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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K/A-1
------------------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(Date of Report (Date of earliest event reported): August 8, 1997
--------------------
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0572810
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
360 E. Jackson Street, Medford, Oregon 97501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541)776-6899
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LITHIA MOTORS, INC.
FORM 8-K/A-1
INDEX
Item Description Page
- ---- ----------- ----
Item 2. Acquisition or Disposition of Assets 2
Item 7. Financial Statements and Exhibits 3
Signatures 4
1
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) On August 8, 1997, Lithia Motors, Inc. (the "Company"), acquired the
inventories, operating assets and intangible assets of Sun Valley Ford,
Inc., a California corporation, dba "Sun Valley Ford Volkswagen Hyundai"
("Sun Valley Ford" or the "Seller"), located in Concord, California,
pursuant to an Agreement for Purchase and Sale of Business Assets (the
"Agreement") dated April 2, 1997. Pursuant to the Agreement, the total
purchase price was $17.9 million, consisting of $5.3 million in cash from
the Company's existing cash balances, $4.2 million in notes to the Seller
and $8.4 million financed through the Company's flooring line of credit.
The Company has assumed the leases of the land and facilities.
There was no previous relationship between the Company and Sun Valley Ford,
nor any of the Company's and Sun Valley Ford's affiliates, officers or
directors.
(b) The Company acquired vehicle and parts and supplies inventories, as well as
other assets used in the business of vehicle sales, service and support.
The Company intends to utilize the purchased assets in the same capacity.
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION, AND EXHIBITS
(a) FINANCIAL STATEMENTS OF THE BUSINESS ACQUIRED
The financial statements required by this item begin on page F-1.
(b) PRO FORMA FINANCIAL INFORMATION
The Pro Forma financial information required by this item begins on page
PF-1.
(c) EXHIBITS
The exhibits filed as a part of this report are listed below and this list
constitutes the exhibit index.
2.1 Agreement for Purchase and Sale of Business Assets, by and between
Sun Valley Ford, Inc., a California corporation, dba Sun Valley Ford
Volkswagen Hyundai, and the Company, dated April 2, 1997, previously
filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and filed with the Securities Exchange
Commission on August 12, 1997, and is incorporated herein by
reference.
10.1 Promissory Note for Leasehold Improvements by and between Lithia
Motors, Inc. and Sun Valley Ford, Inc., dated August 8, 1997,
previously filed with the Company's report of Form 8-K dated August
8, 1997 and filed with the Securities Exchange Commission on August
21, 1997, and is incorporated herein by reference.
10.2 Promissory Note for Intangible Assets by and between Lithia Motors,
Inc. and Sun Valley ford, Inc., dated August 8, 1997, previously
filed with the Company's report of Form 8-K dated August 8, 1997 and
filed with the Securities Exchange Commission on August 21, 1997,
and is incorporated herein by reference.
10.3 Standard Industrial Lease, as amended, and assignment thereof, by
and between Lithia Motors, Inc., Edmund C. Bartlett, Jr. and Anna
Bartlett and Sun Valley Ford, Inc., dated July 16, 1997.
10.4 Lease Agreement, and assignment thereof, by and between Lithia
Motors, Inc., George Valente and Lena E. Valente and Sun Valley
Ford, Inc., dated August 4, 1997.
