<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 21, 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. 2
---------------
LITHIA MOTORS, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
OREGON 93-0572810 5511
(State or other jurisdiction (I.R.S. Employer (Primary
of Identification No.) Standard
Incorporation or organization) Industrial
Classification
Code Number)
</TABLE>
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:
<TABLE>
<S> <C>
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)
</TABLE>
--------------------------
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 462(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. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER UNIT(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A Common Stock........................ 2,875,000 $15.00 $43,125,000 $13,069(3)
</TABLE>
(1) Includes 375,000 shares issuable upon exercise of the Underwriters'
over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a).
(3) Includes $12,769 previously paid.
--------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 22, 1996
PROSPECTUS
2,500,000 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 $13.00 and
$15.00 per share. For information that was considered in determining the initial
public offering price, see "Underwriting." The Class A Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "LMTR."
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 on a share for share basis. All of
the outstanding shares of Class B Common Stock, which will represent
approximately 94.3% 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.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE DISCOUNTS PROCEEDS TO
TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (3)..................................... $ $ $
</TABLE>
(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 $1,100,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, 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 December , 1996.
FURMAN SELZ
DAIN BOSWORTH
INCORPORATED
EVEREN SECURITIES, INC.
----------------
The date of this Prospectus is , 1996
<PAGE>
[PHOTOS 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 publications. This Prospectus includes trademarks
of companies other than Lithia Motors, 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.
<PAGE>
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 375,000 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 15 domestic and imported makes of new automobiles and light
trucks at seven locations. As an integral part of its operations, the Company
arranges related financing and insurance and sells parts, service and ancillary
products. Most of the Company's operations are currently located in Medford,
Oregon, where it has a market share of over 40%. The Company has grown primarily
by successfully acquiring and integrating dealerships and by obtaining new
dealer franchises. The Company recently acquired Melody Toyota and Kia in
Vacaville, California and has entered into agreements to acquire Roberts Dodge
in Eugene, Oregon and Linder Honda in Salinas, California. The Company's
strategy is to become a leading acquiror of dealerships in medium-sized markets
in the western United States.
The Company was founded in 1946 and its 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 the FIFO
Method) was 18.1% and its pre-tax profit margin before minority interest (on the
FIFO Method) was 3.2%, versus 12.9% and 1.4%, respectively, for the industry.
For the nine months ended September 30, 1996, such gross profit margin for the
Company was 17.2% and its pre-tax profit margin before minority interest was
3.2%.
The Company intends to take advantage of the consolidation opportunities in
the $600 billion automotive retailing industry. According to industry data, the
number of franchised automobile dealerships has declined from more than 36,000
dealerships in 1960 to approximately 22,000 in 1996. Currently, the largest 100
dealer groups generate less than 10% of total industry sales and control
approximately 5% of all franchised automobile dealerships. Several economic and
industry factors are expected to lead to the further consolidation of the
automobile retailing industry, including increasing capital requirements
necessary to operate an automobile dealership, the fact that many dealerships
are owned by individuals nearing retirement age who are seeking exit
opportunities, and the desire of manufacturers to strengthen their dealer
networks through consolidation. Since inception, the Company has acquired eight
dealerships and believes that it is well positioned to continue to capitalize on
the highly fragmented and consolidating automotive retail 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. At its seven locations, the Company offers, collectively, 15 makes of
new vehicles including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda,
Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki, Kia 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
3
<PAGE>
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 ratio of used vehicles to new vehicles sold of 1.89-to-1,
compared to an industry average of approximately 1.25-to-1. 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 it 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) increase
ancillary product sales to improve overall profitability. 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 sells accompanying ancillary products and services. In
1995, the Company arranged financing for 59% of its new vehicle sales and 69% of
its used vehicle sales, 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 cash management.
Each dealership is managed as a profit center by a trained and experienced
general manager who has primary responsibility for decisions relating to
inventory, advertising, pricing and personnel. The Company compensates its
general managers and department managers based on the profitability of their
dealerships and departments, respectively, rather than on sales volume. Senior
management utilizes computer-based management information systems to monitor
each dealership's sales, profitability and inventory on a daily basis and to
identify areas requiring improvement. The Company believes the application of
its professional management practices provides it with a competitive advantage
over many dealerships and is critical to its ability to achieve levels of
profitability superior to industry averages.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer
satisfaction throughout its organization and continually seeks to maintain its
reputation for quality and fairness. The Company trains its sales personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. The Company recently implemented an innovative customer-oriented
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 within 90 minutes for
a vehicle purchase, (iv) provide a 10-day/500-mile "no questions asked" right of
exchange on any used vehicle sold, (v) provide a warranty on all used vehicles
sold for 60 days/3,000 miles and (vi) make a $20 donation to a local charity or
educational organization for every vehicle sold. The Company believes "Priority
You" will help differentiate it from many other dealerships, thereby increasing
customer traffic and developing stronger customer loyalty.
4
<PAGE>
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 seek dealerships or dealer groups that, among other criteria, possess
either the sole franchise of a major manufacturer or a significant share of new
vehicle sales in each targeted market. The Company's evaluation of potential
acquisitions takes into account a dealership's reputation with its customers,
the type and make of vehicles sold by the dealership and the opportunity for the
Company to improve operating results and acquire additional franchises within
the market to achieve a larger market share. The Company believes that the
majority of the dealerships that fit its acquisition criteria will be located in
medium-sized markets. However, the Company may consider acquisitions of dealer
groups with stores in larger metropolitan markets if such groups are well
managed and profitable.
Upon completing an acquisition, the Company implements its operating
strategy, which includes selling more used vehicles, increasing finance and
insurance revenues, 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 senior management, as well as
the dealership's 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 the 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 senior management team has gained
considerable experience over the past five years in acquiring dealerships and
implementing its operating strategy to improve the performance and profitability
of such dealerships following the acquisition. The Company acquired its Medford
Pontiac, Mazda and Jeep/Eagle franchises and its Grants Pass Dodge franchise in
1991 and was awarded its Medford Saturn franchise in 1992. The Company is
continuing its expansion in Oregon and has recently signed a purchase agreement
to acquire Roberts Dodge, the sole Dodge franchise in Eugene, Oregon. The
Company has also begun expansion into selected markets in California with the
acquisition of Melody Toyota and Kia in Vacaville in 1996 and the signing of a
purchase agreement to acquire Linder Honda, the sole Honda franchise in Salinas.
The Company maintains its principal executive offices at 360 E. Jackson
Street, Medford, Oregon 97501, and its telephone number is (541) 776-6899.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Company............................ 2,500,000 shares of Class A Common Stock
Common Stock to be outstanding after
the Offering....................... 2,500,000 shares of Class A Common Stock (1)
4,110,000 shares of Class B Common Stock
Use of proceeds..................... Finance the acquisition of three automobile
dealerships, purchase certain real property from
Lithia Properties, repay certain indebtedness, pay
distributions to existing owners of previously taxed
undistributed earnings and general corporate
purposes, primarily for acquisitions of additional
automobile dealerships. See "Use of Proceeds."
Nasdaq National Market symbol....... LMTR
</TABLE>
- ------------------------
(1) Does not include an aggregate of 685,000 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 439,085
of which are subject to outstanding options as of the date hereof. See
"Management -- 1996 Stock Incentive Plan."
5
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The following table presents (i) summary historical combined financial data
of the Company as of the dates and for the periods indicated and (ii) summary
pro forma financial 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, each reported on the LIFO Method except where
indicated otherwise. 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, Melody Vacaville, Inc., Roberts Dodge, Inc. and Sam Linder, 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ --------------------
PRO
ACTUAL FORMA (1) ACTUAL
----------------------------------------------------- ----------- --------------------
1991 1992 1993 1994 1995 1995 1995 1996
--------- --------- --------- --------- --------- ----------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS
DATA:
Total sales...................... $ 64,087 $ 79,439 $ 92,239 $ 109,423 $ 114,196 $ 197,170 $ 85,821 $ 105,566
Gross profit (2)................. 11,064 14,022 17,459 19,099 21,064 32,075 15,454 18,260
Operating income................. (499) (102) 2,337 3,925 4,329 3,730 3,390 3,786
Income before minority interest
(2)(3).......................... $ 229 $ 516 $ 1,786 $ 3,972 $ 4,153 $ 3,660 $ 3,250 $ 3,431
PRO FORMA COMBINED AND CONDENSED
STATEMENT OF OPERATIONS DATA:
(4)
Net income....................... $ 2,076 $ 2,269 $ 1,628 $ 1,713
Net income per share (5)......... $ 0.43 $ 0.33 $ 0.34 $ 0.36
Weighted average shares
outstanding (in thousands)
(5)............................. 4,819 6,952 4,819 4,819
OTHER OPERATING DATA:
New automobiles sold............. 1,890 2,106 2,464 2,744 2,715 2,054 2,424
Used automobiles sold............ 3,403 3,934 4,718 5,206 5,144 3,895 4,656
Gross margin (FIFO Method) (2)... 17.8% 18.3% 19.5% 18.0% 18.1% 16.3% 17.7% 17.2%
Pre-tax margin before minority
interest (FIFO Method) (2)...... 1.0% 1.2% 2.5% 4.2% 3.3% 1.9% 3.5% 3.1%
<CAPTION>
PRO
FORMA (1)
-----------
1996
-----------
<S> <C>
COMBINED STATEMENT OF OPERATIONS
DATA:
Total sales...................... $ 173,116
Gross profit (2)................. 27,263
Operating income................. 4,402
Income before minority interest
(2)(3).......................... $ 4,300
PRO FORMA COMBINED AND CONDENSED
STATEMENT OF OPERATIONS DATA:
(4)
Net income....................... $ 2,666
Net income per share (5)......... $ 0.38
Weighted average shares
outstanding (in thousands)
(5)............................. 6,952
OTHER OPERATING DATA:
New automobiles sold.............
Used automobiles sold............
Gross margin (FIFO Method) (2)... 15.8%
Pre-tax margin before minority
interest (FIFO Method) (2)...... 2.5%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
AS OF -----------------------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL PRO FORMA (6) AS ADJUSTED (7)
------------- --------- ------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Working capital..................................................... $ 7,761 $ 9,946 $ 11,376 $ 35,472
Total assets........................................................ 39,222 37,922 39,352 49,953
Total long-term debt, less current maturities....................... 10,743 8,010 12,211 4,857
Total shareholders' equity.......................................... 851 3,080 948 32,398
</TABLE>
- ------------------------------
(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 currently utilizes the LIFO (Last In-First Out) method of
accounting ("LIFO Method"). See Note 2 to the Company's Combined Financial
Statements. Commencing January 1, 1997, the Company intends to file an
election with the IRS to convert to the specific identification method of
accounting for vehicles and the FIFO (First In-First Out) method of
accounting for parts (herein collectively referred to as the "FIFO Method")
and report its earnings for tax purposes and in its 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, $18.0 million, $19.7 million
and $20.6 million, respectively, and $15.2 million and
6
<PAGE>
$18.2 million for the nine months ended September 30, 1995 and 1996,
respectively. 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 $3.0 million and $3.3 million
for the nine months ended September 30, 1995 and 1996, respectively.
(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 Selling, General & Administrative expense. 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
the cash 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 10 to the Company's Combined Financial Statements.
(5) Historical net income per share is 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. See Note 1 to the Company's Combined Financial Statements for a
calculation of weighted average shares outstanding.
(6) Reflects the establishment of a $3.3 million S Corporation distribution
payable to current stockholders, a current deferred income tax asset of
$1,430,000 and a non-current deferred income tax liability of $598,000 to
reflect the Company's conversion to C Corporation status. See Notes 10 and
17 to the Company's Combined Financial Statements.
(7) Adjusted to reflect the sale of Class A Common Stock offered hereby by the
Company (at an assumed initial public offering price of $14.00 per share and
after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company) and the receipt of the net
proceeds therefrom. See "Use of Proceeds."
7
<PAGE>
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 further growth
is to make additional acquisitions in its existing and new geographic markets.
In 1996, the Company purchased Melody Toyota and Kia in Vacaville, California
and entered into agreements to acquire Roberts Dodge in Eugene, Oregon and
Linder Honda in Salinas, California. Melody Toyota and Kia has incurred
significant losses since January 1, 1995 and none of the recent or pending
acquisitions have profit margins comparable to those of the Company. The
acquisition of Roberts Dodge is expected to close in December 1996 and the
acquisition of Linder Honda is expected to close in January 1997, each after the
consummation of the Offering. The consummation of these acquisitions are subject
to certain closing conditions including the receipt of manufacturers' consents.
Thus, there can be no assurance that such acquisitions will be consummated.
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, acquire and retain or hire and train professional
management and sales personnel at each such acquired dealership and promptly and
profitably integrate the acquired operations into the Company. The Company has
and may continue to acquire dealerships with 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
profitability 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. However, no assurance
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 may 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, Chrysler, Toyota, Honda and Saturn, collectively accounted
for 87% of the Company's new vehicle sales. The Company may become dependent on
additional manufacturers in the future as a result of its acquisition strategy
and changes in the Company's sales mix.
8
<PAGE>
Each of the Company's dealerships operates pursuant to a franchise agreement
with each of the respective manufacturers for which it serves as franchisee.
Manufacturers exert significant control over the Company's dealerships through
the terms and conditions of their 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, however, generally afford the Company a reasonable
opportunity to cure violations and no manufacturer has terminated or failed to
renew any franchise agreement with the Company. If a manufacturer terminates or
declines 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 an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the manufacturers. In order to obtain sufficient numbers of these vehicles,
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 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 or vehicle model 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
automobile 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, Chrysler, Toyota, Honda and Mazda have indicated
that they will consent to the Restructuring. Saturn and Ford are currently
developing internal policies regarding publicly-owned franchised dealerships,
but the Company does not expect that such policies will be announced prior to
the consummation of the Offering, and there can be no assurance that the
Restructuring will be permitted under such policies. There can be no assurance
that any manufacturer that does not consent to the Restructuring will not
attempt to prevent the Restructuring, terminate its franchise agreement, refuse
to renew its franchise agreement, refuse to approve future acquisitions 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 one of its dealerships
and 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
9
<PAGE>
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 an 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 for the Company, 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
thereafter. The Company may have to sell one or more of its franchises or a
majority interest in such 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, a manufacturer may consider many factors, including the
financial condition and ownership structure of the acquiror. Because the Company
will be publicly owned after the Offering, the Company believes that certain
manufacturers, including Saturn and Ford, may not consent at this time to the
acquisition by the Company of any of their respective franchises. 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. For example, each of Chrysler, Toyota and Honda
currently limit the number of dealerships which may be owned by any one dealer
group. These restrictions limit the Company from owning more than ten Chrysler
or Dodge dealerships, seven Toyota dealerships, three Lexus dealerships, seven
Honda dealerships and three Acura dealerships. Toyota and Honda also prohibit
ownership of contiguous dealerships and the dualing of a franchise with any
other brand without consent. Toyota further requires that at least nine months
elapse between acquisitions. 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 affect its growth strategy.
In determining whether to approve an acquisition by the Company, a
manufacturer also considers 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. In
1995 and the first nine months of 1996, the Pontiac dealership accounted for
approximately 2% of the Company's vehicle sales. No assurance can be given that
the Company could obtain approvals for the acquisition of any General Motors
dealerships.
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.
Certain manufacturers also may require that Lithia Holding and/or Sidney B.
DeBoer maintain a
10
<PAGE>
certain ownership interest in the Company or the subsidiary holding the
franchise. 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) and could limit the ability of the Company to
acquire all of or a controlling interest in certain dealerships. 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 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 recently completed the acquisition of a new dealership
in Vacaville, California and has pending an acquisition of an additional
dealership in that state, substantially all of the Company's current operations
are located in Oregon. Unless the Company completes significant additional
acquisitions outside the state of Oregon, 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 from these sources or on terms and conditions acceptable to
the Company.
The Company's strategy of growth through the acquisition of additional
dealerships will require substantial capital. The Company anticipates that
approximately $25.0 million of the net proceeds from this Offering will be used
to finance the acquisition of additional dealerships. If the Company's
acquisition strategy is successful, the net proceeds from the Offering will be
fully utilized 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 the Company using cash, incurring additional
debt or issuing equity securities, which could have a dilutive effect on its
then-
11
<PAGE>
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. The Company does not have employment agreements
with any of its key management personnel which would restrict their ability to
terminate their employment and compete with the Company. The Company does not
maintain key man insurance on either Messrs. DeBoer or Heimann. Further, Mr.
DeBoer and Mr. Heimann are identified in 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 may need to hire additional managers, particularly if it acquires
dealerships from owners/managers seeking to retire or dealerships that are
under-performing under their current management. 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.
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 94.3% 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."
12
<PAGE>
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 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, South Korea and Germany. In the future,
automobiles that the Company distributes may also be imported from other
countries. In 1995, 40% of the Company's new automobile sales were manufactured
by foreign suppliers. 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 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. 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") 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.
Certain of the Company's facilities own and operate underground storage
tanks ("USTs") for the storage of various petroleum products. The USTs are
generally subject to federal, state and local laws and regulations that require
testing and upgrading of USTs and remediation of polluted soils and groundwater
resulting from leaking USTs. In addition, if leakage from Company-owned or
operated USTs migrates onto the property of others, the Company may be subject
to civil liability to third parties for remediation costs or other damages.
Based on historical experience, the Company believes that its liabilities
associated with UST testing, upgrades and remediation are unlikely to have a
material adverse effect on its financial condition or operating results.
13
<PAGE>
As with automobile dealerships generally, and service, parts and body shop
operations in particular, the Company's business involves the use, handling,
storage 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.
Certain of the properties leased by the Company are located in commercial
areas and have historically been used for gasoline service stations. As a
consequence, it is possible that historical site activities or current
neighboring activities have affected properties leased by the Company and that,
as a result, additional environmental issues may arise in the future, the
precise nature of which the Company cannot now predict.
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. 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. All of the outstanding
shares of Class B Common Stock 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. Further, the 84,940 shares of Class A Common Stock for which
options (at exercise prices between $3.02 and $3.32 per share) are exercisable,
are also subject to 180-day lock-up following the date of this Prospectus. 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. See "Dividend Policy."
14
<PAGE>
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, subsidiaries and affiliated entities were established to hold certain
dealerships and the real property on which the Company operates.
Currently, Lithia Motors, Inc. is an S Corporation which is owned 62.5% by
Sidney B. 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
(v) 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, 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, 24.99% by R. Bradford Gray and 0.01% by
Mr. DeBoer) and (iii) Lithia Dodge, L.L.C. (75% by Lithia Motors, 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 12, 1996 for all of its common stock. Lithia TKV, Inc. was
formed to acquire Melody Toyota and Kia. After the restructuring, Lithia Holding
will have three new members, Sidney B. DeBoer (58.1%), M.L. Dick Heimann (34.9%)
and R. Bradford Gray (7.0%). Mr. DeBoer is named the sole managing member of
Lithia Holding.
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 shareholders 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.
The Company 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. The Dividend Notes bore interest at 9% per annum and
were payable in ten equal annual installments beginning one year and ten days
after demand by the noteholders. As of September 30, 1996, the Dividend Notes
had been partially prepaid and had a remaining principal balance of $1.9
million. The Company prepaid the remaining principal balance of the Dividend
Notes and paid additional dividends of $2.0 million as a partial distribution of
its 1996 earnings, on November 12, 1996, at the time of the purchase of Melody
Toyota and Kia. These payments permitted Messrs. DeBoer and Heimann to fund
Lithia TKV, Inc. in order to complete the closing of that acquisition. See
"Recent and Pending Acquisitions." Toyota Motors Distributors, Inc. requires
that each Toyota dealership be held in a separate legal entity. Accordingly,
15
<PAGE>
Lithia TKV, Inc. was formed to acquire Melody Toyota and Kia, but because of the
Company's current subchapter S tax status, the Company cannot hold the shares of
Lithia TKV, Inc. until after the Restructuring. In 1994, the Company distributed
total tax payment dividends of $2.0 million to the Principal Owners.
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 remaining undistributed
taxable income of the Company or such other entities, as the case may be,
through the effective date of the Restructuring. The Company intends to make the
final distribution of earnings from a portion of the proceeds of the Offering
shortly after the closing of the Offering. The total amount to be paid to the
Principal Owners as the result of such distributions is expected to be
approximately $3.1 million, but the final amount may be more or less than this
estimate since it is dependent upon the then undistributed earnings of the
Company and the other affiliated entities through the effective date of the
Restructuring. See "Use of Proceeds."
RECENT AND PENDING ACQUISITIONS
In furtherance of the Company's growth strategy, the Company has signed
definitive agreements in recent months to purchase three additional dealerships:
Melody Vacaville, Inc. ("Melody Toyota and Kia"), a Toyota and Kia dealer in
Vacaville, California; Roberts Dodge, Inc. ("Roberts Dodge"), a Dodge dealer in
Eugene, Oregon; and Sam Linder, Inc. ("Linder Honda"), a Honda dealer in
Salinas, California (collectively referred to herein as the "Acquisitions"). The
purchase prices were negotiated directly between the Company and the sellers, in
some cases with the assistance of a broker, without appraisals, except for the
appraisal undertaken to determine the value of the real estate to be purchased
from Roberts Dodge. The Company intends to use borrowings under its Flooring and
Capital Lines and the proceeds from this Offering to finance the payment of the
purchase prices. See "Use of Proceeds" and "Management's Discussion Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
The Melody Toyota and Kia acquisition closed November 14, 1996. Although the
Company expects the closing of the other pending Acquisitions in due course, the
consummation of the Acquisitions is not a condition for the closing of the
Offering. The Company expects the acquisitions of Roberts Dodge and Linder Honda
to close in December 1996 and January 1997, respectively. There can be no
assurance that either of these acquisitions will be consummated. "See "Risk
Factors -- Dependence on Acquisitions for Growth" and "-- Manufacturers' Consent
to Acquisitions."
MELODY TOYOTA AND KIA. The Company paid $2.58 million in cash for the
equipment, business and goodwill of Melody Toyota and Kia, $3.1 million for the
new vehicle and parts inventory valued at seller's cost and $850,000 for the
used vehicle inventory valued at the Kelly Wholesale Blue Book value less
reconditioning costs of $150,000. The Company did not assume any material
liabilities as part of the acquisition. In addition, the Company leases the real
property and improvements utilized by the dealership from a third party at a
current monthly rental rate of approximately $35,000. Melody Toyota and Kia had
$27.8 million in sales in 1995 and is the sole Toyota and Kia dealer in
Vacaville and the surrounding area.
ROBERTS DODGE. The Company has agreed to pay $2.4 million for the
equipment, business and goodwill of Roberts Dodge, plus an additional amount for
the new car and parts inventory valued at seller's cost, estimated to be
approximately $2.1 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 by (i) payment of $1.9 million plus the cost of parts and the new (and
any used) vehicle inventory acquired, in cash at closing and (ii) delivery of 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 $2.3 million, payable
in cash at
16
<PAGE>
closing. See "Business -- Properties" and "Certain Relationships and Related
Transactions." Closing is expected to occur in December 1996. The purchase is
subject to normal closing conditions and approval by 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.
LINDER HONDA. The Company has agreed to pay approximately $1.1 million in
cash for the equipment, business and goodwill of 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,
estimated to be approximately $2.1 million, less any reconditioning costs. The
Company is not assuming any material liabilities as part of the acquisition.
Lithia Properties will purchase the real property and improvements utilized for
the new vehicle store prior to September 30, 1997 for $2.1 million and lease the
property to the Company or its subsidiary operating Linder Honda. See "Business
- -- Properties" and "Certain Relationships and Related Transactions." Closing of
the acquisition of Linder Honda is expected to occur in January 1997. The
purchase is subject to normal closing conditions and approval by Honda. The
Company expects to obtain such approval in due course, but no assurances can be
made in that regard. Linder Honda also has a Cadillac and Oldsmobile dealership
franchise at this location which is expected to be sold and transferred to a
third party purchaser. Linder Honda 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.
Historical financial statements for Roberts Dodge, Inc., Sam Linder, Inc.
and Melody Vacaville, Inc. are included in this Prospectus beginning at page
F-21, Pro forma statements of operations and balance sheets showing the effect
on the Company of all of the above acquisitions, as if they had occurred as of
January 1, 1995 and September 30, 1996, respectively, are included in this
Prospectus beginning at page 23.
17
<PAGE>
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
$31,450,000 ($36,332,000 if the Underwriters' over-allotment option is exercised
in full), assuming an initial offering price of $14.00 per share.
The Company anticipates that the net proceeds will be used for the following
purposes: (i) $9.6 million to finance the purchase of Melody Toyota and Kia,
Roberts Dodge and Linder Honda (net of debt incurred of $8.1 million) (see
"Recent and Pending Acquisitions"), (ii) approximately $1.8 million (net of
mortgages assumed of $900,000) to purchase the land and improvements of the new
body and paint shop under construction and a parcel of land held for a future
dealership or sales lot, both in Medford, Oregon, from Lithia Properties at
cost, (iii) $1.3 million to repay existing notes to affiliates and related
parties, (iv) approximately $3.1 million to distribute the remaining
undistributed 1996 earnings of the Company to the Principal Owners and purchase
a minority interest in Lithia TLM, L.L.C. (See "Company Restructuring and Prior
S Corporation Status" and "Certain Relationships and Related Transactions"), and
(v) the balance of $15.6 million for general corporate purposes, primarily for
acquisitions of additional automobile dealerships.
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. Bank, 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
September 30, 1996. The Capital Line bears interest at prime plus 0.75 percent.
See Note 6 to the Company's Combined Financial Statements. 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 after the
Offering. The Company intends to retain any earnings that it may realize in the
future to finance its acquisitions and 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. The Company's
franchise dealer agreements with vehicle manufacturers generally require the
Company, or its subsidiary operating a particular dealership, to maintain
adequate levels of capitalization, which could also restrict the Company's
ability to pay dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and total combined
capitalization of the Company at September 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 2,500,000 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."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Flooring notes payable....................................................... $ 13,495 $ 13,495 $ --
Notes payable................................................................ 3,044 3,044 3,044
Current maturities of long-term debt......................................... 2,713 2,713 2,713
--------- ----------- -----------
Total short-term debt.................................................... $ 19,252 $ 19,252 $ 5,757
--------- ----------- -----------
--------- ----------- -----------
Long-term debt, less current maturities (1).................................. $ 8,010 $ 12,211 $ 4,857
Minority interest............................................................ 1,237 -- --
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; 2,500,000 pro forma as adjusted
(2)..................................................................... -- -- 31,450
Class B Common Stock, no par value, 25,000,000 shares authorized,
4,110,000 outstanding, actual, pro forma and pro forma as adjusted...... 801 948 948
Retained earnings (3)...................................................... 2,279 -- --
--------- ----------- -----------
Total shareholders' equity (3)........................................... 3,080 948 32,398
--------- ----------- -----------
Total capitalization......................................................... $ 11,090 $ 13,159 $ 37,255
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
- ------------------------
(1) Includes $1.8 million and $5.1 million actual and pro forma, respectively,
of notes payable to Principal Owners related to S Corporation distributions.
(2) Does not include an aggregate of 685,000 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 439,085
of which are subject to outstanding options as of the date hereof. See
"Management -- 1996 Stock Incentive Plan."
(3) The Company currently utilizes the LIFO 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 the FIFO Method and
change its method of accounting to the industry standard FIFO Method for
financial statement and tax reporting. Had the Company used the FIFO Method,
total shareholders' equity at September 30, 1996 would have been $3.0
million higher.
19
<PAGE>
DILUTION
The pro forma net tangible book value of the Company's Common Stock at
September 30, 1996, was $762,000, or $0.19 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 September
30, 1996, other than to give effect to the Offering by the Company of 2,500,000
shares of Class A Common Stock to the public at an assumed initial public
offering price of $14.00 per share and the receipt by the Company of the net
proceeds therefrom (after deducting the underwriting discounts and commissions
and estimated expenses of the public offering payable by the Company), the pro
forma net tangible book value of the Company would have been $4.87 per share.
This amount represents an immediate increase in the pro forma net tangible book
value of $4.68 per share to the existing shareholders and an immediate dilution
of $9.13 per share to new investors purchasing shares of Class A Common Stock at
the initial public offering price. The Company currently utilizes the LIFO
Method of accounting (See Note 2 to the Company's Combined Financial
Statements). Had the Company used a FIFO Method as it intends to elect
commencing January 1, 1997, total shareholders' equity at September 30, 1996
would have been $3.0 million higher.
The following table calculates dilution by subtracting net tangible book
value per share after the Offering on both the LIFO and FIFO Methods, from the
initial public offering price.
<TABLE>
<CAPTION>
LIFO METHOD FIFO METHOD
-------------------- --------------------
<S> <C> <C> <C> <C>
Assumed initial public offering price per share....................................... $ 14.00 $ 14.00
Pro forma net tangible book value as of September 30, 1996............... $ 0.19 $ 0.91
Increase attributable to new investors................................... $ 4.68 $ 4.41
Pro forma net tangible book value after the Offering.................................. $ 4.87 $ 5.32
--------- ---------
Dilution per share to new investors................................................... $ 9.13 $ 8.68
--------- ---------
--------- ---------
</TABLE>
The following table summarizes, on a pro forma basis as of September 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 $14.00 per share).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) CASH PAID(2) AVERAGE
------------------------ --------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing shareholders............................. 4,110,000 62.2% $ 948,000 2.6% $ .23
New investors..................................... 2,500,000 37.8 35,000,000 97.4 14.00
----------- ----- -------------- -----
Total......................................... 6,610,000 100.0% $ 35,948,000 100.0%
----------- ----- -------------- -----
----------- ----- -------------- -----
</TABLE>
- ------------------------
(1) Does not include an aggregate of 685,000 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 439,085
of which are subject to options outstanding as of September 30, 1996, with a
weighted average exercise price of $3.11 per share. If all such options were
deemed to be exercised and proceeds were received therefrom, dilution per
share to new investors would be $9.24 (LIFO Method) or $8.81 (FIFO Method).
See "Management -- 1996 Stock Incentive Plan."
(2) Does not reflect deduction of underwriting discounts and commissions or
estimated offering expenses.
20
<PAGE>
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, and for and as of the end of the nine month period ended
September 30, 1996, 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 certified public accountants. The
following selected combined historical financial information for the nine months
ended September 30, 1995 have 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 nine months ended September 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 September 30, 1996 and for the nine
months ended, September 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMBINED STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles.............................. $ 28,946 $ 34,479 $ 42,663 $ 51,154 $ 53,277 $ 39,824 $ 48,006
Used vehicles............................. 23,369 29,930 34,986 42,381 44,061 33,246 43,470
Other operating revenues.................. 11,772 15,030 14,590 15,888 16,858 12,751 14,090
--------- --------- --------- --------- --------- --------- ---------
Total sales........................... 64,087 79,439 92,239 109,423 114,196 85,821 105,566
Cost of sales............................... 53,023 65,417 74,780 90,324 93,132 70,367 87,306
--------- --------- --------- --------- --------- --------- ---------
Gross profit (1)............................ 11,064 14,022 17,459 19,099 21,064 15,454 18,260
Selling, general and administrative (2)..... 11,563 14,124 15,122 15,174 16,735 12,064 14,474
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)..................... (499) (102) 2,337 3,925 4,329 3,390 3,786
Interest income............................. 308 161 216 99 179 102 176
Interest expense............................ (784) (743) (1,374) (954) (1,390) (797) (1,013)
Other income, net........................... 1,204 1,200 607 902 1,035 555 482
--------- --------- --------- --------- --------- --------- ---------
Income before minority interest............. 229 516 1,786 3,972 4,153 3,250 3,431
Minority interest........................... (49) (168) (233) (458) (778) (597) (627)
--------- --------- --------- --------- --------- --------- ---------
Net income (1)(2)........................... $ 180 $ 348 $ 1,553 $ 3,514 $ 3,375 $ 2,653 $ 2,804
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
PRO FORMA COMBINED STATEMENT OF OPERATIONS
DATA:
Income before taxes, and minority interest,
as reported................................ $ 1,786 $ 3,972 $ 4,153 $ 3,250 $ 3,431
Pro forma provision for taxes (3)........... (697) (1,521) (1,598) (1,254) (1,335)
Pro forma minority interest................. (142) (283) (479) (368) (383)
--------- --------- --------- --------- ---------
Pro forma net income........................ $ 947 $ 2,168 $ 2,076 $ 1,628 $ 1,713
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share.............. $ 0.43 $ 0.34 $ 0.36
Weighted average shares outstanding (4)..... 4,819 4,819 4,819
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------- AS OF
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
--------- --------- --------- --------- --------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMBINED BALANCE SHEET DATA:
Working capital............................. $ 2,339 $ 1,369 $ 13 $ 6,034 $ 7,761 $ 9,946
Total assets................................ 21,080 24,955 33,381 36,659 39,222 37,922
Total long-term debt, less current
maturities................................. 3,124 4,012 3,789 6,748 10,743 8,010
Total shareholders' equity.................. 1,628 1,238 1,184 2,803 851 3,080
</TABLE>
- ------------------------------
(1) The Company utilizes the LIFO Method. See Note 2 to the Company's Combined
Financial Statements. Commencing January 1, 1997, the Company intends to
file an election with the IRS to convert to the FIFO Method for tax and
financial
21
<PAGE>
reporting. 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, $18.0 million, $19.7 million and $20.6 million, and $15.2 million
and $18.2 million for the nine months ended September 30, 1995 and 1996,
respectively. Net income for the five years ended December 31, 1995 would
have been $527,000, $733,000, $2.1 million, $4.1 million, and $2.9 million,
respectively and $2.4 million and $2.7 million for the nine months ended
September 30, 1995 and 1996, respectively.
(2) Prior to 1994, the Company and its 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 selling, general and
administrative expense above. 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.
(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 10 to the Company's Combined Financial
Statements.
(4) See Note 1 to the Company's Combined Financial Statements for the
calculation of weighted average shares outstanding.
22
<PAGE>
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 nine months ended
September 30, 1996 reflect the historical accounts of the Company for those
periods adjusted to give pro forma effect to the Acquisitions, the conversion to
the FIFO Method (to be effective January 1, 1997), the Restructuring and the
Offering, as if these transactions had occurred as of January 1, 1995.
The following unaudited pro forma combined balance sheet as of September 30,
1996 reflects the historical accounts of the Company as of that date adjusted to
give pro forma effect to the Acquisitions, the conversion to the FIFO Method of
accounting (to be effective January 1, 1997), the Restructuring and the
Offering, as if they had occurred as of September 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 Melody Vacaville, Inc., Roberts Dodge,
Inc., and Sam Linder, 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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------------------------------------------------------
ACTUAL
COMPANY ---------------------------------
---------------------- MELODY ROBERTS SAM
ADJUSTED VACAVILLE, DODGE, LINDER, PRO FORMA PRO FORMA
ACTUAL (1) INC.(2) INC. (2) INC. (2) ADJUSTMENTS ACQUISITIONS PRO FORMA
--------- ----------- ----------- --------- --------- -------------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicle................. $ 53,277 $ 53,277 $ 18,126 $ 15,848 $ 12,656 $ (3,069)(3) $ 96,838 $ 96,838
Used vehicle................ 44,061 44,061 6,015 12,151 10,234 -- 72,461 72,461
Other operating revenue..... 16,858 16,858 3,669 3,895 3,967 (518)(3) 27,871 27,871
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Total sales............. 114,196 114,196 27,810 31,894 26,857 (3,587)(3) 197,170 197,170
Cost of sales................. 93,132 93,558 24,858 27,270 22,646 (3,237)(3)(4) 165,095 165,095
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Gross profit.................. 21,064 20,638 2,952 4,624 4,211 (350) 32,075 32,075
Selling, general and
administrative............... 16,735 16,735 4,254 3,828 3,928 (400)(3)( (6) 28,345 28,345
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Operating income (loss)....... 4,329 3,903 (1,302) 796 283 50 3,730 3,730
Other income (expense), net... (176) (176) (310) (527) (347) 1,290(2)(3 (5) (70) (70)
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Income (loss) before minority
interest and income taxes.... 4,153 3,727 (1,612) 269 (64) 1,340 3,660 3,660
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Minority interest............. (778) (778) -- -- -- -- (778) --
Income taxes (7).............. -- -- -- -- -- -- -- (1,391)
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Net income (loss)............. $ 3,375 $ 2,949 $ (1,612) $ 269 $ (64) $ 1,340 $ 2,882 $ 2,269
--------- ----------- ----------- --------- --------- ------- ----------- ---------
--------- ----------- ----------- --------- --------- ------- ----------- ---------
Net income per share.................................................................................................. $ 0.33
---------
---------
Weighted average shares outstanding (8)............................................................................... 6,952
</TABLE>
23
<PAGE>
PRO FORMA COMBINED AND CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------------------------------------
ACTUAL
---------------------------------
COMPANY MELODY ROBERTS SAM
---------------------- VACAVILLE, DODGE, LINDER, PRO FORMA PRO FORMA
ACTUAL ADJUSTED(1) INC.(2) INC.(2) INC.(2) ADJUSTMENTS ACQUISITIONS
--------- ----------- ----------- --------- --------- ----------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles............... $ 48,006 $ 48,006 $ 14,706 $ 14,290 $ 10,517 $ (1,650)(3) $ 85,869
Used vehicles.............. 43,470 43,470 5,253 8,482 7,098 -- 64,303
Other operating revenues... 14,090 14,090 3,063 3,250 2,913 (372 (3) 22,944
--------- ----------- ----------- --------- --------- ------- -----------
Total sales.............. 105,566 105,566 23,022 26,022 20,528 (2,022 (3) 173,116
--------- ----------- ----------- --------- --------- ------- -----------
Cost of sales................ 87,306 87,392 20,786 22,136 17,360 (1,821 (4) 145,853
--------- ----------- ----------- --------- --------- ------- -----------
Gross profit................. 18,260 18,174 2,236 3,886 3,168 (201 ) 27,263
Selling, general and
administrative.............. 14,474 14,474 2,777 3,152 2,868 (410 (6) 22,861
--------- ----------- ----------- --------- --------- ------- -----------
Operating income (loss)...... 3,786 3,700 (541 ) 734 300 209 4,402
Other income (expense),
net......................... (355) (355 ) (119 ) (371) (146) 889(2)(3)(5) (102)
--------- ----------- ----------- --------- --------- ------- -----------
Income (loss) before minority
interest and income taxes... 3,431 3,345 (660 ) 363 154 1,098 4,300
--------- ----------- ----------- --------- --------- ------- -----------
Minority interest............ (627) (627 ) -- -- -- -- (627)
Income taxes(7).............. -- -- -- -- -- -- --
--------- ----------- ----------- --------- --------- ------- -----------
Net income (loss).......... $ 2,804 $ 2,718 $ (660 ) $ 363 $ 154 $ 1,098 $ 3,673
--------- ----------- ----------- --------- --------- ------- -----------
--------- ----------- ----------- --------- --------- ------- -----------
Net income per share....................................................................................................
Weighted average shares outstanding(8)..................................................................................
<CAPTION>
PRO FORMA
------------
<S> <C>
Sales:
New vehicles............... $ 85,869
Used vehicles.............. 64,303
Other operating revenues... 22,944
------------
Total sales.............. 173,116
------------
Cost of sales................ 45,853
------------
Gross profit................. 27,263
Selling, general and
administrative.............. 22,861
------------
Operating income (loss)...... 4,402
Other income (expense),
net......................... (102 )
------------
Income (loss) before minority
interest and income taxes... 4,300
------------
Minority interest............ --
Income taxes(7).............. (1,634 )
------------
Net income (loss).......... $ 2,666
------------
------------
Net income per share......... $ 0.38
Weighted average shares outst 6,952
</TABLE>
- ------------------------------
(1) Reflects the conversion of the Company from the LIFO Method of inventory
accounting to the FIFO Method. Under the FIFO Method, cost of sales would
have been higher by $426,000 and $86,000 for the year ended December 31,
1995, and the nine month period ended September 30, 1996, respectively. The
Company intends to convert to the FIFO Method effective January 1, 1997.
(2) 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 $9.6 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 $12.5 million. 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
three 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.
(3) Reflects adjustment to sales, cost of sales, selling, general and
administrative, and other direct expenses for General Motors products which
the Company will not acquire from Sam Linder, Inc. Amounts total $3.6
million, $3.2 million, $246,000 and $36,000 and $2.0 million, $1.7 million,
$155,000, and $34,000 for the year ended December 31, 1995 and the nine
month period ended September 30, 1996, respectively.
(4) Reflects the conversion of Melody Vacaville, Inc. and Sam Linder, Inc. from
the LIFO Method of inventory accounting to the FIFO Method. Under the FIFO
Method, cost of sales would have been lower by $19,000, and $122,000 for the
year ended December 31, 1995 and the nine month period ended September 30,
1996, respectively. The Company intends to convert to the FIFO Method
effective January 1, 1997.
(5) 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 currently available to the Company on the
acquired companies' flooring debt. The reduction in expenses include:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
Management compensation...................................... $ 277,000 $ 347,000
Interest expense............................................. $ 160,000 $ 35,000
</TABLE>
The net reduction in interest expense was calculated based on an average
floor plan debt of approximately $10.6 million at the differential in
interest rate in effect during each respective period from the variable rate
currently available to the
24
<PAGE>
Company. Had the interest rate to the Company been 12.5 basis points higher,
the interest expense saving would have been $147,000 and $23,000, for the
year ended December 31, 1995 and for the nine months ended September 30,
1996, respectively.
(6) Reflects amortization as if Melody Vacaville, Inc., Roberts Dodge, Inc., and
Sam Linder, Inc. had been acquired as of January 1, 1995. The pro forma
amortization for the year ended December 31, 1995 and the nine-month period
ended September 30, 1996 reflects additional amortization of approximately
$123,000 and $92,000, respectively, associated with intangible assets, which
assets consist largely of goodwill, resulting from the acquisition of Melody
Vacaville, Inc., Roberts Dodge, Inc. and Sam Linder, Inc. Such costs are
being amortized over a 40-year period. See Note 4 to Pro Forma Combined and
Condensed Balance Sheet.
(7) The Company and each of the 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 each of the Acquisitions had been C Corporations based on a 38%
effective rate assumed during the period.
(8) Pro forma earnings per share are based upon the assumption that 6,610,000
shares of Common Stock and 439,085 of options are outstanding for each
period. This amount represents the shares to be issued in the Offering
(2,500,000) the number of shares of Common Stock owned by the Company's
stockholders immediately following the Restructuring (4,110,000), and common
equivalent shares from stock options outstanding is calculated using the
treasury stock method.
PRO FORMA COMBINED AND CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
------------------------------------------------------
RESTRUCTURING
ACTUAL AND OFFERING ACQUISITIONS PRO FORMA
--------- ----------------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 9,822 $ 10,601(1)(2) $ (11,430) (4) $ 8,993
Receivables............................................. 2,773 -- -- 2,773
Inventories............................................. 15,517 -- 14,190( (5) 29,707
Vehicles leased to others............................... 4,099 -- -- 4,099
Other current assets.................................... 775 1,430(6) (1,430)(5) 775
--------- ----------------- ----------- -----------
Total current assets.................................. 32,986 12,031 1,330 46,347
Net property, plant and equipment......................... 1,269 -- 6,180( (4) 7,449
Vehicles leased to other, less current portion............ 2,207 -- -- 2,207
Goodwill, net; and other assets........................... 1,460 -- 4,920(3) 6,380
--------- ----------------- ----------- -----------
Total assets........................................ $ 37,922 $ 12,031 $ 12,430 $ 62,383
--------- ----------------- ----------- -----------
--------- ----------------- ----------- -----------
LIABILITIES, MINORITY INTEREST AND OWNERS'/SHAREHOLDERS EQUITY
Current Liabilities:
Notes Payable........................................... $ 3,044 $ -- $ -- $ 3,044
Flooring notes payable.................................. 13,495 (13,495)(1) 5,900(3) 5,900
Current maturities of long-term debt.................... 2,713 -- -- 2,713
Accounts payable........................................ 1,387 -- -- 1,387
Accrued expenses and other liabilities.................. 2,401 -- 398(5) 2,799
--------- ----------------- ----------- -----------
Total current liabilities............................. 23,040 (13,495) 6,298 15,843
Long-term debt, excluding current maturities.............. 8,010 (3,153)(1)( (8) 3,150( (4) 8,007
Other long-term liabilities............................... 2,555 598(6) -- 3,153
--------- ----------------- ----------- -----------
Total liabilities..................................... 33,605 (16,050) 9,448 27,003
--------- ----------------- ----------- -----------
Minority interest......................................... 1,237 (1,237)(7) -- --
--------- ----------------- ----------- -----------
Owners'/Shareholders' Equity:
Preferred stock......................................... -- -- --
Common stock............................................ 801 31,597(2)(7) -- 32,398
Retained earnings....................................... 2,279 (2,279)(6)( (8) 2,982(5) 2,982
--------- ----------------- ----------- -----------
Total owners'/shareholders' equity.................... 3,080 29,318 2,982 35,380
--------- ----------------- ----------- -----------
Total liabilities and owners'/shareholders'
equity............................................. $ 37,922 $ 12,031 $ 12,430 $ 62,383
--------- ----------------- ----------- -----------
--------- ----------------- ----------- -----------
</TABLE>
- ------------------------------
(1) Reflects the application of the estimated net proceeds of the Offering of
which approximately $13.5 million will be used to reduce floor plan debt,
approximately $3.2 million to pay current shareholders substantially all of
the undistributed
25
<PAGE>
cumulative taxable income, approximately $1.9 million to pay notes to
Principal Owners for all previously taxed undistributed earnings,
approximately $1.3 million to pay notes to other affiliates, and
approximately $1.0 million to reduce a payable for the Acquisition of a
minority interest.
(2) Reflects the issuance of 2,500,000 shares of Common Stock at an assumed
initial public offering price of $14.00 per share, net of estimated
underwriting discounts and commissions and offering expenses.
(3) Reflects the preliminary allocation of the Melody Vacaville, Inc., Roberts
Dodge, Inc. and Sam Linder, Inc. aggregate purchase price based on the
estimated fair value of assets acquired. The purchase price consists of the
following:
<TABLE>
<CAPTION>
MELODY
VACAVILLE, SAM LINDER, ROBERTS
INC. INC. DODGE, INC.
------------- ----------- -----------
<S> <C> <C> <C>
Estimated total consideration.............................. $ 6,625,000 $3,215,000 $7,940,000
Less estimated fair value of assets acquired............... 4,505,000 2,315,000 6,040,000
------------- ----------- -----------
Excess of purchase price over fair value of tangible assets
acquired.................................................. $ 2,120,000 $ 900,000 $1,900,000
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
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 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 September 30,
1996, approximated $10,151,000, will be financed with floor plan debt.
Approximately $9.6 million will be utilized to acquire Melody Vacaville,
Inc., Roberts Dodge, Inc. and Sam Linder, Inc. See "Recent and Pending
Acquisitions" and "Use of Proceeds."
(4) Reflects the purchase of the land and improvements of the Company's new body
and paint shop (under construction) and an additional vacant parcel of land
held for future development for approximately $2.7 million, $1.8 million in
cash and $900,000 in notes payable.
(5) Reflects the conversion of the Company, Melody Vacaville, Inc., and Sam
Linder, Inc. from the LIFO Method of inventory accounting to the FIFO
Method. Under the FIFO Method, inventory, shareholders' equity and current
deferred tax liability would have been higher by approximately $4.8 million,
$3.0 million and $1.8 million, respectively. The Company intends to convert
to the FIFO Method effective January 1, 1997.
(6) Represents the establishment of a deferred income tax asset of $1.4 million
and a non-current deferred income tax liability of $598,000 to effect the
Company's conversion to C Corporation status.
(7) Reflects the acquisition of a minority interest in Lithia TLM, L.L.C. in the
amount of approximately $1.0 million, the transfer of all other interests in
the affiliated entities to Lithia Motors, Inc. (see "Company Restructuring
and Prior S Corporation Status") in the amount of approximately $300,000,
and the transfer of the remaining accumulated deficit to common stock.
(8) Reflects the estimated distribution of $3.2 million to its current
shareholders of substantially all of the undistributed cumulative taxable
income through the date of the termination of the S Corporation election
that has been taxed or is taxable to its current shareholders.
26
<PAGE>
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
Lithia Motors is the largest retailer of new and used vehicles in Southwest
Oregon, offering 15 domestic and imported makes of new automobiles and light
trucks at seven locations. As an integral part of its operations, the Company
arranges related financing and insurance and sells parts, service and ancillary
products. Most of the Company's operations are currently located in Medford,
Oregon, where it has a market share of over 40%. The Company has grown primarily
by successfully acquiring and integrating dealerships and by obtaining new
dealer franchises. The Company recently acquired Melody Toyota and Kia in
Vacaville, California and has entered into agreements to acquire Roberts Dodge
in Eugene, Oregon and Linder Honda in Salinas, California. The Company's
strategy is to become a leading acquiror of dealerships in medium-sized markets
in the western United States.
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.
AVERAGE U.S. DEALERSHIP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles................................................................... 60.0% 60.3% 58.6%
Used vehicles.................................................................. 26.4 26.9 29.0
Parts and service, 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%
----- ----- -----
----- ----- -----
</TABLE>
- ------------------------
Source: AUTOMOTIVE EXECUTIVE/August 1996; NADA Industry Analysis Division
27
<PAGE>
THE COMPANY
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 profit margins are presented on the LIFO Method
and before minority interest.
LITHIA MOTORS, INC.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles............................................ 46.3% 46.8% 46.6% 46.5% 45.4%
Used vehicles........................................... 37.9 38.7 38.6 38.7 41.2
Parts and service....................................... 9.2 9.1 9.6 9.5 9.0
Finance, insurance and other............................ 6.6 5.4 5.2 5.3 4.4
----- ----- ----- ----- -----
Total sales......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit.............................................. 18.9 17.5 18.4 18.0 17.2
Selling, general and administrative expenses.............. 16.4 13.9 14.6 14.0 13.7
----- ----- ----- ----- -----
Operating income.......................................... 2.5 3.6 3.8 4.0 3.5
Other income (expense), net............................... (0.6) 0.0 (0.2) (0.2) (0.3)
----- ----- ----- ----- -----
Income before taxes and minority interest................. 1.9% 3.6% 3.6% 3.8% 3.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
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 profit margins are presented on the FIFO Method
and before minority interest to permit comparisons to U.S. industry data.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total sales............................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit (1).......................................... 19.5 18.0 18.1 17.7 17.2
Selling, general and administrative expenses.............. 16.4 13.9 14.7 14.0 13.7
----- ----- ----- ----- -----
Operating income (1)...................................... 3.1 4.1 3.4 3.7 3.5
Other income (expense), net............................... (0.6) 0.1 (0.2) (0.2) (0.3)
----- ----- ----- ----- -----
Income before taxes and minority interest (1)............. 2.5% 4.2% 3.2% 3.5% 3.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
- ------------------------------
(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. "Book only" fleet sales are transactions in which
vehicles are delivered directly to the purchasers and title is never acquired by
the Company. Used vehicle revenues include amounts received for used vehicles
sold to wholesale and retail customers. Finance, insurance and other revenues
include 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 and leases, the Company receives either a fee or a spread
from the lender for originating and assigning the loan or
28
<PAGE>
lease but is assessed a chargeback fee by the lender if a loan is cancelled, in
most cases, within 120 days of making the loan. Early cancellation can result
from early repayment because of refinancing of the loan, selling or trade-in of
the vehicle or default on the loan.
