March 8, 2004
TO OUR SHAREHOLDERS:
Lithia resumed its earnings growth in 2003 even though most of the markets where Lithia operates saw a
continuation of the slow economic environment that we had experienced in the previous two years. This
weak economic environment, however, was counterbalanced by low interest rates, strong new vehicle
incentives and high vehicle affordability. In the first quarter of the year, Lithia experienced one of the
slowest quarters since its IPO in late 1996. This mirrored our experience in the first quarter of 2001 when
the economy had also decelerated rapidly. Both times we demonstrated that it only takes us one or two
quarters to adjust to a slower sales environment. After a weak first quarter, we were able to produce record
earnings for the following three quarters of the year.
We continued with an aggressive approach to new vehicle sales throughout 2003 in a successful attempt to
gain market share and increase new vehicle sales volume. We ended the year with growth in new vehicle
same-store sales of 6.2%, as compared to an industry that was down approximately 1%, and growth in total
retail same-store sales of 1.2%. While new vehicle sales are the gateway to the other higher margin business
lines of the auto-retail model, it is important to remember that new vehicle sales represent only one part of a
four-part business model and only about 27% of our gross profit. The parts/service, body shop, retail used
vehicle, and finance and insurance businesses generate higher margins, and represent approximately 73% of
the total gross profits for the company. These four business lines provide stability to Lithia’s auto-retail
model and opportunities to generate profits from multiple sources.
Lithia’s auto-retail model is focused on acquiring average performing new vehicle franchised stores and then
integrating and improving them. Our goal is to maximize the operations of all four departments of every
store we acquire. While our strategy has not changed over the last seven years, our ability to integrate and
improve the stores that we acquire has increased dramatically. We have also developed a better process for
identifying acquisition targets that fit our operating model. Our business plan remains on track. Our cash
position, substantial lines of credit, plus an extremely competent and well-trained staff, are all available to
facilitate our continued growth as the opportunities develop.
SIGNIFICANT EVENTS
During 2003, Lithia made some noteworthy accomplishments, we:
•
•
Produced growth in net income from continuing operations of 10% to $35.6 million;
Successfully completed the acquisition of 11 automotive retail franchised stores with annual
revenues of approximately $330 million. We currently operate 79 stores with 25 brands of new
vehicles in 12 western states: California, Colorado, Oregon, Washington, Nevada, Idaho, South
Dakota, Alaska, Texas, Nebraska, Oklahoma and Montana;
•
Lithia initiated a dividend program by announcing a quarterly dividend of $0.07 per share in July
of this year. Lithia was the first company in the auto-retail sector to offer a dividend to its
shareholders; and
•
Toyota Financial Services became a partner with Daimler Chrysler Services North America in
our $200 million credit facility for acquisitions and working capital.
FINANCIAL OVERVIEW
Total revenues for 2003 reached $2.5 billion, growing 11% compared with $2.27 billion in 2002. Net profit
from continuing operations was $35.6 million growing 10% from $32.4 million in 2002. Lithia earned $1.92
per share in 2003 as compared to $1.84 per share in 2002, a 4% increase on 5% more diluted shares
outstanding. We have a very strong balance sheet with only a 33% long-term debt to total capitalization
ratio. This year we decided to include “discontinued operations” in our income statement and balance sheet
information. For the full-year, there was zero net effect as the losses from the stores were offset by the gains
from the sale of the stores. Our IPO took place in December 1996. Since that time, we have increased our
revenues more than seventeen fold. Our book value per basic share has grown at a compounded annual rate
of 25% from $4.22 to $19.63 as of December 31, 2003. Over the same period, the compounded annual
growth rate (CAGR) in sales was 51% per year; net income 45% per year; and EPS 21% per year. Over the
same period, same-store retail sales have grown at an average annual rate of 4.1%. These achievements are
among the best of any public automotive retailer, and demonstrate our position as a premier operator in our
sector.
OPERATIONS
In 2003, we continued with a volume-based strategy in new vehicle sales that we had initiated in the prior
year. Through an advertising campaign called “Driving America” that is centered on “Promo Pricing”, we
were able to gain market share in many of the markets where we operate by emphasizing new vehicle sales.
This strategy complemented the approach taken by the auto manufacturers who had continued to offer a high
level of customer incentives. In the first quarter of 2003, which was the most difficult of the year, same-store
new vehicle sales were up 7.7% year-over-year while industry new vehicle sales in the period were down
more than 4%. In the second quarter, new vehicle same-store sales for Lithia were up 13.3% and industry
new vehicle sales were down 0.6%. In the third quarter, Lithia’s new vehicle same-store sales for the quarter
increased 1.5% as compared to industry sales that were down over 1% for the same period. Finally, for the
fourth quarter new vehicle same-store sales for Lithia were up 2.3% as compared to industry sales that were
up approximately 1%. As mentioned earlier, for the full year 2003, we were able to produce positive new
vehicle same-store sales growth of 6.2% as compared to an industry that was down approximately 1.0% for
the year.
In 2004, we expect that manufacturers will continue to incentivize new vehicle sales through a combination
of rebates and low interest rate loans to consumers. Lithia will continue with a volume based new vehicle
strategy in most of the markets where we operate. As the economy and the incentive environment change,
we will adjust our new vehicle sales strategy accordingly to take advantage of any new conditions.
Industry-wide used vehicle sales continued to experience substantial weakness throughout all of 2003. The
competition from highly incentivized new vehicles with low interest rate financing and high rebates had a
strong negative impact on the used vehicle market. The industry also experienced a large number of lease-
returns that negatively impacted used vehicle pricing throughout the year. As a result, Lithia experience a
decline in used vehicle same store sales of 9.3%. This is not the whole story, however. We saw the weak
used vehicle market coming in 2003 and we were able to react accordingly by focusing on improving
margins. We were successful with this strategy and were able to produce year-over-year retail used vehicle
margin improvements of 130 basis points from 12.5% in 2002 to 13.8% in 2003. Most importantly, the
improvement in used vehicle margins throughout the year more than offset the declines in same-store used
vehicle sales.
In the first half of 2004 we expect the weak used vehicle sales market to show signs of stabilization or even
improvement. Year-over-year sales comparisons should be easier and pricing has had time to adjust to the
highly incentivized new vehicle market. In the second half of the year, these trends should continue, and we
expect to see the market improve as fewer off-lease vehicles hit the market.
ACQUISITIONS
We anticipate continued long-term revenue growth from acquisitions to increase annualized revenues by 10 -
15%. We target stores where we can improve operating performance that will be accretive to earnings per
share in the first year. Each new store is fully integrated upon acquisition as a Lithia store. We focus on
improving the operating performance of each store by utilizing standardized processes that deliver
measurable results. This is as close as we can get to green fielding new stores in what is considered a mature
franchise system.
We continue to focus our growth in 70 markets west of the Mississippi, typically in locations with franchises
that are considered exclusive. We have a goal to exceed the market share and customer satisfaction targets
provided to us from the manufacturer, within the initial 12 months. This is accomplished by instituting
Lithia’s uniform processes guided by industry recognized in-store leadership. Building this way generally
costs less than buying platform groups, but takes strong support and training.
Lithia has operational teams that are now capable of integrating up to 2 stores a month or 24 per year. These
teams are comprised of some of the best people in the industry. We have a strong financial position with
ample free cash flow, a 33% long-term debt to total capitalization ratio, and an acquisition credit facility of
up to $200 million. We are in great shape to continue with our growth plans in the future.
LITHIA’S VISION STATEMENT
This is a quote from our recent company newsletter and I wanted to share it with you; “There remains a lot to
do because we all know how easy it is to let our guard down and slip back to mediocre performance. I have
been working on writing a vision statement for the company in order to encourage us all to keep improving.
A vision statement describes how we see ourselves - a goal we should all be striving for. It is something to
reflect on with each customer contact and with the contact we have with each other. We can perfect our
vision together. Your input would be appreciated - Ready, Fire, Aim.”
VISION STATEMENT
WE are the most admired and the most profitable retailer of cars and trucks and related services in North
America. WE are constantly growing through increases in same-store sales and through the successful
acquisition of stores. ALL of our acquisitions become more efficient through the installation of the Lithia
operating model. WE speak and execute a common language in all our stores. OUR customers love us
because of the extra effort we make in all that we do to serve their transportation needs. WE have a dynamic
and dedicated management staff in both our stores and in Support Services that is committed to the standards
and mission of Lithia. OUR employees are in complete support of our Company goals and objectives. WE
have highly satisfied employees because of our positive work environment. WE have a well thought out plan
for our future that is agreed upon and followed. OUR ethics and our processes are the best in auto retailing.
CONCLUSION
In 2004, we will continue to take an aggressive approach towards new vehicle sales. We look for a
progressively improving used vehicle market throughout the year. The acquisition environment remains
strong and we will continue to acquire targeted stores in select markets. An improving economy should
benefit all aspects of our business model; however, we are in a good position to operate successfully in most
any business environment. We will continue to focus on hiring and training the best team members, and
constantly work to refine our operations and systems in order to lower costs, maximize profitability, and
better serve our customers. As always, we remain committed to doing what is best for our customers, team
members and shareholders.
Sincerely,
Sidney B. DeBoer
Chairman and Chief Executive Officer
M. L. Dick Heimann
President and Chief Operating Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
___________________
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 2003
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-14733
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
Oregon
(State or other jurisdiction of incorporation
or organization)
360 E. Jackson Street, Medford, Oregon
(Address of principal executive offices)
93-0572810
(I.R.S. Employer
Identification No.)
97501
(Zip Code)
541-776-6899
(Registrant's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A common stock, without par value
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
__________ _________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes [X ] No [ ]
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant
was $111,194,525, computed by reference to the last sales price ($16.17) as reported by the New York Stock
Exchange for the Registrant’s Class A common stock, as of the last business day of the Registrant’s most
recently completed second fiscal quarter (June 30, 2003).
The number of shares outstanding of the Registrant's common stock as of March 8, 2004 was: Class A:
14,871,528 shares and Class B: 3,762,231 shares.
Documents Incorporated by Reference
The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its
2004 Annual Meeting of Shareholders.
LITHIA MOTORS, INC.
2003 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
PART II
Item 5.
Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Item 9A.
Controls and Procedures
PART III
Item 10.
Directors and Executive Officers of the Registrant
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Page
2
13
13
14
14
15
16
28
29
30
30
30
30
30
30
31
31
35
1
PART I
Item 1. Business
Forward Looking Statements and Risk Factors
Some of the statements under the sections entitled “Risk Factors,” “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere
in this Form 10-K constitute forward-looking statements. In some cases, you can identify
forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,”
“forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the
negative of these terms or other comparable terminology. The forward-looking statements
contained in this Form 10-K involve known and unknown risks, uncertainties and situations that
may cause our actual results, level of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or
implied by these statements. Some of the important factors that could cause actual results to
differ from our expectations are discussed in Exhibit 99.1 to this Form 10-K.
Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee
levels of activity, performance or
future results,
achievements. You should not place undue reliance on these forward-looking statements.
Where You Can Find More Information
We file annual, quarterly and special reports, proxy statements and other information with the
Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 as
amended (the “Exchange Act”). You can inspect and copy our reports, proxy statements, and
other information filed with the SEC at the offices of the SEC’s Public Reference Rooms in
Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-
SEC-0330 for further information on the Public Reference Rooms. The SEC maintains an
Internet Web site at http://www.sec.gov/ where you can obtain most of our SEC filings. In
addition, you can inspect our reports and other information at the offices of the New York Stock
Exchange at 20 Broad Street, New York, NY 10005. We also make available free of charge on
our website at www.lithia.com our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after they are
filed electronically with the SEC. You can also obtain copies of these reports by contacting
Investor Relations at 541-776-6591.
Overview
We are a leading operator of automotive franchises and retailer of new and used vehicles and
services. As of March 1, 2004, we offered 25 brands of new vehicles through 152 franchises in
79 stores in the Western United States and over the Internet. As of March 1, 2004, we
operated 16 stores in Oregon, 13 in California, 11 in Washington, 8 in Texas, 7 in Idaho, 7 in
Colorado, 6 in Nevada, 4 in Alaska, 2 in South Dakota, 2 in Nebraska, 2 in Montana and 1 in
Oklahoma. We sell new and used cars and light trucks; sell replacement parts; provide vehicle
maintenance, warranty, paint and repair services; and arrange related financing, service
contracts, protective products and credit insurance for our automotive customers.
We achieve gross margins above industry averages by selling a higher ratio of retail used
vehicles to new vehicles and by arranging finance and extended warranty contracts for a
greater percentage of our customers. In 2003, we achieved a gross margin of 16.0%.
2
We were founded in 1946 and incorporated in 1968. Our two senior executives have managed
the company for more than 30 years. Since our initial public offering in 1996, we have grown
from 5 to 79 stores, primarily through an aggressive acquisition program, increasing annual
revenues from $143 million in 1996 to $2.5 billion in 2003. In addition, since our initial public
offering through December 31, 2003, we have achieved compound annual growth rates of 51%
per year for revenues, 45% per year for net income and 21% per year for earnings per share,
together with a 4.1% average annual same store sales increase.
The Industry
At approximately $1.0 trillion in annual sales, automotive retailing is the largest retail trade
sector in the United States and comprises roughly 10% of the GDP. The industry is highly
fragmented with the 100 largest automotive retailers generating approximately 16% of total
industry revenues in 2002. The number of franchised stores in the U.S. has declined in the last
20 years from approximately 25,000 stores in 1983 to approximately 22,000 in 2003. In
addition to these new vehicle outlets, used vehicles are sold by approximately 53,000
independent used vehicle dealers and through casual (person to person) transactions. New
vehicles can only be sold through automotive retail stores franchised by auto manufacturers.
These franchise stores have designated trade territories under state franchise law protection,
which limits the number of new stores that can be opened in any given area.
Consolidation is expected to continue as many smaller automotive retailers are now
considering selling or joining forces with larger retailer groups, given the large capital
requirements necessary to operate in today’s retail environment. With many owners reaching
retirement age, often without clear succession plans, larger, well-capitalized automotive
retailers provide an attractive exit strategy. We believe these factors provide an attractive
environment for continuing consolidation.
Unlike other retailing segments, automotive manufacturers provide unparalleled support to the
automotive retailer. Manufacturers often bear the burden of markdown risks on slow-moving
inventory as they provide aggressive dealer and customer incentives to clear aged inventory in
order to free the inventory pipeline for new purchases. In addition, an automotive retailer’s cash
investment in inventory is relatively small, given floorplan financing from manufacturers.
Furthermore, manufacturers provide low-cost financing for working capital and acquisitions and
credit to consumers to finance vehicle purchases, as well as pay retail prices to their dealers
for servicing vehicles under manufacturers’ warranties.
Sales in the automotive sector are affected by general economic conditions including rates of
employment, income growth, interest rates and general consumer sentiment.
New vehicle sales usually decline during a weak economy; however, the higher margin service
and parts business typically benefits in the same environment because consumers tend to
keep their vehicles longer. Strong sales of new vehicles in recent years have provided a
population of vehicles for future service and parts revenues. Automotive retailers benefit from
their designation as an exclusive warranty and recall service provider of a manufacturer. For
the typical manufacturer’s warranty, this provides an automotive retailer with a period of at
least 3 years of repeat business for service covered by warranty. Extended warranties can add
two or more years to this repeat servicing period.
Automotive retailers’ profitability varies widely and depends in part on product mix, effective
management of inventory, marketing, quality control and responsiveness to customers. In
2002, new vehicles accounted for an estimated 59.6% of industry revenues. The remaining
40.4% of revenues were derived from used vehicles sales of 28.6%, and service and parts
sales of 11.8%. Finance and insurance sales are included in the new and used vehicle sales
numbers. Gross margins on new vehicles were 5.6% in 2002.
3
Automotive retailers have much lower fixed overhead costs than automobile manufacturers
and parts suppliers. Variable and discretionary costs, such as sales commissions and
personnel, advertising and inventory finance expenses, can be adjusted to match new vehicle
sales. Variable and discretionary costs account for an estimated 60-65% of the industry’s total
expenses. Moreover, an automotive retailer can enhance its profitability from sales of higher
margin products and services. Gross margins for the parts and service business are
significantly higher at approximately 47%, given the labor-intensive nature of the product
category. Gross margins for finance and insurance are virtually 100% as they are fee driven
income items. These supplemental, high margin products and services provide substantial
incremental revenue and net income, decreasing reliance on the highly competitive new
vehicle sales.
Store Operations
Each store is its own profit center and is managed by an experienced general manager who
has primary responsibility for inventory, advertising, pricing and personnel. In order to provide
additional support for improving performance, we make available to each store a team of
specialists in new vehicle sales, used vehicle sales, finance and insurance, service and parts,
and back-office administration.
The following tables set forth information about our stores as of March 1, 2004:
State
Number of
Stores
Number of
Franchises
Percent of
Total Revenue
in 2003
Oregon ...........................
Washington ....................
California ........................
Texas .............................
Colorado.........................
Idaho ..............................
Nevada...........................
South Dakota .................
Alaska ............................
Montana .........................
Nebraska........................
Oklahoma.......................
Total ..........................
