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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________
FORM 10-Q
___________________
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____
Commission file number: 000-21789
___________________
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0572810
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
360 E. JACKSON STREET, MEDFORD, OREGON 97501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 541-776-6899
___________________
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common stock without par value 2,895,550
Class B Common stock without par value 4,110,000
(Class) (Outstanding at November 5, 1997)
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LITHIA MOTORS, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets -September 30, 1997 and December 31,
1996 2
Consolidated Statements of Operations - Three and Nine Months
Ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
September 30, December 31,
1997 1996 (1)
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 7,379 $15,413
Trade receivables 5,952 2,260
Notes receivable, current portion 429 414
Notes receivable - related party - 308
Inventories, net 50,748 33,362
Vehicles leased to others, current portion 991 524
Prepaid expenses and other 1,330 372
Deferred income taxes 1,251 1,646
-------- -------
Total Current Assets 68,080 54,299
Property and Equipment, net of accumulated
depreciation of $3,900 and $2,073 11,933 4,616
Vehicles Leased to Others, less current portion 5,103 4,500
Notes Receivable, less current portion 328 377
Goodwill, net of accumulated amortization of
$204 and $23 14,817 4,101
Other Non-Current Assets 1,040 1,071
-------- -------
Total Assets $101,301 $68,964
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ - $ 500
Flooring notes payable 33,856 19,645
Current maturities of long-term debt 4,307 1,855
Trade payables 2,197 2,434
Accrued liabilities 4,690 2,482
Payable to related parties - 1,952
-------- -------
Total Current Liabilities 45,050 28,868
Long-Term Debt, less current maturities 14,662 6,160
Deferred Revenue 2,615 3,250
Other Long-Term Liabilities 264 -
Deferred Income Taxes 2,840 2,772
-------- -------
Total Liabilities 65,431 41,050
-------- -------
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 and 2,500 28,038 24,172
Class B common stock
authorized 25,000 shares; issued and
outstanding 4,110 and 4,110 511 511
Retained earnings 7,321 3,231
-------- -------
Total Shareholders' Equity 35,870 27,914
-------- -------
Total Liabilities and Shareholders' Equity $101,301 $68,964
-------- -------
-------- -------
(1) Restated, see Note 2 of Notes to Consolidated Financial Statements
The accompanying notes are an integral part of
these consolidated balance sheets.
2
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1997 1996 (1) 1997 1996 (1)
---------- ---------- ---------- ----------
Sales:
Vehicles $ 73,525 $ 31,599 $ 178,400 $ 91,477
Service, body, parts and other 12,048 4,924 28,299 14,089
---------- ---------- ---------- ----------
Net Sales 85,573 36,523 206,699 105,566
Cost of sales
Vehicles 66,107 27,590 160,156 80,495
Service, body, parts and other 5,281 2,367 12,694 6,897
---------- ---------- ---------- ----------
Cost of Sales 71,388 29,957 172,850 87,392
---------- ---------- ---------- ----------
Gross profit 14,185 6,566 33,849 18,174
Selling, general and administrative 11,162 5,202 26,743 14,475
---------- ---------- ---------- ----------
Operating income 3,023 1,364 7,106 3,699
Other income (expense)
Equity in income of affiliate (4) 16 52 40
Interest income 39 44 100 175
Interest expense (723) (315) (1,374) (1,012)
Other, net 238 96 779 443
---------- ---------- ---------- ----------
(450) (159) (443) (354)
---------- ---------- ---------- ----------
Income before minority interest and income taxes 2,573 1,205 6,663 3,345
Minority interest - 311 - 627
---------- ---------- ---------- ----------
Income before income taxes 2,573 894 6,663 2,718
Income tax expense 994 - 2,573 -
---------- ---------- ---------- ----------
Net income $ 1,579 $ 894 $ 4,090 $ 2,718
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income per share $ 0.22 $ 0.18 (2) $ 0.56 $ 0.56 (2)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in per share calculations 7,311,758 4,883,016 7,280,875 4,883,016
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Pro Forma Net Income Data (unaudited)
- --------------------------------------------------------------
Income before minority interest and income taxes, as reported $ 1,205 $ 3,345
Pro forma income taxes 462 1,284
---------- ----------
Pro forma net income $ 743 $ 2,061
---------- ----------
---------- ----------
Pro forma net income per share $ 0.15 $ 0.42
---------- ----------
---------- ----------
(1) Restated, see Note 2 of Notes to Consolidated Financial Statements.
