- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 June 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 August 1, 1997) - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
LITHIA MOTORS, INC. FORM 10-Q INDEX <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 2 Consolidated Statements of Operations - Three and Six Months Ended June 30, 1997 and 1996 3 Consolidated Statements of Cash Flows - Six Months Ended June 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 7 PART II - OTHER INFORMATION - --------------------------- Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 </TABLE> 1
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LITHIA MOTORS, INC, AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands) (Unaudited) <TABLE> <CAPTION> June 30, December 31, 1997 1996 (1) -------------- -------------- <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 15,296 $ 15,413 Trade receivables 3,851 2,260 Notes receivable, current portion 204 414 Notes receivable - related party - 308 Inventories, net 42,626 33,362 Vehicles leased to others, current portion 859 524 Prepaid expenses and other 286 372 Deferred income taxes 1,316 1,646 -------------- -------------- Total Current Assets 64,438 54,299 Property and Equipment, net of accumulated depreciation of $3,752 and $2,073 8,816 4,616 Vehicles Leased to Others, less current portion 5,269 4,500 Notes Receivable, less current portion 599 377 Goodwill, net of accumulated amortization of $111 and $23 6,808 4,101 Other Non-Current Assets 1,291 1,071 -------------- -------------- Total Assets $ 87,221 $ 68,964 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ - $ 500 Flooring notes payable 29,146 19,645 Current maturities of long-term debt 3,975 1,855 Trade payables 1,699 2,434 Accrued liabilities 2,801 2,482 Payable to related parties - 1,952 -------------- -------------- Total Current Liabilities 37,621 28,868 Long-Term Debt, less current maturities 9,599 6,160 Deferred Revenue 2,784 3,250 Other Long-Term Liabilities 175 - Deferred Income Taxes 2,753 2,772 -------------- -------------- Total Liabilities 52,932 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 28,037 24,172 Class B common stock authorized 25,000 shares; issued and outstanding 4,110 and 4,110 511 511 Retained earnings 5,741 3,231 -------------- -------------- Total Shareholders' Equity 34,289 27,914 -------------- -------------- Total Liabilities and Shareholders' Equity $ 87,221 $ 68,964 -------------- -------------- -------------- -------------- </TABLE> (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) <TABLE> <CAPTION> Three months ended June 30, Six months ended June 30, ---------------------------- ---------------------------- 1997 1996 (1) 1997 1996 (1) ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Sales: Vehicles $ 57,405 $ 31,822 $ 104,875 $ 59,878 Service, body, parts and other 9,017 4,817 16,251 9,165 ------------ ------------ ------------ ------------ Net Sales 66,422 36,639 121,126 69,043 Cost of sales Vehicles 51,570 28,179 94,049 52,905 Service, body, parts and other 4,136 2,409 7,413 4,530 ------------ ------------ ------------ ------------ Cost of Sales 55,706 30,588 101,462 57,435 ------------ ------------ ------------ ------------ Gross profit 10,716 6,051 19,664 11,608 Selling, general and administrative 8,417 4,797 15,581 9,273 ------------ ------------ ------------ ------------ Operating income 2,299 1,254 4,083 2,335 Other income (expense) Equity in income of affiliate 6 7 56 24 Interest income 33 87 61 131 Interest expense (505) (329) (651) (697) Other, net 394 185 541 347 ------------ ------------ ------------ ------------ (72) (50) 7 (195) ------------ ------------ ------------ ------------ Income before minority interest and income taxes 2,227 1,204 4,090 2,140 Minority interest - 159 - 316 ------------ ------------ ------------ ------------ Income before income taxes 2,227 1,045 4,090 1,824 Income tax expense 859 - 1,579 - ------------ ------------ ------------ ------------ Net income $ 1,368 $ 1,045 $ 2,511 $ 1,824 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Net income per share $ 0.19 $ 0.21 (2) $ 0.35 $ 0.37 (2) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Shares used in per share calculations 7,308,911 4,883,016 7,265,155 4,883,016 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Pro Forma Net Income Data (unaudited) - ------------------------------------------------------------- Income before minority interest and income taxes, as reported $ 1,204 $ 2,140 Pro forma income taxes 462 822 ------------ ------------ Pro forma net income $ 742 $ 1,318 ------------ ------------ ------------ ------------ Pro forma net income per share $ 0.15 $ 0.27 ------------ ------------ ------------ ------------ </TABLE> (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 7 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) <TABLE> <CAPTION> Six months ended June 