- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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 MARCH 31, 1999 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 6,158,171 Class B Common stock without par value 4,110,000 (Class) (Outstanding at May 10, 1999) - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
LITHIA MOTORS, INC. FORM 10-Q INDEX <TABLE> <CAPTION> PART I - FINANCIAL INFORMATION PAGE - ------------------------------ ---- <S> <C> Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) - March 31, 1999 and December 31, 1998 2 Consolidated Statements of Operations (Unaudited) - Three Months Ended March 31, 1999 and 1998 3 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 1999 and 1998 4 Notes to Consolidated Financial Statements (Unaudited) 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II - OTHER INFORMATION - --------------------------- 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> March 31, December 31, 1999 1998 --------- ------------ <S> <C> <C> ASSETS Current Assets: Cash and cash equivalents $ 24,789 $ 20,879 Trade receivables 16,745 17,287 Notes receivable, current portion, net of allowance for doubtful accounts of $677 and $714 2,923 3,074 Inventories, net 153,320 157,455 Vehicles leased to others, current portion 865 861 Prepaid expenses and other 931 1,933 Deferred income taxes 1,760 2,707 -------- -------- Total Current Assets 201,333 204,196 Property and Equipment, net of accumulated depreciation of $4,244 and $3,907 33,200 32,933 Vehicles Leased to Others, less current portion 5,494 5,647 Notes Receivable, less current portion 6,630 7,173 Goodwill, net of accumulated amortization of $1,473 and $1,180 43,390 42,951 Other Non-Current Assets, net of accumulated amortization of $123 and $103 1,433 1,498 -------- -------- Total Assets $291,480 $294,398 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable $ 1,612 $ 515 Floorplan notes payable 122,708 124,167 Current maturities of long-term debt 10,645 7,601 Current portion of capital leases 25 27 Trade payables 6,465 6,313 Accrued liabilities 13,401 12,020 -------- -------- Total Current Liabilities 154,856 150,643 Long-Term Debt, less current maturities 28,600 38,994 Long-Term Capital Lease Obligation, less current portion 2,420 2,426 Deferred Revenue 1,924 2,076 Other Long-Term Liabilities 1,923 1,606 Deferred Income Taxes 6,928 7,142 -------- -------- Total Liabilities 196,651 202,887 -------- -------- -------- -------- 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 6,150 and 6,105 71,093 70,871 Class B common stock - no par value; authorized 25,000 shares; issued and outstanding 4,110 and 4,110 511 511 Additional paid-in capital 170 150 Retained earnings 23,055 19,979 -------- -------- Total Shareholders' Equity 94,829 91,511 -------- -------- Total Liabilities and Shareholders' Equity $291,480 $294,398 -------- -------- -------- -------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 2
LITHIA MOTORS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ----------------------------- 1999 1998 --------- --------- <S> <C> <C> Revenues: New vehicle sales $ 116,853 $ 74,908 Used vehicle sales 71,809 49,801 Service, body and parts 23,430 14,592 Other revenues 12,053 6,897 --------- --------- Total revenues 224,145 146,198 Cost of sales 188,945 123,252 --------- --------- Gross profit 35,200 22,946 Selling, general and administrative 26,648 17,916 Depreciation and amortization 1,075 720 --------- --------- Income from operations 7,477 4,310 Other income (expense) Floorplan interest expense (2,109) (1,636) Other interest expense (629) (574) Other income, net 266 366 --------- --------- (2,472) (1,844) --------- --------- Income before income taxes 5,005 2,466 Income tax expense 1,976 947 --------- --------- Net income $ 3,029 $ 1,519 --------- --------- --------- --------- Basic net income per share $ 0.30 $ 0.22 --------- --------- --------- --------- Diluted net income per share $ 0.29 $ 0.21 --------- --------- --------- --------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 3
LITHIA MOTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 -------- --------- <S> <C> <C> Cash flows from operating activities: Net income $ 3,029 $ 1,519 Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: Depreciation and amortization 1,075 720 Compensation related to stock option issuances 20 - Loss on sale of assets 25 - (Gain) loss on sale of vehicles leased to others 38 (45) Equity in income of affiliate (16) (9) Changes in operating assets and liabilities, net of effect of acquisitions: Trade and installment contract receivables, net 369 (2,994) Inventories 4,164 (19,174) Prepaid expenses and other 1,002 162 Other noncurrent assets 71 277 Floorplan notes payable (1,459) 4,793 Trade payables 152 (519) Accrued liabilities 1,381 1,942 Deferred income taxes, net 204 (195) Other liabilities 165 (196) -------- --------- Net cash provided by (used