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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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, 1998
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 6,103,491
Class B Common stock without par value 4,110,000
(Class) (Outstanding at November 4, 1998)
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LITHIA MOTORS, INC.
FORM 10-Q
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets -September 30, 1998 (unaudited) and December 31, 1997 2
Consolidated Statements of Operations - Three and Nine Months Ended September 30, 1998
and 1997 (unaudited) 3
Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997
(unaudited) 4
Notes to Consolidated Financial Statements (unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
1
PART 1-FINANCIAL INFORMATION
Item 1. Financial Statements
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
Assets
Current Assets:
Cash and cash equivalents $ 17,655 $ 18,454
Trade receivables 14,468 7,655
Notes receivable, current portion 704 427
Inventories, net 117,093 89,845
Vehicles leased to others, current portion 705 738
Prepaid expenses and other 776 913
Deferred income taxes 2,062 1,855
------------- ------------
Total Current Assets 153,463 119,887
Property and Equipment, net of accumulated
depreciation of $3,519 and $2,822 29,203 16,265
Vehicles Leased to Others, less current portion 5,057 4,588
Notes Receivable, less current portion 351 309
Goodwill, net of accumulated amortization of
$910 and $293 35,531 24,062
Other Non-Current Assets, net of accumulated
amortization of $93 and $53 1,279 1,415
------------- ------------
Total Assets $224,884 $166,526
------------- ------------
------------- ------------
Liabilities and Shareholders' Equity
Current Liabilities:
Flooring notes payable $ 88,185 $ 82,598
Current maturities of long-term debt 2,973 2,688
Current portion of capital leases 105 99
Trade payables 4,952 3,874
Accrued liabilities 11,395 6,758
------------- ------------
Total Current Liabilities 107,610 96,017
Long-Term Debt, less current maturities 20,773 24,242
Long-Term Capital Lease Obligation, less current
portion 2,236 2,316
Deferred Revenue 1,984 2,519
Other Long-Term Liabilities 1,328 447
Deferred Income Taxes 3,044 3,108
------------- ------------
Total Liabilities 136,975 128,649
------------- ------------
Shareholders' Equity
Preferred stock - no par value; authorized 15,000
shares; issued and outstanding; none -- --
Class A common stock - no par value;
authorized 100,000 shares; issued and
outstanding 6,082 and 2,926 70,633 28,117
Class B common stock
authorized 25,000 shares; issued and
outstanding 4,110 and 4,110 511 511
Additional paid-in capital 175 59
Retained earnings 16,590 9,190
------------- ------------
Total Shareholders' Equity 87,909 37,877
------------- ------------
Total Liabilities and Shareholders' Equity $224,884 $166,526
------------- ------------
------------- ------------
The accompanying notes are an integral part of these statements.
2
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
1998 1997 1998 1997
----------- ---------- ----------- ----------
Sales:
Vehicles $ 167,102 $ 73,525 $ 442,409 $ 178,400
Service, body, parts and other 28,812 12,048 73,245 28,299
----------- ---------- ----------- ----------
Net Sales 195,914 85,573 515,654 206,699
Cost of sales
Vehicles 151,307 66,107 400,938 160,156
Service, body, parts and other 13,104 5,281 33,625 12,694
----------- ---------- ----------- ----------
Cost of Sales 164,411 71,388 434,563 172,850
----------- ---------- ----------- ----------
Gross profit 31,503 14,185 81,091 33,849
Selling, general and administrative 23,241 10,849 61,352 26,039
Depreciation and amortization 675 313 1,742 704
----------- ---------- ----------- ----------
Operating income 7,587 3,023 17,997 7,106
Other income (expense)
Equity in income of affiliate 16 (4) 35 52
Interest income 41 39 115 100
Interest expense (2,232) (723) (7,099) (1,374)
Other, net 553 238 1,013 779
----------- ---------- ----------- ----------
(1,622) (450) (5,936) (443)
----------- ---------- ----------- ----------
Income before income taxes 5,965 2,573 12,061 6,663
Income tax expense 2,307 994 4,661 2,573
----------- ---------- ----------- ----------
Net income $ 3,658 $ 1,579 $ 7,400 $ 4,090
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Basic net income per share $ 0.36 $ 0.23 $ 0.84 $ 0.59
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Diluted net income per share $ 0.35 $ 0.22 $ 0.81 $ 0.56
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
The accompanying notes are an integral part of these statements.