The Company currently utilizes the LIFO (Last In-First Out) method of
accounting for inventory ("LIFO Method"), but will convert to the specific
identification method of accounting for vehicles and the FIFO (First In-First
Out) method of accounting for parts (herein collectively referred to as 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 $557,000, $615,000, and
$(426,000) for the years ended December 31, 1993, 1994, and 1995, respectively
and $(243,000) and $(86,000) for the nine months ended September 30, 1995 and
1996, respectively, from the reported results under the LIFO Method. In the
analysis of annual and interim results, the Company has provided a discussion of
gross profits on the FIFO Method as well on the LIFO Method because management
believes that in assessing trends and comparing the Company's performance with
prior periods or with industry data, FIFO Method 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's 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 margin obtained by franchised automobile dealers in
the United States on sales of new vehicles has declined from over 7.0% in 1991
to 6.5% in 1995. The Company's gross profit margin (on the LIFO Method) on new
vehicle sales was 12.7% for 1995 (12.8% on the FIFO Method) and 12.1% for the
first nine months of 1996 (12.2% on the FIFO Method). The Company's gross profit
margin on new vehicle sales has consistently been higher than the industry
average.
The Company's gross profit margin (on the LIFO Method) on used vehicle sales
was 13.8% (11.4% on the FIFO Method) for 1995 and 13.6% (10.0% on the FIFO
Method) for the first nine months of 1996. Excluding sales to wholesalers (which
are frequently at or close to cost), the Company's gross profit margin (on the
LIFO Method) in 1995 and for the first nine months of 1996 was 13.8% (13.2% on
the FIFO Method) and 13.6% (12.8% on the FIFO Method), respectively. The
industry average (on the FIFO Method) 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 primarily based 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
29
<PAGE>
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.
The Company is intending to undertake the Restructuring (see "Company
Restructuring and Prior S Corporation Status") in connection with the public
offering of its Class A Common Stock which, among other steps, will result in
all of the Company's outstanding shares of Class B Common Stock being
transferred to Lithia Holding. The various Company's dealership agreements with
manufacturers provide that there can be no change in control or ownership of the
Company without the manufacturers' consent. Certain manufacturers have not
consented to the Restructuring and approvals from Saturn and Ford are not
expected to be received prior to the Restructuring. Because of the Company's
current relationship with each of these manufacturers and Oregon franchise law
that appears to permit reorganizations such as the Restructuring, the Company
does not expect such manufacturers to terminate their franchise agreements,
although no assurance can be given in that regard. Any termination of a
franchise agreement could have a material adverse effect on the Company's
revenues and earnings.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
REVENUES
Revenues increased in each of the Company's operating segments for the first
nine months of 1996 as compared to the first nine months of 1995, resulting in
total sales increasing 23.0% to $105.6 million. New vehicle sales revenue
increased 20.5% in the first nine months of 1996 to $48.0 million, compared with
$39.8 million for the first nine months of 1995. The increase in sales was due
primarily to increased unit sales (18.0%) 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 (2.1%).
Used vehicle sales increased by 30.8% in the first nine months of 1996 to
$43.5 million, compared with $33.2 million in the first nine 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 (19.5%) and, to a lesser extent, an increase in the average per
unit sales price (9.4%).
The Company's other operating revenue increased 10.2% to $14.1 million in
the first nine months of 1996, from $12.8 million in the first nine months of
1995, due to an increased number of F&I transactions and to a lesser extent, an
increase in revenues derived from service department maintenance and repairs.
GROSS PROFIT
Gross profit (on the LIFO Method) increased 18.2% for the first nine months
of 1996 to $18.3 million, compared with $15.5 million for the first nine months
of 1995, primarily because of the increase in new and used vehicle sales during
the period. Gross profit margin decreased from 18.0% for the first nine months
in 1995 to 17.3% for the first nine 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 margin on new vehicles sales. 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 the FIFO Method) increased 19.5% for the first nine months
of 1996 to $18.2 million, compared with $15.2 million for the first nine 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 nine months
in 1995 to 17.2% for the first nine months of 1996. The decrease in gross profit
margin was primarily caused by a reduction in gross profit margins on used
vehicles sales and other operating revenue, partially offset by an increase in
gross profit margin on sales of new vehicles.
30
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
The Company's SG&A expense increased to $14.5 million in the first nine
months of 1996 compared to $12.1 million in the first nine months of 1995. SG&A
as a percentage of sales decreased to 13.7% from 14.1%. 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 Acquisitions.
INTEREST EXPENSE, NET
The Company's net interest expense increased by 20.4% to $837,000 for the
first nine months of 1996, compared to $695,000 for the first nine months of
1995. The increase was primarily due to an increase in the Dividend Notes
outstanding for the first nine months of 1996, offset partially by a decrease in
interest rates. In 1996, the Company distributed to the Principal Owners in the
aggregate $3.9 million in notes representing approximately all of the previously
undistributed earnings of the Company through December 31, 1995.
OTHER INCOME, NET
Other income, net, consisting primarily of management fees from Lithia
Properties, equity in the income of Lithia Properties and other non-dealer
service income, decreased 13.2% from $555,000 to $482,000 for the first nine
months of 1996. This reduction was primarily due to a non-recurring lawsuit
recovery in the prior period.
1995 COMPARED TO 1994
REVENUES
Revenue increased 4.4% to $114.2 million in 1995 from $109.4 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 6.1% to $16.9 million in
1995 compared to $15.9 million in 1994, primarily due to an increase in revenues
derived from service department maintenance and repairs.
GROSS PROFIT
Gross profit (on the LIFO Method) increased 10.3% in 1995 to $21.1 million
from $19.1 million in 1994. Gross profit margin increased from 17.5% to 18.4% 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 cost of sales.
Gross profit (on the FIFO Method) increased 4.6% in 1995 to $20.6 million
from $19.7 million in 1994. Gross profit margin, at 18.1%, 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 used vehicles and parts and
service sales.
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 revenue 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, NET
The Company's interest expense, net, in 1995 increased 41.6% to $1.2 million
from $855,000 in 1994. The increase was due primarily to an increase in the
Company's average loan balances in 1995
31
<PAGE>
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 the Principal Owners incurred
during the period.
OTHER INCOME, NET
Other income, net, consisting primarily of management fees from Lithia
Properties, equity in the income of Lithia Properties and other non-dealer
service income, increased 14.7% from the prior year. This increase is
attributable primarily to receipt of a judgment in a lawsuit brought by the
Company.
1994 COMPARED TO 1993
REVENUES
Revenues increased 18.6% to $109.4 million in 1994 as compared with $92.2
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 increased 10.3%).
The Company's other operating revenue increased 8.9% to $15.9 million in
1994 compared to $14.6 million in 1993, primarily as a result of an increase in
revenues derived from the Company's parts and service operations.
GROSS PROFIT
Gross profit (on the LIFO Method) increased 9.4% to $19.1 million in 1994
from $17.5 million in 1993. Gross profit margin decreased to 17.5% in 1994
compared to 18.9% in 1993. The decrease in gross profit margin occurred in all
operating segments.
Gross profit (on the FIFO Method) increased 9.4% to $19.7 million in 1994
from $18.0 million in 1993. Gross profit margin decreased to 18.0% in 1994
compared to 19.5% in 1993. The decrease 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 volume 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.
INTEREST EXPENSE, NET
The Company's interest expense, net, decreased 26.2% to $855,000 in 1994
from $1.2 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, consisting primarily of management fees
derived from Lithia Properties, equity in the income of Lithia Properties and
other non-dealer service income, increased 48.6% to $902,000. This increase is
attributable to an increase in equity in the earnings of Lithia Properties 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.
32
<PAGE>
The Company currently has a credit facility with U.S. Bank, giving the
Company access to an aggregate of approximately $37.1 million of credit for
various purposes. The principal component of the credit facility is the 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 September 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 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.
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 0.75% (9.0% at September 30, 1996). See Note 5 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 September 30,
1996).
The credit facility also includes the 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 September 30, 1996, there were no borrowings under the Capital Line.
The Company had $27.3 million of debt outstanding at September 30, 1996,
consisting of $3.2 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,
$13.5 million in variable-rate borrowings under its credit facility, $3.0
million to finance in-house vehicle sales, and $6.5 million outstanding on
vehicles leased to others.
Capital expenditures, exclusive of acquisitions, were $524,000 in 1995 and
$274,000 for the first nine months of 1996. The principal capital expenditures
in 1995 and the first nine 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
Acquisitions, all anticipated prior to February 1997. Acquisition costs are
estimates as the actual purchase prices will depend on inventory levels at each
acquired dealership upon closing. Estimates assume the purchase of used vehicles
at each store location and the purchase of the Linder Honda facility in 1997.
<TABLE>
<CAPTION>
TOTAL
ESTIMATED
ACQUISITIONS PURCHASE PRICE
--------------
<S> <C>
Melody Toyota and Kia......................... $ 6,625,000
Roberts Dodge................................. $ 7,940,000
Linder Honda.................................. $ 5,315,000
</TABLE>
The Company anticipates that it will be able to satisfy its cash
requirements through December 1998, including its currently anticipated growth,
primarily with cash flow from operations,
33
<PAGE>
borrowings under the Flooring Line and the Company's other lines of credit and
the proceeds of this Offering. However, if acquisition opportunities exceed
current projections, further capital could be required. See "Risk
Factors--Availability and Cost of Capital."
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's 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 for
the quarterly periods presented. This presentation should be read in conjunction
with the audited and unaudited combined 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.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1995 1995 1995 1995 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Sales:
New vehicles.................. $ 12,241 $ 12,840 $ 14,743 $ 13,453 $ 14,817 $ 16,665 $ 16,524
Used vehicles................. 10,717 10,278 12,251 10,815 13,239 15,156 15,075
Other operating revenues...... 4,160 4,160 4,532 4,006 4,390 4,859 4,841
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total sales..................... 27,118 27,278 31,526 28,274 32,446 36,680 36,440
Cost of sales................... 22,264 22,369 25,734 22,765 26,965 30,705 29,636
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................... 4,854 4,909 5,792 5,509 5,481 5,975 6,804
Selling, general and
administrative................. 3,895 3,961 4,309 4,570 4,517 4,797 5,160
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income................ 959 948 1,483 939 964 1,178 1,644
Other income (expense), net..... 165 (203) (91) (47) (145) (94) (116)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest....................... $ 1,124 $ 745 $ 1,392 $ 892 $ 819 $ 1,084 $ 1,528
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1995 1995 1995 1995 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles.................. 45.1% 47.1% 46.8% 47.6% 45.7% 45.4% 45.3%
Used vehicles................. 39.6 37.7 38.9 38.3 40.8 41.3 41.4
Other operating revenues...... 15.3 15.2 14.3 14.1 13.5 13.3 13.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................... 82.1 82.0 81.6 80.5 83.1 83.7 81.3
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................... 17.9 18.0 18.4 19.5 16.9 16.3 18.7
Selling, general and
administrative................. 14.4 14.5 13.7 16.2 13.9 13.1 14.2
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income................ 3.5 3.5 4.7 3.3 3.0 3.2 4.5
Other income (expense), net..... 0.6 (0.8) (0.3) (0.1) (0.5) (0.2) (0.3)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income before minority
interest....................... 4.1% 2.7% 4.4% 3.2% 2.5% 3.0% 4.2%
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
34
<PAGE>
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 adopted January 1, 1996 requires "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." The
adoption of SFAS 121 did 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
is in effect for fiscal years beginning after December 15, 1995.
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 $200
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 6.1% and
15.7%, 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, but 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.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLES SALES
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
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 15.2 16.2 17.5 18.5
Used vehicle sales revenue.......................... $ 114.0 $ 126.3 $ 147.9 $ 177.5 $ 203.6
</TABLE>
- ------------------------
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, the average
dealership's revenue consisted of 58.6% new vehicle sales, 29.0% used vehicle
sales and 12.4% other products and services. However, as a result of intense
competition for new vehicle sales, the typical dealership currently generates
substantially all of its profits from the sale of used vehicles and finance and
insurance products, as well as revenues derived from the dealership's parts and
service departments.
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 generated on average between 12.9% and 14.1% gross profit
margin and between 1.0% and 1.6% pre-tax profit margin, on sales.
35
<PAGE>
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. Such leases bring the consumer back to the new vehicle market sooner
than if the purchase had been financed through longer-term debt financing and
provide new vehicle dealerships with a steady source of late-model, off-lease
vehicles for their used vehicle inventory. Vehicle leases also enable the parts
and service departments within each dealership to provide repair services under
factory warranty coverage for the term of the lease. 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.
automobile manufacturers to imported vehicles forced many dealerships 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 more than 36,000 dealerships in 1960 to approximately 22,000 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.
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
dealer networks through consolidating their franchised dealerships. 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.
36
<PAGE>
BUSINESS
GENERAL
Lithia Motors is the largest retailer of new and used vehicles in Southwest
Oregon, offering 15 domestic and imported makes of new automobiles and light
trucks at seven locations. As an integral part of its operations, the Company
arranges related financing and insurance and sells parts, service and ancillary
products. Most of the Company's operations are currently located in Medford,
Oregon, where it has a market share of over 40%. The Company has grown primarily
by successfully acquiring and integrating dealerships and by obtaining new
dealer franchises. The Company recently acquired Melody Toyota and Kia in
Vacaville, California and has entered into agreements to acquire Roberts Dodge
in Eugene, Oregon and Linder Honda in Salinas, California. The Company's
strategy is to become a leading acquiror of dealerships in medium-sized markets
in the western United States.
The Company was founded in 1946 and its 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 the FIFO
Method) was 18.1% and its pre-tax profit margin before minority interest (on the
FIFO Method) was 3.2%, versus 12.9% and 1.4%, respectively, for the industry.
For the nine months ended September 30, 1996, such gross profit margin for the
Company was 17.2% and its pre-tax profit margin before minority interest was
3.2%.
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. At its seven locations, the Company offers, collectively, 15 makes of
new vehicles including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda,
Saturn, Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki, Kia 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 ratio of used vehicles to new vehicles sold of 1.89-to-1,
compared to an industry average of approximately 1.25-to-1. 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 it 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) increase
ancillary product sales to improve overall profitability. 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 sells
37
<PAGE>
accompanying ancillary products and services. In 1995, the Company arranged
financing for 59% of its new vehicle sales and 69% of its used vehicle sales,
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 cash management.
Each dealership is managed as a profit center by a trained and experienced
general manager who has primary responsibility for decisions relating to
inventory, advertising, pricing and personnel. The Company compensates its
general managers and department managers based on the profitability of their
dealerships and departments, respectively, rather than on sales volume. Senior
management utilizes computer-based management information systems to monitor
each dealership's sales, profitability and inventory on a daily basis and to
identify areas requiring improvement. The Company believes the application of
its professional management practices provides it with a competitive advantage
over many dealerships and is critical to its ability to achieve levels of
profitability superior to industry averages.
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 personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. The Company recently implemented an innovative customer-oriented
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 within 90 minutes for
a vehicle purchase, (iv) provide a 10-day/500-mile "no questions asked" right of
exchange on any used vehicle sold, (v) provide a warranty on all used vehicles
sold for 60 days/3,000 miles and (vi) make a $20 donation to a local charity or
educational organization for every vehicle sold. 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 seek dealerships or dealer groups that, among other criteria, possess
either the sole franchise of a major manufacturer or a significant share of new
vehicle sales in each targeted market. 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 dealership 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 the
dealerships that fit its acquisition criteria will be located in medium-sized
markets. However, the Company may consider acquisitions of dealer groups with
stores in larger metropolitan markets if such groups are well managed and
profitable.
Upon completing an acquisition, the Company immediately implements its
operating strategy, which includes selling more used vehicles, increasing
finance and insurance revenues 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 senior management, as
well as the dealership's 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 the 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,
38
<PAGE>
experienced dealership organizations. The Company believes that its senior
management team has gained considerable experience over the past five years in
acquiring dealerships and implementing its operating strategy to improve the
performance and profitability of such dealerships following the acquisition. The
Company acquired Medford Pontiac, Mazda and Jeep/Eagle franchises and its Grants
Pass Dodge franchise in 1991 and was awarded its Medford Saturn franchise in
1992. The Company is continuing its expansion in Oregon and has recently signed
a purchase agreement to acquire Roberts Dodge, the sole Dodge franchise in
Eugene, Oregon. The Company has also begun expansion into selected markets in
California with the acquisition of Melody Toyota and Kia in Vacaville in 1996
and the signing of a purchase agreement to acquire Linder Honda, the sole Honda
franchise in Salinas.
DEALERSHIP OPERATIONS
The Company owns and operates six dealership locations in Southwest Oregon,
five in Medford and one in Grants Pass, Oregon and has recently acquired a
dealership in Vacaville, California. Each of the Company's dealerships sells 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 15 makes of new vehicles,
including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda, Saturn, Mazda,
Pontiac, Lincoln, Mercury, Isuzu, Suzuki, Kia 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
each 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 based on the profitability of their respective
departments.
NEW VEHICLE SALES. The Company sells 15 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 generating
revenues 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.
<TABLE>
<CAPTION>
1995 PERCENTAGE OF
MANUFACTURER NEW VEHICLE SALES
- --------------------------------------------------------------------------- -------------------
<S> <C>
Chrysler (Chrysler, Plymouth, Dodge, Jeep/Eagle)........................... 43.5%
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
Kia........................................................................ N/A*
Volkswagen................................................................. N/A *
-----
100.0 %
</TABLE>
- ------------------------
* Franchise acquired by the Company in 1996.
39
<PAGE>
The following table sets forth the sales and gross profit margins (on the FIFO
Method) for new vehicle sales for the periods presented.
<TABLE>
<CAPTION>
NEW VEHICLE SALES
-------------------------------------------------------------------------
NINE MONTHS ENDED
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
--------- --------- --------- --------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Units............................. 1,890 2,106 2,464 2,744 2,715 2,424
Sales............................. $ 28,946 $ 34,479 $ 42,663 $ 51,154 $ 53,277 $ 48,006
Gross profit margin*.............. 9.6% 12.2% 12.8% 12.5% 12.8% 12.2%
</TABLE>
- ------------------------
* On the FIFO Method
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.
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 sells vehicles from the factory to a fleet purchaser utilizing
(i) "book only" fleet sales in which the Company never takes title of a vehicle;
or (ii) fleet sales which pass through the Company's inventory. The Company
realizes substantially less profit per vehicle on fleet sales than it does
through retail sales. For "book only" fleet sales, only the net revenue 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 generating revenues of $44.1 million, which
constituted 39% of the Company's total revenue. The Company has made a strategic
commitment to emphasize used vehicle sales. As part of its focus on used vehicle
sales, the Company retains a full-time used vehicle manager at each of its
locations and has allocated additional financing and display space to this
effort. The Company 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 specified
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 the FIFO Method) on used vehicle
40
<PAGE>
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 September 1996. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
USED VEHICLE SALES
-------------------------------------------------------------------------
NINE MONTHS ENDED
1991 1992 1993 1994 1995 SEPTEMBER 30, 1996
--------- --------- --------- --------- --------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Retail units...................... 2,375 2,640 3,076 3,372 3,302 2,853
Retail sales...................... $ 18,762 $ 24,228 $ 29,680 $ 36,389 $ 36,997 $ 35,894
Retail gross margin*.............. 14.9% 16.2% 13.9% 13.5% 13.2% 12.8%
Wholesale units................... 1,028 1,294 1,642 1,834 1,842 1,803
Wholesale sales................... $ 4,607 $ 5,702 $ 5,306 $ 5,999 $ 7,064 $ 7,576
Wholesale gross margin*........... 1.9% 3.7% 3.0% 3.0% 2.4% 2.0%
Total units....................... 3,403 3,934 4,718 5,206 5,144 4,656
Total sales....................... $ 23,369 $ 29,930 $ 34,986 $ 42,381 $ 44,061 $ 43,470
Total gross margin*............... 12.3% 13.8% 12.3% 12.0% 11.4% 10.0%
</TABLE>
- ------------------------
* On the FIFO Method.
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 vehicle 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 vehicles 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
of the 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.
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. Because of the high profit margins which are typically generated
through sales of F&I products, the Company employs more than one F&I manager at
its dealership locations. 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 vehicle it sells and has financed or arranged financing for 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, whenever possible, that maximize the Company's
revenues on the sale of the loan or lease to such source. The interest rates
available and the required
41
<PAGE>
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 F&I managers have
close working relationships with 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. A credit check
generally occurs within minutes while the customer remains at the dealership,
allowing the sales manager to assist the customer in making a fully informed
decision regarding the terms of the transaction.
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.
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. In addition to arranging for vehicle
financing, the Company's F&I managers also 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
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 extended service 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 $550,000 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.
The Company also owns and operates two automobile rental facilities, Avis
Rent-A-Car and Discount Auto & Truck Rental, Inc., both located in Medford,
Oregon.
PARTS AND SERVICE, BODY AND PAINT 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
dealerships but may also service other vehicles. In 1995, the Company's parts
and service operations generated $11.0 million in revenues, or 9.5% of total
revenues, at a gross profit margin of 45% (on the FIFO Method). 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-up on a part is based upon the cost and availability of such part.
42
<PAGE>
The parts and service business is relatively stable and provides an
important recurring revenue stream to the Company's dealerships. The Company
markets its parts and service products by notifying the owners of vehicles
purchased at its dealerships when their vehicles are due for periodic service.
This practice encourages preventive maintenance rather than post-breakdown
repairs. To a limited extent, revenues from the parts and service department are
countercyclical to new car sales as owners repair existing vehicles rather than
buy new vehicles. The Company believes this helps mitigate the affects of a
downturn in the new vehicle sales cycle.
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 body and paint shop since 1970. The
body and paint shop services all of the Company's dealerships located in
southwest Oregon, other dealerships in the area that do not own a body and paint
shop, and a number of major automotive casualty insurance companies that
contract with the Company to perform insurance repairs. The Company is
constructing 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.
See "Properties" and "Certain Relationships and Related Transactions."
SALES AND MARKETING
The Company emphasizes customer satisfaction throughout its organization and
continually seeks to maintain its 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 within 90 minutes for a vehicle purchase, (iv) provide a
10-day/500-mile "no questions asked" right of exchange on any used vehicle sold,
(v) provide a 60-day/3,000-mile warranty on all used vehicles sold and (vi) make
a $20 donation to a local charity or educational organization for every vehicle
sold. 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' advertising, particularly in the
medium-sized markets in which the Company has been the only representative of a
manufacturer.
The Company's marketing efforts focus on a wide range of potential buyers.
The Company offers a variety of new and used cars and light trucks at a wide
range of prices and with various 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
43
<PAGE>
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 management information
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
more 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 is automatically transferred at the end of
each weekday to a central collateral account at 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
44
<PAGE>
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), Kia America Motors, Inc. (Kia) and
Volkswagen of America (Volkswagen) (herein collectively referred to as
"manufacturers").
The typical automobile 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 (except for Saturn) 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 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, 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 a 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. The Company has
endeavored to obtain the approval of each of the aforementioned manufacturers to
proceed with the Restructuring and to conduct the Offering. To date, only
Chrysler, Toyota, Honda and Mazda have indicated that they will consent to the
Restructuring and the Offering. The consent of the other manufacturers is not a
condition to this Offering, and there can be no assurance that the Company will
be able to obtain such consents. 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
45
<PAGE>
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 but
one 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.
The Company also may face increased competition from certain automobile
"superstores," such as CarMax, 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 federal regulatory agencies, such as OSHA and the
EPA 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.
46
<PAGE>
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, 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 September 30, 1996, the Company employed approximately 350 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 Linder Honda, a dealership the Company is
intending to purchase, are bound by a collective bargaining agreement. The
purchase agreement with Linder Honda does not require the Company to assume the
collective bargaining agreement. See "Recent and 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
$200,000. See "Certain Relationships and Related Transactions -- Lease and
Purchase of Real Estate from Lithia Properties."
The Company and its various dealerships and other facilities occupy an
aggregate of approximately 35 acres of land, providing approximately 258,000
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, the
approximate square footage at each facility and the acreage of each location.
All facilities are located in Medford, Oregon except for the Grants Pass Auto
Center, located in Grants Pass, Oregon and Melody Toyota and Kia, located in
47
<PAGE>
Vacaville, California. The Vacaville and the Avis Rent-A-Car facilities and
minor parcels of land are leased from third parties. All other facilities are
leased from Lithia Properties. The new body and paint facility and the vacant
parcel to be held for future expansion will be purchased by the Company from
Lithia Properties after the closing of the Offering.
<TABLE>
<CAPTION>
TOTAL
BUILDING/ TOTAL
DEALERSHIP/FACILITY SQUARE FT. LAND/ ACRES
- -------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
Lithia Motors............................................................. 5,255 0.51
Lithia Honda Pontiac Suzuki
Isuzu Volkswagen........................................................ 32,978 4.47
Lithia Toyota Lincoln Mercury............................................. 35,849 3.92
Lithia Dodge Chrysler Plymouth
Mazda Jeep/Eagle........................................................ 45,596 4.12
Saturn of Southwest Oregon................................................ 11,226 2.33
Grants Pass Auto Center (Dodge)........................................... 27,978 3.69
Lithia Toyota Kia of Vacaville............................................ 22,900 4.18
Lithia Body & Paint (1)................................................... 20,508 0.95
Lithia Body & Paint (2)................................................... 41,729 5.01
Thrift Auto Supply........................................................ 11,230 0.46
Discount Auto & Truck Rental.............................................. 278 --
Cellular World............................................................ 1,850 --
Avis Rent-A-Car........................................................... 630 --
Vacant Parcel (3)......................................................... -- 5.32
</TABLE>
- ------------------------
(1) A new facility is under construction. The current facility will be absorbed
and utilized by the Lithia Dodge Chrysler Plymouth Mazda Jeep/Eagle
dealership.
(2) Under construction. To be occupied Spring 1997.
(3) Held for further development.
The following table sets forth information regarding the facilities of the
two proposed dealership acquisitions. See "Recent and Pending Acquisitions." The
Company intends to purchase the Roberts Dodge facility and lease the Linder
Honda facility from Lithia Properties.
<TABLE>
<CAPTION>
TOTAL TOTAL
BUILDING/ LAND/ TO BE
DEALERSHIP/FACILITY LOCATION SQUARE FT. ACRES PURCHASED/LEASED
- --------------------------------------- ---------------------- ----------- ----------- ------------------
<S> <C> <C> <C> <C>
Roberts Dodge Eugene, Oregon 24,996 3.68 Purchased
Linder Honda Salinas, California 17,446 3.24 Lease/Purchase
</TABLE>
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.
48
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Lithia are as follows:
<TABLE>
<CAPTION>
YEAR ELECTED OR
APPOINTED
DIRECTOR/EXECUTIVE
NAME AGE POSITION OFFICER
- ------------------------ --- --------------------------------------------------------------- ----------------
<S> <C> <C> <C>
Sidney B. DeBoer 53 Chairman, President, Chief Executive 1968
Officer and Secretary
M.L. Dick Heimann 53 Executive Vice President, Chief 1970
Operating Officer and Director
Brian R. Neill 42 Chief Financial Officer 1995
R. Bradford Gray 45 Vice President-Acquisitions 1995
</TABLE>
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,
Chief Operating Officer and Director 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
degree 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, 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 completing a course
of study with the NADA Dealer Candidate Academy.
R. BRADFORD GRAY. Mr. Gray has served as Vice President-Acquisitions of the
Company since 1995. From 1981 to 1995, he served in various capacities with the
Company, including 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 candidate has been asked to serve as director. 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 reimburse all directors for their reasonable out-of-pocket
expenses incurred in connection with their attendance at Board meetings.
49
<PAGE>
OTHER KEY PERSONNEL
All of the persons listed below have served the Company in these key
positions for over five years.
<TABLE>
<CAPTION>
YEARS WITH CURRENT
NAME AGE THE COMPANY POSITION
- --------------------------- --- ----------------- ----------------------------------------------------------------
<S> <C> <C> <C>
Stephen R. Philips......... 43 19 General Manager -- Lithia Toyota Lincoln Mercury
Burt Frederickson.......... 44 16 General Manager -- Saturn of Southern Oregon
Bryan DeBoer............... 30 7 General Manager -- Lithia Honda Pontiac Suzuki Isuzu Volkswagen
Don Jones, Jr.............. 33 7 General Manager -- Lithia Dodge Chrysler Plymouth Mazda
Jeep/Eagle
Dorothy Crockett........... 47 16 Comptroller
Bill Daves................. 53 15 Director of Human Resources, Training and Development
</TABLE>
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
------------------------ ALL OTHER
NAME AND POSITION YEAR SALARY BONUS (2) COMPENSATION
- ------------------------------------------------------------------ --------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
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)
</TABLE>
- ------------------------------
(1) For calendar year 1996, the officers shown in the table receive the
following annual salaries: Mr. DeBoer -- $359,600; Mr. Heimann -- $278,000;
and Mr. Gray -- $195,000.
(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 685,000 shares
of the Company's Class A Common Stock to be issued, terminates on April 4, 2006.
As of the date hereof, Incentive Options with respect to 439,085 shares of Class
A Common Stock are outstanding, constituting all of the Awards granted under the
Plan to date. An additional 245,915 shares are available for issuance under the
Plan. As of the date of this prospectus, options with respect to 85,940 shares
are exercisable.
50
<PAGE>
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
incentive stock 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 stock 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:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
- -------------------------------------------------------------- ----------------- --------------- ----------------
<S> <C> <C> <C>
Sidney B. DeBoer.............................................. 68,500 $ 3.32 April 4, 2001
M.L. Dick Heimann............................................. 68,500 3.32 April 4, 2001
R. Bradford Gray.............................................. 68,500 3.02 April 4, 2006
Brian R. Neill................................................ 54,800 3.02 April 4, 2006
</TABLE>
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 five 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 SHAREHOLDERS
The following table sets forth, as of September 30, 1996, and as adjusted to
reflect the sale of shares of the Company's Class A 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
51
<PAGE>
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.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
BEFORE THE OFFERING (1) AFTER THE OFFERING (1)
---------------------------------------------- ----------------------------------------------
CLASS A CLASS B CLASS A CLASS B
---------------------- ---------------------- ---------------------- ----------------------
NAME AND ADDRESS(2) NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT NUMBER PERCENT
- --------------------------------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lithia Holding Company, LLC(3)... -- --% 4,110,000 100% -- --% 4,110,000 100%
Sidney B. DeBoer(3).............. 54,800(4) 100% 4,110,000 100% 54,800(4) 2.2% 4,110,000 100%
M. L. Dick Heimann(3)............ 54,800(4) 100% -- --% 54,800(4) 2.2% -- --%
Brian R. Neill................... 20,550(5) 100% -- --% 20,550(5) 0.8% -- --%
R. Bradford Gray(3))............. -- --% -- --% -- --% -- --%
All directors and officers as a
group (4 persons)............... 130,150 100% 4,110,000 100% 130,150 5.2% 4,110,000 100%
<CAPTION>
PERCENT OF
VOTING
NAME AND ADDRESS(2) POWER
- --------------------------------- -------------
<S> <C>
Lithia Holding Company, LLC(3)... 94.3%
Sidney B. DeBoer(3).............. 94.3%
M. L. Dick Heimann(3)............ 0.1%
Brian R. Neill................... *%
R. Bradford Gray(3))............. --%
All directors and officers as a
group (4 persons)............... 94.3%
</TABLE>
- ------------------------------
* 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 persons can be reached c/o 360 E. Jackson Street, Medford, Oregon
97501.
(3) Lithia Holding's members consists of Messrs. DeBoer (58.1%), Heimann
(34.9%) and Gray (7.0%). 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 68,500 shares
of Class A Common Stock at an exercise price of $3.32 per share, 54,800 of
which are exercisable within 60 days of this Prospectus. See "Management --
Executive Compensation" and "-- 1996 Stock Incentive Plan."
(5) Mr. Neill holds an option to acquire 54,800 shares of Class A Common Stock
at $3.02 per share, 20,550 of which are exercisable within 60 days of the
date of this Prospectus. See "Management -- Executive Compensation" and "--
1996 Stock Incentive Plan."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPANY RESTRUCTURING AND INDEBTEDNESS TO EXECUTIVE OFFICERS
Lithia Motors 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. Philips have 0.01% and 19.99% interests,
respectively, in Lithia Toyota LLC, which is otherwise owned by Lithia Motors.
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., with the balance held by Lithia Motors.
Contemporaneously with the Offering, and pursuant to the Reorganization
Agreement, Lithia Motors and the foregoing affiliated entities will consummate a
restructuring which will result in each of the 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, M.L. Dick
Heimann and R. Bradford Gray 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
52
<PAGE>
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 bore interest at 9% per annum, payable
in ten equal annual installments beginning one year and ten days after demand by
the noteholders. The Dividend Notes were prepaid during 1996. On November 12,
1996, additional dividends totaling $2.0 million were declared in partial
payment of earnings realized in 1996. These funds permitted Messrs. DeBoer and
Heimann to capitalize Lithia TKV, Inc. to purchase Melody Toyota and Kia. 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 remaining undistributed taxable income of the Company and the affiliated
entities through the effective date of the Restructuring. Any final distribution
of earnings will be paid at or shortly after the closing of the Offering. The
Company will purchase Messrs. DeBoer's and Heimann's stock of Lithia TKV, Inc.
at their original cost 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. and the
purchase of Mr. Phillip's minority interest in Lithia Toyota, LLC (see "Company
Restructuring and Prior S Corporation Status") is expected to be approximately
$7.0 million, with the actual amount being dependent on the earnings of the
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 AND PURCHASE OF REAL ESTATE FROM LITHIA PROPERTIES
Substantially all of the real property on which the Company's businesses are
located (except the property on which Melody Toyota and Kia is operated) 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 $1.85
million, $1.89 million and $2.0 million in lease payments to Lithia Properties
during the years ended December 31, 1993, 1994 and 1995, respectively. For the
year ending December 31, 1996, lease payments will total $2.3 million which
includes $140,000 of lease payments on the Company's facilities in Grants Pass
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 lease payments of $1.75
million. Unlike prior years, the Company will be responsible for property taxes,
insurance and maintenance expenses commencing in 1997. The 1997 lease payments
are determined by a formula which sets the monthly payment at 1% of the fair
market value of the properties according to recent independent appraisals. 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 entitled U.S. CITY AVERAGE -- ALL ITEMS FOR ALL URBAN CONSUMERS
(base year 1982-84=100) published by the Bureau of Labor Statistics of the U.S.
Department of Labor. For a more complete description of the Company's
facilities, see "Business -- Properties."
Lithia Properties is constructing a new body and paint shop for use by the
Company which is scheduled to be completed in Spring 1997. The Company has
agreed to purchase the facility and improvements together with a 5.3 acre parcel
held for future development in Medford, Oregon, at Lithia Properties' cost,
including interest carrying costs, upon closing of the Offering. The total
purchase price for these properties is estimated at $2.7 million.
The Company has generally chosen to lease its facilities in the past. It may
continue this practice in the future and assign any rights it acquires to
purchase real estate in connection with the acquisition of dealerships to Lithia
Properties or others. No future transfers to or leases with Lithia Properties
will be undertaken without the unanimous approval of the independent directors
on the Company's Board of Directors and a determination by such independent
directors that such transactions are the equivalent of a negotiated arm's-length
transaction with a third party.
53
<PAGE>
CONSTRUCTION OF THE NEW BODY AND PAINT SHOP
The Company will purchase from Lithia Properties the new body and paint shop
currently under construction. Construction costs are estimated to total
approximately $2.0 million. Lithia Properties has retained, and after purchase
of the facility the Company will continue to retain, Mark DeBoer Construction,
Inc. as the general contractor for the project. Mark DeBoer, the owner of Mark
DeBoer Construction, Inc., is the son of Sidney B. DeBoer and is one of the
members of Lithia Properties. The general contractor fee is the lesser of 8% of
the construction costs or $128,000, an arrangement the Company believes is fair
in comparison with fees negotiated with independent third parties.
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, and will not be
renewed.
GUARANTEE OF LITHIA PROPERTIES INDEBTEDNESS; SHORT-TERM LOAN FROM LITHIA
PROPERTIES
The Company has guaranteed and has committed to guarantee certain
indebtedness of Lithia Properties incurred in connection with the purchase or
refinancing of real property which secures mortgage loans. All of the property
securing these loans are occupied by the Company under long-term leases with
Lithia Properties. The loans will have a total principal amount of approximately
$15.0 million with interest rates from 8.25% to 10.0% and remaining terms of
from two years to 12 years.
In September 1996, the Company borrowed $3.0 million from Lithia Properties
on an unsecured basis at prime plus 0.50%. The loan was repaid in October 1996.
54
<PAGE>
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 4,110,000 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 2,500,000 shares
(2,875,000 shares if the Underwriters' over-allotment option is exercised) of
Class A Common Stock and 4,110,000 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 shareholders holding 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, 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 entitle 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
55
<PAGE>
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
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 94.3% of the voting power of the outstanding Common Stock (or
93.5% if the underwriters' over-allotment option is exercised), 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 -- Concentration of Voting Power;
Anti-Takeover Provisions."
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.
56
<PAGE>
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 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: (i) for any breach of the director's duty of loyalty to the Company
or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for any
unlawful distribution to shareholders; or (iv) 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 Articles provide that the Company shall
indemnify directors and officers against certain liabilities that may arise by
reason of their status or service as a director or officer 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 and registrar for the Class A Common Stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 2,500,000
shares of Class A Common Stock (and up to 375,000 additional shares that may be
sold pursuant to the Underwriters' over-allotment option) and 4,110,000 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 4,110,000 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
Securities Act, or, in certain circumstances, in private transactions outside of
any public trading market.
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 (25,000 shares, assuming the issuance of 2,500,000 shares
of Class A Common Stock in this Offering) 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 Class A 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 4,110,000
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 685,000 shares of Class A Common Stock
for issuance pursuant to the Company's 1996 Stock Incentive Plan. Of this
amount, 439,085 shares are subject to outstanding options, 84,940 of which are
exercisable as of the date of this Prospectus. The Company intends to file a
registration statement under the Securities Act to register shares to be issued
pursuant to the Plan. Such registration statement is expected to be filed
promptly 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. 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, as 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.
58
<PAGE>
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:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
-----------
<S> <C>
UNDERWRITER
- -----------------------------------------------------------------------------------------------------
Furman Selz LLC......................................................................................
Dain Bosworth Incorporated...........................................................................
EVEREN Securities, Inc...............................................................................
-----------
Total.............................................................................................. 2,500,000
-----------
-----------
</TABLE>
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. 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, the Company's 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 375,000
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-allotments, 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.
59
<PAGE>
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
Securities Exchange Act of 1934, 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 Class A Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "LMTR."
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.
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, Portland, Oregon.
Certain legal matters will be passed upon for the Underwriters by Milbank,
Tweed, Hadley & McCloy, Los Angeles, California.
EXPERTS
The combined financial statements of Lithia Motors, Inc. and Affiliated
Companies as of December 31, 1994 and 1995, and September 30, 1996 and for each
of the years in the three-year period ended December 31, 1995 and for the nine
month period ended September 30, 1996, and the combined financial statements of
Roberts Dodge, Inc. and Affiliated Company 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
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
The financial statements of Melody Vacaville, Inc. and 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,
60
<PAGE>
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.
61
<PAGE>
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
Lithia Motors, Inc. and Affiliated Companies
Report of Independent Auditors'.......................................................................... F-2
Combined Balance Sheets.................................................................................. F-3
Combined Statements of Operations........................................................................ F-4
Combined Statements of Changes in Owners' Equity......................................................... F-5
Combined Statements of Cash Flows........................................................................ F-6
Notes to Combined Financial Statements................................................................... F-7
Roberts Dodge, Inc. and Affiliated Company
Report of Independent Auditors'.......................................................................... F-21
Combined Balance Sheets.................................................................................. F-22
Combined Statements of Operations........................................................................ F-23
Combined Statements of Changes in Owners' Equity......................................................... F-24
Combined Statements of Cash Flows........................................................................ F-25
Notes to Combined Financial Statements................................................................... F-26
Sam Linder, Inc.
Report of Independent Auditors'.......................................................................... F-31
Balance Sheets........................................................................................... F-32
Statements of Operations and Accumulated Deficit......................................................... F-33
Statements of Cash Flows................................................................................. F-34
Notes to Financial Statements............................................................................ F-35
Melody Vacaville, Inc.
Report of Independent Auditors'.......................................................................... F-41
Balance Sheets........................................................................................... F-42
Statements of Operations................................................................................. F-43
Statements of Stockholders' Deficit...................................................................... F-44
Statements of Cash Flows................................................................................. F-45
Notes to Financial Statements............................................................................ F-46
</TABLE>
F-1
<PAGE>
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 September 30,
1996, and the related combined statements of operations, changes in owners'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1995 and for the nine-month period ended September 30, 1996. 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 September 30,
1996, and the results of their operations and their cash flows for the years in
the three-year period ended December 31, 1995 and for the nine-month period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
Portland, Oregon
October 25, 1996, except
as to note 17(d), which is
as of November 10, 1996
F-2
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, 1996
-------------------- --------------------
1994 1995 ACTUAL PROFORMA
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(NOTES 10
AND 17)
Current assets:
Cash and cash equivalents........................................ $ 6,952 $ 9,350 $ 9,822 $ 9,822
Trade receivables................................................ 1,289 1,744 2,580 2,580
Lease receivables, current portion............................... 125 140 193 193
Inventories...................................................... 19,132 17,700 15,517 15,517
Vehicles leased to others, current portion....................... 3,201 3,462 4,099 4,099
Notes receivable................................................. 78 127 54 54
Prepaid expenses and other....................................... 306 273 721 721
Deferred income taxes............................................ -- -- -- 1,430
--------- --------- --------- ---------
Total current assets........................................... 31,083 32,796 32,986 34,416
--------- --------- --------- ---------
Property, plant and equipment, net................................. 3,070 3,234 1,269 1,269
Vehicles leased to others, less current portion.................... 1,724 1,864 2,207 2,207
Other assets:
Lease receivables, less current portion.......................... 88 310 264 264
Notes receivable................................................. 88 146 253 253
Investment in affiliate.......................................... 424 491 491 491
Other noncurrent assets.......................................... 182 381 452 452
--------- --------- --------- ---------
782 1,328 1,460 1,460
--------- --------- --------- ---------
$ 36,659 $ 39,222 $ 37,922 $ 39,352
--------- --------- --------- ---------
--------- --------- --------- ---------
LIABILITIES, MINORITY INTEREST AND OWNERS' EQUITY
Current liabilities:
Notes payable.................................................... $ 390 $ 625 $ 3,044 $ 3,044
Flooring notes payable........................................... 21,218 19,590 13,495 13,495
Current maturities of long-term debt............................. 1,621 2,085 2,713 2,713
Trade payables................................................... 846 1,455 1,387 1,387
Accrued liabilities.............................................. 974 1,280 2,401 2,401
--------- --------- --------- ---------
Total current liabilities...................................... 25,049 25,035 23,040 23,040
Long-term debt, less current liabilities........................... 6,748 10,743 8,010 12,211
Deferred revenue................................................... 1,462 1,782 2,555 2,555
Other long-term liabilities........................................ 61 62 -- --
Deferred income taxes.............................................. -- -- -- 598
--------- --------- --------- ---------
Total liabilities.............................................. 33,320 37,622 33,605 38,404
--------- --------- --------- ---------
Commitments and contingency
Minority interest.................................................. 536 749 1,237 --
Owners' equity:
Common stock..................................................... 751 801 801 948
Retained earnings................................................ 2,052 50 2,279 --
--------- --------- --------- ---------
Total owners' equity........................................... 2,803 851 3,080 948
--------- --------- --------- ---------
$ 36,659 $ 39,222 $ 37,922 $ 39,352
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ------------------------
1993 1994 1995 1995 1996
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Sales:
Vehicle.............................................. $ 77,649 $ 93,535 $ 97,338 $ 73,070 $ 91,476
Service, body, parts and other....................... 14,590 15,888 16,858 12,751 14,090
--------- ----------- ----------- ----------- -----------
Net sales........................................ 92,239 109,423 114,196 85,821 105,566
--------- ----------- ----------- ----------- -----------
Cost of sales:
Vehicle.............................................. 67,092 81,141 83,366 64,191 80,376
Service, body, parts and other....................... 7,688 9,183 9,766 6,176 6,930
--------- ----------- ----------- ----------- -----------
Cost of sales.................................... 74,780 90,324 93,132 70,367 87,306
--------- ----------- ----------- ----------- -----------
Gross profit..................................... 17,459 19,099 21,064 15,454 18,260
Selling, general and administrative.................... 15,122 15,174 16,735 12,064 14,474
--------- ----------- ----------- ----------- -----------
Operating income................................. 2,337 3,925 4,329 3,390 3,786
--------- ----------- ----------- ----------- -----------
Other income (expense):
Equity in income of affiliate........................ 54 55 67 25 40
Interest income...................................... 216 99 179 102 176
Interest expense..................................... (1,374) (954) (1,390) (797) (1,013)
Other, net........................................... 553 847 968 530 442
--------- ----------- ----------- ----------- -----------
(551) 47 (176) (140) (355)
--------- ----------- ----------- ----------- -----------
Income before minority interest.................. 1,786 3,972 4,153 3,250 3,431
Minority interest...................................... (233) (458) (778) (597) (627)
--------- ----------- ----------- ----------- -----------
Net income....................................... $ 1,553 $ 3,514 $ 3,375 $ 2,653 $ 2,804
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Pro forma net income data (unaudited):
Income before income taxes and minority interest, as
reported............................................ $ 1,786 $ 3,972 $ 4,153 $ 3,250 $ 3,431
Pro forma income taxes............................... (697) (1,521) (1,598) (1,254) (1,335)
--------- ----------- ----------- ----------- -----------
Pro forma net income before minority interest........ 1,089 2,451 2,555 1,996 2,096
Pro forma minority interest.......................... (142) (283) (479) (368) (383)
--------- ----------- ----------- ----------- -----------
Pro forma net income................................. $ 947 $ 2,168 $ 2,076 $ 1,628 $ 1,713
--------- ----------- ----------- ----------- -----------
--------- ----------- ----------- ----------- -----------
Pro forma net income per share....................... $ 0.43 $ 0.34 $ 0.36
Shares used in computing pro forma net income per
share............................................... 4,819 4,819 4,819
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1992............................................. 4.7 $ 799 $ 437 $ 1,236
Net income............................................................. -- -- 1,553 1,553
Issuance of common stock:
Lithia Rentals, Inc.................................................. 1.0 25 -- 25
Dividends.............................................................. -- -- (1,630) (1,630)
--------- ----- --------- ---------
Balance, December 31, 1993............................................. 5.7 824 360 1,184
Net income............................................................. -- -- 3,514 3,514
Issuance of common stock:
Lithia Rentals, Inc.................................................. .7 50 -- 50
Discount Auto and Truck Rental, Inc.................................. 1.0 20 -- 20
Cancellation of common stock:
Paul Phillips, Inc................................................... (.5) (143) 143 --
Dividends.............................................................. -- -- (1,965) (1,965)
--------- ----- --------- ---------
Balance, December 31, 1994............................................. 6.9 751 2,052 2,803
Net income............................................................. -- -- 3,375 3,375
Issuance of common stock:
Discount Auto and Truck Rental, Inc.................................. 2.5 50 -- 50
Dividends.............................................................. -- -- (5,377) (5,377)
--------- ----- --------- ---------
Balance, December 31, 1995............................................. 9.4 801 50 851
Net income............................................................. -- -- 2,804 2,804
Issuance of common stock pursuant to restructuring..................... 4,109.9 -- -- --
Dividends.............................................................. -- -- (575) (575)
--------- ----- --------- ---------
Balance, September 30, 1996............................................ 4,119.3 $ 801 $ 2,279 $ 3,080
--------- ----- --------- ---------
--------- ----- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income...................................................... $ 1,553 $ 3,514 $ 3,375 $ 2,653 $ 2,804
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization................................. 1,803 1,954 1,907 1,222 1,218
(Gain) loss on sale of assets................................. (184) (146) (305) (126) 180
Minority interest in income................................... 233 458 778 597 627
Equity in income of affiliate................................. (54) (55) (67) (25) (40)
Changes in operating assets and liabilities:
Trade and lease receivables................................. (682) 1,659 (692) (570) (843)
Inventories................................................. (5,177) (2,085) 1,432 6,015 2,183
Other current assets........................................ 13 (116) 30 60 (448)
Prepaid expenses and other.................................. (59) (20) (277) (150) (71)
Trade payables.............................................. 561 (1,793) 609 (56) (68)
Accrued liabilities......................................... 6 1,002 306 389 1,121
Other long-term liabilities................................. 153 358 321 241 711
Proceeds from sale of vehicles leased to others............... 4,254 5,239 4,757 3,391 3,909
Expenditures for vehicles leased to others.................... (6,963) (6,764) (6,308) (5,158) (5,726)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) operating activities....... (4,543) 3,205 5,866 8,483 5,557
--------- --------- --------- ----------- ---------
Cash flows from investing activities:
Notes receivable issued......................................... (135) (142) (190) (159) (488)
Principal payments received on notes receivable................. 142 309 83 86 454
Principal payments received on notes-related party.............. 201 -- -- -- --
Proceeds from sale of assets.................................... -- 3 10 1 176
Capital expenditures............................................ (108) (164) (524) (235) (274)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) investing activities....... 100 6 (621) (307) (132)
--------- --------- --------- ----------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on flooring notes payable........... 5,443 2,170 (1,628) (9,207) (6,095)
Net borrowings (repayments) on notes payable.................... 1,527 (2,312) 235 (390) 2,419
Principal payments on long-term debt............................ (3,244) (9,084) (8,070) (3,956) (11,265)
Proceeds from issuance of long-term debt........................ 3,973 11,300 12,529 4,966 10,272
Proceeds from issuance of common stock and minority interest.... 25 (73) 50 50 --
Proceeds from minority interest share receivable................ 15 144 142 142 320
Dividends and distributions..................................... (1,802) (2,263) (6,105) (2,447) (604)
--------- --------- --------- ----------- ---------
Net cash provided by (used in) financing activities....... 5,937 (118) (2,847) (10,842) (4,953)
--------- --------- --------- ----------- ---------
Net increase (decrease) in cash and cash equivalents...... 1,494 3,093 2,398 (2,666) 472
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 $ 4,286 $ 9,822
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest........................ $ 1,374 $ 954 $ 1,390 $ 797 $ 996
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
Supplemental schedule of noncash financing activities:
Cancellation of common stock.................................... $ -- $ 143 $ -- $ -- $ --
Debt extinguished upon transfer of property..................... -- -- -- -- 1,112
Issuance of notes receivable -- minority interest............... -- -- 678 -- --
--------- --------- --------- ----------- ---------
--------- --------- --------- ----------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-6
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Lithia Motors, Inc. and Affiliated Companies (the Company) operate in
Medford and Grants Pass, Oregon. The Company serves customers located
principally in southern Oregon. 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. At its six
locations, the Company offers, collectively, 14 makes of new vehicles including
Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda, Saturn, Mazda, Pontiac,
Lincoln, Mercury, Isuzu, Suzuki and Volkswagen.
