- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 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 incorporation or organization) Identification No.) 360 E. JACKSON STREET, MEDFORD, OREGON 97501 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 541-776-6899 ----------------------- 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. <TABLE> <S> <C> Class A Common stock without par value 6,081,715 Class B Common stock without par value 4,110,000 (Class) (Outstanding at August 7, 1998) </TABLE> - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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, 1998 (unaudited) and December 31, 1997 2 Consolidated Statements of Operations -- Three and Six Months Ended June 30, 1998 and 1997 (unaudited) 3 Consolidated Statements of Cash Flows -- Six Months Ended June 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 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 </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, 1998 1997 ---------- ------------ <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 27,136 $ 18,454 Trade receivables 11,942 7,655 Notes receivable, current portion 460 427 Inventories, net 138,137 89,845 Vehicles leased to others, current portion 755 738 Prepaid expenses and other 2,537 913 Deferred income taxes 1,825 1,855 ---------- ------------ Total Current Assets 182,792 119,887 Property and Equipment, net of accumulated depreciation of $3,454 and $2,822 29,650 16,265 Vehicles Leased to Others, less current portion 5,052 4,588 Notes Receivable, less current portion 286 309 Goodwill, net of accumulated amortization of $696 and $293 32,844 24,062 Other Non-Current Assets, net of accumulated amortization of $83 and $63 1,180 1,415 ---------- ------------ Total Assets $251,804 $ 166,526 ---------- ------------ ---------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Flooring notes payable $119,964 $ 82,598 Current maturities of long-term debt 3,781 2,688 Current portion of capital leases 94 99 Trade payables 5,966 3,874 Accrued liabilities 9,019 6,758 ---------- ------------ Total Current Liabilities 138,824 96,017 Long-Term Debt, less current maturities 20,267 24,242 Long-Term Capital Lease Obligation, less current portion 2,271 2,316 Deferred Revenue 2,135 2,519 Other Long-Term Liabilities 966 447 Deferred Income Taxes 2,959 3,108 ---------- ------------ Total Liabilities 167,422 128,649 ---------- ------------ ---------- ------------ 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 70,799 28,117 Class B common stock authorized 25,000 shares; issued and outstanding 4,110 and 4,110 511 511 Additional paid-in capital 140 59 Retained earnings 12,932 9,190 ---------- ------------ Total Shareholders' Equity 84,382 37,877 ---------- ------------ Total Liabilities and Shareholders' Equity $251,804 $166,526 ---------- ------------ ---------- ------------ </TABLE> 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, --------------------------- ------------------------- 1998 1997 1998 1997 ---------- ----------- ---------- ---------- <S> <C> <C> <C> <C> Sales: Vehicles $ 150,597 $ 57,405 $ 275,307 $ 104,875 Service, body, parts and other 22,944 9,017 44,433 16,251 ---------- ----------- ---------- ---------- Net Sales 173,541 66,422 319,740 121,126 Cost of sales Vehicles 136,638 51,570 249,631 94,049 Service, body, parts and other 10,040 4,136 20,521 7,413 ---------- ----------- ---------- ---------- Cost of Sales 146,678 55,706 270,152 101,462 ---------- ----------- ---------- ---------- Gross profit 26,863 10,716 49,588 19,664 Selling, general and administrative 20,195 8,195 38,111 15,190 Depreciation and amortization 569 222 1,067 391 ---------- ----------- ---------- ---------- Operating income 6,099 2,299 10,410 4,083 Other income (expense) Equity in income of affiliate 10 6 19 56 Interest income 20 33 74 61 Interest expense (2,657) (505) (4,867) (651) Other, net 157 394 460 541 ---------- ----------- ---------- ---------- (2,470) (72) (4,314) 7 ---------- ----------- ---------- ---------- Income before income taxes 3,629 2,227 6,096 4,090 Income tax expense 1,407 859 2,354 1,579 ---------- ----------- ---------- ---------- Net income $ 2,222 $ 1,368 $ 3,742 $ 2,511 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Basic net income per share $ 0.24 $ 0.20 $ 0.46 $ 0.36 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Diluted net income per share $ 0.24 $ 0.19 $ 0.45 $ 0.35 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- </TABLE> 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, ------------------------------- 1998 1997 ----------- ----------- <S> <C> <C> Cash flows from operating activities: Net income $ 3,742 $ 2,511 Adjustments to reconcile net income to net cash flows used in operating activities: Depreciation and amortization 1,523 1,025 Compensation expense related to stock option issuances 69 - Loss on sale of assets 9 - Gain on sale of vehicles leased to others (54) (118) Deferred income taxes (136) (19) Equity in income of affiliate (19) (56) (Increase) decrease in: Trade and installment contract receivables, net (4,328) (1,597) Inventories (28,354) (1,199) Prepaid expenses and other (1,454) 478 Other noncurrent assets 228 (340) Increase (decrease) in: Trade payables 2,085 (734) Accrued liabilities 2,261 320 Other liabilities 13 (2,245) Proceeds from sale of vehicles leased to others 3,664 2,421 Expenditures for vehicles leased to others (4,579) (4,069) ----------- ----------- Net cash used in operating activities (25,330) (3,622) Cash flows from investing activities: Notes receivable issued (171) (203) Principal payments received on notes receivable 161 192 Capital expenditures (2,420) (4,089) Cash paid for acquisitions (25,935) (2,736) ----------- ----------- Net cash used in investing activities (28,365) (6,836) Cash flows from financing activities: Net borrowings on flooring notes payable 23,726 1,918 Principal payments on long-term debt (31,168) (3,363) Proceeds from issuance of long-term debt 27,137 7,922 Proceeds from issuance of common stock 42,682 3,864 ----------- ----------- Net cash provided by financing activities 62,377 10,341 ----------- ----------- Increase (decrease) in cash and cash equivalents 8,682 (117) Cash and cash equivalents: Beginning of period 18,454 15,413 ----------- ----------- End of period $ 27,136 $ 15,296 ----------- ----------- ----------- ----------- </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 OR AS OTHERWISE INDICATED) (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The financial information included herein for June 30, 1998 and December 31, 1997 and for the three and six-month periods ended June 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). <TABLE> <CAPTION> June 30, 1998 December 31, 1997 ------------- ----------------- <S> <C> <C> New and demonstrator vehicles $ 105,853 $ 63,457 Used vehicles 26,283 21,524 Parts and accessories 6,001 4,864 --------- -------- $ 138,137 $ 89,845 --------- -------- --------- -------- </TABLE> NOTE 3. CREDIT FACILITY In May 1998, the Company's credit facility was 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. See also Note 8. Subsequent Event. 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 in the first two quarters of 1998: <TABLE> <CAPTION> TOTAL CASH DEBT NET NAME MONTH PAID PAID INCURRED INVESTMENT(1) - ------------------------ -------- ------- -------- -------- ------------- <S> <C> <C> <C> <C> <C> 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 ------- ------- ------- ------- Total $33,354 $16,976 $16,378 $15,458 ------- ------- ------- ------- ------- ------- ------- ------- </TABLE> 5
(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 and $1,650, respectively. The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations, both individually and in aggregate, are not material for the above acquisitions and therefore have not been included herein. NOTE 5. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows: <TABLE> <CAPTION> Six Months Ended June 30, ------------------------- 1998 1997 --------- --------- <S> <C> <C> Cash paid during the period for income taxes $ 2,155 $ 1,434 Cash paid during the period for interest 4,352 817 Property acquired through debt - 1,424 </TABLE> 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. Following is a reconciliation of basic EPS and diluted EPS: <TABLE> <CAPTION> Three Months Ended June 30, 1998 1997 - --------------------------------------- ------------------------------------- ------------------------------ Per Per Share Share BASIC EPS Income Shares Amount Income Shares Amount ------------------------------------- ------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Income available to Common Shareholders $2,222 9,102 $ 0.24 $1,368 7,006 $ 0. 20 ------- ------- ------- ------- DILUTED EPS Effect of dilutive stock options - 324 - 303 ---------------------- --------------------- Net Income available to Common Shareholders $2,222 9,426 $ 0.24 $1,368 7,309 $ 0.19 ------- ------- ------- ------- <CAPTION> Six Months Ended June 30, 1998 1997 - --------------------------------------- -------------------------------------- ------------------------------ Per Per Share Share BASIC EPS Income Shares Amount Income Shares Amount -------------------------------------- ------------------------------- <S> <C> <C> <C> <C> <C> <C> Net Income available to Common Shareholders $ 3,742 8,075 $ 0.46 $2,511 6,957 $ 0.36 -------- ------- -------- ------- DILUTED EPS Effect of dilutive stock options - 330 - 308 --------------------- ------------------- Net Income available to Common Shareholders $ 3,742 8,405 $ 0.45 $2,511 7,265 $ 0.35 -------- ------- -------- ------- </TABLE> 6
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 $42.7 million. NOTE 8. SUBSEQUENT EVENT In July 1998, the Company's credit facility was 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. 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 26 locations in the western United States. The Company currently operates 14 dealerships in California, 9 in Oregon 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 21 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. <TABLE> <CAPTION> AVERAGE U.S. DEALERSHIP YEAR ENDED DECEMBER 31, STATEMENT OF OPERATIONS DATA: ----------------------------- 1997 1996 ---------- ---------- <S> <C> <C> 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% </TABLE> Source: NADA INDUSTRY ANALYSIS DIVISION 7