3
LITHIA MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Unaudited)
Nine months ended
September 30,
---------------------
1998 1997
---------- ---------
Cash flows from operating activities:
Net income $ 7,400 $ 4,090
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization 2,447 1,721
Compensation expense related to stock option issuances 103 --
Loss on sale of assets 32 2
Gain on sale of vehicles leased to others (14) (216)
Deferred income taxes (64) 68
Equity in income of affiliate (35) 91
(Increase) decrease, net of effect of acquisitions:
Trade and installment contract receivables, net (6,855) (3,694)
Inventories (5,959) 5,966
Prepaid expenses and other 75 (316)
Other noncurrent assets 141 (236)
Increase (decrease), net of effect of acquisitions:
Flooring notes payable 5,829 (6,005)
Trade payables 1,000 (344)
Accrued liabilities 4,638 2,149
Other liabilities 224 (371)
---------- ---------
Net cash provided by operating activities 8,962 2,905
Cash flows from investing activities:
Notes receivable issued (621) (219)
Principal payments received on notes receivable 302 253
Capital expenditures (2,840) (5,043)
Proceeds from sale of assets 168 3
Proceeds from sale of vehicles leased to others 5,416 4,042
Expenditures for vehicles leased to others (6,602) (5,953)
Cash paid for acquisitions (28,256) (11,094)
---------- ---------
Net cash used in investing activities (32,433) (18,011)
Cash flows from financing activities:
Net repayments on used vehicle line of credit (15,500) --
Principal payments on long-term debt (37,531) (5,919)
Proceeds from issuance of long-term debt 33,174 11,078
Proceeds from issuance of common stock 42,529 3,866
Dividends and distributions -- (1,953)
---------- ---------
Net cash provided by financing activities 22,672 7,072
---------- ---------
Decrease in cash and cash equivalents (799) (8,034)
Cash and cash equivalents:
Beginning of period 18,454 15,413
---------- ---------
End of period $ 17,655 $ 7,379
---------- ---------
---------- ---------
The accompanying notes are an integral part of these 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, 1998 and 1997 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, 1997 is
derived from Lithia Motors, Inc.'s (the Company's) 1997 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 1997 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. 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, 1998 December 31, 1997
------------------ -----------------
New and demonstrator vehicles $ 85,880 $ 63,457
Used vehicles 25,033 21,524
Parts and accessories 6,180 4,864
--------- --------
$ 117,093 $ 89,845
--------- --------
--------- --------
Note 3. Credit Facility
In May 1998, the Company's credit facilities were amended to increase the
total available credit by $20 million to a total of $195 million, including $130
million in new, used and program flooring lines, $30 million in acquisition
capital and $35 million for other corporate purposes. In July 1998, the
Company's credit facilities were again amended to increase the total available
credit by $45 million to a total of $240 million, including $175 million in new,
used and program flooring lines, $30 million in acquisition capital and $35
million for other corporate purposes. The amendment also extended the expiration
date of the credit facility to December 1, 1998.
In September 1998, the Company signed a letter of intent with Ford Motor
Credit Company to serve as its primary lender, providing a total of $350 million
in credit lines, including $275 million in new, program and used vehicle
flooring lines for any make of vehicle and $75 million for acquisitions. The
Company expects to sign a final agreement with Ford Credit in November 1998.
5
Note 4. Acquisitions
The following table sets forth the total purchase price, cash paid, debt
incurred and the net investment for acquisitions made by the Company to date
during 1998:
Debt Net
Name Month Total Paid Cash Paid Incurred Investment(1)
- ---- ------------- ---------- ----------- ----------- ---------------
Quality Nissan Jeep(2) January $ 8,404 $7,097 $1,307 $4,405
Reno Volkswagen February 1,400 411 989 293
Medford Nissan, BMW February 3,231 546 2,685 2,326
Haddad Jeep March 4,912 1,528 3,384 2,063
Rodway Chevrolet(2) June 11,488 5,094 6,394 3,783
Boyland Toyota(2) July 3,919 2,300 1,619 2,588
Camp Automotive October 11,535 8,000 3,535 11,535
Hutchins(2) November 6,955 5,000 1,955 6,955
------- ------- ------- -------
Total $51,844 $29,976 $21,868 $33,948
------- ------- ------- -------
------- ------- ------- -------
- -------------------
(1) Net investment consists of the amount of goodwill, working capital, any
notes issued to the seller and other initial investments.