(2) Not comparable to 1997 data due to S Corporation status in 1996, therefore
this is a pre-tax earnings per share amount. See Note 8 of Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
3
LITHIA MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine months ended September 30,
-------------------------------
1997 1996
-------- --------
Cash flows from operating activities:
Net income $ 4,090 $ 2,718
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 1,721 1,218
Loss on sale of assets 2 180
Gain on sale of vehicles leased to others (216) -
Deferred income taxes 68 -
Minority interest in income - 627
Equity in income of affiliate 91 (40)
(Increase) decrease in:
Trade and installment contract receivables, net (3,694) (843)
Inventories 5,966 2,269
Prepaid expenses and other (316) (519)
Other noncurrent assets (236) -
Increase (decrease) in:
Trade payables (344) (68)
Accrued liabilities 2,149 765
Other liabilities (2,324) 711
Proceeds from sale of vehicles leased to others 4,042 3,909
Expenditures for vehicles leased to others (5,953) (5,726)
-------- --------
Net cash provided by operating activities 5,046 5,201
Cash flows from investing activities:
Notes receivable issued (219) (488)
Principal payments received on notes receivable 253 454
Capital expenditures (5,043) (274)
Proceeds from sale of assets 3 176
Cash paid for acquisitions (11,094) -
-------- --------
Net cash used in investing activities (16,100) (132)
Cash flows from financing activities:
Net borrowings (repayments) on notes payable - 2,419
Net repayments on flooring notes payable (6,005) (6,095)
Principal payments on long-term debt (5,919) (11,265)
Proceeds from issuance of long-term debt 11,078 10,272
Proceeds from issuance of common stock 3,866 -
Proceeds from minority interest share receivable - 320
Dividends and distributions - (604)
-------- --------
Net cash provided by (used in) financing activities 3,020 (4,953)
-------- --------
Increase (decrease) in cash and cash equivalents (8,034) 116
Cash and cash equivalents:
Beginning of period 15,413 9,706
-------- --------
End of period $ 7,379 $ 9,822
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated statements.
4
LITHIA MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1: BASIS OF PRESENTATION
The financial information included herein for the three and nine-month
periods ended September 30, 1997 and 1996 is unaudited; however, such
information reflects all adjustments consisting only of normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations and cash flows
for the interim periods. The financial information as of December 31, 1996
is derived from Lithia Motors, Inc.'s (the Company's) 1996 Annual Report on
Form 10-K. The interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's 1996 Annual Report on Form 10-K. The results of
operations for the interim periods presented are not necessarily indicative
of the results to be expected for the full year.
NOTE 2: CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1997, the Company changed its method of accounting for
inventories from the last-in first-out (LIFO) method to the specific
identification method for vehicles and the first-in first-out (FIFO) method
of accounting for parts (collectively, the FIFO method). Management believes
the FIFO method is preferable because the FIFO method of valuing inventories
more accurately presents the Company's financial position as it reflects more
recent costs at the balance sheet date, more accurately matches revenues with
costs reported during the period presented and provides comparability to
industry information. The financial statements of prior periods have been
restated to apply the new method of accounting for inventories retroactively.
The effect of this restatement was to increase retained earnings as of
January 1, 1996 by $4,896. The restatement decreased net income by $321, or
$0.07 per share and $86, or $0.02 per share, for the three and nine-month
periods ended September 30, 1996, respectively.
NOTE 3: INVENTORIES
Inventories are valued at cost, using the specific identification method for
vehicles and the first-in first-out (FIFO) method of accounting for parts
(collectively, the FIFO method).
September 30, 1997 December 31, 1996
------------------ -----------------
New and demonstrator vehicles $33,158 $19,402
Used vehicles 14,381 12,199
Parts and accessories 3,209 1,761
------- -------
$50,748 $33,362
------- -------
------- -------
NOTE 4: ACQUISITIONS
In April 1997, the Company closed its previously announced acquisition of
Magnussen Dodge and Magnussen Isuzu in Concord, California. The Company paid
a total of $10.4 million in cash and notes for all of the assets of the
dealerships and certain leasehold improvements, with bank finance funding a
substantial portion of the total payment.
