (175) (4) (2,141)
--------- --------- --------- --------- ---------
Income before income taxes(3)............................... 2,342 4,587 3,727 4,229 9,497
Income taxes................................................ 890 1,743 1,430 1,623 3,538
--------- --------- --------- --------- ---------
Net income(4)............................................... $ 1,452 $ 2,844 $ 2,297 $ 2,606 $ 5,959
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income per share(4)(5).............................. $ 0.50 $ 0.56 $ 0.85
--------- --------- ---------
--------- --------- ---------
Diluted net income per share(4)(5)............................ $ 0.47 $ 0.52 $ 0.82
--------- --------- ---------
--------- --------- ---------
OTHER OPERATING DATA:
New vehicles sold........................................... 2,464 2,744 2,715 3,274 7,493
Used vehicles sold (retail and wholesale)................... 4,718 5,206 5,144 6,504 12,138
Gross margin................................................ 19.5% 18.0% 18.1% 17.2% 16.7%
Selling, general and administrative as a percentage of
sales..................................................... 16.0% 13.5% 14.3% 13.9% 12.7%
Operating margin............................................ 3.1% 4.2% 3.4% 3.0% 3.6%
Pre-tax margin.............................................. 2.5% 4.2% 3.3% 3.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
DECEMBER MARCH SEPTEMBER DECEMBER
1996(1) 1997 JUNE 1997 1997 1997
----------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total sales............................................... $ 37,278 $ 54,704 $ 66,422 $ 85,573 $ 113,096
Gross profit.............................................. 6,337 8,949 10,716 14,185 19,582
Operating income.......................................... 534 1,785 2,299 3,023 4,531
Net income(4)............................................. 560 1,144 1,368 1,579 1,868
Basic net income per share(4)............................. $ 0.12 $ 0.17 $ 0.20 $ 0.23 $ 0.27
Diluted net income per share(4)........................... $ 0.11 $ 0.16 $ 0.19 $ 0.22 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-----------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
COMBINED BALANCE SHEET DATA:
Working capital........................................................................ $ 23,870 $
Total assets........................................................................... 166,526
Short-term debt........................................................................ 85,385
Long-term debt, less current maturities................................................ 26,558
Total shareholders' equity............................................................. 37,877
</TABLE>
- ------------------------------
(1) Restated to give effect for the Company's conversion from the LIFO method of
accounting for inventory to the FIFO method, which was effective January 1,
1997.
(2) Does not include depreciation included in cost of sales related to leased
vehicles. See "Consolidated Statements of Cash Flows" for total depreciation
and amortization.
7
<PAGE>
(3) Prior to 1994, the Company paid cash bonuses to its shareholders and members
in amounts approximating their respective income tax liability on their
undistributed earnings ($1.0 million in 1993), in addition to their normal
salaries. These cash bonuses are reflected in Selling, General &
Administrative expense. In 1994 and subsequent periods, cash to meet the
shareholders' and members' tax liabilities was distributed to the
shareholders and members as dividends. The Company believes that for a fair
evaluation of its historical performance, results for 1993 should be
adjusted to eliminate the cash bonus payments.
(4) The Company was an S Corporation and accordingly was not subject to federal
and state income taxes prior to 1996. Net income prior to 1996 is presented
on a pro forma basis to reflect the elimination of minority interest
pursuant to the restructuring at the time of the initial public offering,
and federal and state income taxes as if the Company had been a C
Corporation, based on the effective tax rates that would have been in effect
during these periods. See Notes 1 and 8 to the Company's Consolidated
Financial Statements.
(5) Historical net income per share is not presented for 1993 and 1994, as the
historical capital structure of the Company prior to the restructuring and
the initial public offering was not comparable with the capital structure
subsequent to these events. See Note 1 to the Consolidated Financial
Statements for a reconciliation of the basic and diluted income per share.
(6) Adjusted to reflect the sale of 3 million shares of Class A Common Stock
offered hereby by the Company (at an assumed public offering price of $
per share and after deducting underwriting discounts and estimated offering
expenses payable by the Company) and the application of the net proceeds
therefrom to reduce indebtedness. See "Use of Proceeds."
8
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements that are based on the
current beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. All statements
other than statements of historical facts included in this Prospectus, including
without limitation, statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding the Company's financial position, business
strategy and plans and objectives of management of the Company for future
operations, are forward-looking statements. When used in this Prospectus, the
words "anticipate," "believe," "estimate," "expect" and "intend" and words or
phrases of similar meaning, as they relate to the Company or Company management,
are intended to identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("cautionary statements") are
disclosed under "Risk Factors" which follows. Based upon changing conditions, if
any one or more of these risks or uncertainties materialize, or if any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking statements
subsequent to the consummation of the Offering. All subsequent written and oral
forward-looking statements attributable to the Company and or persons acting on
its behalf are expressly qualified in their entirety by the applicable
cautionary statements.
9
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH
BELOW.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The U.S. automobile industry is considered a mature industry in which
minimal growth is expected in unit sales of new vehicles. Sales of new vehicles
by the Company have fluctuated in the past and no assurance can be given that
the Company will be able to increase or maintain unit sales from year to year in
the future. Accordingly, a principal component of the Company's growth strategy
is to make additional acquisitions in its existing and new geographic markets.
Within the past 16 months, the Company purchased 16 new dealerships and has
entered into an agreement to acquire an additional dealership.
The Company's future growth and financial success will be dependent upon a
number of factors including, among others, the Company's ability to identify
acceptable acquisition candidates, consummate the acquisition of such
dealerships on terms that are favorable to the Company, obtain the consent of
automobile manufacturers, hire and train professional management and sales
personnel at each such acquired dealership, and promptly and profitably
integrate the acquired operations into the Company. The Company has and may
continue to acquire dealerships with net profit margins which are materially
lower than the Company's historical average net profit margin. No assurance can
be given that the Company will be able to improve the profitability of such
acquired dealerships. To manage its expansion, the Company will continue to
evaluate the adequacy of its existing systems and procedures, including, among
others, its financial and reporting control systems, data processing systems and
management structure. However, no assurance can be given that the Company will
adequately anticipate all of the demands its growth will impose on such systems,
procedures and structure. Any failure to adequately anticipate and respond to
such demands could have a material adverse effect on the Company.
Acquisitions of additional dealerships will require substantial capital
investment and could have a significant impact on the Company's financial
position and operating results. Any such acquisitions may involve the use of
cash (including the net proceeds of this Offering) or the issuance of additional
debt or equity securities, which could have a dilutive effect on the
then-outstanding capital stock of the Company. Future acquisitions may result in
the accumulation of additional goodwill and intangible assets, which would
result in higher amortization charges to the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business-- Growth Strategy."
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
The Company is significantly dependent upon its relationships with, and the
success of, certain automobile manufacturers or authorized distributors thereof
(collectively referred to herein as "manufacturers"). For the three months ended
December 31, 1997, Chrysler, Ford and Toyota collectively accounted for 71% of
the Company's new vehicle sales. No assurance can be given that the Company will
reduce such dependency on these manufacturers. The Company may become dependent
on additional manufacturers in the future as a result of new acquisitions.
Each of the Company's dealerships operates pursuant to a franchise agreement
with each of the respective manufacturers for which it serves as franchisee.
Manufacturers exert significant control over the Company's dealerships through
the terms and conditions of their franchise agreements, including provisions for
termination or non-renewal for a variety of causes. The Company from
time-to-time has failed to comply with certain provisions of its franchise
agreements. These agreements, however, generally afford the Company a reasonable
opportunity to cure violations and no manufacturer has terminated or failed to
renew any franchise agreement with the Company. If a manufacturer terminates or
declines to renew one
10
<PAGE>
or more of the Company's significant franchise agreements, such action could
have a material adverse effect on the Company and its business.
The Company also is dependent upon its manufacturers to provide it with an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the manufacturers. In order to obtain sufficient numbers of these vehicles,
the Company may be required to purchase a larger number of less desirable makes
and models than it would otherwise purchase. Sales of less desirable makes and
models may result in lower profit margins than sales of the more popular
vehicles. If the Company is unable to obtain sufficient quantities of the most
popular makes and models, its profitability may be adversely affected.
With the exception of the Saturn franchise, the Company's franchise
agreements with the manufacturers do not give the Company the exclusive right to
sell that manufacturer's product within a given geographical area. Accordingly,
a manufacturer could grant another dealer a franchise to start a new dealership
in proximity to one or more of the Company's locations or an existing dealer
could move its dealership to a location which would be directly competitive with
the Company. Such an event could have a material adverse effect on the Company
and its operations.
The success of each of the Company's franchises is dependent to a great
extent on the success of the respective manufacturer. The success of the Company
is therefore linked to the financial condition, marketing, vehicle demand,
production capabilities and management of the manufacturers of which the Company
is a franchisee. Events such as labor strikes or negative publicity concerning a
particular manufacturer or vehicle model may adversely affect the Company. The
Company has attempted to lessen its dependence on any one manufacturer by
acquiring franchise agreements with a number of different domestic and foreign
automobile manufacturers.
MANUFACTURERS' CONSENT TO OFFERING
Each of the Company's franchise agreements requires the consent of the
manufacturer to any change in the ownership of the franchise. Until recently,
all manufacturers had expressed reluctance to permit the public ownership of
dealerships since franchises are awarded to a named individual to whom the
manufacturer looks to have direct control of the franchise and its operations.
However, within the last 18 months most manufacturers have come to accept some
level of public ownership and have adopted policies to ensure a degree of
control over transfer of ownership. In an attempt to address manufacturers'
concerns regarding the effects of public ownership of the Company, the Company's
principals established Lithia Holding and a dual-class voting structure for the
Company, designed to ensure that Sidney B. DeBoer will have voting control of
the Company for the foreseeable future. After the Offering, Lithia Holding
Company LLC's ownership of all Common Stock will drop below 50%, although it
will continue to hold sufficient voting rights to control the Company.
Four manufacturers (Honda, Saturn, Suzuki and Hyundai) have policies or
agreements with the Company which require their prior written consent to this
Offering. The Company has requested such consent; however, it is unlikely such
consent will be received prior to the Offering. The Company can give no
assurances as to whether these manufacturers will consent or object to the
Offering. Each of the four manufacturers represents less than 3% of the
Company's total sales. The Company's franchise agreements are complex, and while
the Company believes that it is not required to obtain the consent of any other
manufacturer to the Offering, there can be no assurance that any other
manufacturer will not take a contrary position.
There can be no assurance that any manufacturer that does not consent to the
Offering will not terminate its franchise agreement, refuse to renew its
franchise agreement, refuse to approve future acquisitions or take other action
which could have a material adverse effect on the Company and its operations.
The Company may have to sell one or more of its franchises or a majority
interest in such franchises in order to avoid termination by a manufacturer who
objects to the Offering. In the event of
11
<PAGE>
such a sale, no assurance can be given that the Company will be able to receive
full value for such franchises or favorable sales terms.
MANUFACTURERS' CONSENT TO ACQUISITIONS
The Company is required to obtain a consent from each relevant manufacturer
prior to the acquisition of a dealership franchise. In determining whether to
approve an acquisition, a manufacturer may consider many factors, including the
financial condition and ownership structure of the acquiror. Most major
manufacturers have now established limitations on the acquisition of new
franchisee locations. These include limitations on the total number of such
manufacturers' dealerships that may be acquired by a company, the number that
may be acquired in any market or region, the percentage of total sales that may
be controlled by one dealer group, the ownership of contiguous dealerships and
the dualing of a franchise with any other brand without consent, and the
frequency of acquisitions. The Company's ability to meet manufacturers'
requirements for acquisitions in the future will have a direct bearing on the
Company's ability to complete acquisitions and may affect its growth strategy.
Because of the public ownership structure of the Company, management does not
believe it could secure approval to acquire any Honda or Acura dealership
without a change in the current policies of the manufacturer.
In determining whether to approve an acquisition by the Company, a
manufacturer also considers factors such as the Company's past performance as
measured by the manufacturer's Customer Satisfaction Index ("CSI") scores and
sales performance at the Company's existing franchises. On occasion, certain of
the Company's franchises have had CSI scores and sales performance numbers which
were below the manufacturers' standards. Failure of the Company to maintain
satisfactory CSI scores and sales performance goals may adversely affect the
Company's ability to complete additional acquisitions.
LIMITATION ON STOCK OWNERSHIP; RESTRICTION ON TRANSFER
Certain manufacturers impose limitations on the amount of the Company's
securities that may be owned by an individual or a group without the prior
approval of such manufacturers. For example, any acquisition of a 20% or greater
ownership share of the Company by any individual or entity without prior
approval from Toyota, Isuzu, Mazda, Nissan or Saturn would be a violation of the
Company's agreement with such manufacturer. The stated policy of Honda requires
its consent to the acquisition of 10% or greater ownership share of the Company.
Without prior written consent, most manufacturers also require that Lithia
Holding and/or Sidney B. DeBoer maintain a controlling interest in the Company
or the subsidiary holding the franchise. These restrictions will limit the
Company's ability to raise additional capital or to consummate acquisitions
through the issuance of equity securities to the extent that such issuance
dilutes the ownership interest of Lithia Holding or Sidney B. DeBoer below
requisite thresholds.
COMPETITION
The automobile dealership business is highly competitive and generally
fragmented. The new and used automobile sectors are characterized by a large
number of private operators. In addition, certain regional and national car
rental companies operate retail used car lots to dispose of their used rental
cars. Private sales of used vehicles is an additional source of competition.
Consolidation has continued to accelerate in the new and used automobile
dealership business as national and regional companies are establishing large
used automobile "mega-stores." No assurances can be made with respect to the
Company's ability to continue to compete effectively with other automobile
dealers. In addition, no assurance can be given that automobile manufacturers
will not attempt to modify the historical automobile manufacturer/dealer
franchise system in such a way to increase competition among dealers or market
their vehicles through other distribution channels. See "Business--Competition."
12
<PAGE>
MATURE INDUSTRY; CYCLICAL NATURE OF AUTOMOBILE SALES
The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
"Business--Growth Strategy."
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability.
AVAILABILITY AND COST OF CAPITAL
The Company's new and used automobile sales operations require significant
capital resources. The Company's future operating results will be directly
related to the availability and cost of its capital. The principal sources of
financing for the Company's new and used automobile inventories have
historically been lines of credit from U.S. Bank N.A. and cash generated from
operations. No assurance can be given that the Company will be able to continue
to obtain capital for its current or expanded operations from these sources or
on terms and conditions acceptable to the Company.
The Company's growth through the acquisition of additional dealerships will
require substantial capital. The Company anticipates that the net proceeds from
this Offering will be used to finance the acquisition of additional dealerships.
If the Company's acquisition strategy is successful, the net proceeds from the
Offering will be fully utilized within a limited period of time and the Company
will require additional capital in order to continue its acquisition strategy.
Such expansion and new acquisitions may involve the Company using cash,
incurring additional debt or issuing equity securities, which could have a
dilutive effect on its then-outstanding capital stock. The Company may seek to
obtain funds through borrowings from institutions or by the public or private
sale of its securities subsequent to this Offering. No assurance can be given
that the Company will be able to obtain capital to finance its growth on terms
and conditions acceptable to the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DEPENDENCE ON KEY PERSONNEL AND ADDITIONAL MANAGEMENT
The Company's success will depend largely on the efforts and abilities of
its senior management, particularly Sidney B. DeBoer, the Company's Chairman and
Chief Executive Officer, M. L. Dick Heimann, the Company's President and Chief
Operating Officer, and R. Bradford Gray, the Company's Executive Vice-President.
The Company does not have employment agreements with any of its key management
personnel which would restrict their ability to terminate their employment and
compete with the Company. The Company does not maintain key man insurance on
either Messrs. DeBoer or Heimann. Further, Mr. DeBoer and Mr. Heimann are
identified in the Company's dealership franchise agreements as the individuals
who control the franchises and upon whose financial resources and management
expertise the manufacturers have relied on when awarding such franchises. The
loss of either of those individuals could materially adversely affect the
Company's on-going relationship with its vehicle manufacturers. See
"Business--Relationships with Automobile Manufacturers."
In addition, the Company places substantial responsibility on the general
managers of its dealerships for the profitability of such dealerships. The
Company has increased its number of dealerships from 7 in December 1996 to 21 as
of February 1998. This rapid expansion has resulted in the need to hire
additional managers and, as the Company continues to expand, the need for
additional experienced managers will become even more critical. The market for
qualified employees in the industry, particularly for general managers, is
highly competitive. The loss of the services of key management personnel or the
inability to attract additional qualified managers could have a material adverse
effect on the Company's business and the execution of its growth strategy.
13
<PAGE>
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's business is seasonal with a disproportionate amount of sales
occurring in the second and third quarters. Further, the Company incurs a
significant amount of training and integration costs upon the acquisition of
each new dealerships. Accordingly, due to such seasonality and the timing and
frequency of acquisitions, the Company will likely experience quarter-to-quarter
fluctuations in its operating results. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Selected Consolidated
Quarterly Financial Data."
CONCENTRATION OF VOTING POWER; ANTI-TAKEOVER PROVISIONS
Lithia Holding Company, LLC, of which Sidney B. DeBoer, the Company's
Chairman and Chief Executive Officer, is the sole managing member, holds all of
the outstanding shares of Class B Common Stock. 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. Consequently, upon completion of
the Offering, Lithia Holding will control 87.4% of the aggregate number of votes
eligible to be cast by shareholders for the election of Directors and certain
other shareholder actions. Therefore, Lithia Holding will control the election
of the Board of Directors of the Company 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 does and will continue to
control all of the outstanding Class B Common Stock, thus allowing him to
control the Company. See "Principal Shareholders." 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 shareholder approval that
do not require a class vote. See "Description of Capital Stock."
Certain provisions of the Company's Articles of Incorporation may be
considered anti-takeover provisions. For example, the Company's Board of
Directors has the authority to issue additional shares of Common Stock and up to
15,000,000 shares of Preferred Stock and determine the price, rights,
preferences and privileges (including voting rights) of those shares without any
further vote or action by the shareholders. The rights of the holders of Common
Stock are subject to, and may be materially adversely affected by, the rights of
the holders of any outstanding Preferred Stock, if any. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue shares of Preferred Stock. The Company's
Restated Articles of Incorporation and Bylaws contain certain other provisions
that may have the effect of discouraging offers to acquire the Company. See
"Description of Capital Stock."
IMPORTED PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS
Certain motor vehicles sold by the Company, as well as certain major
components of vehicles sold by the Company, are of foreign origin. Accordingly,
the Company is subject to the import and export restrictions of various
jurisdictions and is dependent to some extent upon general economic conditions
in and political relations with a number of foreign countries. Additionally,
fluctuations in currency exchange rates may adversely affect the Company's 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.
14
<PAGE>
SUPERVISION AND REGULATION; ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations. While management believes that it maintains all requisite licenses
and permits and is in substantial compliance with all applicable federal, state
and local regulations, there can be no assurance that the Company will be able
to maintain all requisite licenses and permits. The failure to satisfy those and
other regulatory requirements could have a material adverse effect on the
operations of the Company. The adoption of additional laws, rules and
regulations could also have a material adverse effect on the Company's business.
Various state and regulatory agencies have jurisdiction over the operation of
the Company's dealerships, repair shops, body shops and other operations, with
respect to matters such as consumer protection, workers' safety and laws
regarding clean air and water.
As with automobile dealerships generally, and service, parts and body shop
operations in particular, the Company's business involves the use, handling,
storage and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon,
waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. Accordingly, the Company is subject to
regulation by federal, state and local authorities establishing health and
environmental quality standards, and liability related thereto, and providing
penalties for violations of those standards.
Certain of the properties leased by the Company are located in commercial
areas and have historically been used for gasoline service stations. As a
consequence, it is possible that historical site activities or current
neighboring activities have affected properties leased by the Company and that,
as a result, additional environmental issues may arise in the future, the
precise nature of which the Company cannot now predict. See
"Business--Regulation."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,925,550 shares of Class A Common Stock, of which the 3,000,000 shares offered
hereby will, subject to certain exceptions, be freely tradable without
restriction or registration under the Securities Act of 1933, as amended (the
"Securities Act"). In addition, the Company has outstanding 4,110,000 shares of
Class B Common Stock held by Lithia Holding which is convertible on a share for
share basis into Class A Common Stock. Of the Company's outstanding shares,
74,450 shares of Class A Common Stock and all of the shares of Class B Common
Stock are "restricted" securities under the Securities Act, which the Company
believes are subject to volume limitations on resale. All of the Company's
executive officers and directors and Lithia Holding have agreed not to sell any
Class A Common Stock or securities exchangeable for or convertible into shares
of Class A Common Stock, or any option, warrant or other right to acquire such
shares, for a period of 90 days after this offering without the consent of
Furman Selz LLC. An aggregate of 619,450 shares of Class A Common Stock have
been reserved for issuance, and an additional 415,000 shares of Class A Common
Stock are expected to be reserved for issuance, under the Company's 1996 Stock
Incentive Plan. As of the date of this Prospectus, an aggregate of 175,265
shares of Class A Common Stock were issuable upon the exercise of vested stock
options granted by the Company and an aggregate of 370,574 shares were subject
to issuance upon the exercise of granted but unvested stock options. The Company
has filed a registration statement on Form S-8 under the Securities Act covering
the 619,450 shares of Class A Common Stock reserved for issuance under the
Company's 1996 Stock Incentive Plan and expects to amend such registration
statement to include the additional 415,000 shares to be reserved for issuance
thereunder. Future sales of a substantial number of shares of Class A Common
Stock, or the perception that such sales could occur, could have a material
adverse effect on the prevailing market price for the Company's Class A Common
Stock. See "Management--1996 Stock Incentive Plan" and "Description of Capital
Stock."
15
<PAGE>
VOLATILITY OF STOCK PRICE
The Company's stock price has been volatile. Quarterly and annual operating
results of the Company, variations between such results and the results expected
by investors and analysts, changes in local or general economic conditions or
developments affecting the automobile industry, the Company or its competitors
could cause the market price of the Class A Common Stock to fluctuate
substantially. As a result of these factors, as well as other factors common to
publicly traded companies, the market price could fluctuate substantially.
LACK OF DIVIDENDS
The Company has no plans to pay any cash dividends. See "Common Stock Price
Range and Dividend Policy."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby (after deducting underwriting discounts and estimated offering
expenses payable by the Company) are estimated to be $ ($ if the
Underwriters' over-allotment option is exercised in full).
The Company anticipates that the net proceeds will be used primarily to
finance acquisitions of additional automobile dealerships. Pending such
utilization of the net proceeds, the Company intends to reduce outstanding
borrowings (approximately $99.0 million at March 1, 1998) under its lines of
credit with U.S. Bank N.A. Such lines currently bear interest at rates ranging
from 7.625% to 8.75% per annum and mature on October 1, 1998 (subject to the
Company's option to convert amounts outstanding under its acquisition line to a
5-year term loan). After completion of this Offering, the Company intends to
borrow under these lines as necessary from time to time to fund purchases of new
and used automobiles and additional dealerships and for general corporate
purposes.
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Company's Class A Common Stock trades on the Nasdaq National Market
under the symbol LMTR. The quarterly high and low sales prices of the Company's
Common Stock for the period from December 18, 1996 (the date of the Company's
initial public offering) through March , 1998 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
Fourth Quarter (from December 18, 1996).................................... $ 11.50 $ 10.94
1997
First Quarter.............................................................. $ 13.13 $ 10.50
Second Quarter............................................................. $ 12.38 $ 9.50
Third Quarter.............................................................. $ 14.25 $ 10.50
Fourth Quarter............................................................. $ 19.00 $ 13.63
1998
First Quarter (through March , 1998)..................................... $ 17.00 $ 12.00
</TABLE>
On March , 1998, the closing sale price as reported on the Nasdaq
National Market was $ per share. As of March 1, 1998, the Company had 27
holders of record of its Class A Common Stock.
The Company does not intend to declare or pay cash dividends. The Company
intends to retain any earnings that it may realize in the future to finance its
acquisitions and operations. The payment of any future dividends will be subject
to the discretion of the Board of Directors of the Company and will depend upon
the Company's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal restrictions on the payment of dividends and other
factors the Board of Directors deems relevant.
