-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EtEuwYj3oPAg0mcBTzwyL1KNgkYrnwF8bKlVGFgnGfYUlu9I1kdsgP0g7n5KfSmr 0kNs2Q7bHTwnvgA5sFyOiw== 0000912057-96-024364.txt : 19961104 0000912057-96-024364.hdr.sgml : 19961104 ACCESSION NUMBER: 0000912057-96-024364 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 19 FILED AS OF DATE: 19961101 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LITHIA MOTORS INC CENTRAL INDEX KEY: 0001023128 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-AUTO DEALERS & GASOLINE STATIONS [5500] IRS NUMBER: 930572810 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-14031 FILM NUMBER: 96651551 BUSINESS ADDRESS: STREET 1: 360 E JACKSON CITY: MEDFORD STATE: OR ZIP: 97501 BUSINESS PHONE: 5417766400 MAIL ADDRESS: STREET 1: LITHIA MOTORS INC STREET 2: 360 E JACKSON CITY: MEDFORD STATE: OR ZIP: 97501 S-1/A 1 S-1/A As filed with the Securities and Exchange Commission on October 31, 1996. Registration No. 333 - 14031 - ------------------------------------------------------------------------------- Securities and Exchange Commission Washington, D.C. 20549 FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AMENDMENT NO. 1 LITHIA MOTORS, INC. (Exact name of registrant as specified in charter) OREGON 93-0572810 5511 - ----------------- ------------------------------------ ------------------- (State or other (I.R.S. Employer Identification No.) (Primary Standard jurisdiction of Industrial Incorporation or Classification organization) Code Number) 360 E. Jackson Street, Medford, Oregon 97501 (541) 776-6899 (Address and telephone number of registrant's principal executive offices) Sidney B. DeBoer, President 360 E. Jackson Street Medford, Oregon 97501 (541) 776-6899 (Name, address and telephone number of agent for service) Copies of all communications to: Kenneth E. Roberts, Esq. Kenneth J. Baronsky, Esq. Foster Pepper & Shefelman Milbank, Tweed, Hadley & McCloy 101 S.W. Main St., 15th Floor 601 South Figueroa St., 30th Floor Portland, Oregon 97204 Los Angeles, California 90017 (503) 221-1151 (213) 892-4000 (503) 221-1510 (FAX) (213) 629-5063 (FAX) APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 464(b) under the Securities Act, check the following box and list the Securities Act registration number of earlier effective registration statement for the same offering. / / ------------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------ If delivery of the prospectus is expected to be made pursuant to the Rule 434, please check the following box. / / The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED ___________, 1996 PROSPECTUS ___________ SHARES [LOGO] LITHIA MOTORS, INC. CLASS A COMMON STOCK --------------------- All of the shares of Class A Common Stock, no par value (the "Class A Common Stock"), offered hereby are being sold by Lithia Motors, Inc. ("Lithia Motors" or the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Class A Common Stock of the Company. It is currently anticipated that the initial public offering price will be between $_____ and $_____ per share. For information which was considered in determining the initial public offering price, see "Underwriting". Application has been made to have the Class A Common Stock approved for quotation on the Nasdaq National Market under the symbol "LITH." The Company has two classes of authorized Common Stock, Class A Common Stock, which is offered hereby, and Class B Common Stock, no par value (the "Class B Common Stock"). Holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Class A Common Stock is not convertible but is freely transferable, while Class B Common Stock is transferable only to certain limited transferees and is freely convertible into Class A Common Stock. All of the outstanding shares of Class B Common Stock, which will represent approximately ___% of the aggregate voting power of the Company upon completion of this Offering, are controlled by Sidney B. DeBoer and beneficially owned by Mr. DeBoer, M. L. Dick Heimann and R. Bradford Gray, each executive officers of the Company, through Lithia Holding Company, L.L.C. ("Lithia Holding"), the sole shareholder of the Company immediately prior to this Offering. See "Risk Factors--Concentration of Voting Power; Anti-takeover Provisions," "Description of Capital Stock--Common Stock" and "Principal Shareholders." ------------------------- FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS" BEGINNING ON PAGE 8. -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Underwriting Price to Discounts and Proceeds to Public Commissions (1) Company (2) - -------------------------------------------------------------------------------- Per Share. . . . . . . . $ $ $ - -------------------------------------------------------------------------------- Total (3). . . . . . . . $ $ $ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated at $___________. (3) The Company has granted to the Underwriters a 30-day option to purchase up to ____________ additional shares of Class A Common Stock solely to cover over-allotments, if any. If such option is exercised, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $_____, $_______ and $________, respectively. See "Underwriting." The shares of Class A Common Stock are being offered by the several Underwriters when, as and if delivered to and accepted by the Underwriters and subject to various prior conditions, including the right to reject orders in whole or in part. It is expected that delivery of the certificates representing the shares will be made against payment therefor at the offices of Furman Selz LLC in New York, New York or through the facilities of the Depository Trust Company on or about ______________, 1996. FURMAN SELZ DAIN BOSWORTH INCORPORATED EVEREN SECURITIES, INC. ------------------------- The date of this Prospectus is ___________, 1996 [Photo of Dealerships] This Prospectus includes statistical data regarding the retail automobile industry. Unless otherwise indicated herein, such data is taken or derived from information published by the Industry Analysis Division of the National Automobile Dealers Association ("NADA") in its INDUSTRY ANALYSIS AND OUTLOOK AND AUTOMOTIVE EXECUTIVE MAGAZINE publication. This Prospectus includes trademarks of companies other than Lithia Motors, Inc., which trademarks are the property of their respective holders. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS, (i) ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION TO PURCHASE UP TO ____________ ADDITIONAL SHARES OF CLASS A COMMON STOCK FROM THE COMPANY IS NOT EXERCISED AND (ii) GIVES EFFECT TO THE CONSUMMATION OF THE RESTRUCTURING, AS DEFINED IN AND DESCRIBED UNDER "COMPANY RESTRUCTURING AND PRIOR S CORPORATION STATUS" IN THIS PROSPECTUS, WHICH TRANSACTIONS WILL TAKE PLACE IMMEDIATELY PRIOR TO THE CLOSING OF THE OFFERING. REFERENCES HEREIN TO "COMMON STOCK" MEAN THE COMPANY'S CLASS A COMMON STOCK AND CLASS B COMMON STOCK, COLLECTIVELY. UNLESS OTHERWISE INDICATED, REFERENCES TO THE "COMPANY" MEAN LITHIA MOTORS AND ITS SUBSIDIARIES AFTER THE RESTRUCTURING. THE COMPANY Lithia Motors is the largest retailer of new and used vehicles in Southwest Oregon, offering 14 domestic and imported makes of new automobiles and light trucks at five locations. As an integral part of its operations, the Company also arranges related financing and insurance and sells parts, service and ancillary products. The Company has grown primarily by successfully acquiring and integrating dealerships and by obtaining new dealer franchises. Most of the Company's operations are currently located in Medford, Oregon, where it has a market share of over 40%. The Company's strategy is to become a leading acquiror of dealerships in medium-sized markets in the western United States. The Company has recently entered into agreements to acquire additional dealerships in Eugene, Oregon and Salinas, California. The Company's two senior executives, Sidney B. DeBoer and M.L. Dick Heimann, have managed the Company's operations for over 25 years. During this time, they have developed and implemented an operating strategy that has enabled the Company to achieve profitability superior to industry averages. In 1995, the Company's gross profit margin (on a FIFO basis) was 18.0% and its pre-tax profit margin before minority interest (on a FIFO basis) was 3.3%, versus 12.9% and 1.4%, respectively, for the industry. OPERATING STRATEGY The Company's operating strategy consists of the following elements: PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad range of products and services including a wide selection of new and used cars and light trucks, vehicle financing and insurance and replacement parts and service. In Southwest Oregon, the Company's five locations offer, collectively, 14 makes of new vehicles including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda, Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki and Volkswagen. In addition, the Company sells a variety of used vehicles at a broad range of prices. By offering new and used vehicles and an array of complementary services at each of its locations, the Company seeks to increase customer traffic and meet specific customer needs. The Company believes that offering numerous new vehicle brands appeals to a variety of customers, minimizes dependence on any one manufacturer and reduces its exposure to supply problems and product cycles. FOCUS ON USED VEHICLE SALES. A key element of the Company's operating strategy is to focus on the sale of used vehicles. The Company's goal is to sell two used vehicles for every new vehicle sold. In 1995, the Company sold 5,144 used vehicles, a 1.83 to one ratio as compared to new vehicles sold. The Company strives to attract customers and enhance buyer satisfaction by offering multiple financing options, a 10-day/500-mile "no questions asked" exchange program and a 60-day/3,000-mile warranty on every used vehicle sold. The Company believes that a well-managed used vehicle operation at each location affords an opportunity to (i) generate additional customer traffic from a wide variety of prospective buyers, (ii) increase new and used vehicle sales by aggressively pursuing customer trade-ins, (iii) generate incremental revenues from customers financially unable or unwilling to purchase a new vehicle, and (iv) improve total vehicle profit margins and ancillary product sales. To maintain a broad selection of high quality used vehicles and to meet local demand preferences, the Company acquires used vehicles from trade-ins and a variety of sources nationwide, including direct purchases and manufacturers' and independent auctions. EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company generates substantial incremental revenue and achieves higher profitability through the sale of certain ancillary products and services such as financing and insurance, extended service contracts and vehicle maintenance. Employees receive special training and are compensated on a commission basis to sell such products and services. The Company arranges competitive financing packages for vehicle purchases and ancillary products and services. In 1995, the Company arranged 3 financing for 59% of its new vehicle sales and 69% of its used vehicle sales, as compared to 42% and 51%, respectively, for the average automobile dealership in the United States. The Company also sells extended service coverage and other vehicle protection packages which the Company believes enhance the value of the vehicle and provide a higher level of customer satisfaction. EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional management practices in all aspects of its operations, including information technology, employee training, profit-based compensation and a cash management system. Each dealership is a profit center and is managed by a trained and experienced general manager who has primary responsibility for decisions relating to inventory, advertising, pricing and personnel. Compensation of the general manager is based on dealership profitability and the compensation of department managers is similarly based upon departmental profitability. Senior management utilizes computer-based management information systems to monitor each dealership's sales, profitability and inventory on a daily basis. The Company believes the application of its professional management practices provides it a competitive advantage over many dealerships and is critical to its ability to achieve levels of profitability superior to industry average. FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer satisfaction throughout its organization and continually seeks to maintain a reputation for quality and fairness. The Company trains its sales people to work to identify an appropriate vehicle for each of its customers at an affordable price. The Company also recently implemented an innovative marketing program entitled "Priority You." "Priority You" provides the Company's retail customers six value-added services which the Company believes are important to overall customer satisfaction, including a commitment to (i) provide a customer credit check within 10 minutes, (ii) complete a used vehicle appraisal within 30 minutes, (iii) complete the paper work on a new vehicle purchase within 90 minutes, (iv) provide a 10-day/500-mile "no questions asked" right of exchange on any used vehicle, (v) provide a warranty on all used vehicles for 60 days/3,000 miles and (vi) make a $20 per vehicle donation to a local charity or educational organization. The Company believes "Priority You" will help differentiate it from many other dealerships thereby increasing customer traffic and developing stronger customer loyalty. GROWTH STRATEGY The Company's goal is to become a leading acquiror of automobile dealerships in the western United States. As part of its acquisition strategy, the Company intends to focus its efforts on acquiring dealerships or dealer groups that, among other criteria, possess either the sole franchise or a significant share of new vehicle sales in a targeted market. Additionally, the Company's evaluation of potential acquisitions takes into account a dealership's local reputation with its customers, the type and make of vehicles sold by the dealer and the possibility for the Company to acquire additional franchises within the market to achieve a larger market share. The Company believes that the majority of dealerships that fit its acquisition criteria will be located in medium-sized markets within the nine western states. If the Company were able to acquire a larger dealer group to significantly expand revenues and earnings in a single transaction, it would carefully consider the acquisition even if not all of the stores in the group were in medium-sized markets or dominated sales of a particular manufacturer. Upon completing an acquisition, the Company immediately implements its operating strategy, including increasing finance and insurance revenues, selling more used vehicles and enhancing employee training. The Company also installs its management information system in the acquired dealership as soon as possible after the acquisition, which allows the Company's executive officers, as well as the general manager, to carefully monitor each aspect of the dealership's operations and performance. Whenever possible, the Company assumes the management of a dealership's operations prior to closing of an acquisition, enabling the Company to accelerate the implementation of its operating strategy. To date, a significant percentage of the Company's growth has resulted from acquisitions and the Company believes that acquisition opportunities will continue to be available to well-capitalized, experienced dealership organizations. The Company believes that its management team has considerable experience in acquiring dealerships and implementing its operating strategy to improve the performance and profitability of such dealerships following the acquisition. The Company is continuing its expansion in Oregon and has recently signed a purchase agreement to acquire the sole Dodge franchise in Eugene, Oregon. The Company has also begun expansion into selected markets in California with the signing of a purchase agreement to acquire the sole Honda franchise in Salinas, located near the Monterey Peninsula and the Toyota dealership in Vacaville. See "Risk Factors -- Dependence on Acquisitions for Growth; Manufacturers' Consent to Acquisitions" and "Pending Acquisitions." The Company maintains its principal executive offices at 360 E. Jackson Street, Medford, Oregon 97501, and its telephone number is (541) 776-6899. 4 THE OFFERING Common Stock offered by the Company. . . . . . . . . . . . shares of Class A Common Stock (1) -------- Common Stock to be outstanding after the Offering. . . . . shares of Class A Common Stock (1) -------- shares of Class B Common Stock -------- Use of proceeds . . . . . . . . . . . . . . . . . . . . . Acquisition of additional automobile dealerships, payment of distributions to existing owners of previously undistributed earnings, the repayment of debt working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol . . . . . . . . . . LITH
- ----------------------- (1) Does not include and aggregate of _____________ shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, ____________ of which are subject to outstanding options as of the date hereof. See "Management -- 1996 Stock Incentive Plan." 5 SUMMARY COMBINED FINANCIAL AND OPERATING DATA The following table presents (i) summary historical combined financial and other data of the Company as of the dates and for the periods indicated and (ii) summary pro forma financial and other data of the Company as of the dates and for the periods indicated giving effect to the events described in the Pro Forma Combined and Condensed Financial Data included elsewhere herein as though they had occurred on the dates indicated therein. The summary pro forma financial data are not necessarily indicative of operating results or financial position that would have been achieved had these events been consummated on the date indicated and should not be construed as representative of future operating results or financial position. The summary historical and pro forma financial data should be read in conjunction with the financial statements and related notes thereto of the Company, Roberts Dodge, Inc. and Sam Linder, Inc. and Melody Vacaville, Inc. with the Pro Forma Combined and Condensed Financial Statements and with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
Six Months Ended Years Ended December 31, June 30, ------------------------------------------------------------------- ------------------------- Pro Pro Actual Forma(1) Actual Forma(1) ------------------------------------------------------------------- ----------------- ------- 1991 1992 1993 1994 1995 1995 1995 1996 1996 ------- ------- ------- ------- ------- ------- -------- -------- ------ (Dollars in thousands, except per share data) COMBINED STATEMENT OF OPERATIONS DATA: Total sales. . . . . . . . . $64,087 $79,439 $92,109 $109,322 $114,196 $ $54,396 $69,125 $ Gross profit(2). . . . . . . 11,064 14,022 17,260 18,905 20,943 9,763 11,456 Operating income . . . . . . (499) (102) 2,138 3,731 4,208 1,903 2,142 Income before minority interest (2) (3). . . . . $ 229 $ 516 $ 1,786 $ 3,972 $ 4,153 $ 1,869 $ 1,903 ------- ------- ------- -------- -------- --------- ------- ------- ------- ------- -------- -------- --------- ------- PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS DATA (4): Income . . . . . . . . . . . _ $ 947 $2,168 $2,076 $ $ 915 $ 968 $ Income per share(5). . . . . $ Weighted average shares outstanding(5) OTHER OPERATING DATA: New automobiles sold . . . . 1,890 2,106 2,464 2,744 2,715 1,303 1,594 Used automobiles sold. . . . 3,403 3,934 4,718 5,206 5,144 2,560 3,202 Gross margin (FIFO basis)(2) 17.8% 18.3% 19.3% 17.9% 18.0% 17.7% 16.9% Pre-tax margin before minority interest (FIFO basis)(2) . . . . . . 1.0% 1.2% 2.5% 4.2% 3.3% 3.1% 3.1% As of June 30, 1996 ------------------------------------------- As of Pro Forma December 31, 1995 Actual Pro Forma(4) As Adjusted (6) ------------------- ------ ------------ --------------- (In thousands) COMBINED BALANCE SHEET DATA: Working capital. . . . . . . . . . . . . . . . . $7,764 $ 8,763 $ 6,857 $ Total assets . . . . . . . . . . . . . . . . . . 39,225 32,116 30,210 Total long-term debt . . . . . . . . . . . . . . 12,828 10,469 10,469 Total shareholders' equity . . . . . . . . . . . 854 1,906 --
- ----------------------- (1) For information regarding the pro forma adjustments made to the Company's historical financial data, see "Pro Forma Combined and Condensed Financial Data." (2) The Company utilizes the LIFO (Last In-First Out) accounting method. See Note 2 of the Notes to the Company's Combined Financial Statements. Commencing January 1, 1997, the Company intends to file an election with the IRS to convert to a FIFO (First In-First Out) accounting method and report its earnings for tax and financial statements on the industry standard FIFO method. If the Company had previously utilized the FIFO method gross profit for the five years ended December 31, 1995 would have been $11.4 million, $14.5 million, $17.8 million, $19.5 million and $20.5 million, respectively and $9.6 million and $11.7 million for the six months ended June 30, 1995 and 1996. Income before minority interest for the five years ended December 31, 1995 would have been $613,000, $955,000, $2.3 million, $4.6 million, and $3.7 million, respectively and $1.7 million and $2.1 million for the six months ended June 30, 1995 and 1996. 6 (3) Prior to 1994, the Company paid cash bonuses to its shareholders and members in amounts approximating their respective income tax liability on their undistributed earnings ($532,000 in 1991, $640,000 in 1992, and $1.0 million in 1993), in addition to their normal salaries. These cash bonuses are reflected in SG&A expenses. In 1994 and subsequent periods, cash to meet the shareholders' and members' tax liabilities was distributed to the shareholders and members as dividends. The Company believes that for a fair evaluation of its historical performance, results for 1991, 1992 and 1993 should be adjusted to eliminate such bonus payments. (4) The Company was an S Corporation and accordingly was not subject to federal and state income taxes during the periods indicated. Pro forma net income reflects federal and state income taxes as if the Company had been a C Corporation, based on the effective tax rates that would have been in effect during these periods. See "Company Restructuring and Prior S Corporation Status" and Notes 1 and 9 of Notes to Company's Combined Financial Statements. (5) Historical earnings per share are not presented, as the historical capital structure of the Company prior to the Restructuring and the Offering is not comparable with the capital structure that will exist subsequent to these events. Pro forma earnings per share are based upon the assumption that ____________ shares of Common Stock are outstanding. This amount represents the number of shares of Class B Common Stock owned by the Company's stockholders immediately following the Restructuring but before the Offering. See Note 1 of the Notes to the Company's Combined Financial Statements for a calculation of weighted average shares outstanding. (6) Adjusted to reflect the sale of Class A Common Stock offered hereby by the Company (at an assumed initial public offering price of $_______ per share and after deducting the underwriting discounts and estimated offering expenses payable by the Company) and the application of the net proceeds therefrom. See "Use of Proceeds." (7) Does not include ____________ shares of Class A Common Stock subject to options outstanding, as of the date of this Prospectus, under the Company's 1996 Stock Incentive Plan. See "Management -- 1996 Stock Incentive Plan." 7 RISK FACTORS THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF THE RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH BELOW. THE COMPANY CAUTIONS THE READER THAT THIS LIST OF RISK FACTORS MAY NOT BE EXHAUSTIVE. DEPENDENCE ON ACQUISITIONS FOR GROWTH The U.S. automobile industry is considered a mature industry in which minimal growth is expected in unit sales of new vehicles. Sales of new vehicles by the Company have fluctuated in the past and no assurance can be given that the Company will be able to increase or maintain unit sales from year to year in the future. Accordingly, a principal component of the Company's business strategy is to make additional acquisitions in its existing and new geographic markets. In 1996, the Company entered into agreements to purchase dealerships in Eugene, Oregon, Salinas, California and Vacaville, California. The Company's future growth and financial success will be dependent upon a number of factors including, among others, the Company's ability to identify acceptable acquisition candidates, consummate the acquisition of such dealerships on terms that are favorable to the Company, obtain the consent of automobile manufacturers, retain, hire and train professional management and sales personnel at each such acquired dealership and promptly and profitably integrate the acquired operations into the Company. No assurance can be given that the Company will be able to improve the profitability of such acquired dealerships. The Company may acquire dealerships which have net profit margins which are materially lower than the Company's historical average net profit margin. No assurance can be given that the Company will be able to improve the net profit margins of such acquired dealerships. To manage its expansion, the Company intends to evaluate on an ongoing basis the adequacy of its existing systems and procedures, including, among others, its financial and reporting control systems, data processing systems and management structure. No assurance, however, can be given that the Company will adequately anticipate all of the demands its growth will impose on such systems, procedures and structure. Any failure to adequately anticipate and respond to such demands could have a material adverse effect on the Company. Acquisitions of additional dealerships will require substantial capital investment and could have a significant impact on the Company's financial position and operating results. Any such acquisitions may involve the use of cash (including the net proceeds of this Offering) or the issuance of additional debt or equity securities, which could have a dilutive effect on the then-outstanding capital stock of the Company. Acquisitions could result in the accumulation of substantial goodwill and intangible assets, which would result in amortization charges to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," and "Business -- Growth Strategy." DEPENDENCE ON AUTOMOBILE MANUFACTURERS The Company is significantly dependent upon its relationships with, and the success of, certain automobile manufacturers or authorized distributors thereof (collectively referred to herein as "manufacturers"). For the year ended December 31, 1995, four manufacturers, Chrysler, Toyota, Honda and Saturn, collectively accounted for 87% of the Company's new vehicle sales. The Company may become dependent on additional manufacturers as a result of its acquisition strategy and changes in the Company's sales mix. Each of the Company's dealerships operates pursuant to a franchise agreement with each respective manufacturer. Manufacturers exert significant control over the Company's dealerships through the terms and conditions of the franchise agreements, including provisions for termination or non-renewal for a variety of causes. The Company from time-to-time has failed to comply with certain provisions of its franchise agreements. These agreements generally afford the Company a reasonable opportunity to cure such violations and no manufacturer has terminated or failed to renew any franchise agreement. If a manufacturer terminated or declined to renew one or more of the Company's significant franchise agreements, such action could have a material adverse effect on the Company and its business. The Company also is dependent upon its manufacturers to provide it with inventory of new vehicles. The most popular automobiles tend to provide the Company with the highest profit margins and are the most difficult to obtain from the manufacturers. In order to obtain sufficient numbers of these automobiles, the Company may be required to purchase a larger number of less desirable makes and models than it would otherwise purchase. Sales of less desirable makes and models may result in lower profit margins than sales of the more popular vehicles. If the 8 Company is unable to obtain sufficient quantities of the most popular makes and models, its profitability may be adversely affected. With the exception of the Saturn franchise, the Company's franchise agreements with the manufacturers do not give the Company the exclusive right to sell that manufacturer's product within a given geographical area. Accordingly, a manufacturer could grant another dealer a franchise to start a new dealership in proximity to one or more of the Company's locations or an existing dealer could move its dealership to a location which would be directly competitive with the Company. Such an event could have a material adverse effect on the Company and its operations. The success of each of the Company's franchises is dependent to a great extent on the success of the respective manufacturer. The success of the Company is therefore linked to the financial condition, marketing, vehicle demand, production capabilities and management of the manufacturers of which the Company is a franchisee. Events such as labor strikes or negative publicity concerning a particular manufacturer may adversely affect the Company. The Company has attempted to lessen its dependence on any one manufacturer by acquiring franchise agreements with a number of different domestic and foreign automotive manufacturers. MANUFACTURERS' CONSENT TO OFFERING Each of the Company's franchise agreements requires the consent of the manufacturer to any change in the ownership of the franchise. Accordingly, the Company has requested a consent to the proposed Restructuring, of which this Offering is a part, from each of the manufacturers for which it serves as a franchised dealer. To date, only Chrysler, Toyota and Honda have indicated that they will consent to the Restructuring and the Offering but with certain conditions and limitations. The Company currently believes that certain manufacturers, such as Ford and Saturn, will not consent to the Restructuring. There can be no assurance that any manufacturer that does not consent to the Restructuring, will not attempt to prevent the Restructuring, terminate franchises, refuse to renew or approve franchises or take other action which could have a material adverse effect on the Company and its operations. The franchise laws of the states of Oregon (where most of the Company's current dealerships are located) and California (where certain of the Company's pending acquisitions are located) generally make it unlawful for a manufacturer to unreasonably fail to give effect to, or attempt to prevent unreasonably, any sale or transfer of the ownership or management of a dealership or the making of reasonable changes in the capital structure of the dealership, provided that the dealership meets any reasonable capital requirements of the manufacturer and certain other conditions. See "Business -- Regulation." Until recently, all manufacturers have expressed reluctance to permit the public ownership of dealerships since franchises are awarded to a named individual to whom the manufacturer looks to have direct control of the franchise and its operations. In the attempt to address manufacturers' concerns regarding the effects of public ownership of the Company, the Company's principals have established Lithia Holding and a dual-class voting structure, designed to ensure that Sidney B. DeBoer will have voting control of the Company for the foreseeable future. See "Risk Factors -- Concentration of Voting Power; Anti-takeover Provisions", "Principal Shareholders" and "Description of Capital Stock." This Offering is conditioned upon the Company's receipt of consents from Chrysler, Toyota and Honda, which collectively accounted for 78% of the Company's new vehicle sales in 1995. There can be no assurance that the Company will receive any other consents prior to the closing of the Offering or ever. The Company may have to sell one or more of its franchises in order to avoid termination by a manufacturer who objects to the Restructuring. In the event of such a sale, no assurance can be given that the Company will be able to receive full value for such franchises or favorable sales terms. MANUFACTURERS' CONSENT TO ACQUISITIONS The Company is required to obtain a consent from each relevant manufacturer prior to the acquisition of a dealership franchise. In determining whether to approve an acquisition, the manufacturers consider many factors, including the financial condition and ownership structure of the acquiror. Because the Company will be publicly owned after consummation of the Offering, the Company believes that certain manufacturers, including Ford and Saturn, will not consent to new acquisitions of their respective franchises at this time. Further, manufacturers may impose conditions on granting their approvals for acquisitions including a limitation on the number of such manufacturers' dealerships that may be acquired by the Company. In particular, Toyota limits the number of dealerships which may be owned by any one group to seven Toyota and three Lexus dealerships and prohibits ownership of contiguous dealerships and the dualing of the franchise with any other brand without its consent. The Company's ability to meet manufacturers' requirements for acquisitions in the future will have a direct bearing on the Company's ability to complete acquisitions and effect its growth strategy. 9 In determining whether to approve an acquisition by the Company, a manufacturer also consider factors such as the Company's past performance as measured by the manufacturer's Customer Satisfaction Index ("CSI") scores and sales performance at the Company's existing franchises. On occasion, certain of the Company's franchises have had CSI scores and sales performance numbers which were below the manufacturers' standards. In particular, the Company has relatively low sales performance numbers and below average CSI scores for its General Motors (Pontiac) franchise which is currently housed with other brands at one of its Medford stores. The low performance ratings of the Pontiac franchise have been cited by General Motors as the reason for its recent denial of the transfer of two dealerships the Company had contracted to purchase. Although the Company is still seeking to secure approvals for these acquisitions, the Company can give no assurance that it will be permitted to acquire any new General Motors franchise in the future. See "Pending Acquisitions." LIMITATION ON STOCK OWNERSHIP; RESTRICTION ON TRANSFER Certain manufacturers may impose limitations on the amount of the Company's securities that may be owned by an individual or a group without the prior approval of such manufacturers. For example, any acquisition of a 20% or greater ownership share of the Company by any individual or entity without Toyota's prior approval would be a violation of the Company's agreement with Toyota. This restriction may discourage certain investors from acquiring an ownership interest in the Company. Certain manufacturers also may require that Lithia Holding and/or Sidney B. DeBoer maintain a certain ownership interest in the Company. These restrictions will limit the Company's ability to raise additional capital through the issuance of equity securities to the extent that such issuance dilutes the ownership interest of Lithia Holding or Sidney B. DeBoer below requisite thresholds. See "Risk Factors -- Availability and Cost of Capital" below. COMPETITION The automobile dealership business is highly competitive and generally fragmented. The new and used automobile sectors are characterized by a large number of independent operators. In addition, certain regional and national car rental companies operate retail used car lots to dispose of their used rental cars. Private sales of used vehicles by previous owners is an additional source of competition. Recently, consolidation has begun to accelerate in the new and used automobile dealership business as national and regional companies have begun to establish large used automobile "mega-stores." No assurances can be made with respect to the Company's ability to continue to compete effectively with other automobile dealers or such mega-stores. Furthermore, certain of the Company's future competitors may be larger than the Company and have access to greater financial resources. See "Business --Competition." In addition, no assurance can be given that automobile manufacturers will not attempt to modify the historical automobile manufacturer/dealer franchise system in such a way to increase competition among dealers or market their vehicles through other distribution channels. CYCLICAL NATURE OF AUTOMOBILE SALES; CONCENTRATION OF OPERATIONS IN OREGON The market for automobiles, particularly the new automobile market, is subject to substantial cyclical variation. An increase in interest or tax rates, or uncertainties regarding future economic conditions that affect consumer spending habits, could materially adversely affect the Company's results of operations. For the past few years, the industry has experienced growth that may not be sustained in the future. A material decrease in automobile sales, whether new or used, would be expected to adversely affect the Company's results of operations. Although the Company has pending acquisitions of two dealership in California, all of its current operations are located in Oregon. For at least the immediately foreseeable future, the Company's results of operations will be substantially dependent upon general economic conditions, consumer spending habits and preferences in Oregon and, to a lesser extent, California, as well as various factors specific to such states such as tax rates and state and local regulation. The Company's growth strategy is intended to reduce its dependence on the Oregon economy; however, no assurance can be given that it will succeed or that geographic expansion will adequately insulate it from the adverse effects of local or regional economic conditions. AVAILABILITY AND COST OF CAPITAL The Company's new and used automobile sales operations require significant capital resources. The Company's future operating results will be directly related to the availability and cost of its capital. The principal sources of financing for the Company's new and used automobile inventories have historically been lines of credit from United States National Bank of Oregon ("U.S. Bank") and cash generated from operations. No assurance can be given that the Company will be able to continue to obtain capital for its current or expanded operations on terms and conditions acceptable to the Company. 10 The Company's strategy of growth through the acquisition of additional dealerships will require substantial capital. The Company anticipates that approximately $_____ million of the net proceeds from this Offering will be used to acquire other dealerships. If the Company's acquisition strategy is successful, this capital will be fully invested within a limited period of time and the Company will require additional capital in order to continue its acquisition strategy. Such expansion and new acquisitions may involve using cash, incurring additional debt or issuing Company's equity securities, which could have a dilutive effect on the then-outstanding capital stock. The Company may seek to obtain funds through borrowings from institutions or by the public or private sale of its securities subsequent to this Offering. No assurance can be given that the Company will be able to obtain capital to finance its growth on terms and conditions acceptable to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." DEPENDENCE ON KEY PERSONNEL The Company's success will depend largely on the efforts and abilities of its senior management, particularly Sidney B. DeBoer, the Company's President and Chief Executive Officer, M. L. Dick Heimann, the Company's Executive Vice President and Chief Operating Officer, and R. Bradford Gray, the Company's Vice- President of Acquisitions. Further, as Mr. DeBoer and Mr. Heimann are identified in each of the Company's dealership franchise agreements as the individuals who control the franchises and upon whose financial resources and management expertise the manufacturers have relied on when awarding such franchises. The loss of either of those individuals could materially adversely affect the Company's on-going relationship with its vehicle manufacturers. See "Business -- Relationships with Automobile Manufacturers." In addition, the Company places substantial responsibility on the general managers of its dealerships for the profitability of such dealerships. As the Company expands, it will need to hire additional managers, particularly as it acquires dealerships in locations which are distant from the Company's headquarters in Medford, Oregon. The market for qualified employees in the industry, particularly for general managers, is highly competitive. The loss of the services of key management personnel or the inability to attract additional qualified managers could have a material adverse effect on the Company's business and the execution of its growth strategy. The Company does not have employment agreements with any of its key management personnel which would restrict their ability to terminate their employment or compete with the Company. The Company does not maintain key man insurance on either Messrs. DeBoer or Heimann. VARIABILITY OF QUARTERLY OPERATING RESULTS The Company's business is seasonal with a disproportionate amount of sales occurring in the second and third quarters. Due to such seasonality, the Company will likely experience quarter-to-quarter fluctuations in its operating results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Selected Quarterly Results of Operations." CONCENTRATION OF VOTING POWER; ANTI-TAKEOVER PROVISIONS Upon conclusion of this Offering, Lithia Holding, of which Sidney B. DeBoer, the Company's President, Chief Executive Officer and Chairman of the Board, is the sole managing member, will hold all of the shares of outstanding Class B Common Stock. Holders of Class B Common Stock are entitled to ten votes for each share held, while holders of Class A Common Stock are entitled to one vote per share held. Consequently, upon completion of the Offering, Lithia Holding will control ______% of the aggregate number of votes eligible to be cast by shareholders for the election of Directors and certain other shareholder actions. Therefore, Lithia Holding will control the election of the Board of Directors of the Company and will be in a position to control the policies and operations of the Company. In addition, because Mr. DeBoer is the managing member of Lithia Holding, he currently does and will control all of the outstanding Class B Common Stock, thus allowing him to control the Company. See "Principal Shareholders." So long as at least 16 2/3% of the total number of shares outstanding are shares of Class B Common Stock, the holders of Class B Common Stock will be able to control all matters requiring approval of 66 2/3% or less of the aggregate number of votes. Absent increases in the number of shares of Class A Common Stock or conversion of Class B Common Stock into Class A Common Stock, the holders of shares of Class B Common Stock will be entitled to elect all members of the Board of Directors and control all matters subject to shareholder approval that do not require a class vote. See "Description of Capital Stock." The formation of Lithia Holding and the creation of the dual classes of voting stock were undertaken by the principals of the Company to consolidate voting control of the Company in an attempt to address concerns of manufacturers who have expressed opposition to public ownership of franchised dealerships. The Company's Board of Directors will have the authority to issue up to 15,000,000 shares of Preferred Stock and determine the price, rights, preferences and privileges (including voting rights) of those shares without any further vote or action by the shareholders. The rights of the holders of Common Stock will be subject to, and may 11 be materially adversely affected by the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue shares of Preferred Stock. The Company's Restated Articles of Incorporation and Bylaws contain certain other provisions that may have the effect of discouraging offers to acquire the Company. The Company will also be subject to certain provisions of the Oregon Business Corporation Act which may have the effect of discouraging attempts to acquire the Company without the approval or cooperation of the Company's Board of Directors. See "Description of Capital Stock." FOREIGN SUPPLIERS Certain of the automobiles purchased by the Company are currently imported into the United States from Japan. In the future, automobiles that the Company distributes may also be imported from other countries. In 1995, 45% of the Company's new automobile purchases (net of fleet sales) were imported automobiles. As a result, the Company's operations are subject to the customary risks of purchasing merchandise that has been imported from abroad, including fluctuation in the value of currencies, import duties, restrictions on the transfer of funds, work stoppages and, in certain parts of the world, political instability. The United States or the countries from which the Company's products are or may be imported may, from time to time, impose new quotas, duties, tariffs or other restrictions, or adjust presently prevailing quotas, duty or tariff levels, which could affect the Company's operations and its ability to purchase imported automobiles at current or increased levels. Imports into the United States are also affected by the cost of transportation and increased competition from greater production demands abroad. SUPERVISION AND REGULATION; ENVIRONMENTAL MATTERS The Company's operations are subject to extensive regulation, supervision and licensing under various other federal, state and local statutes, ordinances and regulations. While management believes that it maintains all requisite licenses and permits and is in substantial compliance with all applicable federal, state and local regulations, there can be no assurance that the Company will be able to maintain all requisite licenses and permits, and the failure to satisfy those and other regulatory requirements could have a material adverse effect on the operations of the Company. The adoption of additional laws, rules and regulations could also have a material adverse effect on the Company's business. See "Business -- Regulation." Various state and regulatory agencies, such as the Occupational Safety and Health Administration ("OSHA"), the United States Environmental Protection Agency (the "EPA") and the Oregon Department of Justice, have jurisdiction over the operation of the Company's dealerships, repair shops, body shops and other operations, with respect to matters such as consumer protection, workers' safety and laws regarding clean air and water. As with automobile dealerships generally, and service, parts and body shop operations in particular, the Company's business involves the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Accordingly, the Company is subject to regulation by federal, state and local authorities establishing health and environmental quality standards, and liability related thereto, and providing penalties for violations of those standards. The Company is also subject to laws, ordinances and regulations governing remediation of contamination at facilities it operates or to which it sends hazardous or toxic substances or wastes for treatment, recycling or disposal. The Company believes that it does not have any material environmental liabilities and that compliance with environmental laws, ordinances and regulations will not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. However, soil and groundwater contamination has been known to exist at certain properties leased by the Company. The Company has also been required to remove aboveground and underground storage tanks containing hazardous substances or wastes. Environmental laws and regulations are complex and subject to frequent change. There can be no assurance that compliance with amended, new or more stringent laws or regulations, stricter interpretations of existing laws or the future discovery of environmental conditions will not require additional expenditures by the Company, or that such expenditures would not be material. SHARES ELIGIBLE FOR FUTURE SALE No accurate prediction can be made as to the effect, if any, that future sales of Class A Common Stock, or the availability of shares for future sales, will have on the prevailing market price for the Class A Common Stock prevailing from time to time. Sales of a substantial amount of Class A Common Stock in the public market following this Offering, or the perception that such sales could occur, could adversely affect the prevailing market price for the Class A Common Stock. None of the shares of Common Stock to be held by Lithia Holding immediately after this Offering will be eligible for sale pursuant to Rule 144 until _____________, 1998. All of 12 such shares are subject to a lock-up agreement between the Underwriters and Lithia Holding for a period of 180 days following the date of this Prospectus. As of the date of this Prospectus, options to acquire ________ shares of Common Stock, which were granted at prices between $_______ and $______ per share, are fully vested and exercisable. See "Management -- 1996 Stock Incentive Plan" and "Shares Eligible for Future Sale." NO PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to this Offering, there has been no public market for any of the Company's securities, and no assurance can be given that an active trading market will develop after this Offering or that the Class A Common Stock offered hereby will trade at or above the initial public offering price. The initial public offering price has been determined by negotiations among the Company and the Representatives (as defined herein) of the Underwriters. See "Underwriting." Quarterly and annual operating results of the Company, variations between such results and the results expected by investors and analysts, changes in local or general economic conditions or developments affecting the automobile industry, the Company or its competitors could cause the market price of the Class A Common Stock to fluctuate substantially. As a result of these factors, as well as other factors common to initial public offerings, the market price could fluctuate substantially from the offering price. DILUTION; LACK OF DIVIDENDS The public offering price is substantially higher than the tangible book value per share of Class A Common Stock. Investors purchasing shares of Class A Common Stock in this Offering will therefore incur immediate, substantial dilution. See "Dilution." Further, the Company has no plans to pay any cash dividends in the immediate future. See "Dividend Policy." COMPANY RESTRUCTURING AND PRIOR S CORPORATION STATUS The Company was founded by Walt DeBoer in 1946 as a single Dodge dealership in Ashland, Oregon. In 1968, upon the death of Walt DeBoer, his son, Sidney B. DeBoer, assumed ownership and control of the business and incorporated the Company in Oregon. M. L. Dick Heimann joined the Company in 1970 and serves as its Executive Vice President and Chief Operating Officer. As the Company expanded, it formed subsidiaries and affiliated entities to hold certain dealerships and real property on which the Company operates. Currently, the Company is an S Corporation which is owned 62.5% by Sidney D. DeBoer and 37.5% by M. L. Dick Heimann. In addition, there are five other affiliated S Corporations which are owned 62.5% by Mr. DeBoer and 37.5% by Mr. Heimann: (i) Lithia Rentals, Inc., (ii) Lithia Leasing, Inc., (iii) Lithia Chrysler Plymouth Jeep Eagle, Inc., (iv) Discount Auto & Truck Rental, Inc. and Lithia TKV, Inc. There are also three limited liability companies which are owned as indicated: (i) Lithia TLM, L.L.C. (80% by Lithia Motors, Inc., 19.99% by Stephen R. Philips and 0.01% by Mr. DeBoer), (ii) Lithia's Grants Pass Auto Center, L.L.C. (75% by Lithia Motors, Inc, 24.99% by R. Bradford Gray and 0.01% by Mr. DeBoer) and (iii) Lithia Dodge, L.L.C. (75% by Lithia Motors, Inc, 24.99% by Mr. Gray and 0.01% by Mr. DeBoer). Prior to completion of the Offering, the Company and these other affiliated entities will consummate a restructuring (the "Restructuring") which will result in each of the Company's dealerships and operating divisions becoming direct or indirect wholly-owned subsidiaries of the Company with Lithia Holding owning all of the outstanding Class B Common Stock of the Company. All current shareholders or members will exchange their interests in the Company and the affiliated entities for shares of Lithia Holding with the exception of (i) the interest in Lithia TLM, L.L.C. held by Mr. Philips which will be purchased by Lithia TLM, L.L.C. for $700,000, the price paid by Mr. Philips for his interest, through the payment of $135,000 cash and the cancellation of a note in the remaining principal amount of $565,000 and (ii) Lithia TKV, Inc. which will be purchased by the Company for $3.9 million, the amount contributed by Messrs. DeBoer and Heimann on November ___, 1996 for all of its common stock. Lithia TKV, Inc.; was formed to acquire Melody Vacaville, Inc. The Company and the other corporations and limited liability companies which are parties to the Restructuring have been treated for federal and state income tax purposes as S Corporations under subchapter S of the Internal Revenue Code of 1986, as amended (the "Code") or as partnerships. As a result of the tax status of the Company and these affiliated entities, their stockholders or members (the "Principal Owners"), rather than the Company and such other entities, have been taxed directly on the earnings of such entities for federal and state income tax purposes. In connection with the Restructuring, the tax status of the Company and these affiliated entities as S Corporations or as partnerships will terminate and they will thereafter be subject to federal and state income tax at applicable C Corporation rates. 13 The Company has distributed to the Principal Owners promissory notes (the "Dividend Notes") in the aggregate amount of $3.9 million, representing approximately all of the previously taxed undistributed earnings of the Company through December 31, 1995. In 1994, the Company distributed total tax payment dividends of $2.0 million to the Principal Owners. The Dividend Notes bear interest at 9% per annum and are payable in ten equal annual installments beginning one year and ten days after demand by the noteholders. Shortly before the completion of the Offering, the Company and the other affiliated entities each intend to declare additional distributions to the Principal Owners in an aggregate amount equal to the undistributed taxable income of the Company or such other entities, as the case may be, from January 1, 1996 through the effective date of the Restructuring. The Company intends to prepay the Dividend Notes at the time of the purchase of Melody Vacaville, Inc. permitting Messrs. DeBoer and Heimann to fund Lithia TKV, Inc. to complete the closing of the acquisition and make the final distribution of earnings from a portion of the proceeds of the Offering shortly after the closing of the Offering. Toyota Motors Distribution, Inc. requires that each distributorship be held as a separate legal entity. Accordingly, Lithia TKV, Inc. has been formed to acquire Melody Vacaville but because of the Company's current subchapter S tax status, it cannot hold the shares until after the Restructuring. The total amount to be paid to the Principal Owners as the result of such distributions is expected to be approximately $6.0 million, but the final amount may be more or less than this estimate since it is dependent upon the earnings of the Company and the other affiliated entities through the effective date of the Restructuring. See "Use of Proceeds." 14 PENDING ACQUISITIONS In furtherance of the Company's growth strategy, the Company has signed definitive agreements to purchase three additional dealerships: Roberts Dodge, Inc., a Dodge dealer in Eugene, Oregon; Sam Linder, Inc., a Honda dealer in Salinas, California and Melody Vacaville, Inc., a Toyota and Kia dealer in Vacaville, California, (referred to herein as the "Pending Acquisitions"). The consummation of the Melody Vacaville and Roberts Dodge acquisition are a condition for the consummation of the Offering. ROBERTS DODGE, INC. The Company has agreed to pay $2.35 million for Roberts Dodge, plus an additional amount for the new car and parts inventory valued at seller's cost estimated to be approximately $1.9 million. The Company will also purchase the used vehicle inventory, estimated to be approximately $1.1 million, if the parties can agree to a price at the time of closing. If no agreement can be reached, a used vehicle inventory will be acquired from other sources. The purchase price is payable as (i) $1.75 million plus the cost of the parts and the new (and any used) vehicle inventory acquired, in cash at closing and (ii) a promissory note for $500,000, with interest at 8.5% per annum, payable in equal monthly installments for five years. The Company is not assuming any material liabilities as part of the acquisition. In addition, the Company will purchase the real property on which the dealership is located for $2.33 million, payable in cash at closing. The Company may assign its obligation to purchase the real estate to Lithia Properties which, in such event, would lease the property to the Company or its subsidiary operating Roberts Dodge. See "Business--Properties" and "Certain Relationships and Related Transactions." Closing is expected to occur on or before November 30, 1996. The purchase is subject to normal closing conditions and the approval of Chrysler. The Company expects to obtain such approval in due course, but no assurances can be made in that regard. Roberts Dodge had $31.9 million in sales in 1995 and is the sole Dodge dealer in Eugene. SAM LINDER, INC. The Company has agreed to pay approximately $1.15 million in cash for Sam Linder Honda, plus an additional amount for the new vehicle and parts inventory valued at seller's costs and the used vehicle inventory at the KELLY WHOLESALE BLUE BOOK value less any reconditioning costs, estimated to be approximately $2.1 million. The Company is not assuming any material liabilities as part of the acquisition. The Company will also purchase the real property and improvements utilized for the new vehicle store prior to December 31, 1997 for $2.1 million. The Company may assign its obligation to purchase the real estate to Lithia Properties which, in such event, would lease the property to the Company or its subsidiary operating Sam Linder Honda. See "Business--Properties and "Certain Relationships and Related Transactions." Closing is expected to occur early in 1997. The purchase is subject to normal closing conditions and the approval of Honda Motor Company, Inc. The Company expects to obtain such approval in due course, but no assurances can be made in that regard. Sam Linder, Inc. also has a Cadillac and Oldsmobile dealership franchise at this location which is expected to be sold and transferred to a third party purchaser. Sam Linder, Inc. had $26.9 million in sales in 1995 and is the sole Honda dealer in Salinas. Cadillac and Oldsmobile's new vehicle sales accounted for less than 15% of its 1995 revenues. MELODY VACAVILLE, INC. The Company has agreed to pay approximately $2.43 million in cash for Melody Toyota and Kia, plus an additional amount for the new vehicle and parts inventory valued at seller's costs and the used vehicle inventory at the KELLY WHOLESALE BLUE BOOK value less any reconditioning costs, estimated to be approximately $4.2 million. The Company is not assuming any material liabilities as part of the acquisition. In addition, the Company will lease the real property and improvements utilized by the dealership from a third party at a current monthly rental rate of approximately $35,000. Closing is expected to occur on or before November 15, 1996. The purchase is subject to normal closing conditions and the approval of Toyota Motor Distributors, Inc. The Company expects to obtain such approval in due course, but no assurances can be made in that regard. Melody Vacaville, Inc. had $27.8 million in sales in 1995 and is the sole Toyota and Kia dealer in Vacaville. Historical financial statements for Roberts Dodge, Inc., Sam Linder, Inc. and Melody Vacaville, Inc. are included in this Prospectus beginning at page F-20. Pro forma financial statements showing the effect on the Company of all of the above acquisitions as if they had occurred as of January 1, 1995 and January 1, 1996 are included in this Prospectus beginning at page 21. USE OF PROCEEDS The net proceeds to the Company from the sale of the Class A Common Stock offered hereby (after deducting underwriting discounts and commissions and estimated Offering expenses payable by the Company) are estimated to be $____________ ($____________ if the Underwriters' over-allotment option is exercised in full), assuming an initial offering price of $__________ per share. The Company anticipates that the net proceeds will be used for the following purposes: (i) up to approximately $ million for the acquisition of additional automobile dealerships, including approximately $ million to acquire the dealerships in Eugene, Oregon, Salinas, California and Vacaville, California, which are subject to definitive purchase agreements. See "Pending Acquisitions"; and (ii) approximately $6.0 million to purchase Litria TKV Inc., at cost, from Sidney B DeBoer and M.L. Dick Heimann, to prepay notes to certain other related parties and to distribute current earnings of the Company to the Principal Owners. See "Company Restructuring and Prior S Corporation Status" and "Certain Relationships and Related Transactions." The balance of the net proceeds will be used for working capital and general corporate purposes. Pending utilization of the net proceeds for the purposes set forth herein, the Company intends to reduce the outstanding balances of existing lines of credit, including the Company's flooring line of credit (the "Flooring Line") with U.S. National Bank of Oregon, and its line of credit obtained to close the acquisitions described herein (the "Capital Line"). The Flooring Line bears interest at the prime rate. The effective annual interest rate on such indebtedness was 8.25% at June 30, 1996. The Capital Line bears interest at prime plus 0.25 percent. See Notes 6 and 12 of Notes to the Company Combined Financial Statements. 15 After completion of this Offering, the Company intends to re-borrow under the Flooring Line and other lines of credit as necessary from time to time to fund purchases of new and used automobiles and additional dealerships. DIVIDEND POLICY Other than the dividends and distributions paid to the Principal Owners referred to in "Company Restructuring and Prior S Corporation Status," the Company has no present intention to declare or pay cash dividends in the foreseeable future after the Offering. The Company intends to retain any earnings that it may realize in the future to finance its operations. The payment of any future dividends will be subject to the discretion of the Board of Directors of the Company and will depend upon the Company's results of operations, financial position and capital requirements, general business conditions, restrictions imposed by financing arrangements, if any, legal restrictions on the payment of dividends and other factors the Board of Directors deems relevant. 16 CAPITALIZATION The following table sets forth the short-term debt and total combined capitalization of the Company at June 30, 1996 (i) on an actual historical basis, (ii) pro forma to include the effect of the Restructuring and (iii) as adjusted to reflect the sale of _______ shares of Class A Common Stock pursuant to the Offering and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Combined Financial Statements and related notes and "Pro Forma Combined and Condensed Financial Data" appearing elsewhere in this Prospectus. See also, "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." June 30, 1996 -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------------------------------- (Dollars in thousands) Flooring notes payable . . . . . . . . . . . $13,723 $13,723 $ Current maturities of long-term debt . . . . 2,207 2,207 ------ ------ ------ Total short-term debt. . . . . . . . . . $15,930 $15,930 $ ------ ------ ------ ------ ------ ------ Long-term debt(2). . . . . . . . . . . . . . $ 8,262 $11,000 $ Minority interest. . . . . . . . . . . . . . 1,029 1,029 Owners' equity . . . . . . . . . . . . . . . 1,906 --- --- Shareholders' equity: Preferred Stock, no par value, 15,000,000 shares authorized, none outstanding . . . . . . . . . . . . . --- --- -- Common Stock Class A Common Stock, no par value, 100,000,000 shares authorized, none outstanding, actual and pro forma; _____, pro forma as adjusted(1) . . --- --- Class B Common Stock, no par value, 25,000,000 shares authorized, ________ outstanding, actual, pro forma and pro forma as adjusted. . . . . . . . . . . . . . 801 Retained earnings (deficit) (3). . . . . --- (1,230) ------ ------ ------ Total shareholders' equity(3)/ owners' equity. . . . . . . . . . . 1,906 (429) Total capitalization . . . . . . . . . . . . $11,197 $11,600 $ ------ ------ ------ ------ ------ ------ - ----------------------- (1) Does not include an aggregate of __________ shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, _______of which are subject to outstanding options as of the date hereof. See "Management -- 1996 Stock Incentive Plan." (2) Includes $3.3 million of notes payable to Principal Owners related to S Corporation distributions. (3) The Company utilizes the LIFO (Last In-First Out) method of accounting for financial statement and tax reporting (See Note 2 of the Notes to the Company's Combined Financial Statements). Commencing January 1, 1997, the Company intends to file an election with the IRS to convert to a FIFO (First In-First Out) accounting method and change its method of accounting to the industry standard, FIFO accounting method for financial statement and tax reporting. Had the Company used a FIFO method in 1996, total shareholders' equity at June 30, 1996 would have been $3.2 million higher. DILUTION The pro forma net tangible book value of the Company's Common Stock at June 30, 1996, was $________, or $_____ per share. Pro forma net tangible book value per share of Common Stock represents the Company's total tangible assets less total liabilities, divided by the number of shares of Common Stock outstanding, assuming the Restructuring has taken place. Without taking into account any change in pro forma net tangible book value subsequent to June 30, 1996, other than to give effect to the Offering by the Company of _________________ shares of Class A Common Stock to the public at an assumed initial public offering price of $___ per share and the receipt by the Company of the net proceeds therefrom (after deducting the Underwriters' discount and estimated expenses of the public offering payable by the Company), the pro forma net tangible book value of the Company would have been $_____ per share. This amount represents an immediate increase in the pro forma net tangible book value of $_____ per share to the existing shareholders and an immediate dilution of $_____ per share to new investors purchasing shares of Class A Common Stock at the initial public offering price. The Company utilizes the LIFO method of accounting (See Note 2 of the Notes to the Company's Combined Financial Statements). Had the Company used a FIFO method, total shareholders' equity at June 30, 1996 would have been $3.2 million higher. 17 The following table calculates dilution by subtracting net tangible book value per share after the Offering on both a LIFO and a FIFO basis, from the initial public Offering price.
LIFO BASIS FIFO BASIS ---------------------------- ------------------------ Assumed initial public offering price per share. . . . . . $ $ -------- -------- Pro forma net tangible book value as of June 30, 1996. . . . . . . . . $ $ --------- -------- Increase attributable to new investors. . . . . . . . . . . . $ $ --------- -------- Pro forma net tangible book value after Offering . . . . . $ $ -------- -------- Dilution per share to new investors. . . . . . . . . . . . $ $ -------- --------
The following table summarizes, on a pro forma basis as of June 30, 1996, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by the existing stockholders and by purchasers of the shares offered by the Company hereby (at an assumed initial public offering price of $_________ per share). Average Shares Purchased(1) Cash Paid(2) Price ------------------- ------------------ Number Percent Amount Percent PerShare -------- --------- -------- --------- -------- Existing shareholders. . . . % $ % $ New investors. . . . . . . . % $ % $ ------ ------ ------- ------ ------- Total. . . . . . . . . . 100.0% 100.0% ------ ------ ------- ------ ------- ------ ------ ------- ------ ------- - -------------------- (1) Does not include an aggregate of ____________shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan,______ of which are subject to options outstanding as of June 30, 1996, with a weighted average exercise price of $____ per share. If all such options were deemed to be exercised and proceeds were received therefrom, dilution per share to new investors would be $_________ (LIFO Basis) or $______ (FIFO Basis) See "Management -- 1996 Stock Incentive Plan." (2) Does not reflect deduction of the underwriting discount or estimated Offering expenses. 18 SELECTED COMBINED FINANCIAL DATA The following selected combined financial data presented below under the captions "Combined Statement of Operations Data" and "Combined Balance Sheet Data" for and as of the end of each of the years in the four year period ended December 31, 1995, are derived from the combined financial statements of Lithia Motors, Inc. and its affiliated companies, which financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The following selected combined historical financial information at or for the six months ended June 30, 1995 and June 30, 1996 has been derived from unaudited financial statements that, in the opinion of management of the Company, reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information for such periods and as of such dates. The combined historical results for the six months ended June 30, 1996 are not necessarily indicative of results for a full fiscal year. The combined financial statements as of December 31, 1994 and 1995 and for each of the years in the three year period then ended, and as of June 30, 1996 and for the six months ended, June 30, 1995 and 1996 and the reports thereon, are included elsewhere in this Prospectus. The following combined selected financial data should be read in conjunction with the Combined Financial Statements, including the notes thereto, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," appearing elsewhere herein.
