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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One) |
/X/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 1999 | |
OR | |
/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 000-21789
LITHIA MOTORS, INC.
(Exact name of registrant
as specified in its charter)
Oregon (State or other jurisdiction of incorporation or organization) |
93-0572810 (I.R.S. Employer Identification No.) |
360 E. Jackson Street, Medford, Oregon (Address of principal executive offices) |
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97501 (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.
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Class A Common stock without par value | 7,446,054 | |
Class B Common stock without par value | 4,110,000 | |
(Class) | (Outstanding at August 10, 1999) |
LITHIA MOTORS, INC.
FORM 10-Q
INDEX
PART
I - FINANCIAL INFORMATION |
Page
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Item 1. |
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Financial Statements |
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Consolidated Balance Sheets June 30, 1999 (unaudited) and December 31, 1998 |
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2 |
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Consolidated Statements of Operations Three and Six Months Ended June 30, 1999 and 1998 (unaudited) |
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3 |
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Consolidated Statements of Cash Flows Six Months Ended June 30, 1999 and 1998 (unaudited) |
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4 |
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Notes to Consolidated Financial Statements (unaudited) |
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5 |
Item 2. |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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7 |
Item 3. |
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Quantitative and Qualitative Disclosures About Market Risk |
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14 |
PART II - OTHER INFORMATION |
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Item 4. |
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Submission of Matters to a Vote of Security Holders |
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15 |
Item 6. |
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Exhibits and Reports on Form 8-K |
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16 |
Signatures |
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17 |
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
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June 30, 1999 |
December 31, 1998 |
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Assets | ||||||
Current Assets: | ||||||
Cash and cash equivalents | $ | 42,001 | $ | 20,879 | ||
Trade receivables | 25,603 | 17,287 | ||||
Notes receivable, current portion, net of allowance for doubtful accounts of $533 and $714 | 4,897 | 3,074 | ||||
Inventories, net | 233,624 | 157,455 | ||||
Vehicles leased to others, current portion | 1,677 | 861 | ||||
Prepaid expenses and other | 1,353 | 1,933 | ||||
Deferred income taxes | 3,290 | 2,707 | ||||
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Total Current Assets | 312,445 | 204,196 | ||||
Property and Equipment, net of accumulated depreciation of $4,783 and $3,907 | 42,726 | 32,933 | ||||
Vehicles Leased to Others, net | 5,718 | 5,647 | ||||
Notes Receivable, less current portion | 5,722 | 7,173 | ||||
Goodwill, net of accumulated amortization of $1,892 and $1,180 | 78,633 | 42,951 | ||||
Other Non-Current Assets, net of accumulated amortization of $123 and $103 | 1,671 | 1,498 | ||||
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Total Assets | $ | 446,915 | $ | 294,398 | ||
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Liabilities and Shareholders' Equity | ||||||
Current Liabilities: | ||||||
Floorplan notes payable | $ | 185,426 | $ | 124,167 | ||
Current maturities of long-term debt | 8,893 | 8,116 | ||||
Current portion of capital leases | 153 | 27 | ||||
Trade payables | 11,246 | 6,313 | ||||
Accrued liabilities | 21,788 | 12,020 | ||||
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Total Current Liabilities | 227,506 | 150,643 | ||||
Long-Term Debt, less current maturities | 72,106 | 38,994 | ||||
Long-Term Capital Lease Obligation, less current portion | 2,651 | 2,426 | ||||
Deferred Revenue | 2,607 | 2,076 | ||||
Other Long-Term Liabilities | 3,002 | 1,606 | ||||
Deferred Income Taxes | 9,217 | 7,142 | ||||
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Total Liabilities | 317,089 | 202,887 | ||||
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Shareholders' Equity | ||||||
Preferred stock no par value; authorized 15,000 shares; issued and outstanding; none | | | ||||
Convertible, redeemable Series M preferred stock; authorized 15 shares; issued and outstanding 10.4 | 6,216 | | ||||
Class A common stock no par value; authorized 100,000 shares; issued and outstanding 7,432 and 6,105 | 95,325 | 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 | 189 | 150 | ||||
Retained earnings | 27,585 | 19,979 | ||||
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Total Shareholders' Equity | 129,826 | 91,511 | ||||
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Total Liabilities and Shareholders' Equity | $ | 446,915 | $ | 294,398 | ||
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The accompanying notes are an integral part of these consolidated statements.