(2) Excludes real property purchased for $5,560, $4,050, $1,650 and $1,750,
respectively.
The above acquisitions were accounted for under the purchase method of
accounting. Except for Camp Automotive, pro forma results of operations, both
individually and in aggregate, are not material and therefore have not been
included herein. Pro forma results of operations for Camp Automotive are not
included herein as the acquisition closed subsequent to the end of the quarter.
Note 5. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information is as follows:
Nine Months Ended September 30,
-------------------------------
1998 1997
-------------- --------------
Cash paid during the period for income taxes $ 4,372 $ 2,262
Cash paid during the period for interest 7,099 1,511
Property acquired through debt -- 1,424
LIFO to FIFO restatement -- 9,620
Note 6. Earnings Per Share
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS
are computed using the methods prescribed by Statement of Financial Accounting
Standards No. 128, Earnings per Share (SFAS 128). Basic EPS is calculated using
the weighted average number of common shares outstanding for the period and
diluted EPS is computed using the weighted average number of common shares and
dilutive common equivalent shares outstanding. Prior period amounts have been
restated to conform with the presentation requirements of SFAS 128.
6
Following is a reconciliation of basic EPS and diluted EPS:
Three Months Ended September 30, 1998 1997
- -------------------------------------- --------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ------------ ---------- ----------- --------- ----------
Basic EPS
- ---------
Net income available to Common
Shareholders $3,658 10,192 $ 0.36 $1,579 7,006 $ 0.23
---------- ----------
---------- ----------
Diluted EPS
- -----------
Effect of dilutive stock options -- 316 -- 306
--------- ------------ ----------- ---------
Net income available to Common
Shareholders $3,658 10,508 $ 0.35 $1,579 7,312 $ 0.22
---------- ----------
---------- ----------
Nine Months Ended September 30, 1998 1997
- -------------------------------------- --------------------------------- --------------------------------
Per Share Per Share
Income Shares Amount Income Shares Amount
---------- ------------ ---------- ----------- --------- ----------
Basic EPS
- ---------
Net income available to Common
Shareholders $7,400 8,789 $ 0.84 $4,090 6,973 $ 0.59
---------- ----------
---------- ----------
Diluted EPS
- -----------
Effect of dilutive stock options -- 324 -- 308
--------- ------------ ----------- ---------
Net income available to Common
Shareholders $7,400 9,113 $ 0.81 $4,090 7,281 $ 0.56
---------- ----------
---------- ----------
Note 7. Sale of Class A Common Stock
On May 1, 1998, the Company announced the sale of 3.0 million newly issued
shares of its Class A Common Stock in a public offering at a price of $14.50 per
share. On May 31, 1998, an additional 150 shares were sold through the
underwriters' overallotment option at a price of $14.50 per share. Net proceeds
from the sales were $42.5 million.
Note 8. Reclassifications
Certain amounts in the prior period financial statements have been
reclassified to conform to current period presentation.
Note 9. Subsequent Events
In October 1998, the Company closed its acquisition of Camp Automotive for
a total purchase price of $11.5 million. In November 1998, the Company closed
its acquisition of Hutchins Imported Motors for a total purchase price of $7.0
million. See Note 4. Acquisitions.
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 offering prospectus
dated May 1, 1998 and in its 1997 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 a leading automotive retailer offering a total of 23
brands in 28 locations in the western United States. The Company currently
operates 14 dealerships in California, 9 in Oregon, 2 in Washington and 3 in
Nevada. The Company sells new and used cars and light trucks, sells replacement
parts, provides vehicle maintenance, warranty, paint and repair services, and
arranges related financing and insurance for its automotive customers. Since
December 1996 when the Company completed its initial public offering, it has
acquired 23 dealerships and is actively pursuing additional acquisitions.