Six Months Ended As of Year Ended December 31, June 30, ---------------------------------------------------------------------- ------------------------- 1991 1992 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (In thousands except per share amounts) COMBINED STATEMENT OF OPERATIONS DATA: SALES: New vehicles . . . . . . . $ 28,946 $ 34,479 $ 42,663 $ 51,154 $ 53,277 $ 25,081 $ 31,482 Used vehicles. . . . . . . 23,369 29,930 34,986 42,381 44,061 20,995 28,395 Other operating revenues . 11,722 15,030 14,460 15,787 16,858 8,320 9,248 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total sales . . . . . . 64,087 79,439 92,109 109,322 114,196 54,396 69,125 Cost of sales. . . . . . . . 53,023 65,417 74,849 90,417 93,253 44,633 57,669 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit(1). . . . . . . 11,064 14,022 17,260 18,905 20,943 9,763 11,456 Selling, general and administrative(2). . . . . 11,563 14,124 15,122 15,174 16,735 7,860 9,314 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Operating income (loss). . . (499) (102) 2,138 3,731 4,208 1,903 2,142 Interest income. . . . . . . 308 161 216 99 179 65 93 Interest expense . . . . . . (784) (743) (1,375) (955) (1,390) (583) (649) Other income, net. . . . . . 1,204 1,200 807 1,097 1,156 484 382 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income before minority interest . . . . . . . . . 229 516 1,786 3,972 4,153 1,869 1,903 Minority interest. . . . . . (49) (168) (233) (458) (778) (383) (317) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (1),(2) . . . . . $ 180 $ 348 $ 1,553 $ 3,514 $ 3,375 $ 1,486 $ 1,586 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA: Income before taxes and minority interest, as reported. . . . . . . . $ 1,786 $ 3,972 $ 4,153 $ 1,869 $ 1,903 Pro forma provision for taxes(3) . . . . . . . 697 1,521 1,598 719 742 Pro forma minority interest . . . . . . . . . 142 283 479 235 193 ---------- ---------- ---------- ---------- ---------- Pro forma net income . . . . $ 947 $ 2,168 $ 2,076 $ 915 $ 968 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
As of December 31, ---------------------------------------------------------------------- As of 1991 1992 1993 1994 1995 June 30, 1996 ---------- ---------- ---------- ---------- ---------- --------------------- (In thousands) COMBINED BALANCE SHEET DATA: Working capital. . . . . . . . . . $ 2,339 $ 1,369 $ 13 $ 6,034 $ 7,764 $ 8,763 Total assets . . . . . . . . . . . 21,080 24,955 33,381 36,656 39,225 32,116 Total long-term debt . . . . . . . 4,222 5,424 6,153 8,369 12,828 10,469 Total shareholders' equity . . . . 1,628 1,238 1,184 2,800 854 1,906
- -------------------- (1) The Company utilizes the LIFO (Last In-First Out) accounting method. See Note 2 of the Notes to the Company's Combined Financial Statements. Commencing January 1, 1997, the Company intends to file an election with the IRS to convert to a FIFO (First In-First Out) accounting method for tax and financial statement reporting and report its earnings on the FIFO method. If it had previously utilized the FIFO method, gross profit for the five years ended December 31, 1995 would have been $11.4 million, $14.5 million, $17.8 million, $19.5 million and $20.5 million, net income for the five years ended December 31, 1995 would have been $527,000, $733,000, $2.1 million, $4.1 million, and $3.0 million, respectively and $1.4 million and $1.8 million for the six months ended June 30, 1995 and 1996. (2) Prior to 1994, the Company and it affiliated entities paid cash bonuses to their shareholders and members in amounts approximating their respective income tax liability on their undistributed earnings ($532,000 in 1991, $640,000 in 1992, and $1.0 million in 1993), in addition to their normal salaries. These cash bonuses are reflected in the SG&A expenses above. In 1994 and subsequent periods, cash to meet the shareholders' and members' tax liabilities was distributed to the shareholders and members as dividends. 19 The Company believes that for a fair evaluation of its historical performance, results for 1991, 1992 and 1993 should be adjusted to eliminate such bonus payments. (3) The Company was an S Corporation and accordingly was not subject to federal and state income taxes during the periods indicated. Pro forma net income reflects federal and state income taxes as if the Company had been a C Corporation, based on the effective tax rates that would have been in effect during these periods. See "Company Restructuring and Prior S Corporation Status" and Notes 1 and 9 of Notes to Company's Combined Financial Statements. 20 PRO FORMA COMBINED AND CONDENSED FINANCIAL DATA The following unaudited pro forma combined and condensed statements of operations for the year ended December 31, 1995 and for the six months ended June 30, 1996 reflect the historical accounts of the Company for those periods adjusted to give pro forma effect to the Pending Acquisitions, the conversion to the FIFO accounting method (to be effective January 1, 1997), the Restructuring and the Offering, as if these transactions had occurred at the beginning of each period presented. The following unaudited pro forma combined balance sheet as of June 30, 1996 reflects the historical accounts of the Company as of that date adjusted to give pro forma effect to the Pending Acquisitions, the conversion to the FIFO accounting method (to be effective January 1, 1997), the Restructuring, and the Offering, as if they had occurred as of June 30, 1996. The unaudited pro forma combined and condensed financial data and accompanying notes should be read in conjunction with the Combined Financial Statements of the Company and the related notes as well as the combined financial statements and related notes of Roberts Dodge, Inc., Sam Linder, Inc., and Melody Vacaville, Inc., all of which are included elsewhere in this Prospectus. The Company believes that the assumptions used in the following statements provide a reasonable basis on which to present the pro forma financial data. The pro forma combined financial data is provided for informational purposes only and should not be construed to be indicative of the Company's financial condition or results of operations had the transactions and events described above been consummated on the dates assumed and are not intended to project the Company's financial condition on any future date or results of operations for any future period. PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1995 -------------------------------------------------------------------------------------- Actual ------------------------------------------- Roberts Sam Melody Dodge, Linder, Vacaville Pro Forma Pro Forma Pro Company(1) Inc.(1) Inc.(1) Inc.(1) Adjustments Acquisitions Forma ---------- -------- ---------- ---------- ------------ ------------ --------- (In thousands, except share data) Sales: New vehicle. . . . . . . $ 53,277 $15,848 $12,656 $18,126 $(3,069)(6) $ 96,838 $ Used vehicle . . . . . . 44,061 12,151 10,234 6,015 - 72,461 Other operating revenue. . . . . . . . 16,858 3,895 3,967 3,669 (518)(6) 27,871 -------- ------- ------- ------- ------- -------- -------- Total sales. . . . . 114,196 31,894 26,857 27,810 (3,587)(6) 197,170 Cost of sales. . . . . . . 93,253 27,270 22,646 24,858 (2,799)(6)(7) 165,228 -------- ------- ------- ------- ------- -------- -------- Gross profit . . . . . . . 20,943 4,624 4,211 2,952 (788) 31,942 Selling, general and administrative . . . . . 16,735 3,828 3,928 4,254 (412)(2)(3)(6) 28,333 -------- ------- ------- ------- ------- -------- -------- Operating income (loss). . 4,208 796 283 (1,302) (376) 3,609 Other income (expense), net. . . . . . . . . . . (55) (527) (347) (310) 1,358 (1)(2)(6) 119 -------- ------- ------- ------- ------- -------- -------- Income (loss) before minority interest and income taxes . . . . . . 4,153 269 (64) (1,612) 982 3,728 -------- ------- ------- ------- ------- -------- -------- Minority interest. . . . . (778) - - - - (778) Income taxes . . . . . . . - - - - - - -------- ------- ------- ------- ------- -------- -------- Net income (loss). . . . . 3,375 $ 269 $ (64) $(1,612) $ 982 $ 2,950 $ (3) -------- ------- ------- ------- ------- -------- -------- -------- ------- ------- ------- ------- -------- -------- Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5) Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -------- --------
21 PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS
Six Months Ended June 30, 1996 -------------------------------------------------------------------------------------- Actual ------------------------------------------- Roberts Sam Melody Dodge, Linder, Vacaville Pro Forma Pro Forma Pro Company(1) Inc.(1) Inc.(1) Inc.(1) Adjustments Acquisitions Forma ---------- -------- ---------- ---------- ------------ ------------ --------- (In thousands, except share data) Sales: New vehicles . . . . . . $31,482 $ 9,771 $ 6,456 $ 9,147 $(1,013)(6) $ 55,843 $ Used vehicles. . . . . . 28,395 5,838 4,519 3,569 - 42,321 Other operating revenues . . . . . . . 9,248 2,074 1,893 1,949 (242)(6) 14,922 ------- ------- ------- ------- ------- -------- -------- Total sales. . . . . 69,125 17,683 12,868 14,665 (1,255)(6) 113,086 Cost of sales. . . . . . . 57,669 15,015 10,809 13,227 (1,386)(6)(7) 95,334 ------- ------- ------- ------- ------- -------- -------- Gross profit . . . . . . . 11,456 2,668 2,059 1,438 131 17,752 Selling, general and (8) administrative . . . . . 9,379 2,165 1,912 1,786 (339)(2)(3)(6) 14,903 ------- ------- ------- -------- ------- -------- Operating income (loss). . 2,077 503 147 (348) 470 2,849 Other income (expense), net. . . . . . . . . . . (174) (231) (103) (144) 686 (1)(2)(6) 34 ------- ------- ------- -------- ------- -------- -------- Income (loss) before minority interest and income taxes . . . . . . 1,903 272 44 (492) 1,156 2,883 ------- ------- ------- -------- ------- -------- -------- Minority interest. . . . . (317) - - - - (317) - Income taxes . . . . . . . - - - - - - - ------- ------- ------- -------- ------- -------- -------- Net income (loss). . . . . $ 1,586 $ 272 $ 44 $ (492) $ 1,156 $ 2,566 $ ------- ------- ------- -------- ------- -------- -------- ------- ------- ------- -------- ------- -------- -------- Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -------- -------- Weighted average shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- -------------------- (1) The Company will use the proceeds from the Offering primarily to acquire dealerships in the future. The pro forma statements of operations shown above assumes that approximately $ million will be used to acquire the three new dealerships. Until the remaining proceeds are used to acquire other dealerships, the Company intends to reduce floor plan debt with its bank by approximately $ million [and to invest the remaining proceeds of approximately $________ million in other cash equivalents]. See "Use of Proceeds." Partially offsetting the decrease in floor plan financing will be an increase in floor plan debt to finance the purchase of new vehicle inventory related to the two new dealerships. See Footnotes 2 and 3 to the Pro Forma Combined Balance Sheet below. Interest expense associated with such debt is reflected in the acquired companies' actual results of operations for each period. (2) Reflects the Company's estimate of the net deductions from selling, general and administrative expenses and reductions in interest expense which would have occurred if the Offering had been effected as of the beginning of each period and consists of (a) an elimination of certain owners tax payment bonuses and (b) a net reduction in interest expense reflecting a lower interest rate on floor plan debt available to the Company on the acquired companies' flooring debt. The reduction in expenses include: Year Ended Six Months Ended December 31, 1995 June 30, 1996 ----------------- ---------------- Management compensation. . . . . . $277,000 $292,000 Interest expense . . . . . . . . . $ 97,000 $ 49,000 The net reduction in interest expense was calculated based on an average floor plan debt of approximately $6.5 million at the interest rate differential in effect during each respective period. (3) Reflects amortization as if Roberts Dodge, Inc., Sam Linder, Inc. and Melody Vacaville, Inc. had been acquired as of January 1, 1995. The pro forma amortization for the year ended December 31, 1995 and the six-month period ended June 30, 1996 reflects additional amortization of approximately $111,000 and $55,500, respectively, associated with intangible assets, which assets consist largely of goodwill, resulting from the acquisition of Roberts Dodge, Sam Linder, Inc. and Melody Vacaville, Inc. Such costs are being amortized over a 40-year period. See Note 4 to Pro Forma Combined and Condensed Balance Sheet (4) Pro forma earnings per share are based upon the assumption that __________ shares of Common Stock are outstanding for each period. This amount represents the shares to be issued in the Offering (_________) and the number of shares of Common Stock owned by the Company's stockholders immediately following the Restructuring (__________). 22 (5) The Company and Pending Acquisitions are S Corporations and accordingly not subject to federal and state income taxes during the period indicated. This reflects the federal and state income taxes as if the Company were and the Pending Acquisitions had been C Corporations based on a 38% effective rate assumed during the period. (6) Reflects adjustment to sales, cost of sales, selling, general and administrative, and other expenses for General Motor products which Sam Linder, Inc. has not received approval to sell when acquired by the Company. Amounts total $3.6 million, $3.2 million, $246,000 and $36,000 and $1.3 million, $1.1 million, $103,000, and $24,000 for the year ended December 31, 1995 and the six month period ended June 30, 1996, respectively. (7) Reflects the conversion of the Company, Sam Linder, Inc. and Melody Vacaville, Inc. from the LIFO method of inventory accounting to the FIFO method. Under the FIFO method, cost of sales would have been higher (lower) by $419,000, and $(328,000) for the year ended December 31, 1995 and the six month period ended June 30, 1996, respectively. The Company and Sam Linder, Inc. intend to convert to the FIFO accounting method effective January 1, 1997. (8) No adjustments have been made to reflect anticipated savings as a result of reduced lease costs under the new lease agreements with Lithia Properties from whom the Company leases substantially all of its facilities. 23 PRO FORMA COMBINED AND CONDENSED BALANCE SHEET
As of June 30, 1996 --------------------------------------------- Pro Forma Actual Adjustments Pro Forma ---------- ----------- ---------- (In thousands) ASSETS Current Assets: Cash and cash equivalents . . . . . $ 3,819 $ - $ Receivables . . . . . . . . . . . . 2,472 - Inventories . . . . . . . . . . . . 16,480 16,266 (4)(5) Vehicles leased to others . . . . . 3,680 - Other current assets. . . . . . . . 932 - (6) - ---------- ---------- ---------- Total current assets. . . . . . . . 27,383 16,266 Net property, plant and equipment. . . . 1,278 5,578 (4) Vehicles leased to other, less current portion. . . . . . . . . . . . . . . . 1,982 - Goodwill, net; and other assets. . . . . 1,473 4,450 (4) ---------- ---------- Total assets. . . . . . . . . . . . $ 32,116 $ 26,294 $ ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES, MINORITY INTEREST AND OWNERS' SHAREHOLDERS' EQUITY Current Liabilities: Flooring notes payable. . . . . . . $ 13,723 $ - $ Current maturities of long-term debt. . . . . . . . . . 2,207 - Accounts payable. . . . . . . . . . 1,249 - Accrued expenses and other liabilities . . . . . . . . . . . 1,441 - ---------- ---------- ---------- Total current liabilities . . . . . 18,620 - ---------- ---------- ---------- Long-term debt, excluding current maturities . . . . . . . . . . . . . . 8,262 23,901 (4)(7) Other long-term liabilities. . . . . . . 2,299 1,950 (5)(6) ---------- ---------- ---------- Total liabilities . . . . . . . . . 29,181 25,851 ---------- ---------- ---------- Minority interest. . . . . . . . . . . . 1,029 - ---------- ---------- ---------- Owners'/Shareholders' Equity: Preferred stock. . . . . . . . . . . . . - - Common stock . . . . . . . . . . . . . . 801 - Retained earnings. . . . . . . . . . . . 1,105 443 (5)(6)(7) ---------- ---------- ---------- Total owners'/shareholders' equity. . . . . . . . . . . . . . 1,906 443 ---------- ---------- ---------- Total liabilities and owners'/ shareholders' equity. . . . . . . $ 32,116 $ 26,294 $ ---------- ---------- ---------- ---------- ---------- ----------
- -------------------- (1) Reflects the application of the estimated net proceeds of the Offering. Approximately $________ million will be used to reduce acquired floor plan debt of acquired companies, approximately $_________ million will be utilized to acquire Roberts Dodge, Inc., Sam Linder, Inc. and Melody Vacaville, Inc. See "Pending Acquisitions" and "Use of Proceeds." (2) Reflects the issuance of __________ shares of Common Stock at an assumed initial public offering price of $_________ per share, net of estimated offering expenses. (3) Reflects the Restructuring. (4) Reflects the allocation of the Roberts Dodge, Inc., Sam Linder, Inc. and Melody Vacaville, Inc. purchase price based on the estimated fair value of assets acquired. The purchase price consists of the following: Melody Roberts Sam Vacaville, Dodge, Inc. Linder, Inc. Inc. ----------- ------------ ---------- Estimated total consideration $8,194,000 $6,108,000 $6,861,000 Less estimated fair value of assets acquired 6,394,000 5,308,000 5,011,000 ---------- ---------- ---------- Excess of purchase price over fair value of tangible assets acquired $1,800,000 $ 800,000 $1,850,000 ---------- ---------- ---------- ---------- ---------- ---------- The Company is purchasing new vehicle and parts inventories, certain real property and equipment, goodwill and dealer agreements, and may purchase some or all of the used vehicle inventory. The excess of the purchase price over the fair value of tangible assets acquired will be allocated to intangible assets, primarily the dealer agreements and goodwill. Fair value of assets acquired primarily represents the estimated fair value of the parts inventory and certain property and equipment. Vehicle inventory, which at June 30, 1996 approximated $___________, will be financed with floor plan debt. 24 (5) Reflects the conversion of the Company, Sam Linder, Inc. and Melody Vacaville, Inc. from LIFO method of inventory accounting to the FIFO method. Under the FIFO method, shareholders' equity would have been higher by $3.2 million. The Company to convert to the FIFO accounting method effective January 1, 1997. (6) Represents the establishment of a deferred income tax asset of $997,000 and a deferred income tax liability of $594,000 to effect the Company's conversion to C Corporation status. (7) Reflects the estimated distribution and payment of $_____ to its current shareholders of substantially all of the undistributed commutative taxable income through the date of the termination of the S Corporation election that has been taxed or is taxable to its current shareholders and payment of $3.3 million in notes to Principal Owners and other affiliates for all previously taxed undistributed earning. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the Combined Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. The following includes a discussion of certain significant business trends and uncertainties as well as other forward-looking statements. For a discussion of important factors that could cause actual results to differ materially from the forward-looking statements, see "Risk Factors." GENERAL The Company is the largest retailer of new and used vehicles in Southwest Oregon, offering 14 domestic and imported makes of new automobiles and light trucks at five locations. As an integral part of its operations, the Company also arranges related finance and insurance and sells parts, service and ancillary products. The Company has successfully acquired and integrated several new dealer franchises in Southwest Oregon where it has achieved a dominant market share. The Company is seeking to become a leading acquiror of dealerships in the western United States. The Company has recently entered into agreements to acquire an additional dealership in Eugene, Oregon, and Salinas, and Vacaville, California. The following table sets forth selected condensed financial data expressed as a percentage of total sales for the periods indicated for the average automotive dealer in the United States. 1996 data is not available. AVERAGE U.S. DEALERSHIP Year ended December 31, ----------------------------- 1993 1994 1995 ---- ---- ---- STATEMENT OF OPERATIONS DATA: Sales: New vehicles. . . . . . . . . . . . . . 60.0% 60.3% 58.6% Used vehicles . . . . . . . . . . . . . 26.4 26.9 29.0 Parts and services sales, other . . . . 13.6 12.8 12.4 ----- ----- ----- Total sales. . . . . . . . . . . . . 100.0% 100.0% 100.0% Gross profit . . . . . . . . . . . . . . . . 13.4 13.1 12.9 Total dealership expense . . . . . . . . . . 11.8 11.3 11.5 ----- ----- ----- Income before taxes. . . . . . . . . . . . . 1.6% 1.8% 1.4% ----- ----- ----- ----- ----- ----- - -------------------- Source: AUTOMOTIVE EXECUTIVE/August 1996; NADA Industry Analysis Division 26 The following table sets forth selected condensed financial data for the Company expressed as a percentage of total sales for the periods indicated below. Gross profit and pre-tax margins are presented on a FIFO basis and before minority interest to permit comparisons to U.S. industry data. LITHIA MOTORS, INC.
Six Months Ended Year ended December 31, June 30, ------------------------------ ------------------ 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ STATEMENT OF OPERATIONS DATA: Sales: New vehicles. . . . . . . . . . . . . . 46.3% 46.8% 46.7% 46.1% 45.5% Used vehicles . . . . . . . . . . . . . 38.0 38.8 38.5 38.6 41.1 Parts and service sales . . . . . . . . 9.2 9.1 9.6 9.8 8.9 Finance, insurance and other. . . . . . 6.5 5.3 5.2 5.5 4.5 ----- ----- ----- ----- ----- Total sales. . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% Gross profit(1). . . . . . . . . . . . . . . 19.3 17.9 18.0 17.7 16.9 Selling, general and administrative expenses . . . . . . . . . . . . . . . . . 16.4 13.9 14.7 14.5 13.6 ----- ----- ----- ----- ----- Operating income(1). . . . . . . . . . . . . 2.9 4.0 3.3 3.2 3.3 Other income (expense), net. . . . . . . . . (0.4) 0.2 0.0 (0.1) (0.2) ----- ----- ----- ----- ----- Income before taxes and minority interest(1). . . . . . . . . . . . . . . . 2.5% 4.2% 3.3% 3.1% 3.1% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
- -------------------- (1) Using the FIFO method of accounting for inventory to permit comparisons to U.S. industry data. The Company currently uses the LIFO method for tax and financial reporting, purposes but will convert to the FIFO method effective January 1, 1997. New vehicle revenues include sales of new vehicles (other than "book only" fleet sales) at retail. Used vehicle revenues include amounts received for used vehicles sold to wholesale and retail customers. Finance, insurance and other includes fees and commissions from finance and insurance ("F&I") transactions, sales of the Company's extended service contracts for vehicles, and "book only" fleet sales, net. The Company recognizes revenue attributable to sales of its service contracts over the term of the contracts for accounting purposes, although it receives payment in full at the time of the sale. For vehicle financing contracts, the Company receives either a fee or a spread from the lender for originating and assigning the loan but is assessed a chargeback fee by the lender if the contract is cancelled, in most cases, within 120 days of making the loan. Early cancellation can result from early repayment because of refinancing the loan, selling or trade-in of the vehicle or default on the loan. The Company currently utilizes the LIFO method of accounting for inventory, but will convert to the FIFO method effective January 1, 1997. If the FIFO method of inventory accounting had been used by the Company in prior periods, income before taxes and minority interest would have been higher (lower) by $556,000, $615,000, and ($426,000) for the years ended December 31, 1993, 1994, and 1995, respectively and $(162,000) and $235,000 for the six months ended June 30, 1995 and 1996, respectively, from the reported results under the LIFO method. In the analysis of interim and annual results, the Company has provided a discussion of gross profits on FIFO as well on a LIFO basis because management believes that in assessing trends and comparing the Company's performance with prior periods or with industry data, FIFO data should be considered. Further, commencing January 1, 1997, the Company will utilize the FIFO method of accounting for both book and tax purposes. At each of its dealership locations, the Company's management focuses on maximizing profitability in each area of operations rather than on the volume of vehicle sales. The key factors affecting the Company profitability are its dominant market share for the new vehicle brands it sells and its focused efforts to increase the sales of used vehicles, F&I and ancillary products. The average gross profit margins obtained by franchised automobile dealers in the United States on sales of new vehicles have declined from over 7.0% in 1991 to 6.5% in 1995. The Company's gross profit margin (on a FIFO basis) on new vehicle sales was 12.8% for 1995 and 13.2% for the first six months of 1996. The Company's gross profit margin on new vehicle sales has consistently been higher than the industry average. 27 The Company's gross profit margin (on a FIFO basis) on used vehicle sales was 11.4% for 1995 and 10.0% for the first six months of 1996. Excluding sales to wholesalers (which are frequently at or close to cost), the Company's gross profit margin on a FIFO basis in 1995 and for the first six months of 1996 on retail sales of used vehicles were 13.2% and 12.6%, respectively. The industry average in 1995 was 11.5%. See "Business - Dealership Operations." The Company's salary expense, employee benefit costs and advertising expenses comprise the majority of its selling, general and administrative ("SG&A") expense. The Company's interest expense fluctuates based primarily on the level of debt required to support the inventory of new and used vehicles at its dealerships and vehicles leased to others. The Company and its affiliated entities have been treated for federal income tax purposes as S Corporations or as partnerships under the Internal Revenue Code since their inception and, as a result, have not been subject to federal or certain state income taxes. Accordingly, the following discussion of the Company's historical results of operations does not include a discussion of income tax expense. Immediately before the completion of this Offering, and in connection with the Restructuring, the Company and its affiliated entities that are S Corporations will terminate their status as S Corporations and will thereafter be subject to federal and state income tax at applicable C Corporation rates. Prior to 1994, the shareholders and members of the Company and the affiliated entities each received substantial year-end tax payment bonuses to provide the cash to pay income taxes on the Company's and affiliated entities income which was taxable to the principals. Such payments were reflected in SG&A expense. See "Management--Executive Compensation." The Company has accounted for each of its acquisitions prior to 1993 by the purchase method of accounting, and, as a result, does not include in its financial statements the results of operations of these dealerships prior to the date they were acquired by the Company. The combined financial statements of the Company reflect the results of operations, financial position and cash flows of each of the Company's dealerships and those of its affiliated entities whose operations will be combined under the Restructuring, using an "as if" pooling of interest basis of accounting. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 REVENUES Revenues increased in each of the Company's operating segments for the first six months of 1996 as compared to the first six months of 1995, resulting in total sales increasing 27.1% to $69.1 million. New vehicle sales revenue increased 25.5% in the first six months of 1996 to $31.5 million, compared with $25.1 million for the first six months of 1995. The increase in sales was due primarily to increased unit sales (22.3%) which resulted from higher levels of promotional activity for certain popular brands and, to a much lesser extent, an increase in the average per unit sales price (2.6%). Used vehicle sales increased by 35.2% in the first six months of 1996 to $28.4 million, compared with $21.0 million in the first six months of 1995. The increase in sales was due primarily to the availability in the 1996 period of an increasing number of late-model used vehicles which were in high demand by consumers. Increased used vehicle revenue was attributable primarily to unit sales increases (25.1%) and, to a lesser extent, an increase in the average per unit sales price (8.4%). The Company's other operating revenue increased 11.2% to $9.2 million in the first six months of 1996, from $8.3 million in the first six months of 1995, due to an increased number of F&I transactions and to a lesser extent, increases in service department maintenance and repairs. GROSS PROFIT Gross profit (on a LIFO basis) increased 17.4% for the first six months of 1996 to $11.5 million, compared with $9.8 million for the first six months of 1995, primarily because of the increase in new and used vehicle sales during the period. Gross profit margin decreased from 17.9% for the first six months in 1995 to 16.8% for the first six months of 1996. The decrease in gross profit margin was primarily caused by a reduction in profit margins on used vehicle sales and other operating revenue, partially offset by an increase in gross profit 28 as a percentage of sales on new vehicles. Gross profit margin in 1995 was favorably impacted by the reduction in new vehicle inventory during the period which resulted in historically lower vehicle inventory costs flowing through cost of sales. Gross profit (on a FIFO basis) increased 21.8% for the first six months of 1996 to $11.7 million, compared with $9.6 million for the first six months of 1995, primarily because of the increase in new and used vehicle sales during the period. Gross profit margin decreased from 17.7% for the first six months in 1995 to 16.9% for the first six months of 1996. The decrease in gross profit margin was primarily caused by a reduction in profit margins on used vehicles sales and other operating revenue, partially offset by an increase in gross profit margin. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE The Company's SG&A expense increased to $9.3 million in the first six months of 1996 compared to $7.9 million in the first six months of 1995. SG&A as a percentage of sales decreased to 13.6% from 14.5%. The increase in SG&A was due primarily to increased selling, or variable expense related to the increase in sales, and to a lesser extent, an increase in compensation for additional personnel and management in preparation for the Pending Acquisitions. See "Pending Acquisitions." INTEREST EXPENSE The Company's interest expense increased by 11.3% to $649,00 for the first six months of 1996, compared to $583,000 for the first six months of 1995. The increase was due entirely to an increase in the average balances of flooring and other notes outstanding for the first six months of 1996, offset partially by a decrease in interest rates. The increase in the loan balances was due primarily to additional borrowings to finance additional inventory and notes to Principal Owners. OTHER INCOME, NET Other income, net, which consisted primarily of management fees and equity in the income of Lithia Properties and other non-dealer service income, decreased 21.1% from $484,000 to $382,000 for the first six-months of 1996. This reduction is due to a non reoccurring lawsuit recovery in the prior period. 1995 COMPARED TO 1994 REVENUES Revenue increased 4.6% to $114.2 million in 1995 from $109.3 million in 1994. New vehicle revenue increased 4.2%, while used vehicle revenue increased 4.0%. The increase in sales was due to per-unit price increases in new and used vehicles, offset in part by a reduction in unit sales of 1.1%. Industry and Company unit sales were essentially flat from 1994 to 1995. The Company's other operating revenue increased 6.8% to $16.9 million 1995 compared to $15.8 million in 1994, primarily due to increases in service department maintenance and repairs. GROSS PROFIT Gross profit (on a LIFO basis) increased 10.8% in 1995 to $20.9 million from $18.9 million in 1994. Gross profit margin increased from 17.3% to 18.3% in 1995. Gross profit margin in 1995 was favorably impacted by the reduction in new vehicle inventory during the period which resulted in historically lower vehicle inventory costs flowing through costs of goods sold. Gross profit (on a FIFO basis) increased 5.1% in 1995 to $20.5 million from $19.5 million in 1994. Gross profit margin, at 18.0%, was essentially unchanged from 1994. Increases in gross profit margin on new vehicle sales were offset by a reduction in the gross profit margin on new vehicles and parts and service sales. 29 SELLING, GENERAL AND ADMINISTRATIVE EXPENSE The Company's SG&A expense increased 10.3% to $16.7 million or 14.7% of the Company's revenues, in 1995, from $15.2 million, or 13.9% of the Company's revenues in 1994. A reserve for workers' compensation claims, expense associated with compensation, primarily from salaries and bonuses for the Company's managers and, to a lesser extent, an increase in advertising expense, accounted for a significant portion of the increase. INTEREST EXPENSE The Company's interest expense in 1995 increased 45.5% to $1.4 million from $955,000 in 1994. The increase was due primarily to an increase in the Company's average loan balances in 1995 as compared to 1994, and, to a lesser extent, an increase in interest rates on borrowed funds. Loan balances increased to support increased flooring of inventory, vehicles leased to others and notes to Principal Owners incurred during the period. OTHER INCOME, NET Other income, net, consisted primarily of management fees derived from the Company's management of Lithia Properties and equity in the income of Lithia Properties and other non-dealers service income, increased 5.4% from the prior year. This increase is attributable to primarily to receipt of a judgment in a lawsuit brought by the Company. 1994 COMPARED TO 1993 REVENUES Revenues increased 18.7% to $109.3 million in 1994 as compared with $92.1 million in 1993. New vehicle sales increased 19.9%, while used vehicle sales increased 21.1% in 1994 compared to 1993. The increase in vehicle sales was due to increased per unit sales prices and high consumer demand for new vehicles (unit sales increase of 11.4%) as well as low-mileage, late-model used vehicles (unit sales increase of 10.3%). The Company's other operating revenue increased 9.2% to $15.8 million in 1994 compared to $14.5 million in 1993, primarily as a result of increases in revenues derived from the Company's parts and service operations. GROSS PROFIT Gross profit (on a LIFO basis) increased 9.5% to $18.9 million in 1994 from $17.3 million in 1993. Gross profit margin decreased to 17.3% in 1994 compared to 18.7% in 1993. The decrease in gross profit margin occurred in all operating segments. Gross profit (on a FIFO basis) increased 9.6% to $19.5 million in 1994 from $17.8 million in 1993. Gross profit margin decreased to 17.9% in 1994 compared to 19.3% in 1993, occurred in all operating segments and was consistent with industry trends. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE SG&A expense increased less than 1.0% in 1994. This represents a decline in SG&A expense as a percentage of sales to 13.9% in 1994 compared to 16.4% in 1993. This decrease was primarily due to an increase in sales volumes and the effect of special tax payment bonuses ($1.0 million) paid in 1993 to the owners of the Company to fund personal income tax payments on earnings of the Company. In 1994 and subsequent periods, such amounts were distributed as dividends or other distributions and were not reflected as an administrative expense. This decrease was offset by additional compensation and other benefits provided to Company management. 30 INTEREST EXPENSE The Company's interest expense decreased 30.5% to $955,000 in 1994 from $1.4 million in 1993. The decrease in interest expense was primarily due to lower loan balances and a decrease in the Company's flooring interest rates. OTHER INCOME, NET Other income, net, for the period consisted primarily of management fees derived from Lithia Properties and equity in the income of Lithia Properties and other non-dealer service income, increased 35.9% to $1.1 million. This increase is attributable to an increase in equity in the earnings of Lithia Properties, advertising service income and administrative fees. LIQUIDITY AND CAPITAL RESOURCES The Company's principal needs for capital resources are to finance acquisitions, capital expenditures and increased working capital requirements. Historically, the Company has relied primarily upon internally generated cash flows from operations, borrowings under its credit facility and borrowings from its shareholders to finance its operations and expansion. The Company currently has a credit facility with U.S. Bank, giving the Company access to an aggregate of approximately $37.2 million of credit for various purposes. The principal component of the credit facility is a Flooring Line which permits the Company to borrow up to $27.9 million, based on the level of the new and used vehicle inventories securing the line. The Flooring Line bears interest at rates from prime (for new vehicles) to prime plus 0.5% (for used vehicles). At June 30, 1996, the annualized rates of interest on the Flooring Line were from 8.25% to 8.75%. The principal payments are due within five business days of an automobile being sold. The Flooring Line also permits the Company to borrow at the U.S. Bank's Interbank Offering Rate, which is the rate offered to U.S. Bank for U.S. dollar deposits in the Eurodollar market selected by U.S. Bank. These borrowings are available only in increments of $500,000 and cannot be prepaid before the end of their terms (typically, 60 or 90 days) without substantial penalty. The rate is generally one percentage point less than the standard rate available under the Flooring Line. The Flooring Line expires on September 10, 1997. See Note 2 of the Notes to Company's Combined Financial Statements. Management believes that the Flooring Line provides the Company with financing at rates less than those available from manufacturers and other sources. The credit facility provides a line of credit permitting the Company to borrow up to $1.0 million for the purpose of in-house financing of vehicle sales and in-house leases (subject to a maximum amount equal to 75% of the total in- house vehicle receivables under 60 days past due). See "Business--Dealership Operations." The borrowings under this line of credit bear interest at prime plus 1.0% (9.25% at June 30, 1996). See "Note 5 of the Notes to the Company's Combined Financial Statements." An additional line of credit of $2.15 million is available for the purchase of equipment, $1.4 million of which is available for purchasing equipment associated with future or pending acquisitions. The borrowings under this line of credit bear interest at prime plus 0.5% (8.75% at June 30, 1996). The credit facility also includes a Capital Line, a line of credit of $6.0 million to finance acquisitions. The Capital Line bears interest at prime plus 0.75% and is secured by the Company's inventory, receivables, equipment and real property. During the first year in which the Capital Line is used, interest only is payable monthly. After the first year, monthly payments are based on a ten-year amortization, with final payment due five years from the first draw. As of June 30, 1996, there were no borrowings under the Capital Line. The Company has also established an additional $5.0 million unsecured line of credit from Western Bank to finance additional acquisitions. The line bears interest at prime plus 1.0%. As of June 30, 1996, there were no borrowings under this line of credit. 31 The Company had $24.2 million of debt outstanding at June 30, 1996, consisting of $3.6 million in notes payable to the Principal Owners and other affiliated parties, primarily to pay the undistributed Subchapter S earnings, $1.0 million in term borrowings under fixed-rate notes secured by equipment, $13.7 million in variable- rate borrowings under its credit facility and $5.9 million outstanding on vehicles leased to others. Capital expenditures, exclusive of acquisitions, were $134,000 in 1995 and $223,000 for the first six months of 1996. The principal capital expenditures in 1995 and the first six months of 1996 included equipment, building improvements and computer equipment for use in the Company's dealerships. The following table sets forth the estimated funds required to complete the Pending Acquisitions, all anticipated prior to year-end 1996. Acquisition costs are necessarily estimates as the actual purchase price will depend on inventory levels at each acquired dealership upon closing. Estimates assumes the purchase of used vehicles at each store location. Pending Acquisitions Total Estimated Purchase Price -------------------- ------------------------------ Roberts Dodge, Inc. $7,900,000 Sam Linder, Inc. $5,300,000 Melody Vacaville, Inc. $6,600,000 The Company anticipates that it will be able to satisfy its cash requirements through December 1998, including its expected growth, primarily with cash flow from operations, borrowings under the Flooring Line and the Company's other lines of credit and the proceeds of this Offering. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's sales and operating results have historically varied during each quarter of the year. Historically, sales have been lower in the fourth quarter of each year largely due to consumer purchasing patterns during the holiday season, inclement weather and the reduced number of business days during the holiday season. As a result, financial performance for the Company is generally lower during the fourth quarter than during the other quarters of each fiscal year; however, this did not hold true for the year 1995. Management believes that interest rates, levels of consumer debt, consumer buying patterns and confidence, as well as general economic conditions, may also contribute to fluctuations in sales and operating results. The timing of acquisitions may cause substantial fluctuations of operating results from quarter to quarter. SELECTED QUARTERLY RESULTS OF OPERATIONS The following tables set forth the Company's results of operations data (on a LIFO Basis) for the quarterly periods presented. This presentation should be read in conjunction with the audited and unaudited financial statements of the Company and the Notes thereto appearing elsewhere in this Prospectus. Because of the seasonal nature of the Company's business and based on the Company's past experience, it expects its operating income for the fourth quarter to be lower than that of other quarters.
Quarter Ended ------------------------------------------------------------------------------ March 31, June 30, September 30, December 31, March 31, June 30, 1995 1995 1995 1995 1996 1996 -------- -------- -------- -------- -------- -------- (In thousands) Sales: New vehicles. . . . . . . $12,241 $12,840 $14,743 $13,453 $14,817 $16,665 Used vehicles . . . . . . 10,717 10,278 12,251 10,815 13,239 15,156 Other operating revenues . . . . . . . 4,160 4,160 4,532 4,006 4,390 4,859 -------- -------- -------- -------- -------- -------- Total sales. . . . . . . . . 27,118 27,278 31,526 28,274 32,446 36,680 Cost of sales. . . . . . . . 22,264 22,369 25,734 22,886 26,965 30,705 -------- -------- -------- -------- -------- -------- Gross profit . . . . . . . . 4,854 4,909 5,792 5,388 5,481 5,975 32 Selling, general and administrative. . . . . . 3,895 3,961 4,309 4,570 4,517 4,797 -------- -------- -------- -------- -------- -------- Operating income . . . . . . 959 948 1,483 818 964 1,178 Other income (expense), net . . . . . . . . . . . 165 (203) (91) 74 (145) (94) -------- -------- -------- -------- -------- -------- Income before minority interest. . . . . . . . . 1,124 745 1,392 892 819 1,084 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Quarter Ended ------------------------------------------------------------------------------ March 31, June 30, September 30, December 31, March 31, June 30, 1995 1995 1995 1995 1996 1996 -------- -------- -------- -------- -------- -------- (In thousands) Sales: New vehicles. . . . . . . 45.1% 47.1% 46.8% 47.6% 45.7% 45.4% Used vehicles . . . . . . 39.5 37.7 38.9 38.3 40.8 41.3 Other operating revenues . . . . . . . . 15.3 15.3 14.4 14.2 13.5 13.2 -------- -------- -------- -------- -------- -------- Total sales. . . . . . . . . 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales. . . . . . . . 82.1 82.0 81.6 80.9 83.1 83.7 -------- -------- -------- -------- -------- -------- Gross profit . . . . . . . . 17.9 18.0 18.4 19.1 16.9 16.3 Selling, general and administrative. . . . . . 14.4 14.5 13.7 16.2 13.9 13.1 -------- -------- -------- -------- -------- -------- Operating income . . . . . . 3.5 3.5 4.7 2.9 3.0 3.2 Other income (expense), net . . . . . . . . . . . 0.6 (0.7) (0.3) 0.3 (0.5) (0.3) -------- -------- -------- -------- -------- -------- Income before minority interest. . . . . . . . . 4.1% 2.7% 4.4% 3.2% 2.5% 3.0% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INFLATION The Company believes that the relatively moderate rate of inflation over the past few years has not had a significant impact on the Company's revenues or profitability. In the past, the Company has been able to maintain its profit margins during inflationary periods. NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," which the Company will adopt for its fiscal year ending December 31, 1996, will require "that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable." In the opinion of the Company's management, the adoption of SFAS 121 will not have a material effect on the Company's financial position or results of operations. In October 1995, the Financial Accounting Standards Board issued Statement No. 123 ("SFAS 123"), which establishes a fair value based method of accounting for stock-based compensation plans. The Company will continue to account for employee stock options under APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and therefore believes the statement will have no impact on the Company's financial statements other than expanded footnote disclosure. SFAS 123 will be effective for fiscal years beginning after December 15, 1995. 33 INDUSTRY Domestic and foreign automobile manufacturers distribute their vehicles through franchised dealerships. In 1995, franchised automobile dealers in the United States sold over $290 billion in new cars and light trucks and over $180 billion in used vehicles. New vehicle sales grew at an average rate of 12.5% from 1991 to 1995, while new vehicle unit sales, after growing at an average rate of 7.1% each year from 1991 through 1994, declined 2.0% in 1995. From 1991 through 1995 used vehicle units and revenues grew at average rates of 1.8% and 12.3% respectively. See "Risk Factors; Cyclical Nature of Automobile Sales; Concentration of Operations in Oregon." The following chart provides information about new and used vehicle unit and dollar sales of U.S. franchised dealerships for the years 1991 to 1995. Used vehicle sales reflect sales at retail and wholesale from franchised dealerships and do not include sales by independent used car and truck retailers. Sales by independent used vehicle retailers were $77.2, $81.0, $100.3, $134.1 and $129.7 billion, respectively from 1991 to 1995.
UNITED STATES FRANCHISED DEALERS' VEHICLES SALES 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- (Units in millions; dollars in billions) New vehicle unit sales . . . . . . . . . 12.3 12.9 13.9 15.1 14.8 New vehicle sales revenue. . . . . . . . $ 182.9 $ 191.7 $ 225.1 $ 261.8 $ 293.3 Used vehicle unit sales. . . . . . . . . 14.6 14.6 14.8 15.1 15.7 Used vehicle sales revenue . . . . . . . $ 114.1 $ 130.0 $ 146.0 $ 167.8 $ 181.7
Sources: NADA; CNW Market Research. - -------------------- Dealerships sell new and used vehicles and offer a range of other services and products, including repair and warranty work, replacement parts, extended warranty coverage, financing and credit insurance. In 1995, of the average dealership's revenue, new vehicles sales constituted 58.6%, used vehicles sales 29.0%, and sales of other products and services 12.4%, of total sales. Automotive dealership profitability varies widely and depends, in part, on the effective management of inventory, marketing, competition, quality control and customer responsiveness. Since 1991, retail automobile dealerships in the United States have earned on average between 12.9% and 14.1% gross profit margin and between 1.0% and 1.6% net profit margin, on sales. In recent years, manufacturers have offered attractive lease terms to reduce the monthly costs of owning a new automobile, especially on short-term vehicle leases. This has drawn consumers to such short-term leases, which has had the effect of bringing the consumer back to the new vehicle market sooner than if the purchase had been financed through longer-term debt financing. This also provides new car dealerships with a steady source of late-model, off-lease vehicles for their used car inventory and enables the parts and service departments within each dealership to provide repair service under factory warranty coverage for the term of the lease. Industry-wide, the percentage of new vehicle retail sales that are leasing transactions has increased from 13.5% in 1990 to 31.5% in 1995. Several economic and industry factors have led to a consolidation of the highly-fragmented vehicle dealership industry. Dealerships typically have been owned and operated by one individual who controlled a single franchise. After significant expansion in the number of franchised dealerships in the 1950's, competitive and economic pressures during the 1970s and 1980s, particularly the oil embargo of 1973 and the subsequent loss of market share experienced by U.S. auto manufacturers to imported vehicles, many dealerships were forced to close or sell to better-capitalized dealer groups. Continued competitive and economic pressure on dealers, combined with the easing of restrictions against multiple dealer ownership, has led to a further reduction in the number of franchised dealerships. According to industry data, the number of franchised dealerships has declined from 36,336 dealerships in 1960 to 22,288 in 1996. While the number of dealerships has decreased, there has been an increase in the formation of larger dealer groups. Despite this consolidation, however, the Company estimates that the largest 100 dealer groups generate less than 10% of total industry revenues and control approximately 5% of all franchised dealerships in the retail vehicle. 34 The Company believes that the franchised automobile dealership industry will continue to consolidate due to the increased capital required to operate dealerships, the fact that many dealerships are owned by individuals nearing retirement age and the desire of certain manufacturers to strengthen their brand identity by consolidating their franchised dealerships. For example, General Motors Corporation has announced its Network 2000 Channel Strategy (Project 2000) to close or consolidate 1,500 of its 8,400 franchised dealerships by the year 2000. The Company believes that an opportunity exists for dealership groups with significant equity capital and experience in identifying, acquiring and professionally managing dealerships to acquire additional franchises either for cash, stock, debt or a combination thereof. Publicly-owned dealership groups, such as the Company, are able to offer prospective sellers tax-advantaged transactions through the use of publicly-traded stock which may, in certain circumstances, make them more attractive acquirors to prospective sellers. BUSINESS GENERAL Lithia Motors is the largest retailer of new and used vehicles in Southwest Oregon, offering 14 domestic and imported makes of new automobiles and light trucks at five locations. As an integral part of its operations, the Company also arranges related financing and insurance and sells parts, service and ancillary products. The Company has grown primarily by successfully acquiring and integrating dealerships and by obtaining new dealer franchises. Most of the Company's operations are currently located in Medford, Oregon, where it has a market share of over 40%. The Company's strategy is to become a leading acquiror of dealerships in medium-sized markets in the western United States. The Company has recently entered into agreements to acquire additional dealerships in Eugene, Oregon, Salinas, California and Vacaville, California. The Company's two senior executives, Sidney B. DeBoer and M.L. Dick Heimann, have managed the Company's operations for over 25 years. During this time, they have developed and implemented an operating strategy that has enabled the Company to achieve profitability superior to industry averages. In 1995, the Company's gross profit margin (on a FIFO basis) was 18.0% and its pre-tax profit margin before minority interest (on a FIFO basis) was 3.3%, versus 12.9% and 1.4%, respectively, for the industry. OPERATING STRATEGY The Company's operating strategy consists of the following elements: PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad range of products and services including a wide selection of new and used cars and light trucks, vehicle financing and insurance and replacement parts and service. In Southwest Oregon, the Company's five locations offer, collectively, 14 makes of new vehicles including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda, Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki and Volkswagen. In addition, the Company sells a variety of used vehicles at a broad range of prices. By offering new and used vehicles and an array of complementary services at each of its locations, the Company seeks to increase customer traffic and meet specific customer needs. The Company believes that offering numerous new vehicle brands appeals to a variety of customers, minimizes dependence on any one manufacturer and reduces its exposure to supply problems and product cycles. FOCUS ON USED VEHICLE SALES. A key element of the Company's operating strategy is to focus on the sale of used vehicles. The Company's goal is to sell two used vehicles for every new vehicle sold. In 1995, the Company sold 5,144 used vehicles, a 1.83 to one ratio as compared to new vehicles sold. The Company strives to attract customers and enhance buyer satisfaction by offering multiple financing options, a 10-day/500-mile "no questions asked" exchange program and a 60-day/3,000-mile warranty on every used vehicle sold. The Company believes that a well-managed used vehicle operation at each location affords an opportunity to (i) generate additional customer traffic from a wide variety of prospective buyers, (ii) increase new and used vehicle sales by aggressively pursuing customer trade-ins, (iii) generate incremental revenues from customers financially unable or unwilling to purchase a new vehicle, and (iv) improve total vehicle profit margins and ancillary product sales. To maintain a broad selection of high quality used vehicles and to meet local demand preferences, the Company acquires used vehicles from trade-ins and a variety of sources nationwide, including direct purchases and manufacturers' and independent auctions. 35 EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company generates substantial incremental revenue and achieves higher profitability through the sale of certain ancillary products and services such as F&I, extended service contracts and vehicle maintenance. Employees receive special training and are compensated on a commission basis to sell such products and services. The Company arranges competitive financing packages for vehicle purchases and ancillary products and services. In 1995, the Company arranged financing for 59% of its new vehicle sales and 69% of its used vehicle sales, as compared to 42% and 51%, respectively, for the average automobile dealership in the United States. The Company also sells extended service coverage and other vehicle protection packages which the Company believes enhance the value of the vehicle and provide a higher level of customer satisfaction. EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional management practices in all aspects of its operations, including information technology, employee training, profit-based compensation and a cash management system. Each dealership is a profit center and is managed by a trained and experienced general manager who has primary responsibility for decisions relating to inventory, advertising, pricing and personnel. Compensation of the general manager is based on dealership profitability and the compensation of department managers is similarly based upon departmental profitability. Senior management utilizes computer-based management information systems to monitor each dealership's sales, profitability and inventory on a daily basis. The Company believes the application of its professional management practices provides it a competitive advantage over many dealerships and is critical to its ability to achieve levels of profitability superior to industry average. FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer satisfaction throughout its organization and continually seeks to maintain a reputation for quality and fairness. The Company trains its sales people to work to identify an appropriate vehicle for each of its customers at an affordable price. The Company also recently implemented an innovative marketing program entitled "Priority You." "Priority You" provides the Company's retail customers six value-added services which the Company believes are important to overall customer satisfaction, including a commitment to (i) provide a customer credit check within 10 minutes, (ii) complete a used vehicle appraisal within 30 minutes, (iii) complete the paper work on a new vehicle purchase within 90 minutes, (iv) provide a 10-day/500-mile "no questions asked" right of exchange on any used vehicle, (v) provide a warranty on all used vehicles for 60 days/3,000 miles and (vi) make a $20 per vehicle donation to a local charity or educational organization. The Company believes "Priority You" will help differentiate it from many other dealerships thereby increasing customer traffic and developing stronger customer loyalty. GROWTH STRATEGY The Company's goal is to become a leading acquiror of automobile dealerships in the western United States. As part of its acquisition strategy, the Company intends to focus its efforts on acquiring dealerships or dealer groups that, among other criteria, possess either the sole franchise or a significant share of new vehicle sales in a targeted market. Additionally, the Company's evaluation of potential acquisitions takes into account a dealership's local reputation with its customers, the type and make of vehicles sold by the dealer and the possibility for the Company to acquire additional franchises within the market to achieve a larger market share. The Company believes that the majority of dealerships that fit its acquisition criteria will be located in medium-sized markets within the nine western states. If the Company were able to acquire a larger dealer group to significantly expand revenues and earnings in a single transaction, it would carefully consider the acquisition even if not all of the stores in the group were in medium-sized markets or dominated sales of a particular manufacturer. Upon completing an acquisition, the Company immediately implements its operating strategy, including increasing finance and insurance revenues, selling more used vehicles and enhancing employee training. The Company also installs its management information system in the acquired dealership as soon as possible after the acquisition, which allows the Company's executive officers, as well as the general manager, to carefully monitor each aspect of the dealership's operations and performance. Whenever possible, the Company assumes the management of a dealership's operations prior to closing of an acquisition, enabling the Company to accelerate the implementation of its operating strategy. To date, a significant percentage of the Company's growth has resulted from acquisitions and the Company believes that acquisition opportunities will continue to be available to well-capitalized, experienced dealership organizations. The Company believes that its management team has considerable experience in acquiring dealerships and implementing its operating strategy to improve the performance and profitability of such dealerships following the acquisition. The Company is continuing its expansion in Oregon and has recently signed a purchase agreement to acquire the sole Dodge franchise in Eugene, Oregon. The Company has also begun expansion into selected markets in California with the signing of a purchase agreement to acquire the sole Honda franchise in Salinas, located near the Monterey Peninsula and the Toyota dealership in Vacaville. See "Risk Factors - - Dependence on Acquisitions for Growth; Manufacturer's Consent to Acquisitions" and "Pending Acquisitions." 36 DEALERSHIP OPERATIONS The Company owns and operates five dealership locations in southwest Oregon, four in Medford and one in Grants Pass, Oregon. Each of the Company's stores sell new and used vehicles and related automotive parts and services. The Company's primary target market is comprised of middle-income customers seeking moderately-priced vehicles. The Company offers 14 makes of new vehicles, including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda, Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki and Volkswagen. The operations of each of the Company's locations are overseen by a general manager, who has primary responsibility for all aspects of the operations of the dealership, including new and used vehicle inventory, advertising and marketing, and the selection of personnel. Each location is operated as a profit center and the general manager's compensation is based on dealership profitability. Each general manager reports directly to the Company's Chief Operating Officer. In addition, each dealership's general sales manager, used vehicle manager, parts manager, service manager and F&I managers report directly to the general manager and are compensated in large part on profitability. NEW VEHICLE SALES. The Company sells 14 domestic and imported brands ranging from economy to luxury cars, as well as sport utility vehicles, minivans and light trucks. In 1995, the Company sold 2,715 new vehicles with total sales of $53.3 million, which constituted 46% of the Company's total revenues. The following table sets forth, by manufacturer, the percentage of new vehicles sold (net of "book only" fleet sales) by the Company during 1995. 1995 Percentage of Manufacturer New Vehicle Sales ------------ ------------------ Chrysler (Chrysler, Plymouth, Dodge, Jeep/Eagle) . . 43.6% Toyota . . . . . . . . . . . . . . . . . . . . . . . 23.3 Honda. . . . . . . . . . . . . . . . . . . . . . . . 11.2 Saturn . . . . . . . . . . . . . . . . . . . . . . . 9.0 Ford (Lincoln/Mercury) . . . . . . . . . . . . . . . 5.3 Mazda. . . . . . . . . . . . . . . . . . . . . . . . 2.7 General Motors (Pontiac) . . . . . . . . . . . . . . 2.1 Isuzu. . . . . . . . . . . . . . . . . . . . . . . . 2.0 Suzuki . . . . . . . . . . . . . . . . . . . . . . . 0.9 Volkswagen . . . . . . . . . . . . . . . . . . . . . 0.0 * --- 100.0% - -------------------- * Franchise acquired in 1996. The following table sets forth the sales and gross profit margins (on a FIFO basis) for new vehicle sales for the periods presented.