23 Consent of Moss Adams LLP
3
SIGNATURES
Pursuant to the requirements 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: October 6, 1997 LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
---------------------
Sidney B. DeBoer
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer)
By /s/ BRIAN R. NEILL
-------------------
Brian R. Neill
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
4
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SUN VALLEY FORD
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1996
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F-1
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CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . . . . . 1
FINANCIAL STATEMENTS
Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of income and retained earnings . . . . . . . . . . . . . . . . . 4
Statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to financial statements. . . . . . . . . . . . . . . . . . . . . . . . 7
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F-2
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Sun Valley Ford
We have audited the accompanying balance sheet of Sun Valley Ford, as of
December 31, 1996, and the related statements of income and retained earnings
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sun Valley Ford as of December
31, 1996, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
\s\ Moss Adams LLP
Santa Rosa, California
June 24, 1997
F-3
SUN VALLEY FORD
BALANCE SHEETS
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December 31, June 30, 1997 June 30, 1996
1996 (unaudited) (unaudited)
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ASSETS
CURRENT ASSETS
Cash $ 54,600 $ 16,500 $ 775,800
Receivables 3,435,000 4,390,500 4,048,000
Current portion of notes receivable
from stockholders 288,400 401,500 144,600
Inventories 5,621,700 10,587,100 6,262,100
Prepaid expenses 81,400 98,400 85,600
--------------- --------------- ----------------
Total current assets 9,481,100 15,494,000 11,316,100
--------------- --------------- ----------------
PROPERTY AND EQUIPMENT 858,200 970,300 964,100
--------------- --------------- ----------------
OTHER ASSETS
Notes receivable from stockholders, net of
current portion - - 286,500
Deposits 45,700 45,700 45,700
--------------- --------------- ----------------
45,700 45,700 332,200
--------------- --------------- ----------------
$ 10,385,000 $ 16,510,000 $ 12,612,400
--------------- --------------- ----------------
--------------- --------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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F-4 PAGE 2
SUN VALLEY FORD
BALANCE SHEETS (CONTINUED)
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December 31, June 30, 1997 June 30, 1996
1996 (unaudited) (unaudited)
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Outstanding checks in excess of bank balance $ 227,800 $ 74,300 $ -
Floor plan note payable 5,350,800 12,397,500 7,799,300
Accounts payable 619,000 773,000 706,100
Accrued liabilities and other payables 927,200 792,800 1,187,900
Income taxes payable 4,600 - 2,000
Current maturities of notes payable to
related parties 1,360,000 1,075,000 287,000
Current maturities of long-term debt 103,100 103,100 109,000
--------------- --------------- ----------------
Total current liabilities 8,592,500 15,215,700 10,091,300
--------------- --------------- ----------------
LONG-TERM LIABILITIES
Notes payable to related parties, net of
current maturities - - 475,000
Long-term debt, net of current maturities 241,500 189,900 293,100
--------------- --------------- ----------------
241,500 189,900 768,100
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STOCKHOLDERS' EQUITY
Common stock, $100 par value; 1,500
shares authorized, 536.9 shares issued
and outstanding 53,700 53,700 53,700
Retained earnings 1,497,300 1,050,700 1,699,300
--------------- --------------- ----------------
1,551,000 1,104,400 1,753,000
--------------- --------------- ----------------
$ 10,385,000 $ 16,510,000 $ 12,612,400
--------------- --------------- ----------------
--------------- --------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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F-5 PAGE 3
SUN VALLEY FORD
STATEMENTS OF INCOME AND RETAINED EARNINGS
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Year Ended Six Months Ended June 30,
December 31, 1997 1996
1996 (unaudited) (unaudited)
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SALES
New vehicles $ 25,591,300 $ 13,929,200 $ 11,406,400
Fleet 19,272,700 11,259,800 9,519,600
Used vehicles 12,023,900 4,856,900 6,444,800
Service, body and parts 10,456,000 5,127,200 5,184,500
Used wholesale 2,506,300 922,800 1,361,800
Warranty 1,887,000 890,800 902,000
Finance and insurance 489,600 257,800 273,000
Other 174,200 52,200 92,000
--------------- --------------- ----------------
72,401,000 37,296,700 35,184,100
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COST OF SALES
New vehicles 23,671,700 13,163,200 10,628,600
Fleet 18,240,000 10,473,800 9,008,400
Used vehicles 10,823,700 4,181,500 5,775,400
Service, body and parts 6,894,200 3,464,300 3,425,700
Used Wholesale 2,501,000 922,400 1,359,300
Warranty 914,700 441,300 450,200
Finance and insurance 240,100 97,100 130,300
Other 89,200 26,000 48,000
--------------- --------------- ----------------
63,374,600 32,769,600 30,825,900
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GROSS PROFIT 9,026,400 4,527,100 4,358,200
SELLING, GENERAL AND ADMINISTRATIVE 8,564,900 4,155,100 3,891,200
--------------- --------------- ----------------
INCOME FROM OPERATIONS 461,500 372,000 467,000
--------------- --------------- ----------------
OTHER INCOME (EXPENSE)
Interest expense (116,000) (124,800) (131,900)