17
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and total consolidated
capitalization of the Company at December 31, 1997 (i) on an actual historical
basis and (ii) as adjusted to reflect the sale of 3,000,000 shares of Class A
Common Stock pursuant to the Offering and the application of the estimated net
proceeds therefrom to reduce indebtedness. This table should be read in
conjunction with the Consolidated Financial Statements and related notes
appearing elsewhere in this Prospectus. See also, "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Flooring notes payable.................................................................... $ 82,598 $
Current maturities of long-term debt...................................................... 2,688
Current portion of capital leases......................................................... 99
--------- -----------
Total short-term debt................................................................... $ 85,385 $
--------- -----------
--------- -----------
Long-term debt, less current maturities................................................... $ 24,242
Long-term capital leases, less current portion............................................ 2,316
--------- -----------
Total long-term debt.................................................................... 26,558
--------- -----------
Shareholders' equity:
Preferred Stock, no par value, 15,000,000 shares authorized, none outstanding........... -- --
Common Stock
Class A Common Stock, no par value, 100,000,000 shares authorized and outstanding;
2,925,550 outstanding; actual; and 5,925,550 as adjusted (1)........................ 28,117
Class B Common Stock, no par value, 25,000,000 shares authorized, 4,110,000
outstanding, actual and as adjusted................................................. 511
Additional paid-in capital............................................................ 59
Retained earnings....................................................................... 9,190
--------- -----------
Total shareholders' equity............................................................ 37,877
--------- -----------
Total capitalization...................................................................... $ 64,435 $
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Does not include (i) an aggregate of 619,450 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 545,839
of which were subject to outstanding options as of March 1, 1998 (see
"Management--1996 Stock Incentive Plan"); (ii) an aggregate of 15,000 shares
of Class A Common Stock reserved for issuance under the Company's 1997
Non-Discretionary Stock Option Plan for Non-Employee Directors, 3 million of
which were subject to outstanding options as of March 1, 1998 (see
"Management--Director's Compensation"); (iii) an aggregate of 250,000 shares
of Class A Common Stock reserved for issuance under the Company's Employee
Stock Purchase Plan (see "Management--Employee Stock Purchase Plan"); and
(iv) an additional 415,000 shares of Class A Common Stock to be reserved for
issuance under the Company's 1996 Stock Incentive Plan, which have been
approved by the Board of Directors, subject to completion of this Offering.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data presented below under the
captions "Consolidated Statement of Operations Data" and "Consolidated Balance
Sheet Data" for and as of the end of each of the years in the five-year period
ended December 31, 1997, are derived from the consolidated financial statements
of Lithia Motors, Inc. and Subsidiaries, which consolidated financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants.The consolidated financial statements as of December 31, 1996 and
1997 and for each of the years in the three-year period then ended, and the
report thereon, are included elsewhere in this Prospectus. The following
consolidated selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles.................................................... $ 42,663 $ 51,154 $ 53,277 $ 65,092 $ 161,294
Used vehicles................................................... 34,986 42,381 44,061 58,611 113,099
Other........................................................... 14,590 15,888 16,858 19,141 45,402
--------- --------- --------- --------- ---------
Total sales................................................... 92,239 109,423 114,196 142,844 319,795
Cost of sales..................................................... 74,224 89,709 93,559 118,333 266,363
--------- --------- --------- --------- ---------
Gross profit...................................................... 18,015 19,714 20,637 24,511 53,432
Selling, general and administrative (2)........................... 14,721 14,781 16,333 19,830 40,625
Depreciation and amortization (3)................................. 401 393 402 448 1,169
--------- --------- --------- --------- ---------
Operating income.................................................. 2,893 4,540 3,902 4,233 11,638
Interest income................................................... 216 99 179 193 138
Interest expense.................................................. (1,374) (954) (1,390) (1,353) (3,004)
Other income, net................................................. 607 902 1,036 1,156 725
--------- --------- --------- --------- ---------
Income before minority interest and income taxes.................. 2,342 4,587 3,727 4,229 9,497
Minority interest................................................. (233) (458) (778) (687) --
--------- --------- --------- --------- ---------
Income before income taxes (1) (2)................................ $ 2,109 $ 4,129 $ 2,949 3,542 9,497
--------- --------- ---------
--------- --------- ---------
Income tax (expense) benefit...................................... 813 (3,538)
--------- ---------
Net income........................................................ $ 4,355 $ 5,959
--------- ---------
--------- ---------
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Income before taxes, and minority interest, as reported........... $ 2,342 $ 4,587 $ 3,727 $ 4,229
Pro forma provision for taxes (4)................................. (890) (1,743) (1,430) (1,623)
--------- --------- --------- ---------
Pro forma net income.............................................. $ 1,452 $ 2,844 $ 2,297 $ 2,606
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income per share (5)...................................... $ 0.50 $ 0.56 $ 0.85
--------- --------- ---------
--------- --------- ---------
Diluted net income per share (5).................................... $ 0.47 $ 0.52 $ 0.82
--------- --------- ---------
--------- --------- ---------
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................... $ $ $ $ 25,431 $ 23,870
Total assets...................................................... 68,964 166,526
Short-term debt................................................... 24,380 23,511 22,300 22,000 85,385
Long-term debt, less current maturities........................... 3,789 6,748 10,743 6,160 26,558
Total shareholders' equity........................................ 6,094 3,716 27,914 37,877
</TABLE>
- --------------------------
(1) Effective January 1, 1997, the Company converted from the LIFO method of
accounting for inventories to the FIFO method. Accordingly, the 1993, 1994,
1995 and 1996 data has been restated to reflect this change. See Note 1 of
Notes to Consolidated Financial Statements.
19
<PAGE>
(2) Prior to 1994, the Company and its affiliated entities paid cash bonuses to
their shareholders and members in amounts approximating their respective
income tax liability on their undistributed earnings ($532,000 in 1991,
$640,000 in 1992, and $1.0 million in 1993), in addition to their normal
salaries. These cash bonuses are reflected in the selling, general and
administrative expense above. In 1994 and subsequent periods, cash to meet
the shareholders' and members' tax liabilities was distributed to the
shareholders and members as dividends. The Company believes that for a fair
evaluation of its historical performance, results for 1991, 1992 and 1993
should be adjusted to eliminate such bonus payments.
(3) Does not include depreciation included in cost of sales related to vehicles
leased to others. See "Consolidated Statements of Cash Flows" for total
depreciation and amortization.
(4) The Company was an S Corporation and accordingly was not subject to federal
and state income taxes during the periods indicated. Pro forma net income
reflects federal and state income taxes as if the Company had been a C
Corporation, based on the effective tax rates that would have been in effect
during these periods. See "Company Restructuring and Prior S Corporation
Status" and Notes 1 and 8 to the Company's Consolidated Financial
Statements.
(5) The per share amounts are pro forma for 1995 and 1996 and actual for 1997.
20
<PAGE>
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 audited consolidated financial statements of the Company
and the notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996(1) 1996(1) 1996(1) 1996(1) 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles........................ $ 14,817 $ 16,665 $ 16,524 $ 17,086 $ 24,829 $ 31,627 $ 44,562
Used vehicles....................... 13,239 15,157 15,075 15,140 22,641 25,778 28,963
Other............................... 4,390 4,775 4,924 5,052 7,234 9,017 12,048
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total sales........................... 32,446 36,597 36,523 37,278 54,704 66,422 85,573
Cost of sales......................... 26,847 30,588 29,957 30,941 45,755 55,706 71,388
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 5,599 6,009 6,566 6,337 8,949 10,716 14,185
Selling, general and administrative... 4,410 4,646 5,090 5,684 6,995 8,195 10,849
Depreciation and amortization......... 107 110 112 119 169 222 313
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income...................... 1,082 1,253 1,364 534 1,785 2,299 3,023
Other income (expense), net........... (145) (50) (159) 350 79 (72) (450)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes................... 937 1,203 1,205 884 1,864 2,227 2,573
Income taxes (2)...................... 360 477 462 324 720 859 994
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (2)........................ $ 577 $ 726 $ 743 $ 560 $ 1,144 $ 1,368 $ 1,579
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Basic net income per share (2)........ $ 0.13 $ 0.16 $ 0.16 $ 0.12 $ 0.17 $ 0.20 $ 0.23
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted net income per share (2)...... $ 0.12 $ 0.15 $ 0.15 $ 0.11 $ 0.16 $ 0.19 $ 0.22
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996(1) 1996(1) 1996(1) 1996(1) 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles........................ 45.7% 45.6% 45.0% 45.8% 45.4% 47.6% 52.0%
Used vehicles....................... 40.8% 41.4% 41.5% 40.6% 41.4% 38.8% 33.9%
Other............................... 13.5% 13.0% 13.5% 13.6% 13.2% 13.6% 14.1%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 82.8% 83.6% 82.0% 83.0% 83.6% 83.9% 83.4%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 17.2% 16.4% 18.0% 17.0% 16.4% 16.1% 16.6%
Selling, general and administrative... 13.6% 12.7% 14.0% 15.3% 12.8% 12.3% 12.7%
Depreciation and amortization......... 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.4%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income...................... 3.3% 3.4% 3.7% 1.4% 3.3% 3.5% 3.5%
Other income (expense), net........... (0.4)% (0.1)% (0.4)% 1.0% 0.1% (0.1)% (0.5)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes................... 2.9% 3.3% 3.3% 2.4% 3.4% 3.4% 3.0%
Income taxes (2)...................... 1.1% 1.3% 1.3% 0.9% 1.3% 1.3% 1.1%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (2)........................ 1.8% 2.0% 2.0% 1.5% 2.1% 2.1% 1.9%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31,
1997
-----------
<S> <C>
Sales:
New vehicles........................ $ 60,276
Used vehicles....................... 35,717
Other............................... 17,103
-----------
Total sales........................... 113,096
Cost of sales......................... 93,514
-----------
Gross profit.......................... 19,582
Selling, general and administrative... 14,586
Depreciation and amortization......... 465
-----------
Operating income...................... 4,531
Other income (expense), net........... (1,698)
-----------
Income before taxes................... 2,833
Income taxes (2)...................... 965
-----------
Net income (2)........................ $ 1,868
-----------
-----------
Basic net income per share (2)........ $ 0.27
-----------
-----------
Diluted net income per share (2)...... $ 0.25
-----------
-----------
DEC. 31,
1997
-----------
<S> <C>
Sales:
New vehicles........................ 53.3%
Used vehicles....................... 31.6%
Other............................... 15.1%
-----------
Total sales........................... 100.0%
Cost of sales......................... 82.7%
-----------
Gross profit.......................... 17.3%
Selling, general and administrative... 12.9%
Depreciation and amortization......... 0.4%
-----------
Operating income...................... 4.0%
Other income (expense), net........... (1.5)%
-----------
Income before taxes................... 2.5%
Income taxes (2)...................... 0.8%
-----------
Net income (2)........................ 1.7%
-----------
-----------
</TABLE>
- --------------------------
(1) The quarterly data for 1996 has been restated to give effect for the
conversion from the LIFO method of accounting for inventory to the FIFO
method, which was effective January 1, 1997.
(2) The quarterly data for 1996 is pro forma in order to be comparable to 1997
data due to S Corporation status in 1996 and C Corporation status in 1997,
as well as the elimination of minority interest pursuant to the
restructuring at the time of the initial public offering.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Prospectus. The following includes a discussion of certain significant business
trends and uncertainties as well as other forward-looking statements. For a
discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors."
GENERAL
Lithia Motors is a leading retailer of new and used vehicles in the western
United States, offering 21 domestic and imported makes of new automobiles and
light trucks at 21 locations: 11 in California, 7 in Oregon and 3 in Nevada. The
Company sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services, and arranges
related financing and insurance for its automotive customers. The Company has
grown primarily by successfully acquiring and integrating dealerships and by
obtaining new dealer franchises. The Company's strategy is to continue as a
leading acquirer and operator of dealerships in the western United States.
The following table sets forth selected condensed financial data expressed
as a percentage of total sales for the periods indicated for the average
automotive dealer in the United States (1997 data is not yet available).
AVERAGE U.S. DEALERSHIP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Sales:
New vehicles............................................................... 58.6% 57.7%
Used vehicles.............................................................. 29.0% 30.4%
Parts, service and other................................................... 12.4% 11.9%
--------- ---------
Total sales.............................................................. 100.0% 100.0%
Gross profit................................................................. 12.9% 12.9%
Income before taxes.......................................................... 1.4% 1.5%
</TABLE>
- ------------------------
Source: NADA Industry Analysis Division (latest information available).
The following table sets forth selected condensed financial data for the
Company expressed as a percentage of total sales for the periods indicated
below. Lithia Motors, Inc.
LITHIA MOTORS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995(1) 1996(1) 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
New vehicles.................................................... 46.6% 45.6% 50.4%
Used vehicles................................................... 38.6% 41.0% 35.4%
Parts, service and other........................................ 14.8% 13.4% 14.2%
----- ----- -----
Total sales................................................... 100.0% 100.0% 100.0%
Gross profit...................................................... 18.1% 17.2% 16.7%
Income before taxes............................................... 3.3% 3.0% 3.0%
</TABLE>
- ------------------------
(1) Restated to reflect FIFO method of accounting.
22
<PAGE>
Prior to January 1, 1997, the Company utilized the LIFO (Last In-First Out)
method of accounting for inventory ("LIFO Method"). Industry standard is to use
the specific identification method of accounting for vehicles and the FIFO
(First In-First Out) method of accounting for parts (herein collectively
referred to as the "FIFO Method"). Beginning January 1, 1997, the Company began
using the FIFO Method.Prior period statements have been restated to be
consistent with the current year presentation on the FIFO Method.
RECENT ACQUISITIONS
Since December 1996, the Company has completed the acquisition of 16
dealerships representing 16 makes of new automobiles and light trucks. An
additional acquisition is pending. The Company has accounted for each of its
acquisitions by the purchase method of accounting, and the results of operations
of these dealerships have not been included in the Company's results of
operations prior to the date they were acquired by the Company.
1997 COMPARED TO 1996
SALES. Sales for the Company increased $177.0 million, or 123.9% to $319.8
million for the year ended December 31, 1997 from $142.8 million in 1996. Total
vehicles sold during 1997 increased by 9,853, or 100.8%, to 19,631 from 9,778
during 1996. Dealerships acquired in late 1996 and 1997 accounted for 9,836 of
the total vehicles sold in 1997. Same dealership sales growth was 4.8%, due to a
3.1% increase in vehicle sales, and a 20.7% increase in other operating sales.
NEW VEHICLES. The Company sells 21 domestic and imported brands ranging
from economy to luxury cars, as well as sport utility vehicles, minivans and
light trucks. In 1997 and 1996, the Company sold 7,493 and 3,274 new
vehicles, generating revenues of $161.3 million and $65.1 million, which
constituted 50.4% and 45.6% of the Company's total sales, respectively.
The Company purchases substantially all of its new car inventory
directly from manufacturers who allocate new vehicles to dealerships based
on the amount of vehicles sold by the dealership and by the dealership's
market area. The Company will also exchange vehicles with other dealers to
accommodate customer demand and to balance inventory.
USED VEHICLES. The Company offers a variety of makes and models of used
cars and light trucks of varying model years and prices. Used vehicle sales
are an important part of the Company's overall profitability. In 1997 and
1996, the Company sold 12,138 and 6,504 used vehicles, respectively,
generating revenues of $113.1 million and $58.6 million, which constituted
35.4% and 41.0% of the Company's total revenue, respectively.
OTHER. The Company derives additional revenue from the sale of parts
and accessories, maintenance and repair services, auto body work, and
financing and insurance ("F&I") transactions. Other operating revenue
increased 137.7% to $45.4 million during 1997, from $19.1 million during
1996, due to an increased number of F&I transactions and, to a lesser
extent, an increase in revenues derived from service department maintenance
and repairs. To a limited extent, revenues from the parts and service
department are counter-cyclical to new car sales as owners repair existing
vehicles rather than buy new vehicles. The Company believes this helps
mitigate the effects of a downturn in the new vehicle sales cycle.
GROSS PROFIT. Gross profit increased 118.0% during 1997 to $53.4 million,
compared with $24.5 million for 1996, primarily because of the increase in new
and used vehicle unit sales during the period. The gross profit margin achieved
by the Company on new vehicle sales during 1997 and 1996 was 11.4% and 13.1%,
respectively. This compares favorably with the average gross profit margin of
6.5% realized by franchised automobile dealers in the United States on sales of
new vehicles in 1996. The Company sells used vehicles to retail customers and,
in the case of vehicles in poor condition or vehicles which have not
23
<PAGE>
sold within a specified period of time, to other dealers and to wholesalers.
Sales to other dealers and to wholesalers are frequently at, or close to, cost
and therefore affect the Company's overall gross profit margin on used vehicle
sales. Excluding wholesale transactions, the Company's gross profit margin on
used vehicle sales was 11.4% in 1997 and 12.8% in 1996, as compared to the
industry average for 1996 of 11.0%. Total gross profit margin decreased to 16.7%
for 1997 from 17.2% for 1996.The decrease in gross profit margins was primarily
a result of the acquisition of several new dealerships during 1997 which were
generating gross margins lower than those of the Company. The Company's gross
profit margin continues to exceed the average U.S. dealership gross profit
margin of 12.9% for 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's selling, general
and administrative ("SG&A") expense increased $20.8 million, or 104.9%, to $40.6
million for 1997 compared to $19.8 million for 1996. SG&A as a percentage of
sales decreased to 12.7% for 1997 from 13.9% for 1996. The increase in SG&A was
due primarily to increased selling, or variable, expense related to the increase
in sales resulting from the acquisition of additional dealerships, and increased
costs associated with being a public company. The decrease in SG&A as a percent
of total sales is a result of economies of scale gained as the fixed expenses
are spread over a larger revenue base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $721,000 or 160.9% to $1.2 million for the year ended December 31,
1997 compared to $448,000 for 1996 primarily as a result of increased property
and equipment and goodwill related to acquisitions in 1997. Depreciation and
amortization was 0.4% of sales in 1997 compared to 0.3% in 1996. These figures
exclude depreciation related to leased vehicles included in cost of sales.
INTEREST EXPENSE. Interest expense increased $1.6 million or 122.0% to $3.0
million for the year ended December 31, 1997 compared to $1.4 million for 1996,
primarilyas a result of increased debt in 1997 related to acquisitions, partly
offset by increased cash balances for a majority of the year related to the
Company's initial public offering.
OTHER INCOME, NET. Other income, net, consisting primarily of management
fees from Lithia Properties, equity in the income of Lithia Properties and other
non-dealer service income, decreased 37.3% to $725,000 for 1997 from $1.2
million for 1996. This decrease was primarily due to the one-time benefit of
insurance proceeds received in 1996 related to damage caused by a hail storm.
INCOME TAX EXPENSE. Prior to December 18, 1996, the Company and its
affiliated entities were treated as S Corporations or as partnerships under the
Internal Revenue Code for federal income tax purposes since their inception and,
as a result, have not been subject to federal or certain state income taxes.
Immediately before the completion of the Company's initial public offering on
December 18, 1996, and in connection with its restructuring, the Company and its
affiliated entities that were S Corporations terminated their status as S
Corporations and became subject to federal and state income tax at applicable C
Corporation rates.
The Company's effective tax rate for 1997 was 37.3% compared to 38.4% (on a
pro forma basis) for 1996. The Company's effective tax rate may be affected by
the purchase of new dealerships in jurisdictions with tax rates either higher or
lower than the current estimated rate.
NET INCOME. Net income rose 128.7% to $6.0 million (1.9% of total sales)
for the year ended December 31, 1997 compared to $2.6 million (1.8% of total
sales), on a pro forma basis, for 1996, as a result of the individual line item
changes discussed above.
1996 COMPARED TO 1995
SALES. Sales for the Company increased $28.6 million, or 25% from $114.2
million for 1995, to $142.8 million for the year ended December 31, 1996. Total
vehicles sold increased by 1,919, or 24.4%, from 7,859 during 1995 to 9,778 in
1996. The increase in sales was primarily from increased new and used
24
<PAGE>
vehicle unit sales as a result of increased levels of promotional activity for
certain popular brands, increased availability of late model used vehicles (both
retail and wholesale) which were in high demand and, to a lesser extent, from
increased average per unit sales prices on both new and used vehicles. Sales in
the third and fourth quarters of 1996 were also slightly higher due to a hail
storm in July that mildly damaged vehicles in the Company's lots in and around
Medford, Oregon. Such vehicles were sold at reduced prices, increasing unit
sales, and increasing the gross profit margin due to the receipt of insurance
proceeds applied to increase the gross profit rather than repair the vehicles.
Sales in the fourth quarter of 1996 also increased as a result of the
acquisition of two dealerships late in the quarter.
NEW VEHICLES. In 1996 and 1995, the Company sold 3,274 and 2,715 new
vehicles, respectively, generating revenues of $65.1 million and $53.2
million, which constituted 45.6% and 46.7% of the Company's total revenues,
respectively.
USED VEHICLES. In 1996 and 1995, the Company sold 6,504 and 5,144 used
vehicles, respectively, generating revenues of $58.6 million and $44.1
million, constituting 41.0% and 38.6%, respectively, of the Company's total
revenue.
OTHER. Revenue from maintenance and repair service, parts and other
operating revenue increased 13.5% to $19.1 million during 1996, from $16.9
million during 1995, due to an increased number of F&I transactions and to a
lesser extent, an increase in revenues derived from service department
maintenance and repairs.
GROSS PROFIT. Gross profit increased 18.8% during 1996 to $24.5 million,
compared with $20.6 million for 1995, primarily because of the increase in new
and used vehicle unit sales during the period. The gross profit margin achieved
by the Company on new vehicle sales during 1996 and 1995 was 13.1% and 12.8%,
respectively, compared to the average gross profit margin obtained by franchised
automobile dealers in the United States on sales of new vehicles of 6.5% in
1996. Excluding wholesale transactions, the Company's gross profit margin on
used vehicle sales was 12.8% in 1996 and 13.2% in 1995, as compared to the
industry average for 1995 of 11.5%. Gross profit margin decreased to 17.2% for
1996 from 18.1% for 1995. The decrease in gross profit margins is primarily due
to a reduction in gross profit margins on used vehicle sales caused by an
increase in wholesale sales of used vehicles, which typically provide negligible
profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's SG&A expense
increased $3.5 million, or 21.4%, to $19.8 million for 1996 compared to $16.3
million for 1995. SG&A as a percentage of sales decreased to 13.9% for 1996 from
14.3% for 1995. The increase in SG&A expense was due primarily to increased
selling, or variable, expense related to the increase in sales, and to a lesser
extent, an increase in compensation for additional personnel and management in
preparation for acquisitions.
INTEREST EXPENSE. In connection with the reorganization of the Company
prior to its initial public offering, and the termination of the Company's
status as an S Corporation, the Company distributed to the shareholders
promissory notes ("Dividend Notes") in the aggregate amount of $3.9 million,
representing approximately all of the previously taxed undistributed earnings of
the Company through December 31, 1995. The Company's interest expense remained
stable at $1.4 million for 1996 and 1995 because the increase in total debt
outstanding for 1996 caused by the distribution of the Dividend Notes was offset
by a decrease in interest rates during 1996.
OTHER INCOME, NET. Other income, net, consisting primarily of management
fees from Lithia Properties, equity in the income of Lithia Properties and other
non-dealer service income, increased 11.6% to $1.2 million for 1996 from $1.0
million for 1995. This increase was primarily due to insurance proceeds received
in 1996 related to damage caused by a hail storm.
INCOME TAX BENEFIT. The Company and its affiliated entities have been
treated for federal income tax purposes as S Corporations or as partnerships
under the Internal Revenue Code since their inception and,
25
<PAGE>
as a result, have not been subject to federal or certain state income taxes.
Immediately before the completion of the Company's initial public offering on
December 18, 1996 and in connection with its restructuring, the Company and its
affiliated entities that were S Corporations terminated their status as S
Corporations and became subject to federal and state income tax at applicable C
Corporation rates. As a result of the conversion from S Corporation status to C
Corporation status in December 1996, the Company recorded a deferred tax asset
of $906,000 and a corresponding benefit of $906,000 to income taxes in the
fourth quarter of 1996.
Prior to 1994, the shareholders and members of the Company and the
affiliated entities each received substantial year-end tax payment bonuses to
provide the cash to pay income taxes on the Company's and affiliated entities
income which was taxable to the principals. Such payments were reflected in SG&A
expense.