COMPANY'S NEW VEHICLE SALES First six months 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- --------- (Dollars in thousands) Unit sales . . . . . . . 1,890 2,106 2,464 2,744 2,715 1,594 Sales revenue. . . . . . $28,946 $34,479 $42,663 $51,154 $53,277 $31,482 Gross profit margin* . . 9.6% 12.2% 12.8% 12.5% 12.8% 13.2%
- -------------------- * On a FIFO basis The Company purchases substantially all of its new car inventory directly from manufacturers who allocate new vehicles to dealerships based on the amount of vehicles sold by the dealership and by the dealership's market area. The Company will also exchange vehicles with other dealers to accommodate customer demand and to balance inventory. 37 As required by law, the Company posts the manufacturer's suggested retail price on every new vehicle. As is customary in the automobile industry, the final sales price of a new vehicle is generally negotiated with the customer. However, at the Company's Saturn dealership the Company does not deviate from the posted price. The Company is continually evaluating its pricing practices and policies in light of changing consumer preferences and competitive factors. The Company also sells vehicles for delivery directly from the factory to a fleet purchaser ("book only" fleet sales). The Company realizes substantially less profit per vehicle than it does through retail sales. Only the net revenue on "book only" fleet sales is included in the Company's revenue. USED VEHICLE SALES. The Company offers a variety of makes and models of used cars and light trucks, of varying model years and prices. Used vehicle sales are an important part of the Company's overall profitability. In 1995, the Company sold 5,144 used vehicles with total sales of $44.0 million which constituted 39% of the Company's total revenue. The Company has made a strategic commitment to emphasize used vehicle sales by the retention of a full- time used vehicle manager at each of its locations and the allocation of additional financing and display space to this effort. The Company also believes there is substantial consumer demand for quality used vehicles, given the escalating prices of new vehicles. The Company sells used vehicles to retail customers and, in the case of vehicles in poor condition or vehicles which have not sold within a reasonable period of time, to other dealers and to wholesalers. As the table below reflects, sales to other dealers and to wholesalers are frequently at or close to cost and therefore affect the Company's overall gross profit margin on used vehicle sales. Excluding wholesale transactions, the Company's gross profit margin (on a FIFO basis) on used vehicle sales was 13.2% in 1995, as compared to the industry average for 1995 of 11.5%. The following table reflects used vehicle sale transactions of the Company from 1991 through June 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
COMPANY'S USED VEHICLE SALES First six months 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- --------- (Dollars in thousands) Retail unit sales. . . . . 2,375 2,640 3,076 3,372 3,302 1,839 Retail sales revenue . . . $18,762 $24,228 $29,680 $36,389 $36,997 $21,566 Retail gross margin* . . . 14.9% 16.2% 13.9% 13.5% 13.2% 12.6% Wholesale unit sales . . . 1,028 1,294 1,642 1,834 1,842 1,363 Wholesale sales revenue. . $4,607 $5,702 $5,306 $5,999 $7,064 $6,829 Wholesale gross margin . . 1.9% 3.7% 3.0% 3.0% 2.4% 1.4% Total unit sales . . . . . 3,403 3,934 4,718 5,206 5,144 3,202 Total sales revenue. . . . $23,369 $29,930 $34,986 $42,381 $44,061 $28,395 Total gross margin . . . . 12.3% 13.8% 12.3% 12.0% 11.4% 10.0%
- -------------------- *On a FIFO basis. The Company acquires the majority of its used vehicles through customer trade-ins. The Company also acquires its used vehicles at "closed" auctions which may be attended only by new car dealers and which offer off-lease, rental and fleet vehicles, and at "open" auctions which offer repossessed vehicles and vehicles being sold by other dealers. The Company sells the majority of its used cars to retail purchasers. In an effort to reach the Company's objective of two used vehicle sales for every new vehicle sale, the Company employs innovative marketing programs, such as "Priority You," which offers a 60-day/3,000-mile warranty and a 10-day/500-mile "no questions asked" exchange program on every used vehicle it sells in order to generate customer confidence in his or her purchasing decision. Each dealership's used vehicle manager is responsible for the purchasing and pricing his used vehicle inventory. The Company strives to sell each of its used vehicles within 60-days of acquisition and financially motivates its used vehicle managers to effect such sales within that period. 38 VEHICLE FINANCING AND LEASING. The Company believes that its customers' ability to obtain financing at its dealerships is critical to its ability to sell new and used vehicles and ancillary products and services. The Company provides a variety of financing and leasing alternatives in order to meet the specific needs of each potential customer. The Company believes its ability to obtain customer-tailored financing on a "same day" basis provides it with an advantage over many of its competitors, particularly smaller competitors who lack the resources to offer vehicle financing or who do not generate sufficient volume to attract the diversity of financing sources that are available to the Company. The Company's F&I managers have extensive knowledge regarding available financing alternatives and sources and are specially trained to determine the customer's financing needs to enable the customer to purchase or lease an automobile. The Company seeks to finance or arrange financing for every used vehicle it sells and has financed a larger percentage of its transactions than the industry average. During 1995, the Company financed or arranged for financing for over 59% of its new vehicle sales and 69% of its used vehicle sales, compared to an industry average of 42% and 51%, respectively. The Company maintains close relationships with a wide variety of financing sources and arranges financing for its customers with those sources that are best suited to satisfy its customers' particular needs. The Company also utilizes financing sources, wherever possible, that maximize the Company's revenues on the sale of the loan to such source. The interest rates available and the required down payment, if any, depend to a large extent, upon the bank or other institution providing the financing and the credit history of the particular customer. Currently, the Company has relationships with 22 banks and other financial institutions who are in a position to arrange financing for automobile purchases or leases by the Company's customers. The Company's managers have close working relationships with the third-party financing sources which enables them to quickly determine a customer's credit position and confirm the type and level of financing that the third party can commit to provide. This process generally occurs within a matter of minutes while the customer is still in the store, allowing the sales manager to assist the customer in making a fully-informed decision regarding the terms of the sale. In most cases, the Company arranges financing for its customers from third party sources, which relieves the Company from any credit risk. However, in certain circumstances where the Company believes the credit risk is manageable and the risk-weighted income is expected to exceed the earnings available upon the immediate sale of the finance contract, the Company will directly finance or lease the automobile to such customer. In these cases, the Company bears the risk of default by the borrower or lessee. Historically, the Company has provided direct financing for less than 1.0% of its new and used vehicle sales and has incurred insignificant losses related to such activities. The Company intends to continue providing financing to certain of its customers and may gradually expand its direct financing operations in circumstances where it believes attractive returns can be achieved or other operational benefits can be obtained. ANCILLARY SERVICES AND PRODUCTS. The Company employs two to three F&I managers at each dealership to market a number of ancillary products and services to every purchaser of a new or used vehicle. Typically, these products and services yield high profit margins and contribute significantly to improving the overall profitability of the Company. The Company offers extended service contracts which provide that, for a predetermined and prepaid price, all designated repairs covered by the plan during its term will be made by the Company at no additional charge above the deductible. While all new vehicles are sold with the automobile manufacturer's standard warranty, service plans provide additional coverage beyond the time frame or scope of the manufacturer's warranty. Purchasers of used vehicles are offered a similar extended service contract, even if the selected vehicle is no longer under the manufacturer's warranty. Substantially all of these contracts sold are written by the Company. The Company manages the service and warranty obligations that it sells and provides the parts and service (or pays the cost of others who may provide such parts and services) for claims made under the contract. Most required services under the contracts are provided by the Company thereby increasing the Company's sales of parts and service. The Company's net service contract income has increased from $575,000 in 1993 to $764,000 in 1995. Claims and cancellations have been less than 16% of recognized service contract income in each of these years. The Company offers its customers credit life, health and accident insurance when they finance an automobile purchase. The Company receives a commission on each policy sold. The Company also offers other ancillary products such as protective coatings and automobile alarms. 39 The Company also owns and operates two automobile rental facilities, Avis Rent-A-Car, and Discount Auto & Truck Rental, Inc. located in Medford, Oregon. PARTS AND SERVICE, PAINT AND BODY SHOP. The Company considers its parts and service operations to be an integral part of its customer service program and an important element of establishing customer loyalty. The Company provides parts and service primarily for the new vehicle brands sold by the Company's stores but may also service other vehicles. In 1995, the Company's parts and service operations generated $11.0 million in revenues, or 10% of total revenues, at a gross profit margin of 45% (on a FIFO basis). The Company attributes its profitability in parts and service to its comprehensive management system, including the use of a variable pricing structure designed to reflect the difficulty and sophistication of different types of repairs. The mark-ups on parts is based upon the cost and availability of a particular part. The service and parts business is relatively stable and provides an important recurring revenue stream to the Company's dealerships. The Company also notifies owners of vehicles purchased at its dealerships when their vehicles are due for periodic service, thereby encouraging preventive maintenance rather than post-breakdown repairs. To a limited extent, revenues from this department are countercyclical to new car sales as owners repair existing vehicles rather than buy new vehicles. The Company believes this helps mitigate the affects of a downturn in the new vehicle sales cycle. The Company has in excess of 80 service bays throughout its network of dealerships. All service facilities are equipped with technologically advanced tools and diagnostic equipment and are staffed by factory-trained and certified service technicians. The Company's dealerships feature various combinations of fully-equipped service facilities capable of handling almost any type of vehicle repair, from rebuilding engines and transmissions to routine maintenance functions including oil changes, front-end alignments and inspections. All dealerships offer lounges where service customers may relax or conduct business while waiting for service to be performed. The Company has operated a full-service paint and body shop since 1970. The body shop services all of the Company's dealerships located in southwest Oregon, other dealerships in the area that do not have a captive body shop, and a number of major automotive casualty insurance companies that contract with the Company to perform insurance repairs. A new 39,480 square-foot body and paint facility is being constructed in Medford, Oregon, to handle the increased demand for the Company's body and paint services. The new facility, to be completed in Spring 1997, will have four paint booths as well as the latest technology, tools and equipment. The facility will be leased to the Company pursuant to a long- term lease from Lithia Properties. See "Properties" and "Certain Relationships and Related Transactions." SALES AND MARKETING The Company emphasizes customer satisfaction throughout its organization and continually seeks to maintain a reputation for quality and fairness. The Company's sales force works closely with each customer to identify an appropriate vehicle at a price affordable to that customer. The Company believes that its "counseling" approach during the sales process increases the likelihood that a customer will be satisfied with the vehicle purchased over a longer time period and enables the Company to sell more vehicles at higher gross profit margins. The Company recently implemented a marketing program entitled "Priority You," which provides the Company's retail customers six value-added services which the Company believes are important to the overall satisfaction of the customer, including a commitment to (i) provide a customer credit check within 10 minutes, (ii) complete a used vehicle appraisal within 30 minutes, (iii) complete the paper work on a new vehicle purchase within 90 minutes, (iv) provide a 10-day/500-mile "no questions asked" right of exchange on any used vehicle, (v) provide a 60-day/3,000-mile warranty on all used vehicles, and (vi) make a $20 per vehicle donation to a local charity or educational organization. The Company believes "Priority You" will help differentiate it from traditional dealerships and, thereby, increase customer traffic and develop customer loyalty. Advertising and marketing play a significant role in the success of the Company. The competitive environment of the automobile dealership industry requires that a substantial portion of each sales dollar be allocated to advertising. However, as is the case with most new automobile dealerships, approximately 75% of the Company's advertising and marketing expenses are paid for by the automobile manufacturers. The manufacturers also provide the Company with the benefit of market research, which assists the Company in developing its own advertising and marketing campaigns. The Company believes that it receives significant benefit from manufacturers' 40 advertising, particularly in the medium-sized markets in which the Company's stores are the only franchise representing the manufacturer. The Company's marketing efforts generally focus on a wide range of potential buyers. The Company offers a variety of new and used cars and light trucks with at various prices and financing terms. The Company utilizes most forms of media in its advertising, including television, newspaper, radio and direct mail, including periodic mailers to previous customers. The Company primarily uses advertising that focuses on developing its image as a reputable dealer, offering quality service, affordable automobiles and financing for all potential buyers. In addition, the Company's individual dealerships periodically sponsor price discounts or other promotions designed to attract additional customers. Each dealership has substantial control over the content and timing of its promotions, although all advertising is coordinated by the Company. As the Company owns several dealerships, it realizes cost savings on its advertising expenses in the Medford, Oregon, market from volume discounts and other media concessions. The Company also benefits from a substantial amount of advertising through cooperatives or associations, such as the Southern Oregon Toyota Dealers Association. The Company participates as a member of these cooperatives or associations whose members, among other things, pool their resources and expertise together with that of the manufacturer to develop advertising aimed at benefitting all of their members. MANAGEMENT INFORMATION SYSTEM The Company's financial information, operational and accounting data and other related statistical information are consolidated, processed and maintained at its headquarters in Medford, Oregon, on a network of server computers and work stations. The flexible nature of the Company's installed network allows for accumulation, processing and distribution of information using ADP, Inc. computing programs. ADP, Inc. is a national software provider for many companies including automotive dealers. All sales and expense information, and other data related to the operations of each dealership or other Company facility, are entered at each location. This system allows senior management to access detailed information on a "real time" basis from all of the Company's dealerships and other stores regarding, for example, the makes and models of automobiles in its inventory, the mix of new and used automobile sales, the number of automobiles being sold or leased, the percentage of vehicles for which the Company arranged financing or sold ancillary products and services, the profit margins being obtained on sales, and the relative performances of the Company's dealerships to each other. Such information is also available to each dealership's general manager. Reports can be generated that set forth and compare revenue and expense data by department and by store, allowing management to quickly analyze the results of operations, identify trends in the business, and focus on areas that require attention or improvement. The Company believes that its management information system also allows its general managers to quickly respond to changes in consumer preferences and purchasing patterns, thereby maximizing inventory turnover. The Company believes that its management information system is a key factor in successfully incorporating newly acquired businesses into the Company. Following each acquisition, the Company installs its system at the dealership location, thereby quickly making the financial, accounting and other operational data easily accessible to senior management at the Company's corporate offices. With access to such data, senior management can efficiently incorporate the Company's operating strategy at the newly acquired dealership. CASH MANAGEMENT The Company employs cash management systems designed to maximize returns and minimize interest expense. The Company's new vehicle flooring line is supplied by the Company's bank, rather than by automobile manufacturers, unlike many dealerships that do not have the financial condition or results of operations that would permit them to obtain bank financing on terms more favorable than those offered by manufacturers. As a result, the Company's interest rate for flooring financing is 25 to 50 basis points below the rates currently available to it from most manufacturers. In addition, in order to minimize the outstanding balance under the Company's Flooring Line, all available excess cash in the Company's various checking accounts are automatically transferred at the end of each weekday to a central collateral account U.S. Bank. These funds are used to pay down the balance under the Flooring Line, thereby reducing the balance on which the Company is required to pay interest and decreasing the Company's overall interest expense below what it otherwise would be. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 41 RELATIONSHIPS WITH AUTOMOBILE MANUFACTURERS The Company has, either directly or through its subsidiaries, entered into franchise or dealer sales and service agreements with each manufacturer of the new vehicles it sells. The Company currently has agreements with Chrysler Corporation (Chrysler, Plymouth, Dodge, Jeep/Eagle), American Honda Motor Co. Inc. (Honda), American Isuzu Motors, Inc. (Isuzu), Ford Motor Company (Lincoln, Mercury), General Motors Corporation (Pontiac), Mazda Motor of America, Inc. (Mazda), Saturn Corporation (Saturn), Toyota Motor Distributors, Inc. (Toyota), American Suzuki Motor Corporation (Suzuki) and Volkswagen of America (Volkswagen). The typical automotive franchise agreement specifies the locations at which the dealer has the right and the obligation to sell vehicles and related parts and products and to perform certain approved services in order to serve a specified market area. The designation of such areas and the allocation of new vehicles among dealerships are subject to the discretion of the manufacturer, which generally does not guarantee exclusivity within a specified territory. A franchise agreement may impose requirements on the dealer concerning such matters as the showroom, the facilities and equipment for servicing vehicles, the maintenance of inventories of vehicles and parts, the maintenance of minimum net working capital, the training of personnel and the adherence to certain performance standards established by the manufacturer regarding sales volume and customer satisfaction. Compliance with these requirements is closely monitored by each manufacturer. In addition, manufacturers require each dealership to submit monthly and annual financial statements of operations. The franchise agreements also grant the dealer the non-exclusive right to use and display manufacturers' trademarks, service marks and designs in the form and manner approved by each manufacturer. Most franchise agreements expire after a specified period of time, ranging from one to five years; however, some franchise agreements, including those with Chrysler, have no termination date. The typical franchise agreement provides for early termination or non-renewal by the manufacturer under certain circumstances such as change of management or ownership without manufacturer consent, insolvency or bankruptcy of the dealership, death or incapacity of the dealer manager, conviction of a dealer manager or owner of certain crimes, misrepresentation of certain information by the dealership or dealer manager or owner to the manufacturer, failure to adequately operate the dealership, failure to maintain any license, permit or authorization required for the conduct of business, or material breach of other provisions of the franchise agreement including the dealership's poor sales performance or low CSI ratings. The dealer is typically entitled to terminate the franchise agreement at any time without cause. Each franchise agreement sets forth the name of the person approved by the manufacturer to exercise full managerial authority over the dealership's operations and the names and ownership percentages of the approved owners of the dealership, and contains provisions requiring the manufacturer's prior approval of changes in management or transfers of ownership of the dealership. Accordingly, any significant change in ownership, including the sale of shares by the Company to the public or the acquisition of a dealership from a third party, is subject to the consent of the respective manufacturer. Prior to the Offering, the Company will endeavor to obtain the approval of each relevant manufacturer to proceed with the Restructuring and to conduct the Offering. The Company must also request and receive approval from the relevant manufacturer prior to the closing of an acquisition or the establishment of an automobile dealership. See "Risk Factors -- Dependence on Automobile Manufacturers; -- Manufacturers' Consent to the Offering; -- Manufacturers' Consent to Acquisitions." COMPETITION The new and used automobile dealership business in which the Company operates is highly competitive. The automobile dealership industry is fragmented and characterized by a large number of independent operators, many of whom are individuals, families and small groups. In the sale of new vehicles, the Company principally competes with other new automobile dealers in the same general vicinity of the Company's dealership locations. Such competing dealerships may offer the same or different models and makes of vehicles that the Company sells. In the sale of used vehicles, the Company principally competes with other used automobile dealers and with new automobile dealers that operate used automobile lots in the same general vicinity of the Company's dealership locations. The Company believes that there are approximately 14 other new automobile dealerships and 66 other used automobile stores within a 50-mile radius of Medford, Oregon, near which all of the Company's dealerships are currently located. In addition, certain regional and national car rental companies operate retail used car lots to dispose of their used rental cars. 42 The Company also may face increased competition from certain automobile "superstores," such as CarMax, a division of Circuit City Stores Inc., United Auto Group, AutoNation USA and Driver's Mart Worldwide Inc. Such used automobile superstores have emerged recently in various areas of the United States and are beginning to expand nationally. However, the Company is not aware of any of such superstores currently located in any region where the Company operates dealerships. In addition, the Company competes to a lesser extent with an increasing number of automobile dealers that sell vehicles through nontraditional methods, such as through direct mail or via the Internet. Due to the size and number of the automobile dealerships that the Company owns, the Company is relatively larger than the independent operators with which it currently competes. However, as it enters other markets, the Company, may face competitors that are much larger and that have access to greater financial resources. Historically, the Company's size has permitted it to attract experienced and professional sales and service personnel and has provided the Company the resources to compete effectively. The Company, however, does not have any cost advantage in purchasing new vehicles from manufacturers and typically relies on advertising and merchandising, sales expertise, service reputation and location of its dealerships to sell new vehicles. REGULATION The Company's operations are subject to extensive regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations. Various state and regulatory agencies, such as OSHA, the EPA and the Oregon Department of Justice, have jurisdiction over the operation of the Company's dealerships, repair shops, body shops and other operations, with respect to matters such as consumer protection, workers' safety and laws regarding clean air and water. The relationship between a franchised automobile dealership and a manufacturer is governed by various federal and state laws established to protect dealerships from the generally unequal bargaining power between the parties. Federal laws, as well as Oregon and California state laws, prohibit a manufacturer from terminating or failing to renew a franchise without good cause. Under Oregon and California law, a manufacturer may not require a dealer to accept any vehicle, part or accessory not voluntarily ordered by the dealer, to refuse to deliver any new vehicle, part or accessory advertised by the manufacturer as available, or to require monetary participation in any sales promotion or advertising campaign. Manufacturers are also prohibited from preventing or attempting to prevent any reasonable changes in the capital structure or the manner in which a dealership is financed. Further, Oregon law prohibits a manufacturer from failing to give effect to, or attempting to prevent, the sale of the ownership or management, or an interest in the ownership or management, of a dealership. Under California law, a dealer, or any officer, partner or stockholder may sell or transfer any interest in the dealership business provided that the sale or transfer of such interest does not have the effect of a sale or transfer of the franchise, without the consent of the manufacturer. Manufacturers are, however, entitled to object to a sale or change of management where such an objection is related to material reasons relating to the character, financial ability or business experience of the proposed transferee. In both Oregon and California, a dealer is entitled to seek judicial relief to prevent a manufacturer from establishing a competing dealership of the same vehicle make within the dealer's relevant market area. Automobile dealers and manufacturers are also subject to various federal and state laws established to protect consumers, including so-called "Lemon Laws" which require a manufacturer or the dealer to replace a new vehicle or accept it for a full refund within one year after initial purchase if the vehicle does not conform to the manufacturer's express warranties and the dealer or manufacturer, after a reasonable number of attempts, is unable to correct or repair the defect. Federal laws require certain written disclosures to be provided on new vehicles, including mileage and pricing information. In addition, the financing and insurance activities of the Company are subject to certain statutes governing credit reporting, debt collection, and insurance industry regulation. The imported automobiles purchased by the Company are subject to United States customs duties and, in the ordinary course of its business, the Company may, from time to time, be subject to claims for duties, penalties, liquidated damages, or other charges. Currently, United States customs duties are generally assessed at 2.5% of the customs value of the automobiles imported, as classified pursuant to the Harmonized Tariff Schedule of the United States. As with automobile dealerships generally, and parts, service and body shop operations in particular, the Company's business involves the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, 43 transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. The Company has also been required to remove aboveground and underground storage tanks containing such substances or wastes. Accordingly, the Company is subject to regulation by federal, state and local authorities establishing health and environmental quality standards, and liability related thereto, and providing penalties for violations of those standards. The Company is also subject to laws, ordinances and regulations governing remediation of contamination at facilities it operates or to which it sends hazardous or toxic substances or wastes for treatment, recycling or disposal. The Company believes that it does not have any material environmental liabilities and that compliance with environmental laws, ordinances and regulations will not, individually or in the aggregate, have a material adverse effect on the Company's results of operations or financial condition. See "Risk Factors - Supervision and Regulation; Environmental Matters." EMPLOYEES As of June 30, 1996, the Company employed approximately 340 persons on a full-time equivalent basis. None of the Company's employees is represented by a labor union or bound by a collective bargaining agreement. However, the service department employees at Sam Linder, Inc., a dealership the Company is intending to purchase later this year, are bound by a collective bargaining agreement. See "Pending Acquisitions." The Company believes it has a good relationship with its employees. PROPERTIES Substantially all of the Company's facilities currently are leased from Lithia Properties LLC, an Oregon Limited Liability Company ("Lithia Properties"), with aggregate monthly lease payments totalling approximately $170,900. See "Certain Relationships and Related Transactions -- Lease of Real Estate from Lithia Properties." The Company's headquarters, which presently occupy approximately 4,700 square feet of space, are located in Medford, Oregon. The Company and its various dealerships and other facilities occupy an aggregate of approximately 21 acres of land, providing approximately 185,000 square feet of building space. Such properties consist primarily of automobile showrooms, display lots, service facilities, two body and paint shops, rental agencies, supply facilities, automobile storage lots, parking lots and offices. The Company believes its facilities are currently adequate for its needs and are in good maintenance and repair. The following table sets forth each of the Company's facilities, all of which are leased from Lithia Properties and the approximate square footage at each facility, the acreage of each location and the annual rental rate for the current and previous three years together with the rate to be effective January 1, 1997. Company in 1997, the Company will be responsible for all taxes, insurance and maintenance with respect to the facilities. Previously, Lithia Properties had been responsible for these payments. All facilities are located in Medford, Oregon except for the Grants Pass Auto Center, located in Grants Pass, Oregon. Minor parcels of land and the Avis Rent-A-Car facility are leased from third parties. 44 TOTAL TOTAL BUILDING LAND- DEALERSHIP/FACILITY SQUARE FT. ACRES ------------------- ---------- ----- Lithia Motors, Inc. 5,255 0.42 Lithia Honda Pontiac Suzuki Isuzu Volkswagen 32,978 4.47 Lithia Toyota Lincoln Mercury 35,849 3.75 Lithia Dodge Chrysler Plymouth Mazda Jeep/Eagle 47,446 4.25 Saturn of Southwest Oregon 11,226 2.33 Grants Pass Auto Center(Dodge)(1) 27,978 3.69 Lithia Body & Paint(2) 20,500 0.95 Lithia Body & Paint(3) 41,729 5.01 Thrift Auto Supply 11,230 0.46 Discount Auto & Truck Rental 2,778 0.31 ------------------ (1) Acquired by Lithia Properties from the Company June 1, 1996. (2) A new facility is under construction. The current facility will be absorbed and utilized by the Lithia Dodge Chrysler Plymouth Mazda Jeep/Eagle dealership. (3) Under construction. To be occupied Spring 1997. The following table sets forth information regarding the facilities of the three proposed dealership acquisitions. See "Pending Acquisitions." The Company may assign any right and obligation to purchase these properties to Lithia Properties. If the properties are purchased by Lithia Properties, it is anticipated such facilities would be leased to the Company on terms similar to the Company's other new leases and at an initial monthly rental rate equal to 1% of the purchase price of such properties. TOTAL TOTAL BUILDING LAND- TO BE DEALERSHIP/FACILITY LOCATION SQUARE FT. ACRES PURCHASED/LEASED - ------------------- -------- ---------- ----- ---------------- Roberts Dodge Eugene, Oregon 24,996 3.68 Purchased Linder Honda Salinas, California 17,446 3.24 Lease/Purchase Melody Toyota Vacaville, California 22,900 4.18 Lease LITIGATION The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. The Company does not believe it is presently a party to litigation that will have a material adverse effect on its business or operations. 45 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of Lithia are as follows: Year Elected or Appointed Director/Executive NAME AGE POSITION Officer - ------------------ --- -------- ------------------ Sidney B. DeBoer 53 Chairman, President, Chief 1968 Executive Officer and Secretary M. L. Dick Heimann 53 Chief Operating Officer, 1970 Executive Vice President Brian R. Neill 42 Chief Financial Officer 1995 R. Bradford Gray 45 Vice President- Acquisitions 1995 SIDNEY B. DEBOER. Mr. DeBoer has served as the Chairman, President, Chief Executive Officer and Secretary of the Company since 1968. He also is a member of various automobile industry organizations, including the President's Club of the National Automobile Dealers Association, Oregon Auto Dealers Association, Medford New Car Dealers Association, Chrysler Dealer Council, Toyota Dealer Council and Honda Dealer Council. M. L. DICK HEIMANN. Mr. Heimann has served as the Executive Vice President and Chief Operating Officer of the Company since 1970. Prior to joining the Company, he served as a district manager of Chrysler Corporation from 1967 to 1970. He is a member of various automobile industry organizations including the Oregon Auto Dealers Association, the Jeep Dealer Council and the Medford New Car Dealers Association, for which he has previously served as president. Mr. Heimann is a graduate of University of Colorado with a Bachelor of Science in Biology and Languages. BRIAN R. NEILL. Mr. Neill has served as the Chief Financial Officer of the Company since September 1995. Prior to joining the Company at that time, he served as the Senior Vice President and Chief of Operations of Jackson County Federal Bank in Medford, Oregon from 1977 to 1991. Mr. Neill, a graduate of Northwest Christian College with a Bachelor of Science degree in Management, is graduating from the NADA Dealer Candidate Academy in November 1996. R. BRADFORD GRAY. Mr. Gray has served as the Vice President-Acquisitions of the Company since 1995. From 1981 to 1995, he has served in various capacities with the Company including, most recently, as General Manager of the Company's Grants Pass (1991-1995) and Lithia Dodge (1989-1991) dealerships. Since 1975, Mr. Gray has held various positions in the automobile sales industry, including sales representative, sales manager and general manager. The Company has committed to seek and elect at least two independent directors to serve on the Board of Directors no later than 90 days after the Offering. At this time no candidates have been asked to serve as directors. All directors hold office until the next annual meeting of shareholders or until their successors have been duly elected and qualified. Executive officers are appointed by, and serve at the discretion of, the Board of Directors (the "Board"). COMMITTEES OF THE BOARD The Board will establish a Compensation Committee and an Audit Committee, effective with the election of at least two independent directors. The Compensation Committee will review and approve salaries for the executive officers, any grants of stock options and other incentive compensation for employees of the Company. The Audit Committee will recommend the selection of auditors for the Company and will review the results of the audit and other reports and services provided by the Company's independent auditors. The Company intends to provide competitive compensation to its independent directors and reimburses all directors for their reasonable out-of-pocket expenses incurred in connection with their attendance at Board meetings. 46 OTHER KEY PERSONNEL All of the persons listed below have served the Company in these key positions for over five years. YEARS WITH CURRENT NAME AGE THE COMPANY POSITION - ------------------ --- ----------- -------- Stephen R. Philips 43 19 General Manager - Toyota/Lincoln Mercury Burt Frederickson 44 16 General Manager - Saturn Bryan DeBoer 30 7 General Manager - Honda/Pontiac/Suzuki/ Isuzu/Volkswagen Don Jones, Jr. 33 7 General Manager - Dodge/Chrysler/ Plymouth/Jeep/Eagle Dorothy Crockett 47 16 Comptroller Bill Daves 53 15 Vice President - Human Resources - Training and Development EXECUTIVE COMPENSATION SUMMARY COMPENSATION. The following table shows compensation paid to the Chief Executive Officer and each of the two other executive officers who had total compensation during 1995 exceeding $100,000. All of the persons listed below have served the Company in these key positions for over five years. SUMMARY COMPENSATION TABLE Annual Compensation (1) ------------------------- All Other Name and Position Year Salary Bonus (2) Compensation - ----------------- ---- --------- --------- ------------ Sidney B. DeBoer 1995 $ 331,125 $ 1,500 $ 2,310(3) M. L. Dick Heimann 1995 $ 277,125 $ 1,500 $ 2,310(3) R. Bradford Gray 1995 $ 189,060 $ 3,645 $ 5,981(4) (1) For calendar year 1996, the officers shown in the table receive the following annual salaries: Mr. DeBoer - $352,800; Mr. Heimann -$273,000; and Mr. Gray - $192,000. (2) Includes a "wellness bonus" of $1,500 for each of the named Executive Officers. All full-time employees are entitled to an annual "wellness bonus" equal to $150 per year for each year of employment (maximum of $1,500) for undergoing a physical and other health counseling. (3) Consists of amounts contributed by the Company to the accounts of Mr. DeBoer and Mr. Heimann pursuant to the Company's 401(k) and Profit Sharing Plan. (4) Includes $2,310 contributed by the Company to the account of Mr. Gray pursuant to the Company's 401(k) and Profit Sharing Plan, an automobile allowance of $3,625 and an insurance premium payment of $46. 1996 STOCK INCENTIVE PLAN In April, 1996, the Board and the Company's shareholders adopted the Company's 1996 Stock Incentive Plan (the "Plan"). The Plan provides for the granting of stock-based awards ("Awards") to executive officers (including those who are directors), to other employees and to non-employee consultants of the Company. Such Awards may take any form approved by the Board or by a committee designated by the Board, including stock options, stock bonuses, stock appreciation rights and restricted stock awards. Stock options granted under the Plan may be either options that qualify as "incentive stock options", within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended ("Incentive Options"), or those that do not qualify as such "incentive stock options" ("Non-qualified Options"). The Plan, which permits up to __________ shares of the Company's Class A Common Stock to be issued, terminates on April 4, 2006. As of the date hereof, stock options with respect to ___________ shares of Class A Common Stock were outstanding, constituting all of the Awards granted under the Plan to date. An additional _______________ shares were available for issuance under the Plan. As of the date of this prospectus, options with respect to ___________ shares are exercisable. 47 Shares of Class A Common Stock may be issued under the Plan for any lawful consideration. To date, the Company has only granted stock options pursuant to the Plan. The Plan is administered by the Board or by a Compensation Committee of the Board. Subject to the terms of the Plan, the Board or the Compensation Committee determines the persons to whom Awards are granted and the terms and the number of shares covered by each Award. The term of each option may not exceed ten years from the date the option is granted, or five years in the case of an option granted to a holder of more than 10% of the fully-diluted capital stock of the Company. Options may become exercisable in whole at grant or in installments over time, as determined by the Committee. With respect to the stock options granted by the Company to date, such options generally expire when the optionee ceases to be affiliated with the Company. Options may not be transferred other than by will or the laws of descent and distribution, and during the lifetime of an optionee may be exercised only by the optionee. Each of the outstanding stock options under the Plan provide that if the optionee is terminated without cause at any time when Sidney B. DeBoer is not the chairman, president or chief executive officer of the Company, then all options held by such optionee shall become fully vested and exercisable for a period of three months following the termination of employment. The Plan provides that any Award may contain, at the discretion of the Committee, a provision conditioning or accelerating the receipt of benefits pursuant to such Award upon the occurrence of specified events, including continued employment by the Company, a change in control, merger, dissolution or liquidation of the Company, or the sale of substantially all of the Company's assets. The acceleration of vesting of Awards in the event of a merger or other similar event may be seen as an anti-takeover provision and may have the effect of discouraging a proposal for merger, a takeover attempt or other efforts to gain control of the Company. Under the terms of the options issued to date, payment upon the exercise of an option may be in cash, by check or by delivery of shares of Class A Common Stock with a "fair market value," as defined in the Plan, equal to the aggregate exercise price. OPTION GRANTS. No option grants were made during 1995 to any of the executive officers of the Company. In April 1996, the following grants of options to acquire Class A Common Stock were made to executive officers: Name Number of Shares Exercise Price Expiration Date - ------------ ---------------- -------------- --------------- Sidney B. DeBoer April 4, 2001 M.L. Dick Heimann April 4, 2001 R. Bradford Gray April 4, 2006 Brian R. Neill April 4, 2006 The options granted to Messrs Gray and Neill have a term of 10 years and have exercise prices equal to the fair market value of the shares underlying those options on the date the option was granted, as determined by an independent valuation. The options granted to Messrs DeBoer and Heimann have a term of 5 years and have exercise prices at 110% of such fair market value as provided by the Plan. No other Awards have been made to executive officers under the Plan. OPTION EXERCISES. No options were outstanding during 1995 and no options have been exercised in 1996 by any optionee. PRINCIPAL STOCKHOLDERS The following table sets forth, as of June 30, 1996, and as adjusted to reflect the sale of shares of the Company's Common Stock in this Offering, certain information with respect to beneficial ownership of the Common Stock by (i) each person or entity known by the Company to own beneficially more than 5% of the Common Stock, (ii) each director of the Company, (iii) each executive officer of the Company named in the summary compensation table, and (iv) all directors and officers as a group. Except as indicated in footnotes to this table, each of the persons named in the table have sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by them, subject to community property laws where applicable. 48
Shares Beneficially Owned Shares Beneficially Owned Before the Offering(1) After the Offering(1) -------------------------------------------- -------------------------------------------------------- Class A Class B Class A Class B Percent of -------------------- ---------------------- -------------------------------------------- Voting Name and Address(2) Number Percent Number Percent Number Percent Number Percent Power - ------------------- ------ ------- ------ ------- ------ ------- ------ ------- ------- Lithia Holding Company, LLC (3) --- ---% ---% --- ---% 100% _____% Sidney B. DeBoer(3) (4) 100% 100% 1.7% 100% ---% M. L. Dick Heimann(3) (4) 100% --- ---% 1.7% --- ---% ---% Brian R. Neill (5) 100% --- ---% * --- ---% * R. Bradford Gray --- ---% --- ---% --- ---% --- ---% ---% All directors and officers as a group (4 persons) 100% 100% 4.1% 100% ---%
* Less than 0.1% (1) Assumes consummation of the Restructuring. See "Company Restructuring and Prior S Corporation Status." Also assumes no exercise of the Underwriters' over-allotment option. See "Underwriting". (2) All such person can be reached c/o 360 E. Jackson Street, Medford, Oregon 97501. (3) Lithia Holding's members consists of Messrs DeBoer, Heimann and Gray. Mr. DeBoer, as the manager of Lithia Holding and pursuant to the terms of its operating agreement, has the sole voting and investment power with respect to all of the Class B Common Stock held. (4) Each of Messrs DeBoer and Heimann hold an option to purchase shares of Class A Common Stock at a exercise price of $ per share, of which are exercisable within 60 days of this Prospectus. See "Executive Compensation" and "1996 Stock Incentive Plan". (5) Mr. Neill holds an option to acquire shares of Class A Common Stock at $ per share, all of which are exercisable within 60 days of the date of this Prospectus. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS COMPANY RESTRUCTURING AND INDEBTEDNESS TO EXECUTIVE OFFICERS The Company is currently owned by Sidney B. DeBoer (62.5%) and M. L. Dick Heimann (37.5%). Mr. DeBoer and Mr. Heimann also own, with the same ownership percentages, Lithia Rentals, Lithia Leasing, Lithia Chrysler Plymouth Jeep Eagle, Inc., Discount Auto & Truck Rental, Inc. and Lithia TKV, Inc. Further, Sidney B. DeBoer and Stephen R. Phillips have 0.01% and 19.99% interests, respectively, in Lithia Toyota LLC, which is otherwise owned by the Company. Similarly, Sidney B. DeBoer and R. Bradford Gray have 0.01% and 24.99% interests, respectively, in Lithia's Grants Pass Auto Center, L.L.C. and Lithia Dodge, L.L.C. Contemporaneously with the Offering, and pursuant to an Agreement of Reorganization, the Company and the foregoing affiliated entities will consummate a restructuring which will result in each of the Company's dealerships and operating divisions becoming direct or indirect wholly-owned subsidiaries of the Company. The Company will continue to be controlled by Sidney B. DeBoer and M. L. Dick Heimann through their ownership of Lithia Holding. See "Company Restructuring and Prior S Corporation Status," "Principal Shareholders" and "Description of Capital Stock." The Company and its affiliated corporations and limited liability companies, which together directly or indirectly own and control the Company's dealerships, are currently treated for federal and state income tax purposes as subchapter S Corporations or partnerships under the Internal Revenue Code of 1986, as amended. Accordingly, Sidney B. DeBoer, M. L. Dick Heimann, R. Bradford Gray and Stephen R. Philips, the principal owners of the Company and the affiliated entities, have been taxed directly on the earnings of those entities. In December 1995, the Company and the affiliated entities distributed to these individuals the Dividend Notes in the aggregate amount of $3.9 million, representing approximately all of the previously taxed undistributed earnings of those entities. See "Company Restructuring and Prior S Corporation Status." The Dividend Notes bear interest at 9% per annum, payable in ten equal annual installments beginning one year and ten days after demand by the noteholders. Prior to completion of the Offering, the Company and the affiliated entities intend to distribute additional amounts to these individuals in an aggregate amount equal to the undistributed taxable income of the Company and the affiliated entities from January 1, 1996, through the effective date of the Restructuring. Any final distribution of earnings will be paid at or shortly after the closing of the Offering. Upon consummation of the Restructuring, the Company will assume the obligations of the affiliated entities under the Dividend Notes. It is anticipated that the Company will prepay the Dividend Notes at the time of the purchase of Melody Vacaville, Inc. and will purchase Messrs. DeBoer's and Heimann's stock of Lithia TKV, Inc. at their costs and make distributions of the remaining undistributed earnings at or shortly following the closing of the Offering using a portion of the proceeds of the Offering. See "Use of Proceeds." The total amount to be paid to these individuals, including the purchase of Lithia TKV, Inc., is expected to be approximately $6.0 million, with the actual amount being dependent on the actual earnings of the 49 Company and the affiliated entities through the date of Restructuring. Dividends of $2.0 million were paid to those individuals in 1994 with respect to prior Company and affiliated entity income. LEASE OF REAL ESTATE FROM LITHIA PROPERTIES Substantially all of the real property on which the Company's businesses are located is owned by Lithia Properties, the members of which are the Company (20%), Sidney B. DeBoer (35%), M.L. Dick Heimann (30%) and three of Mr. DeBoer's children, who own 5% each. The Company and the affiliated entities paid an aggregate of $2.1 million, $2.1 million and $2.2 million in lease payments to Lithia Properties during the years ended December 31, 1993, 1994 and 1995, respectively. For the years ending December 31, 1996, lease payments will total $2.3 million of which $2.4 million represents the lease of the Company's facilities in Grants Pass which were acquired by Lithia Properties on June 1, 1996, from Lithia Dodge, LLC. The Company and Lithia Properties have recently entered into new lease agreements with respect to each facility, effective January 1, 1997. The new leases have terms of 30 years and have aggregate annual payments of $2.0 million. This amount includes approximately $304,000 for the lease of a body and paint facility currently under construction, and expected to be completed in 1997. Lease payments will commence on such facility upon completion of construction. Unlike in prior years, and commencing 1997, the Company will be responsible for property taxes, insurance and maintenance expenses. The initial payments are determined by a formula based on the fair market value of the properties according to recent independent appraisals, and approximate 1% of such fair market value per month. Lease payments are paid monthly and will be adjusted each year beginning January 1998 to an amount equal to any increase in the cost of living based on the "Consumer Price Index - Pacific Cities and U. S. Average" (1967-100) published by the bureau of Labor Statistics of the U. S. Department of Labor, for the City of Portland, Oregon. If any improvements are made to the properties at the Company's request or with its concurrence, then upon completion, the monthly lease payment shall be adjusted as follows: If the improvements are of such a nature as to cause an increase in the fair market value of the property, then the monthly lease payment shall be increased by 1.0% of the increase in fair market value. If the improvements do not materially increase the fair market value of the property, then the monthly lease payment shall be increased by the amount which would amortize the cost of the improvements over a 60-month period at 12% interest per annum. For a more complete description of the Company's facilities, see "Business." MANAGEMENT CONTRACT WITH LITHIA PROPERTIES The Company provides accounting, property management, and general administrative services to Lithia Properties in connection with the management of the facilities owned by Lithia Properties and leased to the Company or related entities. The Company receives a monthly fee of $36,000 for its services to Lithia Properties. In 1995, the Company received $288,000 under the contract. The current Management Contract terminates on December 31, 1996. GUARANTEE OF LITHIA PROPERTIES, INDEBTEDNESS The Company guaranteed certain indebtedness of Lithia Properties, incurred in connection with the purchase or refinancing of real property which secures the loan. The loans have a total principal amount of $13.1 million with interest rates from 8.25% to 10.0% and have terms of from 2 years to 12 years. 50 DESCRIPTION OF CAPITAL STOCK GENERAL The Company's authorized capital stock consists of 100,000,000 shares of Class A Common Stock, no par value, 25,000,000 shares of Class B Common Stock, no par value, and 15,000,000 shares of Preferred Stock, no par value. The Board of Directors may, by its own action, decrease the number of authorized shares of Class B Common Stock. If it does so, the number of shares of Class A Common Stock will automatically be increased on a share for share basis. COMMON STOCK Each share of Common Stock is designated as either Class A Common Stock or Class B Common Stock. As of the date hereof, there are no shares of Class A Common Stock outstanding and _______________ shares of Class B Common Stock outstanding. All of the outstanding Class B Common Stock is held by Lithia Holding. Upon completion of this Offering, there will be _____________ shares ( _____________ shares if the over-allotment options is exercised) of Class A Common Stock and _______________ shares of Class B Common Stock outstanding. The issued and outstanding shares of Class B Common Stock have been, and the shares of Class A Common Stock offered hereby will be, duly authorized, validly issued, fully paid and nonassessable. Without the prior approval of shareholder holding over a majority of all Class A Common Stock outstanding, no additional shares of Class B Common Stock can be issued, except in conjunction with stock splits, reverse stock splits, stock dividends, reclassification and similar transactions and events regarding the Class A Common Stock that would otherwise have the effect of changing conversion rights of the Class B Common Stock relative to the Class A Common Stock (the "Adjustments"). Holders of Common Stock do not have any preemptive rights or rights to subscribe for additional securities of the Company. Shares of Common Stock are not redeemable, and there are no sinking fund provisions. While the shares of Class A Common Stock are not convertible into any other series or class of the Company's securities, each share of Class B Common Stock is freely convertible into one share (subject to the Adjustments) of Class A Common Stock at the option of the holder of the Class B Common Stock. All shares of Class B Common Stock shall automatically convert to shares of Class A Common Stock (on a share-for-share basis, subject to the Adjustments) on the earliest record date for an annual meeting of the Company shareholders on which the number of shares of Class B Common Stock outstanding is less than 1% of the total number of shares of Common Stock outstanding. Shares of Class B Common Stock may not be transferred to third parties (except for transfers to certain family members and in other limited circumstances). Any purported transfer of Class B Common Stock to a person who is not a permitted transferee under the Articles of Incorporation is automatically void. Subject to the preferences applicable to any Preferred Stock outstanding at the time, holders of shares of Common Stock are entitled to dividends if, when and as declared by the Board of Directors from funds legally available therefor, and are entitled, in the event of liquidation, to share ratably in all assets remaining after payment of liabilities and Preferred Stock preferences, if any. Each share of Class A Common Stock and Class B Common Stock will be treated equally with respect to dividends and distributions. Holders of Class A Common Stock are entitled to one vote for each share held of record, and holders of Class B Common Stock are entitled to ten votes for each share held of record. The Class A Common Stock and Class B Common Stock vote together as a single class on all matters submitted to a vote of shareholders (including the election of directors), except that, the Oregon Business Corporation Act would entitled either the Class A Common Stock or the Class B Common Stock to vote as a separate voting group on any proposed amendment of the Company's Articles of Incorporation otherwise requiring shareholder approval if the proposed amendment would (i) increase or decrease the aggregate number of authorized shares of the class, (ii) effect an exchange or reclassification of all or part of the shares of the class into shares of another class or create a right to do so, (iii) change the shares of all or part of the class into a different number of shares of the same class, (iv) create a new class having rights or preferences with respect to distributions or dissolution that are prior to superior or substantially equal to shares of the class or (v) otherwise alter the rights, preferences or limitations of all or part of the shares of the class. In these circumstances, the class of Common Stock to be altered shall vote on the 51 amendment as a separate class. Shares of Common Stock do not have cumulative voting rights with respect to the election of directors. Immediately after this Offering, Lithia Holding will hold shares of Class B Common Stock constituting approximately ___% of the voting power of the outstanding Common Stock, which will allow it to control all actions to be taken by the shareholders, except as noted above, including the election of all directors to the Board of Directors. See "Principal Shareholders" and "Risk Factors--Control by Management." PREFERRED STOCK The Board of Directors may, without further action of the shareholders of the Company, issue shares of Preferred Stock in one or more series and fix the rights and preferences thereof, including the dividend rights, dividend rates, conversion rights, voting rights, rights and terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or the designations of such series, and increase or decrease the number of shares of any such series (but not below the number of such shares then outstanding). The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stock that may be issued in the future. Issuance of Preferred Stock provides desirable flexibility in connection with possible acquisitions and other corporate purposes. However, the Board of Directors, without further shareholder approval, can issue Preferred Stock with voting and conversion rights that would adversely affect the voting power and other rights of the holders of Common Stock. In addition, the Board of Directors can issue and sell shares of Preferred Stock to designated persons, the impact of which could make it more difficult for a holder of a substantial block of Common Stock to remove incumbent directors or otherwise gain control of the Company. The Company has no present plans to issue any shares of Preferred Stock. CERTAIN PROVISIONS OF THE OREGON BUSINESS CORPORATIONS ACT Upon completion of the Offering, the Company will become subject to the Oregon Control Share Act (Oregon Revised Statutes Sections 60.801-60.816). The Oregon Control Share Act generally provides that a person (the "Acquiring Person") who acquires voting stock of an Oregon corporation in a transaction which results in such Acquiring Person holding more than 20%, 33-1/3% or 50% of the total voting power of such corporation (a "Control Share Acquisition") cannot vote the shares it acquires in the Control Share Acquisition ("control shares") unless voting rights are accorded to such control shares by the holders of a majority of the outstanding voting shares, excluding the control shares held by the Acquiring Person and shares held by the Company's officers and inside directors ("interested shares"), and by the holders of a majority of the outstanding voting shares, including interested shares. This vote would be required at the time an Acquiring Person's holdings exceed 20% of the total voting power of a company, and again at the time the Acquiring Person's holdings exceed 33-1/3% and 50%, respectively. The term "Acquiring Person" is broadly defined to include persons acting as a group. A transaction in which voting power is acquired solely by receipt of an immediately revocable proxy does not constitute a "Control Share Acquisition." The Acquiring Person may, but is not required to, submit to the Company an "Acquiring Person Statement" setting forth certain information about the Acquiring Person and its plans with respect to the Company. The Acquiring Person Statement may also request that the Company call a special meeting of shareholders to determine whether the control shares will be allowed to retain voting rights. If the Acquiring Person does not request a special meeting of shareholders, the issue of voting rights of control shares will be considered at the next annual meeting or special meeting of shareholders that is held more than 60 days after the date of the Control Share Acquisition. If the Acquiring Person's control shares are accorded voting rights and represent a majority or more of all voting power, shareholders who do not vote in favor of the restoration of such voting rights will have the right to receive the appraised "fair value" of their shares, which may not be less than the highest price paid per share by the Acquiring Person for the control shares. Upon completion of the Offering, the Company will also become subject to the Oregon Business Combination Act (Oregon Revised Statutes Sections 60.825- 60.845). The Oregon Business Combination Act generally provides that in the event a person or entity acquires 15% or more of the voting stock of an Oregon corporation (an "Interested Shareholder"), the corporation and the Interested Shareholder, or any affiliated entity, may not engage in certain business combination transactions for a period of three years following the date the person became an Interested Shareholder. Business combination transactions for this purpose include (a) a merger or plan of share exchange, (b) any sale, lease, mortgage or other disposition of the assets of the corporation where the assets have an aggregate market value equal to 10% or more of the aggregate market value of the corporation's assets or outstanding capital stock, and (c) certain transactions that result in the issuance of capital stock of the corporation 52 to the Interested Shareholder. These restrictions do not apply if (i) the Interested Shareholder, as a result of the transaction in which such person became an Interested Shareholder, owns at least 85% of the outstanding voting stock of the corporation (disregarding shares owned by directors who are also officers and certain employee benefit plans), (ii) the Board of Directors approves the share acquisition or business combination before the Interested Shareholder acquired 15% or more of the corporation's voting stock, or (iii) the Board of Directors and the holders of at least two-thirds of the outstanding voting stock of the corporation (disregarding shares owned by the Interested Shareholder) approve the transaction after the Interested Shareholder acquires 15% or more of the corporation's voting stock. The Oregon Control Share Act and the Oregon Business Combination Act will have the effect of encouraging any potential acquiror to negotiate with the Company's Board of Directors and will also discourage certain potential acquirors unwilling to comply with the provisions of these laws. A corporation may provide in its articles of incorporation or bylaws that the laws described above do not apply to its shares. The Company has not adopted such a provision and does not currently intend to do so. These laws may make the Company less attractive for takeover, and thus shareholders may not benefit from a rise in the price of the Common Stock that a takeover could cause. LIMITATION OF LIABILITY AND INDEMNIFICATION As allowed by the Oregon Business Corporation Act, the Company's Articles of Incorporation provide that the liability of the directors of the Company for monetary damages will be eliminated to the fullest extent permissible under Oregon law. This is intended to eliminate the personal liability of a director for monetary damages in an action brought by or in the right of the Company for breach of a director's duties to the Company or its shareholders except for liability: (1) for any breach of the director's duty of loyalty to the Company or its shareholders, (2) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; and (3) for any unlawful distribution to shareholders; or (4) for any transaction from which the director derived an improper personal benefit. This provision does not limit or eliminate the rights of the Company or any shareholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of a director's duty of care. This provision also does not affect the director's responsibilities under any other laws, such as the federal or state securities or environmental laws. The Articles of Incorporation and the Bylaws also provide that the Company shall indemnify, to the fullest extent permitted under Oregon law, any person who has been made, or is threatened to be made, a party to an action, suit or legal proceeding by reason of the fact that the person is or was a director or officer of the Corporation. The Company has entered into separate indemnification agreements with each of its directors and executive officers. These agreements require the Company to indemnify its officers and directors to the fullest extent permitted by law, including circumstances in which indemnification would otherwise be discretionary. Among other things, the agreements require the Company to indemnify directors, officers and such employee against certain liabilities that may arise by reason of their status or service as a director, officer or employee and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. TRANSFER AGENT The transfer agent for the Common Stock is ___________________________. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding _______ shares of Class A Common Stock (and any of the __________________ shares sold which are subject to the over-allotment option) and ______________ shares of Class B Common Stock. Of these shares, the shares of Class A Common Stock sold in the Offering, except for any shares purchased by an "affiliate" of the Company, as that term is defined in the rules and regulations under the Securities Act of 1933, as amended (the "Securities Act"), will be freely tradable without restriction or further registration under the Securities Act. The remaining _____________ shares of Class B Common Stock outstanding were issued and sold by the Company pursuant to an exemption provided under the Securities Act and are restricted securities within the meaning of Rule 144 under the Securities Act (the "Restricted Shares"). The Restricted Shares may be resold only in an Offering registered under the Securities Act, pursuant to an exemption from such registration such as that provided by Rule 144 under the Act, or, in certain circumstances, in private transactions outside of any public trading market. 53 In general, under Rule 144 a person (or persons whose shares must be aggregated for purposes of the volume limitation under the rule), including any affiliate, who has beneficially owned Restricted Shares for at least two years would be entitled to sell, within any three-month period, a number of shares that does not exceed the greater of 1% of the outstanding shares of the Company's Common Stock (_____________ shares, assuming the issuance of ________ shares of Class A Common Stock in this Offering by the Company) or the reported average weekly trading volume in the over-the-counter market for the four weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information about the Company. It is not expected that such information concerning the Company will be available until at least 90 days after the closing date of the Offering. Future sales of such shares could have a material adverse effect on the market price of the Company's Common Stock. Persons who have not been affiliates of the Company for at least three months, and who have held their shares for more than three years, are entitled to sell such shares without any volume limitations, in reliance upon paragraph (k) of Rule 144. Upon completion of the Restructuring, Lithia Holding will be deemed to have held the ____________ shares of Class B Common Stock for more than three years, but is an affiliate of the Company. Affiliates of the Company are subject to the volume and other limitations with respect to all shares held by them, regardless of whether such shares are Restricted Shares. In addition, the Company has reserved _________________ shares of Class A Common Stock for issuance pursuant to the Plan. Of this amount, _______________ shares are subject to outstanding options, ________________ of which are exercisable as of the date of this Prospectus. The Company intends to file a registration statement under the Act to register shares to be issued pursuant to the Plan. Such registration statement is expected to be filed as soon as practicable after the closing date of the Offering and will become effective automatically upon filing. Shares issued upon exercise of outstanding stock options after the effective date of the Plan's registration statement generally will be eligible for resale in the open market, unless held by affiliates of the Company. Lithia Holding and each executive officer and director of the Company have agreed not to sell or otherwise dispose of shares of Common Stock for a period of 180 days following the closing date of the Offering without the consent of Furman Selz LLC, one of the Representatives of the Underwriters. See "Underwriting." After expiration of the lock-up period, all of such shares will be eligible for sale in the public market, subject to the provisions of Rule 144, described above. Prior to the Offering there has been no public trading market for the Common Stock of the Company and no accurate predictions can be made as to the effect, if any, that sales of Restricted Shares or shares issued under the Plan may have on the prevailing market price of the Class A Common Stock from time to time. See "Principal Shareholders" and "Management -- 1996 Stock Incentive Plan." Sales of significant numbers of Restricted Shares or shares issued under the Plan or the "overhang" resulting from the eligibility of such shares for sale into the public trading markets could adversely affect prevailing market prices and could impair the ability of the Company to raise additional capital in the future through an Offering of its equity securities at a price acceptable to the Company or use its equity securities as consideration in future acquisitions. UNDERWRITING The underwriters named below (the "Underwriters"), for which Furman Selz LLC, Dain Bosworth Incorporated and EVEREN Securities, Inc. are acting as representatives (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement, to purchase from the Company the number of shares of Class A Common Stock indicated below opposite their respective names: Number of Underwriter Shares ----------- --------- Furman Selz LLC ........................ Dain Bosworth Incorporated ............. EVEREN Securities, Inc. ................ _____________________ .................. _____________________ .................. _____________________ .................. _____________________ .................. --------- Total ............................. ----------- ----------- 54 The Underwriting Agreement provides that the obligations of the Underwriters to purchase the shares of Class A Common Stock listed above are subject to the approval of certain legal matters by counsel and various other conditions. The Underwriting Agreement also provides that the Underwriters are committed to purchase all of the shares of Class A Common Stock offered hereby, if any are purchased (except for any shares that may be purchased through exercise of the Underwriters' over-allotment option which may be exercised by the Underwriters in whole or in part). The Representatives have advised the Company that the Underwriters propose to offer the shares of Class A Common Stock to the public at the initial public offering price set forth on the cover of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share to certain other dealers. After the Offering, the public offering price and other selling terms may be changed by the Representatives. The Class A Common Stock is offered subject to receipt and acceptance by the Underwriters, and to certain other conditions, including the right to reject orders in whole or in part. Prior to this Offering, there has been no public market for the Class A Common Stock. Accordingly, the initial pubic offering price has been determined by negotiation between the Company and the Representatives. Among the factors considered in determining the initial public offering price were the Company's present and historical results of operations, current financial condition, estimates of the business potential and prospects of the Company, the condition of the Company's target market, the experience of the Company's management, the economics of the industry in general, the general condition of the equities market at the time of the Offering and other relevant factors. There can be no assurance that any active trading market will develop for the Class A Common Stock or as to the price at which the Class A Common Stock may trade in the public market from time to time subsequent to the Offering. The Company has granted the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to _____________ additional shares of Class A Common Stock at the initial public offering price set forth on the cover page of this Prospectus, less underwriting discounts and commissions. To the extent the Underwriters exercise the option, each Underwriter will have a firm commitment, subject to certain conditions, to purchase such number of additional shares of Class A Common Stock as is proportionate to such Underwriter's initial commitment to purchase shares from the Company. The Underwriters may exercise such option solely to cover over- llotments, if any, incurred in connection with the sale of shares of Class A Common Stock offered hereby. The Underwriting Agreement provides that the Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. All of the Company's executive officers and directors and Lithia Holding have agreed that, for a period of 180 days after the day on which the Registration Statement becomes effective by order of the Commission, they will not, without the prior written consent of Furman Selz LLC, directly or indirectly, offer for sale, sell, contract to sell, or grant any option to sell (including, without limitation, any short sale), pledge, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, transfer, assign or otherwise dispose of any shares of the Company's Class A Common Stock or securities exchangeable for or convertible into shares of the Company's Class A Common Stock, or any option, warrant or other right to acquire such shares, or publicly announce the intention to do any of the foregoing. The Representatives have advised the Company that the Underwriters do not intend to confirm sales of Class A Common Stock offered by this Prospectus made to any accounts over which they exercise discretionary authority. The Company has applied for quotation of the Class A Common Stock on the Nasdaq National Market under the symbol "LITH." The foregoing is a brief summary of the provisions of the Underwriting Agreement and does not purport to be a complete statement of its terms and conditions. A copy of the form of Underwriting Agreement has been filed as an exhibit to the Registration Statement. 55 LEGAL MATTERS The validity of the Company's Class A Common Stock being offered hereby will be passed upon for the Company by Foster Pepper & Shefelman. Certain legal matters will be passed upon for the Underwriters by Milbank, Tweed, Hadley & McCloy, Los Angeles, California. EXPERTS The combined financial statements and schedules of Lithia Motors, Inc. and affiliates as of December 31, 1994 and 1995, and for each of the years in the three-year period then ended, and the combined financial statements of Roberts Dodge, Inc. at December 31, 1995 and for each of the years in the two-year period then ended included herein and elsewhere in the Registration Statement have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent auditors appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The financial statements of Sam Linder, Inc., included in this Prospectus and in the Registration Statement, have been audited by Moss Adams LLP, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission"), a Registration Statement on Form S-1 under the Securities Act, with respect to the Class A Common Stock offered hereby. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and financial schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance that a reference is made to a contract or other document filed as an exhibit to the Registration Statement, each such statement is qualified in all respects by such reference. A copy of the Registration Statement may be examined without charge at the Commission's principal offices at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from the Public Reference Section of the Commission upon payment of certain fees prescribed by the Commission. Copies of such materials may also be obtained from the website that the Commission maintains at http://www.sec.gov. No Manufacturer (as defined in this Prospectus) has been involved, directly or indirectly, in the preparation of this Prospectus or in the Offering being made hereby. No Manufacturer has made any statements or representations in connection with the Offering or has provided any information or materials that were used in connection with the Offering, and no Manufacturer has any responsibility for the accuracy or completeness of this Prospectus. The Company intends to furnish to its shareholders annual reports containing consolidated financial statements audited by independent certified public accountants and quarterly reports containing unaudited consolidated financial information for the first three quarters of each year. 56 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE --------- HISTORICAL FINANCIAL STATEMENTS Lithia Motors, Inc. and Affiliated Companies Report of Independent Auditors'.......................................................................... F-1 Combined Balance Sheets.................................................................................. F-2 Combined Statements of Operations........................................................................ F-3 Combined Statements of Changes in Owners' Equity......................................................... F-4 Combined Statements of Cash Flows........................................................................ F-5 Notes to Combined Financial Statements................................................................... F-6 Roberts Dodge, Inc. and Affiliated Company Independent Auditors' Report............................................................................. F-23 Combined Balance Sheets.................................................................................. F-24 Combined Statements of Operations........................................................................ F-25 Combined Statements of Changes in Owners' Equity......................................................... F-26 Combined Statements of Cash Flows........................................................................ F-27 Notes to Combined Financial Statements................................................................... F-28 Sam Linder, Inc. Independent Auditors' Report............................................................................. F-36 Balance Sheet............................................................................................ F-37 Statements of Operations and Accumulated Deficit......................................................... F-38 Statement of Cash Flows.................................................................................. F-39 Notes to Financial Statements............................................................................ F-40 Melody Vacaville, Inc. Report of Independent Auditors'.......................................................................... F-49 Balance Sheet............................................................................................ F-50 Statement of Operations.................................................................................. F-51 Statement of Stockholders Deficit........................................................................ F-52 Statement of Cash Flows.................................................................................. F-53 Notes to Financial Statements............................................................................ F-54