16
11
13
8
7
7
6
2
4
2
2
1
79
32
19
23
17
14
13
13
3
7
7
2
2
152
19%
17
15
13
10
8
5
4
3
2
3
1
100%
Location
CALIFORNIA
Concord
Fresno
Redding
Vacaville
Burlingame
Salinas
Santa Rosa
Fairfield
Store
Franchises
Lithia Dodge of Concord
Lithia Ford of Concord
Lithia Volkswagen of Concord
Lithia Ford of Fresno
Lithia Nissan Hyundai of Fresno
Lithia Mazda Suzuki of Fresno
Lithia Chevrolet of Redding
Lithia Toyota of Redding
Lithia Toyota of Vacaville
Lithia Chrysler Jeep Dodge of
Burlingame
Chevrolet of Salinas
Lithia Dodge of Santa Rosa
Lithia Dodge of Fairfield
Dodge, Dodge Truck
Ford
Volkswagen
Ford
Nissan, Hyundai
Mazda, Suzuki
Chevrolet
Toyota, Scion
Toyota, Scion
Chrysler, Dodge, Dodge Truck, Jeep
Chevrolet
Dodge, Dodge Truck
Dodge, Dodge Truck
Year
Opened/
Acquired
1997
1997
1997
1997
1998
1997
1998
1998
1996
2002
2003
2003
2003
4
Location
OREGON
Eugene
Grants Pass
Klamath Falls
Medford
Store
Franchises
Lithia Dodge of Eugene
Lithia Nissan of Eugene
Saturn of Eugene
Lithia’s Grants Pass Auto Center
Lithia Klamath Falls Auto Center
Lithia Chrysler Jeep Dodge
Lithia Honda
Lithia Nissan
Medford BMW
Lithia Toyota
Lithia Volkswagen
Saturn of Southwest Oregon
Dodge, Dodge Truck
Nissan
Saturn
Dodge, Dodge Truck, Chrysler, Jeep
Toyota, Dodge, Dodge Truck, Chrysler, Jeep
Dodge, Dodge Truck, Chrysler, Jeep
Honda
Nissan
BMW
Toyota
Volkswagen
Saturn
Oregon City
(Portland)
Roseburg
Lithia Subaru of Oregon City
Lithia Ford Lincoln Mercury of Roseburg
Lithia Chrysler Jeep Dodge of Roseburg
Springfield (Eugene) Lithia Toyota of Springfield
COLORADO
Aurora (Denver)
Lithia Dodge of Cherry Creek
Lithia Colorado Chrysler Jeep
Lithia Colorado Springs Jeep Chrysler
Colorado Springs
Englewood (Denver) Lithia Centennial Chrysler Jeep
Fort Collins
Lithia Foothills Chrysler
Lithia Foothills Hyundai
Lithia Volkswagen of Thornton
Subaru
Ford, Lincoln, Mercury
Dodge, Dodge Truck, Chrysler, Jeep
Toyota
Dodge, Dodge Truck
Chrysler, Jeep
Jeep, Chrysler
Chrysler, Jeep
Dodge, Dodge Truck, Chrysler, Jeep
Hyundai
Volkswagen
Thornton (Denver)
WASHINGTON
Bellevue (Seattle)
Issaquah (Seattle)
Kennewick
Renton
Richland
Seattle
Spokane
IDAHO
Boise
Caldwell
Pocatello
Twin Falls
NEVADA
Reno
Sparks
Chevrolet Hummer of Bellevue
Chevrolet of Issaquah
Honda of Tri-Cities
Lithia Dodge of Tri-Cities
Lithia Chrysler Jeep Dodge of Renton
Lithia Hyundai of Renton
Lithia Ford of Tri-Cities
BMW Seattle
Lithia Camp Chevrolet
Lithia Camp Imports
Mercedes-Benz of Spokane
Chevrolet
Hummer
Chevrolet
Honda
Dodge, Dodge Truck
Chrysler, Jeep, Dodge, Dodge Truck
Hyundai
Ford
BMW
Chevrolet, Cadillac
Subaru, BMW, Volvo
Mercedes
Lithia Ford of Boise
Chevrolet of Boise
Lithia Lincoln-Mercury Isuzu of Boise
Chevrolet of Caldwell
Honda of Pocatello
Lithia Chrysler Dodge Hyundai of
Pocatello
Chevrolet Cadillac of Twin Falls
Ford
Chevrolet
Lincoln, Mercury, Isuzu
Chevrolet
Honda
Chrysler, Dodge, Dodge Truck, Hyundai
Chevrolet, Cadillac
Lithia L/M/Audi Isuzu of Reno
Lithia Reno Hyundai
Lithia Reno Subaru
Lithia Volkswagen of Reno
Lithia Chrysler Jeep of Reno
Lithia Sparks (satellite of Lithia Reno)
Audi, Lincoln, Mercury, Isuzu
Hyundai
Subaru
Volkswagen
Chrysler, Jeep
Suzuki, Lincoln, Mercury, Isuzu
5
Year
Opened/
Acquired
1996
1998
2000
Pre-IPO
1999
Pre-IPO
Pre-IPO
1998
1998
Pre-IPO
Pre-IPO
Pre-IPO
2002
1999
1999
1998
1999
1999
1999
1999
1999
1999
2002
2001
2002
2001
2000
1999
2000
2002
2000
2001
1998
1998
2003
2000
1999
1999
2001
2001
2001
2003
1997
1997
1999
1998
2004
1997
Year
Opened/
Acquired
2000
2001
2001
2001
2003
2003
2002
2002
2002
2002
2002
2002
2002
2003
2002
2002
2003
2003
2003
Location
SOUTH DAKOTA
Sioux Falls
Store
Franchises
Chevrolet of Sioux Falls
Lithia Dodge of Sioux Falls
Chevrolet
Dodge, Dodge Truck
ALASKA
Anchorage
Fairbanks
TEXAS
San Angelo
Odessa
Midland
Grapevine
NEBRASKA
Omaha
MONTANA
Missoula
Lithia Chrysler Jeep of Anchorage
Lithia Dodge of South Anchorage
Lithia Hyundai of Anchorage
Chevrolet Cadillac of Fairbanks, Alaska
Chrysler, Jeep
Dodge, Dodge Truck
Hyundai
Chevrolet, Cadillac
All American Chrysler Jeep Dodge of
San Angelo
Honda of San Angelo
All American Chevrolet of San Angelo
All American Chrysler Jeep Dodge
of Odessa
All American Chevrolet of Odessa
All American Dodge-Hyundai of Midland
All American Chevrolet of Midland
Lithia Dodge of Grapevine
Dodge, Dodge Truck, Jeep, Chrysler
Honda
Chevrolet
Dodge, Dodge Truck, Jeep, Chrysler
Chevrolet
Dodge, Dodge Truck, Hyundai
Chevrolet
Dodge, Dodge Truck
Lithia Ford of Omaha
Mercedes-Benz of Omaha
Ford
Mercedes
Lithia Auto Center of Missoula
Billings
Lithia Dodge of Billings
Chrysler, Dodge, Dodge Truck, Lincoln,
Mercury
Dodge, Dodge Truck
OKLAHOMA
Broken Arrow
Lithia Dodge of Broken Arrow
Dodge, Dodge Truck
6
New Vehicle Sales
In 2003, we sold 25 domestic and imported brands ranging from economy to luxury cars, sport
utility vehicles, minivans and light trucks.
Manufacturer
DaimlerChrysler (Chrysler, Dodge, Jeep, Dodge
Trucks)
General Motors (Chevrolet, Saturn, Cadillac and
Hummer)
Ford (Ford, Lincoln, Mercury)
Toyota, Scion
BMW
Hyundai
Subaru
Honda
Volkswagen, Audi
Nissan
Mercedes
Mazda
Suzuki
Isuzu
Volvo
Percent of
Total
Revenue
21.7%
13.9
5.3
4.4
2.2
2.0
1.7
1.6
1.5
1.4
0.7
0.4
0.3
0.1
0.1
57.3%
Percent of
New
Vehicle
Sales in
2003
37.9%
24.3
9.2
7.7
3.9
3.4
3.0
2.9
2.6
2.4
1.1
0.8
0.5
0.2
0.1
100.0%
Our unit and dollar sales of new vehicles from continuing operations were as follows:
New vehicle units……………………..
New vehicle sales (in thousands)…..
Average selling price…………………
2003
53,804
$1,441,000
$26,782
Year Ended December 31,
2001
37,190
$926,981
$24,926
2000
34,349
$833,107
$24,254
2002
46,929
$1,218,364
$25,962
1999
26,045
$615,617
$23,637
We purchase our new car inventory directly from manufacturers, who allocate new vehicles to
stores based on the number of vehicles sold by the store on a monthly basis and by the store’s
market area. Accordingly, we rely on the manufacturers to provide us with vehicles that
consumers desire and to supply us with such vehicles at suitable locations, quantities and
prices. We attempt to exchange vehicles with other automotive retailers to accommodate
customer demand and to balance inventory.
We post the manufacturer’s suggested retail price (MSRP) on every vehicle, as required by
law. We negotiate the final sales price of a new vehicle individually with the customer, selling
many vehicles at a special marketing offered price called “Promo Price,” which is typically less
than MSRP.
Used Vehicle Sales
At each new vehicle store, we also sell used vehicles. Retail used vehicle sales are an
important part of our overall profitability. In 2003, retail used vehicle sales generated a gross
margin of 13.8% compared with a gross margin of 7.7% for new vehicle sales. To enhance our
sales efforts, we employ a used vehicle manager at each location.
Retail used vehicle sales are an important part of our overall profitability. In 2003, retail used
vehicle sales generated a gross margin of 13.8% compared with a gross margin of 7.7% for
new vehicle sales.
7
Our used vehicle operations give us an opportunity to:
• generate sales to customers financially unable or unwilling to purchase a new vehicle;
• increase new and used vehicle sales by aggressively pursuing customer trade-ins; and
• increase service contract sales and provide financing to used vehicle purchasers.
In 2003, we sold approximately 0.8 retail used vehicles for every new vehicle sold.
In addition to selling late model used cars, as do other new vehicle dealers, our stores
emphasize sales of used vehicles three to ten years old. These vehicles sell for lower prices,
but generate greater margins. We believe that selling a larger number of used vehicles makes
us less susceptible to the effects of changes in the volume of new vehicle sales that result from
economic conditions.
We acquire most of our used vehicles through customer trade-ins, but we also buy them at
“closed” auctions, attended only by new vehicle automotive retailers with franchises for the
brands offered. These auctions offer off-lease, rental and fleet vehicles. We also buy used
vehicles at “open” auctions of repossessed vehicles and vehicles being sold by other
automotive retailers.
In addition to selling used vehicles to retail customers, we sell vehicles in poor condition and
vehicles that have not sold promptly to other automotive retailers and to wholesalers.
Our used vehicle sales from continuing operations were as follows:
Retail used units………………….. ............
Retail used unit sales (in thousands)…….
Average selling price ................................
2003
41,451
$603,096
$14,550
Year Ended December 31,
2001
35,845
$480,848
$13,415
2000
29,866
$392,017
$13,126
2002
40,781
$594,256
$14,572
1999
22,430
$292,516
$13,041
Wholesale used units ...............................
Wholesale used unit sales (in thousands).
Average selling price ................................
25,982
$122,451
$4,713
24,475
$121,504
$4,964
18,081
$83,201
$4,602
15,967
$70,055
$4,387
12,751
$58,378
$4,578
Total used units ........................................
Total used units sales (in thousands)….…
67,433
$725,547
65,256
$715,760
53,926
$564,049
45,833
$462,072
35,181
$350,894
Vehicle Financing, Extended Warranty and Insurance
We believe that arranging financing is critical to our ability to sell vehicles and related products
and services. We provide a variety of financing and leasing alternatives to meet customer
needs. Offering customer financing on a “same day” basis gives us an advantage, particularly
over smaller competitors who do not generate enough sales to attract our breadth of financing
sources.
Because of greater profit margins from sales of finance and insurance products, we try to
arrange financing for every vehicle we sell. Our finance and insurance managers possess
extensive knowledge of available financing alternatives and receive training in determining
each customer’s financing needs so that the customer can purchase or lease a vehicle. The
finance and insurance managers work closely with financing sources to quickly determine a
customer’s credit status and to confirm the type and amount of financing available to each
customer.
In 2003, we had finance and insurance penetration for 78% of our new vehicle sales and 73%
of our retail used vehicle sales. Our average finance and insurance revenue per vehicle totaled
$945 in 2003.
8
We earn a portion of the financing charge by discounting each finance contract we write and
subsequently sell to a lender. In 2003, many automobile manufacturers continued to offer zero
percent financing as sales incentives to new vehicle purchasers. Zero percent financing
reduces, but does not eliminate, our per unit fee income from arranging financing, as we
receive a fixed payment from the manufacturers in connection with such financing. Many
customers do not qualify for zero percent financing, either because of their credit standing or
because they require longer financing terms than offered for zero percent financing. Incentive
financing programs, including zero percent programs, usually offer cash rebates as an
alternative to reduced interest rates. A majority of eligible customers elect to receive cash
rebates instead of incentive financing, usually using the cash rebate as a down payment to
complete the purchase of a new vehicle with little or no cash out of pocket. We have been able
to increase finance and insurance revenue per vehicle, despite zero percent financing, due to
higher penetration of other finance and insurance products.
We usually arrange financing for customers by selling the contracts to outside sources on a
non-recourse basis to avoid the risk of default. During 2003, we directly financed less than
0.01% of our vehicle sales.
Our finance and insurance managers also market third-party extended warranty contracts and
insurance contracts to our new and used vehicle buyers. These products and services yield
higher profit margins than vehicle sales and contribute significantly to our profitability. Extended
warranty contracts provide additional coverage for new vehicles beyond the duration or scope
of the manufacturer’s warranty. The service contracts we sell to used vehicle buyers provide
coverage for certain major repairs.
We also offer our customers third party credit life and health and accident insurance when they
finance an automobile purchase and receive a commission on each policy sold. We also offer
other products, such as protective coatings and automobile alarms.
Service, Body and Parts
Our automotive service, body and parts operations are an integral part of establishing
customer loyalty and contribute significantly to our overall revenue and profits. We provide
parts and service primarily for the new vehicle brands sold by our stores, but we also service
other vehicles. In 2003, our service, body and parts operations generated $251.3 million in
revenues, or 10.0% of total revenues. We set prices to reflect the difficulty of the types of
repair and the cost and availability of parts.
The service, body and parts businesses provide important repeat revenues to the stores. We
market our parts and service products by notifying the owners of vehicles when their vehicles
are due for periodic service. This encourages preventive maintenance rather than post-
breakdown repairs. We offer a lifetime oil and filter service, which, in 2003, was purchased by
34.0% of our new and used vehicle buyers. This service helps us retain customers, and
provides opportunities for repeat parts and service business. Revenues from the service, body
and parts departments are important during economic downturns as owners tend to repair their
existing used vehicles rather than buy new vehicles during such periods. This limits the effects
of a drop in new vehicle sales.
We operate nineteen collision repair centers: four in Texas, three each in Oregon and Idaho;
two in South Dakota and one each in California, Washington, Montana, Colorado, Nevada,
Alaska and Nebraska.
9
Marketing
We market ourselves as “America’s Car & Truck Store” and as “Driving America.” We use
most types of advertising, including television, newspaper, radio, direct mail, and an Internet
web site. Advertising expense, net of manufacturer credits, was $20.1 million during 2003, with
41% of the total amount used for print media, 18% for television, 13% for radio and 28% for
direct mail, Internet and other. We advertise to develop our image as a reputable automotive
retailer, offering quality service, affordable automobiles and financing for all buyers. The
automobile manufacturers pay for many of our advertising and marketing expenditures. The
manufacturers also provide us with market research, which assists us in developing our own
advertising and marketing campaigns. In addition, our stores advertise discounts or other
promotions to attract customers. By owning a cluster of stores in a particular market, we save
money from volume discounts and other media concessions. We also participate as a member
of advertising cooperatives and associations, whose members pool their resources and
expertise with manufacturers to develop advertising campaigns.
We maintain a web site (www.lithia.com) that generates leads and provides information for our
customers. We use the Internet site as a marketing tool to familiarize customers with us, our
stores and the products we sell, rather than to complete purchases. Although many customers
use the Internet to research information about new vehicles, nearly all ultimately visit a store to
complete the sale and take delivery of the vehicle. Our web site enables a customer to:
• locate our stores and identify the new vehicle brands sold at each store;
• view new and used vehicle inventory;
• schedule service appointments;
• view Kelley Blue Book values;
• visit our investor relations site; and
• view employment opportunities.
We emphasize customer satisfaction and strive to develop a reputation for quality and fairness.
We train our sales personnel to identify an appropriate vehicle for each of our customers at an
affordable price.
We believe that our “Driving America” customer-oriented plan differentiates us from other
automotive retail stores.
Management Information System
We consolidate, process and maintain financial information, operational and accounting data,
and other related statistical information on centralized computers at our headquarters. We
have a fully operational intranet with each store directly connected to headquarters. Our
systems are based on an ADP platform for the main database, and information is processed
and analyzed utilizing customized financial reporting software from Hyperion Solutions. Senior
management can access detailed information from all of our locations regarding:
• inventory;
• cash balances;
• total unit sales and mix of new and used vehicle sales;
• lease and finance transactions;
• sales of ancillary products and services;
• key cost items and profit margins; and
• the relative performance of the stores.
10
Each store’s general manager has access to this same information. With this information, we
can quickly analyze the results of operations, identify trends and focus on areas that require
attention or improvement. Our management information system also allows our general
managers to respond quickly to changes in consumer preferences and purchasing patterns,
maximizing our inventory turnover.
Our management information system is particularly important to successfully operating new
stores. Following each acquisition, we immediately install our management information system
at each location. This quickly makes financial, accounting and other operational data easily
available throughout the company. With this information, we can more efficiently execute our
operating strategy at the new store.
Franchise Agreements
Each of our store subsidiaries signs a franchise (or dealer sales and service) agreement with
each manufacturer of the new vehicles it sells.
The typical automobile franchise agreement specifies the locations within a designated market
area at which the store may sell vehicles and related products and perform certain approved
services. The designation of such areas and the allocation of new vehicles among stores are at
the discretion of the manufacturer. Franchise agreements do not guarantee exclusivity within a
specified territory, but do have some protection under state laws.
A franchise agreement may impose requirements on the store with respect to:
• the showroom;
• service facilities and equipment;
• inventories of vehicles and parts;
• minimum working capital;
• training of personnel; and
• performance standards for sales volume and customer satisfaction.
Each manufacturer closely monitors compliance with these requirements and requires each
store to submit monthly and annual financial statements. Franchise agreements also grant a
store the right to use and display manufacturers’ trademarks, service marks and designs in the
manner approved by each manufacturer.
Most franchise agreements are generally renewed after one to five years, and, in practice,
have indefinite lives. Some franchise agreements, including those with DaimlerChrysler, have
no termination date. Historically, all of our agreements have been renewed and we expect that
manufacturers will continue to renew them in the future. In addition, state franchise laws limit
the ability of manufacturers to terminate or fail to renew automotive franchises. Each franchise
agreement authorizes at least one person to manage the store’s operations. The typical
franchise agreement provides for early termination or non-renewal by the manufacturer upon:
• a change of management or ownership without manufacturer consent;
• insolvency or bankruptcy of the dealer;
• death or incapacity of the dealer/manager;
• conviction of a dealer/manager or owner of certain crimes;
• misrepresentation of certain information by the store, dealer/manager or owner to the
manufacturer;
• failure to adequately operate the store;
• failure to maintain any license, permit or authorization required for the conduct of
business; or
• poor sales performance or low customer satisfaction index scores.
11
We sign master framework agreements with most manufacturers that impose additional
requirements on our stores. See Exhibit 99.1 “Risk Factors” for further details.
Competition
The retail automotive business is highly competitive, consisting of a large number of
independent operators, many of whom are individuals, families and small retail groups. We
compete primarily with other automotive retailers, both publicly and privately-held, near our
store locations. In addition, regional and national car rental companies operate retail used car
lots to dispose of their used rental cars.
Vehicle manufacturers have designated specific marketing and sales areas within which only
one dealer of a vehicle brand may operate. In addition, our franchise agreements typically limit
our ability to acquire multiple dealerships of a given brand within a particular market area.
Certain state franchise laws also restrict us from relocating our dealerships or establishing new
dealerships of a particular brand within any area that is served by another dealer with the same
brand. Accordingly, to the extent that a market has multiple dealers of a particular brand, as
many of our key markets do, we are subject to significant intra-brand competition.
We are larger and have more financial resources than most private automotive retailers with
which we currently compete in most of our regional markets. We compete directly with
retailers like ourselves in our metropolitan markets like Denver, Colorado, Seattle, Washington
and Concord, California. As we enter other markets, we may face competitors that are larger or
have access to greater financial resources. We do not have any cost advantage in purchasing
new vehicles from manufacturers. We rely on advertising and merchandising, sales expertise,
service reputation and location of our stores to sell new vehicles.
In addition to competition for the sale of vehicles, we expect increased competition for the
acquisition of other stores. We have faced only limited competition with respect to our
acquisitions to date, primarily from privately-held automotive retailers. Other publicly-owned
automotive retailers with significant capital resources may enter our current and targeted
market areas in the future.
Regulation
Our business is subject to extensive regulation, supervision and licensing under federal, state
and local laws, ordinances and regulations. State and federal regulatory agencies, such as the
Department of Motor Vehicles, the Occupational Safety and Health Administration, the EEOC
(Equal Employment Opportunity Commission) and the U.S. Environmental Protection Agency,
have jurisdiction over the operation of our stores, service centers, collision repair shops and
other operations. They regulate matters such as consumer protection, workers’ safety and air
and water quality.
Laws also protect franchised automotive retailers from the unequal bargaining power held by
the manufacturers. Under those laws, a manufacturer may not:
• terminate or fail to renew a franchise without good cause; or
• prevent any reasonable changes in the capital structure or financing of a store.
Manufacturers may object to a sale of a store or change of management based on character,
financial ability or business experience of the proposed new operator.
12
Automotive retailers and manufacturers are also subject to laws to protect consumers,
including so-called “Lemon Laws.” Most “Lemon Laws” require a manufacturer to replace a
new vehicle or accept it for a full refund within a set time period after initial purchase if:
• the vehicle does not conform to the manufacturer’s express warranties; and
• the automotive retailer or manufacturer, after a reasonable number of attempts, is unable
to correct or repair the defect.
We must provide written disclosures on new vehicles of mileage and pricing information.
Financing and insurance activities are subject to credit reporting, debt collection, truth-in-
lending and insurance industry regulation.
Our business, particularly parts, service and collision repair operations, involves hazardous or
toxic substances or wastes, such as motor oil, waste motor oil and filters, transmission fluid,
antifreeze, Freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. Federal, state and local authorities establishing health and
environmental quality standards regulate the handling, storage, treatment, recycling and
disposal of hazardous substances and wastes and remediation of contaminated sites, both at
our facilities and at sites to which we send hazardous or toxic substances or wastes for
treatment, recycling or disposal. We are aware of contamination at certain of our current and
former facilities, and we are in the process of conducting investigations and/or remediation at
some of these properties. Based on our current information, any costs or liabilities relating to
such contamination, other environmental matters or compliance with environmental regulations
are not expected to have a material adverse effect on our results of operations or financial
condition. There can be no assurances, however, that (i) additional environmental matters will
not arise or that new conditions or facts will not develop in the future at our current or formerly
owned or operated facilities, or at sites that we may acquire in the future, or that (ii) these
matters, conditions or facts will not result in a material adverse effect on our results of
operations or financial condition.