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: 1997 1996
-------------------- -------------------
Sales:
New vehicles 58.3% 57.7%
Used vehicles 29.8 30.4
Parts and service, other 11.9 11.9
-------------------- -------------------
Total sales 100.0% 100.0%
Gross profit 12.7 12.9
Total dealership expense 11.4 11.3
Income before taxes 1.4% 1.5%
Source: NADA Industry Analysis Division
8
The following table sets forth selected condensed financial data for the
Company, expressed as a percentage of total sales for the periods indicated
below.:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- ------------- ---------------- --------------
Statement of Operations Data:
Sales:
New vehicles 56.4 % 52.1 % 54.3 % 48.9 %
Used vehicles 28.9 33.8 31.5 37.4
Service, body, parts
and other 14.7 14.1 14.2 13.7
--------------- ------------- ---------------- --------------
Total sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 16.1 16.6 15.7 16.4
Selling, general and
administrative 11.9 12.7 11.9 12.6
Depreciation and amortization 0.3 0.4 0.3 0.4
--------------- ------------- ---------------- --------------
Operating income 3.9 3.5 3.5 3.4
Other income (expense), net (0.8) (0.5) (1.2) (0.2)
--------------- ------------- ---------------- --------------
Income before taxes 3.1 3.0 2.3 3.2
Income taxes 1.2 1.2 0.9 1.2
--------------- ------------- ---------------- --------------
Net income 1.9 % 1.8 % 1.4 % 2.0 %
--------------- ------------- ---------------- --------------
--------------- ------------- ---------------- --------------
Results of Operations
Net sales for the Company increased $110.3 million, or 128.9 percent, to
$195.9 million for the quarter ended September 30, 1998 from $85.6 million for
the comparable period of 1997. Net sales increased $309.0 million, or 149.5
percent, to $515.7 million for the nine months ended September 30, 1998 compared
to $206.7 million for the comparable period of 1997. The Company's sales mix
shifted more to new vehicle sales, away from used vehicle sales, with a slight
increase in service, body, parts and other as a percentage of total sales. Same
store sales growth was 15.9 percent and 15.1 percent, respectively, for the
three and nine month periods ended September 30, 1998 compared to the same
periods of 1997.
New Vehicle Sales. The Company sells 23 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 148.0 percent to $110.5
million and 177.3 percent to $280.1 million, respectively, for the three and
nine-month periods ended September 30, 1998 compared to $44.6 million and $101.0
million, respectively, for the comparable periods of 1997. These increases were
achieved by a 146.9 percent and 171.1 percent increase, respectively, in units
sold to 5,142 and 12,926, respectively, for the three and nine-month periods
ended September 30, 1998 and a 0.4 percent and 2.3 percent increase,
respectively, in the average selling price to $21,489 and $21,670, respectively,
for the three and nine-month periods ended September 30, 1998. The increases are
primarily attributable to a 15.1 percent overall same store growth rate in the
first nine months of 1998 and the inclusion of 13 locations acquired since
September 1997.
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.
9
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 97.2 percent and 115.8 percent, respectively
to $44.2 million and $127.1 million for the three and nine-month periods ended
September 30, 1998 from $22.4 million and $58.9 million, respectively, for the
comparable periods of 1997. Retail used unit volume increased 94.8 percent and
108.4 percent, respectively, to 3,493 units and 9,959 units, respectively, for
the three and nine-month periods ended September 30, 1998. The average unit
price increased 1.2 percent and 3.5 percent, respectively, to $12,650 and
$12,763, respectively for the three and nine-month periods ended September 30,
1998. The increases are primarily attributable to a 15.1 percent overall same
store growth rate and the inclusion of 13 locations acquired since September
1997.
Other. The Company derives additional revenue from the sale of parts and
accessories, maintenance and repair services, auto body work and finance and
insurance ("F&I") transactions. Other operating revenue increased 139.2 percent
and 158.8 percent, respectively, to $28.8 million and $73.2 million,
respectively, for the three and nine-month periods ended September 30, 1998,
from $12.0 million and $28.3 million, respectively, for the comparable periods
of 1997. This increase is primarily due to a 15.1 percent overall same store
growth rate and the inclusion of 13 new locations since September 1997. To a
limited extent, revenues from the parts and service department are
countercyclical to new car sales as owners repair existing vehicles rather than
buy new vehicles. The Company believes this helps mitigate the affects of a
downturn in the new vehicle sales cycle.