2
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(Unaudited)
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Three months ended June 30,
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Six months ended June 30,
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1999
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1998
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1999
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1998
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Revenues: | ||||||||||||
New vehicle sales | $ | 167,222 | $ | 94,704 | $ | 284,075 | $ | 169,612 | ||||
Used vehicle sales | 93,049 | 55,894 | 164,858 | 105,695 | ||||||||
Service, body and parts | 28,477 | 16,156 | 51,907 | 30,748 | ||||||||
Other revenues | 19,005 | 6,788 | 31,058 | 13,685 | ||||||||
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Total revenues | 307,753 | 173,542 | 531,898 | 319,740 | ||||||||
Cost of sales | 258,967 | 146,443 | 447,912 | 269,695 | ||||||||
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Gross profit | 48,786 | 27,099 | 83,986 | 50,045 | ||||||||
Selling, general and administrative | 36,061 | 20,195 | 62,709 | 38,111 | ||||||||
Depreciation and amortization | 1,364 | 804 | 2,439 | 1,524 | ||||||||
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Income from operations | 11,361 | 6,100 | 18,838 | 10,410 | ||||||||
Other income (expense) | ||||||||||||
Floorplan interest expense | (2,179 | ) | (1,880 | ) | (4,288 | ) | (3,516 | |||||
Other interest expense | (1,065 | ) | (777 | ) | (1,694 | ) | (1,351 | |||||
Other income (expense), net | (338 | ) | 187 | (72 | ) | 553 | ||||||
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(3,582 | ) | (2,470 | ) | (6,054 | ) | (4,314 | ||||||
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Income before income taxes | 7,779 | 3,630 | 12,784 | 6,096 | ||||||||
Income tax expense | 3,202 | 1,407 | 5,178 | 2,354 | ||||||||
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Net income | $ | 4,577 | $ | 2,223 | $ | 7,606 | $ | 3,742 | ||||
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Basic net income per share | $ | 0.42 | $ | 0.24 | $ | 0.72 | $ | 0.46 | ||||
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Diluted net income per share | $ | 0.40 | $ | 0.24 | $ | 0.69 | $ | 0.45 | ||||
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The accompanying notes are an integral part of these consolidated statements.
3
LITHIA MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Six months ended June 30,
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1999
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1998
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Cash flows from operating activities: | ||||||
Net income | $ | 7,606 | $ | 3,742 | ||
Adjustments to reconcile net income to net cash flows provided by (used in) operating activities: | ||||||
Depreciation and amortization | 2,439 | 1,524 | ||||
Compensation expense related to stock option issuances | 39 | 69 | ||||
Loss on sale of assets | 21 | 9 | ||||
Loss (gain) on sale of vehicles leased to others | 111 | (54 | ||||
Deferred income taxes | (1,446 | ) | (136 | |||
Equity in income of affiliate | (151 | ) | (19 | |||
Changes in operating assets and liabilities, net of effect of acquisitions: | ||||||
Trade and installment contract receivables, net | 526 | (4,328 | ||||
Inventories | (13,686 | ) | (28,355 | |||
Prepaid expenses and other | 884 | (1,454 | ||||
Other noncurrent assets | (42 | ) | 228 | |||
Floorplan notes payable | 12,776 | 23,726 | ||||
Trade payables | (3,544 | ) | 2,085 | |||
Accrued liabilities | 5,940 | 2,261 | ||||
Other long-term liabilities and deferred revenue | 1,737 | 13 | ||||
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Net cash provided by (used in) operating activities | 13,210 | (689 | ||||
Cash flows from investing activities: |
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Notes receivable issued | (418 | ) | (171 | |||
Principal payments received on notes receivable | 2,496 | 161 | ||||
Capital expenditures | (4,497 | ) | (2,420 | |||
Proceeds from sale of assets | 389 | | ||||
Expenditures for vehicles leased to others | (4,932 | ) | (4,579 | |||
Proceeds from sale of vehicles leased to others | 3,312 | 3,664 | ||||
Cash paid for acquisitions, net of cash acquired | (21,490 | ) | (25,935 | |||
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Net cash used in investing activities | (25,140 | ) | (29,280 | |||
Cash flows from financing activities: |
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Net borrowings on lines of credit | 36,400 | | ||||
Principal payments on long-term debt and capital leases | (5,047 | ) | (31,168 | |||
Proceeds from issuance of long-term debt | 1,351 | 27,137 | ||||
Proceeds from issuance of common stock | 348 | 42,682 | ||||
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Net cash provided by financing activities | 33,052 | 38,651 | ||||
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Increase in cash and cash equivalents | 21,122 | 8,682 | ||||
Cash and cash equivalents: | ||||||
Beginning of period | 20,879 | 18,454 | ||||
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End of period | $ | 42,001 | $ | 27,136 | ||
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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 as of June 30, 1999 and December
31,
1998 and for the three and six-month periods ended June 30, 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 (the
Company's)
1998 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
1998 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).