Employees
As of December 31, 2003, we employed approximately 5,130 persons on a full-time equivalent
basis. Employees in the service and parts departments at our Dodge, Ford and Volkswagen
stores in Concord, California are represented by union collective bargaining agreements. We
believe we have good relationships with our employees.
Item 2. Properties
Our stores and other facilities consist primarily of automobile showrooms, display lots, service
facilities, nineteen collision repair and paint shops, rental agencies, supply facilities, automobile
storage lots, parking lots and offices. We believe our facilities are currently adequate for our
needs and are in good repair. We own some of our properties, but also lease many properties,
providing future flexibility to relocate our retail stores as demographics change. Most leases
give us the option to renew the lease for one or more lease extension periods. We also hold
some undeveloped land for future expansion.
Item 3. Legal Proceedings
We are party to numerous legal proceedings arising in the normal course of our business.
While we cannot predict with certainty the outcomes of these matters, we do not anticipate that
the resolution of these proceedings will have a material adverse effect on our business, results
of operations, financial condition, or cash flows.
13
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our shareholders during the quarter ended December
31, 2003.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Class A common stock trades on the New York Stock Exchange under the symbol LAD. The
following table presents the high and low sale prices for our Class A common stock, as
reported on the New York Stock Exchange Composite Tape for each of the quarters in 2002
and 2003:
2002
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2003
Quarter 1
Quarter 2
Quarter 3
Quarter 4
$
$
High
25.99
31.20
26.60
18.49
16.05
17.35
24.20
25.95
$
$
Low
17.40
22.27
16.42
14.55
10.92
10.81
15.55
19.75
The number of shareholders of record and approximate number of beneficial holders of Class
A common stock at February 27, 2004 was 1,389 and 3,900, respectively. All shares of Lithia’s
Class B common stock are held by Lithia Holding Company LLC.
Our Board of Directors approved the following dividends on our Class A and Class B common
stock in 2003:
Month
declared
July 2003
Quarter
dividend is
based on
second
Payable to
shareholders of
record on
August 8, 2003
Date paid
August 22, 2003
Amount
per share
$0.07
Total
amount of
dividend
$1.3 million
October 2003
third
November 7, 2003
November 21, 2003
$0.07
$1.3 million
We currently intend to continue paying quarterly dividends similar to those paid in 2003. The
payment of any dividends is subject to the discretion of our Board of Directors. Pursuant to our
$200 million credit agreement with DaimlerChrysler Services, total dividends and repurchases
of our common stock cannot exceed $18.0 million over the term of the agreement. To date,
over the term of the agreement, we have paid dividends and repurchased stock totaling $2.8
million. This credit agreement expires February 2006.
Information regarding securities authorized for issuance under equity compensation plans is
included in Item 12.
14
Item 6. Selected Financial Data
You should read the Selected Financial Data in conjunction with Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” our Consolidated
Financial Statements and Notes thereto and other financial information contained elsewhere in
this Annual Report on Form 10-K.
(In thousands, except per share amounts)
Consolidated Statement of Operations
2003
Year Ended December 31,
2001
2000
2002
1999
Data:
Revenues:
New vehicles
Used vehicles
Service, body and parts
Finance and insurance
Fleet and other
Total revenues
Cost of sales
Gross profit
Selling, general and administrative
Depreciation and amortization
Income from operations
Floorplan interest expense
Other interest expense
Other income (expense), net
Income from continuing operations before
income taxes
Income taxes
Income from continuing operations
Income (loss) from discontinued
operations, net of tax
Net income
Income per basic share from continuing
operations
Income (loss) per basic share from
discontinued operations
Basic net income per share
Shares used in basic per share
calculations
Income per diluted share from continuing
operations
Income per diluted share from
discontinued operations
Diluted net income per share
Shares used in diluted per share
calculations
$ 1,441,000 $ 1,218,364 $
833,107 $
725,547
251,316
89,982
5,657
2,513,502
2,110,393
403,109
313,289
9,593
80,227
(13,997)
(6,081)
(951)
59,198
(23,561)
35,637
715,760
216,382
77,776
43,114
2,271,396
1,913,704
357,692
280,310
7,192
70,190
(10,775)
(5,985)
(589)
52,841
(20,480)
32,361
926,981 $
564,049
173,114
62,856
40,593
1,767,593
1,478,528
289,065
224,501
8,690
55,874
(13,652)
(7,546)
(298)
462,072
149,963
52,394
57,491
1,555,027
1,303,800
251,227
182,591
7,125
61,511
(16,532)
(7,629)
803
615,617
350,894
106,992
41,606
26,265
1,141,374
959,386
181,988
133,651
5,102
43,235
(10,212)
(4,063)
201
34,378
(13,270)
21,108
38,153
(14,690)
23,463
29,161
(11,716)
17,445
(90)
35,547 $
(45)
32,316 $
646
21,754 $
850
24,313 $
1,729
19,174
1.95
$
1.88
$
1.58
$
1.72
$
1.52
(0.01)
1.94 $
-
1.88 $
0.05
1.63 $
0.06
1.78 $
0.15
1.67
18,289
17,233
13,371
13,652
11,506
1.92
$
1.84
$
1.55
$
1.70
$
1.45
$
$
$
$
-
-
$
1.92 $
1.84 $
0.05
1.60 $
0.06
1.76 $
0.15
1.60
18,546
17,598
13,612
13,804
11,998
(In thousands)
Consolidated Balance Sheet Data:
Working capital
Inventories
Total assets
Flooring notes payable
Current maturities of long-term debt
Long-term debt, less current maturities
Total stockholders’ equity
2003
2002
As of December 31,
2001
2000
1999
$
$
160,066
445,281
1,102,782
435,228
14,299
178,467
358,926
$
126,308
445,908
942,049
427,635
4,466
104,712
319,993
104,834
275,398
662,944
280,947
10,203
95,830
203,497
$
98,917 $
314,290
628,003
314,137
5,342
72,586
181,775
74,999
268,281
506,433
243,903
7,132
38,411
155,638
15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations
You should read the following discussion in conjunction with Item 1. “Business,” our Consolidated
Financial Statements and Notes thereto and Exhibit 99.1 “Risk Factors.”
Overview
Our auto-retail model is focused on acquiring average performing new vehicle franchised
stores and then integrating and improving them. Our goal is to maximize the operations of all
four departments of every store we acquire. We have had success with this strategy since our
initial public offering in late 1996. While our strategy has not changed over the last seven
years, our ability to integrate and improve the stores that we acquire has increased
dramatically. We have also developed a better process for identifying acquisition targets that fit
our operating model. Our cash position, substantial lines of credit, plus an extremely
competent and well-trained staff are all available to facilitate our continued growth as the
opportunities develop.
In keeping with this model, we acquired 11 stores with 23 franchises during 2003 with total
estimated annual revenues of approximately $330 million.
During an economic downturn, customers tend to shift towards the purchase of more modestly
priced new vehicle models or used vehicles. Many customers decide to delay purchasing a
new vehicle and instead repair existing vehicles. In addition, manufacturers typically offer
increased dealer and customer incentives during an economic downturn in order to support
new vehicle sales volume. These factors generally lead to less volatility in earnings for
automobile retailers than for automobile manufacturers.
Historically, new vehicle sales have accounted for approximately 50% of our total revenues but
less than 30% of total gross profit. In 2003, we continued with a volume-based strategy in new
vehicle sales that we initiated in 2002. Through an advertising campaign called “Driving
America” that is centered on “Promo Pricing,” we were able to gain new vehicle market share
in many of our markets. This strategy complemented the approach taken by the auto
manufacturers, which had continued to offer a high level of customer incentives.
In 2004, we expect that manufacturers will continue to incentivize new vehicle sales through a
combination of rebates and low interest rate loans to consumers. We plan to continue with our
volume-based new vehicle strategy in most of the markets where we operate. As the economy
and the incentive environment change, we will adjust our new vehicle sales strategy
accordingly to take advantage of any new conditions.
Industry-wide used vehicle sales continued to experience substantial weakness throughout all
of 2003. The competition from highly incentivized new vehicles with low interest rate financing
and high rebates had a strong negative impact on the used vehicle market. The industry also
experienced a large number of lease-returns that negatively impacted used vehicle pricing
throughout the year.
16
Results of Continuing Operations
Certain revenue, gross margin and gross profit information by product line was as follows for
2003 and 2002:
2003
New vehicles ........................................................................................
Retail used vehicles(1) ..........................................................................
Service, body and parts .......................................................................
Finance and insurance(2) ......................................................................
Fleet and other…………………………………………………………….
Percent of
Total Revenues
57.3%
24.0
10.0
3.6
0.2
Gross
Margin
7.7%
13.8
47.2
99.7
19.1
Percent of Total
Gross Profit
27.4%
20.7
29.4
22.3
0.3
(1) Excludes wholesale used vehicle sales, representing 4.9% of total revenues, and a negative gross margin
contribution of 0.1%.
(2) Reported net of anticipated cancellations.
2002
New vehicles ........................................................................................
Retail used vehicles(1) ..........................................................................
Service, body and parts .......................................................................
Finance and insurance(2) ......................................................................
Fleet and other…………………………………………………………….
Percent of
Total Revenues
53.6%
26.2
9.5
3.4
1.9
Gross
Margin
8.5%
12.5
48.0
99.4
2.1
Percent of Total
Gross Profit
28.9%
20.7
29.1
21.6
0.3
(1) Excludes wholesale used vehicle sales, representing 5.4% of total revenues, and a negative gross margin
contribution of 0.6%.
(2) Reported net of anticipated cancellations.
2001
New vehicles ........................................................................................
Retail used vehicles(1) ..........................................................................
Service, body and parts .......................................................................
Finance and insurance(2) ......................................................................
Fleet and other…………………………………………………………….
Percent of
Total Revenues
52.4%
27.2
9.8
3.6
2.3
Gross
Margin
9.1%
13.1
46.6
98.8
2.8
Percent of Total
Gross Profit
29.1%
21.9
27.9
21.5
0.4
(1) Excludes wholesale used vehicle sales, representing 4.7% of total revenues, and a negative gross margin
contribution of 0.8%.
(2) Reported net of anticipated cancellations.
The following table sets forth selected condensed financial data for Lithia expressed as a
percentage of total revenues for the periods indicated below.
Lithia Motors, Inc. (1)
Revenues:
New vehicles
Used vehicles
Service, body and parts
Finance and insurance
Fleet and other
Total revenues
Gross profit
Selling, general and administrative expenses
Depreciation and amortization
Income from operations
Floorplan interest expense
Other interest expense
Other expense, net
Income from continuing operations before taxes
Income tax expense
Income from continuing operations
(1) The percentages may not add due to rounding.
17
Year Ended December 31,
2002
2003
2001
57.3%
28.9
10.0
3.6
0.2
100.0%
16.0
12.5
0.4
3.2
0.6
0.2
0.0
2.4
0.9
1.4
53.6%
31.6
9.5
3.4
1.9
100.0%
15.7
12.3
0.3
3.1
0.5
0.3
0.0
2.3
0.9
1.4
52.4%
31.9
9.8
3.6
2.3
100.0%
16.4
12.7
0.5
3.2
0.8
0.4
0.0
1.9
0.8
1.2
The following tables set forth the changes in our operating results from continuing operations in
2003 compared to 2002 and in 2002 compared to 2001:
$
$
$
$
$
$
$
Revenues:
New vehicle sales
Used vehicle sales
Service, body and parts
Finance and insurance
Fleet and other
Total revenues
Cost of sales
Gross profit
Selling, general and administrative
Depreciation and amortization
Income from operations
Floorplan interest expense
Other interest expense
Other expense, net
Income from continuing operations before
income taxes
Income tax expense
Income from continuing operations
New units sold
Average selling price per new vehicle
Used units sold – retail
Average selling price per retail used vehicle
Used units sold – wholesale
Average selling price per wholesale used
vehicle
Finance and insurance sales per retail unit
Revenues:
New vehicle sales
Used vehicle sales
Service, body and parts
Finance and insurance
Fleet and other
Total revenues
Cost of sales
Gross profit
Selling, general and administrative
Depreciation and amortization
Income from operations
Floorplan interest expense
Other interest expense
Other expense, net
Income from continuing operations before
income taxes
Income tax expense
Income from continuing operations
Year Ended
December 31,
2003
2002
Increase
(Decrease)
%
Increase
(Decrease)
1,441,000 $
725,547
251,316
89,982
5,657
2,513,502
2,110,393
403,109
313,289
9,593
80,227
(13,997)
(6,081)
(951)
1,218,364 $
715,760
216,382
77,776
43,114
2,271,396
1,913,704
357,692
280,310
7,192
70,190
(10,775)
(5,985)
(589)
59,198
23,561
35,637 $
52,841
20,480
32,361 $
Year Ended
December 31,
2003
53,804
26,782 $
41,451
14,550 $
2002
46,929
25,962 $
40,781
14,572 $
25,982
24,475
4,713
$
4,964
$
945 $
887 $
222,636
9,787
34,934
12,206
(37,457)
242,106
196,689
45,417
32,979
2,401
10,037
(3,222)
(96)
(362)
6,357
3,081
3,276
18.3%
1.4
16.1
15.7
(86.9)
10.7
10.3
12.7
11.8
33.4
14.3
29.9
1.6
61.5
12.0
15.0
10.1%
Increase
(Decrease)
6,875
820
%
Increase
(Decrease)
14.7%
3.2%
670
(22)
1,507
(251)
58
1.6%
(0.2)%
6.2%
(5.1)%
6.5%
Year Ended
December 31,
2002
2001
Increase
(Decrease)
%
Increase
(Decrease)
926,981 $
564,049
173,114
62,856
40,593
1,767,593
1,478,528
289,065
224,501
8,690
55,874
(13,652)
(7,546)
(298)
34,378
13,270
21,108 $
291,383
151,711
43,268
14,920
2,521
503,803
435,176
68,627
55,809
(1,498)
14,316
2,877
1,561
(291)
18,463
7,210
11,253
31.4%
26.9
25.0
23.7
6.2
28.5
29.4
23.7
24.9
(17.2)
25.6
(21.1)
(20.7)
97.7
53.7
54.3
53.3%
1,218,364 $
715,760
216,382
77,776
43,114
2,271,396
1,913,704
357,692
280,310
7,192
70,190
(10,775)
(5,985)
(589)
52,841
20,480
32,361 $
$
18
New units sold
Average selling price per new vehicle
Used units sold – retail
Average selling price per retail used vehicle
Used units sold – wholesale
Average selling price per wholesale used
vehicle
Finance and insurance sales per retail unit
$
$
$
$
Year Ended
December 31,
2002
46,929
25,962 $
40,781
14,572 $
2001
37,190
24,926 $
35,845
13,415 $
24,475
18,081
4,964
$
4,602
$
887 $
861 $
Increase
(Decrease)
9,739
1,036
%
Increase
(Decrease)
26.2%
4.2%
4,936
1,157
6,394
362
26
13.8%
8.6%
35.4%
7.9%
3.0%
Revenues
Total revenues increased 10.7% in 2003 compared to 2002 as a result of acquisitions and
1.2% growth in same store retail sales. Same store sales percentage increases (decreases)
were as follows:
New vehicles
Retail used vehicles
Service, body and parts
Finance and insurance
Total retail sales
2003 vs. 2002
2002 vs. 2001
6.2%
(9.3)
0.7
5.1
1.2
6.1%
(7.6)
(1.0)
0.2
1.1
Same store sales are calculated by dealership comparing only those months that contain full-
month operating data.
The automotive retailing industry reported declines in new vehicle sales of approximately 1.0%
in 2003 compared to 2002 and 2% in 2002 compared to 2001. The industry has reported an
approximately 3.4% decrease in sales of domestic brands in 2003 compared to 2002, while we
achieved a 6.8% same store increase in sales of our domestic brands, which represented
71.4% of our total new vehicle sales in 2003. Our same-store Chrysler sales, which represents
our largest brand, have increased approximately 7.2% in the same period. We have same-
store sales increases in 2003 compared to 2002 for all domestic brands, which is counter to
national trends. We are able to generate positive sales trends that run contrary to industry and
specific brand trends due to our operating model that is focused on increasing market share
through the use of promotional pricing at our stores. Additionally, we believe that the market
dynamics of smaller, non-metropolitan, western markets support more stable domestic truck
and SUV sales.
Slowing economies in our markets and higher than normal new vehicle inventories at the end
of 2002, coupled with a strong new vehicle incentive environment, spurred our aggressive
approach to new vehicle sales in 2003. During both 2003 and 2002, we utilized an aggressive
company-wide marketing campaign based on the “Driving America” theme that is aimed at
increasing market share by competitively pricing new vehicles in order to secure a long-term
customer base for future parts and service business and repeat and referral business. The
increases in new vehicle sales also led to increases in same-store finance and insurance
sales, as we have been able to maintain our high penetration rate for such sales.
The industry used vehicle business was weak in 2003 and 2002 due to competition from highly
incentivized new vehicles within the overall weaker total vehicle market. Our used vehicle
gross profit demonstrated improvement throughout 2003, achieving retail used vehicle gross
margins of 13.0%, 13.9%, 14.6% and 13.6%, respectively, in the first through fourth quarters of
2003. The improvements in used vehicle margins in 2003 more than offset the declines in
same-store sales resulting in positive same-store gross profit growth for 2003 compared to
2002.
19
The service and parts business has been negatively impacted in the past couple of years by
substantial improvements in the quality of domestic vehicles, resulting in less warranty work,
offset in part by increases in the customer-pay portion of the business. However, in the second
half of 2003, we saw positive trends with the decline in domestic warranty repairs slowing in
comparison to declines in previous quarters and customer-pay service and parts growth
increasing 4.1% in 2003, on a same store basis, compared to 2002.
Fleet and other sales include both fleet sales and fees received for delivering vehicles on
behalf of the manufacturer, the U.S. military, rent-a-car companies or leasing companies. In
2003 we decided to deemphasize fleet sales due to their low margins. This has resulted in a
decrease in total fleet and other sales, but an increase in the gross margin percentage due to a
higher percentage of fee income compared to fleet income.
Penetration rates for certain products were as follows:
Finance and insurance
Service contracts
Lifetime oil change and filter
2003
75%
41
34
2002
75%
40
30
2001
75%
39
29
During 2003 and 2002, manufacturers offered, and are continuing to offer, incentives, including
low interest rates and rebates, in order to attract new vehicle buyers. The availability of cash
rebates and zero percent and low interest rate financing have enhanced our ability to sell
finance, warranty and insurance products and services in both 2003 and 2002.
Gross Profit
Gross profit increased $45.4 million in 2003 compared to 2002 and increased $68.6 million in
2002 compared to 2001 due primarily to increased total revenues. Gross margins achieved
were as follows:
New vehicles ...................................................
Retail used vehicles ........................................
Service and parts ............................................
Finance and insurance ....................................
Overall.............................................................
New vehicles ...................................................
Retail used vehicles ........................................
Service and parts ............................................
Finance and insurance ....................................
Overall.............................................................
Year Ended December 31,
2003
7.7%
13.8
47.2
99.7
16.0
2002
8.5%
12.5
48.0
99.4
15.7
Year Ended December 31,
2002
8.5%
12.5
48.0
99.4
15.7
2001
9.1%
13.1
46.6
98.8
16.4
Lithia
Margin Change*
(80)bp
130
(80)
30
30
Lithia
Margin Change*
(60)bp
(60)
140
60
(70)
____________
* “bp” stands for basis points (one hundred basis points equals one percent).
Our overall gross margin increased in 2003 compared to 2002 due primarily to increases in
margins achieved on used vehicle sales as a result of selling older aged vehicles which carry a
higher margin and improved inventory management. These increases in the used vehicle gross
margin also contributed to a same store increase in total gross profit dollars per used vehicle
sold.
20
The improvements in our gross margin in 2003 were offset by the following factors:
• A significant shift towards our lowest margin new vehicle business as a result of the
strong incentive environment;
• Lower floorplan interest credits from the manufacturers on new vehicles due to lower
market rates; and
• Aggressive pricing of new vehicles in order to gain market share, which resulted in
lower new vehicle margins.
The decrease in the overall gross margin in 2002 compared to 2001 was primarily a result of
four factors:
• A significant shift towards our lowest margin new vehicle business with the strong
incentive environment;
• Lower floorplan interest credits from the manufacturers on new vehicles due to lower
market rates;
• Aggressive pricing of new vehicles in order to gain market share, which resulted in
lower new vehicle margins; and
• A mix shift in used vehicle sales to the lower margin, one to three-year old vehicles,
which have lower margins than the older used vehicles.