Gross Profit. Gross profit increased to $31.5 million and $81.1 million,
respectively, for the three and nine-month periods ended September 30, 1998,
compared with $14.2 million and $33.8 million, respectively, for the comparable
periods of 1997. These increases are primarily due to an increase in new and
used vehicle unit sales and an increase in other operating revenue as discussed
above. The gross profit margin achieved by the Company on new vehicle sales was
9.8 percent and 9.9 percent, respectively, for the three and nine-month periods
ended September 30, 1998, compared to 10.7 percent and 11.3 percent,
respectively, in the comparable periods of 1997. This compares favorably with
the average gross profit margin of 6.4 percent realized by franchised automobile
dealers in the United States on sales of new vehicles in 1997. 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. Excluding wholesale transactions, the
Company's gross profit margin on used vehicle sales was 11.3 percent and 10.9
percent, respectively, for the three and nine-month periods ended September 30,
1998 compared to 11.4 percent and 11.5 percent in the comparable periods of
1997. The industry average for 1997 was 10.9 percent. Overall gross profit
margins were 16.1 percent and 15.7 percent, respectively, for the three and
nine-month periods ended September 30, 1998 compared to 16.6 percent and 16.4
percent for the comparable periods of 1997. The decreases in the gross profit
margins were primarily a result of the acquisition of several new dealerships
during 1997 and early 1998, which were generating gross margins lower than those
of the Company's pre-existing stores. The Company's gross profit margin
continues to exceed the average U.S. dealership gross profit margin of 12.7
percent for the full year of 1997.
10
Selling, General and Administrative Expense ("SG&A"). The Company's SG&A
expense increased to $23.2 million and $61.3 million (11.9 percent and 11.9
percent, respectively, of net sales), respectively, for the three and nine-month
periods ended September 30, 1998 compared to $10.8 million and $26.0 million
(12.7 percent and 12.6 percent, respectively, of net sales), respectively, for
the comparable periods of 1997. The increase in SG&A was due primarily to
increased selling, or variable, expense related to the increase in sales and the
number of total locations. 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 and from macro and micro economies of scale as the Company
consolidates multiple stores in a single market.
Depreciation and Amortization. Depreciation and amortization expense
increased to $0.7 million and $1.8 million, respectively, for the three and
nine-month periods ended September 30, 1998 compared to $0.3 million and $0.7
million, respectively, for the comparable periods of 1997, primarily as a result
of increased property and equipment and goodwill related to acquisitions in 1997
and 1998. Depreciation and amortization was 0.3 percent of sales for the 1998
periods and 0.4 percent of sales for 1997 periods. These figures exclude
depreciation related to leased vehicles, which is included in cost of sales.
Operating Income. Operating income increased to $7.6 million and $18.0
million (3.9 percent and 3.5 percent, respectively, of net sales), respectively,
for the three and nine-month periods ended September 30, 1998 compared to $3.0
million and $7.1 million (3.5 percent and 3.4 percent, respectively, of net
sales). In addition to gaining efficiencies related to economies of scale, the
Company has seen improvements in the operating margins at stores that it has
acquired and operated for a full year, bringing them more in line with the
Company's pre-existing stores.
Interest Expense. Interest expense increased to $2.2 million and $7.1
million, respectively, for the three and nine month periods ended September 30,
1998 from $0.7 million and $1.4 million, respectively, for the comparable
periods of 1997, primarily as a result of increased flooring notes payable
related to increased inventories as a result of the increase in stores owned.
Income Tax Expense. The Company's effective tax rate for the three and
nine-month periods ended September 30, 1998 was 38.6 percent compared to 38.6
for the comparable periods of 1997. 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 $3.7 million and $7.4 million (1.9 percent and
1.4 percent, respectively, of net sales), respectively, for the three and
nine-month periods ended September 30, 1998 compared to $1.6 million and $4.1
million (1.8 percent and 2.0 percent, respectively, of net sales), respectively,
for the comparable periods of 1997, as a result of the individual line item
changes discussed above.
Liquidity and Capital Resources
The Company's principal needs for capital resources are for acquisitions,
capital expenditures and increased working capital requirements. Historically,
the Company has relied primarily upon internally generated cash flows from
operations, borrowings under its
11
credit facility and the proceeds from its initial public offering to finance
its operations and expansion. In May 1998, the Company closed an offering of
3.15 million newly issued shares of its Class A Common Stock for net proceeds
of $42.5 million. The proceeds have been used to pay down the Company's lines
of credit until needed for future acquisitions.