NET INCOME. Net income was $2.6 million (1.8% of total sales) for the year
ended December 31, 1996, on a pro forma basis, compared to $2.3 million (2.0% of
total sales), on a pro forma basis, for 1995, as a result of the individual line
item changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for capital resources are to finance
acquisitions, capital expenditures and increased working capital requirements.
Historically, the Company has relied primarily upon internally generated cash
flows from operations, borrowings under its credit facility and the proceeds
from its initial public offering to finance its operations and expansion.
The Company's credit facility with a syndicate of banks, with U.S. Bank N.A.
as agent, provides for aggregate borrowings of $175 million (the "Credit
Facility").The Credit Facility consists of (i) a $110 million revolving line of
credit to finance new and used vehicle inventory (the "Flooring Line"), (ii) a
$30 million revolving line of credit for acquisitions (the "Acquisition Line"),
(iii) a $10 million revolving line of credit for leased vehicles (the "Lease
Line"), (iv) a $10 million revolving line of credit for equipment (the
"Equipment Line"), and (v) a $15 million commitment for real estate acquisitions
(the "Real Estate Line").
The Credit Facility has a maturity date of October 1, 1998. At that time,
the Company has the right to elect to convert outstanding loans under the
Acquisition Line and the Equipment Line to a term loan payable over 5 years.
Amounts outstanding at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Flooring Line...................................................................... $ 82,598
Acquisition Line................................................................... 5,000
Lease Line......................................................................... 5,211
Equipment and Real Estate Lines.................................................... 4,827
---------
Total............................................................................ $ 97,636
---------
---------
</TABLE>
Loans under the Credit Facility bear interest at LIBOR (London Interbank
Offered Rate) plus 150 to 275 basis points, equivalent to 7.625% to 8.75% at
December 31, 1997.
The Credit Facility contains financial covenants requiring the Company to
maintain compliance with, among other things, specified ratios of (i) minimum
net worth; (ii) total liabilities to net worth; (iii) funded debt to cash flow;
(iv) fixed charge coverage; and (v) maximum allowable capital expenditures. The
Company is currently in compliance with all such financial covenants.
26
<PAGE>
Since December 1996 when the Company completed its initial public offering,
the Company has acquired 16 dealerships. The aggregate net investment by the
Company was approximately $46.6 million (excluding borrowings on its credit
lines to finance acquired vehicle inventories and equipment).
The Company anticipates that it will be able to satisfy its cash
requirements at least through December 31, 1998, including its currently
anticipated growth, primarily with cash flow from operations, borrowings under
the Flooring Line and the Company's other lines of credit, cash currently
available, and the proceeds of this Offering. In addition, the Company is
exploring various alternative financing arrangements with respect to its real
estate, the result of which would be to provide additional available cash. No
specific plans have been made in that regard as of the date of this Prospectus.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been lower in the first and fourth
quarters of each year largely due to consumer purchasing patterns during the
holiday season, inclement weather and the reduced number of business days during
the holiday season. As a result, financial performance for the Company is
generally lower during the first and fourth quarters than during the other
quarters of each fiscal year; however, this did not hold true for the fourth
quarters of 1996 and 1995. Management believes that interest rates, levels of
consumer debt, consumer buying patterns and confidence, as well as general
economic conditions, also contribute to fluctuations in sales and operating
results. The timing of acquisitions may cause substantial fluctuations of
operating results from quarter to quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130").This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements.The objective of SFAS 130
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company expects to adopt SFAS 130 in the first
quarter of 1998 and does not expect comprehensive income to be materially
different from currently reported net income.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way that public
business enterprises report information about operating segments in interim and
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company expects to adopt SFAS 131 for its fiscal year beginning January 1,
1998.
INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's revenues or
profitability. In the past, the Company has been able to maintain its profit
margins during inflationary periods.
YEAR 2000
The Company has assessed the implications of the Year 2000 issue and has
determined that the cost of making its information systems Year 2000 compliant
will not be material.
27
<PAGE>
INDUSTRY
Domestic and foreign automobile manufacturers distribute their vehicles
through franchised dealerships. In 1996, franchised automobile dealers in the
United States sold over $320 billion in new cars and light trucks and over $170
billion in used vehicles. New vehicle sales grew at an average rate of 14.4%
from 1992 to 1996, while new vehicle unit sales grew at an average rate of 4.1%
over the same period. From 1992 through 1996 used vehicle units and revenues
grew at average rates of 6.2% and 14.7%, respectively. See "Risk
Factors--Cyclical Nature of Automobile Sales." The following chart provides
information about new and used vehicle unit and dollar sales of U.S. franchised
dealerships for the years 1992 to 1996. Used vehicle sales reflect sales at
retail and wholesale from franchised dealerships, but do not include sales by
independent used car and truck retailers. Sales by independent used vehicle
retailers were $81.0, $100.2, $133.8, $129.3 and $121.4 billion, respectively,
from 1992 to 1996.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLES SALES
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales........................................... 12.9 13.9 15.1 14.8 15.1
New vehicle sales revenue........................................ $ 220.6 $ 253.0 $ 289.9 $ 302.7 $ 328.4
Used vehicle unit sales.......................................... 15.1 16.3 17.8 18.5 19.2
Used vehicle sales revenue....................................... $ 99.5 $ 115.0 $ 138.6 $ 157.0 $ 171.8
</TABLE>
- ------------------------
Sources: NADA; CNW Market Research.
Dealerships sell new and used vehicles and offer a range of other services
and products, including repair and warranty work, replacement parts, extended
warranty coverage, financing and credit insurance. In 1996, the average
dealership's revenue consisted of 57.7% new vehicle sales, 30.4% used vehicle
sales and 11.9% other products and services. However, as a result of intense
competition for new vehicle sales, the typical dealership currently generates
substantially all of its profits from the sale of used vehicles and finance and
insurance products, as well as revenues derived from the dealership's parts and
service departments.
Automotive dealership profitability varies widely and depends, in part, on
the effective management of inventory, marketing, competition, quality control
and customer responsiveness. Since 1992, retail automobile dealerships in the
United States have generated between 12.9% and 13.8% average gross profit margin
and between 1.4% and 1.8% pre-tax profit margin, on sales.
In recent years, manufacturers have offered attractive lease terms to reduce
the monthly costs of owning a new automobile, especially on short-term vehicle
leases. Such leases bring the consumer back to the new vehicle market sooner
than if the purchase had been financed through longer-term debt financing and
provide new vehicle dealerships with a steady source of late-model, off-lease
vehicles for their used vehicle inventory. Vehicle leases also enable the parts
and service departments within each dealership to provide repair services under
factory warranty coverage for the term of the lease.
Several economic and industry factors have led to a consolidation of the
highly-fragmented vehicle dealership industry. Dealerships typically have been
owned and operated by one individual who controlled a single franchise. After
significant expansion in the number of franchised dealerships in the 1950's,
competitive and economic pressures during the 1970s and 1980s, particularly the
oil embargo of 1973 and the subsequent loss of market share experienced by U.S.
automobile manufacturers to imported vehicles, forced many dealerships to close
or sell to better-capitalized dealer groups. Continued competitive and economic
pressure on dealers, combined with the easing of restrictions against multiple
dealer ownership, has led to a further reduction in the number of franchised
dealerships.
According to industry data, the number of franchised dealerships has
declined from more than 36,000 dealerships in 1960 to approximately 22,000 in
1996. While the number of dealerships has decreased, there
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<PAGE>
has been an increase in the formation of larger dealer groups. Despite this
consolidation, however, the Company estimates that the largest 100 dealer groups
generate less than 10% of total industry revenues and control approximately 5%
of all franchised dealerships.
The Company believes that the franchised automobile dealership industry will
continue to consolidate due to the increased capital required to operate
dealerships, the fact that many dealerships are owned by individuals nearing
retirement age and the desire of certain manufacturers to strengthen their
dealer networks through consolidating their franchised dealerships. The Company
believes that an opportunity exists for dealership groups with significant
equity capital and experience in identifying, acquiring and professionally
managing dealerships to acquire additional franchises either for cash, stock,
debt or a combination thereof. Publicly-owned dealership groups, such as the
Company, are able to offer prospective sellers tax-advantaged transactions
through the use of publicly-traded stock which may, in certain circumstances,
make them more attractive acquirors to prospective sellers.
29
<PAGE>
BUSINESS
GENERAL
Lithia Motors is a leading automotive retailer offering a total of 21 brands
in 21 locations in the western United States. The Company currently operates 11
dealerships in California, 7 in Oregon and 3 in Nevada. The Company sells new
and used cars and light trucks, sells replacement parts, provides vehicle
maintenance, warranty, paint and repair services, and arranges related financing
and insurance for its automotive customers. Since December 1996 when the Company
completed its initial public offering, Lithia has acquired 16 dealerships and is
actively pursuing additional acquisitions with one currently pending.
In 1997, the Company generated record total sales, net income and unit sales
of new and used vehicles. Total sales increased to $319.8 million in 1997 from
$142.8 million in 1996, an increase of 124%. For the same period, net income
increased to $6.0 million from $2.6 million (pro forma), an increase of 129%. In
the fourth quarter of 1997, the Company's total sales and net income were $113.1
million and $1.9 million, respectively, representing growth of 203% and 234%
compared to the same period in 1996. New vehicle unit sales increased to 7,493
in 1997 from 3,274 in 1996, an increase of 129%, and retail used vehicle unit
retail sales increased from 4,156 to 7,148, an increase of 72%.
Lithia was founded in 1946 and its two senior executives have managed the
Company for over 27 years. Management has developed and implemented its
acquisition and operating strategies which have enabled the Company to
successfully identify, acquire and integrate dealerships, achieving
profitability superior to industry averages. In 1997, the Company was able to
achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus
12.9% and 1.5%, respectively, for the industry (latest 1996 data).
The Company intends to continue to take advantage of the consolidation
opportunities in the $640 billion automotive retailing industry. According to
industry data, the number of franchised automobile dealerships has declined from
more than 36,000 dealerships in 1960 to approximately 22,000 in 1997. Currently,
the largest 100 dealer groups generate less than 10% of total industry sales and
control approximately 5% of all franchised automobile dealerships. Several
economic and industry factors are expected to lead to the further consolidation
of the automobile retailing industry, including increasing capital requirements
necessary to operate an automobile dealership, the fact that many dealerships
are owned by individuals nearing retirement age who are seeking exit
opportunities, and the desire of manufacturers to strengthen their dealer
networks through consolidation. The Company believes that it is well positioned
to continue to capitalize on the highly fragmented and consolidating automotive
retail industry.
GROWTH STRATEGY
The Company has become a leading acquiror of automobile dealerships in the
western United States. The Company pursues a disciplined acquisition strategy,
targeting acquisitions in certain under-dealered markets where management
believes the Company has the opportunity to acquire a cluster of dealerships
over time and build a significant market presence. This strategy is patterned
after the Company's operations in southern Oregon where, prior to two recent
acquisitions, the Company operated 5 dealerships with annual revenues
approximating $135 million. The Company's current core markets are South-Central
Oregon, the Northeast Bay Area and South-Central Valley regions of California,
and Northern Nevada. Within these markets, the Company's evaluation of potential
acquisitions takes into account a dealership's size and reputation, and the
brand of vehicles sold by the dealership.
Over the last 16 months, the Company has completed the purchase of 16
dealerships with pre-acquisition annual revenues of approximately $436 million
for an aggregate net investment of $46.6 million (excluding real estate
purchases or borrowings on credit lines to finance acquired vehicle inventories
and
30
<PAGE>
equipment). In addition, the Company has one pending fill-in acquisition in an
existing core market. The following table sets forth certain information
regarding recent acquisitions:
<TABLE>
<CAPTION>
PRIOR-YEAR
ANNUAL
REVENUES(1)
REGION LOCATION BRANDS (MILLIONS) DATE ACQUIRED
- ----------------------------------- ------------------- --------------------- ------------- ------------------
<S> <C> <C> <C> <C>
South-Central Oregon Eugene, OR Dodge, Dodge Trucks $ 32 December 1996
Medford, OR Nissan, BMW 15 February 1998
Northeast Bay Area, California Vacaville, CA Toyota 28 December 1996
Concord, CA Dodge, Dodge Trucks,
Isuzu 39 April 1997
Napa, CA Ford, Lincoln-Mercury 24 July 1997
Concord, CA Ford 70 August 1997
Concord, CA Volkswagen August 1997
South-Central Valley, California Bakersfield, CA Nissan 41 October 1997
Bakersfield, CA BMW, Acura October 1997
Fresno, CA Ford 60 December 1997
Fresno, CA Mazda December 1997
Fresno, CA Nissan 40 January 1998
Fresno, CA Jeep, Hyundai January 1998
Northern Nevada Reno, NV Isuzu, Lincoln-
Mercury, Suzuki,
Audi 78 October 1997
Sparks, NV Isuzu, Lincoln-
Mercury, Suzuki October 1997
Reno, NV Volkswagen 9 February 1998
-----
$ 436
-----
-----
</TABLE>
- ------------------------
(1) Revenues taken from dealer statements for the year prior to acquisition.
Based upon its current dealership locations, the percentage share of the
Company's total revenues from each region is approximately: South-Central
Oregon--32%; Northeast Bay Area, California--28%; South-Central Valley,
California--25%; and Northern Nevada--15%.
OPERATING STRATEGY
Upon completing an acquisition, the Company installs its management
information systems as soon as possible and implements its operating strategy.
The Company's operating strategy consists of the following elements:
VALUE PARTNERSHIP WITH MANUFACTURERS.
The Company recognizes that the manufacturers are true partners through the
franchise system. They are all large well-developed companies with enormous
resources committed to the franchise as the method of retailing their products.
They lend support in training the Company's employees, in allocating vehicles,
in designing systems for operations, in selling slower-moving inventories
through incentives and rebates, and in advertising through regional and national
sources. The Company relies on this help and encourages
31
<PAGE>
their assistance as a welcome partner. The Company cooperates in facility
design, in marketing efforts, and in program support.
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES.
The Company offers a broad range of products and services including a wide
selection of new and used cars and light trucks, vehicle financing and insurance
and replacement parts and service. At its 21 locations, the Company offers,
collectively, 21 makes of new vehicles including Dodge, Dodge Trucks, Chrysler,
Plymouth, Jeep, Ford, Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi,
Honda, Acura, Suzuki, BMW, Saturn, Pontiac, Mazda and Hyundai. In addition, the
Company sells a variety of used vehicles at a broad range of prices. By offering
new and used vehicles and an array of complementary services at each of its
locations, the Company seeks to increase customer traffic and meet specific
customer needs. The Company believes that offering numerous new vehicle brands
appeals to a variety of customers, minimizes dependence on any one manufacturer
and reduces its exposure to supply problems and product cycles.
FOCUS ON USED VEHICLE SALES. In addition to the sale of new vehicles, a key
element of the Company's operating strategy is to focus on the sale of used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales to improve overall
profitability. To maintain a broad selection of high quality used vehicles and
to meet local demand preferences, the Company acquires used vehicles from
trade-ins and a variety of sources nationwide, including direct purchases and
manufacturers' and independent auctions. The Company's goal is to sell 1.5
retail used vehicles for every new vehicle sold, compared to an industry average
ratio of 0.8-to-1. The Company strives to attract customers and enhance buyer
satisfaction by offering multiple financing options, a 10-day/500-mile "no
questions asked" exchange program and a 60-day/3,000-mile warranty on every used
vehicle sold.
EMPHASZLE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company
generates substantial incremental revenue and achieves higher profitability
through the sale of certain ancillary products and services such as financing
and insurance, extended service contracts and vehicle maintenance. Employees
receive special training and are compensated on a commission basis to sell such
products and services. In 1997, the Company arranged financing for 71% of its
new vehicle sales and 74% of its used vehicle sales, compared to 42% and 51%,
respectively, for the average automobile dealership in the United States (1996
data). Sales of these other ancillary products and services represent 14% of
Lithia's total sales, compared to 12% for the average U.S. dealership. The
Company also sells extended service coverage and other vehicle protection
packages which the Company believes enhances the value of the vehicle and
provides a higher level of customer satisfaction.
EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional
management practices in all aspects of its operations, including information
technology, employee training, profit-based compensation and cash management.
These efforts have been critical in managing the rapid growth in new stores over
the last 16 months. Each dealership is its own profit center and is managed by a
trained and experienced general manager who has primary responsibility for
decisions relating to inventory, advertising, pricing and personnel. The general
manager is assisted by a 5-person operations support team consisting of
specialists in the areas of new vehicle sales, used vehicle sales, finance and
insurance, service and parts, and back office administration (including
accounting and management information systems). The Company compensates its
general managers and department managers based on the profitability of their
dealerships and departments, respectively. Senior management utilzles
computer-based management information systems to monitor each dealership's
sales, profitability and inventory on a daily basis and to
32
<PAGE>
identify areas requiring improvement. The Company believes the application of
its professional management practices provides it with a competitive advantage
over many dealerships and is critical to its ability to achieve levels of
profitability superior to industry averages.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphaszles customer
satisfaction throughout its organzlation and continually seeks to maintain its
reputation for quality and fairness. The Company trains its sales personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. In 1996, the Company implemented an innovative customer-oriented
marketing program entitled "Priority You" which provides the Company's retail
customers six value-added services which the Company believes are important to
overall customer satisfaction, including a commitment to (i) provide a customer
credit check within 10 minutes, (ii) complete a used vehicle appraisal within 30
minutes, (iii) complete the paper work within 90 minutes for a vehicle purchase,
(iv) provide a 10-day/500-mile "no questions asked" right of exchange on any
used vehicle sold, (v) provide a warranty on all used vehicles sold for 60
days/3,000 miles and (vi) make a donation to a local charity or educational
organzlation for every vehicle sold. The Company believes "Priority You" will
help differentiate it from many other dealerships, thereby increasing customer
traffic and developing stronger customer loyalty.
The Company has received a number of dealer quality and customer
satisfaction awards from various manufacturers. Most recently, Lithia's Medford
and Grants Pass, Oregon Chrysler product dealerships achieved Chrysler's highest
recognition for dealer excellence, the Five-Star Certification. The Medford
location was the first to receive this certification in the Pacific Northwest.
DEALERSHIP OPERATIONS
The Company owns and operates 11 dealership locations in California, 7 in
Oregon and 3 in Nevada. Each of the Company's dealerships sell new and used
vehicles and related automotive parts and services. The Company's primary target
market comprises middle-income customers seeking moderately-priced vehicles. The
Company offers 21 makes of new vehicles, including Dodge, Dodge Trucks,
Chrysler, Plymouth, Jeep, Ford, Lincoln-Mercury, Toyota, Isuzu, Nissan,
Volkswagen, Audi, Honda, Acura, Suzuki, BMW, Saturn, Pontiac, Mazda and Hyundai.
The operations of each of the Company's locations are overseen by a general
manager, who has primary responsibility for all aspects of the operations of the
dealership, including new and used vehicle inventory, advertising and marketing,
and the selection of personnel. Each location is operated as a profit center and
each general manager's compensation is based on dealership profitability. Each
general manager reports directly to the Company's Chief Operating Officer. In
addition, each dealership's general sales manager, used vehicle manager, parts
manager, service manager and F&I managers report directly to the general manager
and are compensated based on the profitability of their respective departments.
NEW VEHICLE SALES. The Company sells 21 domestic and imported brands
ranging from economy to luxury cars, sport utility vehicles, minivans and light
trucks. In 1997, the Company sold 7,493 new vehicles generating revenues of
$161.3 million, which constituted 50.4% of the Company's total revenues. The
33
<PAGE>
following table sets forth, by manufacturer, the percentage of new vehicle sales
by the Company during the fourth quarter of 1997.
<TABLE>
<CAPTION>
1997 FOURTH QUARTER
PERCENTAGE OF
MANUFACTURER NEW VEHICLE SALES
- --------------------------------------------------------------------------------------------- -----------------------
<S> <C>
Chrysler (Chrysler, Plymouth, Dodge, Jeep, Dodge Trucks)..................................... 32%
Ford (Ford, Lincoln, Mercury)................................................................ 27%
Toyota....................................................................................... 12%
Isuzu........................................................................................ 8%
Nissan....................................................................................... 5%
Volkswagen, Audi............................................................................. 4%
BMW.......................................................................................... 4%
Honda (Acura, Honda)......................................................................... 3%
General Motors (Saturn, Pontiac)............................................................. 2%
Suzuki....................................................................................... 2%
Mazda........................................................................................ 1%
Hyundai...................................................................................... *
---
100%
---
---
</TABLE>
- ------------------------
* Acquired in 1998.
The following table sets forth the Company's sales and gross profit margins
for new vehicle sales for the periods presented.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Units..................................................... 2,464 2,744 2,715 3,274 7,493
Sales..................................................... $ 42,663 $ 51,154 $ 53,277 $ 65,092 $ 161,294
Gross profit margin....................................... 12.8% 12.5% 12.8% 13.1% 11.4%
</TABLE>
The Company purchases substantially all of its new car inventory directly
from manufacturers who allocate new vehicles to dealerships based on the amount
of vehicles sold by the dealership and by the dealership's market area. The
Company will also exchange vehicles with other dealers to accommodate customer
demand and to balance inventory.
As required by law, the Company posts the manufacturer's suggested retail
price on every new vehicle. As is customary in the automobile industry, the
final sales price of a new vehicle is generally negotiated with the customer.
However, at the Company's Saturn dealership the Company does not deviate from
the posted price. The Company is continually evaluating its pricing practices
and policies in light of changing consumer preferences and competitive factors.
USED VEHICLE SALES. The Company offers a variety of makes and models of
used cars and light trucks of varying model years and prices. Used vehicle sales
are an important part of the Company's overall profitability. In 1997, the
Company sold 12,138 used vehicles generating revenues of $113.1 million, which
constituted 35.4% of the Company's total revenue. The Company has made a
strategic commitment to emphasize used vehicle sales. As part of its focus on
used vehicle sales, the Company retains a full-time used vehicle manager at each
of its locations and has allocated additional financing and display space to
this effort.
34
<PAGE>
The Company sells used vehicles to retail customers and, in the case of
vehicles in poor condition or vehicles which have not sold within a specified
period of time, to other dealers and to wholesalers. As the table below
reflects, sales to other dealers and to wholesalers are frequently at or close
to cost and, therefore, affect the Company's overall gross profit margin on used
vehicle sales. Excluding wholesale transactions, the Company's gross profit
margin on used vehicle sales was 11.4% in 1997, as compared to the industry
average for 1996 of 11.0%. The following table reflects used vehicle sale
transactions of the Company from 1993 through December 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Retail units.......................... 3,076 3,372 3,302 4,156 7,148
Retail sales.......................... $ 29,680 $ 36,382 $ 36,997 $ 48,697 $ 88,571
Retail gross margin................... 13.9% 13.5% 13.2% 12.8% 11.4%
Wholesale units....................... 1,642 1,834 1,842 2,348 4,990
Wholesale sales....................... $ 5,306 $ 5,999 $ 7,064 $ 9,914 $ 24,528
Wholesale gross margin................ 3.0% 3.0% 2.4% 1.7% 0.4%
Total units........................... 4,718 5,206 5,144 6,504 12,138
Total sales........................... $ 34,986 $ 42,381 $ 44,061 $ 58,611 $ 113,099
Total gross margin.................... 12.3% 12.0% 11.4% 10.9% 9.1%
</TABLE>
The Company acquires the majority of its used vehicles through customer
trade-ins. The Company also acquires its used vehicles at "closed" auctions
which may be attended only by new vehicle dealers and which offer off-lease,
rental and fleet vehicles, and at "open" auctions which offer repossessed
vehicles and vehicles being sold by other dealers.
The Company sells the majority of its used vehicles to retail purchasers. In
an effort to reach the Company's objective of 1.5 retail used vehicle sales for
every new vehicle sale, the Company employs innovative marketing programs, such
as "Priority You," which offers a 60-day/3,000-mile warranty and a
10-day/500-mile "no questions asked" exchange program on every used vehicle it
sells in order to generate customer confidence in his or her purchasing
decision. Each dealership's used vehicle manager is responsible for the
purchasing and pricing of the used vehicle inventory. The Company strives to
sell each of its used vehicles within 60 days of acquisition and financially
motivates its used vehicle managers to effect such sales within that period.