5
In July 1997, the Company closed its previously announced acquisition of
Magnussen-Barbee Ford of Napa, California. The Company paid a total of
$7.9 million in cash and notes for all of the assets of the dealerships, with
bank finance funding a substantial portion of the total payment.
These acquisitions were recorded as purchase transactions. Pro forma
financial information is not presented, as it is not materially different
from the reported financial information of the Company.
In August 1997, the Company closed its previously announced acquisition of
Sun Valley Ford, Inc., a California corporation, dba "Sun Valley Ford
Volkswagen Hyundai", located in Concord, California. The Company paid a
total of $17.9 million in cash and notes, with bank finance funding a
substantial portion of the total payment. Pro forma financial information is
as follows:
Nine Months Ended
September 30,
----------------------
1997 1996
-------- --------
Total revenues $251,620 $161,315
Net income 3,943 1,829
Earnings per share 0.54 0.37
NOTE 5: CREDIT FACILITY
In September 1997, the Company announced an agreement in principal with U.S.
Bank for $175 million in credit lines, including $110 million in new, used
and program flooring lines, $30 million in acquisition capital and $35
million for other corporate purposes.
NOTE 6: SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
Nine Months Ended September 30,
-------------------------------
1997 1996
------ ----
Cash paid during the period for income taxes $2,262 $ -
Cash paid during the period for interest 1,511 996
Property acquired through debt 1,424 -
LIFO to FIFO restatement 9,620 -
NOTE 7: EARNINGS PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement 128,
EARNINGS PER SHARE ("SFAS 128"), superseding Opinion 15. This statement
establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board
Opinion No. 15. Under SFAS 128, the Company will be required to present both
basic net income per share and diluted net income per share. Basic net
income per share is expected to be comparable or slightly higher than the
currently presented net income per share as the effect of dilutive stock
options will not be considered in computing basic net income per share.
Diluted net income per share is expected to be comparable or slightly higher
than the currently presented net income per share since the diluted
calculation will also use the average market price instead of the
6
higher of the average or ending market price for its calculations. SFAS 128
is required to be adopted for periods ending after December 15, 1997. Pro
forma effects of applying SFAS 128 are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
----- ----- ----- -----
Primary EPS as reported $0.22 $0.09 $0.56 $0.33
Effect of SFAS 128 0.01 0.00 0.03 0.00
----- ----- ----- -----
Basic EPS as restated $0.23 $0.09 $0.59 $0.33
----- ----- ----- -----
----- ----- ----- -----
Fully diluted EPS as reported $0.22 $0.09 $0.56 $0.33
Effect of SFAS 128 0.00 0.00 0.00 0.00
----- ----- ----- -----
Diluted EPS as restated $0.22 $0.09 $0.56 $0.33
----- ----- ----- -----
----- ----- ----- -----
NOTE 8: RECLASSIFICATIONS
Certain reclassifications have been made to the prior period statements to
conform to current presentation. Such reclassifications are a result of the
change from an S Corporation to a C Corporation as of December 18, 1996, the
date of the Company's initial public offering and also as a result of the
change in accounting principle discussed above in Note 2.
NOTE 9: SUBSEQUENT EVENTS
On October 1, 1997, the Company closed its previously announced acquisition
of Dick Donnelly Automotive Enterprises, Inc., dba Dick Donnelly Lincoln,
Mercury, Audi, Suzuki, Isuzu, located in Reno, Nevada. The Company paid a
total of $12.8 million in cash and notes, with bank financing funding a
substantial portion of the total payment.
On October 3, 1997, the Company closed its previously announced acquisition
of Nissan-BMW, Inc., dba Bakersfield Nissan, Acura, BMW ("Bakersfield
Nissan-BMW"), located in Bakersfield, California. The Company paid a total
of $9.2 million in cash and notes, with bank financing funding a substantial
portion of the total payment. The Company is leasing the land and facilities
from the Bakersfield Nissan-BMW.
Both the Dick Donnelly and the Bakersfield acquisitions were accounted for as
purchase transactions.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10-Q contains forward-looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward looking statements as a
result of certain risks including those set forth in the Company's initial
public offering prospectus dated December 18, 1996 and in its 1996 Annual
Report on Form 10-K. These risk factors include, but are not limited to, the
cyclical nature of automobile sales, the intense competition in the
automobile retail industry and the Company's ability to negotiate profitable
acquisitions and secure manufacturer approvals for such acquisitions.