30, ------------------------------- 1997 1996 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net income $ 2,511 $ 1,824 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 1,025 823 Loss on sale of assets - 25 Gain on sale of vehicles leased to others (118) (142) Deferred income taxes (19) - Minority interest in income - 317 Equity in income of affiliate (56) (24) (Increase) decrease in: Trade and installment contract receivables, net (1,597) (579) Inventories (1,199) 988 Prepaid expenses and other 478 (454) Other noncurrent assets (340) (143) Increase (decrease) in: Trade payables (734) (206) Accrued liabilities 320 (196) Other liabilities (2,245) 455 Proceeds from sale of vehicles leased to others 2,421 2,814 Expenditures for vehicles leased to others (4,069) (3,642) ------------ ------------ Net cash provided by (used in) operating activities (3,622) 1,860 Cash flows from investing activities: Notes receivable issued (203) (672) Principal payments received on notes receivable 192 643 Capital expenditures (4,089) (133) Proceeds from sale of assets - 1,876 Cash paid for acquisitions (2,736) - ------------ ------------ Net cash provided by (used in) investing activities (6,836) 1,714 Cash flows from financing activities: Net repayments on notes payable - (625) Net borrowings (repayments) on flooring notes payable 1,918 (5,867) Principal payments on long-term debt (3,363) (7,461) Proceeds from issuance of long-term debt 7,922 5,102 Proceeds from issuance of common stock 3,864 - Proceeds from minority interest share receivable - 149 Dividends and distributions - (760) ------------ ------------ Net cash provided by (used in) financing activities 10,341 (9,462) ------------ ------------ Decrease in cash and cash equivalents (117) (5,888) Cash and cash equivalents: Beginning of period 15,413 9,706 ------------ ------------ ------------ ------------ End of period $ 15,296 $ 3,818 ------------ ------------ ------------ ------------ </TABLE> 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 six-month periods ended June 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 increased net income by $117, or $0.02 per share and $235, or $0.05 per share, for the three and six-month periods ended June 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). June 30, 1997 December 31, 1996 ------------- ----------------- New and demonstrator vehicles $ 27,119 $ 19,402 Used vehicles 13,349 12,199 Parts and accessories 2,158 1,761 -------- -------- $ 42,626 $ 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. NOTE 5: SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows: Six Months Ended June 30, ---------------------------- 1997 1996 -------- -------- Cash paid during the period for income taxes $ 1,434 $ - Cash paid during the period for interest 817 919 Property acquired through debt 1,424 - NOTE 6: 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 lower 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. SFAS 128 is required to be adopted for periods ending after December 15, 1997. Pro forma effects of applying SFAS 128 are as follows: <TABLE> <CAPTION> Three Months Ended June 30, Six Months Ended June 30, ----------------------------- ----------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Primary EPS as reported $ 0.19 $ 0.17 $ 0.35 $ 0.33 Effect of SFAS 128 0.01 0.00 0.01 0.00 ------------ ------------ ------------ ------------ Basic EPS as restated $ 0.20 $ 0.17 $ 0.36 $ 0.33 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Fully diluted EPS as reported $ 0.19 $ 0.17 $ 0.35 $ 0.33 Effect of SFAS 128 0.00 0.00 0.00 0.00 ------------ ------------ ------------ ------------ Diluted EPS as restated $ 0.19 $ 0.17 $ 0.35 $ 0.33 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> NOTE 7: 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. 6
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 fifteen 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. YEAR ENDED DECEMBER 31, AVERAGE U.S. DEALERSHIP ----------------------------- 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 7
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. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales: New vehicles 47.6 % 45.5 % 46.6 % 45.6 % Used vehicles 38.8 41.4 40.0 41.1 Parts and service 8.4 8.9 8.4 9.0 Finance, insurance and other 5.2 4.2 5.0 4.3 ------------ ------------ ------------ ------------ Total sales 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 16.1 16.5 16.2 16.5 Selling, general and administrative 12.6 13.1 12.8 13.4 ------------ ------------ ------------ ------------ Operating income 3.5 3.4 3.4 3.1 Other income (expense), net (0.1) (0.1) 0.0 (0.3) ------------ ------------ ------------ ------------ Income before taxes and minority interest 3.4 % 3.3 % 3.4 % 2.8 % ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ </TABLE> RESULTS OF OPERATIONS 1997 COMPARED TO 1996 Net sales for the Company increased $29.8 million, or 81 