VEHICLE FINANCING AND LEASING. The Company believes that its customers'
ability to obtain financing at its dealerships is critical to its ability to
sell new and used vehicles and ancillary products and services. The Company
provides a variety of financing and leasing alternatives in order to meet the
specific needs of each potential customer. The Company believes its ability to
obtain customer-tailored financing on a "same day" basis provides it with an
advantage over many of its competitors, particularly smaller competitors who
lack the resources to offer vehicle financing or who do not generate sufficient
volume to attract the diversity of financing sources that are available to the
Company. Because of the high profit margins which are typically generated
through sales of F&I products, the Company employs more than one F&I manager at
its dealership locations. The Company's F&I managers have extensive knowledge
regarding available financing alternatives and sources and are specially trained
to determine the customer's financing needs to enable the customer to purchase
or lease an automobile. The Company seeks to finance or arrange financing for
every vehicle it sells and has financed or arranged financing for a larger
percentage of its transactions than the industry average. During 1997, the
Company financed or arranged for financing for over 71% of its new vehicle sales
and 74% of its used vehicle sales, compared to an industry average of 42% and
51%, respectively (latest 1996 data).
The Company maintains close relationships with a wide variety of financing
sources and arranges financing for its customers with those sources that are
best suited to satisfy its customers' particular needs.
35
<PAGE>
The Company also utilizes financing sources, whenever possible, that maximize
the Company's revenues on the sale of the loan or lease to such source. The
interest rates available and the required down payment, if any, depend to a
large extent, upon the bank or other institution providing the financing and the
credit history of the particular customer. Currently, the Company has
relationships with approximately 30 banks and other financial institutions who
are in a position to provide financing for automobile purchases or leases by the
Company's customers. The Company's F&I managers have close working relationships
with third-party financing sources which enables them to quickly determine a
customer's credit position and confirm the type and level of financing that the
third party can commit to provide. A credit check generally occurs within
minutes while the customer remains at the dealership, allowing the sales manager
to assist the customer in making a fully informed decision regarding the terms
of the transaction.
In most cases, the Company arranges financing for its customers from third
party sources, which relieves the Company from any credit risk. However, in
certain circumstances where the Company believes the credit risk is manageable
and the risk-weighted income is expected to exceed the earnings available upon
the immediate sale of the finance contract, the Company will directly finance or
lease the automobile to such customer. In these cases, the Company bears the
risk of default by the borrower or lessee. Historically, the Company has
provided direct financing for a minimal number of its new and used vehicle
sales.
ANCILLARY SERVICES AND PRODUCTS. In addition to arranging for vehicle
financing, the Company's F&I managers also market a number of ancillary products
and services to every purchaser of a new or used vehicle. Typically, these
products and services yield high profit margins and contribute significantly to
the overall profitability of the Company.
The Company offers third party extended service contracts which provide
that, for a predetermined and prepaid price, all designated repairs covered by
the plan during its term will be made at no additional charge above the
deductible. While all new vehicles are sold with the automobile manufacturer's
standard warranty, service plans provide additional coverage beyond the time
frame or scope of the manufacturer's warranty. Purchasers of used vehicles are
offered a similar extended service contract, even if the selected vehicle is no
longer under the manufacturer's warranty.
The Company offers its customers credit life, health and accident insurance
when they finance an automobile purchase. The Company receives a commission on
each policy sold. The Company also offers other ancillary products such as
protective coatings and automobile alarms.
The Company also owns and operates two automobile rental facilities, Avis
Rent-A-Car and Discount Auto & Truck Rental, Inc., both located in Medford,
Oregon.
PARTS AND SERVICE, BODY AND PAINT SHOP. The Company considers its parts and
service and body and paint operations to be an integral part of its customer
service program and an important element of establishing customer loyalty. The
Company provides parts and service primarily for the new vehicle brands sold by
the Company's dealerships but may also service other vehicles. In 1997, the
Company's parts and service operations generated $29.8 million in revenues, or
9.3% of total revenues. The Company uses a variable pricing structure designed
to reflect the difficulty and sophistication of different types of repairs. The
mark-up on a part is based upon the cost and availability of such part.
The parts and service business is relatively stable and provides an
important recurring revenue stream to the Company's dealerships. The Company
markets its parts and service products by notifying the owners of vehicles
purchased at its dealerships when their vehicles are due for periodic service.
This practice encourages preventive maintenance rather than post-breakdown
repairs. To a limited extent, revenues from the parts and service department are
countercyclical to new car sales as owners repair existing vehicles rather than
buy new vehicles. The Company believes this helps mitigate the affects of a
downturn in the new vehicle sales cycle.
36
<PAGE>
The Company has operated a full-service body and paint shop since 1970. In
1997, it completed a body and paint shop to service all of the Company's
dealerships located in southwest Oregon, other dealerships in the area that do
not own a body and paint shop, and a number of major automotive casualty
insurance companies that contract with the Company to perform insurance repairs.
SALES AND MARKETING
The Company places particular emphasis on customer satisfaction throughout
its organization and continually seeks to maintain its reputation for quality
and fairness. The Company's sales force works closely with each customer to
identify an appropriate vehicle at a price affordable to that customer. The
Company believes that its "counseling" approach during the sales process
increases the likelihood that a customer will be satisfied with the vehicle
purchased over a longer time period and enables the Company to sell more
vehicles at higher gross profit margins.
The Company recently implemented a marketing program entitled "Priority
You," which provides the Company's retail customers six value-added services
which the Company believes are important to the overall satisfaction of the
customer, including a commitment to (i) provide a customer credit check within
10 minutes, (ii) complete a used vehicle appraisal within 30 minutes, (iii)
complete the paper work within 90 minutes for a vehicle purchase, (iv) provide a
10-day/500-mile "no questions asked" right of exchange on any used vehicle sold,
(v) provide a 60-day/3,000-mile warranty on all used vehicles sold and (vi) make
a donation to a local charity or educational organization for every vehicle
sold. The Company believes "Priority You" will help differentiate it from
traditional dealerships, and thereby increase customer traffic and develop
customer loyalty.
Advertising and marketing play a significant role in the success of the
Company. The competitive environment of the automobile dealership industry
requires that a substantial portion of each sales dollar be allocated to
advertising. However, as is the case with most franchised automobile
dealerships, approximately 75% of the Company's advertising and marketing
expenses are paid for by the automobile manufacturers. The manufacturers also
provide the Company with market research, which assists the Company in
developing its own advertising and marketing campaigns. The Company believes
that it receives significant benefit from manufacturers' advertising,
particularly in the medium-sized markets in which the Company has been the only
representative of a manufacturer.
The Company's marketing efforts focus on a wide range of potential buyers.
The Company offers a variety of new and used cars and light trucks at a wide
range of prices and with various financing terms. The Company utilizes most
forms of media in its advertising, including television, newspaper, radio and
direct mail, including periodic mailers to previous customers. The Company
primarily uses advertising that focuses on developing its image as a reputable
dealer, offering quality service, affordable automobiles and financing for all
potential buyers. In addition, the Company's individual dealerships periodically
sponsor price discounts or other promotions designed to attract additional
customers. Each dealership has substantial control over the content and timing
of its promotions, although all advertising is coordinated by the Company. As
the Company owns several dealerships in most of the markets it serves, it
realizes cost savings on its advertising expenses from volume discounts and
other media concessions. The Company also participates as a member of a number
of advertising cooperatives or associations whose members, among other things,
pool their resources and expertise together with that of the manufacturer to
develop advertising aimed at benefiting all of their members.
MANAGEMENT INFORMATION SYSTEM
The Company's financial information, operational and accounting data and
other related statistical information are consolidated, processed and maintained
at its headquarters in Medford, Oregon, on a network of server computers and
work stations. The flexible nature of the Company's installed network allows for
accumulation, processing and distribution of information using ADP, Inc. and
Reynolds &
37
<PAGE>
Reynolds computing programs. ADP, Inc. and Reynolds & Reynolds are national
software providers for many companies including automotive dealers. All sales
and expense information, and other data related to the operations of each
dealership or other Company facility, are entered at each location. This system
allows senior management to access detailed information on a "real time" basis
from all of the Company's dealerships and other stores regarding, for example,
the makes and models of automobiles in its inventory, the mix of new and used
automobile sales, the number of automobiles being sold or leased, the percentage
of vehicles for which the Company arranged financing or sold ancillary products
and services, the profit margins being obtained on sales and the relative
performances of the Company's dealerships to each other. Such information is
also available to each dealership's general manager. Reports can be generated
that set forth and compare revenue and expense data by department and by store,
allowing management to quickly analyze the results of operations, identify
trends in the business, and focus on areas that require attention or
improvement. The Company believes that its management information system also
allows its general managers to quickly respond to changes in consumer
preferences and purchasing patterns, thereby maximizing inventory turnover.
The Company believes that its management information system is a key factor
in successfully incorporating newly acquired businesses into the Company.
Following each acquisition, the Company installs its management information
system at the dealership location, thereby quickly making the financial,
accounting and other operational data easily accessible to senior management at
the Company's corporate offices. With access to such data, senior management can
more efficiently execute the Company's operating strategy at the newly acquired
dealership.
CASH MANAGEMENT
The Company employs a centralized cash management system designed to
maximize returns and minimize interest expense. The Company's new vehicle
flooring line is supplied by the Company's bank, rather than by automobile
manufacturers, unlike many dealerships that do not have the financial condition
or results of operations that would permit them to obtain bank financing on
terms more favorable than those offered by manufacturers. As a result, the
Company's interest rate for flooring financing is 150 to 200 basis points below
the rates currently available to it from most manufacturers. In addition, in
order to minimize the outstanding balance under the Company's Flooring Line, all
available excess cash in the Company's various checking accounts is
automatically transferred at the end of each weekday to a central collateral
account at U.S. Bank N.A. These funds are used to pay down the balance under the
Flooring Line, thereby reducing interest expense. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
RELATIONSHIPS WITH AUTOMOBILE MANUFACTURERS
The Company has, either directly or through its subsidiaries, entered into
franchise or dealer sales and service agreements with each manufacturer of the
new vehicles it sells. The Company currently has agreements with Chrysler
Corporation (Chrysler, Plymouth, Dodge, Dodge Trucks, Jeep), American Honda
Motor Co. Inc. (Honda, Acura), American Isuzu Motors, Inc. (Isuzu), Ford Motor
Company (Ford, Lincoln, Mercury), General Motors Corporation (Pontiac), Mazda
Motor of America, Inc. (Mazda), Saturn Corporation (Saturn), Toyota Motor
Distributors, Inc. (Toyota), Nissan Motor Corporation, U.S.A. (Nissan), American
Suzuki Motor Corporation (Suzuki), Audi of America, Inc. (Audi), BMW of North
America, Inc. (BMW), Hyundai Motor America (Hyundai), and Volkswagen of America
(Volkswagen) (herein collectively referred to as "manufacturers").
The typical automobile franchise agreement specifies the locations at which
the dealer has the right and the obligation to sell vehicles and related parts
and products and to perform certain approved services in order to serve a
specified market area. The designation of such areas and the allocation of new
vehicles among dealerships are subject to the discretion of the manufacturer,
which (except for Saturn) does not guarantee exclusivity within a specified
territory. A franchise agreement may impose requirements on the
38
<PAGE>
dealer concerning such matters as the showroom, the facilities and equipment for
servicing vehicles, the maintenance of inventories of vehicles and parts, the
maintenance of minimum working capital, the training of personnel and the
adherence to certain performance standards established by the manufacturer
regarding sales volume and customer satisfaction. Compliance with these
requirements is closely monitored by each manufacturer. In addition,
manufacturers require each dealership to submit monthly and annual financial
statements of operations. The franchise agreements also grant the dealer the
non-exclusive right to use and display manufacturers' trademarks, service marks
and designs in the form and manner approved by each manufacturer.
Most franchise agreements expire after a specified period of time, ranging
from one to five years; however, some franchise agreements, including those with
Chrysler, have no termination date. The typical franchise agreement provides for
early termination or non-renewal by the manufacturer under certain circumstances
such as change of management or ownership without manufacturer consent,
insolvency or bankruptcy of the dealership, death or incapacity of the dealer
manager, conviction of a dealer manager or owner of certain crimes,
misrepresentation of certain information by the dealership, dealer manager or
owner to the manufacturer, failure to adequately operate the dealership, failure
to maintain any license, permit or authorization required for the conduct of
business, or a material breach of other provisions of the franchise agreement
including the dealership's poor sales performance or low CSI ratings. The dealer
is typically entitled to terminate the franchise agreement at any time without
cause.
Each franchise agreement sets forth the name of the person approved by the
manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership, and contains provisions requiring the manufacturer's prior approval
of changes in management or transfers of ownership of the dealership.
Accordingly, any significant change in ownership, including the sale of shares
by the Company to the public or the acquisition of a dealership from a third
party, is subject to the consent of the respective manufacturer. Most
manufacturers now have stated public ownership policies which the Company
believes it will be able to satisfy. Some of the policies impose additional
restrictions or conditions on the Company that would not exist under private
ownership. For a summary of the restrictions and conditions applicable to the
Company, see "Risk Factors-- Dependence on Automobile Manufacturers";
"--Manufacturers' Consent to Offering"; "--Manufacturers' Consent to
Acquisitions."
COMPETITION
The new and used automobile dealership business in which the Company
operates is highly competitive. The automobile dealership industry is fragmented
and characterized by a large number of independent operators, many of whom are
individuals, families and small groups. In the sale of new vehicles, the Company
principally competes with other new automobile dealers in the same general
vicinity of the Company's dealership locations. Such competing dealerships may
offer the same or different models and makes of vehicles that the Company sells.
In the sale of used vehicles, the Company principally competes with other used
automobile dealers and with new automobile dealers that operate used automobile
lots in the same general vicinity of the Company's dealership locations. In each
of its markets, the Company competes with numerous other new automobile dealers
selling other brands and a large number of other used automobile stores. In
addition, certain regional and national car rental companies operate retail used
car lots to dispose of their used rental cars.
The Company also may face increased competition from certain automobile
"superstores," such as CarMax, AutoNation USA and Driver's Mart Worldwide Inc.
Such used automobile superstores have emerged recently in various areas of the
United States and are beginning to expand nationally. However, the Company is
not aware of any of such superstores currently located in any region where the
Company operates dealerships. In addition, the Company competes to a lesser
extent with an increasing number of automobile dealers that sell vehicles
through nontraditional methods, such as through direct mail or via the Internet.
39
<PAGE>
The Company believes it is larger and has more financial resources than the
other operators with which it currently competes. However, as it enters other
markets, the Company may face competitors that are more established or have
access to greater financial resources. The Company, however, does not have any
cost advantage in purchasing new vehicles from manufacturers and typically
relies on advertising and merchandising, sales expertise, service reputation and
location of its dealerships to sell new vehicles.
REGULATION
The Company's operations are subject to extensive regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations. Various state and federal regulatory agencies, such as the
Occupational Safety and Health Administration and the U.S. Environmental
Protection Agency, have jurisdiction over the operation of the Company's
dealerships, repair shops, body shops and other operations, with respect to
matters such as consumer protection, workers' safety and laws regarding clean
air and water.
The relationship between a franchised automobile dealership and a
manufacturer is governed by various federal and state laws established to
protect dealerships from the generally unequal bargaining power between the
parties. Federal laws, as well as certain state laws, prohibit a manufacturer
from terminating or failing to renew a franchise without good cause.
Manufacturers are also prohibited from preventing or attempting to prevent any
reasonable changes in the capital structure or the manner in which a dealership
is financed. Manufacturers are, however, entitled to object to a sale or change
of management where such an objection is related to material reasons relating to
the character, financial ability or business experience of the proposed
transferee.
Automobile dealers and manufacturers are also subject to various federal and
state laws established to protect consumers, including so-called "Lemon Laws"
which require a manufacturer or the dealer to replace a new vehicle or accept it
for a full refund within one year after initial purchase if the vehicle does not
conform to the manufacturer's express warranties and the dealer or manufacturer,
after a reasonable number of attempts, is unable to correct or repair the
defect. Federal laws require certain written disclosures to be provided on new
vehicles, including mileage and pricing information. In addition, the financing
and insurance activities of the Company are subject to certain statutes
governing credit reporting, debt collection, and insurance industry regulation.
The imported automobiles purchased by the Company are subject to United
States customs duties and, in the ordinary course of its business, the Company
may, from time to time, be subject to claims for duties, penalties, liquidated
damages, or other charges.
As with automobile dealerships generally, and parts, service and body shop
operations in particular, the Company's business involves the use, handling and
contracting for recycling or disposal of hazardous or toxic substances or
wastes, including environmentally sensitive materials such as motor oil, waste
motor oil and filters, transmission fluid, antifreeze, freon, waste paint and
lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline
and diesel fuels. The Company has also been required to remove aboveground and
underground storage tanks containing such substances or wastes. Accordingly, the
Company is subject to regulation by federal, state and local authorities
establishing health and environmental quality standards, and liability related
thereto, and providing penalties for violations of those standards. The Company
is also subject to laws, ordinances and regulations governing remediation of
contamination at facilities it operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Company believes
that it does not have any material environmental liabilities and that compliance
with environmental laws, ordinances and regulations will not, individually or in
the aggregate, have a material adverse effect on the Company's results of
operations or financial condition. See "Risk Factors--Supervision and
Regulation; Environmental Matters."
40
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company employed approximately 1,000 persons on
a full-time equivalent basis. The service department employees at Lithia Concord
Dodge, Isuzu and Lithia Sun Valley Ford, Volkswagen, Hyundai are bound by a
collective bargaining agreement. The Company believes it has a good relationship
with its employees.
PROPERTIES
The Company and its various dealerships and other facilities occupy an
aggregate of approximately 100 acres of land, providing approximately 700,000
square feet of building space. Such properties consist primarily of automobile
showrooms, display lots, service facilities, two body and paint shops, rental
agencies, supply facilities, automobile storage lots, parking lots and offices.
The Company believes its facilities are currently adequate for its needs and are
in good repair.
The following table sets forth each of the Company's facilities, the
approximate square footage at each facility, the acreage of each location and
whether the facility is owned or leased.
<TABLE>
<CAPTION>
FACILITY
-----------------------------------------------------
TOTAL LEASED FROM
BUILDING/ TOTAL OWNED BY LEASED FROM THIRD LITHIA PROPERTIES
DEALERSHIP/FACILITY SQUARE FEET LAND/ACRES COMPANY PARTY L.L.C.(1)
- ------------------------------------------------- ----------- ------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Lithia Motors, Medford, Oregon................... 5,255 0.51 X
Lithia Honda Pontiac Suzuki Isuzu
Volkswagen, Medford, Oregon.................... 27,114 3.30 X
Lithia Toyota Lincoln-Mercury,
Medford, Oregon................................ 56,658 5.09 X
Lithia Dodge Chrysler Plymouth
Mazda Jeep, Medford, Oregon.................... 64,962 4.35 X
Saturn of Southwest Oregon,
Medford, Oregon................................ 11,226 2.08 X
Grants Pass Auto Center,
Grants Pass, Oregon............................ 32,138 4.12 X
Lithia Toyota of Vacaville, California........... 22,900 4.18 X
Lithia Dodge of Eugene, Oregon................... 35,706 5.58 X
Lithia Nissan Acura BMW,
Bakersfield, California........................ 49,000 7.12 X
Lithia Donnelly Lincoln-Mercury Audi
Suzuki Isuzu, Reno, Nevada..................... 38,373 6.00 X
Lithia Donnelly Isuzu Lincoln-Mercury
Suzuki, Sparks, Nevada......................... 8,448 1.78 X
Lithia Sun Valley Ford Volkswagen,
Concord, California............................ 78,240 12.60 X
Lithia Ford, Napa, California.................... 26,900 6.20 X
Lithia Dodge, Concord California................. 21,722 4.46 X
Lithia Isuzu, Concord, California................ 2,000 1.50 X
Lithia Ford, Fresno, California.................. 60,577 6.10 X
Lithia Mazda, Fresno, California................. 27,947 5.00 X
Lithia Body & Paint, Medford, Oregon............. 42,873 5.01 X
Thrift Auto Supply, Medford, Oregon.............. 11,230 0.46 X
Discount Auto & Truck Rental,
Medford, Oregon................................ 278 -- X
Cellular World, Medford, Oregon.................. 1,850 -- X
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
FACILITY
-----------------------------------------------------
TOTAL LEASED FROM
BUILDING/ TOTAL OWNED BY LEASED FROM THIRD LITHIA PROPERTIES
DEALERSHIP/FACILITY SQUARE FEET LAND/ACRES COMPANY PARTY L.L.C.(1)
- ------------------------------------------------- ----------- ------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Avis Rent-A-Car, Medford, Oregon................. 630 -- X X
Vacant Parcel, Medford, Oregon(2)................ -- 5.32 X
Lithia Nissan BMW, Medford, Oregon............... 22,687 4.03 X
Lithia Nissan Jeep, Fresno, California........... 47,914 6.00 X
Lithia Donnelly Volkswagen,
Reno, Nevada................................... 9,120 4.45 X
</TABLE>
- ------------------------
(1) Lithia Properties L.L.C., an Oregon limited liability company, is owned by
certain affiliates of the Company.
(2) Held for future development.
LITIGATION
The Company is, from time to time, a party to litigation that arises in the
normal course of its business operations. The Company does not believe it is
presently a party to litigation that will have a material adverse effect on its
business or operations.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The list identifies certain information regarding the Company's executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Sidney B. DeBoer(1)............ 54 Chairman, Chief Executive Officer and Secretary
M.L. Dick Heimann.............. 54 President, Chief Operating Officer and Director
R. Bradford Gray............... 46 Executive Vice President and Director
Brian R. Neill................. 44 Senior Vice President and Chief Financial Officer
Thomas Becker(1)............... 46 Director
William J. Young(1)............ 55 Director
</TABLE>
- ------------------------
(1) Member of the Audit and Compensation Committees.
SIDNEY B. DEBOER. Mr. DeBoer has served as the Chairman, Chief Executive
Officer and Secretary of the Company 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.
M.L. DICK HEIMANN. Mr. Heimann has served as the Chief Operating Officer
and Director of the Company since 1970 and was appointed President in 1997.
Prior to joining the Company, 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.
R. BRADFORD GRAY. Mr. Gray has served as Executive Vice President of the
Company since 1996 and became a Director of the Company in 1996. From 1981 to
1995, he served in various capacities with the Company, including as General
Manager of the Company's Grants Pass (1991-1995) and Lithia Dodge (1989-1991)
dealerships. Since 1975, Mr. Gray has held various positions in the automobile
sales industry, including sales representative, sales manager and general
manager.
BRIAN R. NEILL. Mr. Neill has served as the Chief Financial Officer of the
Company since September 1995 and as Senior Vice President since 1997. Prior to
joining the Company, he served as the Senior Vice President and Chief of
Operations of Jackson County Federal Bank in Medford, Oregon from 1977 to 1991.
Mr. Neill is a graduate of Northwest Christian College with a Bachelor of
Science degree in Management.
THOMAS BECKER. Mr. Becker became a Director of the Company on March 1,
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: Trinity Terrace, Ft. Worth, Texas; Cascade Manor,
Eugene, Oregon; University Retirement Community at Davis, Davis, California;
Rogue Valley Manor Community Services, Inc., Medford, Oregon; 12 Rogue Valley
Manor Community Housing Corporations located in Oregon and California; Rogue
Valley Manor Foundation and Rogue Valley Manor Home Health Care Agency, both in
Medford, Oregon. Mr. Becker began his career with Rogue Valley Manor on January
1, 1978. Mr. Becker holds a Bachelor of Science degree from the University of
Oregon.
WILLIAM J. YOUNG. Mr. Young became a Director of the Company on March 1,
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 this time, Mr. Young served with Volkswagen of America
('VOA') for 18 years,
43
<PAGE>
most recently as President and Chief Executive Officer. During his tenure as
President and CEO of VOA, Mr. Young also served as President of V-Crest Systems,
Inc. ("VCI"), a computer services company serving 1,200 auto dealer agencies,
and Director of VCI, Inc., a $2 billion financial services company.
