March 8, 2005
TO OUR SHAREHOLDERS:
Dick and I want to thank our valued shareholders for your continued support of our company. Lithia
was founded by a strong family of business people who have now grown to include not only the original
family, who are still in charge of the company, but also a large family of over 5,000 employees and
hundreds of dedicated shareholders. We take great pride in our successes and are pleased to report
another successful year – the eighth for us as a public company. Lithia’s performance in 2004 showed
overall sales growth and margin improvements across all business lines, particularly in the used
vehicle, parts and service businesses. The sales environment in 2004 showed mixed trends, however,
we were still able to maximize our profits through many strategic initiatives. Earnings per share ended
up being 17 cents higher than the high end of our original guidance for the year.
Nationally, new vehicle sales were volatile from month to month due to a fluctuating incentive
environment. Used vehicle sales have remained slow for the past three years. While we have a good
diversification of markets across thirteen states, a few of the markets where we operate remain
depressed compared to prior years. We are encouraged by the fact that those markets appear to have
stabilized, though at lower levels. Long-term, we believe that we are in some of the best markets in the
country and that there is good potential for all of our markets to demonstrate healthy growth in the
future.
Regardless of market conditions, Lithia’s auto-retail model creates margin improvements even when
facing a difficult sales environment. For the full-year 2004, we were able to increase margins across all
business lines. Our year-over-year total gross margin improved 80 basis points to 16.8% and our
SG&A as a percentage of gross profit improved 160 basis points to 76.1%. As a result, full-year 2004
operating margins improved 30 basis points to 3.5%. This is the third consecutive year of margin
improvements for our company. Although same-store sales were down 2.7% for the year, total same-
store gross profits improved 1.9%.
Industry observers are predicting an essentially flat new vehicle sales environment in 2005 with an
improving used vehicle sales market. We did see some signs of the improved used vehicle market in
the fourth quarter of 2004 with same-store sales improving 1.7%, and used vehicle margins improving
50 basis points from the fourth quarter of 2003.
The direction of the new and used vehicle market is difficult to predict accurately on a year-to-year
basis. Lithia has a strong business model that allows the company to benefit regardless of the
operating environment. The success of our business model was demonstrated in 2004 by total same-
store pre-tax profits that improved 16% in an environment where total same-store sales were down for
the company. For 2005, we believe we are in a good position to continue our growth as we execute our
proven operating and acquisition strategy.
SIGNIFICANT EVENTS
During 2004, Lithia made some noteworthy accomplishments. We:
•
•
Produced growth in net income from continuing operations of 19.5% to $42.6 million;
Completed the acquisition of 10 automotive retail stores and 21 franchises with annual
revenues of approximately $340 million. As of December 31, 2004, we operated 86 stores
with 25 brands of new vehicles in 13 western states;
• Were named to Fortune’s list of America’s Most Admired Company survey, capturing the
No. 2 ranking in the Automotive Retailing/Services category. The Fortune list ranked Lithia
as the category leader in “social responsibility,” one of eight key attributes used to measure
each business against its competition.
FINANCIAL OVERVIEW
Total revenues for 2004 reached $2.7 billion, growing 9% compared with $2.5 billion in 2003. We have
a very strong balance sheet. Our long-term debt-to-total-capitalization ratio remains low at 20%, which
excludes cash, used vehicle flooring and real estate debt. Discontinued operations resulted in a one-
cent gain, because the losses from these discontinued operations were more than offset by the gains
from the sale of these stores. Since our IPO in December 1996, we have increased our revenues more
than nineteen fold. Our book value per basic share has grown at a compounded annual rate of 26%
from $4.22 to $21.62 as of December 31, 2004. The compounded annual growth rate (CAGR) in sales
was 45% per year; net income 42% per year; and EPS 20% per year. Total same-store sales have
grown at an average annual rate of 3.1%. These achievements are among the best of any public
automotive retailer and demonstrate our position as a premier operator in our sector.
ACQUISITIONS
Lithia is a company that is dedicated to long-term growth. Our growth plan includes increases in same-
store sales combined with additional revenues from acquisitions. We believe that we have the best
acquisition team in the industry. In 2004, we added approximately $340 million in annualized revenues
to our base of total revenues of $2.5 billion in 2003. This represents growth of nearly 14%. We
anticipate continued long-term revenue growth from acquisitions to increase annualized revenues by 10
- 15% per year in the years to come. We target stores where we can improve operating performance
that will be accretive to earnings per share in the first year. We focus on improving the operating
performance of each store by utilizing standardized processes that deliver measurable results. Each
new store is fully integrated into our system upon acquisition as a Lithia store. This is as close as we
can get to opening or “greenfielding” new stores in what is a mature franchise system.
We continue to focus our growth in 70 markets west of the Mississippi, typically in locations with
franchises that are exclusive in their market, or that have a dominant market share position. We have a
goal to exceed the market share and customer satisfaction targets provided to us from the
manufacturer, within the initial 36 months of ownership. We accomplish this 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 20% long-term debt to total capitalization ratio, and an acquisition
credit facility of $150 million. Most of our growth is internally funded from free cash flow at the current
time. We are in great shape to continue with our growth plans in the future.
LITHIA’S MISSION AND VISION STATEMENT
THE MISSION OF LITHIA, AMERICA'S CAR AND TRUCK STORE, IS TO BE THE
PREFERRED PROVIDER OF CARS AND TRUCKS AND RELATED SERVICES IN NORTH
AMERICA
Vision Statement - A statement of what we are striving to be
(cid:1) Lithia envisions the future, develops and embraces a strategic plan, and ensures the
success of the plan.
(cid:1) We strive for strong, sustainable and profitable growth.
(cid:1) We speak a common language and execute best-in-class processes in all of our
operations.
(cid:1) We have a dynamic and dedicated leadership committed to the standards and mission of
Lithia.
(cid:1) We provide opportunities for our people to excel and grow in a positive, respectful work
environment.
(cid:1) Our customers choose us because of our professionalism, consistency, and the extra effort
we make to serve them.
(cid:1) Our investors choose us because we are a sound investment.
(cid:1) We hold ourselves to the highest ethical standards in how we treat our customers, our
stakeholders and each other.
INTERNAL CONTROLS
Lithia committed a substantial amount of resources to the Sarbanes Oxley Section 404 certification
process during 2004. Under Sarbanes Oxley, we are required to design, implement and test internal
policies and procedures. Our disclosure controls also must be certified to ensure our financial
statements are accurate. This examination was helpful in further refining our policies and procedures,
and as a result, we have a much stronger audit and control process. We are proud to say that Lithia
has received a clean bill of health with no identified material weaknesses or significant deficiencies.
CONCLUSION
Of the three original public auto retailers, who were the pioneers of public auto retailing in 1996, only
Lithia remains under its original management and operating plan. Our plan is well designed to grow the
company in a predictable and consistent manner. Our operating model has proven itself over the last
eight years to be effective and reliable. Lithia’s continued growth and margin improvements
demonstrate the benefit of having strong operating systems and a group of employees that are
dedicated to raising the performance of our stores. Our ability to integrate new stores, and improve the
performance of existing stores is better today than ever before. We take our mission statement and
the points in our vision statement seriously, and that is why we list them here. We are building Lithia for
long-term success, and we will continue to execute our plan with an eye towards what is best for the
long-term health of our company.
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, 2004
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. [ ]
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 $215,949,919, computed by reference to the last sales price ($24.78) 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, 2004).
The number of shares outstanding of the Registrant's common stock as of March 8, 2005 was: Class A:
15,352,102 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
2005 Annual Meeting of Shareholders.
LITHIA MOTORS, INC.
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
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, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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
Item 9B.
Other Information
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 and
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures
1
2
13
14
14
14
15
16
29
31
31
31
31
32
32
32
32
32
32
33
Item 1. Business
Forward Looking Statements and Risk Factors
PART I
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 future results, levels of activity, performance or 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 Room in Washington, D.C.
Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. The
SEC maintains an Internet site at http://www.sec.gov/ where you can obtain most of our SEC filings.
We also make available, free of charge on our website at www.lithia.com, our annual reports 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. The information found on our website is
not part of this Form 10-K. You can also obtain copies of these reports by contacting Investor
Relations at 541-776-6591.
Compliance with Section 303A of the NYSE Listed Company Manual
We confirm that we submitted a Section 12(a) CEO certification to the NYSE in 2004. We also
confirm that we filed with the SEC the Chief Executive Officer and Chief Financial Officer certifications
required under Section 302 of the Sarbanes-Oxley Act in 2003.
Overview
We are a leading operator of automotive franchises and retailer of new and used vehicles and
services. As of March 10, 2005, we offered 25 brands of new vehicles through 172 franchises in 87
stores in the Western United States and over the Internet. As of March 10, 2005, we operated 16
stores in Oregon, 11 in California, 11 in Washington, 9 in Texas, 7 in Idaho, 7 in Colorado, 7 in
Alaska, 6 in Nevada, 6 in Montana, 2 in South Dakota, 3 in Nebraska, 1 in Oklahoma and 1 in New
Mexico. 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 for our automotive customers.
2
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 2004, we achieved a gross margin of 16.8%.
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 87
stores, primarily through an aggressive acquisition program, increasing annual revenues from $143
million in 1996 to $2.7 billion in 2004. In addition, since our initial public offering through December
31, 2004, we have achieved compound annual growth rates of 45% per year for revenues, 42% per
year for net income and 20% per year for earnings per share, together with a 3.1% 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 2003.
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 21,650 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 many 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.
Profitability amongst automotive retailers can vary and depends in part on product mix, effective
management of inventory, marketing, quality control and responsiveness to customers. In 2003, new
vehicles accounted for an estimated 59.9% of industry revenues. The remaining 40.1% of revenues
3
were derived from used vehicles sales of 28.3% and service and parts sales of 11.8%. Finance and
insurance sales are included in the new and used vehicle sales numbers. Industry gross margins on
new vehicles were 5.4% in 2003.
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 46%, 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 10, 2005:
State
Oregon ............................
California .........................
Texas...............................
Washington .....................
Colorado..........................
Alaska..............................
Idaho ...............................
Nebraska.........................
Nevada ............................
Montana ..........................
South Dakota ..................
Oklahoma........................
New Mexico.....................
Total ...........................