PRINCIPLES OF COMBINATION
The accompanying combined financial statement reflects 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 "as if" pooling of interest basis of
accounting. The following entities are affiliated through common ownership and
management:
<TABLE>
<S> <C>
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
</TABLE>
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-7
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(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, PLANT AND EQUIPMENT
Property and equipment are stated at cost and are being depreciated over
their estimated useful lives principally on the straight-line basis. The range
of estimated useful lives are as follows:
<TABLE>
<S> <C>
Building of improvements 40 years
Service and equipment 5 to 10 years
Furniture, signs and fixtures 5 to 10 years
</TABLE>
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 payable by the individual stockholders rather than the
corporation.
The Company's S Corporation status will terminate immediately prior to the
effectiveness of the proposed initial public offering of its common stock
discussed in note 17. At this time the Company will establish its net deferred
tax asset and record an accompanying credit to income tax expense. The
accompanying statements of operations for the year ended December 31, 1995, and
the nine-months ended September 30, 1995 and 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-8
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(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 11) 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 initial public
offering price. In addition, the calculation includes 368 shares deemed to be
outstanding representing the number of shares (at the initial public offering
price) sufficient to fund estimated S Corporation distributions subsequent to
September 30, 1996.
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.
Advertising expense was $1,002, $946, $1,136, $899 and $929 for the years ended
December 31, 1993, 1994, and 1995 and the nine-month periods ended September 30,
1995 and 1996.
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.
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 the
date of the financial statements and revenues and expenses during the reporting
period. 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.
F-9
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Finance fees represent revenue earned by the Company for notes placed with
financial institutions in connection with customer vehicle financing. Finance
fees are recognized in income upon acceptance of the credit by the financial
institution. Insurance income represents commissions earned on credit life,
accident and disability insurance sold in connection with the vehicle on behalf
of third-party insurance companies. Insurance commissions are recognized in
income upon customer acceptance of the insurance terms as evidenced by contract
execution. Finance fees and insurance commissions, net of chargebacks, are
classified as other operating revenue in the accompanying combined statement of
operations.
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
whereby the Company does not take title are shown on a net basis in other
revenue.
MAJOR SUPPLIER AND DEALER AGREEMENT
The Company purchases substantially all of its new vehicles and inventory
from various manufacturers at the prevailing prices charged by the automaker to
all franchised dealers. The Company's overall sales could be impacted by the
automaker's inability or unwillingness to supply the dealership with an adequate
supply of popular models.
The Company enters into agreements (Dealer Agreements) with the
manufacturer. 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 in material breach of the terms.
The Company's ability to expand operations depends, in part, on obtaining
consents of the manufacturer to the acquisition of additional dealerships.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements for the nine-months ended
September 30, 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.
F-10
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(2) INVENTORIES AND RELATED NOTES PAYABLE
The new and used vehicle inventory collateralizing related notes payable and
other inventory were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1994 1995 SEPTEMBER 30, 1996
-------------------- -------------------- --------------------
INVENTORY NOTES INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE COST PAYABLE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
New and demonstrator vehicles................... $ 16,776 $ 17,172 $ 13,972 $ 15,346 $ 12,020 $ 12,628
Used vehicles................................... 6,847 4,046 7,532 4,244 7,061 867
Parts and accessories........................... 831 -- 1,092 -- 1,246 --
--------- --------- --------- --------- --------- ---------
Inventories at FIFO............................. 24,454 21,218 22,596 19,590 20,327 13,495
Less LIFO reserve for new and used vehicles and
parts inventories.............................. 5,322 -- 4,896 -- 4,810 --
--------- --------- --------- --------- --------- ---------
Inventories at LIFO............................. $ 19,132 $ 21,218 $ 17,700 $ 19,590 $ 15,517 $ 13,495
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
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 $(243) and $(86) for the years ended December 31, 1993, 1994 and 1995
and the nine-month periods ended September 30, 1995 and 1996, respectively.
Flooring notes payable consist of 7.125% to 8.25% flooring notes from a bank
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 nine-month period
ended September 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
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Buildings and improvements.......................................... $ 1,373 $ 1,445 $ --
Service and equipment............................................... 1,224 1,431 1,474
Furniture, signs and fixtures....................................... 1,634 1,607 1,773
--------- --------- -------------
4,231 4,483 3,247
Less accumulated depreciation....................................... 1,587 1,840 1,978
--------- --------- -------------
2,644 2,643 1,269
Land................................................................ 426 591 --
--------- --------- -------------
$ 3,070 $ 3,234 $ 1,269
--------- --------- -------------
--------- --------- -------------
</TABLE>
F-11
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Vehicles leased to others......................................... $ 6,201 $ 6,678 $ 7,722
Less accumulated depreciation..................................... (1,276) (1,352) (1,416)
--------- --------- -------------
4,925 5,326 6,306
Less current portion, net..................................... 3,201 3,462 4,099
--------- --------- -------------
$ 1,724 $ 1,864 $ 2,207
--------- --------- -------------
--------- --------- -------------
</TABLE>
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:
<TABLE>
<CAPTION>
DIRECT-
OPERATING FINANCING
----------- -----------
<S> <C> <C>
Year ending December 31:
1996 (for the three months ended December 31)...................... $ 472 $ 73
1997............................................................... 1,415 155
1998............................................................... 1,070 109
1999............................................................... 100 67
2000 and thereafter................................................ 17 54
----------- -----
$ 3,074 $ 458
----------- -----
----------- -----
</TABLE>
Vehicles leased to others are stated at cost and depreciated over their
estimated useful lives (5 years) on a straight-line basis.
(5) NOTES PAYABLE
The Company has a 9.00% 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. No amounts were
outstanding as of September 30, 1996. See note 15.
(6) 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 in note 17. The line of credit 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.
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 September 30, 1996).
F-12
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996
--------- --------- -------------
<S> <C> <C> <C>
Notes payable to officer and director, interest at prime plus 0.5%; due in
ten equal annual installments beginning one year and ten days subsequent to
demand by the note holder................................................... $ 925 $ 3,865 $ 1,868
Notes payable to related parties other than officer and director, interest at
prime plus or minus 0.5%; due in ten equal annual installments beginning at
various times subsequent to demand by the note holder....................... 827 1,234 1,285
Notes payable in monthly installments, including interest at 8.75%; maturing
at various dates through 2000; secured by equipment......................... 1,092 1,404 1,025
Notes payable in monthly installments, including interest at 8.5% or prime
plus 1% to 1.5%; maturing at various dates through 2000; secured by vehicles
leased to others............................................................ 4,409 5,466 6,545
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 10,723
Less current maturities...................................................... 1,621 2,085 2,713
--------- --------- -------------
$ 6,748 $ 10,743 $ 8,010
--------- --------- -------------
--------- --------- -------------
</TABLE>
The schedule of future principal payments on long-term debt after September
30, 1996 is as follows:
<TABLE>
<S> <C>
Year ending December 31:
1996 (for the three months ended December 31)................... $ 543
1997............................................................ 2,170
1998............................................................ 5,119
1999............................................................ 547
2000 and thereafter............................................. 2,344
---------
$ 10,723
---------
---------
</TABLE>
(8) MINORITY INTEREST
For the years ended December 31, 1994 and 1995 and the nine-month period
ended September 30, 1996, the Company held notes receivable of $142, $678 and
$566, 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.
F-13
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(9) OWNERS' EQUITY
CAPITAL STRUCTURE
The capital structure of the corporations included in the combined balance
sheet at December 31, 1994 is as follows:
<TABLE>
<CAPTION>
NO PAR COMMON STOCK
-------------------------------------------
AUTHORIZED ISSUED OUTSTANDING
------------- ----------- ---------------
<S> <C> <C> <C>
Lithia Motors, Inc.......................................... 1.0 .3 .1
Lithia Leasing, Inc......................................... 1.0 .1 .1
Discount Auto and Truck Rental, Inc......................... 10.0 4.0 4.0
Lithia Rentals, Inc......................................... 5.0 2.7 2.7
</TABLE>
The capital structure of the corporations included in the combined balance
sheet at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
NO PAR COMMON STOCK
-------------------------------------------
AUTHORIZED ISSUED OUTSTANDING
------------- ----------- ---------------
<S> <C> <C> <C>
Lithia Motors, Inc.......................................... 1.0 .3 .1
Lithia Leasing, Inc......................................... 1.0 .1 .1
Discount Auto and Truck Rental, Inc......................... 10.0 6.5 6.5
Lithia Rentals, Inc......................................... 5.0 2.7 2.7
</TABLE>
The capital structure of the corporations included in the combined balance
sheet at September 30, 1996 is as follows:
<TABLE>
<CAPTION>
NO PAR COMMON STOCK CLASS A
-----------------------------------
AUTHORIZED ISSUED OUTSTANDING
----------- --------- -----------
<S> <C> <C> <C>
Lithia Motors, Inc...................................... 100,000.0 -- --
<CAPTION>
NO PAR COMMON STOCK
-----------------------------------
AUTHORIZED ISSUED OUTSTANDING
----------- --------- -----------
<S> <C> <C> <C>
Lithia Motors, Inc. -- Class B.......................... 25,000.0 4,110.0 4,110.0
Lithia Leasing, Inc..................................... 1.0 .1 .1
Discount Auto and Truck Rental, Inc..................... 10.0 6.5 6.5
Lithia Rentals, Inc..................................... 5.0 2.7 2.7
</TABLE>
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 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).
F-14
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(9) OWNERS' EQUITY (CONTINUED)
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.
(10) PRO FORMA INCOME TAXES
The unaudited pro forma amounts included in the accompanying pro forma
balance sheet as of September 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 $1,430 and a non-current deferred
income tax liability of $598, 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 $3,264 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 date of the financial
statements.
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Pro forma income taxes:
Current:
Federal..................................................... $ 490 $ 1,292 $ 1,487 $ 1,161 $ 1,538
State....................................................... 102 269 309 241 320
--------- --------- --------- --------- ---------
Total current............................................. 592 1,561 1,796 1,402 1,858
Deferred:
Federal..................................................... 87 (33) (164) (123) (433)
State....................................................... 18 (7) (34) (25) (90)
--------- --------- --------- --------- ---------
Total deferred............................................ 105 (40) (198) (148) (523)
--------- --------- --------- --------- ---------
Total pro forma income taxes.............................. $ 697 $ 1,521 $ 1,598 $ 1,254 $ 1,335
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-15
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
For the years ended December 31, 1993,
1994 and 1995 and the nine months ended
September 30, 1995 (unaudited) and 1996
(In thousands)
(10) 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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Expected pro forma income tax expense........................... $ 607 $ 1,350 $ 1,412 $ 1,105 $ 1,167
State income taxes, net of federal tax effect................... 78 173 181 145 149
Other, net...................................................... 12 (2) 5 4 19
--------- --------- --------- --------- ---------
$ 697 $ 1,521 $ 1,598 $ 1,254 $ 1,335
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
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
September 30, 1996, are presented below:
<TABLE>
<S> <C>
Pro forma deferred income tax assets:
Allowance and accruals........................................... $ 1,430
---------
Total deferred income tax assets............................... 1,430
Pro forma deferred income tax liability:
Property and equipment, principally due to differences in
depreciation.................................................... (598)
---------
Pro forma net deferred income tax asset........................ $ 832
---------
---------
</TABLE>
The Company is changing its tax basis method of valuing inventories from the
LIFO method to the FIFO and specific identification methods in 1997. The balance
of the LIFO reserve as of December 31, 1996 will be amortized into taxable
income over a one to six year period, thereby increasing current taxes payable.
This amortization will create a corresponding reduction in the pro forma
deferred tax liability related to inventory and will not impact the Company's
effective tax rate.
(11) 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, 1995
and September 30, 1996 was approximately $77, $206 and $172, respectively.
OPERATING LEASES
Substantially all of the Company's operations are conducted in leased
facilities under noncancelable operating leases with Lithia Properties, LLC
(Lithia Properties) a related party (note 13). The Company and Lithia Properties
recently entered into new lease agreements with respect to the facilities,
effective January 1, 1997. The new leases have terms of 30 years. The Company
will be responsible for property taxes, insurance and maintenance expenses.
Lease payments are subject to an annual cost of living increase.
F-16
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(11) COMMITMENTS AND CONTINGENCY (CONTINUED)
The minimum rental commitments under operating leases after September 30,
1996 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996 (for the three months ended December 31).................... $ 668
1997............................................................. 1,747
1998............................................................. 1,747
1999............................................................. 1,747
2000 and thereafter.............................................. 3,494
---------
9,403
---------
---------
</TABLE>
Rental expense for all operating leases was $1,849, $1,888 $1,993, $1,559
and $1,657 for the years ended December 31, 1993, 1994 and 1995 and the
nine-month periods ended September 30, 1995 and 1996, respectively.
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position, results of operations or liquidity.
(12) PROFIT SHARING PLAN
The Company has a defined contribution plan and trust covering substantially
all full-time employees. The annual contribution to the plan is at the
discretion of the Board of Directors of the Company. Contributions of $100,
$100, $84, $61 and $74 were recognized for the years ended December 31, 1993,
1994, 1995 and the nine-month periods ended September 30, 1995 and 1996,
respectively. Employees may contribute to the plan under certain circumstances.
(13) INVESTMENT IN UNCONSOLIDATED AFFILIATE
The Company has an investment in Lithia Properties, 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 September 30, 1996:
<TABLE>
<S> <C>
Investment in affiliate, December 31, 1993........................... $ 389
Equity in affiliate.................................................. 55
Distributions from affiliate......................................... (20)
---------
Investment in affiliate, December 31, 1994........................... 424
Equity in affiliate.................................................. 67
Distributions from affiliate......................................... --
---------
Investment in affiliate, December 31, 1995........................... 491
Equity in affiliate.................................................. 40
Distributions from affiliate......................................... (40)
---------
Investment in affiliate, September 30, 1996.......................... $ 491
---------
---------
</TABLE>
F-17
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(14) 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 685 shares of the Company's Class A Common
Stock. The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plan. Accordingly, no compensation cost has been recognized
for the Plan. Had compensation cost for the Plan been determined consistent with
FASB Statement 123, the Company's net income and earnings per share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Net income As reported...................................................... $ 2,804
-------------
-------------
Pro forma........................................................ 2,764
-------------
-------------
</TABLE>
The following table summarizes stock option activity through September 30,
1996:
<TABLE>
<CAPTION>
SHARES PRICE RANGE
--------- --------------
<S> <C> <C>
Outstanding options at December 31, 1995......................... -- $ -
Granted.......................................................... 439.1 3.02 - 3.32
Exercised........................................................ -- -
Canceled......................................................... -- -
--------- --------------
Outstanding options at September 30, 1996........................ 439.1 $3.02 - 3.32
--------- --------------
--------- --------------
</TABLE>
At September 30, 1996, 60 outstanding options were exercisable.
(15) RELATED PARTY TRANSACTIONS
Substantially all of the real property on which the Company's business is
located is owned by Lithia Properties (note 13). The Company, leases its
facilities under various lease agreements from Lithia Properties (note 11).
Recorded in other current assets are deposits relating to these operating leases
of $178, $175 and $175 as of December 31, 1994 and 1995 and September 30, 1996,
respectively.
The Company provides management services to Lithia Properties. Other income
includes management fees of $288 for the years ended December 31, 1993, 1994 and
1995 and $216 and $300 for the nine-month periods ended September 30, 1995 and
1996, respectively.
Lithia Properties leases certain equipment to the Company. Selling, general
and administrative expense includes equipment rental expense of $27, $26, $27,
$12 and $19 for the years ended December 31, 1993, 1994 and 1995 and the
nine-month periods ended September 30, 1995 and 1996, respectively.
F-18
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(15) RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has notes payable included in long-term debt of $925, $3,865 and
$2,831 as of December 31, 1994, 1995 and September 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 incurred in connection with purchases of real property which secures
the loan. This indebtedness amounts to approximately $13,000.
The Company has a short-term payable of $3,044 to Lithia Properties
pertaining to the purchase of equipment. This note accrues interest at prime
plus 0.5 percentage points and was paid subsequent to September 30, 1996.
(16) OTHER INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Management fees........................................ 288 288 288 216 300
Advertising............................................ 108 69 57 37 46
Lawsuit settlement..................................... -- -- 160 160 --
Miscellaneous, net..................................... 157 490 463 67 96
--- --- --- --- ---
Other income, net...................................... 553 847 968 530 442
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
(17) SUBSEQUENT EVENTS
(a) STOCKHOLDER DISTRIBUTIONS
As an S Corporation, the Company has paid dividends to its stockholders
partially to provide them with funds to pay income taxes on corporate earnings.
Immediately prior to the completion of the proposed initial public offering, the
Company intends to declare a dividend payable of approximately $3.2 million to
existing stockholders of the Company. This dividend represents undistributed S
Corporation earnings of the Company through the completion of the proposed
initial public offering and the amount of the stockholders' S Corporation tax
bases.
(b) RESTRUCTURING
On October 8, the Board of Directors approved the filing of a registration
statement with the Securities and Exchange Commission 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 of Lithia Motors, Inc. and
Lithia Holdings, LLC owning all of the outstanding Class B common stock of the
Company.
F-19
<PAGE>
LITHIA MOTORS, INC.
AND AFFILIATED COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993,
1994 AND 1995 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (UNAUDITED) AND 1996
(IN THOUSANDS)
(17) SUBSEQUENT EVENTS (CONTINUED)
(c) ACQUISITIONS
The Company has signed definitive agreements to purchase three additional
dealerships described below. These purchases are subject to normal closing
conditions and the approval of the change in ownership by the manufacturers. The
Company will account for these acquisitions as purchases and consolidate the
respective results of operations from the date of consummation of the purchase.
The Company has agreed to pay $2.25 million plus the new car and parts
inventory at seller's cost for certain assets of Roberts Dodge, Inc., 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 January 1, 1997
The Company has agreed to pay approximately $2.58 million in cash for Melody
Vacaville, Inc., a Toyota and Kia dealership in Vacaville, California. In
addition, the Company will purchase 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 $4.05
million. The Company is not assuming any material liabilities as part of the
acquisition. 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.
(d) STOCK SPLIT
The Company effected a 1.37 for 1 stock split in November 10, 1996. All
share and per share amounts have been restated to reflect the split.
F-20
<PAGE>
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 each of
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
October 25, 1996
F-21
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents...................................................... $ 2,069 $ 1,270
Trade receivables, net......................................................... 555 740
Inventories.................................................................... 4,383 3,550
Prepaid expenses and other..................................................... 7 31
------------- -------------
Total current assets......................................................... 7,014 5,591
------------- -------------
Property and equipment, net...................................................... 1,448 1,525
Other assets:
Goodwill....................................................................... 22 19
Stockholder advances........................................................... -- 251
Other noncurrent assets........................................................ 121 128
------------- -------------
143 398
------------- -------------
$ 8,605 $ 7,514
------------- -------------
------------- -------------
LIABILITIES AND OWNERS' EQUITY
Current liabilities:
Notes payable.................................................................. $ -- $ 300
Flooring notes payable......................................................... 4,127 3,181
Current maturities of long-term debt........................................... 1,970 1,085
Trade payables................................................................. 370 208
Accrued liabilities............................................................ 213 524
------------- -------------
Total current liabilities.................................................... 6,680 5,298
Long-term debt, less current maturities.......................................... 1,125 1,063
------------- -------------
Total liabilities............................................................ 7,805 6,361
------------- -------------
Commitments and contingency
Owners' equity:
Common stock, no par value, 10,000 shares authorized, 100 shares issued and
outstanding................................................................... 250 250
Retained earnings.............................................................. 550 903
------------- -------------
Total owners' equity......................................................... 800 1,153
------------- -------------
$ 8,605 $ 7,514
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Sales:
Vehicle.......................................................... $ 26,383 $ 27,999 $ 21,025 $ 22,772
Service, parts and other......................................... 3,588 3,895 2,891 3,250
--------- --------- --------- ---------
29,971 31,894 23,916 26,022
--------- --------- --------- ---------
Cost of sales:
Vehicle.......................................................... 23,526 25,086 18,609 20,267
Service, parts and other......................................... 2,104 2,184 1,604 1,869
--------- --------- --------- ---------
25,630 27,270 20,213 22,136
--------- --------- --------- ---------
Gross profit................................................... 4,341 4,624 3,703 3,886
Selling, general and administrative................................ 3,654 3,828 2,939 3,152
--------- --------- --------- ---------
Operating income............................................... 687 796 764 734
--------- --------- --------- ---------
Other income (expense):
Interest income.................................................. 27 101 58 111
Interest expense................................................. (477) (602) (439) (483)
Other, net....................................................... (29) (26) 11 1
--------- --------- --------- ---------
(479) (527) (370) (371)
--------- --------- --------- ---------
Net income..................................................... $ 208 $ 269 $ 394 $ 363
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
COMBINED STATEMENTS OF CHANGES IN OWNERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ RETAINED
SHARES AMOUNT EARNINGS TOTAL
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993................................................ 100 $ 250 $ 134 $ 384
Net income................................................................ -- -- 208 208
Distributions............................................................. -- -- (37) (37)
--- ----- ----- ---------
Balance, December 31, 1994................................................ 100 250 305 555
Net income................................................................ -- -- 269 269
Distributions............................................................. -- -- (24) (24)
--- ----- ----- ---------
Balance, December 31, 1995................................................ 100 250 550 800
Net income (unaudited).................................................... -- -- 363 363
Distributions (unaudited)................................................. -- -- (10) (10)
--- ----- ----- ---------
Balance, September 30, 1996 (unaudited)................................... 100 $ 250 $ 903 $ 1,153
--- ----- ----- ---------
--- ----- ----- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-24
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
-------------------- --------------------
1994 1995 1995 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income............................................................ $ 208 $ 269 $ 394 $ 363
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities:
Depreciation and amortization....................................... 65 75 48 59
Changes in operating assets and liabilities:
Trade receivables................................................. (10) (86) (44) (184)
Inventories....................................................... (1,139) 239 3 832
Other current assets.............................................. (13) 8 9 (24)
Trade payables.................................................... 73 116 62 (162)
Accrued liabilities............................................... 54 33 378 311
Other noncurrent assets........................................... (108) 9 (130) (259)
--------- --------- --------- ---------
Net cash provided by (used in) operating activities............. (870) 663 720 936
--------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures.................................................. (88) (210) (148) (132)
--------- --------- --------- ---------
Net cash used in investing activities........................... (88) (210) (148) (132)
--------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) on flooring notes payable................. 1,340 (154) (515) (946)
Increase in notes payable............................................. -- -- -- 300
Principal payments on long-term debt.................................. (151) (135) (98) (1,147)
Proceeds from issuance of long-term debt.............................. -- 1,936 83 200
Distributions......................................................... (37) (24) (35) (10)
--------- --------- --------- ---------
Net cash provided by (used in) financing activities............. 1,152 1,623 (565) (1,603)
--------- --------- --------- ---------
Net increase (decrease) in cash......................................... 194 2,076 7 (799)
Cash (book overdraft), beginning of period.............................. (201) (7) (7) 2,069
--------- --------- --------- ---------
Cash (book overdraft), end of period.................................... $ (7) $ 2,069 $ -- $ 1,270
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994
AND 1995 AND AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Roberts Dodge, Inc. and Affiliated Company (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 rentals, 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 are 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.
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 inability or unwillingness to supply the dealership with an adequate
supply of popular models.
F-26
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994
AND 1995 AND AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 in material breach of the terms.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements for the nine-months ended
September 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 payables
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 instruments. 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 related to advertising as
incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company 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 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 Company 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
F-27
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994
AND 1995 AND AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, related collateralizing notes payable,
and other inventory were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------- ----------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
New and demonstrator vehicles...................... $ 2,899 $ 3,349 $ 2,278 $ 2,734
Used vehicles...................................... 1,180 778 1,018 447
Parts and accessories.............................. 304 -- 254 --
----------- --------- ----------- ---------
$ 4,383 $ 4,127 $ 3,550 $ 3,181
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
The automaker finances new and used vehicle purchases by the Company. Floor
plan financing bear interest at prime plus 1% (approximately 9.25% at September
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.
(3) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Buildings and improvements................................... $ 1,047 $ 1,046
Service and equipment........................................ 204 206
Furniture, signs and fixtures................................ 69 69
Construction-in-progress..................................... -- 131
------------- -------------
1,320 1,452
Less accumulated depreciation................................ 293 348
------------- -------------
1,027 1,104
Land......................................................... 421 421
------------- -------------
$ 1,448 $ 1,525
------------- -------------
------------- -------------
</TABLE>
(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 $300 at September 30,
F-28
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994
AND 1995 AND AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
(4) NOTES PAYABLE (CONTINUED)
1996. There were no outstanding borrowings at December 31, 1995. Advances under
the credit line accrue interest at variable rates (9.75% at September 30, 1996)
and are subject to the collateral and guaranty provisions in the Chrysler credit
arrangement described in note 5.
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------- -------------
<S> <C> <C>
Note payable to Chrysler, interest at 11% or if higher, prime plus 1%, monthly
installments of $11, maturing in 1997........................................... $ 74 $ 30
Note payable to Chrysler, due in monthly installments of $1 plus interest at
prime plus 1.5%................................................................. 15 8
Demand notes payable to stockholder, interest at prime less 2%................... 1,807 953
Note payable to Chrysler, monthly installments of $1 plus interest at 10.25%..... 46 39
Note payable to Chrysler, due in monthly installments of $15 including interest
at 9%........................................................................... 1,144 1,113
Other............................................................................ 9 5
------------- -------------
3,095 2,148
Less current maturities.......................................................... 1,970 1,085
------------- -------------
$ 1,125 $ 1,063
------------- -------------
------------- -------------
</TABLE>
The schedule of future principal payments on long-term debt after December
31, 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------
<S> <C>
Year ending:
1996.......................................................................... $ 1,970
1997.......................................................................... 120
1998.......................................................................... 110
1999.......................................................................... 110
2000 and thereafter........................................................... 785
-------------
$ 3,095
-------------
-------------
</TABLE>
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 30, 1996.
F-29
<PAGE>
ROBERTS DODGE, INC.
AND AFFILIATED COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1994
AND 1995 AND AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 (UNAUDITED)
(IN THOUSANDS)
(5) LONG-TERM DEBT (CONTINUED)
Interest paid to stockholders totaled $32 and $71 for the year ended
December 31, 1995 and the nine-month period ended September 30, 1996,
respectively.
(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 September 30, 1996 was approximately $231 and $154, 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 $32 for the years ended December 31, 1994,
1995 and nine-month period ended September 30, 1996, respectively.
(8) SUBSEQUENT EVENTS
The Company 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, with interest at 8.5% per annum,
payable in equal monthly installments for five years. Lithia Motors, Inc. is not
assuming any material liabilities as part of the acquisition. In addition,
Lithia Motors, Inc. 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 its television and radio advertising
through this agency. Approximately 50% of total advertising is purchased through
R & R. Advertising expense was $527, $463 and $284 for the years ended December
31, 1994 and 1995 and the nine-month period ended September 30, 1996,
respectively.
At September 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
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder
Sam Linder, Inc.
We have audited the accompanying balance sheets 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
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................................................... $ 1,128,900 $ 836,300
Receivables....................................................................... 537,300 530,100
Inventories....................................................................... 2,433,400 2,303,300
Notes receivable.................................................................. 170,000 54,000
Prepaid expenses and other........................................................ 19,000 57,700
------------- -------------
Total current assets............................................................ 4,288,600 3,781,400
Property and equipment, net......................................................... 270,600 359,900
Other assets........................................................................ 33,700 31,500
------------- -------------
$ 4,592,900 $ 4,172,800
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Flooring notes payable............................................................ $ 2,287,100 $ 2,405,700
Current maturities of obligation under capital lease.............................. -- 23,900
Trade payables.................................................................... 468,500 75,100
Accrued liabilities............................................................... 209,200 347,400
Advances from stockholder......................................................... 1,461,500 989,800
------------- -------------
Total current liabilities....................................................... 4,426,300 3,841,900
Obligation under capital lease, less current maturities............................. -- 98,000
------------- -------------
Total liabilities............................................................... 4,426,300 3,939,900
------------- -------------
Stockholders' equity:
Common stock, no par value, 2,500 shares authorized; 500 shares issued and
outstanding...................................................................... 1,000,000 1,000,000
Accumulated deficit............................................................... (833,400) (767,100)
------------- -------------
Total stockholders' equity...................................................... 166,600 232,900
------------- -------------
$ 4,592,900 $ 4,172,800
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------ ------------------------------
1994 1995 1995 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Sales:
Vehicle....................................... $ 16,112,600 $ 22,889,800 $ 16,290,100 $ 17,614,700
Service, body and parts....................... 2,692,300 2,550,600 1,904,100 2,306,600
Finance and lease............................. 620,300 1,417,000 1,011,400 606,500
-------------- -------------- -------------- --------------
19,425,200 26,857,400 19,205,600 20,527,800
-------------- -------------- -------------- --------------
Cost of sales:
Vehicle....................................... 14,808,400 20,936,700 14,856,100 16,008,500
Service, body and parts....................... 1,448,600 1,393,500 1,060,900 1,034,100
Finance and lease............................. 124,000 315,800 272,600 317,500
-------------- -------------- -------------- --------------
16,381,000 22,646,000 16,189,600 17,360,100
-------------- -------------- -------------- --------------
Gross profit................................ 3,044,200 4,211,400 3,016,000 3,167,700
Selling, general and administrative............. 3,038,700 3,928,000 2,785,600 2,867,800
-------------- -------------- -------------- --------------
Operating income............................ 5,500 283,400 230,400 299,900
-------------- -------------- -------------- --------------
Other expense (income):
Interest expense.............................. 227,800 346,700 261,300 150,800
Other, net.................................... 3,400 800 2,000 (4,700)
-------------- -------------- -------------- --------------
231,200 347,500 263,300 146,100
-------------- -------------- -------------- --------------
Net (loss) income........................... (225,700) (64,100) (32,900) 153,800
Accumulated deficit:
Beginning of period........................... (542,100) (769,300) (769,300) (833,400)
Dividends..................................... (1,500) -- -- (87,500)
-------------- -------------- -------------- --------------
End of period................................. $ (769,300) $ (833,400) $ (802,200) $ (767,100)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------- ---------------------------
1994 1995 1995 1996
----------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net (loss) income........................................... $ (225,700) $ (64,100) $ (32,900) $ 153,800
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities.................
Depreciation and amortization............................. 92,700 92,500 75,200 91,100
Change in allowance for doubtful accounts................. -- 86,000 89,000 3,000
Changes in assets and liabilities
(Increase) decrease in receivables...................... (159,700) (14,900) 334,000 4,200
(Increase) decrease in inventories...................... 446,500 (235,200) (1,239,500) 130,100
(Increase) decrease in other current assets............. 3,500 (6,200) (81,700) (38,800)
(Increase) decrease in other noncurrent assets.......... 3,600 (4,700) (2,500) 2,300
Increase (decrease) in trade payables................... (91,500) 261,300 (72,200) (393,400)
Increase (decrease) in accrued liabilities.............. 70,500 (40,700) 173,100 138,200
Increase in accrued interest on advances from
stockholder............................................ 103,800 140,200 105,100 --
----------- ------------ ------------- ------------
Net cash provided by (used in) operating activities... 243,700 214,200 (652,400) 90,500
----------- ------------ ------------- ------------
Cash flows from investing activities:
Net collections (increase) of notes receivable.............. (300) 316,200 226,700 116,000
Acquisition of property and equipment....................... (3,900) (17,800) (17,800) (49,000)
----------- ------------ ------------- ------------
Net cash provided by (used in) investing activities... (4,200) 298,400 208,900 67,000
----------- ------------ ------------- ------------
Cash flows from financing activities:
Net borrowings on flooring notes payable.................... 81,500 143,300 419,400 118,600
Principal payments on long-term debt........................ (40,000) (73,300) (73,300) --
Net borrowings (repayments) on advances from stockholder.... (195,200) 180,000 180,000 (471,700)
Principal payments on obligations under capital lease....... -- -- -- (9,500)
Dividends paid.............................................. (1,500) -- -- (87,500)
----------- ------------ ------------- ------------
Net cash provided by (used in) financing activities......... (155,200) 250,000 526,100 (450,100)
----------- ------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents........ 84,300 762,600 82,600 (292,600)
Cash and cash equivalents:
Beginning of period......................................... 282,000 366,300 366,300 1,128,900
----------- ------------ ------------- ------------
End of period............................................... $ 366,300 $ 1,128,900 $ 448,900 $ 836,300
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................... $ 124,000 $ 206,500 $ 261,300 $ 150,800
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
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
----------- ------------ ------------- ------------
----------- ------------ ------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
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 an original maturity of
three months or less to be cash equivalents.
INVENTORIES
New vehicle, used vehicle, parts and accessory 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 nine months ended
September 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 nine months ended
September 30, 1996 and 1995 were $298,000 (unaudited) and $231,400 (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 and September 30, 1996, the Company has deposits in excess of federally
insured limits.
F-35
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF BUSINESS AND 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 September 30, 1996 and revenues and expenses during the
years ended December 31, 1994 and 1995 and the nine month periods ended
September 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
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. 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 for a portion of
this fee should the customer terminate the finance or insurance contract before
its scheduled term or before specified dates under arrangements with such
institutions. Finance revenues are fees due to the Company from financial
institutions for fees on contracts arranged to finance vehicle purchases.
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 in material breach of the terms.
NOTE 2 -- RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Trade receivables......................................................... $ 482,900 $ 449,300
Finance reserves.......................................................... 54,700 97,700
Employee receivables...................................................... 26,700 13,100
------------ -------------
564,300 560,100
Less allowance for doubtful accounts...................................... 27,000 30,000
------------ -------------
$ 537,300 $ 530,100
------------ -------------
------------ -------------
</TABLE>
F-36
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- NOTES RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Various notes receivable arising from in-house financing of used vehicle
sales, with payments of principal and interest required weekly,
semi-monthly, or monthly and terms range from twelve to eighteen months.
Interest rates range from 8.9% to 19.75%, and the notes are
collateralized by the related vehicles................................... $ 272,000 $ 206,000
Note receivable from related party, with interest at prime plus .50% due
monthly, principal due on demand, unsecured.............................. 50,000 --
------------ -------------
322,000 206,000
Less allowance for doubtful accounts...................................... (152,000) (152,000)
------------ -------------
$ 170,000 $ 54,000
------------ -------------
------------ -------------
</TABLE>
NOTE 4 -- INVENTORIES AND FLOORING NOTES PAYABLE
The new and used vehicle inventory collateralizing related flooring notes
payable and other inventory are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------------- ----------------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
New and demonstrator vehicles.............. $ 1,800,800 $ 1,618,000
Used vehicles.............................. 1,059,300 1,107,100
Parts and accessories...................... 225,800 244,600
------------- -------------
Inventories at FIFO........................ 3,085,900 2,969,700
Less LIFO reserve for new and used vehicles
and parts inventories..................... 652,500 666,400
------------- ------------- ------------- -------------
Inventories at LIFO........................ $ 2,433,400 $ 2,287,100 $ 2,303,300 $ 2,405,700
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
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 $52,800 and net loss would have decreased by
$49,400 to net income of $206,600 and net income of $16,500 for the nine months
ended September 30, 1996 and 1995, respectively (unaudited). Stockholder's
equity would have increased to $819,100 and $899,300 (unaudited) at December 31,
1995 and September 30, 1996, respectively.
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.
F-37
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- INVENTORIES AND FLOORING NOTES PAYABLE (CONTINUED)
The Company recognized manufacturers' floor plan interest expense subsidies
of approximately $22,000 and $51,000 for the years ended December 31, 1995 and
1994, respectively, and $20,000 and $17,000 for the nine months ended September
30, 1996 and 1995, respectively (unaudited). These amounts have been offset
against floor plan interest expense in the accompanying statements of
operations.
NOTE 5 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Company vehicles.......................................................... $ 32,500 $ 43,400
Equipment................................................................. 206,300 243,500
Furniture and fixtures.................................................... 299,000 299,000
Leasehold improvements.................................................... 278,600 279,500
Signs..................................................................... 13,700 13,700
Equipment under capital lease............................................. -- 131,400
------------ -------------
830,100 1,010,500
Less accumulated depreciation and amortization............................ 559,500 650,600
------------ -------------
$ 270,600 $ 359,900
------------ -------------
------------ -------------
</TABLE>
NOTE 6 -- OBLIGATION UNDER CAPITAL LEASE
At September 30, 1996, future minimum lease payments for equipment under a
capital lease agreement are as follows:
<TABLE>
<S> <C>
Year Ending December 31:
1996 (3 months)........................................................ $ 8,300
1997................................................................... 33,000
1998................................................................... 33,000
1999................................................................... 33,000
2000................................................................... 33,000
2001................................................................... 5,500
---------
Total minimum lease payments........................................... 145,800
Less imputed interest.................................................. (23,900)
---------
Present value of minimum lease payments................................ 121,900
Less current maturities................................................ 23,900
---------
$ 98,000
---------
---------
</TABLE>
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 accrue interest at 10% and are
unsecured. These advances are due on demand after December 31, 1996. At December
31, 1995 and September 30, 1996, $600,000 of these advances have been
subordinated to Bank of America National Trust and Savings Association.
F-38
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
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 $75,000 being charged to operations for the nine
months ended September 30, 1996 (unaudited).
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:
<TABLE>
<CAPTION>
STOCKHOLDER OTHER TOTAL
----------- --------- -----------
<S> <C> <C> <C>
Year Ending December 31:
1996 (three months)............................................. $ 60,000 $ 9,900 $ 69,900
1997............................................................ 240,000 33,900 273,900
1998............................................................ 240,000 6,800 246,800
1999............................................................ 100,000 2,000 102,000
2000............................................................ -- 1,800 1,800
----------- --------- -----------
$ 640,000 $ 54,400 $ 694,400
----------- --------- -----------
----------- --------- -----------
</TABLE>
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 $204,000 (unaudited) for the nine months ended September 30, 1996
and 1995, with $180,000 (unaudited) 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.
F-39
<PAGE>
SAM LINDER, INC.
(DBA SAM LINDER CADILLAC-HONDA-OLDSMOBILE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCY (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Financial assets:
Notes receivable......................... $ 170,000 $ 170,000 $ 54,000 $ 54,000
Financial liabilities:
Flooring notes payable................... $ 2,287,100 $ 2,287,100 $ 2,405,700 $ 2,405,700
</TABLE>
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:
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-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders
Melody Vacaville, Inc.
We have audited the accompanying balance sheets 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-41
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
-------------- SEPTEMBER 30,
1996
--------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 2,013,200 $ 362,500
Receivables..................................................................... 553,000 882,400
Inventories..................................................................... 4,137,900 4,297,600
Prepaid expenses and other...................................................... 89,200 114,100
-------------- --------------
Total current assets.......................................................... 6,793,300 5,656,600
Property and equipment, net....................................................... 256,000 222,500
-------------- --------------
$ 7,049,300 $ 5,879,100
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Flooring notes payable.......................................................... $ 4,054,600 $ 3,454,900
Current maturities of long-term debt............................................ 306,300 234,700
Note payable to related party................................................... -- 50,000
Trade payables, including retained bank checks.................................. 2,343,200 2,433,900
Accrued liabilities............................................................. 233,700 261,000
-------------- --------------
Total current liabilities..................................................... 6,937,800 6,434,500
Long-term debt, less current maturities........................................... 584,900 577,700
-------------- --------------
Total liabilities............................................................. 7,522,700 7,012,200
-------------- --------------
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) (3,210,900)
-------------- --------------
Total stockholders' deficit................................................... (473,400) (1,133,100)
-------------- --------------
$ 7,049,300 $ 5,879,100
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------ ------------------------------
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales:
Vehicle....................................... $ 33,518,500 $ 24,141,500 $ 19,417,800 $ 19,959,100
Service and parts............................. 3,478,300 2,608,400 1,983,300 2,248,400
Finance and lease............................. 1,735,200 1,060,500 878,800 814,900
-------------- -------------- -------------- --------------
38,732,000 27,810,400 22,279,900 23,022,400
-------------- -------------- -------------- --------------
Cost of sales:
Vehicle....................................... 30,723,200 22,858,400 18,145,000 18,937,700
Service and parts............................. 1,889,900 1,426,800 1,105,400 1,344,000
Finance and lease............................. 880,400 572,900 467,600 504,700
-------------- -------------- -------------- --------------
33,493,500 24,858,100 19,718,000 20,786,400
-------------- -------------- -------------- --------------
Gross profit................................ 5,238,500 2,952,300 2,561,900 2,236,000
Selling, General and Administrative............. 4,800,400 4,254,400 3,094,000 2,776,900
-------------- -------------- -------------- --------------
Operating income (loss)..................... 438,100 (1,302,100) (532,100) (540,900)
-------------- -------------- -------------- --------------
Other Income (Expense):
Interest expense.............................. (393,400) (474,700) (368,300) (224,100)
Other, net.................................... 53,300 165,000 70,700 105,300
-------------- -------------- -------------- --------------
(340,100) (309,700) (297,600) (118,800)
-------------- -------------- -------------- --------------
Net income (loss)............................... $ 98,000 $ (1,611,800) $ (829,700) $ (659,700)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NOTE
COMMON STOCK ADDITIONAL RECEIVABLE
----------------------- PAID-IN FROM ACCUMULATED
SHARES AMOUNT CAPITAL STOCKHOLDER DEFICIT TOTAL
--------- ------------ ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
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 September
30, 1996..................................... -- -- -- -- (659,700) (659,700)
--------- ------------ ---------- ----------- ------------ ------------
Balance, September 30, 1996..................... 100,000 $ 1,881,000 $ 282,000 $ (85,200) $ (3,210,900) $ (1,133,100)
--------- ------------ ---------- ----------- ------------ ------------
--------- ------------ ---------- ----------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------- ----------------------------
1994 1995 1995 1996
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $ 98,000 $ (1,519,400) $ (829,700) $ (659,700)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities
Depreciation and amortization................... 111,100 109,900 51,300 56,100
Change in allowance for doubtful accounts....... -- 56,000 49,000 (56,000)
(Gain) loss on disposition of fixed assets...... 1,500 (181,000) 14,400 4,000
Changes in assets and liabilities:
(Increase) decrease in receivables.............. (206,200) 394,600 151,500 (273,400)
(Increase) decrease in inventories.............. (1,397,700) 913,000 1,455,900 (159,700)
(Increase) decrease in other current assets..... (17,200) (15,400) (16,000) (24,900)
Increase (decrease) in trade payables........... (77,000) 2,051,000 522,400 90,700
Increase (decrease) in accrued liabilities...... 84,700 (180,900) (134,800) 27,300
------------- ------------- ------------- -------------
Net cash provided by (used in) operating
activities................................... (1,402,800) 1,627,800 1,264,000 (995,600)
------------- ------------- ------------- -------------
Cash flows from investing activities
Proceeds from sale of land........................ -- 600,000 -- --
Acquisition of property and equipment............. (163,100) (20,300) (19,300) (26,600)
------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities................................... (163,100) 579,700 (19,300) (26,600)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) on flooring notes
payable.......................................... 1,180,100 (350,900) (943,900) (599,700)
Principal payments on long-term debt.............. (99,900) (547,800) (194,000) (170,100)
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) (1,137,900) (628,500)
------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents.................................. (485,700) 1,971,400 106,800 (1,650,700)
Cash and cash equivalents:
Beginning of period............................... 527,500 41,800 41,800 2,013,200
------------- ------------- ------------- -------------
End of period..................................... $ 41,800 $ 2,013,200 $ 148,600 $ 362,500
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.......... $ 393,400 $ 474,700 $ 368,300 $ 224,100
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Cash paid during the period for income taxes...... $ 800 $ 800 $ 800 $ 800
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
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 September 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.
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.
F-46
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 16, 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.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements for the nine-months ended
September 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 nine months ended
September 30, 1996 and 1995 were $438,700 (unaudited) and $494,500 (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 September 30, 1996, and revenues and expenses
F-47
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during the years ended December 31, 1994 and 1995, and the nine month periods
ended September 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
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. 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 for a portion of
this fee should the customer terminate the finance or insurance contract before
its scheduled term or before specified dates under arrangements with such
institutions. Finance reserves are fees due to the Company from financial
institutions for fees on contracts arranged to finance vehicle purchases.
NOTE 2 -- RECEIVABLES
Receivables consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Trade receivables............................................... $ 423,700 $ 509,400
Finance reserves................................................ 192,300 214,400
Employee receivables............................................ 5,200 9,700
Insurance settlement receivable................................. -- 118,300
Advances to majority stockholder................................ 77,800 120,600
------------ -------------
699,000 972,400
Less allowance for doubtful accounts............................ 146,000 90,000
------------ -------------
$ 553,000 $ 882,400
------------ -------------
------------ -------------
</TABLE>
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 nine months ended September 30, 1996,
representing the difference between the recorded cost and the estimated
insurance proceeds. Related debt of $95,800 is included in long-term debt at
September 30, 1996 ($120,800 at December 31, 1995).
NOTE 3 -- NOTE RECEIVABLE FROM MAJORITY STOCKHOLDER
A note receivable from the 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 September 30, 1996.
F-48
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- INVENTORIES AND FLOORING NOTES PAYABLE
The new and used vehicle inventory collateralizing related notes payable and
other inventory are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------------- ----------------------------
INVENTORY INVENTORY
COST NOTES PAYABLE COST NOTES PAYABLE
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
New and demonstrator vehicles.............. $ 2,812,000 $ 3,420,200
Used vehicles.............................. 1,290,700 954,100
Parts and accessories...................... 309,600 266,900
------------- -------------
Inventories at FIFO........................ 4,412,300 4,641,200
Less LIFO reserve for new vehicle
inventories............................... 274,400 343,600
------------- ------------- ------------- -------------
Inventories at LIFO........................ $ 4,137,900 $ 4,054,600 $ 4,297,600 $ 3,454,900
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
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 $69,200 and increased
by $35,500 to net loss of $590,500 and $865,200 for the nine months ended
September 30, 1996 and 1995, respectively (unaudited). Stockholder's deficit
would have decreased to $199,000 and $806,000 (unaudited) at December 31, 1995
and September 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.
The Company recognized manufacturers' floor plan interest expense subsidies
of approximately $108,000 for the nine months ended September 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
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Company vehicles.......................................................... $ 34,500 $ 2,000
Equipment................................................................. 231,300 231,900
Furniture and fixtures.................................................... 321,600 337,100
Leasehold improvements.................................................... 122,800 132,900
------------ -------------
710,200 703,900
Less accumulated depreciation and amortization............................ 454,200 481,400
------------ -------------
$ 256,000 $ 222,500
------------ -------------
------------ -------------
</TABLE>
F-49
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------ SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
Term note payable to Primus Automotive Financial Services, Inc., due in
monthly installments of $10,000, plus interest at 1.5% above prime (8.25%
at September 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 $ 500,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C>
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............................................. $ -- $ 74,500
Unsecured note payable to minority stockholder, due in monthly
installments of $4,395, including interest at 8%......................... 177,000 140,200
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 September 30, 1996.......................................... 120,800 95,800
Other..................................................................... 3,400 1,900
------------- -------------
891,200 812,400
Current portion......................................................... 306,300 234,700
------------- -------------
Long-term portion....................................................... $ 584,900 $ 577,700
------------- -------------
------------- -------------
</TABLE>
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:
<TABLE>
<CAPTION>
STOCKHOLDERS OTHER TOTAL
------------ ----------- -----------
<S> <C> <C> <C>
Year Ending December 31:
1996 (three months)........................................... $ 10,500 $ 127,700 $ 138,200
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
------------ ----------- -----------
$ 214,700 $ 597,700 $ 812,400
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
F-50
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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). Information regarding the volume of
insurance premiums ceded for the quarter ending September 30, 1996, is not
available. 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 9, 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).
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-51
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------- NINE MONTHS ENDED
1994 1995 SEPTEMBER 30, 1995
------------- ----------- ------------------
<S> <C> <C> <C>
Sales of vehicles to affiliate.......................... $ 1,508,000 $ 763,000 $ 763,000
Purchases of vehicles from affiliate.................... 1,856,000 719,000 719,000
Payments to affiliate for shared services............... 184,000 69,000 69,000
Receipts from affiliate for shared expenses............. 45,000 54,000 54,000
</TABLE>
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:
<TABLE>
<CAPTION>
FACILITIES OTHER TOTAL
------------- --------- -------------
<S> <C> <C> <C>
Year Ending December 31:
1996 (three months)......................................... $ 107,600 $ 12,300 $ 119,900
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
------------- --------- -------------
$ 1,936,800 $ 73,700 $ 2,010,500
------------- --------- -------------
------------- --------- -------------
</TABLE>
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 $347,000 for each of the nine months ended
September 30, 1996 and 1995, with $310,000 being attributable to the lease with
the related parties in each of the nine 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
F-52
<PAGE>
MELODY VACAVILLE, INC.
(DBA MELODY TOYOTA-KIA VACAVILLE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- COMMITMENTS AND CONTINGENCY (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Financial liabilities:
Flooring notes payable................... $ 4,054,600 $ 4,054,600 $ 3,454,900 $ 3,454,900
Long-term debt........................... 301,200 301,200 312,400 312,400
Note payable -- Primus................... 590,000 590,000 500,000 500,000
</TABLE>
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-53
<PAGE>
[DESCRIPTION OF "PRIORITY YOU" MARKETING CAMPAIGN]
[INSIDE BACK COVER OF PROSPECTUS]
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 8
Company Restructuring and Prior S Corporation
Status.............................................. 15
Recent and Pending Acquisitions...................... 16
Use of Proceeds...................................... 18
Dividend Policy...................................... 18
Capitalization....................................... 19
Dilution............................................. 20
Selected Combined Financial Data..................... 21
Pro Forma Combined and Condensed Financial Data...... 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 27
Industry............................................. 35
Business............................................. 37
Management........................................... 49
Principal Shareholders............................... 51
Certain Relationships and Related Transactions....... 52
Description of Capital Stock......................... 55
Shares Eligible for Future Sale...................... 58
Underwriting......................................... 59
Legal Matters........................................ 60
Experts.............................................. 60
Additional Information............................... 60
Index to Combined Financial Statements............... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK OFFERED HEREBY,
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.