in) operating activities 10,220 (13,719) Cash flows from investing activities: Notes receivable issued (769) (54) Principal payments received on notes receivable 1,463 87 Capital expenditures (1,128) (1,195) Proceeds from sale of assets 357 - Expenditures for vehicles leased to others (1,851) (2,046) Proceeds from sale of vehicles leased to others 1,669 2,191 Cash paid for acquisitions (12) (15,197) -------- --------- Net cash used in investing activities (271) (16,214) Cash flows from financing activities: Principal payments on long-term debt and capital leases (6,928) (1,010) Proceeds from issuance of long-term debt 667 26,617 Proceeds from issuance of common stock 222 53 -------- --------- Net cash provided by (used in) financing activities (6,039) 25,660 -------- --------- Increase (decrease) in cash and cash equivalents 3,910 (4,273) Cash and cash equivalents: Beginning of period 20,879 18,454 -------- --------- End of period $ 24,789 $ 14,181 -------- --------- -------- --------- </TABLE> The accompanying notes are an integral part of these consolidated financial 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-month periods ended March 31, 1999 and 1998 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, 1998 is derived from Lithia Motors, Inc.'s 1998 Annual Report to Shareholders 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 Lithia Motors' 1998 Annual Report to Shareholders. 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). Detail of inventory is as follows: <TABLE> <CAPTION> MARCH 31, 1999 DECEMBER 31, 1998 -------------- ----------------- <C> <C> <C> New and demonstrator vehicles $112,878 $112,990 Used vehicles 30,729 34,599 Parts and accessories 9,713 9,866 -------- -------- $153,320 $157,455 -------- -------- -------- -------- </TABLE> NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ---------------------------- 1999 1998 ---------- --------- <S> <C> <C> Cash paid during the period for income taxes $ 923 $ 650 Cash paid during the period for interest 2,899 1,614 </TABLE> 5
NOTE 4. EARNINGS PER SHARE Following is a reconciliation of basic earnings per share ("EPS") and diluted EPS: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 1999 1998 - ------------------------------ ---------------------------------- -------------------------------- Per Per Share Share BASIC EPS Income Shares Amount Income Shares Amount ---------------------------------- -------------------------------- <S> <C> <C> <C> <C> <C> <C> Income available to Common Shareholders $ 3,029 10,240 $ 0.30 $ 1,519 7,036 $ 0.22 ------ ------ ------ ------ DILUTED EPS Effect of dilutive stock options - 365 - 335 ------- ------ ------- ----- Income available to Common Shareholders $ 3,029 10,605 $ 0.29 $ 1,519 7,371 $ 0.21 ------ ------ ------ ------ </TABLE> Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive include 24 and 44 shares, respectively, issuable pursuant to stock options, for the three month periods ended March 31, 1999 and 1998, respectively. 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. These risk factors include, but are not limited to, the following: - - The cyclical nature of automobile sales; - - Lithia's ability to negotiate profitable, accretive acquisitions; - - Lithia's ability to secure manufacturer approvals for acquisitions; and - - Lithia's ability to retain existing management. See Exhibit 99 to Lithia's 1998 Form 10-K for a more complete discussion of risk factors. GENERAL Lithia is a leading operator and retailer in the highly fragmented automotive industry. We offer 23 brands of new vehicles, through 56 franchises in 28 locations in the western United States. We currently operate 14 dealerships in California, 9 in Oregon, 2 in Washington and 3 in Nevada. Lithia 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. 6
The following table shows selected condensed financial data expressed as a percentage of total revenues 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: --------------------------- 1998 1997 ----------- ----------- <S> <C> <C> Revenues: New vehicles 59.0% 58.3% Used vehicles 29.4 29.8 Parts and service, other 11.6 11.9 ----------- ----------- 100.0% 100.0% Gross profit 12.9 12.7 Total dealership expense 11.2 11.3 Income before taxes 1.7% 1.4% </TABLE> Source: NADA INDUSTRY ANALYSIS DIVISION The following table sets forth selected condensed financial data for the Company, expressed as a percentage of total revenues for the periods indicated below. <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ----------------------------- 1999 1998 ----------- ----------- <S> <C> <C> STATEMENT OF OPERATIONS DATA: Sales: New vehicles 52.1% 51.2% Used vehicles 32.0 34.1 Service, body and parts 10.5 10.0 Other 5.4 4.7 ----------- ----------- Total sales 100.0 100.0 Gross profit 15.7 15.7 Selling, general and administrative 11.9 12.3 Depreciation and amortization 0.5 0.5 ----------- ----------- Operating income 3.3 2.9 