At September 30, 1998 the Company had working capital of $45.9 million,
which included $17.7 million of cash and cash equivalents. The $0.8 million
decrease in cash since December 31, 1997 is primarily a result of $28.3 million
used for acquisitions, $2.8 million used for the purchase of property and
equipment, $15.5 million net payments on the used vehicle line of credit and
$4.4 million net payments on long-term debt, offset by $42.5 million from the
sale of the Company's Common Stock and $9.0 million provided by operations. The
current ratio at September 30, 1998 was 1.4:1 compared to 1.2:1 at December 31,
1997.
The Company's credit facility has a maturity date of December 1, 1998. At
that time, the Company has the right to elect to convert outstanding loans under
the Acquisition Line and the Equipment Line to a term loan payable over 5 years.
Amounts outstanding at September 30, 1998 were as follows (in thousands):
Flooring Line $ 88,185
Acquisition Line --
Lease Line --
Equipment and Real Estate Lines 14,481
--------
Total $102,666
--------
--------
Loans under the credit facility bear interest at LIBOR (London Interbank
Offered Rate) plus 150 to 275 basis points, equivalent to 6.875 percent to 8.125
percent at September 30, 1998.
The Credit Facility contains financial covenants requiring the Company to
maintain compliance with, among other things, specified ratios of (i) minimum
net worth; (ii) total liabilities to net worth; (iii) funded debt to cash flow;
(iv) fixed charge coverage; and (v) maximum allowable capital expenditures. The
Company is currently in compliance with all such financial covenants.
Since December 1996 when the Company completed its initial public offering,
the Company has acquired 23 dealerships. The aggregate net investment by the
Company was approximately $33.9 million (excluding borrowings on its credit
lines to finance acquired vehicle inventories and equipment and the purchase of
any real estate).
Seasonality and Quarterly Fluctuations
Historically, the Company's sales have been lower in the first and fourth
quarters of each year largely due to consumer purchasing patterns during the
holiday season, inclement weather and the reduced number of business days during
the holiday season. As a result, financial performance for the Company is
generally lower during the first and fourth quarters than during the other
quarters of each fiscal year. Management believes that interest rates, levels of
consumer debt, consumer buying patterns and confidence, as well as general
12
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.
Year 2000
General
The Company has identified three major areas of concern: (1) the
functionality of the Company's internal systems and the Company's ability to run
its daily business after January 1, 2000, (2) the visual representation of
"2000" and (3) third party systems. The Company is not currently Year 2000
compliant, but expects to be prior to January 1, 2000. The Company is utilizing
the NADA dealer guide to assist in resolving its Year 2000 issues and problems.
Internal Systems
The Company is in the process of analyzing and updating its internal
systems, including its dealer management systems, dealer communication systems,
personal computer systems, shared port systems and phone systems. The Company
estimates that it is 65 percent complete with implementing various manufacturer
upgrades to its systems in order to make them Year 2000 compliant. The Company
estimates that it will be fully Year 2000 compliant with its internal systems by
July 1, 1999.
Like all businesses, the Company will be at risk from external
infrastructure failures that could arise from Year 2000 failures. It is not
clear that electrical power, telephone and computer networks, for example, will
be fully functional across the nation in the year 2000. Investigation and
assessment of infrastructures, like the nation's power grid, is beyond the scope
and resources of the Company. Investors should use their own awareness of the
issues in the nation's infrastructure to make ongoing infrastructure risk
assessments and their potential impact to a company's performance.
Visual Representation
The Company is currently working on ensuring that all report date stamps,
timekeeping devises, etc. are Year 2000 compliant. The Company estimates that it
is about 55 percent complete with this area.
Third Parties
The Company has begun a Year 2000 supplier audit program. It has contacted
all of its critical suppliers to inform them of the Company's Year 2000
expectations, and requests have been made for each vendor's compliance program
and/or Year 2000 compliance assurance. In regard to the automobile
manufacturers, the Company has not yet received written confirmation that they
are Year 2000 compliant, but each of them has assured the Company that they
expect to be Year 2000 compliant prior to January 1, 2000.