INDEPENDENT AUDITORS' REPORT The Board of Directors Lithia Motors, Inc. and Affiliated Companies: We have audited the accompanying combined balance sheets of Lithia Motors, Inc. and Affiliated Companies as of December 31, 1994 and 1995, and the related combined statements of operations, changes in owners' equity, and cash flows for the years in the three-year period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Lithia Motors, Inc. and Affiliated Companies as of December 31, 1994 and 1995 and the results of their operations and their cash flows for the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Portland, Oregon March 8, 1996 F-1 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES COMBINED BALANCE SHEETS (IN THOUSANDS)
DECEMBER 31, JUNE 30, 1996 -------------------- ------------------------ 1994 1995 ACTUAL PROFORMA --------- --------- ----------- ----------- (UNAUDITED) (UNAUDITED) (NOTE 9) ASSETS Current assets: Cash and cash equivalents...................................... $ 6,952 $ 9,350 $ 3,819 $ 3,819 Trade receivables.............................................. 1,289 1,744 2,322 2,322 Lease receivables, current portion............................. 125 140 150 150 Inventories.................................................... 19,132 17,700 16,480 16,480 Vehicles leased to others, current portion..................... 3,201 3,462 3,680 3,680 Notes receivable............................................... 78 127 14 14 Prepaid expenses and other..................................... 309 273 918 918 Deferred income taxes.......................................... -- -- -- 997 --------- --------- ----------- ----------- Total current assets......................................... 31,086 32,796 27,383 28,380 --------- --------- ----------- ----------- Property, plant and equipment, net............................... 3,070 3,234 1,278 1,278 Vehicles leased to others, less current portion.................. 1,724 1,864 1,982 1,982 Other assets: Lease receivables, less current portion........................ 88 310 333 333 Notes receivable............................................... 88 146 261 261 Investment in affiliate........................................ 488 569 591 591 Other noncurrent assets........................................ 115 303 288 288 --------- --------- ----------- ----------- 779 1,328 1,473 1,473 --------- --------- ----------- ----------- $ 36,659 $ 39,222 $ 32,116 $ 33,113 --------- --------- ----------- ----------- --------- --------- ----------- ----------- LIABILITIES, MINORITY INTEREST AND OWNERS' EQUITY Current liabilities: Notes payable.................................................. $ 390 $ 625 $ -- $ -- Flooring notes payable......................................... 21,218 19,590 13,723 13,723 Current maturities of long-term debt........................... 1,621 2,085 2,207 2,207 Trade payables................................................. 846 1,455 1,249 1,249 Accrued liabilities............................................ 974 1,280 1,441 1,441 Deferred income taxes.......................................... -- -- -- 594 --------- --------- ----------- ----------- Total current liabilities.................................... 25,049 25,035 18,620 19,214 Long-term debt, less current maturities........................ 6,748 10,743 8,262 11,000 Deferred revenue............................................... 1,462 1,782 2,238 2,238 Other long-term liabilities.................................... 61 62 61 61 --------- --------- ----------- ----------- Total liabilities............................................ 33,320 37,622 29,181 32,513 --------- --------- ----------- ----------- Commitments and contingency...................................... Minority interest................................................ 536 749 1,029 1,029 Owners' equity: Common stock................................................... 751 801 801 801 Retained earnings.............................................. 2,052 50 1,105 (1,230) --------- --------- ----------- ----------- Total owners' equity......................................... 2,803 851 1,906 (429) --------- --------- ----------- ----------- $ 36,659 $ 39,222 $ 32,116 $ 33,113 --------- --------- ----------- ----------- --------- --------- ----------- -----------
See accompanying notes to combined financial statements. F-2 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) Sales: Vehicle.................................................. $ 77,649 $ 93,535 $ 97,338 $ 46,076 $ 59,877 Service, body, parts and other........................... 14,460 15,787 16,858 8,320 9,248 --------- --------- --------- --------- --------- Net sales.............................................. 92,109 109,322 114,196 54,396 69,125 --------- --------- --------- --------- --------- Cost of sales: Vehicle.................................................. 67,161 81,234 83,487 39,763 52,244 Service, body, parts and other........................... 7,688 9,183 9,766 4,870 5,425 --------- --------- --------- --------- --------- Cost of sales.......................................... 74,849 90,417 93,253 44,633 57,669 --------- --------- --------- --------- --------- Gross profit........................................... 17,260 18,905 20,943 9,763 11,456 Selling, general and administrative........................ 15,122 15,174 16,735 7,860 9,379 --------- --------- --------- --------- --------- Operating income....................................... 2,138 3,731 4,208 1,903 2,077 --------- --------- --------- --------- --------- Other income (expense): Equity in income of affiliate............................ 55 77 81 29 22 Interest income.......................................... 216 99 179 65 93 Interest expense......................................... (1,374) (954) (1,390) (583) (649) Other, net............................................... 751 1,019 1,075 455 360 --------- --------- --------- --------- --------- (352) 241 (55) (34) (174) --------- --------- --------- --------- --------- Income before minority interest........................ 1,786 3,972 4,153 1,869 1,903 Minority interest.......................................... (233) (458) (778) (383) (317) --------- --------- --------- --------- --------- Net income............................................. $ 1,553 $ 3,514 $ 3,375 $ 1,486 $ 1,586 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Pro forma net income data (unaudited): Income before income taxes and minority interest, as reported............................................... $ 1,786 $ 3,972 $ 4,153 $ 1,869 $ 1,903 Proforma income taxes.................................... (697) (1,521) (1,598) (719) (742) --------- --------- --------- --------- --------- Proforma net income before minority interest............. 1,089 2,451 2,555 1,150 1,161 Proforma minority interest............................... (142) (283) (479) (235) (193) --------- --------- --------- --------- --------- Proforma net income...................................... $ 947 $ 2,168 $ 2,076 $ 915 $ 968 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Proforma net income per share............................ $ 0.65 $ 0.29 $ 0.30 Shares used in computing proforma net income per share... 3,196 3,196 3,196 --------- --------- --------- --------- --------- ---------
See accompanying notes to combined financial statements. F-3 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY (IN THOUSANDS)
COMMON STOCK ------------------------ RETAINED SHARES AMOUNT EARNINGS TOTAL ----------- ----------- --------- --------- Balance, December 31, 1992................................................ 4,720 $ 799 $ 437 $ 1,236 Net income................................................................ -- -- 1,553 1,553 Issuance of common stock: Lithia Rentals, Inc..................................................... 1,000 25 -- 25 Dividends................................................................. -- -- (1,630) (1,630) ----- ----- --------- --------- Balance, December 31, 1993................................................ 5,720 824 360 1,184 Net income................................................................ -- -- 3,514 3,514 Issuance of common stock: Lithia Rentals, Inc..................................................... 667 50 -- 50 Discount Auto and Truck Rental, Inc..................................... 1,000 20 -- 20 Cancellation of common stock: Paul Phillips, Inc...................................................... (500) (143) 143 -- Dividends................................................................. -- -- (1,965) (1,965) ----- ----- --------- --------- Balance, December 31, 1994................................................ 6,887 751 2,052 2,803 Net income................................................................ -- -- 3,375 3,375 Issuance of common stock: Discount Auto and Truck Rental, Inc..................................... 2,500 50 -- 50 Dividends................................................................. -- -- (5,377) (5,377) ----- ----- --------- --------- Balance, December 31, 1995................................................ 9,387 801 50 851 Net income (unaudited).................................................... -- -- 1,586 1,586 Dividends (unaudited)..................................................... -- -- (531) (531) ----- ----- --------- --------- Balance, June 30, 1996 (unaudited)........................................ 9,387 $ 801 $ 1,105 $ 1,906 ----- ----- --------- --------- ----- ----- --------- ---------
See accompanying notes to combined financial statements. F-4 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX-MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ------------------------------- -------------------- 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income.................................................... $ 1,553 $ 3,514 $ 3,375 $ 1,486 $ 1,586 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization............................. 1,803 1,954 1,832 785 960 (Gain) Loss on sale of assets............................. (184) (146) (305) 18 (142) Minority interest in income............................... 233 458 778 383 317 Equity in income of Properties............................ (55) (77) (81) (29) (22) Changes in operating assets and liabilities: Trade and lease receivables............................. (682) 1,659 (692) (459) (611) Inventories............................................. (5,177) (2,085) 1,432 3,977 1,220 Other current assets.................................... 13 (116) 27 80 (642) Deposits to related parties............................. (3) 0 3 3 0 Other noncurrent assets................................. (55) 2 (188) (97) 15 Trade payables.......................................... 561 (1,793) 609 (377) (206) Accrued liabilities..................................... 6 1,002 306 41 161 Other long-term liabilities............................. 153 358 321 228 455 Proceeds from sale of vehicles leased to others........... 4,254 5,289 4,757 2,056 3,382 Expenditures for vehicles leased to others................ (6,963) (6,764) (6,308) (3,255) (3,647) --------- --------- --------- --------- --------- Net cash provided by (used in) operating activities... (4,543) 3,205 5,866 4,840 2,826 --------- --------- --------- --------- --------- Cash flows from investing activities: Notes receivable issued....................................... (135) (142) (190) (158) (446) Principal payments received on notes receivable............... 142 309 83 49 444 Principal payments received on notes-related.................. 201 0 0 0 0 Proceeds from sale of assets.................................. 0 3 10 0 1,286 Capital expenditures.......................................... (108) (164) (524) (134) (223) --------- --------- --------- --------- --------- Net cash provided by (used in) investing activities... 100 6 (621) (243) 1,061 --------- --------- --------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) on flooring notes payable......... 5,443 2,170 (1,628) (4,337) (5,867) Net borrowings (repayments) on notes payable.................. 1,527 (2,312) 235 (390) (625) Principal payments on long-term debt.......................... (3,244) (9,084) (8,070) (3,869) (7,251) Proceeds from issuance of long-term debt...................... 3,973 11,300 12,529 4,966 4,892 Proceeds from issuance of common stock and minority interest.................................................... 25 (73) 50 0 0 Principal payments received on notes receivable -- owners'.... 15 144 142 142 149 Dividends and distributions................................... (1,630) (1,965) (5,377) (1,518) (531) Distribution to minority interest............................. (172) (298) (728) (315) (185) --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities... 5,937 (118) (2,847) (5,321) (9,418) --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents.. 1,494 3,093 2,398 (724) (5,531) Cash and cash equivalents at beginning of period................ 2,365 3,859 6,952 6,952 9,350 --------- --------- --------- --------- --------- Cash and cash equivalents at end of period...................... $ 3,859 $ 6,952 $ 9,350 $ 6,228 $ 3,819 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the period for interest...................... $ 1,375 $ 955 $ 1,390 $ 583 $ 649 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Supplemental schedule of noncash financing activities: Cancellation of common stock.................................. $ -- $ 143 $ -- $ -- $ -- Issuance of notes receivable -- minority interest............. -- -- 678 678 -- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to combined financial statements. F-5 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Lithia Motors, Inc. and Affiliated Companies (the Company) operate in Medford and Grants Pass, Oregon and are primarily dealers in new and used automobile and light-duty trucks. The Company serves customers located principally in southern Oregon. In addition, the Company retails and wholesales replacement parts and provides vehicle servicing, leasing and financing. PRINCIPLES OF COMBINATION The accompanying combined financial statements include the accounts of the following entities who are affiliated through common ownership and management: Lithia Motors, Inc. Subchapter S Corporation Lithia TLM LLC Limited Liability Corporation Lithia Dodge LLC Limited Liability Corporation Lithia Grants Pass Auto Center LLC Limited Liability Corporation Lithia Leasing, Inc. Subchapter S Corporation Discount Auto and Truck Rental, Inc. Subchapter S Corporation Lithia Rentals, Inc. Subchapter S Corporation
Lithia TLM LLC, Lithia Dodge LLC and Lithia Grants Pass Auto Center LLC are limited liability corporations majority owned by Lithia Motors, Inc.. The 20%, 25% and 25% minority interests in Lithia TLM LLC, Lithia Dodge LLC and Lithia Grants Pass Auto Center LLC, respectively have been recorded in the accompanying financial statements. All significant intercompany accounts and transactions, consisting principally of intercompany sales, have been eliminated upon combination. As stipulated in the Operating Agreements ("the Agreements"), for Lithia TLM LLC, Lithia Dodge LLC and Lithia's Grants Pass Auto Center LLC the term of the Companies is for thirty years, terminating in 2025, unless terminated earlier. In addition, the terms of the agreements limit the transferability of a member's interest without the consent of the other members. Lithia Motors, Inc. is the managing member of all Limited Liability Corporations referred to above. As a limited liability company, each member's liability is limited to amounts reflected in their respective member accounts. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers contracts in transit and all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. F-6 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES New vehicle, used vehicle and parts and accessories inventories are stated at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are being depreciated over their estimated useful lives principally on the straight-line basis. Expenditures for maintenance, repairs and minor renewals are expensed as incurred, while significant renewals and betterments are capitalized. When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the account, and any gain or loss is credited or charged to income. INCOME TAXES The Company is currently an S Corporation for federal and state income tax reporting purposes. Federal and state income taxes on the income of an S Corporation are generally by the individual stockholders rather than the corporation. The Company's S Corporation status will terminate immediately prior to the effectiveness of the proposed IPO of its common stock discussed in note 12. At this time the Company will establish its net deferred tax liabilities and record an accompanying charge to income tax expense. The accompanying statements of income for the year ended December 31, 1995, and the six-months ended June 30, 1996, reflect provisions for income taxes on an unaudited pro forma basis, using the asset and liability method, as if the Company had been a C Corporation, fully subject to federal and state income taxes. Under the asset and liability method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of changes in tax rates is recognized in income in the period that includes the enactment date. ENVIRONMENTAL LIABILITIES AND EXPENDITURES Accruals for environmental matters, if any, are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Accrued liabilities are exclusive of claims against third parties and are not discounted. In general, costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. F-7 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRO FORMA NET INCOME PER SHARE Pro forma net income per share is computed using pro forma net income (as described in note 9) and is based on the weighted average number of shares of common stock outstanding and common equivalent shares from stock options outstanding using the treasury stock method. In accordance with certain Securities and Exchange Commission (SEC) Staff Accounting Bulletins, such computations include all common and common equivalent shares issued within 12 months of the offering date as if they were outstanding for all periods presented using the treasury stock method and the anticipated IPO price. INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements for the six-months ended June 30, 1996 and 1995 have been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. FINANCIAL INSTRUMENTS The carrying amount of cash equivalents, trade receivables, trade payable and short term borrowing approximate fair value because of the short-term nature of these instruments. The fair value of long-term debt was estimated by discounting the future cash flows using market interest rates and does not differ significantly from that reflected in the financial statements. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. ADVERTISING The Company expenses production and other costs of advertising as incurred. CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company's customer base. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits. The Company generally limits its exposure to credit risk from balances on deposit in financial institutions in excess of the FDIC-insured limit. F-8 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 1995 and 1994 and revenues and expenses during the three-year period ended December 31, 1995. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements. REVENUE RECOGNITION Revenue from service contract insurance sold by the Company is recorded as deferred revenue upon initial receipt and recognized as income on a prorated basis over the term of the policy. Income from finance and insurance commissions is recorded separately on an accrual basis. Revenue from the sale of cars is recognized upon delivery, when the sales contract is signed and down payment has been received. Fleet sales of vehicles are shown on a net basis in other revenue. (2) INVENTORIES AND RELATED NOTES PAYABLE The new and used vehicle inventory collateralizing related notes payable and other inventory were as follows:
DECEMBER 31 ---------------------------------------------- JUNE 30, 1994 1995 1996 ---------------------- ---------------------- ---------------------- INVENTORY NOTES INVENTORY NOTES INVENTORY NOTES COST PAYABLE COST PAYABLE COST PAYABLE ----------- --------- ----------- --------- ----------- --------- New and demonstrator vehicles.................. $ 16,776 $ 17,172 $ 13,972 $ 15,346 $ 12,549 $ 12,905 Used vehicles.............. 6,847 4,046 7,532 4,244 7,839 818 Parts and accessories...... 831 -- 1,092 -- 1,223 -- ----------- --------- ----------- --------- ----------- --------- Inventories at FIFO........ 24,454 21,218 22,596 19,590 21,611 13,723 Less LIFO reserve for new and used vehicles and parts inventories......... 5,322 -- 4,896 -- 5,131 -- ----------- --------- ----------- --------- ----------- --------- Inventories at LIFO........ $ 19,132 $ 21,218 $ 17,700 $ 19,590 $ 16,480 $ 13,723 ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- ----------- ---------
If the first-in, first-out (FIFO) method of inventory accounting were used by the Company, net income would have been higher (lower) by $557, $615 and $(426) and $235 for the years ended December 31, 1993, 1994 and 1995 and the six-month period ended June 30, 1996, respectively. F-9 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (2) INVENTORIES AND RELATED NOTES PAYABLE (CONTINUED) Flooring notes payable consist of 8.5% to 9% flooring notes secured by new and used vehicles. The flooring arrangements permit the Company to borrow up to $21,900 in 1995 and 1994 and $27,900 for the six-month period ended June 30, 1996, restricted by new and used vehicle levels. The notes are due within five days of the vehicle being sold or after the vehicle has been in inventory for one year for new vehicles, six months for program vehicles, and on a revolving basis for used vehicles. (3) PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 --------- --------- ----------- Buildings and improvements...................................... $ 1,373 $ 1,445 $ -- Service and equipment........................................... 1,224 1,431 1,468 Furniture, signs and fixtures................................... 1,634 1,607 1,701 --------- --------- ----------- 4,231 4,483 3,169 Less accumulated depreciation................................... 1,587 1,840 1,892 --------- --------- ----------- 2,644 2,643 1,277 Land............................................................ 426 591 -- --------- --------- ----------- $ 3,070 $ 3,234 $ 1,277 --------- --------- ----------- --------- --------- -----------
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 --------- --------- --------- Vehicles leased to others..................................... $ 6,201 $ 6,678 $ 6,941 Less accumulated depreciation................................. (1,276) (1,352) (1,279) --------- --------- --------- 4,925 5,326 5,662 Less current portion, net................................... 3,201 3,462 3,680 --------- --------- --------- $ 1,724 $ 1,864 $ 1,982 --------- --------- --------- --------- --------- ---------
F-10 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES (CONTINUED) Lease receivables result from customer leases of vehicles under agreements which qualify as operating and direct-financing leases. Future minimum lease income from non-cancelable long-term leases and direct-financing leases are as follows:
DIRECT- OPERATING FINANCING ----------- ----------- Year ending December 31: 1996.................................................................. $ 1,563 $ 140 1997.................................................................. 884 118 1998.................................................................. 220 91 1999.................................................................. 44 51 2000 and thereafter................................................... 8 50 ----------- ----- $ 2,719 $ 450 ----------- ----- ----------- -----
(5) NOTES PAYABLE Notes payable consist of a 9.25% credit line with a bank for the in-house financing of vehicle sales and leases. The Company may borrow up to $1,000 or 75% of the total in-house vehicle receivables under 60 days past due. F-11 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (6) LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, -------------------- JUNE 30, 1994 1995 1996 --------- --------- --------- Notes payable to officer and director, interest at 9%; due in ten equal annual installments beginning one year and ten days subsequent to demand by the note holder................................................. $ 925 $ 3,865 $ 3,262 Notes payable to related parties other than officer and director, interest at 8.0% to 9.0%; due in ten equal annual installments beginning at various times subsequent to demand by the note holder................................... 827 1,234 316 Notes payable in monthly installments, including interest at 9%; maturing at various dates through 2000; secured by equipment.......................... 1,092 1,404 1,039 Notes payable in monthly installments, including interest at 8.75% to 10%; maturing at various dates through 2000; secured by vehicles leased to others................................... 4,409 5,466 5,852 Mortgages payable in monthly installments of $105, including interest at 7.5% to 12%; maturing at various dates through 2013; secured by land and buildings............................... 1,092 858 -- Other......................................................... 24 1 -- --------- --------- --------- 8,369 12,828 10,469 Less current maturities....................................... 1,621 2,085 2,207 --------- --------- --------- $ 6,748 $ 10,743 $ 8,262 --------- --------- --------- --------- --------- ---------
F-12 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (6) LONG-TERM DEBT (CONTINUED) The schedule of future principal payments on long-term debt after December 31, 1995 is as follows:
DECEMBER 31, 1995 ------------ Year ending: 1996.......................................................................... $ 2,085 1997.......................................................................... 4,740 1998.......................................................................... 1,036 1999.......................................................................... 790 2000 and thereafter........................................................... 4,177 ------------ $ 12,828 ------------ ------------
(7) MINORITY INTEREST For the years ended December 31, 1994 and 1995 and the six-month period ended June 30, 1996, the Company held notes receivable of $142, $678 and $565, respectively, from minority owners' of the Company. These notes are secured by the minority owners' interest in the Company and bear interest at .5% over prime rate and 10.5% respectively. The amount of the receivables are shown on the balance sheet as a reduction to minority interest. (8) OWNERS' EQUITY CAPITAL STRUCTURE The capital structure of the corporations included in the combined balance sheet at December 31, 1994 is as follows:
NO PAR COMMON STOCK ------------------------------------- AUTHORIZED ISSUED OUTSTANDING ----------- --------- ------------- Lithia Motors, Inc.......................................... 1,000 240 120 Lithia Leasing, Inc......................................... 1,000 100 100 Discount Auto and Truck Rental, Inc......................... 10,000 4,000 4,000 Lithia Rentals, Inc......................................... 5,000 2,667 2,667
The capital structure of the corporations included in the combined balance sheet at December 31, 1995 is as follows:
NO PAR COMMON STOCK ------------------------------------- AUTHORIZED ISSUED OUTSTANDING ----------- --------- ------------- Lithia Motors, Inc.......................................... 1,000 240 120 Lithia Leasing, Inc......................................... 1,000 100 100 Discount Auto and Truck Rental, Inc......................... 10,000 6,500 6,500 Lithia Rentals, Inc......................................... 5,000 2,667 2,667
F-13 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (9) PRO FORMA INCOME TAXES The unaudited pro forma amounts included in the accompanying pro forma balance sheet as of June 30, 1996, reflect the following unaudited pro forma adjustments: - Provisions for income taxes as if the Company had been a C Corporation, fully subject to federal and state income taxes. - A current deferred income tax asset of $997 and a deferred income tax liability of $594, established to effect the Company's conversion to C Corporation status. The net of these amounts will be credited to income tax expense as a nonrecurring credit upon the Company's conversion to C Corporation status but have been excluded from the pro forma statement of income. - A $2,738 S Corporation distribution payable to the current stockholders. This amount represents estimated undistributed S Corporation earnings of the Company from January 1, 1996 through the completion of the proposed IPO and the amount of the stockholders' S Corporation tax bases. The pro forma provision for income taxes reflects the income tax expense that would have been reported if the Company had been a C Corporation. The components of unaudited pro forma income taxes are as follows:
YEAR ENDED DECEMBER 31, SIX-MONTHS ------------------------------- ENDED JUNE 1993 1994 1995 30, 1996 --------- --------- --------- ------------- Pro forma income taxes: Current: Federal........................................... $ 490 $ 1,292 $ 1,487 $ 693 State............................................. 102 269 309 144 --------- --------- --------- ----- Total current................................... 592 1,561 1,796 837 --------- --------- --------- ----- Deferred: Federal........................................... 87 (33) (164) (79) State............................................. 18 (7) (34) (16) --------- --------- --------- ----- Total deferred.................................. 105 (40) (198) (95) --------- --------- --------- ----- Total pro forma income taxes.................... $ 697 $ 1,521 $ 1,598 $ 742 --------- --------- --------- ----- --------- --------- --------- -----
F-14 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (9) PRO FORMA INCOME TAXES (CONTINUED) The following tabulation reconciles the expected corporate federal income tax expense (computed by multiplying the Company's income before minority interest by 34%) to the Company's unaudited pro forma income tax expense:
YEAR ENDED DECEMBER 31, SIX-MONTHS ------------------------------- ENDED JUNE 1993 1994 1995 30, 1996 --------- --------- --------- ------------- Expected pro forma income tax expense................. $ 607 $ 1,350 $ 1,412 $ 647 State income taxes, net of federal tax effect......... 78 173 181 83 Other, net............................................ 12 (2) 5 12 --------- --------- --------- ----- $ 697 $ 1,521 $ 1,598 $ 742 --------- --------- --------- ----- --------- --------- --------- -----
The tax effects of temporary differences that give rise to significant portions of the unaudited pro forma deferred income tax assets and liability as of June 30, 1996, are presented below:
Pro forma deferred income tax assets: Allowance and accruals................................................. $ 997 --------- Total deferred income tax assets................................... 997 Pro forma deferred income tax liability: Property and equipment, principally due to differences in depreciation......................................................... (594) --------- Pro forma net deferred income tax liability........................ $ 403 --------- ---------
(10) COMMITMENTS AND CONTINGENCY RECOURSE PAPER The Company is contingently liable to banks for recourse paper from the financing of vehicle sales. The contingent liability at December 31, 1994 and 1995 was approximately $77 and $206, respectively. OPERATING LEASES Substantially all of the Companies operations are conducted in leased facilities under noncancelable operating leases with Lithia Properties, LLC a related party (note 13). These leases expire at various dates through 1996. At the end of the lease term, all of the leases are renewable at the then fair rental value for periods of five to seven years. F-15 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (10) COMMITMENTS AND CONTINGENCY (CONTINUED) The minimum rental commitments under operating leases after December 31, 1995 are as follows:
DECEMBER 31, 1995 ------------- 1996............................................................................ $ 2,265
Rental expense for all operating leases was $1,849, $1,888 $1,993 and $1,023 for the years ended December 31, 1993, 1994 and 1995 and the six-month period ended June 30, 1996, respectively. F-16 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (11) PROFIT SHARING PLAN The Company has a defined contribution plan and trust (the 401(k) and profit sharing plan) covering substantially all full-time employees. Effective May 1, 1995, the Plan was amended to include a 401(k) component for eligible employees. The annual contribution to the plan is at the discretion of the Board of Directors of Lithia Motors, Inc. Contributions of $100, $100, $84 and $46 were paid for the years ended December 31, 1993, 1994, 1995 and the six-month period ended June 30, 1996, respectively. Employees may contribute up to 15% of compensation to the plan under certain circumstances. (12) INVESTMENT IN UNCONSOLIDATED AFFILIATE The Company has an investment in Lithia Properties, LLC, the members of which are the Company (20%), Sidney DeBoer (35%), M.L. Dick Heimann (30%) and three of Mr. DeBoer's children (5% each). This investment is accounted for using the equity method. The following table summarizes activity in the Company's investment through June 30, 1996: Investment in affiliate, December 31, 1993........................... $ 411 Equity in affiliate.................................................. 77 Distributions from affiliate......................................... -- --------- Investment in affiliate, December 31, 1994........................... 488 Equity in affiliate.................................................. 81 Distributions from affiliate......................................... -- --------- Investment in affiliate, December 31, 1995........................... 569 Equity in affiliate.................................................. 22 Distributions from affiliate......................................... -- --------- Investment in affiliate, June 30, 1996............................... $ 591 --------- ---------
(13) RELATED PARTY TRANSACTIONS Substantially all of the real property on which the Company's business is located is owned by Lithia Properties, LLC, (note 12). The Company, leases its facilities under various lease agreements from Lithia Properties, LLC (note 10). Rental expense for these operating leases was $1,849, $1,888, $1,993 and $1,023 for the years ended December 31, 1993, 1994 and 1995 and the six-month period ended June 30, 1996, respectively. Recorded in other assets deposits relating to these operating leases of $178, $175 and $175 for the years ended December 31, 1994 and 1995 and the six-month period ended June 30, 1996, respectively relating to these operating leases is recorded in other current assets. The Company provides management services to Lithia Properties, LLC. Other income includes management fees of $288 for the years ended December 31, 1993, 1994 and 1995 and $144 for the six-month period ended June 30, 1996, respectively. F-17 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (13) RELATED PARTY TRANSACTIONS (CONTINUED) Lithia Properties, LLC leases certain equipment to the Company. Selling, general and administrative expense includes equipment rental expense of $27, $26, $27 and $10 for the years ended December 31, 1993, 1994 and 1995 and the six-month period ended June 30, 1996, respectively. The Company has notes payable included in long-term debt of $925, $3,865 and $3,262 for the years ended December 31, 1994 and 1995 and the six-month period ended June 30, 1996, respectively, to certain officers and directors. These notes accrue interest at 9% and are due in ten equal annual installments beginning one year and ten days subsequent to demand by the noteholder. The Company has agreed to guarantee certain indebtedness of Lithia Properties LLC incurred in connection with purchases of real property which secures the loan. The total indebtedness is approximately $11,917. (14) SUBSEQUENT EVENTS (UNAUDITED) STOCK INCENTIVE PLAN In April, 1996, the Board and the Company's shareholders adopted the Company's 1996 Stock Incentive Plan (the Plan). The Plan provides for the granting of stock-based awards to executive officers (including those who are directors), to other employees and non-employee consultants of the Company. Either non-qualified or incentive stock options may be issued under this plan and are exercisable for a period of up to ten years from the date of grant. The Plan is permitted to issue up to 500 shares of the Company's Class A common stock. The following table summarizes stock option activity through June 30, 1996:
PRICE SHARES RANGE ----------- ------------- Outstanding options at December 31, 1995........................................ -- $ -- Granted......................................................................... 320.5 4.14 - 4.55 Exercised....................................................................... -- -- Canceled........................................................................ -- -- ----- ------------- Outstanding options at June 30, 1996............................................ 320.5 $ 4.14 - 4.55 ----- ------------- ----- -------------
At June 30, 1996, no outstanding options were exercisable. STOCKHOLDER DISTRIBUTIONS As an S Corporation, the Company has made distributions to its stockholders partially to provide them with funds to pay income taxes on corporate earnings. Immediately prior to the completion of the proposed IPO, the Company intends to declare a distribution payable to existing stockholders of the Company. This distribution represents undistributed S Corporation earnings of the Company through the completion of the proposed IPO and the amount of the stockholders' S Corporation tax bases. F-18 LITHIA MOTORS, INC. AND AFFILIATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED) (14) SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) RESTRUCTURING On April 5, 1996, Lithia Motors, Inc. authorized 25,000 shares of Series B common stock and 100,000 shares of Series A common stock of which 3,000 and 0, respectively are outstanding. On October 8, the Board of Directors approved the filing of a registration statement with the SEC permitting the Company to sell shares of its Class A common stock. Prior to completion of the offering, the Company and other affiliated companies will consummate a restructuring which will result in each of the Company's dealerships and operating divisions becoming direct or indirect wholly-owned subsidiaries and Lithia Holdings, LLC owning all of the outstanding Class B common stock of the Company. ACQUISITIONS The Company has signed definitive agreements to purchase two additional dealerships described below. These purchases are subject to normal closing conditions and the approval of the appropriate factories. The Company has agreed to pay $2.25 million plus the new car and parts inventory at seller's cost for Roberts Dodge, a Dodge dealer in Eugene, Oregon. In addition, the Company will purchase the real property on which the dealership is located for $2.3 million. The Company has agreed to pay $1.05 million plus the new car and parts inventory at seller's cost for Sam Linder, Inc. a Honda, Cadillac, and Oldsmobile dealership in Salinas, California. In addition, the Company will purchase the real property on which the dealership is located for $2.33 million. Closing is scheduled to occur on or before November 1, 1996. LINE OF CREDIT The Company obtained a secured line of credit from a bank in the principal amount of $6.0 million which will be utilized to fund the cash portion of the acquisitions described above. The credit line bears interest at prime plus 75 basis points with interest due monthly during the first year "draw down" period, after which monthly payments are based on a ten-year amortization schedule, with final payment due five years from the initial advance. F-19 INDEPENDENT AUDITORS' REPORT The Board of Directors Roberts Dodge, Inc. and Affiliated Company: We have audited the accompanying combined balance sheets of Roberts Dodge, Inc. and Affiliated Company as of December 31, 1995, and the related combined statements of operations, changes in owners' equity, and cash flows for the years in the two-year period ended December 31, 1995. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Roberts Dodge, Inc. and Affiliated Company as of December 31, 1995 and the results of their operations and their cash flows for the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Portland, Oregon September 17, 1996 F-20 ROBERTS DODGE, INC. AND AFFILIATED COMPANY COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 1995 ------------- JUNE 30, 1996 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................................... $ 2,220 $ 1,202 Trade receivables, net.............................................................. 555 785 Inventories......................................................................... 4,383 4,766 Prepaid expenses and other.......................................................... 7 42 ------ ----------- Total current assets.......................................................... 7,165 6,795 ------ ----------- Property, plant and equipment, net.................................................... 1,413 1,452 Other assets: Goodwill............................................................................ 22 20 Stockholder advances................................................................ -- 178 Other noncurrent assets............................................................. 156 174 ------ ----------- 178 372 ------ ----------- $ 8,756 $ 8,619 ------ ----------- ------ ----------- LIABILITIES AND OWNERS' EQUITY Current liabilities: Notes payable....................................................................... $ -- $ 200 Flooring notes payable.............................................................. 4,241 4,149 Current maturities of long-term debt................................................ 1,970 1,470 Trade payables...................................................................... 407 182 Accrued liabilities................................................................. 213 496 ------ ----------- Total current liabilities..................................................... 6,831 6,497 Long-term debt, less current maturities............................................... 1,125 1,056 ------ ----------- Total liabilities............................................................. 7,956 7,553 ------ ----------- Commitments and contingency Owners' equity: Common stock, no par value, 10,000 shares authorized, 100 shares issued and outstanding....................................................................... 250 250 Retained earnings................................................................... 550 816 ------ ----------- Total owners' equity.......................................................... 800 1,066 ------ ----------- $ 8,756 $ 8,619 ------ ----------- ------ -----------
See accompanying notes to combined financial statements. F-21 ROBERTS DODGE, INC. AND AFFILIATED COMPANY COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------- -------------------- 1994 1995 1995 1996 --------- --------- --------- --------- (UNAUDITED) Sales: Vehicle............................................................. $ 26,383 $ 27,999 $ 14,233 $ 15,609 Service, parts and other............................................ 3,588 3,895 1,920 2,074 --------- --------- --------- --------- 29,971 31,894 16,153 17,683 --------- --------- --------- --------- Cost of sales: Vehicle............................................................. 23,526 25,086 12,602 13,827 Service, parts and other............................................ 2,104 2,184 1,055 1,188 --------- --------- --------- --------- 25,630 27,270 13,657 15,015 --------- --------- --------- --------- Gross profit.................................................... 4,341 4,624 2,496 2,668 Selling, general and administrative................................... 3,654 3,828 1,946 2,165 --------- --------- --------- --------- Operating income................................................ 687 796 550 503 --------- --------- --------- --------- Other income (expense): Interest income..................................................... 27 101 15 78 Interest expense.................................................... (477) (602) (299) (302) Other, net.......................................................... (29) (26) (20) (7) --------- --------- --------- --------- (479) (527) (304) (231) --------- --------- --------- --------- Net income...................................................... $ 208 $ 269 $ 246 $ 272 --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to combined financial statements. F-22 ROBERTS DODGE, INC. AND AFFILIATED COMPANY COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ------------------------ RETAINED SHARES AMOUNT EARNINGS TOTAL ----------- ----------- ----------- --------- Balance, December 31, 1993................................................. 1 $ 250 $ 135 $ 385 Net income................................................................. -- -- 208 208 Distributions.............................................................. -- -- (37) (37) -- ----- ----- --------- Balance, December 31, 1994................................................. 1 250 306 556 Net income................................................................. -- -- 269 269 Distributions.............................................................. -- -- (24) (24) -- ----- ----- --------- Balance, December 31, 1995................................................. 1 250 551 801 Net income (unaudited)..................................................... -- -- 272 272 Distributions (unaudited).................................................. -- -- (7) (7) -- ----- ----- --------- Balance, June 30, 1996 (unaudited)......................................... 1 $ 250 $ 816 $ 1,066 -- -- ----- ----- --------- ----- ----- ---------
See accompanying notes to combined financial statements. F-23 ROBERTS DODGE, INC. AND AFFILIATED COMPANY COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------- -------------------- 1994 1995 1995 1996 --------- --------- --------- --------- (UNAUDITED) Cash flows from operating activities: Net income.............................................................. $ 208 $ 269 $ 246 $ 272 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization....................................... 87 125 50 49 Changes in assets and liabilities: (Increase) decrease in trade receivables.......................... (10) (73) 142 (230) (Increase) decrease in inventories................................ (1,139) 239 (54) (383) (Increase) decrease in other current assets....................... (13) 8 (12) (35) Increase (decrease) in trade payables............................. 73 153 (26) (224) Increase (decrease) in accrued liabilities........................ 54 20 293 283 Increase in other non current assets.............................. (130) (50) (177) (196) --------- --------- --------- --------- Net cash provided by (used in) operating activities.......................................... (870) 691 462 (464) --------- --------- --------- --------- Cash flows from investing activities: Capital expenditures.................................................... (88) (201) (118) (86) --------- --------- --------- --------- Net cash used in investing activities........................... (88) (201) (118) (86) --------- --------- --------- --------- Cash flows from financing activities: Net borrowings (repayments) on flooring notes payable......................................................... 1,340 (40) (359) (92) Net borrowings (repayments) on notes payable............................ -- -- 25 200 Principal payments on long-term debt.................................... (151) (135) (62) (569) Proceeds from issuance of long-term debt................................ -- 1,936 83 -- Distributions........................................................... (37) (24) (22) (7) --------- --------- --------- --------- Net cash provided by (used in) financing activities.......................................... 1,152 1,737 (335) (468) --------- --------- --------- --------- Net increase (decrease) in cash........................................... 194 2,227 9 (1,018) Cash (book overdraft), beginning of period................................ (201) (7) (7) 2,220 --------- --------- --------- --------- Cash (book overdraft), end of period...................................... $ (7) $ 2,220 $ 2 $ 1,202 --------- --------- --------- --------- --------- --------- --------- ---------
See accompanying notes to combined financial statements. F-24 ROBERTS DODGE, INC. AND AFFILIATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Roberts Dodge, Inc. and Affiliated Company's (the Company) is an Oregon Corporation. Its principal business is the retail sales of new Dodge automobiles obtained through an exclusive dealer agreement with Chrysler Motors Corporation (Chrysler) and the sale of used cars. In addition, the Company retails and wholesales replacement parts and provides vehicle servicing. The Company operates in the Eugene, Oregon area. PRINCIPLES OF COMBINATION The accompanying combined financial statements include the accounts of the following entities which are affiliated through common ownership: - Roberts Dodge, Inc. - Sole proprietorship - real estate All significant intercompany accounts and transactions, consisting principally of intercompany sales, have been eliminated upon combination. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, the Company considers contracts in transit and all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES Vehicles are stated at the lower of cost or market, cost being determined on a specific identification basis. Parts are stated at the lower of cost or market, cost being determined on the first-in, first-out (FIFO) basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and is being depreciated over their estimated useful lives on the declining balance and straight-line basis. Expenditures for maintenance, repairs and minor renewals are expensed as incurred, while significant renewals and betterments are capitalized. When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the account, and any gain or loss is credited or charged to income. FEDERAL INCOME TAXES The Company is organized as a sub-chapter S-Corporation under the Internal Revenue Code; therefore, the income earned by Roberts Dodge, Inc. is reported on the personal tax returns of the stockholders. Consequently, no provision for income taxes has been recorded in the accompanying financial statements. F-25 ROBERTS DODGE, INC. AND AFFILIATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) MAJOR SUPPLIER AND DEALER AGREEMENT The Company purchases substantially all of its new vehicles and inventory from Chrysler at the prevailing prices charged by the automaker to all franchised dealers. The Company's overall sales could be impacted by the automaker's ability or unwillingness to supply the dealership with an adequate supply of popular models. The Dealer Agreement generally limits the location of the dealership and retains automaker approval rights over changes in dealership management and ownership. The automaker is also entitled to terminate the agreement if the dealership is material breach of the terms. INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements for the six-months ended June 30, 1996 and 1995 have been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. FINANCIAL INSTRUMENTS The carrying amount of cash equivalents, trade receivables, trade payable and short term borrowing approximate fair value because of the short-term nature of these instruments. The fair value of long-term debt was estimated by discounting the future cash flows using market interest rates and does not differ significantly from that reflected in the financial statements. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. ADVERTISING The Company expenses production and other costs of advertising as incurred. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject Roberts Dodge to concentrations of credit risk consist principally of cash deposits. Concentrations of credit risk with respect to customer receivables are limited primarily to Chrysler Financial Corp. and financial institutions such as regional banks. MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 1995 and revenues and expenses during the two-year period then ended. The F-26 ROBERTS DODGE, INC. AND AFFILIATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements. REVENUE RECOGNITION Revenues from vehicle and parts sales and from service operations are recognized at the time the vehicle is delivered to the customer or service is completed. RECOGNITION OF FINANCE FEES AND INSURANCE COMMISSIONS The Company arranges financing for its customers' vehicle purchases and arranges insurance in connection therewith. Financing contracts are reviewed by the dealership and are forwarded to Chrysler Financial Corp. and other financial institutions. The Company receives a fee from the financial institution for arranging the financing and receives a commission for the sale of an insurance policy. The Company is charged back (chargebacks) for a portion of this fee should the customer terminate the finance or insurance contract before its' scheduled term. Finance fees and insurance commissions, net of chargebacks, are classified with Service, Parts and Other revenue in the accompanying statement of operations. (2) INVENTORIES AND RELATED NOTES PAYABLE The new and used vehicle inventory collateralizing related notes payable and other inventory were as follows:
DECEMBER 31, 1995 JUNE 30, 1996 ---------------------- ---------------------- INVENTORY NOTES INVENTORY NOTES COST PAYABLE COST PAYABLE ----------- --------- ----------- --------- New and demonstrator vehicles....................... $ 2,899 $ 3,464 $ 3,310 $ 3,562 Used vehicles....................................... 1,180 777 1,203 587 Parts and accessories............................... 304 -- 253 -- ----------- --------- ----------- --------- $ 4,383 $ 4,241 $ 4,766 $ 4,149 ----------- --------- ----------- --------- ----------- --------- ----------- ---------
The automaker finances new and used vehicle purchases by the Company. Floor plan financing bears interest at prime plus 1% (approximately 9.25% at June 30, 1996). The notes are collateralized by all of the Company's tangible and intangible personal property, including but not limited to, substantially all new, used and demonstrator vehicles, parts and accessories inventory, accounts receivable, and all machinery and equipment. The notes are generally due within ten days of the sale of the vehicles or within three days after receiving the sales proceeds, whichever is sooner. Accordingly, floor plan financing is classified as current in the accompanying balance sheet. F-27 ROBERTS DODGE, INC. AND AFFILIATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) (3) PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, JUNE 30, 1995 1996 ------------- ----------- Buildings and improvements........................................... $ 1,047 $ 1,047 Service and equipment................................................ 204 206 Furniture, signs and fixtures........................................ 69 69 Construction-in-progress............................................. -- 84 ------ ----------- 1,320 1,406 Less accumulated depreciation........................................ 328 375 ------ ----------- 992 1,031 Land................................................................. 421 421 ------ ----------- $ 1,413 $ 1,452 ------ ----------- ------ -----------
(4) NOTES PAYABLE The Company has a $500 revolving line of credit with Chrysler Financial Corp. which is scheduled to mature on April 15, 1997. Outstanding borrowings by the Company totaled $200 at June 30, 1996 (unaudited). There were no outstanding borrowings at December 31, 1995. Advances under the credit line accrue interest at variable rates (9.5% at June 30, 1996) and are subject to the collateral and guaranty provisions in the Chrysler credit arrangement described in note 5. F-28 ROBERTS DODGE, INC. AND AFFILIATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) (5) LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 31, JUNE 30, 1995 1996 ------------- ----------- Note payable to Chrysler, interest at 11% or if higher, prime plus 1%, monthly installments of $11, maturing in 1997................... $ 74 $ 45 Note payable to Chrysler, due in monthly installments of $1 plus interest at prime plus 5%........................................... 15 10 Demand notes payable to stockholder, interest at prime less 1.25%.... 1,807 1,318 Note payable to Chrysler, monthly installments of $1 plus interest at 10.25%.............................................................. 46 41 Note payable to Chrysler, due in monthly installments of $15 including interest at 9%............................................ 1,144 1,105 Other................................................................ 9 7 ------ ----------- 3,095 2,526 Less current maturities.............................................. 1,970 1,470 ------ ----------- $ 1,125 $ 1,056 ------ ----------- ------ -----------
The schedule of future principal payments on long-term debt after December 31, 1995 is as follows:
DECEMBER 31, 1995 ------------- Year ending: 1996.......................................................................... $ 1,970 1997.......................................................................... 120 1998.......................................................................... 110 1999.......................................................................... 110 2000 and thereafter........................................................... 785 ------ $ 3,095 ------ ------
The Chrysler notes described above, and the revolving line of credit with Chrysler are personally guaranteed by the stockholders of the Company. Substantially all assets of the Company have been pledged as collateral for the notes. In addition, Chrysler requires guarantees from companies related through common ownership. The Company has guaranteed certain term notes for Roberts Ford, Inc. and Frontier Motors, Inc. The combined balances of these obligations are reflected on the books of the respective companies and totaled $950 at September 17, 1996. Interest paid to stockholders totaled $32 and $50 for the year ended December 31, 1995 and the six-month period ended June 30, 1996 (unaudited), respectively. F-29 ROBERTS DODGE, INC. AND AFFILIATED COMPANY NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995 AND THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 (UNAUDITED) (6) COMMITMENTS AND CONTINGENCY RECOURSE PAPER The Company is contingently liable to Chrysler Financial Corp. for recourse paper from the financing of vehicle sales. The contingent liability at December 31, 1995 and the six-month period ended June 30, 1996 (unaudited) was approximately $331 and $143, respectively. (7) PROFIT SHARING PLAN Effective January 1, 1994, the Company established a 401(k) profit-sharing plan covering substantially all employees. Contributions to the plan include elective salary reduction by the employees, and matching contributions up to a stated percentage and discretionary amounts by the Company. Company contributions totaled $7, $37, and $22 for the years ended December 31, 1994, 1995 and six-month period ended June 30, 1996 (unaudited), respectively. (8) SUBSEQUENT EVENTS Roberts Dodge has executed a purchase and sale agreement whereby it has agreed to sell substantially all of its assets to Lithia Motors, Inc. The purchase price will consist of cash consideration of approximately $2.25 million for fixed assets and intangible assets, plus an additional amount for the new car and parts inventory valued at the seller's cost. The purchase price is payable as (i) $1.75 million plus the cost of the new car and parts inventory in cash at closing and (ii) a promissory note for $500,000, with interest at 8.5% per annum, payable in equal monthly installments for five years. The Company is not assuming any material liabilities as part of the acquisition. In addition, the Company will purchase the real property on which the dealership is located for $2.33 million, payable in cash at closing. Closing is scheduled to occur on or before November 1, 1996. The purchase is subject to normal closing conditions and the approval of Chrysler. (9) RELATED PARTY TRANSACTIONS R & R Advertising (R & R) is an advertising agency owned by a stockholder of the Company. The Company purchases all their television and radio advertising through this agency. Approximately 50% of total advertising expense is purchased through R & R. Advertising expense was $527, $463 and $193 for the years ended December 31, 1994 and 1995 and the six-month period ended June 30, 1996 (unaudited), respectively. At June 30, 1996, trade receivables included a $200 balance due from Frontier Motors, Inc., a dealership owned 70% by the stockholder's of the Company. F-30 INDEPENDENT AUDITORS' REPORT To the Stockholder Sam Linder, Inc. We have audited the accompanying balance sheet of Sam Linder, Inc. (dba Sam Linder Cadillac-Honda-Oldsmobile) as of December 31, 1995, and the related statements of operations and accumulated deficit and cash flows for each of the years in the two-year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Sam Linder, Inc. as of December 31, 1995, and the results of its operations and cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Moss Adams LLP Seattle, Washington September 17, 1996 F-31 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) BALANCE SHEET
DECEMBER 31, 1995 ------------ JUNE 30, 1996 ------------ (UNAUDITED) ASSETS Current Assets Cash and cash equivalents............................... $ 1,128,900 $ 537,200 Receivables............................................. 537,300 471,600 Inventories............................................. 2,433,400 2,931,100 Notes receivable........................................ 170,000 129,100 Prepaid expenses and other.............................. 19,000 60,700 ------------ ------------ Total current assets.................................. 4,288,600 4,129,700 Property, Plant and Equipment, net........................ 270,600 354,400 Other Assets.............................................. 33,700 32,000 ------------ ------------ $ 4,592,900 $ 4,516,100 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Flooring notes payable.................................. $ 2,287,100 $ 2,430,600 Current maturities of obligation under capital lease.... -- 21,500 Trade payables.......................................... 468,500 355,400 Accrued liabilities..................................... 209,200 318,600 Advances from stockholder............................... 1,461,500 1,163,000 ------------ ------------ Total current liabilities............................. 4,426,300 4,289,100 Obligation Under Capital Lease, less current maturities... -- 104,200 ------------ ------------ Total liabilities..................................... 4,426,300 4,393,300 ------------ ------------ Stockholders' Equity Common stock, $2,000 par value, 2,500 shares authorized, 500 shares issued and outstanding..................... 1,000,000 1,000,000 Accumulated deficit..................................... (833,400 ) (877,200) ------------ ------------ Total stockholders' equity............................ 166,600 122,800 ------------ ------------ $ 4,592,900 $ 4,516,100 ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. F-32 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, ---------------------------- --------------------------- 1994 1995 1995 1996 ------------- ------------- ------------ ------------- (UNAUDITED) SALES Vehicle............................................. $ 16,112,600 $ 22,889,800 $ 9,494,000 $ 10,975,400 Service, body and parts............................. 2,692,300 2,550,600 1,283,500 1,446,700 Finance and lease................................... 620,300 1,417,000 528,800 446,000 ------------- ------------- ------------ ------------- 19,425,200 26,857,400 11,306,300 12,868,100 ------------- ------------- ------------ ------------- COST OF SALES Vehicle............................................. 14,808,400 20,936,700 8,588,700 9,945,200 Service, body and parts............................. 1,448,600 1,393,500 703,000 669,500 Finance and lease................................... 124,000 315,800 169,600 194,100 ------------- ------------- ------------ ------------- 16,381,000 22,646,000 9,461,300 10,808,800 ------------- ------------- ------------ ------------- Gross profit...................................... 3,044,200 4,211,400 1,845,000 2,059,300 SELLING, GENERAL AND ADMINISTRATIVE 3,038,700 3,928,000 1,824,200 1,912,000 ------------- ------------- ------------ ------------- Operating income.................................. 5,500 283,400 20,800 147,300 ------------- ------------- ------------ ------------- OTHER INCOME (EXPENSE) Interest expense.................................... (227,800) (346,700) (183,700) (103,800) Other, net.......................................... (3,400) (800) 500 200 ------------- ------------- ------------ ------------- (231,200) (347,500) (183,200) (103,600) ------------- ------------- ------------ ------------- NET (LOSS) INCOME..................................... (225,700) (64,100) (162,400) 43,700 ACCUMULATED DEFICIT Beginning of period................................. (542,000) (769,300) (769,300) (833,400) Dividends........................................... (1,500) -- -- (87,500) ------------- ------------- ------------ ------------- End of period....................................... $ (769,300) $ (833,400) $ (931,700) $ (877,200) ------------- ------------- ------------ ------------- ------------- ------------- ------------ -------------
The accompanying notes are an integral part of these financial statements. F-33 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) STATEMENT OF CASH FLOWS
YEAR ENDED SIX MONTHS ENDED DECEMBER 31, JUNE 30, -------------------- -------------------- 1994 1995 1995 1996 --------- --------- --------- --------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income................................................. $(225,700) $ (64,100) $(162,400) $ 43,700 Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation and amortization................................... 92,700 92,500 51,400 47,600 Change in allowance for doubtful accounts....................... -- 86,000 89,000 (2,000) Changes in assets and liabilities (Increase) decrease in receivables.............................. (159,700) (14,900) 94,700 67,700 (Increase) decrease in inventories.............................. 446,500 (235,200) (61,700) (497,700) (Increase) decrease in other current assets..................... 3,500 (6,200) (113,800) (41,700) (Increase) decrease in other noncurrent assets.................. 3,600 (4,700) (3,100) 1,700 Increase (decrease) in trade payables........................... (91,500) 261,300 123,300 (113,100) Increase (decrease) in accrued liabilities...................... 70,500 (40,700) 15,900 109,400 Increase in accrued interest on advances from stockholder....... 103,800 140,200 70,100 140,200 --------- --------- --------- --------- Net cash provided by (used in) operating activities......... 243,700 214,200 103,400 (244,200) --------- --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Net collections (increase) of notes receivable.................... (300) 316,200 161,900 40,900 Acquisition of property and equipment............................. (3,900) (17,800) (8,300) -- --------- --------- --------- --------- Net cash provided by (used in) investing activities......... (4,200) 298,400 153,600 40,900 --------- --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) on flooring notes payable............. 81,500 143,300 (655,300) 143,500 Principal payments on long-term debt.............................. (40,000) (73,300) (64,000) -- Net borrowings (repayments) on advances from stockholder.......... (195,200) 180,000 200,000 (438,700) Principal payments on obligations under capital lease............. -- -- -- (5,700) Dividends paid.................................................... (1,500) -- -- (87,500) --------- --------- --------- --------- Net cash provided by (used in) financing activities......... (155,200) 250,000 (519,300) (388,400) --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents........ 84,300 762,600 (262,300) (591,700) CASH AND CASH EQUIVALENTS Beginning of period............................................... 282,000 366,300 366,300 1,128,900 --------- --------- --------- --------- End of period..................................................... $ 366,300 $1,128,900 $ 104,000 $ 537,200 --------- --------- --------- --------- --------- --------- --------- --------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest.......................... $ 124,000 $ 206,500 $ 113,600 $ 103,800 --------- --------- --------- --------- --------- --------- --------- --------- Cash paid during the period for income taxes...................... $ 800 $ 800 $ 800 $ 800 --------- --------- --------- --------- --------- --------- --------- --------- Non-cash investing and financing activities: Equipment acquired through capital lease........................ $ -- $ -- $ -- $ 131,400 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements. F-34 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS -- Sam Linder, Inc., dba Sam Linder Cadillac-Honda-Oldsmobile (the Company), was established as a corporation on November 30, 1989. The purpose of the Company is to engage in retail sales of new Cadillac, Honda and Oldsmobile vehicles obtained through dealership agreements, used vehicles, parts and service. The Company sells to individuals and commercial businesses located primarily in the Salinas, California area. CASH AND CASH EQUIVALENTS -- For purposes of reporting cash flows, the Company considers contracts in transit and all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. INVENTORIES -- New vehicle, used vehicle and parts and accessories inventories are stated at the lower of cost or market. Cost is determined by using the last-in, first-out (LIFO) method. PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost and are being depreciated over their estimated useful lives, principally using the straight-line method. Expenditures for maintenance, repairs and minor renewals are expensed as incurred, while significant renewals and betterments are capitalized. When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the account, and any gain or loss is credited or charged to income. INCOME TAXES -- The Company, with the consent of its stockholder, has elected to be an S Corporation under the Internal Revenue Code and California Revenue and Taxation Code. In lieu of corporate income taxes, the stockholders of an S Corporation are taxed on their proportionate share of the Company's taxable income or receive a deduction for their proportionate share of the Company's taxable loss. The Company is subject to a 1.5% California franchise tax on taxable income, with a minimum amount of $800 payable annually. INTERIM FINANCIAL STATEMENTS -- The accompanying unaudited financial statements for the six-months ended June 30, 1995 and 1996 have been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. ADVERTISING -- The Company expenses production and other costs of advertising as incurred. Advertising expense for the years ended December 31, 1995 and 1994 were $386,100 and $190,700, respectively. Advertising expense for the six months ended June 30, 1996 and 1995 were $189,900 (unaudited) and $150,000 (unaudited), respectively. CONCENTRATIONS OF CREDIT RISK -- Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base. Receivables arising from vehicle sales are secured by the related vehicle. Receivables arising from all other sales are unsecured open accounts. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits. At December 31, 1995, the Company has deposits in excess of amounts insured by the FDIC. MANAGEMENT ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 1995 and June 30, 1996 and revenues and F-35 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) expenses during the years ended December 31, 1994 and 1995 and the six month periods ended June 30, 1995 and 1996. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements. REVENUE RECOGNITION -- Revenue from the sale of cars is recognized upon delivery, when the sales contract is signed and down payment has been received. Income from finance and insurance commissions is recorded separately on an accrual basis. MAJOR SUPPLIER AND DEALER AGREEMENT -- The Company purchases substantially all of its new vehicles and inventory from automakers at the prevailing prices charged by the automakers to all franchised dealers. The Company's overall sales could be impacted by the automaker's ability or unwillingness to supply the dealership with an adequate supply of popular models. The Dealer Agreement generally limits the location of the dealership and retains automaker approval rights over changes in dealership management and ownership. The automaker is also entitled to terminate the agreement if the dealership is material breach of the terms. NOTE 2 -- RECEIVABLES
DECEMBER 31, 1995 ------------ JUNE 30, 1996 ----------- (UNAUDITED) Trade receivables................................................. $ 482,900 $ 373,900 Finance reserves.................................................. 54,700 91,700 Employee receivables.............................................. 26,700 31,000 ------------ ----------- 564,300 496,600 Less allowance for doubtful accounts.............................. 27,000 25,000 ------------ ----------- $ 537,300 $ 471,600 ------------ ----------- ------------ -----------
NOTE 3 -- NOTES RECEIVABLE
DECEMBER 31, 1995 ------------ JUNE 30, 1996 ----------- (UNAUDITED) VARIOUS NOTES RECEIVABLE ARISING FROM IN-HOUSE FINANCING OF USED VEHICLE SALES, with payments of principal and interest required either weekly, semi-monthly, or monthly and terms range from twelve to twenty-four months. Interest rates range from 8.9% to 19.75%, and the notes are collateralized by the related vehicles.................... $ 272,000 $ 231,100 NOTE RECEIVABLE FROM RELATED PARTY, with interest at .5% above prime plus .50% due monthly, principal due on demand, unsecured......................................... 50,000 50,000 ------------ ----------- 322,000 281,100 Less allowance for doubtful accounts.................................................. 152,000 152,000 ------------ ----------- $ 170,000 $ 129,100 ------------ ----------- ------------ -----------
F-36 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4 -- INVENTORIES AND RELATED NOTES PAYABLE The new and used vehicle inventory collateralizing related notes payable and other inventory are as follows:
DECEMBER 31, 1995 JUNE 30, 1996 -------------------------- -------------------------- INVENTORY NOTES INVENTORY NOTES COST PAYABLE COST PAYABLE ------------ ------------ ------------ ------------ (UNAUDITED) New and demonstrator vehicles............................ $ 1,800,800 $ 2,287,100 $ 2,297,000 $ 2,430,600 Used vehicles............................................ 1,059,300 -- 1,132,900 -- Parts and accessories.................................... 225,800 -- 181,800 -- ------------ ------------ ------------ ------------ Inventories at FIFO...................................... 3,085,900 2,287,100 3,611,700 2,430,600 Less LIFO reserve for new and used vehicles and parts inventories............................................. 652,500 -- 680,600 -- ------------ ------------ ------------ ------------ Inventories at LIFO...................................... $ 2,433,400 $ 2,287,100 $ 2,931,100 $ 2,430,600 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