2,500,000 SHARES
[LOGO]
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
------------------
PROSPECTUS
------------------
FURMAN SELZ
DAIN BOSWORTH
INCORPORATED
EVEREN SECURITIES, INC.
DATED , 1996
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
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:
<TABLE>
<S> <C>
SEC Registration Fees.......................................... $ 13,068
NASD Filing Fees............................................... 4,813
Nasdaq Initial Listing Fee..................................... 23,125
Blue Sky Fees and Expenses (including legal fees).............. 5,000
Costs of Printing.............................................. 100,000
Accounting Fees and Expenses................................... 375,000
Legal Fees..................................................... 325,000
Premium for Director and Officer Securities Liability
Insurance..................................................... 200,000
Miscellaneous Expenses......................................... 53,994
----------
Total Expenses............................................. $1,100,000
----------
----------
</TABLE>
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.
II-1
<PAGE>
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 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 4,110,000 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 2,568,750 shares of
Class B Common Stock and M.L. Dick Heimann exchanged 45 shares of the Company's
Common Stock for 1,541,250 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
II-2
<PAGE>
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 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
<PAGE>
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 November 21, 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 NOVEMBER 21, 1996
<TABLE>
<S> <C>
/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)
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
-----------
<C> <C> <S> <C>
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)
* 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
</TABLE>
Z-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
-----------
<C> <C> <S> <C>
* 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
10.12.1 Commercial Lease, dated September 20, 1996, between Lithia Properties, L.L.C. and Lithia
Motors, Inc. (3)
10.12.2 Form of Commercial Lease, effective January 1, 1997, between Lithia Properties, L.L.C. and
Lithia Motors, Inc. (4)
* 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 November 5, 1996, 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 R.
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(5)
* 10.16.2 Promissory Note by Lithia Motors, Inc. to United States National Bank of Oregon in the amount
of $6.0 million(6)
* 10.16.3 Promissory Note by Lithia Leasing, Inc. to United States National Bank of Oregon in the
amount of $1.4 million (7)
* 10.17.1 Promissory Note between Lithia Motors, Inc. and Sidney B. DeBoer in the amount of $500,000(8)
* 10.17.2 Subordination Agreement between Lithia Motors, Inc., Sidney B. DeBoer and United States
National Bank(9)
* 10.18.1 Floor Plan Accommodation Agreement (Security Agreement) between Lithia Motors, Inc. and
United States National Bank of Oregon(10)
</TABLE>
Z-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
-----------
<C> <C> <S> <C>
* 10.18.2 Corporate Resolution to Guarantee of Lithia Motors, Inc. (11)
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(12)
* 10.20.1 Management Contract between Lithia Leasing, Inc. and Lithia Properties LLC.
10.23.1 Commercial Security Agreement, dated September 9, 1996, between Lithia Motors, Inc. and
United States National Bank
11.1 Statement re Computation of Per Share Earnings
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
* Previously filed
</TABLE>
(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 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.
Z-3
<PAGE>
(4) Substantially identical lease will exist between Lithia Properties L.L.C.
and (i) 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, 315
& 321 Apple St., and 401 E. 4th St., collectively at a lease rate of $33,728
per month; (ii) Lithia Auto Services, Inc. dba Lithia Body and Paint,
relating to the properties in Medford, Oregon, located at 401 E. 4th St.,
4th & Bartlett, 235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants
Pass, Oregon, at 1470 N.E. 7th, and 801 N. Riverside Ave, collectively at a
lease rate of $17,439 per month; (iii) Lithia Rentals, Inc., dba Discount
Auto and Truck Rental, relating to properties located in Medford, Oregon, at
971 Gilman Rd., and in Grants Pass, Oregon, at 1470 N.E. 7th, collectively
at a lease rate of $962 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)
LGPAC, Inc., relating to the property located in Grants Pass, Oregon, at
1421 N.E. 6th and 1470 N.E. 7th, collectively at a lease rate of $18,023 per
month; (vi) Lithia SSO, Inc., relating to properties located in Medford,
Oregon, at 400, 705-717 N. Riverside Ave., collectively at a lease rate of
$16,364 per month; (vii) Lithia DM, Inc., relating to properties located in
Medford, Oregon, at 324 E. 5th, 319 & 323 E. 6th St., 6th & Riverside, 129
N. Riverside, 4th & Riverside, 225 E. 6th, 315 E. 5th, 322 E. 4th, 201 N.
Riverside, 309, 315, 333, and 329 N. Riverside, 334 & 346 Apple St. and 401
E. 4th, collectively at a lease rate of $30,557 per month; and (viii) Lithia
Motors, Inc., relating to properties located in Medford, Oregon, at 360 E.
Jackson, 325 E. Jackson, 345 B. Bartlett, and 401 E. 4th St., collectively
at a lease rate of $5,309 per month.
(5) Substantially identical notes exist between the same parties in amounts of
$2.0 million, $2.5 million, and $5.0 million.
(6) A substantially identical note exists between the same parties in the amount
of $400,000.
(7) Substantially identical notes exist between the same parties in amounts of
$750,000, and $1.0 million.
(8) A substantially identical note exists between Lithia Motors, Inc. and
Manfred L. Heimann in the same amount
(9) A substantially identical agreement exists between Lithia Motors, Inc. and
Manfred L. Heimann
(10) 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.
(11) A substantially identical guarantee exists under which Lithia's Grants Pass
Auto Center, L.L.C. is the Guarantor.
(12) A substantially identical guaranty exists under which Manfred L. Heimann is
the Guarantor of Lithia Motors, Inc.
Z-4
<PAGE>
EXHIBIT 1.1
2,500,000(1) SHARES
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
NO PAR VALUE PER SHARE
FORM OF UNDERWRITING AGREEMENT
_____________, 1996
FURMAN SELZ LLC
DAIN BOSWORTH INCORPORATED
EVEREN SECURITIES, INC.,
As Representatives of the
several Underwriters
c/o Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
Dear Sirs:
1. Introduction. Lithia Motors, Inc., an Oregon corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters"), for which Furman Selz LLC, Dain Bosworth
Incorporated and EVEREN Securities, Inc. are acting as representatives (the
"Representatives"), an aggregate of 2,875,000 shares of the Company's Class A
Common Stock, no par value per share (the "Common Stock"). The 2,500,000 shares
of Common Stock to be sold by the Company are referred to herein as the "Firm
Shares." The Company also proposes to issue and sell to the several
Underwriters an aggregate of not more than 375,000 additional shares of Common
Stock (the "Additional Shares"), if requested by the Underwriters in accordance
with Section 9 hereof. The issuance and sale of the Firm Shares by the Company
to the Underwriters, as contemplated hereby, is referred to herein as the
"Offering." The Firm Shares and the Additional Shares are collectively referred
to herein as the "Shares." The words "you" and "your" refer to the
Representatives of the Underwriters.
- ---------------
(1) Excludes the Underwriters' option to purchase the Additional Shares to
cover over-allotments, if any.
<PAGE>
The Company hereby agrees with the several Underwriters as follows:
2. Representations and Warranties. The Company represents, warrants and
agrees with each of the Underwriters that:
(a) A registration statement on Form S-1, (File No. 333-14031) under
the Securities Act of 1933, as amended (the "Act"), with respect to the Shares,
including a form of prospectus subject to completion, has been prepared by the
Company in conformity with the requirements of the Act and the rules and
regulations of the Securities and Exchange Commission (the "Commission")
thereunder (the "Rules and Regulations"). Such registration statement has been
filed with the Commission under the Act, and one or more amendments to such
registration statement may also have been so filed. After the execution of this
Agreement, the Company shall file with the Commission either (A) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, a prospectus in the form most recently
included in an amendment to such registration statement filed with the
Commission (or, if no such amendment shall have been filed, in such registration
statement), with such insertions and changes as are required by Rule 430A under
the Act or permitted by Rule 424(b) under the Act as shall have been provided to
and approved by the Representatives prior to the filing thereof, or (B) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representatives prior to the filing thereof.
As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto; the
Registration Statement shall be deemed to include any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as
hereinafter defined); the term "Registration Statement" shall also include any
registration statement relating to the Common Stock that is filed and becomes
effective pursuant to Rule 462(b) under the Act; the term "Preliminary
Prospectus" means each prospectus subject to completion contained in such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto or filed pursuant to Rule 424(a) under the Act at the time it
was or is declared effective); and the term "Prospectus" means the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act or, if no
prospectus is required to be filed pursuant to said
- 2 -
<PAGE>
Rule 424(b), such term means the prospectus included in the Registration
Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus and has not instituted
or threatened to institute any proceedings with respect to such an order. When
any Preliminary Prospectus was filed with the Commission it (A) contained all
statements required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (A) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. When the Prospectus and when any amendment or supplement
thereto is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed, when
the Registration Statement and when any amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and at
all times subsequent thereto up to and including the Closing Date (as defined in
Section 3 hereof) and the Option Closing Date (as defined in Section 9 hereof),
the Prospectus, as amended or supplemented at any such time, (A) contained or
will contain all statements required to be stated therein in accordance with,
and complied or will comply in all material respects with the requirements of,
the Act and the Rules and Regulations and (B) did not or will not include any,
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions of this
paragraph (b) shall not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon, and in
conformity with, information furnished in writing to the Company by or on behalf
of the Underwriters through the Representatives expressly for use therein. The
Company has not distributed any offering material in connection with the
Offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus or the Prospectus.
- 3 -
<PAGE>
(c) Each of the Company and (i) LGPAC, Inc., (ii) Lithia DM, Inc.,
(iii) Lithia Chrysler Plymouth Jeep Eagle, Inc., (iv) Lithia MTLM, Inc., (v)
Lithia HPI, Inc., (vi) Lithia SSO, Inc., (vii) Lithia Financial Corporation,
(viii) Lithia Rentals, Inc., (ix) Lithia Auto Services, Inc., (x) Lithia DE,
Inc., and (xi) Lithia Real Estate, Inc., each an Oregon corporation, and (xii)
Lithia's Grants Pass Auto Center, L.L.C., (xii) Lithia Dodge, L.L.C., and (xiv)
Lithia TLM, L.L.C., each an Oregon limited liability company and (xv) Lithia
TKV, Inc. and (xvi) Lithia HS, Inc., each a California corporation,
(collectively, the Company's "Subsidiaries" or individually, a "Subsidiary")
(A) is a duly incorporated and validly existing corporation or limited
liability company under the laws of its jurisdiction of incorporation or
organization, with full power and authority (corporate and other) to own or
lease its properties and to conduct its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and (B) is duly qualified to
do business as a foreign corporation or limited liability company in each
jurisdiction in which the conduct of its business requires such qualification
(except for those jurisdictions in which the failure so to qualify has not had
and will not have a Material Adverse Effect (as hereinafter defined)).
"Material Adverse Effect" means, when used in connection with the Company or its
Subsidiaries, any development, change or effect that is materially adverse to
the business, properties, assets, net worth, condition (financial or other),
results of operations or prospects of the Company and its Subsidiaries taken as
a whole. Except for the Subsidiaries or as disclosed in the Registration
Statement, the Company does not own, and at the Closing Date will not own,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the articles of organization, articles of incorporation and of the
bylaws of the Company and each of its Subsidiaries and all amendments thereto
have been delivered to the Representatives, and no changes therein will be made
subsequent to the date hereof and prior to the Closing Date.
(d) The Company has the duly authorized and validly outstanding
capitalization set forth under the caption "Capitalization" in the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and will have the adjusted capitalization set forth therein on the
Closing Date and the Option Closing Date, based on the assumptions set forth
therein. The securities of the Company conform to the descriptions thereof
contained in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary
- 4 -
<PAGE>
Prospectus). The outstanding shares of Common Stock have been duly authorized
and validly issued by the Company and are fully paid and nonassessable. Except
as created hereby, referred to in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) or pursuant to the
Company's 1996 Stock Incentive Plan, there are no outstanding options, warrants
or rights to acquire, or instruments convertible into or exchangeable for or any
contracts or commitments or liens related to or entitling any person to purchase
or otherwise acquire, any shares of capital stock or other equity interest in
the Company or any Subsidiary. No holders of outstanding shares of capital
stock of the Company are entitled as such to any preemptive or other rights to
subscribe for any of the Shares and neither the filing of the registration
statement nor the offering or sale of the Shares as contemplated by this
Agreement gives rise to any rights, other than those which have been waived
or satisfied, for or relating to, the registration of any securities of the
Company. The Shares have been duly authorized. On the Closing Date or the
Option Closing Date (as the case may be), after payment therefor in accordance
with the terms of this Agreement, (A) the Firm Shares and the Additional Shares
to be sold by the Company hereunder will be validly issued, fully paid and
nonassessable, and (B) good and marketable title to the Shares will pass to the
Underwriters on the Closing Date or the Option Closing Date (as the case may be)
free and clear of any pledge, lien, encumbrance, security interest, claim or
other restriction whatsoever. All the outstanding shares of capital stock of
each Subsidiary has been duly authorized and validly issued, are fully paid
and nonassessable and are owned directly or indirectly by the Company, free
and clear of any pledge, lien, encumbrance, security interest, claim or other
restriction whatsoever. The Company has filed a registration statement pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to register the Common Stock, has received, subject to notice
of issuance, approval to have the Shares quoted on the Nasdaq National Market
(the "Nasdaq National Market") and knows of no reason or set of facts which is
likely to adversely affect such approval.
(e) The combined financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
fairly present the combined financial condition, results of operations, owners'
equity and cash flows of the Company and its subsidiaries at the dates and for
the periods specified therein. Such financial statements and the related notes
and schedules thereto have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
(except as otherwise noted therein) and such financial statements
- 5 -
<PAGE>
as are audited have been examined by KPMG Peat Marwick LLP, who are independent
public accountants within the meaning of the Act and the Rules and Regulations,
as indicated in their reports filed therewith. The selected financial
information and statistical data set forth under the caption "Selected Combined
Financial Data" in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus) have been prepared on a basis consistent
with the financial statements of the Company and its subsidiaries. The pro
forma financial statements of the Company and its subsidiaries, and the related
notes thereto, set forth in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence the most recent Preliminary Prospectus),
have been prepared in conformity with the requirements of the Act and the Rules
and Regulations and present fairly the information shown therein based upon the
assumptions set forth therein; and the pro forma adjustments on such pro forma
financial statements have been properly applied on the basis described in the
related notes thereto. The pro forma financial data set forth in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), under the caption "Pro Forma
Combined and Condensed Financial Data" have been prepared on a basis consistent
with the pro forma combined financial statements of the Company and its
subsidiaries. The statements included in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) with respect to the accountants pursuant to Rule 509 of
Regulation S-K of the Act are true and correct in all material respects. The
statistical and market-related data included in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) are derived from sources that the Company believes are
reliable and accurate.
(f) The Company and each of its Subsidiaries have filed all necessary
federal, state and local and foreign income, franchise and other material tax
returns and have paid all taxes shown as due thereunder, and the Company has no
knowledge of any tax deficiency which might be assessed against the Company
which, if so assessed, would have a Material Adverse Effect.
(g) The Company and each of its Subsidiaries maintains insurance of the
types and in amounts which they reasonably believe to be adequate for their
businesses in such amounts and with such deductibles as is customary for
companies in the same or similar businesses. All such insurance is outstanding
and fully in force on the date hereof and will be outstanding and duly in force
on the Closing Date and the Option Closing Date, if any.
- 6 -
<PAGE>
(h) Except as disclosed in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there is no pending action, suit, proceeding or
investigation or threatened action, suit, proceeding or investigation before or
by any court, regulatory body or administrative agency or any other governmental
agency or body, domestic or foreign, which (A) questions the validity of the
capital stock of the Company or this Agreement or of any action taken or to be
taken by the Company pursuant to or in connection with this Agreement or as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
(B) is required to be disclosed in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) which is not so disclosed (and such proceedings, if any, as are
summarized therein are accurately summarized in all material respects) or (C)
may have a Material Adverse Effect.
(i) The Company has full legal right, power and authority to enter
into this Agreement and to consummate the transactions provided for herein.
This Agreement has been duly authorized, executed and delivered by the Company
and, assuming it is a binding agreement of yours, constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting the enforcement of creditors, rights and
the application of equitable principles relating to the availability of remedies
and except as rights to indemnity or contribution may be limited by federal or
state securities laws and the public policy underlying such laws), and none of
the Company's execution or delivery of this Agreement, its performance
hereunder, its consummation of the transactions contemplated herein, its
application of the net proceeds of the offering in the manner set forth under
the caption "Use of Proceeds" or the conduct of its business as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), conflicts or will conflict with or results or will
result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default, under, causes or will cause (or
permits or will permit) the maturation or acceleration of any liability or
obligation or the termination of any right under, or result in the creation or
imposition of any lien, charge, or encumbrance upon, any property or assets of
the Company or any of its Subsidiaries pursuant to the terms of (A) the articles
of organization, articles of incorporation or bylaws of the Company or any of
its Subsidiaries, (B) any indenture, mortgage, deed of trust, voting
- 7 -
<PAGE>
trust agreement, stockholders agreement, note agreement, dealership or franchise
agreement (except as identified in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus with respect to such
dealership or franchise agreement) or other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which any of them are or may
be bound or to which any of their respective property is or may be subject or
(C) any statute, judgment, decree, order, rule or regulation applicable to the
Company or any of its Subsidiaries of any government, arbitrator, court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over the Company, any of its
Subsidiaries or any of their respective activities or properties.
(j) All executed agreements or copies of executed agreements filed as
exhibits to the Registration Statement to which the Company or any of its
Subsidiaries is a party or by which any of them are or may be bound or to which
any of their assets, properties or businesses is or may be subject have been
duly and validly authorized, executed and delivered by the Company or such
Subsidiary, as the case may be, and constitute the legal, valid and binding
agreements of the Company or such Subsidiary, as the case may be, enforceable
against each of them in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws relating to enforcement of creditors,
rights generally, and general equitable principles relating to the availability
of remedies, and except as rights to indemnity or contribution may be limited by
federal or state securities laws and the public policy underlying such laws).
The descriptions in the Registration Statement of contracts and other documents
are accurate and fairly present the information required to be shown with
respect thereto by the Act and the Rules and Regulations, and there are no
contracts or other documents which are required by the Act or the Rules and
Regulations to be described in the Registration Statement or filed as exhibits
to the Registration Statement which are not described or filed as required, and
the exhibits which have been filed are complete and correct copies of the
documents of which they purport to be copies.
(k) Subsequent to the most recent respective dates as of which
information is given in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), and
except as expressly contemplated therein, neither the Company nor any of its
Subsidiaries has incurred, other than in the ordinary course of its business,
any material liabilities or obligations, direct or contingent, purchased any of
its outstanding capital stock, paid
- 8 -
<PAGE>
or declared any dividends or other distributions on its capital stock, except as
disclosed in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) with
respect to the Subchapter S distributions to the Company's Principal Owners (as
defined therein), or entered into any material transactions not in the ordinary
course of business, except as disclosed in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) under the heading "Recent and Pending Acquisitions," and
there has been no material change in capital stock or debt or any material
adverse change in the business, properties, assets, net worth, condition
(financial or other), or results of operations or prospects of the Company and
its Subsidiaries taken as a whole. Neither the Company nor any of its
Subsidiaries (nor the manner in which any of them conducts its business) is in
breach or violation of, or in default under, any term or provision of (A) its
articles of organization, articles of incorporation or bylaws, (B) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note agreement, dealership or franchise agreement or other agreement
or instrument to which it is a party or by which it is or may be bound or to
which any of its property is or may be subject, or any indebtedness, the effect
of which breach or default singly or in the aggregate may have a Material
Adverse Effect, or (C) any statute, judgment, decree, order, rule or regulation
applicable to the Company or any of its Subsidiaries or of any arbitrator,
court, regulatory body, administrative agency or any other governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their respective activities or properties and the effect
of which breach or default singly or in the aggregate may have a Material
Adverse Effect.
(l) There is (i) no significant unfair labor practice complaint
pending against the Company or any of its Subsidiaries before the National Labor
Relations Board or any state or local labor relations board, and no significant
grievance or more significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company or any of its
Subsidiaries, or to the best knowledge of the Company, threatened against any of
them, and (ii) no significant strike, labor dispute, slowdown or stoppage
pending against the Company or any of its Subsidiaries or, to the best knowledge
of the Company, threatened against any of them except for such actions specified
in clause (i) or (ii) above or otherwise disclosed in the Prospectus, which,
singly or in the aggregate could not reasonably be expected to have a Material
Adverse Effect.
- 9 -
<PAGE>
(m) Since its inception, the Company has not incurred any material
liability arising under or as a result of the application of the provisions of
the Act.
(n) Each of the Company and its Subsidiaries owns, or is licensed
or otherwise has sufficient right to use, the proprietary knowledge,
inventions, patents, trademarks, service marks, trade names, logo marks and
copyrights used in or necessary for the conduct of its business (collectively
"Rights") as described in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary
Prospectus), except where the absence of such right could not reasonably be
expected to have a Material Adverse Effect. No claims have been asserted
against the Company or any of its Subsidiaries by any person with respect to
the use of any such Rights, except where such claim could not reasonably be
expected to have a Material Adverse Effect or challenging or questioning the
validity or effectiveness of any such Rights. The use, in connection with
the business and operations of the Company and its Subsidiaries of such
Rights does not, to the Company's best knowledge, infringe on the rights of
any person, where such infringement could not reasonably be expected to have
a Material Adverse Effect.
(o) No consent, approval, authorization or order of or filing with any
court, regulatory body, administrative agency or any other governmental agency
or body, domestic or foreign, is required for the performance of this Agreement
or the consummation of the transactions contemplated hereby or in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), except such as have been or
may be obtained under the Act or may be required under state securities or Blue
Sky laws in connection with the Underwriters' purchase and distribution of the
Shares.
(p) No consent, approval, authorization of or notice to, or filing with
any third party is required for the performance of this Agreement or the
consummation or the transactions contemplated hereby or in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), except those that have been disclosed in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), or those which would not
have a Material Adverse Effect on the Company and its Subsidiaries taken as a
whole. Neither the Company nor any of its Subsidiaries has any reason to
believe that any such consent, approval, authorization or filing with any
third party necessary in the future to conduct the business of the Company and
its Subsidiaries as described in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
- 10 -
<PAGE>
Prospectus) will not be granted upon application, except as disclosed therein,
or that any third party is investigating the Company or any of its Subsidiaries
other than in the ordinary course of business or in a review of the
transactions contemplated hereby.
(q) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company to
include such securities under the Registration Statement (other than those that
have been disclosed in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), that have not been waived with respect
to the Registration Statement.
(r) Neither the Company nor any of its officers, directors or affiliates
(within the meaning of the Rules and Regulations) has taken, directly or
indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(s) Each of the Company and its Subsidiaries has good and marketable
title to, or valid and enforceable leasehold interests in, all properties and
assets owned or leased by it, free and clear of all liens, encumbrances,
security interests, claims, restrictions, equities, claims and defects,
except (A) such as are described in the Registration Statement and Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), or such as do not materially adversely affect the value of any
of such properties or assets taken as a whole and do not materially interfere
with the use made and proposed to be made of any of such properties or
assets, and (B) liens for taxes not yet due and payable as to which
appropriate reserves have been established and reflected in the financial
statements included in the Registration Statement. Each of the Company and
its Subsidiaries own or lease all such properties as are necessary to its
operations as now conducted, and as proposed to be conducted as set forth in
the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus); and the properties and
business of the Company and its Subsidiaries conform in all material respects
to the descriptions thereof contained in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). All the material leases and subleases of the
Company and its
- 11 -
<PAGE>
Subsidiaries, and under which the Company or any Subsidiary holds
properties or assets as lessee or sublessee, constitute valid leasehold
interests of the Company or such Subsidiary free and clear of any lien,
encumbrance, security interest, restriction, equity, claim or defect, are in
full force and effect, and neither the Company nor any Subsidiary is in default
in respect of any of the material terms or provisions of any such material
leases or subleases, and neither the Company nor any Subsidiary has notice of
any claim which has been asserted by anyone adverse to the Company's or any of
its Subsidiary's rights as lessee or sublessee under either the material lease
or sublease, or affecting or questioning the Company's or any Subsidiary's right
to the continued possession of the leased or subleased premises under any such
material lease or sublease, which may have a Material Adverse Effect.
(t) Neither the Company nor any Subsidiary has violated any
applicable environmental, safety, health or similar law applicable to the
business of the Company, nor any federal or state law relating to discrimination
in the hiring, promotion or pay of employees, nor any applicable federal or
state wages and hours laws, nor any provisions of Employee Retirement Income
Security Act or the rules and regulations promulgated thereunder, the
consequences of which violation may have a Material Adverse Effect.
(u) To the Company's best knowledge, the Company has reasonably
concluded that the costs and liabilities associated with the effect of
environmental laws on the business, operations and properties of the Company
and its Subsidiaries (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
environmental laws or any permit, license or approval, any related
constraints on operating activities and any potential liabilities to third
parties) would not, singly or in the aggregate, have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole.
(v) Each of the Company and its Subsidiaries holds all franchises,
licenses, permits, approvals, certificates and other authorizations from
federal, state and other governmental or regulatory authorities (including
foreign regulatory authorities), all self-regulatory organizations, all domestic
or foreign courts and other tribunals and third parties, including without
limitation, all automobile manufacturers and distributors necessary to the
ownership, leasing and operation of its properties or required for the present
and proposed conduct of its business, and such franchises, licenses, permits,
approvals,
- 12 -
<PAGE>
certificates and other authorizations are in full force and effect and the
Company and its Subsidiaries are in compliance therewith in all material
respects except as otherwise disclosed in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or where the failure so to obtain, maintain or comply
with would not have a Material Adverse Effect. Neither the Company nor any of
its Subsidiaries has received any actual notice of any proceeding relating to
revocation or modification of any such franchise, license, permit, approval,
certificate or authorization, except as described in the Registration Statement
and the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(w) No Subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such Subsidiary's capital stock, from repaying to the Company
any loans or advances to such Subsidiary from the Company or from transferring
any of such Subsidiary's property or assets to the Company or any other
Subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(x) Neither the Company nor any of its Subsidiaries is an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(y) Neither the Company nor any affiliate of the Company does
business with the government of Cuba or with any person or affiliate located in
Cuba and the Company and each affiliate thereof has complied with all provisions
of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(z) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no business
relationships or related party transactions required to be disclosed therein by
Item 404 of Regulation S-K under the Act.
(aa) The Company and each of its Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with
- 13 -
<PAGE>
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(ab) Each agreement to which the Company or any of its Subsidiaries
is a party and pursuant to which the Company or any of its Subsidiaries acts
as a franchisee or dealer, whereby it sells products, including without
limitation the Dealer, Dealer Sales and Service, and Sales and Service
Agreements and the standard provisions relating thereto between the Company
and/or its Subsidiaries and each of Chrysler Corporation, American Honda
Motor Company, American Isuzu Motors, Ford Motor Company, General Motors
Corporation, Mazda Motor of America, Inc., Saturn Distribution Corporation,
Toyota Motor Distributors, Inc., American Suzuki Motor Corporation, Kia
America Motors, Inc. and Volkswagen of America (each a "Dealer Agreement")
and except for as disclosed in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) with respect to the Restructuring, each such Dealer Agreement
being listed as an Exhibit to the Registration Statement, is a valid and
binding agreement and no default has occurred or is continuing thereunder
which might result in any Material Adverse Effect.
(ac) The Company has obtained and delivered to you the agreement of
each of the persons listed on Annex I hereto to the effect that each such
person will not, for a period of 180 days following the effective date of the
Registration Statement, without the written consent of Furman Selz LLC, which
shall not be unreasonably withheld or delayed, directly or indirectly offer
to sell, sell, grant any option for the sale of, or otherwise dispose of, any
Common Stock of the Company owned by such person.
(ad) Any certificates signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty of the Company to the Underwriters as to the matters
covered thereby. Any certificate delivered by the Company to its counsel for
purposes of enabling such counsel to render the opinions referred to in
Section 9 will also be furnished to you and counsel for the Underwriters and
shall be deemed to be additional representations and warranties by the Company
to the Underwriters as to the matters covered thereby.
(ae) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), the Company has not consummated the acquisition or
disposition of any business or property which is "significant" to the Company
within the meaning
- 14 -
<PAGE>
of Regulation S-X under the Act, and, except for the acquisition of the business
of Lithia TKV, Inc., Roberts Dodge, Inc. and Sam Linder, Inc., as set forth in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), no such acquisition or
disposition is probable (within the meaning of such Regulation).
(af) The Directors' and Officers' Questionnaires delivered by the
Company to the Representatives on or prior to the Closing Date are true and
correct in all material respects.
3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to sell
to each Underwriter and each Underwriter, severally and not jointly, agrees to
purchase from the Company at a purchase price of $________ per Share, the number
of Firm Shares set forth opposite the name of such Underwriter in Column (1) of
Schedule I hereto.
Delivery of certificates, and payment of the purchase price, for the
Firm Shares shall be made at the offices of Furman Selz LLC at 230 Park Avenue,
New York, New York 10169, or such other location as shall be agreed upon by the
Company and the Representatives. Such delivery and payment shall be made at
10:00 a.m., New York City time, on ___________, 1996 or at such other time and
date thereafter as shall be agreed upon by the Representatives and the Company.
The time and date of such delivery and payment are herein called the "Closing
Date." Delivery of the certificates for the Firm Shares shall be made to the
Representatives for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representatives of the purchase
price for the Firm Shares by Federal or other funds immediately available in New
York City drawn to the order of the Company for the Firm Shares sold by it. The
certificates for the Firm Shares to be so delivered will be in definitive, fully
registered form, will bear no restrictive legends and will be in such
denominations and registered in such names as the Representatives shall request,
not less than two full business days prior to the Closing Date. The
certificates for the Firm Shares will be made available to the Representatives
at such office or such other place as the Representatives may designate for
inspection, checking and packaging not later than 9:30 a.m., New York time on
the business day prior to the Closing Date.
4. PUBLIC OFFERING OF THE SHARES. It is understood that the Underwriters
propose to make a public offering of the Shares at the price and upon the other
terms set forth in the Prospectus.
- 15 -
<PAGE>
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendments thereto, if not effective at the time of execution
of this Agreement, to become effective as promptly as practicable. If required,
the Company will file the Prospectus and any amendment or supplement thereto
with the Commission in the manner and within the time period required by
Rule 424(b) under the Act. During any time when a prospectus relating to the
Shares is required to be delivered under the Act, the Company (A) will comply
with all requirements imposed upon it by the Act and the Rules and Regulations
to the extent necessary to permit the continuance of sales of or dealings in the
Shares in accordance with the provisions hereof and of the Prospectus, as then
amended or supplemented, and (B) will not file with the Commission the
prospectus or the amendment referred to in the third sentence of Section 2(a)
hereof, any amendment or supplement to such prospectus or any amendment to the
Registration Statement of which the Representatives shall not previously have
been advised and furnished with a copy a reasonable period of time prior to the
proposed filing and as to which filing the Representatives shall not have given
its their consent, which consent shall not be unreasonably withheld or delayed.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives (A) when the Registration Statement,
as amended, has become effective; if the provisions of Rule 430A promulgated
under the Act will be relied upon, when the Prospectus has been filed in
accordance with said Rule 430A and when any post-effective amendment to the
Registration Statement becomes effective; (B) of any request made by the
Commission for amending the Registration Statement, for supplementing any
Preliminary Prospectus or the Prospectus or for additional information, or
(C) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto or the
institution or threat of any investigation or proceeding for that purpose, and
will use its best efforts to prevent the issuance of any such order and, if
issued, to obtain the lifting thereof as soon as possible.
(c) The Company will (A) use its best efforts to arrange for the
qualification of the Shares for offer and sale under the state securities or
blue sky laws of such jurisdictions as the Representatives may designate,
(B) continue such qualifications in effect for as long as may be necessary to
- 16 -
<PAGE>
complete the distribution of the Shares, and (C) make such applications, file
such documents and furnish such information as may be required for the purposes
set forth in clauses (A) and (B); PROVIDED, HOWEVER, that the Company shall not
be required to qualify as a foreign corporation or file a general or unlimited
consent to service of process in any such jurisdiction.
(d) The Company consents to the use of the Prospectus (and any
amendment or supplement thereto) by the Underwriters and all dealers to whom the
Shares may be sold, in connection with the offering or sale of the Shares and
for such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating
to the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or if it becomes
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules and Regulations, the Company promptly will so notify the
Representatives and, subject to Section 5(a)(i) hereof, will prepare and file
with the Commission an amendment to the Registration Statement or an amendment
or supplement to the Prospectus which will correct such statement or omission or
effect such compliance, each such amendment or supplement to be reasonably
satisfactory to counsel to the Underwriters.
(e) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company will make
generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representatives, an
earnings statement which will be in the detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless required by
the Act or the Rules and Regulations, covering a period of at least 12
consecutive months after the effective date of the Registration Statement.
(f) During a period of five years after the date hereof, the Company
will furnish to its shareholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the
Representatives:
- 17 -
<PAGE>
(i) concurrently with furnishing such quarterly reports to its
shareholders, statements of operations of the Company for each quarter in the
form furnished to the Company's shareholders and certified by the Company's
principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
shareholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, owners' equity, and cash
flows of the Company for such fiscal year, accompanied by a copy of the report
thereon of independent public accountants;
(iii) as soon as they are available copies of all information
(financial or other) mailed to shareholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the National
Association of Securities Dealers, Inc. (the "NASD") or any securities exchange;
(v) every press release and every material news item or
article of interest to the financial community in respect of the Company or its
affairs which was released or prepared by the Company; and
(vi) any additional information of a public nature concerning
the Company or its business which the Representatives may reasonably request.
During such five-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(g) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company, a Registrar (which may
be the same entity as the Transfer Agent) for its Common Stock.
(h) The Company will furnish, without charge, to the Representatives
or on the Representatives' order, at such place as the Representatives may
designate, copies of the each Preliminary Prospectus, the Registration Statement
and any pre-effective or post-effective amendments thereto (three of which
copies will be signed and will include all financial statements and exhibits)
and the Prospectus, and all amendments and supplements thereto, in each case as
soon as available and in
- 18 -
<PAGE>
such quantities as the Representatives may reasonably request. The Company will
provide or cause to be provided to the Representatives and upon request to each
Underwriter, a copy of the report on Form SR filed by the Company as required by
Rule 463 under the Act.
(i) The Company will not, directly or indirectly, without the prior
written consent of Furman Selz LLC, which shall not be unreasonably withheld,
issue, sell, grant any option to purchase or otherwise dispose (or announce any
issuance, sale, grant or any option to purchase or other disposition, other than
in connection with a transaction pursuant to Rule 145 of the Securities Act) of
any shares of Common Stock or any securities convertible into, or exchangeable
or exercisable for, shares of Common Stock for a period of 180 days after the
date hereof, except pursuant to this Agreement, except for issuances pursuant to
the exercise of stock options outstanding on or granted subsequent to the date
hereof, pursuant to a stock option or other employee benefit plan in existence
on the date hereof and except as contemplated by the Prospectus.
(j) The Company will cause the Shares to be duly included for
quotation on the Nasdaq National Market prior to the Closing Date.
(k) Neither the Company nor any of its officers or directors, nor
affiliates of any of them (within the meaning of the Rules and Regulations) will
take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(l) The Company will apply the net proceeds of the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
(m) The Company will timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Rules and
Regulations, the Exchange Act, and the rules and regulations thereunder, and all
such reports, forms and documents filed will comply as to form and substance
with the applicable requirements under the Act, the Rules and Regulations, the
Exchange Act and the rules and regulations thereunder.
(n) As soon as practicable after the Closing Date, and, in any event,
no later than 90 days after the completion of the Offering, the Company will
elect at least two (2) independent board members to the Board of Directors of
the Company and shall maintain at least two (2) independent board members at all
times after the Closing Date.
- 19 -
<PAGE>
6. EXPENSES
(a) Regardless of whether the transactions contemplated in this
Agreement are consummated, and regardless of whether for any reason this
Agreement is terminated, the Company will pay, and hereby agrees to indemnify
each Underwriter against, all fees and expenses incident to the performance of
the obligations of the Company under this Agreement, including, but not limited
to, 1. fees and expenses of accountants and counsel for the Company, 2. all
costs and expenses incurred in connection with the preparation, duplication,
printing, filing, delivery and shipping of copies of the Registration Statement
and any pre-effective or post-effective amendments thereto, any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto
(including postage costs related to the delivery by the Underwriters of any
Preliminary Prospectus or Prospectus, or any amendment or supplement thereto),
this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreement,
Underwriters' Questionnaire, Underwriters' Power of Attorney and all other
documents in connection with the transactions contemplated herein, including the
cost of all copies thereof 3. fees and expenses relating to qualification of the
Shares under state securities or blue sky laws, including the cost of preparing
and mailing the preliminary and final blue sky memoranda and filing fees and
disbursements and fees of counsel and other related expenses, if any, in
connection therewith, 4. filing fees of the Commission and the NASD relating to
the Shares, 5. any fees and expenses in connection with the quotation of the
Shares on the Nasdaq National Market, 6. costs and expenses incident to the
preparation, issuance and delivery to the Underwriters of any certificates
evidencing the Shares, including transfer agent's and registrar's fees and any
applicable transfer taxes incurred in connection with the delivery to the
Underwriters of the Shares to be sold by the Company pursuant to this Agreement,
7. costs and expenses incident to any meetings with prospective investors in the
Shares (other than as shall have been specifically approved by the
Representatives to be paid for by the Underwriters) and 8. costs and expenses of
advertising relating to the offering of the Shares (other than as shall have
been specifically approved by the Representatives to be paid for by the
Underwriters).
(b) If the purchase of the Shares as herein contemplated is not
consummated for any reason other than the Underwriters' default under this
Agreement, including the failure or refusal of an Underwriter to purchase and
pay for Shares pursuant to Section 12 of this Agreement, or other than by reason
of Section 11(a), the Company shall reimburse the several Underwriters for their
out-of-pocket expenses (including rea-
- 20 -
<PAGE>
sonable counsel fees and disbursements) in connection with any investigation
made by them, and any preparation made by them in respect of marketing of the
Shares or in contemplation of the performance by them of their obligations
hereunder.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of each
Underwriter to purchase and pay for the Shares set forth opposite the name of
such Underwriter in Schedule I is subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date as if they had been made on and as of the Closing Date;
the accuracy on and as of the Closing Date of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
on and as of the Closing Date of its covenants and agreements hereunder; and the
following additional conditions:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Registration Statement shall have been declared effective, and the
Prospectus (containing the information omitted pursuant to Rule 430A) shall have
been filed with the Commission not later than the Commission's close of business
on the second business day following the date hereof or such later time and date
to which the Representatives shall have consented; if the Company does not elect
to rely on Rule 430A, the Registration Statement shall have been declared
effective not later than 11:00 A.M., New York time, on the date hereof or such
later time and date to which the Representatives shall have consented; if
required, in the case of any changes in or amendments or supplements to the
Prospectus in addition to those contemplated above, the Company shall have filed
such Prospectus as amended or supplemented with the Commission in the manner and
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representatives' opinion, is material, or omits to state a
fact which, in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any
- 21 -
<PAGE>
supplement thereto, contains an untrue statement of fact which, in the
Representatives' opinion, is material, or omits to state a fact which, in the
Representatives' opinion, is material and is required to be stated therein or is
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(c) On or prior to the Closing Date, the Representatives shall have
received from counsel to the Underwriters, such opinion or opinions with respect
to the issuance and sale of the Firm Shares, the Registration Statement and the
Prospectus and such other related matters as the Representatives reasonably may
request and such counsel shall have received such documents and other
information as they request to enable them to pass upon such matters.
(d) On the Closing Date the Underwriters shall have received the
opinion, dated the Closing Date, of Foster, Pepper & Shefelman, counsel to the
Company ("Company Counsel"), to the effect set forth below:
(i) Each of the Company and each of its Subsidiaries (A) is a
duly incorporated and validly existing corporation or limited
liability company under the laws of its jurisdiction of incorporation
or organization with full power and authority to own or lease its
properties and to conduct its business as described in the
Registration Statement and the Prospectus, and (B) is duly qualified
to do business as a foreign corporation or limited liability company
in each jurisdiction in which the conduct of its business requires
such qualification (except for those jurisdictions in which the
failure so to qualify can be cured without having a Material Adverse
Effect);
(ii) The Company has authorized capital stock as set forth in the
Prospectus; the securities of the Company conform in all material
respects to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly authorized and
validly issued by the Company, are fully paid and nonassessable, and
are free of any preemptive or other rights to subscribe for any of the
Shares; the Company has duly authorized the issuance and sale of the
Shares to be sold by it hereunder; such Shares, when issued by the
Company and paid for in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and will conform in all
material respects to the description thereof contained in the
Prospectus and will not be subject to any preemptive, subscription or
other similar rights; and the Shares have been duly authorized for
quotation on the Nasdaq National Market;
- 22 -
<PAGE>
(iii) The Registration Statement is effective under the Act;
any required filing of the Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time period required by Rule 424(b);
and no stop order suspending the effectiveness of the Registration
Statement or any amendment thereto has been issued, and no proceedings
for that purpose have been instituted or are pending or, to the best
knowledge of such counsel, are threatened or contemplated under the
Act; the registration statement originally filed with respect to the
Shares and each amendment thereto and the Prospectus and, if any, each
amendment and supplement thereto (except for the financial statements,
schedules and other financial data included therein, as to which such
counsel need not express any opinion), complied as to form in all
material respects with the requirements of the Act and the Rules and
Regulations; the descriptions contained and summarized in the
Registration Statement and the Prospectus of the terms and provisions
of contracts and other documents, including, without limitation, the
terms and provisions of the Dealer Agreements and employee benefit
plans, are accurate and fairly represent in all material respects the
information required to be shown by the Act and the Rules and
Regulations and do not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; to the best
knowledge of such counsel, there are no contracts or documents which
are required by the Act to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration
Statement which are not described or filed as required by the Act and
the Rules and Regulations; to the best knowledge of such counsel,
there is not pending or threatened against the Company or any of its
Subsidiaries any action, suit, proceeding or investigation before or
by any court, regulatory body, or administrative agency or any other
governmental agency or body, domestic or foreign, of a character
required to be disclosed in the Registration Statement or the
Prospectus which is not so disclosed therein; and the statements set
forth under the headings "Business--Regulation" and "Business--
Litigation," in the Registration Statement and the Prospectus, insofar
as such statements constitute a summary of the legal matters or
proceedings referred to therein, provide an accurate summary of such
legal matters and proceedings;
(iv) The Company has the requisite corporate power and
authority to enter into this Agreement and to consummate the
transactions provided for herein; this
- 23 -
<PAGE>
Agreement has been duly authorized, executed and delivered by the Company; and
this Agreement, assuming due authorization, execution and delivery by each other
party hereto, is a valid and binding agreement of the Company, enforceable in
accordance with its terms, except as limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws now or hereafter in effect
relating to or affecting creditors, rights generally or by general principles of
equity relating to the availability of remedies and except as rights to
indemnity and contribution may be limited by federal or state securities laws or
the public policy underlying such laws. Except as otherwise set forth in the
Prospectus, none of the Company's execution or delivery of this Agreement, its
performance hereof, its consummation of the transactions contemplated herein or
its application of the net proceeds of the offering in the manner set forth
under the caption "Use of Proceeds," conflicts or will conflict with or results
or will result in any breach or violation of any of the terms or provisions of,
or constitute a default under, or result in the creation or imposition of any
lien, charge or encumbrance upon, any property or assets of the Company or any
of its Subsidiaries pursuant to the terms of the articles of organization,
articles of incorporation or bylaws of the Company or any of its Subsidiaries;
the terms of any indenture, mortgage, deed of trust, voting trust agreement,
shareholder's agreement, note agreement, dealership or franchise agreement or
other agreement or instrument known to such counsel after reasonable
investigation to which the Company or any of its Subsidiaries is a party or by
which it or any of its Subsidiaries is or may be bound or to which any of their
respective properties may be subject; any statute, rule or regulation of any
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their respective activities or properties; or any
judgment, decree or order, known to such counsel after reasonable investigation,
of any government, arbitrator, court, regulatory body or administrative agency
or other governmental agency or body, domestic or foreign, having such
jurisdiction; and no consent, approval, authorization or order of any court,
regulatory body or administrative agency or other governmental agency or body,
domestic or foreign, has been or is required for the Company's Agreement or the
consummation of the transactions contemplated hereby, except such as have been
obtained under the Act or may be required under state securities or blue sky
laws in connection with the purchase and distribution by the Underwriters of the
Shares;
- 24 -
<PAGE>
(v) To the best of such counsel's knowledge, the conduct of
the businesses of the Company and its Subsidiaries is not in violation of
any federal, state or local statute, administrative regulation or other
law, which violation is likely to have a Material Adverse Effect; and each
of the Company and its Subsidiaries has obtained all licenses, permits,
franchises, certificates and other authorizations from state, federal and
other regulatory authorities as are necessary or required for the
ownership, leasing and operation of its properties and the conduct of its
business as presently conducted and as contemplated in the Prospectus;
(vi) The issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned by the Company free and clear of any
perfected security interests or, to the best knowledge of such counsel, any
other liens, encumbrances, claims or security interests; no Subsidiary of
the Company is currently prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on such
Subsidiary's capital stock, from repaying to the Company any loans or
advances to such Subsidiary from the Company or from transferring any of
such Subsidiary's property or assets to the Company or any other Subsidiary
of the Company, except as described in or contemplated by the Prospectus;
(vii) To the best of such counsel's knowledge, except as
described in the Prospectus, no claims have been asserted against the
Company or any of its Subsidiaries by any person to the use of any such
Rights or challenging or questioning the validity or effectiveness of any
such Rights, except such claims that could not reasonably be expected to
have a Material Adverse Effect. The use, in connection with the businesses
and operations of the Company and its Subsidiaries of such Rights, does
not, to the best of such counsel's knowledge, infringe on the rights of any
person, except where such infringement could not reasonably be expected to
have a Material Adverse Effect; and
(viii) Neither the Company nor any of its subsidiaries is, or
will be upon the issuance and sale of the Shares by the Company and
compliance with the terms of the Agreement, an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the
- 25 -
<PAGE>
Prospectus, such counsel has participated in conferences with officers and
representatives of the Company and with the Company's independent public
accountants, at which conferences such counsel made inquiries of such officers,
representatives and accountants and discussed the contents of the Registration
Statement and the Prospectus and (without taking any further action to verify
independently the statements made in the Registration Statement and the
Prospectus and, except as stated in the foregoing opinion, without assuming
responsibility for the accuracy, completeness or fairness of such statements)
nothing has come to such counsel's attention that causes such counsel to believe
that either the Registration Statement as of the date it is declared effective
and as of the Closing Date or the Prospectus as of the date thereof and as of
the Closing Date contained or contains any untrue statement of a material fact
or omitted or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (it being understood
that such counsel need not express any opinion with respect to the financial
statements, schedules and other financial data included in the Registration
Statement or the Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) On or prior to the Closing Date, counsel to the Underwriters
shall have been furnished such documents, certificates and opinions as they may
reasonably require in order to evidence the accuracy, completeness or
satisfaction of any of the representations or warranties of the Company or
conditions herein contained.
(f) At the time that this Agreement is executed by the Company, the
Underwriters shall have received from each of KPMG Peat Marwick LLP and Moss
Adams LLP a letter as of the date this Agreement is executed by the Company in
form and substance satisfactory to you (the "Original Letter"), and on the
Closing Date the Underwriters shall have received from each of such firms a
letter dated the Closing Date stating that, as of a specified date not earlier
than five (5) days prior to the Closing Date, nothing has come to the attention
of such firm to suggest that the statements made in the Original Letter are not
true and correct.
- 26 -
<PAGE>
(g) On the Closing Date, the Underwriters shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that each
of such persons has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date,
and the Company and each of its Subsidiaries has complied with all
agreements and covenants and satisfied all conditions contained, in this
Agreement on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each of
such persons are contemplated or threatened under the Act and any and all
filings required by Rule 424 and Rule 430A have been timely made;
(iii) The Registration Statement and Prospectus and, if any, each
amendment and each supplement thereto, contain all statements and
information required to be included therein, and neither the Registration
Statement nor any amendment thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
neither the Prospectus (nor any supplement thereto) nor any Preliminary
Prospectus includes or included any untrue statement of a material fact or
omits or omitted to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus up to and
including the Closing Date and except for as necessary to undertake either
the Reorganization or the Acquisitions as described in the Registration
Statement or the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), neither the Company nor any of
the Subsidiaries has incurred, other than in the ordinary course of its
business, any material liabilities or obligations, direct or contingent;
neither the Company nor any of the Subsidiaries has purchased any of its
outstanding capital stock or paid or declared any dividends or other
distributions on its capital stock, except as disclosed in
- 27 -
<PAGE>
the Prospectus with respect to the Subchapter S distributions to the
Company's Principal Owners; neither the Company nor any of the Subsidiaries
has entered into any transactions not in the ordinary course of business;
and there has not been any change in the capital stock or long-term debt or
any increase in the short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the Company or
any material adverse change to the business properties, assets, net worth,
condition (financial or other), results of operations or prospects of the
Company and its Subsidiaries taken as a whole; neither the Company nor any
of the Subsidiaries has sustained any material loss or damage to its
property or assets, whether or not insured; there is no litigation which is
pending or threatened against the Company or any of its Subsidiaries which
is required under the Act or the Rules and Regulations to be set forth in
an amended or supplemented Prospectus which has not been set forth; and
there has not occurred any event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
paragraph (g) are to such documents as amended and supplemented at the date of
the certificate.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date there has not been (i) any change or decrease specified in the
letter or letters referred to in paragraph (f) of this Section 7 or (ii) any
change, or any development involving a prospective change, in the business or
properties of the Company or its Subsidiaries which change or decrease in the
case of clause (i) or change or development in the case of clause (ii) makes it
impractical or inadvisable in the Representatives' judgment to proceed with the
public offering or the delivery of the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 5(c)(A) hereof has been issued on or prior
to the Closing Date and no proceedings for that purpose have been instituted or,
to your knowledge or that of the Company, have been or are contemplated.
(j) The Representatives shall have received from each person
listed on Annex I hereto an agreement to the effect that such person will
not, directly or indirectly, without the prior written consent of Furman Selz
LLC, which shall not be unreasonably withheld or delayed, offer, sell, grant
any option to purchase
- 28 -
<PAGE>
or otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 180 days after the date of this Agreement.
(k) The Company shall have furnished the Underwriters with such
further opinions, letters, certificates or documents as you or counsel for the
Underwriters may reasonably request. All opinions, certificates, letters and
documents to be furnished by the Company will comply with the provisions hereof
only if they are reasonably satisfactory in all material respects to the
Underwriters and to counsel for the Underwriters. The Company shall furnish the
Underwriters with conformed copies of such opinions, certificates, letters and
documents in such quantities as you reasonably request. The certificates
delivered under this Section 7 shall constitute representations, warranties and
agreements of the Company, as the case may be, as to all matters set forth
therein as fully and effectively as if such matters had been set forth in
Section 2 of this Agreement.
