8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

Date of Report: 12-31-09(Date of earliest event reported)

Lithia Motors, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Oregon(State or Other Jurisdiction of Incorporation or Organization) 0-21789(Commission File
Number) 93 - 0572810(IRS Employer
Identification No.)

360 E. Jackson Street
Medford, Oregon 97501(address of Principal Executive Offices) (Zip Code)

541- 776-6591

Registrant's Telephone Number, Including Area Code

Not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

[  ]     Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

[  ]     Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

[  ]     Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

[  ]     Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01      Entry into a Material Definitive Agreement.

On December 31, 2009, the Company entered into an Option Agreement with its Vice Chairman, M.L. Dick Heimann, giving Mr. Heimann the option to purchase the Nissan and the Volkswagen stores in Medford, Oregon, through and including December 31, 2012.  A copy of the Option Agreement is attached as an exhibit to this filing.

Item 5.02      Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangement of Certain Officers.

Also on December 31, 2009, Mr. Heimann elected to defer any cash bonuses he might earn through such date, under a newly adopted Executive Nonqualified Deferred Compensation Plan.  A copy of his agreement which reflects the operative terms of the plan is also attached as an exhibit to this filing.  The deferred compensation plan for executives is substantially identical to an earlier plan adopted for outside directors.

(a)	Not applicable.
(b)	Not applicable.
(c)	Not applicable.
(d)	Exhibits.
	99.1  Option Agreement
	99.2  Deferred Compensation Plan

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 hereunto duly authorized.

Date:  01-05-10



By: LITHIA MOTORS, INC.
(Registrant)


/s/ Kenneth E. Roberts Kenneth E. Roberts
Assistant Secretary

EX-99.1

EXHIBIT 99.1

Option Agreement

This Option Agreement (“Option”) is entered into between Lithia Motors, Inc. (“Lithia”) and M.L. Dick Heimann, his successors or assigns (“Heimann”).  For the sum of ten dollars and other consideration the receipt of which is hereby acknowledge, Lithia, in its own right and on behalf of its wholly owned subsidiaries, grants to Heimann (or an entity controlled by him) an option to purchase the “Purchased Assets” as that term is described below and further defined in the attached Exhibit A, (the “Purchase Agreement”), and to assume the lease or leases (or if the same can not be assigned, enter into a sub-lease) with respect to “Business Real Property” as that term is described below and further defined in the Purchase Agreement, or, if the Business Real Property is then owned, to purchase such property.

The terms of such Option are as follows:

Purchased Assets

The Purchased Assets consist of the operating assets and inventories of the Nissan and Volkswagen stores (the “dealerships”) owned and operated by Lithia in Medford, Oregon.

Business Real Property

The Business Real Property for the Nissan store currently consist of parcels and improvements located at 600 and 613 N. Central (except for those portions used in the operation of the BMW franchise which Lithia will retain), and for the Volkswagen store consists of parcels and improvements located at 705, 712, 717 and 801 N. Riverside and 717 Pine, Medford, Oregon.  These Business Real Property parcels are currently leased by Lithia through its wholly owned subsidiary, copies of which agreements have been provided to Heimann.  However, if, prior to the closing of any such purchase, the business location for the dealerships shall change, the Business Real Property will be such new location or locations and the improvements thereon.

Term

            This Option shall continue until December 31, 2012 unless extended by the agreement of the parties.

Exercise

            Heimann may exercise this option by giving no less than sixty days (60) prior written notice anytime during the Term.  During such 60 day period, the parties will complete, execute and deliver the Purchase Agreement (or Agreements if the Nissan store and Volkswagen stores are still in separate locations) in substantially the form attached.  The Purchase Agreement(s) will provide for the assignment and assumption (and hold harmless if Lithia/Lithia Real Estate, Inc. are not released therefrom) of all operating leases with respect to the Business Real Property. Provided, however, if Lithia is prohibited from assigning such lease or leases, the parties will enter into a sublease or subleases whose terms will mirror the primary lease, or leases, as appropriate.  The parties acknowledge that at this time, Lithia also operates a BMW dealership at 600 N. Central, Medford Oregon in addition to the Nissan store, which facility is subject to the same real estate lease.  If, at the time of the exercise of this Option and closing of the Purchase Agreement, the BMW store still resides on this property, the lease with respect to these facilities will be ratably divided based upon there then current usage of the property.