If the specific identification and the first-in, first-out (FIFO) methods had been used in the accompanying financial statements, net loss would have decreased by $65,900 and $122,000 to net income of $1,800 and net loss of $103,700 for the years ended December 31, 1995 and 1994, respectively. Net income would have increased by $28,100 and net loss would have decreased by $32,900 to net income of $71,800 and net loss of $129,500 for the six months ended June 30, 1996 and 1995, respectively (unaudited). Stockholder's equity would have increased to $819,100 and $803,400 (unaudited) at December 31, 1995 and June 30, 1996. Notes payable consist of floor plan notes to Bank of America National Trust and Savings Association, secured by new and used vehicle inventories. The notes are payable on specific dates after sale of units, with monthly curtailments including interest at the bank's reference rate plus .75% (8.75% at December 31, 1995). The floor plan agreement requires the Company to meet certain financial covenants as defined by the agreement. The Company must maintain a current ratio of 1.25 to 1.0, working capital of $850,000, tangible net worth of $2,000,000 and a ratio of liabilities to tangible net worth of 2.25 to 1.0, all as defined in the agreement. Additional restrictions apply to incurring direct or contingent debt, capital expenditures and changes in ownership. Floor plan notes payable are guaranteed by the Company's majority stockholder. The Company recognized manufacturers' floor plan interest expense subsidies of approximately $82,000 and $51,000 for the years ended December 31, 1995 and 1994, respectively, and $15,000 and $9,000 for the six months ended June 30, 1996 and 1995, respectively (unaudited). These amounts have been offset against floor plan interest expense in the accompanying statements of operations. F-37 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5 -- PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31, 1995 ---------- JUNE 30, 1996 ----------- (UNAUDITED) Company vehicles............................. $ 32,500 $ 32,500 Equipment.................................... 206,300 206,300 Furniture and fixtures....................... 299,000 299,000 Leasehold improvements....................... 278,600 278,600 Signs........................................ 13,700 13,700 Equipment under capital lease................ -- 131,400 ---------- ----------- 830,100 961,500 Less accumulated depreciation and amortization............................... 559,500 607,100 ---------- ----------- $ 270,600 $ 354,400 ---------- ----------- ---------- -----------
NOTE 6 -- OBLIGATION UNDER CAPITAL LEASE At June 30, 1996, future minimum lease payments for equipment under a capital lease agreement are as follows:
YEAR ENDING JUNE 30, - ---------------------------------------------------------------------------------- 1997.............................................................................. $ 33,000 1998.............................................................................. 33,000 1999.............................................................................. 33,000 2000.............................................................................. 33,000 2001.............................................................................. 22,000 ---------- Total minimum lease payments...................................................... 154,000 Less imputed interest............................................................. 28,300 ---------- Present value of minimum lease payments........................................... 125,700 ---------- Less current maturities........................................................... 21,500 ---------- $ 104,200 ---------- ----------
F-38 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7 -- TRANSACTIONS WITH RELATED PARTIES NOTE RECEIVABLE -- As further discussed in Note 3, a note receivable is due from an entity owned by the Company's majority stockholder. ADVANCES -- Advances from the majority stockholder are unsecured and due on demand after December 31, 1996. Interest on the advances has been accrued at the rate of 6% per annum. At December 31, 1995 and June 30, 1996, $600,000 of the advances have been subordinated to Bank of America National Trust and Savings Association. MANAGEMENT SERVICES FEE -- In 1996, the Company paid $100,000 to an entity affiliated through common ownership for management services to be provided during 1996. The amount paid is being amortized monthly, with $50,000 being charged to operations for the six months ended June 30, 1996. LEASE AGREEMENT -- As further discussed in Note 8, the Company leases its premises from the majority stockholder. NOTE 8 -- COMMITMENTS AND CONTINGENCY The Company is obligated under a noncancellable operating lease with the stockholder for the rental of its facilities through November 1999. The Company is also obligated under a noncancellable operating sublease for the rental of a car lot through August 1997. An option exists to extend this lease to August 2000. The Company leases equipment under noncancellable agreements which expire in May, 2000. Following is a schedule of the approximate future minimum lease payments under the above noncancellable operating leases:
YEAR ENDING DECEMBER 31, STOCKHOLDER OTHER TOTAL - ---------------------------------------------------------- ----------- --------- ---------- 1996 (six months)......................................... $ 120,000 $ 15,000 $ 135,000 1997...................................................... 240,000 34,000 274,000 1998...................................................... 240,000 7,000 247,000 1999...................................................... 220,000 2,000 222,000 2000...................................................... -- 2,000 2,000 ----------- --------- ---------- $ 820,000 $ 60,000 $ 880,000 ----------- --------- ---------- ----------- --------- ----------
F-39 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 8 -- COMMITMENTS AND CONTINGENCY (CONTINUED) Rental expense incurred on operating leases amounted to approximately $285,000 and $280,000 for the years ended December 31, 1995 and 1994, respectively, with $240,000 being attributable to the lease with the stockholder for each of the years. Rental expense incurred on operating leases amounted to approximately $136,000 for the six months ended June 30, 1996 and 1995, with $120,000 being attributable to the lease with the stockholder in each of the six month periods. ENVIRONMENTAL -- Substantially all of the Company's facilities are subject to federal, state and local provisions regulating the discharge of materials into the environment. Compliance with these provisions has not had, nor does the Company expect such compliance to have, any material effect upon the capital expenditures, net income, financial condition or competitive position of the Company. Management believes that its current practices and procedures for the control and disposition of such wastes comply with applicable federal and state requirements. During the year ended December 31, 1995, the Company removed its underground gasoline and used motor oil storage tanks and cleaned up minor contamination surrounding the tanks. The Company does not expect to incur any further liability related to this clean-up. The Company has no plans to seek reimbursement from the State of California for the clean-up under SB 2004, the Underground Storage Tank Clean-up Fund. Accruals for environmental matters are recorded in operating expenses when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. In general, costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. NOTE 9 -- FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS The carrying amount of cash equivalents, trade receivables, trade payables and flooring notes payable approximate fair value because of the short-term nature of these instruments. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The carrying amounts and estimated fair values of the Company's significant financial instruments, none of which are held for trading purposes, are as follows:
DECEMBER 31, 1995 JUNE 30, 1996 (UNAUDITED) -------------------------- -------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ------------ ------------ ------------ ------------ Financial assets Notes receivable............................. $ 170,000 $ 170,000 $ 129,100 $ 129,100 Financial liabilities Flooring notes payable....................... $ 2,287,100 $ 2,287,100 $ 2,430,600 $ 2,430,600
The carrying amounts shown in the above table are included in the balance sheet under the indicated captions. F-40 SAM LINDER, INC. (DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 9 -- FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS (CONTINUED) The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Notes Receivable -- The fair values are based on the current rates offered by the Company for loans of the same remaining maturities with similar risks and collateral requirements. Flooring Notes Payable -- The carrying amounts approximate fair value because the interest rate fluctuates with the lender's prime rate. Advances From Stockholder -- It is not practicable to determine the fair value of advances from the majority stockholder, as the related party nature of the transaction impacts the repayment terms. NOTE 10 -- LABOR AGREEMENT Mechanics account for approximately 25% of the Company's work force and are covered by a collective bargaining agreement. This agreement was renewed in June 1996 for a three year period. NOTE 11 -- SUBSEQUENT EVENT Sam Linder, Inc. has executed a purchase and sale agreement whereby it has agreed to sell substantially all if its assets to Lithia Motors, Inc. The purchase price will consist of cash consideration of approximately $1,049,000 for property, plant and equipment and intangible assets, plus an amount for parts inventory. In addition, the purchaser will acquire the new vehicle inventories at the cost paid to the manufacturer and used vehicle inventories at a negotiated value. The sale is subject to customary closing conditions and approval of the change in ownership by the franchisers. F-41 INDEPENDENT AUDITORS' REPORT To the Stockholders Melody Vacaville, Inc. We have audited the accompanying balance sheet of Melody Vacaville, Inc. (dba Melody Toyota-Kia Vacaville) as of December 31, 1995, and the related statements of operations, stockholders' deficit and cash flows for each of the years in the two-year period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Melody Vacaville, Inc. as of December 31, 1995, and the results of its operations and cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Moss Adams LLP Seattle, Washington October 25, 1996 F-49 MELODY VACAVILLE, INC. (DBA MELODY TOYOTA-KIA VACAVILLE) BALANCE SHEET ASSETS December 31, June 30, 1995 1996 ----------- ----------- (Unaudited) CURRENT ASSETS Cash and cash equivalents $ 2,013,200 $ 2,201,800 Receivables 553,000 888,000 Inventories 4,137,900 4,223,000 Prepaid expenses and other 89,200 129,100 ----------- ----------- Total current assets 6,793,300 7,441,900 PROPERTY AND EQUIPMENT, net 256,000 230,500 ----------- ----------- $ 7,049,300 $ 7,672,400 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Flooring notes payable $ 4,054,600 $ 4,447,300 Current maturities of long-term debt 306,300 285,400 Note payable to related party - 50,000 Trade payables, including retained bank checks 2,343,200 3,054,400 Accrued liabilities 233,700 214,700 ----------- ----------- Total current liabilities 6,937,800 8,051,800 LONG-TERM DEBT, less current maturities 584,900 586,000 ----------- ----------- Total liabilities 7,522,700 8,637,800 ----------- ----------- STOCKHOLDERS' DEFICIT Common stock, no par value, 200,000 shares authorized, 100,000 shares issued and outstanding 1,881,000 1,881,000 Additional paid-in capital 282,000 282,000 Note receivable from stockholder (85,200) (85,200) Accumulated deficit (2,551,200) (3,043,200) ----------- ----------- Total stockholders' deficit (473,400) (965,400) ----------- ----------- $ 7,049,300 $ 7,672,400 ----------- ----------- ----------- ----------- The accompanying notes are an integral part of these financial statements. F-50 MELODY VACAVILLE, INC. (DBA MELODY TOYOTA-KIA VACAVILLE) STATEMENT OF OPERATIONS
Year Ended Six Months Ended December 31, June 30, --------------------------- --------------------------- 1994 1995 1995 1996 ------------ ------------ ------------ ------------ (Unaudited) SALES Vehicle $ 33,518,500 $ 24,141,500 $ 13,541,600 $ 12,715,800 Service and parts 3,478,300 2,608,400 1,358,500 1,396,000 Finance and lease 1,735,200 1,060,500 590,900 552,700 ----------- ------------ ----------- ---------- 38,732,000 27,810,400 15,491,000 14,664,500 ----------- ------------ ----------- ---------- COST OF SALES Vehicle 30,723,200 22,858,400 12,499,500 12,150,300 Service and parts 1,889,900 1,426,800 775,800 784,300 Finance and lease 880,400 572,900 294,200 292,300 ----------- ------------ ----------- ---------- 33,493,500 24,858,100 13,569,500 13,226,900 ----------- ------------ ----------- ---------- Gross profit 5,238,500 2,952,300 1,921,500 1,437,600 SELLING, GENERAL AND ADMINISTRATIVE 4,800,400 4,254,400 2,062,600 1,785,200 ----------- ------------ ----------- ---------- Operating income (loss) 438,100 (1,302,100) (141,100) (347,600) ----------- ------------ ----------- ---------- OTHER INCOME (EXPENSE) Interest expense (393,400) (474,700) (254,600) (161,400) Other, net 53,300 165,000 43,100 17,000 ----------- ------------ ----------- ---------- (340,100) (309,700) (211,500) (144,400) ----------- ------------ ----------- ---------- NET INCOME (LOSS) $ 98,000 $ (1,611,800) $ (352,600) $ (492,000) ----------- ------------ ----------- ---------- ----------- ------------ ----------- ----------
The accompanying notes are an integral part of these financial statements. F-51 MELODY VACAVILLE, INC. (DBA MELODY TOYOTA-KIA VACAVILLE) STATEMENT OF STOCKHOLDERS' DEFICIT
Note Common Stock Additional Receivable ------------------------ Paid-In From Accumulated Shares Amount Capital Stockholder Deficit Total --------- ------------ ----------- ----------- ------------- ----------- Balance, December 31, 1993 (Unaudited) 36,328 $ 1,531,000 $ - $ - $ (573,100) $ 957,900 Note receivable from stockholder - - 85,200 (85,200) - - Net income for the year ended December 31, 1994 - - - - 98,000 98,000 --------- ------------ ---------- ---------- ------------- ----------- Balance, December 31, 1994 36,328 1,531,000 85,200 (85,200) (475,100) 1,055,900 Net loss for the year ended December 31, 1995 - - - - (1,611,800) (1,611,800) Distribution to stockholder - - - - (464,300) (464,300) Capital contribution - - 196,800 - - 196,800 Issuance of common stock 12,109 350,000 - - - 350,000 Stock split 51,563 - - - - - --------- ------------ ---------- ---------- ------------- ----------- Balance, December 31, 1995 100,000 1,881,000 282,000 (85,200) (2,551,200) (473,400) Net loss for the six months ended June 30, 1996 - - - - (492,000) (492,000) --------- ------------ ---------- ---------- ------------- ----------- Balance, June 30, 1996 100,000 $ 1,881,000 $ 282,000 $ (85,200) $ (3,043,200) $ (965,400) --------- ------------ ---------- ---------- ------------- ----------- --------- ------------ ---------- ---------- ------------- -----------
The accompanying notes are an integral part of these financial statements. F-52 MELODY VACAVILLE, INC. (DBA MELODY TOYOTA-KIA VACAVILLE) STATEMENT OF CASH FLOWS
Year Ended Six Months Ended December 31, June 30, -------------------------- -------------------------- 1994 1995 1995 1996 ----------- ----------- ----------- ----------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income $ 98,000 $(1,519,400) $ (352,600) $ (492,000) Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities Depreciation and amortization 111,100 109,900 35,900 46,400 Change in allowance for doubtful accounts - 56,000 20,000 (24,500) (Gain) loss on disposition of fixed assets 1,500 (181,000) 14,500 - Changes in assets and liabilities (Increase) decrease in receivables (206,200) 394,600 (179,200) (310,500) (Increase) decrease in inventories (1,397,700) 913,000 (1,062,200) (85,100) (Increase) decrease in other current assets (17,200) (15,400) (57,700) (39,900) Increase (decrease) in trade payables (77,000) 2,051,000 916,800 711,200 Increase (decrease) in accrued liabilities 84,700 (180,900) (83,800) (19,000) ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activities (1,402,800) 1,627,800 (748,300) (213,400) ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of land - 600,000 - - Acquisition of property and equipment (163,100) (20,300) (14,000) (20,900) ----------- ----------- ----------- ----------- Net cash provided by (used in) investing activities (163,100) 579,700 (14,000) (20,900) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) on flooring notes payable 1,180,100 (350,900) 1,169,600 392,700 Principal payments on long-term debt (99,900) (547,800) (125,700) (111,100) Proceeds from long-term debt - 580,000 - 141,300 Dividends paid - (464,300) - - Issuance of common stock - 350,000 - - Contribution of capital - 196,900 - - ----------- ----------- ----------- ----------- Net cash provided by (used in) financing activities 1,080,200 (236,100) 1,043,900 422,900 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents (485,700) 1,971,400 281,600 188,600 CASH AND CASH EQUIVALENTS Beginning of period 527,500 41,800 41,800 2,013,200 ----------- ----------- ----------- ----------- End of period $ 41,800 $ 2,013,200 $ 323,400 $ 2,201,800 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for interest $ 393,400 $ 474,700 $ 254,600 $ 165,000 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Cash paid during the period for income taxes $ 800 $ 800 $ 800 $ 800 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
The accompanying notes are an integral part of these financial statements. F-53 MELODY VACAVILLE, INC. (DBA MELODY TOYOTA-KIA VACAVILLE) NOTES TO FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND NATURE OF BUSINESS - Melody Vacaville, Inc., dba Melody Toyota-Kia Vacaville (the Company), was established as a corporation on January 16, 1990, under the name Wilson/Malasoma, Inc. In March 1993, the name of the corporation was changed to Melody Vacaville, Inc. Through October 1995, majority ownership of the Company was held by an individual who also owned another automotive dealership. In November 1995, the majority stockholder sold his interest in the Company to the minority stockholder. Subsequent to the stock transaction, a stock split was declared, resulting in an increase in the number of shares which the Company is authorized to issue from 100,000 to 200,000. The 48,437.33 shares outstanding prior to the split were converted into 100,000 shares. The purpose of the Company is to engage in retail sales of new Toyota and Kia vehicles obtained through dealership agreements, used vehicles, parts and service. The Company sells to individuals and commercial businesses located primarily in the Vacaville, California area. MAJOR SUPPLIER AND DEALER AGREEMENT - The Company purchases substantially all of its new vehicles and inventory from automakers at the prevailing prices charged by the automakers to all franchised dealers. The Company's overall sales could be impacted by the automaker's ability or unwillingness to supply the dealership with an adequate supply of popular models. The Dealer Agreement generally limits the location of the dealership and retains automaker approval rights over changes in dealership management and ownership. The automaker is also entitled to terminate the agreement if the dealership is material breach of the terms. The Company is presently operating under a dealer agreement with Toyota, which expires on November 1, 1997. The agreement requires the Company to maintain specified sales, net working capital, and debt to equity, among other matters. If the Company is in compliance with the terms of the agreement on November 1, 1997, Toyota will enter into a new standard six-year dealer agreement with the Company. At December 31, 1995 and June 30, 1996, the Company is not in compliance with certain covenants included in the dealer agreement. Further, financial information previously provided to Toyota includes various false representations as to the financial position of the Company. Under the terms of the agreement, Toyota may treat this as an event that will terminate the dealer agreement. If the agreement is terminated, the Company will not be able to continue its existence, unless a suitable replacement franchise is obtained. However, as further discussed in Note 11, the Company is in the process of selling the majority of its operating assets and transferring the dealer agreement to an unrelated entity. F-54 MELODY VACAVILLE, INC. (DBA MELODY TOYOTA-KIA VACAVILLE) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, the Company considers contracts in transit and all highly liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. Bank checks written but not released as of the balance sheet dates are included in flooring notes payable or accounts payable, depending on the original classification of the liability being paid. INVENTORIES - New vehicle, used vehicle and parts and accessories inventories are stated at the lower of cost or market. Cost for new vehicles is determined by using the last-in, first-out (LIFO) method. Cost for used vehicles is based on the specifically identified amounts. For parts inventories, cost is based on current catalog prices, which approximates cost determined using the first-in, first-out method. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost and are being depreciated over their estimated useful lives, principally using the straight-line method. Expenditures for maintenance, repairs and minor renewals are expensed as incurred, while significant renewals and betterments are capitalized. When an asset is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the account, and any gain or loss is credited or charged to income. INCOME TAXES - The Company, with the consent of its stockholders, has elected to be an S Corporation under the Internal Revenue Code and California Revenue and Taxation Code. In lieu of corporate income taxes, the stockholders of an S Corporation are taxed on their proportionate share of the Company's taxable income or receive a deduction for their proportionate share of the Company's taxable loss. The Company is subject to a 1.5% California franchise tax on taxable income, with a minimum amount of $800 payable annually. As discussed in Note 8, a portion of a transaction involving the former majority stockholder has been treated as dividend. Since a proportionately equal distribution was not paid to the minority stockholder, this could be considered an event which could terminate the Company's S election. In addition, other tax-related elections made by the Company could also be jeopardized. If the S election were to be terminated, the Company would be required to pay Federal income and state of California franchise tax on taxable income. These financial statements do not include any adjustments that may be necessary should the S election be terminated. F-55 NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTERIM FINANCIAL STATEMENTS - The accompanying unaudited financial statements for the six-months ended June 30, 1995 and 1996 have been prepared on substantially the same basis as the audited financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information set forth therein. ADVERTISING - The Company expenses production and other costs of advertising as incurred. Advertising expense for the years ended December 31, 1995 and 1994 were $700,000 and $854,000, respectively. Advertising expense for the six months ended June 30, 1996 and 1995 were $271,000 (unaudited) and $332,000 (unaudited), respectively. CONCENTRATIONS OF CREDIT RISK - Concentration of credit risk with respect to trade receivables is limited due to the large number of customers comprising the Company's customer base. Receivables arising from vehicle sales are secured by the related vehicle. Receivables arising from all other sales are unsecured open accounts. Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash deposits. In the normal course of business, the Company has balances in excess of federally insured amounts. MANAGEMENT ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at December 31, 1995 and June 30, 1996 and revenues and expenses during the years ended December 31, 1994 and 1995 and the six month periods ended June 30, 1995 and 1996. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements. REVENUE RECOGNITION - Revenue from the sale of vehicles is recognized upon delivery, when the sales contract is signed and down payment has been received. Income from finance and insurance commissions is recorded separately on an accrual basis. F-56 NOTE 2 - RECEIVABLES Receivables consist of the following: December 31, June 30, 1995 1996 ------------ ---------- (Unaudited) Trade receivables $ 423,700 $ 480,600 Finance reserves 192,300 211,000 Employee receivables 5,200 81,500 Insurance settlement receivable - 118,300 Advances to majority stockholder 77,800 118,100 --------- ---------- 699,000 1,009,500 Less allowance for doubtful accounts 146,000 121,500 --------- ---------- $ 553,000 $ 888,000 --------- ---------- --------- ---------- The insurance settlement receivable represents management's estimate of the proceeds to be realized from a claim arising from the theft of a Company-owned vehicle. The vehicle, a 1992 Lamborghini with a recorded cost of approximately $178,000, was stolen on June 24, 1996. A loss of $60,000 has been recognized in the statement of operations for the six months ended June 30, 1996, representing the difference between the recorded cost and the estimated insurance proceeds. Related debt of $107,100 is included in long-term debt at June 30, 1996 ($120,800 at December 31, 1995). NOTE 3 - NOTE RECEIVABLE FROM MAJORITY STOCKHOLDER A note receivable from majority stockholder is due October 1, 1998. Interest at the same rate charged under the Company's flooring agreement is payable monthly. The note is secured by the stockholder's shares of the Company's common stock. Since this amount represents a portion of funds due from the stockholder for additional paid-in capital, it is reflected as an increase to stockholders' deficit at December 31, 1995 and June 30, 1996. F-57 NOTE 4 - INVENTORIES AND FLOORING NOTES PAYABLE The new and used vehicle inventory collateralizing related notes payable and other inventory are as follows: December 31, 1995 June 30, 1996 ------------------------- -------------------------- Inventory Notes Inventory Notes Cost Payable Cost Payable ----------- ----------- ----------- ----------- (Unaudited) New and demonstrator vehicles $ 2,812,000 $ 3,045,900 Used vehicles 1,290,700 1,185,300 Parts and accessories 309,600 331,100 ----------- ----------- Inventories at FIFO 4,412,300 4,562,300 Less LIFO reserve for new vehicle inventories 274,400 339,300 ----------- ----------- Inventories at LIFO $ 4,137,900 $ 4,054,600 $ 4,223,000 $ 4,447,300 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- If the specific identification and the first-in, first-out (FIFO) methods had been used in the accompanying financial statements, net loss would have increased by $47,400, to net loss of $1,659,200 for the year ended December 31, 1995, and net income would have increased by $92,400 to $190,400 for the year ended December 31, 1994. Net loss would have decreased by $64,800 and increased by $24,000 to net loss of $427,200 and $376,600 for the six months ended June 30, 1996 and 1995, respectively (unaudited). Stockholder's deficit would have decreased to $199,000 and $626,100 (unaudited) at December 31, 1995 and June 30, 1996, respectively. Notes payable consist of floor plan notes to Primus Automotive Financial Services, Inc., (Primus) secured by new and used vehicle inventories, parts inventories, accounts receivable and furniture, fixtures and equipment, among other items. The notes are payable on demand, or if no demand is made, on specific dates after sale of units, with monthly curtailments including interest at Primus' prime rate plus .75% to 1.5%, depending on the vehicles being financed. Floor plan notes payable are guaranteed by the Company's majority stockholder. F-58 NOTE 4 - INVENTORIES AND RELATED NOTES PAYABLE (CONTINUED) The Company recognized manufacturers' floor plan interest expense subsidies of approximately $75,000 for the six months ended June 30, 1996 (unaudited). These amounts have been offset against floor plan interest expense in the accompanying statements of operations. There were no interest subsidies for periods prior to December 31, 1995. NOTE 5 - PROPERTY AND EQUIPMENT December 31, June 30, 1995 1996 ------------ ----------- (Unaudited) Company vehicles $ 34,500 $35,000 Equipment 231,300 231,900 Furniture and fixtures 321,600 336,700 Leasehold improvements 122,800 127,500 ---------- ---------- 710,200 731,100 Less accumulated depreciation and amortization 454,200 500,600 ---------- ---------- $256,000 $230,500 ---------- ---------- ---------- ---------- NOTE 6 - LONG-TERM DEBT Long-term debt consists of the following: December 31, June 30, 1995 1996 ------------ ----------- (Unaudited) TERM NOTE PAYABLE TO PRIMUS AUTOMOTIVE FINANCIAL SERVICES, INC., due in monthly installments of $10,000, plus interest at 1.5% above prime (8.75% at June 30, 1996). The note is guaranteed by the stockholders, and is subject to cross-default provisions included in the flooring agreement described in Note 4. $ 590,000 $ 530,000 F-59 NOTE 6 - LONG-TERM DEBT (CONTINUED) December 31, June 30, 1995 1996 ------------ ----------- (Unaudited) UNSECURED AMOUNTS PAYABLE TO MAJORITY STOCKHOLDER, due aggregate in monthly installments of $2,030, with interest at 10.75% and 13.50%. The amounts were loaned to the Company as part of the contribution of vehicles discussed in Note 7. $ - $ 82,000 UNSECURED NOTE PAYABLE TO MINORITY STOCKHOLDER, due in monthly installments of $4,395, including interest at 8%. 177,000 150,400 NOTE PAYABLE TO TOYOTA MOTOR CREDIT CORPORATION, due in monthly installments of $3,354, including interest at 6.25%. Collateralized by a 1992 Lamborghini, which was stolen in June 1996 (Note 2). Due to the theft of the collateral, the entire note is classified as a current liability at June 30, 1996. 120,800 107,100 OTHER 3,400 1,900 --------- --------- 891,200 871,400 Current portion 306,300 285,400 --------- --------- Long-term portion $ 584,900 $ 586,000 --------- --------- --------- --------- The notes payable to stockholders are subordinated to Primus Automotive Financial Services, Inc. (Note 4). Scheduled annual principal maturities on these notes are as follows: Year Ending December 31, - ------------------------ Stockholders Other Total ------------ ---------- -------- 1996 (six months) $ 28,100 $ 169,100 $ 197,200 1997 60,200 120,000 180,200 1998 66,000 120,000 186,000 1999 58,800 120,000 178,800 2000 19,200 110,000 129,200 ----------- ------------ --------- $ 232,300 $ 639,100 $ 871,400 ----------- ------------ --------- ----------- ------------ --------- F-60 NOTE 7 - TRANSACTIONS WITH RELATED PARTIES ADVANCES TO MAJORITY STOCKHOLDER - Advances to the majority stockholder (Note 2) are unsecured, noninterest bearing and due on demand. NOTE RECEIVABLE FROM STOCKHOLDER - As further discussed in Note 3, a note receivable is due from the Company's majority stockholder. NOTE PAYABLE - A note payable to the estate of a relative of the minority stockholder is due 60 days from demand, with interest at 12.5% per annum payable monthly. The note is collateralized by used car inventory. NOTES PAYABLE TO STOCKHOLDERS - As discussed in Note 6, the Company has two notes payable to the Company's stockholders. EXTENDED WARRANTY CONTRACTS - The Company sells various extended warranty products to its customers. A portion of these contracts are ultimately reinsured by an entity related through common ownership. Extended warranty premiums ceded to the reinsurance company amounted to $12,000 for the year ended December 31, 1995, and $43,000 for the six months ended June 30, 1996 (unaudited). A different related entity was used to reinsure the extended warranty products prior to the stock transaction described in Note 1. Information regarding the volume of insurance premiums ceded to that entity is not available. LEASE AGREEMENT - As further discussed in Note 8, the Company leases its premises from the minority stockholder and the former majority stockholder. CONTRIBUTION OF VEHICLES - In 1996, the majority stockholder contributed a 1977 Ferrari and a 1984 Rolls Royce to the Company, in exchange for a reduction in amounts due from the stockholder for advances made. The vehicles were recorded at a value of $33,500 and $27,250, respectively. Subsequently, the stockholder obtained a personal loan, using the vehicles as collateral. The funds, amounting to approximately $91,000, were then loaned to the Company (Note 6). While the stockholder continues to be listed as the owner of record of these vehicles, it is his intention that title will be transferred to the Company upon sale. SALE OF LAND AND DISTRIBUTION OF PROCEEDS - Concurrent with the stock transaction described in Note 1, the Company sold certain land for $600,000, resulting in a gain of $108,000 being recognized in 1995. Directly from escrow, funds amounting to approximately $450,000 were distributed to the former majority owner. The remaining funds, amounting to approximately $125,000, were distributed to a dealership owned by the former majority owner in payment of intercompany accounts payable. F-61 NOTE 7 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED) AFFILIATED DEALERSHIP - Through November 1995, the Company had various transactions with another dealership owned by a stockholder (Note 1). The Company and the related dealership conducted various transactions, including trading of new and used vehicles. In addition, the dealerships shared certain common administrative functions. These transactions are summarized as follows:
Year ended December 31, ----------------------- Six months ended 1994 1995 June 30, 1995 ----------- --------- ------------- Sales of vehicles to affiliate $ 1,508,000 $ 763,000 $ 705,000 Purchases of vehicles from affiliate 1,856,000 719,000 643,000 Payments to affiliate for shared services 184,000 69,000 54,000 Receipts from affiliate for shared expenses 45,000 54,000 39,000
NOTE 8 - COMMITMENTS AND CONTINGENCY LEASES - The Company is obligated under a noncancellable operating lease with the former majority stockholder and the current minority stockholder for the rental of its facilities through March 2001. The lease payment is subject to annual increases based on changes in the Consumer Price Index. The Company has an option to renew the lease for an additional five years. The Company also leases equipment under noncancellable agreements which expire through 1998. Following is a schedule of the approximate future minimum lease payments under the above noncancellable operating leases: Year Ending December 31, Facilities Other Total ------------------------ ----------- -------- ---------- 1996 (six months) $ 215,200 $ 24,700 $ 239,900 1997 430,400 49,400 479,800 1998 430,400 12,000 442,400 1999 430,400 - 430,400 2000 430,400 - 430,400 2001 107,600 - 107,600 ----------- -------- ---------- $ 2,044,400 $ 86,100 $2,130,500 ----------- -------- ---------- ----------- -------- ---------- F-62 NOTE 8 - COMMITMENTS AND CONTINGENCY (CONTINUED) Rental expense incurred on operating leases amounted to approximately $470,000 and $462,000 for the years ended December 31, 1995 and 1994, respectively, with $413,000 and $405,000 being attributable to the lease with the related parties for each of the years. Rental expense incurred on operating leases amounted to approximately $231,000 and $235,000 for the six months ended June 30, 1996 and 1995, respectively, with $207,000 being attributable to the lease with the related parties in each of the six month periods. ENVIRONMENTAL - Substantially all of the Company's facilities are subject to federal, state and local provisions regulating the discharge of materials into the environment. Compliance with these provisions has not had, nor does the Company expect such compliance to have, any material effect upon the capital expenditures, net income, financial condition or competitive position of the Company. Management believes that its current practices and procedures for the control and disposition of such wastes comply with applicable federal and state requirements. NOTE 9 - FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. The carrying amount of cash equivalents, trade receivables, trade payables and flooring notes payable approximate fair value because of the short- term nature of these instruments. It is not practicable to estimate the fair values of advances to the majority stockholder, the note receivable from stockholder, or notes payable to related parties, as the relationship of the parties to the Company influences the terms of the instruments, and similar instruments are not generally available. F-63 NOTE 9 - FAIR VALUE OF SIGNIFICANT FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and estimated fair values of the Company's significant financial instruments, none of which are held for trading purposes, are as follows: December 31, 1995 June 30, 1996 (Unaudited) ------------------------ ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ------------ Financial liabilities Flooring notes payable $ 4,054,600 $ 4,054,600 $ 3,239,900 $ 3,239,900 Long-term debt 301,200 301,200 341,400 341,400 Note payable - Primus 590,000 590,000 530,000 530,000 The carrying amounts shown in the above table are included in the balance sheet under the indicated captions. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: FLOORING NOTES PAYABLE - The carrying amounts approximate fair value because the interest rate fluctuates with the lender's prime rate. NOTE PAYABLE TO PRIMUS - The carrying amount approximates fair value because the interest rate fluctuates with the lender's prime rate. NOTE 10 - SUBSEQUENT EVENT Melody Vacaville, Inc. has executed a purchase and sale agreement whereby it has agreed to sell substantially all if its assets to Lithia Motors, Inc. The purchase price will consist of cash consideration of approximately $2,300,000 for property and equipment and intangible assets, plus an amount for parts inventory. In addition, the purchaser will acquire the new vehicle inventories at the cost paid to the manufacturer and used vehicle inventories at a negotiated value. The sale is subject to customary closing conditions and approval of the change in ownership by the franchisers. F-64 [Description of "Priority You" Marketing Campaign] [Inside Back Cover of Prospectus] NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES OF CLASS A COMMON STOCK TO WHICH IT RELATES OR AN OFFER TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE OF THIS PROSPECTUS OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ---------------------------------------------------- TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY........................................................... 3 RISK FACTORS................................................................. 8 COMPANY RESTRUCTURING AND PRIOR S CORPORATION STATUS ........................ 13 PENDING ACQUISITIONS......................................................... 15 USE OF PROCEEDS.............................................................. 15 DIVIDEND POLICY.............................................................. 16 CAPITALIZATION............................................................... 17 DILUTION..................................................................... 17 SELECTED COMBINED FINANCIAL DATA............................................. 19 PRO FORMA COMBINED AND CONDENSED FINANCIAL DATA.............................. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................................... 26 INDUSTRY..................................................................... 34 BUSINESS......................................................................35 MANAGEMENT................................................................... 46 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... 49 DESCRIPTION OF CAPITAL STOCK................................................. 51 SHARES ELIGIBLE FOR FUTURE SALE.............................................. 53 UNDERWRITING................................................................. 54 LEGAL MATTERS................................................................ 56 EXPERTS...................................................................... 56 ADDITIONAL INFORMATION....................................................... 56 UNTIL ______________, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. _______________ SHARES [LOGO] LITHIA MOTORS, INC. CLASS A COMMON STOCK PROSPECTUS FURMAN SELZ DAIN BOSWORTH INCORPORATED EVEREN SECURITIES, INC. _________, 1996 PART II (Items not required in Prospectus) ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the fees and expenses incurred by the Company in connection with the Offering. Except for the SEC registration fees, NASD filing fees, and Nasdaq initial listing fees, all expenses are estimates: SEC Registration Fees. . . . . . . . .$12,769 NASD Filing Fees . . . . . . . . . . . .4,203 Nasdaq Initial Listing Fee . . . . . . 20,725 Blue Sky Fees and Expenses (including legal fees). . . . . . . 15,000 Costs of Printing. . . . . . . . . . .100,000 Accounting Fees and Expenses . . . . .175,000 Legal Fees . . . . . . . . . . . . . .275,000 Miscellaneous Expenses . . . . . . . .192,303 -------- Total Expenses. . . . . . . . . . $795,000 -------- -------- ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS As an Oregon corporation, the Company is subject to the Oregon Business Corporation Act (the "Business Corporation Act"). Under the Business Corporation Act, a corporation may provide in its Articles of Incorporation or in its Bylaws for the indemnification of directors and officers against liability where the director or officer has acted in good faith and with a reasonable belief that actions taken were in the best interests of the corporation or at least not adverse to the corporation's best interests and, if in a criminal proceeding, the individual had no reasonable cause to believe that the conduct in question was unlawful. Under the Business Corporation Act, a corporation may not indemnify an officer or director against liability in connection with a claim by or in the right of the corporation in which such officer or director was adjudged liable to the corporation or in connection with any other proceeding in which the officer or director was adjudged liable for receiving an improper personal benefit; however, a corporation may indemnify against the reasonable expenses associated with such proceeding. A corporation may not indemnify against breaches of the duty of loyalty. The Business Corporation Act provides for mandatory indemnification of directors against all reasonable expenses incurred in the successful defense of any claim made or threatened whether or not such claim was by or in the right of the corporation. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances whether or not the director or officer met the good faith and reasonable belief standards of conduct set out in the statute. Unless otherwise stated in the Articles of Incorporation, officers of the corporation are also entitled to the benefit of the above statutory provisions. The Business Corporation Act also provides that the corporation may, by so providing in its Articles of Incorporation, eliminate or limit the personal liability of a director to the corporation or its shareholders for monetary damages for conduct as a director, provided that the Articles of Incorporation may not eliminate or limit liability for any breach of the director's duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, any unlawful distribution, or any transaction from which the director received an improper personal benefit. In accordance with Oregon law, the Articles of Incorporation of the Company provide that directors are not personally liable to the corporation or its shareholders for monetary damages for conduct as a director, except for (i) any breach of a director's duty of loyalty to the corporation, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) any distribution to shareholders which is unlawful, or (iv) any transaction from which the director received an improper personal benefit. The Articles of Incorporation also provide for indemnification of any person who is or was a party, or is threatened to be made a party, to any civil, administrative or criminal proceeding by reason of the fact that the person is or was a director or officer of the corporation or any of its subsidiaries, or is or was serving at the request of the corporation as a director, officer, partner, agent or employee of another corporation or entity, against II-1 expenses, including attorneys' fees, judgments, fines and amounts paid in settlement, actually and reasonably incurred by that person if (i) the person acted in good faith and in a manner reasonably believed to not be opposed to the best interests of the corporation, or (ii) the act or omission giving rise to such action or proceeding is ratified, adopted or confirmed by the corporation, or the benefit thereof was received by the corporation. Indemnification is available under this provision of the Articles of Incorporation in the case of derivative actions, unless the person is adjudged to be liable for gross negligence or deliberate misconduct in the performance of the person's duty to the corporation. To the extent a director, officer, employee or agent (including an attorney) is successful on the merits or otherwise in defense of any action to which this provision is applicable, the person is entitled to indemnification for expenses actually and reasonably incurred by the person in connection with that defense. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On April 5, 1996, the Company issued __________ shares of Class B Common Stock pursuant to the terms of a Plan of Recapitalization under which Sidney B. DeBoer exchanged 75 shares of the Company's Common Stock for __________ shares of Class B Common Stock and M. L. Dick Heimann exchanged 45 shares of the Company's Common Stock for __________ shares of Class B Common Stock. The issuance of these securities was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits. The index of exhibits being filed with this Registration Statement is attached on page Z-1. (b) Financial Statement Schedules None. ITEM 17. UNDERTAKINGS. The undersigned registrant hereby undertakes that: (A) The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (B) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant Rule 424(b)(1) or (4), or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared it effective. (C) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (D) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, (the "Act") may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of II-2 appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Medford, state of Oregon, on October 31, 1996. LITHIA MOTORS, INC. By /s/ Sidney B. DeBoer ------------------------------------------ Sidney B. DeBoer, President PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON OCTOBER 31, 1996 /s/ Sidney B. DeBoer /s/ M. L. Dick Heimann - ----------------------------------------- ----------------------------------- Sidney B. DeBoer, Chairman, President, M.L. Dick Heimann, Director Chief Executive Officer and Director (Principal Executive Officer) /s/ Brian R. Neill - ----------------------------------------- Brian R. Neill, Chief Financial Officer (Principal Financial and Accounting Officer) EXHIBIT INDEX
Exhibit ------- *1.1 Form of Underwriting Agreement 3.1 Restated Articles of Incorporation of Lithia Motors, Inc. 3.2 Bylaws of Lithia Motors, Inc. *4.1 Specimen Common Stock certificate *5.1 Opinion of Foster Pepper & Shefelman **10.1 1996 Stock Incentive Plan **10.2.1 Incentive Stock Option Agreement **10.2.2 Non-Qualified Stock Option Agreement **10.2.3 Incentive Stock Option Agreement **10.3.1 Chrysler Corporation Chrysler Sales and Service Agreement, dated January 10, 1994, between Chrysler Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc. (standard provisions are in Exhibit 10.3.2 hereto)(1) **10.3.2 Chrysler Corporation Dealer Agreement Standard Provisions **10.4.1 Honda Automobile Dealer Sales and Service Agreement dated August 11, 1994, between American Honda Motor Company, Inc. and Lithia Motors, Inc. dba Lithia Honda (standard provisions are in Exhibit 10.4.2 hereto) **10.4.2 American Honda Automobile Dealer's Standard Agreement 10.5.1 Isuzu Dealer Sales and Service Agreement, dated June 5, 1996 between American Isuzu Motors, Inc. and Lithia Motors, Inc. **10.5.2 Isuzu Dealer Sales and Service Agreement General Provisions 10.6.1 Mercury Sales and Service Agreement, dated December 28, 1979, between Ford Motor Company and Lithia Motors, Inc. (General provisions are in Exhibit 10.6.5 hereto)(2) *10.6.2 Amendment, dated May 22, 1989, to Mercury Sales and Service Agreement and Lincoln Sales and Service Agreement **10.6.3 Ford Motor Company Imported Vehicle Sales and Service Agreement, dated July 2, 1984, between Ford Motor Company and Lithia Motors, Inc. dba Lithia Toyota, Lincoln-Mercury (General provisions are in Exhibit 10.6.4 hereto) **10.6.4 Ford Motor Company Imported Vehicle Sales and Service Agreement General Provisions *10.6.5 Mercury Sales and Service Agreement General Provisions(2)
Z-1 **10.7.1 General Motors Corporation Dealer Sales and Service Agreement, dated March 12, 1993, between General Motors Corporation Pontiac Division and Lithia Motors, Inc. dba Lithia Pontiac **10.7.2 General Motors Dealer Sales and Service Agreement Standard Provisions **10.8.1 Mazda Dealer Agreement, dated April 11, 1994 between Mazda Motor of America, Inc. and Lithia Dodge, L.L.C. dba Lithia Mazda **10.8.2 Letter, dated September 29, 1995 extending Mazda Dealer Agreement between Mazda Motor of America, Inc. and Lithia Dodge, L.L.C. dba Lithia Mazda **10.9.1 Saturn Distribution Corporation Dealer Agreement, dated September 12, 1991, between Saturn Distribution Corporation and Medford Dodge dba Saturn of Medford **10.10.1 Toyota Dealer Agreement, dated January 30, 1990, between Toyota Motor Distributors, Inc. and Lithia Motors, Inc. dba Medford Toyota 10.10.2 Toyota Dealer Agreement Standard Provisions *10.10.3 Agreement, dated September 30, 1996, between Toyota Motor Sales, U.S.A., Inc. and Lithia Motors, Inc. 10.11.1 Suzuki Term Dealer Sales and Service Agreement, dated May 13, 1996, between American Suzuki Motor Corporation and Lithia Motors, Inc. dba Lithia Suzuki **10.13.1 Asset Purchase Agreement, dated August 2, 1996, between Lithia Motors, Inc. and Roberts Dodge, Inc. **10.13.2 Land Sale Contract, dated August 2, 1996, between Lithia Properties, L.L.C. and Milford G. Roberts, Sr. and Sandra L. Roberts *10.13.3 Assignment of Land Sale Contract, dated , between Lithia Properties, LLC and Lithia Motors, Inc. *10.14.1 Purchase and Sale Agreement between Lithia Motors, Inc. and Sam Linder, Inc. *10.15.1 Reorganization Agreement, dated as of October 10, 1996, by and among Lithia Motors, Inc., LGPAC, Inc., Lithia DM, Inc., Lithia MTLM, Inc., Lithia HPI, Inc., Lithia SSO, Inc., Lithia Rentals, Inc., Discount Auto Truck Rental, Inc., Lithia Auto Services, Inc., Lithia Holding Company L.L.C., Sidney B. DeBoer, M.L. Dick Heimann, R. Bradford Gray, and Steve Philips 10.16.1 Alternative Rate Option Promissory Note by Lithia Motors, Inc., Lithia TLM, LLC, Lithia Dodge, L.L.C., and Lithia's Grants Pass Auto Center, L.L.C., to United States National Bank of Oregon in the amount of $18 million(3) 10.16.2 Promissory Note by Lithia Motors, Inc. to United States National Bank of Oregon in the amount of $6.0 million(4) 10.16.3 Promissory Note by Lithia Leasing, Inc. to United States National Bank of Oregon in the amount of $1.4 million (5)
Z-2 10.17.1 Promissory Note between Lithia Motors, Inc. and Sidney B. DeBoer in the amount of $500,000(6) 10.17.2 Subordination Agreement between Lithia Motors, Inc., Sidney B. DeBoer and United States National Bank(7) 10.18.1 Floor Plan Accommodation Agreement (Security Agreement) between Lithia Motors, Inc. and United States National Bank of Oregon(8) 10.18.2 Corporate Resolution to Guarantee of Lithia Motors, Inc. (9) *10.19.1 Commercial Guaranty under which Sidney B. DeBoer is the guarantor of obligations of Lithia Motors, Inc. to United States National Bank of Oregon(10) 10.20.1 Management Contract between Lithia Leasing, Inc. and Lithia Properties LLC. *10.21.1 Commercial Lease, dated September 20, 1996, between Lithia Properties, L.L.C. and Lithia Motors, Inc.(11) *10.22.1 Commercial Lease, effective January 1, 1997, between Lithia Properties, L.L.C. and Lithia Motors, Inc.(12) *10.23.1 Commercial Security Agreement, dated September 9, 1996, between Lithia Motors, Inc. and United States National Bank *10.24.1 Agreement for Purchase and Sale of Business, dated October 7, 1996, between Lithia Motors, Inc. and Melody Vacaville, Inc. *10.24.2 Commercial Lease, dated April 1, 1992, between Billy J. Wilson, et al. and Wilson/Malasoma, Inc., and Assignment of Lease, dated , relating to the Vacaville, California facility. *21.1 Subsidiaries of Lithia Motors, Inc. 23.1 Consent of KPMG Peat Marwick LLP relating to Lithia Motors, Inc. 23.2 Consent of KPMG Peat Marwick LLP relating to Roberts Dodge, Inc. 23.3 Consent of Moss Adams LLP relating to Sam Linder, Inc. 23.4 Consent of Moss Adams LLP relating to Melody Vacaville, Inc. 23.5 Consent of Foster Pepper & Shefelman (included in Exhibit 5.1). **24.1 Powers of Attorney **27.1 Financial Data Schedules
- ------------ * To be filed by amendment ** Previously filed (1) Substantially identical agreements exist between Chrysler Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc., and between Chrysler Corporation and Lithia's Grants Pass Auto Mart, with respect to Jeep, Eagle, Dodge and Plymouth sales and service, and between Chrysler Corporation and Medford Dodge with respect to Dodge sales and service. (2) A substantially identical agreement exists between the same parties with respect to Lincoln Sales and Services. (3) Substantially identical notes exist between the same parties in amounts of $2.0 million, $2.5 million, and $5.0 million. (4) A substantially identical note exists between the same parties in the amount of 400,000. (5) Substantially identical notes exist between the same parties in amounts of $750,000, and $1.0 million. (6) A substantially identical note exists between Lithia Motors, Inc. and Manfred L. Heimann in the same amount. (7) A substantially identical agreement exists between Lithia Motors, Inc. and Manfred L. Heimann. Z-3 (8) Substantially identical agreements exist between United States National Bank of Oregon and each of Lithia TLM, LLC, Lithia Dodge, L.L.C., Lithia's Grants Pass Auto Center, L.L.C., and Lithia Leasing, Inc. (9) A substantially identical guarantee exists under which Lithia's Grants Pass Auto Center, L.L.C. is the Guarantor. (10) A substantially identical guaranty exists under which Manfred L. Heimann is the Guarantor of Lithia Motors, Inc. (11) Substantially identical leases of the same date exist between Lithia Properties L.L.C. and (i) Lithia TLM, L.L.C. and Lithia MTLM, Inc., relating to the properties located in Medford, Oregon at 360 E. Jackson St., 400 N. Central Ave., 325 E. Jackson St., 343-345 Apple St., 440-448 Front St., 3rd & Front St. and 344 Bartlett, collectively at a lease rate of $42,828 per month; (ii) Lithia Motors, Inc. dba Lithia Body and Paint, relating to the properties in Medford, Oregon, located at 4th & Bartlett, 235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of $16,890 per month; (iii) Discount Auto and Truck Rental, Inc., relating to properties located in Medford, Oregon, at 326 N. Bartlett, 315 & 321 Apple St., and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of $2,609 per month; (iv) Lithia Dodge, L.L.C. and Lithia DM, Inc., relating to properties located in Medford, Oregon, at 322 E. 4th, 315 & 324 E. 5th St., 225, 319 & 323 E. 6th, Riverside & 4th, Riverside & 6th, and 129 N. Riverside, collectively at a lease rate of $53,490 per month; (v) Lithia Grants Pass Auto Center and L.L.C., LCGAC, Inc., relating to the property located in Grants Pass, Oregon, at 1421 N.E. 6th at a lease rate of $25,625 per month; (vi) Lithia Motors, Inc. and Lithia SSO, Inc., relating to properties located in Medford, Oregon, at 400, 705-717 N. Riverside Ave., 712 and 716 Pine St., and 502 Maple St., collectively at a lease rate of $20,048 per month; (vii) Lithia Motors, Inc. dba Thrift Auto Supply, relating to the properties located in Medford, Oregon, at 801 N. Riverside Ave, and 503 Maple St., collectively at a lease rate of $6,265 per month; and (viii) Lithia Motors, Inc. and Lithia HPI, Inc., relating to properties located in Medford, Oregon, at 700 and 800 N. Central Ave, 217 and 220 N. Beatty St., 710 and 815-817 Niantic St., and 311 & 313 Maple St., collectively at a lease rate of $30,350 per month. (12) Substantially identical leases exist between Lithia Properties L.L.C. and (i) Lithia TLM, L.L.C. and Lithia MTLM, Inc., relating to the properties located in Medford, Oregon at 360 E. Jackson St., 400 N. Central Ave., 325 E. Jackson St., 343-345 Apple St., 440-448 Front St., 3rd & Front St. and 344 Bartlett, collectively at a lease rate of $ per month; (ii) Lithia Motors, Inc. dba Lithia Body and Paint, relating to the properties in Medford, Oregon, located at 4th & Bartlett, 235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of $ per month; (iii) Discount Auto and Truck Rental, Inc., relating to properties located in Medford, Oregon, at 326 N. Bartlett, 315 & 321 Apple St., and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of $ per month; (iv) Lithia Dodge, L.L.C. and Lithia DM, Inc., relating to properties located in Medford, Oregon, at 322 E. 4th, 315 & 324 E. 5th St., 225, 319 & 323 E. 6th, Riverside & 4th, Riverside & 6th, and 129 N. Riverside, collectively at a lease rate of $53,490 per month; (v) Lithia Grants Pass Auto Center and L.L.C., LCGAC, Inc., relating to the property located in Grants Pass, Oregon, at 1421 N.E. 6th at a lease rate of $25,625 per month; (vi) Lithia Motors, Inc. and Lithia SSO, Inc., relating to properties located in Medford, Oregon, at 400, 705-717 N. Riverside Ave., 712 and 716 Pine St., and 502 Maple St., collectively at a lease rate of $ per month; (vii) Lithia Motors, Inc. dba Thrift Auto Supply, relating to the properties located in Medford, Oregon, at 801 N. Riverside Ave, and 503 Maple St., collectively at a lease rate of $6,265 per month; and (viii) Lithia Motors, Inc. and Lithia HPI, Inc., relating to properties located in Medford, Oregon, at 700 and 800 N. Central Ave, 217 and 220 N. Beatty St., 710 and 815-817 Niantic St., and 311 & 313 Maple St., collectively at a lease rate of $ per month. Z-4 EX-3.1 2 EXHIBIT 3.1 EXHIBIT 3.1 RESTATED ARTICLES OF INCORPORATION OF LITHIA MOTORS, INC. The following Restated Articles of Incorporation of Lithia Motors, Inc. (the "Corporation") amend and supersede the heretofore existing Articles of Incorporation, including all amendments made thereto. ARTICLE I: NAME OF CORPORATION The name of the corporation is Lithia Motors, Inc. ARTICLE II: NUMBER OF AUTHORIZED SHARES The total number of shares of stock of all classes which the corporation shall have the authority to issue is one hundred forty million (140,000,000) shares, consisting of fifteen million (15,000,000) shares of a single class of preferred stock with no par value, one hundred million (100,000,000) shares of Class A Common Stock with no par value, and twenty-five million (25,000,000) shares of Class B Common Stock with no par value. After any shares of Class A Common Stock are issued and outstanding, the Board of Directors of the corporation shall not, without the vote or consent of the holders of the corporation's Class A Common Stock, issue any shares of Class B Common Stock except as provided by Article III, Section 2. ARTICLE III: RIGHTS AND LIMITATIONS OF CAPITAL STOCK The relative rights and limitations of each class of capital stock shall be as set forth in this Article III. SECTION 1. VOTING OF CLASS A AND CLASS B STOCK (a) In all elections of directors, and in all other matters as to which the vote or consent of shareholders of the corporation shall be required or shall be taken, each holder of one or more shares of Class A Common Stock shall be entitled to one (1) vote for each share of the Class A Common Stock then held. (b) In all elections of directors, and in all other matters as to which the vote or consent of shareholders of the corporation shall be required or shall be taken, each holder of one or more shares of Class B Common Stock shall be entitled to ten (10) votes for each share of the Class B Common Stock then held. (c) Except as otherwise required by law, the holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall vote together as one class on all matters submitted to a vote of the corporation's shareholders. SECTION 2. DIVIDENDS AND DISTRIBUTIONS WITH RESPECT TO CLASS A AND CLASS B STOCK. The holders of shares of Class A Common Stock and the holders of shares of Class B Common Stock shall be entitled to receive whatever dividends, payable in cash or otherwise, are lawfully declared by the Board of Directors from time to time with respect to those shares. Shares of Class A Common Stock and Class B Common Stock shall have equal rights to share in and receive any dividends, liquidation proceeds and other distributions made by the corporation with respect to the corporation's common stock. In furtherance of and not limiting the foregoing, in the event that the holders of shares of Class A Common Stock are entitled to receive a dividend or distribution payable in whole or in part in additional shares of Class A Common Stock, the holders of shares of Class B Common Stock shall be entitled to receive a proportionately equal dividend or distribution payable in shares of Class B Common Stock. SECTION 3. RESTRICTIONS ON TRANSFER OF CLASS B STOCK (a) Except as provided in subsection 3(b) of this Article III, no person holding shares of Class B Common Stock or any beneficial interest therein (a "Class B Holder") may transfer any interest in such Class B shares to any person other than a "Permitted Transferee". Neither the corporation nor the transfer agent, if any, for the Class B Common Stock (the "Transfer Agent"), shall register the transfer of any interest in shares of Class B Common Stock, except to a "Permitted Transferee" of the transferor. (b) For purposes of this Section 3, the term "Permitted Transferee" shall mean and include the corporation and also shall have the following meanings in the indicated circumstances: (1) In the case of a Class B Holder who is a natural person holding record and beneficial ownership of one or more shares of Class B Common Stock, "Permitted Transferee" means: (i) The spouse of that Class B Holder (the "Spouse"). (ii) A lineal descendant of a great grandparent of that Class B Holder or of the Spouse (a "Descendant"). (iii) The trustee of a trust (including a voting trust) maintained for the benefit of any one or more of the following persons, and for no other person: (A) that Class B Holder, (B) the Spouse, (C) one or more Descendants, or (D) an organization to which contributions are deductible for federal income, estate or gift tax purposes (a "Charitable Organization"). A trust described in the preceding sentence may grant a general or special power of appointment to the Spouse or to one or more of the Descendants. A trust described in the first sentence of this subsection 3(b)(1)(iii) may permit trust assets to be used to pay taxes, legacies and other obligations of the trust or of the estate of the Class B Holder which are payable by reason of the death of the Class B Holder, the Spouse or a Descendant. In order to be a "Permitted Transferee", a trust which is otherwise described in this subsection 3(b)(1)(iii) must prohibit any transfer (other than the granting of a power of appointment as provided in the second sentence of this subsection 3(b)(1)(iii)) of any beneficial interest in shares of Class B Common Stock to any person other than "Permitted Transferees" as defined in clauses (A) through (D) of this subsection 3(b)(1)(iii). A trust which satisfies all of the conditions of this subsection 3(b)(1)(iii) shall be referred to herein as a "Trust". (iv) Any Charitable Organization, including but not limited to a Charitable Organization established by that Class B Holder or a Descendant. (v) An Individual Retirement Account, as defined in Section 408(a) of the Internal Revenue Code, with respect to which that Class B Holder is a participant or beneficiary, but only if that Class B Holder is vested with the power to direct the investment of funds deposited into that Individual Retirement Account and to control the voting of securities held by that Individual Retirement Account (an "IRA"). (vi) A pension, profit sharing, stock bonus or other type of plan or trust with respect to which that Class B Holder is a participant or beneficiary and which satisfies the requirements for qualification under Section 401 of the Internal Revenue Code, but only if that Class B Holder is vested with the power to direct the investment of funds deposited into that plan or trust and to control the voting of securities held by that plan or trust (a "Plan"). (vii) A corporation all of the outstanding capital stock of which is owned by persons who are included in one or more of the following classes of permitted owners: (A) that Class B Holder, (B) the Spouse, (C) one or more Descendants, (D) any Permitted Transferee of that Class B Holder (determined pursuant to this subsection 3(b)), (E) any other Class B Holder, and/or (F) a Permitted Transferee of any other Class B Holder (determined pursuant to this subsection 3(b)). If 50% or more of the voting shares of a corporation described in the preceding sentence (or of any survivor of a merger or consolidation of such a corporation), are acquired in the aggregate by one or more persons who are not included in one or more of the classes of permitted owners described in the preceding sentence, then all shares of Class B Common Stock then held by that corporation shall be deemed without further act on any person's part to be converted into shares of Class A Common Stock in accordance with the provisions of subsection 4(b) of this Article III, and any and all stock certificates representing those shares of Class B Common Stock shall thereupon cease to represent shares of Class B Common Stock and shall thereafter be deemed for all purposes to represent an identical number of shares of Class A Common Stock. (viii) A partnership in which more than fifty percent (50%) of the capital interests and more than fifty percent (50%) of the voting interests are owned by persons who are included in one or more of the following classes of permitted owners: (A) that Class B Holder, (B) the Spouse, (C) one or more Descendants, (D) any Permitted Transferee of that Class B Holder (determined pursuant to this subsection 3(b)), (E) any other Class B Holder, and/or (F) a Permitted Transferee of any other Class B Holder (determined pursuant to this subsection 3(b)). If 50% or more of the capital interests or 50% or more of the voting interests in a partnership described in the preceding sentence are acquired in the aggregate by one or more persons who are not included in one or more of the classes of permitted owners described in the preceding sentence, then all shares of Class B Common Stock then held by that partnership shall be deemed without further act on any person's part to be converted into shares of Class A Common Stock in accordance with the provisions of subsection 4(b) of this Article III, and any and all stock certificates representing those shares of Class B Common Stock shall thereupon cease to represent shares of Class B Common Stock and shall thereafter be deemed for all purposes to represent an identical number of shares of Class A Common Stock. (ix) A limited liability company in which more than fifty percent (50%) of the capital interests and more than fifty percent (50%) of the voting interests are owned by persons who are included in one or more of the following classes of permitted owners: (A) that Class B Holder, (B) the Spouse, (C) one or more Descendants, (D) any Permitted Transferee of that Class B Holder (determined pursuant to this subsection 3(b)), (E) any other Class B Holder, and/or (F) a Permitted Transferee of any other Class B Holder (determined pursuant to this subsection 3(b)). If 50% or more of the capital interests or 50% or more of the voting interests in a limited liability company described in the preceding sentence are acquired in the aggregate by one or more persons who are not included in one or more of the classes of permitted owners described in the preceding sentence, then all shares of Class B Common Stock then held by that limited liability company shall be deemed without further act on any person's part to be converted into shares of Class A Common Stock in accordance with the provisions of subsection 4(b) of this Article III, and any and all stock certificates representing those shares of Class B Common Stock shall thereupon cease to represent shares of Class B Common Stock and shall thereafter be deemed for all purposes to represent an identical number of shares of Class A Common Stock. (x) Another Class B Holder or another Class B Holder's Permitted Transferee (determined pursuant to this subsection 3(b)). (xi) In the event of the death of a Class B Holder, that Class B Holder's estate and heirs. (2) In the case of a Class B Holder which is holding shares of Class B Common Stock as trustee of an IRA, a Plan or a Trust other than a Trust described in subsection 3(b)(3) of this Article III, each of the following shall be a "Permitted Transferee": (a) any participant in or beneficiary of such IRA, such Plan or such Trust, (b) the person who transferred those shares of Class B Common Stock to such IRA, such Plan or such Trust, and (c) a Permitted Transferee of any person described in clause (a) or (b) of this subsection 3(b)(2). (3) In the case of a Class B Holder which is holding shares of Class B Common Stock as trustee pursuant to a Trust which is irrevocable on the "Issue Date" (as defined in subsection 3(d)(6)), "Permitted Transferee" means any person in existence on the Issue Date to whom or for whose benefit principal may be distributed either during the term of that Trust or at the end of the term of that Trust, whether by power of appointment or otherwise. (4) In the case of a Class B Holder which is holding record (but not beneficial) ownership of shares of Class B Common Stock as nominee for the person who is the beneficial owner thereof on the "Issue Date", "Permitted Transferee" means that beneficial owner and a Permitted Transferee of that beneficial owner (determined pursuant to this subsection 3(b)). (5) In the case of a Class B Holder which is a partnership holding record and beneficial ownership of shares of Class B Common Stock, "Permitted Transferee" means any person who is a partner of that partnership at the time that partnership first becomes a Class B Holder, and also means any Permitted Transferee of that partner (determined pursuant to this subsection 3(b)). (6) In the case of a Class B Holder which is a limited liability company holding record and beneficial ownership of shares of Class B Common Stock, "Permitted Transferee" means any person who is a member of that limited liability company at the time that limited liability company first becomes a Class B Holder, and also means any Permitted Transferee of that member (determined pursuant to this subsection 3(b)). (7) In the case of a Class B Holder which is a corporation (other than a Charitable Organization described in subsection 3(b)(1)(iv)) holding record and beneficial ownership of shares of Class B Common Stock (a "Corporate Holder"), "Permitted Transferee" means: (a) any person who is a shareholder of that Corporate Holder at the time the Corporate Holder first becomes a Class B Holder, or any Permitted Transferee of any such shareholder (determined pursuant to this subsection 3(b)); and (b) the survivor (the "Survivor") of a merger or consolidation of that Corporate Holder, but only for so long as that Survivor is controlled, directly or indirectly, by: (i) those shareholders of the Corporate Holder who are shareholders of the Corporate Holder at the time the Corporate Holder first becomes a Class B Holder, and/or (ii) any Permitted Transferees of such shareholders (determined pursuant to this subsection 3(b)). (8) In the case of a Class B Holder which is the estate of a deceased Class B Holder which held record and beneficial ownership of shares of Class B Common Stock at the time of death, and in the case of a Class B Holder which is the estate of a bankrupt or insolvent Class B Holder which held record and beneficial ownership of shares of Class B Common Stock at the time of bankruptcy or insolvency, "Permitted Transferee" means a Permitted Transferee of that deceased, bankrupt or insolvent Class B Holder (determined pursuant to this subsection 3(b)). (9) In the case of any Class B Holder who desires to gift one or more shares of Class B Common Stock to any other Class B Holder or to any Permitted Transferee of any other Class B Holder (determined pursuant to this subsection 3(b)), "Permitted Transferee" means any such other donee Class B Holder or Permitted Transferee. (10) In the case of any Class B Holder, "Permitted Transferee" means any person which will hold record (but not beneficial) ownership of shares of Class B Common Stock as nominee for that Class B Holder or a Permitted Transferee of that Class B Holder (determined pursuant to this subsection 3(b)). (11) Only those persons specifically identified as "Permitted Transferees" in the preceding provisions of this subsection 3(b) shall be "Permitted Transferees" for purposes of this Section 3. (c) Notwithstanding any contrary provision set forth in this Section 3, any Class B Holder may pledge that Holder's shares of Class B Common Stock to a pledgee pursuant to a bona fide pledge of those shares as collateral security for indebtedness due to the pledgee, provided that such shares shall not be transferred to, registered in the name of, or voted by, the pledgee and shall remain subject to the provisions of this Section 3. In the event foreclosure or other similar action by a pledgee shall cause record or beneficial ownership of pledged Class B Common Stock to be transferred to a person who is not a Permitted Transferee of the pledgor, such pledged shares of Class B Common Stock shall be converted into shares of Class A Common Stock at the moment of transfer of ownership, in accordance with the provisions of subsection 4(b). (d) For purposes of this Article III: (1) The relationship between any two persons which is derived by or through legal adoption shall be considered a natural relationship. (2) Each joint owner of shares of Class B Common Stock and each owner of a community property interest in shares of Class B Common Stock shall be considered a "Class B Holder" of such shares. (3) A minor for whom shares of Class B Common Stock are held pursuant to a Uniform Transfer to Minors Act or similar law shall be considered to be the Class B Holder of such shares (and the custodian of those shares shall not be considered to be a Class B Holder of those shares). (4) Unless otherwise specified, the term "person" means and includes natural persons, corporations, partnerships, unincorporated associations, firms, joint ventures, limited liability companies, trusts and all other entities. (5) The term "transfer" shall mean and include any form of voluntary or involuntary sale, exchange, gift, bequest, devise, assignment, disposition, pledge, hypothecation, encumbrance, appointment, grant of voting power or proxy, or other conveyance of any and every kind, including but not limited to conveyances by operation of law. (6) With respect to particular shares of Class B Common Stock, the "Issue Date" shall be the date on which those shares of Class B Common Stock are first issued by the corporation. (e) Any purported transfer of shares of Class B Common Stock to any person who is not a Permitted Transferee shall be void and of no effect, and the purported transferee shall have no rights as a shareholder of the corporation and no other rights against or with respect to the corporation. The corporation may, as a condition to the transfer or the registration of transfer of shares of Class B Common Stock to a purported Permitted Transferee, require the furnishing of such affidavits or other proof as the corporation deems necessary to establish that such transferee is a Permitted Transferee. Each certificate representing shares of Class B Common Stock shall be endorsed with a legend which states that shares of Class B Common Stock are not transferable to any person other than certain restricted transferees and are subject to certain restrictions as set forth in the Restated Articles of Incorporation filed by the corporation with the Secretary of State of the State of Oregon. SECTION 4. CONVERSION OF CLASS B COMMON STOCK (a) Each holder of one or more shares of Class B Common Stock shall have the right and option at any time to convert one or more shares of Class B Common Stock into an equivalent number of fully paid and nonassessable shares of Class A Common Stock (i.e. one share of Class B Common Stock for one share of Class A Common Stock). Such right shall be exercised by the surrender to the corporation (at any time during normal business hours at the principal executive offices of the corporation or at the office of the Transfer Agent) of the certificate representing the share(s) of Class B Common Stock to be converted, accompanied by: (1) a written notice stating the election by the holder thereof to convert, and (2) instruments of transfer (if so required by the corporation or the Transfer Agent), in form satisfactory to the corporation and to the Transfer Agent, duly executed by such holder or such holder's duly authorized attorney, and (3) transfer tax stamps or funds therefor (if required pursuant to subsection 4(f)). (b) Subject to, and without limiting the effect of, subsection 3(e), if there is any transfer or other change in the beneficial ownership (as determined under Rule 13d-3 promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of any share of Class B Common Stock or of any interest in any share of Class B Common Stock, and if the new beneficial owner of that share of Class B Common Stock is not a "Permitted Transferee" (as defined in subsection 3(b) of this Article III) of the person who shall have been the beneficial owner of that share of Class B Common Stock immediately prior to that change in beneficial ownership, then each such share of Class B Common Stock shall thereupon be converted automatically into one (1) fully paid and nonassessable share of Class A Common Stock, and any and all stock certificates representing each such share of Class B Common Stock shall thereupon cease to represent shares of Class B Common Stock and shall thereafter be deemed for all purposes to represent an identical number of shares of Class A Common Stock. (1) A determination by the Secretary of the corporation that a change in beneficial ownership of one or more shares of Class B Common Stock requires conversion under this subsection 4(b) shall be conclusive. If the Secretary of the corporation determines that a change in beneficial ownership of one or more shares of Class B Common Stock requires conversion under this subsection 4(b), then the Secretary of the corporation shall promptly request that each holder of record of each such share of Class B Common Stock deliver to the corporation for conversion hereunder, and each such holder shall thereupon be required, within ten (10) days following that request, to deliver to the corporation for conversion hereunder, the certificate representing each such share of Class B Common Stock, together with instruments of transfer, in form satisfactory to the corporation and Transfer Agent, duly executed by such holder or such holder's duly authorized attorney, and together with transfer tax stamps or funds therefor (if required pursuant to subsection 4(f)). (2) Notwithstanding any other provision of this Article III, the transfer to any person of capital interests, voting interests or other membership interests in a limited liability company which holds record and beneficial ownership of shares of Class B Common Stock shall not cause or be deemed to have caused any change in the beneficial ownership of any share(s) of Class B Common Stock or of any interest(s) in share(s) of Class B Common Stock which are owned by that limited liability company, unless and until such time as 50% or more of the capital interests or 50% or more of the voting interests in that limited liability company are held by one or more persons who would