These factors were partially offset by an increase in the gross margin achieved in our parts and
service business in 2002 compared to 2001.
Selling, General and Administrative Expense
Selling, general and administrative expense includes salaries and related personnel expenses,
facility lease expense, advertising (net of manufacturer cooperative advertising credits), legal,
accounting, professional services and general corporate expenses. Selling, general and
administrative expense increased $33.0 million in 2003 compared to 2002 and increased $55.8
million in 2002 compared to 2001 due to increased selling, or variable, expenses related to the
increase in revenues and the number of locations. The increase as a percentage of revenue in
2003 compared to 2002 is due partially to higher advertising and sales compensation
expenses related to our aggressive new vehicle marketing. The decrease as a percentage of
revenue in 2002 compared to 2001 was due to expense leverage on higher sales.
Depreciation and Amortization
Depreciation and amortization increased $2.4 million in 2003 due to the addition of property
and equipment primarily related to our acquisitions. Depreciation and amortization expense
decreased $1.5 million in 2002 compared to 2001 primarily as a result of the adoption of SFAS
No. 142 “Goodwill and Other Intangible Assets” in the first quarter of 2002, offset by additions
to property and equipment primarily related to acquisitions. SFAS No. 142 requires that
goodwill and other intangibles with indefinite useful lives no longer be amortized. Goodwill and
other intangibles amortization expense totaled $3.6 million in 2001.
Income from Operations
Operating margins improved by 10 basis points to 3.2% in 2003 from 3.1% in 2002. The
increase is due to the improved overall gross profit margin as discussed above, partially offset
by higher operating expenses as a percentage of revenue. Operating margins decreased 10
basis points in 2002 compared to 2001 due to the decrease in the overall gross margin
percentage, offset in part by lower operating expenses as a percentage of revenue.
Floorplan Interest Expense
The $3.2 million increase in floorplan interest expense in 2003 compared to 2002 is primarily
due to an approximately $2.8 million increase in expense as a result of an increase in the
average outstanding balances of our floorplan facilities, mainly due to acquisitions. In addition,
increased expense from interest rate swaps was responsible for $1.1 million of the increase.
21
These increases were offset in part by a decrease in the LIBOR and the prime rates in 2003
compared to 2002.
The decrease in floorplan interest expense in 2002 compared to 2001 was primarily due to
approximately $8.4 million in savings as a result of decreases in the effective interest rate on
the floating rate credit lines, offset in part by a $4.1 million increase in expense as a result of an
overall average increase in the outstanding balances of our floorplan facilities, mainly due to
acquisitions. In addition to the interest expense on our flooring lines of credit, floorplan interest
expense includes the interest expense related to our interest rate swaps.
Other Interest Expense
Other interest expense includes interest on debt incurred related to acquisitions, real estate
mortgages, our used vehicle line of credit and equipment related notes. Changes in the
weighted average interest rate on our debt in 2003 compared to 2002 decreased other interest
expense by $259,000. Changes in the average outstanding balances in 2003 compared to
2002 resulted in increases to other interest expense of $355,000.
The $1.6 million decrease in other interest expense in 2002 compared to 2001 resulted from
$3.2 million of savings due to lower interest rates in 2002 compared to 2001 and approximately
$3.0 million in savings due to the pay-down of $78.0 million on our lines of credit in March
2002, following our equity offering. These decreases were offset in part by less capitalized
interest on construction projects in progress in 2002 compared to 2001 and by an increase in
the outstanding balances due to acquisitions and the financing of previously unfinanced real
estate during 2002. The lower interest rates in 2002 are due in part to the refinancing of $15.2
million of fixed interest rate mortgage loans since November 2001, utilizing floating rate loans
with Toyota Motor Credit and Ford Motor Credit.
Income Tax Expense
Our effective tax rate was 39.8% in 2003 compared to 38.8% in 2002 and 38.6% in 2001. Our
effective tax rate may be affected in the future by the mix of asset acquisitions compared to
corporate acquisitions, as well as by the mix of states where our stores are located.
Income from Continuing Operations
Income from continuing operations as a percentage of revenue remained flat in 2003
compared to 2002 as a result of improvements in gross margins being offset by increased
operating expenses.
Net Income
Net income as a percentage of revenue increased 20 basis points in 2002 compared to 2001
as a result of increased revenues and lower operating expenses and interest expense, offset
by a lower gross margin percentage.
Discontinued Operations
During 2003, we decided to sell certain of our stores and related franchises. We recognized a
net gain on the sale of one of our stores classified as discontinued operations totaling
$374,000, net of tax, in 2003, which is netted with loss from discontinued operations on our
consolidated statement of operations. At December 31, 2003, we had $20.4 million of assets
classified as assets held for sale on our balance sheet related to one store we intend to sell
during 2004. The assets primarily include inventory and property, plant and equipment. We did
not recognize any gain or loss on disposal of discontinued operations during 2002 or 2001.
We continually monitor the performance of each of our stores and make determinations to sell
based on return on capital criteria.
22
Selected Consolidated Quarterly Financial Data
The following tables set forth our unaudited quarterly financial data for the quarterly periods
presented.
2003
Revenues:
New vehicle sales .............................................................
Used vehicle sales ............................................................
Service, body and parts ....................................................
Finance and insurance………………………………….....
Fleet and other ..................................................................
Total revenues ...............................................................
Cost of sales .......................................................................
Gross profit .........................................................................
Selling, general and administrative .....................................
Depreciation and amortization ............................................
Income from operations ......................................................
Flooring interest expense....................................................
Other interest expense........................................................
Other, net ............................................................................
Income from continuing operations before income taxes ...
Income taxes.......................................................................
Income before discontinued operations ..............................
Discontinued operations, net of tax.....................................
Net income ..........................................................................
Basic income per share from continuing operations ...........
Basic income (loss) per share from discontinued
operations ...........................................................................
Basic net income per share ................................................
Diluted income per share from continuing operations.........
Diluted income (loss) per share from discontinued
operations ...........................................................................
Diluted net income per share ..............................................
2002
Revenues:
New vehicle sales .............................................................
Used vehicle sales ............................................................
Service, body and parts ....................................................
Finance and insurance…………………………...
Fleet and other ..................................................................
Total revenues ...............................................................
Cost of sales .......................................................................
Gross profit .........................................................................
Selling, general and administrative .....................................
Depreciation and amortization ............................................
Income from operations ......................................................
Flooring interest expense....................................................
Other interest expense........................................................
Other, net ............................................................................
Income from continuing operations before income taxes ...
Income taxes.......................................................................
Income before discontinued operations ..............................
Discontinued operations, net of tax.....................................
Net income ..........................................................................
Basic income per share from continuing operations ...........
Basic income (loss) per share from discontinued
operations ...........................................................................
Basic net income per share ................................................
Diluted income per share from continuing operations.........
Diluted income (loss) per share from discontinued
operations ...........................................................................
Diluted net income per share ..............................................
Three Months Ended,
March 31
June 30
September 30
December 31
(in thousands, except per share data )
$308,494
172,096
56,485
20,410
2,075
559,560
471,073
88,487
74,229
2,131
12,127
(3,546)
(1,388)
(147)
7,046
(2,731)
4,315
(150)
$ 4,165
$ 0.24
$363,845
191,092
61,032
22,478
1,865
640,312
538,573
101,739
79,585
2,254
19,900
(3,672)
(1,564)
(255)
14,409
(5,808)
8,601
(82)
$ 8,519
$ 0.47
(0.01)
$ 0.23
0.00
$ 0.47
$411,358
196,280
67,849
25,071
882
701,440
588,636
112,804
83,904
2,504
26,396
(3,324)
(1,496)
(243)
21,333
(8,491)
12,842
39
$ 12,881
$ 0.70
0.00
$ 0.70
$357,303
166,079
65,950
22,023
835
612,190
512,111
100,079
75,571
2,704
21,804
(3,455)
(1,633)
(306)
16,410
(6,531)
9,879
103
$ 9,982
$ 0.54
0.00
$ 0.54
$ 0.24
$ 0.47
$ 0.69
$ 0.52
(0.01)
$ 0.23
(0.01)
$ 0.46
0.00
$ 0.69
0.01
$ 0.53
Three Months Ended,
March 31
June 30
September 30
December 31
(in thousands except per share data )
$252,043
176,981
48,413
17,006
3,399
497,842
418,742
79,100
64,100
1,553
13,447
(2,244)
(1,559)
121
9,765
(3,769)
5,996
395
$ 6,391
$ 0.40
$284,264
180,697
51,670
19,383
22,808
558,822
470,253
88,569
69,571
1,697
17,301
(2,763)
(1,436)
(161)
12,941
(4,996)
7,945
(10)
$ 7,935
$ 0.44
0.03
$ 0.43
0.00
$ 0.44
$370,158
193,565
59,631
21,166
12,904
657,424
557,309
100,115
75,795
1,892
22,428
(2,813)
(1,542)
(216)
17,857
(6,956)
10,901
(172)
$ 10,729
$ 0.61
(0.01)
$ 0.60
$311,899
164,517
56,668
20,221
4,003
557,308
467,400
89,908
70,844
2,050
17,014
(2,955)
(1,448)
(333)
12,278
(4,759)
7,519
(258)
$ 7,261
$ 0.42
(0.02)
$ 0.40
$ 0.39
$ 0.43
$ 0.60
$ 0.41
0.03
$ 0.42
0.00
$ 0.43
(0.01)
$ 0.59
(0.01)
$ 0.40
23
Seasonality and Quarterly Fluctuations
Historically, our sales have been lower in the first and fourth quarters of each year due to
consumer purchasing patterns during the holiday season, inclement weather and the reduced
number of business days during the holiday season. As a result, financial performance may be
lower during the first and fourth quarters than during the other quarters of each fiscal year. We
believe that interest rates, levels of consumer debt and consumer confidence, as well as general
economic conditions, also contribute to fluctuations in sales and operating results. Historically,
the timing, performance and frequency of acquisitions have been the largest contributor to
fluctuations in our operating results from quarter to quarter.
Liquidity and Capital Resources
Our principal needs for capital resources are to finance acquisitions and capital expenditures, as
well as for working capital. We have relied primarily upon internally generated cash flows from
operations, borrowings under our credit agreements and the proceeds from public equity
offerings to finance operations and expansion. We believe that our available cash, cash
equivalents, available lines of credit and cash flows from operations will be sufficient to meet our
anticipated operating expenses and capital requirements for at least twelve months from
December 31, 2003.
Our free cash flow in 2003, defined as net income plus depreciation minus dividends and
maintenance (unfinanceable) capital expenditures was approximately $31.9 million. In 2002
and 2001, free cash flow was $33.8 million and $26.0 million, respectively. The reconciliation
of net income to free cash flow is as follows (in thousands):
Year Ended December 31,
Net income
Depreciation
Dividends
Maintenance capital expenditures
Free cash flow
2003
35,547
9,593
(2,575)
(10,678)
31,887
$
$
$
$
2002
32,316
7,192
-
(5,691)
33,817
$
$
2001
21,754
8,690
-
(4,439)
26,005
Our inventories decreased slightly to $445.3 million at December 31, 2003 from $445.9 million at
December 31, 2002 due primarily to efficiencies gained from the implementation of our new
centralized inventory control process, offset by acquisitions. Our new and used flooring notes
payable increased to $435.2 million at December 31, 2003 from $427.6 million at December 31,
2002 due to a higher percentage of used vehicles being financed as well as an increase in new
vehicle inventory and a decrease in used vehicle inventory. New vehicles are financed at
approximately 100% and used vehicles are financed at approximately 80%. Our days supply of
new vehicles decreased by approximately 5 days at December 31, 2003 compared to December
31, 2002. Our days supply of used vehicles also decreased by approximately 5 days at
December 31, 2003 compared to December 31, 2002. Our used vehicle inventories are at
lowest levels for this time of year compared to the last five years. We believe that our new and
used vehicle inventories are at appropriate levels at this time.
Assets of discontinued operations held for sale include inventory and property, plant and
equipment related to one store held for sale and are recorded on our balance sheet at the lower
of book value or estimated fair market value, less applicable selling costs.
Primarily as a result of the acquisition of eleven stores in 2003, our goodwill and other intangibles
increased $29.8 million to $236.0 million at December 31, 2003 compared to $206.2 million at
December 31, 2002.
24
In 2003, our Board of Directors approved dividends on our Class A and Class B common stock of
$0.07 per share for both the second and third quarters of 2003. The dividends totaled $2.6
million. In February 2004, our Board of Directors approved a dividend on our Class A and Class
B common stock of $0.07 per share for the fourth quarter of 2003, which will total approximately
$1.3 million. We anticipate recommending to the Board of Directors the approval of a cash
dividend each quarter.
In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our
Class A common stock. Through October 2003, we have purchased a total of 59,400 shares
under this program and may continue to do so from time to time in the future as conditions
warrant. However, the recent change in the tax law tends to equalize the benefits of dividends
and share repurchases as a means to return capital or earnings to shareholders. As a result, we
believe it is now advantageous to shareholders to have a dividend in place. With the dividend,
we are able to offer an immediate and tangible return to our shareholders without reducing our
already limited market float, which occurs when we repurchase shares.
In February 2003 we entered into a working capital and used vehicle flooring credit facility with
DaimlerChrysler Services North America LLC totaling up to $200 million, which expires in
February 2006, with interest due monthly. In December 2003, Toyota Motor Credit joined
DaimlerChrysler in syndication on this credit facility. None of the terms of the credit facility were
changed.
The credit line with DaimlerChrysler Services is cross-collateralized and secured by cash and
cash equivalents, new and used vehicles that are not specifically financed by other lenders, parts
inventories, accounts receivable,
to
DaimlerChrysler Services the stock of all of our subsidiaries except entities operating BMW,
Honda, Nissan or Toyota stores.
intangible assets and equipment.
We pledged
The financial covenants in our agreement with DaimlerChrysler Services require us to maintain
compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge
coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and
(v) certain working capital levels. At December 31, 2003, we were in compliance with all of the
covenants of this agreement.
Toyota Motor Credit Corporation, Ford Motor Credit and General Motors Acceptance Corporation
have agreed to floor all of our new vehicles for their respective brands with DaimlerChrysler
Services and Toyota Motor Credit Corporation serving as the primary lenders for substantially all
other brands. These new vehicle lines are secured by new vehicle inventory of the relevant
brands.
We also have a real estate line of revolving credit with Toyota Motor Credit totaling $40 million,
which expires in May 2005. This line of credit is secured by the real estate financed under this
line of credit.
In February 2004, our U.S. Bank N.A. credit facility agreement was amended to provide for a
$50.0 million revolving line of credit for leased vehicles and equipment purchases, which expires
January 31, 2006. Previously, the amount available under this line of credit was $35.0 million and
it was set to expire January 31, 2005.
Interest rates on all of the above facilities ranged from 2.62% to 3.87% at December 31, 2003.
Amounts outstanding on the lines at December 31, 2003 together with amounts remaining
available under such lines were as follows (in thousands):
25
New and program vehicle lines
Working capital and used vehicle line
Real estate line
Equipment/leased vehicle line
Outstanding at
December 31, 2003
$378,961
117,000
9,018
35,000
$539,979
Remaining Availability as
of December 31, 2003
$
*
83,000**
30,982
-
$113,982*
_________
* There are no formal limits on the new and program vehicle lines with certain lenders.
** As limited by the terms of the line regarding the borrowing base.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2003 is as
follows (in thousands):
Contractual
Obligation
Floorplan Notes
Lines of Credit and
Long-Term Debt
Capital
Commitments
Operating Leases
Total
435,228
$
192,766
5,244
147,150
780,388
$
$
$
Payments Due By Period
2005 and
2006
56,267
$
$
2004
378,961
2007 and
2008
-
2009 and
beyond
$
-
14,299
105,097
46,719
26,651
5,244
19,975
418,479
$
-
38,031
199,395
$
-
34,360
81,079
-
54,784
81,435
$
Our capital commitments of $5.2 million at December 31, 2003 were for the construction of one
new store facility and additions to three existing facilities and the remodel of four facilities. The
new facility will be a Hyundai store in Anchorage, Alaska. We have already incurred $7.5 million
for these projects. We expect to pay for the construction out of existing cash balances until
completion of the projects, at which time we anticipate securing long-term financing and general
borrowings from third party lenders for 70% to 90% of the amounts expended.
In addition, we have recorded a reserve for our estimated contractual obligations related to
potential charge-backs for vehicle service contracts and lifetime oil change contracts that are
terminated early by the customer. At December 31, 2003, this reserve totaled $9.8 million.
Based on past experience, we estimate that the $9.8 million will be paid out as follows: $5.5
million in 2004; $2.6 million in 2005; $1.1 million in 2006; $0.4 million in 2007; and $0.2 million
thereafter.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America requires us to make certain estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and reported amounts of revenues and expenses at the date of
the financial statements. Some of our accounting policies require us to make difficult and
subjective judgments on matters that are inherently uncertain. The following accounting
policies involve critical accounting estimates because they are particularly dependent on
assumptions made by management. While we have made our best estimates based on facts
and circumstances available to us at the time, different estimates could have been used in the
current period. Changes in the accounting estimates we used are reasonably likely to occur
from period to period, which may have a material impact on the presentation of our financial
condition and results of operations.
26
Our most critical accounting estimates include service contract and lifetime oil contract income
recognition, finance fee income recognition, workers’ compensation insurance premium
accrual, assessment of recoverability of goodwill and other intangible assets, and used vehicle
inventory valuations. We also have other key accounting policies, such as our policies for
valuation of accounts receivable, expense accruals and other revenue recognition. However,
these policies either do not meet the definition of critical accounting estimates described above
or are not currently material items in our financial statements. We review our estimates,
judgments and assumptions periodically and reflect the effects of revisions in the period that
they are deemed to be necessary. We believe that these estimates are reasonable. However,
actual results could differ from these estimates.
Service Contract and Lifetime Oil Change Contract Income Recognition
We receive fees from the sale of vehicle service contracts and lifetime oil contracts to
customers. The contracts are sold through an unrelated third party, but we may be charged
back for a portion of the fees in the event of early termination of the contracts by customers.
We have established a reserve for estimated future charge-backs based on an analysis of
historical charge-backs in conjunction with termination provisions of the applicable contracts. At
December 31, 2003 and 2002, this reserve totaled $9.8 million and $9.3 million, respectively,
and is included in accrued liabilities and other long-term liabilities on our consolidated balance
sheets. We may also participate in future underwriting profit, pursuant to retrospective
commission arrangements, that would be recognized as income upon receipt.
Finance Fee Income Recognition
We receive finance fees from various financial institutions when we arrange financing for our
customers on a non-recourse basis. We may be charged back for a portion of the financing fee
income when the customer pays off their loan prior to the guidelines agreed to by the various
financial institutions. We have established a reserve for potential net charge-backs and
cancellations based on historical experience, which typically result if the customer pays off their
loan during the 90 to 180 days after receiving financing. At December 31, 2003 and 2002, this
reserve totaled $403,000 and $448,000, respectively, and is included in accrued liabilities on
our consolidated balance sheets.
Workers’ Compensation Insurance Premium Accrual
Insurance premiums are paid for under a retrospective cost policy, whereby premium cost
depends on experience. We accrue premiums based on our historical experience rating,
although the actual experience can be something greater or less than the anticipated claims
experience. We expect that the retrospective cost policy, as opposed to a guaranteed cost with
a flat premium, will be the most cost efficient over time.
Intangible Assets
We review our goodwill and other identifiable intangible assets for impairment at least annually
by applying a fair-value based test using discounted estimated cash flows. Discounted future
cash flows are prepared by applying a growth rate to historical revenues. Growth rates are
calculated individually for each region with data derived from the U.S. Census Bureau on
population growth and the U.S. Department of Labor, Bureau of Labor Statistics for historical
consumer price index data. The discount rate applied to the future cash flows is derived from a
Capital Asset Pricing Model which factors in an equity risk premium and a risk free rate. The
review is conducted more frequently than annually if events or circumstances occur that
warrant a review. Our other identifiable intangible assets primarily include the franchise value
of the business units, which is considered to have an indefinite life and not subject to
amortization, but rather is included in the fair-value based testing. Impairment could occur if
the operating business unit does not meet the determined fair-value testing. At such point, an
impairment loss would be recognized to the extent that the carrying amount exceeds the
assets’ fair value. During 2003 and 2002, we concluded that there was no impairment. At
27
December 31, 2003 and 2002, goodwill and other identifiable intangible assets totaled $236.0
million and $206.2 million, respectively.