Purchase Price

            The Purchase Price will be determined in accordance with the pricing terms in the Purchase Agreement.  The Purchase Price will be paid in cash at closing unless the parties otherwise provide in the executed Purchase Agreement.

Purchase Price of Any Owned Business Real Property

            If at the time of the exercise one or both locations of the Business Real Estate is owned by Lithia, Heimann will purchase the same at its fair market value.  Any owned Business Real Estate shall be sold pursuant to a Real Estate Purchase Agreement substantially in the form of the attached Exhibit B.  If the parties cannot agree on its fair market value, the price will be determined by appraisal as provided in Section 2 (b) (i), (ii) and (iii) of Exhibit B.

Election to Include Lithia as Minority Shareholder/Member

            Heimann may elect at the time of exercise to require Lithia to become a 20% shareholder/member in the acquisition entity formed to affect the purchase.  Lithia will make a pro rata investment into the entity on the same terms as Heimann, but will not be required to guaranty any debt or obligations of the acquisition entity.  In such event, a buy/sale shareholder/member agreement will be negotiated between the parties.

Covenants of Lithia prior to any Closing

            Prior to the execution of the Purchase Agreement, Lithia shall be subject to no limitations on the conduct and operation of the Purchased Assets or the Business Real Property; provided, however, if a decision is made to move either franchise to a new location, Lithia will consult with Heimann regarding the move and the acquisition of the new site.  Following the execution of the Purchase Agreement, the provisions of such agreement will dictate the covenants of the parties. 

Dated this 31^st day of December, 2009.

Lithia Motors, Inc.

By:  /s/ Bryan DeBoer   /s/ M.L. Dick Heimann

Title: President                                                                          M.L. Dick Heimann

EX-99.2

Exhibit 99.2

LITHIA MOTORS, INC.

Executive Nonqualified Deferred Compensation Agreement

THIS AGREEMENT by and among Lithia Motors, Inc., an Oregon corporation (the “Company”), and M.L. Dick Heimann (the “Executive”) is dated effective December 31^st, 2009 (the “Effective Date”).

RECITALS

A.        On December 31^st, 2009, the Company’s Board of Directors approved the granting of a nonqualified deferred compensation benefit (the “Plan”), the terms of which are set forth in this Agreement, to executives of the Company with a title of Senior Vice President and higher (“Executives”).  As of that date, all Executives are eligible to participate in the Plan or will become eligible to participate in the Plan upon commencement of their service as an executive of the Company.

B.         The Executive is an executive officer of the Company.

C.         The Company and the Executive execute this Agreement to evidence the Executive’s election to defer constructive and actual receipt of what would otherwise be current compensation in the form of cash payable or shares issuable to the Executive for services performed as a member of the Company’s executive team.

AGREEMENT

    The Executive and the Company agree as follows:

Article 1

Definitions

In addition to those defined terms set forth in the Recitals to this Agreement, the following are defined terms that shall have the specified meanings whenever used in the Agreement:

1.1 “Claimant” means the Executive, any designated beneficiary, or other person who believes that he or she is being denied a benefit to which he or she is entitled under this Agreement.

1.2 “Code”means the Internal Revenue Code of 1986, as amended.

1.3 “Compensation”means Executive compensation that would be paid or stock issuable to the Executive during a Plan Year.

1.4 “Deferral Account”means the Company’s accounting of the Executive’s accumulated Deferrals plus accrued interest, if applicable.

            1.5 “Deferrals” means the amount of the Executive’s Compensation that the Executive elects to defer according to this Agreement.

            1.6  “Deferral Election Form” means the form attached as Appendix A.

            1.7  “Plan Administrator”  means the person or persons designated from time to time by the Company’s Board of Directors to administer the terms of this Agreement, or if no person or persons have been designated, the Company’s Board of Directors.

            1.8  “Plan Year” means the calendar year.

            1.9  “Termination of Services” means that the Executive ceases to be an Executive of the Company.

            1.10  “Unforeseeable Emergency” means severe financial hardship resulting from an illness or accident of the Executive, the Executive’s spouse or a dependent (as defined in Section 152(a) of the Code), loss of the Executive’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Executive.