Number of
Stores
16
11
9
11
7
7
7
3
6
6
2
1
1
87
Store
Location
CALIFORNIA
Concord
Fresno
Redding
Vacaville
Burlingame
Salinas
Santa Rosa
Fairfield
Lithia Chrysler Jeep Dodge 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 Chrysler Jeep Dodge of Santa
Rosa
Lithia Dodge of Fairfield
4
Number of
Franchises
35
25
19
18
14
11
12
6
10
13
3
2
4
172
Percent of
Total
Annualized
Revenue
16%
15
13
12
8
8
7
6
5
5
3
1
1
100%
Franchises
Dodge, Dodge Truck, Chrysler, Jeep
Ford
Nissan, Hyundai
Mazda, Suzuki
Chevrolet
Toyota, Scion
Toyota, Scion
Chrysler, Dodge, Dodge Truck, Jeep
Chevrolet
Chrysler, Dodge, Dodge Truck, Jeep
Dodge, Dodge Truck
Year
Opened/
Acquired
1997
1997
1998
1997
1998
1998
1996
2002
2003
2003/2004
2003
Location
OREGON
Eugene
Grants Pass
Klamath Falls
Medford
Oregon City
(Portland)
Roseburg
Springfield (Eugene)
COLORADO
Aurora (Denver)
Colorado Springs
Englewood (Denver)
Fort Collins
Thornton (Denver)
WASHINGTON
Bellevue (Seattle)
Issaquah (Seattle)
Kennewick
Renton
Richland
Seattle
Spokane
IDAHO
Boise
Caldwell
Pocatello
Twin Falls
NEVADA
Reno
Sparks
Store
Franchises
Lithia Chrysler Dodge of Eugene
Lithia Nissan of Eugene
Saturn of Eugene
Lithia’s Grants Pass Auto Center
Lithia Klamath Falls Auto Center
Dodge, Dodge Truck, Chrysler
Nissan
Saturn
Dodge, Dodge Truck, Chrysler, Jeep
Toyota, Scion, Dodge, Dodge Truck, Chrysler,
Lithia Chrysler Jeep Dodge
Lithia Honda
Lithia Nissan
Medford BMW
Lithia Toyota
Lithia Volkswagen
Saturn of Southwest Oregon
Jeep
Dodge, Dodge Truck, Chrysler, Jeep
Honda
Nissan
BMW
Toyota, Scion
Volkswagen
Saturn
Lithia Subaru of Oregon City
Lithia Ford Lincoln Mercury of Roseburg
Lithia Chrysler Jeep Dodge of Roseburg
Lithia Toyota of Springfield
Subaru
Ford, Lincoln, Mercury
Dodge, Dodge Truck, Chrysler, Jeep
Toyota, Scion
Lithia Dodge of Cherry Creek
Lithia Colorado Chrysler Jeep
Lithia Colorado Springs Jeep Chrysler
Lithia Centennial Chrysler Jeep
Lithia Chrysler of Fort Collins
Lithia Hyundai of Fort Collins
Lithia Volkswagen of Thornton
Dodge, Dodge Truck
Chrysler, Jeep
Jeep, Chrysler
Chrysler, Jeep
Dodge, Dodge Truck, Chrysler, Jeep
Hyundai
Volkswagen
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
Mercedes
Lithia Ford of Boise
Chevrolet of Boise
Lithia Lincoln-Mercury of Boise
Chevrolet of Caldwell
Honda of Pocatello
Lithia Chrysler Dodge Hyundai of
Pocatello
Chevrolet Cadillac of Twin Falls
Ford
Chevrolet
Lincoln, Mercury
Chevrolet
Honda
Chrysler, Dodge, Dodge Truck, Hyundai
Chevrolet, Cadillac
Lithia L/M/Audi Isuzu of Reno
Lithia Hyundai of Reno
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
Location
SOUTH DAKOTA
Sioux Falls
Store
Franchises
Chevrolet of Sioux Falls
Lithia Dodge of Sioux Falls
Chevrolet
Dodge, Dodge Truck
ALASKA
Anchorage
Fairbanks
Wasilla
TEXAS
San Angelo
Odessa
Midland
Grapevine
NEBRASKA
Omaha
MONTANA
Missoula
Billings
Helena
Great Falls
OKLAHOMA
Broken Arrow
NEW MEXICO
Santa Fe
Lithia Chrysler Jeep of Anchorage
Lithia Dodge of South Anchorage
Lithia Hyundai of Anchorage
Chevrolet of South Anchorage
BMW of Anchorage
Chevrolet Cadillac of Fairbanks
Chevrolet of Wasilla
Chrysler, Jeep
Dodge, Dodge Truck
Hyundai
Chevrolet, Saab
BMW
Chevrolet, Cadillac
Chevrolet
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
Lithia Toyota 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
Toyota, Scion
Dodge, Dodge Truck, Hyundai
Chevrolet
Dodge, Dodge Truck
Lithia Ford of Omaha
Mercedes-Benz of Omaha
Lithia Chrysler Jeep Dodge of Omaha
Ford
Mercedes
Chrysler, Jeep, Dodge, Dodge Truck
Lithia Auto Center of Missoula
Lithia Dodge of Billings
Chevrolet of Helena
Lithia Chrysler Dodge of Helena
Lithia Chrysler Jeep Dodge of Great
Falls
Honda of Great Falls
Chrysler, Dodge, Dodge Truck
Dodge, Dodge Truck
Chevrolet
Chrysler, Dodge, Dodge Truck
Dodge, Dodge Truck, Jeep
Honda
Lithia Dodge of Broken Arrow
Dodge, Dodge Truck
Lithia Chrysler Jeep Dodge of Santa Fe
Chrysler, Jeep, Dodge, Dodge Truck
Year
Opened/
Acquired
2000
2001
2001
2001
2003
2004
2004
2003
2004
2002
2002
2002
2002
2002
2004
2002
2002
2003
2002
2002
2005
2003
2003
2004
2004
2004
2004
2003
2004
6
New Vehicle Sales
In 2004, we sold 25 domestic and imported brands ranging from economy to luxury cars, sport utility
vehicles, minivans and light trucks.
Percent of
Total Revenue
Percent of
New Vehicle
Sales in
2004
22.7%
14.0
4.9
4.4
2.1
1.8
1.8
1.7
1.5
1.4
0.7
0.5
0.3
0.1
*
*
57.9%
39.6%
24.1
8.5
7.6
3.6
3.1
3.0
2.9
2.5
2.4
1.3
0.8
0.5
0.1
*
*
100.0%
2000
34,349
$833,107
$24,254
Manufacturer
DaimlerChrysler (Chrysler, Dodge, Jeep, Dodge Trucks)
General Motors (Chevrolet, Saturn, Cadillac, Hummer)
Ford (Ford, Lincoln, Mercury)
Toyota, Scion
BMW
Hyundai
Nissan
Honda
Subaru
Volkswagen, Audi
Mercedes
Mazda
Suzuki
Isuzu
Volvo
Saab
* Less than 0.1%
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…………………
2004
56,529
$1,589,613
$28,120
Year Ended December 31,
2002
2003
53,804
$1,441,000
$26,782
46,929
$1,218,364
$25,962
2001
37,190
$926,981
$24,926
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. However, high demand
vehicles often are in short supply. 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. We sell many of our
higher volume vehicles under our “Promo Price” program. This program markets vehicles at an
affordable price that is less than MSRP.
Used Vehicle Sales
At each new vehicle store, we also sell used vehicles. Used vehicle sales are an important part of
our overall profitability. In 2004, retail used vehicle sales generated a gross margin of 14.3%
compared with a gross margin of 7.8% for new vehicle sales. To enhance our sales efforts, we
employ a used vehicle manager at each location.
Since the beginning of 2002, the used vehicle market has been negatively impacted by strong
competition from the new vehicle market, with heavy manufacturer incentives in the form of cash
rebates and low interest financing. This trend continued throughout most of 2004. Towards the end
7
of 2004, there were signs of an improvement in the pricing side of the used vehicle market as a result
of decreased supply. Early indications are that this trend will continue into 2005.
We have implemented new procedures in the used vehicle business to help offset recent negative
trends as follows:
• We have begun conducting our own local used vehicle auctions in select markets and
managing the disposal of used vehicles at larger auctions. We no longer allow individual
stores to dispose of their excess inventories on their own. The process is centralized and
controlled at the management level.
• We have a “Used Vehicle Promo Pricing” strategy, which markets vehicles with a $99 down
payment and then groups vehicles by payment level. Vehicles are marked with clear and
understandable pricing, which reduces haggling and speeds up the sale process. This
strategy resolves the three biggest issues of price, down payment and monthly payment for
our customers and our sales personnel in a simple way.
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 2004, we sold approximately 74 retail used vehicles for every 100 new vehicles 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 normally
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 wholesale to other automotive retailers and
to other wholesalers used vehicles in poor condition and vehicles that have not sold promptly.
Our used vehicle sales from continuing operations were as follows:
Retail used vehicle units……………………..
Retail used vehicle sales (in thousands)…...
Average selling price.................................. ..
Wholesale used vehicle units .................... …
Wholesale used vehicle sales (in
thousands)……………………………………
Average selling price…………………………
2004
41,802
$630,910
$15,093
Year Ended December 31,
2002
40,781
$594,256
$14,572
2001
35,845
$480,848
$13,415
2003
41,451
$603,096
$14,550
2000
29,866
$392,017
$13,126
23,137
25,982
24,475
18,081
15,967
$124,912
$5,399
$122,451
$4,713
$121,504
$4,964
$83,201
$4,602
$70,055
$4,387
Total used vehicle units ............................. …
Total used vehicle sales (in thousands)….…
Average selling price………………………….
64,939
$755,822
$11,639
67,433
$725,547
$10,760
65,256
$715,760
$10,968
53,926
$564,049
$10,460
45,833
$462,072
$10,082
8
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 finance 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 2004, we had finance and insurance penetration for 81% of our new vehicle sales and 72% of our
retail used vehicle sales. Our average finance and insurance revenue per retail vehicle totaled $1,031
in 2004.
We earn a portion of the financing charge by discounting each finance contract we write and
subsequently sell to a lender. In 2004, 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 2004, 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. We 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 2004,
our service, body and parts operations generated $290.4 million in revenues, or 10.6% of total
revenues. We set prices to reflect the difficulty of the types of repair and the cost and availability of
parts.
9
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 2004, was purchased by 36% 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 that may occur in a
slow economic environment.
We operate eighteen collision repair centers: four in Texas, three in Oregon and two each in Idaho,
South Dakota and Alaska and one each in Washington, Montana, Colorado, Nevada, and Nebraska.
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 $18.3 million during 2004, with 40% of the total amount
used for print media, 17% for television, 13% for radio, 11% for Internet and 19% for direct mail and
other sources. 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
10
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.
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.
11
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;
•
• poor sales performance or low customer satisfaction index scores.
failure to maintain any license, permit or authorization required for the conduct of business; or
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. With respect to each brand of vehicles we market, 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.
12
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.
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 a 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 limited
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, 2004, we employed approximately 5,187 persons on a full-time equivalent basis.
Employees in the service and parts department at our Dodge store in Concord, California are
represented by a union collective bargaining agreement. 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, eighteen 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.
13
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.
On April 28, 2004, a lawsuit was filed against us in the United States District Court for the District of
Oregon: Robert Allen, et al., vs. Lithia Motors, Inc., et al., Civil Case No. 04-03032-CO. The
complaint seeks money damages from us for alleged federal and state RICO violations, violation of
Oregon's Unlawful Trade Practices Act and fraud, with respect to arranging the financing of vehicles.
Each of the 23 Allen plaintiffs seeks stated actual damages ranging from $733 to $20,859, damages
for mental distress ranging from $10,000 to $250,000, and punitive damages of $1,500,000. With
statutory penalties, the Allen plaintiffs seek actual damages that total less than $250,000, trebled,
approximately $3.0 million in mental distress claims and punitive damages of $34.5 million.
Management believes that if damages were assessed, most would be covered by insurance. The
case is still in its pleading stage and no depositions or document production has yet occurred. We
intend to vigorously defend this matter and management believes that the likelihood of a judgment for
the amount of damages sought is remote.
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,
2004.
PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our Class A common stock trades on the New York Stock Exchange under the symbol LAD. T h e
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 2003 and 2004:
2004
Quarter 1
Quarter 2
Quarter 3
Quarter 4
2003
Quarter 1
Quarter 2
Quarter 3
Quarter 4
$
$
High
30.79
28.86
24.93
26.95
16.05
17.35
24.20
25.95
$
$
Low
24.60
23.29
20.55
20.04
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 March 8, 2005 was 1,536 and 3,300, respectively. All shares of Lithia’s Class B
common stock are held by Lithia Holding Company LLC.
We declared and paid a dividend of $0.07 per share of Class A and Class B common stock for each
of the second, third and fourth quarters of 2003 and the first quarter of 2004, totaling approximately
$1.3 million each quarter. In addition, we declared and paid a dividend of $0.08 per share of Class A
and Class B common stock for each of the second, third and fourth quarters of 2004, totaling
approximately $1.5 million per quarter.
We currently intend to continue paying quarterly dividends similar to those paid in 2004. The payment
of any dividends is subject to the discretion of our Board of Directors. Pursuant to our $150 million
credit agreement with DaimlerChrysler Services North America LLC and Toyota Motor Credit
Corporation, total dividends and repurchases of our common stock cannot exceed $18.0 million over
14
the term of the agreement. To date, over the term of the agreement, we have paid dividends and
repurchased stock totaling $8.4 million. This credit agreement expires May 1, 2007. We did not
repurchase any shares of our common stock during the fourth quarter of 2004.
Information regarding securities authorized for issuance under equity compensation plans is included
in Item 12.