Used Vehicle Inventory
Used vehicle inventories are stated at cost plus the cost of any equipment added,
reconditioning and transportation. We select a sampling of dealerships throughout the year to
perform quarterly testing of book values against market valuations utilizing the Kelly Blue Book
and NADA guidelines. Used vehicle inventory values are cyclical and could experience
impairment when market valuations are significantly below inventory costs. Historically, we
have not experienced significant write-downs on our used vehicle inventory.
Recent Accounting Pronouncements
See Note 17 of Notes to Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have
a material current or future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Variable Rate Debt
We use variable-rate debt to finance our new and program vehicle inventory and certain real
estate holdings. The interest rates on our variable rate debt are tied to either the one or three-
month LIBOR or the prime rate. These debt obligations therefore expose us to variability in
interest payments due to changes in these rates. The flooring debt is based on open-ended
lines of credit tied to each individual store from the various manufacturer finance companies. If
interest rates increase, interest expense increases. Conversely, if interest rates decrease,
interest expense decreases.
Our variable-rate flooring notes payable and other credit line borrowings subject us to market
risk exposure. At December 31, 2003, we had $575.0 million outstanding under such
agreements at interest rates ranging from 2.62% to 5.16% per annum. A 10% increase in
interest rates to 2.88% to 5.68%, respectively, would increase annual interest expense by
approximately $468,000, net of tax, based on amounts outstanding on the lines of credit at
December 31, 2003.
Fixed Rate Debt
The fair market value of our long-term fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt will increase as interest rates fall
because we could refinance for a lower rate. Conversely, the fair value of fixed interest rate
debt will decrease as interest rates rise. The interest rate changes affect the fair market value
but do not impact earnings or cash flows. At December 31, 2003, we had $53.0 million of long-
term fixed interest rate debt outstanding with maturity dates of between January 2005 and May
2022. Based on discounted cash flows, we have determined that the fair market value of our
long-term fixed interest rate debt was approximately $52.2 million at December 31, 2003.
Hedging Strategies
We believe it is prudent to limit the variability of a portion of our interest payments.
Accordingly, we have entered into interest rate swaps to manage the variability of our interest
rate exposure, thus leveling a portion of our interest expense in a rising or falling rate
environment.
28
We have effectively changed the variable-rate cash flow exposure on a portion of our flooring
debt to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps.
Under the interest rate swaps, we receive variable interest rate payments and make fixed
interest rate payments, thereby creating fixed rate flooring debt.
We do not enter into derivative instruments for any purpose other than to manage interest rate
exposure. That is, we do not speculate using derivative instruments.
As of December 31, 2003, we have outstanding the following interest rate swaps with U.S.
Bank Dealer Commercial Services:
• effective September 1, 2000 – a five year, $25 million interest rate swap at a fixed rate
of 6.88% per annum, variable rate adjusted on the 1st and 16th of each month
• effective January 26, 2003 – a five year, $25 million interest rate swap at a fixed rate of
3.265% per annum, variable rate adjusted on the 26th of each month
• effective February 18, 2003 – a five year, $25 million interest rate swap at a fixed rate
of 3.30% per annum, variable rate adjusted on the 1st and 16th of each month
• effective November 18, 2003 – a five year, $25 million interest rate swap at a fixed rate
of 3.65% per annum, variable rate adjusted on the 1st and 16th of each month
• effective November 26, 2003 – a five year, $25 million interest rate swap at a fixed rate
of 3.63% per annum, variable rate adjusted on the 26th of each month
We earn interest on all of the interest rate swaps at the one-month LIBOR rate. The one-
month LIBOR rate at December 31, 2003 was 1.12% per annum.
The fair value of our interest rate swap agreements represents the estimated receipts or
payments that would be made to terminate the agreements. These amounts are recorded as
deferred gains or losses in our consolidated balance sheet with the offset recorded in
accumulated other comprehensive income, net of tax. The amount of deferred gains and
(losses) at December 31, 2003 were $0 and $(2.4) million respectively. The difference
between interest earned and the interest obligation results in a monthly settlement which is
reclassified from accumulated other comprehensive income to the statement of operations as
incremental flooring interest expense. The resulting cash settlement reduces the amount of
deferred gains and losses. Because the critical terms of the interest rate swaps and the
underlying debt obligations are the same, there was no ineffectiveness recorded in interest
expense.
If, in the future, the interest rate swap agreements were determined to be ineffective or were
terminated before the contractual termination date, or if it became probable that the hedged
variable cash flows associated with the variable rate borrowings would stop, we would be
required to reclassify into earnings all or a portion of the deferred gains or losses on cash flow
hedges included in accumulated other comprehensive income.
Incremental flooring interest expense recognized, net of tax, related to the reclassification of
amounts in accumulated other comprehensive income was $2.2 million, $1.5 million and
$832,000, respectively, in 2003, 2002 and 2001. Interest expense savings, net of tax, on un-
hedged debt as a result of decreasing interest rates, based on interest rates effective as of
January 1, 2001 was approximately $12.4 million, $10.0 million and $4.1 million, respectively,
in 2003, 2002 and 2001. Interest expense savings, net of tax, on un-hedged debt as a result of
decreasing interest rates, based on interest rates effective as of January 1 of each year was
$415,000, $139,000 and $4.1 million, respectively, in 2003, 2002 and 2001. As of December
31, 2003, approximately 71.7% of our total debt outstanding was subject to un-hedged variable
rates of interest.
29
At current interest rates, we estimate that we will incur additional interest expense, net of tax,
of approximately $2.3 million related to our interest rate swaps during 2004.
Risk Management Policies
We assess interest rate cash flow risk by continually identifying and monitoring changes in
interest rate exposures that may adversely impact expected future cash flows and by
evaluating hedging opportunities.
We maintain risk management control systems to monitor interest rate cash flow attributable to
both our outstanding and our forecasted debt obligations as well as our offsetting hedge
positions. The risk management control systems involve the use of analytical techniques,
including cash flow sensitivity analysis, to estimate the expected impact of changes in interest
rates on our future cash flows.
Item 8. Financial Statements and Supplementary Financial Data
The financial statements and notes thereto required by this item begin on page F-1 as listed in
Item 15 of Part IV of this document. Quarterly financial data for each of the eight quarters in
the two-year period ended December 31, 2003 is included in Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our
President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this report pursuant
to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on
that evaluation, our President and Chief Executive Officer and Chief Financial Officer have
concluded that, as of the end of the period covered by this report, our disclosure controls and
procedures are effective in ensuring that information required to be disclosed in our Exchange
Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2)
accumulated and communicated to our management, including our President and Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during
our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Item 10. Directors and Executive Officers of the Registrant
PART III
Information required by this item will be included under the captions Election of Directors,
Meetings and Committees of the Board of Directors, Audit Committee Financial Expert, Code
of Ethics, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance in
our Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein
by reference.
30
Item 11. Executive Compensation
The information required by this item will be included under the captions Director
Compensation, Executive Compensation and Compensation Committee Interlocks and Insider
Participation in our Proxy Statement for our 2004 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included under the captions Security Ownership of
Certain Beneficial Owners and Management and Equity Compensation Plan Information in our
Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be included under the caption Certain Relationships
and Related Transactions in our Proxy Statement for our 2004 Annual Meeting of Shareholders
and is incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by this item is included under the caption Independent Auditors in the
Proxy Statement for our 2004 Annual Meeting of Shareholders and is incorporated herein by
reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Financial Statements and Schedules
The Consolidated Financial Statements, together with the report thereon of KPMG LLP, are
included on the pages indicated below:
Independent Auditors’ Report
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Operations for the years ended December 31, 2003,
2002 and 2001
Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive
Income for the years ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 2003,
2002 and 2001
Notes to Consolidated Financial Statements
There are no schedules required to be filed herewith.
Page
F-1
F-2
F-3
F-4
F-5
F-6
(b) Reports on Form 8-K
We filed one report on Form 8-K during the quarter ended December 31, 2003 pursuant to Item
12. Results of Operations and Financial Condition dated September 30, 2003 regarding our
financial results for our third quarter of 2003.
(c) Exhibits
Except for exhibits 31.1, 31.2, 32.1 and 32.2, this section has been intentionally omitted.
31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date: March 12, 2004
LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities
indicated on March 12, 2004:
Signature
Title
/s/ SIDNEY B. DEBOER
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ JEFFREY B. DEBOER
Officer
Jeffrey B. DeBoer
Senior Vice President and Chief Financial
(Principal Financial Officer)
/s/ LINDA A. GANIM Vice President and Chief Accounting Officer
Linda A. Ganim
(Principal Accounting Officer)
/s/ M. L. DICK HEIMANN
M. L. Dick Heimann
Director, President and
Chief Operating Officer
/s/ R. BRADFORD GRAY
R. Bradford Gray
/s/ THOMAS BECKER
Thomas Becker
/s/ PHILIP J. ROMERO
Philip J. Romero
/s/ GERALD F. TAYLOR
Gerald F. Taylor
/s/ WILLIAM J. YOUNG
William J. Young
Director and Executive Vice President
Director
Director
Director
Director
32
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Sidney B. DeBoer, certify that:
1.
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 12, 2004
/s/Sidney B. DeBoer
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
Lithia Motors, Inc.
33
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
I, Jeffrey B. DeBoer, certify that:
1.
I have reviewed this annual report on Form 10-K of Lithia Motors, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant's auditors and the audit committee of
the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal control over financial reporting.
Date: March 12, 2004
/s/Jeffrey B. DeBoer
Jeffrey B. DeBoer
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.
34
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Lithia Motors, Inc. (the "Company") on Form 10-K for
the year ended December 31, 2003 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Sidney B. DeBoer, Chairman of the Board, Chief Executive
Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted
pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Company.
/s/ Sidney B. DeBoer
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
Lithia Motors, Inc.
March 12, 2004
35
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report of Lithia Motors, Inc. (the "Company") on Form 10-K for
the year ended December 31, 2004 as filed with the Securities and Exchange Commission on
the date hereof (the "Report"), I, Jeffrey B. DeBoer, Senior Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of
the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and result of operations of the Company.
/s/ Jeffrey B. DeBoer
Jeffrey B. DeBoer
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.
March 12, 2004
36
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, 2003 and 2002, and the related consolidated statements of
operations, changes in stockholders’ equity and comprehensive income and cash flows for each of
the years in the three-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Lithia Motors, Inc. and Subsidiaries as of
December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 1 to the financial statements, effective July 1, 2001, the Company adopted the
provisions of SFAS No. 141, Business Combinations, and certain provisions of SFAS No. 142,
Goodwill and Other Intangible Assets, as required for goodwill and intangible assets resulting from
business combinations consummated after June 30, 2001. Effective January 1, 2002, the Company
adopted the remaining provisions of SFAS No. 142.
/s/ KPMG LLP
Portland, Oregon
February 6, 2004
F-1
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
Assets
Current Assets:
Cash and cash equivalents
Contracts in transit
Trade receivables, net of allowance for doubtful
accounts of $413 and $455
Notes receivable, current portion, net of allowance
for doubtful accounts of $49 and $247
Inventories, net
Vehicles leased to others, current portion
Prepaid expenses and other
Assets held for sale
Deferred income taxes
Total Current Assets
Land and buildings, net of accumulated
depreciation of $5,683 and $3,618
Equipment and other, net of accumulated
depreciation of $18,315 and $14,602
Notes receivable, less current portion
Vehicles leased to others, less current portion
Goodwill
Other intangible assets, net of accumulated
amortization of $351 and $330
Other non-current assets
Total Assets
Liabilities and Stockholders' Equity
Current Liabilities:
Flooring notes payable
Current maturities of long-term debt
Trade payables
Accrued liabilities
Liabilities held for sale
Total Current Liabilities
Used Vehicle Flooring Facility
Real Estate Debt, less current maturities
Other Long-Term Debt, less current maturities
Deferred Revenue
Other Long-Term Liabilities
Deferred Income Taxes
Total Liabilities
Stockholders' Equity:
Preferred stock - no par value; authorized
15,000 shares; none outstanding
Class A common stock - no par value;
authorized 100,000 shares; issued and
outstanding 14,693 and 14,299
Class B common stock - no par value
authorized 25,000 shares; issued and
outstanding 3,762 and 3,762
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equit
December 31,
2003
2002
$
74,408
44,709
$
42,199
208
445,281
5,747
3,392
20,408
585
636,937
15,932
41,493
40,680
167
445,908
5,341
5,707
-
550
555,778
164,676
118,696
$
$
62,637
676
10
207,027
28,946
1,873
1,102,782
378,961
14,299
24,402
46,164
13,045
476,871
56,267
80,159
98,308
875
7,235
24,141
743,856
58,215
881
19
185,212
20,985
2,263
942,049
364,635
4,466
19,445
40,924
-
429,470
63,000
73,798
30,914
1,617
9,581
13,676
622,056
-
-
208,187
203,577
468
1,231
(1,468)
150,508
358,926
1,102,782
$
468
929
(2,517)
117,536
319,993
942,049
$
$
$
See accompanying notes to consolidated financial statements.
F-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenues:
New vehicle sales
Used vehicle sales
Service, body and parts
Finance and insurance
Fleet and other
Total revenues
Cost of sales
Gross profit
Selling, general and administrative
Depreciation - buildings
Depreciation and amortization - other
Income from operations
Other income (expense):
Floorplan interest expense
Other interest expense
Other income, net
Income from continuing operations before
income taxes
Income taxes
Income before discontinued operations
Income (loss) from discontinued operations,
net of income taxes (benefit) of $59, 30 and $(405)
Net income
Basic income per share from continuing operations
Basic income (loss) per share from discontinued
operations
Basic net income per share
Shares used in basic net income per share
Diluted income per share from continuing operations
Diluted income per share from discontinued
operations
Diluted net income per share
Year Ended December 31,
2002
2001
2003
1,441,000
725,547
251,316
89,982
5,657
2,513,502
2,110,393
403,109
313,289
2,096
7,497
80,227
(13,997)
(6,081)
(951)
(21,029)
59,198
(23,561)
35,637
(90)
35,547
1.95
(0.01)
1.94
$
$
$
$
1,218,364
715,760
216,382
77,776
43,114
2,271,396
1,913,704
357,692
280,310
2,405
4,787
70,190
(10,775)
(5,985)
(589)
(17,349)
52,841
(20,480)
32,361
(45)
32,316
1.88
-
1.88
$
$
$
$
926,981
564,049
173,114
62,856
40,593
1,767,593
1,478,528
289,065
224,501
1,261
7,429
55,874
(13,652)
(7,546)
(298)
(21,496)
34,378
(13,270)
21,108
646
21,754
1.58
0.05
1.63
18,289
17,233
13,371
1.92
$
1.84
$
-
1.92
$
-
1.84
$
1.55
0.05
1.60
$
$
$
$
$
$
Shares used in diluted net income per share
18,546
17,598
13,612
See accompanying notes to consolidated financial statements.
F-3
Balance at December 31, 2000
Comprehensive income:
Net income
Unrealized loss on investments, net
Cash flow hedges:
Cumulative effect of adoption of SFAS
133, net of tax effect of $594
Net derivative losses, net of tax effect
of $1,237
Reclassification adjustment of interest
rate swaps, net of tax effect of $(523)
Total comprehensive income
Issuance of stock in connection with
employee stock plans
Conversion of Series M Preferred Stock
Conversion of Class B Common Stock
Compensation for stock option issuances
Balance at December 31, 2001
Comprehensive income:
Net income
Unrealized gain on investments, net
Cash flow hedges:
Net derivative losses, net of tax effect
of $1,234
Reclassification adjustment of interest
rate swaps, net of tax effect of $(963)
Total comprehensive income
Issuance of stock in connection with
public offering
Issuance of stock in connection with
acquisition
Issuance of stock in connection with
employee stock plans
Conversion and redemption of Series M
Preferred Stock
Conversion of Class B Common Stock
Compensation for stock option issuances
and tax benefits from option exercises
Balance at December 31, 2002
Comprehensive income:
Net income
Unrealized gain on investments, net
Cash flow hedges:
Net derivative losses, net of tax effect
of $833
Reclassification adjustment of interest
rate swaps, net of tax effect of $(1,442)
Total comprehensive income
Issuance of stock in connection with
employee stock plans
Compensation for stock option issuances
and tax benefits from option exercises
Dividends paid
Repurchase of Class A shares
Balance at December 31, 2003
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
For the years ended December 31, 2001, 2002 and 2003
(In thousands, except share data)
Common Stock
Class A
Class B
Shares
8,412,087
$
Amount
108,565
Shares
4,087,000
$
Amount
508
$
Additional
Paid In
Capital
306
Accumulated
Other
Compre-
hensive
Income
(Loss)
15
$
$
Total
Retained Stockholders
Earnings
63,466
Equity
181,775
$
Series M Preferred Stock
Amount
Shares
14,859
$
8,915
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5,183)
-
-
9,676
-
(3,109)
-
-
5,806
169,492
265,247
47,281
-
1,873
3,109
6
-
-
-
(47,281)
-
8,894,107
113,553
4,039,719
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9,676)
-
(5,806)
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4,500,000
77,198
25,000
352,836
249,311
277,488
475
5,067
7,250
34
-
-
-
-
-
-
-
-
(277,488)
-
-
-
14,298,742
203,577
3,762,231
-
-
-
-
-
-
-
-
413,485
4,825
-
-
(19,400)
14,692,827
$
-
-
(215)
208,187
-
-
-
-
-
-
-
-
3,762,231
$
-
-
-
-
-
-
-
(6)
-
502
-
-
-
-
-
-
-
-
(34)
-
468
-
-
-
-
-
-
-
-
-
-
-
(20)
-
221
507
-
-
-
-
-
-
-
(11)
-
433
929
-
-
-
-
-
-
-
-
468
$
302
-
-
1,231
$
-
(26)
21,754
-
21,754
(26)
(948)
(1,963)
831
-
-
-
-
(2,091)
-
3
(1,948)
1,519
-
-
-
-
-
-
(2,517)
-
8
(1,140)
2,181
-
-
-
-
(1,468)
-
-
-
-
-
-
-
85,220
32,316
-
-
-
-
-
-
-
-
-
117,536
35,547
-
-
-
-
-
(2,575)
-
$
150,508
$
(948)
(1,963)
831
19,648
1,873
(20)
-
221
203,497
32,316
3
(1,948)
1,519
31,890
77,198
475
5,067
1,433
-
433
319,993
35,547
8
(1,140)
2,181
36,596
4,825
302
(2,575)
(215)
358,926
See accompanying notes to consolidated financial statements.
F-4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Depreciation and amortization of discontinued operations
Compensation expense related to stock option issuances
(Gain) loss on sale of assets
(Gain) loss on sale of vehicles leased to others
Gain on sale of franchise
Deferred income taxes
Equity in (income) loss of affiliate
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net
Contracts in transit
Inventories
Prepaid expenses and other
Other non-current assets
Increase (decrease), net of effect of acquisitions:
Floorplan notes payable
Trade payables
Accrued liabilities
Other long-term liabilities and deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Notes receivable issued
Principal payments received on notes receivable
Capital expenditures:
Non-financeable
Financeable
Proceeds from sale of assets
Proceeds from sale of vehicles leased to others
Expenditures for vehicles leased to others
Cash paid for other investments
Cash paid for acquisitions, net of cash acquired
Cash from sale of franchises
Distribution from affiliate
Net cash used in investing activities
Cash flows from financing activities:
Net borrowings (repayments) on lines of credit
Principal payments on long-term debt and capital leases
Proceeds from issuance of long-term debt
Repurchase of common stock
Redemption of Series M Preferred Stock
Proceeds from issuance of common stock
Dividends paid
Net cash provided by financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents:
Beginning of year
End of year
Supplemental disclosures of cash flow information:
Cash paid during the period for interest
Cash paid during the period for income taxes
Supplemental schedule of noncash investing and financing
activities:
Stock issued in connection with acquisitions
Debt assumed/issued in connection with acquisitions
Termination of capital lease
Assets acquired with debt
Assets acquired through real estate exchange
Debt extinguished through refinancing
2003
Year Ended December 31,
2002
2001
$
35,547
$
32,316
$
21,754
9,593
702
185
(586)
127
(919)
10,235
13
(695)
(3,080)
38,466
2,794
347
(12,390)
4,785
6,586
(3,397)
88,313
(106)
365
(10,678)
(32,448)
441
920
(6,650)
-
(63,799)
3,542
33
(108,380)
58,317
(4,631)
22,845
(215)
-
4,802
(2,575)
78,543
58,476
7,192
621
169
77
58
(50)
4,963
(4)
(4,512)
1,626
(107,126)
(1,126)
1,473
106,583
2,032
2,539
835
47,666
(178)
1,410
(5,691)
(32,792)
1,672
2,219
(7,372)
(384)
(81,698)
535
-
(122,279)
(28,000)
(11,223)
33,055
-
(4,366)
82,265
-
71,731
(2,882)
8,690
585
221
(43)
(20)
(352)
(97)
87
(1,007)
(8,079)
64,200
654
(663)
(58,321)
3,243
10,958
(630)
41,180
(902)
2,715
(4,439)
(26,247)
7,635
4,675
(6,228)
-
(45,496)
7,060
-
(61,227)
24,000
(9,908)
17,089
-
-
1,853
-
33,034
12,987
$
$
$
15,932
74,408
$
18,814
15,932
$
5,827
18,814
$
$
20,733
9,596
-
324
-
-
1,987
12,350
$
$
17,395
16,541
475
3,314
-
-
-
4,360
24,061
12,657
-
-
58
6,982
-
10,840
See accompanying notes to consolidated financial statements.