(l) The Shares have been duly authorized for quotation on the Nasdaq
National Market.
(m) Each of the transactions contemplated by the Reorganization
Agreement shall have been consummated and the acquisition of Melody Vacaville,
Inc. described under the heading "RECENT AND PENDING ACQUISITIONS," in the
Prospectus shall have been consummated.
8. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls such Underwriter within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, against any and all
losses, claims, damages or liabilities, joint or several (and actions in respect
thereof), to which such Underwriter or such controlling person may become
subject, under the Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or the
Prospectus or any Preliminary Prospectus, or any amendment or supplement
thereto, or any blue sky application or other document executed by the Company
specifically for the purpose of qualifying, or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify, any or all of the Shares under the securities or blue sky laws thereof
(any such application,
- 29 -
<PAGE>
document or information being hereinafter called a "Blue Sky Application"), or
arise out of or are based upon the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to make the
statements therein not misleading and will reimburse, as incurred, such
Underwriter or such controlling persons for any legal or other expenses incurred
by such Underwriter or such controlling persons in connection with
investigating, defending or appearing as a third party witness in connection
with any such loss, claim, damage, liability or action; PROVIDED, HOWEVER, that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage, liability or action arises out of or is based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in any of such documents in reliance upon and in conformity with
information furnished in writing to the Company on behalf of such Underwriter
through the Representatives expressly for use therein, and PROVIDED, FURTHER,
that such indemnity with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter (or to the benefit of any person controlling
such Underwriter) from whom the person asserting any such loss, claim, damage,
liability or action purchased Shares which are the subject thereof to the extent
that any such loss, claim, damage, liability or action (i) results from the fact
that such Underwriter failed to send or give a copy of the Prospectus (as
amended or supplemented) to such person at or prior to the confirmation of the
sale of such Shares to such person in any case where such delivery is required
by the Act and (ii) arises out of or is based upon an untrue statement or
omission of a material fact contained in such Preliminary Prospectus that was
corrected in the Prospectus (as amended and supplemented), unless such failure
resulted from non-compliance by the Company with Section 5(h) hereof.
The indemnity agreement in this paragraph (a) shall be in addition to
any liability which the Company may otherwise have.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, and each of its
officers who has signed the Registration Statement, each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages or liabilities
(and actions in respect thereof) to which the Company or any of the Company's
directors, officers, or controlling persons may become subject, under the Act or
other federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in the
- 30 -
<PAGE>
Registration Statement or the Prospectus or any Preliminary Prospectus, or any
amendment or supplement thereto or in any Blue Sky Application, or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with information furnished
in writing by that Underwriter through the Representatives to the Company
expressly for use therein; and will reimburse, as incurred, all legal or other
expenses reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action. The Company acknowledges that the
statements with respect to the public offering of the Shares set forth under the
heading "Underwriting" and the stabilization legend in the Prospectus have been
furnished by the Underwriters to the Company expressly for use therein and
constitute the only information furnished in writing by or on behalf of the
Underwriters for inclusion in the Prospectus. The indemnity agreement contained
in this subsection (b) shall be in addition to any liability which the
Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 8, notify such indemnifying party or
parties of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under subsection (a) or (b) of this
Section 8 or to the extent that the indemnifying party was not adversely
affected by such omission. In case any such action is brought against an
indemnified party and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties against which a claim is
to be made will be entitled to participate therein and, to the extent that it or
they may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party has reasonably concluded that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and otherwise to participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to
- 31 -
<PAGE>
such indemnified party of its election so to assume the defense of such action
and approval by the indemnified party of counsel, the indemnifying party will
not be liable to such indemnified party under this Section 8 for any legal or
other expenses (other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party has employed such counsel in connection with the
assumption of such different or additional legal defenses in accordance with the
proviso to the immediately preceding sentence, (ii) the indemnifying party has
not employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages, expenses
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) (i) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified, on the other hand, from the offering of
the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. In any case where the Company is a
contributing party and the Underwriters are the indemnified party, the relative
benefits received by the Company on the one hand, and the Underwriters, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the cover page of the Prospectus. Relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Underwriters, and the parties, relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission. The amount paid or payable by an
- 32 -
<PAGE>
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this paragraph (d) shall be
deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this paragraph (d), the
Underwriters shall not be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by the Underwriters
hereunder. The Underwriters, obligations to contribute pursuant to this
paragraph (d) are several in proportion to their respective underwriting
obligations, and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), (i) each person, if any,
who controls an Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as
such Underwriter and (ii) each director of the Company, each officer of the
Company who has signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act shall have the same rights to contribution as the Company,
subject in each case to this paragraph (d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect to which a claim for contribution may
be made against another party or parties under this paragraph (d), notify such
party or parties from whom contribution may be sought, but the omission so to
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any other obligation (x) it or they may have
hereunder or otherwise than under this paragraph (d) or (y) to the extent that
such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may otherwise have.
9. RIGHT TO INCREASE OFFERING. At anytime during a period of 30 days
from the date of the Prospectus, the Underwriters, by no less than two business
days' prior notice to the Company, may designate a closing (which may be
concurrent with, and part of, the closing on the Closing Date with respect to
the Firm Shares or may be a second closing held on a date subsequent to the
Closing Date, in either case such date shall be referred to herein as the
"Option Closing Date") at which the Underwriters may purchase all or less than
all of the Additional Shares in accordance with the provisions of this Section 9
at the purchase price per share to be paid for the Firm Shares. In no event
shall the option Closing Date be later than 10 business days
- 33 -
<PAGE>
after written notice of election to purchase Additional Shares is given.
The Company agrees to sell to the several Underwriters on the Option
Closing Date the number of Additional Shares specified in such notice and the
Underwriters agree severally and not jointly, to purchase such Additional Shares
on the Option Closing Date. Such Additional Shares shall be purchased for the
account of each Underwriter in the same proportion as the number of Firm Shares
set forth opposite the name of such Underwriter listed on Schedule I bears to
the total number of Firm Shares (subject to adjustment by you to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm Shares.
No Additional Shares shall be sold or delivered unless the Firm Shares
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Additional Shares or any portion thereof may be surrendered and
terminated at any time upon notice by you to the Company.
Except to the extent modified by this Section 9, all provisions of
this Agreement relating to the transactions contemplated to occur on the Closing
Date for the sale of the Firm Shares shall apply, MUTATIS MUTANDIS, to the
Option Closing Date for the sale of the Additional Shares.
10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and payment for the Shares. Any
successors to the Underwriters shall be entitled to the indemnity, contribution
and reimbursement agreements contained in this Agreement.
11. EFFECTIVE DATE AND TERMINATION
(a) This Agreement shall become effective at 11:00 A.M., New
York time on the first business day following the date hereof, or at such
earlier time after the Registration Statement becomes effective as the
Representatives, in their sole discretion, shall release the Shares for the sale
to the public unless prior to such time the Representatives shall have received
written notice from the Company that it elects that this Agreement shall not
become effective, or the Rep-
- 34 -
<PAGE>
resentatives shall have given written notice to the Company that the
Representatives on behalf of the Underwriters elect that this Agreement shall
not become effective; PROVIDED, HOWEVER, that the provisions of this Section and
of Section 6 and Section 8 hereof shall at all times be effective. For purposes
of this Section 11(a), the Shares to be purchased hereunder shall be deemed to
have been so released upon the earlier of notification by the Representatives to
securities dealers releasing such Shares for offering or the release by the
Representatives for publication of the first newspaper advertisement which is
subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representatives by notice to the Company in the
event that the Company has failed to comply in any respect with any of the
provisions of this Agreement required on its part to be performed at or prior to
the Closing Date or the Option Closing Date, or if any of the representations or
warranties of the Company is not accurate in any respect or if the covenants,
agreements or conditions of, or applicable to the Company herein contained have
not been complied with in any respect or satisfied within the time specified on
the Closing Date or the Option Closing Date, respectively, or if prior to the
Closing Date or the Option Closing Date:
(i) the Company or any of its Subsidiaries shall have sustained
a loss by strike, fire, flood, accident or other calamity of such a
character as to have a Material Adverse Effect on Company and its
Subsidiaries taken as a whole regardless of whether or not such loss was
insured;
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market
shall have been suspended or a material limitation on such trading shall
have been imposed or minimum or maximum prices shall have been established
on any such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak
or escalation of any other insurrection or armed conflict involving the
United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present or
prospective business or
- 35 -
<PAGE>
condition (financial or other) of the Company and its Subsidiaries taken as
a whole that, in each case, in the Representatives' judgment makes it
impracticable or inadvisable to make or consummate the public offering,
sale or delivery of the Company's Shares on the terms and in the manner
contemplated in the Prospectus and the Registration Statement.
(c) Termination of this Agreement under this Section 11 or Section 12
after the Firm Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement shall
be without liability of any party to any other party other than as provided in
Sections 6 and 8 hereof.
12. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 7 or 11 hereof) to
purchase and pay for (a) in the case of the Closing Date, the number of Firm
Shares agreed to be purchased by such Underwriter or Underwriters upon tender to
you of such Firm Shares in accordance with the terms hereof or (b) in the case
of the Option Closing Date, the number of Additional Shares agreed to be
purchased by such Underwriter or Underwriters upon tender to you of such
Additional Shares in accordance with the terms hereof, and the number of such
Shares shall not exceed 10% of the Firm Shares or Additional Shares required to
be purchased on the Closing Date or the Option Closing Date, as the case may be,
then, each of the non-defaulting Underwriters shall purchase and pay for (in
addition to the number of such Shares which it has severally agreed to purchase
hereunder) that proportion of the number of Shares which the defaulting
Underwriter or Underwriters shall have so failed or refused to purchase on such
Closing Date or Option Closing Date, as the case may be, which the number of
Shares agreed to be purchased by such nondefaulting Underwriter bears to the
aggregate number of Shares so agreed to be purchased by all such non-defaulting
Underwriters on such Closing Date or Option Closing Date, as the case may be.
In such case, you shall have the right to postpone the Closing Date or the
Option Closing Date, as the case may be, to a date not exceeding seven full
business days after the date originally fixed as such Closing Date or the Option
Closing Date, as the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration Statement, the Prospectus or any other
documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise
than for a reason sufficient to justify the termination of this Agreement under
the provisions of Section 7 or 11
- 36 -
<PAGE>
hereof) to purchase and pay for (a) in the case of the Closing Date, the number
of Firm Shares agreed to be purchased by such Underwriter or Underwriters upon
tender to you of such Firm Shares in accordance with the terms hereof or
(b) in the case of the Option Closing Date, the number of Additional Shares
agreed to be purchased by such Underwriter or Underwriters upon tender to you of
such Additional Shares in accordance with the terms hereof, and the number of
such Shares shall exceed 10% of the Firm Shares or Additional Shares required to
be purchased by all the Underwriters on the Closing Date or the Option Closing
Date, as the case may be, then (unless within 48 hours after such default
arrangements to your satisfaction shall have been made for the purchase of the
defaulted Shares by an Underwriter or Underwriters) and subject to the
provisions of Section 11(b) hereof, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter or on the part of the
Company except as otherwise provided in Sections 6 and 8 hereof. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this paragraph. Nothing in this Section 12, and no action
taken hereunder, shall relieve any defaulting Underwriter from liability in
respect of any default of such Underwriter under this Agreement.
13. NOTICES. All communications hereunder shall be in writing and if sent
to the Representatives or the Underwriters shall be mailed or delivered or
telecopied and confirmed by letter to c/o Furman Selz LLC at 230 Park Avenue,
New York, New York 10169, Attention: Syndicate Department or, if sent to the
Company, shall be mailed or delivered or telecopied and confirmed by letter to
the Company at 360 E. Jackson Street, Medford, Oregon 97501, Attention: Sidney
B. DeBoer.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Company and each Underwriter and the Company's and each
Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representations, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also be
for the benefit of any person or per-
- 37 -
<PAGE>
sons, if any, who control any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, and except that the Underwriters'
indemnity and contribution agreements shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement, any person or persons, if any, who control the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act.
No purchaser of Shares from the Underwriters will be deemed a successor because
of such purchase.
15. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law or conflict of law principles thereof. Each party
hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 8 above
and,agrees to accept, either directly or through an agent, service of process of
each such court.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
If the foregoing correctly sets forth our understanding, please
indicate the Underwriters' acceptance thereof in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
LITHIA MOTORS, INC.
By:
----------------------------
Name: Sidney B. DeBoer
Title: President, Chief
Executive Officer
and Secretary
- 38 -
<PAGE>
Accepted as of the date first above written:
FURMAN SELZ LLC
DAIN BOSWORTH INCORPORATED
EVEREN SECURITIES, INC.
By: Furman Selz LLC
Acting on its own behalf and as one of the Representatives of the several
Underwriters referred to in the foregoing Agreement
By:
-----------------------------
Title:
--------------------------
- 39 -
<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriting Agreement dated _____________, 1996
Number of
Firm
Shares to be
Purchased
from
the Company
-----------
Name
- ----
Furman Selz LLC
-----------
Dain Bosworth Incorporated
-----------
EVEREN Securities, Inc
-----------
Total
-----------
-----------
-----------
- 40 -
<PAGE>
ANNEX I
PERSONS DELIVERING LOCK-UP
AGREEMENTS
Underwriting Agreement dated _____________, 1996
<PAGE>
Lithia Holding Company, L.L.C., an Oregon limited liability company
Sidney B. DeBoer
M.L. Dick Heimann
R. Bradford Gray
Brian R. Neill
- 41 -
<PAGE>
EXHIBIT 4.1
SPECIMEN STOCK CERTIFICATE
Class A Common Stock [LITHIA LOGO] Class A Common Stock
Number Shares
LMTR_________ Incorporated Under the Laws of the State of Oregon ______________
See Reverse for Certain
Definitions and a Statement as to
the Rights, Preferences, Privileges
and Restrictions on Shares
CUSIP 536797 10 3
THIS CERTIFIES THAT ___________________________
IS THE OWNER OF _______________________ fully paid and non-assessable
shares of the Class A Common Stock, no par value, of
LITHIA MOTORS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated ______________________
/s/ M.L. Dick Heimann [SEAL] /s/ Sidney B. DeBoer
Executive Vice President President and Chief Executive Officer
and Assistant Secretary
Countersigned and Registered:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596, Denver, Colorado 80201
Transfer Agent and Registrar
By ___________________________
Authorized Signature
<PAGE>
LITHIA MOTORS, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common (Oregon Custodians use the following)
TEN ENT - as tenants by the entireties (Name) CUST UL OREG (Name) MIN-
_______________ as
JT TEN - as joint tenants with right Custodian under the laws of Oregon, for
of survivorship and not as ______________________________, a minor
tenants in common
(Name) CUST (Name)(State) UNIF GIFT MIN
ACT-
_________________________ Custodian
(Cust)
________________
(Minor)
Under _______________ Uniform Gift to
(State)
Minors Act
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED,______________________________ hereby sell, assign and
transfer unto
Please insert Social Security or other
number identifying number of Assignee
________________________________
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address, including Zip Code, of Assignee
- --------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- --------------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated______________________
X
-----------------------
X
-----------------------
Notice: The signature(s) to this Assignment must correspond with the
name(s) as written upon the face of the certificate in every particular, without
alteration or enlargement or any change whatsoever.
Signature(s) Guarateed
By
-------------------------
The signatures should be guaranteed by an eligible guarantor instution (Banks,
stockbrokers, savings and loan associations and credit unions with membership in
an approved signature guarantee medallion program), pursuant to SEC Rule 17Ad-15
<PAGE>
EXHIBIT 5.1
November 18, 1996
Board of Directors
Lithia Motors, Inc.
360 E. Jackson St.
Medford, Oregon 97501
Re: Proposed Public Offering of Lithia Motors, Inc. Common Stock
Gentlemen:
The undersigned has acted as counsel to Lithia Motors, Inc. (the "Company")
in the preparation and filing of a Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended, covering
2,875,000 shares (the "Shares") of the Company's Class A Common Stock, including
375,000 shares that may be sold by the Company upon exercise of an option
granted to the Underwriters to cover over-allotments.
In the course of our representation we have examined the Registration
Statement, copies of the Articles of Incorporation, Bylaws, and excerpts of
minutes of meetings of the Boards of Directors of the Company. We have also
received from officers of the Company certain other documents, corporate
records, and representations concerning factual matters. We have reviewed such
documents and have made such review of laws as we consider necessary for
purposes of this opinion.
We have relied as to matters of fact upon the above documents and
investigation. We have assumed without investigation the genuineness of all
signatures and the authenticity and completeness of all documents submitted to
us as originals and the conformity to authentic and complete original documents
of all documents submitted to us as certified or photostatic copies.
Based upon the foregoing and subject to the qualifications and exceptions
heretofore and hereinafter set forth, we are of the opinion that, when the
Registration Statement has been declared effective, the applicable provisions of
state securities laws have been complied with and the Company has issued the
Shares against payment therefor in the manner described the Registration
Statement, the shares will be validly issued and fully paid, and non-assessable.
The opinion herein expressed are specifically subject to and qualified by
the following:
This opinion is limited to the present laws of the State of Oregon and the
United States of America and to the facts bearing on this opinion as they exist
on the date of this letter.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the prospectus.
Very truly yours,
FOSTER PEPPER & SHEFELMAN
By: /s/ Kenneth E. Roberts
Kenneth E. Roberts
<PAGE>
EXHIBIT 10.6.2
FORD AMENDMENT TO SALES AND SERVICE AGREEMENT
LINCOLN-MERCURY DIVISION
Oakland District
MERCURY SALES AND SERVICE AGREEMENT Dated: 12/28/79
LINCOLN SALES AND SERVICE AGREEMENT Dated: 12/28/79
___________________________________ Dated: ___________
___________________________________ Dated:____________
SUPPLEMENTAL AGREEMENT made as of the [22nd] day of [May], [1989], by and
between
Lithia Motors, Inc.
- --------------------------------------------------------------------------------
(NAME OF ENTITY)
Corporation Oregon
- --------------------------------------------------------------------------------
(STATE WHETHER AN INDIVIDUAL, (IF THE LATTER, SHOW NAME OF STATE
PARTNERSHIP OR CORPORATION.) IN WHICH INCORPORATED.)
doing business as Lithia Lincoln-Mercury
------------------------------------------------------------
(TRADE NAME)
and with a principal place of business at 360 East Jackson
--------------------------------------
(STREET ADDRESS)
Medford Jackson Oregon 97501
- --------------------------------------------------------------------------------
(CITY) (COUNTY) (STATE) (ZIP CODE)
(hereinafter called the "Dealer") and Ford Motor Company, a Delaware corporation
with its principal place of business at Dearborn, Michigan (hereinafter called
the "Company").
The parties hereto have previously entered into the above designated Sales
and Service Agreements (hereinafter "Agreements") and now desire to make certain
changes therein.
NOW, THEREFORE, in consideration of these premises, the parties hereto
mutually agree that said Agreements be amended by changing Paragraph F to read
as follows:
F. In view of the personal nature of these Agreements and their
objectives and purposes, the Company expressly reserves to itself the right to
execute said Agreements with individuals or other entities specifically selected
and approved by the Company. Accordingly, these Agreements 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 these Agreements. These
Agreements have 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 owner of the Dealer:
HOME PERCENTAGE
NAME ADDRESS OF INTEREST
Sidney B. DeBoer 401 E. Modec Medford, OR 97501 62.5%
- --------------------------------------------------------------------------------
Manfred L. Heimann 426 Roundelay Circle Medford, OR 97504 37.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
(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:
HOME
NAME ADDRESS TITLE
Sidney B. DeBoer 401 E. Modec Medford, OR 97501 President
- --------------------------------------------------------------------------------
Manfred L. Heimann 426 Roundelay Circle Medford, OR 97504 Manager
- --------------------------------------------------------------------------------
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:
HOME PERCENTAGE
NAME ADDRESS OF INTEREST
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Dealer shall give the Company prior notice of any proposed change in the
said ownership or managerial authority of said Dealer, and immediate notice of
the death or incapacity of any such person. No such change or notice, and no
amendment or assignment of these Agreements 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 these Agreements 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. If the Company's
restriction regarding amendment or assignment of these Agreements is illegal
under a valid law of any jurisdiction where such change is to take place, this
amendment will be modified to the minimum extent necessary to comply with such
law if it was effective on the date of execution of these Agreements.
This Supplemental Agreement is subject to all the terms and conditions contained
in said Agreements, except insofar as such terms and conditions may be
inconsistent with the express terms hereof.
IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the day
and year first above written and the Company is authorized to deliver the same
to the Dealer by placing the Dealer's copy thereof in the United States Mail,
duly stamped and addressed to the Dealer at his principal place of business, or
by delivery to such place of business or to the Dealer in person.
FORD MOTOR COMPANY MEDFORD LINCOLN-MERCURY
--------------------------------------
(DEALER'S TRADE NAME)
By [R.C. Pearson] By [Sidney B. DeBoer]
-------------------------------- -----------------------------------
(ASSISTANT SECRETARY) (SIGNATURE AND TITLE)
[Manfred L. Heinmann]
<PAGE>
EXHIBIT 10.6.5
FORD MOTOR COMPANY
MERCURY SALES AND SERVICE AGREEMENT
STANDARD PROVISIONS
DEFINITIONS
1. As used herein, the following terms shall have the following meanings,
respectively:
1. (a) "COMPANY PRODUCTS" shall mean such
(1) new passenger cars OR OTHER NEW PASSENGER VEHICLES, and
(2) parts and accessories therefor,
as from time to time are offered for sale by the Company to all authorized
Mercury Dealers as such for resale, plus such other products as may be offered
for sale by the Company to the Dealer from time to time. The Company reserves
me right to offer any new, different and differently designated passenger car,
truck or chassis, and any other product, bearing any trademarks or brand names
used or claimed by the Company or any of its subsidiaries, including the name
"Mercury", to selected authorized Mercury Dealers or others under existing or
separate new agreements; provided, however, that the Company shall not franchise
any such new passenger car OR OTHER NEW PASSENGER VEHICLE bearing the name
"Mercury" to anyone who is not an authorized Mercury Dealer.
1. (b) "VEHICLE" shall mean any passenger car OR OTHER NEW PASSENGER
VEHICLE, INCLUDING THE MERCURY VILLAGER, included in this agreement pursuant to
paragraph 1(a) above.
1. (c) "COMPETITIVE VEHICLES" shall mean those new cars OR OTHER NEW
PASSENGER VEHICLES not marketed by the Company which are selected by the Company
as generally comparable with VEHICLES in price and product characteristics.
1. (d) "INDUSTRY VEHICLES" shall mean all new cars AND OTHER NEW
COMPETITIVE VEHICLES of all manufacturers to the extent data therefor are
reasonably available.
1. (e) "GENUINE PARTS" shall mean such parts, accessories and equipment for
VEHICLES as are offered for sale by the Company from time to time to the Dealer.
1. (f) "DEALER PRICE" shall mean, with respect to each COMPANY PRODUCT to
which it refers, the price to the Dealer for such product, as from time to time
established by the Company, before deduction of any cash or other discount
applicable thereto. It shall not include any amount in the nature of a
predelivery or other holdback deposit or charge, any dealer association
collection, any charge by the Company for distribution, delivery or taxes, or
any other charge for special items or services.
1. (g) "VEHICLE TERMS OF SALE BULLETIN" shall mean the latest VEHICLE TERMS
OF SALE BULLETIN and amendments thereto furnished to the Dealer from time to
time by the Company setting forth the terms of sale and ordering procedures
applicable to sales of VEHICLES to authorized Mercury dealers.
1. (h) "PARTS AND ACCESSORIES TERMS OF SALE BULLETIN" shall mean the latest
PARTS AND ACCESSORIES TERMS OF SALE BULLETIN and amendments thereto furnished to
the Dealer from time to time by the Company setting forth the terms of sale and
ordering procedures applicable to sales of GENUINE PARTS to authorized Mercury
dealers.
1. (i) "CUSTOMER SERVICE BULLETIN" shall mean the latest CUSTOMER SERVICE
BULLETIN and amendments thereto furnished to the Dealer from time to time by the
Company establishing standards for authorized Mercury Dealers with respect to
service personnel, training, tools and equipment, for customer handling
procedures and for evaluating the Dealer's service performance.
1. (j) "DEALER'S LOCALITY" shall mean the locality designated in writing to
the Dealer by the Company from time to time as the area of the Dealer's sales
and service responsibility for COMPANY PRODUCTS.
1. (k) "DEALERSHIP LOCATION" shall mean the place or places of business of
the Dealer for carrying out this agreement which are approved by the Company as
provided in paragraph 5 of this agreement.
1. (l) "DEALERSHIP FACILITIES" shall mean the land areas, buildings and
improvements established at the DEALERSHIP LOCATION in accordance with the
provisions of paragraph 5 of this agreement.
1. (m) "DEALERSHIP OPERATIONS" shall mean the sale of COMPANY PRODUCTS and
used vehicle service operations and (if the Dealer so elects) rental or leasing
of VEHICLES, conducted by the Dealer at or from the DEALERSHIP FACILITIES.
1. (n) "PLANNING VOLUME" shall mean the average annual estimated sales base
for VEHICLES established by the Company for the Dealer from time to time for
planning purposes under its standard procedures for authorized Mercury Dealers
in single or multiple DEALERS' LOCALITIES, as the case may be, based on
historical sales and registrations, and current trends, in VEHICLES, COMPETITIVE
VEHICLES and INDUSTRY VEHICLES in the DEALER'S LOCALITY. Consideration shall
also be given to the environs of the DEALERSHIP LOCATION and market trends
therein, consumer shopping habits, demographic factors and other appropriate
data
<PAGE>
to the extent available and pertinent. Such terms shall not represent the
actual sales volumes to be achieved by the Dealer to meet his responsibilities
under paragraph 2 of this agreement.
1. (o) "PERCENT RESPONSIBILITY" shall mean the ratio of the Dealer's
PLANNING VOLUME to the total PLANNING VOLUMES for all authorized Mercury Dealers
in the DEALER'S LOCALITY.
1. (p) "UIO" (units in operation) shall mean the VEHICLES of the next
preceding three or more model years (as determined by the Company from time to
time) licensed within the DEALER'S LOCALITY at a given time multiplied by the
Dealer's PERCENT RESPONSIBILITY therefor.
1. (q) "GUIDES" shall mean such reasonable standards as may be established
by the Company for the Dealer from time to time under its standard procedures
for authorized Mercury Dealers (i) for DEALERSHIP FACILITIES and equipment,
capitalization and net working capital based on such factors as PLANNING
VOLUMES, UIO, the DEALER'S LOCALITY and (ii) for inventories, personnel,
demonstrators and other elements of DEALERSHIP OPERATIONS based on such factors
as sales and service volumes.
RESPONSIBILITIES WITH RESPECT TO VEHICLES
2. (a) SALES. The Dealer shall promote vigorously and aggressively the sale
at retail (and, if the Dealer elects, the leasing and rental) of VEHICLES to
private and fleet customers within the DEALER'S LOCALITY, and shall develop
energetically and satisfactorily the potentials for such sales and obtain a
reasonable share thereof; but the Dealer shall not be limited to the DEALER'S
LOCALITY in making sales. To this end, the Dealer shall develop, maintain and
direct a trained, quality vehicle sales organization and shall conduct
throughout each model year aggressive advertising and sales promotion
activities, making use to the greatest feasible extent the Company's advertising
and sales promotion programs relating to VEHICLES.
The Dealer's performance of his sales responsibility for VEHICLES shall be
measured by such reasonable criteria as the Company may develop from time to
time, including:
(1) The Dealer's sales of VEHICLES to private and fleet users located in
the DEALER'S LOCALITY as a percentage of:
(i) all private and all fleet registrations of VEHICLES
in the DEALER'S LOCALITY,
(ii) all private and all fleet registrations of
COMPETITIVE VEHICLES in the DEALER'S LOCALITY,
(iii) all private and all fleet registrations of INDUSTRY VEHICLES
in the
DEALER'S
LOCALITY,
and
(iv) the private and fleet sales objectives for VEHICLES established
by the Company for the Dealer from time to time.
(2) If the Dealer is not the only authorized dealer in VEHICLES in the
DEALER'S LOCALITY, the following factors shall be used in computing
percentages pursuant to 2(a) (1) above:
(i) The Dealer's sales of VEHICLES to users located in the DEALER'S
LOCALITY shall be deemed to be the total registrations thereof
in the DEALER'S LOCALITY multiplied by the Dealer's percent of
sales of all VEHICLES made by all authorized Mercury Dealers
located in the DEALER'S LOCALITY unless the Dealer or the
Company shows that the Dealer actually has made a different
number of such sales,
(ii) The registrations of VEHICLES and COMPETITIVE and INDUSTRY
VEHICLES in the DEALER'S LOCALITY against which the Dealer shall be measured
shall be the total thereof multiplied by the Dealer's PERCENT RESPONSIBILITY,
and
(iii) The Dealer's objectives for VEHICLES shall be the total
objectives therefor of all authorized Mercury Dealers in the DEALER'S LOCALITY
multiplied by the Dealer's PERCENT RESPONSIBILITY.
(3) A comparison of each such percentage with percentages similarly
obtained for all other authorized Mercury Dealers combined in the
Company's sales zone and district in which the Dealer is located, and
where subparagraph 2(a) (2) applies, for all other authorized Mercury
Dealers combined in the DEALER'S LOCALITY.
(4) In evaluating any comparisons provided for in subparagraph 2(a) (3)
above, the Company shall give consideration to the availability of
VEHICLES to the Dealer and other authorized Mercury Dealers and any
special local marketing conditions that might affect the Dealer's
sales performance differently from the sales performance of
COMPETITIVE or INDUSTRY VEHICLE Dealers or other authorized Mercury
Dealers.
(5) The sales and registration data referred to in this subparagraph 2(a)
shall include sales to and registrations in the name of leasing and
daily rental operations and shall be those utilized in the Company's
records or in reports furnished to the Company by independent sources
selected by
<PAGE>
it and generally available for such purpose in the automotive
industry. In the event such reports of the registrations and/or sales
of INDUSTRY or COMPETITIVE VEHICLES in the DEALER'S LOCALITY are not
generally available, the evaluation of the Dealer's sales performance
shall be based on such registrations and/or sales or purchase data as
can be reasonably obtained by the Company.
The Company will provide to the Dealer an evaluation of his performance
under this subparagraph 2(a) from time to time as initiated by the Company, or
not more than once a month upon the written request of the Dealer.
2. (B) ORDERS.
(1) To enable the Company to plan for and establish, and its manufacturing
sources to carry out, production schedules, the Dealer shall, on the
dates and forms provided by the Company, furnish the Company basic
orders for types of VEHICLES and specific orders for individual
VEHICLES against the applicable basic order as specified in the
applicable VEHICLE TERMS OF SALE BULLETIN.
(2) The Company is authorized to have installed on any VEHICLE ordered by
the Dealer any equipment or accessory required by any applicable
federal, state or local law, rule, or regulation.
(3) Any order for a VEHICLE not shipped during the month for which
delivery was scheduled will remain in effect unless cancelled by the
Dealer or the Company by written notice to the other. An order for an
"off standard" VEHICLE may be cancelled only by or with the consent of
the Company. Any VEHICLE which differs from the Company's standard
specifications, or which incorporates special equipment, shall be
considered an "off standard" VEHICLE.
(4) The Dealer shall not be liable to the Company for any failure to
accept shipments of VEHICLES ordered from the Company where such
failure is due to any labor difficulty at the DEALERSHIP LOCATION or
to any cause beyond the Dealer's control or without the Dealer's fault
or negligence.
2. (C) CONSIDERATION OF ORDERS.
(1) The Company may reject orders not submitted in accordance with
subparagraph 2(b) (1) above. The Company shall make reasonable
efforts to fill each order of the Dealer that is accepted by the
Company. During any period of shortage of any VEHICLE, the Company
shall be entitled to give priority to accepted orders for such
VEHICLES for resale to users residing within the DEALER'S LOCALITY of
the ordering dealer.
(2) The Company shall not be liable to the Dealer in any respect for
failure to ship or for delay in shipment of accepted orders for
VEHICLES where such failure or delay is due wholly or in part to (i)
shortage or curtailment of material, labor, transportation, or utility
services, (ii) any labor or production difficulty in any of its own or
any of its suppliers' locations, (iii) any governmental action, or
(iv) any cause beyond the Company's control or without its fault or
negligence.
2. (D) STOCKS. The dealer shall maintain stocks of current models of such
lines or series of VEHICLES, of an assortment and in quantities as are in
accordance with Company GUIDES therefor, or adequate to meet the Dealer's share
of current and anticipated demand for VEHICLES in the DEALER'S LOCALITY. The
Dealer's maintenance of VEHICLE stocks shall be subject to the Company's filling
the Dealer's orders therefor.
2. (E) DEMONSTRATORS. The Dealer shall maintain at all times in good
condition and running order for demonstration and loan to prospective
purchasers, such numbers of the latest model of such lines or series of VEHICLES
as are in accordance with Company GUIDES therefor.
2. (F) FACTORY SUGGESTED PRICE LABELS. If any VEHICLE is delivered by the
Company to the Dealer with an incorrect label, or without a completed label,
affixed thereto pursuant to the Federal Automobile Information Disclosure Act,
the Dealer shall promptly complete and affix to such VEHICLE a correct label on
the form and in accordance with the directions furnished by the Company.
2. (G) OWNER LITERATURE. The Dealer shall, in accordance with the
Company's instructions, complete, execute and deliver to each retail purchaser
of a VEHICLE from him the Company's then current publications for owners with
respect to the operation, maintenance and warranty of that VEHICLE (hereinafter
called "Owner's Literature"). The Dealer shall fulfill promptly all dealer
responsibilities under each piece of the Owner's Literature delivered by him.
The Company may specify in the Owner's Literature that the Dealer will perform
certain inspections of the VEHICLE. The Dealer authorizes the Company to charge
his account for work done by another Company authorized dealer in VEHICLES under
the Owner's Literature delivered by the Dealer, and to credit his account for
work done by him under Owner's Literature delivered by another Company
authorized dealer in VEHICLES. The charge or credit shall be in the amount
specified by the Company from time to time.
2. (H) REBATES AND ALLOWANCES. The Dealer shall be entitled to such
rebates and allowances from the Company on VEHICLES and factory installed
options, subject to such conditions and procedures, as may be specified in the
applicable VEHICLE TERMS OF SALE BULLETIN or other notice pertaining thereto
sent to the Dealer by the Company, provided that any change in the model
close-out allowance shall be announced to the Dealer prior to the Company's
solicitation of the build-out order.
<PAGE>
2. (i) WARRANTY. The company shall from time to time establish, by notice
to the Dealer, the warranty to the owner applicable to each VEHICLE. There
shall be NO OTHER WARRANTY, express or implied, including any warranty of
MERCHANTABILITY OR FITNESS, or any other obligation of the Company to the Dealer
or the owner with respect to the VEHICLE or any part thereof except the warranty
established pursuant to this subparagraph. The Dealer shall expressly
incorporate such warranty as a part of each buyer's order form or other contract
for the sale of a VEHICLE and shall deliver a copy of the warranty, in the form
furnished by the Company, to the owner at the time the VEHICLE is delivered to
the owner, all in accordance with instructions set forth in the Company's then
current Warranty and Policy Manual and supplements thereto (hereinafter called
"Warranty Manual").
RESPONSIBILITIES WITH RESPECT TO GENUINE PARTS
3. (a) SALES. The Dealer shall promote vigorously and aggressively the
sale of GENUINE PARTS to service, wholesale and other customers within the
DEALER'S LOCALITY, and shall develop energetically and satisfactorily the
potentials for such sale and obtain a reasonable share thereof; but the Dealer
shall not be linked to the DEALER'S LOCALITY in making sales. To this end, the
Dealer shall develop, maintain and direct a trained quality parts sales
organization and shall conduct aggressive advertising and sales promotion
activities, making use to the greatest feasible extent of the Company's
advertising and sales promotion programs relating to GENUINE PARTS. The Dealer
shall not sell or offer for sale or use in the repair of any COMPANY PRODUCT, as
a GENUINE PART, any part or accessory that is not in fact a GENUINE PART.
The Dealer's performance of his sales responsibility for GENUINE PARTS
shall be measured by such reasonable criteria as the Company may develop from
time to time including:
(1) His sales as a percentage of the sales objectives established for him
by the Company from time to time, and his sales per UIO, and
(2) A comparison of such percentage and sales per UIO with the percentage
similarly obtained and sales per UIO of all other authorized Mercury
Dealers combined in one or more of the following: (i) the DEALER'S
LOCALITY, (ii) the Company's sales or service zone, and (iii) the
district in which the Dealer is located, as the Company may determine.
3. (b) ORDERS.
(1) Stock orders for the Dealer's requirements of GENUINE PARTS shall be
furnished to the Company by the Dealer in accordance with the
applicable PARTS AND ACCESSORIES TERMS OF SALE BULLETIN.
(2) Any order for a GENUINE PART not shipped in accordance with normal
shipping schedules will remain in effect unless cancelled by the
Dealer or the Company by written notice to the other.
(3) The Dealer shall not be liable to the Company for any failure to
accept shipment of GENUINE PARTS ordered from the Company where such
failure is due to any labor difficulty in the Dealer's place of
business or to any cause beyond the Dealer's control or without the
Dealer's fault or negligence.
3. (C) CONSIDERATION OF ORDERS.
(1) The Company shall make reasonable efforts to fill each order of the
Dealer that is accepted by the Company.
(2) The Company shall not be liable to the Dealer in any respect for
failure to ship or for delay in shipment of accepted orders for
GENUINE PARTS where such failure or delay is due wholly or in part to
(i) shortage or curtailment of material, labor, transportation or
utility services, (ii) any labor or production difficulty in any of
its own or any of its suppliers' locations, (iii) any governmental
action or (iv) any cause beyond the Company's control or without its
fault or negligence.
3. (D) STOCKS. The Dealer shall maintain a stock of parts, including
GENUINE PARTS, in accordance with Company GUIDES therefor, and of an assortment
in quantities adequate to meet the current and anticipated demand therefor. The
Dealer's maintenance of stocks of GENUINE PARTS shall be subject to the
Company's filling the Dealer's orders therefor.
3. (E) RETURNS AND ALLOWANCES. The Dealer shall be entitled to such
allowances, discounts, incentives and return privileges from the Company on
GENUINE PARTS subject to such conditions and procedures as may be specified in
the applicable PARTS AND ACCESSORIES TERMS OF SALE BULLETIN or other notice
pertaining thereto sent to the Dealer by the Company.
3. (F) WARRANTY. The Company shall from time to time establish, by notice
to the Dealer, the warranty applicable to each GENUINE PART. There shall be NO
OTHER WARRANTY, express or implied, including any warranty of MERCHANTABILITY OR
FITNESS, or any other obligation of the Company to the Dealer or the customer
with respect to any GENUINE PART or any part thereof except the warranty
established pursuant to this subparagraph. The Dealer shall expressly
incorporate such warranty as a part of each sale of a GENUINE PART, in
accordance with instructions set forth in the Warranty Manual.
<PAGE>
RESPONSIBILITIES WITH RESPECT TO SERVICE
4. The Dealer shall develop, maintain and direct a trained, quality service
organization and render at the DEALERSHIP FACILITIES prompt, workmanlike,
courteous and willing service to owners and users of COMPANY PRODUCTS, in
accordance with the standards and procedures set forth in the applicable
CUSTOMER SERVICE BULLETIN, including without limitation all service to which a
purchaser of a COMPANY PRODUCT from any authorized Mercury Dealer may be
entitled.
4. (a) PREDELIVERY SERVICE. The Dealer shall perform or be responsible for
the performance of such inspection, conditioning and repair of each VEHICLE
before delivery as may be prescribed for such VEHICLE in the Company's
applicable predelivery inspection and conditioning schedules furnished by the
Company to the Dealer. The Dealer shall maintain or be responsible for the
maintenance of adequate records of all predelivery inspection, conditioning and
repair work performed by or for the Dealer.
4. (b) WARRANTY AND POLICY AND CAMPAIGN SERVICE.
(1) The Dealer shall perform all warranty and policy service on each
COMPANY PRODUCT it is certified to sell and service, presented by
owners, in accordance with the warranty and policy applicable thereto
and the applicable provisions of the Warranty Manual and CUSTOMER
SERVICE BULLETIN.
(2) The Dealer shall perform campaign inspections and/or corrections for
owners and users of all VEHICLES, subject to the campaign instructions
issued by the Company from time to time and the applicable provisions
of the Warranty Manual. The Company may ship parts in quantity to the
Dealer to effect such campaign work and if such parts are in excess of
the Dealer's requirements, the Dealer may return unused parts to the
Company for credit after completion of the campaign.
(3) The Dealer shall use only GENUINE PARTS in performing warranty, policy
and campaign work, except as otherwise provided in the Warranty
Manual, CUSTOMER SERVICE BULLETIN or campaign instructions, and shall
give precedence to all such work over other service work if the use of
the vehicle is impaired. The Dealer shall promptly report to the
Company, and seek the Company's assistance with respect to, any
warranty or policy or campaign work which cannot be performed to the
owner's or the Dealer's satisfaction. The Company shall give
precedence to such requests over other service assistance. The Dealer
shall provide the owner with a copy of the repair order for such work
itemizing the work performed. The Dealer shall have such repair order
signed by the owner except in unusual circumstances where it is not
feasible to obtain such signature.
(4) The Dealer shall submit claims to the Company for reimbursement for
the parts and labor used in performing warranty, policy and campaign
work and the Company shall reimburse the Dealer therefor, in
accordance with the provisions of the Warranty Manual or campaign
instructions and the Dealer's approved warranty labor rate. The
Dealer shall maintain adequate records and documents supporting such
claims in accordance with the provisions of the Warranty Manual.
4. (c) MAINTENANCE AND REPAIR SERVICE. The Dealer shall perform all other
maintenance and repair services, including, where feasible, body repair
services, reasonably required by owners and users of VEHICLES and shall provide
each customer a copy of the repair order itemizing the work performed and the
charges therefor. The Dealer shall have the customer sign such repair order
except in unusual circumstances where it is not feasible to obtain such
signature.
4. (d) SERVICE TOOLS AND EQUIPMENT. The Dealer shall acquire and maintain
for use in DEALERSHIP OPERATIONS such diagnostic equipment and other tools,
equipment and machinery, comparable to the type and quality recommended by the
Company from time to time, as are necessary to meet the Dealer's service
responsibilities hereunder and substantially in accordance with Company GUIDES
therefor and the applicable CUSTOMER SERVICE BULLETIN.
RESPONSIBILITIES WITH RESPECT TO DEALERSHIP FACILITIES
5. (a) LOCATIONS AND FACILITIES. The Dealer shall establish and maintain
at the DEALERSHIP LOCATION approved by the Company DEALERSHIP FACILITIES of
satisfactory appearance and condition and adequate to meet the Dealer's
responsibilities under this agreement. The DEALERSHIP FACILITIES shall be
substantially in accordance with the GUIDES therefor established by the Company
from time to time.
5. (b) DEALERSHIP FACILITIES SUPPLEMENT. The Dealer and the Company have
executed, as a part of and simultaneously with this agreement, a Dealership
Facilities Supplement which includes a description of all of the DEALERSHIP
LOCATION and FACILITIES, the GUIDES therefor as of the date of this agreement
and the purpose for which each shall be used.
5. (c) CHANGES AND ADDITIONS. The Dealer shall not move or substantially
modify or change the usage of any of the DEALERSHIP LOCATION or FACILITIES for
COMPANY PRODUCTS, nor shall the Dealer or any person named in subparagraphs F(i)
or F(ii) hereof directly or indirectly establish or operate in whole or in part
any other locations or facilities for the sale or service of COMPANY PRODUCTS or
the sale of used vehicles without the prior written consent of the Company. Any
such change shall be evidenced by a new Dealership Facilities Supplement
executed by the Dealer and the Company. To ensure that all data included on the
Dealership
<PAGE>
Facilities Supplement are reasonably accurate, the Company and the Dealer shall
execute a new Dealership Facilities Supplement at least once every five (5)
years.
5. (d) COMPANY ASSISTANCE. To assist the Dealer in planning, establishing
and maintaining DEALERSHIP LOCATION and FACILITIES in accordance with his
responsibilities under this agreement, the Company will make available, at the
request of the Dealer, and at a mutually convenient time and place, personnel to
provide counsel and advice regarding location and facility planning, including
layout and design.
5. (e) FULFILLMENT OF RESPONSIBILITY. The Dealer shall be deemed to be
fulfilling his responsibilities under this paragraph 5 when and as long as the
DEALERSHIP LOCATION is approved by the Company and the DEALERSHIP FACILITIES are
substantially in accordance with the current GUIDES therefor. The execution of
this agreement or of any Dealership Facilities Supplement shall not of itself be
construed as evidence of the fulfillment by the Dealer of his responsibilities
to provide adequate DEALERSHIP LOCATION and FACILITIES.
OTHER DEALER AND COMPANY RESPONSIBILITIES
6. (a) SIGNS. The Dealer shall install and maintain at the DEALERSHIP
LOCATION signs of good appearance and adequate to identify such locations as (1)
authorized sales and service establishments for VEHICLES and other COMPANY
PRODUCTS identifying such products as products of the Company, (2) authorized
sales locations for used vehicles and (3) authorized locations for the leasing
or rental of vehicles, as the case may be. Each sign shall be compatible with
the design standards established by the Company from time to time and shall be
subject to the Company's approval with respect to any display of any trademark
or trade name used or claimed by the Company or any of its subsidiaries.
Fulfillment of any separate Dealership Identification Agreement between the
Dealer and the Company shall be deemed fulfillment of this subparagraph 6(a).
The Company will make available, at the request of the Dealer, and at a mutually
convenient time and place, personnel to provide counsel and advice regarding
dealership signs and identification.
6. (b) PERSONNEL. The dealer shall employ and train such numbers and
classifications of competent personnel of good character including, without
limitation, sales, parts service, owner relations and other department managers,
salesmen and service technicians, as will enable the Dealer to fulfill all his
responsibilities under this agreement. The Company shall provide assistance to
the Dealer in determining personnel requirements. In response to the training
needs of the Dealer's personnel, the Dealer at his expense shall cause his
personnel to attend training schools or courses conducted by the Company from
time to time.
6. (c) DEALER RESIDENCE. Effective operation of the Dealer's business is
dependent in large part on the Dealer's management becoming a part of and
accepted within his local community. Accordingly, each person named in
subparagraph F(ii) hereof shall (unless otherwise approved in writing by the
Company because of individual circumstances) reside within the DEALER'S
LOCALITY.
6. (d) CAPITAL. The Dealer shall at all times maintain and employ in
connection with his DEALERSHIP OPERATIONS separately from any other business of
the Dealer, such total investment, net working capital, adequate lines of
wholesale credit and competitive retail financing plans for VEHICLES as are in
accordance with Company GUIDES therefor and will enable the Dealer to fulfill
all his responsibilities under this agreement.
6. (e) ACCOUNTING SYSTEM. It is in the mutual interests of the Dealer and
the Company that uniform accounting systems and practices be maintained by the
Company's authorized dealers in order that the Company may develop and
disseminate helpful information, evaluate the relative operating performance of
each dealer and develop criteria that will enable the Company to formulate plans
and policies in the interests of its dealers and the Company and that will
assist each dealer to obtain satisfactory results from his dealership
operations. Accordingly, the Dealer shall install and use in his DEALERSHIP
OPERATIONS, whether conducted as one or several business entities, an accounting
system, not exclusive of any other system the Dealer may wish to use, in
accordance with the Company's Manual of Dealer Accounting Procedures as amended
from time to time.
6. (f) FINANCIAL REPORTS. In furtherance of the mutual interests set forth
in paragraph 6(e) hereof, the Dealer shall furnish to the Company each month, at
the time and on the forms prescribed by the Company, a complete statement
reflecting the true financial condition and the month and year-to-date operating
results of his DEALERSHIP OPERATIONS as of the end of the preceding month. The
Dealer also shall promptly furnish to the Company a copy of any adjusted annual
statement that may be prepared by or for the Dealer. All such statements,
reports and data shall be based whenever applicable upon the accounting system
installed and used by the Dealer in accordance with subparagraph 6(e).
Financial information furnished by the Dealer shall be handled on a confidential
basis by the Company and, unless authorized by the Dealer or required by law, or
offered in evidence in judicial or arbitration proceedings, shall not be
furnished, except as an unidentified part of a composite or coded report, to any
party outside of the Company.
6. (g) DELIVERY AND SALES REPORTS. To assist the Company in evaluating
current sales and market trends, in advising its manufacturing sources of
adjustments desired in production and distribution schedules, and in providing
the type of information necessary to provide assistance and counsel to the
Dealer, the Dealer shall (1) accurately complete the information prescribed on
the vehicle delivery card and forward such card to the Company at or as soon as
reasonably possible after the end of the day on which the new VEHICLE is
delivered or sold, whichever shall occur first, to the private or fleet customer
or to rental or leasing operations, if any, conducted or controlled by the
Dealer, and (2) furnish the Company with accurate and complete delivery or sales
reports and data relating to the Dealer and his DEALERSHIP OPERATIONS at the
times and on such forms as the Company may specify from time to time.
<PAGE>
6. (h) CUSTOMER HANDLING. The Dealer shall cooperate with Company
programs, and develop and maintain his own programs, designed to develop good
relationships between the Dealer and the public. The Dealer shall promptly
investigate and handle all matters brought to his attention by the Company or
the public relating to the sale or servicing of COMPANY PRODUCTS in the DEALER'S
LOCALITY, in accordance with procedures set forth in the applicable CUSTOMER
SERVICE BULLETIN, so as to develop public confidence in the Dealer, the Company
and COMPANY PRODUCTS. The Dealer shall report promptly to the Company the
details of each inquiry or complaint received by the Dealer relating to any
COMPANY PRODUCT which the Dealer cannot handle satisfactorily. The Dealer shall
not make, directly or indirectly, any false or misleading statement or
representation to any customer as to any VEHICLE, GENUINE PART or other COMPANY
PRODUCT as to the source, condition or capabilities thereof, or the Dealer's or
the Company's prices or charges therefor or for distribution, delivery, taxes or
other items.
6. (i) BUSINESS PRACTICES, ADVERTISING AND PROGRAMS. The Dealer shall
conduct DEALERSHIP OPERATIONS in a manner that will reflect favorably at all
times on the reputation of the Dealer, other Company authorized dealers, the
Company, COMPANY PRODUCTS and trademarks and trade names used or claimed by the
Company or any of its subsidiaries. The Dealer shall avoid in every way any
"bait", deceptive, misleading, confusing or illegal advertising or business
practice. The Company shall not publish or employ any such advertising or
practice or encourage any dealer or group of dealers to do so.