Article 2

Deferral Election

2.1 Initial Election. The Executive shall make an initial deferral election under this Agreement by filing with the Company a signed Deferral Election Form within 30 days after the Executive becomes eligible to participate in the Plan, for the first Plan Year of eligibility, or thereafter, prior to the beginning of the Plan Year for which Compensation is to be deferred . The Deferral Election Form shall set forth the amount of Compensation to be deferred and shall be effective to defer only Compensation earned after the date the Deferral Election Form is received by the Company.

2.2Election Changes.  The Executive may modify the amount of Compensation to be deferred annually by filing a new Election Form with the Company prior to the beginning of the Plan Year in which the Compensation is to be deferred. The modified deferral election shall not be effective until the calendar year following the year in which the subsequent Deferral Election Form is received and approved by the Company.  Unless and until a new Deferral Election Form is delivered to the Company, the Executive’s election will remain in effect with respe ct to succeeding Plan Years. 

2.3 Change in Time and Form of Distribution.The timing of a distribution of any portion of the Deferral Account may not be accelerated except as set forth in Section 4.2 or except as permitted under Rule 409A of the Code.  Any change which delays the timing of distributions or changes the form of distributions may only be made by a written agreement signed by the Company and the Executive and only if the following requirements are met:

                        2.3.1     Any election to change the time and form of distribution may not take effect until at least 12 months after the date on which the election is made; and

             2.3.2     Other than in the event of death, disability (as defined under Rule 409A of the Code) or Unforeseeable Emergency, the first payment or distribution with respect to such election must be deferred for a period of at least 5 years from the date such payment or distribution would otherwise have been made.

             2.3.3     Any election related to a payment or distribution to be made at a specified time may not be made less than 12 months prior to the date of the first scheduled payment or distribution.

Article 3

Deferral Account

3.1  Establishing and Crediting. The Company shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts:

             3.1.1  Deferrals. The portion of the Compensation deferred by the Executive as of the time the Compensation would have otherwise been paid to the Executive.

             3.1.2  Dividends on Stock.  The account shall also be credited with any cash or stock dividends, stock splits or the like, that would have been paid or issuable with respect to the shares of Class A Common Stock, the issuance of which deferred hereunder.   

3.1.3  Interest. At the end of each Plan Year under this Agreement, interest is to be credited on the account cash balance at an annual rate equal to the weighted average interest rate on the Company’s new car flooring lines of credit by reference to such rate as of the last business day of the preceding Plan Year.

3.2 Statement of Accounts. Within 120 days after the end of each Plan Year, the Company shall provide to the Executive a statement setting forth the Deferral Account balance.

3.3 Accounting Device Only. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement. The Deferral Account is not a trust fund of any kind. The Executive is a general unsecured creditor of the Company for the payment of cash benefits. The benefits represent the mere promise of the Company to pay such benefits. The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by the Executive’s creditors.

Article 4

Payment of Benefit

4.1  Timing of Distribution.  The Deferral Account balance is payable to the Executive as set forth in the Deferral Election Form.

4.2 Hardship Distribution. Upon the Board of Directors’ determination (following petition by the Executive) that the Executive has suffered an Unforeseeable Emergency, the Company shall distribute to the Executive all or a portion of the Deferral Account balance as determined by the Company. The amount distributed may not exceed the amount necessary to satisfy the financial hardship plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or otherwise or by liq uidation of the Executive’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship).

Article 5

Death Benefit

            In the event of the Executive’s death b efore all benefit payments have been made under this Agreement, the Company shall pay the remaining benefits to the Executive’s designated beneficiary, or if no beneficiary is designated, to the Executive’s estate, at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.

Article 6

Beneficiaries

6.1 Beneficiary Designations. The Executive shall designate a beneficiary or beneficiaries by filing a written designation in the form attached as Appendix B, with the Company. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and received by the Company during the Executive’s lifetime. The Executive’s beneficiary designation shall be deemed automatically revoked if the beneficiary predeceases the Executive or if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments and distributions shall be made to the Executive’s estate.

6.2 Facility of Payment. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Company may pay or distribute such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Company may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit.

Article 7

Amendments and Termination

This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive.  Notwithstanding the foregoing, the Company may amend or terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits). In no event shall this Agreement be terminated under this section without payment to the Executive o f the Deferral Account balance attributable to the Executive’s Deferrals and interest credited on such amounts.