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June 30, 1999
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December 31, 1998
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New and demonstrator vehicles | $ | 171,837 | $ | 112,990 | ||
Used vehicles | 49,589 | 34,599 | ||||
Parts and accessories | 12,198 | 9,866 | ||||
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$ | 233,624 | $ | 157,455 | |||
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Note 3. Supplemental Cash Flow Information
Supplemental disclosure of cash flow information is as follows:
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Six Months Ended June 30,
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1999
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1998
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Cash paid during the period for income taxes | $ | 4,630 | $ | 2,155 | ||
Cash paid during the period for interest | 5,569 | 4,352 |
5
Note 4. Earnings Per Share
Following is a reconciliation of basic earnings per share ("EPS") and diluted EPS:
Three Months Ended June 30,
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1999 |
1998 |
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Basic EPS | Income |
Shares |
Per Share Amount |
Income |
Shares |
Per Share
Amount |
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Net income available to Common Shareholders | $ | 4,577 | 10,926 | $ | 0.42 | $ | 2,223 | 9,102 | $ | 0.24 | ||||||
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Diluted EPS | ||||||||||||||||
Effect of dilutive stock options | | 349 | | 324 | ||||||||||||
Conversion of preferred stock | 295 | |||||||||||||||
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Net income available to Common Shareholders | $ | 4,577 | 11,570 | $ | 0.40 | $ | 2,223 | 9,426 | $ | 0.24 | ||||||
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Six Months Ended June 30,
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1999 |
1998 |
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Basic EPS | Income |
Shares |
Per Share Amount |
Income |
Shares |
Per Share Amount |
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Net income available to Common Shareholders | $ | 7,606 | 10,585 | $ | 0.72 | $ | 3,742 | 8,075 | $ | 0.46 | ||||||
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Diluted EPS | ||||||||||||||||
Effect of dilutive stock options | | 353 | | 330 | ||||||||||||
Conversion of preferred stock | 147 | |||||||||||||||
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Net income available to Common Shareholders | $ | 7,606 | 11,085 | $ | 0.69 | $ | 3,742 | 8,405 | $ | 0.45 | ||||||
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Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive include 109 and 44 shares, respectively, issuable pursuant to stock options, for the three month periods ended June 30, 1999 and 1998, respectively, and 133 and 44 shares, respectively, for the six month periods ended June 30, 1999 and 1998, respectively.
Note 5. Acquisitions
In May 1999, Lithia acquired all of the stock of seven commonly controlled
automotive dealerships constituting the Moreland Automotive Group ("Moreland") for
approximately $35.7 million in cash drawn from the Company's existing used vehicle line of credit,
1,272,919 shares of the Company's Class A Common Stock with a value of approximately $24.1
million at the time of issuance, and 10,360 shares of Lithia's newly created Series M
Preferred
Stock with a value of approximately $6.2 million at the time of issuance. Additional amounts will
be payable by Lithia to the Moreland shareholders if the performance of the Moreland stores exceeds
certain profit targets set for 1999. At closing, Moreland had approximately $18.2 million of used
vehicles available for flooring under the Lithia's used vehicle line of credit, reducing Lithia's
net investment in the acquired dealerships by that amount to a total of $47.8 million.
Lithia also acquired one store in Klamath Falls, Oregon in May 1999 for a net investment of $2.4 million.