not be "Permitted Transferees" (as determined under subsection 3(b)(6)) of that limited liability company. If at any time the Secretary of the corporation determines that 50% or more of the capital interests or 50% or more of the voting interests in a limited liability company (which holds record and beneficial ownership of shares of Class B Common Stock) are acquired or held by one or more persons who would not be "Permitted Transferees" (as determined under subsection 3(b)(6)) of that limited liability company, then all shares of Class B Common Stock then held by that limited liability company shall be converted automatically into an equivalent number of shares of Class A Common Stock in accordance with the provisions of this subsection 4(b), and any and all stock certificates representing those shares of Class B Common Stock shall thereupon cease to represent shares of Class B Common Stock and shall thereafter be deemed for all purposes to represent an identical number of shares of Class A Common Stock. (c) If, on the record date for any annual meeting of shareholders, the number of shares of Class B Common Stock then outstanding is less than one percent (1%) of the aggregate number of shares of Class B Common Stock and Class A Common Stock then outstanding, as determined by the Secretary of the corporation, then each share of Class B Common Stock then outstanding shall thereupon automatically be converted into one (1) fully paid and nonassessable share of Class A Common Stock, and each share of Class B Common Stock then authorized but unissued shall thereupon automatically be deemed an authorized but unissued share of Class A Common Stock. Upon making such determination, the Secretary of the corporation shall promptly request that each holder of record of one or more shares of Class B Common Stock deliver to the corporation for conversion hereunder, and each such holder shall thereupon be required, within ten (10) days following that request, to deliver to the corporation for conversion hereunder, the certificates representing all shares of Class B Common Stock held by such holder, together with instruments of transfer in form satisfactory to the corporation and Transfer Agent, duly executed by such holder or such holder's duly authorized attorney, and together with transfer tax stamps or funds therefor (if required pursuant to subsection 4(f)). (d) As promptly as practicable following the surrender for conversion of a certificate representing shares of Class B Common Stock in the manner provided in subsections (a), (b) or (c) of this Section 4 and the payment in cash of any amount required by the provisions of subsection 4(f), the corporation will deliver or cause to be delivered at the office of the Transfer Agent, to or upon the written order of the holder of such certificate, a certificate or certificates representing the number of full shares of Class A Common Stock issuable upon such conversion, issued in such name or names as such holder may direct. In the case of a conversion under subsection 4(a), the conversion shall be deemed to have been made immediately prior to the close of business on the date of the surrender of the certificate representing the converted shares of Class B Common Stock. In the case of a conversion under subsection 4(b), the conversion shall be deemed to have been made on the date that the beneficial ownership of such share(s) has changed as set forth in subsection 4(b). In the case of a conversion under subsection 4(c), the conversion shall be deemed to have occurred on the annual meeting record date on which the condition set forth in subsection 4(c) is determined by the Secretary of the corporation to have occurred. Upon the date of any conversion under subsection 4(b), all rights of the holder of the converted share(s) of Class B Common Stock shall cease, and the new beneficial owner(s) of such shares shall be treated for all purposes as having become the record holder(s) of the shares of Class A Common Stock issued in the conversion. Upon the date of any conversion under subsection 4(c), all rights of the holders of shares of Class B Common Stock shall cease, and such holders shall be treated for all purposes as having become the record holders of the shares of Class A Common Stock issued in the conversion. (e) The corporation covenants that it will at all times reserve and keep available, solely for the purpose of enabling the issuance upon conversion of all outstanding shares of Class B Common Stock, a number of shares of Class A Common Stock which is equal to the number of then-outstanding shares of Class B Common Stock. The preceding sentence shall not preclude the corporation from satisfying its obligations in respect of the conversion of outstanding shares of Class B Common Stock by delivery of purchased shares of Class A Common Stock which are held in the treasury of the corporation. The corporation covenants that if any shares of Class A Common Stock required to be reserved for purposes of conversion hereunder shall require registration with or the approval of any governmental authority under any federal or state law before such shares of Class A Common Stock may be issued upon conversion, then the corporation will cause such shares to be duly registered or approved. Prior to delivery of shares of Class A Common Stock which are required to be delivered in connection with the conversion of shares of Class B Common Stock, the corporation will endeavor to list those shares of Class A Common Stock upon each national securities exchange upon which the outstanding Class A Common Stock is listed at the time of such delivery. The corporation covenants that all shares of Class A Common Stock which are issued upon conversion of shares of fully paid and nonassessable Class B Common Stock shall, upon issue, be fully paid and nonassessable. (f) The issuance of certificates for shares of Class A Common Stock upon conversion of shares of Class B Common Stock shall be made without charge for any stamp or other similar tax in respect of such issuance. However, if any such certificate is to be issued in a name other than the person in whose name the converted shares of Class B Common Stock are registered immediately prior to conversion, then the person or persons requesting the issuance thereof shall pay to the corporation the amount of any tax which may be payable in connection with any transfer involved in such issuance, or shall establish to the satisfaction of the corporation that such tax has been paid. SECTION 5. PREFERRED STOCK. The Board of Directors of the corporation shall have the authority at any time, without action of the shareholders, to adopt and file articles of amendment which provide for the issuance of shares of preferred stock in one or more series. The Board of Directors may establish, fix and/or alter the designations, powers, preferences, qualifications, limitations, restrictions and/or relative rights applicable to any series of preferred stock, including, without limitation, dividend rights (and whether dividends are cumulative), conversion rights( if any), voting rights (including the number of votes, if any, per share, as well as the number of members, if any, of the Board of Directors or the percentage of members, if any, of the Board of Directors each series of preferred stock may be entitled to elect), rights and terms of redemption (including sinking fund provisions, if any), redemption price and liquidation preferences of any wholly unissued series of preferred stock, and the number of shares constituting any such series and the designation thereof. The Board of Directors also is authorized to increase or decrease the number of shares of any series of preferred stock subsequent to the issuance of shares of such series, but not below the number of shares of such series then outstanding. Notwithstanding the preceding sentences of this Section 5, the Board of Directors shall have no power to alter the rights of any shares of preferred stock then outstanding without the consent of the holders of a majority of the outstanding shares the rights of which are to be altered. Shares of preferred stock which are redeemed, purchased or otherwise acquired by the corporation may be reissued except as otherwise provided by law. SECTION 6. DISTRIBUTIONS UPON LIQUIDATION. In the event of any dissolution, liquidation or winding up of the affairs of the corporation in accordance with applicable law, whether voluntary or involuntary, and after payment or provision for payment of the debts and other liabilities of the corporation, the holders of each series of preferred stock, if any, shall be entitled to receive, out of the net assets of the corporation, an amount for each share of preferred stock which is equal to the required amount which shall have been fixed and determined by the Board of Directors in the resolution or resolutions creating such shares and series, plus an amount equal to all dividends accrued and unpaid on shares of such series to the date fixed for distribution, and no more, before any of the assets of the corporation shall be distributed or paid over to the holders of Class A or Class B Common Stock. After payment in full of such amounts to the holders of preferred stock of all series, the remaining assets and funds of the corporation shall be divided among and paid to the holders of shares of Class A Common Stock and Class B Common Stock, with each share of Class A and Class B Common Stock being treated equally for such purposes. If, upon such dissolution, liquidation or winding up, the assets of the corporation distributable as aforesaid among the holders of preferred stock of all series shall be insufficient to permit full payment of the required preferential amounts to those holders, then the corporation's assets shall be distributed ratably among the holders of shares of preferred stock in proportion to the respective total amounts which the holders are entitled to receive as provided in this Section 6. ARTICLE IV: MANAGEMENT OF CORPORATION The following provisions are inserted for the management of the business and for the conduct of the affairs of the corporation, and for further definition, limitation and regulation of the powers of the corporation and of its directors and shareholders: SECTION 1. ELECTION OF DIRECTORS. Except to the extent that these Restated Articles of Incorporation grant to the holders of any series of preferred stock the right (voting separately by class or series) to elect additional directors under specified circumstances, the number of directors of the corporation shall be as fixed from time to time by or pursuant to the Bylaws of the corporation. Each director shall serve until his or her successor is duly elected and qualified or until his or her earlier death, resignation or removal. The election of directors need not be by written ballot unless required by the Bylaws of the corporation. SECTION 2. REMOVAL OF DIRECTORS. Except to the extent that these Restated Articles of Incorporation grant to the holders of any series of preferred stock the right (voting separately by class or series) to elect directors under specified circumstances, any director or directors may be removed from office at any time, with or without cause, by the affirmative vote of not less than a majority of the total number of votes represented by the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class. Unless previously filled by the vote of at least a majority of the total number of votes represented by the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors (voting together as a single class), any vacancy in the Board of Directors resulting from any such removal may be filled by vote of a majority of the directors then in office, even if less than a quorum, and any directors so chosen shall hold office until the next annual shareholders meeting and until their successors shall have been elected and qualified or until their earlier death, resignation or removal. SECTION 3. RIGHT OF PREFERRED STOCK TO VOTE FOR DIRECTORS. Notwithstanding the foregoing paragraphs of this Article IV, if at any time the Board of Directors of the corporation shall have adopted and filed articles of amendment which give to the holders of any series of preferred stock issued by the corporation the right (voting separately by class or series) to elect directors at an annual or special meeting of shareholders, then the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of those articles of amendment applicable thereto (as those articles may be amended from time to time). SECTION 4. CALLING OF MEETINGS. Special meetings of shareholders of the corporation for any purpose may be called at any time by: (i) a majority of the Board of Directors, or (ii) the President of the corporation, or (iii) one or more shareholders who, in the aggregate, own shares representing ten percent (10%) or more of the total votes of all shares then outstanding. No other person or persons shall have authority to call a special meeting of the shareholders of the corporation. ARTICLE V: NO PREEMPTIVE RIGHTS No holder of shares of any class shall have any preemptive or preferential right to subscribe to or otherwise acquire any shares of stock of the corporation, or any obligations or securities convertible into or carrying options or warrants to purchase shares of stock of the corporation, whether now or hereafter authorized and whether unissued or held by the corporation as treasury stock (whether or not the issuance or sale of any such shares, obligations or securities would adversely affect such shareholder's proportionate voting power), other than any rights which the Board of Directors in its discretion may from time to time grant. ARTICLE VI: ELECTIONS OR ACTIONS BY WRITTEN CONSENT Any election of directors or other action by the shareholders of the corporation may be effected at an annual or special meeting of shareholders or by written consent of the shareholders given in lieu of such a meeting. The record date with respect to the determination of shareholders entitled to consent in writing to any action shall be the first date on which a signed written consent setting forth the action to be taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Oregon, to its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of shareholders are recorded. Any action by written consent shall be deemed effective as of the day on which written consents, signed by all shareholders, are delivered to the corporation by delivery to its registered office in Oregon, to its principal place of business, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of shareholders are recorded. Any delivery which is made to the corporation's registered office under this Article VI shall be by hand or by certified or registered mail, return receipt requested. ARTICLE VII: LIMITATION ON LIABILITY OF DIRECTORS No director of the Corporation is personally liable to the Corporation or its shareholders for monetary damages for conduct as a director, except for the following: (a) Any breach of the director's duty of loyalty to the Corporation or its shareholders; (b) Acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) Any distribution to shareholders that is unlawful under the Oregon Business Corporation Act or successor statute; or (d) Any transaction from which the director derived an improper personal benefit. This Article VII does not limit or eliminate the liability of a director for any act or omission occurring before the effective date of this Article VII. No amendment to or repeal of this Article VII may make any director of the Corporation personally liable to the Corporation or its shareholders for monetary damages for any act or omission as a director occurring before the effective date of that amendment or repeal. This Article VII is intended to limit the liability of any director of the Corporation to the greatest extent authorized under the Oregon Business Corporation Act. Any further limitation on the liability of directors authorized under any amendment to the Oregon Business Corporation Act is incorporated into this Article VII on the effective date of that amendment. ARTICLE VIII: INDEMNIFICATION SECTION 1. NON-DERIVATIVE ACTIONS. Subject to the provisions of Sections 3, 5 and 6 of this Article VIII, the Corporation shall indemnify any person who was or is a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, (including all appeals) (other than an action by or in the right of the Corporation) by reason of or arising from the fact that the person is or was a director or officer of the Corporation or one of its subsidiaries, or is or was serving at the request of the Corporation as a director, officer, partner, or trustee of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against reasonable expenses (including attorney's fees), judgments, fines, penalties, excise taxes assessed with respect to any employee benefit plan and amounts paid in settlement actually and reasonably incurred by the person to be indemnified in connection with such action, suit or proceeding if the person acted in good faith, did not engage in intentional misconduct, and, with respect to any criminal action or proceeding, did not know the conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith or, with respect to any criminal action or proceeding, that the person knew that the conduct was unlawful. SECTION 2. DERIVATIVE ACTIONS. Subject to the provisions of Sections 3, 5 and 6 of this Article VIII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit (including all appeals) by or in the right of the Corporation to procure a judgment in its favor by reason of or arising from the fact that the person is or was a director or officer of the Corporation or one of its subsidiaries, or is or was serving at the request of the Corporation as a director, officer, partner, or trustee of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against reasonable expenses (including attorneys' fees) actually incurred by the person to be indemnified in connection with the defense or settlement of such action or suit if the person acted in good faith, provided, however, that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable for deliberate misconduct in the performance of that person's duty to the Corporation, for any transaction in which the person received an improper personal benefit, for any breach of the duty of loyalty to the Corporation, or for any distribution to shareholders which is unlawful under the Oregon Business Corporation Act, or successor statute, unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. SECTION 3. DETERMINATION OF RIGHT TO INDEMNIFICATION IN CERTAIN CASES. Subject to the provisions of Sections 5 and 6 of this Article VIII, indemnification under Sections 1 and 2 of this Article VIII shall not be made by the Corporation unless it is expressly determined that indemnification of the person who is or was an officer or director, or is or was serving at the request of the Corporation as a director, officer, partner, or trustee of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, is proper in the circumstances because the person has met the applicable standard of conduct set forth in Sections 1 or 2 of this Article VIII. That determination may be made by any of the following: (a) By the Board of Directors by majority vote of a quorum consisting of directors who are not or were not parties to the action, suit or proceeding; (b) If a quorum cannot be obtained under paragraph (a) of this subsection, by majority vote of a committee duly designated by the Board of Directors consisting solely of two or more directors not at the time parties to the action, suit or proceeding (directors who are parties to the action, suit or proceeding may participate in designation of the committee); (c) By special legal counsel selected by the Board of Directors or its committee in the manner prescribed in (a) or (b) or, if a quorum of the Board of Directors cannot be obtained under (a) and a committee cannot be designated under (b) the special legal counsel shall be selected by majority vote of the full Board of Directors, including directors who are parties to the action, suit or proceeding; (d) If referred to them by Board of Directors of the Corporation by majority vote of a quorum (whether or not such quorum consists in whole or in part of directors who are parties to the action, suit or proceeding), by the shareholders; or (e) By a court of competent jurisdiction. SECTION 4. INDEMNIFICATION OF PERSONS OTHER THAN OFFICERS OR DIRECTORS. Subject to the provisions of Section 6 of this Article VIII, in the event any person not entitled to indemnification under Sections 1 and 2 of this Article VIII was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding of a type referred to in Sections 1 or 2 of this Article VIII by reason of or arising from the fact that such person is or was an employee or agent (including an attorney) of the Corporation or one of its subsidiaries, or is or was serving at the request of the Corporation as an employee or agent (including an attorney) of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, the Board of Directors of the Corporation by a majority vote of a quorum (whether or not such quorum consists in whole or in part of directors who were parties to such action, suit or proceeding) or the stockholders of the Corporation by a majority vote of the outstanding shares upon referral to them by the Board of Directors of the Corporation by a majority vote of a quorum (whether or not such quorum consists in whole or in part of directors who were parties to such action, suit or proceeding) may, but shall not be required to, grant to such person a right of indemnification to the extent described in Sections 1 or 2 of this Article VIII as if the person were acting in a capacity referred to therein, provided that such person meets the applicable standard of conduct set forth in such Sections. Furthermore, the Board of Directors may designate by resolution in advance of any action, suit or proceeding, those employees or agents (including attorneys) who shall have all rights of indemnification granted under Sections 1 and 2 of this Article VIII. SECTION 5. SUCCESSFUL DEFENSE. Notwithstanding any other provision of Sections 1, 2, 3 or 4 of this Article VIII, but subject to the provisions of Section 6 of this Article VIII, to the extent a director, officer, or employee is successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1, 2 or 4 of this Article VIII, or in defense of any claim, issue or matter therein, that person shall be indemnified against expenses (including attorneys fees) actually and reasonably incurred by him in connection therewith. SECTION 6. CONDITION PRECEDENT TO INDEMNIFICATION UNDER SECTIONS 1, 2, 4 OR 5. Any person who desires to receive the benefits otherwise conferred by Sections 1, 2, 4 or 5 of this Article VIII shall promptly notify the Corporation that the person has been named a defendant to an action, suit or proceeding of a type referred to in Sections 1, 2, 4, or 5 of this Article VIII and intends to rely upon the right of indemnification described in Sections 1, 2, 4 or 5 of this Article VIII. The notice shall be in writing and mailed, via registered or certified mail, return receipt requested, to the President of the Corporation at the executive offices of the Corporation or, in the event the notice is from the President, to the registered agent of the Corporation. Failure to give the notice required hereby shall entitle the Board of Directors of the Corporation by a majority vote of a quorum (consisting of directors who, insofar as indemnity of officers or directors is concerned, were not parties to such action, suit or proceeding, but who, insofar as indemnity of employees or agents is concerned, may or may not have been parties) or, if referred to them by the Board of Directors of the Corporation by a majority vote of a quorum (consisting of directors who, insofar as indemnity of officers or directors is concerned, were not parties to such action, suit or proceeding, but who, insofar as indemnity of employees or agents is concerned, may or may not have been parties), the shareholders of the Corporation by a majority of the votes entitled to be cast by holders of shares of the Corporation's stock which have unlimited voting rights to make a determination that such a failure was prejudicial to the Corporation in the circumstances and that, therefore, the right to indemnification referred to in Sections 1, 2 or 4 of this Article VIII shall be denied in its entirety or reduced in amount. SECTION 7. ADVANCES FOR EXPENSES. Expenses incurred by a person indemnified hereunder in defending a civil, criminal, administrative or investigative action, suit or proceeding (including all appeals) or threat thereof, may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such person to repay such expenses if it shall ultimately be determined that the person is not entitled to be indemnified by the Corporation and a written affirmation of the person's good faith belief that he or she has met the applicable standard of conduct. The undertaking must be a general personal obligation of the party receiving the advances but need not be secured and may be accepted without reference to financial ability to make repayment. SECTION 8. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation or one of its subsidiaries or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against and incurred by that person in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify that person against such liability under the provisions of this Article or under the Oregon Business Corporation Act. SECTION 9. PURPOSE AND EXCLUSIVITY. The indemnification referred to in the various Sections of this Article VIII shall be deemed to be in addition to and not in lieu of any other rights to which those indemnified may be entitled under any statute, rule of law or equity, agreement, vote of the stockholders or Board of Directors or otherwise. The Corporation is authorized to enter into agreements of indemnification. The purpose of this Article VIII is to augment the provisions of the Oregon Business Corporation Act dealing with indemnification. SECTION 10. SEVERABILITY. If any of the provisions of this Article VIII are found, in any action, suit or proceeding, to be invalid or ineffective, the validity and the effect of the remaining provisions shall not be affected. ARTICLE IX: ARTICLES AND BYLAWS SECTION 1. RESTATED ARTICLES OF INCORPORATION. The corporation reserves the right to alter, amend, repeal or rescind any provision contained in these Restated Articles of Incorporation in any manner now or hereafter permitted by law, and all rights conferred on shareholders herein are granted subject to this reservation. The affirmative vote of the holders of not less than a majority of the total number of votes represented by the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend or repeal these Restated Articles of Incorporation, or to adopt any provision inconsistent with the purpose or intent of Articles IV through IX or Section 1 of Article III of these Restated Articles of Incorporation. SECTION 2. BYLAWS. In furtherance and not in limitation of the powers conferred by the Oregon Business Corporation Act, the Board of Directors shall have the power to make, alter, amend, repeal or rescind the Bylaws of the corporation, subject to the power of the shareholders to alter, amend, repeal or rescind any Bylaw made by the Board of Directors. DATED effective the ____________________ day of October, 1996. EX-3.2 3 EXHIBIT 3.2 EXHIBIT 3.2 BYLAWS OF LITHIA MOTORS, INC. ARTICLE 1. SHAREHOLDERS' MEETINGS Section 1.1 ANNUAL MEETING. The annual meeting of the shareholders will be held in April or May of every year on such date and at such time as is be determined by the Board of Directors. The annual meeting of the shareholders will be held at the principal office of the Corporation or at such other place as may be determined by the Board of Directors. At such meeting the shareholders entitled to vote will elect a Board of Directors and transact such other business as may come before the meeting. Section 1.2 SPECIAL MEETINGS. Special meetings of shareholders will be held at any time on call of the President or the Board of Directors, or on demand in writing by shareholders of record holding shares with at least 10 percent of the votes entitled to be cast on any matter proposed to be considered at the special meeting. Section 1.3 NOTICE. Written notice stating the place, date and time of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, will be delivered not less than ten nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the President or the Secretary, to each shareholder of record entitled to vote at such meeting. If mailed, the notice will be deemed to be delivered when deposited in the United States mail addressed to the shareholder at the shareholder's address as it appears on the current shareholder records of the Corporation, with postage prepaid. Section 1.4 WAIVER OF NOTICE. A shareholder may, at any time, waive any notice required by these Bylaws, the Articles of Incorporation or the Oregon Business Corporation Act. Except as otherwise provided by this Section 1.4, the waiver must be in writing, must be signed by the shareholder and must be delivered to the Corporation for inclusion in the minutes and filing in the corporate records. A shareholder's attendance at a meeting waives any objection to (a) lack of notice or defective notice, unless the shareholder objects at the beginning of the meeting to holding the meeting or transacting business at the meeting and (b) consideration of any matter at the meeting that is not within the purpose or purposes described in the notice of a special meeting, unless the shareholder objects to considering the matter when it is first presented. Section 1.5 VOTING. Except as otherwise provided in the Articles of Incorporation, each shareholder will be entitled to one vote, in person or by proxy, on each matter voted on at a shareholder's meeting for each share of stock outstanding in such shareholder's name on the records of the Corporation which is entitled to vote on such matter. Unless held as trustee or in another fiduciary capacity, shares may not be voted if held by another corporation in which the Corporation holds a majority of the shares entitled to vote for directors of such other corporation. The Board of Directors, by a resolution duly adopted by them, may require the use of written ballots at any annual or special meeting of the shareholders. In the absence of such a resolution, written ballots will not be required. Section 1.6 QUORUM; VOTE REQUIRED. A majority of the shares entitled to vote on a matter, represented in person or by proxies, will constitute a quorum with respect to that matter at any meeting of the shareholders. If a quorum is present, action on a matter, other than the election of directors, is approved if the votes cast in favor of the action exceed the votes cast in opposition, unless the vote of a greater number is required by the Oregon Business Corporation Act or the Articles of Incorporation. Election of directors is governed by Section 2.1 of these Bylaws. Unless otherwise provided in the Articles of Incorporation, a majority of votes represented at a meeting of shareholders, whether or not a quorum, may adjourn the meeting to a different time, date, or place. No further notice of the adjourned meeting is required if the new time, date, and place is announced at the meeting prior to adjournment and the date is set 120 days or less from the date of the original meeting. Section 1.7 ACTION WITHOUT MEETING. Any action required or permitted to be taken at a meeting of shareholders may be taken without a meeting if a written consent, or consents, describing the action taken is signed by all of the shareholders entitled to vote on the action and is delivered to the Corporation for inclusion in the minutes and filing with the corporate records. The action is effective when the last shareholder signs the consent, unless the consent specifies an earlier or later effective date. A consent signed under this section has the effect of a meeting vote and may be described as such in any document. Unless a record date for determining the shareholders entitled to take action without a meeting is otherwise established, the record date for that purpose is the date the first shareholder signs the consent. If the Oregon Business Corporation Act requires that notice of a proposed action be given to non-voting shareholders and that the action is to be taken by unanimous consent of the shareholders, at least 10 days written notice of the proposed action will be given to non-voting shareholders before the action is taken. ARTICLE 2. BOARD OF DIRECTORS Section 2.1 NUMBER AND ELECTION OF DIRECTORS. The Board of Directors will consist of not less than two members and not more than seven members. The number of directors will be established within this range from time to time by the Board of Directors. A decrease in the number of directors will not have the effect of shortening the term of any incumbent director. At each annual meeting, the shareholders will elect directors by a plurality of the votes cast by the shares entitled to vote in the election. Each director will be elected to hold office until the next annual meeting of shareholders and until the election and qualification of a successor, subject to prior death, resignation or removal. Section 2.2 VACANCIES. Unless otherwise provided by the Articles of Incorporation or unless previously filled by the vote of at least a majority of the total number of votes represented by the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (voting together as a single class, any vacancy occurring in the Board of Directors, including both a vacancy resulting from removal of a director or from an increase in the number of directors, may be filled by vote of a majority of the remaining directors then in office, even if less than a quorum. Any director elected to fill a vacancy will serve until the next annual shareholders meeting and until the successors have been elected and qualified, subject to prior death, resignation or removal. Section 2.3 ANNUAL MEETING. An annual meeting of the Board of Directors will be held without notice immediately after the adjournment of the annual meeting of the shareholders or at another time designated by the Board of Directors upon notice in the same manner as provided in Section 2.5. The annual meeting will be held at the principal office of the Corporation or at such other place as the Board of Directors may designate. Section 2.4 REGULAR MEETINGS. The Board of Directors may provide by resolution for regular meetings. Unless otherwise required by such resolution, regular meetings may be held without notice of the date, time, place or purpose of the meeting. Section 2.5 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the President, the Chief Executive Officer or any member of the Board of Directors. Notice of each special meeting will be given to each director, either by oral or in written notification actually received not less than 24 hours prior to the meeting or by written notice mailed by deposit in the United States mail, first class postage prepaid, addressed to the director at the director's address appearing on the records of the Corporation not less than 72 hours prior to the meeting. Special meetings of the directors may also be held at any time when all members of the Board of Directors are present and consent to a special meeting. Special meetings of the directors will be held at the principal office of the Corporation or at any other place designated by a majority of the Board of Directors. Section 2.6 TELEPHONIC MEETINGS. The Board of Directors may permit directors to participate in a meeting by any means of communication by which all of the persons participating in the meeting can hear each other at the same time. Participation in such a meeting will constitute presence in person at the meeting. Section 2.7 WAIVER OF NOTICE. A director may, at any time, waive any notice required by these Bylaws, the Articles of Incorporation or the Oregon Business Corporation Act. Except as otherwise provided in this Section 2.7, the waiver must be in writing, must be signed by the director, must specify the meeting for which notice is waived, and must be delivered to the Corporation for inclusion in the minutes and filing in the corporate records. A director's attendance at a meeting waives any required notice, unless the director at the beginning of the meeting or promptly upon the director's arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to any action taken at the meeting. Section 2.8 QUORUM. A majority of the number of directors that has been established by the Board of Directors pursuant to Section 2.1 of these Bylaws will constitute a quorum for the transaction of business. Section 2.9 VOTING. The act of the majority of the directors present at a meeting at which a quorum is present will for all purposes constitute the act of the Board of Directors, unless otherwise provided by the Articles of Incorporation or these Bylaws. Section 2.10 ACTION WITHOUT MEETING. Unless otherwise provided by the Articles of Incorporation, any action required or permitted to be taken at a Board of Directors meeting may be taken without a meeting if a written consent, or consents, describing the action taken is signed by each director and included in the minutes and filed with the corporate records. The action is effective when the last director signs the consent, unless the consent specifies an earlier or later effective date. A consent signed under this section has the effect of an act of the Board of Directors at a meeting and may be described as such in any document. Section 2.11 REMOVAL OF DIRECTORS. Unless otherwise provided by the Articles of Incorporation, the shareholders, at any meeting of the shareholders called expressly for that purpose, may remove any director from office, with or without cause, by the affirmative vote of not less than a majority of the total number of votes represented by the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class. Section 2.12 POWERS OF DIRECTORS. The Board of Directors will have the sole responsibility for the management of the business of the Corporation. In the management and control of the property, business and affairs of the Corporation, the Board of Directors is vested with all of the powers possessed by the Corporation itself, so far as this delegation of power is not inconsistent with the Oregon Business Corporation Act, the Articles of Incorporation, or these Bylaws. The Board of Directors will have the power to determine what amount constitutes net earnings of the Corporation, what amount will be reserved for working capital and for any other purpose, and what amount, if any, will be declared as dividends. Such determinations by the Board of Directors will be final and conclusive except as otherwise expressly provided by the Oregon Business Corporation Act or the Articles of Incorporation. The Board of Directors may designate one or more officers of the Corporation who will have the power to sign all deeds, leases, contracts, mortgages, deeds of trust and other instruments and documents executed by and binding upon the Corporation. In the absence of a designation of any other officer or officers, the Chief Executive Officer is so designated. Section 2.13 COMMITTEES. Unless the Articles of Incorporation provide otherwise, a majority of the Board of Directors may designate from among its members an Executive Committee and any number of other committees. Each committee must consist of two or more directors and will have such powers and will perform such duties as may be delegated and assigned to the committee by the Board of Directors. No committee will have the authority of the Board of Directors with respect to (a) approving dividends or other distributions to shareholders, except as permitted by (h), below, (b) amending the Articles of Incorporation, except as permitted by (j), below (c) adopting a plan of merger, (d) recommending to the shareholders the sale, lease, exchange, or other disposition of all or substantially all the property and assets of the Corporation other than in the usual and regular course of its business, (e) recommending to the shareholders a voluntary dissolution of the Corporation or a revocation thereof, (f) approving or proposing to shareholders other actions required to be approved by the shareholders, (g) approving a plan of merger which does not require shareholder approval, (h) authorizing or approving any reacquisition of shares of the Corporation, except pursuant to a formula or method prescribed by the Board of Directors, (i) authorizing or approving the issuance, sale or contract for sale of shares of the Corporation's stock except either pursuant to a stock option or other stock compensation plan or where the Board of Directors has determined the maximum number of shares and has expressly delegated this authority to the committee, (j) determining the designation and relative rights, preferences and limitations of a class or series of shares, unless the Board of Directors has determined a maximum number of shares and expressly delegated this authority to the committee, (k) adopting, amending or repealing Bylaws for the Corporation, or (l) filling vacancies on the Board of Directors or on any of its committees or (m) taking any other action which the Oregon Business Corporation Act prohibits a committee of a board of directors to take. The provisions of Sections 2.4, 2.5, 2.6, 2.7, 2.8, 2.9, and 2.10 of the Bylaws will also apply to all committees of the Board of Directors. Each committee will keep written records of its activities and proceedings. All actions by committees will be reported to the Board of Directors at the next meeting following the action and the Board of Directors may ratify, revise or alter such action, provided that no rights or acts of third parties will be affected by any such revision or alteration. Section 2.14 CHAIRMAN OF THE BOARD. The Board of Directors may elect one of its members to be Chairman of the Board of Directors. The Chairman will advise and consult with the Board of Directors and the officers of the Corporation as to the determination of policies of the Corporation, will preside at all meetings of the Board of Directors and of the shareholders, and will perform such other functions and responsibilities as the Board of Directors may designate from time to time. ARTICLE 3. OFFICERS Section 3.1 COMPOSITION. The officers of this Corporation will consist of at least a President and a Secretary and may also include a separate Chief Executive Officer, one or more Vice Presidents and a Treasurer, each of whom will be elected by the Board of Directors at the annual meeting of the Board of Directors or at any regular meeting of the Board of Directors or at any special meeting called for that purpose. Other officers and assistant officers and agents may be elected or appointed by or in the manner directed by the Board of Directors as the Board of Directors may deem necessary or appropriate. Any vacancies occurring in any office of this Corporation may be filled by election or appointment by the Board of Directors at any regular meeting or any special meeting called for that purpose. Each officer will hold his or her office until the next annual meeting of the Board of Directors and until the election and qualification of a successor in such office, subject to prior death, resignation or removal. Section 3.2 CHIEF EXECUTIVE OFFICER. The Board of Directors may designate one of the officers of the Corporation or the Chairman of the Board of Directors to serve as the Chief Executive Officer of the Corporation. The Chief Executive Officer will be responsible for implementing the policies and goals of the Corporation as stated by the Board of Directors and will have general supervisory responsibility and authority over the property, business and affairs of the Corporation. Unless otherwise provided by the Board of Directors, the Chief Executive Officer will have the authority to hire and fire employees and agents of the Corporation and to take such other actions as the Chief Executive Officer deems to be necessary or appropriate to implement the policies, goals and directions of the Board of Directors. Section 3.3 PRESIDENT. In the absence of a specific designation by the Board of Directors of a separate Chief Executive Officer, the President will have all the responsibilities and authority of the Chief Executive Officer as set forth in Section 3.1 and may be referred to as the Corporation's Chief Executive Officer. The President may sign any documents and instruments of the Corporation which require the signature of the President under the Oregon Business Corporation Act, the Articles of Incorporation or these Bylaws. The President will also have such responsibilities and authority as may be delegated to the President by the Chief Executive Officer or prescribed by the Board of Directors. At the request of the Chairman of the Board of Directors or in the Chairman's absence, the President will preside at meetings of the Board of Directors and at meetings of the shareholders. Upon the death, resignation or removal of the President, the Board of Directors may appoint a Vice President or another person to serve as an "acting" or "interim" President to serve as such until the position is filled by action of the Board of Directors. Unless otherwise provided by the Board of Directors, an "acting" or "interim" President will have all responsibilities and authority of the President. Section 3.4 VICE PRESIDENT. A Vice President will have such responsibilities and authority as may be prescribed by the Board of Directors or as may be delegated by the Chief Executive Officer or the President to such Vice President. If at any time there is more than one Vice President, the Board of Directors may designate the order of seniority or the areas of responsibility of such Vice Presidents. A Vice President (or if more than one, the Vice Presidents in order of seniority by designation or order of appointment) will have all of the powers and perform all of the duties of the President during the absence or disability of the President. Section 3.5 SECRETARY. The Secretary will keep the minutes and records of all the meetings of the shareholders and directors and of all other official business of the Corporation. The Secretary will give notice of meetings to the shareholders and directors and will perform such other duties as may be prescribed by the Board of Directors. Section 3.6 TREASURER. The Treasurer will receive all moneys and funds of the Corporation and deposit such moneys and funds in the name of and for the account of the Corporation with one or more banks designated by the Board of Directors or in such other short-term investment vehicles as may from time to time be designated or approved by the Board of Directors. The Treasurer will keep accurate books of account and will make reports of financial transactions of the Corporation to the Board of Directors, and will perform such other duties as may be prescribed by the Board of Directors. If the Board of Directors elects a Vice President, Finance or a Chief Financial Officer, the duties of the office of Treasurer may rest in that officer. Section 3.7 REMOVAL. The directors, at any regular meeting or any special meeting called for that purpose, may remove any officer from office with or without cause; provided, however, that no removal will impair the contract rights, if any, of the officer removed or of this Corporation or of any other person or entity. ARTICLE 4. STOCK AND OTHER SECURITIES Section 4.1 CERTIFICATES. All stock and other securities of this Corporation will be represented by certificates which will be signed by the President or a Vice President and the Secretary or an Assistant Secretary of the Corporation, and which may be sealed with the seal of the Corporation or a facsimile thereof. Section 4.2 TRANSFER AGENT AND REGISTRAR. The Board of Directors may from time to time appoint one or more Transfer Agents and one or more Registrars for the stock and other securities of the Corporation. The signatures of the President or a Vice President and the Secretary or an Assistant Secretary upon a certificate may be facsimiles if the certificate is manually signed by a Transfer Agent, or registered by a Registrar. Section 4.3 TRANSFER. Title to a certificate and to the interest in this Corporation represented by that certificate can be transferred only (a) by delivery of the certificate endorsed by the person designated by the certificate to be the owner of the interest represented thereby either in blank or to a specified person or (b) by delivery of the certificate and a separate document containing a written assignment of the certificate or a power of attorney to sell, assign or transfer the same, signed by the person designated by the certificate to be the owner of the interest represented thereby either in blank or to a specified person. Section 4.4 NECESSITY FOR REGISTRATION. Prior to presentment for registration upon the transfer books of the Corporation of a transfer of stock or other securities of this Corporation, the Corporation or its agent for purposes of registering transfers of its securities may treat the registered owner of the security as the person exclusively entitled to vote the securities; to receive any notices to shareholders; to receive payment of any interest on a security, or of any ordinary, extraordinary, partial liquidating, final liquidating, or other dividend, or of any other distribution, whether paid in cash or in securities or in any other form; and otherwise to exercise or enjoy any or all of the rights and powers of an owner. Section 4.5 FIXING RECORD DATE. The Board of Directors may fix in advance a date as record date for the purpose of determining the registered owners of stock or other securities (a) entitled to notice of or to vote at any meeting of the shareholders or any adjournment thereof; (b) entitled to receive payment of any interest on a security, or of any ordinary, extraordinary, partial liquidating, final liquidating, or other dividend, or of any other distribution, whether paid in cash or in securities or in any other form; or (c) entitled to otherwise exercise or enjoy any or all of the rights and powers of an owner, or in order to make a determination of registered owners for any other proper purpose. The record date will be not more than 70 days and, in the case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action which requires such determination of registered owners is to be taken. Section 4.6 RECORD DATE FOR ADJOURNED MEETING. A determination of shareholders entitled to notice of or to vote at a meeting of the shareholders is effective for any adjournment of the meeting unless the Board of Directors fixes a new record date. A new record date must be fixed if a meeting of the shareholders' is adjourned to a date more than 120 days after the date fixed for the original meeting. Section 4.7 LOST CERTIFICATES. In case of the loss or destruction of a certificate of stock or other security of this Corporation, a duplicate certificate may be issued in its place upon such conditions as the Board of Directors may prescribe. ARTICLE 5. AMENDMENTS Unless otherwise provided in the Articles of Incorporation, the Bylaws of the Corporation may be amended or repealed by the directors, subject to amendment or repeal by action of the shareholders, at any regular meeting or at any special meeting called for that purpose, provided notice of the proposed change is given in the notice of the meeting or notice thereof is waived in writing. ARTICLE 6. SEVERABILITY If any provision of these Bylaws is found, in any action, suit or proceeding, to be invalid or ineffective, the validity and the effect of the remaining provisions will not be affected. Adopted by action of the Board of Directors of Lithia Motors, Inc. as of October 10, 1996. ---------------------------------------- Sidney B. DeBoer, Secretary EX-10.5-1 4 EXHIBIT 10.5.1 EXHIBIT 10.5.1 DEALERSHIP STANDARDS ADDENDUM FOR LITHIA MOTORS, INC. dba LITHIA ISUZU EFFECTIVE FROM AND AFTER June 5, 1996 UNTIL AMENDED In accordance with Section 5 of our Isuzu Dealer Sales and Service Agreement with you dated June 5, 1996 and Article III of the Isuzu Dealer Sales and Service Agreement Additional Provisions thereto, you agree to: 1. Furnish to us, on or before the tenth day of each month, on such forms or by such means as we may designate, complete and accurate financial and operating statements reflecting your true financial condition as of the end of the preceding month and for that portion of the fiscal year then ended. 2. Maintain flooring arrangements with an approved Bank or Financial Institution providing a wholesale flooring line of $600,000 exclusively for the purchase of Isuzu vehicles. 3. Maintain a new vehicle showroom located at 700 North Central, Medford, OR for the display and sale of Isuzu vehicles. Said showroom to be a minimum of 1,200 square feet, and sufficient in design to display at least two (2) Isuzu vehicles. 4. Install and maintain standard signs as required by us for an Isuzu dealership, including brand, fascia, exterior service and parts, and interior parts signs where allowable under the then current local sign ordinance. 5. Having your service management and technicians attend specified Isuzu sponsored service training programs. 6. Having your sales and management personnel attend Isuzu sponsored product training sessions. 7. Maintain a designated area in the service department located at 700 North Central, Medford, OR, for servicing Isuzu vehicles. This shall be coordinated with our designated representative and subject to our approval. 8. Maintain a specified area in the parts department located at 700 North Central, Medford, OR, for storage of Isuzu parts. This shall be coordinated with our designated representative and subject to our approval. 9. Maintain Net Working Capital of $94,850 in excess of the combined current net working capital requirement of other manufacturers you may also represent. Additionally, having and maintaining Net Working Capital in the amount required by Isuzu as determined by a revised standard working capital formula. 10. Maintain and utilize the Isuzu-Net Dealer Communication System for the submission of required monthly financial statements, parts orders, warranty claims, retail sales reporting, and all other functions which from time to time American Isuzu Motors, Inc. may deem necessary. American Isuzu Motors, Inc. reserves the right to amend the foregoing dealership standards at any time upon written notice to you. Lithia Motors, Inc. dba Lithia Isuzu 700 North Central Medford, OR 97501 By [Signature] ------------------------------------- Its [President Sec-Treas.] ------------------------------------ AMERICAN ISUZU MOTORS, INC. By [Signature] ------------------------------------- Its Senior Vice President/General Manager Sales and Service ------------------------------------ EX-10.6-1 5 EXHIBIT 10.6.1 EXHIBIT 10.6.1 FORD MOTOR COMPANY SEATTLE DISTRICT Mercury Sales and Service Agreement AGREEMENT made as of the 28TH day of DECEMBER, 1979, by and between JACOBSON LINCOLN-MERCURY, INC., A CORPORATION DELAWARE doing business as VALLEY LINCOLN-MERCURY and with a principal place of business at 143 S. RIVERSIDE, MEDFORD, JACKSON, OREGON, 97501. (hereinafter called the "Dealer") and Ford Motor Company, a Delaware corporation with its principal place of business at Dearborn, Michigan (hereinafter called the "Company"). PREAMBLE The purpose of this agreement is to (i) establish the Dealer as an authorized dealer in COMPANY PRODUCTS including VEHICLES (as herein defined), (ii) set forth the respective responsibilities of the Company in producing and selling those products to the Dealer and of the Dealer in reselling and providing service for them and (iii) recognize the interdependence of both parties in achieving their mutual objectives of satisfactory sales, service and profits by continuing to develop and retain a broad base of satisfied owners of COMPANY PRODUCTS. In entering into this agreement, the Company and the Dealer recognize that the success of the Company and of each of its authorized dealers depends largely on the reputation and competitiveness of COMPANY PRODUCTS and dealers' services, and on how well each fulfills its responsibilities under this agreement. It is the opinion of the Company that sales and service of COMPANY PRODUCTS usually can best be provided to the public through a system of independent franchised dealers, with each dealer fulfilling his responsibilities in a given locality from properly located, adequate, well-equipped and attractive dealerships, which are staffed by competent personnel and provided with the necessary working capital. The Dealer recognizes that, in such a franchise system, the Company must plan for the establishment and maintenance of the numbers, locations and sizes of dealers necessary for satisfactory and proper sales and service representation in each market area as it exists and as it develops and changes. At the same time, the Company endeavors to provide each of its dealers with a reasonable profit opportunity based on the potential for sales and service of COMPANY PRODUCTS within his locality. The Company endeavors to make available to its dealers a variety of quality products, responsive to broad wants and needs of the buying public, which are attractively styled, of sound engineering design and produced on a timely basis at competitive prices. The development, production and sale of such products require that the Company and its manufacturing sources make large continuing investments in plants, equipment, tools and other facilities, engineering and styling research and development, quality control procedures, trained personnel and marketing programs. Heavy commitments must also be made in advance for raw materials and finished parts. For purposes of making these investments and commitments, planning production and estimating costs for setting prices, the Company assumes in advance an estimated volume of sales for each of its products. Within each year, it develops monthly production schedules from basic orders submitted by its franchised dealers for the following month and its and their best estimates of the market for subsequent months. In turn, each of the Company's franchised dealers makes important investments or commitments in retail sales and service facilities and equipment, in working capital, in inventories for vehicles, parts and accessories, and trained sales and service personnel based on annual planning volumes for their markets. If satisfactory volumes for either the Company or a dealer are not realized, each may suffer because of commitments already made and the cost of manufacturing and of selling each product may be increased. Each month each dealer must forecast and give the Company a basic order for the products needed to serve his market. During the month each dealer should submit specific orders for products covered by his basic order. If dealers' specific orders for any product are greater than or different from their basic orders, the Company seeks to revise production schedules to the extent feasible, and to allocate fairly any product in short supply, but inevitably both the Company and its dealers suffer loss of profits to the extent they cannot meet market demands. Thus, the automotive business is a high risk business in which the Company, its manufacturing sources and its dealers can succeed only through cooperative and competitive effort in their respective areas of manufacturing, sales, service and customer satisfaction. Since it is the dealer who deals directly with, and develops the sale of COMPANY PRODUCTS to, the consuming public, the Company substantially relies on its dealers to provide successful sales and merchandising programs, competent service operations and effective owner relations programs. To do this, dealers must carry out their responsibilities of establishing and maintaining adequate wholesale and retail finance plans, new and used vehicle sales programs, parts and service sales programs, personnel training and supportive capitalization and working capital. To assist its dealers in these responsibilities, the Company establishes and periodically updates standards of operation and planning guides based on its experience and current conditions. It also offers sales and service training courses, advice as to facilities, counseling in the various phases of dealership operations and, through other agreements and the activities of its affiliates, assistance in financing, new and used vehicle merchandising, parts and service merchandising, leasing, daily rentals and facilities development. It also conducts national advertising, promotional and other marketing programs and assists dealers in developing complementary group and individual programs. To enable the Company to provide such assistance, it requires dealers to submit uniform and accurate sales, operating and financial reports from which it can derive and disseminate analytical and comparative operating data and advice to dealers. The Company also solicits dealers to bring to its attention through their National Dealer Council organization any mutual dealer problems or complaints as they arise. Because the Company relies heavily on its dealers for success, it reserves the right to cease doing business with any dealer who is not contributing sufficiently to such success. Similarly, the Company recognizes that its dealers look to it to provide competitive products and programs and that, if it does not do so, any dealer may elect to cease doing business with the Company. The Company has elected to enter into this agreement with the Dealer with confidence in the Dealer's integrity and ability, his intention to carry out his responsibilities set forth in this agreement, and his desire to provide courteous, competent and satisfying sales and service representation to consumers for COMPANY PRODUCTS, and in reliance upon his representations as to the persons who will participate in the ownership and management of the dealership. The Dealer has elected to enter into this agreement with the Company with confidence in its integrity and ability, its intention to provide competitive products and assist the Dealer to market them successfully, and its desire to maintain high quality dealers. Both parties recognize that the rights of the Dealer and the Company under this agreement are defined and limited by the terms of this agreement and applicable law. The Company and the Dealer further acknowledge that their methods of operation and business practices have an important effect on the reputation of the Dealer, the Company, COMPANY PRODUCTS and other franchised dealers of the Company. The Company and the Dealer also acknowledge that certain practices are detrimental to their interests, such as deceptive, misleading or confusing advertising, pricing, merchandising or business practices, or misrepresenting the characteristics, quality, condition or origin of any item of sale. It is the expectation of each of the parties that by entering into this agreement, and by the full and faithful observance and performance of its duties, a mutually satisfactory relationship will be established and maintained. IN CONSIDERATION of the mutual agreements and acknowledgements hereinafter made, the parties hereto agree as follows: A. The Company hereby appoints the Dealer as an authorized dealer at retail in VEHICLES and at retail and wholesale in other COMPANY PRODUCTS and grants the Dealer the privilege of buying COMPANY PRODUCTS from the Company for sale in its DEALERSHIP OPERATIONS (as herein defined). The Company also grants to the Dealer the privilege of displaying, at approved locations), the Company's trademarks and trade names applicable to COMPANY PRODUCTS. The Dealer hereby accepts such appointment. B. Subject to and in accordance with the terms and conditions of this agreement, the Company shall sell COMPANY PRODUCTS to the Dealer and the Dealer shall purchase COMPANY PRODUCTS from the Company. C. The Ford Motor Company Mercury Sales and Service Agreement Standard Provisions (Form "LM-7939a SALES OFC 4-72"), a duplicate original of which is attached to the Dealer's duplicate original of this agreement, have been read and agreed to by the Company and by the Dealer, and such Standard Provisions and any duly executed and delivered supplement or amendment thereto, are hereby made a part of this agreement with the same force and effect as if set forth herein in full. D. This agreement shall bind the Company when it bears the facsimile signature of the General Manager, and the manual countersignature of the General Sales Manager, Market Representation Manager, or a Regional or District Sales Manager, of the Lincoln-Mercury Division of the Company and a duplicate original thereof is delivered personally or by mail to the Dealer or the Dealer's principal place of business. E. The Dealer acknowledges that (i) this agreement may be executed only in the manner provided in paragraph D hereof, (ii) no one except the General Manager, the General Sales Manager, or Market Representation Manager of the Lincoln-Mercury Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to make or execute any other agreement relating to the subject matter hereof on behalf of the Company, or in any manner to enlarge, vary or modify the terms of this agreement, and then only by an instrument in writing, and (iii) no one except the General Manager of the Lincoln-Mercury Division of the Company, or the Secretary or an Assistant Secretary of the Company, is authorized to terminate this agreement on behalf of the Company, and then only by an instrument in writing. F. In view of the personal nature of this agreement and its objectives and purposes, the Company expressly reserves to itself the right to execute a Mercury Sales and Service Agreement with individuals or other entities specifically selected and approved by the Company. Accordingly, this agreement and the rights and privileges conferred on the Dealer hereunder are not transferable, assignable or salable by the Dealer and no property right or interest, direct or, indirect, is sold, conveyed or transferred to the Dealer under this agreement. This agreement has been entered into by the Company with the Dealer in reliance (i) upon the representation and agreement that the following person(s), and only the following person(s), shall be the principal owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST Lithia Motors, Inc. 360 E. Jackson, Medford, OR 100% - ------------------------------------------------------------------------------ (ownership: J.L. Koken-10%; M.L. Heimann-15%; A.W. DeBoer-25%; - ------------------------------------------------------------------------------ R.G. DeBoer-25%; S.B. DeBoer-25%, controlling trustee for all stock) - ------------------------------------------------------------------------------ (ii) upon the representation and agreement that the following person(s), and only the following person(s), shall have full managerial authority for the operating management of the Dealer in the performance of this agreement: NAME HOME TITLE ADDRESS S.B. DeBoer 401 S. Modoc, Medford, OR 97501 President, G.M. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ and (iii) upon the representation and agreement that the following person(s), and only the following person(s), shall be the remaining owners of the Dealer: NAME HOME PERCENTAGE ADDRESS OF INTEREST - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ The Dealer shall give the Company prior notice of any proposed change in the said ownership or managerial authority, and immediate notice of the death or incapacity of any such person. No such change or notice, and no assignment of this agreement or of any right or interest herein, shall be effective against the Company unless and until embodied in an appropriate amendment to or assignment of this agreement, as the case may be, duly executed and delivered by the Company and by the Dealer. The Company shall not unreasonably withhold its consent to any such change. G. (Strike out either subparagraph (1) or (2) whichever is not applicable.) (1) This agreement shall continue in force and effect from the date of its execution until terminated by either party under the provisions of paragraph 17 hereof. (2) This agreement shall continue in force and effect for a term commencing on the date of its execution and expiring __________ unless sooner terminated under the provisions of paragraph 17 hereof. H. Both the Company and the Dealer assume and agree to carry out and perform their respective responsibilities under this agreement. IN WITNESS WHEREOF the parties hereto have duly executed this agreement in duplicate as of the day and year first above written. FORD MOTOR COMPANY General Manager, VALLEY LINCOLN-MERCURY Lincoln-Mercury Division By [Signature] ---------------------------- Countersigned by (Title) [President] [Signature] ----------------------- - ----------------------------------- Initials - -------- EX-10.10-2 6 EXHIBIT 10.10.2 EXHIBIT 10.10.2 TOYOTA DEALER AGREEMENT STANDARD PROVISIONS The Standard Provisions set forth below are expressly incorporated in and made a part of the Toyota Dealer Agreement. XIII. SALE OF TOYOTA PRODUCTS TO DEALER A. DEALER'S RIGHT TO PURCHASE TOYOTA PRODUCTS DEALER shall have the right to purchase Toyota Products from DISTRIBUTOR subject to the provisions of paragraph XIII(B) herein. B. DISTRIBUTOR'S OBLIGATION TO SELL TOYOTA PRODUCTS DISTRIBUTOR agrees to use its best efforts to provide Toyota Products to DEALER in such quantities and types as may be required by DEALER to fulfill its obligations with respect to the sale and servicing of Toyota Products under this Agreement, subject to available supply from IMPORTER, DISTRIBUTOR's marketing requirements, and any change or discontinuance with respect to any Toyota Product. DISTRIBUTOR and DEALER recognize that certain Toyota Products may not be available in sufficient supply from time to time because of factors which are beyond the control of DISTRIBUTOR and IMPORTER. Where such a shortage is determined by DISTRIBUTOR to exist, DISTRIBUTOR will endeavor to allocate the affected Toyota Product(s) among its dealers in a fair and equitable manner, which it shall determine in its sole discretion. DISTRIBUTOR agrees to provide DEALER with an explanation of the method used to distribute such products and, upon written request, will advise DEALER of DISTRIBUTOR's total sales of new motor vehicles, by series, in DEALER's region, and to DEALER individually. C. DELIVERY OF TOYOTA PRODUCTS 1. Mode and Place of Delivery DISTRIBUTOR shall select the distribution points and the mode of transportation and shall pay carrier(s) for all charges in effecting delivery of Toyota Products to DEALER. DISTRIBUTOR will invoice DEALER for Destination Freight Charges or such functional equivalent as DISTRIBUTOR may in its discretion establish, and DEALER agrees to reimburse DISTRIBUTOR therefor. 2. Diversion Charges If DISTRIBUTOR is required to divert any Toyota Product which DEALER has agreed to purchase and which is not cancelled prior to shipment by DISTRIBUTOR, because of DEALER's failure or refusal to accept such product, DEALER agrees to assume responsibility for and pay any charges incurred by DISTRIBUTOR as a result of such diversion. DEALER's responsibility for such charges shall not exceed the charge of returning any such product to the point of original shipment by DISTRIBUTOR plus all charges for demurrage, storage or other charges related to such diversion. DEALER also agrees to assume responsibility for and shall pay any and all charges for demurrage, storage or other charges accruing after arrival of shipment at the distribution point established by DISTRIBUTOR. 3. Delay or Failure of Delivery DISTRIBUTOR shall not be liable for delay or failure to deliver Toyota Products which it has previously agreed to deliver, where such delay or failure to deliver is the result of any event beyond the control of DISTRIBUTOR or IMPORTER, including but not limited to any law or regulation of any governmental entity, acts of God, foreign or civil wars, riots, interruptions of navigation, shipwrecks, fires, floods, storms, strikes, lockouts, or other labor troubles, embargoes, blockades, or delay or failure of FACTORY, IMPORTER or other suppliers of DISTRIBUTOR to deliver Toyota Products. 4. Damage Claims Against Carriers Upon request by DEALER and as may be mutually agreed upon by the parties, DISTRIBUTOR agrees to assist DEALER in recovery against any carrier for loss or damage to Toyota Products shipped hereunder. D. PRICES AND OTHER TERMS OF SALE DISTRIBUTOR shall have the right from time to time to establish and revise prices and other terms for its sales of Toyota Products to DEALER. Revised prices, terms or provisions shall apply to any Toyota Product not shipped by DISTRIBUTOR at the time the notice of such change is given to DEALER (in the case of Toyota Motor Vehicles) or upon issuance of a new or modified parts price list or through change notices, letters, bulletins or revision sheets (in the case of parts, options and accessories). E. CHANGE OF DESIGN, OPTIONS OR SPECIFICATIONS DEALER understands and agrees that there may be changes in the design or specifications of any Toyota Product or in the availability of options in any Toyota Product and that DISTRIBUTOR is under no obligation to provide notice of same or to make any similar change upon any product previously purchased by or shipped to DEALER. No change shall be considered a model year change unless so specified by FACTORY. F. DISCONTINUANCE OF MANUFACTURE The manufacture and production of all or part of any Toyota Product, whether motor vehicle, parts, options, or accessories, including any model, series, or body style of any Toyota Motor Vehicle, may be discontinued at any time without any obligation or liability to DEALER on the part of FACTORY, IMPORTER, or DISTRIBUTOR by reason thereof. XIV. PROMOTING AND SELLING TOYOTA PRODUCTS A. RESPONSIBILITIES OF THE DEALER DEALER shall actively and effectively promote, through DEALER's own advertising and sales promotion activities, the purchase of Toyota Products by CUSTOMERS in DEALER's primary area of responsibility. Nothing contained in this Agreement, however, shall limit or be construed to limit the geographical area in which, or the persons to whom, DEALER may sell or promote the sale of Toyota Products. The primary area of responsibility is a geographic area which DISTRIBUTOR shall designate from time to time and is solely a tool used by DISTRIBUTOR to evaluate DEALER's performance of its sales and service obligations hereunder. DEALER agrees that: it has no right or interest in any primary area of responsibility that DISTRIBUTOR may designate; DISTRIBUTOR may add new dealers to, or relocate dealers in, the primary area of responsibility designated for DEALER; and DISTRIBUTOR may, in its sole discretion, change DEALER's primary area of responsibility from time to time. B. SALES OPERATIONS 1. Sales Organization To enable DEALER to fulfill it responsibilities satisfactorily under paragraph XIV(A) of this section, DEALER agrees to organize and maintain an adequate and trained sales organization. 2. Fair Dealing DISTRIBUTOR has selected DEALER because of its integrity and commitment to fair dealing. DEALER shall at all times maintain a high standard of ethics in advertising, promoting and selling Toyota Products and shall not engage in any misrepresentation or unfair or deceptive trade practices. 3. Disclosure as to Prices of Toyota Products DEALER agrees to explain to purchasers of Toyota Products the items which make up the purchase price and to give such purchasers itemized invoices and any other information required by law. DEALER further agrees that it will not make any misleading statements or misrepresentations as to the items which make up the total selling price of any Toyota Motor Vehicle, or as to the prices related to such items. DEALER also agrees not to charge CUSTOMERS for any services for which the DEALER is reimbursed by DISTRIBUTOR and/or IMPORTER, including pre-delivery inspection and adjustment services, without disclosing the fact of such reimbursement to the CUSTOMER. 4. Product Warranties DEALER understands and agrees that the only warranties of FACTORY, IMPORTER or DISTRIBUTOR that shall be applicable to each new Toyota Product sold to DEALER by DISTRIBUTOR shall be the written warranty or warranties expressly furnished by FACTORY, IMPORTER or DISTRIBUTOR and/or as stated in the Toyota Warranty Policies and Procedures Manual, as it may be revised from time to time. Except for its limited liability under such written warranty or warranties, neither FACTORY, IMPORTER nor DISTRIBUTOR assumes any other warranty, obligation or liability. DEALER is not authorized to assume any additional warranty obligations or liabilities on behalf of DISTRIBUTOR, FACTORY or IMPORTER. Any such additional obligations assumed by DEALER shall be solely the responsibility of DEALER. 5. Disclosure Regarding Dealer Installed Items DEALER recognizes that its CUSTOMERS have a right to expect that any product that they purchase from DEALER meets the high quality standards associated with DISTRIBUTOR, IMPORTER, FACTORY, the Toyota Marks and Toyota Products in general. Accordingly, DEALER agrees that, if it sells any equipment, part or accessory that is not a Genuine Toyota part or accessory, it shall disclose such fact to the CUSTOMER and shall advise the CUSTOMER that the item is not included in warranties furnished by IMPORTER or FACTORY. In all cases, the purchaser's contract of purchase and sale will include written notice of such disclosure. In addition, DEALER will clearly explain to the CUSTOMER the extent of any warranty covering the equipment, part or accessory involved and will deliver a copy of such warranty to the CUSTOMER. C. ASSISTANCE PROVIDED BY DISTRIBUTOR 1. Sales Training Assistance To assist DEALER in the fulfillment of its sales responsibilities under this Agreement, DISTRIBUTOR agrees to offer general and specialized sales management and sales training programs for the benefit and use of DEALER's sales organization. When requested by DISTRIBUTOR, DEALER's personnel shall participate in such programs. 2. Sales Promotion Assistance In order that authorized Toyota dealers may be assured of the benefits of comprehensive advertising and promotion of Toyota Products, DISTRIBUTOR agrees to establish and maintain general advertising and promotion programs and will from time to time make sales promotion and campaign materials available to DEALER to promote the sales of such Toyota Products at a reasonable charge where applicable. 3. Field Sales Personnel Assistance To assist DEALER in handling its sales responsibilities under this Agreement, DISTRIBUTOR agrees to provide trained field sales personnel to advise and counsel DEALER on sales- related subjects, including merchandising, training and sales management. D. EVALUATION OF DEALER'S SALES PERFORMANCE DISTRIBUTOR will evaluate DEALER's sales performance within DEALER's primary area of responsibility on an annual basis. DISTRIBUTOR agrees to review such evaluations with DEALER and, if requested, to furnish copies thereof, so that DEALER may take prompt action if necessary to improve its sales performance to such levels as DISTRIBUTOR may reasonably require. In evaluating DEALER's sales performance, DISTRIBUTOR may, at its discretion, include the following considerations: 1. Achievement of fair and reasonable sales objectives as DISTRIBUTOR may establish at its discretion; 2. A comparison of sales and/or registrations of Toyota Motor Vehicles to sales and/or registrations of other line makes: (a) in DEALER's primary area of responsibility; and (b) in DISTRIBUTOR's region or any area thereof as DISTRIBUTOR may reasonably establish; 3. A comparison of sales and/or registration of Toyota Motor Vehicles to sales and/or registrations of Toyota Motor Vehicles of other Toyota dealers of comparable size which DISTRIBUTOR shall select in its sole discretion; 4. The trend of DEALER's sales performance over a reasonable period of time; 5. The manner in which DEALER has conducted its sales operations, including advertising, sales promotions and total CUSTOMER satisfaction; 6. The availability of new motor vehicles to DEALER from DISTRIBUTOR; and 7. Significant local conditions that may have affected DEALER's performance. XV. SERVICING TOYOTA MOTOR VEHICLES A. DEALER'S SERVICING OBLIGATIONS DEALER and DISTRIBUTOR agree that the future growth of sales of Toyota Motor Vehicles is in part dependent upon CUSTOMER satisfaction with vehicle servicing. DEALER recognizes that DISTRIBUTOR entered into this Agreement with DEALER in reliance upon DEALER's ability and commitment to fair dealing and professional servicing. DEALER agrees, therefore, to take all reasonable steps to provide service and parts for all Toyota Motor Vehicles, regardless of where purchased, and whether or not under warranty; insure that necessary repairs on CUSTOMER vehicles are accurately diagnosed and professionally performed; see that the CUSTOMER is advised and his or her consent is obtained prior to the initiation of any repairs; and, assure that the CUSTOMER is treated courteously and fairly at all times. 