Interest income 25,600 - -
Miscellaneous 59,000 12,000 42,100
--------------- --------------- ----------------
(31,400) (112,800) (89,800)
--------------- --------------- ----------------
INCOME BEFORE INCOME TAXES 430,100 259,200 377,200
PROVISION FOR INCOME TAXES 8,900 5,800 4,000
--------------- --------------- ----------------
NET INCOME 421,200 253,400 373,200
RETAINED EARNINGS, beginning of period 1,378,100 1,497,300 1,378,100
DISTRIBUTIONS PAID (302,000) (700,000) (52,000)
--------------- --------------- ----------------
RETAINED EARNINGS, end of period $ 1,497,300 $ 1,050,700 $ 1,699,300
--------------- --------------- ----------------
--------------- --------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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F-6 PAGE 4
SUN VALLEY FORD
STATEMENTS OF CASH FLOWS
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Year Ended Six Months Ended June 30,
December 31, 1997 1996
1996 (unaudited) (unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 421,200 $ 253,400 $ 373,200
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 304,800 123,800 109,700
Loss on disposal of assets 106,600 66,900 54,300
Allowance for doubtful accounts 23,700 47,000 120,700
Changes in:
Receivables (14,400) (1,002,500) (724,400)
Inventories 3,210,100 (4,965,400) 2,569,700
Prepaid expenses 68,300 (17,000) 64,100
Deposits (45,700) - (45,700)
Accounts payable 230,600 245,200 408,900
Accrued liabilities and other payables 77,800 (225,600) 247,300
Income taxes payable 4,600 (4,600) 2,000
--------------- --------------- ----------------
Net cash provided (used) by operating
activities 4,387,600 (5,478,800) 3,179,800
--------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (221,600) (302,800) (80,100)
Loan to stockholder (82,000) (115,000) (82,000)
Repayment on notes receivable from stockholders 146,500 1,900 3,800
--------------- --------------- ----------------
Net cash used by investing activities (157,100) (415,900) (158,300)
--------------- --------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable to related parties 975,000 325,000 275,000
Outstanding checks in excess of bank balance 227,800 (153,500) -
Net borrowings (payments) on floor plan note payable (4,763,500) 7,046,700 (2,315,000)
Principal repayments on notes payable to related
parties (358,200) (610,000) (256,200)
Distributions paid (302,000) (700,000) (52,000)
Principal repayments on long-term debt (114,300) (51,600) (56,800)
--------------- --------------- ----------------
Net cash provided (used) by financing
activities (4,335,200) 5,856,600 (2,405,000)
--------------- --------------- ----------------
NET CHANGE IN CASH (104,700) (38,100) 616,500
CASH, beginning of period 159,300 54,600 159,300
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CASH, end of period $ 54,600 $ 16,500 $ 775,800
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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F-7 PAGE 5
SUN VALLEY FORD
STATEMENTS OF CASH FLOWS (CONTINUED)
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Year Ended Six Months Ended June 30,
December 31, 1997 1996
1996 (unaudited) (unaudited)
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SUPPLEMENTAL CASH-FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 1,000 $ 12,000 $ -
Interest $ 713,700 $ 439,200 $ 386,672
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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F-8 PAGE 6
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF OPERATIONS - Sun Valley Ford, (the Company), engages in retail
sales of new Ford, Hyundai, and Volkswagen vehicles obtained through dealership
agreements, used vehicles, parts and service. The Company sells to individuals
and commercial businesses located primarily in the Concord, California area.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the Company
considers all highly liquid debt instruments with an original maturity of three
months or less to be cash equivalents.
CONCENTRATION OF RISK - Financial instruments potentially subjecting the Company
to concentrations of credit risk consist primarily of bank demand deposits in
excess of FDIC insurance thresholds and receivables. Credit risk related to
receivables is mitigated through ongoing credit evaluations of its customers and
a large, diversified customer base. Historically, the Company has not
experienced significant losses on trade receivables.
INVENTORIES - New vehicle, used vehicle, and parts and accessories inventories
are stated at the lower of cost or market. Cost for new vehicles is determined
by using the last-in, first-out (LIFO) method. Cost for used vehicles is based
on the specifically identified amounts. For parts inventories, cost is based on
current catalog prices, which approximates cost determined using the first-in,
first-out method.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and
depreciated or amortized using straight-line and accelerated methods over the
following estimated useful lives:
Leasehold improvements 5 - 24 years
Machinery and equipment 5 years
Furniture and fixtures 5 - 7 years
Company vehicles 3 - 5 years
Leased vehicles 5 years
INCOME TAXES - The Company is taxed under the provisions of Subchapter S of the
Internal Revenue Code and Chapter 4.5 of the California Revenue and Taxation
Code. Under this election, income taxes are paid by the stockholders on their
respective shares of corporate taxable income. The provision for income taxes
consists of a franchise tax required by the California Revenue and Taxation Code
equal to the greater of $800 or 1.5% of taxable income.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. The amounts
estimated could differ from actual results.