6
The following table sets forth the total purchase price, cash paid from existing cash reserves, debt incurred and the net investment for the two acquisitions made by Lithia in the first half of 1999:
Name |
Month
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Total Paid
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Cash Paid
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Debt Incurred
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Stock Issued
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Net Investment(1)
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Moreland Automotive | May | $ | 66,018 | $ | | $ | 35,696 | $ | 30,322 | $ | 47,818 | ||||||
Klamath Falls | May | 4,107 | 1,721 | 2,386 | | 2,400 | |||||||||||
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Total | $ | 70,125 | $ | 1,721 | $ | 38,082 | $ | 30,322 | $ | 50,218 | |||||||
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The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations including Klamath Falls are not materially different from actual results of operations. Pro forma results of operations including Moreland Automotive for the six months ended June 30, 1999 and 1998 are as follows:
Six Months Ended June 30, |
1999
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1998
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Revenue | $ | 698,643 | $ | 499,665 | ||
Net income | $ | 9,441 | $ | 3,746 | ||
EPS: Basic | $ | 0.82 | $ | 0.40 | ||
Diluted | $ | 0.76 | $ | 0.36 |
Note 6. Sale of Properties
In June 1999, Lithia Properties, LLC, of which 20% is owned by Lithia,
completed
its previously announced sale of certain real estate holdings in the Southern Oregon
region to Capital Automotive Real Estate Investment Trust ("Capital") for $18.3 million. Lithia now
leases such properties from Capital for amounts that are not materially different from the lease
amounts under the previous lease agreements.
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:
See Exhibit 99 to Lithia's 1998 Form 10-K for a more complete discussion of risk factors.
7
General
Lithia is a leading operator and retailer in the highly fragmented automotive
industry. We offer 24 brands of new vehicles, through 83 franchises in 36 locations in the western
United States. We currently operate 14 dealerships in California, 10 in Oregon, 2 in Washington, 6
in Colorado and 4 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.
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.
Average
U.S. Dealership Statement of Operations Data: |
Year Ended
December 31,
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1998
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1997
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Revenues: | |||||
New vehicles | 59.0 | % | 58.3 | % | |
Used vehicles | 29.4 | 29.8 | |||
Parts and service, other | 11.6 | 11.9 | |||
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Total sales | 100.0 | % | 100.0 | % | |
Gross profit | 12.9 | 12.7 | |||
Total dealership expense | 11.2 | 11.3 | |||
Income before taxes | 1.7 | % | 1.4 | % |
Source: NADA Industry Analysis Division
The following table sets forth selected condensed financial data for the Company, expressed as a percentage of total sales for the periods indicated below.
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Three Months Ended June 30, |
Six Months Ended June 30, |
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1999
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1998
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1999
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1998
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Statement of Operations Data: | |||||||||
Revenues: | |||||||||
New vehicles | 54.3 | % | 54.6 | % | 53.4 | % | 53.0 | % | |
Used vehicles | 30.2 | 32.2 | 31.0 | 33.1 | |||||
Service, body and parts | 9.3 | 9.3 | 9.8 | 9.6 | |||||
Other | 6.2 | 3.9 | 5.8 | 4.3 | |||||
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Total sales | 100.0 | 100.0 | 100.0 | 100.0 | |||||
Gross profit | 15.8 | 15.6 | 15.8 | 15.7 | |||||
Selling, general and administrative | 11.7 | 11.6 | 11.8 | 11.9 | |||||
Depreciation and amortization | 0.4 | 0.5 | 0.5 | 0.5 | |||||
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Operating income | 3.7 | 3.5 | 3.5 | 3.3 | |||||
Other expense, net | (1.2 | ) | (1.4 | ) | (1.1 | ) | (1.4 | ) | |
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Income before taxes | 2.5 | % | 2.1 | % | 2.4 | % | 1.9 | % | |
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8
Results of Operations
Revenues. Revenues increased $134.2 million, or 77.3%, to $307.8 million for the quarter ended June 30, 1999 from $173.5 million for the comparable period of 1998. Revenues increased $212.2 million, or 66.4%, to $531.9 million for the six months ended June 30, 1999 compared to $319.7 million for the comparable period of 1998. Same store sales increased 7.0% in the second quarter of 1999 compared to the second quarter of 1998 and 9.7% in the first six months of 1999 compared to the first six months of 1998.