6. (j) COMPLIANCE WITH LAWS, RULES AND REGULATIONS. The Dealer shall
comply with all applicable federal, state, and local laws, rules and regulations
in the ordering, sale and service of COMPANY PRODUCTS and the sale and service
of used vehicles, including without limitation those related to motor vehicle
safety, emissions control and customer service. The Company shall provide the
Dealer, and the Dealer shall provide the Company, such information and
assistance as may be reasonably requested by the other in connection with the
performance of obligations under such laws, rules and regulations.
6. (k) INDEMNIFICATION BY THE COMPANY. The Company shall defend,
indemnify, hold harmless and protect the Dealer from any losses, damages or
expense, including costs and attorney's fees, resulting from or related to
lawsuits, complaints or claims commenced against the Dealer by third parties
concerning:
(1) Property damage to a COMPANY PRODUCT or bodily injury or property
damage arising out of an occurrence caused solely by a "production
defect" in that product (i.e., due to defective materials or
workmanship utilized or performed at the factory), except for any
"production defect" in tires and diesel engines made by others,
provided, however, that the "production defect" could not have been
discovered by the Dealer in the reasonable pre-delivery inspection of
the VEHICLE as recommended by the Company.
(2) Property damage to a COMPANY PRODUCT or bodily injury or property
damage arising out of an occurrence caused solely by a defect in the
design of that product, except for a defect in the design of tires or
diesel engines made by others.
(3) Any damage occurring to a new VEHICLE and repaired by the Company
(excluding removal and replacement of an entire component with a like
component where no welding, riveting or painting is involved), from
the time the VEHICLE leaves the Company's assembly plant or warehouse
to the time it is delivered to the Dealer's designated location,
provided the Company failed to notify the Dealer in writing of such
damage and repair in transit prior to delivery of the VEHICLE to the
first retail customer.
In the event that any legal action arising out of any of these causes is brought
against the Dealer, the Company shall undertake, at its sole expense, to defend
said action on behalf of the Dealer when requested to do so by the Dealer,
provided that the Dealer promptly notifies the Company in writing of the
commencement of the action against the Dealer and cooperates fully in the
defense of the action in such manner and to such extent as the Company may
reasonably require (provided, however, that the Company shall have the right to
continue the suit in the name of the Dealer, if the Company deems such action to
be necessary). Should the Company refuse to undertake the defense on behalf of
the Dealer, or fail to undertake an adequate defense, the Dealer may conduct its
own defense and the Company shall be liable for the cost of such defense,
including reasonable attorney's fees, together with any verdict, judgment or
settlement paid by the Dealer (provided, however, that the Dealer shall notify
the Company within a reasonable period of any such settlement).
(4) Personal injury or property damage arising solely out of a negligent
or improper act of an employee of the Company.
DEALER'S RESPONSIBILITIES WITH RESPECT TO HOURS OF BUSINESS
7. To the end that the needs of customers and owners served by the Dealer
are fulfilled properly, the Dealer shall maintain DEALERSHIP OPERATIONS open for
business during all hours and days which are customary in the trade and lawful
for such operations in the DEALER'S LOCALITY.
PURCHASES FROM OTHERS AND SALES TO OTHERS
8. The Dealer reserves the right to make purchases from others without
obligation or liability of any kind to the Company, provided that the Dealer
shall not be relieved of any responsibility assumed by the Dealer under this
agreement; and, except as otherwise expressly provided herein, the Company
reserves the right to make sales to others (including without limitation to
other dealers) without obligation or liability of any kind to the Dealer.
<PAGE>
[MISSING SECTIONS 9 AND 10; PAGE 12 MISSING FROM ORIGINAL]
ACCESSORIES TERMS OF SALE BULLETIN. Except as otherwise specified in writing by
the Company, such prices, charges, discounts and terms of sale shall be those in
effect, and delivery to the Dealer shall be deemed to have been made and the
order deemed to have been filled on the date of delivery to the carrier or the
Dealer, whichever occurs first. The Company has the right at any time and from
time to time to change or eliminate prices, charges, discounts, allowances,
rebates refunds or other terms of sale affecting COMPANY PRODUCTS by issuing a
new VEHICLE or PARTS AND ACCESSORIES TERMS OF SALE BULLETIN, new price schedules
or other notices. In the event the Company shall increase the DEALER PRICE for
any COMPANY PRODUCT, the Dealer shall have the right to cancel, by notice to the
Company within ten (10) days after receipt by the Dealer of notice of such
increase, any orders for such product placed by the Dealer with the Company
prior to receipt by the Dealer of notice of such increase and unfilled at the
time of receipt by the Company of such notice of cancellation.
TERMS AND TITLE
11. (a) PAYMENT. Payment by the Dealer for each COMPANY PRODUCT shall be
in accordance with the terms and conditions set forth in the applicable VEHICLE
or PARTS AND ACCESSORIES TERMS OF SALE BULLETIN.
11. (b) TITLE. Title to each COMPANY PRODUCT purchased by the Dealer shall
(unless otherwise provided in the applicable VEHICLE or PARTS AND ACCESSORIES
TERMS OF SALE BULLETIN) pass to the Dealer, or to such financing institution or
other party as may have been designated to the Company by the Dealer, upon
delivery thereof to the carrier or to the Dealer, whichever occurs first, but
the Company shall retain a security interest in and right to repossess any
product until paid therefor.
11. (c) RISK OF LOSS AND CLAIMS. The Company shall assume all risk of loss
or damage to any VEHICLE purchased by the Dealer from the Company which is not
borne by the carrier while the VEHICLE is in the possession of the carrier
provided the Dealer properly inspects and records any loss or damage of the
VEHICLE upon receipt thereof. The Dealer shall cooperate with the Company in
processing all claims for loss or damage of the VEHICLE in accordance with the
Company's then current procedures.
11. (d) DEMURRAGE AND DIVERSION LIABILITY. The Dealer shall be responsible
for and pay any and all demurrage, storage and other charges accruing after
arrival of any shipment at its destination. In the event the Dealer shall fail
or refuse for any reason (other than labor difficulty in the Dealer's place of
business or any cause beyond the Dealer's control or without the Dealer's fault
or negligence) to accept delivery of any COMPANY PRODUCT ordered by the Dealer,
the Dealer shall also pay the Company the amount of all expenses incurred by the
Company in shipping such product to the Dealer and in returning such product to
the original shipping point or diverting it to another destination; but in no
event shall the Dealer pay the Company more for any such diversion than the
expense of returning the product to its original shipping point.
11. (e) STATE AND LOCAL TAXES. The Dealer hereby represents and warrants
that all COMPANY PRODUCTS purchased from the Company are purchased for resale in
the ordinary course of the Dealer's business. The Dealer further represents and
warrants that the Dealer has complied with all requirements for his collection
and/or payment of applicable sales, use and like taxes, and has furnished or
will furnish evidence thereof to the Company. These representations and
warranties shall be deemed a part of each order given by the Dealer to the
Company.
The Dealer agrees that, as to any COMPANY PRODUCT put to a taxable use by
the Dealer, or in fact purchased by the Dealer other than for resale, the Dealer
shall make timely and proper return and payment of all applicable sales, use and
like taxes, and shall hold the Company harmless from all claims and demands
therefor.
RECORDS, INSPECTIONS AND TESTS
12. (a) RECORD RETENTION. The Dealer shall retain for at least two (2)
years all records and documents, including journals and ledgers, which relate in
any way, in whole or in part, to DEALERSHIP OPERATIONS, except for records used
as a basis for submission of warranty and policy claims, which shall be retained
for at least one (1) year.
12. (b) INSPECTIONS AND TESTS. The Dealer shall allow persons designated
by the Company, at reasonable times and intervals and during normal business
hours, to examine the DEALERSHIP FACILITIES and OPERATIONS, the Dealer's stocks
of COMPANY PRODUCTS and used vehicles and vehicles at the DEALERSHIP FACILITIES
for service or repair, to test the Dealer's equipment, to check and instruct the
Dealer and his employees in the proper handling of warranty and other repairs
and claims based thereon, and to examine, copy and audit any and all of the
Dealer's records and documents. The Company may charge back to the Dealer all
payments or credits made by the Company to the Dealer pursuant to such claims or
otherwise which were improperly claimed or paid.
CHANGES IN COMPANY PRODUCTS
13. The Company may change the design of any COMPANY PRODUCT, or add any
new or different COMPANY PRODUCT or line, series or body style of VEHICLES, at
any time and from time to time, without notice or obligation to the Dealer,
including any obligation with respect to any COMPANY PRODUCT theretofore ordered
or purchased by or delivered to the Dealer. Such changes shall not be
considered model year changes as contemplated by the provisions of any VEHICLE
TERMS OF SALE BULLETIN. The Company may discontinue any VEHICLE or other
COMPANY PRODUCT at any time without liability to the Dealer.
<PAGE>
DEALER NOT AGENT OF THE COMPANY
14. This agreement does not in any way create the relationship of principal
and agent between the Company and the Dealer and under no circumstances shall
the Dealer be considered to be an agent of the Company. The Dealer shall not
act or attempt to act, or represent himself, directly or by implication, as
agent of the Company or in any manner assume or create any obligation on behalf
of or in the name of the Company.
TRADEMARKS AND TRADE NAMES
15. (a) USE IN FIRM NAME. The Dealer may not use any trademark or trade
name used or claimed by the Company or any of its subsidiaries in the Dealer's
firm name or trade name except with the Company's prior written approval. If,
after such approval, the Company should at any time so request, the Dealer shall
promptly discontinue such use and take all steps necessary or appropriate in the
opinion of the Company to eliminate such trademark or trade name from the
Dealer's firm name or trade name.
15. (b) LIMITATIONS ON USE. The Dealer shall not use any trademark or
trade name used or claimed by the Company or any of its subsidiaries, or coined
words or combinations containing the same or parts thereof, in connection with
any business conducted by the Dealer other than in dealing in COMPANY PRODUCTS
to which such trademark or trade name refers and then only in the manner and
form approved by the Company; provided that the word "Mercury" may be used in
connection with a business operated by or affiliated with the Dealer as the
Dealer's used vehicle outlet if the Dealer obtains the Company's prior written
approval, which may be revoked at any time, and if the Dealer retains the right
to require any such affiliated business to discontinue such use at any time the
Dealer may direct. The Dealer shall direct such discontinuance on request of
the Company at any time.
The Dealer shall not contest the right of the Company to exclusive use of
any trademark or trade name used or claimed by the Company or any of its
subsidiaries.
REPORTS TO FORD MOTOR COMPANY'S DEALER POLICY BOARD
16. In the interest of maintaining harmonious relationships between the
parties to this agreement, the Dealer shall report promptly in writing to Ford
Motor Company's Dealer Policy Board (hereafter called "Policy Board") any act or
failure to act on the part of the Company or any of its representatives which
the Dealer believes was not in accordance with this agreement or was not
reasonable, fair, for good cause or provocation or in good faith as to the
Dealer. For the purposes of this agreement, the term "good faith" shall mean
the Company and its representatives acting in a fair and equitable manner toward
the Dealer so as to guarantee the Dealer freedom from coercion or intimidation
from the Company. It is the purpose of the Policy Board to receive, carefully
evaluate and, to the extent possible, resolve any such claim to the mutual
satisfaction of the parties. Any decision of the Policy Board shall be binding
on the Company but shall not be binding on the Dealer.
TERMINATION OR NONRENEWAL OF AGREEMENT
17. (a) BY DEALER. The Dealer may terminate or not renew this agreement at
any time at will by giving the Company at least thirty (30) days prior written
notice thereof.
17. (b) BY COMPANY DUE TO EVENTS CONTROLLED BY DEALER. The following
represent events which are substantially within the control of the Dealer and
over which the Company has no control, and which are so contrary to the intent
and purpose of this agreement as to warrant its termination or nonrenewal:
(1) Any transfer or attempted transfer by the Dealer of any interest in,
or right, privilege or obligation under this agreement; or transfer by
operation of law or otherwise, of the principal assets of the Dealer
that are required for the conduct of DEALERSHIP OPERATIONS; or any
change, however accomplished, without the Company's prior written
consent, which consent shall not be unreasonably withheld, in the
direct or indirect ownership or operating management of the Dealer as
set forth in paragraph F.
(2) Any misrepresentation in applying for this agreement by the Dealer or
any person named in paragraph F; or submission by the Dealer to the
Company of any false or fraudulent application or claim, or statement
in support thereof, for warranty, policy or campaign adjustments, for
wholesale parts or VEHICLE sales incentives or for any other refund,
credit, rebate, incentive, allowance, discount, reimbursement or
payment under any Company program; or acceptance by the Dealer of any
payment for any work not performed by the Dealer in accordance with
the provisions of this agreement, the Warranty Manual or any
applicable CUSTOMER SERVICE BULLETIN.
(3) Insolvency of the Dealer, inability of the Dealer to meet debts as
they mature, filing by the Dealer of a voluntary petition under any
bankruptcy or receivership law, adjudication of the Dealer as a
bankrupt or insolvent pursuant to an involuntary petition under any
such law, appointment by a court of a temporary or permanent receiver,
trustee or custodian for the Dealer or the Dealer's assets, or
execution of an assignment by the Dealer for the benefit of creditors;
dissolution of the Dealer; or failure of the Dealer for any reason to
function in the ordinary course of business, or to maintain the
DEALERSHIP OPERATIONS open for business during and for not less than
the hours customary in the trade and lawful in the DEALER'S LOCALITY
as set forth in paragraph 7.
(4) Conviction in a court of original jurisdiction of the Dealer or any
person named in paragraph F for any violation of law, or any conduct
by any such person unbecoming a reputable businessman,
<PAGE>
or disagreement between or among any persons named in paragraph F,
which in the Company's opinion tends to affect adversely the operation
or business of the Dealer or the good name, goodwill or reputation of
the Dealer, other authorized dealers of the Company, the Company, or
COMPANY PRODUCTS.
(5) The Dealer shall have engaged, after written warning by the Company,
in any advertising or business practice contrary to the provisions of
subparagraph 6(i) of this agreement.
(6) Failure of the Dealer to fulfill any provisions of paragraph 10 (as to
prices or charges), or paragraph 11 (as to terms and title, including
payment for COMPANY PRODUCTS), or paragraph 15 (as to trademarks or
trade names), or to pay the Company any sum due pursuant to any
agreement, including any purchase or lease agreement, between the
Company and the Dealer.
Upon occurrence of any of the foregoing events, the Company may terminate this
agreement by giving the Dealer at least fifteen (15) days prior written notice
thereof.
17. (c) BY COMPANY FOR NONPERFORMANCE BY DEALER OF SALES, SERVICE,
FACILITIES OR OTHER RESPONSIBILITIES. If the Dealer shall fail to fulfill any of
his responsibilities with respect to:
(1) VEHICLES under the provisions of paragraph 2 of this agreement,
(2) GENUINE PARTS under the provisions of paragraph 3 of this agreement,
(3) SERVICE under the provisions of paragraph 4 of this agreement,
(4) DEALERSHIP LOCATION or FACILITIES under the provisions of paragraph 5
of this agreement, or
(5) Other responsibilities under the provisions of subparagraphs 6(a)
through 6(h) (as to signs, personnel, residence, capital, accounting
system, financial reports, delivery or sales reports or customer
handling), subparagraph 6(j) (as to laws, rules or regulations),
paragraph 12 (as to records, inspections and tests) or paragraph 14
(as to the Dealer not being an agent of the Company) of this
agreement,
the Company shall notify the Dealer in writing of such failure or failures, will
offer to review promptly with the Dealer the reasons which, in the Company's or
Dealer's opinion, account for such failure or failures and will provide the
Dealer with a reasonable opportunity to cure the same. If the Dealer fails or
refuses to cure the same within a reasonable time after such notice, the Company
may terminate or not renew this agreement by giving the Dealer at least ninety
(90)days prior written notice thereof.
17. (d) BY COMPANY OR DEALER BECAUSE OF DEATH OR PHYSICAL OR MENTAL
INCAPACITY OF ANY PRINCIPAL OWNER. Since this agreement has been entered into by
the Company in reliance upon the continued participation in the ownership of the
Dealer by the persons named in subparagraph F(i) hereof, the Company or the
Dealer may (subject to the provisions of paragraph 20 hereof) terminate or not
renew this agreement, by giving the other at least fifteen (15) days prior
written notice thereof, in the event of the death or physical or mental
incapacity of any owner of the Dealer named in subparagraph F(i); provided,
however, that in order to facilitate orderly termination and liquidation of the
dealership, the Company shall defer for a period of three (3) months to one (1)
year, as the Company may determine, the exercise of its right to terminate in
such event if the executor or representative of such deceased or incapacitated
owner shall so request and shall demonstrate the ability to carry out the terms
and conditions of this agreement.
17. (e) BY COMPANY OR DEALER FOR FAILURE OF DEALER OR COMPANY TO BE
LICENSED. If the Company or the Dealer requires a license for the performance
of any responsibility under this agreement in any jurisdiction where this
agreement is to be performed and if either party shall fail to secure and
maintain such license, or if such license is suspended or revoked, irrespective
of the cause or reason, either party may terminate or not renew this agreement
by giving the other at least fifteen (15) days prior written notice thereof.
17. (f) BY COMPANY AT WILL OR UPON FAILURE TO HOLD OTHER COMPANY DOMESTIC
AGREEMENTS.
(1) If this agreement is not for a stated term specified in paragraph G of
this agreement, the Company may terminate this agreement at will at
any time by giving the Dealer at least one hundred and twenty (120)
days prior written notice thereof.
(2) The Dealer acknowledges that, where the Company has issued the Dealer
more than one domestic vehicle sales and service agreement, the
Company, in order to be fully competitive, must have the right to
terminate or not renew, in the event the Dealer ceases for any reason
to hold any one of such sales and service agreements with the Dealer.
Accordingly, the Dealer agrees that, in the event the Dealer for any
reason shall give or be given notice of termination or nonrenewal of
any other domestic vehicle sales and service agreement with the
Company at any DEALERSHIP LOCATION or FACILITIES established by the
Dealer under paragraph 5 of this agreement, the Company, within a
reasonable time thereafter, may terminate or not renew this agreement
by written notice given to the Dealer, effective after fifteen (15)
days or upon the same date as the effective date of such other notice
of termination or nonrenewal, whichever is later.
<PAGE>
17. (g) BY COMPANY UPON THE OFFER OF A NEW AGREEMENT. The Company may
terminate this agreement at any time by giving the Dealer at least thirty (30)
days prior written notice thereof in the event the Company offers a new or
amended form of agreement to its authorized dealers in COMPANY PRODUCTS.
17. (h) ACTS IN GOOD FAITH.
(1) The Dealer acknowledges that each of his responsibilities under this
agreement is reasonable, proper and fundamental to the purpose of this
agreement and that (i) his failure to fulfill any of them would
constitute a material breach of this agreement, (ii) the occurrence of
any of the events set forth in subparagraph 17(b), 17(c), or 17(e)
would seriously impair fundamental considerations upon which this
agreement is based, and (iii) the rights of termination or nonrenewal
reserved in the events specified in subparagraphs 17(f) (2) or 17(g)
are necessary to permit the Company to remain competitive at all
times. The Dealer acknowledges that any such failure, occurrence or
event constitutes a reasonable, fair, good, due and just cause and
provocation for termination or nonrenewal of this agreement by the
Company.
(2) The Dealer agrees that if the Company or any of its representatives
(i) requests the Dealer to fulfill any of such responsibilities, (ii)
believes that any such failure, occurrence or event is occurring or
has occurred and advises the Dealer that unless remedied, such
failure, occurrence or event may result in Company termination or
nonrenewal of this agreement, (iii) gives the Dealer notice of
termination or nonrenewal, or terminates or fails to renew this
agreement, because of any such failure, occurrence or event, then such
request, advice, notice, termination or nonrenewal shall not be
considered to constitute or be evidence of coercion or intimidation,
or threat thereof, or to be unreasonable, unfair, undue or unjust, or
to be not in good faith.
REQUIRED APPEAL TO POLICY BOARD - TERMINATIONS OR NONRENEWALS - OPTIONAL
ARBITRATION PLAN
18. (a) ARBITRATION PLAN. The Company has adopted the Ford Motor Company
Plan and Rules of Arbitration ("Arbitration Plan"), effective June 1, 1972, a
copy of which was delivered to the Dealer with this agreement. The Company
reserves the right to terminate, change or modify the Arbitration Plan at any
time upon notice to the Dealer. Any arbitration pursuant to the Arbitration
Plan shall be governed by the terms of the Arbitration Plan in effect on the
date such arbitration is commenced.
18. (b) APPEAL TO POLICY BOARD. Any protest, controversy or claim by the
Dealer (whether for damages, stay of action or otherwise) with respect to any
termination or nonrenewal of this agreement by the Company or the settlement of
the accounts of the Dealer with the Company after any termination or nonrenewal
of this agreement by the Company or the Dealer has become effective, shall be
appealed by the Dealer to the Policy Board within fifteen (15) days after the
Dealer's receipt of notice of termination or nonrenewal, or, as to settlement of
accounts after termination or nonrenewal, within one (1) year after the
termination or nonrenewal has become effective. Appeal to the Policy Board
shall be a condition precedent to the Dealer's right to pursue any other remedy
available under this agreement or otherwise available under law. The Company,
but not the Dealer, shall be bound by the decision of the Policy Board.
18. (c) OPTIONAL ARBITRATION. If the Dealer is dissatisfied with the
decision of the Policy Board in a case referred to in subparagraph 18(b), the
Dealer may, at his option, elect to arbitrate in accordance with the Arbitration
Plan or elect not to arbitrate and retain the right to pursue whatever other
remedies may be available, provided that:
(1) The Dealer's election to arbitrate shall be made by filing an
Arbitration Demand with the Secretary appointed under the Arbitration
Plan within thirty (30) days after receipt by the Dealer of a decision
by the Policy Board. The Arbitration Demand shall set forth a clear
and complete statement of the nature of the Dealer's claim and the
basis thereof, the amount involved, if any, and the remedy sought.
The Arbitration Demand shall be in writing and shall be given by
personal delivery or sent by registered or certified mail, postage
prepaid, to the Secretary, Arbitration Panel, Ford Motor Company, 300
Renaissance Center, P.O. Box 43333, Detroit, Michigan 48243.
(2) If the Dealer, by filing a timely Arbitration Demand, elects to
arbitrate, arbitration shall be the sole and exclusive remedy of the
Dealer in such cases, and the decision and award of the Arbitration
Panel provided for in the Arbitration Plan shall be final and binding
on both parties.
(3) If the Dealer elects to arbitrate, either party may enjoin the other
from pursuing any other remedy in such cases, except that either party
may sue to enforce any order or award of the Arbitration Panel and
judgment upon such order or award may be entered by any court having
jurisdiction.
18. (d) LIMITATION OF ACTIONS. If the Dealer elects not to arbitrate by
failing to file a timely Arbitration Demand, all causes of action at law or in
equity and all rights and remedies before federal, state, or local
administrative agencies, departments or boards shall be forever barred unless
commenced or instituted within one (1) year after the date of the decision of
the Policy Board.
18. (e) EXPENSES OF ARBITRATION. During the first quarter of each calendar
year, the Company and the Chairmen of the Ford and Lincoln-Mercury National
Dealer Councils ("Dealer Council Chairmen") shall jointly establish a budget for
that calendar year for the retainer fees, daily fees, clerical costs, travel
expenses and living allowances ("Compensation") of the Arbitrator selected by
the Dealer Council Chairmen, for one-half of the
<PAGE>
Compensation of the Arbitrator selected as Chairman of the Arbitration Panel,
and for one-half of the cost of outside services employed by the Arbitration
Panel, pursuant to the Arbitration Plan.
(1) The amount of such budget shall be advanced by the Company to a
Trustee selected by the Company and the Dealer Council Chairmen. The
Trustee shall pay the Compensation of the Arbitrator selected by the
Dealer Council Chairmen, one-half of the Compensation of the Chairman
of the Arbitration Panel, and one-half of the cost of outside services
employed by the Arbitration Panel, as statements are rendered
therefor, from and to the extent of such advance. All other costs of
the Arbitration Panel for that calendar year shall be borne by the
Company except as hereinafter provided. Any unexpended portion of
such budget shall be carried forward to the next calendar year.
(2) The amount of such budget shall be spread in equal amounts among all
dealerships then having valid and outstanding Ford, Mercury or Lincoln
Sales and Service Agreements with the Company ("Authorized Dealers").
Such equal amount shall be charged to each Authorized Dealer. The
Dealer shall promptly pay the amount so charged.
(3) Each party shall pay and bear all costs of any witness called or other
evidence adduced by that party, of any attorney, accountant or other
person retained by that party and of any transcript ordered by that
party in connection with any arbitration under the Arbitration Plan.
(4) The Arbitration Panel, as a part of any award, may assess, against any
party or parties to an arbitration under the Arbitration Plan, all or
any part of the costs of any witness called, any other evidence
adduced, or any outside service employed, at the direct request of any
Arbitrator.
OBLIGATIONS UPON TERMINATION OR NONRENEWAL
19. Upon termination or nonrenewal of this agreement by either party, the
Dealer shall cease to be an authorized Mercury Dealer; and:
19. (a) SUMS OWING THE COMPANY. The Dealer shall pay to the Company all
sums owing to the Company by the Dealer.
19. (b) DISCONTINUANCE OF USE OF TRADEMARKS AND TRADE NAMES. The Dealer
shall at his own expense (1) remove all signs erected or used by the Dealer, or
by any business associated or affiliated with the Dealer, and bearing the name
"Mercury" or any other trademark or trade name used or claimed by the Company or
any of its subsidiaries (except signs owned by the Company and except as such
use may be permitted under other agreements relating to products of the Company
other than COMPANY PRODUCTS) or any word indicating that the Dealer is an
authorized dealer with respect to any COMPANY PRODUCT, (2) erase or obliterate
all such trademarks, trade names and words from stationery, forms and other
papers used by the Dealer, or any business affiliated with the Dealer, (3)
discontinue all advertising of the Dealer as an authorized dealer in COMPANY
PRODUCTS, (4) discontinue any use of any such trademark, trade name or word in
the Dealer's firm or trade name and take all steps necessary or appropriate in
the opinion of the Company to change such firm or trade name to eliminate any
such trademark, trade name or word therefrom, and (5) refrain from doing
anything whether or not specified above that would indicate that the Dealer is
or was an authorized Dealer in COMPANY PRODUCTS.
If the Dealer fails to comply with any of the requirements of this
subparagraph 19(b), the Dealer shall reimburse the Company for all costs and
expenses, including reasonable attorney's fees, incurred by the Company in
effecting or enforcing compliance.
19. (c) WARRANTY WORK. The Dealer shall cease to be eligible to receive
reimbursement from the Company with respect to any work thereafter performed or
part thereafter supplied under any warranty or policy applicable to any COMPANY
PRODUCT, unless specifically authorized by the Company in writing to perform
such work and then only in the manner and for the period of time set forth in
such authorization.
19. (d) SERVICE RECORDS. The Dealer shall deliver to the Company or its
nominee all of the Dealer's records with respect to predelivery, warranty,
policy, campaign and other service work of the Dealer.
19. (e) ORDERS AND CUSTOMER DEPOSITS. The Dealer shall assign to the
Company or its nominee all customer orders for COMPANY PRODUCTS which the Dealer
has not filled and which the Company is not obligated by subparagraph 19(f) to
supply to the Dealer, and all customer deposits made thereon; and deliver to the
Company or its nominee the names and addresses of the Dealer's existing and
prospective customers for COMPANY PRODUCTS.
19. (f) DELIVERIES AFTER TERMINATION OR NONRENEWAL. If this agreement
shall be terminated or not renewed by the Company (1) because of the death or
physical or mental incapacity of any principal owner of Dealer pursuant to
subparagraph 17(d) hereof, or (2) at will pursuant to subparagraph 17(f)(1)
hereof, or (3) pursuant to subparagraph 17(f)(2) hereof because another domestic
sales agreement between the Dealer and the Company has been terminated either at
will or by reason of the death or physical or mental incapacity of a principal
owner of the Dealer, the Company shall use its best efforts to fill the Dealer's
bona fide orders for COMPANY PRODUCTS outstanding on the effective date of
termination or nonrenewal. The Company's fulfillment of such orders for
VEHICLES, however, may be limited to the number and type of VEHICLES delivered
to the Dealer by the COMPANY during the ninety (90) days immediately preceding
such date, or the number and type of bona fide retail orders for VEHICLES
accepted by the Dealer and unfilled on such date, whichever is smaller.
Deliveries under this subparagraph shall be made in substantial accord with the
Company's normal delivery schedules for the area, unless the Company elects to
make all such deliveries within thirty (30) days after the effective date of
termination.
<PAGE>
The Dealer shall inspect, condition and repair such VEHICLES in the manner
specified in this agreement and in accordance with procedures outlined by the
Company from time to time.
Except for deliveries required by this subparagraph 19(f), each order for a
COMPANY PRODUCT received by the Company from the Dealer and unfilled on the
effective date of termination or expiration of this agreement shall be deemed
cancelled.
SUCCESSOR TO THE DEALER IN THE EVENT OF DEATH OR INCAPACITY
20. In the event of termination or nonrenewal of this agreement by the
Company pursuant to subparagraphs 17(d) or 17(f)(2) because of the death or
physical or mental incapacity of a principal owner of the Dealer named in
subparagraph F(i) hereof:
20. (a) INTERIM AGREEMENT. The Company, subject to the other provisions of
this paragraph, shall offer an Interim Mercury Sales and Service Agreement for
COMPANY PRODUCTS
(1) To a successor dealership composed of the last person nominated by
such principal owner as his successor, together with any other
principal and remaining owners named in subparagraphs F(i) and F(iii)
(hereafter called "Other Owners") hereof, provided that:
(i) The nomination had been submitted to the Company in
writing on the form supplied by the Company with the
consent of the Other Owners prior to such death or the
occurrence of such incapacity, and
(ii) The Company, upon receipt of the nomination had accepted
the nominee as then being qualified (or as capable of
becoming qualified in five (5) years), and at the time the
notice of termination or nonrenewal is given approves the
nominee as then being qualified, to assume full managerial
authority for the DEALERSHIP OPERATIONS, which acceptance
or approval shall not be unreasonably withheld, and
(iii) The nominee has been named as a manager of, and has been
actively participating in the general management of, the
Dealer or a satisfactorily performing automotive or
comparable retail business for a reasonable period of time
prior to the time of the notice of termination or
nonrenewal, and
(iv) The successor dealership, at the time the Interim
Agreement is to be offered, has capital and facilities
substantially in accordance with Company GUIDES therefor,
and
(v) In the event more than one nominee fulfills the above
conditions, the Company, in its discretion, shall determine
which nominee or nominees, together with the Other Owners,
shall compose the successor dealership to which such
Interim Agreement shall be offered;
(2) To a successor dealership, in the event that such principal owner has
notified the Company in writing that the spouse or another relative or
heir of such principal owner shall retain or acquire a financial
interest in the successor dealership and the Company has approved such
spouse, relative or heir for such financial interest which approval
shall not be unreasonably withheld. Such successor dealership shall
be composed of such spouse, relative or heir, together with the Other
Owners and any nominee or nominees approved and qualified pursuant to
subparagraph 20(a)(1) hereof, provided that:
(i) The Other Owners and any nominees and such spouse, relative
or heir agree in writing how each of them shall participate
in the ownership and management of the successor
dealership, and
(ii) Managerial authority and responsibility of the successor
dealership shall be vested in a nominee approved and
qualified pursuant to subparagraph 20(a)(1) hereof, or in a
person or persons who have been named in subparagraph F(ii)
of this agreement and have been actually participating in
the general management of the Dealer for a reasonable period
of time prior to the notice of termination or nonrenewal or
in another person or persons qualified to assume managerial
authority and responsibility and approved by the Company to
be so named, which approval shall not be unreasonably
withheld, and
(iii) The successor dealership, at the time the Interim Agreement
is to be offered, has capital and facilities substantially
in accordance with Company GUIDES therefor;
(3) To a successor dealership, in the event that the deceased or
incapacitated principal owner has neither nominated a successor
pursuant to subparagraph 20(a)(1) hereof, nor notified the Company of
a retained or acquired financial interest pursuant to subparagraph
20(a)(2) hereof, which successor dealership shall be composed of the
Other Owners; provided that the Other Owners agree in writing how each
of them shall participate in the ownership and management of the
successor dealership and the successor dealership fulfills the
conditions set forth in subparagraphs 20(a)(2)(ii) and (iii) of this
agreement.
<PAGE>
20. (b) BUY-OUT. The successor dealership named in such Interim Agreement
shall arrange in writing, subject to the approval of the Company which shall not
be unreasonably withheld, for one or more persons named in subparagraph F(ii) of
the Interim Agreement to have the right to acquire during its term at least a
20% ownership interests in the successor dealership and, if the successor
dealership is offered a standard Sales and Service Agreement for COMPANY
PRODUCTS at the expiration of the Interim Agreement, to have the right to
acquire additional ownership interests therein during the first five (5) years
of such standard agreement and, at the end of such five (5) years, to acquire
the entire ownership interest therein.
20. (c) TERM/CONTINUATION. Any Interim Agreement offered pursuant to this
paragraph 20 shall be in the form in effect between the Company and is
authorized dealers in COMPANY PRODUCTS at the time of such offer, and the term
of such Interim Agreement shall be for twenty-four (24) months, or such longer
term as the Company shall determine to be reasonable to permit the person or
persons named in subparagraph F(ii) thereof to acquire a 20% ownership interest
in the successor dealership pursuant to subparagraph 20(b) of this agreement,
subject to termination during such term as provided in such Interim Agreement.
At least ninety (90) days prior to the end of the term of such Interim
Agreement, the Company shall determine whether or not the person or persons
composing the successor dealership with which such Interim Agreement shall have
been executed possess the qualifications with respect to management, capital and
facilities necessary to fulfill the responsibilities of an authorized dealer in
COMPANY PRODUCTS and, if the Company shall determine that they do possess the
same, which determination shall not be unreasonably made, the Company shall
offer to such successor dealership, upon the expiration of the term of the
Interim Agreement, a standard Sales and Service Agreement for COMPANY PRODUCTS
in the form then in effect.
20. (d) LIMITATION OF OFFER. Notwithstanding anything stated or implied to
the contrary in this paragraph 20, the Company shall not be obligated to offer
an Interim Agreement to any successor dealership if the Company has notified the
Dealer in writing prior to such death or physical or mental incapacity that the
Company's market representation plans do not provide for continuation of
representation from the DEALERSHIP FACILITIES as determined by the Company under
paragraph 9 of this agreement. If such market representation plans provide for
the relocation of the Dealer to another location, however, the Company shall
offer an Interim Agreement subject to the condition that the successor
dealership relocate within a reasonable time to such other location in
facilities approved by the Company.
20. (e) LIMITATION FOR ACCEPTANCE. In the event that the person or persons
composing a proposed successor dealership to which any offer of an Interim
Agreement or standard Sales and Service Agreement for COMPANY PRODUCTS shall
have been made pursuant to this paragraph 20 shall not accept the same within
thirty (30) days after notification to them of such offer, such offer shall
automatically expire.
REACQUISITION OF COMPANY PRODUCTS AND ACQUISITION OF THE DEALER'S SIGNS,
SPECIAL TOOLS AND EQUIPMENT, AND MAINTENANCE ITEMS
21. Upon termination or nonrenewal of this agreement by the Company, the
Dealer may elect as provided in paragraph 23 or, upon termination or nonrenewal
of this agreement by the Dealer, the Dealer may demand in his notice of
termination or nonrenewal, to have the Company purchase or accept upon return
from the Dealer, in return for his general release specified in paragraph 23:
21. (a) VEHICLES. Each unused, undamaged and unsold VEHICLE (together with
all factory-installed options thereon) in the Dealer's stock on the effective
date of such termination or nonrenewal, provided such VEHICLE is in first-class
salable condition, is of a then current model, has not been altered outside Ford
Motor Company's factory, and was purchased by the Dealer from the Company or
another authorized dealer in VEHICLES prior to giving or receiving notice of
such termination or nonrenewal. The price for such VEHICLE shall be its DEALER
PRICE, plus the Company's charges for distribution, delivery and taxes, at the
time it was purchased from the Company, less all allowances paid or applicable
allowances offered thereon by the Company.
21. (b) GENUINE PARTS. Each unused, undamaged and unsold GENUINE PART, and
each unopened item of appearance and maintenance materials and paints
(hereinafter called "maintenance items") in the Dealer's stock on the effective
date of such termination or nonrenewal, provided such GENUINE PART or
maintenance item is offered for sale by the Company to authorized dealers in
VEHICLES in the Company's then current Parts and Accessories Price Schedules, is
in first-class salable condition including reasonably legible and usable
packaging and was purchased by the Dealer from the Company or another Company
authorized dealer in normal volume prior to giving or receiving notice of such
termination or nonrenewal. Notwithstanding the foregoing, the repurchase of
such GENUINE PARTS identified by the Company as accessories shall be limited to
those so purchased by the Dealer within twelve (12) months preceding such date,
or those sold to the Dealer by the Company for use in a VEHICLE that is a
current model on such effective date. The price for each such GENUINE PART or
maintenance item shall be its DEALER PRICE in effect on the effective date of
termination or nonrenewal, less all allowances paid or applicable allowances
offered thereon by the Company. The Dealer, at his own expense, shall carefully
pack and box such of the eligible GENUINE PARTS and maintenance items as the
Company may direct, and the Company shall pay the Dealer an additional five
percent (5%) of the DEALER PRICE of the eligible GENUINE PARTS and maintenance
items so packaged and boxed.
21. (c) DEALER'S SIGNS. Each sign at the DEALERSHIP LOCATION which bears a
trademark or trade name used or claimed by the Company or any of its
subsidiaries, is owned by the Dealer on the effective date of termination or
nonrenewal, was approved by the Company pursuant to subparagraph 6(a) and, if
requested by the Company, is removed by the Dealer at his expense. The price
for each such sign shall be its fair market value on such effective date as
agreed by the Company and the Dealer, or, if they cannot agree, as determined by
a qualified independent appraiser selected by the Company and the Dealer.
<PAGE>
21. (d) SPECIAL TOOLS AND EQUIPMENT. All special tools and automotive
service equipment owned by the Dealer on the effective date of termination or
nonrenewal which were designed especially for servicing VEHICLES, which are of
the type recommended in writing by the Company and designated as "special" tools
and equipment in the applicable CUSTOMER SERVICE BULLETIN or other notice
pertaining thereto sent to the Dealer by the Company, which are in usable and
good condition except for reasonable wear and tear, and which were purchased by
the Dealer within the three (3) year period preceding the effective date of
termination or nonrenewal. The price for each special tool and item of
automotive service equipment shall be its fair market value on such effective
date as agreed by the Company and the Dealer, or, if they cannot agree, as
determined by a qualified independent appraiser selected by the Company and the
Dealer.
21. (e) PROCEDURES, DELIVERY AND TITLE. The Dealer shall return all
property to be purchased or acquired by the Company pursuant to this paragraph
21 in accordance with the procedures and timetables then established by the
Company, shall deliver such property at the DEALERSHIP FACILITIES unless the
Company directs otherwise (in which event the Company shall pay transportation
costs to the place of delivery), shall and hereby does warrant good clear title
to all such property, and shall furnish to the Company evidence satisfactory to
the Company that the Dealer has complied with all applicable bulk sales laws and
that such property is free and clear of all claims, liens and encumbrances.
21. (f) PAYMENT. The Company shall pay the Dealer for the property
purchased or acquired by it pursuant to this paragraph 21 within a reasonable
time following the Dealer's fulfillment of all of the Dealer's obligations under
paragraph 19 and this paragraph 21 subject to the Dealer's tender of a general
release as specified in paragraph 23, and further subject to offset of any
obligations owing by the Dealer to the Company. If the Company has not paid the
Dealer the net amount due the Dealer for such property within a period of two
(2) months after the Dealer has fulfilled his obligations under this paragraph
21 and provided the Dealer has fully complied with paragraphs 19 and 23, the
Company will, at the Dealer's request, advance the Dealer seventy-five percent
(75%) of the estimated amount due the Dealer net of any monies owed to the
Company by the Dealer. The Company will pay the balance of such amount as soon
as practical thereafter.
21. (g) ASSIGNMENT OF BENEFITS. As an assist to the Dealer in effecting an
orderly transfer of his assets to a replacement dealer and to minimize possible
interruptions in customer convenience and service, in the event of termination
or nonrenewal by either party, any rights or benefits with respect to
subparagraphs 21(a), 21(b), 21(c) and 21(d), herein may be assigned by the
Dealer to anyone to whom the Dealer has agreed to sell the respective property
and whom the Company has approved as a replacement for the Dealer. Such
assignments will be subject to Dealer's fulfillment of his obligations under
paragraph 19 and this paragraph 21 and subject to the Dealer's tender of a
general release as specified in paragraph 23.
DEALERSHIP FACILITIES ASSISTANCE UPON NONRENEWAL OR CERTAIN TERMINATIONS BY
THE COMPANY
22. (a) DEALER ELIGIBILITY. The Dealer may elect, as provided in paragraph
23, to have the Company assist the Dealer with respect to the Dealer's Eligible
Facilities (as herein defined), in return for the Dealer's general release as
specified in paragraph 23, upon nonrenewal of this agreement by the Company, or
upon termination of this agreement by the Company, for the following reasons:
(1) Because of disagreement among persons named in paragraph F pursuant to
subparagraph 17(b)(4) or because of the Dealer's failure with respect
to prices or charges, terms or title or trademarks or trade names, or
other sums due the Company pursuant to subparagraph 17(b)(6);
(2) Because of the Dealer's nonperformance of his responsibilities set
forth in paragraphs 2, 3, 4 or 6 pursuant to subparagraph 17(c);
(3) Because of the death or physical or mental incapacity of a principal
owner named in subparagraph F(i) pursuant to subparagraph 17(d)
providing that a successor dealership is not appointed as provided
under paragraph 20;
(4) Because of failure of the Dealer or the Company to be licensed
pursuant to subparagraph 17(e); or
(5) At will pursuant to subparagraph 17(f)(1) if this agreement is not for
a stated term specified in paragraph G of this agreement.
22. (b) ELIGIBLE FACILITIES. "Eligible Facilities" are hereby defined as
only those DEALERSHIP FACILITIES which are listed in the Dealership Facilities
Supplement in effect at the time of such nonrenewal or termination, are approved
by the Company pursuant to paragraph 5, are owned or leased by the Dealer and
are being used by the Dealer solely for fulfilling his responsibilities under
this agreement (or under this agreement and one or more other vehicle sales
agreements with the Company which are not renewed or are terminated by the
Company at the same time as this agreement) at the time the Dealer received
notice of such nonrenewal or termination.
22. (c) COMPANY'S OBLIGATION. Subject to the provisions of subparagraph
22(d) hereof, if neither the Dealer nor the Company can arrange with a third
party within ninety (90) days after the effective date of such termination or
nonrenewal:
<PAGE>
(1) In the case of Eligible Facilities which are owned by the Dealer,
either a lease for one year commencing within such ninety (90) days at
fair rental value or a sale within such ninety (90) days at fair
market value; or
(2) In the case of Eligible Facilities which are leased by the Dealer,
either an assignment of lease, or a sublease for one year (or for the
balance of the term of the Dealer's lease if that is shorter)
commencing within such ninety (90) days at the Dealer's rental rate
(or, if the facilities are owned by an affiliate of the Dealer at fair
rental value, if that is different);
the Company shall offer either to make monthly payments to the Dealer,
commencing with the ninety-first day, pursuant to subparagraph 22(e) hereof, or
to make a lump sum payment to the Dealer pursuant to said subparagraph 22(e), or
to accept for itself on the ninety-first day such a lease or sale from the
Dealer-owner or such an assignment or sublease from the Dealer-lessee.
For the purpose of this subparagraph 22(c), fair market or fair rental
value shall mean value based on the use of the facilities in the conduct of
DEALERSHIP OPERATIONS. In the event the Dealer and the Company are unable to
agree on the fair market or rental value of any Eligible Facilities, such value
shall be determined by an independent real estate appraiser selected by the
Dealer and the Company.
22. (d) LIMITATIONS ON COMPANY'S OBLIGATION. The Company's obligation with
respect to any Eligible Facilities shall be limited to those expressly set forth
in this paragraph 22. The Company shall be released from all obligations with
respect to any Eligible Facilities if (1) the Dealer fails to give the Company,
within thirty (30) days after the Company shall have sent him a tender of
benefits as provided in paragraph 23, a written request for assistance pursuant
to this paragraph 22, accompanied by a written representation by the Dealer that
the Dealer and each owner named in subparagraph F(i) is, for a period of at
least one (1) year, retiring from the business of selling new and used passenger
cars and trucks in the general area of the DEALER'S LOCALITY, (2) the Dealer
fails to make diligent efforts to obtain from third parties an offer to
purchase, lease, sublease or take an assignment of lease described in
subparagraph 22(c), or refuses, or within a reasonable time fails to accept,
such an offer from a third party; (3) the Dealer does not accept any offer with
respect to Eligible Facilities made by the Company in accordance with
subparagraph 22(c) within thirty (30) days after receiving it; (4) the Dealer or
anyone else occupies such facilities for any purpose for a period of more than
ninety (90) days following the effective date of such termination or nonrenewal;
or (5) the Company arranges a cancellation of the lease of any leased facilities
without cost to the Dealer or the Dealer fails or refuses to execute an
agreement covering such cancellation.
22. (e) SATISFACTION OF COMPANY'S OBLIGATION. The Company may satisfy all
of its obligations under this paragraph 22 with respect to any Eligible
Facilities by paying to the Dealer (1) if the facilities are owned by the
Dealer, the difference, each month for twelve months (or until facilities are
sold if that is earlier), between any lesser rentals received by the Dealer for
such facilities for such month and the fair rental value of such facilities for
such month, or (2) if the facilities are leased by the Dealer, the difference,
each month for twelve months (or until the expiration of the lease if that is
earlier) between any lesser rentals received by the Dealer for such facilities
for such month and the rental paid by the Dealer (or, if the facilities are
owned by an affiliate of the Dealer, the fair rental value if that is different)
for such facilities for such month, or (3) at the election of the Company, a
lump sum equal to the total payments contemplated in items (1) or (2) of this
subparagraph 22(e), or such lesser sum as may be agreed upon between the Dealer
and the Company, or by paying any lease cancellation cost negotiated by the
Dealer or the Company not to exceed the total of the Company's obligations under
subparagraphs 22(c) and 22(e).
TERMINATION BENEFITS FULL COMPENSATION; GENERAL RELEASE
23. In the event of termination or nonrenewal of this agreement by the
Company, the Company, within thirty (30) days after the effective date thereof,
shall submit to the Dealer (1) a written tender of the benefits provided for in
paragraph 21 (and in paragraph 22 where applicable) and (2) a form for the
Dealer to use to elect either to reject all of such benefits or to accept one or
more of them as full and complete compensation for such nonrenewal or
termination. The Dealer shall have thirty (30) days after receipt of such form
to return the same to the Company evidencing his election. If the Dealer fails
to return the form stating such election within such thirty (30) days, the
Dealer shall be deemed to have elected to accept such benefits. Upon the
Dealer's election to accept any of such benefits, or upon the Dealer's demand of
any such benefits upon any termination or nonrenewal by the Dealer, the Company
shall be released from any and all other liability to the Dealer with respect to
all relationships and actions between the Dealer and the Company, however
claimed to arise, except any liability that the Company may have under
subparagraph 19(f) and said paragraphs 21 and 22, and except for such amounts as
the Company may have agreed in writing to pay to the Dealer. Simultaneously
with the receipt of any benefits so elected or demanded, the Dealer shall
execute and deliver to the Company a general release with exceptions, as above
described, satisfactory to the Company.
DISPOSITION OF THE DEALER'S ASSETS; RIGHT OF FIRST REFUSAL
24. (a) COMPANY RIGHT TO APPROVE CHANGE IN OWNERSHIP. In view of the
nature, purposes and objectives of the Company's Dealer Sales and Service
Agreements, and the differences in operating requirements among dealerships of
differing sizes and types of markets, the Company expressly reserves the right
to select the dealers with whom it will enter into such agreements so as to
maintain as high quality a dealer organization as possible. In the event this
agreement is terminated or not renewed by either party or if the Dealer plans to
terminate or not renew this agreement, the Company acknowledges that the Dealer
has the right to negotiate for the sale of the assets of the Dealer at such
price as may be agreed upon by the Dealer and the prospective purchaser. In
turn, the Dealer acknowledges that the Company has the right to approve or
decline to approve any prospective purchaser as to his
<PAGE>
character, automotive experience, management, capital and other qualifications
for appointment as an authorized dealer in COMPANY PRODUCTS for the DEALERSHIP
OPERATIONS involved. Approval by the Company of the prospective purchaser shall
not, however, be unreasonably withheld. If, in the opinion of the Company, the
price to be paid for such assets appears, on the basis of the average operating
results of other dealers, to result in an unsatisfactory return on investment so
that such prospective purchaser (1) may not remain as a dealer, or (2) may be
impelled to sell COMPANY PRODUCTS at high noncompetitive prices with a probable
reduction in sales volume, the Company may without liability to the Dealer,
counsel with such prospective purchaser regarding such opinions.
24. (b) COMPANY RIGHT OF FIRST REFUSAL TO PURCHASE. (1) In the event the
Dealer proposes a change in stock ownership or transfer by sale or otherwise of
the dealership business or its principal assets to any person or entity
conditioned upon the Company entering into a Sales and Service Agreement with
that person or entity, the Company shall have a Right of First Refusal to
Purchase the stock or assets on the same terms and conditions offered or agreed
to with such person, regardless of whether the proposed buyer is qualified to be
a dealer.
(2) To exercise its Right of First Refusal, the Company must notify the
Dealer in writing within thirty days of its receipt of the completed
proposal for the proposed sale or transfer.
(3) Upon the Company's request the Dealer shall provide all documents
relating to the transfer. The Company shall have the right to inspect
the assets, including real estate, before exercising its Right of
First Refusal.
(4) The Company's Right of First Refusal under this section may be
assigned to any third party ("Assignee"). If there is an assignment,
Company will guarantee full payment of the purchase price by the
Assignee. The Company shall have the opportunity to discuss the terms
of the buy/sell agreement with any potential Assignee.
(5) The Company's rights hereunder are binding on and enforceable against
any successor in interest of the Dealer or purchaser of the Dealer's
assets. When the proposed change of ownership involves a transfer by
the Dealer solely to a member or members of his or her immediate
family, or to a qualifying member of Dealer management, the Company's
Right of First Refusal will not apply. An "immediate family member"
shall be the spouse, child, grandchild, spouse of a child or
grandchild, brother, sister or parent of the Dealer owner. A
"qualifying member of the Dealer's management" shall be an individual
who has been employed by the Dealer in the dealership for at least
four years and is otherwise qualified as a dealer operator.