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
2004
Year Ended December 31,
2002
2003
2001
2000
Data:
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
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
Basic income per share from continuing
operations
Basic income (loss) per share from
discontinued operations
Basic net income per share
Shares used in basic per share
Diluted income per share from continuing
operations
Diluted income per share from
discontinued operations
Diluted net income per share
Shares used in diluted per share
(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
$
$
$
$
$
$
$ 1,589,613
755,822
290,386
101,374
8,592
2,745,787
2,285,851
459,936
349,946
13,143
96,847
(16,702)
(9,174)
(1,520)
$ 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)
69,451
(26,878)
42,573
98
42,671
2.27
0.00
2.27
18,773
$
$
$
59,198
(23,561)
35,637
(90)
35,547
1.95
(0.01)
1.94
18,289
$
$
$
$
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
(45)
32,316
1.88
0.00
1.88
17,233
$
$
$
$
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
646
21,754
1.58
0.05
1.63
13,371
$
$
$
$
833,107
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
38,153
(14,690)
23,463
850
24,313
1.72
0.06
1.78
13,652
2.12
$
1.92
$
1.84
$
1.55
$
1.70
$
$
0.01
2.13
20,647
2004
126,177
536,653
1,256,904
450,859
6,565
267,310
405,946
0.00
1.92
18,546
$
0.00
1.84
17,598
$
0.05
1.60
13,612
As of December 31,
2002
2003
$
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
2001
104,834
275,398
662,944
280,947
10,203
95,830
203,497
$
$
0.06
1.76
13,804
2000
98,917
314,290
628,003
314,137
5,342
72,586
181,775
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 eight 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 experienced and well-trained staff are all available to facilitate our continued
growth as the opportunities develop.
In keeping with this model, we acquired 10 stores with 21 franchises during 2004 with total estimated
annual revenues of approximately $340 million.
Historically, new vehicle sales have accounted for over half of our total revenues but less than one-
third of total gross profit. We use a volume-based strategy for new vehicle sales that was initiated in
2002. This strategy complements the goal of most auto manufacturers, which have continued to offer
a high level of cash or other incentives on purchases.
For 2005, we expect that manufacturers will continue to offer incentives on new vehicle sales through
a combination of rebates and low interest rate loans to consumers.
Since the beginning of 2002, the used vehicle market has been negatively impacted by strong
competition from the new vehicle market, with heavy manufacturer incentives in the form of cash
rebates and low interest financing. This trend in weak used vehicle unit demand continued throughout
2004. We have implemented new procedures in the used vehicle business to help offset recent
negative trends as follows:
• We have begun conducting our own local used vehicle auctions in select markets and
managing the disposal of used vehicles at larger auctions. We no longer allow individual
stores to dispose of their excess inventories on their own. The process is centralized and
controlled at the management level.
• We utilize a “Used Vehicle Promo Pricing” strategy, which markets vehicles with a $99 down
payment and then groups vehicles by payment level. Vehicles are marked with clear and
understandable pricing, which reduces haggling and speeds up the sale process. This
strategy resolves the three biggest issues of price, down payment and monthly payment for
our customers and our sales personnel in a simple way.
In addition, as a complement to our ongoing used vehicle operation at each store, we use specialists
in our support services group to increase the acquisition of used vehicles. We believe that this will
help bolster sales volumes in the 3 to 7 year old vehicle range.
16
Results of Continuing Operations
Certain revenue, gross margin and gross profit information by product line was as follows for 2004,
2003 and 2002:
2004
New vehicles ..........................................................................................
Used vehicles .........................................................................................
Finance and insurance(1) ........................................................................
Service, body and parts .........................................................................
Fleet and other…………………………………………………………….
2003
New vehicles ..........................................................................................
Used vehicles .........................................................................................
Finance and insurance(1) ........................................................................
Service, body and parts .........................................................................
Fleet and other…………………………………………………………….
2002
New vehicles ..........................................................................................
Used vehicles .........................................................................................
Finance and insurance(1) ........................................................................
Service, body and parts .........................................................................
Fleet and other…………………………………………………………….
(1) Reported net of anticipated cancellations.
Percent of
Total Revenues
57.9%
27.5
3.7
10.6
0.3
Percent of
Total Revenues
57.3%
28.9
3.6
10.0
0.2
Percent of
Total Revenues
53.6%
31.6
3.4
9.5
1.9
Gross
Margin
7.8%
12.4
99.6
48.1
14.0
Gross
Margin
7.7%
11.5
99.7
47.2
19.1
Gross
Margin
8.5%
10.1
99.4
48.0
2.1
Percent of Total
Gross Profit
27.0%
20.3
22.0
30.4
0.3
Percent of Total
Gross Profit
27.4%
20.6
22.3
29.4
0.3
Percent of Total
Gross Profit
28.9%
20.1
21.6
29.1
0.3
The following table sets forth selected condensed financial data expressed as a percentage of total
revenues for the periods indicated below.
Lithia Motors, Inc. (1)
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
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.
Year Ended December 31,
2003
2004
2002
57.9%
27.5
3.7
10.6
0.3
100.0%
16.8
12.7
0.5
3.5
0.6
0.3
0.1
2.5
1.0
1.6%
57.3%
28.9
3.6
10.0
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
3.4
9.5
1.9
100.0%
15.7
12.3
0.3
3.1
0.5
0.3
0.0
2.3
0.9
1.4%
17
The following tables set forth the changes in our operating results from continuing operations in 2004
compared to 2003 and in 2003 compared to 2002:
(In Thousands)
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
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
Average selling price per used vehicle
Finance and insurance sales per retail unit
(In thousands)
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
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,
2004
2003
Increase
(Decrease)
%
Increase
(Decrease)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,589,613
755,822
101,374
290,386
8,592
2,745,787
2,285,851
459,936
349,946
13,143
96,847
(16,702)
(9,174)
(1,520)
1,441,000
725,547
89,982
251,316
5,657
2,513,502
2,110,393
403,109
313,289
9,593
80,227
(13,997)
(6,081)
(951)
69,451
26,878
42,573
$
59,198
23,561
35,637
Year Ended
December 31,
2004
2003
56,529
28,120
64,939
11,639
1,031
$
$
$
53,804
26,782
67,433
10,760
945
Year Ended
December 31,
2003
2002
$
1,441,000
725,547
89,982
251,316
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
77,776
216,382
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
$
148,613
30,275
11,392
39,070
2,935
232,285
175,458
56,827
36,657
3,550
16,620
2,705
3,093
569
10,253
3,317
6,936
Increase
(Decrease)
2,725
1,338
(2,494)
879
86
Increase
(Decrease)
222,636
9,787
12,206
34,934
(37,457)
242,106
196,689
45,417
32,979
2,401
10,037
3,222
96
362
6,357
3,081
3,276
10.3%
4.2
12.7
15.5
51.9
9.2
8.3
14.1
11.7
37.0
20.7
19.3
50.9
59.8
17.3
14.1
19.5%
%
Increase
(Decrease)
5.1%
5.0%
(3.7)%
8.2%
9.1%
%
Increase
(Decrease)
18.3%
1.4
15.7
16.1
(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%
18
New units sold
Average selling price per new vehicle
Used units sold
Average selling price per used vehicle
Finance and insurance sales per retail unit
Year Ended
December 31,
2003
2002
53,804
26,782
67,433
10,760
945
$
$
$
46,929
25,962
65,256
10,968
887
$
$
$
Increase
(Decrease)
6,875
820
2,177
(208)
58
$
$
$
%
Increase
(Decrease)
14.6%
3.2%
3.3%
(1.9)%
6.5%
Revenues
Total revenues increased 9.2% and 10.7%, respectively, in 2004 compared to 2003 and in 2003
compared to 2002, primarily as a result of acquisitions. In addition, increases in the average new and
used vehicle sales prices in 2004 compared to 2003 and in the average new vehicle sales prices in
2003 compared to 2002 contributed to the revenue increases. The 2004 increase was offset by a
same-store sales decline of 2.4%, while 2003 had a 1.2% same-store sales increase. Same-store
sales percentage increases (decreases) were as follows:
New vehicles
Used vehicles
Finance and insurance
Service, body and parts
Total sales
2004 compared to 2003
(2.4)%
(5.7)
1.9
3.0
(2.4)
2003 compared to 2002
6.2%
(8.8)
5.1
0.7
1.2
Same-store sales are calculated by dealership comparing only those months that contain full-month
operating data.
The automotive retailing industry reported an increase in new vehicle sales of approximately 1.5% in
2004 and a decline of 1.0% in 2003.
Our new vehicle same store sales were down in 2004 because of a slower sales environment in our
markets and a difficult comparison from the prior year of up 6.2%. Used vehicle same store sales
were negatively affected in both 2004 and 2003 because of continued manufacturer incentives on
new vehicles which led to continued weakness in the used vehicle market.
Penetration rates for certain products were as follows:
Finance and insurance
Service contracts
Lifetime oil change and filter
2004
77%
43
36
2003
75%
41
34
2002
75%
40
30
The improvements in same-store service, body and parts revenue in 2004 compared to 2003 and in
2003 compared to 2002 were a result of our continued focus on service-advisor training and our
Lifetime Oil Program. We continue to experience positive same-store sales growth in the customer-
pay side of the business. Conversely, improvements in the quality of Chrysler, General Motors, Ford
and Toyota vehicles, which comprise approximately 80% of our total new vehicle sales, have resulted
in declines in warranty work for these brands. Other brands continue to demonstrate increases in
same-store warranty sales.
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.
19
Gross Profit
Gross profit increased $56.8 million in 2004 compared to 2003 and increased $45.4 million in 2003
compared to 2002 due primarily to increased total revenues, as well as increases in our overall gross
margin. Gross margins achieved were as follows:
New vehicles .......................................................
Retail used vehicles............................................
Wholesale used vehicles ....................................
Finance and insurance .......................................
Service and parts ................................................
Overall ................................................................
New vehicles .......................................................
Retail used vehicles............................................
Wholesale used vehicles ....................................
Finance and insurance .......................................
Service and parts ................................................
Overall ................................................................
Year Ended December 31,
2004
7.8%
14.3
2.9
99.6
48.1
16.8
2003
7.7%
13.8
(0.2)
99.7
47.2
16.0
Year Ended December 31,
2003
7.7%
13.8
(0.2)
99.7
47.2
16.0
2002
8.5%
12.5
(1.7)
99.4
48.0
15.7
Lithia
Margin Change*
10bp
50
310
(10)
90
80
Lithia
Margin Change*
(80)bp
130
150
30
(80)
30
____________
* “bp” stands for basis points (one hundred basis points equals one percent).
The increase in the overall gross profit margin in 2004 compared to 2003 was a result of
improvements in the margins achieved on our new and used vehicle businesses as well as on our
service and parts business. Additionally, the increase in our high-margin service and parts revenue
as a percentage of total revenue also positively affected our gross margins.
Because of the slower new vehicle sales environment
in 2004, we implemented internal directives
aimed at generating more gross profit per vehicle sold. We were able to achieve improved margins
on our new vehicles in 2004 compared to 2003. This compares to a higher volume, lower margin
strategy that was in place in 2003.
In 2004, we have been able to improve the margins on our used vehicle sales primarily because of
the strategies discussed above regarding the auctioning of undesired used vehicles and our “Used
Vehicle Promo Pricing” for our retail sales.
Our focus on service advisor training, which has led to gains in sales of higher margin service items,
and cost saving initiatives across all service, parts and body shop business lines has resulted in
improved gross margins in this area in 2004 compared to 2003.
Our overall gross margin increased in 2003 compared to 2002 primarily because of 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. The increase in the used vehicle gross margin also
contributed to a same store increase in total gross profit dollars per used vehicle sold.
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.
20
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 $36.7 million in 2004 compared to 2003 and increased $33.0 million in 2003 compared to
2002. The increases in dollars spent are due to increased selling, or variable, expenses related to the
increases in revenues and the number of locations, as well as increases related to compliance with
the Sarbanes-Oxley Act of 2002. SG&A as a percentage of sales will increase when the service and
parts revenue contribution increases relative to total sales due to its higher SG&A component.
Because of this, a better gauge is the trend of SG&A as a percentage of gross profit. SG&A as a
percentage of gross profit improved 160 and 70 basis points, respectively, in 2004 compared to 2003
and in 2003 compared to 2002. The increase as a percentage of revenue in 2003 compared to 2002
was also due partially to higher advertising and sales compensation expenses related to our
aggressive new vehicle marketing during 2003.
Depreciation and Amortization
Depreciation and amortization increased $3.6 million and $2.4 million, respectively, in 2004 compared
to 2003 and in 2003 compared to 2002 due to the addition of property and equipment related to our
acquisitions, as well as leasehold improvements to existing facilities.