New Vehicles. Total revenue from new vehicle sales increased 76.6% and 67.5%, respectively, to $167.2 million and $284.1 million, respectively (54.3% and 53.4%, respectively, of total revenues) in the three and six month periods ended June 30, 1999 compared to $94.7 million and $169.6 million, respectively (54.6% and 53.0%, respectively, of total revenues) for the three and six-month periods ended June 30, 1998. Lithia sold 7,229 and 12,460 new vehicles, respectively, in the three and six month periods ended June 30, 1999, a 65.7% and 60.1% increase, respectively, over the 4,362 and 7,784 sold, respectively, in the three and six month periods ended June 30, 1998. Average selling prices for new vehicles increased 6.5% and 4.6%, respectively, to $23,132 and $22,799, respectively, in the three and six month periods ended June 30, 1999 compared to $21,711 and $21,790, respectively, in the three and six month periods ended June 30, 1998. The increases in units sold are 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 74.9% and 60.5%, respectively, to $78.1 million and $133.1 million, respectively (25.4% and 25.0%, respectively, of total revenues) in the three and six month periods ended June 30, 1999 compared to $44.6 million and $82.9 million, respectively (25.7% and 25.9%, respectively, of total revenues) for the three and six-month periods ended June 30, 1998. Lithia sold 5,875 and 10,128 retail used vehicles, respectively, in the three and six month periods ended June 30, 1999, a 70.8% and 56.6% increase, respectively, over the 3,439 and 6,466 sold, respectively, in the three and six month periods ended June 30, 1998. Average selling prices for used retail vehicles increased 2.4% and 2.5%, respectively, to $13,285 and $13,144, respectively, in the three and six month periods ended June 30, 1999 compared to $12,977 and $12,823, respectively, in the three and six month periods ended June 30, 1998. The increases in units sold are 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 76.3% and 68.8%, respectively, to $28.5 million and $51.9 million, respectively (9.3% and 9.8% of total revenues, respectively), in the three and six month periods ended June 30, 1999 compared to $16.2 million and $30.7 million, respectively (9.3% and 9.6% of total revenues, respectively), in the three and six month periods ended June 30, 1998. The increases are primarily a result of internal growth and dealership acquisitions.
9
Other Revenues. Other revenues consist primarily of fleet, financing and insurance ("F& I") transactions. Other revenues increased 180.0% and 126.9%, respectively, to $19.0 million and $31.1 million, respectively (6.2% and 5.8% of total revenues, respectively), in the three and six month periods ended June 30, 1999 compared to $6.8 million and $13.7 million, respectively (3.9% and 4.3% of total revenues, respectively), in the three and six month periods ended June 30, 1998. The increases are a result of internal growth and dealership acquisitions.
Gross Profit. Gross profit increased 80.0% and 67.8%, respectively, to $48.8 million and $84.0 million, respectively, for the three and six month periods ended June 30, 1999, compared with $27.1 million and $50.0 million, respectively, for the three and six month periods ended June 30, 1998, primarily due to increased revenues as indicated above. The gross profit margin achieved by the Company on new vehicle sales during the three and six month periods ended June 30, 1999 was 9.3% and 9.5%, respectively, compared to 9.7% and 9.9%, respectively, for the three and six month periods ended June 30, 1998. These figures compare 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 three and six month periods ended June 30, 1999 was 11.5% and 11.4%, respectively, compared to 10.9% and 10.7%, respectively, for the three and six month periods ended June 30, 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 increased to 15.9% and 15.8% for the three and six month periods ended June 30, 1999, respectively, compared to 15.6% and 15.7% for the comparable periods of 1998. The decreases in gross profit margin on new vehicle sales and service, body and parts were more than offset by increases in gross profit margin on retail used vehicle sales and finance and lease transactions.
Selling, General and Administrative Expense. Selling, general and administrative ("SG&A") expense increased 78.6% and 64.6%, respectively, to $36.1 million and $62.7 million, respectively (11.7% and 11.8% of total revenues, respectively), for the three and six month periods ended June 30, 1999, compared with $20.2 million and $38.1 million, respectively (11.6% and 11.9% of total revenues, respectively), for the three and six month periods ended June 30, 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.
Depreciation and Amortization. Depreciation and amortization expense increased 67.8% and 59.1%, respectively, to $1.4 million and $2.4 million, respectively (0.4% and 0.5% of total revenues, respectively), for the three and six month periods ended June 30, 1999, compared with $0.8 million and $1.5 million, respectively (0.5% and 0.5% of total revenues, respectively), for the three and six month periods ended June 30, 1998. The increases are primarily a result of increased property and equipment and goodwill related to acquisitions in 1998 and 1999.
10
Floorplan Interest Expense. Floorplan interest expense increased 15.9% and 22.0%, respectively, to $2.2 million and $4.3 million, respectively (0.7% and 0.8% of total revenues, respectively), for the three and six month periods ended June 30, 1999, compared with $1.9 million and $3.5 million, respectively (1.1% and 1.1% of total revenues, respectively), for the three and six month periods ended June 30, 1998. The increases are primarily 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 six months of 1999 was 40.5% compared to 38.6% in the first six months of 1998 and 39.3% for the full year 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 and by the deductibility or non-deductibility of goodwill related to acquisitions.