(6) The Company agrees to pay the reasonable expenses, including
attorney's fees which do not exceed the usual, customary, and
reasonable fees charged for similar work done for other clients,
incurred by the proposed new owners and transferee prior to the
Company's exercise of its Right of First Refusal in negotiating and
implementing the contract for the proposed sale or transfer of the
Dealer or Dealer's assets.
(7) Notwithstanding the foregoing, no payment of such expenses and
attorney's fees shall be required if the Dealer has not submitted or
caused to be submitted an accounting of those expenses within thirty
days of the Dealer's receipt of the Company's written request for such
an accounting. Such accounting may be requested before the exercise
by the Company of its Right of First Refusal.
NEW AGREEMENT
25. The termination or nonrenewal of this agreement by the Company in
connection with the offer by the Company of a new sales and service agreement
for one or more COMPANY PRODUCTS to the Dealer or the Dealer's successor in
interest shall not give rise to the rights and obligations provided in
paragraphs 19, 21 and 22 with respect to the COMPANY PRODUCTS included in such
new agreement, unless otherwise specified by the Company in writing.
ACKNOWLEDGMENTS
26. This agreement terminates and supersedes all other agreements
concerning the DEALERSHIP OPERATIONS and constitutes the entire agreement
between the parties with respect to the subject matter hereof. Each party
acknowledges that, except as expressly set forth herein, no representation,
understanding or presumption of law or fact has been made or relied upon (1)
which has induced the execution of this agreement or would in any way modify any
of its provisions, or (2) with respect to the effectiveness or duration of this
agreement or the sales or profit expectancy of the DEALERSHIP OPERATIONS. The
Dealer further acknowledges that he has voluntarily entered into this agreement
without coercion or intimidation or threats thereof from the Company, and that
each of its provisions is reasonable, fair and equitable.
NO IMPLIED WAIVERS
27. Except as expressly provided in this agreement, the waiver by either
party, or the failure by either party to claim a breach, of any provision of
this agreement shall not constitute a waiver of any subsequent breach, or affect
in any way the effectiveness, of such provision.
RELATIONS AFTER TERMINATION NOT A RENEWAL
<PAGE>
28. In the event that, after termination or nonrenewal of this agreement,
either party has any business relations with the other party with respect to any
COMPANY PRODUCT, such relations shall not constitute either a renewal of this
agreement or a waiver of such termination or nonrenewal, but all such relations
shall be governed by terms identical with the provisions of this agreement
unless the parties execute a new and different agreement.
LIMITATION OF THE COMPANY'S LIABILITY
29. This agreement contemplates that all investments by or in the Dealer
shall be made, and the Dealer shall purchase and resell COMPANY PRODUCTS, in
conformity with the provisions hereof, but otherwise in the discretion of the
Dealer and the Dealer's owners. Except as herein specified, nothing herein
contained shall impose any liability on the Company in connection with the
DEALERSHIP OPERATIONS or otherwise or for any expenditure made or incurred by
the Dealer in preparation for performance or in performance of the Dealer's
responsibilities under this agreement.
NOTICES
30. Any notice required or permitted by this agreement, or given in
connection herewith, shall be in writing and shall be given by personal delivery
or by first-class or certified or registered mail, postage prepaid. Notices to
the Company shall be delivered to or addressed to the Regional Manager of the
area in which the Dealer is located except notices given by the Dealer either to
the Policy Board or pursuant to the Arbitration Plan. Notices to the Dealer
shall be delivered to any person designated in paragraph F(ii) of this agreement
or directed to the Dealer at the Dealer's principal place of business as
described herein.
AMENDMENT
31. Notwithstanding anything in this agreement to the contrary, the Company
shall have the right to amend, modify or change this agreement in case of
legislation, government regulation or changes in circumstances beyond the
control of the Company that might affect materially the relationship between the
Company and the Dealer.
MICHIGAN AGREEMENT
32. This agreement has been signed by the Dealer and sent to the Company in
Michigan for final approval and execution and has there been signed and
delivered on behalf of the Company. The parties intend this agreement to be
executed as a Michigan Agreement and to be construed in accordance with the laws
of the State of Michigan.
CONFLICT WITH STATUTE
33. If performance under this Agreement is illegal under a valid law of any
jurisdiction where such performance is to take place, the performance will be
modified to the minimum extent necessary to comply with any such law as was
effective on the date of execution of this Agreement.
<PAGE>
EXHIBIT 10.10.3
AGREEMENT BETWEEN
TOYOTA MOTOR SALES, U.S.A., INC.
AND
LITHIA MOTORS, INC.
Agreement, dated [Sept. 30], 1996, entered between Lithia Motors, Inc.
("Lithia"), an Oregon corporation, with its principal place of business at 360
E. Jackson, Medford, OR 97501, and Toyota Motor Sales, U.S.A., Inc. ("TMS"), a
California corporation, with its principal place of business at 19001 South
Western Avenue, Torrance, CA, 90509.
WHEREAS, Lithia is currently the owner, directly or through its Affiliates (as
defined in Paragraph 1 below) of one Toyota automobile dealership; and
WHEREAS, Lithia may wish to acquire, directly or through an Affiliate,
additional Toyota and Lexus dealerships; and
WHEREAS, Lithia wants to issue stock in a public offering of securities
anticipated to be traded on the NASDAQ; and
WHEREAS, TMS has advised Lithia of TMS' policy limiting the number of commonly
owned or controlled, directly or through an Affiliate (as defined below),
dealerships by a single entity, which is currently as follows:
A. TOYOTA
A single entity shall not hold an ownership interest, directly or through
an Affiliate, in more than: (a) the greater of one (1) or 20% of the Toyota
dealer count in a "Metro" market ("Metro markets are multiple Toyota
dealership markets as defined by TMS); (b) the lesser of five dealerships
or 5% of the Toyota dealerships in any Toyota Region ("Toyota Region"
currently includes nine TMS Regions, Central Atlantic Toyota, Southeast
Toyota, and Gulf States Toyota); and c) seven (7) Toyota dealerships
nationally.
LEXUS
A single entity shall not hold an ownership interest, directly or through
an Affiliate, in more than: (a) two (2) Lexus dealerships in any Area
("Area" currently includes Eastern, Southern, Central and Western); and (b)
three (3) Lexus dealerships nationally.
"Affiliate" of, or a person or entity "affiliated" with, a specified person
or entity, means a person or entity that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, the person or entity specified. For the purpose of this
definition, the term "control" (including the terms "controlling,"
"controlled by" and "under common control with") means the possession,
directly or indirectly, or the power to direct or cause the direction of
the management and policies of a person or entity, whether through the
ownership of securities, by contract or otherwise.
B. In order for an entity to acquire additional Toyota or Lexus dealerships,
within the limits of this Agreement, each Toyota or Lexus dealership which
it owns, directly or through an Affiliate, must: a) be in full compliance
with all of the terms of its Dealer Agreement; and b) meet all of the
applicable Toyota or Lexus Market Representation and performance policies.
C. If the purchase of any Toyota or Lexus dealership would result in exceeding
the limits set forth in Paragraph 1 above, TMS will reject a dealer's
application for approval of the ownership transfer until such time as the
dealer shall divest itself of the appropriate number of dealerships to
bring it into compliance with the requirements of this Agreement.
WHEREAS, Lithia and TMS are willing to resolve these issues in accordance with
the terms set forth herein,
NOW THEREFORE, Lithia and TMS agree as follows:
CHANGE IN OWNERSHIP OF LITHIA
1. TMS shall have the right to approve any new acquisition in ownership or
voting rights of Lithia of twenty percent (20%) or greater by any individual or
entity; PROVIDED, HOWEVER, that if TMS reasonably determines that such
individual or entity is unqualified to own a Toyota or Lexus dealership, or has
interests incompatible with TMS, and such transfer is effected, Lithia must,
within ninety (90) days from the date of notification by TMS of its
determination, either: a) transfer the assets of its Toyota and Lexus
dealerships to a third party acceptable to TMS; b) voluntarily terminate its
Toyota and Lexus Dealership Agreements; or c) demonstrate that such individual
or entity in fact owns less that 20% of the outstanding shares of Lithia, or
does not have 20% of the voting rights in Lithia.
OWNERSHIP OF CONTIGUOUS DEALERSHIPS
<PAGE>
2. Lithia shall not own contiguous dealerships (as that term is defined in the
applicable Toyota or Lexus Dealer Agreement or policy) with common boundaries.
SEPARATE LEGAL ENTITIES FOR EACH TOYOTA AND LEXUS DEALERSHIP
3. Lithia shall create separate legal entities for each Toyota and Lexus
dealership which it owns, directly or through an Affiliate, shall obtain a
separate motor vehicle license for each dealership, and shall maintain separate
financial statements for each such dealership. Consistent with TMS policy, the
name "Toyota" or "Lexus," as applicable shall appear in the d/b/a of each
dealership.
FACILITY STANDARDS
4. In no instance shall a Toyota or Lexus dealership or any department(s)
thereof be dualled with any other brand without TMS' prior written approval.
GENERAL MANAGERS
5. Each Toyota and Lexus dealership owned or controlled by Lithia shall have a
qualified, approved (subject to the exception noted in Paragraph 6 below)
General Manager. Each General Manager shall work at the Toyota or Lexus
dealership premises, shall devote all of his/her efforts to the management of
the dealership and shall have no other business interests or management
responsibilities. Lithia shall obtain TMS' prior approval for any General
Manager to also manage any dealership that is dualled with the Toyota or
Lexus facility.
APPROVAL OF THE GENERAL MANAGER
6. Whenever Lithia nominates a new General Manager candidate for a Toyota or
Lexus dealership, TMS shall have the right to withhold a decision concerning
approval or rejection of the candidate for a period of up to one year, at its
sole discretion; PROVIDED, HOWEVER, that the candidate may operate in the
capacity of General Manager until TMS has approved or rejected him/her.
LIMITATIONS ON THE AUTHORITY OF THE GENERAL MANAGER
7. Lithia shall advise TMS of the limitations, by category and, where
applicable, by specific action, on the authority of the General Manager
regarding the operation of the dealership, and shall provide the name of the
individual at Lithia who has such authority with respect to each listed category
or specific action, in accordance with Paragraph 8 below.
IDENTIFICATION OF LITHIA CONTACT OFFICIAL
8. Lithia shall identify, in each Toyota and Lexus Dealer Agreement, the
Lithia executive (other than the General Manager of the dealership) who will
respond directly to any Toyota or Lexus concerns regarding the operation or
performance of the dealership, which executive will have full authority, in
accordance with Lithia management policies, to resolve issues raised by TMS in
connection with the operation of the dealership.
SELLING TOYOTA AND LEXUS PRODUCTS
9. Lithia shall make available to the customers at its Toyota and Lexus
dealerships, all Toyota and Lexus products, including vehicles, Genuine Parts
and Accessories, retail financing (whether for purchases or leases) and extended
service contracts.
REPRESENTATION ON TOYOTA AND LEXUS DEALER ORGANIZATIONS
10. No more than one representative each from the Toyota, and, separately,
Lexus, dealerships owned, directly or through an Affiliate, by Lithia, may serve
on the National Dealer Council or any future Toyota or Lexus national board(s)
which may be established, and no more than one representative each may serve on
either a Regional or Area Dealer Council, or Toyota or Lexus Dealer Association
Board of Directors.
DEALERSHIP PERSONNEL TRAINING
11. Lithia shall not substitute training courses or certification programs of
its own for those provided or sponsored by TMS without the prior approval of
TMS.
PUBLIC OFFERING OF SECURITIES BY LITHIA
12. TMS shall not object to a public offering of securities by Lithia so long
as the limitations on ownership of voting control of Lithia contained in this
agreement are not exceeded or breached in any way. In addition, TMS hereby
approves the increase to 100% in equity interest in each Toyota and Lexus
dealership in which subsidiaries of Lithia now have a majority equity interest.
FINANCIAL DISCLOSURES
13. Lithia shall provide TMS with copies of all information and materials filed
with the Securities Exchange Commission, including, but not limited to,
quarterly and annual financial statement filings, prospectuses and other
materials related to Lithia.
PROSPECTUS DISCLAIMER AND INDEMNIFICATION AND HOLD HARMLESS AGREEMENT
<PAGE>
14. Lithia shall place in its registration statement and its prospectus, as
well as in any other document offering shares in Lithia to public or private
investors, the following disclaimer:
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.
Lithia shall indemnify and hold harmless TMS pursuant to the terms of the
Indemnification and Hold Harmless Agreement set forth in Attachment 1 to this
Agreement.
SOLE AGREEMENT OF THE PARTIES
15. There are no prior agreements or understandings, either oral or written,
between the Parties affecting this Agreement, except as otherwise specified or
referred to in this Agreement. No change or addition to, or deletion of any
portion of this Agreement shall be valid or binding upon the parties hereto
unless approved in writing signed by an officer of each of the parties hereto.
SEVERABILITY
16. If any provision of this Agreement should be held invalid or unenforceable
for any reason whatsoever, or conflicts with any applicable law, this Agreement
will be considered divisible as to such provision(s), and such provision(s) will
be deemed amended to comply with such law, or if it (they) cannot be so amended
without materially affecting the tenor of the Agreement, then it (they) will be
deemed deleted from this Agreement in such jurisdiction, and in either case, the
remainder of the Agreement will be valid and binding.
NO IMPLIED WAIVERS
17. The 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 any
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.
TMS POLICIES
18. This Agreement refers to certain policies and standards. Lithia
acknowledges that these policies and standards are prepared by TMS in its sole
discretion based upon TMS' evaluation of the marketplace. TMS may reasonably
amend its policies and standards from time to time.
APPLICABLE LAW
19. This Agreement shall be governed by and construed according to the laws of
California.
BENEFIT
20. This Agreement is entered into by and between TMS and Lithia for their sole
and mutual benefit. Neither this Agreement nor any specific provision contained
in it is intended or shall be construed to be for the benefit of any third
party.
NOTICE TO THE PARTIES
21. Any notices permitted or required under the terms of this Agreement shall
be directed to the following respective addresses of the parties, or if either
of the parties shall have specified another address by notice in writing to the
other party, then to the address last specified:
TOYOTA MOTOR SALES, U.S.A., INC.
19001 South Western Avenue
Torrance, California 90509
LITHIA MOTORS, INC.
360 E. Jackson
Medford, Oregon 97501
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
LITHIA MOTORS, INC.
BY:
--------------------------------
TOYOTA MOTOR SALES, U.S.A., INC.
BY:
--------------------------------
<PAGE>
ATTACHMENT 1
INDEMNIFICATION AGREEMENT
INDEMNIFICATION AGREEMENT, made this [30th] day of [Sept.], 1996 between
Lithia Motors, Inc., an Oregon corporation the address of which is 360
E. Jackson, Medford, OR 97501 ("Lithia") and Toyota Motor Sales, U.S.A., Inc., a
California corporation the address of which is 19001 S. Western Avenue,
Torrance, CA 90509 ("TMS").
WITNESSETH
WHEREAS, Lithia has been formed to own subsidiary corporations which will
own and operate automobile dealerships; and
WHEREAS, Lithia intends to publicly offer and sell shares of stock ("Lithia
Stock") in a public offering pursuant to the Securities Act of 1933 (the "Act");
and
WHEREAS, TMS has consented to the offer and sale of such Lithia Stock to
the public; and
WHEREAS, in recognition of TMS' demand for complete protection against
liability and threats of legal action and in order to obtain TMS' consent to the
offer and sale of such shares, Lithia wishes to provide in this Agreement for
the indemnification of and the advancing of expenses to TMS as set forth herein.
NOW, THEREFORE, in consideration of the mutual promises made herein and for
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged, the parties hereby agree as follows:
1. INDEMNITY OF TMS
Lithia hereby agrees to indemnify and hold harmless TMS and its affiliates
from and against any and all losses, liabilities, judgments, amounts paid in
settlement, claims, damages and expenses whatsoever (collectively a "Claim"),
including, but not limited to, any and all expenses whatsoever incurred
investigating, preparing or defending against any litigation, commenced or
threatened, to which TMS may become subject under the Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the securities laws of
any state (the "Blue Sky Laws"), any other statute or at common law or otherwise
under the laws of any foreign country, arising in connection with the sale of
the Lithia Stock. In addition, Lithia hereby agrees to indemnify and hold
harmless TMS from any and all claims of the shareholders of Lithia with respect
to any matter, PROVIDED, that if it is ultimately determined, based upon a final
decision of a court, arbitrator or other authorized panel or a settlement
entered into by the parties to the dispute and consented to by TMS that TMS was
liable for such Claim in whole or in part, the indemnification set forth herein
shall be of no force or effect, and TMS shall immediately reimburse Lithia for
any expenses advanced by Lithia pursuant to Paragraph 3 of this Agreement.
2. NOTIFICATION AND DEFENSE OF CLAIM
(a) If any litigation is commenced against TMS in respect of which
indemnity may be sought pursuant to this Agreement, TMS shall promptly notify
Lithia in writing of the commencement of any such litigation, and Lithia shall
then assume the defense of any such litigation, including the employment and
fees of counsel (reasonably satisfactory to TMS) and the payment of all such
expenses.
(b) TMS shall have the right to employ its own counsel in any such
case to oversee the litigation on behalf of TMS, to consult with the attorneys
engaged by Lithia as to the proper handling of the litigation and to take such
actions in connection with the litigation as are reasonably necessary to protect
TMS' interests. Lithia shall pay the reasonable fees and expenses of not more
than one additional firm of attorneys for TMS.
(c) Lithia agrees promptly to notify TMS of the commencement of any
litigation against Lithia in connection with the issue and sale of the Lithia
Stock. Lithia and TMS agree to cooperate with each other in the defense of any
litigation.
(d) Lithia shall not be obligated to indemnify or reimburse TMS under
this Agreement for any amounts paid in settlement of any litigation effected
without Lithia's prior written consent. Lithia shall not, in the defense of any
such litigation, except with TMS' prior written consent, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or the plaintiff to TMS of a release
from all liability in respect to such litigation. Neither Lithia nor TMS shall
unreasonably withhold its consent to any proposed settlement.
3. PAYMENT OF EXPENSES
Lithia agrees that it will pay any and all expenses incurred by TMS in
defending any civil or criminal action, suit or proceeding against TMS in
advance of the time such expenses are due. With respect to legal fees and
disbursements of TMS' attorneys, Lithia will pay such attorneys an advance
retainer of up to $20,000 and will pay additional fees and expenses of such
attorneys in increments of not more than $20,000 periodically in advance of the
dates that such fees and expenses are incurred.
4. ENFORCEMENT
<PAGE>
(a) Lithia expressly confirms and agrees that it has entered into
this Agreement and assumes the obligations imposed on it in order to induce TMS
to consent to the offer and sale of Lithia Stock and acknowledges that TMS is
relying upon this Agreement to grant such consent.
(b) In the event TMS is required to bring any action to enforce
rights or to collect moneys due under this Agreement and is successful in such
action, Lithia shall reimburse TMS for all of TMS' reasonable fees and expenses
in bringing and pursuing such action.
5. SUBROGATION
(a) In the event of payment under this Agreement, Lithia shall be
subrogated to the extent of such payment to all of the rights of recovery of
TMS, which shall execute all papers required and shall do everything that may be
necessary to secure such rights, including the execution of such document
necessary to enable Lithia effectively to bring suit to enforce such rights.
(b) Lithia shall not be liable under this Agreement to make any
payment in connection with any claim or litigation made against TMS to the
extent TMS has otherwise actually received payment (under any insurance policy
or otherwise) of the amounts otherwise indemnifiable hereunder.
6. MISCELLANEOUS
(a) This Agreement shall be interpreted and construed in accordance
with the laws of the State of California, without giving effect to the conflict
of law rules.
(b) This Agreement shall be binding upon and inure to the benefit of
Lithia and TMS and their respective legal representatives, successors and
assigns.
(c) No amendment, modification or termination of this Agreement shall
be effective unless in writing and signed by both parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first above written.
LITHIA MOTORS, INC. TOYOTA MOTOR SALES, U.S.A., INC.
By:
----------------- --------------------------------------------------
Title:
----------------- --------------------------------------------------
<PAGE>
EXHIBIT 10.12.1
COMMERCIAL LEASE
DATED: SEPTEMBER 20, 1996
BETWEEN: LITHIA PROPERTIES, L.L.C. an Oregon limited liability company
LANDLORD
AND: LITHIA MOTORS, INC., an Oregon corporation
TENANT
WHEREAS, the above parties desire to start a lease arrangement reflecting the
current understanding and agreement between them, all of which appertains to all
of the improved and unimproved real property owned by Landlord and utilized by
Tenant in various locations as noted under II (a) below.
NOW, THEREFORE, the following is the understanding and agreement of the parties
as regards their lease arrangement:
I. OCCUPANCY
a) Original Term: The term of the Lease shall commence OCTOBER 1, 1996,
and continue through SEPTEMBER 30, 2026.
b) Possession: Tenant's right to possession and obligations under this
Lease shall continue uninterrupted throughout the course and term of this lease
arrangement, subject only to contractual performance required from Tenant as
called for herein.
II. RENT
a) Basic Rent: Tenant shall pay to Landlord as rent the sum of $5,917
per month. Rent shall be payable on the 10th day of each month in advance at
such place as may be designated by Landlord. The rent amount is for the
following properties:
360 E. JACKSON-MOTORS OFFICES 7%
325 E. JACKSON 1/2 WITH TOYOTA
345 N. BARTLETT - LEIGH JOHNSON
326 N. BARTLETT 1/2 SHARED WITH DISCOUNT
401 E. 4TH ST.-MOTORS 13.45% SHARED WITH CELLULAR
b) Security Deposit: N/A
c) Escalation: It is contemplated, that because of the long-range lease
arrangement there will be rent adjustments made from time to time. Generally,
the lease payment will be adjusted the 1st of January of every year beginning in
1998 and will be computed to be 1.25% of the highest value of the property as
determined by appraisal, county assessment or Landlord's estimate. If the
Landlord makes further improvements to the property, 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 1.25% of the increase in
fair market value. If the improvements do not 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.
In the event that mutual agreement is not had between the parties as to what
those rent increases shall be, then the following shall apply: On the 1st day
of January, 1998 and the 1st day of January of each succeeding year, there shall
be computed any increase in the cost of living based on the "Consumer Price
Index-Pacific Cities and U.S. Average" (1967-100) hereinafter called the
"Index", published by the bureau of Labor Statistics of the U.S. Department of
Labor. The Index number for the City of Portland, Oregon entitled "All Items"
for the month of December. The monthly rental amount set forth in Paragraph II
hereof shall, in the event of an increase in the cost of living determined as
above-mentioned, be increased effective the 1st day of January of each
succeeding calendar year during the term of this Lease Agreement wherein there
is an increase in said cost of living. The current Index number shall be
divided by the base Index number and the result multiplied by the basic monthly
rental, the result being the adjusted monthly rental. Landlord shall, within a
reasonable time after determining the appropriate information, with respect to
said increase, give Tenant notice of such increase, and Landlord's computation
thereof shall be binding and conclusive unless Tenant shall, within fifteen (15)
days after the giving of said notice, advise Landlord of any dispute in
conjunction therewith. Any dispute between the parties as to such computation
shall be determined by a Board of Arbitration with one member selected by
Landlord and one member selected by Tenant and one member selected by the
selectees of Landlord and Tenant. If publication of the Index shall be
discontinued, the parties shall thereafter accept comparable statistics on the
cost of living for the City of Portland as they shall
<PAGE>
be computed and published by any government agency or by a responsible financial
periodical of recognized authority. In the event that any method is not
utilizable and does not have an appropriate Index for the given month that is
herein involved, computation shall be undertaken in the form of interpolation
between given dates that are applicable so that the spirit and intent of this
paragraph can be given effect. At the Landlord's discretion, Landlord may waive
the above mentioned increase if the United States is at war or if economic
conditions are causing undue hardship to the Tenant.
III. USE OF THE PREMISES
a) Permitted Use: The premises shall be used for a general automobile
dealership, including, but not limited to, sale of new and used vehicles, repair
of vehicles, sale of accessories and other allied products; and for no other
purpose without the consent of Landlord.
b) Restrictions on Use: In connection with the use of the premises,
Tenant shall:
(1) Conform to all applicable laws and regulations of any public
authority affecting the premises and use, and shall correct at Tenant's own
expense any failure of compliance created through Tenant's fault or by reason of
Tenant's use or as otherwise required from Tenant by the terms of this lease.
(2) Refrain from any activity which would make it impossible to
insure the premises against casualty, would increase the insurance rate, or
would prevent Landlord from taking advantage of any ruling of the Oregon
Insurance Rating Bureau or its successor allowing Landlord to obtain reduced
premium rates for long-term fire insurance policies, unless Tenant pays the
additional cost of the insurance.
(3) Refrain from any use which would be reasonably offensive to
other tenants or owners or users of neighboring premises or which would tend to
create a nuisance or damage the reputation of the premises.
(4) Refrain from loading the floors beyond the point considered
safe by a competent engineer or architect selected by Landlord.
(5) Refrain from making any marks on or attaching any sign,
insignia, antenna, aerial, or other device to the exterior or interior walls,
windows, or roof of the premises without the written consent of Landlord.
c) Continuity of Use: Tenant shall use the premises continuously during
normal business hours except to the extent the use is interrupted or prevented
by causes beyond Tenant's control.
IV. REPAIRS AND MAINTENANCE
a) Landlord's Obligations: The Landlord shall be responsible for all
repairs and maintenance to all parts of the building and land, including but not
limited to the following:
(1) Repairs and maintenance of the roof and gutters, exterior walls
(including painting), bearing walls, structural members, and foundation.
(2) Repair of sidewalks, driveways, curbs, parking areas, and areas used
in common by Tenant and Landlord or tenants of other portions of the same
building.
(3) Repair and maintenance of exterior water, sewage, gas, and
electrical services up to the point of entry to the leased premises.
(4) Repair of interior walls, ceilings, doors and windows and related
hardware, light fixtures, switches, wiring plumbing and light bulbs.
(5) All repairs and maintenance concerning the heating and air
conditioning system.
(6) All other repairs to the premises which Landlord is required to
make.
b) Tenant's Obligations: The following shall be the responsibility of
Tenant: Any repair necessitated by the negligence of Tenant, its agents,
employees, and invitees.
c) Landlord's Interference with Tenant: Any repairs, replacements,
alterations, or other work performed on or around the leased premises by
Landlord shall be done so as to interfere as little as reasonably possible with
use of the premises by Tenant. Tenant shall have no right to an abatement of
rent nor any claims against Landlord for any inconvenience or disturbance
resulting from Landlord's activities performed in conformance with the
requirement of this provision.
d) Reimbursement for Repairs Assumed: If either party fails or refuses
to make the repairs which are required by this Lease, the other party may make
the repairs and charge the actual cost of repairs to the first party. Such
expenditures by Landlord shall be reimbursed by Tenant on demand together with
interest at the rate of twelve percent (12%) per annum from the date expenditure
by Landlord. Such expenditures by Tenant may be deducted from rent and other
payments subsequently becoming due or, at Tenant's election, collected directly
from Landlord. Except in an emergency creating an immediate risk of personal
injury or property damage, neither party may perform repairs which are the
obligation of the other party and charge the other party for the resulting
expenses unless at least thirty (30) days before work is commenced the
defaulting party is given notice, in writing, outlining
<PAGE>
with reasonable particularity the repairs required, and such party fails within
that time to initiate such repairs in good faith.
e) Inspection of Premises: Landlord shall have the right to inspect the
premises at any reasonable time or times to determine the necessity of repairs.
Whether or not such inspection is made, the duty of Landlord to make repairs
shall not mature until a reasonable time after Landlord has received from Tenant
notice in writing of the repairs that are required.
V. ALTERATIONS
a) Alterations Prohibited: Tenants shall make no improvements or
alterations on the leased premises of any kind without first obtaining
Landlord's written consent.
b) Ownership of Alterations: All improvements and alterations performed
on the leased premises by either Landlord or Tenant shall be the property of
Landlord when installed unless the applicable Landlord's consent specifically
provides otherwise.
VI. INSURANCE
a) Insurance Required: Landlord shall keep the leased premises insured
at Landlord's expense against fire and other risks covered by standard fire
insurance policy with an endorsement for extended coverage. Tenant shall bear
the expense of any insurance insuring the property of Tenant on the premises
against such risks but shall not be required to insure.
b) Waiver of Subrogation: Neither party shall be liable to the other (or
to be other's successors or assigns) for any loss or damage caused by fire or
any of the risks enumerated in a standard fire insurance policy with an extended
coverage endorsement, and in the event of insured loss neither party's insurance
company shall have a subrogated claim against the other, unless the policy of
insurance procured fails to provide for the waiver of subrogation.
VII. TAXES
Tenant shall pay as due all taxes on its personal property located on the leased
premises. Landlord shall pay as due all real property taxes and special
assessments levied against the leased premises.
VIII. DAMAGE AND DESTRUCTION
a) Partial Damage: If the leased premises are partly damaged and the
following subsection does not apply, the property shall be repaired by Landlord
at Landlord's expense if insurance proceeds are available. Repairs shall be
accomplished with all reasonable dispatch subject to interruptions and delays
from labor disputes and matters beyond the control of Landlord.
b) Destruction: If the lease premises are destroyed or damaged such that
the cost of repair exceeds the available insurance proceeds, either party may
elect to terminate the Lease as of the date of the damage or destruction by
notice given to the other in writing not more than forty-five (45) days
following the date of damage. In such event, all rights and obligations of the
parties shall cease as of the date of termination, and Tenant shall be entitled
to the reimbursement of any prepaid amounts paid by Tenant and attributable to
the anticipated term. If neither party elects to terminate, Landlord shall
proceed to restore the lease premises to substantially the same form as prior to
the damage or destruction. Work shall be commenced as soon as reasonably
possible and thereafter shall proceed without interruption except for work
stoppages on account of labor disputes and matters not under control of
Landlord.
c) Rent Abatement: Rent shall be abated during the repair of any damage
to the extent the premises are untenantable, except that there shall be no rent
abatement where the damage occurred as the result of the fault of Tenant.
d) Damage Late in Term: If damage or destruction referred to within
Subsection (b) would apply occurs within twelve months prior to the end of the
then current Lease term, Landlord may elect to terminate the Lease by notice in
writing to Tenant given within thirty (30) days after the date of the damage.
IX. EMINENT DOMAIN
a) Partial Taking: If a portion of the leased premises is condemned, and
Subsection (b) does not apply, the Lease shall continue on the following terms:
Landlord shall proceed as soon as reasonably possible to make such repairs and
alterations to the premises as are necessary to restore the remaining premises
to a condition as comparable as reasonably practicable to that existing at the
time of the condemnation.
b) Total Taking: If a condemning authority takes all of the leased
premises or a portion sufficient to render the remaining premises reasonably
unsuitable for the use which Tenant was then making of the premises, the Lease
shall terminate as of the date the title vests in the condemning authorities.
Landlord shall receive all condemnation proceeds.
c) Sale in Lieu of Condemnation: Sale of all or part of the leased
premises to a purchaser with the power of eminent domain in the face of a threat
or probability of the exercise of the power shall be treated for the purposes of
this Section as a taking by condemnation.
<PAGE>
X. LIABILITY AND INDEMNITY
a) Liens:
(1) Except with respect to activities for which Landlord is
responsible, Tenant shall pay as due all claims for work done on, and for
services rendered or material furnished to, the leased premises and shall keep
the premises free from any liens. If Tenant fails to pay any such claims or to
discharge any lien, Landlord may do so and collect the cost as additional rent.
Any amount so added shall bear interest at the rate of twelve percent (12%) per
annum from the date expended by Landlord and shall be payable on demand. Such
action by Landlord shall not constitute a waiver of any right or remedy which
Landlord may have on account of Tenant's default.
(2) Tenant may withhold payment of any claim in connection with a
good-faith dispute over the obligation to pay, so long as Landlord's property
interests are not jeopardized. If a lien is filed as a result of nonpayment,
Tenant shall, within ten (10) days after knowledge of the filing, secure the
discharge of the lien or deposit with Landlord cash or sufficient corporate
surety bond or other surety satisfactory to Landlord in an amount sufficient to
discharge the lien plus any cost, attorney fees, and other charges that could
accrue as a result of a foreclosure or sale under the lien.
b) Indemnification: Tenant shall indemnify and defend Landlord from any
claim, loss, or liability arising out of or related to any activity of Tenant on
the leased premises or any condition of the leased premises in the possession or
under the control of Tenant. Landlord shall have no liability to Tenant for any
loss or damage caused by third parties or by any condition of the premises.
c) Liability Insurance: Before going into possession of the premises,
Tenant shall procure and thereafter during the term of the Lease shall continue
to carry the following insurance at Tenant's cost: public liability and
property damage insurance in a responsible company with limits of not less than
$300,000 for injury to one person, $500,000 for injury to two or more persons in
one occurrence, and $50,000 for damage to property. Such insurance shall cover
all risks arising directly or indirectly out of Tenant's activities on or any
condition of the leased premises whether or not related to an occurrence caused
or contributed to by Landlord's negligence, shall protect Tenant against the
claims of Landlord on account of the obligations assumed by Tenant under the
Lease; and shall protect Landlord and Tenant against claims of third persons.
Certificates evidencing such insurance and bearing endorsements requiring ten
(10) days' written notice to Landlord prior to any changes or cancellation shall
be furnished to Landlord prior to Tenant's occupancy of the property.
XI. ASSIGNMENT AND SUBLEASE
No part of the leased property may be assigned, hypothecated, or subleased,
nor may a right of use of any portion of the property be conferred on any third
person by any other means, without the prior written consent of Landlord. No
consent in one instance shall prevent the provision from applying to a
subsequent instance.
XII. DEFAULT
The following shall be events of default:
a) Default in Rent: Failure of Tenant to pay any rent or other charge
within twenty days after it becomes due.
b) Default in Other Covenants: Failure of Tenant to comply with any term
or condition or fulfill any obligation of the Lease (other than the payment of
rent or other charges) within twenty days after written notice by Landlord
specifying the nature of the default with reasonable particularity. If the
default is of such a nature that it cannot be completely remedied within said
twenty day period, this provision shall be deemed complied with if Tenant begins
correction of the default within the twenty day period and thereafter proceeds
with reasonable diligence and in good faith to effect the remedy as soon as
practicable.
c) Abandonment: Failure of Tenant for twenty days or more to occupy the
property for one or more of the purposes permitted under this Lease, unless such
failure is excused under other provisions of this Lease, shall be an abandonment
of the property.
d) Insolvency: The insolvency of Tenant assignment for the benefit of
creditors, or the appointment of a receiver for Tenant, or the initiation of any
bankruptcy proceedings.
XIII. REMEDIES ON DEFAULT
Upon the termination of this Lease, at its expiration by elapse of time or
otherwise, the Tenant shall yield up immediate possession to the Landlord.
It is mutually agreed as a condition of this Lease, and the Tenant covenants,
that if the monthly cash rent called for in said Lease, or any part thereof,
shall not be paid promptly on or before the date when due, no notice being
required, or if the Tenant shall breach or fail to perform any other of the
covenants, conditions, provisions and agreements herein contained, following
twenty (20) days written notice defining the nature of such default, then in
each of every case, the term hereby granted shall, at the election of the
Landlord, immediately thereupon cease, determine and come to an end, without
further formality and without prejudice to Landlord's right to rents due or
<PAGE>
to become due; and the Landlord may recover and resume possession of the demised
premises by any legal means; and in such case, the Landlord shall have the right
to re-enter upon said premises and resume possession of same and without
prejudice to any remedies which might otherwise be available to Landlord.
It is understood and agreed that in the event of default of Tenant's obligations
as defined in this agreement, so that Landlord resumes possession of the subject
real property and improvements thereon, the Tenant's obligations for monthly
installment payments shall not terminate; that each month's unpaid installment
shall constitute a separate cause of action for which the Landlord may litigate
independently. Any action or suit to recover possession of said real property
and improvements shall not terminate rent obligations due the Tenant
The written notice of Landlord's intention to terminate this Lease hereinabove
provided for shall be deemed a re-entry under the law, as to all rights between
Landlord and Tenant herein, and upon any such resumption of possession by
Landlord in any manner, it may remove all persons and property from the demised
premises. Landlord may thereafter be entitled to hold the Tenant liable for
expenses incurred by the Landlord for necessary repairs to the demised premises,
so far as incumbent upon the Tenant to keep same in repair, or by reason of the
breach of any of the terms, conditions, or covenants of this Lease, and all
expenses incurred in recovering possession of the premises and in reletting same
to mitigate Landlord's loss.
XIV. SURRENDER AT EXPIRATION
a) Condition of Premises: Upon expiration of the Lease term, or earlier
termination on account of default, Tenant shall deliver all keys to Landlord and
surrender the leased premises in first-class condition and broom clean.
Alterations constructed by Tenant with permission from Landlord shall not be
removed or restored to the original condition unless the terms of permission for
the alteration so require. Depreciation and wear from ordinary use for the
purpose for which Tenant is responsible shall be completed to the latest
practical date prior to such surrender.
b) Fixtures:
(1) All fixtures placed upon the leased premises during the term,
other than Tenant's trade fixtures, shall, at Landlord's option, become the
property of Landlord. If Landlord so elects, Tenant shall remove any or all
fixtures which would otherwise remain the property of Landlord, and shall repair
any physical damage resulting from the removal. If Tenant fails to remove such
fixtures, Landlord may do so and charge the cost to Tenant with interest at the
legal rate from the date of expenditure.
(2) Prior to expiration or termination of the Lease term Tenant
shall remove all furnishings, furniture, and trade fixtures which remain its
property. If Tenant fails to do so, this shall be an abandonment of the
property.
c) Holdover:
(1) If Tenant does not vacate the leased premises at the time
required, Landlord shall have the option to treat Tenant as a tenant from
month-to-month, subject to all of the provisions of this Lease, except the
provisions for term and for rent. Rent shall be in an amount as prescribed by
the Landlord. Failure of Tenant to remove fixtures, furniture, furnishings or
trade fixtures which Tenant is required to remove under this Lease, shall
constitute a failure to vacate to which this paragraph shall apply if the
property not removed will substantially interfere with occupancy of the premises
by another tenant or with occupancy by Landlord for any purpose, including
preparation for a new tenant.
(2) If a month-to-month tenancy results from a holdover by Tenant
under this subsection, the tenancy shall be terminated at the end of any monthly
rental period on written notice from Landlord given not less than thirty (30)
days prior to the termination date which shall be specified in the notice.
Tenant waives any notice which would otherwise be provided by law with respect
to a month-to-month tenancy.
XV. MISCELLANEOUS
a) Nonwaiver: Waiver by either party of strict performance of any
provision of this Lease shall not be a waiver of or prejudice the party's right
to require strict performance of the same provision in the future, or of any
other provision.
b) Attorney Fees: If suit or action is instituted in connection with
any controversy arising out of this Lease, the prevailing party shall be
entitled to recover, in addition to costs, such sum as the Court may adjudge
reasonable as attorney fees at trial and on appeal.
c) Notices: Any notice required or permitted under this Lease shall be
deemed given when actually delivered, or forty-eight (48) hours after deposit
in the United States mail as Certified Mail addressed to the address first given
in this Lease, or to such other address as may be specified from time to time by
either of the parties in writing.
d) Succession: Subject to the above-stated limitations on transfer of
Tenant's interest, this Lease shall be binding upon and inure to the benefit of
the parties, their respective successors and assigns, subject to the above
restrictions on assignment.
<PAGE>
e) Landlord anticipates selling the property encompassed by this lease
to Lithia Properties, Inc. under terms which will bind Lithia Properties, Inc.
to the terms of this lease. If said event comes to pass, Tenant hereby agrees
to honor this lease just as though Lithia Properties, L.L.C. were still the
Landlord.
LITHIA PROPERTIES, L.L.C. Lithia Motors, Inc.
By: /s/ Sidney B. DeBoer By: /s/ Sidney B. DeBoer
Sidney B. DeBoer President
<PAGE>
EXHIBIT 10.12.2
LEASE AGREEMENT
This Lease made this _________ day of _____________________, 19__ between
Lithia Properties, L.L.C., an Oregon limited liability company ("Landlord") and
Lithia HPI, Inc., an Oregon corporation ("Tenant").
As parties hereto, Landlord and Tenant agree:
1. LEASE DATA; DEFINITIONS. Whenever used in this Lease, the following
terms shall have the meanings indicated below.
1.1 APPLICABLE LAWS. Any law, ordinance, code, order, rule or
regulation of any Governmental Authority.
1.2 COMMENCEMENT DATE. January 1, 1997.
1.3 EXPIRATION DATE. December 31, 2026.
1.4 GOVERNMENTAL AUTHORITY. The United States, the State of Oregon,
and any political subdivision thereof or any local public or quasi-public
authority, agency, department, commission, board, bureau or instrumentality of
any of them including, with respect to matters pertaining to insurance, rating
bureaus or insurance carriers to the extent they have power to impose conditions
on the issuance of policies or the coverage thereof.
1.5 NECESSARY APPROVALS. Any permit, license, certificate or
approval or other evidence of compliance with any Applicable Laws necessary to
the lawful occupancy of the Premises and to the issuance of the insurance
required to be carried hereunder for the Permitted Uses.
1.6 NOTICE ADDRESSES.
Landlord: Lithia Properties, L.L.C.
360 E. Jackson St.
Medford, Oregon 97501
Tenant: Lithia HPI, Inc.
360 E. Jackson St.
Medford, Oregon 97501
Landlord or Tenant may change their Notice Address as set forth in
Section 13.9.
1.7 PREMISES. The real property, including all improvements thereon,
as described in Exhibit A hereto.
1.8 RENT. The Fixed Rent and Additional Rent, as set forth in
Section 3.
1.9 TERM. Thirty-year period commencing on the Commencement Date and
expiring December 31, 2026, if not terminated earlier pursuant to the terms of
this Lease.
2. LEASE OF PREMISES. Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord the Premises upon the terms and conditions contained
herein. Tenant has made its own investigation of the Premises and its
suitability for Tenant's purposes and is not relying on any oral or written
representations by Landlord or Landlord's agents, except as contained in this
Lease.
3. RENT. All Rent shall be paid in lawful money of the United States at
the address of Landlord set forth in this Lease or at such other place as
Landlord in writing may designate, without any set-off or deduction whatsoever
and without any prior demand therefor. For any portion of a calendar month
included at the beginning or end of the Term, Tenant shall pay 1/30th of each
monthly installment of Rent for each day of such portion, payable in advance at
the beginning of such portion.
3.1 FIXED RENT. Tenant shall pay the Fixed Rent in equal monthly
installments, subject to adjustment pursuant to Section 3.2 of this Lease, in
advance on the first day of each calendar month included in the Term. The
initial Fixed Rent shall be as set forth in Exhibit A hereto.
3.2 ADDITIONAL RENT. In addition to the Fixed Rent, Tenant shall pay
to Landlord as Additional Rent all other amounts which Tenant assumes or agrees
to pay to Landlord pursuant to this Lease, including, without limitation,
amounts paid by Landlord for taxes and insurance on the real property
constituting the Premises, such costs and expenses as Landlord may incur for
maintenance of the Premises, and all other amounts referred to herein as
"Additional Rent", except as otherwise provided by the terms of this Lease.
Unless another time is expressly provided, Additional Rent shall be due and
payable on demand or together with the next succeeding installment of Fixed
Rent, whichever occurs first. Landlord shall have the same remedies for failure
<PAGE>
to pay the Additional Rent as for a non-payment of Fixed Rent. At Landlord's
option, amounts of Additional Rent attributable to property taxes and insurance
may be estimated and payable monthly together with the Fixed Rent, provided
however, that if any such amounts are estimated, Landlord shall deliver to
Tenant within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing the actual Additional Rent incurred during
the preceding year. If Tenant's payments under this Section during the
preceding year exceed the actual amounts incurred, as indicated on said
statement, Tenant shall be credited the amount of such over-payment against
Tenant's Rent next becoming due. If Tenant's payments under this Section during
said preceding year were less than actual amounts incurred, as indicated on said
statement, Tenant shall pay to Landlord the amount of the deficiency within ten
(10) days after delivery by Landlord to Tenant of said statement.
3.3 ESCALATION. The Rent will be subject to adjustment as of the
first day of January of each year during the term of this Lease, beginning on
January 1, 1998, by an amount equal to the Rent for the then-current year
multiplied by a fraction, the numerator of which is the cost of living based on
the "Consumer Price Index-U.S. Cities Average - All Items for All Urban
Consumers" (1982-84=100), hereinafter called the "Index", published by the
bureau of Labor Statistics of the U.S. Department of Labor most immediately
preceding the first day of the next following calendar year, and the denominator
of which shall be the Index published most immediately preceding the first day
of the then-current calendar year. As soon as the monthly rent for the renewal
term is established, Landlord shall give Tenant notice of the amount of monthly
rent for the ensuing year.
If the Index is changed so that the base year differs from that
used as of the date the initial term commenced, the Index shall be converted in
accordance with the conversion factor published by the United States Department
of labor, Bureau of Labor Statistics. If the Index is discounted or revised
during the Lease term, such other government index or computation with which it
is replaced shall be used in order to obtain substantially the same result as
would be obtained if the Index had not been discontinued or revised.
3.4 INTEREST. From and after 10 days after the due date of any
payment of Rent, interest shall accrue thereon at the rate of the lesser of
1-1/2% per month or the maximum rate permitted by law.
4. UTILITIES SERVICE. Tenant shall pay directly for all utilities and
services supplied to the Premises, including but not limited to electricity,
telephone, security, gas and cleaning of the Premises, together with any taxes
thereon.
5. USE.
5.1 PERMITTED USE. Tenant shall use the Premises only for the
operation of a general automobile dealership, including, without limitation, the
sale of new and used vehicles, maintenance and repair of vehicles, sales of
parts, services and accessories relating to vehicle sales and service, vehicle
leasing, inventory storage and display, and for such other activities reasonably
deemed by Tenant as necessary for the operation of an automobile dealership, and
for no other purpose, and in no event shall Tenant permit the use of the
Premises in violation of any Applicable Laws, or for any unlawful, or noxious or
offensive purpose or in such a manner as to constitute a nuisance.
5.2 OPERATIONS. Tenant shall conform to all reasonable rules and
regulations of any public authority affecting the use of the Premises and shall
correct at Tenant's own expense any failure of compliance though Tenant's own
fault or by reason of Tenant's use or as otherwise required from Tenant by the
terms of this Lease. Tenant shall not commit or allow to be committed any
waste upon the Premises, or any public or private nuisance or other act or thing
which disturbs the quiet enjoyment of any other tenants, owners or users of
neighboring premises.
5.3 HAZARDOUS SUBSTANCES.
5.3.1 Tenant shall not, otherwise than in compliance with all
Applicable Requirements (as defined in Section 5.4), engage in any activity in
or about the Premises involving (i) the installation or use of any above or
below ground storage tank, or (ii) the generation, possession, use, storage,
transportation or disposal of Hazardous Substances. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Landlord to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Tenant may, in compliance with all Applicable Requirements, use any
ordinary and customary materials reasonably required to be used by Tenant in the
normal course of the Permitted Use, so long as such use does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Landlord to any liability therefor.
5.3.2 INDEMNIFICATION. Tenant shall indemnify, protect,
defend and hold Landlord, its agents, employees, lenders and ground lessor, if
any, harmless from and against any and all damages, liabilities,
<PAGE>
judgments, costs, claims, liens, expenses, penalties, loss of permits and
attorneys' and consultants' fees arising out of or involving any Hazardous
Substance brought onto the Premises by or for Tenant or by anyone under Tenant's
control. Tenant's obligations under this Section 5.3.2 shall include, but not
be limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Tenant, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Landlord and
Tenant shall release Tenant from its obligations under this Lease with respect
to Hazardous Substances, unless specifically so agreed by Landlord in writing at
the time of such agreement.
5.4 TENANT'S COMPLIANCE WITH REQUIREMENTS. Tenant shall, at Tenant's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Landlord's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (1) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Tenant shall, within five (5) days after receipt of Landlord's written
request, provide Landlord with copies of all documents and information,
including but not limited to permits, registrations, manifests, applications,
reports and certificates, evidencing Tenant's compliance with any Applicable
Requirements specified by Landlord, and shall immediately upon receipt, notify
Landlord in writing (with copies of any documents involved) of any threatened or
actual claim, notice, citation, warning, complaint or report pertaining to or
involving failure by Tenant or the Premises to comply with any Applicable
Requirements.
5.5 INSPECTION; COMPLIANCE WITH LAW. Landlord, Landlord's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time in the case of an emergency,
and otherwise at reasonable times, for the purpose of inspecting the condition
of the Premises and for verifying compliance by Tenant with this Lease and all
Applicable Requirements, and Landlord shall be entitled to employ experts and/or
consultants in connection therewith to advise Landlord with respect to Tenant's
activities, including but not limited to Tenant's installation, operation, use,
monitoring, maintenance, or removal of any Hazardous Substance on or from the
Premises. The costs and expenses of any such inspections shall be paid by the
party requesting same, unless a Default or Breach of this Lease by Tenant or a
violation of Applicable Requirements or a contamination, caused or materially
contributed to by Tenant, is found to exist or to be imminent, or unless the
inspection is requested or ordered by a governmental authority as the result of
any such existing or imminent violation or contamination. In such case, Tenant
shall upon request reimburse Landlord or Landlord's Lender, as the case may be,
for the costs and expenses of such inspections.
6. MAINTENANCE AND REPAIR; ALTERATIONS
6.1 REPAIRS BY TENANT. Tenant shall take good care of the Premises
and, at Tenant's sole cost and expense, make all improvements, repairs and
replacements, interior and exterior, structural or nonstructural, foreseen or
unforeseen as and when needed to preserve the Premises in good working order and
condition. Without affecting or limiting Tenant's obligations set forth in this
preceding sentence, Tenant, at Tenant's sole cost and expense, shall provide
(i) maintenance and repair of the electrical, heating, plumbing, elevators,
sprinkler and air conditioning systems in the Premises; (ii) repair and maintain
all exterior and interior doors, windows, partitions, lighting, glass, floor
surfaces and entry ways; and (iii) generally keep and maintain the Premises,
both interior and exterior, in good repair and condition. Before installing any
heavy equipment or fixtures in the Premises, Tenant shall submit the plans and
specifications therefor to Landlord for approval. Tenant shall at all times
during the term of this Lease, keep and maintain in full force and effect
maintenance and repair contracts for the benefit of Landlord and Tenant,
providing for the service, maintenance, and repair of the heating, ventilating
and air conditioning of the Premises. Tenant shall make all repairs,
alterations, additions or replacements to the Premises, including appurtenances,
equipment, facilities and fixtures therein, arising out of Tenant's use or
occupancy of the Premises or necessary to satisfy any Governmental Requirement
and shall keep the Premises equipped with all safety appliances so required
because of such use or occupancy and otherwise to comply with the orders and
regulations of any Governmental Authority.