percent, to $66.4 million for the quarter ended June 30, 1997 from $36.6 million for the comparable period of 1996. Net sales increased $52.1 million, or 75 percent, to $121.1 million for the six months ended June 30, 1997 compared to $69.0 million for the comparable period of 1996. The Company's revenue mix for the three and six months ended June 30, 1997 was relatively consistent with the prior year, although with a slight trend towards increased finance and insurance as a percentage of total revenue. Same store revenue growth for the three and six month periods ended June 30, 1997 was 7.6 percent and 5.5 percent, respectively, with a 12.5 percent and 11.1 percent increase in used retail revenue, respectively, a 19.2 percent and 20.1 percent increase in other operating revenue, respectively, offset by a 3.0 percent and 3.2 percent decrease in new vehicle sales, respectively. NEW VEHICLE SALES. The Company sells 21 domestic and imported brands (including acquisitions that have not yet closed) ranging from economy to luxury cars, as well as sport utility vehicles, minivans and light trucks. Revenue on new vehicle sales increased 89 percent to $31.6 million and 79 percent to $56.5 million, respectively, for the three and six-month periods ended June 30, 1997 compared to $16.7 million and $31.5 million, respectively, for the comparable periods of 1996. These increases were achieved by a 77 percent and 68 percent increase, respectively, in units sold to 1,488 and 2,685, respectively, for the three and six-month periods ended June 30, 1997 and a 7 percent and 6 percent increase, respectively, in the average selling price to $21,255 and $21,027 respectively, for the three and six-month periods ended June 30, 1997. The increases are primarily attributable to the Eugene Dodge, Vacaville Toyota and Concord Dodge stores, all of which were acquired since the fourth quarter of 1996. Same store new vehicle 8
revenue was down 3.0 percent and 3.2 percent, respectively, for the three and six-month periods ended June 30, 1997, primarily as a result of decreased volume at the Medford Saturn and Honda stores 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 50 percent and 58 percent, respectively to $18.9 million and $36.5 million for the three and six-month periods ended June 30, 1997 from $12.6 million and $23.1 million, respectively, for the comparable periods of 1996. Retail used unit volume increased 35 percent and 47 percent, respectively, to 1,536 units and 2,986 units, respectively, for the three and six-month periods ended June 30, 1997. The average unit price increased 13 percent and 8 percent, respectively, to $12,329 and $12,224, respectively for the three and six-month periods ended June 30, 1997. The increases are attributable to the addition of the three new stores and a same store used retail revenue increase of 12.5 percent and 11.1 percent, respectively, with a 12 percent and 8 percent increase, respectively, in same store average selling prices. 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 $9.0 million and $16.3 million, respectively, for the three and six-month periods ended June 30, 1997, from $4.8 million and $9.2 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 9
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 $10.7 million and $19.7 million, respectively, for the three and six-month periods ended June 30, 1997, compared with $5.8 million and $11.4 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 16.1 percent and 16.2 percent, respectively, for the three and six-month periods ended June 30, 1997 compared to 16.5 percent and 16.5 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. Same store gross profit margin was 16.1 percent and 16.6 percent, respectively, for the three and six month periods ended June 30, 1997 compared to 16.4 percent and 16.4 percent, respectively, for the comparable periods of 1996. The decrease for the three-month period was primarily a result of increased volume at several of the Company's stores during the quarter ended June 30, 1997. The increase in the six-month period gross margin is primarily a result of growth in service and parts and finance and insurance income. 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 $8.4 million and $15.6 million (12.6 percent and 12.8 percent, respectively, of total sales), respectively, for the three and six-month periods ended June 30, 1997 compared to $4.8 million and $9.3 million (13.0 percent and 13.4 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 six-month periods ended June 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 $1.4 million and $2.5 million (2.1 percent and 2.1 percent, respectively, of total sales), respectively, for the three and six-month periods ended June 30, 1997 compared to $0.6 million and $1.2 million (1.6 percent and 1.7 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. 10