ADVERTISING COSTS - Advertising costs are expensed as incurred and were $650,000
for the year ended December 31, 1996. Advertising expense for the six months
ended June 30, 1997 and 1996 were $401,000 (unaudited) and $285,000 (unaudited),
respectively.
REVENUE RECOGNITION - Revenues from vehicle and parts sales and from service
operations are recognized at the time the vehicle is delivered to the customer
or service is completed.
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F-9 PAGE 7
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 1 - DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
RECOGNITION OF FINANCE FEES AND INSURANCE COMMISSIONS - The Company arranges
financing for its customers' vehicle purchases and arranges insurance in
connection therewith. The Company receives a fee from the financial institution
for arranging the financing and receives a commission for the sale of an
insurance policy. The Company is charged back for a portion of this fee should
the customer terminate the finance or insurance contract before its scheduled
term or before specified dates under arrangements with such institutions.
Finance revenues are fees due to the Company from financial institutions for
fees on contracts arranged to finance vehicle purchases.
MAJOR SUPPLIER AND DEALER AGREEMENT - The Company purchases substantially all of
its new vehicles and inventory from automakers at the prevailing prices charged
by the automakers to all franchised dealers. The Company's overall sales could
be impacted by the automaker's ability or unwillingness to supply the dealership
with an adequate supply of popular models. The Dealer Agreement generally limits
the location of the dealership and retains automaker approval rights over
changes in dealership management and ownership. The automaker is also entitled
to terminate the agreement if the dealership is in material breach of the terms.
INTERIM FINANCIAL STATEMENTS - The accompanying unaudited financial statements
for the six months ended June 30, 1997 and 1996 have been prepared on
substantially the same basis as the audited financial statements and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein.
NOTE 2 - RECEIVABLES
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
------------ ------------ ------------
Vehicle $ 2,484,200 $ 3,411,500 $ 3,005,100
Manufacturer 613,300 714,000 644,700
Parts and service 184,000 203,600 306,500
House contracts 106,300 94,400 117,600
Finance and insurance 59,900 61,100 94,400
Stockholders 37,900 - 17,800
Other 28,400 31,900 37,900
------------ ------------ -----------
3,514,000 4,516,500 4,224,000
Less allowance for
doubtful accounts 79,000 126,000 176,000
------------ ------------ -----------
$ 3,435,000 $ 4,390,500 $4,048,000
------------ ------------ -----------
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F-10 PAGE 8
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 3 - NOTES RECEIVABLE FROM STOCKHOLDERS
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
------------ ------------- -------------
Note receivable from a stockholder, with
interest at the prime rate; principal
and accrued interest due December 1997;
unsecured $ 206,500 $ 321,500 $ 300,800
Non-interest bearing notes receivable from
stockholders; due on demand 81,900 80,000 130,300
---------- ---------- ----------
$ 288,400 $ 401,500 $ 431,100
---------- ---------- ----------
---------- ---------- ----------
Interest received from a stockholder was $23,600, for the year ended December
31, 1996. No interest was received from stockholders for the six months ended
June 30, 1997 and 1996.
NOTE 4 - INVENTORIES
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
------------ ------------- -------------
New vehicles $ 5,930,600 $ 10,848,900 $ 6,698,000
Used vehicles 1,891,800 1,967,000 1,952,000
Parts, accessories and other 845,400 933,900 685,200
------------ ------------- ------------
8,667,800 13,749,800 9,335,200
Less LIFO reserve for new vehicle inventories 3,046,100 3,162,700 3,073,100
------------ ------------ ------------
$ 5,621,700 $ 10,587,100 $ 6,262,100
------------ ------------ ------------
------------ ------------ ------------
If the specific identification and the first-in, first-out (FIFO) methods had
been used in the accompanying financial statements, net income would have
decreased $48,400, to net income of $372,800, for the year ended December 31,
1996. Net income would have increased $116,500 (unaudited) and decreased $21,400
(unaudited) to net income of $369,900 (unaudited) and $351,800 (unaudited), for
the six months ended June 30, 1997 and 1996, respectively.