Other income (expense), net (1.1) (1.2) ----------- ----------- Income before taxes 2.2% 1.7% ----------- ----------- ----------- ----------- </TABLE> RESULTS OF OPERATIONS REVENUES. Revenues increased $77.9 million, or 53.3 percent, to $224.1 million for the quarter ended March 31, 1999 from $146.2 million for the comparable period of 1998. Total retail vehicles sold during the quarter ended March 31, 1999 increased 47.1% to 9,484 from 6,449 for the quarter ended March 31, 1998. The average selling price for new and retail used vehicles increased 2.0% and 2.4%, respectively, for the quarter ended March 31, 1999 compared to the quarter ended March 31, 1998. The average selling price for wholesale used vehicles decreased 2.6% in the first quarter of 1999 compared to the first quarter of 1998. Same store sales and pre-tax profit increased 12.9% and 43.5%, respectively, in the first quarter of 1999 compared to the first quarter of 1998. Lithia's newest thirteen stores 7
showed a 14.6% increase in same-store sales and a 110.3% increase in same store pre-tax profits. NEW VEHICLES. Total revenue from new vehicle sales increased 56.0% to $116.9 million (52.1% of total revenues) in the first quarter of 1999 from $74.9 million (51.2% of total revenues) in the first quarter of 1998. Lithia sold 5,231 new vehicles in the first quarter of 1999, a 52.9% increase over the 3,422 sold in the first quarter of 1998. Average selling prices for new vehicles increased 2.0% to $22,338 in the first quarter of 1999 compared to $21,890 in the first quarter of 1998. The increase in units sold is primarily a result of acquisitions and strong internal growth. Lithia purchases substantially all of its new car inventory directly from manufacturers who allocate new vehicles to dealerships based on orders and the amount of vehicles sold by the dealership and by the dealership's market area. Lithia also exchanges vehicles with other dealers to accommodate customer demand and to balance inventory. RETAIL USED VEHICLES. Total revenue from retail used vehicle sales increased 43.8% to $55.1 million (24.6% of total revenues) in the first quarter of 1999 from $38.3 million (26.2% of total revenues) in the first quarter of 1998. Lithia sold 4,253 retail used vehicles in the first quarter of 1999, a 40.5% increase over the 3,027 sold in the first quarter of 1998. The average selling price for retail used vehicles increased 2.4% to $12,948 in the first quarter of 1999 from $12,649 in the first quarter of 1998. The increase in units sold is primarily a result of acquisitions and strong internal growth. SERVICE, BODY AND PARTS. Lithia derives additional revenue from the sale of parts and accessories, maintenance and repair services and collision repair work. Revenues from these services increased 60.6% to $23.4 million (10.5% of total revenues) in the first quarter of 1999 compared to $14.6 million (10.0% of total revenues) in the first quarter of 1998. The increase is primarily a result of internal growth and dealership acquisitions. OTHER REVENUES. Other revenues consist primarily of financing and insurance ("F&I") transactions. Other revenues increased 74.8% to $12.1 million (5.4% of total revenues) in the first quarter of 1999 compared to $6.9 million (4.7% of total revenues) in the first quarter of 1998. The increase is a result of both internal growth and dealership acquisitions. GROSS PROFIT. Gross profit increased 53.4% to $35.2 million for the first quarter of 1999, compared with $22.9 million for the first quarter of 1998, primarily due to increased revenues as indicated above. The gross profit margin achieved by the Company on new vehicle sales during the first quarter of 1999 was 9.7% compared to 10.2% in the first quarter of 1998. This compares favorably with the average gross profit margin of 6.5% realized by franchised automobile dealers in the United States on sales of new vehicles in 1998. Lithia's gross profit margin on retail used vehicle sales during the first quarter of 1999 was 11.2% compared to 10.6% in the first quarter of 1998, and compared to the industry average for 1998 of 10.9%. Sales of used vehicles to other dealers and to wholesalers are frequently at, or close to, cost. Total gross profit margin remained stable at 15.7% in the first quarter of 1999 and 1998. The decreases in gross profit margin on new vehicle sales and service, body and parts were offset by increases in gross profit margin on retail used vehicle sales and finance and lease transactions. 8