Article 8

Administration

                 8.1  Plan Administrator.  This Agreement shall be administered by the Plan Administrator.  The Plan Administrator shall have such powers as are necessary to carry out the intent and administration of this Agreement, including but not limited to (a) interpreting the provisions of the Agreement; (b) establishing and revising the method of accounting for the Agreement; (c) maintaining a record of benefit payments; (d) establishing rules and prescribing any forms necessary or desirable to administer the Agreement; and (e) appointing agents, c ounsel, accountants, consultants and other persons as may be required to assist in administering the Agreement.

                 8.2  Claims Procedure. 

                        8.2.1     Benefits shall be paid in accordance with the provisions of this Agreement.  A Claimant shall send a written request for such benefit, setting forth the claim, to the Company at its principal place of business. The claim will be forwarded to the Plan Administrator.

                        8.2.2     Upon proper delivery and receipt of a claim, the Plan Administrator shall advise the Claimant that a reply will be forthcoming within 90 days and shall deliver such reply within such period.  The Plan Administrator may, however, extend the reply period for an additional 90 days for reasonable cause.

                                    If the claim is denied in whole or in part, the Plan Administrator shall provide written notice, setting forth: (i) the specific reason or reasons for such denial; (ii) the specific reference to pertinent provisions of this Agreement on which such denial is based; (iii) a description of any additional material or information necessary for the Claimant to perfect the claim and an explanation why such material or such information is necessary; (iv) appropriate information as to the steps to be taken if the Claimant wishes to submit the claim for review; and (v) the time limits for requesting a review under Section 8. 2.3 and for review under Section 8.2.4.

                        8.2.3     If the claim is denied and a review is desired, the Claimant must, within 60 days after receipt by the Claimant of the written denial of claim, as described above, request in writing that the Plan Administrator reconsider the determination of the Company.  Such request must be addressed to the Plan Administrator at the Company’s principal place of business.  The Claimant or his or her duly authorized representative may review the pertinent documents and submit issues and comments in writing for consideration of the Plan Administrator.  If the Claimant does not request a reconsideration of the Plan Administrator’s determination within such 60 day period, then the Claimant shall be barred and stopped from challenging the Plan Administrator’s determination.

                        8.2.4     Within 60 days after the Plan Administrator’s receipt of a timely and properly delivered request for review, the Plan Administrator shall review the Company’s determination, and after considering all materials presented by the Claimant, shall render a written option, setting forth the specific reasons for the decision and containing specific references to the pertinent provisions of this Agreement on which the decision is based.  If special circumstances require that the 60-day time period be extended, the Plan Administrator will notify the Claimant and the Plan Administrator will render the decision as soon as possible, but not later than 120 days after receipt of the request for review.

Miscellaneous

                 9.1 Binding Effect. This Agreement shall bind the Executive and the Company and their beneficiaries, survivors, executors, administrators and transferees. 

                 9.2  No Guarantee of Continued Position. This Agreement is not a contract for employment, nor does it entitle the Executive to remain an executive of the Company. It also does not require the Executive to remain an executive nor interfere with the Executive’s right to resign at any time.

9.3  Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner. 

9.4  Tax Withholding. The Company shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement.

9.5  Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of Oregon, except to the extent the laws of the United States of America otherwise require.

9.6 Unfunded Arrangement. The Executive and the Executive’s beneficiary are general unsecured creditors of the Company for the payment of benefits under this Agreement. The benefits represent the mere promise by the Company to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors.

                 9.7 Reorganization. The Company shall not merge or consolidate into or with another Company, or reorganize, or sell substantially all of its assets to another Company, firm, or person unless such succeeding or continuing Company, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor Company.

9.8  Attorney Fees.  In the event of litigation, arbitration, mediation or any other form of dispute resolution to enforce any provision of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys fees, including fees on appeal, if any, in addition to other relief awarded.

                 9.9 Notice.  Any notice required or permitted to be given under this Agreement shall be in writing, signed by the party giving the same.  If such notice is mailed to a party hereto, it shall be sent by United States certified mail, postage prepaid, addressed to such party’s last known address as shown on the Company’s records.

                 9.10 Entire Agreement. This Agreement constitutes the entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement.

Executive:                                                                  Lithia Motors, Inc.

/s/ M.L. Dick HeimannBy: /s/ Bryan DeBoer

Title: President