F-5
LITHIA MOTORS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 and 2001
(1)
Summary of Significant Accounting Policies
Organization and Business
We are a leading operator of automotive franchises and retailer of new and used vehicles
and services. As of December 31, 2003, we offered 25 brands of new vehicles through 147
franchises in 78 stores in the Western United States and over the Internet. As of December 31, 2003,
we operated 16 stores in Oregon, 13 in California, 11 in Washington, 8 in Texas, 7 in Idaho, 7 in
Colorado, 5 in Nevada, 4 in Alaska, 2 in South Dakota, 2 in Nebraska, 2 in Montana and 1 in
Oklahoma. We sell new and used cars and light trucks; sell replacement parts; provide vehicle
maintenance, warranty, paint and repair services; and arrange related financing, service contracts,
protection products and credit insurance our automotive customers.
Principles of Consolidation
The accompanying financial statements reflect the results of operations, the financial
position, and the cash flows for Lithia Motors, Inc. and its directly and indirectly wholly-owned
subsidiaries. All significant intercompany accounts and transactions, consisting principally of
intercompany sales, have been eliminated upon consolidation.
Cash and Cash Equivalents
Cash and cash equivalents are defined as cash on hand and cash in bank accounts.
Contracts in Transit
Contracts in transit relate to amounts due from various lenders for the financing of vehicles
sold and are typically received within five days of selling a vehicle.
Trade Receivables
Trade receivables include amounts due from customers for vehicles and service and parts
business, from manufacturers for factory rebates, dealer incentives and warranty reimbursement,
from insurance companies, finance companies and other miscellaneous receivables. Receivables
are recorded at invoice cost and do not bear interest until such time as they are 60 days past due.
Reserves for uncollectible accounts are estimated based on our historical write-off experience and
are reviewed on a monthly basis. Account balances are charged off against the reserve after all
means of collection have been exhausted and the potential for recovery is considered remote. We do
not have any off-balance sheet credit exposure related to our customers.
Inventories
We account for inventories, using the specific identification method for new and used vehicles
and the first-in first-out (FIFO) method for parts. The cost of used vehicle inventories includes the cost
of any equipment added, reconditioning and transportation. Inventories are valued at the lower of
market value or cost.
Vehicles Leased to Others and Related Leases Receivable
Vehicles leased to others are stated at cost and depreciated over their estimated useful lives
(5 years) on a straight-line basis. Lease receivables result from customer, employee and fleet leases
of vehicles under agreements that qualify as operating leases. Leases are cancelable at the option of
the lessee after providing 30 days written notice. Vehicles leased to others are classified as current
or non-current based on the remaining lease term.
F-6
Assets and Liabilities Held for Sale
Assets held for sale include inventory and property, plant and equipment related to one store
held for sale and, in accordance with Statement of Financial Accounting Standards (SFAS) No. 144
“Accounting for the Impairment or Disposal of Long-Lived Assets,” are recorded on our balance sheet
at the lower of book value or estimated fair market value, less applicable selling costs. Liabilities held
for sale include flooring notes payable at contract value related to the store held for sale.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are being depreciated over their
estimated useful lives, principally on the straight-line basis. The range of estimated useful lives is as
follows:
Buildings and improvements
Service equipment
Furniture, signs and fixtures
40 years
5 to 10 years
5 to 10 years
The cost for maintenance, repairs and minor renewals is expensed as incurred, while
significant renewals and betterments are capitalized. In addition, interest on borrowings for major
capital projects, significant renewals and betterments is capitalized. Capitalized interest then
becomes a part of the cost of the depreciable asset and is depreciated according to the estimated
useful lives as previously stated.
When an asset is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or charged to income.
Leased property meeting certain criteria is capitalized and the present value of the related
lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on a
straight-line basis over the shorter of the useful life or the term of the lease and is included in
depreciation expense.
Long-Lived Asset Impairment
Long-lived assets held and used by us and intangible assets with determinable lives are
reviewed for impairment whenever events or circumstances indicate that the carrying amount of
assets may not be recoverable in accordance with SFAS No. 144 “Accounting for the Impairment or
Disposal of Long-Lived Assets.” We evaluate recoverability of assets to be held and used by
comparing the carrying amount of an asset to future net undiscounted cash flows to be generated by
the asset. If such assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the fair value of the
assets. Such reviews assess the fair value of the assets based upon estimates of future cash flows
that the assets are expected to generate. Long-lived assets to be disposed of by sale are valued at
the lower of book value or fair value less cost to sell.
Goodwill and Other Identifiable Intangible Assets
Goodwill represents the excess purchase price over fair value of net assets acquired, which
is not allocable to separately identifiable intangible assets. Other identifiable intangible assets
represents the franchise value of stores acquired since July 1, 2001 and non-compete agreements.
Except for our non-compete agreements, all of our other identifiable intangible assets have indefinite
useful lives.
We determined that our franchise agreements have indefinite useful lives based on the
following:
• Certain of our franchise agreements continue indefinitely by their terms;
• Certain of our franchise agreements have limited terms, but are routinely renewed
without substantial cost to us;
In the established retail automotive franchise industry, we are not aware of manufacturers
terminating franchise agreements against the wishes of the franchise owners and we
have never had a franchise agreement terminated against our wishes. A manufacturer
may pressure a franchise owner to sell a franchise when they are in breach of the
F-7
franchise agreement over an extended period of time. The franchise owner is typically
able to sell the franchise for market value.
• State dealership franchise laws typically limit the rights of the manufacturer to terminate
or not renew a franchise unless there has been illegal activity on the part of the franchise
owner;
• We are not aware of any legislation or other factors that would materially change the
retail automotive franchise system; and
• As evidenced by our acquisition history, there is an active market for automotive
dealership franchises within the United States. We attribute value to the franchise
agreements acquired with the dealerships we purchase based on the understanding and
industry practice that the franchise agreements will be renewed indefinitely by the
manufacturer.
Accordingly, we have determined that our franchise agreements will continue to contribute to
our cash flows indefinitely and, therefore, have indefinite lives.
Pursuant to SFAS No. 142, “Goodwill and Other Intangible Assets,” which was adopted in the
first quarter of 2002, goodwill and other identifiable intangible assets with indefinite useful lives are no
longer amortized, but, instead, tested for impairment, at least annually, in accordance with the
provisions of SFAS No. 142. The impairment test is a two step process. The first identifies potential
impairments by comparing the fair value of a reporting unit with its book value, including goodwill and
other identifiable intangible assets. If the fair value of the reporting unit exceeds the carrying amount,
goodwill and other identifiable intangible assets are not impaired and the second step is not
necessary. If the carrying value exceeds the fair value, the second step includes determining the
implied fair value through further market research. The implied fair value of goodwill and other
identifiable intangible assets is then compared with the carrying amount to determine if an impairment
loss is recorded.
We adopted the provisions of SFAS No. 141 “Business Combinations” effective July 1, 2001.
Upon adoption of SFAS No. 142, SFAS No. 141 required that we evaluate our existing intangible
assets and goodwill that were acquired in prior purchase business combinations and make any
necessary reclassifications in order to conform with the criteria in SFAS No. 141 for recognition apart
from goodwill. We did not reclassify any intangibles upon adoption of SFAS No. 142.
We tested our goodwill and other identifiable intangible assets for impairment utilizing the
discounted cash flows method in accordance with the provisions of SFAS No. 142 as of December
31, 2003 and determined that no impairment losses were required to be recognized. Growth rates
utilized in the calculation were derived from the U.S. Census Bureau on population growth and the
U.S. Department of Labor, Bureau of Labor Statistics for historical consumer price index data. The
discount rate applied to the future cash flows was derived from a Capital Asset Pricing Model, which
factors in an equity risk premium and a risk free rate.
The following table discloses what reported net income would have been in the year ended
December 31, 2001, which was prior to the adoption of SFAS No. 142, exclusive of amortization
expense (including any related tax effects) recognized in that period related to goodwill and other
identifiable intangible assets that are no longer being amortized (in thousands, except per share
amounts):
Net income as reported
Add back amortization of goodwill and other intangible assets, net of
tax effect of $(1,414)
Adjusted net income
Basic net income per share as reported
Adjustment for add back of amortization expense, net of tax effect
Adjusted basic net income per share
Diluted net income as reported
Adjustment for add back of amortization expense, net of tax effect
Adjusted diluted net income per share
$
$
$
$
$
$
21,754
2,250
24,004
1.63
0.17
1.80
1.60
0.16
1.76
F-8
Incentives, Credits and Floor Plan Assistance
Manufacturers reimburse us for holdbacks, floor plan interest, and advertising credits, which
are earned when each vehicle is purchased by us. The manufacturers reimburse us weekly, monthly,
or quarterly depending on the manufacturer and the type of program. The manufacturers determine
the amount of the reimbursements based on many factors including the value and make of the
vehicles purchased. Pursuant to EITF 02-16 “Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor,” we recognize advertising credits, floorplan interest
credits, holdbacks, cash incentives and other rebates received from manufacturers that are tied to
specific vehicles as a reduction to cost of goods sold as the related vehicles are sold. When amounts
are received prior to the sale of the vehicle, such amounts are netted against inventory until the
vehicle is sold.
We earn certain other cash incentives and rebates from the manufacturer when the vehicles
are sold to the customer. The amount of cash incentives and other rebates can vary based on the
type and number of models sold.
Advertising credits that are not tied to specific vehicles are earned from the manufacturer
when we submit reimbursement for qualifying advertising expenditures and are recognized as a
reduction of advertising expense upon manufacturer confirmation that our submitted expenditures
qualify for such credits.
Parts purchase discounts that we receive from the manufacturer are earned when certain
parts or volume of parts are purchased from the manufacturer and are recognized as a reduction to
cost of good sold as the related inventory is sold. Given the number of parts purchased, this is
estimated using historical experience based on estimated days supply of parts inventory.
Advertising
We expense production and other costs of advertising as incurred as a component of selling,
general and administrative expense. Advertising expense, net of manufacturer cooperative
advertising credits of $6.1 million, $8.2 million and $5.3 million, was $20.1 million, $16.8 million and
$14.9 million for the years ended December 31, 2003, 2002 and 2001, respectively.
Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded in operating expenses when it is
probable that a liability has been incurred and the amount of the liability can be reasonably estimated.
Accrued liabilities are exclusive of claims against third parties and are not discounted.
In general, costs related
to expense.
Environmental costs are capitalized if such costs increase the value of the property and/or mitigate or
prevent contamination from future operations.
to environmental remediation are charged
We are aware of contamination at certain of our current and former facilities, and are in the
process of conducting investigations and/or remediation at some of these properties. Based on our
current information, we do not believe that any costs or liabilities relating to such contamination, other
environmental matters or compliance with environmental regulations will have a material adverse
effect on our cash flows, results of operations or financial condition. There can be no assurances,
however, that additional environmental matters will not arise or that new conditions or facts will not
develop in the future at our current or formerly owned or operated facilities, or at sites that we may
acquire in the future, that will result in a material adverse effect on our cash flows, results of
operations or financial condition.
F-9
Income Taxes
Income taxes are accounted for under the asset and liability method as prescribed by
Statement of Financial Accounting Standards (“SFAS”) No. 109 “Accounting for Income Taxes.”
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.
Computation of Per Share Amounts
Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed
by SFAS No. 128, “Earnings per Share.” Following is a reconciliation of basic EPS and diluted EPS
(in thousands, except per share amounts):
Year Ended December 31,
2003
2002
2001
Basic EPS
Income available to common
Income
Shares
Per
Share
Amount
Income
Shares
Per
Share
Amount
Income
Shares
Per
Share
Amount
stockholders
$35,547
18,289
$1.94
$32,316
17,233
$1.88
$21,754
13,371
$1.63
Diluted EPS
Stock options
Income available to common
stockholders
Shares issuable pursuant to
stock options not included
since they were antidilutive
257
-
365
-
241
$35,547
18,546
$1.92
$32,316
17,598
$1.84
$21,754
13,612
$1.60
342
-
758
Concentrations of Credit Risk
Concentrations of credit risk with respect to trade receivables are limited due to the large
number of customers comprising our customer base. Receivables from all manufacturers accounted
for 22.7% and 21.5%, respectively, of total accounts receivable at December 31, 2003 and 2002.
Included in the 22.7% is one manufacturer who accounted for 10.5% of the total accounts receivable
balance at December 31, 2003. Included in the 21.5% is one manufacturer who accounted for 8.8%
of the total accounts receivable balance at December 31, 2002. In addition, in 2003, 35.6% of our
total revenue was derived from vehicles from two manufacturers.
Financial instruments, which potentially subject us to concentrations of credit risk, consist
principally of cash deposits. We generally are exposed to credit risk from balances on deposit in
financial institutions in excess of the FDIC-insured limit.
Financial Instruments and Market Risks
The carrying amount of cash equivalents, contracts in transit, trade receivables, trade
payables, accrued liabilities and short term borrowings approximates fair value because of the
short-term nature of these instruments. The fair values of long-term debt and notes receivable for
leased vehicles accounted for as sales-type leases were estimated by discounting the future cash
flows using market interest rates.
Fair value estimates are made at a specific point in time, based on relevant market
information about the financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
We have variable rate floor plan notes payable and other credit line borrowings that subject
us to market risk exposure. At December 31, 2003 we had $540.0 million outstanding under such
facilities at interest rates ranging from 2.62% to 3.87% per annum. An increase or decrease in the
interest rates would affect interest expense for the period accordingly.
F-10
The fair market value of long-term fixed interest rate debt is subject to interest rate risk.
Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and
decrease as interest rates rise. The interest rate changes affect the fair market value but do not
impact earnings or cash flows. We monitor our fixed rate debt regularly, refinancing debt that is at an
above market rate. The book value of our fixed rate debt and the fair value, based on discounted
cash flows, was as follows at December 31, 2003 and 2002 (in thousands):
December 31,
Book value of fixed rate debt
Fair value of fixed rate debt
2003
52,978
52,183
2002
23,421
26,210
$
$
$
$
Lithia also subjects itself to credit risk and market risk by entering into interest rate swaps.
See below and also Note 6. We minimize the credit or repayment risk on our derivative instruments
by entering into transactions with high quality institutions, whose credit rating is higher than Aa.
Derivative Financial Instruments
Lithia enters into interest rate swap agreements to reduce its exposure to market risks from
changing interest rates on its new vehicle floorplan lines of credit. The difference between interest
paid and interest received, which may change as market interest rates change, is accrued and
recognized as either additional floorplan interest expense, or a reduction thereof. If a swap is
terminated prior to its maturity, the gain or loss is recognized over the remaining original life of the
swap if the item hedged remains outstanding, or immediately if the item hedged does not remain
outstanding. If the swap is not terminated prior to maturity, but the underlying hedged debt item is no
longer outstanding, the interest rate swap is marked to market, and any unrealized gain or loss is
recognized immediately.
Effective January 1, 2001, we adopted the provisions of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for
Certain Derivative Instruments and Certain Hedging Activities-an amendment of FASB Statement No.
133” and SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities” (collectively,
“the Standards”). The Standards require that all derivative instruments (including certain derivative
instruments embedded in other contracts) be recorded on the balance sheet as either an asset or
liability measured at its fair value, and that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Upon adoption of the
Standards, we recorded a liability of $1.5 million and a corresponding, net-of-tax cumulative-effect-
type adjustment of $948,000 in accumulated other comprehensive income to recognize, at fair value,
all derivatives that are designated as cash-flow hedging instruments. See also Note 6.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America 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.
Estimates are used in the calculation of certain reserves maintained for charge backs on
estimated cancellations of service contracts, life, accident and disability insurance policies, and
finance fees from financial institutions. We also use estimates in the calculation of various accruals
and reserves including anticipated workers compensation premium expenses related to a
retrospective cost policy, estimated uncollectible accounts and notes receivable, environmental
matters and warranty.
F-11
Revenue Recognition
Revenue from the sale of vehicles is recognized upon delivery, when the sales contract is
signed, down payment has been received and funding has been approved from the lending agent.
Fleet sales of vehicles whereby we do not take possession of the vehicles are shown on a net basis
in fleet and other revenue.
Finance fees earned for notes placed with financial institutions in connection with customer
vehicle financing are recognized, net of estimated charge-backs, as finance and insurance revenue
upon acceptance of the credit by the financial institution.
Insurance income from third party insurance companies for commissions earned on credit
life, accident and disability insurance policies sold in connection with the sale of a vehicle are
recognized, net of administration fees and anticipated cancellations, as finance and insurance
revenue upon execution of the insurance contract.
Commissions from third party service contracts are recognized, net of administration fees and
anticipated cancellations, as finance and insurance revenue upon sale of the contracts.
We may also participate in future underwriting profit, pursuant to retrospective commission
arrangements, that would be recognized as income upon receipt.
Sales Returns
As is typical in the automotive retailing industry, we do not allow for sales returns for our
vehicle sales, and have therefore not provided for an allowance for sales returns. Historically, we
have not experienced sales returns. We do allow for customer returns on sales of our parts inventory
up to 30 days after the sale. Most parts returns generally occur within one to two weeks from the time
of sale, and are not significant. We, therefore, have not provided for an allowance for parts sales
returns.
Warranty
We offer a 60-day limited warranty on the sale of retail used vehicles. We estimate our
warranty liability based on the number of vehicles sold and an estimated cost per vehicle based on
past experience. During 2003, we analyzed the warranty charges related to our used vehicle sales
and updated our per used vehicle warranty estimate. The estimated warranty is added to cost of
sales upon sale of the related vehicle. At December 31, 2003 and 2002, accrued warranty totaled
$220,000 and $525,000, respectively, and is included in other current liabilities on the consolidated
balance sheet. A roll-forward of our warranty liability for the years ended December 31, 2003 and
2002 is as follows (in thousands):
Balance, December 31, 2001
Warranties issued
Reductions for warranty payments made
Adjustments and changes in estimates
Balance, December 31, 2002
Warranties issued
Reductions for warranty payments made
Adjustments and changes in estimates
Balance, December 31, 2003
$
$
456
2,827
(2,758)
-
525
2,935
(2,918)
(322)
220
Comprehensive Income
Comprehensive income includes the unrealized gain on investments and the fair value of
cash flow hedging instruments that are reflected in stockholders’ equity, net of tax, instead of net
income.
F-12
Major Supplier and Franchise Agreements
We purchase substantially all of our new vehicles and inventory from various manufacturers
at the prevailing prices charged by auto makers to all franchised dealers. Our overall sales could be
impacted by the auto makers’ inability or unwillingness to supply the dealership with an adequate
supply of popular models.
We enter into agreements (Franchise Agreements) with the manufacturers. The Franchise
Agreements generally limit the location of the dealership and provide the auto maker approval rights
over changes in dealership management and ownership. The automakers are also entitled to
terminate the Franchise Agreements if the dealership is in material breach of the terms. Our ability to
expand operations depends, in part, on obtaining consents of the manufacturers for the acquisition of
additional dealerships. See also “Goodwill and Other Identifiable Intangible Assets” above.