The Company's Bylaws provide for not less than two and not more than seven
directors. The Company currently has five directors.Directors are elected by the
shareholders at the Company's annual meeting and serve until the next annual
meeting and until their successors are elected and qualified. Executive officers
are appointed by and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD
The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee reviews and approves salaries for the executive
officers, grants of stock options and other incentive compensation for employees
of the Company. The Compensation Committee also administers the Company's 1996
Stock Incentive Plan and the Company's Employee Stock Purchase Plan. The Audit
Committee recommends the selection of auditors for the Company and reviews the
results of the audit and other reports and services provided by the Company's
independent auditors.
OTHER KEY PERSONNEL
<TABLE>
<CAPTION>
YEARS WITH THE
NAME AGE COMPANY CURRENT POSITION
- -------------------------------------------- --- ----------------- -----------------------------------------------
<S> <C> <C> <C>
Stephen R. Philips.......................... 45 21 Vice President, Operations
Dorothy Crockett............................ 49 19 Vice President, Comptroller
Bryan B. DeBoer............................. 32 9 Vice President, Acquisitions
Don Jones, Jr............................... 35 9 Vice President, Operations
Bill Daves.................................. 55 7 Vice President, Operations
Jeffrey B. DeBoer........................... 33 1 Vice President, Finance/Investor Relations
</TABLE>
STEPHEN R. PHILIPS, VICE PRESIDENT, OPERATIONS. Mr. Philips joined Lithia
in 1977 and has held various positions with the Company, including Sales
Representative, Used Vehicle Manager and General Sales Manager. Since 1985 he
has held the position of General Manager of Lithia Toyota Lincoln Mercury. Mr.
Philips has won numerous awards from Toyota for customer service excellence.
DOROTHY CROCKETT, VICE PRESIDENT, COMPTROLLER. Dorothy Crockett serves as
the Company's Comptroller and has served in various administrative management
positions with the Company since 1980, including accounting, personnel and
administration of the Company's profit sharing plan.
BRYAN B. DEBOER, VICE PRESIDENT, ACQUISITIONS. Mr. DeBoer joined the
Company in 1988 and has served on the acquisition team since the end of 1996.
Prior to 1996, Mr. DeBoer worked in various capacities at Lithia, including
General Manager of the Medford Honda Isuzu Suzuki Pontiac Volkswagen dealership,
Finance Manager and General Sales Manager. He received his Bachelor of Science
degree summa cum laude in Business Administration from Southern Oregon
University in 1989 and is a graduate of the NADA Dealer Academy in Washington,
D.C.
DON JONES, JR., VICE PRESIDENT, OPERATIONS. Mr. Jones has served as
Operations and General Manager of Lithia's Dodge Chrysler Plymouth dealerships
since 1989. In 1996 he was awarded the Chrysler Five Star Award for Excellence.
Prior to joining Lithia, Mr. Jones was General Manager at Cottage Grove Motor
Company in Cottage Grove, Oregon. He received his Bachelor of Science degree in
Business from the University of Oregon in 1986.
BILL DAVES, VICE PRESIDENT, OPERATIONS. Bill E. Daves serves as the
Company's Operations Manager, a position he has held since 1981. Mr. Daves has
over 36 years of experience in the automotive industry in various positions,
including General Manager, Training Manager, F&I sales, parts and service.
44
<PAGE>
JEFFREY B. DEBOER, VICE PRESIDENT, FINANCE/INVESTOR RELATIONS. Mr. DeBoer
has been with Lithia since March 1997, serving as Vice President,
Finance/Investor Relations. Prior to joining the Company, 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. He received his Bachelor of Arts degree cum laude in Asian Studies from
Pomona College in 1988 and a Masters of Business Administration from London
Business School in 1994.
EXECUTIVE COMPENSATION
The following table shows compensation paid to the Chief Executive Officer
and each of the two other executive officers who had total compensation during
1997 exceeding $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS(#) COMPENSATION
- ---------------------------------------------- --------- ---------- ----------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Sidney B. DeBoer.............................. 1997 $ 364,800 $ 4,689 3,636 $ 9,711(2)
Chairman, Chief Executive 1996 $ 344,550 $ 1,500 68,500 $ 7,282(2)
Officer and Secretary 1995 $ 331,125 $ 1,500 -- $ 2,310(3)
M.L. Dick Heimann............................. 1997 $ 273,000 $ 1,996 3,636 $ 7,262(4)
President, Chief Operating 1996 $ 273,000 $ 1,500 68,500 $ 5,842(4)
Officer and Director 1995 $ 277,125 $ 1,500 -- $ 2,310(3)
R. Bradford Gray.............................. 1997 $ 238,000 $ 3,898 2,909 $ 6,795(5)
Executive Vice President 1996 $ 196,000 $ 3,851 68,500 $ 6,296(5)
and Director 1995 $ 189,060 $ 3,645 -- $ 5,935(6)
</TABLE>
- ------------------------
(1) Includes a "wellness bonus" of $1,500 in 1995 and 1996 and $1,000 in 1997
for each of the Named Executive Officers. All full-time employees are
entitled to an annual "wellness bonus" equal to $150 per year in 1995 and
1996 and $120 per year in 1997 for each year of employment (maximum of
$1,500 in 1995 and 1996 and $1,000 in 1997) for undergoing a physical and
other health counseling.
(2) Consists of an automobile allowance of $7,501 and $4,907 and Company
contributions to Mr. DeBoer's 401(k) account of $2,210 and $2,375 in 1997
and 1996, respectively.
(3) Consists of amounts contributed by the Company to the accounts of Mr. DeBoer
and Mr. Heimann pursuant to the Company's 401(k) Plan.
(4) Consists of an automobile allowance of $5,052 and $3,467 and Company
contributions to Mr. Heimann's 401(k) account of $2,210 and $2,375 in 1997
and 1996, respectively.
(5) Consists of an automobile allowance.
(6) Includes $2,310, contributed by the Company to the account of Mr. Gray
pursuant to the Company's 401(k) and Profit Sharing Plan and an automobile
allowance of $3,625.
45
<PAGE>
1996 STOCK INCENTIVE PLAN
In April 1996, the Board and the Company's shareholders adopted the
Company's 1996 Stock Incentive Plan (the "Plan"). The Plan provides for the
granting of stock-based awards ("Awards") to executive officers (including those
who are directors), to other employees and to non-employee consultants of the
Company. Such Awards may take any form approved by the Board or by a committee
designated by the Board, including stock options, stock bonuses, stock
appreciation rights and restricted stock awards. Stock options granted under the
Plan may be either options that qualify as "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Options"), or those that do not qualify as such "incentive stock
options" ("Non-qualified Options"). The Plan, which permits up to 670,000 shares
of the Company's Class A Common Stock to be issued, terminates on April 4, 2006.
As of March 1, 1998, Incentive and Non-Qualified Options with respect to a total
of 545,839 shares of Class A Common Stock are outstanding, and Options covering
50,550 shares of the Company's Class A Common Stock have been exercised. An
additional 73,611 shares are available for issuance under the Plan. As of March
1, 1998, options with respect to 175,265 shares are exercisable. The Board has
approved an amendment to the Plan to increase the number of shares under the
Plan by 415,000 shares. This amendment will be submitted to the Company's
shareholders for their approval at the next annual meeting of shareholders.
The Plan is administered by the Board or by a Compensation Committee of the
Board. Subject to the terms of the Plan, the Board or the Compensation Committee
determines the persons to whom Awards are granted and the terms and the number
of shares covered by each Award. The term of each option may not exceed ten
years from the date the option is granted, or five years in the case of an
incentive stock option granted to a holder of more than 10% of the fully-diluted
capital stock of the Company. Options may become exercisable in whole at grant
or in installments over time, as determined by the Committee.
With respect to the stock options granted by the Company to date, such
options generally expire when the optionee ceases to be affiliated with the
Company. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee.
The Plan provides that any Award may contain, at the discretion of the
Committee, a provision conditioning or accelerating the receipt of benefits
pursuant to such Award upon the occurrence of specified events, including
continued employment by the Company, a change in control, merger, dissolution or
liquidation of the Company or the sale of substantially all of the Company's
assets. The acceleration of vesting of Awards in the event of a merger or other
similar event may be seen as an anti-takeover provision and may have the effect
of discouraging a proposal for merger, a takeover attempt or other efforts to
gain control of the Company.
Options are generally granted with an exercise price equal to the fair
market value of Class A Common Stock on the date of the grant, but the Committee
may, in its discretion, set the exercise price at a higher or lower amount.
Under the terms of the stock options issued to date, payment upon the
exercise of an option may be in cash, by check or by delivery of shares of Class
A Common Stock with a "fair market value," as defined in the Plan, equal to the
aggregate exercise price.
STOCK OPTIONS
In lieu of certain executive annual cash bonuses in 1997, the Company
granted non-qualified stock options covering 21,454 shares exercisable at $1.00
per share. The following table contains information
46
<PAGE>
concerning the grant of stock options under the Company's 1996 Stock Incentive
Plan (the "Plan") to the Named Executive Officers in 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------------- ------------- ----------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Sidney B. DeBoer..................... 3,636 8.2% $ 1.00 12/31/05 $ 75,601 $ 111,327
M.L. Dick Heimann.................... 3,636 8.2% $ 1.00 12/31/05 $ 75,601 $ 111,327
R. Bradford Gray..................... 2,909 6.5% $ 1.00 12/31/05 $ 60,485 $ 89,068
</TABLE>
- ------------------------
(1) All options granted to the named executive officers in 1997 vest as to 20%
on the date of grant and as to an additional 20% on each of the first
through fourth anniversaries thereof and have a term of 8 years. The market
value of the underlying securities on the date of grant was $14.75.
(2) These calculations are based on certain assumed annual rates of appreciation
as prescribed by rules adopted by the Securities and Exchange Commission
requiring additional disclosure regarding executive compensation. Under
these rules, an assumption is made that the shares underlying the stock
options shown in this table could appreciate at rates of 5% and 10% per
annum on a compounded basis over the term of the stock options. Actual
gains, if any, on stock option exercises are dependent on the future
performance of the Company's Common Stock and overall stock market
conditions. There can be no assurance that amounts reflected in this table
will be achieved, or may not be exceeded.
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning the exercise of options
during 1997 and unexercised options held as of the end of the fiscal year, with
respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
SHARES OPTIONS AT FY END FY END(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sidney B. DeBoer................ 30,000 $ 462,777 25,527 16,609 $ 293,358 $ 196,533
M.L. Dick Heimann............... -- -- 55,527 16,609 $ 636,136 $ 196,533
R. Bradford Gray................ -- -- 14,281 57,128 $ 166,664 $ 674,709
</TABLE>
- ------------------------
(1) Market value of the underlying securities at December 31, 1997, $14.75 per
share, minus exercise price of the unexercised options.
EMPLOYEE STOCK PURCHASE PLAN
The Board has approved the implementation of an Employee Stock Purchase Plan
(the "Purchase Plan") and has reserved a total of 250,000 shares of Class A
Common Stock for issuance under the Purchase Plan. The Purchase Plan is subject
to the approval of the Company's shareholders which will be sought at the next
annual meeting of shareholders. The Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended, (the "Internal
Revenue Code") and will be administered by the Compensation Committee of the
Board. Under the Purchase Plan, each calendar quarter is a separate offering
period. Employees of the Company and its subsidiaries are eligible to
47
<PAGE>
participate in the Purchase Plan after they have completed at least six months
of continuous employment and work at last 20 hours per week. Mr. DeBoer, Mr.
Heimann and Mr. Gray are not currently eligible to participate in the Purchase
Plan since employees who control 5% or more of the total voting power of all
classes of the Company's stock are not eligible. The Purchase Plan allows
eligible employees to purchase shares of the Company's Class A Common Stock
through payroll deductions, which may not exceed 15% of an employee's total pay.
The price of shares purchased under the Purchase Plan will be 85% of the lower
of the fair market value of the Class A Common Stock at the beginning or at the
end of each calendar quarter. Employees may end their participation in the
Purchase Plan at any time during the calendar quarter and their participation
ends automatically on the termination of their employment. The Board may amend
or terminate the Purchase Plan at any time but may not increase the number of
shares covered by the Purchase Plan, amend the eligibility requirements or
permit members of the Compensation Committee to participate in the Purchase Plan
without further shareholder approval. The Purchase Plan will terminate on
December 31, 2007.
DIRECTOR COMPENSATION
Those directors who are not employees of the Company are paid $12,000 per
year (in equal monthly installments) and receive an additional $500 per meeting
of the Board or a committee of the Board in excess of one meeting per month.
Non-employee directors also are granted a stock option for 1,500 shares of Class
A Common Stock under the Company's 1997 Non-Discretionary Stock Option Plan for
Non-Employee Directors (the "Directors' Plan") on the January 2 following the
date on which they first join the Board and on each March 1 thereafter. Stock
options granted under the Directors' Plan have an exercise price equal to the
average of the bid and asked price of the Class A Common Stock at the close of
trading on the date of grant. Such options fully vest six months following the
date of grant and expire 10 years following such date subject to earlier
termination one year after the death or disability of the optionee or 90 days
after the optionee ceases to be a director of the Company for any other reason.
Directors of the Company who are employees do not receive any additional
compensation for serving as a director. All directors are also reimbursed for
out-of-pocket expenses which they may incur in connection with their attendance
at Board or committee meetings.
48
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock by (i) each director of the Company,
(ii) each executive officer of the Company named in the summary compensation
table, (iii) all directors and officers as a group, and (iv) each person or
entity known by the Company to own beneficially more than 5% of the Common
Stock. The number of shares owned is as of March 1, 1998 and the percentages are
both as of that date and as adjusted to reflect the sale of shares in this
offering. Except as indicated in footnotes to this table, each of the persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
----------------------------------------------------
SHARES BENEFICIALLY
OWNED BEFORE THE OFFERING AFTER THE OFFERING
---------------------- ------------------------ --------------------------
NAME AND ADDRESS CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- ---------------------------------------------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sidney B. DeBoer (2) (3) (4).................. 69,227 4,110,000 2.3% 100.0% 1.2% 100.0%
M.L. Dick Heimann (2) (3) (5)................. 94,227 -- 3.1% -- 1.6% --
R. Bradford Gray (2) (6)...................... 27,981 -- 0.9% -- 0.5% --
Thomas Becker (2) (7)......................... 5,000 -- 0.2% -- 0.1% --
William J. Young (2) (8)...................... 1,500 -- * -- * --
All directors and executive officers as a 227,730 4,110,000 7.4% 100.0% 3.7% 100.0%
group (6 persons) (9).......................
Lithia Holding Company, L.L.C. (2) (3)........ -- 4,110,000 -- 100.0% -- 100.0%
J.P. Morgan & Co. Incorporated (10) .......... 417,500 -- 14.3% -- 6.6% --
60 Wall Street
New York, NY 10260
Wellington Management Co., LLP (11) .......... 342,900 -- 11.1% -- 5.2% --
75 State Street
Boston, MA 02109
The Capital Group of Companies, Inc. (12) .... 250,000 -- 8.5% -- 4.0% --
333 S. Hope Street, 52nd Floor
Los Angeles, CA 90071
Gardner Lewis Asset Management (13) .......... 250,000 -- 8.5% -- 4.0% --
285 Wilmington West Chester Pike
Chadds Ford, PA 19317
Investment Advisors, Inc. (14) ............... 176,100 -- 6.0% -- 2.9% --
3700 First Bank Place
Minneapolis, MN 55440
<CAPTION>
PERCENT OF
VOTING
NAME AND ADDRESS POWER(1)
- ---------------------------------------------- -------------
<S> <C>
Sidney B. DeBoer (2) (3) (4).................. 87.4%
M.L. Dick Heimann (2) (3) (5)................. *
R. Bradford Gray (2) (6)...................... *
Thomas Becker (2) (7)......................... *
William J. Young (2) (8)...................... *
All directors and executive officers as a 87.6%
group (6 persons) (9).......................
Lithia Holding Company, L.L.C. (2) (3)........ 87.4%
J.P. Morgan & Co. Incorporated (10) .......... 0.9%
60 Wall Street
New York, NY 10260
Wellington Management Co., LLP (11) .......... 0.7%
75 State Street
Boston, MA 02109
The Capital Group of Companies, Inc. (12) .... 0.5%
333 S. Hope Street, 52nd Floor
Los Angeles, CA 90071
Gardner Lewis Asset Management (13) .......... 0.5%
285 Wilmington West Chester Pike
Chadds Ford, PA 19317
Investment Advisors, Inc. (14) ............... 0.4%
3700 First Bank Place
Minneapolis, MN 55440
</TABLE>
- ------------------------------
* Less than 0.1%
(1) Class A Common Stock is entitled to 1 vote per share and Class B Common
Stock is entitled to 10 votes per share.
(2) All such persons can be reached c/o 360 E. Jackson Street, Medford, Oregon
97501.
(3) Lithia Holding's members are Mr. DeBoer (53.6%), Mr. Heimann (34.9%), Mr.
Gray (7.0%), DeBoer Insurance, L.L.C. (3.8%) and Sid and Karen DeBoer
Foundation (0.7%). Mr. DeBoer, as the manager of Lithia Holding 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 held. DeBoer
Insurance, L.L.C. is owned by Mr. DeBoer's adult children.
(4) Mr. DeBoer holds options to purchase 39,227 shares of Class A Common Stock
which are exercisable within 60 days of March 1, 1998. See
"Management--Executive Compensation" and "--1996 Stock Incentive Plan."
(5) Mr. Heimann holds options to purchase 69,227 shares of Class A Common Stock
which are exercisable within 60 days of March 1, 1998. See
"Management--Executive Compensation" and "--1996 Stock Incentive Plan."
(6) Mr. Gray holds options to purchase 27,981 shares of Class A Common Stock
which are exercisable within 60 days of March 1, 1998. See
"Management--Executive Compensation" and "--1996 Stock Incentive Plan."
(7) Mr. Becker holds an option to purchase 1,500 shares of Class A Common Stock
which are exercisable within 60 days of March 1, 1998. See
"Management--Director Compensation."
49
<PAGE>
(8) Mr. Young holds an option to purchase 1,500 shares of Class A Common Stock
which is exercisable within 60 days of March 1, 1998. See
"Management--Director Compensation."
(9) Directors and executive officers as a group hold options to purchase
153,280 shares of Class A Common Stock which are exercisable within 60 days
of March 1, 1998. See "Management--Executive Compensation," "--1996 Stock
Incentive Plan" and "--Director Compensation."
(10) J. P. Morgan & Co. Incorporated ("J. P. Morgan") is the parent holding
company of Morgan Guaranty Trust Company of New York, a bank as defined in
Section 3(a)(6) of the Securities Exchange Act of 1934 and J. P. Morgan
Investment Management, Inc. and J. P. Morgan Florida Federal Savings Bank,
both of which are investment advisers registered under Section 203 of the
Investment Advisers Act of 1940. Based on information filed with the
Securities and Exchange Commission on February 13, 1998, J.P. Morgan has
sole voting power with respect to 346,800 shares and sole dispositive power
with respect to all 417,500 shares.
(11) The securities referred to herein are deemed to be beneficially owned by
Wellington Management Company, LLP ("WMC") as a result of its capacity as
investment adviser. Such securities are owned of record by clients of WMC.
Based on information filed with the Securities and Exchange Commission on
February 10, 1998, WMC has shared voting power with respect to 144,400
shares and shared dispositive power with respect to all 324,900 shares. WMC
is the parent holding company of Wellington Trust Company, NA, a bank as
defined in Section 3(a)(6) of the Securities Exchange Act of 1934.
(12) The Capital Group Companies, Inc. ("CGC") is the parent holding company of
a group of investment management companies that hold investment power and,
in some cases, voting power over the securities reported herein. The
investment management companies, which include Capital Guardian Trust
Company, a bank as defined in Section 3(a)(6) of the Securities Exchange Act
of 1934, and several investment advisers registered under Section 203 of the
Investment Advisers Act of 1940, provide investment advisory and management
services for their respective clients which include registered investment
companies and institutional accounts. Based on information filed with the
Securities and Exchange Commission on February 10, 1998, CGC does not have
investment power or voting power over any of the securities held, but may be
deemed to beneficially own such securities by virtue of Rule 13d-3 under the
Securities and Exchange Act. Capital Guardian Trust Company is the
beneficial owner of 250,000 shares of Class A Common Stock of the Company as
a result of its serving as the investment manager of various institutional
accounts.
(13) Gardner Lewis Asset Management is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940. Based on information
filed with the Securities and Exchange Commission on February 13, 1998,
Gardner Lewis Asset Management has sole voting and dispositive power with
respect to all 250,000 shares.
(14) Based on information filed February 2, 1998 with the Securities and
Exchange Commission, Investment Advisors, Inc. has sole voting power and
sole dispositive power as to 170,800 shares and shared voting power and
shared dispositive power with respect to 5,300 shares.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE AND PURCHASE OF REAL ESTATE FROM LITHIA PROPERTIES
Several of the parcels of real property on which the Company's businesses
are located are owned by Lithia Properties, the members of which are the Company
(20%), Sidney B. DeBoer (35%), M. L. Dick Heimann (30%) and three of Mr.
DeBoer's children, who own 5% each. The Company and the affiliated entities paid
an aggregate of $1.4 million in lease payments to Lithia Properties during the
years ended December 31, 1997.
The Company and Lithia Properties have entered into lease agreements with
respect to each facility, effective January 1, 1997. The leases have terms of 30
years and have aggregate annual lease payments of $1.75 million. The Company is
also responsible for property taxes, insurance and maintenance expenses. The
1997 lease payments are determined by a formula, which sets the monthly payment
at 0.83% of the fair market value of the properties according to independent
appraisals. Lease payments are paid monthly and are adjusted each year beginning
January 1998 to an amount equal to any increase in the cost of living based on
the Consumer Price Index entitled U.S. CITY AVERAGE--ALL ITEMS FOR ALL URBAN
CONSUMERS (base year 1982-84 = 100) published by the Bureau of Labor Statistics
of the U.S. Department of Labor.
Lithia Properties constructed a new body and paint shop for use by the
Company, which was completed in April 1997. The Company purchased the facility
and improvements together with a 5.3 acre parcel held for future development in
Medford, Oregon, in 1997. The total purchase price for these properties was $2.7
million. Lithia Properties retained and, after purchase of the facility, the
Company continued to retain, Mark DeBoer Construction, Inc. as the general
contractor for the project. Mark DeBoer, the owner of Mark DeBoer Construction,
Inc., is the son of Sidney B. DeBoer and is one of the members of Lithia
Properties. The general contractor fee was $128,000, an arrangement the Company
believes is fair in comparison with fees negotiated with independent third
parties.
The Company has generally chosen to lease its facilities in the past. It may
continue this practice in the future and assign any rights it acquires to
purchase real estate in connection with the acquisition of dealerships to Lithia
Properties or others. No future transfers to or leases with Lithia Properties
will be undertaken without the unanimous approval of the independent directors
on the Company's Board of Directors and a determination by such independent
directors that such transactions are the equivalent of a negotiated arm's-length
transaction with a third party.
GUARANTEE OF LITHIA PROPERTIES INDEBTEDNESS; SHORT-TERM LOAN FROM LITHIA
PROPERTIES
The Company has guaranteed and has committed to guarantee certain
indebtedness of Lithia Properties incurred in connection with the purchase or
refinancing of real property which secures mortgage loans. All of the properties
securing these loans are occupied by the Company under long-term leases with
Lithia Properties. The loans have a total outstanding principal balance of
approximately $9.3 million with interest rates from 8.25% to 10.0% and remaining
terms of from one to 11 years.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, no par value, 25,000,000 shares of Class B Common Stock,
no par value, and 15,000,000 shares of Preferred
Stock, no par value. The Board of Directors may, by its own action, decrease the
number of authorized shares of Class B Common Stock. If it does so, the number
of shares of Class A Common Stock will automatically be increased on a share for
share basis.
COMMON STOCK
Each share of Common Stock is designated as either Class A Common Stock or
Class B Common Stock. As of the date hereof, there are 2,925,550 shares of Class
A Common Stock outstanding and 4,110,000 shares of Class B Common Stock
outstanding. All of the outstanding Class B Common Stock is held by Lithia
Holding. Upon completion of this Offering, there will be 5,925,550 shares
(6,375,550 shares if the Underwriters' over-allotment option is exercised) of
Class A Common Stock and 4,110,000 shares of Class B Common Stock outstanding.