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative ("SG&A") expense increased 48.7% to $26.6 million (11.9% of total revenues) for the first quarter of 1999 compared to $17.9 million (12.3% of total revenues) for the comparable period of 1998. The increase in SG&A was due primarily to increased selling, or variable, expense related to the increase in revenues and the number of total locations. The decrease in SG&A as a percent of total revenues is a result of economies of scale gained as the fixed expenses are spread over a larger revenue base and from economies of scale as Lithia consolidates multiple stores in a single market. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased 49.3% to $1.1 million in the first quarter of 1999 compared to $0.7 million in the first quarter of 1998, primarily as a result of increased property and equipment and goodwill related to acquisitions in 1998. Depreciation and amortization was 0.5% of revenues in the first quarter of 1999 and 1998. FLOORPLAN INTEREST EXPENSE. Floorplan interest expense increased to $2.1 million (0.9% of total revenues) in the first quarter of 1999 compared to $1.6 million (1.1% of total revenues) in the first quarter of 1998, primarily as a result of increased flooring notes payable related to increased inventories as a result of the increase in stores owned and vehicles sold. Lithia has been able to reduce its floorplan interest expense as a percentage of total revenues by successfully managing inventory levels. INCOME TAX EXPENSE. Lithia's effective tax rate for the first quarter of 1999 was 39.5% compared to 38.4% in the first quarter of 1998. The Company's effective tax rate may be effected by the purchase of new dealerships in jurisdictions with tax rates either higher or lower than the current effective rate. NET INCOME. Net income increased 99.4% to $3.0 million (1.4% of total revenues) for the first quarter of 1999 compared to $1.5 million (1.0% of total revenues) for the comparable period of 1998, primarily as a result of increased revenues and decreased selling, general and administrative expenses and floorplan and other interest expense as a percent of total revenues. 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 public offerings to finance its operations and expansion. At March 31, 1999 the Company had working capital of $46.5 million, which included $24.8 million of cash and cash equivalents. The $3.9 million increase in cash since December 31, 1998 is primarily a result of $10.2 million provided by operations, offset by $1.1 million used for the purchase of property and equipment and $6.3 million net payments on long-term debt. The current ratio at March 31, 1999 was 1.3:1 compared to 1.4:1 at December 31, 1998. 9
Ford Credit, Toyota Motor Credit Corporation, Chrysler Financial Corporation and General Motors Acceptance Corporation have agreed to floor all of Lithia's new vehicles for their respective brands with Ford serving as the primary lender for all other brands. There are no formal limits to these commitments for new vehicle wholesale financing. Ford Credit has also extended a $60 million revolving line of credit for used vehicles and a $75 million acquisition line of credit to purchase dealerships of any brand. These commitments have an expiration date of November 23, 2000 with interest due monthly. Lithia has the right to elect to extend the term on these lines of credit for an additional two years at November 23, 1999. Lithia also has the option to convert the acquisition line into a five-year term loan on November 23, 1999 or November 23, 2000. In addition, U.S. Bank N.A. has extended a $10 million revolving line of credit for leased vehicles. The lines with Ford Credit are cross-collateralized and are secured by inventory, accounts receivable, intangible assets and equipment. The other new vehicle lines are secured by new vehicle inventory of the relevant dealerships. The Ford Credit lines of credit contain financial covenants requiring Lithia to maintain compliance with, among other things, specified ratios of (i) total debt to tangible base capital; (ii) total adjusted debt to tangible base capital; (iii) current ratio; (iv) fixed charge coverage; and (v) net cash. The Ford Credit lines of credit agreements also preclude the payment of cash dividends without the prior consent of Ford Credit. Lithia was in compliance with all such covenants at March 31, 1999. Interest rates on all of the above facilities ranged from 6.63% to 7.94% at March 31, 1999. Amounts outstanding on the lines at March 31, 1999 were as follows (in thousands): <TABLE> <S> <C> Acquisition Line $ - Used Vehicle Line - New and Program Vehicle Lines 122,708 Leased Vehicle Line 4,000 -------- $126,708 -------- -------- </TABLE> Since December 1996 when Lithia completed its initial public offering, it has acquired 23 dealerships. The aggregate net investment was approximately $74.2 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, Lithia'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 may be 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 in operating results from quarter to quarter. 10