Stock-Based Compensation
SFAS No. 123, “Accounting for Stock-Based Compensation,” which establishes a fair value-
based method of accounting for stock-based compensation plans and requires additional disclosures
for those companies that elect not to adopt the fair value-based method of accounting, was issued in
October 1995. We have elected to continue to account for stock options under APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” Entities electing to remain with the accounting in APB
No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value
based method of accounting defined in SFAS No. 123 had been adopted. In December 2002, SFAS
No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure" was issued. SFAS
No. 148 amends SFAS No. 123 for certain transition provisions for companies electing to adopt the
fair value method and amends SFAS No. 123 for certain financial statement disclosures, including
interim financial statements. We adopted SFAS No. 148 in December 2002. We have elected to
account for our stock-based compensation plans (which are described in Note 12) under APB No.
25. We have computed, for pro forma disclosure purposes, the impact on net income and net income
per share if we had accounted for our stock-based compensation plans in accordance with SFAS No.
123 as follows:
Year Ended December 31,
Net income, as reported
Add – Stock-based employee compensation expense included
in reported net income, net of related tax effects
Deduct - total stock-based employee compensation expense
determined under the fair value based method for all
awards, net of related tax effects
Net income, pro forma
Basic net income per share:
As reported
Pro forma
Diluted net income per share:
As reported
Pro forma
2003
35,547
99
(2,478)
33,168
1.94
1.81
1.92
1.81
$
$
$
$
$
$
2002(1)
32,316
103
(2,052)
30,367
1.88
1.76
1.84
1.76
$
$
$
$
$
$
2001(1)
21,754
136
(1,536)
20,354
1.63
1.52
1.60
1.52
$
$
$
$
$
$
(1) 2002 and 2001 have been restated to reflect adjustments made pursuant to EITF 97-1 “Accounting under
Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option.”
We used the Black-Scholes option pricing model and the following weighted average
assumptions in calculating the value of all options granted during the periods presented:
Year Ended December 31,
Risk-free interest rate
Expected dividend yield
Expected lives – 2001 Plan
Purchase Plan
Expected volatility
2003
2.50% - 3.25%
0.00% - 1.70%
7.7 - 8.0 years
3 months
44.01% - 46.79%
2002
4.00%
0.00%
8.0 years
3 months
46.80%
2001
4.50%
0.00%
8.0 years
3 months
46.72%
F-13
Using the Black-Scholes methodology, the total value of options granted during 2003, 2002
and 2001 was $1.4 million, $4.9 million and $3.5 million, respectively, which would be amortized on a
pro forma basis over the vesting period of the options, typically four to five years for options granted
from the 2001 Plan and three months for options granted from the Purchase Plan. The weighted
average fair value of options granted during 2003, 2002 and 2001 was $4.01, $7.90 and $8.43 per
share, respectively.
Segment Reporting
Based upon definitions contained within SFAS No. 131 “Disclosures about Segments of an
Enterprise and Related Information,” we have determined that we operate in one segment,
automotive retailing.
Reclassifications
Pursuant to EITF 02-16 “Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor,” in the second quarter of 2003 we began classifying
advertising credits that are tied to specific vehicles as a reduction to cost of goods sold as related
vehicles are sold. Accordingly, $1.1 million of credits included in selling, general and administrative
costs in the first quarter of 2003 were reclassified as a credit to cost of sales for that period. Amounts
for 2002 and 2001 are not significant and have not been reclassified. Net income was not affected by
this reclassification.
(2)
Discontinued Operations
During 2003, we decided to sell certain of our stores and related franchises. We recognized
a net gain on the sale of one of our stores classified as discontinued operations totaling $374,000, net
of tax, in 2003, which is netted with loss from discontinued operations on our consolidated statement
of operations. At December 31, 2003, we had $20.4 million of assets classified as assets held for sale
on our balance sheet related to one additional store we intend to sell during 2004. The assets
primarily include inventory and property, plant and equipment. We did not recognize any gain or loss
on disposal of discontinued operations during 2002 or 2001.
We continually monitor the performance of each of our stores and make determinations to
sell based on return on capital criteria.
(3)
Inventories and Related Notes Payable
The new and used vehicle inventory, collateralizing related notes payable, and other
inventory were as follows (in thousands):
New and program vehicles
Used vehicles
Parts and accessories
Total inventories
December 31,
2003
2002
Inventory
Cost
355,937 $
68,747
20,597
445,281 $
$
$
Notes
Payable
378,961
56,267
-
435,228
Inventory
Cost
340,457 $
85,170
20,281
445,908 $
Notes
Payable
364,635
63,000
-
427,635
$
$
The inventory balance is generally reduced by manufacturer holdbacks and incentives, while
the related floor plan liability is reflective of the gross cost of the vehicle. The floor plan liability, as
shown in Notes Payable in the above table, will generally also be higher than the inventory cost due
to the timing of the sale of a vehicle and payment of the related liability.
All new vehicles are pledged to collateralize floor plan notes payable to financial institutions.
The floor plan notes payable bear interest, payable monthly on the outstanding balance, at a rate of
interest determined by the lender, subject to incentives. The new vehicle floor plan notes are due
when the related vehicle is sold. As such, these floor plan notes payable are shown as current
liabilities in the accompanying consolidated balance sheets.
F-14
At December 31, 2003 and 2002, used vehicles were pledged to collateralize our used
vehicle and working capital credit facility.
(4)
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
December 31,
Buildings and improvements
Service equipment
Furniture, signs and fixtures
Less accumulated depreciation – buildings
Less accumulated depreciation – equipment and other
Land
Construction in progress, buildings
Construction in progress, other
(5)
Goodwill and Other Intangible Assets
The roll forward of goodwill is as follows (in thousands):
Year Ended December 31,
Balance, beginning of year
Goodwill acquired and post acquisition adjustments
Goodwill written off
Goodwill included in gain or loss on disposal of franchises
and discontinued operations
Balance, end of year
2003
93,455
19,856
56,742
170,053
(5,683)
(18,315)
146,055
71,592
5,312
4,354
227,313
2003
185,212
25,156
-
$
$
$
2002
69,117
16,925
53,277
139,319
(3,618)
(14,602)
121,099
52,241
956
2,615
176,911
2002
149,742
35,860
-
(3,341)
207,027
(390)
185,212
$
$
$
$
$
At December 31, 2003 and 2002, other intangible assets included the value of franchise
agreements and non-compete agreements. The value attributed to franchise agreements has an
indefinite useful life and non-compete agreements are amortized over the life of the agreements,
typically 3 to 5 years. The gross amount of other intangible assets and the related accumulated
amortization for non-compete agreements were as follows (in thousands):
Franchise value
Non-compete agreements
Accumulated amortization
Net non-compete agreements
Total other intangible assets, net
December 31,
2003
$ 28,875
422
(351)
71
$ 28,946
2002
20,903
412
(330)
82
20,985
$
$
F-15
Amortization expense related to the non-compete agreements totaled $21,000 and $18,000,
respectively, for the years ended December 31, 2003 and 2002. Amortization of non-compete
agreements is as follows over the next five years (in thousands):
2004
2005
2006
2007
2008
$
23
23
22
3
-
(6)
Derivative Financial Instruments
We have entered into interest rate swaps to manage the variability of our interest rate
exposure, thus leveling a portion of our interest expense in a rising or falling rate environment.
We have effectively changed the variable-rate cash flow exposure on a portion of our flooring
debt to fixed-rate cash flows by entering into receive-variable, pay-fixed interest rate swaps. Under
the interest rate swaps, we receive variable interest rate payments and make fixed interest rate
payments, thereby creating fixed rate flooring debt.
We do not enter into derivative instruments for any purpose other than to manage interest
rate exposure. That is, we do not speculate using derivative instruments.
As of December 31, 2003, we have outstanding the following interest rate swaps with U.S.
Bank Dealer Commercial Services:
• effective September 1, 2000 – a five year, $25 million interest rate swap at a fixed rate of
6.88% per annum, variable rate adjusted on the 1st and 16th of each month
• effective January 26, 2003 – a five year, $25 million interest rate swap at a fixed rate of
3.265% per annum, variable rate adjusted on the 26th of each month
• effective February 18, 2003 – a five year, $25 million interest rate swap at a fixed rate of
3.30% per annum, variable rate adjusted on the 1st and 16th of each month
• effective November 18, 2003 – a five year, $25 million interest rate swap at a fixed rate of
3.65% per annum, variable rate adjusted on the 1st and 16th of each month
• effective November 26, 2003 – a five year, $25 million interest rate swap at a fixed rate of
3.63% per annum, variable rate adjusted on the 26th of each month
We earn interest on all of the interest rate swaps at the one-month LIBOR rate. The one-
month LIBOR rate at December 31, 2003 was 1.12% per annum.
The fair value of our interest rate swap agreements represents the estimated receipts or
payments that would be made to terminate the agreements. These amounts are recorded as
deferred gains or losses in our consolidated balance sheet with the offset recorded in accumulated
other comprehensive income, net of tax. The amount of deferred gains and (losses) at December 31,
2003 were $0 and $(2.4) million respectively. The difference between interest earned and the interest
obligation results
from accumulated other
comprehensive income to the statement of operations as incremental flooring interest expense. The
resulting cash settlement reduces the amount of deferred gains and losses. Because the critical
terms of the interest rate swaps and the underlying debt obligations are the same, there was no
ineffectiveness recorded in interest expense.
in a monthly settlement which
is reclassified
If, in the future, the interest rate swap agreements were determined to be ineffective or were
terminated before the contractual termination date, or if it became probable that the hedged variable
cash flows associated with the variable rate borrowings would stop, we would be required to
reclassify into earnings all or a portion of the deferred gains or losses on cash flow hedges included in
accumulated other comprehensive income.
At current interest rates, we estimate that we will incur additional interest expense, net of tax,
of approximately $2.3 million related to our interest rate swaps during 2004.
F-16
(7)
Lines of Credit and Long-Term Debt
We have a working capital and used vehicle flooring credit facility with DaimlerChrysler
Services North America LLC totaling up to $200 million, which expires in February 2006, with interest
due monthly. In December 2003, Toyota Motor Credit joined DaimlerChrysler in syndication on this
credit facility. None of the terms of the credit facility were changed.
The credit line with DaimlerChrysler Services is cross-collateralized and secured by cash and
cash equivalents, new and used vehicle and parts inventories, accounts receivable, intangible assets
and equipment. We pledged to DaimlerChrysler Services the stock of all of our subsidiaries except
entities operating BMW, Honda, Nissan or Toyota stores.
The financial covenants in our agreement with DaimlerChrysler Services require us to
maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge
coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v)
certain working capital levels. In addition, this agreement specifies that total dividends and
repurchases of our common stock cannot exceed $18.0 million over the term of the agreement. To
date, over the term of the agreement, we have paid dividends and repurchased stock totaling $2.8
million. This credit agreement expires February 2006.
Toyota Motor Credit Corporation, Ford Motor Credit and General Motors Acceptance
Corporation have agreed to floor all of our new vehicles for their respective brands with
DaimlerChrysler Services and Toyota Motor Credit Corp. serving as the primary lenders for
substantially all other brands. These new vehicle lines are secured by new vehicle inventory of the
relevant brands.
We also have a real estate line of revolving credit with Toyota Motor Credit totaling $40
million, which expires in May 2005. This line of credit is secured by the real estate financed under this
line of credit.
We also have an agreement with U.S. Bank N.A., which provides for a $35.0 million revolving
line of credit for leased vehicles and equipment purchases and expires January 31, 2005. (See Note
18).
Interest rates on all of the above facilities ranged from 2.62% to 3.87% at December 31,
2003. Amounts outstanding on the lines at December 31, 2003 together with amounts remaining
available under such lines were as follows (in thousands):
New and program vehicle lines
Working capital and used vehicle line
Real estate line
Equipment/leased vehicle line
Outstanding at
December 31, 2003
$378,961
117,000
9,018
35,000
$539,979
Remaining Availability as
of December 31, 2003
$
*
83,000**
30,982
-
$113,982*
_________
* There are no formal limits on the new and program vehicle lines with certain lenders.
** As limited by the terms of the line regarding the borrowing base.
F-17
Long-term debt consisted of the following (in thousands):
December 31,
Variable Rate Debt:
Equipment and leased vehicle line of credit, expiring January 31, 2005
Real estate line of credit payable with monthly payments of interest only, expiring
2003
2002
$
35,000
$
27,500
May 2005; secured by land and buildings
Working capital and used vehicle flooring line of credit payable with monthly
payments of interest only, expiring February 2006
Mortgages payable in monthly installments of $225, including interest between
2.92% and 5.16%, maturing fully January 2024; secured vehicles leased to others
Notes payable in monthly installments of $15 plus interest between 0.0% and 4.4%,
9,018
35,681
117,000
63,000
32,949
21,037
maturing at various dates through 2004; secured by vehicles leased to others
1,607
914
Notes payable related to acquisitions, with interest rate of 4.0%, maturing February
2008
Total Variable Rate Debt
Fixed Rate Debt:
481
196,055
625
148,757
Mortgages payable in monthly installments of $353, including interest between
4.38% and 8.62%, maturing fully May 2022; secured by land and buildings
49,837
19,192
Notes payable related to acquisitions, with interest rates between 7.00% and 8.00%,
maturing at various dates through November 2008
Capital lease obligations, net of interest of $0 and $1, respectively
Total Fixed Rate Debt
Less current maturities
3,141
-
52,978
249,033
(14,299)
234,734
4,221
8
23,421
172,178
(4,466)
$ 167,712
$
The schedule of future principal payments on long-term debt after December 31, 2003 is as
follows (in thousands):
Year Ending December 31,
2004
2005
2006
2007
2008
Thereafter
Total principal payments
$
$
14,299
5,648
155,716
11,858
34,861
26,651
249,033
(8)
Stockholders’ Equity
Class A and Class B Common Stock
The shares of Class A common stock are not convertible into any other series or class of our
securities. Each share of Class B common stock, however, 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
our stockholders on which the number of shares of Class B common stock outstanding is less than
1% of the total number of shares of common stock outstanding. Shares of Class B common stock
may not be transferred to third parties, except for transfers to certain family members and in other
limited circumstances.
Holders of Class A common stock are entitled to one vote for each share held of record and
holders of Class B common stock are entitled to ten votes for each share held of record. The Class A
common stock and Class B common stock vote together as a single class on all matters submitted to
a vote of stockholders.
In March 2002, we registered and sold 4.5 million newly issued shares of Class A common
stock. Proceeds, net of offering expenses, totaled approximately $77.2 million. In connection with
the sale, existing stockholders sold 1.25 million shares of Class A common stock and 121,488 shares
of Class B common stock were converted into a like number of shares of Class A common stock.
In September 2002, 156,000 Class B shares were converted into Class A shares.
F-18
Series M Redeemable, Convertible Preferred Stock
In 1999, the Company authorized 15,000 shares of Series M Redeemable, Convertible
preferred stock (“Series M Preferred Stock”). In May 1999, in connection with the acquisition of
Moreland Automotive Group, the Company issued 10,360 shares of Series M Preferred Stock. The
Series M Preferred Stock was convertible into Class A Common Stock at the option of the Company
at any time and at the option of the holder under limited circumstances. The Series M Preferred Stock
was redeemable at the option of the Company. The Series M Preferred Stock converted into Class A
common stock based on a formula that divided the average Class A common stock price for a certain
15-day period into $1,000 and then multiplied by the number of Series M Preferred Stock being
converted. The Series M Preferred Stock had a $1,000 per share liquidation preference.
In the first quarter of 2000, the Company issued 303,542 shares of Class A common stock
and 4,499 shares of Series M Preferred Stock in order to satisfy contingent payout requirements
related to the Moreland acquisition.
All shares of Series M Preferred Stock have been converted or redeemed and, as of
December 31, 2003 and 2002, no shares of Series M Preferred Stock remained outstanding.
(9)
Cost of Sales
Cost of sales categorized by revenue category is as follows (in thousands):
Year Ended December 31,
New vehicle sales
Used vehicle sales
Service, body and parts
Finance and insurance
Fleet and other
2003
1,330,446
642,443
132,653
276
4,575
2,110,393
$
$
2002
1,114,885 $
643,712
112,434
459
42,214
1,913,704 $
2001
842,891
502,976
92,487
732
39,442
1,478,528
$
$
(10)
Income Taxes
Income tax expense from continuing operations for 2003, 2002 and 2001 was as follows (in
thousands):
Year Ended December 31,
Current:
Federal
State
Deferred:
Federal
State
Total
2003
11,413
1,692
13,105
9,406
1,050
10,456
23,561
$
$
2002
14,033
1,917
15,950
4,008
522
4,530
20,480
2001
12,686
1,980
14,666
(1,226)
(170)
(1,396)
13,270
$
$
$
$
At December 31, 2003, we had income taxes payable totaling $1.8 million and at December
31, 2002, we had income taxes receivable totaling $2.0 million.
F-19
Individually significant components of the deferred tax assets and liabilities are presented
below (in thousands):
December 31,
Deferred tax assets:
Allowance and accruals
Deferred revenue and cancellation reserves
Total deferred tax assets
Deferred tax liabilities:
LIFO recapture and acquired LIFO inventories
differences
Employee benefit plans
Goodwill
Property and equipment, principally due to
differences in depreciation
Total deferred tax liabilities
Total
2003
4,189
4,398
8,587
(5,177)
-
(15,921)
(11,045)
(32,143)
(23,556)
$
$
2002
5,132
4,363
9,495
(3,356)
(1,282)
(11,392)
(6,591)
(22,621)
(13,126)
$
$
In 2003, 2002 and 2001, income tax benefits attributable to employee stock option
transactions of $138,000, $264,000 and $0, respectively, were allocated to stockholders' equity.
The reconciliation between amounts computed using the federal income tax rate of 35% and
our income tax expense from continuing operations for 2003, 2002 and 2001 is shown in the following
tabulation (in thousands):
Year Ended December 31,
Computed “expected” tax expense
State taxes, net of federal income tax benefit
Nondeductible goodwill
Other
Income tax expense
2003
20,719
1,769
-
1,073
23,561
$
$
2002
18,494
1,580
-
406
20,480
$
$
2001
12,032
1,139
454
(355)
13,270
$
$
(11)
401(k) Profit Sharing Plan
We have a defined contribution 401(k) plan and trust covering substantially all full-time
employees. The annual contribution to the plan is at the discretion of our Board of Directors.
Contributions of $0.6 million, $0.9 million and $1.1 million were recognized for the years ended
December 31, 2003, 2002 and 2001, respectively. Employees may contribute to the plan as they
meet certain eligibility requirements.
(12)
Stock Incentive Plans
At our annual shareholders meeting in May 2003, our shareholders approved an amendment
to and restatement of our 2001 Stock Option Plan in the form of the 2003 Stock Incentive Plan (the
“2003 Plan”). The 2003 Plan allows for the granting of up to a total of 1.2 million incentive and
nonqualified stock options and shares of restricted stock to our officers, key employees and
consultants. We also have options outstanding and exercisable pursuant to their original terms
pursuant to prior plans. Options canceled under prior plans do not return to the pool of options to be
granted again in the future. All of the option plans are administered by the Compensation Committee
of the Board and permit accelerated vesting of outstanding options upon the occurrence of certain
changes in control. Options become exercisable over a period of up to ten years from the date of
grant and at exercise prices as determined by the Board. At December 31, 2003, 1,985,123 shares
of Class A common stock were reserved for issuance under the plans, of which 661,500 were
available for future grant.
F-20
Activity under the plans is as follows (in thousands):
Balances, December 31, 2000
Additional shares reserved
Option shares canceled upon
approval of the 2001 Plan
Options granted
Options canceled
Options exercised
Balances, December 31, 2001
Additional shares reserved
Options granted
Options canceled
Options exercised
Balances, December 31, 2002
Options granted
Options canceled
Options exercised
Balances, December 31, 2003
Shares
Available for
Grant
244
600
Shares Subject to
Options
1,189
-
Weighted Average
Exercise Price
$12.65
-
(244)
(275)
-
-
325
600
(433)
52
-
544
(16)
133
-
661
-
275
(64)
(27)
1,373
-
433
(173)
(136)
1,497
16
(151)
(38)
1,324
-
19.24
16.21
8.78
14.02
-
15.80
17.00
12.00
14.25
14.09
16.54
10.09
$14.10
The Board of Directors approved the issuance of non-qualified options during 2000 to certain
members of senior management at an exercise price of $1.00 per share. These options were issued
with five-year cliff vesting as a means to encourage long-term employment from certain members of
the senior management group. Compensation expense, which is equal to the difference between the
market price and the exercise price, is recognized ratably in accordance with the vesting schedules.