Income from Operations
Operating margins in 2004 improved by 30 basis points to 3.5% compared to 3.2% in 2003 and by 10
basis points in 2003 from 3.1% in 2002. The increases are primarily because of improved overall
gross profit margin as discussed above, partially offset by an increase in operating expenses.
Floorplan Interest Expense
The $2.7 million increase in floorplan interest expense in 2004 compared to 2003 resulted primarily
from a $62.3 million increase in the average outstanding balances of our floorplan facilities, mainly
due to acquisitions, and an increase of $473,000 resulting from our interest rate swaps. In addition
an increase in the average interest rates charged on our floorplan facilities increased floorplan
interest expense by $468,000.
The $3.2 million increase in floorplan interest expense in 2003 compared to 2002 resulted primarily
from an approximately $2.8 million increase in expense as a result of an increase in the average
outstanding balances of our floorplan facilities, mainly because of acquisitions. In addition, increased
expense from interest rate swaps was responsible for $1.1 million of the increase. These increases
were offset in part by a decrease in the LIBOR and the prime rates in 2003 compared to 2002.
Other Interest Expense
Other interest expense includes interest on our convertible notes, debt incurred related to
acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes.
Other interest expense increased $3.1 million in 2004 compared to 2003. Changes in the weighted
average interest rate on our debt in 2004 compared to 2003 increased other interest expense by
approximately $753,000 and changes in the average outstanding balances resulted in an increase of
approximately $2.3 million. Interest expense related to the $85.0 million of convertible notes that were
issued in May 2004 totals approximately $764,000 per quarter, which consists of $611,000 of
contractual interest and $153,000 of amortization of debt issuance costs.
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.
21
Income Tax Expense
Our effective tax rate was 38.7% in 2004 compared to 39.8% in 2003 and 38.8% in 2002. 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 increased in 2004 compared to 2003
as a result of improvements in gross margins that were partially offset by increased operating
expenses and interest expense as discussed above.
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.
Discontinued Operations
During 2003, we decided to sell certain 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. During the third quarter of 2004, we disposed of one of the franchises included with the
store we had held for sale, which resulted in a gain of $212,000, net of tax. In the fourth quarter of
2004, we disposed of the remaining franchise, which resulted in a loss of $20,000, net of tax. In
addition, in 2004, we recognized losses from operations of the discontinued operations of $88,000
and a $6,000 loss from discontinued operations that were disposed of in 2003. At December 31,
2004, we did not have any assets held for sale related to discontinued operations.
We continually monitor the performance of each of our stores and make determinations to sell based
on return on capital criteria.
Interest expense is allocated to stores classified in discontinued operations for actual flooring interest
expense directly related to the new vehicles in the store. Interest expense related to the used vehicle
line of credit is allocated based on total used vehicle inventory of the store, and interest expense
related to the equipment line of credit is allocated based on the amount of fixed assets.
22
Selected Consolidated Quarterly Financial Data
The following tables set forth our unaudited quarterly financial data(1).
Three Months Ended,
December 31
March 31
June 30 September 30
(in thousands, except per share data )
2004
Revenues:
New vehicle .........................................................................
Used vehicle ........................................................................
Finance and insurance………………………………….....
Service, body and parts ......................................................
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, net...............................................................................
Income from continuing operations before income taxes.....
Income taxes .........................................................................
Income before discontinued operations................................
Discontinued operations, net of tax.......................................
Net income ............................................................................
$353,601
189,906
23,385
69,426
1,531
637,849
531,615
106,234
85,187
2,954
18,093
(3,616)
(1,740)
(339)
12,398
(4,836)
7,562
(83)
$ 7,479
$400,217
184,186
24,744
71,753
1,367
682,267
566,328
115,939
88,565
3,089
24,285
(4,123)
(2,157)
(358)
17,647
(6,882)
10,765
75
$ 10,840
$451,005
198,534
28,029
74,617
3,708
755,893
631,327
124,566
90,362
3,254
30,950
(4,498)
(2,464)
(502)
23,486
(9,159)
14,327
143
$ 14,470
$384,790
183,196
25,216
74,590
1,986
669,778
556,581
113,197
85,832
3,846
23,519
(4,465)
(2,813)
(321)
15,920
(6,001)
9,919
(37)
$ 9,882
Basic income per share from continuing operations ............
Basic income (loss) per share from discontinued
operations..............................................................................
Basic net income per share...................................................
$ 0.41
$ 0.57
$ 0.76
$ 0.52
(0.01)
$ 0.40
0.01
$ 0.58
0.01
$ 0.77
0.00
$ 0.52
Diluted income per share from continuing operations..........
Diluted income (loss) per share from discontinued
operations..............................................................................
Diluted net income per share ................................................
$ 0.40
$ 0.54
$ 0.69
$ 0.48
(0.01)
$ 0.39
0.00
$ 0.54
0.01
$ 0.70
0.00
$ 0.48
Three Months Ended,
December 31
March 31
June 30 September 30
(in thousands except per share data )
2003
Revenues:
New vehicle .........................................................................
Used vehicle ........................................................................
Finance and insurance…………………………...
Service, body and parts ......................................................
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, net...............................................................................
Income from continuing operations before income taxes.....
Income taxes .........................................................................
Income before discontinued operations................................
Discontinued operations, net of tax.......................................
Net income ............................................................................
$308,494
172,096
20,410
56,485
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
$363,845
191,092
22,478
61,032
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
Basic income per share from continuing operations ............
Basic loss per share from discontinued operations..............
Basic net income per share...................................................
$ 0.24
(0.01)
$ 0.23
$ 0.47
0.00
$ 0.47
Diluted income per share from continuing operations..........
Diluted income (loss) per share from discontinued
operations..............................................................................
Diluted net income per share ................................................
$ 0.24
$ 0.47
(0.01)
$ 0.23
(0.01)
$ 0.46
(1) Quarterly data may not add to yearly totals due to rounding.
23
$411,358
196,280
25,071
67,849
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
$ 0.69
0.00
$ 0.69
$357,303
166,079
22,023
65,950
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
$ 0.52
0.01
$ 0.53
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 in certain of our markets and the
reduced number of business days during the holiday season. As a result, financial performance is
expected to 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. Acquisitions
have also been a 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 and private debt offerings
to finance operations and expansion. In addition, in May 2004, we closed an $85.0 million private debt
offering. We believe that our available cash, cash equivalents, available lines of credit, cash received
from our debt offering in May 2004 and cash flows from operations will be sufficient to meet our
anticipated operating expenses and capital requirements for at least 24 to 36 months from December
31, 2004.
Our inventories increased to $536.7 million at December 31, 2004 from $445.3 million at December 31,
2003 due primarily to acquisitions and our decision to purchase a greater stock of 2005 vehicles in
December of 2004. This was a strategic decision designed to strengthen our ties with our manufacturer
partners, get a better allocation of popular models and have good inventories going into the spring
selling season so we can take advantage of anticipated strong incentives. Our new and used flooring
notes payable increased to $450.9 million at December 31, 2004 from $435.2 million at December 31,
2003 due to acquisitions and higher new vehicle days supply, partially offset by the use of the proceeds
from our $85.0 million convertible notes to pay down used vehicle flooring. New vehicles are financed
at approximately 100% and used vehicles are financed at approximately 80% of cost. Our days supply
of new vehicles increased by approximately 12 days at December 31, 2004 compared to December 31,
2003. Our days supply of used vehicles increased by approximately 1 day at December 31, 2004
compared to December 31, 2003. We believe that our new and used vehicle inventories are at
appropriate levels at this time.
Assets held for sale of $135,000 at December 31, 2004 relate to a building held for sale.
As a result of the acquisition of 12 stores in 2004, our goodwill and other intangibles increased $53.2
million to $289.2 million at December 31, 2004, compared to $236.0 million at December 31, 2003.
Cash paid for acquisitions, net of cash received, in 2004 was $79.4 million.
Our Board of Directors declared a dividend on our Class A and Class B common stock of $0.07 per
share for both the fourth quarter of 2003 and the first quarter of 2004, both of which were paid in 2004
and totaled approximately $1.3 million each. Our Board of Directors also declared a dividend on our
Class A and Class B common stock of $0.08 per share for each of the second, third and fourth quarters
of 2004, two of which were paid in 2004 and one in March 2005, and totaled approximately $1.5 million
each. 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 December 2004, we have purchased a total of 60,000 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
24
tangible return to our shareholders without reducing our already limited market float, which occurs when
we repurchase shares.
We have a working capital and used vehicle flooring credit facility with DaimlerChrysler Services North
America LLC and Toyota Motor Credit Corporation, as amended in June 2004, totaling up to $150
million, which expires May 1, 2007 with an option for the lenders to extend to May 1, 2008, with interest
due monthly. This credit facility is cross-collateralized and secured by cash and cash equivalents, new
and used vehicles on a subordinated basis to the extent not specifically financed by other lenders, parts
inventories, accounts receivable, intangible assets and equipment. We pledged to DaimlerChrysler
Services and Toyota Motor Credit the stock of all of our dealership subsidiaries except entities operating
BMW, Honda, Nissan or Toyota stores.
The financial covenants in our agreement with DaimlerChrysler Services and Toyota Motor Credit
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, 2004, we were in compliance with all of
the covenants of this agreement.
Ford Motor Credit, General Motors Acceptance Corporation and Volkswagen Credit have agreed to
floor all of our new vehicles for their respective brands with DaimlerChrysler Services North America
LLC 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 revolving credit real estate line with Toyota Motor Credit totaling $40 million, which
expires in May 2005. The advances are secured by the real estate financed under this line of credit.
We have a credit facility with U.S. Bank N.A., which provides for a $50.0 million revolving line of credit
for leased vehicles and equipment purchases and expires April 30, 2006. The financial covenants in our
agreement with U.S. Bank N.A. require us to maintain compliance with, among other things, (i) a
specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a minimum total net worth; and
(iv) a minimum tangible net worth. At December 31, 2004, we were in compliance with all of the
covenants of this agreement.
Interest rates on all of the above facilities ranged from 4.05% to 5.15% at December 31, 2004.
Amounts outstanding on the lines at December 31, 2004 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, 2004
Remaining Availability as
of December 31, 2004
$450,859
-
-
40,686
$491,545
$ *
150,000
40,000
9,314
$199,314
_________
* There are no formal limits on the new and program vehicle lines with certain lenders.
In May 2004, we sold $85.0 million of 2.875% senior subordinated convertible notes due 2014
through a Rule 144A offering to qualified institutional buyers. We will also pay contingent interest on
the notes during any six-month interest period beginning May 1, 2009, in which the trading price of
the notes for a specified period of time equals or exceeds 120% of the principal amount of the notes.
Net proceeds from this offering were approximately $82.5 million and were used to pay down our
working capital and used vehicle line and new vehicle flooring notes payable. The notes are
convertible into shares of our Class A common stock at a price of $37.69 per share upon the
satisfaction of certain conditions and upon the occurrence of certain events as follows:
25
•
•
•
•
•
if, prior to May 1, 2009, and during any calendar quarter, the closing sale price of our
common stock exceeds 120% of the conversion price for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the preceding calendar quarter;
if, after May 1, 2009, the closing sale price of our common stock exceeds 120% of the
conversion price;
if, during the five business day period after any five consecutive trading day period in which
the trading price per $1,000 principal amount of notes for each day of such period was less
than 98% of the product of the closing sale price of our common stock and the number of
shares issuable upon conversion of $1,000 principal amount of the notes;
if the notes have been called for redemption; or
upon certain specified corporate events.
Any declaration and payment of a dividend in excess of $0.08 per share per quarter will result in an
adjustment in the conversion rate for the notes.
The notes are redeemable at our option beginning May 6, 2009 at the redemption price of 100% of
the principal amount plus any accrued interest. The holders of the notes can require us to repurchase
all or some of the notes on May 1, 2009 and upon certain events constituting a fundamental change
or a termination of trading. A fundamental change is any transaction or event in which all or
substantially all of our common stock is exchanged for, converted into, acquired for, or constitutes
solely the right to receive, consideration that is not all, or substantially all, common stock that is listed
on, or immediately after the transaction or event, will be listed on, a United States national securities
exchange. A termination of trading will have occurred if our common stock is not listed for trading on
a national securities exchange or the NASDAQ stock market.