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F-11 PAGE 9
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 5 - PROPERTY AND EQUIPMENT
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
------------ ------------- -------------
Leasehold improvements $ 1,538,700 $ 1,704,100 $ 1,538,600
Machinery and equipment 1,358,000 1,452,000 1,326,600
Leased vehicles 217,800 187,500 223,400
Company vehicles 146,200 131,100 155,700
Furniture and fixtures 92,300 92,300 92,300
------------ ------------ ------------
3,353,000 3,567,000 3,336,600
Less accumulated depreciation and
amortization 2,494,800 2,596,700 2,372,500
------------ ------------ ------------
$ 858,200 $ 970,300 $ 964,100
------------ ------------ ------------
------------ ------------ ------------
NOTE 6 - FLOOR PLAN NOTE PAYABLE
The Company has available a $13,000,000 flooring credit line with variable
interest based on the Bank's prime rate. The line is due on demand and is
secured by substantially all assets of the Company.
The Company recognized manufacturers' floor plan interest expense subsidies of
approximately $556,000, for the year ended December 31, 1996, and $335,000
(unaudited) and $226,000 (unaudited) for the six months ended June 30, 1997 and
1996, respectively.
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F-12 PAGE 10
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE TO RELATED PARTIES
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
------------ ------------- -------------
Notes payable to majority stockholder, with
interest at 8.25% to 8.5% payable
monthly; principal repayments due at
various times through November 1997;
unsecured $ 875,000 $ 600,000 $ 275,000
Notes payable to the spouse of the majority
stockholder, with interest at 8.25% to 8.5%
payable monthly; principal repayments due
at various times through November 1997;
unsecured 275,000 275,000 275,000
Notes payable to a relative of the majority
stockholder, with interest at 8.25% to 8.5%
payable monthly; principal repayments due at
various times through September 1997;
unsecured 200,000 200,000 200,000
Note payable to a relative of the majority
stockholder, with interest at 8.75% payable
monthly; principal due January 1997;
unsecured 10,000 - 12,000
------------ ------------- -------------
1,360,000 1,075,000 762,000
Less current maturities 1,360,000 1,075,000 287,000
------------ ------------- -------------
$ - $ - $ 475,000
------------ ------------- -------------
------------ ------------- -------------
Interest expense on notes payable to the various related parties was $70,700 for
the year ended December 31, 1996, and $43,400 (unaudited) and $41,800
(unaudited) for the six months ended June 30, 1997 and 1996, respectively.
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F-13 PAGE 11
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT
DECEMBER 31, JUNE 30, 1997 JUNE 30, 1996
1996 (UNAUDITED) (UNAUDITED)
------------ ------------- -------------
Note payable to bank in monthly installments
of $8,300, plus interest at the bank's prime
rate plus .25%; maturing June 2000;
secured by substantially all assets of the
Company $ 333,400 $ 283,300 $ 383,400
Non-interest bearing note payable to
manufacturer in monthly installments of
$255; maturing September 2000; secured
by equipment 11,200 9,700 12,700
Other - - 6,000
---------- ---------- ----------
344,600 293,000 402,100
Less current maturities 103,100 103,100 109,000
---------- ---------- ----------
$ 241,500 $ 189,900 $ 293,100
---------- ---------- ----------
---------- ---------- ----------
Principal maturities for succeeding years are as follows:
Year Ending December 31,
------------------------
1997 $ 103,100
1998 103,100
1999 103,100
2000 35,300
----------
$ 344,600
----------
----------
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F-14 PAGE 12
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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NOTE 9 - EMPLOYEE BENEFIT PLANS
The Company provides a 401(k) plan covering substantially all nonunion employees
meeting minimum service and age requirements. The Company matches employee
contributions up to $600 per year. In addition, the Company may make additional
discretionary contributions. Employer contributions were approximately $119,000,
for the year ended December 31, 1996, and $19,600 (unaudited) and $10,900
(unaudited) for the six months ended June 30, 1997 and 1996, respectively.
The Company also contributes to a union-sponsored pension plan under a
collective bargaining agreement. Contributions to the union plan were $134,000,
for the year ended December 31, 1996, and $71,100 (unaudited) and $65,100
(unaudited) for the six months ended June 30, 1997 and 1996, respectively.
NOTE 10 - COMMITMENTS
The Company rents it's primary facility under an operating lease expiring in
June 2007. The monthly lease payment, currently $28,200, is adjusted annually
based on the lesser of increases in the Consumer Price Index or 7%, as defined
in the agreement. The Company is responsible for substantially all costs
associated with repairs, maintenance, taxes, and insurance. An option exists to
extend the lease to March 2016.