The following table summarizes stock options outstanding at December 31, 2003:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$1.00
3.02
10.75
10.87 – 12.99
14.00 – 16.18
16.50 - 18.94
19.24 - 20.52
$1.00 - $20.52
Number of
Shares
Outstanding at
12/31/03
87,662
85,055
14,000
188,864
374,253
342,989
230,800
1,323,623
Weighted
Average
Remaining
Contractual Life
(years)
6.3
0.3
1.2
6.5
7.7
5.1
7.8
6.2
Weighted
Average
Exercise
Price
$ 1.00
3.02
10.75
11.89
15.09
16.93
19.35
$14.10
Number of
Shares
Exercisable at
12/31/03
15,662
85,055
14,000
97,154
94,004
178,775
42,600
527,250
Weighted
Average
Exercise
Price
$ 1.00
3.02
10.75
11.95
14.90
17.02
19.33
$12.99
At December 31, 2002 and 2001, 399,810 and 400,533 shares were exercisable at weighted
average exercise prices of $11.88 and $10.39, respectively.
In 1998, the Board of Directors and the stockholders approved the implementation of an
Employee Stock Purchase Plan (the “Purchase Plan”), and, as amended in May 2000, 2002 and
2003, have reserved a total of 1.5 million shares of Class A common stock for issuance thereunder.
The Purchase Plan is intended to qualify as an “Employee Stock Purchase Plan” under Section 423
of the Internal Revenue Code of 1986, as amended, and is administered by the Compensation
Committee of the Board. Eligible employees are entitled to invest up to 10 percent of their base pay
for the purchase of stock up to $25,000 of fair market value of our Class A common stock annually.
The purchase price for shares purchased under the Purchase Plan is 85 percent of the lesser of the
fair market value at the beginning or end of the purchase period. A total of 375,988, 217,230 and
142,433 shares of our Class A common stock were issued under the Purchase Plan during 2003,
2002 and 2001, respectively, and 571,853 remained available for issuance at December 31, 2003.
F-21
(13)
Dividend Payments
Our Board of Directors approved the following dividends on our Class A and Class B
common stock in 2003:
Month
declared
July 2003
Quarter
dividend is
based on
second
Payable to
shareholders
of record on
August 8,
2003
October 2003
third
November 7,
2003
Date paid
August 22,
2003
November
21, 2003
Amount
per share
$0.07
Total
amount of
dividend
$1.3 million
$0.07
$1.3 million
(14)
Commitments and Contingencies
Recourse Contracts
We are contingently liable to banks on certain finance contracts that maintain a recourse
guarantee. Although we don't typically engage in these contracts in our normal course of business,
we have assumed this type of contract with certain acquisitions. The contingent liability, net of
reserves, at December 31, 2003 and 2002 was approximately $0 and $300,000, respectively.
Our potential loss is limited to the difference between the present value of the installment
contract at the date of the repossession and the amount for which the vehicle is resold. However,
most of these contracts are even further limited by an established dollar threshold. Based upon
historical loss percentages, an estimated loss reserve of $15,000 and $443,000 is reflected in our
consolidated balance sheets as of December 31, 2003 and 2002, respectively.
Leases
We lease certain of our facilities under non-cancelable operating leases. These leases expire
at various dates through 2030. Certain lease commitments are subject to escalation clauses of an
amount equal to the cost of living based on the “Consumer Price Index - U.S. Cities Average - All
Items for all Urban Consumers” published by the U.S. Department of Labor.
The minimum lease payments under the operating leases after December 31, 2003 are as
follows (in thousands):
$
Year Ending December 31,
19,975
2004
19,429
2005
18,602
2006
17,673
2007
16,687
2008
Thereafter
54,784
Total minimum lease payments $ 147,150
Rental expense for all operating leases was $19.3 million, $17.8 million and $15.1 million for
the years ended December 31, 2003, 2002 and 2001, respectively.
F-22
Primarily in connection with dispositions of dealerships, we occasionally assign or sublet our
interests in any real property leases associated with such dealerships to the purchaser. We often
retain responsibility for the performance of certain obligations under such leases to the extent that the
assignee or sublessee does not perform, whether such performance is required prior to or following
the assignment of subletting of the lease. Additionally, we generally remain subject to the terms of
any guarantees made by us in connection with such leases. However, we generally have
indemnification rights against the assignee or sublessee in the event of non-performance, as well as
certain other defenses. We presently have no reason to believe that we will be called upon to perform
under any such assigned leases or subleases. Lease rental payments under assigned or sublet
leases for their remaining terms totaled approximately $5.4 million at December 31, 2003. We may
also be called upon to perform other obligations under these leases, such as environmental
remediation of the premises or repairs upon termination of the lease. Although we currently have no
reason to believe that we will be called upon to perform any such services, there can be no
assurance that any future performance required by us under these leases will not have a material
adverse effect on our financial condition or results of operations.
Capital Commitments
We had capital commitments of $5.2 million at December 31, 2003 for the construction of one
new store facility and additions to three existing facilities and the remodel of four facilities. The new
facility will be a Hyundai store in Anchorage, Alaska. We have already incurred $7.5 million for these
projects, with the remaining $5.2 million expected to be spent in 2004. We expect to pay for the
construction out of existing cash balances until completion of the projects, at which time we anticipate
securing long-term financing and general borrowings from third party lenders for 70% to 90% of the
amounts expended.
Litigation
We are party to numerous legal proceedings arising in the normal course of our business.
While we cannot predict with certainty the outcomes of these matters, we do not anticipate that the
resolution of these proceedings will have a material adverse effect on our business, results of
operations, financial condition, or cash flows.
(15)
Related Party Transactions
Mark DeBoer Construction
During 2003, 2002 and 2001, Lithia Real Estate, Inc. paid Mark DeBoer Construction, Inc.
$1.6 million, $4.3 million, and $7.9 million, respectively, for remodeling certain of our facilities. Mark
DeBoer is the son of Sidney B. DeBoer, our Chairman and Chief Executive Officer. These amounts
included $0.9 million, $3.5 million, and $7.1 million, respectively, paid for subcontractors and
materials, $102,000, $183,000 and $16,000, respectively for permits, licenses, travel and various
miscellaneous fees, and $638,000, $558,000, and $780,000, respectively, for contractor fees. In
2003, we paid more of the subcontractors directly, which reduced the overall payments to Mark
DeBoer Construction, Inc. We believe the amounts paid are fair in comparison with fees negotiated
with independent third parties and all significant transactions are reviewed and approved by our
independent audit committee.
W. Douglas Moreland
In May 1999, we purchased certain dealerships owned by W. Douglas Moreland for total
consideration of approximately $66.0 million, at which time, Mr. Moreland became a member of our
Board of Directors. During the normal course of business, these dealerships paid $1.1 million and
$2.5 million in 2002 and 2001, respectively, to other companies owned by Mr. Moreland for vehicle
purchases, recourse paid to a financial lender and management fees. We also paid rental expense of
$2.6 million and $3.0 million in 2002 and 2001, respectively, to other companies owned by Mr.
Moreland. As of October 31, 2002, Mr. Moreland was no longer a member of our Board of Directors.
F-23
(16)
Acquisitions
The following acquisitions were made in 2003:
•
In February 2003, we acquired Richardson Chevrolet in Salinas, California, which has
anticipated 2003 annual revenues of approximately $35.0 million. This store has been
renamed Chevrolet of Salinas.
In March 2003, we acquired Pacific Hyundai of Anchorage, Alaska, which has anticipated
2003 revenues of approximately $10.0 million. The store has been renamed Lithia
Hyundai of Anchorage.
In March 2003, we acquired Randy Hansen Chevrolet of Twin Falls, Idaho, which has
anticipated 2003 annual revenues of approximately $30.0 million. The store has been
renamed Chevrolet Cadillac of Twin Falls.
In April 2003, we acquired Grizzly Chrysler Dodge of Missoula, Montana, which has
anticipated 2003 revenues of approximately $25.0 million. The store has been renamed
Lithia Auto Center of Missoula.
In May 2003, we acquired Expressway Dodge of Broken Arrow, Oklahoma, which has
anticipated 2003 revenues of approximately $40.0 million. The store has been renamed
Lithia Dodge of Broken Arrow.
In June 2003, we acquired Midland Dodge of Billings, Montana, which has anticipated
2003 revenues of approximately $35.0 million. The store has been renamed Lithia
Dodge of Billings.
In August 2003, we acquired Mercedes Benz of Spokane, Washington, which has
anticipated 2003 revenues of approximately $20.0 million. The store has been renamed
Mercedes-Benz of Spokane.
In August 2003, we acquired Santa Rosa Dodge in California, which has anticipated 2003
revenues of approximately $30.0 million. The store has been renamed Lithia Dodge of
Santa Rosa.
In October 2003, we acquired Chevrolet Cadillac of Fairbanks, Alaska, which has
anticipated 2003 revenues of approximately $15.0 million. The store name will remain
the same; and
In October 2003, we acquired Grapevine Dodge in Grapevine, Texas, which has
anticipated 2003 revenues of approximately $70.0 million. The store has been renamed
Lithia Dodge of Grapevine.
In November 2003, we acquired Fairfield Dodge in Fairfield, California, which has
anticipated 2003 revenues of approximately $20.0 million. The store has been renamed
Lithia Dodge of Fairfield.
The following acquisitions were made in 2002:
•
In January 2002, we acquired the Lynn Alexander Auto Group, which is comprised of All
American Chrysler/Jeep/Dodge and All American Chevrolet located in San Angelo, Texas
and All American Chrysler/Jeep/Dodge in Big Spring, Texas. The stores had anticipated
2002 annual revenues of $115.0 million.
In January 2002, we acquired Premier Chrysler/Jeep/Dodge in Odessa, Texas, which
had anticipated 2002 annual revenues of $33.0 million.
In February 2002, we acquired Thomason Subaru in Oregon City, Oregon, which had
anticipated 2002 annual revenues of $20.0 million. The store has been renamed Lithia
Subaru of Oregon City.
In April 2002, we acquired Village Dodge-Hyundai in Midland, Texas, which had
anticipated 2002 annual revenues of $35.0 million.
In May 2002, we opened a newly awarded Hummer franchise in Bellevue, Washington.
In June 2002, we acquired Jay Wolfe Ford in Omaha, Nebraska, which had anticipated
2002 annual revenues of $55.0 million.
In June 2002, we acquired Broncho Chevrolet in Odessa, Texas and Sherman Chevrolet
in Midland, Texas. The stores had combined anticipated 2002 revenues of $115.0 million.
The stores were renamed Chevrolet of Odessa and Chevrolet of Midland, respectively.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
F-24
•
•
•
•
In July 2002, we acquired Mercedes of Omaha in Omaha, Nebraska, which had
anticipated 2002 revenues of $22.0 million.
In August 2002, we acquired Skyline Volkswagen in a suburb of Denver, Colorado, which
had anticipated 2002 revenues of $20.0 million.
In December 2002, we acquired Les Vogel Chrysler/Dodge/Jeep in Burlingame,
California which had anticipated 2002 revenues of $32.0 million.
In December of 2002, we acquired Sound Hyundai in Renton, Washington which had
anticipated 2002 revenues of $8.0 million.
The following acquisitions were made in 2001:
•
In January 2001, we acquired the Johnson Chrysler/Jeep store in Anchorage, Alaska,
which had estimated 2000 revenues of approximately $35.0 million.
In February 2001, we acquired two stores in Pocatello, Idaho with the Honda,
Dodge/Chrysler and Hyundai brands, which had combined estimated 2000 revenues of
approximately $48.0 million.
In July 2001, we acquired Barton Cadillac in Spokane Washington, which was added to
Lithia Camp Chevrolet. Barton Cadillac had estimated 2000 revenues of approximately
$18.0 million.
In August 2001, we acquired the Lanny Berg Chevrolet store in Caldwell, Idaho, which
had anticipated 2001 annual revenues of approximately $22.0 million.
In September 2001, we acquired Ted Tuffy Dodge in Sioux Falls, South Dakota, which
had anticipated 2001 annual revenues of approximately $35.0 million.
In September 2001, we acquired BMW of Seattle in Seattle, Washington, which had
anticipated 2001 annual revenues of approximately $60.0 million.
In November 2001, Lithia acquired Issaquah Chevrolet in Issaquah, Washington, which
had anticipated 2001 annual revenues of approximately $50.0 million.
•
•
•
•
•
•
In addition to the above acquisitions, in August 2001, we completed the construction of and
opened Lithia Dodge of Anchorage.
The above acquisitions were all accounted for under the purchase method of accounting.
Pro forma results of operations assuming all of the above acquisitions occurred at the beginning of
the respective periods are as follows (in thousands, except per share amounts).
Year Ended December 31,
Total revenues
Net income
Basic earnings per share
Diluted earnings per share
$
$
2003
2,756,686
36,953
2.02
1.99
$
2002
2,726,323
34,228
1.99
1.94
2001
2,232,474
23,620
1.77
1.74
There are no future contingent payouts related to any of the above acquisitions and no
portion of the purchase price was paid with our equity securities. The purchase price for the above
acquisitions was allocated as follows (in thousands):
Year Ended December 31,
Inventory
Other current assets
Property and equipment
Goodwill
Other intangible assets – primarily franchise value
Other non-current assets
Total assets acquired
Flooring notes payable
Other current liabilities
Other non-current liabilities
Total liabilities acquired
Net assets acquired
2003
53,441
1,652
23,081
24,656
7,982
-
110,812
45,884
1,252
324
47,460
63,352
$
$
$
$
2002
63,192
5,692
24,637
30,195
13,796
100
137,612
49,225
1,694
2,548
53,467
84,145
$
$
2001
36,163
207
4,452
22,825
7,107
-
70,754
25,351
49
174
25,574
45,180
F-25
Within one year from the purchase date, we may update the value allocated to purchased
assets and the resulting goodwill balances for new information received regarding the valuation of
such assets.
(17)
Recent Accounting Pronouncements
In July 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit
or Disposal Activities.” SFAS No. 146 addresses the financial accounting and reporting for
obligations associated with an exit activity, including restructuring, or with a disposal of long-lived
assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating
employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a
company will record a liability for a cost associated with an exit or disposal activity only when that
liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan
of disposal expresses only management’s intended future actions and, therefore, does not meet the
requirement for recognizing a liability and the related expense. SFAS No. 146 is effective
prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption
encouraged. The adoption of SFAS No. 146 on January 1, 2003 did not have any effect on our
financial position or results of operations.
The FASB’s Emerging Issues Task Force (EITF) finalized EITF 00-21 “Accounting for
Multiple Element Arrangements” in November 2002. EITF 00-21 requires arrangements with multiple
elements to be broken out as separate units of accounting based on their relative fair values.
Revenue for a separate unit of accounting should be recognized only if the amount due can be
reliably measured and the earnings process is substantially complete. Any units that can not be
separated must be accounted for as a combined unit. Our accounting policy is consistent with EITF
00-21 and therefore, the adoption on January 1, 2003 did not have any effect on our financial position
or results of operations.
In March 2003, the EITF issued EITF 02-16 “Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor.” EITF 02-16 primarily applies to floorplan interest
credits and advertising credits received by us from auto manufacturers and specifies the timing of and
appropriate classification of such items in our statement of operations. We recognize floorplan
interest credits and advertising credits that are tied to specific vehicles as a reduction to the carrying
value of the specific inventory and ultimately as a reduction to cost of goods sold as related vehicles
are sold and we recognize other advertising credits as a credit to advertising expense. The adoption
of EITF 02-16 on January 1, 2003 resulted in the reclassification of certain expenses, but did not have
any effect on our net income or financial position (see Note 14).
In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative
Instruments and Hedging Activities.” SFAS No. 149 addresses certain accounting issues related to
hedging activity and derivative instruments embedded in other contracts. In general, the
amendments require contracts with comparable characteristics to be accounted for similarly. In
addition, SFAS No. 149 provides guidance as to when a financing component of a derivative must be
given special reporting treatment in the statement of cash flows. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS No. 149 did not have a
material effect on our financial position or results of operations.
In May 2003, the FASB approved SFAS No. 150, “Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards
for how to classify and measure financial instruments with characteristics of both liabilities and equity.
It requires financial instruments that fall within its scope to be classified as liabilities. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003 and, for pre-existing
financial instruments, as of July 1, 2003. We do not have any financial instruments that fall under the
guidance of SFAS No. 150 and, therefore, the adoption did not have any effect on our financial
position or results of operations.
F-26
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R), “Consolidation of
Variable Interest Entities,” which replaces FIN 46. FIN 46R clarifies the application of Accounting
Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated financial support
from other parties. FIN 46R applies to variable interest entities (VIE’s) created after December 31,
2003, and to VIE’s in which an enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period ending after December 15, 2004 to VIE’s in which an enterprise holds a
variable interest that it acquired before January 1, 2004. We do not have any VIEs and, therefore, the
adoption of FIN 46R will not have any effect on our financial position, results of operations or cash
flows.
In December 2003, the SEC issued Staff Accounting Bulletin No. 104, Revenue Recognition
(SAB 104), which updates the previously issued revenue recognition guidance in SAB 101, based on
the Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. If
the deliverables in a sales arrangement constitute separate units of accounting according to the
EITF’s separation criteria, the revenue-recognition policy must be determined for each identified unit.
If the arrangement is a single unit of accounting under the separation criteria, the revenue-recognition
policy must be determined for the entire arrangement. The issuance of SAB 104 has not had any
impact on our financial position, results of operations or cash flow.
(18)
Subsequent Events
Dividend
In January 2004, our Board of Directors approved a dividend on our Class A and Class B
common stock of $0.07 per share for the fourth quarter of 2003. The dividend, which will total
approximately $1.3 million, will be paid on March 19, 2004 to shareholders of record on March 5,
2004.
Acquisition
In January 2004, we acquired one Chrysler and Jeep store in Reno, Nevada, which has
anticipated annual revenues of approximately $55.0 million. The store has been renamed Lithia
Chrysler Jeep of Reno.
U.S. Bank Agreement
In February 2004, our U.S. Bank N.A. agreement was amended to provide for a $50.0 million
revolving line of credit for leased vehicles and equipment purchases, which expires January 31, 2006.
Previously, the amount available under this line of credit was $35.0 million and it was set to expire
January 31, 2005.
F-27
CORPORATE INFORMATION
Annual Meeting
The Company’s Annual Meeting of Shareholders will be held at 4:30 P.M., Thursday, April 29,
4:30p.m., Rogue Valley Country Club, 2660 Hillcrest Road, Medford, Oregon, 97504. Notice of the
meeting and proxy statement materials are being sent to all shareholders. The Company’s Annual
Report on Form 10-K for the year ended December 31, 2004 includes all information as filed with
the Securities and Exchange Commission, except exhibits.
Shareholder Communications
The Company welcomes your comments about its operations or any aspect of its business. Please
contact our Investor Relations Group at 1-541-776-6591.
Description of Business:
Automobile sales and service
Corporate Headquarters:
360 East Jackson Street, Medford, Oregon 97501
Trading Information
(As of March 8, 2004):
(NYSE - LAD)
18,633,759 shares issued and outstanding
Class A
Class B
14,871,528
3,762,231
Auditors:
KPMG LLP, Portland, Oregon
Legal Counsel:
Foster, Pepper and Tooze, Portland, Oregon
Transfer Agent:
Executive Officers:
Computershare Trust Company
350 Indian St., Suite 800
Golden, Colorado 80401
Sidney B. DeBoer, Chairman and Chief Executive Officer
M.L. Dick Heimann, President and Chief Operating Officer
R. Bradford Gray, Executive Vice President
Bryan DeBoer, Executive Vice President
Don Jones, Jr., Senior Vice President, Retail Operations
Jeffrey B. DeBoer, Senior Vice President and Chief
Financial Officer
Lithia Board of Directors:
Sidney B. DeBoer
M.L. Dick Heimann
R. Bradford Gray
Thomas R. Becker
William J. Young
Gerald F. Taylor
Philip J. Romero
Safe Harbor Statement under the Private Securities Reform Act of 1995
With the exception of historical information, the matters discussed or incorporated by
reference in this Annual Report include forward-looking statements. These statements
are necessarily subject to risk and uncertainty. Actual results could differ materially from
those projected in these forward-looking statements as a result of certain risks including
those set forth from time to time in the Company'’ filings with the SEC. These risk
factors include, but are not limited to, the cyclical nature of automobile sales and the
intense competition in the automobile retail industry, the Company’s ability to negotiate
profitable acquisitions, and the ability to secure manufacturer approvals for such
acquisitions.