We filed a registration statement on Form S-3 with the Securities and Exchange Commission on July
26, 2004 covering the resale of the notes and the common stock issuable upon conversion of the
notes. The registration statement was declared effective by the Securities and Exchange Commission
in October 2004.
Contractual Payment Obligations
A summary of our contractual commitments and obligations as of December 31, 2004 is as follows (in
thousands):
Contractual
Obligation
Floorplan Notes
Lines of Credit and
Long-Term Debt
Interest on Scheduled
Debt Payments
Capital Commitments
Operating Leases
Total
450,859
273,875
63,214
14,662
120,359
922,969
$
$
2005
450,859
6,565
10,345
14,662
18,656
501,087
$
$
$
$
Payments Due By Period
2006 and
2007
2008 and
2009
-
$
-
$
2010 and
beyond
-
58,222
59,761
149,327
20,195
-
33,813
112,230
13,903
-
28,520
102,184
18,771
-
39,370
207,468
$
$
Our capital commitments of $14.7 million at December 31, 2004 were for the construction of five new
facilities, additions to three existing facilities and the remodel of one facility. The new facilities will be for
our Chevrolet dealership in Fairbanks, Alaska, our Toyota dealership in Springfield, Oregon, our
Chevrolet and Hyundai dealerships in Odessa, Texas and a body shop also in Odessa, Texas. We
have already incurred $11.5 million for these projects and anticipate incurring the remaining $14.7
million in 2005. 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.
26
In addition, we have recorded a reserve for our estimated contractual obligations related to potential
charge-backs for vehicle service contracts, lifetime oil change contracts and other various insurance
contracts that are terminated early by the customer. At December 31, 2004, this reserve totaled $11.8
million. Based on past experience, we estimate that the $11.8 million will be paid out as follows: $6.9
million in 2005; $3.2 million in 2006; $1.2 million in 2007; $0.4 million in 2008; and $0.1 million
thereafter.
Critical Accounting Policies and Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted 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.
Our most critical accounting estimates include service contract and lifetime oil contract income
recognition, finance fee income recognition, workers’ compensation insurance premium accrual,
executive bonus 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, 2004 and 2003, this reserve
totaled $11.2 million and $9.8 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, 2004 and 2003, this reserve totaled $258,000 and
$403,000, respectively, and is included in accrued liabilities on our consolidated balance sheets.
27
Workers’ Compensation Insurance Premium Accrual
Insurance premiums are paid for under a three-year 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 and,
as of December 31, 2004, the accrual was $2.5 million. 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.
Executive Bonuses
We make certain estimates, judgments and assumptions regarding the likelihood of our attainment,
and the level thereof, of the annual bonus criteria under our Discretionary Executive Bonus Program
in order to record bonus expense on a quarterly basis. We accrue the estimated year-end expense on
a pro-rata basis throughout the year based on bonus attainment expectations. These estimates,
judgments and assumptions are made quarterly based on available information and take into
consideration the historical seasonality of our business and current trends. If actual year-end results
differ materially from our estimates, the amount of bonus expense recorded in a particular quarter
could be significantly over or under estimated. The bonus accrual at the end of any given year is
accurate and reflective of actual results attained.
Intangible Assets
We review our goodwill and other identifiable non-amortizable 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 2004 and 2003, we concluded that there was no
impairment. At December 31, 2004 and 2003, goodwill and other identifiable non-amortizable
intangible assets totaled $289.2 million and $236.0 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 19 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.
28
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, variable rate mortgage notes payable and other credit line
borrowings subject us to market risk exposure. At December 31, 2004, we had $546.5 million
outstanding under such agreements at interest rates ranging from 4.05% to 6.44% per annum. A
10% increase in interest rates would increase annual interest expense by approximately $887,000,
net of tax, based on amounts outstanding at December 31, 2004.
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.
Based on open market trades, we determined that our $85.0 million of long-term convertible fixed
interest rate debt issued in May 2004 had a fair market value of approximately $84.7 million at
December 31, 2004. In addition, at December 31, 2004, we had $93.3 million of other long-term fixed
interest rate debt outstanding with maturity dates of between November 2005 and May 2022. Based
on discounted cash flows, we have determined that the fair market value of this long-term fixed
interest rate debt was approximately $89.3 million at December 31, 2004.
Hedging Strategies
We believe it is prudent to limit the variability of a portion of our interest payments. Accordingly, we
have entered into interest rate swaps to manage the variability of our interest rate exposure, thus
leveling a portion of our interest expense in a rising or falling rate environment.
We 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, 2004, 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
29
•
•
effective March 9, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.25%
per annum, variable rate adjusted on the 1st and 16th of each month;
effective March 18, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.10%
per annum, variable rate adjusted on the 1st and 16th 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, 2004 was 2.40% 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, 2004
were $1.9 million and $(644,000), 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 $2.5 million, $2.2 million and $1.5 million,
respectively, in 2004, 2003 and 2002. 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, 2002 was
approximately $853,000, $1.4 million and $189,000, respectively, in 2004, 2003 and 2002. 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 $383,000 and $189,000, respectively, in
2003 and 2002. Interest expense, net of tax, on un-hedged debt increased during 2004 by
approximately $571,000 as a result of increasing interest rates during 2004. As of December 31,
2004, approximately 51% of our total debt outstanding was subject to un-hedged variable rates of
interest.
At current interest rates, we estimate that we will incur additional interest expense, net of tax, of
approximately $1.6 million related to our interest rate swaps during 2005.
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 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.
30
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, 2004 is included in Item 7.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Management’s Report on Internal Controls Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal controls over
financial reporting, as such term is defined in Exchange Act Rules 13a –15(f). Under the supervision
and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal controls over financial
reporting based on the framework in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation
under the framework in Internal Control – Integrated Framework, our management concluded that our
internal controls over financial reporting were effective as of December 31, 2004.
Management’s assessment of the effectiveness of our internal controls over financial reporting as of
December 31, 2004, as well as our consolidated financial statements, have been audited by KPMG
LLP, an independent registered public accounting firm, as stated in their reports, which are included
herein.
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.
Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief
Executive Officer, our Chief Financial Officer and our Chief Accounting 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 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 Chief Executive Officer, our Chief Financial Officer and our Chief
Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
Item 9B. Other Information
We reported in a timely manner all events required to be reported on Form 8-K in the fourth quarter of
2004.
31
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 2005 Annual Meeting of Shareholders and is incorporated herein by reference.
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 2005 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 2005 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 2005 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information required by this item will be included under the caption Independent Auditors in the Proxy
Statement for our 2005 Annual Meeting of Shareholders and is incorporated herein by reference.
Item 15. Exhibits and Financial Statement Schedules
PART IV
Except for exhibits 31.1, 31.2, 32.1 and 32.2, this section has been intentionally omitted.
32
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 15, 2005
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
15, 2005:
Signature
Title
/s/ SIDNEY B. DEBOER
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
/s/ JEFFREY B. DEBOER
Jeffrey B. DeBoer
Senior Vice President and Chief Financial Officer
(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
33
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.1
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)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) 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
(d) 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; and
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 15, 2005
/s/Sidney B. DeBoer
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
Lithia Motors, Inc.
34
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
EXHIBIT 31.2
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)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
(c) 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
(d) 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; and
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 15, 2005
/s/Jeffrey B. DeBoer
Jeffrey B. DeBoer
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.
35
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
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, 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 15, 2005
36
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(b) OR RULE 15d-14(b)
OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
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 15, 2005
37
Report of Independent Registered Public Accounting Firm
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
consolidated 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 financial position of Lithia Motors, Inc. and subsidiaries as of December 31, 2004 and
2003, and the results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of Lithia Motors, Inc.’s internal control over financial reporting
as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 11, 2005 expressed an unqualified opinion on management’s assessment of, and
the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Portland, Oregon
March 11, 2005
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Lithia Motors, Inc. and Subsidiaries:
We have audited management's assessment, included in the accompanying Management’s Report on Internal
Controls Over Financial Reporting, that Lithia Motors, Inc. and subsidiaries maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Lithia
Motors, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, evaluating management's
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company; and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management's assessment that Lithia Motors, Inc. maintained effective internal control over
financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established
in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Also, in our opinion, Lithia Motors, Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of Lithia Motors, Inc. and subsidiaries as of December 31, 2004
and 2003, and the related consolidated statements of operations, changes in shareholders’ equity and
comprehensive income and cash flows for each of the years in the three-year period ended December 31, 2004,
and our report dated March 11, 2005 expressed an unqualified opinion on those consolidated financial
statements.
/s/ KPMG LLP
Portland, Oregon
March 11, 2005
F-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands)
December 31,
2004
2003
Assets
Current Assets:
Cash and cash equivalents
Contracts in transit
Trade receivables, net of allowance for doubtful
accounts of $436 and $462
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 $8,110 and $5,683
Equipment and other, net of accumulated
depreciation of $25,922 and $18,315
Goodwill
Other intangible assets, net of accumulated
amortization of $63 and $39
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
Deferred income taxes
Total Current Liabilities
Used vehicle flooring facility
Real estate debt, less current maturities
Other long-term debt, less current maturities
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 15,142 and 14,693
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 income (loss)
Retained earnings
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$
29,264
42,913
$
74,408
44,709
42,407
445,281
5,747
3,392
20,408
585
636,937
164,676
62,637
207,027
28,946
2,559
1,102,782
378,961
14,299
24,402
46,164
13,045
-
476,871
56,267
80,159
98,308
8,110
24,141
743,856
41,576
536,653
5,494
6,840
135
-
662,875
226,356
73,275
244,532
44,649
5,217
1,256,904
450,859
6,565
26,821
52,043
-
410
536,698
-
139,702
127,608
10,611
36,339
850,958
$
$
-
-
215,333
208,187
468
1,811
789
187,545
405,946
1,256,904
$
468
1,231
(1,468)
150,508
358,926
1,102,782
$
$
$
See accompanying notes to consolidated financial statements.
F-3
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share amounts)
Revenues:
New vehicle
Used vehicle
Finance and insurance
Service, body and parts
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 expense, 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 $62, $(59) and $(29)
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 per share calculations
Diluted income per share from continuing operations
Diluted income per share from discontinued
operations
Diluted net income per share
2004
Year Ended December 31,
2003
2002
1,589,613
755,822
101,374
290,386
8,592
2,745,787
2,285,851
459,936
349,946
2,847
10,296
96,847
(16,702)
(9,174)
(1,520)
(27,396)
69,451
(26,878)
42,573
98
42,671
2.27
0.00
2.27
18,773
2.12
0.01
2.13
$
$
$
$
$
$
1,441,000
725,547
89,982
251,316
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
18,289
1.92
0.00
1.92
$
$
$
$
$
$
1,218,364
715,760
77,776
216,382
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
0.00
1.88
17,233
1.84
0.00
1.84
$
$
$
$
$
$
Shares used in diluted per share calculations
20,647
18,546
17,598
See accompanying notes to consolidated financial statements.