The issued and outstanding shares of Class B Common Stock have been, and the
shares of Class A Common Stock offered hereby will be, duly authorized, validly
issued, fully paid and nonassessable.
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 (the
"Adjustments").
Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of the Company. Shares of Common Stock are
not redeemable and there are no sinking fund provisions.
While the shares of Class A Common Stock are not convertible into any other
series or class of the Company's securities, each share of Class B Common Stock
is freely convertible into one share (subject to the Adjustments) of Class A
Common Stock at the option of the holder of the Class B Common Stock. All shares
of Class B Common Stock shall automatically convert to shares of Class A Common
Stock (on a share-for-share basis, subject to the Adjustments) on the earliest
record date for an annual meeting of the Company shareholders on which the
number of shares of Class B Common Stock outstanding is less than 1% of the
total number of shares of Common Stock outstanding. Shares of Class B Common
Stock may not be transferred to third parties (except for transfers to certain
family members and in other limited circumstances). Any purported transfer of
Class B Common Stock to a person who is not a permitted transferee under the
Articles of Incorporation is automatically void.
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.
Holders of Class A Common Stock are entitled to one vote for each share held
of record, and holders of Class B Common Stock are entitled to ten votes for
each share held of record. The Class A Common Stock and Class B Common Stock
vote together as a single class on all matters submitted to a vote of
shareholders (including the election of directors). However, the Oregon Business
Corporation Act would entitle either the Class A Common Stock or the Class B
Common Stock to vote as a separate voting group on any proposed amendment of the
Company's Articles of Incorporation otherwise requiring shareholder
52
<PAGE>
approval if the proposed amendment would (i) increase or decrease the aggregate
number of authorized shares of the class, (ii) 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, (iii) change the shares of all or part
of the class into a different number of shares of the same class, (iv) 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 (v) 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 shall vote on the amendment as a separate class. Shares of
Common Stock do not have cumulative voting rights with respect to the election
of directors. Immediately after this Offering, Lithia Holding will hold shares
of Class B Common Stock constituting approximately 87.4% of the voting power of
the outstanding Common Stock (or 86.6% if the underwriters' over-allotment
option is exercised), which 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. See "Principal Shareholders" and "Risk
Factors--Concentration of Voting Power; Anti-Takeover Provisions."
PREFERRED STOCK
The Board of Directors may, without further action of the shareholders of
the Company, 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 (including
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 the Company. The
Company has no present plans to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE OREGON BUSINESS CORPORATIONS ACT
The Company is subject to the Oregon Control Share Act (Oregon Revised
Statutes Sections 60.801-60.816). The Oregon Control Share Act generally
provides that a person (the "Acquiring Person") who acquires voting stock of an
Oregon corporation in a transaction which results in such Acquiring Person
holding more than 20%, 33 1/3% or 50% of the total voting power of such
corporation (a "Control Share Acquisition") cannot vote the shares it acquires
in the Control Share Acquisition ("control shares") 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 the Acquiring Person and
shares held by the Company's officers and inside directors ("interested
shares"), and by the holders of a majority of the outstanding voting shares,
including interested shares. This vote would be required at the time an
Acquiring Person's holdings exceed 20% of the total voting power of a company,
and again at the time the Acquiring Person's holdings exceed 33 1/3% and 50%,
respectively. The term "Acquiring Person" is broadly defined to 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 a "Control Share
Acquisition."
The Acquiring Person may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans with respect to the Company. The Acquiring Person
Statement may also request that the Company call a special meeting of
shareholders to determine whether the control shares will be allowed to retain
voting rights. If the
53
<PAGE>
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 Control Share Acquisition. 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.
The Company is also subject to the Oregon Business Combination Act (Oregon
Revised Statutes Sections 60.825-60.845). The Oregon Business Combination Act
generally provides that in the event a person or entity acquires 15% or more of
the voting stock of an Oregon corporation (an "Interested Shareholder"), the
corporation and the Interested Shareholder, or any affiliated entity, may not
engage in certain business combination transactions for a period of three years
following the date the person became an Interested Shareholder. Business
combination transactions for this purpose include (a) a merger or plan of share
exchange, (b) 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 the corporation's assets or outstanding
capital stock, and (c) certain transactions that result in the issuance of
capital stock of the corporation to the Interested Shareholder. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting stock of the corporation (disregarding shares
owned by directors who are also officers and certain employee benefit plans),
(ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquired 15% or more of the
corporation's voting stock, or (iii) the Board of Directors and the holders of
at least two-thirds of the outstanding voting stock of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's 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 the
Company's Board of Directors and will also discourage certain potential
acquirors unwilling to comply with the provisions of these laws. A corporation
may provide in its articles of incorporation or bylaws that the laws described
above do not apply to its shares. The Company has not adopted such a provision
and does not currently intend to do so. These laws may make the Company less
attractive for takeover, and thus shareholders may not benefit from a rise in
the price of the Common Stock that a takeover could cause.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As allowed by the Oregon Business Corporation Act, the Company's Articles of
Incorporation provide that the liability of the directors of the Company 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 the Company for
breach of a director's duties to the Company or its shareholders except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for any
unlawful distribution to shareholders; or (iv) for any transaction from which
the director derived an improper personal benefit. This provision does not limit
or eliminate the rights of the Company or any shareholder 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.
The Articles of Incorporation and the Bylaws also provide that the Company
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
54
<PAGE>
officer of the corporation. The Articles provide that the Company 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 American
Securities Transfer & Trust, Inc., Denver, Colorado.
55
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for which Furman Selz
LLC, Dain Rauscher Incorporated and EVEREN Securities, Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Class A Common Stock indicated below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Furman Selz LLC..................................................................
Dain Rauscher Incorporated.......................................................
EVEREN Securities, Inc...........................................................
----------
Total...................................................................... 3,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Class A Common Stock listed above are subject to the
approval of certain legal matters by counsel and various other conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase all of the shares of Class A Common Stock offered hereby, if any are
purchased (except for any shares that may be purchased through exercise of the
Underwriters' over-allotment option which may be exercised by the Underwriters
in whole or in part).
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Class A Common Stock to the public at the public offering
price set forth on the cover of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other dealers.After the Offering, the public offering price and
other selling terms may be changed by the Representatives. The Class A Common
Stock is offered subject to receipt and acceptance by the Underwriters, and to
certain other conditions, including the right to reject orders in whole or in
part.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 450,000
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. To the extent the Underwriters exercise the option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Class A Common Stock as is
proportionate to such Underwriter's initial commitment to purchase shares from
the Company. The Underwriters may exercise such option solely to cover
over-allotments, if any, incurred in connection with the sale of shares of Class
A Common Stock offered hereby.
The Underwriting Agreement provides that the Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and each of the Company's executive officers and directors and
Lithia Holding have agreed that, for a period of 90 days after the day on which
the Registration Statement becomes effective by order of the Commission, they
will not, without the prior written consent of Furman Selz LLC, directly or
indirectly, offer for sale, sell, contract to sell, or grant any option to sell
(including, without limitation, any short sale), pledge, establish an open
"put-equivalent position" within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, transfer, assign or otherwise dispose of any
shares of the Company's Class A Common Stock or securities exchangeable for or
convertible into shares of the Company's Class A Common Stock, or any option,
warrant or other right to acquire such shares, or publicly announce the
intention to do any of the foregoing; provided, that the Company may issue, and
grant options to purchase, shares of Class A Common Stock under its current
stock option and purchase plans and other currently
56
<PAGE>
outstanding options. In addition, the Company may issue shares of Class A Common
Stock in connection with any acquisition of another company if the terms of such
issuance provide that such Class A Common Stock shall not be resold prior to the
expiration of the 90-day period referenced in the preceding sentence.
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Class A Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this Offering in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Class A Common Stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Class A Common Stock at a level
above that which might otherwise prevail and, if commenced, may be discontinued
at any time.
Subject to applicable limitations, the Underwriters, in connection with this
Offering, may place bids for or make purchases of the Class A Common Stock in
the open market or otherwise, for long or short account, or cover short
positions incurred, to stabilize, maintain or otherwise affect the price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market. There can be no assurance that the price of the
Class A Common Stock will be stabilized, or that stabilizing, if commenced, will
not be discontinued at any time. Subject to applicable limitations, the
Underwriters may also place bids or make purchases on behalf of the underwriting
syndicate to reduce a short position created in connection with this Offering.
The Underwriters are not required to engage in these activities and may end
these activities at any time.
LEGAL MATTERS
The validity of the Company's Class A Common Stock being offered hereby will
be passed upon for the Company by Foster Pepper & Shefelman LLP, Portland,
Oregon. Kenneth E. Roberts, a partner with Foster Pepper & Shefelman LLP, owned
30,000 shares of Class A Common Stock as of March 1, 1998.
Certain legal matters will be passed upon for the Underwriters by Milbank,
Tweed, Hadley & McCloy, Los Angeles, California. Milbank, Tweed, Hadley & McCloy
represented the Company in certain matters unrelated to this Offering during
1997.
EXPERTS
The consolidated financial statements of Lithia Motors, Inc. and
Subsidiaries as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering the December 31, 1997 financial statements refers
to a change in the FIFO method of valuing inventories.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act,
with respect to the Class A Common Stock offered hereby. This Prospectus, which
is part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the exhibits and financial schedules
thereto. Statements contained in this Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete, and
in each instance that a reference is made to a contract or other document filed
as an exhibit to the Registration Statement, each such statement is qualified in
all respects by such reference. A copy of the Registration Statement may be
examined without charge at the
57
<PAGE>
Commission's principal offices at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any part thereof may be obtained from the Public Reference Section of the
Commission upon payment of certain fees prescribed by the Commission. Copies of
such materials may also be obtained from the web site that the Commission
maintains at http://www.sec.gov.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith, files reports, proxy or
information statements and other information with the Commission. Such reports,
proxy statements and other information can be inspected and copies may be
obtained from the sources indicated above. In addition, the Company's Class A
Common Stock is traded on the Nasdaq National Market, and the Company's reports,
proxy or information statements and other information may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
No manufacturer (as defined in this Prospectus) has been involved, directly
or indirectly, in the preparation of this Prospectus or in the Offering being
made hereby. No manufacturer has made any statements or representations in
connection with the Offering or has provided any information or materials that
were used in connection with the Offering, and no manufacturer has any
responsibility for the accuracy or completeness of this Prospectus.
58
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Lithia Motors, Inc. and Subsidiaries
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Operations.................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity............................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lithia Motors, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lithia
Motors, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Lithia Motors, Inc. and Subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventories, effective January 1, 1997.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 6, 1998
F-2
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996(1) 1997
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 15,413 $ 18,454
Trade receivables........................................................................ 2,260 7,655
Notes receivable, current portion........................................................ 414 427
Notes receivable, related party.......................................................... 308 --
Inventories, net......................................................................... 33,362 89,845
Vehicles leased to others, current portion............................................... 524 738
Prepaid expenses and other............................................................... 372 913
Deferred income taxes.................................................................... 1,646 1,855
--------- ----------
Total current assets................................................................... 54,299 119,887
Property and equipment, net of accumulated depreciation of $2,073 and $2,822............... 4,616 16,265
Vehicles leased to others, less current portion............................................ 4,500 4,588
Notes receivable, less current portion..................................................... 377 309
Goodwill, net of accumulated amortization of $0 and $293................................... 4,101 24,062
Other non-current assets, net.............................................................. 1,071 1,415
--------- ----------
Total assets........................................................................... $ 68,964 $ 166,526
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................................................ $ 500 $ --
Flooring notes payable................................................................... 19,645 82,598
Current maturities of long-term debt..................................................... 1,855 2,688
Current portion of capital leases........................................................ -- 99
Trade payables........................................................................... 2,434 3,874
Accrued liabilities...................................................................... 2,482 6,758
Payable to related parties............................................................... 1,952 --
--------- ----------
Total current liabilities.............................................................. 28,868 96,017
Long-term debt, less current maturities.................................................... 6,160 24,242
Long-term capital leases, less current portion............................................. -- 2,316
Deferred revenue........................................................................... 3,250 2,519
Other long-term liabilities................................................................ -- 447
Deferred income taxes...................................................................... 2,772 3,108
--------- ----------
Total liabilities...................................................................... 41,050 128,649
--------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 15,000 shares; issued and outstanding none....... -- --
Class A Common Stock, no par value; authorized 100,000 shares; issued and outstanding 2,500
and 2,926................................................................................ 24,172 28,117
Class B Common Stock, no par value; authorized 25,000 shares; issued and outstanding 4,110
and 4,110................................................................................ 511 511
Additional paid-in capital................................................................. -- 59
Retained earnings.......................................................................... 3,231 9,190
--------- ----------
Total shareholders' equity................................................................. 27,914 37,877
--------- ----------
Total liabilities and shareholders' equity................................................. $ 68,964 $ 166,526
--------- ----------
--------- ----------
</TABLE>
- --------------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995(1) 1996(1) 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Sales:
Vehicles................................................................ $ 97,338 $ 123,703 $ 274,393
Service, body, parts and other.......................................... 16,858 19,141 45,402
---------- ---------- ----------
Total sales........................................................... 114,196 142,844 319,795
---------- ---------- ----------
Cost of sales
Vehicles................................................................ 85,381 108,743 245,812
Service, body, parts and other.......................................... 8,178 9,590 20,551
---------- ---------- ----------
Cost of sales......................................................... 93,559 118,333 266,363
---------- ---------- ----------
Gross profit.......................................................... 20,637 24,511 53,432
Selling, general and administrative....................................... 16,333 19,830 40,625
Depreciation and amortization............................................. 402 448 1,169
---------- ---------- ----------
Operating income...................................................... 3,902 4,233 11,638
---------- ---------- ----------
Other income (expense)
Equity in income of affiliate........................................... 67 44 102
Interest income......................................................... 179 193 138
Interest expense........................................................ (1,390) (1,353) (3,004)
Other, net.............................................................. 969 1,112 623
---------- ---------- ----------
(175) (4) (2,141)
---------- ---------- ----------
Income before minority interest and income taxes.......................... 3,727 4,229 9,497
Minority interest......................................................... (778) (687) --
---------- ---------- ----------
Income before income taxes................................................ 2,949 3,542 9,497
Income tax (expense) benefit.............................................. -- 813 (3,538)
---------- ---------- ----------
Net income................................................................ $ 2,949 $ 4,355 $ 5,959
---------- ---------- ----------
---------- ---------- ----------
Basic net income per share................................................ $ 0.64(2) $ 0.94(2) $ 0.85
---------- ---------- ----------
---------- ---------- ----------
Diluted net income per share.............................................. $ 0.60(2) $ 0.88(2) $ 0.82
---------- ---------- ----------
---------- ---------- ----------
PRO FORMA NET INCOME DATA (UNAUDITED)
Income before minority interest and income taxes, as reported............. $ 3,727 $ 4,229
Pro forma income taxes.................................................... (1,430) (1,623)
---------- ----------
Pro forma net income...................................................... $ 2,297 $ 2,606
---------- ----------
---------- ----------
Pro forma basic net income per share...................................... $ 0.50 $ 0.56
---------- ----------
---------- ----------
Pro forma diluted net income per share.................................... $ 0.47 $ 0.52
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
(2) Not comparable to 1997 data due to S Corporation status in 1996; therefore,
this is a pre-tax earnings per share amount. See Note 8 of Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
---------------------- ------------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS(1) EQUITY(1)
----------- --------- ----------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............. -- $ -- 3,017 $ 751 $ -- $ 5,343 $ 6,094
Net income............................. -- -- -- -- -- 2,949 2,949
Issuance of Class B Common Stock....... -- -- 1,093 50 -- -- 50
Dividends.............................. -- -- -- -- -- (5,377) (5,377)
----- --------- ----- ----- ----- ----------- -------------
BALANCE, DECEMBER 31, 1995............. -- -- 4,110 801 -- 2,915 3,716
Net income............................. -- -- -- -- -- 4,355 4,355
Dividends.............................. -- -- -- -- -- (4,460) (4,460)
Contribution of minority interest to
Class B Common Stock pursuant to
restructuring........................ -- -- -- 131 -- -- 131
Restructuring in connection with
initial public offering.............. -- -- -- (421) -- 421 --
Issuance of Class A Common Stock, net
of offering expenses of $3,328....... 2,500 24,172 -- -- -- -- 24,172
----- --------- ----- ----- ----- ----------- -------------
BALANCE, DECEMBER 31, 1996............. 2,500 24,172 4,110 511 -- 3,231 27,914
Net income............................. -- -- -- -- -- 5,959 5,959
Underwriters' over-allotment option.... 375 3,783 -- -- -- -- 3,783
Compensation for stock option
issuances............................ -- -- -- -- 59 -- 59
Exercise of stock options.............. 51 162 -- -- -- -- 162
----- --------- ----- ----- ----- ----------- -------------
BALANCE, DECEMBER 31, 1997............. 2,926 $ 28,117 4,110 $ 511 $ 59 $ 9,190 $ 37,877
----- --------- ----- ----- ----- ----------- -------------
----- --------- ----- ----- ----- ----------- -------------
</TABLE>
- ------------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 2,949 $ 4,355 $ 5,959
Adjustments to reconcile net income to net cash flows provided
by (used in) operating activities:
Depreciation and amortization..................................................... 1,907 1,756 2,483
Compensation related to stock option issuances.................................... -- -- 59
(Gain) loss on sale of assets..................................................... (305) (239) (1)
Gain on sale of vehicles leased to others......................................... -- -- (286)
Deferred income taxes............................................................. -- (906) 336
Minority interest in income....................................................... 778 687 --
Equity in income of affiliate..................................................... (67) (44) (102)
(Increase) decrease in operating assets:
Trade and installment contract receivables, net................................. (692) (852) (5,087)
Inventories..................................................................... 1,858 (7,120) (9,009)
Prepaid expenses and other...................................................... 30 (19) (678)
Other noncurrent assets......................................................... (277) (196) (486)
Increase (decrease) in operating liabilities:
Flooring notes payable.......................................................... (1,628) (3,283) 24,622
Trade payables.................................................................. 609 979 1,440
Accrued liabilities............................................................. 306 797 4,252
Other liabilities............................................................... 677 3,095 (2,274)
Proceeds from sale of vehicles leased to others................................... 4,757 5,760 5,330
Expenditures for vehicles leased to others........................................ (6,308) (6,537) (6,750)
--------- --------- ---------
Net cash provided by (used in) operating activities........................... 4,594 (1,767) 19,808
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable issued............................................................. (190) (540) (249)
Principal payments received on notes receivable..................................... 83 500 304
Capital expenditures................................................................ (524) (395) (8,801)
Proceeds from sale of assets........................................................ 10 765 16
Cash paid for acquisitions.......................................................... -- (6,937) (25,220)
Distribution from affiliate......................................................... -- -- 204
--------- --------- ---------
Net cash used in investing activities......................................... (621) (6,607) (33,746)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes payable........................................ 235 (625) --
Principal payments on long-term debt................................................ (8,070) (25,336) (15,917)
Proceeds from issuance of long-term debt............................................ 12,529 21,635 28,951
Proceeds from issuance of common stock.............................................. 50 24,172 3,945
Proceeds from minority interest share receivable.................................... 142 676 --
Dividends and distributions......................................................... (6,105) (6,441) --
--------- --------- ---------
Net cash provided by (used in) financing activities........................... (1,219) 14,081 16,979
--------- --------- ---------
Increase in cash and cash equivalents................................................. 2,754 5,707 3,041
CASH AND CASH EQUIVALENTS:
Beginning of period................................................................. 6,952 9,706 15,413
--------- --------- ---------
End of period....................................................................... $ 9,706 $ 15,413 $ 18,454
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 1,828 $ 1,823 $ 3,206
Cash paid during the period for income taxes -- -- 3,011
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of notes receivable--minority interest..................................... $ 678 $ -- $ --
Debt extinguishment upon transfer of property....................................... -- 1,112 --
Contribution of minority interest in S Corporation earnings upon
Restructing to Class B Common Stock............................................... -- 131 --
Contribution of excess S Corporation retained earnings upon
Restructuring to Class B Common Stock............................................. -- 421 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Lithia Motors is one of the larger retailers of new and used vehicles in the
western United States, offering 21 domestic and imported makes of new
automobiles and light trucks at 21 locations, 11 in California, seven in Oregon
and three in Nevada. As an integral part of its operations, the Company arranges
related financing (non-recourse) and insurance and sells parts, service and
ancillary products. The Company's headquarters are currently located in Medford,
Oregon, where it has a market share of over 40%. The Company has grown primarily
by successfully acquiring and integrating dealerships and by obtaining new
dealer franchises. The Company's strategy is to become a leading acquirer and
operator of dealerships in the western United States.
At its 21 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki,
BMW, Saturn, Pontiac, Mazda and Hyundai.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect the results of operations, the
financial position, and the cash flows for Lithia Motors, Inc. and its directly
and indirectly wholly-owned subsidiaries. All significant intercompany accounts
and transactions, consisting principally of intercompany sales, have been
eliminated upon consolidation.
The financial results presented for periods prior to the Restructuring (see
note 11) have been restated to reflect the consolidated results of operations,
financial position and cash flows of the Company's dealerships and those of its
affiliated entities under common control whose operations were combined under
the Restructuring, using "as if" pooling of interest basis of accounting.
Lithia TLM LLC, Lithia Dodge LLC and Lithia Grants Pass Auto Center LLC were
limited liability corporations majority owned by Lithia Motors, Inc. The 20%,
25% and 25% minority interests in Lithia TLM LLC, Lithia Dodge LLC and Lithia
Grants Pass Auto Center LLC, respectively, have been recorded in the
accompanying financial statements to the date of Restructuring.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers contracts in
transit and all highly liquid debt instruments with a maturity of three months
or less when purchased to be cash equivalents.
INVENTORIES
Effective January 1, 1997, the Company changed its method of accounting for
inventories from the last-in first-out (LIFO) method to the specific
identification method for vehicles and the first-in first-out (FIFO) method of
accounting for parts (collectively, the FIFO method). Management believes the
FIFO method is preferable because the FIFO method of valuing inventories more
accurately presents the Company's financial position as it reflects more recent
costs at the balance sheet date, more accurately matches revenues with costs
reported during the period presented and provides comparability to industry
information. The financial statements of prior periods have been restated to
apply the new method of accounting for inventories retroactively. The effect of
this restatement was to increase retained earnings as
F-7
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of January 1, 1996 by $4,896. The restatement increased (decreased) net income
by $(426), or $(0.09) per diluted share and $314, or $0.06 per diluted share,
for the years ended December 31, 1995 and 1996, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and being depreciated over
their estimated useful lives, principally on the straight-line basis. The range
of estimated useful lives are as follows:
<TABLE>
<S> <C>
Building and improvements..................... 40 years
5 to 10
Service equipment............................. years
5 to 10
Furniture, signs and fixtures................. years
</TABLE>
The cost for maintenance, repairs and minor renewals is expensed as incurred,
while significant renewals and betterments are capitalized. When an asset is
retired or otherwise disposed of, the related cost and accumulated depreciation
are removed from the accounts, and any gain or loss is credited or charged to
income.
INVESTMENT IN AFFILIATE
The Company has a 20% interest in Lithia Properties, LLC, of which the other
members are Sidney DeBoer (35%), M. L. Dick Heimann (30%) and three of Mr.
DeBoer's children (5% each). The investment is accounted for using the equity
method, with a carrying value of $571 and $468 at December 31, 1996 and 1997,
respectively.
INCOME TAXES
Prior to the Company's initial public offering of its Common Stock in
December 1996 (see note 11), the Company was an S Corporation for federal and
state income tax reporting purposes. Federal and state income taxes on the
income of an S Corporation were payable by the individual stockholders rather
than the corporation.
The Company's S Corporation status terminated immediately prior to the
effectiveness of the Company's initial public offering. At that time, the
Company established a net deferred tax asset and recorded an accompanying credit
to income tax expense. The accompanying statements of operations for the years
ended December 31, 1995 and 1996, reflect provisions for income taxes on an
unaudited pro forma basis, using the asset and liability method, as if the
Company had been a C Corporation, fully subject to federal and state income
taxes for those periods.