The Company rents a second facility, used for it's body shop, pre-delivery
center, used car reconditioning, and vehicle storage, from The Bartlett Family
Partnership, a related limited partnership controlled by the majority
stockholder, under an operating lease expiring November 2008. The monthly lease
payment is $20,000, plus an additional amount calculated at the end of each year
equal to 10% of pre-bonus profits, as defined in the agreement. In December
1998, the base monthly rent increases to $27,600, and will be adjusted annually
based on increases in the Consumer Price Index, as defined in the agreement. No
additional rent based on profits will be paid after November 1998. An option
exists to extend the lease to November 2016.
In addition, the Company leases office equipment and a vehicle storage lot under
operating leases expiring through September 2001.
Future minimum payments under these operating leases are as follows:
Year Ending December 31,
------------------------
1997 $ 611,400
1998 613,800
1999 673,400
2000 673,400
2001 672,700
Thereafter 4,150,100
------------
$ 7,394,800
------------
------------
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F-15 PAGE 13
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS (Continued)
Rent expense was $651,100, for the year ended December 31, 1996. Rent to a
related party was $335,800, and includes $95,800 in accounts payable. Rent
expense for the six months ended June 30, 1997 and 1996 was $278,700 (unaudited)
and $261,100 (unaudited), respectively. Related party rent expense was $120,000
(unaudited) for the six months ended June 30, 1997 and 1996, including $95,800
(unaudited) and $30,000 (unaudited), respectively, in accounts payable
NOTE 11 - FAIR VALUE OF SIGNIFICANT FINANCIAL 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.
The carrying amount of cash equivalents, trade receivables, trade payables, and
floor plan note payable approximate fair value because of the short-term nature
of these instruments. It is not practicable to estimate the fair values of
stockholder receivables, notes receivable from stockholders, or notes payable to
related parties, as the relationship of the parties to the Company influences
the terms of the instruments, and similar instruments are not generally
available.
The carrying amounts and estimated fair values of the Company's significant
financial instruments, none of which are held for trading purposes, are as
follows:
December 31, 1996 June 30, 1997
-------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------- -------------
Financial liabilities:
Floor plan note payable $ 5,350,800 $ 5,350,800 $ 12,397,500 $ 12,397,500
Note payable to bank 333,400 333,400 283,300 283,300
Long-term debt 11,200 11,200 9,700 9,700
The carrying amounts shown in the above table are included in the balance sheet
under the indicated captions.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
FLOOR PLAN NOTE PAYABLE - The carrying amount approximates fair value because
the interest rate fluctuates with the lender's prime rate.
NOTE PAYABLE TO BANK - The carrying amount approximates fair value because the
interest rate fluctuates with the lender's prime rate.
- --------------------------------------------------------------------------------
F-16 PAGE 14
SUN VALLEY FORD
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE 12 - CONTINGENCIES
ENVIRONMENTAL - Substantially all of the Company's facilities are subject to
federal, state and local provisions regulating the discharge of materials into
the environment. Compliance with these provisions has not had, nor does the
Company expect such compliance to have, any material effect upon the capital
expenditures, net income, financial condition or competitive position of the
Company. Management believes that its current practices and procedures for the
control and disposition of such wastes comply with applicable federal and state
requirements.
LITIGATION - The Company is from time to time subject to routine litigation
incidental to the ordinary course of business. Management believes that the
probable resolution of such contingencies will not materially affect the
financial position or results of operations of the Company.
NOTE 13 - SUBSEQUENT EVENT
The Company has executed a purchase and sale agreement whereby it has agreed to
sell substantially all if its assets to Lithia Motors, Inc. The purchase price
will consist of cash consideration of approximately $6,918,000 for property,
plant and equipment and intangible assets, plus an amount for parts inventory.
In addition, the purchaser will acquire the new vehicle inventories at the cost
paid to the manufacturer and used vehicle inventories at a negotiated value. The
sale is subject to customary closing conditions and approval of the change in
ownership by the franchisers.
- --------------------------------------------------------------------------------
F-17 PAGE 15
LITHIA MOTORS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
June 30, 1997
(In thousands)
Lithia Motors,
Lithia Motors, Sun Valley Inc.