F-4
LITHIA MOTORS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income
For the years ended December 31, 2002, 2003 and 2004
(In thousands, except share data)
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
Reversal of net derivative losses previously
recorded due to their recognition in our
statement of operations as incremental
interest expense, 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
Reversal of net derivative losses previously
recorded due to their recognition in our
statement of operations as incremental
interest expense, 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 common stock
Balance at December 31, 2003
Comprehensive income:
Net income
Cash flow hedges:
Net derivative losses, net of tax effect
of $116
Reversal of net derivative losses previously
recorded due to their recognition in our
statement of operations as incremental
interest expense, net of tax effect of $(1,585)
Total comprehensive income
Issuance of stock in connection with
employee stock plans
Repurchase of Class A common stock
Compensation for stock option issuances
and tax benefits from option exercises
Dividends paid
Balance at December 31, 2004
Series M Preferred Stock
Amount
Shares
9,676
$
5,806
Common Stock
Class A
Class B
Shares
8,894,107
$
Amount
113,553
Shares
4,039,719
$
Amount
502
$
Accumulated
Other
Compre-
hensive
Income
(Loss)
Additional
Paid In
Capital
507
$
(2,091)
$
Retained
Earnings
85,220
Total
Stockholders'
Equity
203,497
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(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
-
-
-
-
-
-
449,847
(600)
7,159
(13)
-
-
-
-
-
-
-
-
-
-
-
-
3,762,231
-
-
-
-
-
-
-
15,142,074
$
215,333
3,762,231
$
-
-
-
-
-
-
-
-
(34)
-
468
-
-
-
-
-
-
-
-
468
-
-
-
-
-
-
-
-
-
-
-
-
(11)
-
433
929
-
-
-
-
-
302
-
-
1,231
-
-
-
-
-
-
3
32,316
-
32,316
3
(1,948)
1,519
-
-
-
-
-
-
(2,517)
-
8
(1,140)
2,181
-
-
-
-
(1,468)
-
-
-
-
-
-
-
-
117,536
35,547
-
-
-
-
-
(2,575)
-
150,508
(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
-
42,671
42,671
(254)
2,511
-
-
-
-
-
-
(254)
2,511
44,928
7,159
(13)
-
-
468
$
580
-
1,811
$
-
-
789
$
-
(5,634)
187,545
$
580
(5,634)
405,946
See accompanying notes to consolidated financial statements.
F-5
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 from discontinued operations
Compensation expense related to stock issuances
(Gain) loss on sale of assets
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:
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
Proceeds 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
Debt issuance costs
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 at beginning of period
Cash and cash equivalents at end of period
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 issued in connection with acquisitions
Flooring debt assumed in connection with acquisitions
Acquisition of capital lease
Assets acquired with debt
Assets acquired through real estate exchange
Debt extinguished through refinancing
2004
Year Ended December 31,
2003
2002
$
42,671
$
35,547
$
32,316
13,143
-
240
889
125
(883)
12,139
-
1,178
1,796
(23,601)
(1,480)
(509)
17,881
2,266
7,299
2,393
75,547
585
(13,156)
(40,931)
2,124
1,552
(7,733)
-
(79,395)
8,756
-
(128,198)
(120,332)
(13,326)
142,279
(2,550)
(13)
-
7,083
(5,634)
7,507
(45,144)
9,593
702
185
(586)
127
(919)
10,235
13
(641)
(3,080)
38,466
2,794
552
(12,390)
4,785
6,586
(3,397)
88,572
-
(10,678)
(32,448)
441
920
(6,650)
-
(63,799)
3,542
33
(108,639)
58,317
(4,631)
22,845
-
(215)
-
4,802
(2,575)
78,543
58,476
$
$
$
74,408
29,264
$
15,932
74,408
$
$
$
25,499
18,775
-
12,000
51,884
540
3,680
-
-
$
$
20,733
9,596
-
324
45,884
-
-
1,987
12,350
7,192
621
169
77
58
(50)
4,963
(4)
(3,228)
1,626
(107,126)
(1,126)
1,421
106,583
2,032
2,539
835
48,898
-
(5,691)
(32,792)
1,672
2,219
(7,372)
(384)
(81,698)
535
-
(123,511)
(28,000)
(11,223)
33,055
-
-
(4,366)
82,265
-
71,731
(2,882)
18,814
15,932
17,395
16,541
475
3,314
49,225
-
-
-
4,360
See accompanying notes to consolidated financial statements.
F-6
LITHIA MOTORS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004, 2003 and 2002
(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, 2004, we offered 25 brands of new vehicles through 174
franchises in 86 stores in the Western United States and over the Internet. As of December 31, 2004,
we operated 16 stores in Oregon, 11 in California, 11 in Washington, 9 in Texas, 7 in Idaho, 7 in
Colorado, 7 in Alaska, 6 in Nevada, 6 in Montana, 2 in South Dakota, 2 in Nebraska, 1 in Oklahoma
and 1 in New Mexico. 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 for 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
Inventories are valued at the lower of market value or cost, using the specific identification
method for vehicles and parts. The cost of used vehicle inventories includes the cost of any
equipment added, reconditioning and transportation.
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-7
Assets and Liabilities Held for Sale
Assets held for sale of $135,000 at December 31, 2004 relate to a building held for sale. At
December 31, 2003, we had $20.4 million of assets classified as assets held for sale related to one
store that was sold during 2004. The assets primarily included inventory and property, plant and
equipment. Liabilities held for sale at December 31, 2003 included 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. Capitalized interest totaled $480,000, $260,000 and $295,000,
respectively, in 2004, 2003 and 2002.
When an asset is retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the accounts, and any gain or loss is credited or charged to income.
Leased property meeting certain criteria is capitalized and the present value of the related
lease payments is recorded as a liability. Amortization of capitalized leased assets is computed on a
straight-line basis over the term of the lease, unless the lease transfers title or it contains a bargain
purchase option, at which time, it is amortized over the useful life, and is included in depreciation
expense. The payments on the lease liability are amortized over the term of the lease.
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
represent 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.
F-8
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
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,” goodwill and other
identifiable intangible assets with indefinite useful lives are not amortized, but 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 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, 2004 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.
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.
F-9
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.
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 $6.5 million, $6.1 million and $8.2 million, was $18.3 million, $20.1 million and
$16.8 million for the years ended December 31, 2004, 2003 and 2002, respectively.
Environmental Liabilities and Expenditures
Accruals for environmental matters, if any, are recorded in operating expenses when it is
probable that a liability has been incurred and the amount of the liability can be reasonably estimated.
Accrued liabilities are exclusive of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if such costs increase the value of the property and/or mitigate or
prevent contamination from future operations.
We are aware of limited 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.
Income Taxes
Income taxes are accounted for under the asset and liability method as prescribed by 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.
F-10
Computation of Per Share Amounts
Following is a reconciliation of the income from continuing operations and weighted average
shares used for our basic earnings per share (“EPS”) and diluted EPS (in thousands, except per
share amounts).
Year Ended December 31,
Basic EPS
Income from continuing
operations available to
common stockholders
Effect of Dilutive Securities
2 7/8% convertible senior
subordinated notes
Stock options
Diluted EPS
Income from continuing
operations available to
common stockholders
Antidilutive Securities
Shares issuable pursuant to
stock options not included
since they were antidilutive
2004
Income
from
Continuing
Operations
Per
Share
Amount
Shares
2003
Income
from
Continuing
Operations
Per
Share
Amount
Shares
2002
Income
from
Continuing
Operations
Per
Share
Amount
Shares
$42,573
18,773
$2.27
$35,637
18,289
$1.95
$32,361
17,233
$1.88
1,231
-
1,485
389
(0.10)
(0.05)
-
-
-
257
-
(0.03)
-
-
-
365
-
(0.04)
$43,804
20,647
$2.12
$35,637
18,546
$1.92
$32,361
17,598
$1.84
324
342
-
In October 2004, the Financial Accounting Standards Board (“FASB”) ratified a consensus
position of the Emerging Issues Task Force, EITF 04-8, “Accounting Issues Related to Certain
Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share,” which
requires the inclusion of the 2,255,314 shares issuable pursuant to our convertible debt, which was
issued in the second quarter of 2004. The guidance also required that net income be increased for
the related interest expense, net of taxes.
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 22.1% and 22.4%, respectively, of total accounts receivable at December 31, 2004 and 2003.
Included in the 22.1% is one manufacturer who accounted for 10.1% of the total accounts receivable
balance at December 31, 2004. Included in the 22.4% is one manufacturer who accounted for 10.4%
of the total accounts receivable balance at December 31, 2003.
In addition, in 2004, 2003 and 2002, 36.8%, 35.6% and 31.8%, respectively, 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.
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, 2004 we had $491.5 million outstanding under such
facilities at interest rates ranging from 4.05% to 5.15% per annum, $450.8 million of which was
outstanding under our floorplan facilities. An increase or decrease in the interest rates would affect
interest expense for the period accordingly.
F-11
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. If we refinance at current market rates, we would pay an additional
$4.2 million in interest expense over the remaining lives, which is represented in the table below as
the difference between book value and fair value at December 31, 2004. 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 open market trades or on discounted cash flows, was as follows at December
31, 2004 and 2003 (in thousands):
December 31,
Book value of fixed rate debt
Fair value of fixed rate debt
2004
178,282
173,997
$
$
2003
52,978
52,183
$
$
Lithia also subjects itself to credit risk and market risk by entering into interest rate swaps.
See below and also Note 8. 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.
We account for our derivative financial instruments in accordance with 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. See also
Note 8.
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-12
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.
Revenue from parts and service is recognized upon delivery of the parts or service to the
customer.
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 anticipated cancellations, as finance and insurance revenue upon execution of the
insurance contract.
Commissions from third party service contracts are recognized, net of 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.
Debt Issuance Costs and Loan Origination Fees
Debt issuance costs and loan origination fees paid, including incremental direct costs of
completed loan agreements, are deferred and amortized over the life of the debt to which it relates
and are shown as an increase to the related interest expense.
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 claim cost per vehicle based
on past experience. Each year, we analyze the warranty charges related to our used vehicle sales
and update our per used vehicle warranty estimate. The estimated warranty is added to cost of sales
upon sale of the related vehicle. At December 31, 2004 and 2003, accrued warranty totaled
$198,000 and $220,000, 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, 2004, 2003
and 2002 is as follows (in thousands):
Year Ended December 31,
Balance, beginning of period
Warranties issued
Reductions for warranty payments made
Adjustments and changes in estimates
Balance, end of period
2004
220
2,574
(2,562)
(34)
198
$
$
2003
525
2,935
(2,918)
(322)
220
$
$
2002
456
2,827
(2,758)
-
525
$
$
Comprehensive Income
Comprehensive income includes the unrealized gain or loss 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-13
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
We account for stock options using the intrinsic value method as prescribed by Accounting
Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Pursuant to
SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and Disclosure," we have
computed, for pro forma disclosure purposes, the impact on net income and net income per share as
if we had accounted for our stock-based compensation plans in accordance with the fair value
method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows (in
thousands):
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
$
$
$
$
$
$
2004
42,671
101
(3,266)
39,506
2.27
2.10
2.13
1.99
$
$
$
$
$
$
(1)
2003
35,547
99
(3,128)
32,518
1.94
1.78
1.92
1.77
$
$
$
$
$
$
(1)
2002
32,316
103
(2,318)
30,101
1.88
1.75
1.84
1.74
(1) 2003 and 2002 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,” for updated forfeiture estimates and the
appropriate tax effect on the option expense. The impact on pro forma diluted EPS was a decrease of $0.04 and $0.02 in
2003 and 2002, respectively.
See Note 19 for a discussion of SFAS No. 123R, “Share-Based Payment: an amendment of
FASB Statements No. 123 and 95,” which requires companies to recognize in their income statement
the grant-date fair value of stock options and other equity-based compensation issued to employees.
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,
Employee Stock Purchase Plan
Risk-free interest rates
Dividend yield
Expected lives
Volatility
Option Plans
Risk-free interest rates
Dividend yield
Expected lives
Volatility
2004
2003
2002
0.93% - 1.71%
0.99% - 1.45%
3 months
28.11% - 47.31%
0.89% - 1.22%
0.00% - 1.27%
3 months
42.59% - 50.14%%
1.59% - 1.76%
n/a
3 months
42.59% - 51.80%
2.80%
1.04%
5.4 years
43.32%
2.50% - 3.00%
n/a
7.7 - 8.0 years
46.24% - 46.79%
4.00%
n/a
8.0 years
46.80%
F-14
Using the Black-Scholes methodology, the weighted average fair value of options granted
during 2004, 2003 and 2002, before estimated forfeitures, was $8.55, $3.84 and $7.54 per share,
respectively. The fair value 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.
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
Certain amounts in the prior year financial statements have been reclassified to conform with
the current year presentation. In prior years, we included cash flows from notes receivable issued and
principal payments received on notes receivable as investing activities. Based on recent guidance
regarding the sale of goods and services to customers, we now show such cash flows as a
component of the change in trade and installment contracts receivable, net and other non-current
assets in the operating activities section of our cash flow statement.