The following table sets forth selected condensed financial data for the Company, expressed as a percentage of total sales for the periods indicated below. <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------- --------------------- 1998 1997 1998 1997 ----- ----- ------ ----- <S> <C> <C> <C> <C> STATEMENT OF OPERATIONS DATA: Sales: New vehicles 54.6% 47.6% 53.0% 46.6% Used vehicles 32.2 38.8 33.1 40.0 Parts and service 9.3 8.4 9.6 8.4 Finance, insurance and other 3.9 5.2 4.3 5.0 ------ ------ ------- ------ Total sales 100.0 100.0 100.0 100.0 Gross profit 15.5 16.1 15.5 16.2 Selling, general and administrative 11.6 12.3 11.9 12.5 Depreciation and amortization 0.3 0.3 0.3 0.3 ------ ------ ------- ------ Operating income 3.5 3.5 3.3 3.4 Other expense, net (1.4) (0.1) (1.4) 0.0 ------ ------ ------- ------ Income before taxes 2.1 3.4 1.9 3.4 Income taxes 0.8 1.3 0.7 1.3 ------ ------ ------- ------ Net income 1.3% 2.1% 1.2% 2.1% ------ ------ ------- ------ ------ ------ ------- ------ </TABLE> RESULTS OF OPERATIONS 1998 COMPARED TO 1997 SALES. Net sales for the Company increased $107.1 million, or 161 percent, to $173.5 million for the quarter ended June 30, 1998 from $66.4 million for the comparable period of 1997. Net sales increased $198.6 million, or 164 percent, to $319.7 million for the six months ended June 30, 1998 compared to $121.1 million for the comparable period of 1997. The Company's sales mix shifted more to new vehicle sales, with 54.6 percent and 53.0 percent, respectively of total sales generated from new vehicle sales, 32.2 percent and 33.1 percent, respectively, from used vehicle sales and 13.2 percent and 13.9 percent, respectively, from other operating income for the three and six month periods ended June 30, 1998. Same store sales growth was 18.3 percent and 14.5 percent, respectively, for the three and six month periods ended June 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 199 percent to $94.7 million and 200 percent to $169.6 million, respectively, for the three and six- month periods ended June 30, 1998 compared to $31.6 million and $56.5 million, respectively, for the comparable periods of 1997. These increases were achieved by a 193 percent and 190 percent increase, respectively, in units sold to 4,362 and 7,784, respectively, for the three and six-month periods ended June 30, 1998 and a 2.1 percent and 3.6 percent increase, respectively, in the average selling price to $21,711 and $21,790, respectively, for the three and six-month 8
periods ended June 30, 1998. The increases are primarily attributable to a 14.5 percent overall same store growth rate and the inclusion of 15 locations acquired since June 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. 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 136 percent and 127 percent, respectively to $44.6 million and $82.9 million for the three and six-month periods ended June 30, 1998 from $18.9 million and $36.5 million, respectively, for the comparable periods of 1997. Retail used unit volume increased 124 percent and 117 percent, respectively, to 3,439 units and 6,466 units, respectively, for the three and six-month periods ended June 30, 1998. The average unit price increased 5.3 percent and 4.9 percent, respectively, to $12,977 and $12,824, respectively for the three and six-month periods ended June 30, 1998. The increases are primarily attributable to a 14.5% overall same store growth rate and the inclusion of 15 locations acquired since June 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 to $22.9 million and $44.4 million, respectively, for the three and six-month periods ended June 30, 1998, from $9.0 million and $16.3 million, respectively, for the comparable periods of 1997. This increase is primarily due to a 14.5 percent overall growth rate in such revenue and the inclusion of 15 new locations since June 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 $26.9 million and $49.6 million, respectively, for the three and six-month periods ended June 30, 1998, compared with $10.7 million and $19.7 million, respectively, for the comparable periods of 1997. 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. The gross profit margin achieved by the Company on new vehicle sales was 9.7 percent and 9.9 percent, respectively, for the three and six month periods ended June 30, 1998, compared to 11.3 percent and 11.7 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 10.9 percent and 10.7 percent, respectively, for the three and six months ended June 30, 1998 compared to 12.0 percent and 11.5 percent in the comparable periods of 1997. The industry average for 1996 was 10.9 percent. Overall gross 9