YEAR 2000 GENERAL. Lithia has identified three major areas of concern: 1. The functionality of its 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. Lithia expects to be Year 2000 compliant by July 1, 1999. Lithia is utilizing the National Auto Dealers Association dealer guide to assist in resolving its Year 2000 issues and problems. INTERNAL SYSTEMS. Lithia 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. Lithia estimates that it is 90 percent complete with implementing various manufacturer upgrades to its systems in order to make them Year 2000 compliant. We estimate that our internal systems we will be fully Year 2000 compliant by July 1, 1999. Like all businesses, Lithia is 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 Lithia. 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. Lithia is currently working on ensuring that all report date stamps, timekeeping devices, etc. are Year 2000 compliant. We estimate that we are approximately 95 percent complete with this process. THIRD PARTIES. Lithia has begun a Year 2000 supplier audit program. It has contacted all of its critical suppliers to inform them of its 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, Lithia has received written or other confirmation that they are Year 2000 compliant, except for Subaru. Subaru has assured Lithia 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 Lithia. Investors should use their own awareness of the issues in the transportation infrastructure to make ongoing infrastructure risk assessments and their potential impact to a company's performance. 11
ACQUISITIONS. Acquisitions in 1999 will be subject to strict due diligence for Year 2000 compliance. COST. Lithia expects to incur costs totaling approximately $1,054,000 to ensure Year 2000 compliance, approximately $845,000 of which has already been incurred since the end of 1997. A majority of the $1,054,000 represents replacement of non-compliant systems, and therefore 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 Lithia'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, Lithia is unable to determine, at this time, whether the consequences of Year 2000 failures will have a material impact on its results of operations, liquidity or financial condition. Lithia's efforts to help ensure Year 2000 preparedness have, and will continue to, significantly reduce its level of uncertainty about the Year 2000 problem. We believe that, with completion of the above mentioned plans, the possibility of significant interruptions of normal operations should be reduced. Lithia has developed contingency plans in regard to its internal systems and supplier issues and will distribute these plans to all relevant departments of Lithia by October 1999. The contingency plans consist primarily of manual processes and procedures to be followed in the event of system failures. RECENT ACCOUNTING PRONOUNCEMENT 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. Lithia does not have any derivative instruments and, accordingly, the adoption of SFAS 133 will have no impact on its financial position or results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Lithia's only financial instruments with market risk exposure are variable rate floor plan notes payable and other credit line borrowings. At March 31, 1999 Lithia had $126.7 million outstanding under such facilities at interest rates ranging from 6.63% to 7.94%. An increase or decrease in the interest rates would affect interest expense for the period accordingly. 12
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. <TABLE> <CAPTION> EXHIBIT NO. ----------- <S> <C> 10.1 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and Moreland Auto Limited Partnership, RLLLP and G. Michael Downey and Moreland Auto Corp. 10.2 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and L.A.H. Automotive Limited Partnership, RLLLP and L.A.H. Automotive Enterprises, Inc. 10.3 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and William D. Limited Partnership, RLLLP and James Jannicelli and William D.Corp. 10.4 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and Cherry Creek Dodge Limited Partnership, RLLLP and Cherry Creek Dodge, Incorporated 10.5 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and Colorado Springs Jeep Eagle Limited Partnership, RLLP and Alex Jannicelli and Colorado Springs Jeep/Eagle, Inc. 10.6 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and Foothills Automotive Plaza Limited Partnership, RLLLP and Jerry Cash and Foothills Automotive Plaza, Inc. 10.7 Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and Reno Auto Sales Limited Partnership, RLLLP and Reno Auto Sales, Inc. 27 Financial Data Schedule </TABLE> (b) Reports on Form 8-K Reports on Form 8-K were filed as follows: - Under Item 5, Other Events, filed on January 11, 1999, regarding Lithia's listing on the New York Stock Exchange - Under Item 5, Other Events, filed on March 15, 1999, regarding a pending acquisition 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. <TABLE> <S> <C> Date: May 10, 1999 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) </TABLE> 14