Inc. Ford Adjustments Pro Forma
-------------- ---------- ----------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 15,296 $ - $ (5,277)(a) $ 10,019
Trade receivables 3,851 - - 3,851
Notes receivable, current portion 204 - - 204
Inventories, net 42,626 10,776 - 53,402
Vehicles leased to others, current portion 859 - - 859
Prepaid expenses and other 286 115 - 401
Deferred income taxes 1,316 - - 1,316
-------------- ---------- ----------- -------------
Total Current Assets 64,438 10,891 (5,277) 70,052
Property and Equipment, net of accumulated
depreciation 8,816 1,704 - 10,520
Vehicles Leased to Others, less current portion 5,269 - - 5,269
Notes Receivable, less current portion 599 - - 599
Goodwill, net of accumulated amortization 6,808 5,288 - 12,096
Other Non-Current Assets 1,291 - - 1,291
-------------- ---------- ----------- -------------
Total Assets $ 87,221 $ 17,883 $ (5,277) $ 99,827
-------------- ---------- ----------- -------------
-------------- ---------- ----------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Flooring notes payable $ 29,146 $ - $ 8,410 (b) $ 37,556
Current maturities of long-term debt 3,975 - - 3,975
Trade payables 1,699 - - 1,699
Accrued liabilities 2,801 - - 2,801
-------------- ---------- ----------- -------------
Total Current Liabilities 37,621 - 8,410 46,031
Long-Term Debt, less current maturities 9,599 - 4,196 (c) 13,795
Deferred Revenue 2,784 - - 2,784
Other Long-Term Liabilities 175 - - 175
Deferred Income Taxes 2,753 - - 2,753
-------------- ---------- ----------- -------------
Total Liabilities 52,932 - 12,606 65,538
-------------- ---------- ----------- -------------
Shareholders' Equity
Preferred stock - no par value; authorized 15,000
shares; issued and outstanding; none - - - -
Class A common stock - no par value;
authorized 100,000 shares; issued and
outstanding 2,896 28,037 - - 28,037
Class B common stock
authorized 25,000 shares; issued and
outstanding 4,110 511 - - 511
Retained earnings 5,741 - - 5,741
-------------- ---------- ----------- -------------
Total Shareholders' Equity 34,289 - - 34,289
-------------- ---------- ----------- -------------
Total Liabilities and Shareholders' Equity $ 87,221 $ - $ 12,606 $ 99,827
-------------- ---------- ----------- -------------
-------------- ---------- ----------- -------------
PF-1
LITHIA MOTORS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1996
(In thousands, except per share amounts)
Lithia Motors,
Lithia Motors, Sun Valley Inc.
Inc. Ford Adjustments Pro Forma
-------------- ---------- ----------- -------------
Sales:
Vehicles $ 123,703 $ 40,122 $ - $ 163,825
Service, body, parts and other 19,141 32,279 - 51,420
-------------- ---------- ----------- -------------
Net Sales 142,844 72,401 - 215,245
Cost of sales
Vehicles 109,082 36,997 (266)(d) 145,813
Service, body, parts and other 9,565 26,378 - 35,943
-------------- ---------- ----------- -------------
Cost of Sales 118,647 63,375 (266) 181,756
-------------- ---------- ----------- -------------
Gross profit 24,197 9,026 (266) 33,489
Selling, general and administrative 20,277 8,565 (34)(e) 28,808
-------------- ---------- ----------- -------------
Operating income 3,920 461 300 4,681
Other income (expense)
Equity in income of affiliate 44 - - 44
Interest income 193 26 - 219
Interest expense (1,353) (116) (437)(f) (1,906)
Other, net 1,112 59 - 1,171
-------------- ---------- ----------- -------------
(4) (31) (437) (472)
-------------- ---------- ----------- -------------
Income before minority interest and income taxes 3,916 430 (737) 4,209
Minority interest (687) - 687 (g) -
-------------- ---------- ----------- -------------
Income before income taxes 3,229 430 (50) 4,209
Income tax (benefit) expense (813) 9 2,403 (h) 1,599
-------------- ---------- ----------- -------------
Net income $ 4,042 $ 421 $ (2,453) $ 2,610
-------------- ---------- ----------- -------------
-------------- ---------- ----------- -------------
Net income per share $ 0.81 $ - $ - $ 0.52
-------------- ---------- ----------- -------------
-------------- ---------- ----------- -------------
Shares used in per share calculations 4,973 - - 4,973
-------------- ---------- ----------- -------------
-------------- ---------- ----------- -------------
PF-2
LITHIA MOTORS, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1997
(In thousands, except per share amounts)
Lithia Motors,
Lithia Motors, Sun Valley Inc.