GENERAL
Lithia Motors is one of the larger retailers of new and used vehicles in the
western United States, offering 21 domestic and imported makes of new
automobiles and light trucks (including acquisitions that have not yet
closed) at 15 locations. As an integral part of its operations, the Company
arranges related financing (non-recourse) and insurance and sells parts,
service and ancillary products. The Company's headquarters are currently
located in Medford, Oregon, where it has a market share of over 40 percent.
The Company has grown primarily by successfully acquiring and integrating
dealerships and by obtaining new dealer franchises. The Company's strategy is
to become a leading acquirer and operator of dealerships in the western
United States.
The following table sets forth selected condensed financial data expressed as
a percentage of total sales for the periods indicated for the average
automotive dealer in the United States.
AVERAGE U.S. DEALERSHIP YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA: -----------------------
1996 1995
------ ------
Sales:
New vehicles 57.7% 58.6%
Used vehicles 30.4 29.0
Parts and service, other 11.9 12.4
------ ------
Total sales 100.0% 100.0%
Gross profit 12.8% 12.9%
Total dealership expense 11.3% 11.5%
Income before taxes 1.5% 1.4%
__________
Source: NADA INDUSTRY ANALYSIS DIVISION
8
The following table sets forth selected condensed financial data for the
Company, restated using the FIFO method, expressed as a percentage of total
sales for the periods indicated below.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles 52% 45% 49% 46%
Used vehicles 34 41 37 41
Service, body, parts and other 14 14 14 13
---- ---- ---- ----
Total sales 100% 100% 100% 100%
Gross profit 17 18 16 17
Selling, general and administrative 13 14 13 13
---- ---- ---- ----
Operating income 4 4 3 4
Other income (expense), net (1) (1) - (1)
---- ---- ---- ----
Income before taxes and minority
interest 3% 3% 3% 3%
---- ---- ---- ----
---- ---- ---- ----
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
Net sales for the Company increased $49.1 million, or 134 percent, to $85.6
million for the quarter ended September 30, 1997 from $36.5 million for the
comparable period of 1996. Net sales increased $101.1 million, or 96
percent, to $206.7 million for the nine months ended September 30, 1997
compared to $105.6 million for the comparable period of 1996. Same store
revenue growth for the three and nine month periods ended September 30, 1997
was 5.7 percent and 5.6 percent, respectively, with a 6.3 percent decrease
and 5.0 percent increase in used retail revenue, respectively, a 22.2 percent
and 20.8 percent increase in other operating revenue, respectively, and a 6.6
percent and 0.2 percent increase in new vehicle sales, respectively.
NEW VEHICLE SALES. The Company sells 21 domestic and imported brands ranging
from economy to luxury cars, as well as sport utility vehicles, minivans and
light trucks. Revenue on new vehicle sales increased 170 percent to $44.6
million and 110 percent to $101.0 million, respectively, for the three and
nine-month periods ended September 30, 1997 compared to $16.5 million and
$48.0 million, respectively, for the comparable periods of 1996. These
increases were achieved by a 150 percent and 97 percent increase,
respectively, in units sold to 2,083 and 4,768, respectively, for the three
and nine-month periods ended September 30, 1997 and a 8 percent and 7 percent
increase, respectively, in the average selling price to $21,393 and $21,187
respectively, for the three and nine-month periods ended September 30, 1997.
The increases are primarily attributable to the Eugene Dodge, Vacaville
Toyota, Concord Dodge, Napa Ford, Sun Valley Ford and Sun Valley Volkswagen
stores, all of which were acquired since the fourth quarter of 1996. Same
store new vehicle revenue was up 6.6 percent and 0.2 percent, respectively,
for the three and nine-month periods ended September 30, 1997. The increase
in the third quarter is primarily as a result of manufacturer incentives at
the end of the model year.
9
The Company purchases substantially all of its new car inventory directly
from manufacturers who allocate new vehicles to dealerships based on the
amount of vehicles sold by the dealership and by the dealership's market
area. The Company will also exchange vehicles with other dealers to
accommodate customer demand and to balance inventory.
The Company sells vehicles from the factory to a fleet purchaser utilizing
(i) "book only" fleet sales in which the Company does not take delivery of a
vehicle; or (ii) fleet sales which pass through the Company's inventory. The
Company realizes substantially less profit per vehicle on fleet sales than it
does through retail sales. For "book only" fleet sales, only the net revenue
is included in the Company's revenue. Fleet sales do not represent a
material portion of the Company's sales.