(2)
Discontinued Operations
During 2003, we decided to sell certain 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. During the third quarter of 2004, we disposed of one of the franchises included with the
store we had held for sale, which resulted in a gain of $212,000, net of tax. In the fourth quarter of
2004, we disposed of the remaining franchise, which resulted in a loss of $20,000, net of tax. In
addition, in 2004, we recognized losses from operations of the discontinued operations of $88,000
and a $6,000 loss from discontinued operations that were disposed of in 2003. At December 31,
2004, we did not have any assets held for sale related to discontinued operations.
We continually monitor the performance of each of our stores and make determinations to
sell based on return on capital criteria.
Interest expense is allocated to stores classified in discontinued operations for actual flooring
interest expense directly related to the new vehicles in the store. Interest expense related to the used
vehicle line of credit is allocated based on total used vehicle inventory of the store, and interest
expense related to the equipment line of credit is allocated based on the amount of fixed assets.
(3)
Trade Receivables
Trade receivables consisted of the following (in thousands):
December 31,
Trade receivables
Vehicle receivables
Manufacturer receivables
Other
Less: Allowances
Total receivables, net
2004
12,197
9,971
18,694
1,150
42,012
(436)
41,576
$
$
2003
12,052
9,999
19,520
1,298
42,869
(462)
42,407
$
$
Vehicle receivables represent receivables from financial institutions for the portion of the
vehicle sales price financed by the customer.
F-15
(4)
Inventories and Related Notes Payable
The new and used vehicle inventory, collateralizing related notes payable, and other
inventory were as follows (in thousands):
December 31,
2004
2003
New and program vehicles
Used vehicles
Parts and accessories
Total inventories
Inventory
Cost
427,134
84,739
24,780
536,653
$
$
Notes
Payable
450,859
-
-
450,859
$
$
Inventory
Cost
355,937
68,747
20,597
445,281
$
$
Notes
Payable
378,961
56,267
-
435,228
$
$
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.
At December 31, 2004 and 2003, used vehicles and parts and accessories inventory were
pledged to collateralize our used vehicle and working capital credit facility.
(5)
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
(6)
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 included in gain or loss on disposal of franchises
and discontinued operations
Balance, end of year
2004
129,687
25,373
70,804
225,864
(8,110)
(25,922)
191,832
95,583
9,196
3,020
299,631
2004
207,027
37,505
-
244,532
$
$
$
$
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
(3,341)
207,027
$
$
$
$
F-16
At December 31, 2004 and 2003, 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):
December 31,
Franchise value
Non-compete agreements
Accumulated amortization
Net non-compete agreements
Total other intangible assets, net
2004
44,602
110
(63)
47
44,649
$
$
2003
28,875
110
(39)
71
28,946
$
$
Amortization expense related to the non-compete agreements totaled $24,000, $21,000 and
$18,000, respectively, for the years ended December 31, 2004, 2003 and 2002. Amortization of non-
compete agreements is as follows over the next five years (in thousands):
2005
2006
2007
2008
2009
$
23
22
2
-
-
(7)
Trade Payables
Trade payables consisted of the following (in thousands):
December 31,
Trade payables
Lein payables
Manufacturer payables
Other
Total trade payables
2004
10,001
8,192
4,651
3,977
26,821
$
$
2003
10,200
8,378
3,312
2,512
24,402
$
$
Lein payables represent amounts owed to financial institutions for customer vehicle trade-ins.
(8)
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, 2004, 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
F-17
•
•
•
•
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
effective March 9, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.25%
per annum, variable rate adjusted on the 1st and 16th of each month;
effective March 18, 2004 – a five year, $25 million interest rate swap at a fixed rate of 3.10%
per annum, variable rate adjusted on the 1st and 16th 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, 2004 was 2.4% 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,
2004 were $1.9 million and $(644,000), 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.
At current interest rates, we estimate that we will incur additional interest expense, net of tax,
of approximately $1.6 million related to our interest rate swaps during 2005.
(9)
Lines of Credit and Long-Term Debt
Lines of Credit
We have a working capital and used vehicle flooring credit facility with DaimlerChrysler
Services North America LLC and Toyota Motor Credit Corporation totaling up to $150 million, which
expires May 1, 2007 with an option for the lenders to extend to May 1, 2008, with interest due
monthly. This credit facility is cross-collateralized and secured by cash and cash equivalents, new
and used vehicles on a subordinated basis to the extent not specifically financed by other lenders,
parts inventories, accounts receivable, intangible assets and equipment. We pledged to
DaimlerChrysler Services and Toyota Motor Credit the stock of all of our dealership subsidiaries
except entities operating BMW, Honda, Nissan or Toyota stores.
The financial covenants in our agreement with DaimlerChrysler Services and Toyota Motor
Credit 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, 2004, we were in compliance
with all of the covenants of this agreement.
Ford Motor Credit, General Motors Acceptance Corporation and Volkswagen Credit have
agreed to floor all of our new vehicles for their respective brands with DaimlerChrysler Services North
America LLC 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 revolving credit real estate line with Toyota Motor Credit totaling $40 million,
which expires in May 2005. The advances are secured by the real estate financed under this line of
credit.
F-18
We have a credit facility with U.S. Bank N.A., which provides for a $50.0 million revolving line
of credit for leased vehicles and equipment purchases and expires April 30, 2006. The financial
covenants in our agreement with U.S. Bank N.A. require us to maintain compliance with, among other
things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a minimum total net
worth; and (iv) a minimum tangible net worth. At December 31, 2004, we were in compliance with all
of the covenants of this agreement.
Interest rates on all of the above facilities ranged from 4.05% to 5.15% at December 31,
2004. Amounts outstanding on the lines at December 31, 2004 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, 2004
$450,859
-
-
40,686
$491,545
Remaining Availability as
of December 31, 2004
$
*
150,000
40,000
9,314
$199,314*
_________
* There are no formal limits on the new and program vehicle lines with certain lenders.
Senior Subordinated Convertible Notes
In May 2004, we sold $85.0 million of 2.875% senior subordinated convertible notes (the
“Notes”) due 2014 through a Rule 144A offering to qualified institutional buyers. We will also pay
contingent interest on the notes during any six-month interest period beginning May 1, 2009, in which
the trading price of the Notes for a specified period of time equals or exceeds 120% of the principal
amount of the Notes. Net proceeds from this offering were approximately $82.5 million. The Notes
are convertible into shares of our Class A common stock at a price of $37.69 per share (or 26.53
shares per $1,000 of Notes) upon the satisfaction of certain conditions and upon the occurrence of
certain events as follows:
•
•
•
•
•
if, prior to May 1, 2009, and during any calendar quarter, the closing sale price of our
common stock exceeds 120% of the conversion price for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the preceding calendar quarter;
if, after May 1, 2009, the closing sale price of our common stock exceeds 120% of the
conversion price;
if, during the five business day period after any five consecutive trading day period in which
the trading price per $1,000 principal amount of Notes for each day of such period was less
than 98% of the product of the closing sale price of our common stock and the number of
shares issuable upon conversion of $1,000 principal amount of the Notes;
if the Notes have been called for redemption; or
upon certain specified corporate events.
Any declaration and payment of a dividend in excess of $0.08 per share per quarter will result
in an adjustment in the conversion rate for the Notes.
The Notes are redeemable at our option beginning May 6, 2009 at the redemption price of
100% of the principal amount plus any accrued interest. The holders of the Notes can require us to
repurchase all or some of the notes on May 1, 2009 and upon certain events constituting a
fundamental change or a termination of trading. A fundamental change is any transaction or event in
which all or substantially all of our common stock is exchanged for, converted into, acquired for, or
constitutes solely the right to receive, consideration that is not all, or substantially all, common stock
that is listed on, or immediately after the transaction or event, will be listed on, a United States
national securities exchange. A termination of trading will have occurred if our common stock is not
listed for trading on a national exchange or the NASDAQ stock market.
We filed a registration statement on Form S-3 with the Securities and Exchange Commission
on July 26, 2004 covering the resale of the Notes and the common stock issuable upon conversion of
the Notes. The registration statement was declared effective by the Securities and Exchange
Commission in October 2004.
F-19
Summary
Long-term debt consisted of the following (in thousands):
December 31,
Variable Rate Debt:
Equipment and leased vehicle line of credit, expiring April 2006
Real estate line of credit payable with monthly payments of interest only, expiring
2004
2003
$
40,686
$
35,000
May 2005; secured by land and buildings
Working capital and used vehicle flooring line of credit payable with monthly
payments of interest only, expiring May 2007
-
-
9,018
117,000
Mortgages payable in monthly installments of $386, including interest between
4.20% and 6.44%, maturing through April 2024; secured by land and buildings
52,382
32,949
Notes payable in monthly installments of $21, including interest between 0.0% and
4.7%, maturing at various dates through 2005; secured by vehicles leased to others
Notes payable related to acquisitions, with interest rate of 5.25%, maturing February
2008
Total Variable Rate Debt
2,194
1,607
331
95,593
481
196,055
Fixed Rate Debt:
2.875% senior subordinated convertible notes, due May 2014 with interest due semi-
annually in May and November of each year
85,000
-
Mortgages payable in monthly installments of $622, including interest between
4.00% and 6.96%, maturing fully May 2022; secured by land and buildings
91,298
49,837
Notes payable related to acquisitions, with interest rates between 4.00% and 7.25%,
maturing at various dates through May 2009
Capital lease obligations, net of interest of $174, with monthly lease payments of $5
Total Fixed Rate Debt
Total Long-Term Debt
Less current maturities
1,454
530
178,282
273,875
(6,565)
267,310
$
3,141
-
52,978
249,033
(14,299)
234,734
$
The schedule of future principal payments on long-term debt after December 31, 2004 is as
follows (in thousands):
Year Ending December 31,
2005
2006
2007
2008
2009
Thereafter
Total principal payments
$
$
6,565
45,354
12,868
37,363
22,398
149,327
273,875
(10) 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.
F-20
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.
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, 2002, no shares of Series M Preferred Stock remained outstanding.
(11)
Cost of Sales
Cost of sales categorized by revenue category from continuing operations is as follows (in
thousands):
Year Ended December 31,
New vehicle sales
Used vehicle sales
Finance and insurance
Service, body and parts
Fleet and other
2004
1,465,252
662,221
376
150,609
7,393
2,285,851
$
$
2003
1,330,446
642,443
276
132,653
4,575
2,110,393
$
$
2002
1,114,885
643,713
459
112,433
42,214
1,913,704
$
$
(12)
Income Taxes
Income tax expense from continuing operations for 2004, 2003 and 2002 was as follows (in
thousands):
Year Ended December 31,
Current:
Federal
State
Deferred:
Federal
State
Total
2004
13,163
1,990
15,153
10,423
1,302
11,725
26,878
$
$
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
$
$
$
$
F-21
At December 31, 2004, we had prepaid income taxes totaling $2.2 million and at December
31, 2003, we had income taxes payable totaling $1.8 million.
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:
Inventories
Interest expense
Goodwill
Property and equipment, principally due to
differences in depreciation
Total deferred tax liabilities
Total
2004
3,638
4,801
8,439
(5,766)
(1,856)
(22,896)
(14,670)
(45,188)
(36,749)
$
$
2003
4,189
4,398
8,587
(5,177)
-
(15,921)
(11,045)
(32,143)
(23,556)
$
$
In 2004, 2003 and 2002, income tax benefits attributable to employee stock option
transactions of $415,000, $138,000 and $264,000, 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 2004, 2003 and 2002 is shown in the following
tabulation (in thousands):
Year Ended December 31,
Computed “expected” tax expense
State taxes, net of federal income tax benefit
Other
Income tax expense
2004
24,364
2,138
376
26,878
$
$
2003
20,719
1,769
1,073
23,561
$
$
2002
18,494
1,580
406
20,480
$
$
(13)
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 $1.3 million, $0.6 million and $0.9 million were recognized for the years ended
December 31, 2004, 2003 and 2002, respectively. Employees may contribute to the plan as they
meet certain eligibility requirements.
(14)
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”). As amended in May 2004, the 2003 Plan allows for the granting of up to a total of 2.2
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. Beginning in 2004,
the term of options granted has been reduced to six years. At December 31, 2004, 2,807,801 shares
of Class A common stock were reserved for issuance under the plans, of which 1,379,171 were
available for future grant.