1. Warranty and Policy Service Warranty and policy service shall be performed in accordance with the Toyota Warranty Policies and Procedures Manual. DISTRIBUTOR agrees to compensate DEALER for all warranty and policy work, including labor and diagnosis, in accordance with procedures and at rates to be announced from time to time by DISTRIBUTOR and in accordance with applicable law. DEALER agrees that such rates shall constitute full and complete payment to DEALER for such work. Both parties agree that warranty and policy service is provided for the benefit of CUSTOMERS and DEALER agrees that the CUSTOMER shall not be obligated to pay any charges for warranty or policy work, except as required by law. 2. Changes In Reimbursement Rates DISTRIBUTOR and DEALER recognize that it may be necessary from time to time to adjust the rates at which DEALER is reimbursed for labor and diagnosis in connection with warranty and policy service performed on CUSTOMERS' vehicles. In the event DEALER seeks to readjust such reimbursement rates, DEALER agrees to make the appropriate application to DISTRIBUTOR and to comply with such applicable procedures or policies as may be set forth in the Toyota Warranty Policies and Procedures Manual. 3. New Motor Vehicle Pre-delivery Service DEALER agrees that prior to delivery of a new Toyota Motor Vehicle to any purchaser, DEALER shall be responsible for verifying that the pre-delivery service has been performed in accordance with IMPORTER'S Schedule of Operations published in the applicable Technical Services Bulletin. DEALER shall be reimbursed by DISTRIBUTOR for such pre- delivery service at an authorized labor and/or diagnosis rate established by DISTRIBUTOR and according to the pre- delivery service time allowances as established by IMPORTER or as required by law. 4. Independent Warranty or Service Contract Protection If DEALER sells warranty or service contract protection for a Toyota Motor Vehicle to its CUSTOMER which is independent of that provided by IMPORTER or FACTORY and which covers a period of time and Toyota Products also covered by the limited warranty provided by IMPORTER or FACTORY: a. At the time of sale, DEALER shall conspicuously disclose in writing upon CUSTOMER's purchase order the extent to which the independent warranty or service contract protection purchased by the CUSTOMER overlaps with that provided by IMPORTER or FACTORY; and b. Whenever a CUSTOMER who purchases such independent warranty or service contract protection seeks service on a Toyota Product during the period of time that such Product is also covered by the limited warranty provided by IMPORTER or FACTORY, DEALER expressly agrees that it will not apply for, and will not be entitled to, reimbursement under such limited warranty unless DEALER advises the CUSTOMER in writing, on all copies of the repair order, that the service was provided pursuant to IMPORTER's limited warranty and not by the independent warranty or service contract protection that the CUSTOMER purchased. 5. Use of Parts and Accessories DEALER understands that it has the right to sell, install or use products which are not Genuine Toyota Parts or Accessories. DEALER agrees, however, that its CUSTOMERS have a right to expect that any part or accessory which it sells, installs or uses in the repair or servicing of Toyota Motor Vehicles meets the high quality standards of Genuine Toyota Parts or Accessories. Therefore, in cases where DEALER does not sell, install or use a Genuine Toyota Part or Accessory, DEALER will only utilize such other parts or accessories as: a. Will not adversely affect the mechanical operation of the Toyota Motor Vehicles being serviced or repaired; and b. Are equivalent in quality and design to Genuine Toyota Parts or Accessories. DEALER agrees that it will not represent or offer to sell as new Genuine Toyota Parts or Accessories, any parts or accessories used by it in the repair or servicing of Toyota Motor Vehicles which are not in fact Genuine Toyota Parts or Accessories. 6. Disclosures as to Parts and Accessories In order to avoid confusion and to minimize potential CUSTOMER dissatisfaction, in any case where DEALER does not sell, install or use a Genuine Toyota Part or Accessory in connection with the repair or servicing of a CUSTOMER's Toyota Motor Vehicle, and instead sells, installs or uses a non-Genuine Toyota Part or Accessory, it shall disclose such fact to the CUSTOMER and shall advise the CUSTOMER that the item is not included in warranties furnished by IMPORTER or FACTORY. Such disclosure and advice shall be in writing, conspicuous and set forth on CUSTOMER's copy of the service or repair order. In addition, DEALER will clearly explain to the CUSTOMER the extent of any warranty covering the parts or accessories involved and will deliver a copy of such warranty to the CUSTOMER. 7. Campaign Inspections and Corrections DEALER agrees to perform campaign inspections and/or corrections for owners and users of all Toyota Products that qualify for such inspections and/or corrections. DEALER further agrees to comply with all of the procedures relating thereto set forth in the Toyota Warranty Policies and Procedures Manual. DISTRIBUTOR agrees to reimburse DEALER for all replacement parts and/or other materials required and used in connection therewith and for labor in accordance with the applicable provisions of the Toyota Warranty Policies and Procedures Manual. 8. Compliance With Safety and Emission Control Requirements DEALER agrees to comply with and operate consistently with all applicable provisions of the National Traffic and Motor Vehicle Safety Act of 1966 and the Federal Clean Air Act, as amended, including applicable rules and regulations issued from time to time thereunder, and all other applicable federal, state and local motor vehicle safety and emission control statutes, rules and regulations. In the event that the laws of the state in which DEALER is located require motor vehicle dealers or distributors to install in new or used motor vehicles, prior to the retail sale thereof, any safety devices or other equipment not installed or supplied as standard equipment by FACTORY, IMPORTER or DISTRIBUTOR, then DEALER, prior to its sale of any Toyota Motor Vehicles on which such installations are so required, shall properly install such devices or equipment on such Toyota Motor Vehicles. DEALER shall comply with state and local laws pertaining to installation of such equipment, including, without limitation, the reporting thereof. In the interest of motor vehicle safety and emission control, DISTRIBUTOR agrees to provide to DEALER, and DEALER to DISTRIBUTOR, such information and assistance as may reasonably be requested by the other in connection with the performance of obligations imposed on either party by the National Traffic and Motor Vehicle Safety Act of 1966 and the Federal Clean Air Act, as amended, and the rules and regulations issued thereunder, and all other applicable federal, state and local motor vehicle safety and emission control statutes, rules and regulations. 9. Compliance With Consumer Protection Statutes, Rules and Regulations Because certain CUSTOMER complaints may have legal significance for or impose liability upon DEALER, DISTRIBUTOR or IMPORTER under various repair or replace, or other consumer protection laws, rules and regulations, DEALER agrees to provide promptly notice of such complaints and take such other steps as DISTRIBUTOR or IMPORTER may reasonably require. DEALER will do nothing to affect adversely DISTRIBUTOR's or IMPORTER's rights under such laws, rules and regulations. B. SERVICE AND PARTS OPERATIONS 1. Service and Parts Organization To enable DEALER to fulfill its responsibilities satisfactorily under paragraph XV(A) herein, DEALER agrees to organize and maintain a complete service and parts organization, including a qualified service manager and a qualified parts manager and a sufficient number of competent CUSTOMER relations, service and parts personnel. DEALER further agrees that the foregoing personnel will meet such educational, management and technical training standards as IMPORTER may establish or approve. 2. Handling of Service Complaints DEALER recognizes that it is uniquely positioned to convey to purchasers of Toyota Products the concern of DEALER, DISTRIBUTOR, IMPORTER and FACTORY for the CUSTOMER's satisfaction. DEALER, therefore, agrees to acknowledge, investigate and handle all complaints from CUSTOMERS in a manner which will enhance the goodwill of such CUSTOMERS towards DEALER, DISTRIBUTOR, IMPORTER and Toyota Products. Furthermore, DEALER agrees to participate in and cooperate with such dispute resolution procedures as IMPORTER may designate from time to time. 3. Service Equipment and Special Tools DEALER agrees to provide and maintain adequate service equipment and such special tools as are specified in IMPORTER's minimum equipment standard listing, as amended from time to time, and maintain same in good repair and proper calibration to enable DEALER to fulfill its service responsibilities under this Agreement. 4. Parts Inventory DEALER and DISTRIBUTOR recognize that the owners and users of Toyota Motor Vehicles may reasonably expect that DEALER will have Genuine Toyota Parts or Accessories immediately available for purchase or installation. DEALER, therefore, agrees to carry in stock at all times during the term of this Agreement a complete inventory of Genuine Toyota Parts or Accessories, as listed in DISTRIBUTOR's current inventory guide, to enable DEALER to meet its CUSTOMER's needs and to fulfill its service responsibilities under this Agreement. C. ASSISTANCE PROVIDED BY DISTRIBUTOR 1. Service Training Assistance To assist DEALER in the fulfillment of its service and parts responsibilities, DISTRIBUTOR from time to time shall offer general and specialized service and technical training programs and materials. When requested by DISTRIBUTOR, DEALER's personnel shall participate in such programs. 2. Service Manuals and Materials DISTRIBUTOR agrees to make available to DEALER, for use by DEALER's service and parts organization, copies of such DEALER service manuals and bulletins, publications and technical data as IMPORTER and DISTRIBUTOR shall deem to be necessary for the needs of DEALER's service organization. DEALER shall have the responsibility of keeping such manuals, publications and data current and available for consultation by its service employees. 3. Field Service Personnel Assistance To assist DEALER in handling service responsibilities under this Agreement, DISTRIBUTOR agrees to make available field service personnel who will, from time to time, advise and counsel DEALER on service-related subjects, including product quality, technical adjustment, repair and replacement of product components, customer relations, warranty administration, service and parts merchandising, training and service management. D. EVALUATION OF DEALER'S SERVICE PERFORMANCE Because of the importance of DEALER's service performance to the purposes and objectives of this Agreement, DISTRIBUTOR will periodically evaluate DEALER's performance of its responsibilities for service in areas such as consumer satisfaction, service management and operating procedures, personnel, new vehicle pre-delivery service, parts operation, tools and equipment, and service and parts facilities. DISTRIBUTOR agrees to review such evaluations with DEALER, and if requested, to provide a copy thereof, so that DEALER may take prompt action if necessary to improve its service performance to satisfactory levels as DISTRIBUTOR may reasonably require. XVI. DEALERSHIP FACILITIES AND LOCATIONS A. RESPONSIBILITIES OF DEALER DEALER and DISTRIBUTOR agree that it is important to establish and maintain an effective network of authorized Toyota dealers. Accordingly, DISTRIBUTOR has entered into this Agreement in reliance upon DEALER's representation that it will establish and maintain dealership facilities and operations at the locations identified in paragraph VII that are satisfactory as to space, appearance, amenities, layout, equipment, signage and are otherwise in accordance with IMPORTER'S minimum facilities standards, as amended from time to time. B. OPERATING HOURS DEALER recognizes that the transportation, service and maintenance needs of CUSTOMERS served by the DEALER can be met properly only if DEALER keeps its dealership premises open for business during hours which are reasonable and convenient for such CUSTOMERS. Accordingly, DEALER agrees to maintain its respective dealership operations open for business during all days and hours which are customary and lawful for such operations in the community or locality in which DEALER is located and in accordance with industry standards. C. MINIMUM VEHICLE INVENTORIES Subject to the ability of DISTRIBUTOR to supply Toyota Motor Vehicles to DEALER, DEALER agrees that it shall, at all times, maintain at least the minimum inventory of Toyota Motor Vehicles as may be established by DISTRIBUTOR from time to time. DEALER also agrees that it shall have available at all times, for purposes of display and demonstration, the number of Toyota Motor Vehicles of the most current models as may be established by DISTRIBUTOR from time to time, and shall, at all times, maintain such Motor Vehicles in showroom ready condition. D. SIGNS Subject to applicable governmental ordinances, regulations and statutes, DEALER agrees to erect and maintain, at the dealership location(s), entirely at DEALER's expense standard authorized product and service signs of types recommended by DISTRIBUTOR, as well as such other authorized signs as are necessary to advertise the dealership operations effectively and as recommended by DISTRIBUTOR. E. PLANNING ASSISTANCE FOR DEALERSHIP PREMISES To assist DEALER in planning, establishing and maintaining the dealership premises, DISTRIBUTOR will make available to DEALER, upon request, sample copies of building layout plans, facility planning recommendations, and an applicable identification program covering the placement, installation and maintenance of recommended signs. In addition, representatives of DISTRIBUTOR will be available to DEALER from time to time to counsel and advise DEALER and dealership personnel in connection with DEALER's planning and equipping the dealership premises. F. EVALUATION OF DEALERSHIP FACILITIES DISTRIBUTOR will periodically evaluate DEALER's performance of its responsibilities under paragraphs VII and XVI herein. In making such evaluations, DISTRIBUTOR will consider: the actual building and land space provided by DEALER for the performance of its responsibilities under this Agreement; compliance with DISTRIBUTOR's current requirements for dealership operations; the appearance, condition, layout and signage of the dealership facilities; and such other factors, if any, as in DISTRIBUTOR's opinion may directly relate to the DEALER's performance of its responsibilities under this Agreement. DISTRIBUTOR will discuss such evaluations with DEALER, and upon request will provide a copy of same, so that the DEALER may take prompt action, if necessary, to comply with IMPORTER's minimum facility standards. XVII. CAPITALIZATION REQUIREMENTS DEALER recognizes that its ability to conduct operations successfully on a day-to-day basis depends to a great extent upon the net working capital and flooring and lines of credit which DEALER maintains. A. NET WORKING CAPITAL The amount and structure of the net working capital required to conduct the business of DEALER properly depends upon many factors, including the nature, size and volume of DEALER's vehicle sales, service and parts operations. Therefore, DEALER agrees to establish and maintain actual net working capital in an amount not less than the minimum net working capital specified in a separate Minimum Net Working Capital Agreement made between DEALER and DISTRIBUTOR and executed by DEALER and DISTRIBUTOR concurrently with this Agreement. If, because of changed conditions, it should become necessary to revise the minimum amount of net working capital deemed to be necessary to conduct DEALER's business properly, DISTRIBUTOR shall have the right to revise DEALER's minimum net working capital requirements to be used in dealership's operations and DEALER agrees to meet the new standard within a reasonable period of time. B. FLOORING AND LINES OF CREDIT DEALER recognizes that its ability to fulfill its obligations under this Agreement is dependent upon its maintenance of flooring and lines of credit which are sufficient to sustain its ongoing operations. Accordingly, DEALER agrees, at all times, to obtain, maintain and increase as DISTRIBUTOR may require, adequate flooring and lines of credit from any reputable financial institution or other credit source. Subject to the foregoing obligations, DEALER is free to do its financing business, wholesale or retail or both, with whomever it chooses and to the extent it desires. XVIII. ACCOUNTS, RECORDS AND REPORTS A. UNIFORM ACCOUNTING SYSTEM DISTRIBUTOR uses the operating information provided by its dealers to develop composite operating statistics which are useful to dealers and to DISTRIBUTOR in assessing DEALER's progress in meeting its obligations hereunder and to provide a basis for recommendations which DISTRIBUTOR may make to DEALER from time to time to assist it in improving its dealership operations. It is necessary, therefore, that authorized dealers provide information which is true and accurate and based upon common accounting principles. Accordingly, DEALER agrees to maintain a uniform accounting system designated by DISTRIBUTOR, and in accordance with the Toyota Accounting Manual, as amended from time to time. In addition, DEALER agrees that it will furnish to DISTRIBUTOR, by the tenth (10th) of each month, in a format prescribed by DISTRIBUTOR, a complete and accurate financial and operating statement covering the preceding month and calendar year-to-date operations and showing the true and accurate condition of DEALER's business. DEALER shall also promptly furnish to DISTRIBUTOR a copy of any adjusted financial or operating statement prepared by or for DEALER. B. SALES REPORTING In order to evaluate correctly current market trends and other developments, to provide meaningful advice and recommendations to DEALER, to provide the information necessary for DISTRIBUTOR to evaluate DEALER's sales performance and to enable DISTRIBUTOR to maintain a fair and equitable vehicle distribution system, DISTRIBUTOR requires sales reporting which is true, accurate and up-to-date. Accordingly, DEALER agrees to: 1. Accurately report to DISTRIBUTOR, with such relevant information as DISTRIBUTOR may reasonably require, the delivery of each new motor vehicle to a purchaser by the end of the day in which the vehicle is delivered to the purchaser thereof; and 2. Furnish DISTRIBUTOR with such other reports as DISTRIBUTOR may reasonably require from time to time; and 3. Participate in good faith in any dispute resolution program which DISTRIBUTOR or IMPORTER in its discretion may establish to resolve specific sales reporting and/or sales credit disputes. C. ELECTRONIC DATA PROCESSING REQUIREMENTS To facilitate the accurate and prompt reporting of such relevant dealership operational and financial data as DISTRIBUTOR may require, DEALER agrees to install and maintain electronic data processing facilities which are compatible with and which will facilitate the transmission and reception of such data on the computer network utilized by DISTRIBUTOR. D. SALES AND SERVICE RECORDS DEALER agrees to keep complete, accurate and current records regarding the sale and servicing of Toyota Products for a minimum of five years, exclusive of any retention period required by any governmental entity. In order that the policies and procedures relating to the application for reimbursement for warranty and policy work may be applied uniformly to all dealers, DEALER agrees to prepare, keep current and retain records in support of requests for reimbursement for warranty and policy work performed by DEALER in accordance with the policies and procedures prescribed in the Toyota Warranty Policies and Procedures Manual and standards established by DISTRIBUTOR consistent with said manual. E. EXAMINATION OF DEALERSHIP ACCOUNTS AND RECORDS DEALER agrees that DISTRIBUTOR shall have the right, at all reasonable times and during regular business hours, to inspect the dealership facilities and to examine, audit and to reproduce all records, accounts and all supporting data relating to the sale, sales reporting, service and repair of Toyota Products by DEALER. If requested by DEALER, DISTRIBUTOR agrees to discuss and to provide a copy of the report of the examination or audit of DEALER. F. CONFIDENTIALITY DISTRIBUTOR agrees that it shall not provide any data or documents submitted to it by DEALER to any third party, except IMPORTER, unless authorized by DEALER, required by law, or required to generate composite data for analytical purposes. XIX. DISPLAY AND USE OF TRADEMARKS, SERVICE MARKS AND TRADE NAMES A. USE BY DEALER DISTRIBUTOR grants to DEALER the nonexclusive privilege of displaying or otherwise using the various Toyota Marks, including the name Toyota utilized by IMPORTER and DISTRIBUTOR, in connection with the selling or offering for sale of Toyota Products and the servicing of Toyota Motor Vehicles by DEALER at the location(s) approved herein. DEALER agrees, however, that it shall promptly discontinue the display and use of any such Toyota Marks, and shall change the manner in which any Toyota Marks are displayed and used, when for any reason, it is requested to do so by DISTRIBUTOR. DEALER also agrees that it may use the Toyota Marks only at such locations and for such purposes as are approved herein. DEALER further agrees that such Toyota Marks may be used as part of the name under which DEALER's business is conducted only with the prior written approval of DISTRIBUTOR. B. DISCONTINUANCE OF USE Upon termination, non-renewal, or expiration of this Agreement, DEALER agrees that it shall immediately: 1. Discontinue the use of the word Toyota and the Toyota Marks, or any semblance of same, including without limitation, the use of all stationery and other printed material referring in any way to Toyota or bearing any Toyota Mark; 2. Discontinue any use of the word Toyota or the Toyota Marks, or any semblance of same, as part of its business or corporate name, and file a change or discontinuance of such name with appropriate authorities; 3. Remove all product signs bearing said word(s) or Toyota Marks at DEALER's sole cost and expense; 4. Cease representing itself as an authorized Toyota Dealer; and 5. Refrain from any action, including without limitation any advertising, stating or implying that it is authorized to sell or distribute Toyota Products. In the event DEALER fails to comply with the terms and conditions of this paragraph, DISTRIBUTOR shall have the right to enter upon DEALER's premises and remove, without liability, all such product signs bearing the word Toyota or any Toyota Marks. DEALER agrees that it shall reimburse DISTRIBUTOR for any costs and expenses incurred in connection therewith, including reasonable attorneys fees. XX. TERMINATION OF AGREEMENT A. VOLUNTARY TERMINATION DEALER may voluntarily terminate this Agreement at any time by written notice to DISTRIBUTOR. Termination shall be effective thirty (30) days after DISTRIBUTOR receives such notice unless otherwise waived in writing by DISTRIBUTOR. B. TERMINATION FOR CAUSE 1. Immediate Termination DEALER and DISTRIBUTOR agree that the following conduct is within DEALER's control and is so contrary to the spirit, purposes and objectives of this Agreement as to warrant its immediate termination. Accordingly, DEALER agrees that if it engages in any of the following types of conduct, DISTRIBUTOR shall have the right to terminate this Agreement immediately: a. If dealership is closed for a period of seven (7) consecutive days, except in the event such closure or cessation of operation is caused by some physical event beyond the control of the DEALER, such as strikes, civil war, riots, fires, floods, earthquakes, or other acts of God; b. If DEALER becomes insolvent, or files any petition under any bankruptcy law, or executes an assignment for the benefit of creditors, or appoints a receiver or trustee or another officer having similar powers is appointed for DEALER and is not removed within thirty days from his appointment thereto or there is any levy under attachment or execution or similar process which is not vacated or removed by payment or bonding within ten (10) days; c. If DEALER, or any Owner or officer of DEALER, is convicted of any felony or for any violation of law which in DISTRIBUTOR's opinion tends to adversely affect the ownership, operation, management, reputation, business, or interests of DEALER or DISTRIBUTOR, or to impair the goodwill associated with the Toyota Marks. Such violations of law may include, without limitation, any finding or adjudication by any court of competent jurisdiction or government agency that DEALER has engaged in a misrepresentation or unfair or deceptive trade practice. d. Any misrepresentation to DISTRIBUTOR by DEALER or any DEALER Owner or General Manager in applying for this Agreement or for approval as Owner or General Manager of DEALER; e. Submission by DEALER to DISTRIBUTOR or IMPORTER of false reports, statements or claims for reimbursement, sales incentives, refunds, rebates or credits; submission of false financial information or false sales reporting data; or the making or submission by DEALER of a false report or statement relating to pre- delivery preparation, testing, warranties, servicing, repairing, or maintenance required by DISTRIBUTOR or IMPORTER; f. Failure of DEALER to obtain or maintain any license, or the suspension or revocation of any license, necessary for the conduct by DEALER of its business pursuant to this Agreement; 2. Termination Upon Sixty Days Notice DEALER and DISTRIBUTOR agree that the following conduct violates the terms and conditions of this Agreement and, if DEALER engages in such conduct DISTRIBUTOR shall have the right to terminate this Agreement upon sixty days notice: a. Any attempted or actual sale, transfer or assignment by DEALER of this Agreement or any of the rights granted DEALER hereunder, or any attempted or actual transfer, assignment or delegation by DEALER of any of the responsibilities assumed by it under this Agreement without the prior written approval of DISTRIBUTOR; b. Any removal, withdrawal or change, whether voluntary or involuntary, in the General Manager with ownership of DEALER without the prior written approval of DISTRIBUTOR; c. The conduct, directly or indirectly, of any dealership operation at any location other than those specifically approved herein for such operation without the prior written approval of DISTRIBUTOR; d. Failure of DEALER to pay DISTRIBUTOR for any Toyota Products in accordance with the terms and conditions of sale; e. Failure of DEALER to establish or maintain during the existence of this Agreement: required net working capital or adequate flooring and lines of credit; f. Any dispute, disagreement or controversy between or among partners, managers, officers or stockholders of DEALER which, in the reasonable opinion of DISTRIBUTOR, adversely affects the ownership, operation, management, business, reputation or interests of DEALER or DISTRIBUTOR; g. Retention by DEALER of any General Manager, who in DISTRIBUTOR's reasonable opinion is not competent or, if previously approved by DISTRIBUTOR, no longer possesses the requisite qualifications for the position or who has acted in a manner contrary to the continued best interests of both DEALER and DISTRIBUTOR; h. Impairment of the reputation or financial standing of DEALER or any of its management subsequent to the execution of this Agreement; i. Refusal to permit DISTRIBUTOR to examine or audit DEALER's accounts and records as provided herein upon receipt by DEALER from DISTRIBUTOR of written notice requesting such permission or information. j. Failure of DEALER to furnish accurate sales or financial information and related supporting data in a timely fashion; or k. Breach or violation by DEALER of any other term or provision of this Agreement. 3. Termination For Failure of Performance If, upon evaluation of DEALER's performance pursuant to paragraphs XIV(D), XV(D) and XVI(F) herein, DISTRIBUTOR concludes that DEALER has failed to perform adequately its sales or service responsibilities or to provide adequate dealership facilities, DISTRIBUTOR shall notify DEALER in writing of such failure(s) and will endeavor to review promptly with DEALER the nature and extent of such failure(s), and will grant DEALER 180 days or such other period as may be required by law to correct such failure(s). If DEALER fails or refuses to correct such failure(s) or has not made substantial progress towards remedying such failure(s) at the expiration of such period, DISTRIBUTOR may terminate this Agreement upon sixty (60) days notice or such other notice as may be required by law. 4. Termination of DISTRIBUTOR This Agreement shall terminate upon the effective date of the termination or expiration of DISTRIBUTOR's right to distribute Toyota Products. DEALER understands that IMPORTER has undertaken to assure DEALER that in the event of termination or expiration of DISTRIBUTOR's right to distribute Toyota Products, IMPORTER or its designee will offer DEALER a new agreement of no less than one year's duration containing the terms of the Dealer Agreement then prescribed by IMPORTER and any terms in DEALER's then current agreement relating uniquely to DEALER. 5. Termination Upon Death or Incapacity a. Notice Subject to certain exceptions identified below, DISTRIBUTOR near terminate this Agreement in the event of the death of an Owner or upon the incapacity of any Owner who is also the General Manager identified herein, upon written notice to DEALER and such Owner's legal representative. DISTRIBUTOR shall provide such notices within a reasonable time after Owner's death or incapacity. Termination hereunder shall be effective ninety (90) days from the date of such notice. b. Succession to Ownership After Death of Owner In the event that Owner's interest in dealership passes directly to any person or persons ("Heirs") who wish to succeed to Owner's interest, then Owner's legal representative must notify DISTRIBUTOR within 90 days of the date of notice of termination hereunder of such person's or persons' intent to succeed Owner. In addition, one of the following conditions must be satisfied: (1) the Owner's legal representative must also request DISTRIBUTOR's approval of one of the Heirs to become the new General Manager; or (2) the General Manager of DEALER identified herein must remain unchanged; or (3) the Owner's legal representative must designate for DISTRIBUTOR's approval a new DEALER General Manager. The effect of such notice from Owner's legal representative shall be to suspend the notice of termination issued hereunder. Upon receipt of such notice, DISTRIBUTOR shall request any person identified by the Owner's legal representative as intending to succeed Owner and the designated candidate for General Manager, if any, to submit an application and to provide all personal and financial information that DISTRIBUTOR may reasonably and customarily require in connection with the review of such applications. All requested information must be provided promptly and in no case later than 30 days after receipt of such request. Upon the submission of all requested information, DISTRIBUTOR agrees to review such application(s) pursuant to the then current criteria generally applied by DISTRIBUTOR in qualifying dealer owners and/or general managers. DISTRIBUTOR shall either approve or disapprove the application(s) within ninety (90) days of full compliance with all of DISTRIBUTOR's requests for information. If DISTRIBUTOR approves the application(s), it shall offer to enter into a new Toyota Dealer Agreement with DEALER or its successor in interest in the form then currently in use, except that Heir(s) and the designated General Manager, if any, shall be identified as the new Owner(s) and/or General Manager. The new agreement shall be for a term of twelve (12) months. In the event that DISTRIBUTOR does not approve of the designated Heir or any other candidate for General Manager, or if the Owner's legal representative withdraws his or her notice of a person or persons to succeed as Owner(s) or if the legal representative, or any proposed Owner-successor or designated candidate for General Manager fails to timely provide the required information, DISTRIBUTOR may reinstate the notice of termination by written notice to Heir. c. Succession Upon Incapacity of Owner The parties agree that, as used herein, incapacity shall refer to any physical or mental ailment which, in DISTRIBUTOR's opinion, adversely affects Owner's ability to meet his or her obligations under this Agreement. Termination for incapacity shall apply only where the incapacitated owner is also the General Manager identified herein. Prior to the effective date of any notice of termination hereunder, an incapacitated Owner, or his or her legal representative, may propose a new candidate for the position of General Manager to DISTRIBUTOR. Such proposal shall be in writing and shall suspend the pending notice of termination until DISTRIBUTOR advises DEALER of its approval or disapproval of the new candidate. Any such proposed candidate for General Manager must submit all personal and financial information that DISTRIBUTOR may reasonably and customarily require in connection with its review of such applications. All requested information must be provided promptly and in no case later than thirty (30) days after receipt of such request. Upon submission of all requested information, DISTRIBUTOR agrees to review such application pursuant to the then current criteria generally applied by DISTRIBUTOR in qualifying dealer owners and/or general managers. DISTRIBUTOR shall either approve or disapprove the application within ninety (90) days of full compliance with all of DISTRIBUTOR's requests for information. If DISTRIBUTOR approves the application, it shall offer to enter into a new Toyota Dealer Agreement with DEALER or its successor in interest in the form then currently in use, except that the candidate shall be identified as new General Manager. The new agreement shall be for a term of twelve (12) months. In the event that DISTRIBUTOR disapproves such candidate or candidate withdraws his or her application to be General Manager or fails to timely provide the required information, DISTRIBUTOR may reinstate the notice of termination by written notice to the incapacitated Owner or his or her legal representative. 6. Approval of Successor Prior to Death or Incapacity of Owner DISTRIBUTOR recognizes that a DEALER Owner may wish to designate a person to succeed himself in case of death or incapacity. Accordingly, Owner may nominate on a form provided by DISTRIBUTOR a candidate to assume ownership and/or management of the dealership upon the death or incapacity of the requesting Owner. As soon as practicable after such nomination, DISTRIBUTOR will request such personal and financial information from Owner and/or candidate as it reasonably and customarily may require in evaluating candidates for ownership and/or management qualifications. Owner agrees that DISTRIBUTOR may apply criteria then currently used by DISTRIBUTOR in qualifying owners and/or general managers of authorized dealers. Upon receipt of all requested information, DISTRIBUTOR shall either approve or disapprove such candidate. If DISTRIBUTOR initially approves the candidate, said approval shall remain in effect for the term of this Agreement. DISTRIBUTOR agrees that DEALER may renominate the candidate after the termination of this Agreement and DISTRIBUTOR will review such nomination: (1) so long as DISTRIBUTOR and DEALER have entered into a new Toyota Dealer Agreement; and (2) the proposed candidate continues to comply with the then current criteria used by DISTRIBUTOR in qualifying such candidates. If DISTRIBUTOR does not initially qualify the candidate, DISTRIBUTOR agrees to review the reason(s) for its decision with Owner. Owner is free at any time to renew its nomination. However, in such instance, the candidate must again qualify pursuant to then current criteria. Owner may, by written notice, withdraw a nomination at any time, even if DISTRIBUTOR previously has qualified said candidate. In any case where Owner designates a successor pursuant to this paragraph and that person is not the same person as the Heir, as defined in paragraph XX(B)(5)(b), then DISTRIBUTOR shall proceed as though Owner had withdrawn his nomination of a successor pursuant to this paragraph. C. NOTICE OF TERMINATION Any notice of termination under paragraph XX shall be in writing and shall be mailed to the person(s) designated to receive such notice return receipt requested or shall be delivered in person. Except as otherwise provided in paragraph XX(B)(5), such notice shall be effective on the date of receipt. DISTRIBUTOR need not state all grounds on which it relies in its termination of DEALER. DISTRIBUTOR's failure to refer to additional grounds for termination shall not constitute a waiver of its right to rely upon such grounds. If any period of notice of termination required hereunder is less than that required by applicable law, the period of notice required hereunder shall be deemed to be the minimum period required by such laws. D. CONTINUANCE OF BUSINESS RELATIONS Upon receipt of any notice of termination or non-renewal, DEALER agrees to conduct itself and its operations until the effective date of termination or nonrenewal in a manner which will not injure the reputation or goodwill of the Toyota Marks or DISTRIBUTOR. The continuance of business relations between DISTRIBUTOR and DEALER or the sale or delivery of Toyota Products to DEALER after termination, expiration or non-renewal of this Agreement shall not be construed as a waiver of the termination or a renewal, extension or continuation of this Agreement. E. REPURCHASE PROVISIONS 1. DISTRIBUTOR's Obligations Upon the expiration or prior termination of this Agreement, DISTRIBUTOR shall have the right to cancel any and all shipments of Toyota Products scheduled for delivery to DEALER, and DISTRIBUTOR shall repurchase from DEALER the following: a. New, unused, unmodified and undamaged current model Toyota Motor Vehicles then unsold in DEALER's inventory. The prices of such Motor Vehicles shall be the same as those at which they were originally purchased by DEALER, less all prior refunds or other allowances made by DISTRIBUTOR to DEALER with respect thereto. b. New, unused and undamaged Toyota parts and accessories then unsold in DEALER's inventory which are in good and saleable condition, provided that they are listed in the then current Toyota Dealer Parts Price List. The prices for such parts and accessories shall be the prices last established by DISTRIBUTOR for the sale of identical parts or accessories to dealers in the area in which DEALER is located. c. Tools and equipment recommended by IMPORTER and then owned by DEALER which are especially designed for servicing Toyota Motor Vehicles. The prices for such tools and equipment will be the price paid by DEALER less appropriate depreciation or such other price as the parties may negotiate. d. Signs which DISTRIBUTOR has recommended for identification of DEALER. The price of such signs shall be the price paid by DEALER less appropriate depreciation or such other price as the parties may negotiate. 2. Responsibilities of Dealer DISTRIBUTOR's obligations to repurchase the items set forth in paragraph XX(E)(1), are contingent upon DEALER fulfilling its responsibilities as set forth herein. a. Within thirty days after the date of expiration or the effective date of termination of this Agreement DEALER shall deliver or mail to DISTRIBUTOR a detailed inventory of all items referred to in the paragraph XX(E)(1) which it requests DIStRIBUTOR to repurchase and shall certify that such list is true and accurate. In the event that DEALER fails to supply such a list to DISTRIBUTOR within such period, DISTRIBUTOR shall have the right to enter upon DEALER's premises, without liability, for the purpose of compiling such an inventory list and DEALER shall reimburse DISTRIBUTOR for any costs and expenses incurred in connection therewith. b. DEALER shall request repurchase only of those items which were purchased by DEALER from DISTRIBUTOR, unless DISTRIBUTOR agrees otherwise. c. DEALER agrees that products to be repurchased by DISTRIBUTOR from DEALER shall be delivered by DEALER to DISTRIBUTOR's place of business at DEALER's expense. If DEALER fails to do so, DISTRIBUTOR may transfer such products and deduct the cost therefor from the repurchase price. d. DEALER agrees to execute and deliver to DISTRIBUTOR instruments satisfactory to DISTRIBUTOR conveying good and marketable title to the aforesaid property to DISTRIBUTOR. If such property is subject to any lien or charge of any kind, DEALER agrees to procure the discharge in satisfaction thereof prior to the repurchase of such property by DISTRIBUTOR. DEALER further agrees to comply with the requirements of any state or federal laws which relate to the repurchase including bulk sales or transfer laws. e. DEALER agrees that it must remove, at its own expense, all signage including all Toyota marks before it is eligible for payment hereunder. 3. Payment by DISTRIBUTOR DISTRIBUTOR will pay DEALER for such items as DEALER may request repurchase and which qualify hereunder as soon as practicable upon DEALER's compliance with the obligations set forth herein and upon computation of any outstanding indebtedness of DEALER to DISTRIBUTOR. DISTRIBUTOR shall have the right to offset from any amounts due to DEALER hereunder the total sum of DEALER's outstanding indebtedness to DISTRIBUTOR. If DEALER disagrees with DISTRIBUTOR's valuation of any item herein, and DEALER and DISTRIBUTOR shall have not resolved their disagreement within sixty (60) days of the effective date of termination or expiration of this Agreement, DISTRIBUTOR shall pay to DEALER the amount to which it reasonably believes DEALER is entitled. DEALER's exclusive remedy to recover any additional sums which it believes is due under this paragraph shall be by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. The site of the arbitration shall be the office of the American Arbitration Association in the locality of DISTRIBUTOR's principal place of business or Regional Office. XXI. RIGHT OF FIRST REFUSAL OR OPTION TO PURCHASE A. RIGHTS GRANTED DEALER recognizes the importance of the approved locations to DISTRIBUTOR's authorized dealer network and to the effective sale and servicing of Toyota Products in DEALER's primary area of responsibility. Accordingly, DEALER agrees that in the event that DISTRIBUTOR refuses to approve a transfer or sale of any ownership interest in the dealership, pursuant to paragraph VI, DISTRIBUTOR shall have the right of first refusal or an option to purchase the dealership assets, including any leasehold interest or realty, as provided herein. B. EXERCISE OF DISTRIBUTOR'S RIGHTS If DISTRIBUTOR exercises its right of first refusal or option to purchase the dealership, it must advise DEALER in writing of its decision within thirty (30) days of its refusal to approve any sale or transfer pursuant to paragraph VI. DEALER agrees that DISTRIBUTOR shall have the right to assign its right to exercise its option to purchase or right of first refusal to any third party it may select and hereby guarantees the full payment of the purchase price by such assignee. C. THE NATURE OF DISTRIBUTOR'S RIGHTS If DISTRIBUTOR has refused to approve the transfer or sale of DEALER's ownership or assets and DEALER has entered into a bona fide arm's length written agreement governing such transfer or sale, DISTRIBUTOR's right under this paragraph shall be a right of first refusal, permitting DISTRIBUTOR to assume the buyer's rights and obligations under such written agreement. The purchase price and other terms of sale shall be those set forth in such agreement and any related documents. DISTRIBUTOR may request and DEALER agrees to provide any and all supporting documents relating to the transfer which DISTRIBUTOR may require to assess the bona fides of the agreement. Refusal to provide such documentation or to state that no such documents exist shall create the presumption that the buy/sell agreement is not a bona fide agreement. If DISTRIBUTOR has refused to approve the transfer or sale of DEALER's ownership or assets and DEALER has not entered into a bona fide arm's length written agreement governing such transfer or sale, then DISTRIBUTOR shall have the option to purchase the principal assets of DEALER utilized in the dealership operations, including real estate and/or leasehold interest, and to terminate this Agreement. The purchase price shall be the fair market value as negotiated by the parties. If the parties are unable to reach a negotiated sale in a reasonable time, the price and other terms of sale shall be established exclusively by arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. The site of the arbitration shall be the office of the American Arbitration Association in the locality of DISTRIBUTOR's principal place of business or Regional Office. D. DEALER'S OBLIGATIONS Upon DISTRIBUTOR's exercise of its right or option and tender of the purchase price hereunder, DEALER shall transfer the affected real property by warranty deed conveying marketable title free and clear of all liens, claims, mortgages, encumbrances, tenancies and occupancies. The warranty deed shall be in proper form for recording and DEALER shall deliver complete possession of the property and the deed at time of closing. DEALER shall also furnish to DISTRIBUTOR copies of any easements, licenses or other documents affecting the property or dealership operations and shall assign any permits or licenses which are necessary for the use of the property or the conduct of such DEALER operations. DEALER also agrees to execute and deliver to DISTRIBUTOR instruments satisfactory to DISTRIBUTOR conveying title to all personal property, including leasehold interests, involved in the transfer or sale to DISTRIBUTOR. If any personal property is subject to any lien or charge of any kind, DEALER agrees to procure the discharge and satisfaction thereof prior to the transfer or sale of such property to DISTRIBUTOR. XXII. DEFENSE AND INDEMNIFICATION A. DEFENSE AND INDEMNIFICATION BY DISTRIBUTOR AND/OR IMPORTER DISTRIBUTOR agrees to assume the defense of DEALER and to indemnify and hold DEALER harmless in any lawsuit naming DEALER as a defendant and involving any Toyota Product when the lawsuit also involves allegations of: 1. Breach of warranty provided by FACTORY, IMPORTER or DISTRIBUTOR, bodily injury or property damage arising out of an occurrence allegedly caused solely by a defect in design, manufacture or assembly of a Toyota Product (except for tires not manufactured by FACTORY), provided that the defect could not reasonably have been discovered by DEALER during the pre-delivery service of the Toyota Product required under paragraph XV(A)(3) of this Agreement; or 2. Any misrepresentation or misleading statement or unfair or deceptive trade practice of DISTRIBUTOR or IMPORTER; or 3. Any substantial damage to a Toyota Product purchased by DEALER from DISTRIBUTOR which was repaired by DISTRIBUTOR and where DEALER had not been notified of such damage in writing prior to the delivery of the subject vehicle, part or accessory to a retail CUSTOMER; and Provided: 4. That DEALER delivers to DISTRIBUTOR, in a manner to be designated by DISTRIBUTOR, within ten (10) days of the service of any summons or complaint, copies of such documents and request in writing a defense and/or indemnification therein (except as provided in paragraph XXII(D)); 5. That the complaint does not involve allegations of DEALER misconduct, including but not limited to, improper or unsatisfactory service or repair, misrepresentation, or any claim of DEALER's unfair or deceptive trade practice; 6. That the Toyota Product which is the subject of the lawsuit was not altered by or for DEALER; 7. That DEALER agrees to cooperate fully in the defense of such action as DISTRIBUTOR may reasonably require; and, 8. That DEALER agrees that DISTRIBUTOR may offset any recovery on DEALER's behalf against any indemnification that may be required hereunder. B. DEFENSE AND INDEMNIFICATION BY DEALER DEALER agrees to assume the defense of DISTRIBUTOR, IMPORTER and FACTORY and to indemnify and hold them harmless in any lawsuit naming DISTRIBUTOR, IMPORTER or FACTORY as a defendant when the lawsuit involves allegations of: 1. DEALER's alleged failure to comply, in whole or in part, with any obligation assumed by DEALER pursuant to this Agreement; 2. DEALER's alleged negligent or improper repairing or servicing of a new or used Toyota Motor Vehicle or equipment, or such other motor vehicles or equipment as may be sold or serviced by DEALER; 3. DEALER's alleged breach of any contact or warranty other than that provided by DISTRIBUTOR, IMPORTER or FACTORY; 4. DEALER's alleged misleading statements, misrepresentations, or deceptive or unfair trade practices; 5. Any modification or alteration made by or on behalf of DEALER to a Toyota Product, except those made pursuant to the express instruction or with the express approval of DISTRIBUTOR or IMPORTER; and Provided: 6. That DISTRIBUTOR, IMPORTER or FACTORY delivers to DEALER, within ten (10) days of the proper service of any summons or complaint, copies of such documents, and requests in writing a defense and/or indemnification therein (except as provided in paragraph XXII(D)); 7. That DISTRIBUTOR, IMPORTER or FACTORY agree to cooperate fully in the defense of such action as DEALER may reasonably require; and, 8. That the complaint does not involve allegations of liability premised upon separate DISTRIBUTOR, IMPORTER or FACTORY conduct or omissions. C. CONDITIONAL DEFENSE AND/OR INDEMNIFICATION In agreeing to defend and/or indemnify each other, DEALER and DISTRIBUTOR may make their agreement conditional on the continued existence of the state of facts as then known to such party and may provide for the withdrawal of such defense and/or indemnification at such time as facts arise which, if known at the time of the original request for a defense and/or indemnification, would have caused either DEALER or DISTRIBUTOR to refuse such request. The party withdrawing from its agreement to defend and/or indemnify shall give timely notice of its intent to withdraw. Such notice shall be in writing and shall be effective upon receipt. Moreover, the withdrawing party shall be responsible for all costs and expenses of defense up to the date of receipt of the notice of withdrawal. D. THE EFFECT OF SUBSEQUENT DEVELOPMENTS In the event that subsequent developments in a case make clear that the allegations which initially precluded a request or an acceptance of a request for a defense and/or indemnification are no longer at issue therein or are without foundation, any party having a right to a defense and/or indemnification hereunder may tender such request for a defense and indemnification to the other party. Neither DEALER nor DISTRIBUTOR shall be required to agree to such subsequent request for a defense and/or indemnification where that party would be unduly prejudiced by such delay. E. TIME TO RESPOND AND RESPONSIBILITIES OF THE PARTIES DEALER and DISTRIBUTOR shall have thirty (30) days from the receipt of a request for a defense and/or indemnification to conduct an investigation to determine whether or not, or under what conditions, it may agree to defend and/or indemnify pursuant to this paragraph. If local rules require a response to the complaint in the lawsuit prior to the time provided hereunder for a response to such request the requesting party shall take all steps necessary, including obtaining counsel, to protect its own interest in the lawsuit until DEALER or DISTRIBUTOR assumes the requested defense and/or indemnification. In the event that DEALER or DISTRIBUTOR agrees to assume the defense and/or indemnification of a lawsuit, such party shall have the right to engage and direct counsel of its own choosing and, except in cases where the request is made pursuant to paragraph XXII(D) herein, shall have the obligation to reimburse the requesting party for all reasonable costs and expenses, including attorney fees, incurred prior to such assumption. XXIII. GENERAL PROVISIONS A. NEW DEALERS Both parties understand and agree that additional authorized Toyota dealers may be appointed in or near the primary area of responsibility served by DEALER when DISTRIBUTOR determines that new dealers are warranted, based upon such reasonable criteria as DISTRIBUTOR may establish in its sole discretion. B. TAXES DEALER agrees that it shall be responsible for and shall duly pay all sales taxes, use taxes, excise taxes and other governmental or municipal charges imposed, levied or based upon the sale of Toyota Products by DISTRIBUTOR to DEALER and shall maintain accurate records of same for reporting purposes. C. NOTICES Except as otherwise specifically provided herein, any notice required to be given by either party to the other under or in connection with this Agreement shall be in writing and delivered personally or by certified mail, return receipt requested and shall be effective from the date of mailing. Notices to DEALER shall be directed to DEALER or its representative at DEALER's place of business identified herein. Notices to DISTRIBUTOR shall be directed to the president of DISTRIBUTOR at its place of business identified herein. D. NO IMPLIED WAIVERS Any failure of either party at any time to require performance by the other party of any provision herein shall in no way affect the right of such party to require such performance at any time thereafter, nor shall any waiver by either party of a breach of any provision herein constitute a waiver of any succeeding breach of the same or any other provision, nor constitute a waiver of the provision itself. E. DEALER NOT AN AGENT OR REPRESENTATIVE DEALER is an independently owned business entity. This agreement does not make DEALER the agent or legal representative of DISTRIBUTOR, IMPORTER or FACTORY for any purpose whatsoever. DEALER is not granted any express or implied right or authority to assume or to create any obligation or responsibility on behalf of or in the name of DISTRIBUTOR, IMPORTER or FACTORY or to bind it in any manner whatsoever. F. SOLE AGREEMENT OF THE PARTIES There are no other agreements or understandings, either oral or written, between the parties affecting this Agreement or relating to the sale or servicing of Toyota Products, except as otherwise specifically provided for or referred to in this Agreement. This Agreement cancels and supersedes all previous agreements between the parties relating to the subject matters covered herein. No change or addition to, or deletion of, any portion of this Agreement shall be valid or binding upon the parties hereto unless the same is approved in writing by an officer of each of the parties hereto. G. NEW AND SUPERSEDING DEALER AGREEMENTS In the event any new and superseding form of dealer agreement is offered by DISTRIBUTOR to authorized Toyota dealers generally at any time prior to the expiration of the term of this Agreement, DISTRIBUTOR may, by written notice to DEALER, replace this Agreement with a new agreement in the new and superseding form for a term not less than the then unexpired term of this Agreement. H. ASSIGNMENT OF RIGHTS OR DELEGATION OF DUTIES Except as provided in this Agreement, neither this Agreement nor the rights or obligations of either party hereunder may be sold, assigned, delegated or otherwise transferred without the written approval of the other party. I. SEVERABILITY If any term or provision of this Agreement, or the application thereof to any person or circumstance, shall to any extent found to be invalid, void or unenforceable, the remaining provisions and any application thereof shall nevertheless continue in full force and effect without being impaired or invalidated in any way. J. RELEASE Because the success of the relationship between DISTRIBUTOR and DEALER depends upon the mutual understanding, cooperation, trust and confidence of both DISTRIBUTOR and DEALER, each party hereby releases the other from any and all claims, causes of action or otherwise that it may have against the other for money damages arising from any event occurring prior to the date of execution of this Agreement, except for any accounts payable by one party to the other as a result of the purchase of any Toyota Products, audit adjustments or reimbursement for any services. This release does not extend to claims which either party does not know or reasonably suspect to exist in its favor at the time of execution of this Agreement. K. NO FRANCHISE FEE DEALER agrees and warrants that it has paid no fee, nor has it provided any goods or services in lieu of same, to DISTRIBUTOR in consideration of entering into this Agreement and that the sole consideration for DISTRIBUTOR's entering into this Agreement was DEALER's ability, integrity, assurance of personal services and expressed intention to deal fairly and equitably with DISTRIBUTOR and the public and any other promises recited herein. XXIV. DEFINITIONS The parties agree that the following terms, as used in this Agreement, shall be defined exclusively as set forth below. A. AGREEMENT: This Agreement consists of the Toyota Dealer Agreement entered into by DEALER and DISTRIBUTOR and includes the Standard Provisions. The various headings used in this Agreement are for organizational purposes only and in any case where the heading and the related text shall conflict, the text shall govern. B. AUTHORIZED TOYOTA DEALER: Dealers who are authorized by DISTRIBUTOR to sell and service Toyota Products, and to use the Toyota Marks in connection therewith, pursuant to a duly executed Toyota Dealer Agreement. C. DEALER FACILITIES: The buildings, improvements, fixtures and equipment situated at the approved DEALER locations. D. DEALER LOCATION: The location or locations, and any facilities located thereon, identified in paragraph VII which DISTRIBUTOR has approved for the dealership operations specified therein. E. DEALERSHIP OPERATIONS: All dealer functions contemplated by this Agreement. These include, without limitation, sale and servicing of Toyota Products, use and display of Toyota Marks, advertising and promotion of Toyota Products, rental and leasing of Toyota Motor Vehicles, sale of used cars, body shop work, and financing or insurance services, whether conducted directly or indirectly by DEALER. F. GENERAL MANAGER: The person identified in paragraph V of the Agreement. G. OWNER: The person(s) identified in paragraph IV of the Agreement. H. GENUINE TOYOTA PARTS OR ACCESSORIES: All Toyota parts, accessories and equipment manufactured by or on behalf of FACTORY or specifically approved by IMPORTER for use in servicing Toyota Motor Vehicles and sold by DISTRIBUTOR to authorized Toyota dealers. I. STANDARD PROVISIONS: The Standard Provisions are a part of all Toyota Dealer Agreements and are fully incorporated therein by the express provision of paragraph IX of the Agreement. The Standard Provisions commence with paragraph XIII to reflect continuity with the twelve paragraphs of the Agreement. J. TOYOTA MARKS: The various Toyota trademarks, service marks, names, logos and designs which DEALER is authorized by DISTRIBUTOR to use in the sale and servicing of Toyota Products. K. TOYOTA MOTOR VEHICLES: All automobiles, trucks, vans, cab/chassis or other motor vehicles which IMPORTER, in its sole discretion, sells to DISTRIBUTOR for resale to authorized Toyota dealers. L. TOYOTA PRODUCTS: All Toyota Motor Vehicles, parts, accessories and equipment which IMPORTER, in its sole discretion, sells to DISTRIBUTOR for resale to authorized Toyota dealers. M. TOYOTA WARRANTY POLICIES AND PROCEDURES MANUAL: The current publication issued by IMPORTER known as the Toyota Warranty Policies and Procedures Manual, as it may be revised or supplemented from time to time. EX-10.11-1 7 EXHIBIT 10.11.1 EXHIBIT 10.11.1 TERM DEALER SALES AND SERVICE AGREEMENT THIS AGREEMENT, effective the 13th day of May, 1996 is entered into by and between AMERICAN SUZUKI MOTOR CORPORATION, Automotive Division, a California Corporation (hereinafter referred to as "SUZUKI"), having its principal office at 3251 East Imperial Highway, Brea, California, and LITHIA MOTORS, INC., A CORPORATION DULY INCORPORATED UNDER THE LAWS OF THE STATE OF OREGON, and doing business as LITHIA SUZUKI (hereinafter referred to as "DEALER"), having its principal office at 700 N. CENTRAL AVENUE, MEDFORD, OR 97501-5817. PURPOSE OF AGREEMENT It is acknowledged by both SUZUKI and DEALER that the purpose of this Agreement is to establish DEALER as an authorized dealer of Suzuki Products and to provide for the sale, lease and servicing of Suzuki Products by DEALER. It is of utmost importance to SUZUKI that Suzuki products are sold and serviced in a manner which promotes consumer satisfaction and confidence. It is hereby understood and acknowledged that DEALER desires an opportunity to qualify for a three-year American Suzuki Motor Corporation Dealer Sales and Service Agreement for Suzuki Four Wheel Vehicle Products. DEALER understands, acknowledges and accepts that DEALER must first fulfill all of DEALER's undertakings as hereinafter set forth. In furtherance of the purpose of this Agreement, the parties acknowledge that SUZUKI is the exclusive distributor in the United States (except Hawaii) of Suzuki Four Wheel Vehicles and Parts and Accessories therefor manufactured by Suzuki Motor Co., Ltd., a corporation incorporated under the laws of Japan. It is of utmost important to SUZUKI that Suzuki Products are sold and serviced in a manner which promotes consumer satisfaction and confidence. DEALER desires to become one of SUZUKI's authorized dealers. SUZUKI, based on the representations and promises of DEALER, and in reliance on DEALER's integrity, ability and expressed intention to deal fairly with SUZUKI and the consumer, has accepted DEALER as an authorized retail dealer of Suzuki Products. DEALER acknowledges Vat SUZUKI has"selected DEALER as an authorized SUZUKI dealer and has granted to it a Dealership for Suzuki Products and related rights pursuant to this Agreement solely in reliance upon the undertaking of DEALER to fulfill its responsibilities to any third party or parties. This Agreement sets forth the rights and responsibilities of SUZUKI and DEALER. The relationship between SUZUKI and DEALER shall be that of vendor and purchaser. DEALER is not the agent or legal representative of SUZUKI or Suzuki Motor Co., Ltd. for any purpose whatsoever. DEALER does not have any express or implied rights of authority to assume or create any obligations or responsibilities on behalf of, or in the name of, SUZUKI or Suzuki Motor Co., Ltd. THEREFORE, subject to the terms and conditions of this Agreement, based on the foregoing facts and in consideration of the mutual promises and other valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 11. RIGHTS GRANTED TO DEALER Subject to the terms of this Agreement, SUZUKI hereby appoints DEALER as a nonexclusive authorized dealer for Suzuki Products and grants DEALER the right to: A. Sell, lease and service Suzuki Products to the satisfaction of SUZUKI from the Dealership Facilities and Locations as set forth in the Facility Standards Addendum and Section X herein. B. Identify itself as an authorized Suzuki Dealer utilizing Suzuki- approved signage at the Dealership Facilities; and C. Use the name "Suzuki" and the Suzuki trademarks in the advertising, promotion, sales, leasing and servicing of Suzuki Products in the manner herein provided. SUZUKI hereby reserves the unrestricted right to sell Suzuki Products and to grant the privilege of using the Suzuki name and trademarks to other dealers and entities, wherever they may be located. 12. RESPONSIBILITIES ACCEPTED BY DEALER DEALER accepts its appointment as an authorized Suzuki Dealer and, in consideration of its appointment and subject to other conditions and provisions of the Agreement, agrees to: A. Establish and maintain Dealership Facilities to the satisfaction of SUZUKI as set forth herein and in the Facility Standards Addendum and the Dealer Minimum Standards Addendum at the locations set forth herein; B. Sell, lease and promote Suzuki Products subject to, and in accordance with, the terms and conditions of this Agreement; C. Service, in a manner satisfactory to SUZUKI, Suzuki Products subject to, and in accordance with, the terms and conditions of this Agreement; and D. Build and maintain public confidence and respect in DEALER, SUZUKI and Suzuki Products by maintaining the highest ethical standards of advertising, business practices and conduct. 13. TERM This Agreement shall come into full force and effect at SUZUKI headquarters in Brea, California when executed by SUZUKI and, subject to its earlier termination, in accordance with the provisions of this Agreement, shall continue in full force and effect for ONE YEAR expiring on MAY 13, 1997 subject to the provisions of Section 11.00 of the Standard Provisions only upon the condition that DEALER complies and completes all the terms and conditions of this Agreement. 14. OWNERSHIP OF DEALER DEALER represents and warrants and this Agreement is conditioned upon, and is entered into by SUZUKI upon the representations and warranties of DEALER that: A. Dealer is an OREGON CORPORATION (indicate whether a sole proprietor, a partnership, a corporation or other type of organization) B. The following person(s) and only said person(s) own and will continue to own, throughout the term of this Agreement, the following interest in ownership of the Dealership: Percentage State Whether Partner Name Of Interest Officer or Director ---- ----------- --------------------- SIDNEY B. DEBOER 62.5% PRES./SEC./TREAS./CEO MANFRED L. HEIMANN 37.5% VICE PRESIDENT C. DEALER intends to carry on business under the name(s) of LITHIA SUZUKI. DEALER warrants that the appropriate registration or fictitious business name statement reflecting the name in Paragraph (C) above has been filed with the proper state authorities for the conduct of business under the name by DEALER. 15. MANAGEMENT OF DEALERSHIP A. SUZUKI enters into this Agreement on DEALER's representation that SIDNEY B. DEBOER and no other person, shall be General Manager and shall have full managerial authority and responsibility for the operation and management of all phases of the business of the Dealership with authority to make all decisions on behalf of DEALER with respect to the operation of the Dealership and the performance of this Agreement. 16. CHANGE IN OWNERSHIP OR MANAGEMENT SUZUKI has entered into this Agreement in reliance on DEALER's representation that the persons identified as Owners and/or General Manager in Sections IV and V herein possess the ability, experience and other personal qualifications requisite for the performance of this Agreement. Therefore, if there is to be a change in the person(s) named as having full ownership and/or full managerial authority as General Manager and responsibility for the operation and management of the Dealership, DEALER must give prior written notice of the change to SUZUKI, (except a change caused by death, in which case DEALER or the DEALER's legal representative shall give immediate written notice to SUZUKI). No such change or notice shall alter or modify any of the provisions in this Agreement until embodied in an appropriate written amendment and executed by all parties. SUZUKI will not unreasonably withhold consent to a change in ownership or management, provided that SUZUKI receives all information requested by it concerning the prospective owner(s) and/or General Manager, and provided that the prospective owner(s) and/or General Manager meet(s) all SUZUKI financial qualifications and other qualifications in effect at the time of the proposed change. 17. LICENSING OF DEALER If any state, city or other jurisdiction where the Dealership operations are to be located and conducted requires DEALER to obtain and maintain a license for the conduct of Dealership operations as set forth herein, this Agreement shall not be valid until and unless DEALER shall have first provided to SUZUKI certification of the issuance of such license(s) to DEALER. DEALER shall immediately notify SUZUKI in writing of failure to obtain or maintain any such licenses or renewal thereof. DEALER shall further notify SUZUKI in writing if any license that DEALER has obtained pursuant to this Paragraph is suspended or revoked and the date and reasons therefor. 18. INCORPORATION OF STANDARD PROVISIONS The Suzuki Dealer Sales and Service Agreement Standard Provisions accompanying this Agreement are incorporated herein by this reference and made a part of this Agreement with the same force and effect as if fully set forth at this point. 19. INCORPORATION OF DOCUMENTS AS PART OF AGREEMENT The Dealer Application, Facility Standards Addendum, Dealer Minimum Standards Addendum and Dealer Updates are incorporated by this reference and made a part of this Agreement with the same force and effect as if all the representations and warranties in the Dealer Application, and all terms and conditions of the Facility Standards Addendum, Dealer Minimum Standards Addendum and Dealer Updates were set forth in full herein. The DEALER represents and warrants and SUZUKI enters into this Agreement in reliance upon those representations and warranties that all representations and warranties made by the DEALER in the Dealer Application, Facility Standards Addendum and Dealer Minimum Standards Addendum are true and correct as of the date of execution of this Agreement. 20. CONDITIONS OF SUZUKI'S OFFER If this Agreement is not terminated prior to its expiration date as set forth above, SUZUKI hereby offers to enter into A three-year American Suzuki Corporation Dealer Sales and Service Agreement with DEALER in such form as shall be in use by SUZUKI at that time. This offer may be accepted by DEALER fulfilling all of the following conditions during the term of this Agreement and at the expiration thereof, each of which DEALER recognizes, understands and agrees as being reasonable and necessary: (a) Provide through acquisition or construction, and maintain the following facilities for the Suzuki Dealership and for the sale, leasing and servicing of Suzuki Products: 700 N. CENTRAL AVENUE MEDFORD, OR 97501-5817 Dealer shall not establish or conduct any Dealership operations which are the subject of this Agreement, including the display, sale, leasing or servicing of Suzuki Products, at any location or facility other than as set forth above or in the Facility Standards Addendum. (b) Complete the acquisition and installation, at the Dealership Facilities, of improvements, signs, furniture and furnishings, tools and equipment as recommended by SUZUKI for the Dealership; (c) Empty such personnel, in qualification and number, as recommended by SUZUKI for the Dealership; (d) Furnish SUZUKI, on forms or in the format designated by SUZUKI, by the tenth (10th) day of each month, with the financial and operating statements set forth in Section 3.04 of the Standard Provisions; (e) Comply with all other of SUZUKI's standards of DEALER to operate the Dealership and qualify in all other aspects for a Suzuki three-year Dealer Sales and Service Agreement; (f) Comply with all federal, state and local governmental statutes, ordinances, rules, regulations and standards to conduct business as an authorized Suzuki Dealer at the Dealership Facilities; (g) Other Conditions: - COMPLETE AND MAINTAIN A MINIMUM OF TWO (2) SUZUKI TRAINED TECHNICIANS IN PRODUCT INTRO AND EFI TO SERVICE THE SUZUKI PRODUCT LINE DURING THE TERM OF THIS AGREEMENT. - MAINTAIN AVERAGE MONTHLY DISTRICT, REGION, OR NATIONAL TOTAL SALES PER DEALER, WHICHEVER IS HIGHEST, DURING THE ENTIRE TERM OF THE TERM DEALER SALES AND SERVICE AGREEMENT. - PURSUANT TO SECTION 5.02 OF THE SUZUKI STANDARD PROVISIONS, DEALER AGREES TO OBTAIN AND MAINTAIN ADEQUATE FLOORING ARRANGEMENTS CONFORMING TO THE REQUIREMENTS ESTABLISHED and APPROVED BY SUZUKI, IN NO EVENT LESS THAN $500,000. - Utilize Suzuki financial statement and submit by the 20th of each month to National AND Regional Offices during the term of this agreement. - Maintain approved Suzuki signage in accordance with paragraph 2.02 of the Standard Provisions of the Dealer Sales and Service Agreement. - Maintain Suzuki Information Center during the term of this agreement. Maintain Suzuki SCAT System during the term of this agreement. Should DEALER fail to fulfill each and every condition set forth in this Paragraph during the term of the Agreement and prior to the expiration thereof, the above offer made by SUZUKI shall be automatically revoked on the expiration date set forth in Paragraph III without further notice to dealer. 21. EFFECT OF LEGAL PROCEEDINGS ON SUZUKI'S OFFER TO DEALER Should a proceeding of any nature be filed with or initiated in any court or administrative body seeking to prevent or delay SUZUKI from entering into a Dealer Sales and Service Agreement with DEALER and/or seeking damages resulting from SUZUKI doing so, SUZUKI shall be under no obligation to enter into such Agreement during the pendency of such proceeding. Furthermore, if, as a result of such proceeding, SUZUKI shall be ordered or prevented from entering into such an Agreement with Dealer, the offer contained in Section X herein shall be void and SUZUKI shall have no liability to DEALER whatsoever for any damages which DEALER may incur as a result thereof. 22. BREACH OF AGREEMENT BY DEALER Should DEALER fail to comply with and fully and completely carry out all of the terms and conditions of this Agreement, including those incorporated by reference, such failure shall constitute a material breach of this Agreement, and SUZUKI shall be under no obligation whatsoever to DEALER to extend this Agreement in whole or in part, to enter into a regular three year Dealer Sales and Service Agreement with DEALER or be under any other obligation or have any liability to DEALER whatsoever. 23. ONLY AGREEMENT Unless expressly referred to and incorporated herein, this Agreement cancels and supersedes all previous contracts, agreements and understandings between SUZUKI and DEALER with respect to Suzuki Products, and there are no promises, representations, understandings or agreements except as stated herein. IN WITNESS WHEREOF the parties hereto have executed this Agreement this 13th day of May, 1996. AMERICAN SUZUKI MOTOR CORPORATION Automotive Division By: [Signature] ------------------------------------ M. Nagura, President Name and Title LITHIA MOTORS, INC. DBA LITHIA SUZUKI Dealer Entity Name BY: [Signature] ------------------------------------ President BY: [Signature] ------------------------------------ Secretary EX-10.16-1 8 EXHIBIT 10.16.1 EXHIBIT 10.16.1 ALTERNATIVE RATE _______ PROMISSORY NOTE (PRIME RATE IBOR) $18,000,000.00 Date: September 9, 1996 - ------------------ ----------------- LITHIA MOTORS, INC., LITHIA TLM, L.L.C., LITHIA DODGE, L.L.C., LITHIA'S GRANTS PASS AUTO CENTER, L.L.C. ("Borrower") UNITED STATES NATIONAL BANK OF OREGON ("Lender") 1. TYPE OF CREDIT This note is given to evidence Borrower's obligation to repay all sums which Lender may from time to time advance to Borrower ("Advances") under a: ___ single disbursement loan. Amounts loaned to Borrower hereunder will be disbursed in a single Advance in the amount shown in Section 2. _X_ revolving line of credit. No Advances shall be made which create a maximum amount outstanding at any one time which exceeds the maximum amount shown in Section 2. However, Advances hereunder may be borrowed, repaid and reborrowed, and the aggregate Advances loaned hereunder from time to time may exceed such maximum amount. ___ non-revolving line of credit. Each Advance made from time to time hereunder shall reduce the maximum amount available shown in Section 2. Advances loaned hereunder which are repaid may not be reborrowed. 2. PRINCIPAL BALANCE The unpaid principal balance of all Advances outstanding under this note ("Principal Balance") at one time shall not exceed **Eighteen Million and no/100's*********************. - ---------------------------------------------------- 3. PROMISE TO PAY For value received Borrower promises to pay to Lender or order at DEALER FINANCE DIVISION , the Principal Balance of this note, with interest thereon at the rate(s) specified in Sections 4 and 11 below. 