USED VEHICLE SALES. The Company offers a variety of makes and models of used
cars and light trucks of varying model years and prices. Revenue from retail
used vehicle sales increased 75 percent and 64 percent, respectively to $22.4
million and $58.9 million for the three and nine-month periods ended
September 30, 1997 from $12.8 million and $35.9 million, respectively, for
the comparable periods of 1996. Retail used unit volume increased 76 percent
and 56 percent, respectively, to 1,793 units and 4,779 units, respectively,
for the three and nine-month periods ended September 30, 1997. The average
unit price decreased 1 percent and increased 5 percent, respectively, to
$12,499 and $12,327, respectively for the three and nine-month periods ended
September 30, 1997. The increases in units and total used retail revenue are
attributable to the addition of the six new stores, combined with a same
store used retail revenue decrease of 6.3 percent and increase of 5.0
percent, respectively, with a 0.6 percent decrease and a 5.0 percent
increase, respectively, in same store average selling prices for the three
and nine month periods ended September 30, 1997 compared to the same periods
of 1996.
Used vehicle sales are an important part of the Company's overall
profitability. The Company has made a strategic commitment to emphasize used
vehicle sales. As part of its focus on used vehicle sales, the Company
retains a full-time used vehicle manager at each of its locations and has
allocated additional financing and display space to this effort. The Company
believes there is substantial consumer demand for quality used vehicles.
The Company sells used vehicles to retail customers and, in the case of
vehicles in poor condition, or vehicles which have not sold within a
specified period of time, to other dealers, and to wholesalers. Sales to
other dealers and to wholesalers are frequently at, or close to, cost and
therefore affect the Company's overall gross profit margin on used vehicle
sales.
SERVICE, BODY, PARTS AND OTHER. The Company's service, body, parts and other
operating revenue, the Company's highest margin product area, increased to
$12.0 million and $28.3 million, respectively, for the three and nine-month
periods ended September 30, 1997, from $4.9 million and $14.1 million,
respectively, for the comparable periods of 1996. This increase is primarily
due to an increased number of finance and insurance transactions and an
increase in revenues derived from service department maintenance and repairs.
To a limited extent, revenues from the parts and service department are
countercyclical to new
10
car sales as owners repair existing vehicles rather than buy new vehicles.
The Company believes this helps mitigate the affects of a downturn in the new
vehicle sales cycle.
GROSS PROFIT. Gross profit increased to $14.2 million and $33.8 million,
respectively, for the three and nine-month periods ended September 30, 1997,
compared with $6.6 million and $18.2 million, respectively, for the
comparable periods of 1996. These increases are primarily due to an
increase in new and used vehicle unit sales during the periods at the
Company's new stores as discussed above. Gross profit margins were 16.6
percent and 16.4 percent, respectively, for the three and nine-month periods
ended September 30, 1997 compared to 18.0 percent and 17.2 percent for the
comparable periods of 1996. The decrease in the gross profit margin is
primarily attributable to large volume increases at certain key stores. As
volumes increase, gross profit margin typically decreases. The margins on
the newly acquired stores have improved, however, from pre-acquisition
margins. The decrease in gross profit margins for the three and nine-month
periods was primarily a result of increased volume at several of the
Company's stores during 1997. The Company's gross profit margin continues to
exceed the average U.S. dealership gross profit margin of 12.8 percent for
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A"). The Company's SG&A
expense increased to $11.2 million and $26.7 million (13.0 percent and 12.9
percent, respectively, of total sales), respectively, for the three and
nine-month periods ended September 30, 1997 compared to $5.2 million and
$14.5 million (14.2 percent and 13.7 percent, respectively, of total sales),
respectively, for the comparable periods of 1996. The increase in SG&A was
due primarily to increased selling, or variable, expense related to the
increase in sales and increased costs associated with being a public company.
The decrease in SG&A as a percent of total sales is a result of economies of
scale gained as the fixed expenses are spread over a larger revenue base.
INCOME TAX EXPENSE. The Company's effective tax rate for the three and
nine-month periods ended September 30, 1997 was 38.6 percent compared to 38.4
percent (on a pro forma basis) for the comparable periods of 1996. The
Company's effective tax rate may be effected by the purchase of new stores in
jurisdictions with tax rates either higher or lower than the current
estimated rate.