profit margins were 15.5 percent and 15.5 percent, respectively, for the three and six-month periods ended June 30, 1998 compared to 16.1 percent and 16.2 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 has seen improvements in the 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. 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. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE ("SG&A"). The Company's SG&A expense increased to $20.2 million and $38.1 million (11.6 percent and 11.9 percent, respectively, of total sales), respectively, for the three and six- month periods ended June 30, 1998 compared to $8.2 million and $15.2 million (12.3 percent and 12.5 percent, respectively, of total 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 $0.6 million and $1.1 million, respectively, for the three and six month periods ended June 30, 1998 compared to $0.2 million and $0.4 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 three and six month periods ended June 30, 1998 and 1997. These figures exclude depreciation related to leased vehicles, which is included in cost of sales. INTEREST EXPENSE. Interest expense increased to $2.7 million and $4.9 million, respectively, for the three and six month periods ended June 30, 1998 from $0.5 million and $0.7 million, respectively, for the comparable period 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 six month periods ended June 30, 1998 and 1997 was 38.6 percent. 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 $2.2 million and $3.7 million (1.3 percent and 1.2 percent, respectively, of total sales), respectively, for the three and six- month periods ended June 30, 1998 compared to $1.4 million and $2.5 million (2.1 percent and 2.1 percent, respectively, of total sales), respectively, for the comparable periods of 1997, as a result of the individual line item changes discussed above. 10
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 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 $42.7 million. The proceeds have been used to pay down the Company's lines of credit until needed for future acquisitions. At June 30, 1998 the Company had working capital of $44.0 million, which included $27.1 million of cash and cash equivalents. The $8.7 million increase in cash since December 31, 1997 is primarily a result of $42.7 million from the sale of the Company's Common Stock and $23.7 million in advances under the Company's flooring line, offset by $25.9 million used for acquisitions $25.3 million used in operations (primarily for increases in inventories), $2.4 million used for the purchase of property and equipment and $4.0 million net payments on long-term debt. The current ratio at June 30, 1998 was 1.3:1 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 June 30, 1998 were as follows (in thousands): <TABLE> <S> <C> Flooring Line $ 119,964 Acquisition Line - Lease Line 4,500 Equipment and Real Estate Lines 7,013 ----------- Total $ 131,477 ----------- ----------- </TABLE> Loans under the credit facility bear interest at LIBOR (London Interbank Offered Rate) plus 150 to 275 basis points, equivalent to 7.1875 percent to 8.4375 percent at June 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 21 dealerships. The aggregate net investment by the Company was approximately $58.6 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, 11
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 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. 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. 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 14, 1998, 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: <TABLE> <CAPTION> No. of Shares No. of Shares Name Voting For(1) Withheld Voting ----------------------- -------------- --------------- <S> <C> <C> <C> Sidney B. DeBoer Class A 3,660 0 Class B 4,110,000 0 M. L. Dick Heimann Class A 3,660 0 Class B 4,110,000 0 Thomas Becker Class A 3,660 0 Class B 4,110,000 0 R. Bradford Gray Class A 3,660 0 Class B 4,110,000 0 William J. Young Class A 3,660 0 Class B 4,110,000 0 </TABLE> (1) Each Class A share represents one vote and each Class B share represents 10 votes. 12
(2) The shareholders approved an amendment to the Company's 1996 Stock Incentive Plan to increase the number of shares of the Company's Common Stock that may be issued thereunder by 415,000 shares to a total of 1,085,000 shares. 3,660 Class A shares and 4,110,000 Class B shares voted for and there were no shares voting against or abstaining from vote. (3) The shareholders approved the Company's 1998 Employee Stock Purchase Plan. 3,660 Class A shares and 4,110,000 Class B shares voted for and there were no shares voting against or abstaining from vote. 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. <TABLE> <CAPTION> Exhibit No. ----------- <S> <C> 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. 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. 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. 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. 10.3 Amendment No. 1 to the Lithia Motors, Inc. 1996 Stock Incentive Plan 27 Financial Data Schedule </TABLE> (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 1998. 13
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 10, 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)