4. INTEREST RATE The interest rate on the Principal Balance outstanding may vary from time to time pursuant to the provisions of this note. Subject to the provisions of this note, Borrower shall have the option from time to time of choosing to pay interest at the rate or rates and for the applicable periods of time based on the rate options provided herein: PROVIDED, however, that once Borrower notifies Lender of the rate option chosen in accordance with the provisions of this note, such notice shall constitute Borrower's irrevocable request for an Advance hereunder at the rate option specified in such notice. The rate options are the Prime Borrowing Rate and the IBOR Borrowing Rate, each as defined herein. a. THE PRIME BORROWING RATE i. The Prime Borrowing Rate is a per annum rate equal to Lender's prime rate plus 0.0% per annum. ii. Whenever Borrower desire to use the Prime Borrowing Rate option, Borrower shall give Lender notice orally or in writing in accordance with Section 15 of this note, which notice shall specify the requested disbursement date and principal amount of the Advance, and that Borrower has chose the Prime Borrowing Rate option. iii. Prepayments of all or any part of the Principal Balance bearing interest at the Prime Borrowing Rate may be made at any time without penalty. Upon prepayment of any such principal amount, Borrower must also pay all accrued interest thereon to the date of prepayment. iv. Subject to Section 11 of this note, interest shall accrue on the unpaid Principal Balance at the Prime Borrowing Rate unless and except to the extent that the IBOR Borrowing Rate is in effect. b. THE IBOR BORROWING RATE i. The following terms shall have the following meanings: "Business Day" means any day other than a Saturday, Sunday, or other day that commercial banks in Portland, Oregon or New York City are authorized or required by law to close. "IBOR Amount" means each principal amount for which Borrower chooses to have the IBOR Borrowing Rate apply for any specified IBOR Interest Period. "IBOR Interest Period" means as to any IBOR Amount, a period of 1, 2, OR 3 months commencing on the date the IBOR Borrowing Rate becomes applicable thereto; PROVIDED, however, that: (A) no IBOR Interest Period shall be selected which would extend beyond 1/1/98 ; (B) no IBOR Interest Period shall extend beyond the date of any principal payment required under Section 6 of this note, unless the sum of the principal amounts bearing interest at the Prime Borrowing Rate, plus IBOR Amounts with IBOR Interest Periods ending on or before the scheduled date of such principal payment, plus principal amounts remaining unborrowed under a line of credit, equals or exceeds the amount of such principal payment; (C) any IBOR Interest Period which would otherwise expire on a day which is not a Business Day; unless the result of such extension would be to extend such IBOR Interest Period into another calendar month, in which event the IBOR Interest Period shall end on the immediately preceding Business Day; and (D) any IBOR Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such IBOR Interest Period) shall end on the last Business Day of a calendar month. ii. The IBOR Borrowing Rate is Lender's IBOR Rate plus 1.75% per annum. Lender's IBOR Rate for any IBOR Interest Period is the rate per annum (computed on the basis of a 360-day year and the actual number of days elapsed) equal to the arithmetic average (rounded upward to the nearest 1/16 of 1%) of the rates per annum determined by Lender as of the times specified in Section 4(b)(iii) on the date two (2) Business Days prior to the first day of such IBOR Interest Period as the rates offered to Lender by three Eurodollar money market dealers in such Eurodollar market as may be selected by Lender for U.S. dollar deposits to be delivered on the first day of such IBOR Interest Period for the number of months therein: PROVIDED, however, that Lender's IBOR Rate shall be adjusted to take into account the maximum reserves required to be maintained for Eurocurrency liabilities by banks during each such IBOR Interest Period as specified in Regulation D of the Board of Governors of the Federal Reserve System or any successor regulation. iii. Borrower may obtain IBOR Borrowing Rate quotes from Lender between 8:00 a.m. and 12:00 noon (Portland, Oregon time) on any Business Day. Any IBOR Borrowing Rate quoted (A) before 10:00 a.m. shall be based on Lender's IBOR Rate determined as of approximately 8:00 a.m. on such day, and Borrower may request an Advance at such rate only by giving Lender notice in accordance with Section 4(b)(iv) before 10:00 a.m. on such day; and (B) between 10:00 a.m. and 12:00 noon shall be based on Lender's IBOR Rate determined as of approximately 10:00 a.m. on such day, and Borrower may request an Advance at such rate only be giving Lender notice in accordance with section 4(b)(iv) not later that 12:00 noon on such day. iv. Whenever Borrower desires to use the IBOR Borrowing Rate option, Borrower shall give Lender irrevocable notice (either in writing or orally and promptly confirmed in writing) between 8:00 a.m. and 12:00 noon (Portland, Oregon time) two (2) Business Days in advance of the desired effective date of such rate. Any oral notice shall be given by, and in written notice or confirmation of an oral notice shall be signed by, the person(s) authorized in Section 15 of this note, and shall specify the requested effective date of the rate, IBOR Interest Period and IBOR Amount, and where Borrower is requesting a new Advance at the IBOR Borrowing Rate under a line of credit, conversion of any portion of the Principal Balance bearing interest at the Prime Borrowing Rate to an IBOR Amount, or a new IBOR Interest Period for an outstanding IBOR Amount. Notwithstanding any other term of this note, Borrower may elect the IBOR Borrowing Rate in the minimum principal amount of $ 500,000.00 and in integral multiple of $ 100,000.00 ; PROVIDED, however, that no more than THREE separate IBOR Interest Periods may be in effect at any one time. v. Borrower may not prepay all or any part of any IBOR Amount(s). vi. If at any time Lender's IBOR Rate is unascertainable or unavailable to Lender or if IBOR Rate loans become unlawful, the option to select the IBOR Borrowing Rate shall terminate immediately. If the IBOR Borrowing Rate is then in effect, (A) it shall terminate automatically with respect to all IBOR Amounts (i) on the last day of each then applicable IBOR Interest Period, if Lender may lawfully continue to maintain such loans, or (ii) immediately if Lender may not lawfully continue to maintain such loans through such day, and (B) subject to Section 11, the Prime Borrowing Rate automatically shall become effective as to such amounts upon such termination. vii. If at any time after the date hereof (A) any revision in or adoption of any applicable law, rule, regulation or in the interpretation or administration thereof (i) shall subject Lender or its Eurodollar lending office to any tax, duty, or other charge, or change to the basis of taxation of payments to Lender with respect to any loans bearing interest based on Lender's IBOR Rate, or (ii) shall impose or modify any reserve, insurance, special deposit, or similar requirements against assets of, deposits with or for the account of, or credit extended by Lender or its Eurodollar lending office, or impose on Lender or its Eurodollar lending office any other condition affecting any such loans, and (B) the result of any of the foregoing is (i) to increase the cost to Lender of making or maintaining any such loans or (ii) to reduce the amount of any sum receivable under this note by Lender or its Eurodollar lending office, Borrower shall pay Lender within 15 days after demand by Lender such additional amount as will compensate Lender for such increased cost or reduction. The determination hereunder by Lender of such additional amount shall be conclusive in the absence of manifest error. If Lender demands compensation under this Section 4(b)(vii), Borrower may upon three (3) Business Days' notice to Lender pay the accrued interest on all IBOR Amounts, together with any additional amounts payable under Section 4(b)(vii). Subject to Section 11, upon Borrower's paying such accrued interest and additional costs, the Prime Borrowing Rate immediately shall be effective with respect to the unpaid principal balance of such IBOR Amounts. viii. Upon any termination of any IBOR Borrowing Rate (including but not limited to conversion to another rate) or payment of all or any portion of any IBOR Amount on a date other than the last day of the then applicable IBOR Interest Period, including without limitation (A) acceleration under Section 11 or (B) repayment in response to a notice under Section 4(b)(vii), Borrower shall pay to Lender on demand such amount as Lender reasonably determines (determined as though 100% of the applicable IBOR Amount had been funded in the applicable Eurodollar market) is equivalent to all direct or indirect losses, expenses, liabilities, or reductions in yield to Lender resulting therefrom, whether incurred in connection with liquidation or reemployment of funds or otherwise. ix. If Borrower chooses the IBOR Borrowing Rate, Borrower shall pay interest based on such rate, plus any other applicable taxes or charges hereunder, even though Lender may have obtained the funds loaned to Borrower from sources other than the applicable Eurodollar market. Lender's determination of the IBOR Borrowing Rate and any such taxes or charges shall be conclusive in the absence of manifest error. x. Notwithstanding any other term of this note, Borrower may not select the IBOR Borrowing Rate if an event of default hereunder has occurred and is continuing. xi. Nothing contained in this note, including without limitation the determination of any IBOR Interest Period or Lender's quotation of any IBOR Borrowing Rate, shall be construed to prejudice Lender's right, if any, to decline to make any requested Advance or to require payment on demand. 5. COMPUTATION OF INTEREST All interest under Section 4 and Section 11 will be computed at the applicable rate based on a 360-day year and applied to the actual number of days elapsed. 6. PAYMENT SCHEDULE a. PRINCIPAL Principal shall be paid _X_ on demand. ___ on demand, or if no demand, on _________. ___ on _____________________________________. ___ subject to Section 7, in installments of _______________________ each, plus accrued interest _______________________ each including accrued interest beginning on ___________ and on the same day of each _________ thereafter until ___________ when the entire Principal Balance plus interest thereon shall be due and payable. _______________________________________________________________. b. INTEREST i. Interest on all amounts bearing interest at the Prime Borrowing Rate shall be paid: _X_ on the 1st day of OCTOBER and on the same day of each MONTH thereafter prior to maturity and at maturity. ___ at maturity. ___ at the time each principal installment is due and at maturity. ___________________________________________________. ii. Interest on all IBOR Borrowing Rate Amounts shall be paid : _X_ on the last day of the applicable IBOR Interest Period and if such IBOR Interest Period is longer than three months, on the last day of each three month period occurring during such IBOR Interest Period, and at maturity. ___ on the ____ day of ______ and on the same day of each ____ thereafter prior to maturity and at maturity. ___ at maturity. ___ at the time each principal instalment is due and at maturity. _____________________________________________________. 7. CHANGE IN PAYMENT AMOUNT If the interest rate on this note is subject to change in accordance with Section 4, the holder of this note may, from time to time, in holder's sole discretion, increase or decrease the amount of each of the installments remaining unpaid at the time of each change in rate to an amount holder in its sole discretion deems necessary to continue amortizing the Principal Balance at the same rate established by the installment amount specified in Section 6 (a), whether or not a "balloon" payment may also be due upon maturity of this note. Holder shall notify the undersigned of each change in writing. Whether or not the installment amount is increased under this Section 7, Borrower understands that, as a result of increases in the rate of interest in accordance with Section 4, the final payment due, whether or not a "balloon payment", shall include the entire Principal Balance and interest thereon then outstanding, and may be substantially more than the installment specified in Section [7]. 8. ALTERNATE PAYMENT DATE Notwithstanding any other term of this note, if in any month there is no day on which a scheduled payment would otherwise be due (e.g. February 31), such payment shall be paid on the last banking day of that month. 9. PAYMENT BY AUTOMATIC CHARGE ___ Please automatically deduct the amount of all principal and interest payments from account number ________. If there are insufficient funds in the account to pay the automatic deduction in full, Lender may allow the account to become overdrawn, or Lender may reverse the automatic deduction. Borrower will pay all the fees on the account which result from the automatic deductions, including any overdraft/NSF charges. If for any reason Lender does not charge the account for a payment, or if an automatic payment is revered, the payment is still due according to the note. If the account is a Money Market Account, the number of withdrawals from that account is limited as set out in the agreement. Lender may cancel the automatic deduction at any time in its discretion. Provided, however, if no account number is entered above, Borrower does not want to make payments by automatic charge. 10. LENDER'S PRIME RATE Lender's prime rate is the rate of interest which Lender from time to time establishes as its prime rate and is not, for example, the lowest rate of interest which Lender collects from any borrower or class of borrowers. When Lender's prime rate is applicable under Section 4(a) or 11(b), the interest rate hereunder shall be adjusted without notice effective on the day Lender's prime rate changes, but in no event shall the rate of interest be higher than allowed by law. 11. DEFAULT a. Without prejudice to any right of Lender to require payment on demand or to decline to make any requested Advance, each of the following shall be an event of default: (i) Borrower fails to make any payment when due (ii) Borrower fails to perform or comply with any term, covenant or obligation in this note or any agreement related to this note, or in any other agreement or loan Borrower has with Lender. (iii) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this note or perform Borrower's obligations under this note or any related documents. (iv) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect. (v) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (vi) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (vii) Any of the events described in this default section occurs with respect to any guarantor of this note or any guaranty of Borrower's indebtedness to Lender ceases to be, or is asserted not to be, in full force and effect. (viii) Lender in good faith deems itself insecure. If this note is payable on demand, the inclusion of specific events of default shall not prejudice Lender's right to require payment on demand or to decline to make any requested Advance. b. Without prejudice to any right of Lender to require payments on demand, upon the occurrence of an event of default, Lender may declare the entire unpaid Principal Balance on this note and all accrued unpaid interest immediately due and payable, without notice. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this note to a rate equal to the Prime Borrowing Rate plus 5%. The interest rate will not exceed the maximum rate permitted by applicable law. In addition, if any payment of principal or interest is 19 or more days past due, Borrower will be charged a late charge of 5% of the delinquent payment. 12. EVIDENCE OF PRINCIPAL BALANCE; PAYMENT ON DEMAND Holder's record shall, at any time, be conclusive evidence of the unpaid Principal Balance and interest owing on this note. Notwithstanding any other provisions of this note, in the event holder makes Advances hereunder which result in an unpaid Principal Balance on this note which at any time exceeds the maximum amount specified in Section 2, Borrower agrees that all such Advances, with interest, shall be payable on demand. 13. LINE OF CREDIT PROVISIONS If the type of credit indicated in Section 1 is a revolving line of credit or a non-revolving line of credit, Borrower agrees that Lender is under no obligation and has not committed to make any Advances hereunder. Each Advance hereunder shall be made at the sole option of the Lender. 14. DEMAND NOTE If this note is payable on demand, Borrower acknowledges and agrees that (a) Lender is entitled to demand Borrower's immediate payment in full of all amounts owing hereunder and (b) neither anything to the contrary contained herein or in any other loan documents (including but not limited to, provision relating to defaults, rights of cure, default rate of interest, installment payments, late charges, periodic review of Borrower's financial condition, and covenants) nor any act of Lender pursuant to any such provision shall limit or impair Lender's right or ability to require Borrower's payment in full of all amounts owing hereunder immediately upon Lender's demand. 15. REQUESTS FOR ADVANCES a. Any Advance may be made or interest rate option selected upon the request of Borrower (if an individual), any of the undersigned (if Borrower consists of more than one individual), any person or persons authorized in subsection (b) of this Section 15, and any person or persons otherwise authorized to execute and deliver promissory notes to Lender on behalf of Borrower. b. Borrower hereby authorizes any ONE of the following individuals to request Advances and to select interest rate options: SIDNEY DEBOER MANFRED HEIMANN DOROTHY CROCKETT unless Lender is otherwise instructed in writing. c. All Advances made pursuant to this Section 15 shall be disbursed by deposit directly to Borrower's account number N/A at N/A, branch of Lender, or by cashier's check issued to Borrower. d. Borrower agrees that Lender shall have no obligation to verify the identity of any person making any request pursuant to Section 15 and Borrower assumes all risks of the validity and authorization of such requests. In consideration of Lender agreeing, at its sole discretion, to make Advances upon such requests, Borrower promises to pay holder, in accordance with the provisions of this note, the Principal Balance together with interest thereon and other sums due hereunder, although any Advances may have been requested by a person or persons not authorized to do so. 16. PERIODIC REVIEW Lender will review Borrower's credit accommodations periodically. At the time of the review, Borrower will furnish Lender with any additional information regarding Borrower's financial condition and business operations that Lender requests. This information may include but is not limited to, financial statements, tax returns, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets and forecasts. If upon review, Lender, in its sole discretion, determines that there has been a material adverse change in Borrower's financial condition, Borrower will be in default. Upon default, Lender shall have all rights specified herein. 17. NOTICES Any notice hereunder may be given by ordinary mail, postage paid and addressed to Borrower at the last known address of Borrower as shown on holder's records. If Borrower consists of more that one person, notification of any of said persons shall be compete notification of all. Notice may be given either before or reasonably soon after the effective date of the change. 18. ATTORNEY FEES Whether or not litigation or arbitration is commenced, Borrower promises to pay all costs of collecting overdue amounts. Without limiting the foregoing, in the event that holder consults an attorney regarding the enforcement of any of its rights under this note or any document securing the same, or if this note is placed in the hands of an attorney for collection or if suit or litigation is brought to enforce this note or any document securing the same, Borrower promises to pay all costs thereof including such additional sums as the court or arbitrator(s) may adjudge reasonable as attorney fees, including without limitation, costs and attorney fees incurred in any appellate court, in any proceeding under the bankruptcy code, or in any receivership and post-judgement attorney fees incurred in enforcing any judgment. 19. WAIVERS; CONSENT Each party hereto, whether maker, co-maker, guarantor or otherwise, waives diligence, demand, presentment for payment, notice or non-payment, protest and notice of protest and waives all defenses based on suretyship or impairment of collateral. Without notice to Borrower and without diminishing or affecting Lender's rights or Borrower's obligations hereunder, Lender may deal in any manner with any person who at any time is liable for, or provides any real or personal property collateral for, any indebtedness of Borrower to Lender, including the indebtedness evidenced by this note. Without limiting the foregoing, Lender may, in its sole discretion: (a) make secured or unsecured loans to Borrower and agree to any number of waivers, modifications, extensions and renewals of any length of such loans, including the loan evidenced by this note; (b) impair, release (with or without substitution of new collateral), fail to perfect a security interest in, fail to preserve the value of, fail to dispose of in accordance with applicable law, any collateral provided by any person; (c) sue, fail to sue, agree not to sue, release, and settle or compromise with, any person. 20. JOINT AND SEVERAL LIABILITY All undertakings of the undersigned Borrowers are joint and several and are binding upon any marital community of which any of the undersigned are members. Holder's rights and remedies under this note shall be cumulative. 21. ARBITRATION a. Either Lender or Borrower may require that all disputes, claims, counterclaims and defenses, including those based on or arising from any alleged tort ("Claims") relating in any way to this note or any transaction of which this note is a part (the "Loan"), be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association and Title 9 of the U.S. Code. All Claims will be subject to the statutes of limitation applicable if they were litigated. This provision is void if the Loan, at the time of the proposed submission to arbitration, is secured by real property located outside of Oregon or Washington, or if the effect of the arbitration procedure (as opposed to any Claims of Borrower) would be to materially impair Lender's ability to realize on any collateral securing the Loan. b. If arbitration occurs and each party's Claim is less that $100,000, one neutral arbitrator will decide all issues; if any party's Claim is $100,000 or more, three neutral arbitrators will decide all issues. All arbitrators will be active Oregon State Bar members in good standing. All arbitration hearings will be held in Portland, Oregon. In addition to all other powers, the arbitrator(s) shall have the exclusive right to determine all issues of arbitrability. Judgment on any arbitration award may be entered in any court with jurisdiction. c. If either party disputes any judicial proceeding relating to the Loan, such actions shall not be a waiver of the right to submit any Claims to arbitration. In addition, each has the right before, during and after any arbitration to exercise any number of the following remedies, in any order or concurrently: (i) setoff; (ii) self-help repossession; (iii) judicial or non- judicial foreclosure against real or personal property collateral; and (iv) provisional remedies, including injunction, appointment of receiver, attachment, claim and delivery and replevin. 22. GOVERNING LAW This note shall be governed by and construed and enforced in accordance with the laws of the State of Oregon without regard to conflict of law principles; provided, however, that to the extent that Lender has greater rights or remedies under Federal law, this provision shall not be deemed to deprive Lender of such rights and remedies as may be available under Federal law. 23. DISCLOSURE BY OREGON STATUTE (ORS 41.580), THE FOLLOWING DISCLOSURE IS REQUIRED; UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY LENDERS AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY THE LENDER TO BE ENFORCEABLE. EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS DOCUMENT. Lithia Motors, Inc. By: /s/ President ----------------- Lithia Dodge, L.L.C., By: Lithia Motors, Inc., Managing Member By: /s/ President --------------- Lithia's Grants Pass Auto Center, L.L.C., By: Lithia Motors, Inc., Managing Member By: /s/ President ----------------- Lithia TLM, L.L.C., By: Lithia Motors, Inc., Managing Member By: /s/ President ------------------- For valuable consideration, Lender agrees to the terms of the arbitration provision set forth in this note. United States National Bank of Oregon By: /s/ Vice President --------------------- EX-10.16-2 9 EXHIBIT 10.16.2 EXHIBIT 10.16.2 PROMISSORY NOTE
- ------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $6,000,000.00 09-09-1996 5311162 16245 - ------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------
BORROWER: LITHIA MOTORS, INC. LENDER: UNITED STATES NATIONAL BANK OF OREGON 360 E. JACKSON DEALER FINANCE DIVISION MEDFORD, OR 97504 131 E. MAIN MEDFORD, OR 97501 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Principal Amount: $6,000,000.00 Date of Note: September 9, 1996 PROMISE TO PAY. LITHIA MOTORS, INC. ("BORROWER") PROMISES TO PAY TO UNITED STATES NATIONAL BANK OF OREGON ("LENDER"), OR ORDER, IN LAWFUL MONEY, OF THE UNITED STATES OF AMERICA, ON DEMAND, THE PRINCIPAL AMOUNT OF SIX MILLION & 00/100 DOLLARS ($6,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN IMMEDIATELY UPON LENDER'S DEMAND. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING OCTOBER 10, 1996, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is Lender's Prime Rate (the "Index"). This is the rate Lender charges, or would charge, on 90-day unsecured loans to the most creditworthy corporate customers. This rate may or may not be the lowest rate available from Lender at any given time. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.750 PERCENTAGE POINTS OVER THE INDEX. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Borrower is in default under any other notes, security agreement, lease agreement or lease schedule, loan agreement or other agreement, whether now existing or hereafter made, between Borrower and U.S. Bancorp or any direct or indirect subsidiary of U.S. Bancorp. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Note. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lenders sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDERS RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note to 5.750 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF OREGON. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF JACKSON COUNTY, THE STATE OF OREGON. SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender, regardless of the fact that persons other than those authorized to borrow have authority to draw against the accounts. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between lender and Borrower. ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT OR CLASS IN NATURE, ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; foreclosing by notice and sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal 09-09-1996 PROMISSORY NOTE Loan No (Continued) property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing In this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US (LENDER) AFTER OCTOBER 3,1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE ENFORCEABLE. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETE COPY OF THE NOTE. BORROWER: LITHIA MOTORS, INC. BY: --------------------------------------------------------- LITHIA MOTORS, INC., BY: SIDNEY B. DEBOER, PRESIDENT 09-09-1996 PROMISSORY NOTE Loan No (Continued) LENDER: UNITED STATES NATIONAL BANK OF OREGON BY: --------------------------------------------- AUTHORIZED OFFICER EX-10.16-3 10 EXHIBIT 10.16.3 EXHIBIT 10.16.3 PROMISSORY NOTE
- -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $1,400,000.00 09-09-1996 16245 - -------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------
BORROWER: LITHIA LEASING, INC. LENDER: UNITED STATES NATIONAL BANK OF OREGON 360 JACKSON STREET DEALER FINANCE DIVISION MEDFORD, OR 97504 131 EAST MAIN MEDFORD, OR 97501 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Principal Amount: $1,400,000.00 Date of Note: September 9, 1996 PROMISE TO PAY. LITHIA LEASING, INC. ("BORROWER") PROMISES TO PAY TO UNITED STATES NATIONAL BANK OF OREGON ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF AMERICA, ON DEMAND, THE PRINCIPAL AMOUNT OF ONE MILLION FOUR HUNDRED THOUSAND & 00/100 DOLLARS ($1,400,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. PAYMENT. BORROWER WILL PAY THIS LOAN IMMEDIATELY UPON LENDER'S DEMAND. IN ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING OCTOBER 10, 1996, WITH ALL SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT. Interest on this Note is computed on a 365/360 simple interest basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from time to time based on changes in an index which is Lender's Prime Rate (the "Index"). This is the rate Lender charges, or would charge, on 90-day unsecured loans to the most creditworthy corporate customers. This rate may or may not be the lowest rate available from Lender at any given time. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE AT A RATE OF 0.500 PERCENTAGE POINTS OVER THE INDEX. PREPAYMENT. Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to perform promptly at the time and strictly in the manner provided in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect. (d) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (e) Borrower is in default under any other note, security agreement, lease agreement or lease schedule, loan agreement or other agreement, whether now existing or hereafter made, between Borrower and U.S. Bancorp or any direct or indirect subsidiary of U.S. Bancorp. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any of the events described in this default section occurs with respect to any guarantor of this Note. (h) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Note to 5.500 percentage points over the Index. The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. If not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY LENDER IN THE STATE OF OREGON. IF THERE IS A LAWSUIT, BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THIS COURTS OF JACKSON COUNTY, THE STATE OF OREGON. SUBJECT TO THE PROVISIONS ON ARBITRATION, THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON. RIGHTS OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a straight line of credit. Once the total amount of principal has been advanced, Borrower is not entitled to further loan advances. Advances under this Note, as well as directions for payment from Borrower's accounts, may be requested orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender, regardless of the fact that persons other than those authorized to borrow have authority to draw against the accounts. The unpaid principal balance owing at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. ARBITRATION. LENDER AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE, ARISING FROM THIS NOTE OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose of any collateral securing this Note shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; foreclosing by notice and sale under any deed of trust or mortgage; obtaining a writ of attachment or imposition of a receiver; or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any collateral securing this Note, including any claim to rescind, reform, or otherwise modify any agreement relating to the collateral securing this Note, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Note shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. PERIODIC REVIEW. Lender will review the loan periodically. At the time of the review, Borrower will furnish Lender with any additional information regarding Borrower's financial condition and business operations that Lender requests. This information may include, but is not limited to, financial statements, tax returns, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets and forecasts. If upon review, Lender, in its sole discretion, determines that there has been a material adverse change in Borrower's financial condition, Borrower will be in default. Upon default, Lender shall have all rights specified herein. DEMAND NOTE. BORROWER ACKNOWLEDGES AND AGREES THAT (A) THIS NOTE IS A DEMAND NOTE, AND LENDER IS ENTITLED TO DEMAND BORROWER'S IMMEDIATE PAYMENT IN FULL OF ALL AMOUNTS OWING HEREUNDER, (B) NEITHER ANYTHING TO THE CONTRARY CONTAINED HEREIN OR IN ANY OTHER LOAN DOCUMENTS (INCLUDING BUT NOT LIMITED TO, PROVISIONS RELATING TO DEFAULTS, RIGHTS OF CURE, DEFAULT RATE OF INTEREST, INSTALLMENT PAYMENTS, LATE CHARGES, PERIODIC REVIEW OF BORROWER'S FINANCIAL CONDITION, AND COVENANTS) NOR ANY ACT OF LENDER PURSUANT TO ANY SUCH PROVISIONS SHALL LIMIT OR IMPAIR LENDER'S RIGHT OR ABILITY TO REQUIRE BORROWER'S PAYMENT IN FULL OF ALL AMOUNTS OWING HEREUNDER IMMEDIATELY UPON LENDER'S DEMAND, AND (C) UPON LENDER MAKING ANY SUCH DEMAND, LENDER SHALL HAVE NO OBLIGATION TO MAKE ANY ADVANCE UNDER THIS NOTE OR UNDER THE LOAN DOCUMENTS. GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific default provisions or rights of Lender shall not preclude Lender's right to declare payment of this Note on its demand. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly stated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US (LENDER) AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE ENFORCEABLE. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER: LITHIA LEASING, INC. BY: ------------------------------- SIDNEY DEBOER, PRESIDENT LENDER: UNITED STATES NATIONAL BANK OF OREGON BY: ------------------------------- AUTHORIZED OFFICER EX-10.17-1 11 EXHIBIT 10.17.1 EXHIBIT 10.17.1 Medford, Oregon 97501 August 31, 1996 Lithia Motors, Inc, severally promises to pay to the order of Sydney B. DeBoer, 234 Vista Street, Ashland, OR 97520, $500,000.00 Dollars Interest rate is to be 1/2 over U.S. National Bank Prime rate, adjusted as of the first of each month, but no more than 12% per annum from dated of note, until paid. Note is payable in 10 equal annual installments. The first payment to be due on the 10th day of the onth following 1 years notice and demand by note holder, and a like payment the same date of each year thereafter, until the whole sum, principal and interest has been paid; if any of said installments is not so paid, all principal and interest to become immediately due and collectible at the option of the holder of the note. If this note is placed in the hands of an attorney for collection, Lithia Motors promises and agrees to pay holder's reasonable attorney's fees and collection costs, even though no suit or action is filed hereon; however, if a suit or an action is filed, the amount of such attorney's fees shall be fixed by court, or courts in which the suit is filed, including any appeal therein, is tried, heard or decided. LITHIA MOTORS, INC. ------------------------------------- By: /s/ Sidney B. DeBoer ------------------------------------- Sidney B. DeBoer, President EX-10.17-2 12 EXHIBIT 10.17.2 EXHIBIT 10.17.2 SUBORDINATION AGREEMENT
- --------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $400,000.00 09-09-1996 RVA 5311162 16245 - --------------------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - --------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------
Borrower: Lithia Motors, Inc. Lender: United States National Bank 360 E. Jackson of Oregon Medford, OR 97504 Dealer Finance Division 131 E. Main Medford, OR 97501 Creditor: Sidney B. DeBoer 234 Vista Street Ashland, OR 97520 THIS SUBORDINATION AGREEMENT IS ENTERED INTO AMONG LITHIA MOTORS, INC. ("BORROWER"), WHOSE ADDRESS IS 360 E. JACKSON, MEDFORD, OR 97504; UNITED STATES NATIONAL BANK OF OREGON ("LENDER"), WHOSE ADDRESS IS 131 E. MAIN, MEDFORD, OR 975O1; AND SIDNEY B. DEBOER ("CREDITOR"), WHOSE ADDRESS IS 234 VISTA STREET, ASHLAND, OR 97520. As of this date, September 9, 1996, Borrower is indebted to Creditor in the AGGREGATE AMOUNT OF FIVE HUNDRED THOUSAND & 00/100 DOLLARS ($500,000.00). This amount is the total indebtedness of every kind from Borrower to Creditor. Borrower and Creditor each want Lender to provide financial accommodations to Borrower in the form of (a) new credit or loan advances, (b) an extension of time to pay or other compromises regarding all or part of Borrower's present indebtedness to Lender, or (c) other benefits to Borrower. Borrower and Creditor each represent and acknowledge to Lender that Creditor will benefit as a result of these financial accommodations from Lender to Borrower, and Creditor acknowledges receipt of valuable consideration for entering into this Agreement. BASED ON THE REPRESENTATIONS AND ACKNOWLEDGMENTS CONTAINED IN THIS AGREEMENT, CREDITOR AND BORROWER AGREE WITH LENDER AS FOLLOWS: DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. AGREEMENT. The word "Agreement" means this Subordination Agreement, as this Subordination Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Subordination Agreement from time to time. BORROWER. The word "Borrower" means Lithia Motors, Inc. CREDITOR. The word "Creditor" means Sidney B. DeBoer. LENDER. The word "Lender" means United States National Bank of Oregon, its successors and assigns. SECURITY INTEREST. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SUBORDINATED INDEBTEDNESS. The words "Subordinated Indebtedness" mean and include without limitation all present and future indebtedness, obligations, liabilities, claims, rights, and demands of any kind which may be now or hereafter owing from BORROWER TO CREDITOR. The term "Subordinated Indebtedness" is used in its broadest sense and includes without limitation all principal, all interest, all costs and attorneys' fees, all sums paid for the purpose of protecting the rights of a holder of security (such as a secured party paying for insurance on collateral if the owner fails to do so), all contingent obligations of Borrower (such as a guaranty), and all other obligations, secured or unsecured, of any nature whatsoever. SUPERIOR INDEBTEDNESS. The words "Superior Indebtedness" mean and include without limitation all present and future indebtedness, obligations, liabilities, claims, rights, and demands of any kind which may be now or hereafter owing from BORROWER TO LENDER. The term "Superior Indebtedness" is used in its broadest sense and includes without limitation all principal, all interest, all costs and attorneys' fees, all sums paid for the purpose of protecting Lender's rights in security (such as paying for insurance on collateral if the owner fails to do so), all contingent obligations of Borrower (such as a guaranty), all obligations arising by reason of Borrower's accounts with Lender (such as an overdraft on a checking account), and all other obligations of Borrower to Lender, secured or unsecured, of any nature whatsoever. SUBORDINATION. ALL SUBORDINATED INDEBTEDNESS OF BORROWER TO CREDITOR IS AND SHALL BE SUBORDINATED IN ALL RESPECTS TO ALL SUPERIOR INDEBTEDNESS OF BORROWER TO LENDER. If Creditor holds one or more Security Interests, whether now existing or hereafter acquired, in any of Borrower's real property or personal property, Creditor also subordinates all its Security Interests to all Security Interests held by Lender, whether the Lender's Security Interest or Interests exist now or are acquired later. PAYMENTS TO CREDITOR. Borrower will not make and Creditor will not accept, at any time while any Superior Indebtedness is owing to Lender, (a) any payment upon any Subordinated Indebtedness, (b) any advance, transfer, or assignment of assets to Creditor in any form whatsoever that would reduce at any time or in any way the amount of Subordinated Indebtedness, or (c) any transfer of any assets as security for the Subordinated Indebtedness, except upon Lender's prior written consent. In the event of any distribution, division, or application, whether partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of Borrower's assets, or the proceeds of Borrower's assets, in whatever form, to creditors of Borrower or upon any Indebtedness of Borrower, whether by reason of the liquidation, dissolution or other winding-up of Borrower, or by reason of any execution sale, receivership, insolvency, or bankruptcy proceeding, assignment for the benefit of creditors, proceedings for reorganization, or readjustment of Borrower or Borrower's properties, then and in such event, (a) the Superior Indebtedness shall be paid in full before any payment is made upon the Subordinated Indebtedness, and (b) all payments and distributions, of any kind or character and whether in cash, property, or securities, which shall be payable or deliverable upon or in respect of the Subordinated Indebtedness shall be paid or delivered directly to Lender for application in payment of the amounts then due on the Superior Indebtedness until the Superior Indebtedness shall have been paid in full. In order that Lender may establish its right to prove claims and recover for its own account dividends based on the Subordinated Indebtedness, Creditor does hereby assign all its right, title, and interest in such claims to Lender. Creditor further agrees to supply such information and evidence, provide access to and copies of such of Creditor's records as may pertain to the Subordinated Indebtedness, and execute such instruments as may be required by Lender to enable Lender to enforce all such claims and collect all dividends, payments, or other disbursements which may be made on account of the Subordinated Indebtedness. For such purposes, Creditor hereby irrevocably authorizes Lender in its discretion to make and present for or on behalf of Creditor such proofs of claims on account of the Subordinated Indebtedness as Lender may deem expedient and proper and to vote such claims in any such proceeding and to receive and collect any and all dividends, payments, or other disbursements made thereon in whatever form the same may be paid or issued and to apply the same on account of the Superior Indebtedness. Should any payment, distribution, security, or proceeds thereof be received by Creditor at any time on the Subordinated Indebtedness contrary to the terms of this Agreement, Creditor immediately will deliver the same to Lender in precisely the form received (except for the endorsement or assignment of Creditor where necessary) for application on or to secure the Superior Indebtedness, whether it is due or not due, and until so delivered the same shall be held in trust by Creditor as property of Lender. In the event Creditor fails to make any such endorsement or assignment, Lender, or any of its officers on behalf of Lender, is hereby irrevocably authorized by Creditor to make the same. 09-09-1996 SUBORDINATION AGREEMENT Loan No (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CREDITOR'S NOTES. Creditor agrees to deliver to Lender, at Lender's request, all notes of Borrower to Creditor, or other evidence of the Subordinated Indebtedness, now held or hereafter acquired by Creditor, while this Agreement remains in effect. At Lender's request, Borrower also will execute and deliver to Creditor a promissory note evidencing any book account or claim now or hereafter owed by Borrower to Creditor, which note also shall be delivered by Creditor to Lender. Creditor agrees not to sell, assign, pledge or otherwise transfer any of such notes except subject to all the terms and conditions of this Agreement. CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to Lender that: (a) no representations or agreements of any kind have been made to Creditor which would limit or qualify in any way the terms of this Agreement; (b) this Agreement is executed at Borrower's request and not at the request of Lender; (c) Lender has made no representation to Creditor as to the creditworthiness of Borrower; and (d) Creditor has established adequate means of obtaining from Borrower on a continuing basis information regarding Borrower's financial condition. Creditor agrees to keep adequately informed from such means of any facts, events, or circumstances which might in any way affect Creditor's risks under this Agreement, and Creditor further agrees that Lender shall have no obligation to disclose to Creditor information or material acquired by Lender in the course of its relationship with Borrower. CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (a) to make, extend, renew, or modify any loan to Borrower or to grant any other financial accommodations to Borrower whatsoever; (b) to make any presentment, protest, demand, or notice of any kind, including notice of any nonpayment of the Superior Indebtedness or of any nonpayment related to any Security Interests, or notice of any action or nonaction on the part of Borrower, Lender, any surety, endorser, or other guarantor in connection with the Superior Indebtedness, or in connection with the creation of new or additional Superior Indebtedness; (c) to resort for payment or to proceed directly or at once against any person, including Borrower; (d) to proceed directly against or exhaust any Security Interests held by Lender from Borrower, any other guarantor, or any other person; (e) to give notice of the terms, time, and place of any public or private sale of personal property security held by Lender from Borrower or to comply with any other applicable provisions of the Uniform Commercial Code; (f) to pursue any other remedy within Lender's power; or (g) to commit any act or omission of any kind, at any time, with respect to any matter whatsoever. LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to the Superior Indebtedness or any Security Interests for the Superior Indebtedness without affecting whatsoever any of Lender's rights under this Agreement. In particular, without limitation, Lender may, without notice of any kind to Creditor, (a) make one or more additional secured or unsecured loans to Borrower; (b) repeatedly alter, compromise, renew, extend, accelerate, or otherwise change the time for payment or other terms of the Superior Indebtedness or any part thereof, including increases and decreases of the rate of interest on the Superior Indebtedness; extensions may be repeated and may be for longer than the original loan term; (c) take and hold Security Interests for the payment of the Superior Indebtedness, and exchange, enforce, waive, and release any such Security Interests, with or without the substitution of new collateral; (d) release, substitute, agree not to sue, or deal with any one or more of Borrower's sureties, endorsers, or guarantors on any terms or manner Lender chooses; (e) determine how, when and what application of payments and credits, shall be made on the Superior Indebtedness; (f) apply such security and direct the order or manner of sale thereof, as Lender in its discretion may determine; and (g) assign this Agreement in whole or in part. DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement shall remain in full force and effect. In the event of a corporate reorganization or corporate arrangement of Borrower under the provisions of the Bankruptcy Code, as amended, this Agreement shall remain in full force and effect and the court having jurisdiction over the reorganization or arrangement is hereby authorized to preserve such priority and subordination in approving any such plan of reorganization or arrangement. Any default by Borrower under the terms of the Subordinated Indebtedness also shall be a default under the terms of the Superior Indebtedness to Lender. 09-09-1996 SUBORDINATION AGREEMENT Loan No (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DURATION AND TERMINATION. This Agreement will take effect when received by Lender, without the necessity of any acceptance by Lender, in writing or otherwise, and will remain in full force and effect until Creditor shall notify Lender in writing at the address shown above to the contrary. Any such notice shall not affect the Superior Indebtedness owed Lender by Borrower at the time of such notice, nor shall such notice affect Superior Indebtedness thereafter granted in compliance with a commitment made by Lender to Borrower prior to receipt of such notice, nor shall such notice affect any renewals of or substitutions for any of the foregoing. Such notice shall affect only indebtedness of Borrower to Lender arising after receipt of such notice and not arising from financial assistance granted by Lender to Borrower in compliance with Lender's obligations under a commitment. Any notes lodged with Lender pursuant to the section titled "Creditor's Notes" above need not be returned until this Agreement has no further force or effect. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by Lender in the State of Oregon. If there is a lawsuit, Creditor and Borrower agree upon Lender's request to submit to the jurisdiction of the courts of Jackson County, State of Oregon. Subject to the provisions on arbitration, this Agreement shall be governed by and construed in accordance with the laws of the State of Oregon. No provision contained in this Agreement shall be construed (a) as requiring Lender to grant to Borrower or to Creditor any financial assistance or other accommodations, or (b) as limiting or precluding Lender from the exercise of Lender's own judgment and discretion about amounts and times of payment in making loans or extending accommodations to Borrower. AMENDMENTS. This Agreement constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless made in writing and signed by Lender, Borrower, and Creditor. ARBITRATION. LENDER AND CREDITOR AND BORROWER AGREE THAT ALL DISPUTES, CLAIMS AND CONTROVERSIES BETWEEN THEM, WHETHER INDIVIDUAL, JOINT, OR CLASS IN NATURE, ARISING FROM THIS AGREEMENT OR OTHERWISE, INCLUDING WITHOUT LIMITATION CONTRACT AND TORT DISPUTES, SHALL BE ARBITRATED PURSUANT TO THE RULES OF THE AMERICAN ARBITRATION ASSOCIATION, UPON REQUEST OF EITHER PARTY. No act to take or dispose of any Collateral shall constitute a waiver of this arbitration agreement or be prohibited by this arbitration agreement. This includes, without limitation, obtaining injunctive relief or a temporary restraining order; foreclosing by notice and sale under any deed of trust or mortgage, obtaining a writ of attachment or imposition of a receiver, or exercising any rights relating to personal property, including taking or disposing of such property with or without judicial process pursuant to Article 9 of the Uniform Commercial Code. Any disputes, claims, or controversies concerning the lawfulness or reasonableness of any act, or exercise of any right, concerning any Collateral, including any claim to rescind, reform, or otherwise modify any agreement relating to the Collateral, shall also be arbitrated, provided however that no arbitrator shall have the right or the power to enjoin or restrain any act of any party. Judgment upon any award rendered by any arbitrator may be entered in any court having jurisdiction. Nothing in this Agreement shall preclude any party from seeking equitable relief from a court of competent jurisdiction. The statute of limitations, estoppel, waiver, laches, and similar doctrines which would otherwise be applicable in an action brought by a party shall be applicable in any arbitration proceeding, and the commencement of an arbitration proceeding shall be deemed the commencement of an action for these purposes. The Federal Arbitration Act shall apply to the construction, interpretation, and enforcement of this arbitration provision. ATTORNEYS' FEES; EXPENSES. Creditor and Borrower agree to pay upon demand all of Lender's costs and expenses, including attorneys' fees and Lender's legal expenses incurred in connection with the enforcement of this Agreement. Lender may pay someone else to help enforce this Agreement, and Creditor and Borrower shall pay the costs and expenses of such enforcement. Costs and expenses include Lender's attorneys' fees and legal expenses whether or not there is a lawsuit, including attorneys' fees and legal 09-09-1996 SUBORDINATION AGREEMENT Loan No (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- expenses for bankruptcy proceedings (and including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Creditor and Borrower also shall pay all court costs and such additional fees as may be directed by the court. SUCCESSORS. This Agreement shall extend to and bind the respective heirs, personal representatives, successors and assigns of the parties to this Agreement, and the covenants of Borrower and Creditor respecting subordination of the Subordinated Indebtedness in favor of Lender shall extend to, include, and be enforceable by any transferee or endorsee to whom Lender may transfer any or all of the Superior Indebtedness. WAIVER. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Creditor, shall constitute a waiver of any of Lender's rights or of any of Creditor's obligations as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent to subsequent instances where such consent is required and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER AND CREDITOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR AGREE TO ITS TERMS. THIS AGREEMENT IS DATED AS OF SEPTEMBER 9, 1996. BORROWER: LITHIA MOTORS, INC. BY: ------------------------------------------ LITHIA MOTORS, INC., BY: SIDNEY B. DEBOER, PRESIDENT BY: ------------------------------------------ LITHIA'S GRANTS PASS AUTO CENTER, L.L.C., BY: LITHIA MOTORS, INC. MANAGING MEMBER BY: SIDNEY DEBOER, PRESIDENT BY: ------------------------------------------ LITHIA DODGE L.L.C., BY: LITHIA MOTORS, INC. MANAGING MEMBER BY: SIDNEY DEBOER, PRESIDENT BY: ------------------------------------------ LITHIA TLM L.L.C., BY: LITHIA MOTORS, INC. MANAGING MEMBER BY: SIDNEY DEBOER, PRESIDENT 09-09-1996 SUBORDINATION AGREEMENT Loan No (Continued) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CREDITOR: SIDNEY B. DEBOER BY: ------------------------------------------ LENDER: UNITED STATES NATIONAL BANK OF OREGON BY: ------------------------------------------ AUTHORIZED OFFICER EX-10.18-1 13 EXHIBIT 10.18.1 EXHIBIT 10.18.1 FLOOR PLAN ACCOMMODATION AGREEMENT (Security Agreement) - ------------------------------------------------------------------------------- DEALER PRINCIPAL PLACE OF BUSINESS LITHIA MOTORS, INC. 360 E. JACKSON MEDFORD, OR 97504 - ------------------------------------------------------------------------------- Executed at MEDFORD State of OREGON this 9TH day of SEPTEMBER 1996. Dealer Is engaged In the business of selling and leasing personal properly, and from time to time will require financial assistance to floor its inventory personal property held for sale or lease. In order to induce UNITED STATES NATIONAL BANK OF OREGON (hereinafter "Lender") to make loans to Dealer from time to time to facilitate the purchase or retention of inventory held for sale or lease, Dealer agrees as follows: 1.0 COLLATERAL Dealer hereby grants to Lender a security interest in 1.1 All inventory of Dealer held for sale or lease (including but not limited to trade-ins, repossessions, and inventory held for display or demonstration purposes), whether now owned or hereafter acquired; 1.2 All accounts, chattel paper including but not limited to contracts and leases generated from the sale or lease of all inventory) and general intangibles, whether now owned or hereafter acquired; and 1.3 Proceeds of all the foregoing. (hereinafter collectively "the Collateral"). 2.0 OBLIGATIONS 2.1 The security interest granted hereby is to secure payment and performance of all liabilities and obligations of Dealer to Lender of every kind and description, direct or indirect, absolute or contingent (including but not limited to obligations as guarantor, surety or endorser), due or to become due whether now existing or hereafter arising (hereinafter "Obligations"). 3.0 LOANS; PROMISSORY NOTES 3.1 Insofar as Dealer may request and Lender may be willing in its discretion to make loans to Dealer, each such loan shall be evidenced by Dealer's promissory note payable on such terms as Lender may accept. 3.2 Lender may, in its discretion, prepare a Schedule of Collateral Security, either in connection with a promissory note or otherwise, identifying advances made by the Lender with regard to particular items of Collateral. The existence or utilization of any such Schedules shall not affect the extent of the security interest granted under paragraphs 1 and 2 above. 3.3 Dealer agrees that all loans by Lender hereunder will be used either to acquire or retain ownership of inventory and/or to pay Obligations of Dealer to Lender. Lender is authorized to disburse any loan made hereunder to persons supplying inventory to Dealer without any authorization other than contained herein. 3.4 Dealer understands that although Dealer may execute and deliver promissory notes to Lender which are payable on demand, Lender may, prior to demand, require curtailment payments on such notes. 3.5 Regardless of the maturity of any note, immediately upon disposition (by sale, lease or otherwise) of any Collateral, Dealer agrees to pay Lender in cash the amount, together with accrued interest thereon, which Lender has specifically loaned or advanced against the Collateral which has been disposed of. 4.0 LOCATION, MAINTENANCE AND INSPECTION OF COLLATERAL 4.1 Dealer will keep all Collateral on premises owned or leased by Dealer at all times except while such property is in transit or while such property is being moved from one of premises owned or leased by Dealer to another such premises. Regardless of this paragraph 4.1 Dealer may part with the possession of certain units of Collateral for reasonable periods of time as may be necessary for demonstration purposes, provided that the Dealer has first received written permission from the Lender to use the units for this purpose. 4.2 Dealer shall maintain all Collateral in good condition and repair and not commit or permit damage to or destruction of any of the Collateral Lender and its designated representatives and agents shall have the right at all reasonable times to examine, inspect, and audit the Collateral, wherever located. 4.3 Dealer will immediately report to Lender any event causing loss of or unusual depreciation in value of Collateral. Dealer will deliver to Lender from time to time such reports concerning Collateral as Lender may request. 5.0 PLACES OF BUSINESS; INSPECTION OF RECORDS; NOTIFICATION OF ACCOUNT DEBTORS 5.1 Dealer will promptly notify Lender in writing of any addition to, change in, or discontinuance of, its place or places of business. 5.2 Lender shall be permitted to examine all records and books of account pertaining to the Collateral at any reasonable time. 5.3 Lender may at any time notify account debtors on any Collateral that the Collateral has been assigned to Lender and that the proceeds thereof shall be paid to Lender. Upon request of Lender, Dealer will so notify such account debtors and will indicate on all billings to such account debtors that the amounts are payable to Lender. 6.0 DISPOSITION OF COLLATERAL 6.1 Dealer may sell Collateral in the ordinary course of business for cash or on terms approved in advance by Lender except that no Collateral shall be sold on open account without the express permission of Lender. 6.2 Immediately upon any sale, lease or other disposition of any Collateral, regardless of the terms thereof, Dealer agrees to pay to Lender in cash the amount, together with interest accrued thereon, which Lender has specifically named or advanced against the Collateral so disposed of. 6.3 Dealer shall hold the entire proceeds of all dispositions of Collateral in trust for Lender and immediately deliver such proceeds to Lender and render a full accounting to Lender with respect to such proceeds. 7.0 FINANCING STATEMENTS: CERTIFICATES OF TITLE 7.1 Whenever requested by Lender, Dealer will execute one or more financing statements satisfactory to Lender. A carbon, photographic or other reproduction of this security agreement or any financing statement shall be sufficient as a financing statement. 7.2 If any Collateral is covered or may be covered by a certificate of title, Dealer will deliver the certificate of title or certificate of origin to the Lender with the necessary authority to enable the Lender to have a certificate of title issued with its security interest noted thereon. 8.0 INSURANCE; TAXES; LIENS 8.1 Dealer assumes all risk of loss to the Collateral and shall insure the Collateral at its own expense against loss by fire, theft, and other risks designated by Lender for at least the cost of such Collateral, including collision insurance on demonstrators with deductible amount as approved by the Lender. Each policy shall be with a company and in a form acceptable to the Lender with the Lender's loss payable clause attached, and each policy shall be delivered to Lender. 8.2 Dealer will promptly pay when due all taxes, assessments and liens upon the Collateral. 8.3 Upon Dealer's failure to pay any amounts required to be paid hereunder, including insurance, taxes, assessments and liens on the Collateral, Lender may make such payments and any amount so paid shall be secured by all Collateral, shall be due on demand and shall bear interest until paid at such lawful rate as Lender may fix. In the event Lender must obtain insurance for any of the Collateral, Dealer will perform all repair work at its actual cost with respect to the Collateral made necessary on account of any casualty covered by insurance. 9.0 EVENTS OF DEFAULT The following shall constitute Events of Default: 9.1 Default in the performance of any covenant or condition of this Agreement or of any agreement, note or other instrument executed in connection with this Agreement; 9.2 Nonpayment by Dealer when due of all or any part of Dealer's Obligations to Lender and specifically nonpayment of any amount due hereunder upon sale by Dealer of any of the Collateral; 9.3 Default by Dealer in the performance of any other obligation to Lender whether or not in connection with this Agreement; 9.4 Any warranty or representation furnished to Lender proves to have been false when furnished; 9.5 Loss, theft, damage, destruction, loan, consignment, mortgage, pledge or sale of any of the Collateral (except as expressly herein permitted in the ordinary course of business) or operation or use thereof except for display or demonstration purposes with Lender's written permission; 9.6 Insolvency of Dealer, assignment by Dealer for the benefit of creditors, filing by Dealer of a voluntary petition in bankruptcy, adjudication that Dealer is bankrupt or appointment of receiver for assets of Dealer; 9.7 Continued decline in Dealer's net worth which, in Lender's opinion, substantially increases Lender's risk; 9.8 Inadequacy of or decline in value of the Collateral or unsafe use or misuse thereof which, In the Lender's opinion, substantially increases the Lender's risk; or 9.9 Lender in good faith deems itself insecure such that it believes the prospect of it receiving payment or performance under this Agreement is impaired. 10.0 RIGHTS AND REMEDIES ON DEFAULT In the event of any default by Dealer as defined in paragraph 9 above: 10.1 All Obligations of Dealer to Lender, whether represented by notes or otherwise or whether incurred hereunder or otherwise shall, at Lender's option, become immediately due and payable, except that in the case of an event of default described in paragraph 9.6 above, such acceleration shall be automatic and not optionable. 10.2 Lender may take possession of Collateral without legal process. 10.3 Lender may require that Dealer assemble the Collateral and make it available to Lender at a place reasonably convenient to both Dealer and Lender, and Dealer waives all claims for damages arising from such taking. 10.4 With respect to any Collateral, Lender may give notice to Dealer of its intention to sell the same and may, not more than five (5) days after the serving or sending of such notice, sell the same for Dealer's account at public or private sale and may, at a public sale, itself become a purchaser. Such property may be sold in one or more sales, as Lender shall elect. The proceeds of any such sale, whether public or private, shall be applied (i) to the payment of the expenses of retaking, holding, preparing for the disposition of such property including legal fees and expenses: (ii) then to the satisfaction of all of Dealer's Obligations to Lender whether created pursuant to this Agreement or otherwise; (iii) then to the satisfaction of subordinate security interests in accordance with the Uniform Commercial Code of the state in which Lender is located. Any surplus shall be paid to Dealer. Dealer shall be liable to Lender for any deficiency. Notice of sale shall be deemed sufficiently given if in writing and either (i) personally handed to Dealer, or (ii) sent by postpaid ordinary mail to the Dealer's last known business address. 10.5 Lender shall have such other rights to which it is entitled by law. 10.6 All rights granted hereunder shall be cumulative. 11.0 ADDITIONAL SECURITY 11.1 Regardless of the adequacy of any security which Lender may at any time hold hereunder and regardless of the adequacy of any other security which Lender may obtain at any of its offices from Dealer in connection with any other transaction, all deposits or other monies due from Lender to Dealer at any of its offices shall constitute additional security for, and may be set off against all Obligations secured hereby even though said Obligations may not then be due. 11.2 Any and all instruments, documents, policies and certificates of insurance, securities, goods, accounts receivable, choses in action, cash, property and the proceeds thereof owned by Dealer or in which Dealer has an interest, which now or hereafter are at any time in possession or control of Lender at any of its offices or in transit by mail or carrier to or from Lender or in the possession of any third party acting in Lender's behalf, without regard to whether Lender received the same in pledge, for safekeeping, as agent for collection or transmission or otherwise or whether Lender has conditionally released the same, shall constitute additional security for all Obligations hereunder and may be applied at any time to any Obligations which are then due whether by acceleration or otherwise. 11.3 Dealer hereby assigns to Lender all of its rights to any rebates, credits, factory holdbacks, and incentive payments which may become due to Dealer by the factory or distributor with respect to any of the Collateral, and will pay the full amount of any such rebates, credits, factory holdbacks, and incentive payments to Lender, as soon as the same are received for application on Dealer's Obligations. Lender may collect any rebates, credits, factory holdbacks or incentive payments directly from the factory or distributor whether or not Dealer is in default on any Obligation to Lender, and may give appropriate instructions to the factory or distributor for that purpose. 11.4 All reserves, however created, of Dealer in possession of Lender shall also constitute additional security for Dealer's Obligations to Lender. 12.0 MISCELLANEOUS 12.1 Lender's waiver in any instance of any right hereunder shall not be deemed a waiver of such right in any subsequent instance. 12.2 If Lender brings a suit or action to enforce the terms of this Agreement or to recover damages for the breach hereof, it shall be entitled to recover in addition to costs and disbursements allowed by law, such sums as the court may adjudge reasonable for Lender's attorneys' fees in such suit or action or on any appeal. 12.3 This Agreement is hereby substituted for any prior Floor Plan Accommodation Agreement heretofore executed by Dealer and Lender. Any notes heretofore delivered by Dealer to Lender which refer to a prior Floor Plan Accommodation Agreement shall be secured not only by such agreement but also by this Floor Plan Accommodation Agreement (Security Agreement). 12.4 This Agreement shall inure to the benefit of and bind the successor and assigns of Dealer and Lender. 12.5 The various headings in this Agreement are for purposes of convenience only and are not considered a part hereof. 12.6 This Agreement constitutes the entire agreement between Lender and Dealer and supersedes all prior and contemporaneous agreements, understandings, representations, negotiations and discussions, whether oral or written, between Lender and Dealer regarding the subject matter hereof. This Agreement may not be modified in any manner except by a writing signed by an authorized representative of the party being bound thereby. 13.0 APPOINTMENT OF ATTORNEY IN FACT 13.1 Dealer hereby appoints any officer of Lender as its true and lawful attorney to sign and deliver to Lender on behalf of Dealer any note, financing statement or any other writing which may be necessary or convenient in connection herewith. - ------------------------------------------------------------------------------- LENDER DEALER UNITED STATES NATIONAL BANK OF OREGON LITHIA MOTORS, INC. - ------------------------------------------------------------------------------- BY TITLE BY OFFICER, FIRM, MEMBER, OWNER X X ---------------------------- ----------------------------- - ------------------------------------------------------------------------------- EX-10.18-2 14 EXHIBIT 10.18.2 EXHIBIT 10.18.2 CORPORATE RESOLUTION TO GUARANTEE
- ---------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- PRINCIPAL LOAN DATE MATURITY LOAN NO. CALL COLLATERAL ACCOUNT OFFICER INITIALS $5,288,154.00 06/11/1996 7275 5310685 52393 - ---------------------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - ---------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------
Borrower: Lithia Properties, L.L.C. Lender: United States National 360 E. Jackson Bank of Oregon Medford, OR 97504 Dealer Finance Division 131 E. Main Medford, OR 97501 Guarantor: Lithia Motors, Inc. 360 E. Jackson Medford, OR 97501 I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF LITHIA MOTORS, INC. (THE "CORPORATION"), HEREBY CERTIFY that the Corporation is organized and existing under and by virtue of the laws of the State of Oregon with its principal office at 360 E. Jackson, Medford, OR 97501. I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly called and hold on _____________________, at which a quorum was present and voting, or by other duly authorized corporate action in lieu of a meeting, the following resolutions were adopted: BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or agents of this Corporation, whose actual signatures are shown below: NAME POSITION ACTUAL SIGNATURE Sidney B. DeBoer President X ----------------------- acting for and on behalf of the Corporation and as its act and deed be, and he or she hereby is, authorized and empowered: GUARANTY. To guarantee or act as surety for loans or other financial accommodations to Lithia Properties, L.L.C. from United States National Bank of Oregon ("Lender") on such guarantee or surety terms as may be agreed upon between the officers or employees of this Corporation and Lender and in such sum or sums of money as in his or her judgment should be guaranteed or assured, without limit (the "Guaranty"). GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or otherwise encumber and deliver to Lender, as security for the Guaranty, any property now or hereafter belonging to the Corporation or in which the Corporation now or hereafter may have an interest, including without limitation all real property and all personal property (tangible or intangible) of the Corporation. Such property may be mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered at the time such loans are obtained or such indebtedness is incurred, or at any other time or times, and may be either in addition to or in lieu of any property theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or encumbered. The provisions of these Resolutions authorizing or relating to mortgage, transfer, endorsement hypothecation, granting of a security Interest in, or In any way encumbering, the assets of the Corporation shall include without limitation, doing so in order to lend collateral security for the Indebtedness, now or hereafter existing, and of any nature whatsoever, of Lithia Properties, L.L.C. to Lender. The Corporation has considered the value to itself of lending collateral in support of such indebtedness, and the Corporation represents to Lender that the Corporation is benefited by doing so. EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of mortgage, deed of trust, pledge agreement, hypothecation agreement, and other security agreements and financing statements which may be submitted by Lender, and which shall evidence the terms and conditions under and pursuant to which such liens and encumbrances, or any of them, are given; and also to execute and deliver to Lender any other written instrument, any chattel paper, or any other collateral, of any kind or nature, which he or she may in his or her discretion deem reasonably necessary or proper in connection with or pertaining to the giving of the liens and encumbrances. FURTHER ACTS. To do and perform such other acts and things and to execute and deliver such other documents and agreements as he or she may in his or her discretion deem reasonably necessary or proper in order to carry into effect the provisions of these Resolutions. BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at Lender's address shown above (or such other addresses as Lender may designate from time to time) prior to any (a) change in the name of the Corporation, (b) change in the assumed business name(s) of the Corporation, (c) change in the management of the Corporation, (d) change in the authorized signer(s) or (e) change in any other aspect of the Corporation that directly or indirectly relates to any agreements between the Corporation and Lender. No change in the name of the Corporation will take affect until star Lender has been notified. BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these Resolutions and performed prior to the passage of these Resolutions are hereby ratified and approved, that these Resolutions shall remain in full force and effect and Lender may rely on these Resolutions until written notice of his or her revocation shall have been delivered to and received by Lender. Any such notice shall not affect any of the Corporation's agreements or commitments in effect at the time notice is given. I FURTHER CERTIFY that the officer, employee, or agent named above is duly elected, appointed or employed by or for the Corporation, as the case may be, and occupies the position set opposite the name; that the foregoing Resolutions now stand of record on the books of the Corporation; and that the Resolutions are in full force and effect and have not been modified or revoked in any manner whatsoever. IN TESTIMONY WHEREOF, I HAVE HEREBY SET MY HAND ON JUNE 11, 1996 AND ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE SIGNATURES. CERTIFIED TO AND ATTESTED BY: X --------------------------------------- X --------------------------------------- NOTE: In case the Secretary or other certifying officer is designated by the foregoing resolutions as one of the signing officers, it is advisable to have this certificate signed by a second Officer or Director of the Corporation. - -------------------------------------------------------------------------------- LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.21(c) 1996 CFI ProServices, Inc. All rights reserved. [OR-C10B PROPERTI.LN] EX-10.20-1 15 EXHIBIT 10.20.1 EXHIBIT 10.20.1 MANAGEMENT CONTRACT THIS AGREEMENT made and entered into this 1st day of October, 1996, by and between LITHIA MOTORS, INC., hereinafter designated as "First Party", and LITHIA PROPERTIES, L.L.C., designated as "Party of the Second Part". This agreement supersedes all prior management agreements and amendments. Party of The First Part, an entity having expertise and skills in various specialties that are of need by Party of the Second Part, does herewith enter into a formal agreement to furnish and provide services as herein outlined for compensation as here set forth: I. DESCRIPTION OF SERVICES: 1. Furnishing of bookkeeping and accounting services on a daily, monthly and annual basis. 2. Furnishing of computer services to facilitate the aforesaid bookkeeping and accounting activities. 3. Furnishing full computer and computer software services, including required expertise in surveillance, maintenance and repair of same. 4. Developing software packages and arranging purchases of supplies, software and hardware, as needed for both the ADP and Altos computers. 5. Instructing Party of the Second Part personnel in the use of computer hardware and software. 6. Creating and maintaining the management information system reports to facilitate dissemination of information on sales goals and achievements to appropriate Party of the Second Part personnel. 7. Preparing, maintaining and supervising books involving investments as well as the administering and procurement of investments. 8. Organizing, supervising and detailing preliminary information needed for business tax returns, financial statements and other corporate records for income tax and loan requirements. 9. Planning, handling and overseeing all advertising for company sales efforts. 10. Providing executive management services of top level officers. These services shall include the full range of executive authority and surveillance to assure that all company policies have been appropriately conducted and carried out. It is recognized that these services of high level performance are critical to the successful operation of this company, and such services are required without limitation in order to effect an optimum result for the company. Such services shall entail intensive time and effort on the part of executive management. 11. Providing supervisory management services on a department head level including, but not limited to, sales advertising office and audit, Bill Daves shall act as head of sales and advertising department, functioning in a full time consultation basis. Dorothy Crockett shall head the office and auditing department and shall function on a full time basis. Nothing herein shall preclude Party of the First Part from obtaining replacements for any of said department heads at the exclusive discretion and choice of Party of the First Part. II. COMPENSATION TO PARTY OF THE FIRST PART FOR THE FOREGOING SERVICES: For services rendered, LITHIA PROPERTIES, L.L.C., agrees to pay the sum of $36,000.00 per month. If Party of the First Part provides services by its employees beyond the normal management functions as provided for herein then Party of the First Part shall be compensated at 111% of said employee's salary for the time period he/she devotes beyond the normal functions to Party of the Second Part. From time-to-time both parties may agree to compensation in amounts other than stated above for unusual situations and without the necessity of modification of this agreement. II24. GENERAL STATEMENT OF RESPONSIBILITIES OF PARTY OF THE FIRST PART: Party of the First Part shall conscientiously attend to all of the services and detail set forth above and shall exercise its discretion in terms of providing the services here contemplated. Notwithstanding name and ownership similarities, as between the parties hereto, each is an independent contractor. Neither is employee, agent or servant of the other, so that except as herein provided, there shall not be considered the imputation of vicarious liability unto the other because of the acts or omissions on the part of one. IV. RESPONSIBILITY OF PARTY OF THE SECOND PART: Party of the Second Part shall promptly furnish to Party of the First Part all documents and records required for the management and consultation services here described. Any and all occurrences that would impact on the responsibilities and duties of Party of the First Part shall be forthwith and immediately communicated by Party of the Second Part, their agents, servants and employees, unto the appropriate employees of Party of the First Part. Party of the First Part shall not be required to advance funds for the account of Party of the Second Part. However, should Party of the First Part make payments for the account of the other party, upon notification to the obligated part, that party shall immediately remit unto Party of the First Part sufficient funds to remove any deficit or to cure any advance. All payments required from Party of the Second Part, not limited only to the compensation due Party of the First Part, shall be timely paid and, where required on a monthly basis, shall be paid prior to the tenth day of the month immediately following the month that the obligation was incurred. V. TERM OF AGREEMENT: This agreement shall commence on the date hereof and shall continue until December 31, 1996 whereupon this agreement shall terminate. Further, it is acknowledged that this agreement may be changed from time to time as necessity dictates. IN WITNESS of the understanding and agreement of the parties, they have entered into this agreement this 1st day of October, 1996. PARTY OF THE FIRST PART: PARTY OF THE SECOND PART: LITHIA MOTORS, INC. LITHIA PROPERTIES, L.L.C. [Signature] [Signature] - ------------------------------ ------------------------------- EX-23.1 16 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Lithia Motors, Inc. and Affiliated Companies We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" and "Selected Combined Financial Data" in the prospectus. /s/ KPMG Peat Marwick LLP Portland, Oregon October 31, 1996 EX-23.2 17 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Roberts Dodge, Inc. and Affiliated Companies We consent to the use of our report included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG Peat Marwick LLP Portland, Oregon October 31, 1996 EX-23.3 18 EXHIBIT 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated September 17, 1996 on our audits of the financial statements of Sam Linder, Inc. in the Lithia Motors, Inc. Registration Statement (No. 333-14031) dated October 31, 1996 for the registration of Common Stock. Moss Adams LLP Seattle, Washington October 31, 1996 EX-23.4 19 EXHIBIT 23.4 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated September 17, 1996 on our audits of the financial statements of Melody Vacaville, Inc. in the Lithia Motors, Inc. Registration Statement (No. 333-14031) dated October 31, 1996 for the registration of Common Stock. Moss Adams LLP Seattle, Washington October 31, 1996 -----END PRIVACY-ENHANCED MESSAGE-----