Inc. Ford Adjustments Pro Forma
-------------- ---------- ----------- --------------
Sales:
Vehicles $ 104,875 $ 19,709 $ - $ 124,584
Service, body, parts and other 16,251 17,588 - 33,839
-------------- ---------- ----------- --------------
Net Sales 121,126 37,297 - 158,423
Cost of sales
Vehicles 94,049 18,267 (117)(d) 112,199
Service, body, parts and other 7,413 14,503 - 21,916
-------------- ---------- ----------- --------------
Cost of Sales 101,462 32,770 (117) 134,115
-------------- ---------- ----------- --------------
Gross profit 19,664 4,527 (117) 24,308
Selling, general and administrative 15,581 4,155 2 (e) 19,738
-------------- ---------- ----------- --------------
Operating income 4,083 372 115 4,570
Other income (expense)
Equity in income of affiliate 56 - - 56
Interest income 61 - - 61
Interest expense (651) (125) (270)(f) (1,046)
Other, net 541 12 - 553
-------------- ---------- ----------- --------------
7 (113) (270) (376)
-------------- ---------- ----------- --------------
Income before minority interest and income taxes 4,090 259 (385) 4,194
Income tax expense 1,579 6 9 (h) 1,594
-------------- ---------- ----------- --------------
Net income $ 2,511 $ 253 $ (376) $ 2,600
-------------- ---------- ----------- --------------
-------------- ---------- ----------- --------------
Net income per share $0.35 $ - $ - $ 0.36
-------------- ---------- ----------- --------------
-------------- ---------- ----------- --------------
Shares used in per share calculations 7,265 - - 7,265
-------------- ---------- ----------- --------------
-------------- ---------- ----------- --------------
PF-3
Lithia Motors, Inc. and Subsidiaries
Footnotes to Pro Forma Consolidated Financial Statements
(Unaudited)
(in thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma financial statements have been prepared to
present the effect of the acquisition by the Company of Sun Valley Ford. The
pro forma financial statements have been prepared based upon the historical
financial statements of the Company and Sun Valley Ford as if the acquisition
had occurred at June 30, 1997 and at the beginning of the respective periods.
The Pro Forma Consolidated Balance Sheet was prepared using only those assets
and liabilities of Sun Valley Ford that were purchased by the Company.
The Pro Forma Consolidated Statements of Operations may not be indicative of the
results of operations that actually would have occurred if the transactions had
been in effect as of the beginning of the respective periods nor do they purport
to indicate the results of future operations of the Company. The pro forma
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Company's 1996 Annual Report on Form 10-K and
the audited financial statements and notes thereto for Sun Valley Ford included
elsewhere in this report of Form 8-K/A-1. Management believes that all
adjustments necessary to present fairly such pro forma financial statements have
been made based on the terms and structure of the transaction.
PF-4
2. PFO FORMA ADJUSTMENTS
(a) To record cash paid for Sun Valley Ford.
(b) To record flooring notes payable incurred as part of acquisition.
(c) To record note payable to seller of Sun Valley Ford.
(d) To record the conversion from the LIFO method of inventory accounting
to the FIFO method:
12/31/96 6/30/97
-------- -------
Lithia Motors $ (314) $ -
Sun Valley Ford 48 (117)
-------- -------
$ (266) $ (117)
-------- -------
-------- -------
(e) To record amortization of intangibles associated with the purchase of
Sun Valley Ford and the elimination of certain management expenses:
12/31/96 6/30/97
-------- -------
Intangible amortization $ 132 $ 66
Elimination of expenses (166) (64)
-------- -------
$ (34) $ 2
-------- -------
-------- -------
(f) To reverse manufacturer's floor plan interest expense subsidies
received by Sun Valley Ford, lower floor plan interest expense to
reflect rates available to Lithia and to reverse related party interest
expense:
12/31/96 6/30/97
-------- -------
Reverse subsidies $ 556 $ 335
Lower interest (48) (24)
Reverse related party (71) (41)
-------- -------
$ 437 $ 270
-------- -------
-------- -------
(g) To reverse minority interest for comparability purposes.
(h) To record income tax expense at an effective rate of 38 percent.
PF-5