LIQUIDITY AND CAPITAL RESOURCES At June 30, 1997 the Company had working capital of $26.8 million, which included $15.3 million of cash and cash equivalents. The $117,000 decrease in cash since December 31, 1996 is primarily a result of $3.6 million used in operations, $4.1 million used for the purchase of property and equipment and $2.7 million used for acquisitions, offset by $1.9 million in advances under the Company's flooring line, $4.6 million net proceeds from long-term debt 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 June 30, 1997 was 1.7:1 compared to 1.9:1 at December 31, 1996. Trade receivables increased $1.6 million to $3.9 million at June 30, 1997 from $2.3 million at December 31, 1996, primarily as a result of the acquisition of the Concord Dodge store. Inventories increased $9.2 million to $42.6 million at June 30, 1997 from $33.4 million at December 31, 1996 primarily as a result of vehicles acquired with the Concord Dodge acquisition that closed during the second quarter of 1997. Property and equipment increased $4.2 million to $8.8 million at June 30, 1997 from $4.6 million at December 31, 1996 primarily as a result of the purchase of a new body and paint shop and a vacant parcel of land, which is being held for future development. Total debt, excluding flooring lines, increased by $5.1 to $13.6 million, for a 40 percent debt to equity ratio. Including the flooring line of $29.1 million, the debt to equity ratio increases to 125 percent. The Company currently has a credit facility with U.S. Bank, giving the Company access to an aggregate of approximately $45.9 million of credit for various purposes. The principal component of the credit facility is the Flooring Line. Management believes that the Flooring Line provides the Company with financing at rates lower than those available from manufacturers. At June 30, 1997, there was approximately $29.1 million outstanding under the Flooring Line and $42.3 million outstanding under the credit facility in total. In anticipation of growth due to future acquisitions, all lines of credit are being reviewed for increases with the issuing financial institution. Although the Company is optimistic about such increases being approved by the financial institution, there can be no assurances that such increases will be approved or, if approved, that the terms will be acceptable to the Company. Total shareholders' equity increased $6.4 million 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 $2.5 million of retained earnings from the six months ended June 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. 11
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 finance funding a substantial portion of the total payment. The following table sets forth the estimated purchase price of currently pending acquisitions. Acquisition costs are estimates, as the actual purchase prices will depend on inventory levels at each acquired dealership upon closing. Estimates assume the purchase of used vehicles at each store location. Actual cash used in these purchases is much lower than the total purchase price as bank financing is used for most of the inventory purchase and notes held by the seller, payable over a number of years, are often part of the purchase agreement. TOTAL ESTIMATED ACQUISITIONS PURCHASE PRICE ------------ --------------- Sun Valley Ford Volkswagen Hyundai $18.9 million Bakersfield Nissan and Bakersfield BMW/Acura $10.6 million Dick Donnelly Automotive of Reno, Nevada $12.8 million 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 share. Diluted net income per share is expected to be comparable or slightly lower 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 12
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. PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of the shareholders of the Company was held on May 15, 1997, at which the following actions were taken: 1. The shareholders elected the five nominees for director to the Board of Directors of the Company. The five directors elected, along with the voting results are as follows: No. of Shares No. of Shares Name Voting For Withheld Voting --------------------- ----------------- ----------------- Sidney B. DeBoer Class A 62,350 0 Class B 4,110,000 0 M. L. Dick Heimann Class A 62,350 0 Class B 4,110,000 0 Thomas Becker Class A 62,350 0 Class B 4,110,000 0 R. Bradford Gray Class A 62,350 0 Class B 4,110,000 0 William J. Young Class A 62,350 0 Class B 4,110,000 0 13
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. ----------- 10.1 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. 10.2 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. 10.3 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. 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, dated April 1, 1997 and filed with the Securities and Exchange Commission on June 6, 1997. 14
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: August 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) 15