Under the asset and liability method, deferred income tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred income tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred income tax assets and liabilities
of changes in tax rates is recognized in income in the period that includes the
enactment date.
F-8
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.
COMPUTATION OF PER SHARE AMOUNTS
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS
are computed using the methods prescribed by Statement of Financial Accounting
Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic EPS is calculated using
the weighted average number of common shares outstanding for the period and
diluted EPS is computed using the weighted average number of common shares and
dilutive common equivalent shares outstanding. Prior period amounts have been
restated to conform with the presentation requirements of SFAS 128. Following is
a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to Common Shareholders..... $ 2,949 4,577 $ 0.64 $ 4,355 4,657 $ 0.94
----- -----
----- -----
EFFECT OF DILUTIVE SECURITIES
Stock Options............................... -- 316 -- 316
----------- ----- ----------- -----
DILUTED EPS
Income available to Common Shareholders..... $ 2,949 4,893 $ 0.60 $ 4,355 4,973 $ 0.88
----- -----
----- -----
<CAPTION>
1997
-------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EPS
Income available to Common Shareholders..... $ 5,959 6,988 $ 0.85
-----
-----
EFFECT OF DILUTIVE SECURITIES
Stock Options............................... -- 315
----------- -----
DILUTED EPS
Income available to Common Shareholders..... $ 5,959 7,303 $ 0.82
-----
-----
</TABLE>
In accordance with certain Securities and Exchange Commission (SEC) Staff
Accounting Bulletins, the above computations include all common and common
equivalent shares issued within 12 months of the offering date as if they were
outstanding for all periods presented using the treasury stock method. In
addition, the calculation includes shares deemed issued to fund S Corporation
distributions.
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables, trade payable,
accrued liabilities and short term borrowings approximate fair value because of
the short-term nature of these instruments. The fair value of long-term debt was
estimated by discounting the future cash flows using market interest rates and
does not differ significantly from that reflected in the financial statements.
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
F-9
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
ADVERTISING
The Company expenses production and other costs of advertising as incurred.
Advertising expense was $1,136, $1,297 and $2,678 for the years ended December
31, 1995, 1996 and 1997, respectively.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets of $176 and $136, net of accumulated amortization of $23
and $63, at December 31, 1996 and 1997, respectively, represents a non-compete
agreement being amortized on a straight-line basis over 5 years. This intangible
asset is included in other non-current assets and is evaluated for impairment
each period by determining its net realizable value.
Goodwill, which represents the excess purchase price over fair value of net
assets acquired, is amortized on the straight-line basis over the expected
period to be benefited of forty years. The Company assesses the recoverability
of this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
CONCENTRATIONS OF CREDIT RISK
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Company's customer base.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash deposits. The Company
generally is exposed to credit risk from balances on deposit in financial
institutions in excess of the FDIC-insured limit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such estimates
may affect amounts reported in future periods.
REVENUE RECOGNITION
Finance fees represent revenue earned by the Company for notes placed with
financial institutions in connection with customer vehicle financing. Finance
fees are recognized in income upon acceptance of the credit by the financial
institution. Insurance income represents commissions earned on credit life,
accident and disability insurance sold in connection with the vehicle on behalf
of third party insurance companies. Commissions from third party service
contracts are recognized upon sale. Insurance commissions are recognized in
income upon customer acceptance of the insurance terms as evidenced by contract
F-10
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
execution. Finance fees and insurance commissions, net of charge-backs, are
classified as other operating revenue in the accompanying consolidated
statements of operations.
Revenue from the sale of vehicles is recognized upon delivery, when the
sales contract is signed and down payment has been received. Fleet sales of
vehicles whereby the Company does not take title are shown on a net basis in
other revenue.
MAJOR SUPPLIER AND DEALER AGREEMENTS
The Company purchases substantially all of its new vehicles and inventory
from various manufacturers at the prevailing prices charged by the auto maker to
all franchised dealers. The Company's overall sales could be impacted by the
auto maker's inability or unwillingness to supply the dealership with an
adequate supply of popular models.
The Company enters into agreements (Dealer Agreements) with the
manufacturer. The Dealer Agreements generally limit the location of the
dealership and retain auto maker approval rights over changes in dealership
management and ownership. The auto makers are also entitled to terminate the
Dealer Agreements if the dealership is in material breach of the terms.
The Company's ability to expand operations depends, in part, on obtaining
consents of the manufacturers for the acquisition of additional dealerships.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Effective January 1, 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 requires that companies which do not choose
to account for stock-based compensation as prescribed by this statement shall
disclose the pro forma effects on earnings and earnings per share as if SFAS 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1997 presentation.
(2) INVENTORIES AND RELATED NOTES PAYABLE
Inventories are valued at cost, using the specific identification method for
vehicles and the first-in first-out (FIFO) method of accounting for parts
(collectively, the FIFO method).
F-11
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) INVENTORIES AND RELATED NOTES PAYABLE (CONTINUED)
The new and used vehicle inventory, collateralizing related notes payable,
and other inventory were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1997
---------------------- ----------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
New and demonstrator vehicles..................... $ 19,402 $ 19,645 $ 63,457 $ 67,098
Used vehicles..................................... 12,199 -- 21,524 15,500
Parts and accessories............................. 1,761 -- 4,864 --
----------- --------- ----------- ---------
Total inventories............................. $ 33,362 $ 19,645 $ 89,845 $ 82,598
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Flooring notes payable consist of flooring notes from a bank secured by new
and used vehicles.The flooring arrangements permit the Company to borrow up to
$27.9 million in 1996 and $110 million in 1997, restricted by new and used
vehicle levels. The notes are due within 5 days of the vehicle being sold or
after the vehicle has been in inventory for 1 year for new vehicles, 6 months
for program vehicles, and on a revolving basis for used vehicles.
(3) PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Buildings and improvements............................................... $ 1,131 $ 7,449
Service equipment........................................................ 1,641 3,992
Furniture, signs and fixtures............................................ 2,545 4,340
--------- ---------
5,317 15,781
Less accumulated depreciation............................................ (2,073) (2,822)
--------- ---------
3,244 12,959
Land..................................................................... 1,272 2,924
Construction in progress................................................. 100 382
--------- ---------
$ 4,616 $ 16,265
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Vehicles leased to others................................................ $ 6,378 $ 6,531
Less accumulated depreciation............................................ (1,354) (1,205)
--------- ---------
5,024 5,326
Less current portion..................................................... (524) (738)
--------- ---------
$ 4,500 $ 4,588
--------- ---------
--------- ---------
</TABLE>
Vehicles leased to others are stated at cost and depreciated over their
estimated useful lives (5 years) on a straight-line basis. Lease receivables
result from customer, employee and fleet leases of vehicles under agreements
which qualify as operating leases. Leases are cancelable at the option of the
lessee after providing 30 days written notice.
(5) NOTES PAYABLE
Notes payable at December 31, 1996 consisted of an 8.5% note payable in
connection with the Robert's Dodge acquisition.
(6) LINES OF CREDIT AND LONG-TERM DEBT
In September 1997, the Company announced an agreement with U.S. Bank for
$175 million in credit lines, including $110 million in new, used and program
flooring lines, $30 million in acquisition capital and $35 million for other
corporate purposes. The lines bear interest at LIBOR plus 150 to 275 basis
points, 7.625% to 8.75% at December 31, 1997. The limits and interest rates
associated with the lines are reviewed annually, with the current term expiring
on October 1, 1998.Upon expiring on October 1, 1998, the acquisition line and
the general corporate line convert to 5-year term notes.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Lease Line............................................................... $ 5,196 $ 5,211
Acquisition Line......................................................... -- 5,000
Equipment and Real Estate Line........................................... 1,019 4,827
Notes payable in monthly installments of $35, including interest between
8.27% and 10.63%, maturing fully December 2009; secured by land and
buildings.............................................................. 1,800 11,892
--------- ---------
8,015 26,930
Less current maturities.................................................. (1,855) (2,688)
--------- ---------
$ 6,160 $ 24,242
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
The schedule of future principal payments on long-term debt after December
31, 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 2,688
1999............................................................................... 8,531
2000............................................................................... 3,905
2001............................................................................... 3,160
2002............................................................................... 3,471
Thereafter......................................................................... 5,175
---------
Total principal payments........................................................... $ 26,930
---------
---------
</TABLE>
(7) SHAREHOLDERS' EQUITY
The shares of Class A common stock are not convertible into any other series
or class of the Company's securities. However, each share of Class B common
stock is freely convertible into one share of Class A common stock at the option
of the holder of the Class B common stock. All shares of Class B common stock
shall automatically convert to shares of Class A common stock (on a
share-for-share basis, subject to the adjustments) on the earliest record date
for an annual meeting of the Company shareholders on which the number of shares
of Class B common stock outstanding is less than 1% of the total number of
shares of common stock outstanding. Shares of Class B common stock may not be
transferred to third parties, except for transfers to certain family members and
in other limited circumstances.
Holders of Class A common stock are entitled to one vote for each share held
of record, and holders of Class B common stock are entitled to ten votes for
each share held of record. The Class A common stock and Class B common stock
vote together as a single class on all matters submitted to a vote of
shareholders.
(8) INCOME TAXES
At the date of the Company's restructuring (see note 11), the Company
terminated its S Corporation election and is now taxed as a C Corporation in
accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES.
F-14
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
Pro forma income taxes on the Company's earnings for 1995 (unaudited) and 1996
(unaudited) and income taxes for 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 1,487 $ 1,860 $ 2,967
State....................................................... 309 387 444
--------- --------- ---------
1,796 2,247 3,411
Deferred:
Federal..................................................... (303) (517) 114
State....................................................... (63) (107) 13
--------- --------- ---------
(366) (624) 127
--------- --------- ---------
Total..................................................... $ 1,430 $ 1,623 $ 3,538
--------- --------- ---------
--------- --------- ---------
</TABLE>
Individually significant components of the deferred tax assets and
liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance and accruals................................................. $ 277 $ 470
Deferred revenue....................................................... 1,244 1,126
--------- ---------
Total deferred tax assets............................................ 1,521 1,596
--------- ---------
Deferred tax liabilities:
LIFO recapture......................................................... (2,032) (1,841)
Property and equipment, principally due to differences in
depreciation......................................................... (615) (1,008)
--------- ---------
Total deferred tax liabilities......................................... (2,647) (2,849)
--------- ---------
Total................................................................ $ (1,126) $ (1,253)
--------- ---------
--------- ---------
</TABLE>
The reconciliation between the statutory federal income tax expense at 34%
and the Company's income tax expense for 1997 is shown in the following
tabulation. The following tabulation also reconciles the expected corporate
federal income tax expense for 1995 and 1996 (computed by multiplying the
F-15
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
Company's income before minority interest by 34%) with the Company's unaudited
pro forma income tax expense:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal taxes at 34%................................ $ 1,267 $ 1,438 $ 3,229
State taxes, net of federal income tax benefit................ 162 184 278
Other......................................................... 1 1 31
--------- --------- ---------
Income tax expense............................................ $ 1,430 $ 1,623 $ 3,538
--------- --------- ---------
--------- --------- ---------
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
RECOURSE PAPER
The Company is contingently liable to banks for recourse paper from the
financing of vehicle sales. The contingent liability at December 31, 1995, 1996
and 1997 was approximately $206, $88 and $64, respectively.
OPERATING LEASES
Substantially all of the Company's operations are conducted in leased
facilities under noncancelable operating leases. These leases expire at various
dates through 2012. Beginning in 1998, certain lease commitments are subject to
escalation clauses of an amount equal to the cost of living based on the
"Consumer Price Index--U.S. Cities Average--All stems for all Urban Consumers"
published by the U.S. Department of Labor.
The minimum rental commitments under operating leases after December 31,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 4,815
1999............................................................................... 4,753
2000............................................................................... 4,449
2001............................................................................... 4,447
2002............................................................................... 4,012
Thereafter......................................................................... 34,378
---------
Total principal payments......................................................... $ 56,854
---------
---------
</TABLE>
Rental expense for all operating leases was $1,993, $2,353 and $2,764 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-16
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) COMMITMENTS AND CONTINGENCIES (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.
(10) PROFIT SHARING PLAN
The Company has a defined contribution plan and trust covering substantially
all full-time employees. The annual contribution to the plan is at the
discretion of the Board of Directors of Lithia Motors, Inc. Contributions of
$84, $100 and $138 were recognized for the years ended December 31, 1995, 1996
and 1997, respectively. Employees may contribute to the plan under certain
circumstances.
(11) RESTRUCTURING AND OFFERING
On December 18, 1996, the Company offered 2,500 shares of its Class A common
stock to the public (the "Offering"). Prior to the Offering, the Company
consummated a restructuring (the Restructuring) which resulted in each of the
Company's dealerships and operating divisions becoming direct or indirect
wholly-owned subsidiaries of the Company with Lithia Holding Company, LLC owning
all the outstanding Class B common stock of the Company. All shareholders prior
to the Restructuring exchanged their interests in the Company and its affiliated
entities for shares of Lithia Holding Company, LLC with the exception of (i) one
shareholder who exchanged his interest in one entity for cancellation of a note
due to Lithia TLM, LLC and cash and (ii) Lithia TKV, Inc. whose stock was
purchased by the Company from the Company's principals subsequent to the
Offering.
(12) STOCK INCENTIVE PLANS
In April 1996, the Board of Directors (the Board) and the Company's
shareholders adopted the Company's 1996 Stock Incentive Plan for the granting of
up to 670 incentive and nonqualified stock options to officers, key employees
and consultants of the Company and its subsidiaries, and in 1997, the Board
adopted a Non-Discretionary Stock Option Plan for Non-Employee Directors and
reserved 15 shares under that plan (collectively, the "Plan"). The Plan is
administered by the Board or by a Compensation Committee of the Board and
permits accelerated vesting of outstanding options upon the occurrence of
certain changes in control of the Company. Options become exercisable over a
period of up to ten years from the date of grant as determined by the Board, at
prices generally not less than the fair market value at the date of grant. At
December 31, 1997, 634 shares of Class A common stock were reserved for issuance
under the Plan and 201 shares were available for future grant.
F-17
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK INCENTIVE PLANS (CONTINUED)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
SHARES SHARES WEIGHTED
AVAILABLE SUBJECT TO AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
----------- ------------- ---------------
<S> <C> <C> <C>
Balances, December 31, 1995............................. -- -- $ --
Shares reserved......................................... 685
Options granted......................................... (439) 439 3.11
Options canceled........................................ -- -- --
Options exercised....................................... -- -- --
--- --- -----
Balances, December 31, 1996............................. 246 439 3.11
Options granted......................................... (45) 45 6.05
Options canceled........................................ -- -- --
Options exercised....................................... -- (51) 3.20
--- --- -----
Balances, December 31, 1997............................. 201 433 $ 3.41
--- ---
--- ---
</TABLE>
The Company issued non-qualified options during 1997 to certain members of
management at an exercise price of $1.00 per share. Compensation expense is
recognized ratably in accordance with the 5-year vesting schedule.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS 123), which defines a fair value based method of accounting for employee
stock options and similar equity instruments. As permitted under SFAS 123, the
Company has elected to continue to account for its stock-based compensation plan
under Accounting Principal Board Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES (APB 25), and related interpretations. Accordingly, no compensation
expense has been recognized for the Plan.
The Company has computed, for pro forma disclosure purposes, the value of
options granted under the Plan, using the Black-Scholes option pricing model as
prescribed by SFAS 123, using the weighted average assumptions for grants as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Risk-free interest rate.......................................... 6.50% 6.25%
Expected dividend yield.......................................... 0.0% 0.0%
Expected lives................................................... 6.5 years 6.8 years
Expected volatility.............................................. 60.0% 45.5%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1996 and 1997 was $709 and $320, respectively, which would be amortized
on a pro forma basis over the vesting period of the options, typically five
years. The weighted average fair value of options granted during 1996 and 1997
was $1.62 per share and $7.20 per share, respectively. If the Company had
accounted for its stock-based
F-18
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK INCENTIVE PLANS (CONTINUED)
compensation plan in accordance with SFAS 123, the Company's net income and net
income per share would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income................................ $ 4,355 $ 3,612 $ 5,959 $ 5,723
Basic net income per share................ $ 0.94 $ 0.78 $ 0.85 $ 0.82
Diluted net income per share.............. $ 0.88 $ 0.73 $ 0.82 $ 0.79
</TABLE>
The following table summarizes stock options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- --------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$1.00 21 8.0 $ 1.00 4 $ 1.00
3.02 282 6.3 3.02 64 3.02
3.32 107 3.3 3.32 80 3.32
10.75 20 7.2 10.75 -- --
10.88 3 9.2 10.88 3 10.88
--
- -------------- --- ------ --- ------
$1.00-10.88 433 5.6 $ 3.41 151 $ 3.28
--
--
- -------------- --- ------ --- ------
- -------------- --- ------ --- ------
</TABLE>
At December 31, 1996, 167 shares were exercisable at a weighted average
exercise price of $3.27.
(13) RELATED PARTY TRANSACTIONS
Certain of the real property on which the Company's business is located is
owned by Lithia Properties, LLC. The Company leases such facilities under
various lease agreements from Lithia Properties, LLC (Note 9). Selling, general
and administrative expense includes rental expense of $1,929, $2,132 and $1,442
for the years ended December 31, 1995, 1996 and 1996, respectively relating to
these properties.
The Company provides management services to Lithia Properties, LLC. Other
income includes management fees of $288, $477 and $12 for the years ended
December 31, 1995, 1996 and 1997, respectively.
The Company has guaranteed certain indebtedness of Lithia Properties, LLC
incurred in connection with purchases of real property which secures the loan.
This indebtedness amounts to approximately $9,266 at December 31, 1997.
Through December 1996, the Company and Lithia Properties, LLC share a
"pooled" cash account in the Company's name. At December 31, 1996, amounts due
to Lithia Properties, LLC related to this arrangement amounted to $1,703, and
are included in payable to related parties. Also included in payable to related
parties at December 31, 1996 is $249 due to former S Corporation minority
interest shareholders
F-19
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) RELATED PARTY TRANSACTIONS (CONTINUED)
for distributions of their investment in the Company prior to the Restructuring.
There were no amounts due to related parties at December 31, 1997. Receivable
from related parties at December 31, 1996 represents amounts due to the Company
for overpayments on distributions to shareholders in connection with the
Restructuring.
(14) ACQUISITIONS
During the fourth quarter of 1996, the Company acquired two new and used car
dealerships, Roberts Dodge, Inc. and Melody Vacaville, Inc., now Lithia TKV and
Lithia DE, respectively.
In April 1997, the Company closed its acquisition of Magnussen Dodge and
Magnussen Isuzu in Concord, California. The Company invested $3.8 million to
acquire this store, which includes goodwill, working capital, notes issued to
seller and other initial investments.
In July 1997, the Company closed its acquisition of Magnussen-Barbee Ford of
Napa, California. The Company invested $3.7 million to acquire this store, which
includes goodwill, working capital, notes issued to seller and other initial
investments.
In August 1997, the Company closed its acquisition of Sun Valley Ford, a
California corporation, dba "Sun Valley Ford Volkswagen Hyundai", located in
Concord, California. The Company invested $7.6 million to acquire the two
stores, which includes goodwill, working capital, notes issued to seller and
other initial investments.
On October 1, 1997, the Company closed its acquisition of Dick Donnelly
Automotive Enterprises, Inc., dba Dick Donnelly Lincoln, Mercury, Audi, Suzuki,
Isuzu, located in Reno and Sparks, Nevada. The Company invested $5.8 million to
acquire the two stores, which includes goodwill, working capital, notes issued
to seller and other initial investments.
On October 3, 1997, the Company closed its acquisition of Nissan-BMW, Inc.,
dba Bakersfield Nissan, Acura, BMW ("Bakersfield Nissan-BMW"), located in
Bakersfield, California. The Company invested $6.7 million to acquire this
store, which includes goodwill, working capital, notes issued to seller and
other initial investments. The Company is leasing the land and facilities from
the sellers of Bakersfield Nissan-BMW.
On December 16, 1997 the Company closed its acquisition of Century Ford and
Century Mazda in Fresno, California. The Company invested $4.1 million to
acquire the two stores, which includes goodwill, working capital, notes issued
to seller and other initial investments. The Company is leasing the land and
facilities from the sellers of Century Ford and Century Mazda.
F-20
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) ACQUISITIONS (CONTINUED)
All of the above acquisitions were accounted for as purchase transactions.
The aggregate purchase price of the dealerships acquired in the respective
periods has been allocated to the assets and liabilities acquired at their
estimated fair market value at the acquisition dates as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Assets acquired......................................................... $ 9,542 $ 51,953
Good will............................................................... 4,101 19,944
Less liabilities assumed or incurred.................................... (6,206) (46,190)
--------- ----------
Total consideration..................................................... $ 7,437 $ 25,707
--------- ----------
--------- ----------
</TABLE>
The unaudited pro forma results of operations including Roberts Dodge, Inc.,
Melody Vacaville, Inc., Sun Valley Ford, Inc. and Dick Donnelly Automotive
Enterprises, Inc., are as follows. The results of operations for the remaining
acquisitions are not included in the unaudited pro forma information as they are
not materially different from actual results of the Company.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Total revenues........................................................ $ 361,195 $ 419,675
Net income............................................................ 3,429 6,919
Basic earnings per share.............................................. 0.74 0.99
Diluted earnings per share............................................ 0.69 0.95
</TABLE>
The unaudited pro forma results are not necessarily indicative of what
actually would have occurred had the acquisitions been in effect for the entire
periods presented. In addition, they are not intended to be a projection of
future results that may be achieved from the combined operations.
(15) OTHER INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Management fees...................................................... $ 288 $ 477 $ 12
Hail damage settlement............................................... -- 206 281
Lawsuit settlement................................................... 160 -- --
Miscellaneous, net................................................... 521 429 330
--------- --------- ---------
Other income, net.................................................... $ 969 $ 1,112 $ 623
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-21
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) SUBSEQUENT EVENTS
On January 20, 1998, the Company closed its acquisition of Quality Jeep in
Fresno, California. The Company invested $4,400 to acquire the two stores, which
includes goodwill, working capital, notes issued to seller and other initial
investments.
On February 4, 1998 and February 10, 1998, the Company closed its
acquisitions of Reno Volkswagen and Medford Nissan, respectively. The Company
invested $3,100 to acquire the two stores, which includes goodwill, working
capital, notes issued to seller and other initial investments.
In February 1998, subject to shareholder approval, the Board of Directors
approved the reservation of 250 shares of Class A Common Stock for issuance
under an employee stock purchase plan.
In March 1998, subject to shareholder approval, the Board of Directors of
the Company approved the reservation of an additional 415 shares of Class A
Common Stock under its 1996 Stock Incentive Plan.
Also in March 1998, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission for the sale of 3,000 shares (3,450
shares with the Underwriters' over-allotment option) of Class A Common Stock.
F-22
<PAGE>
[INSIDE BACK COVER OF PROSPECTUS]
[PRIORITY YOU CAMPAIGN]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Disclosure Regarding Forward-Looking Statements........................... 9
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 17
Common Stock Price Range and Dividend Policy.............................. 17
Capitalization............................................................ 18
Selected Consolidated Financial Data...................................... 19
Selected Consolidated Quarterly Financial Data............................ 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 22
Industry.................................................................. 28
Business.................................................................. 30
Management................................................................ 43
Principal Shareholders.................................................... 49
Certain Relationships and Related Transactions............................ 51
Description of Capital Stock.............................................. 52
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Available Information..................................................... 57
Index to Combined Financial Statements.................................... F-1
</TABLE>
3,000,000 SHARES
[LOGO]
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
FURMAN SELZ
DAIN RAUSCHER INCORPORATED
EVEREN SECURITIES, INC.