Net Income. Net income increased 105.9% and 103.3%, respectively, to $4.6 million and $7.6 million, respectively (1.5% and 1.4% of total revenues, respectively), for the three and six month periods ended June 30, 1999, compared with $2.2 million and $3.7 million, respectively (1.3% and 1.2% of total revenues, respectively), for the three and six month periods ended June 30, 1998, primarily as a result of increased revenues and decreased 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 June 30, 1999 the Company had working capital of $84.9 million, which included $42.0 million of cash and cash equivalents. The $21.1 million increase in cash since December 31, 1998 is primarily a result of $13.2 million provided by operations, $36.4 million net borrowings on the Company's lines of credit, offset by $21.5 million used for acquisitions, $4.5 million used for the purchase of property and equipment and $5.0 million net payments on long-term debt. The current ratio was 1.4:1 at both June 30, 1999 and December 31, 1998.
The increases in inventory and goodwill are primarily a result of the acquisition of the Moreland Automotive Group in May 1999 (see Note 5. Acquisitions).
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,
11
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 June 30, 1999.
Interest rates on all of the above facilities ranged from 6.65% to 8.12% at June 30, 1999. Amounts outstanding on the lines at June 30, 1999 were as follows (in thousands):
New and Program Vehicle Lines |
|
$ |
185,426 |
Used Vehicle Line | 40,400 | ||
Acquisition Line | | ||
Leased Vehicle Line | 5,000 | ||
$ | 230,826 | ||
Since December 1996 when Lithia completed its initial public offering, it has acquired 31 dealerships. The aggregate net investment was approximately $124.4 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.
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Year 2000
1. | The functionality of its internal systems and Lithia'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 September 30, 1999, as a result of recent acquisitions. 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 95 percent complete with implementing various internal systems upgrades in order to make them Year 2000 compliant. We estimate that our internal systems we will be fully Year 2000 compliant by September 30, 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 99 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.
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Acquisitions. Acquisitions in 1999 will be subject to strict due diligence for Year 2000 compliance.
Cost. Lithia expects to incur costs totaling approximately $1,345,000, including recent acquisitions, to ensure Year 2000 compliance, approximately $972,000 of which has already been incurred since the end of 1997. A majority of the $1,345,000 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 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137
is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS 137 establishes accounting and reporting standards for
all
derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000.
Lithia does not currently have any derivative instruments and, accordingly, does not expect the
adoption of SFAS 137 to have an 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 June 30, 1999 Lithia had $230.8 million outstanding under such facilities at interest rates ranging from 6.65% to 8.12%. An increase or decrease in the interest rates would affect interest expense for the period accordingly.
14
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 20, 1999, at which the following actions were taken:
Name |
|
|
|
No. of Shares Voting For(1) |
|
No. of Shares Withheld Voting |
---|---|---|---|---|---|---|
Sidney B. DeBoer | Class A | 3,692,963 | 502 | |||
Class B | 4,110,000 | 0 | ||||
M. L. Dick Heimann | Class A | 3,692,963 | 502 | |||
Class B | 4,110,000 | 0 | ||||
Thomas Becker | Class A | 3,692,963 | 502 | |||
Class B | 4,110,000 | 0 | ||||
R. Bradford Gray | Class A | 3,692,963 | 502 | |||
Class B | 4,110,000 | 0 | ||||
William J. Young | Class A | 3,693,263 | 202 | |||
Class B | 4,110,000 | 0 |
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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 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., previously filed as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
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., previously filed as Exhibit 10.2 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
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., previously filed as Exhibit 10.3 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
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, previously filed as Exhibit 10.4 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
10.5 | Agreement and Plan of Reorganization dated January 1, 1999 by and between Lithia Motors, Inc. and Colorado Springs Jeep Eagle Limited Partnership, RLLLP and Alex Jannicelli and Colorado Springs Jeep/Eagle, Inc., previously filed as Exhibit 10.5 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
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., previously filed as Exhibit 10.6 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
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., previously filed as Exhibit 10.7 to the Company's Form 10-Q for the quarter ended March 31, 1999 as filed with the Securities and Exchange Commission on May 12, 1999 and is incorporated herein by reference. | |
27 | Financial Data Schedule |
(b) Reports on Form 8-K | ||
| Under Item 2, Acquisition or Disposition of Assets, and Item 7, Financial Statements and Exhibits, filed on May 27, 1999, and dated May 14, 1999, regarding Lithia's acquisition of all of the stock of Moreland Automotive Group. |
16
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, 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) |
17
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