NET INCOME. Net income was $1.6 million and $4.1 million (1.9 percent and
2.0 percent, respectively, of total sales), respectively, for the three and
nine-month periods ended September 30, 1997 compared to $0.7 million and $2.0
million (2.0 percent and 2.0 percent, respectively, of total sales),
respectively, on a pro forma basis, for the comparable periods of 1996, as a
result of the individual line item changes discussed above.
11
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had working capital of $23.0 million, which
included $7.4 million of cash and cash equivalents. The $8.0 million
decrease in cash since December 31, 1996 is primarily a result of $11.1
million used for acquisitions and $5.0 million used for the purchase of
property and equipment, offset by $5.0 million provided by operations, and
$3.9 million in net proceeds from the sale of the Company's common stock as a
result of the exercise of the underwriters' overallotment option. The
current ratio at September 30, 1997 was 1.5:1 compared to 1.9:1 at December 31,
1996.
Trade receivables increased $3.7 million to $6.0 million at September 30,
1997 from $2.3 million at December 31, 1996, primarily as a result of the
acquisitions since the Company's initial public offering in December 1996.
Inventories increased $17.4 million to $50.7 million at September 30, 1997
from $33.4 million at December 31, 1996 primarily as a result of vehicles
acquired with the Company's 1997 acquisitions.
Property and equipment increased $7.3 million to $11.9 million at September 30,
1997 from $4.6 million at December 31, 1996 primarily as a result of the
purchase of a new body and paint shop, a vacant parcel of land, which is
being held for future development, and property and equipment acquired with
the acquisitions since the Company's initial public offering in December 1996.
Total debt, excluding flooring lines, increased by $10.5 million to $19.0
million at September 30, 1997 compared to $8.5 million at December 31, 1996,
primarily as a result of 1997 acquisitions. At September 30, 1997, the
Company's debt to equity ratio was 53 percent.
In September 1997, the Company announced an agreement in principal with U.S.
Bank for $175 million in credit lines, including $110 million in new, used
and program flooring lines, $30 million in acquisition capital and $35
million for other corporate purposes. Management believes that the Flooring
Line provides the Company with financing at rates lower than those available
from manufacturers. At September 30, 1997, there was approximately $33.9
million outstanding under the Flooring Line and $52.8 million outstanding
under the credit facility in total.
Total shareholders' equity increased $8.0 million in the first nine months of
1997 as a result of the underwriters' exercise of their over allotment option
for 375,000 additional shares of Class A Common Stock for a total of $3.9
million, $3.2 million of non-cash, after-tax LIFO reserves resulting from the
conversion to the FIFO method of accounting (the industry standard) and $4.1
million of retained earnings from the nine months ended September 30, 1997.
The Company's principal needs for capital resources are to finance
acquisitions, capital expenditures and increased working capital
requirements. Historically, the Company has relied primarily upon internally
generated cash flows from operations, borrowings under its credit facility
and borrowings from its shareholders to finance its operations and expansion.
12
In April 1997, the Company closed its acquisition of Magnussen Dodge Isuzu in
Concord, California for $10.4 million in cash and notes, canceled its
agreement to acquire Linder Honda of Salinas, California and signed a
definitive agreement to purchase Sun Valley Ford Volkswagen Hyundai in
Concord, California.
In July 1997, the Company closed its previously announced acquisition of
Magnussen-Barbee Ford Lincoln Mercury of Napa, California. The Company paid
a total of $7.9 million in cash and notes for all of the assets of the
dealerships, with bank financing funding a substantial portion of the total
payment.
In August 1997, the Company closed its previously announced acquisition of
Sun Valley Ford, Inc., a California corporation, dba "Sun Valley Ford
Volkswagen Hyundai", located in Concord, California. The Company paid a
total of $17.9 million in cash and notes, with bank financing funding a
substantial portion of the total payment.
On October 1, 1997, the Company closed its previously announced acquisition
of Dick Donnelly Automotive Enterprises, Inc., dba Dick Donnelly Lincoln,
Mercury, Audi, Suzuki, Isuzu, located in Reno, Nevada. The Company paid a
total of $12.8 million in cash and notes, with bank financing funding a
substantial portion of the total payment.