DATED , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
(ITEMS NOT REQUIRED IN PROSPECTUS)
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses incurred by the Company
in connection with the Offering. Except for the SEC registration fees, NASD
filing fees, and Nasdaq initial listing fees, all expenses are estimates:
<TABLE>
<S> <C>
SEC Registration Fees............................................. $ 16,793
NASD Filing Fees.................................................. 6,193
Nasdaq Listing Fee................................................ 17,500
Blue Sky Fees and Expenses (including legal fees)................. 5,000
Costs of Printing................................................. 120,000
Accounting Fees and Expenses...................................... 100,000
Legal Fees........................................................ 150,000
Miscellaneous Expenses............................................ 84,514
---------
Total Expenses................................................ $ 500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
As an Oregon corporation, the Company is subject to the Oregon Business
Corporation Act (the "Business Corporation Act"). Under the Business Corporation
Act, a corporation may provide in its Articles of Incorporation or in its Bylaws
for the indemnification of directors and officers against liability where the
director or officer has acted in good faith and with a reasonable belief that
actions taken were in the best interests of the corporation or at least not
adverse to the corporation's best interests and, if in a criminal proceeding,
the individual had no reasonable cause to believe that the conduct in question
was unlawful. Under the Business Corporation Act, a corporation may not
indemnify an officer or director against liability in connection with a claim by
or in the right of the corporation in which such officer or director was
adjudged liable to the corporation or in connection with any other proceeding in
which the officer or director was adjudged liable for receiving an improper
personal benefit; however, a corporation may indemnify against the reasonable
expenses associated with such proceeding. A corporation may not indemnify
against breaches of the duty of loyalty. The Business Corporation Act provides
for mandatory indemnification of directors against all reasonable expenses
incurred in the successful defense of any claim made or threatened whether or
not such claim was by or in the right of the corporation. A court may order
indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant circumstances
whether or not the director or officer met the good faith and reasonable belief
standards of conduct set out in the statute. Unless otherwise stated in the
Articles of Incorporation, officers of the corporation are also entitled to the
benefit of the above statutory provisions.
The Business Corporation Act also provides that the corporation may, by so
providing in its Articles of Incorporation, eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for conduct as a director, provided that the Articles of Incorporation
may not eliminate or limit liability for any breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, any unlawful distribution, or any
transaction from which the director received an improper personal benefit.
In accordance with Oregon law, the Articles of Incorporation of the Company
provide that directors are not personally liable to the corporation or its
shareholders for monetary damages for conduct as a director, except for (i) any
breach of a director's duty of loyalty to the corporation, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any
II-1
<PAGE>
distribution to shareholders which is unlawful, or (iv) any transaction from
which the director received an improper personal benefit.
The Articles of Incorporation also provide for indemnification of any person
who is or was a party, or is threatened to be made a party, to any civil,
administrative or criminal proceeding by reason of the fact that the person is
or was a director or officer of the corporation or any of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, agent or employee of another corporation or entity, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by that person if (i) the person acted in good
faith and in a manner reasonably believed to not be opposed to the best
interests of the corporation, or (ii) the act or omission giving rise to such
action or proceeding is ratified, adopted or confirmed by the corporation, or
the benefit thereof was received by the corporation. Indemnification is
available under this provision of the Articles of Incorporation in the case of
derivative actions, unless the person is adjudged to be liable for gross
negligence or deliberate misconduct in the performance of the person's duty to
the corporation. To the extent a director, officer, employee or agent (including
an attorney) is successful on the merits or otherwise in defense of any action
to which this provision is applicable, the person is entitled to indemnification
for expenses actually and reasonably incurred by the person in connection with
that defense.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 5, 1996, the Company issued 4,110,000 shares of Class B Common
Stock pursuant to the terms of a Plan of Recapitalization under which Sidney B.
DeBoer exchanged 75 shares of the Company's Common Stock for 2,568,750 shares of
Class B Common Stock and M.L. Dick Heimann exchanged 45 shares of the Company's
Common Stock for 1,541,250 shares of Class B Common Stock. The issuance of these
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The index of exhibits being filed with this Registration Statement is
attached on page E-1.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(A) For purposes of determining any liability under the Securities Act of
1933, as amended, 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 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 it effective.
(B) For the purpose of determining any liability under the Securities Act of
1933, as amended, 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.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and
II-2
<PAGE>
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 the
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 registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of theSecurities Act of 1933, the registrant
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,
March 4, 1998.
<TABLE>
<S> <C> <C>
LITHIA MOTORS, INC.
By: /s/ SIDNEY B. DEBOER
-----------------------------------------
Sidney B. DeBoer
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints SIDNEY B. DeBOER and BRIAN R. NEILL, and each of them, with full power
of substitution, to act as his true and lawful attorney-in-fact and agent to act
in his name, place and stead, and to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file any and all
amendments to this Registration Statement, including any and all post-effective
amendments.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement and Power of Attorney has been signed by the following
persons in the capacities indicated on March 4, 1998:
Chairman and Chief
/s/ SIDNEY B. DEBOER Executive Officer
- ------------------------------ (Principal Executive
Sidney B. DeBoer Officer)
/s/ M.L. DICK HEIMANN
- ------------------------------ Director
M.L. Dick Heimann
/s/ R. BRADFORD GRAY
- ------------------------------ Director
R. Bradford Gray
/s/ THOMAS BECKER
- ------------------------------ Director
Thomas Becker
- ------------------------------ Director
William J. Young
Senior Vice President and
/s/ BRIAN R. NEILL Chief Financial Officer
- ------------------------------ (Principal Financial and
Brian R. Neill Accounting Officer)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.1 Form of Underwriting Agreement *
3.1 (a) Restated Articles of Incorporation of Lithia Motors, Inc.
3.2 (a) Bylaws of Lithia Motors, Inc.
4.1 (a) Specimen Common Stock certificate
5.1 Opinion of Foster Pepper & Shefelman LLP *
10.1.1 (a) 1996 Stock Incentive Plan
10.1.2 (a) Form of Incentive Stock Option Agreement
10.1.3 (a) Form of Non-Qualified Stock Option Agreement
10.1.4 (a) Form of Incentive Stock Option Agreement
10.2.1 (b) 1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
10.3.1 Employee Stock Purchase Plan *
10.4.1 (a) Chrysler Corporation Chrysler Sales and Service Agreement, dated January 10, 1994, between
Chrysler Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc. (Additional Terms and
Provisions to the Sales and Service Agreements are in Exhibit 10.4.2 hereto) (1)
10.4.2 (a) Chrysler Corporation Dealer Agreement Additional Terms and Provisions
10.5.1 Honda Automobile Dealer Sales and Service Agreement dated October 14, 1997, between American
Honda Motor Company, Inc. and Lithia HPI, Inc. dba Lithia Honda (standard provisions are in
Exhibit 10.5.3 hereto). *
10.5.2 Acura Automobile Dealer Sales and Service Agreement dated October 2, 1997, between American
Honda Motor Company, Inc. and Lithia BB, Inc. dba Lithia Acura of Bakersfield (standard
provisions are in Exhibit 10.5.3 hereto). *
10.5.2 American Honda Automobile Dealer Sales and Service Agreement Standard Provisions. *
10.5.3 Agreement between American Honda Motor Company, Inc. and Lithia Motors, Inc. et al. dated
December 17, 1996. *
10.5.4 Amendment dated October 2, 1997, to Agreement between American Honda Motor Company, Inc. and
Lithia Motors, Inc. et al. dated December 17, 1996. *
10.6.1 (a) Isuzu Dealer Sales and Service Agreement, dated June 5, 1996 between American Isuzu Motors,
Inc. and Lithia Motors, Inc. (Additional Provisions to Dealer Sales and Service Agreements
are in Exhibit 10.5.2 hereto) (2) *
10.6.2 (a) Isuzu Dealer Sales and Service Agreement Additional Provisions
10.6.3 (c) Supplemental Agreement, dated December 27, 1996 to Isuzu Dealer Sales and Service Agreement
(3)
10.7.1 Mercury Sales and Service Agreement, dated June 1, 1997, between Ford Motor Company and
Lithia TLM, LLC dba Lithia Lincoln Mercury (general provisions are in Exhibit 10.6.3 hereto)
(4) *
10.7.2 Supplemental Terms and Conditions agreement between Ford Motor Company and Lithia Motors,
Inc. dated June 12, 1997. *
10.7.3 (a) Mercury Sales and Service Agreement General Provisions
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.8.1 Supplemental Agreement dated January 16, 1998, to General Motors Corporation Dealer Sales and
Service Agreement between General Motors Corporation and Lithia Motors, Inc. *
10.8.2 (a) General Motors Corporation Dealer Sales and Service Agreement, dated March 12, 1993, between
General Motors Corporation Pontiac Division and Lithia Motors, Inc. dba Lithia Pontiac
10.8.3 (a) General Motors Dealer Sales and Service Agreement Standard Provisions
10.9.1 (a) Mazda Dealer Agreement, dated April 11, 1994 between Mazda Motor of America, Inc. and Lithia
Dodge, L.L.C. dba Lithia Mazda
10.10.1 Saturn Distribution Corporation Retailer Agreement, dated June 16, 1997, between Saturn
Distribution Corporation and Saturn of Southwest Oregon, Inc. *
10.10.2 Supplemental Agreement to Saturn Retailer Agreement, dated August 26, 1997, between Saturn of
Southwest Oregon, Inc., Lithia Motors, Inc., Sidney B. DeBoer, Lithia Holding, LLC, and
Saturn Distribution Corporation. *
10.11.1 (a) Toyota Dealer Agreement, dated January 30, 1990, between Toyota Motor Distributors, Inc. and
Lithia Motors, Inc. dba Medford Toyota (5)
10.11.2 (a) Toyota Dealer Agreement Standard Provisions
10.11.3 (a) Agreement, dated September 30, 1996, between Toyota Motor Sales, U.S.A., Inc. and Lithia
Motors, Inc.
10.11.4 (c) Addendum dated December 26, 1996, to Section X--additional provisions to Toyota Dealer
Agreement, dated November 15, 1996 between Toyota Motor Sales, USA, Inc. and Lithia TKV, Inc.
10.12.1 Suzuki Term Dealer Sales and Service Agreement, dated May 14, 1997, between American Suzuki
Motor Corporation and Lithia HPI, Inc. dba Lithia Suzuki (standard provisions are in Exhibit
10.11.2 hereto) (6) *
10.12.2 Suzuki Dealer Sales and Service Agreement Standard Provisions. *
10.13.1 BMW Dealer Agreement, dated October 3, 1997, between BMW of North America, Inc. and Lithia
BB, Inc. *
10.14.1 Hyundai Motor America Dealer Sales and Service Agreement, dated January 26, 1998, between
Hyundai Motor America and Lithia JEF, Inc. *
10.15.1 Nissan Dealer Term Sales and Service Agreement between Lithia Motors, Inc., Lithia NF, Inc.,
and the Nissan Division of Nissan Motor Corporation In USA dated January 2, 1998. (standard
provisions are in Exhibit 10.15.2 hereto) (7)
10.15.2 Nissan Standard Provisions *
10.16.1 Volkswagen Dealer Agreement dated April 5, 1996, between Volkswagen United States, Inc. and
Lithia Motors, Inc. dba Lithia Volkswagen. (standard provisions are in Exhibit 10.16.2
hereto) *
10.16.2 Volkswagen Dealer Agreement Standard Provisions *
10.17.1 (a) Commercial Lease, dated September 20, 1996, between Lithia Properties, L.L.C. and Lithia
Motors, Inc. (8)
10.17.2 (a) Form of Commercial Lease, effective January 1, 1997, between Lithia Properties, L.L.C. and
Lithia Motors, Inc. (9)
10.18.1 (a) Asset Purchase Agreement, dated August 2, 1996, between Lithia Motors, Inc. and Roberts
Dodge, Inc.
10.18.2 (a) Land Sale Contract, dated August 2, 1996, between Lithia Properties, L.L.C. and Milford G.
Roberts, Sr. and Sandra L. Roberts
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.18.3 (a) Assignment of Land Sale Contract, dated November 5, 1996, between Lithia Properties, LLC and
Lithia Motors, Inc.
10.19.1 (a) Commercial Lease, dated April 1, 1992, between Billy J. Wilson et al and Wilson/ Malasoma,
Inc. relating to facility in Vacaville, California.
10.20.1 (d) Agreement for Purchase and Sale of Business Assets between Magnussen Dodge, Inc. and Lithia
Motors, Inc. dated January 21, 1997
10.20.2 (d) Lease between Solano Way Partnership and Lithia Real Estate, Inc. dated February 14, 1997
10.21.1 (c) Agreement for Purchase and Sale of Business Assets between Magnussen-Barbee Ford,
Lincoln-Mercury, Inc. and Lithia Motors, Inc. dated February 21, 1997
10.21.2 (e) Lease between John Ferrogiaro and Bernard L. Magnussen et al., as amended by Second Amendment
to Lease, dated December 12, 1996, and Consent to Assignment and Third Amendment to Lease, by
and among John Ferrogiaro, Magnussen Dealership Group and Lithia Real Estate, Inc.
10.22.1 (f) Agreement for Purchase and Sale of Business Assets between Sun Valley Ford, Inc. and Lithia
Motors, Inc. dated April 2, 1997
10.22.2 (g) Promissory Note for Leasehold Improvements issued by Lithia Motors, Inc. to Sun Valley Ford,
Inc. dated August 8, 1997.
10.22.3 (g) Promissory Note for Intangible Assets issued by Lithia Motors, Inc. to Sun Valley Ford, Inc.
dated August 8, 1997.
10.22.4 (h) Standard Industrial Lease, as amended and assignment thereof, among Edmund C. Bartlett, Jr.,
Anna Bartlett, Sun Valley Ford, Inc. and Lithia Motors, Inc. dated July 16, 1997
10.22.5 (h) Lease Agreement and assignment thereof, among George Valente and Lena E. Valente as trustees
of the George and Lena E. Valente Trust, Sun Valley Ford, Inc. and Lithia Motors, Inc. dated
August 4, 1997.
10.23.1 (f) Agreement for Purchase and Sale of Business Assets between Dick Donnelly Automotive
Enterprises, Inc. dba Dick Donnelly Lincoln-Mercury, Audi, Suzuki, Isuzu and Lithia Motors,
Inc. dated April 2, 1997
10.24.1 (f) Agreement for Purchase and Sale of Business Assets between Nissan BMW, Inc. dba Bakersfield
Nissan, Acura, BMW and Lithia Motors, Inc. dated June 26, 1997
10.25.1 (i) Agreement for Purchase and Sale of Business Assets between Century Ford, Inc. and Lithia
Motors, Inc. dated September 1, 1997
10.26.1 (j) Agreement for Purchase and Sale of Business Assets between Daniel A. Haus Group, Inc. dba
Quality Nissan and Quality Jeep/Eagle Hyundai and Lithia Motors, Inc. dated October 10, 1997
10.27.1 Agreement for Purchase and Sale of Business Assets between Medford Nissan, Inc. dba "Medford
Nissan BMW Kia", Lithia Motors, Inc, or its nominee, and James D. Plummer, dated September 8,
1997. *
10.28.1 Agreement for Purchase and Sale of Business Assets between United American Funding, Inc. dba
"Reno Volkswagen" and Lithia Motors, Inc., or its nominee, dated December 31, 1997. *
10.29.1 (a) Reorganization Agreement, dated as of October 10, 1996, by and among Lithia Motors, Inc.,
LGPAC, Inc., Lithia DM, Inc., Lithia MTLM, Inc., Lithia HPI, Inc., Lithia SSO, Inc., Lithia
Rentals, Inc., Discount Auto & Truck Rental, Inc., Lithia Auto Services, Inc., Lithia Holding
Company L.L.C., Sidney B. DeBoer, M.L. Dick Heimann, R. Bradford Gray, and Steve R. Philips
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.30.1 Credit Agreement among U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22, 1997. *
10.30.2 Security Agreement among U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22, 1997. *
10.30.3 Guaranty among U.S. Bank National Association, as Agent and Lender, and Lithia Motors, Inc.
and its Affiliates and Subsidiaries dated December 22, 1997. *
10.31.1 (a) Management Contract between Lithia Leasing, Inc. and Lithia Properties LLC.
10.32.1 (a) Purchase and Sale Agreement, dated December 13, 1996, between Lithia Properties and Lithia
Real Estate, Inc.
21.1 Subsidiaries of Lithia Motors, Inc. *
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Foster Pepper & Shefelman LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included in the signature page of the Registration Statement)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment
(a) Incorporated by reference from the Company's Registration Statement on Form
S-1, Registration Statement No. 333-14031, as declared effective by the
Securities Exchange Commission on December 18, 1996.
(b) Incorporated by reference from the Company's Registration Statement on Form
S-8, Registration Statement No. 333-45553, as filed with the Securities
Exchange Commission on February 4, 1998.
(c) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, as filed with the Securities Exchange
Commission on March 31, 1997.
(d) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on June 6, 1997.
(e) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on July 16, 1997.
(f) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, as filed with the Securities Exchange
Commission on August 12, 1997.
(g) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on August 21, 1997.
(h) Incorporated by reference from the Company's Form 8-K/A as filed with the
Securities Exchange Commission on October 14, 1997.
(i) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on December 30, 1997.
(j) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on January 30, 1998.
(1) Substantially identical agreements exist between Chrysler Corporation and
Lithia Chrysler Plymouth Jeep Eagle, Inc., with respect to Jeep, Eagle, and
Plymouth sales and service; between Chrysler Corporation and Lithia's Grants
Pass Auto Mart, with respect to Jeep, Eagle, Dodge and Plymouth sales and
service; between Chrysler Corporation and Medford Dodge with respect to
Dodge sales and
<PAGE>
service; and between Chrysler Corporation and Lithia DC, Inc., with respect
to Dodge sales and service.
(2) A substantially identical agreement exists between American Isuzu Motors,
Inc and Lithia SALMIR, Inc. with respect to Isuzu sales and service.
(3) Substantially identical agreements exist between American Isuzu Motors,
Inc., Lithia Motors, Inc. and Lithia DC, Inc. and between American Isuzu
Motors, Inc., Lithia Motors, Inc. and Lithia SALMIR, Inc.
(4) A substantially identical agreement exists between the same parties with
respect to Lincoln Sales and Services; between Ford Motor Company and Lithia
FN, Inc. with respect to Lincoln and Mercury sales and service; and between
Ford Motor Company and Lithia FVHC with respect to Ford sales and service.
(5) A substantially identical agreement exists between Toyota Motor Sales, USA,
Inc. and Lithia TKV, Inc. dba Lithia Toyota Vacaville dated November 15,
1996 with respect to Toyota Sales and Service.
(6) A substantially identical agreement exists between American Suzuki Motor
Corporation and Lithia SALMIR, Inc., dated October 6, 1997, with respect to
Suzuki sales and service.
(7) A substantially identical agreement exists between Nissan Motor Corporation
and Lithia NB, Inc., dated October 2, 1997, with respect to Nissan sales and
service.
(8) Substantially identical leases of the same date exist between Lithia
Properties L.L.C. and (i) Lithia TLM, L.L.C. and Lithia MTLM, Inc., relating
to the properties located in Medford, Oregon at 360 E. Jackson St., 400 N.
Central Ave., 325 E. Jackson St., 343-345 Apple St., 440-448 Front St., 3rd
& Front St. and 344 Bartlett, collectively at a lease rate of $42,828 per
month; (ii) Lithia Motors, Inc. dba Lithia Body and Paint, relating to the
properties in Medford, Oregon, located at 4th & Bartlett, 235 Bartlett, 220
N. Bartlett, and 275 E. 5th; and in Grants Pass, Oregon, at 1470 N.E. 7th,
collectively at a lease rate of $16,890 per month; (iii) Discount Auto and
Truck Rental, Inc., relating to properties located in Medford, Oregon, at
326 N. Bartlett, 315 & 321 Apple St., and in Grants Pass, Oregon, at 1470
N.E. 7th, collectively at a lease rate of $2,609 per month; (iv) Lithia
Dodge, L.L.C. and Lithia DM, Inc., relating to properties located in
Medford, Oregon, at 322 E. 4th, 315 & 324 E. 5th St., 225, 319 & 323 E. 6th,
Riverside & 4th, Riverside & 6th, and 129 N. Riverside, collectively at a
lease rate of $53,490 per month; (v) Lithia Grants Pass Auto Center and
L.L.C., LGPAC, Inc., relating to the property located in Grants Pass,
Oregon, at 1421 N.E. 6th at a lease rate of $25,625 per month; (vi) Lithia
Motors, Inc. and Lithia SSO, Inc., relating to properties located in
Medford, Oregon, at 400, 705-717 N. Riverside Ave., 712 and 716 Pine St.,
and 502 Maple St., collectively at a lease rate of $20,048 per month; (vii)
Lithia Motors, Inc. dba Thrift Auto Supply, relating to the properties
located in Medford, Oregon, at 801 N. Riverside Ave, and 503 Maple St.,
collectively at a lease rate of $6,265 per month; and (viii) Lithia Motors,
Inc. and Lithia HPI, Inc., relating to properties located in Medford,
Oregon, at 700 and 800 N. Central Ave, 217 and 220 N. Beatty St., 710 and
815-817 Niantic St., and 311 & 313 Maple St., collectively at a lease rate
of $30,350 per month.
(9) Substantially identical lease will exist between Lithia Properties L.L.C.
and (i) Lithia MTLM, Inc., relating to the properties located in Medford,
Oregon at 360 E. Jackson St., 400 N. Central Ave., 325 E. Jackson St.,
343-345 Apple St., 440-448 Front St., 3rd & Front St. and 344 Bartlett, 315
& 321 Apple St., and 401 E. 4th St., collectively at a lease rate of $33,728
per month; (ii) Lithia Auto Services, Inc. dba Lithia Body and Paint,
relating to the properties in Medford, Oregon, located at 401 E. 4th St.,
4th & Bartlett, 235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants
Pass, Oregon, at 1470 N.E. 7th, and 801 N. Riverside Ave, collectively at a
lease rate of $17,439 per month; (iii) Lithia Rentals, Inc., dba Discount
Auto and Truck Rental, relating to properties located in Medford, Oregon, at
971 Gilman Rd., and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively
at a lease rate of $962 per month; (iv) Lithia Dodge, L.L.C. and Lithia DM,
Inc., relating to properties located in Medford, Oregon, at 322 E. 4th, 315
& 324 E. 5th St., 225, 319 & 323 E. 6th, Riverside & 4th, Riverside & 6th,
and 129 N. Riverside, collectively at a lease rate of $53,490 per month; (v)
LGPAC, Inc., relating to
<PAGE>
the property located in Grants Pass, Oregon, at 1421 N.E. 6th and 1470 N.E.
7th, collectively at a lease rate of $18,023 per month; (vi) Lithia SSO,
Inc., relating to properties located in Medford, Oregon, at 400, 705-717 N.
Riverside Ave., collectively at a lease rate of $16,364 per month; (vii)
Lithia DM, Inc., relating to properties located in Medford, Oregon, at 324
E. 5th, 319 & 323 E. 6th St., 6th & Riverside, 129 N. Riverside, 4th &
Riverside, 225 E. 6th, 315 E. 5th, 322 E. 4th, 201 N. Riverside, 309, 315,
333, and 329 N. Riverside, 334 & 346 Apple St. and 401 E. 4th, collectively
at a lease rate of $30,557 per month; and (viii) Lithia Motors, Inc.,
relating to properties located in Medford, Oregon, at 360 E. Jackson, 325 E.
Jackson, 345 B. Bartlett, and 401 E. 4th St., collectively at a lease rate
of $5,309 per month.
<PAGE>
EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Lithia Motors, Inc. and Affiliated Companies
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus. Our report refers to a change to the FIFO method of valuing
inventory.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
March 6, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENT FOR THE 12-MONTH PERIOD ENDING DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 18,454
<SECURITIES> 0
<RECEIVABLES> 8,082
<ALLOWANCES> 0
<INVENTORY> 89,845
<CURRENT-ASSETS> 119,887
<PP&E> 19,087
<DEPRECIATION> 2,822
<TOTAL-ASSETS> 166,526
<CURRENT-LIABILITIES> 96,017
<BONDS> 109,528
0
0
<COMMON> 28,628
<OTHER-SE> 9,190
<TOTAL-LIABILITY-AND-EQUITY> 166,526
<SALES> 274,393
<TOTAL-REVENUES> 319,795
<CGS> 245,812
<TOTAL-COSTS> 266,363
<OTHER-EXPENSES> 41,794
<LOSS-PROVISION> 81
<INTEREST-EXPENSE> (3,004)
<INCOME-PRETAX> 9,497
<INCOME-TAX> 3,538
<INCOME-CONTINUING> 5,959
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,959
<EPS-PRIMARY> 1
<EPS-DILUTED> 1
</TABLE>