It should be noted that there have been predictions of failures of key
components in the transportation infrastructure due to the Year 2000 problem. It
is possible that there could be delays in rail, over-the-road and air shipments
due to failure in transportation control systems. Investigation and validation
of the world's transportation infrastructure is beyond the scope and the
resources of the Company. Investors should use their own awareness of
13
the issues in the transportation infrastructure to make ongoing infrastructure
risk assessments and their potential impact to a company's performance.
Cost
The Company expects to incur incremental costs totaling approximately
$950,000 to ensure Year 2000 compliance, approximately $600,000 of which has
already been incurred. A majority of the $950,000 will be capitalized and
amortized over a three to five year period. This estimate could change depending
on variances not anticipated in the initial bids.
Risk
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Company's efforts to help ensure Year 2000 preparedness
have, and will continue to, significantly reduce the Company's level of
uncertainty about the Year 2000 problem. The Company believes that, with
completion of the above mentioned plans, the possibility of significant
interruptions of normal operations should be reduced.
The Company is currently developing contingency plans in regard to its
internal systems and supplier issues, as well as for the more global
infrastructure issues.
Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities (SFAS
133). SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on the Company's financial position or
results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
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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.
2.1 Agreement for Purchase and Sale of Business Assets between Boyland
Auto Group dba Boyland Toyota, Dorian Boyland and Lithia Motors, Inc.,
previously filed as Exhibit 10.34.1 to the Company's Registration
Statement No. 333-47525 on Form S-1 dated May 1, 1998 and is
incorporated herein by reference.
2.2 Agreement for Purchase and Sale of Business Assets between Rodway
Chevrolet Co. and Lithia Motors, Inc., dated March 19, 1998,
previously filed as Exhibit 2.2 to the Company's Form 10-Q for the
quarter ended June 30, 1998 as filed with the Securities and Exchange
Commission on August 13, 1998 and is incorporated herein by reference.
2.3 Stock Purchase Agreement between William N. Hutchins, Hutchins Eugene
Nissan, Inc. and Hutchins Imported Motors and Lithia Motors, Inc.,
dated June 18, 1998, previously filed as Exhibit 2.3 to the Company's
Form 10-Q for the quarter ended June 30, 1998 as filed with the
Securities and Exchange Commission on August 13, 1998 and is
incorporated herein by reference.
2.4 First, Second and Third Addenda to Stock Purchase Agreement by and
between William N. Hutchins, Hutchins Imported Motors, Inc. and
Hutchins Eugene Nissan, Inc. and Lithia Motors, Inc., dated June 18,
1998.
2.5 Restated Stock Purchase Agreement, by and between Phil S. Camp, Jerry
W. Camp, Jr., Julie A. Camp McKay, Chris E. Camp, Travis W. Camp,
Carter B. Camp and Camp Automotive, Inc. and the Company, dated August
1, 1998, previously filed as Exhibit 2.1 to the Company's Form 8-K
dated October 15, 1998 as filed with the Securities and Exchange
Commission on October 28, 1998 and is incorporated herein by
reference.
10.1 Amendment No. 1, dated April 9, 1998 to Business Loan Agreement among
U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22,
1997, previously filed as Exhibit 10.1 to the Company's Form 10-Q for
the quarter ended June 30, 1998 as filed with the Securities and
Exchange Commission on August 13, 1998 and is incorporated herein by
reference.
10.2 Amendment No. 2, dated April 29, 1998 to Business Loan Agreement among
U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22,
1997, previously filed as Exhibit 10.2 to the Company's Form 10-Q for
the quarter ended June 30, 1998 as filed with the Securities and
Exchange Commission on August 13, 1998 and is incorporated herein by
reference.
10.3 Amendment No. 3, dated July 7, 1998, to Business Loan Agreement among
U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22,
1997.
10.4 Amendment No. 1 to the Lithia Motors, Inc. 1996 Stock Incentive Plan,
previously filed as Exhibit 10.3 to the Company's Form 10-Q for the
quarter ended June 30, 1998 as filed with the Securities and Exchange
Commission on August 13, 1998 and is incorporated herein by reference.
27 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended September
30, 1998.
15
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, 1998 LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
--------------------
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
(Principal Executive Officer)
By /s/ BRIAN R. NEILL
--------------------
Brian R. Neill
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
16