F-22
Activity under the above plans is as follows (in thousands):
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
Additional shares reserved
Options granted
Options canceled
Options exercised
Balances, December 31, 2004
Shares
Available for
Grant
325
600
(433)
52
-
544
(16)
133
-
661
1,000
(337)
55
-
1,379
Shares Subject to
Options
1,373
-
433
(173)
(136)
1,497
16
(151)
(38)
1,324
-
337
(64)
(168)
1,429
Weighted Average
Exercise Price
$14.02
-
15.80
17.00
12.00
14.25
14.09
16.54
10.09
14.10
-
29.14
18.41
9.14
$18.04
The following table summarizes stock options outstanding at December 31, 2004:
Options Outstanding
Options Exercisable
Range of
Exercise Prices
$1.00
10.75
10.87 – 12.99
14.31 – 16.18
16.50 – 18.43
19.24 – 20.52
29.42
$1.00 - $29.42
Number of
Shares
Outstanding
87,298
14,000
169,064
323,616
303,723
206,600
324,329
1,428,630
Weighted
Average
Remaining
Contractual Life
(years)
5.3
0.2
5.4
6.6
4.5
7.0
5.2
5.6
Weighted
Average
Exercise
Price
$ 1.00
10.75
11.92
15.09
16.83
19.32
29.42
$18.04
Number of
Shares
Exercisable
16,298
14,000
115,664
98,601
212,886
47,600
8,000
513,049
Weighted
Average
Exercise
Price
$ 1.00
10.75
11.96
14.94
16.86
19.34
29.42
$15.14
At December 31, 2003 and 2002, 527,250 and 399,810 shares were exercisable at weighted
average exercise prices of $12.99 and $11.88, 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, 2003
and 2004, have reserved a total of 1.75 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% 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% of the lesser of
the fair market value at the beginning or end of the purchase period. A total of 281,357, 375,988 and
217,230 shares of our Class A common stock were issued under the Purchase Plan during 2004,
2003 and 2002, respectively, and 540,496 remained available for issuance at December 31, 2004.
(15)
Dividend Payments
We declared and paid a dividend of $0.07 per share of Class A and Class B common stock
for each of the second, third and fourth quarters of 2003 and the first quarter of 2004, totaling
approximately $1.3 million each quarter. In addition, we declared and paid a dividend of $0.08 per
share of Class A and Class B common stock for each of the second and third quarters of 2004,
totaling approximately $1.5 million per quarter. See also Note 19 for information regarding the
declaration of a dividend related to the fourth quarter of 2004.
F-23
(16)
Commitments and Contingencies
Leases
We lease certain of our facilities under non-cancelable operating leases. These leases expire
at various dates through 2030. Certain lease commitments contain fixed payment increases at
predetermined intervals over the life of the lease, while other 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, 2004 are as
follows (in thousands):
Year Ending December 31,
2005
2006
2007
2008
2009
Thereafter
Total minimum lease payments
Less: sublease rentals
$
19,809
18,457
17,360
16,512
13,251
39,404
124,793
(4,434)
$ 120,359
Rental expense for all operating leases was $20.4 million, $19.3 million and $17.8 million for
the years ended December 31, 2004, 2003 and 2002, respectively.
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 $4.4 million at December 31, 2004. 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 $14.7 million at December 31, 2004 for the construction of
five new facilities, additions to three existing facilities and the remodel of one facility. The new
facilities will be for our Chevrolet dealership in Fairbanks, Alaska, our Toyota dealership in
Springfield, Oregon, our Chevrolet and Hyundai dealerships in Odessa, Texas and a body shop also
in Odessa, Texas. We have already incurred $11.5 million for these projects and anticipate incurring
the remaining $14.7 million in 2005. 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.
Charge-Backs for Various Contracts
We have recorded a reserve for our estimated contractual obligations related to potential
charge-backs for vehicle service contracts, lifetime oil change contracts and other various insurance
contracts that are terminated early by the customer. At December 31, 2004, this reserve totaled
$11.8 million. Based on past experience, we estimate that the $11.8 million will be paid out as
follows: $6.9 million in 2005; $3.2 million in 2006; $1.2 million in 2007; $0.4 million in 2008; and $0.1
million thereafter.
F-24
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.
On April 28, 2004, a lawsuit was filed against us in the United States District Court for the
District of Oregon: Robert Allen, et al., vs. Lithia Motors, Inc., et al., Civil Case No. 04-03032-CO.
The complaint seeks money damages from us for alleged federal and state RICO violations, violation
of Oregon's Unlawful Trade Practices Act and fraud, with respect to arranging the financing of
vehicles. Each of the 23 Allen plaintiffs seeks stated actual damages ranging from $733 to $20,859,
damages for mental distress ranging from $10,000 to $250,000, and punitive damages of $1,500,000.
With statutory penalties, the Allen plaintiffs seek actual damages that total less than $250,000,
trebled, approximately $3.0 million in mental distress claims and punitive damages of $34.5 million.
Management believes that if damages were assessed, most would be covered by insurance. The
case is still in its pleading stage and no depositions or document production has yet occurred. We
intend to vigorously defend this matter and management believes that the likelihood of a judgment for
the amount of damages sought is remote.
(17)
Related Party Transactions
Mark DeBoer Construction
During 2004, 2003 and 2002, Lithia Real Estate, Inc. paid Mark DeBoer Construction, Inc.
$1.6 million, $1.6 million, and $4.3 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 $0.7 million, $0.9 million, and $3.5 million, respectively, paid for subcontractors and
materials, $42,000, $102,000 and $183,000, respectively for permits, licenses, travel and various
miscellaneous fees, and $880,000, $638,000, and $558,000, respectively, for contractor fees. In 2004
and 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 in 2002
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 in 2002 to other companies
owned by Mr. Moreland. As of October 31, 2002, Mr. Moreland was no longer a member of our Board
of Directors.
(18)
Acquisitions
The following acquisitions were made in 2004:
•
•
•
In January 2004, we acquired one Chrysler and Jeep store in Reno, Nevada, which had
anticipated annual revenues of approximately $55.0 million. The store has been renamed
Lithia Chrysler Jeep of Reno.
In March 2004, we acquired one Chevrolet store in Helena, Montana, which had
anticipated annual revenues of approximately $40.0 million. The store has been renamed
Chevrolet of Helena.
In April 2004, we acquired Tony Chevrolet of Anchorage and Tony Chevrolet of Wasilla,
Alaska, which had anticipated combined annual revenues of approximately $125 million.
The stores have been renamed Chevrolet of South Anchorage and Chevrolet of Wasilla,
respectively.
F-25
•
•
•
•
•
•
•
In June 2004, we acquired the Saab dealership assets of Pacific Motors Group, Inc. The
Saab franchise purchased with this acquisition was combined with Chevrolet of South
Anchorage.
In July 2004, we acquired one Toyota store in Odessa, Texas, which had anticipated
annual revenues of approximately $20.0 million. The store has been renamed Lithia
Toyota of Odessa.
In September 2004, we acquired a Chrysler Dodge Jeep and a Honda store in Great
Falls, Montana, which had anticipated combined annual revenue of approximately $40
million. The stores have been renamed Lithia Chrysler Dodge Jeep of Great Falls and
Honda of Great Falls, respectively.
In October 2004, we acquired a Chrysler and a Jeep franchise in Santa Rosa, California,
which had anticipated annual revenue of approximately $10 million. These franchises
have been combined with our existing Dodge store in Santa Rosa. The store is now
named Lithia Chrysler Dodge Jeep of Santa Rosa.
In October 2004, we acquired a BMW store in Anchorage, Alaska, which had anticipated
annual revenue of approximately $15 million. The store is now named BMW of
Anchorage.
In November 2004, we acquired a Chrysler Jeep Dodge franchise in Santa Fe, New
Mexico, which had anticipated annual revenue of approximately $20 million. The store is
now named Lithia Chrysler Jeep Dodge of Santa Fe.
In November 2004, we acquired a Dodge store in Helena, Montana, which had
anticipated annual revenue of approximately $18 million. The store is now named Lithia
Dodge of Helena.
The following acquisitions were made in 2003:
•
In February 2003, we acquired Richardson Chevrolet in Salinas, California, which had
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 had 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 had
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 had
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 had
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 had 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 had
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 had 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 had
anticipated 2003 revenues of approximately $15.0 million. The store name will remain
the same.
In October 2003, we acquired Grapevine Dodge in Grapevine, Texas, which had
anticipated 2003 revenues of approximately $70.0 million. The store has been renamed
Lithia Dodge of Grapevine.
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In November 2003, we acquired Fairfield Dodge in Fairfield, California, which had
anticipated 2003 revenues of approximately $20.0 million. The store has been renamed
Lithia Dodge of Fairfield.
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 as of January 1, 2003
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
$
$
2004
2,867,586
44,930
2.39
2.24
2003
2,996,994
42,719
2.34
2.30
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. During 2004, we acquired 12 stores
for $91.6 million, which included $38.0 million of goodwill and $15.6 million of other intangible assets.
During 2003, we acquired 11 stores for $63.4 million, which included $24.7 million of goodwill and
$8.0 million of other intangible assets.
Within one year from the purchase date, we may update the value allocated to purchased
assets and the resulting goodwill balances for information received regarding the valuation of such
assets as of the date of acquisition.
(19)
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
123R, “Share-Based Payment: an amendment of FASB Statements No. 123 and 95,” which requires
companies to recognize in their income statement the grant-date fair value of stock options and other
equity-based compensation issued to employees. SFAS No. 123R is effective for interim or annual
periods beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 123R in our third quarter
of 2005. See Note 1 Summary of Significant Accounting Policies – Stock-Based Compensation above
for the pro forma effects of how SFAS No. 123 would have affected results of operations in 2004,
2003 and 2002. We do not expect the results of SFAS No. 123R to be significantly different than
those of applying SFAS No. 123. SFAS No. 123R will not have any effect on our cash flows.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets."
SFAS No. 153 amends APB Opinion No. 29, "Accounting for Nonmonetary Transactions," by
replacing the exception for exchanges of similar productive assets with an exception for exchanges
that do not have commercial substance. A transaction has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is
effective for fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS
No. 153 to have any effect on our financial position, results of operations or cash flow.
In October 2004, the FASB ratified Emerging Issues Task Force (“EITF”) 04-8, “Accounting
Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted
Earnings Per Share.” Pursuant to EITF 04-8, we are required to include 2,255,314 shares of
common stock issuable upon conversion of our outstanding convertible debt in our diluted earnings
per share calculations. Diluted EPS in prior periods in which the convertible debt was outstanding
have been restated. Adoption of this accounting statement change did not affect our net income,
cash flows or basic earnings per share.
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
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variable interest that it acquired before January 1, 2004. We do not have any VIEs and, therefore, the
adoption of FIN 46R in December 2004 did not have any effect on our financial position, results of
operations or cash flows.
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
any effect on our financial position, results of operations or cash flows.
(20)
Subsequent Events
Dividend
In January 2005, our Board of Directors approved a dividend on our Class A and Class B
common stock of $0.08 per share for the fourth quarter of 2004. The dividend, which will total
approximately $1.5 million, will be paid on March 14, 2005 to shareholders of record on February 28,
2005.
Acquisitions
In January 2005, we acquired a Chrysler and Jeep franchise in Concord, California. The
franchises were added to our Dodge store in that market. The store is now named Lithia Chrysler
Dodge Jeep of Concord.
In January 2005, we acquired a Chrysler franchise in Eugene, Oregon. The franchise was
added to our Dodge store in that market. The stores name is now Lithia Chrysler Dodge of Eugene.
In February 2005, we acquired a Chrysler, Dodge and Jeep store in Omaha, Nebraska. The
store has anticipated annualized revenues of $110 million. The store was renamed Lithia Chrysler
Dodge Jeep of Omaha.
F-28
CORPORATE INFORMATION
Annual Meeting
The Company’s Annual Meeting of Shareholders will be held at 4:00 P.M., Thursday, May 5, 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, 2005):
Auditors:
Legal Counsel:
Transfer Agent:
Executive Officers:
(NYSE - LAD)
19,114,333 shares issued and outstanding
Class A
Class B
15,352,102
3,762,231
KPMG LLP, Portland, Oregon
Foster, Pepper and Tooze, Portland, Oregon
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