On October 3, 1997, the Company closed its previously announced acquisition
of Nissan-BMW, Inc., dba Bakersfield Nissan, Acura, BMW ("Bakersfield
Nissan-BMW"), located in Bakersfield, California. The Company paid a total
of $9.2 million in cash and notes, with bank financing funding a substantial
portion of the total payment. The Company is leasing the land and facilities
from the Bakersfield Nissan-BMW.
As of the date of this filing, the Company did not have any pending
acquisitions.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been lower in the first and fourth
quarters of each year largely due to consumer purchasing patterns during the
holiday season, inclement weather and the reduced number of business days
during the holiday season. As a result, financial performance for the Company
is generally lower during the fourth quarter than during the other quarters
of each fiscal year; however, this did not hold true for the years 1996 and
1995. Management believes that interest rates, levels of consumer debt,
consumer buying patterns and confidence, as well as general economic
conditions, also contribute to fluctuations in sales and operating results.
The timing of acquisitions may cause substantial fluctuations of operating
results from quarter to quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
("SFAS 128"). This statement establishes a different method of computing net
income per share than is currently required under the provisions of
Accounting Principles Board Opinion No. 15. Under SFAS 128, the Company will
be required to present both basic net income per share and diluted net income
per share. Basic net income per share is expected to be comparable or
slightly higher than the currently presented net income per share as the
effect of dilutive stock options will not be considered in computing basic
net income per
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share. Diluted net income per share is expected to be comparable or slightly
higher than the currently presented net income per share since the diluted
calculation will also use the average market price instead of the higher of
the average or ending market price for its calculations. The Company expects
to adopt SFAS 128 in the fourth quarter of 1997 and, at that time, all
historical net income per share data presented will be restated to conform to
the provisions of SFAS 128.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). This statement
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general purpose financial statements. The
objective of SFAS 130 is to report a measure of all changes in equity of an
enterprise that result from transactions and other economic events of the
period other than transactions with owners. The Company expects to adopt
SFAS 130 in the first quarter of 1998 and does not expect comprehensive
income to be materially different from currently reported net income.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as a part of this report are listed below and this list
constitutes the exhibit index.
Exhibit No.
-----------
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 Form 10-Q for the quarter ended
June 30, 1997 as filed with the Securities and Exchange Commission
on August 12, 1997, and is incorporated herein by reference.
2.2 Agreement for Purchase and Sale of Business Assets, by and between
Nissan-BMW, Inc., a California corporation, dba Bakersfield Nissan,
Acura, BMW, and the Company, dated June 26, 1997, previously filed
with the Company's Form 10-Q for the quarter ended June 30, 1997 as
filed with the Securities and Exchange Commission on August 12,
1997, and is incorporated herein by reference.
2.3 Agreement for Purchase and Sale of Business Assets, by and between
Dick Donnelly Automotive Enterprises, Inc., a Delaware corporation,
dba Dick Donnelly Lincoln, Mercury, Audi, Suzuki, Isuzu, and the
Company, dated July 8, 1997, previously filed with the Company's
Form 10-Q for the quarter ended June 30, 1997 as filed with the
Securities and 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, as
previously filed with the Company's Form 8-K dated August 8, 1997
as filed with the Securities and 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, as previously
filed with the Company's Form 8-K dated August 8, 1997 as filed
with the Securities and 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, as
previously filed with the Company's Form 8-K/A dated August 8, 1997
as filed with the Securities and Exchange Commission on October 14,
1997, and is incorporated herein by reference.
10.4 Lease Agreement, and assignment thereof, by and between Lithia
Motors, Inc., George Valente and Lena E. Valenta and Sun Valley
Ford, Inc., dated August 4, 1997, as previously filed with the
Company's Form 8-K/A dated August 8, 1997 as filed with the
Securities and Exchange Commission on October 14, 1997, and is
incorporated herein by reference.
11 Calculations of Net Income Per Share
18 Letter re change in accounting principles, previously filed as
exhibit 18 to the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1997, as filed with the Securities and
Exchange Commission on May 13, 1997 and incorporated herein by
reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a report on Form 8-K under Item 2., Acquisition or
Disposition of Assets and Item 7., Financial Statements and Exhibits, dated
August 8, 1997 and filed with the Securities and Exchange Commission on
August 21, 1997.
The Company filed a report on Form 8-K under Item 2., Acquisition or
Disposition of Assets and Item 7., Financial Statements and Exhibits dated
July 1, 1997 and filed with the Securities and Exchange Commission on July
16, 1997.
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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: November 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)
16