6.2 ALTERATIONS. Tenant shall not make any alterations,
subdivisions, installations, decorations, improvements, additions or other
physical changes in or about the Premises including those which are necessary to
satisfy any Applicable Laws (referred to collectively as "alterations") without
Landlord's prior written consent. Landlord agrees not to unreasonably withhold
its consent to any interior nonstructural alterations to be made by Tenant to
adapt the Premises for Tenant's business purposes. Any alterations that Tenant
desires to make and which require the consent of the Landlord shall be presented
to Landlord in written form with detailed plans. All consents given by Landlord
shall be deemed conditioned upon: (i) Tenant's acquiring all applicable permits
required by Governmental Authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the alteration
to Landlord prior to commencement of the work thereon; and (iii) the compliance
by Tenant with all conditions of the permits in a prompt and expeditious manner.
Any alterations by Tenant during the term of this Lease shall be done in a good
and workmanlike manner, with good and sufficient materials, and be in compliance
with all Applicable Laws. Tenant shall promptly upon completion thereof furnish
Landlord with as-built plans and specifications therefor.
<PAGE>
7. INSURANCE, INDEMNITY.
7.1 LIABILITY INSURANCE. Tenant shall obtain and keep in force
during the term of this Lease a Commercial General liability policy of insurance
protecting Tenant, Landlord and any Lender(s) whose names have been provided to
Tenant in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Landlords of Premises" endorsement and
contain the "Amendment of the Pollution Exclusion" endorsement for damage caused
by heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "insured contract"
for the performance of Tenant's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Tenant shall
not, however, limit the liability of Tenant nor relieve Tenant of any obligation
hereunder. All insurance to be carried by Tenant shall be primary to and not
contributory with any similar insurance carried by Landlord, whose insurance
shall be considered excess insurance only.
7.2 PROPERTY INSURANCE; BUILDING AND IMPROVEMENTS
7.2.1 BUILDING AND IMPROVEMENTS. Landlord and Tenant shall
obtain and keep in force during the term of this Lease a policy or policies
in the name of Landlord, with loss payable to Landlord and to any Lender(s),
insuring against loss or damage to the Premises. Such insurance shall be for
full replacement cost, as the same shall exist from time to time, or the
amount required by any Lender(s), but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, the latter amount is less than
full replacement cost. Tenant-owned alterations, trade fixtures and Tenant's
personal property shall be insured by Tenant pursuant to Section 7.3. If the
coverage is available and commercially appropriate, Landlord's policy or
policies shall insure against all risks of direct physical loss or damage
(except the perils of flood and/or earthquake unless required by a Lender or
included in the Base Premium), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or
replacement of any undamaged sections of the Building required to be
demolished or removed by reason of the enforcement of any building, zoning,
safety or land use laws as the result of a covered loss, but not including
plate glass insurance.
7.2.2 TENANT'S IMPROVEMENTS. Landlord shall not be required
to insure Tenant-owned alterations unless the item in question has become the
property of Landlord under the terms of this Lease.
7.3 TENANT'S PROPERTY INSURANCE. Subject to the requirements of
Section 7.5, Tenant at its cost shall either by separate policy or, at
Landlord's option, by endorsement to a policy already carried, maintain
insurance coverage on all of Tenant's personal property, trade fixtures and
Tenant-owned alterations in, on, or about the Premises similar in coverage to
that carried by Landlord. Such insurance shall be full replacement cost coverage
with a deductible not to exceed $1,000 per occurrence. The proceeds from any
such insurance shall be used by Tenant for the replacement of personal property
and the restoration of trade fixtures and Tenant-owned alterations. Upon
request from Landlord, Tenant shall provide Landlord with written evidence that
such insurance is in force.
7.4 INSURANCE POLICIES. Insurance required hereunder shall be in
companies duly licensed to transact business in the state in which the
Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, or such other rating as may be
required by a Lender, as set forth in the most current issue of "Best's
Insurance Guide." Tenant shall not do or permit to be done anything which
shall invalidate the insurance policies referred to in this Section 7. Upon
reasonable request by Landlord, Tenant shall deliver to Landlord, within
seven (7) days, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Section 7. No such policy may
be cancelable or subject to modification except after thirty (30) days' prior
written notice to Landlord. Tenant shall at least thirty (30) days prior to
the expiration of such policies, furnish Landlord with evidence of renewals
or 'insurance binders' evidencing renewal thereof, or Landlord may order such
insurance and charge the cost thereof to Tenant, which amount is payable by
Tenant to Landlord upon demand.
7.5 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Tenant and Landlord each hereby release and relieve the other, and
waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss or damage to their property arising out of or
incident to the perils required to be insured against under Section 7. The
effect of such releases and waivers of the right to recover damages shall not be
limited by the amount of insurance carried or required, or by any deductibles
applicable thereto. Landlord and Tenant agree to have their respective
insurance companies issuing property damage insurance
<PAGE>
waive any right to subrogation that such companies may have against Landlord or
Tenant, as the case may be, so long as the insurance is not invalidated thereby.
7.6 INDEMNITY. Except for Landlord's negligence and/or breach of
express warranties, Tenant shall indemnify, protect, defend and hold harmless
the Premises, Landlord and its agents, Landlord's master or ground lessor,
partners and Lenders, from and against any and all claims, loss of rents and/or
damages, costs, liens, judgments, penalties, loss of permits, attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or in
connection with, the occupancy of the Premises by Tenant, the conduct of
Tenant's business, any act, omission or neglect of Tenant, its agents,
contractors, employees or invitees, and out of any default or breach by Tenant
in the performance in a timely manner of any obligation on Tenant's part to be
performed under this Lease. The foregoing shall include, but not be limited to,
the defense or pursuit of any claim or any action or proceeding involved
therein, and whether or not (in the case of claims made against Landlord)
litigated and/or reduced to judgment. In case any action or proceeding be
brought against Landlord by reason of any of the foregoing matters, Tenant upon
notice from Landlord shall defend the same at Tenant's expense by counsel
reasonably satisfactory to Landlord and Landlord shall cooperate with Tenant in
such defense. Landlord need not have first paid any such claim in order to be
so indemnified.
7.7 EXEMPTION OF LANDLORD FROM LIABILITY. Landlord shall not be
liable for injury or damage to the person or goods, wares, merchandise or other
property of Tenant, Tenant's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said injury or damage results from conditions arising upon
the Premises or from other sources or places, and regardless of whether the
cause of such damage or injury or the means of repairing the same is accessible
or not. Notwithstanding Landlord's negligence or breach of this Lease, Landlord
shall under no circumstances be liable for injury to Tenant's business or for
any loss of income or profit therefrom.
8. REAL PROPERTY TAXES.
8.1 PAYMENT OF TAXES. Tenant shall pay the Real Property Taxes, as
defined below, applicable to the Premises and except as otherwise provided in
Section 8.3. As used herein, the term "Real Property Taxes" shall include any
form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Industrial Center by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage, or other improvement
district thereof, levied against any legal or equitable interest of Landlord in
the Premises or any portion thereof, Landlord's right to rent or other income
therefrom, and/or Landlord's business of leasing the Premises. The term "Real
Property Taxes" shall also include any tax, fee, levy, assessment or charge, or
any increase therein, imposed by reason of events occurring, or changes in
Applicable Law taking effect, during the term of this Lease, including but not
limited to the execution of this Lease, or any modification, amendment or
transfer thereof, and whether or not contemplated by the Parties. Any payment
of Real Property Taxes made by Landlord in satisfaction of Tenant's obligation
under this Section 8.1 shall be payable by Tenant as Additional Rent in
accordance with Section 3.2 hereof.
8.2 ADDITIONAL IMPROVEMENTS. Tenant shall pay to Landlord, at and as
of the first day of the calendar month in which any Real Property Taxes are due
and payable, the entirety of any increase in Real Property Taxes if assessed
solely by reason of alterations or trade fixtures placed upon the Premises by
Tenant or at Tenant's request.
8.3 TENANT'S PROPERTY TAXES. Tenant shall pay prior to delinquency
all taxes assessed against and levied upon Tenant-owned alterations, trade
fixtures, furnishings, equipment and all personal property of Tenant located in
or on the Premises. When possible, Tenant shall cause its Tenant-owned
alterations, trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of
Landlord. If any of Tenant's said property shall be assessed with Landlord's
real property, Tenant shall pay Landlord the taxes attributable to Tenant's
property within ten (10) days after receipt of a written statement setting forth
the taxes applicable to Tenant's property.
9. DESTRUCTION; CONDEMNATION
9.1 DAMAGE OR DESTRUCTION.
9.1.1 DAMAGE AND REPAIR. In case of damage to the Premises
by fire or other casualty, Tenant shall give immediate notice to Landlord. If
the Premises is damaged by fire or any other cause to such extent that the cost
of restoration, as reasonably estimated by Landlord, will equal or exceed the
insurance proceeds sufficient for restoration, or that adequate insurance
proceeds are otherwise unavailable, then either party may, no later than
Forty-Five (45) days following the damage, give the other party a notice of
election to terminate this Lease. In the event of such an election this Lease
shall be deemed to terminate on the third day after the giving of said notice,
Tenant shall surrender possession of the Premises within a reasonable time
thereafter, and the Rent and Additional Rent shall be apportioned as of the date
of said surrender and any Rent paid for any period beyond said date shall be
repaid to Tenant. If insurance proceeds sufficient for restoration are
available, or if despite the cost neither party elects to terminate this Lease,
Landlord shall restore the Premises (to the extent of improvements to the
Premises originally provided by Landlord hereunder) with reasonable promptness,
subject to delays beyond Landlord's control and delays in the making of
insurance adjustments by Landlord, and Tenant shall have no right to terminate
this Lease except as herein provided. To the extent that the Premises are
rendered untenantable, the Rent shall proportionately abate, except if such
damage resulted from or was contributed to, directly, or indirectly,
<PAGE>
by the act, fault or neglect of Tenant, Tenant's contractors, agents, employees,
invitees or licensees, in which event Rent shall abate only to the extent
Landlord receives proceeds from Landlord's rental income insurance policy, if
any, to compensate Landlord for loss of rent.
9.1.2 DAMAGE NEAR END OF TERM. If at any time during the
last six (6) months of the term of this Lease there is damage for which the cost
to repair exceeds one month's Base Rent, whether or not an Insured Loss,
Landlord may, at Landlord's option, terminate this Lease effective sixty (60)
days following the date of occurrence of such damage by giving written notice to
Tenant of Landlord's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Tenant at that time has an
exercisable option to extend this Lease or to purchase the Premises, then Tenant
may preserve this Lease by (a) exercising such option, and (b) providing
Landlord with any shortage in insurance proceeds (or adequate assurance thereof)
needed to make the repairs on or before the earlier of (i) the date which is ten
(10) days after Tenant's receipt of Landlord's written notice purporting to
terminate this Lease, or (ii) the day prior to the date upon which such option
expires. If Tenant duly exercises such option during such period and provides
Landlord with funds (or adequate assurance thereof) to cover any shortage in
insurance proceeds, Landlord shall, at Landlord's expense repair such damage as
soon as reasonably possible and this Lease shall continue in full force and
effect. If Tenant fails to exercise such option and provide such funds or
assurance during such period, then this Lease shall terminate as of the date set
forth in the first sentence of this Section.
9.1.3 BUSINESS INTERRUPTION. No damages, compensations or
claim shall be payable by Landlord for inconvenience, loss of business or
annoyance arising from any repair or restoration of any portion of the Premises
or of the Building. Landlord shall use its best efforts to effect such repairs
promptly.
9.1.4 TENANT IMPROVEMENTS. Landlord will not carry insurance
of any kind on any improvements paid for by Tenant or on Tenant's furniture or
furnishings or on any fixtures, equipment, personal property, inventory,
improvements or appurtenances of Tenant under this Lease and Landlord shall not
be obligated to repair any damage thereto or replace the same.
9.2 EMINENT DOMAIN.
9.2.1 ENTIRE TAKING. If all of the Premises or such portions
of the Building as may be required for the reasonable use of the Premises, are
taken by eminent domain, this Lease shall automatically terminate as of the date
title vests in the condemning authority and all Rents, Additional Rents and
other payments shall be paid to that date.
9.2.2 CONSTRUCTIVE TAKING OF ENTIRE PREMISES. In the event
of a taking of a material part but less than all of the Premises, where Landlord
shall reasonably determine that the remaining portions of the Premises cannot be
economically and effectively used by it (whether on account of physical,
economic, aesthetic or other reasons), Landlord shall forward a written notice
to Tenant of such determination not more than sixty (60) days after the date of
taking. The term of this Lease shall expire upon such date as Landlord shall
specify in the notice but not earlier than sixty (60) days after the date of
such notice.
9.2.3 PARTIAL TAKING. In case of taking of a part of the
Premises, or a portion of the Building not required for the reasonable use of
the Premises, then this Lease shall continue in full force and effect and the
Rent shall be equitably reduced based on the proportion by which the total area
of real property, whether or not improved, of the Premises is reduced, such Rent
reduction to be effective as of the date title to such portion vests in the
condemning authority.
9.2.4 AWARDS AND DAMAGES. Landlord reserves all rights to
damages to the Premises for any partial, constructive, or entire taking by
eminent domain, and Tenant hereby assigns to Landlord any right Tenant may have
to such damages or award, and Tenant shall make no claim against Landlord or the
condemning authority for damages for termination of the leasehold interest or
the value of such leasehold interest or interference with Tenant's business.
Tenant shall have the right, however, to claim and recover from the condemning
authority compensation for any loss to which Tenant may be put for Tenant's
moving expenses, business interruption or taking of Tenant's personal property
(not including Tenant's leasehold interest) provided that such damages may be
claimed only if they are awarded separately in the eminent domain proceedings
and not out of or as part of the damages recoverable by Landlord.
10. DEFAULTS AND REMEDIES
10.1 DEFAULT. Upon the occurrence, at any time prior to or during the
Term, of any one or more of the following events (referred to as "Events of
Default"):
10.1.1 If Tenant shall default in the payment when due of any
installment of Rent, and such default shall continue for a period of ten (10)
days;
10.1.2 If Tenant shall default in the observance or
performance of any term, covenant or condition of this Lease on Tenant's part to
be observed or performed (other than covenants for the payment of Rent) and
Tenant shall fail after notice by Landlord of such default to remedy such
default within thirty (30) days; or
10.1.3 The occurrence of any of the following events: (i) the
making by Tenant of any general arrangement or assignment for the benefit of
creditors; (ii) Tenant's becoming a 'debtor' as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Tenant, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of
<PAGE>
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within thirty
(30) days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within thirty (30)
days; provided, however, in the event that any provision of this Section 10.1.3
is contrary to any applicable law, such provision shall be of no force or
effect, and shall not affect the validity of the remaining provisions.
Then after the occurrence of such Event of Default, Landlord at any time
thereafter, at Landlord's option, may terminate this Lease by written notice to
Tenant but Tenant shall remain liable for damages as provided herein, or
Landlord may relet the Premises without terminating this Lease, or Landlord may
exercise any other right or remedy allowed by law or provided herein.
10.2 REMEDIES OF LANDLORD.
10.2.1 If an Event of Default has occurred, then, in any of
such events, Landlord may without notice, institute summary proceedings,
terminate all services, dispossess Tenant and the legal representative of Tenant
or other occupants of the Premises, and remove their effects and hold the
Premises as if this Lease had not been made, and Tenant shall remain liable for
damages as provided herein.
10.2.2 LANDLORD'S RE-ENTRY. Upon an Event of Default,
Landlord, in addition to any other rights or remedies it may have, at its
option, may enter the Premises or any part thereof, either with or without
process of law, and expel, remove or put out Tenant or any other persons who may
be thereon, together with all personal property found therein; and Landlord may
terminate this Lease, or it may from time to time, without terminating this
Lease and as agent of Tenant, re-let the Premises or any part thereof for such
term or terms (which may be for a term less than or extending beyond the term
hereof), and at such rental or rentals and upon such other terms and conditions
as Landlord in its sole discretion may deem advisable, with the right to repair,
renovate, remodel, redecorate, alter and change the Premises, Tenant remaining
liable for any deficiency computed as hereinafter set forth. In the case of any
default, re-entry and/or dispossession by summary proceedings or otherwise, all
Rent shall become due thereupon and be paid up to the time of such re-entry or
dispossession, together with such expenses as Landlord may incur in connection
with such default for attorneys fees, advertising expenses, brokerage fees
and/or putting the Premises in good order or preparing the same for re-rental.
10.2.3 RE-LETTING THE PREMISES. At the option of Landlord,
rents received by the Landlord from such re-letting shall be applied first to
the payment of any indebtedness from Tenant to Landlord other than Rent due
hereunder; second, to the payment of any costs and expenses of such re-letting
and including, but not limited to, attorneys fees, advertising fees and
brokerage fees, and to the payment of any alteration and changes in the
Premises; third, to the payment of Rent due and to become due hereunder, and, if
after so applying said rents there is any deficiency in the Rent to be paid by
Tenant under this Lease, Tenant shall pay any deficiency to Landlord monthly on
the dates specified herein and any payment made or suits brought to collect the
amount of the deficiency for any month shall not prejudice in any way the right
of Landlord to collect the deficiency for any subsequent month. The failure or
refusal of Landlord to re-let the Premises or any part or parts thereof shall
not release or affect Tenant's liability hereunder, nor shall Landlord be liable
for failure to re-let, or in the event of re-letting, for failure to collect the
rent thereof, and in no event shall Tenant be entitled to receive any excess of
net rents collected over sums payable by Tenant to Landlord hereunder. No such
re-entry or taking possession, of the Premises shall be construed as an election
on Landlord's part to terminate this Lease unless a written notice of such
intention be given to Tenant. Notwithstanding any such re-letting without
termination, Landlord may at any time thereafter elect to terminate this Lease
for such previous Event of Default. Should Landlord at any time terminate this
Lease by reason of such Event of Default, in addition to any other remedy it may
have, it may recover from Tenant as damages the amount of Rent reserved in this
Lease for the balance of the Term, as it may have been extended, over the then
fair market rental value of the Premises for the same period, plus all court
costs and attorneys' fees incurred by Landlord in the collection of the same.
10.2.4 WAIVER OF REDEMPTION RIGHTS. Tenant, for itself, and
on behalf of any and all persons claiming through or under it, including
creditors of all kinds, does hereby waive and surrender all right and privilege
which they or any of them might have under or by reason of any present or future
law, to redeem the Premises or to have a continuance of this Lease for the term
hereof, as it may have been extended, after having been dispossessed or ejected
therefrom by process of law or under the terms of this Lease or after the
termination of this Lease as herein provided.
10.3 TRIAL BY JURY. Landlord and Tenant shall and hereby do waive
trial by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other arising out of or in any way connected with
this Lease, the relationship of landlord and tenant, Tenant's use or occupancy
of the Premises, and any emergency statutory or any other statutory remedy.
10.4 HOLDOVER BY TENANT. In the event Tenant remains in possession of
any portion of the Premises after the expiration of the Term without the written
permission of Landlord, Tenant shall be deemed to be occupying such portion of
the Premises as a tenant from month to month, at a monthly rental equal to the
monthly installment of Rent payable during the last month of the Term, subject
to all the other conditions, provisions and obligations of this Lease insofar as
the same are applicable to a month-to-month tenancy. Tenant shall not and
hereby waives the right to interpose any counterclaim or counterclaims in a
summary proceeding or other action by Landlord based on holdover.
10.5 LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may cure, after
notice of default is served, any default by Tenant under this Lease; and
whenever Landlord so elects, all costs and expenses incurred by Landlord in
curing a default, including, without limitation, reasonable attorneys' fees,
together with interest on
<PAGE>
the amount of costs and expenses so incurred at the rate provided in Section 3.3
hereof, shall be paid by Tenant to Landlord on demand.
10.6 WAIVER OF DEFAULT. No consent or waiver, express or implied, by
Landlord or Tenant to or of any breach of any covenant, condition or duty of the
other shall be construed as a consent or waiver to or of any other breach of the
same or any other covenant, condition or duty of Tenant, unless in writing
signed by the party against whom waiver is sought.
10.7 BREACH BY LANDLORD. Landlord shall not be deemed in breach of
this Lease unless Landlord fails within a reasonable time to perform an
obligation required to be performed by Landlord. For purposes of this
Section 10.7, a reasonable time shall in no event be less than thirty (30) days
after receipt by Landlord, and by any Lender(s) whose name and address shall
have been furnished to Tenant in writing for such purpose, of written notice
specifying wherein such obligation of Landlord has not been performed: provided,
however, that it the nature of Landlord's obligation is such that more than
thirty (30) days after such notice are reasonably required for its performance,
then Landlord shall not be in breach of this Lease it performance is commenced
within such thirty (30) day period and thereafter diligently pursued to
completion.
11. ASSIGNMENT; SUBLETTING. Tenant shall not assign, sell, mortgage,
pledge, or in any manner, voluntarily or involuntarily, transfer or permit the
transfer of this Lease or any interest therein, or sublet the Premises or parts
thereof without Landlord's prior written consent, which may be withheld in
Landlord's sole discretion, except as otherwise provided herein. A transfer or
change in the ownership of any shares of Tenant's outstanding common stock or, a
change in the composition of any non-corporate Tenant shall, unless such stock
is publicly traded, be deemed an assignment. Consent by Landlord to an
assignment, subletting, concession or license shall not be construed to relieve
Tenant from obtaining the express consent of Landlord to any further assignment
or subletting, nor shall the collection of Rent by Landlord from any assignee,
subtenant or other occupant be deemed a waiver of this covenant or an acceptance
of the assignee or subtenant as Tenant or a release of Tenant from the covenants
in this Lease on Tenant's part to be performed. Tenant and any assignee or
subtenant shall be jointly and severally liable for the obligations of this
Lease. If under the assignment or sublease consented to by Landlord the rent,
additional rent, other charges, and/or consideration, money or thing of value
payable thereunder or payable in connection with the transaction exceed the Rent
provided in this Lease, Tenant or, at Landlord's option, the sublessee or
assignee shall pay said excess rent or other consideration to Landlord as
Additional Rent hereunder as and when the same becomes due under said assignment
or sublease.
12. OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
12.1 OWNERSHIP. Subject to Landlord's right to require their removal
and to cause Tenant to become the owner thereof as hereinafter provided in this
Section, all Alterations made to the Premises by Tenant shall be the property of
and owned by Tenant, but considered a part of the Premises. Landlord may, at
any time and at its option, elect in writing to Tenant to be the owner of all or
any specified part of Alterations installed by Tenant. Unless otherwise
instructed per Section 12.2, all Tenant-owned alterations shall, at the
expiration or earlier termination of this Lease, become the property of Landlord
and remain upon the Premises and be surrendered with the Premises by Tenant.
12.2 REMOVAL. Unless otherwise agreed in writing, Landlord may
require that any or all Tenant-owned alterations be removed by the expiration or
earlier termination of this Lease, notwithstanding that their installation may
have been consented to by Landlord. Landlord may require the removal at any
time of all or any part of any Alterations made without the required consent of
Landlord.
12.3 SURRENDER/RESTORATION. Tenant shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, clean
and free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by GOOD maintenance
practice or by Tenant performing all of its obligations under this Lease.
Except as otherwise agreed or specified herein, the Premises, as surrendered,
shall include the alterations. The obligation of Tenant shall include the
repair of any damage occasioned by the installation, maintenance or removal of
Tenant's trade fixtures, furnishings, equipment, and Tenant-owned alterations,
as well as the removal of any storage tank installed by or for Tenant, and the
removal, replacement, or remediation of any soil, material or ground water
contaminated by Tenant, all as may then be required by Applicable Requirements
and/or good practice. Tenant's trade fixtures shall remain the property of
Tenant and shall be removed by Tenant subject to its obligation to repair and
restore the Premises per this Lease.
13. MISCELLANEOUS PROVISIONS
13.1 QUIET POSSESSION. Upon payment by Tenant of the rent for the
Premises and the performance of all of the covenants, conditions and provisions
on Tenant's part to be observed and performed under this Lease, Tenant shall
have quiet possession of the Premises for the entire term hereof subject to all
of the provisions of this Lease.
13.2 LANDLORD'S ACCESS. Landlord and its agents shall have access in
and about the Premises including, without limitation, the right to enter the
Premises on reasonable notice (except in the case of emergency) to examine the
Premises, to exhibit the Premises to others, or for the purpose of performing
any obligation of Landlord under this Lease or exercising any right or remedy
reserved to Landlord in this Lease.
13.3 RESERVATIONS. Landlord reserves the right to erect, install, use
and maintain in concealed locations pipes, ducts and conduits in and through the
Premises and to make such repairs, alterations, improvements or additions, or to
perform such maintenance, as Landlord may deem necessary or desirable. Access
through the
<PAGE>
Premises for the purposes of operation, maintenance, alteration and repair, are
hereby reserved to Landlord. Tenant acknowledges that Landlord may be required
or may desire to grant easements thereon and Tenant agrees to consent to or join
in such documents to the extent reasonably required by Landlord.
13.4 PRIORITY.
13.4.1 Tenant agrees that this Lease shall be subordinate to
any first mortgage or deed of trust now existing or hereafter placed upon the
Premises created by or at the instance of Landlord and to any and all advances
to be made thereunder and to interest thereon and all renewals, replacements, or
extensions thereof ("Landlord's Mortgage"). Upon demand by Landlord or the
holder of any Landlord's Mortgage ("Holder"), Tenant shall execute and deliver
subordination and attornment agreements in form and substance satisfactory to
such Holder. Notwithstanding the foregoing, upon demand of such Holder, such
Landlord's Mortgage shall be subordinate to this Lease; provided, however, that
in such event, notwithstanding such subordination, such Landlord's Mortgage
shall be superior to this Lease with respect to (i) the right, claim and lien of
the Landlord's Mortgage in, to and upon any award or other compensation for any
taking by eminent domain of any part of the Premises and the right of
disposition thereof in accordance with the provisions of the Landlord's
Mortgage; and upon any proceeds payable under any policies of fire and rental
insurance upon the Premises and to the right of disposition thereof in
accordance with the terms of the Landlord's Mortgage; (ii) any lien, right or
judgment which may have arisen at any time under the terms of the Lease; and
(iii) such other matters as may be specifically reserved by the Holder of such
Landlord's Mortgage in writing in connection with such subordination.
13.4.2 Upon request Tenant shall attorn to the Holder of any
Landlord's Mortgage or any person or persons purchasing or otherwise acquiring
the Land, Building or Premises at any sale or other proceeding under any
Landlord's Mortgage. Tenant shall properly execute, acknowledge and deliver
instruments which the holder of any Landlord's Mortgage may reasonably require
to effectuate the provisions of this Section.
13.5 LANDLORD'S LIABILITY. Anything in this Lease to the
contrary notwithstanding, covenants, undertakings and agreements herein made on
the part of Landlord are made and intended for the purpose of binding only the
Landlord's interest in the Building and Industrial Center, as the same may from
time to time be encumbered, and are not intended to bind personally or the
assets of Landlord (other than Landlord's interest in the Building and
Industrial Center). No personal liability or personal responsibility is assumed
by, nor shall at any time be asserted or enforceable against Landlord or its
partners or shareholders or their respective heirs, legal representatives,
successors, and assigns on account of the Lease or on account of any covenant,
undertaking or agreement of Landlord in or relating to this Lease.
13.6 TRANSFER OF LANDLORD'S INTEREST. In the event of any
transfers of Landlord's interest in the Premises, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Landlord accruing from and
after the date of such transfer and such transferee shall have no obligation or
liability with respect to any matter occurring or arising prior to the date of
such transfer. Tenant agrees to attorn to the transferee.
13.7 TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.
13.8 ATTORNEYS FEES. Tenant shall pay on demand Landlord's
expenses, including reasonable attorneys' fees, at trial and on appeal, incurred
in successfully enforcing any obligation of the Tenant under this Lease or
incurred in any action or proceeding arising out of or pursuant to this Lease.
13.9 NOTICES. Any notice or demand from Landlord to Tenant or
from Tenant to Landlord shall be in writing and shall be deemed duly served if
mailed by registered or certified mail, return receipt requested, addressed, if
to Tenant, at the address of Tenant set forth herein, or to such other address
as Tenant shall have last designated by notice in writing to Landlord, and if to
Landlord, at the address of Landlord set forth herein or such other address as
Landlord shall have last designated by notice in writing to Tenant. Notice
shall be deemed served when mailed.
13.10 BROKERAGE. Tenant and Landlord warrant that they have had
no dealings with any broker or agent in connection with this Lease and each
covenants to pay, hold harmless and indemnify the other from and against any and
all cost, expense or liability for any compensation, commissions and charges
claimed by any broker or agent with respect to this Lease or the negotiation
thereof with whom they had dealings.
13.11 ESTOPPEL CERTIFICATES. Each of the parties agrees that it
will, at any time and from time to time, within 10 business days following
written notice by the other party hereto specifying that it is given pursuant to
this Section, execute, acknowledge and deliver to the party who gave such notice
a statement in writing certifying that this Lease is unmodified and in full
force and effect (or if there have been modifications, that the same is in full
force and effect as modified and stating the modifications), and the dates to
which the Rent and any other payments due hereunder from Tenant have been paid
in advance, if any, and stating whether or not to the best of knowledge of the
signer of such certificate the other party is in default in performance of any
covenant, agreement or condition contained in this Lease, and, if so, specifying
each such default of which the signer may have knowledge.
13.12 APPLICABLE LAW AND CONSTRUCTION. The laws of the State of
Oregon shall govern the validity, performance and enforcement of this Lease.
The invalidity or unenforceability of any provision of this Lease shall not
affect or impair any other provision. The submission of this document to Tenant
for examination does not constitute an offer to lease, or a reservation of or
option to lease, and becomes effective only upon execution and delivery thereof
by Landlord and Tenant. All negotiations, considerations, representations and
<PAGE>
understandings between the parties are incorporated in this Lease. The headings
of the several articles and sections contained herein are for convenience only
and do not define, limit or construe the contents of such articles or sections.
Whenever herein the singular number is used, the same shall include the plural,
and the neuter gender shall include the masculine and feminine genders.
13.13 RELATIONSHIP OF THE PARTIES. Nothing contained herein shall
be deemed or construed by the parties hereto, or by any third party, as creating
the relationship of principal and agent or partnership or joint venture between
the parties hereto, it being understood and agreed that no provisions herein,
nor any acts of the parties hereto, shall be deemed to create any relationship
between the parties hereto other than the relationship of landlord and tenant.
13.14 BINDING EFFECT OF LEASE. The covenants, agreements and
obligations herein contained, except as herein otherwise specifically provided
shall extend to, bind and inure to the benefit of the parties hereto and their
respective personal representatives, heirs, successors and permitted assigns.
Each covenant, agreement, obligation or other provision herein contained shall
be deemed and construed as a separate and independent covenant of the party
bound by, undertaking or making the same, not dependent on any other provision
of this Lease unless otherwise expressly provided.
13.15 EFFECT OF UNAVOIDABLE DELAYS. The provisions of this
Section shall be applicable if there shall occur, during the Term, or prior to
the commencement thereof, any (i) strike(s), lockout(s) or labor dispute(s);
(ii) inability to obtain labor or materials, or reasonable substitutes therefor;
or (iii) acts of God, governmental restrictions, regulations or controls, enemy
or hostile governmental action, civil commotion, fire or other casualty, or
(iv) other conditions similar or dissimilar to those enumerated in this
Section beyond the reasonable control of the party obligated to perform. If
Landlord or Tenant shall, as the result of any of the above-described events,
fail punctually to perform any obligation on its part to be performed under this
Lease, then such failure shall be excused and not be a breach of this Lease by
the party in question, but only to the extent occasioned by such event. If any
right or option of either party to take any action under or with respect to this
Lease is conditioned upon the same being exercised within any prescribed period
of time or at or before a named date, then such prescribed period of time and
such named date shall be deemed to be extended or delayed, as the case may be,
for a period equal to the period of delay occasioned by any above-described
event. Notwithstanding anything herein contained however, the provisions of
this Section shall not be applicable to Tenant's obligations to pay Rent or its
obligations to pay any other sums, moneys, costs, charges or expenses required
to be paid by Tenant hereunder and time shall be of the essence with respect to
timely payment thereof.
13.16 NO ORAL CHANGES. Neither this Lease nor any provision
hereof may be changed, waived, discharged or terminated orally, but only by an
instrument in writing signed by the party against whom enforcement of the
change, waiver, discharge or termination is sought.
13.17 EXECUTED COUNTERPARTS OF LEASE. This Lease may be executed
in any number of counterparts and each of such counterparts shall for all
purposes be deemed to be an original; and all such counterparts shall together
constitute but one and the same Lease.
13.18 INVALID PROVISIONS. If any provision of this Lease is held
unlawful or invalid, then this Lease shall continue in full force and effect but
such unlawful or invalid provision shall be deemed omitted. If any portion of
the Rent shall at any time be held to be higher than the amount which the
Landlord may lawfully reserve then the amount thereof shall be reduced to the
highest lawful amount.
13.19 ENTIRE AGREEMENT. This Lease is the final and complete
expression of Landlord and Tenant relating in any manner to the leasing, use and
occupancy of the Premises and other matters set forth in this Lease. No prior
agreement or understanding pertaining to the same shall be valid or of any force
or effect.
<PAGE>
Landlord and Tenant have executed this Lease as of the day and year set
forth at the beginning of this Lease.
Landlord: Lithia Properties, L.L.C.
By
--------------------------------
Tenant: LITHIA HPI, INC.
By
--------------------------------
Its
-------------------------------
<PAGE>
EXHIBIT A
TO LEASE AGREEMENT
REAL PROPERTY SUBJECT TO LEASE:
Real property located in Medford, Oregon, at the following addresses:
700 N. Central Ave.
800 N. Central Ave.
217 N. Beatty St.
311 & 313 Maple St.
535 N. Bartlett
533 N. Bartlett
527 N. Bartlett
The initial Fixed Rent for the above properties collectively is $23,212.00 per
month.
<PAGE>
EXHIBIT 10.13.3
ASSIGNMENT OF INTEREST
THIS ASSIGNMENT made this 5th day of November, 1996, by and between Lithia
Properties, L.L.C. ("Assignor") and Lithia Motors, Inc. ("Assignee"):
WITNESSETH, that for valuable consideration received, which is hereby
acknowledged, the Assignor hereby assigns and transfers to the Assignee all of
its rights, title, obligations and interest in that certain "Land Sale Contract"
dated August 2, 1996, wherein Lithia Properties, L.L.C. is the buyer and Milford
G. Roberts, Sr. and Sandra L. Roberts are the sellers for the real property at
2121 Centennial Boulevard in Eugene, Oregon. Provided, however, that no
warranties of any kind whatsoever are made incident to this Assignment.
Lithia Properties, L.L.C. Lithia Motors, Inc.
/s/ Sidney B. DeBoer /s/ Sidney B. DeBoer
Sidney B. DeBoer Sidney B. DeBoer, President
<PAGE>
EXHIBIT 10.14.1
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
THIS AGREEMENT is entered into by and between SAM LINDER, INC. dba "SAM
LINDER HONDA, CADILLAC, OLDSMOBILE" (hereinafter referred to as "Seller"), and
LITHIA MOTORS, INC. or its nominee (hereinafter referred to as the "Buyer").
RECITALS:
Seller is a California business corporation engaged in the business of
selling and servicing Honda, Cadillac and Oldsmobile motor vehicles and related
parts and accessories from premises located at 333 North Main Street, Salinas,
California, under franchises issued by American Honda Motor Co., Inc. and
General Motors Corporation.
Buyer wishes to purchase from Seller, and Seller is willing to sell to
Buyer, all assets relating to Seller's Honda, Cadillac and Oldsmobile franchises
upon the terms and conditions set forth herein.
Buyer (or a related entity) also wishes to lease and purchase the real
property commonly referred to as 333 North Main Street, Salinas, California, and
the purchase of Seller's business assets shall be conditioned upon the
simultaneous closing of the leasing of that real property.
NOW, THEREFORE, IN CONSIDERATION OF the mutual promises set forth herein,
the parties agree as follows:
1. DEFINITIONS. In this Agreement, the following words shall have
the indicated meanings:
(a) "CLOSING" shall refer to the consummation of the transaction
contemplated under this Agreement in accordance with the terms hereof, and
"Closing Date" shall refer to the actual date of Closing. "Target Closing
Date" shall refer to December 2, 1996. "Final Closing Date" shall refer to
the earlier of: (i) January 2, 1997, or (ii) the 11th business day after the
condition precedent set forth in subparagraph 17(a) (the issuance of
Franchisor approvals) has been satisfied or waived.
(b) "SELLER'S BUSINESS" shall refer to any and all activities
conducted by Seller in Monterey County, California, relating to the marketing
and sale of new Honda, Cadillac and Oldsmobile vehicles and associated parts
and accessories, and the repair and servicing of new or used Honda, Cadillac
and Oldsmobile vehicles.
(c) "PURCHASED ASSETS" shall refer to those assets which are
identified in Paragraph 2 as being purchased and sold by the parties
hereunder.
(d) Seller's "EQUIPMENT" shall refer to all non-inventory items of
tangible personal property presently owned or used by Seller in connection
with Seller's Business, including all of Seller's machinery, tools, signs,
office equipment, computer equipment, computer programs, microfiches, parts
lists, repair manuals, sales or service brochures, furniture and fixtures,
and further including all similar assets listed on Seller's financial
statements as of June 30, 1996. Attached to this Agreement as Exhibit "A" is
a listing prepared by Seller of certain items of Equipment being retained by
Seller and not being purchased by Buyer.
(e) The term "EQUIPMENT" shall include the Hercules Car Wash and new
exterior awnings which have been ordered by Seller but not installed by
Seller as of the date of this Agreement.
(f) Seller's "INTANGIBLE ASSETS" shall refer to Seller's name ("Sam
Linder Honda, Cadillac, Oldsmobile"), telephone and fax numbers, service
customer lists, sales customer lists, vehicle sales records, vehicle service
records, all rights of Seller under contracts assigned to and assumed by
Buyer pursuant to this Agreement, all goodwill associated with Seller's
Business, and all other intangible rights and interests of any value relating
to Seller's Business.
(g) "BUSINESS REAL PROPERTY" shall refer to the real property located
at 333 North Main Street, Salinas, California which has been used in
connection with Seller' business.
(h) "FRANCHISORS" shall refer to American Honda Motor Co., Inc. and
General Motors Corporation.
(i) "NEW VEHICLE" shall refer to a Honda, Cadillac and Oldsmobile
motor vehicle which: (i) is unregistered and unused, (ii) is from the 1996 or
1997 model year, (iii) has been driven for less than 500 odometer miles, and
(iv) may be represented or warranted to consumers as "new" under California
law.
<PAGE>
(j) "PROGRAM VEHICLE" shall mean any vehicle which has been purchased
by Buyer at a factory auction or from a seller (or an affiliate of such
seller) which is engaged in the business of renting or leasing vehicles.
(k) "DEMONSTRATOR VEHICLE" shall mean any Honda, Cadillac and
Oldsmobile vehicle which: (i) is from the 1996 or 1997 model year, and
(ii) either is registered in the name of Seller (and is being used by a third
party which has received use of the vehicle in exchange for the advertising
credit) or is registered in the name of a third party which has received use
of the vehicle in exchange for advertising credit or (iii) is utilized by
Seller or its employees and has not been sold at retail. "Used Vehicle" shall
mean any vehicle which is not a new vehicle, a program vehicle or a
demonstrator vehicle.
(l) "DATE OF THIS AGREEMENT" shall refer to the first date upon which
this Agreement has been signed by all of the parties.
(m) All amounts payable by Buyer to Seller at Closing shall be paid by
certified check drawn against a bank of Buyer's choice having offices located
in Jackson County, Oregon, or by whatever other means shall be acceptable to
Seller.
2. PURCHASED ASSETS. Subject to paragraph 17, Seller agrees to sell to
Buyer, and Buyer agrees to purchase from Seller, the assets identified in
Paragraphs 3, 4, 5, 6, 7, 8, 9 and 10 of this Agreement (the "Purchased
Assets"). Excluded from this transaction are Seller's cash, accounts
receivable, notes receivable, banking accounts and deposits, and all other
assets not identified in such paragraphs or excluded pursuant to the terms
hereof.
3. INVENTORY OF NEW AND DEMONSTRATOR VEHICLES. Buyer shall purchase
Seller's entire inventory of new Honda, Cadillac and Oldsmobile vehicles, as
that inventory exists on the Closing Date. Buyer also shall purchase
Seller's entire inventory of demonstrator vehicles, as that inventory exists
on the Closing Date.
(a) PRICE OF NEW VEHICLES. The purchase price for each of the new
vehicles shall be equal to Seller's factory invoice cost, reduced by any
factory hold-backs, factory rebates, factory incentives, carry-over model
allowances, unexpired floor plan allowances, finance cost allowances, unpaid
advertising allowances, and any other items which should reasonably be
deducted in order to establish Seller's actual net cost for each vehicle, and
further reduced by the actual net cost for any and all accessories, equipment
and parts which are missing from a vehicle. Seller's actual net cost for the
new vehicle shall include Seller's actual installed net cost for any and all
parts and accessories reasonably installed by Seller on new vehicles in the
ordinary course of business, including $80 per unit in connection with the
installation of a silencer security system on Honda Civic, Prelude, and
Passport models, and $74 per unit in connection with such installation on all
other vehicles, and shall not include any other vehicle preparation charges
or other dealer charges.
(b) PRICE FOR DEMONSTRATOR VEHICLES. The purchase price for each of
Seller's demonstrator vehicles shall be determined under subparagraph (a) in
the same manner as for new vehicles, except that the purchase price for a
demonstrator vehicle shall be reduced by ten cents ($0.10) for each odometer
mile in excess of 1,000 miles.
(c) DEDUCTION FOR DAMAGE TO NEW OR DEMONSTRATOR VEHICLES. Immediately
prior to Closing, Buyer and Seller shall jointly inspect Seller's inventory
of new and demonstrator vehicles. If any new or demonstrator vehicle
purchased by Buyer from Seller is damaged, the price for that vehicle, as
determined under subparagraph 3(a), shall be reduced by the actual net cost
to Buyer of repairing that damage. If Buyer and Seller are unable to agree
upon the actual net cost to Buyer of repairing the damage to a vehicle, then
Buyer and Seller shall select an independent third party to determine that
repair cost, which determination shall be binding upon both Buyer and Seller.
(d) PAYMENT FOR NEW AND DEMONSTRATOR VEHICLES. The aggregate purchase
price for all new and demonstrator vehicles purchased by Buyer from Seller
shall be paid in full at Closing.
(e) PURCHASE ORDERS FOR NEW VEHICLES. Immediately prior to Closing,
Buyer and Seller shall jointly review Seller's outstanding purchase orders
for new vehicles ordered from Seller by customers but not delivered prior to
Closing. At Closing, Seller shall assign to Buyer, and Buyer shall assume
from Seller, all of Seller's rights (including customer deposits) and
obligations (including sales commissions) under such purchase orders;
provided, however, that Buyer shall not be obligated to assume Seller's
rights or obligations with respect to any new vehicle purchase order which is
at a price less than factory invoice, or which provides for a trade-in at a
price or under terms unacceptable to Buyer. At Closing, Buyer shall
reimburse Seller for all deposits made by Seller with respect to ordered but
undelivered new vehicles.
4. INVENTORY OF USED VEHICLES. Except as hereinafter provided, Buyer
shall purchase Seller's entire inventory of used vehicles as that inventory
exists at Closing.
(a) DISCLOSURES. Seller shall be obligated to: (i) disclose to Buyer
any and all facts known to Seller concerning each used vehicle which Seller
would be legally obligated to disclose to a consumer (including but not
limited to known damage and usage history), and (ii) provide to Buyer legal
odometer statements and free and clear title for each of the used vehicles.
<PAGE>
(b) PRICE FOR USED VEHICLES AND PROGRAM VEHICLES. The purchase price
for each of Seller's used vehicles except used Honda vehicles shall be equal
to the "wholesale" value for that vehicle as published in the Kelley Blue
Book (Western Edition) for the period which includes the Closing Date plus
$74 for each installed silencer security system, reduced by the amount, if
any, reasonably necessary to repair or recondition such vehicle to a standard
which is customary for such used vehicle to be sold at retail. Buyer shall
perform all such repairs and reconditioning at the dealership location if
possible, and any reduction of the used vehicle price shall not exceed 50% of
the normal retail charge for such repairs or reconditioning. If it is not
possible to perform such repairs or reconditioning at the dealership
location, the reduction of the used vehicle price shall be Buyer's cost to
complete such repairs or reconditioning. If the parties cannot agree upon
the necessity for or the extent of such repairs or reconditioning, they shall
select an independent third party to make such a determination, which
determination shall be final and binding upon both Buyer and Seller.
The purchase price for used Honda vehicles and Program Vehicles shall be
that certain price determined by mutual agreement of Buyer and Seller. If Buyer
and Seller are unable to agree upon the price for any used Honda vehicle or
Program Vehicle, the Buyer shall have no right or obligation to purchase that
vehicle, and Seller shall have no right or obligation to sell that vehicle.
Buyer and Seller agree to use their best efforts to establish the proposed
purchase prices of all used vehicles and program vehicles at least three
business days prior to the anticipated Closing Date.
(c) PAYMENT FOR USED VEHICLES. The aggregate purchase price for
Seller's Inventory of used vehicles and Program Vehicles sold hereunder shall
be paid in full at Closing.
5. INVENTORY OF NEW PARTS AND ACCESSORIES. Buyer shall purchase Seller's
entire inventory of new, current (non-obsolete), undamaged Honda, Cadillac
and Oldsmobile vehicle parts and accessories furnished by Franchisors and/or
third party suppliers, as that inventory exists on the Closing Date. Buyer
shall purchase Seller's entire inventory of parts relating to silencer
security systems at Seller's cost. Buyer shall have no obligation to purchase
from Seller any parts or accessories which are used, damaged or obsolete.
For purposes of this Paragraph 5, a part or accessory shall be "obsolete" on
the Closing Date if not then returnable to the supplier from which that part
was originally purchased or if not then listed in the supplier's then-current
price and parts books. Prior to Closing, Seller shall maintain Seller's
inventory of parts and accessories at a level consistent with good business
practices and Seller's normal and regular course of business.
(a) PRICE FOR PARTS AND ACCESSORIES. The purchase price for each item
in Seller's inventory of new, current and undamaged parts and accessories for
Honda, Cadillac and Oldsmobile vehicles (whether manufactured by a Franchisor
or third party suppliers) shall be the net cost of that item as set forth in
the then most recent price book published by the supplier of that item,
reduced by any discounts, rebates, incentives or allowances which should
reasonably be taken into account in order to establish what Buyer's net cost
for that item would be if that item was purchased by Buyer directly from that
supplier at the time of Closing.
(b) DETERMINATION OF INVENTORY OF PARTS AND ACCESSORIES. Seller's
inventory of new, current and undamaged Honda, Cadillac and Oldsmobile parts
and accessories shall be determined immediately prior to Closing (or on
whatever earlier date shall be selected by mutual agreement of the parties)
by a third party inventory service selected by mutual agreement of the
parties. Buyer and Seller each shall be responsible for 50% of the fees
charged by the inventory service for conducting the inventory.
(c) PAYMENT FOR INVENTORY OF NEW PARTS AND ACCESSORIES. The purchase
price for Seller's inventory of parts and accessories shall be paid in full
at Closing.
6. EQUIPMENT. Buyer shall purchase Seller's Equipment. Buyer
acknowledges that Seller is retaining, and is not selling to Buyer, those
items of Seller's Equipment which are listed on Exhibit "A" attached hereto.
(a) PRICE FOR EQUIPMENT. The aggregate purchase price for Seller's
Equipment shall be equal to the sum of: (i) Two Hundred Thirty-Three Thousand
Five Hundred Fifty and 00/100 Dollars ($233,550), plus (ii) cost of new tools
and displays required by either of the Franchisors and purchased by Buyer
subsequent to August 1, 1996. In addition, Buyer will negotiate in good
faith and pay to Seller a reasonable price for the office trailer located on
the used car lot and the storage trailer located at the new car sales
location. Buyer shall have the right to reasonably allocate the purchase
price among the items of Equipment in whatever manner Buyer believes will
best reflect the relative fair market values of those items. Seller hereby
assigns to Buyer, subject to the Closing of this Agreement, Seller's
agreement for the purchase and installation of new exterior awnings at the
dealer premises. Buyer shall assume and pay the balance of the purchase
price in connection with such contract and shall reimburse Seller at Closing
its deposit in the amount of $9,411.00 previously paid under said contract.
(b) PAYMENT FOR EQUIPMENT. Prior to or simultaneously with the
execution of this Agreement, Buyer has deposited with The Escrow Forum, in
Lake Forest, California, a $150,000.00 earnest money deposit to be applied
against the purchase of the Equipment. The Escrow Forum shall deposit that
$150,000.00 earnest money deposit in an interest bearing account. At
Closing, that entire $150,000.00 earnest money deposit, together with all
interest earned on that earnest money deposit, shall be credited against the
purchase price for the Equipment. The balance of the purchase price for the
Equipment shall be paid in full at Closing.
<PAGE>
7. SUPPLIES. Buyer shall purchase all of the gas, oil, nuts, bolts,
paper products, office supplies, and other supplies which are held for use in
Seller's Business. The price for all such supplies shall be Seller's actual
net cost, as determined by mutual agreement of the parties, and shall be paid
to Seller at Closing.
8. CONTRACTUAL RIGHTS AND OBLIGATIONS. At Closing, Buyer shall assume all
rights and obligations of Seller under those certain equipment leases and
other contracts identified on Exhibit "B" attached hereto. Seller warrants
that all of Seller's obligations under the contracts listed on Exhibit "B"
shall be current at the time of Closing. Seller agrees to indemnify Buyer
against all obligations under the contracts identified on Exhibit "B" which
relate to periods prior to Closing. Buyer agrees to indemnify Seller against
all obligations under the contracts identified on Exhibit "B" which relate to
periods after Closing.
9. REPAIR WORK IN PROGRESS. Buyer shall purchase all of Seller's vehicle
repair work in progress (in-house and subcontracted), at a price equal to
Seller's actual net cost (before profit and overhead) for all work completed
prior to Closing. The purchase price for work in progress shall be paid at
Closing.
10. INTANGIBLE ASSETS. Buyer shall purchase all of Seller's Intangible
Assets.
(a) The aggregate purchase price for Seller's Intangible Assets shall
be Eight Hundred Thousand One and 00/100 Dollars ($800,001.00). The
$800,001.00 purchase price for Seller's Intangible Assets shall be paid in
full at Closing. The $800,001.00 purchase price shall, subject to paragraph
17(a)(1)(iv), be allocated among the items which constitute the Intangible
Assets as follows:
(1)Four Hundred Thousand Dollars
($400,000.00) shall be allocated to the purchase of the goodwill, service
customer lists, sales customer lists, vehicle sales records, vehicle service
records, and other intangible rights and interests of any value relating to
Seller's Honda franchise.
(2)Four Hundred Thousand Dollars
($400,000.00) shall be allocated to the purchase of the goodwill, service
customer lists, sales customer lists, vehicle sales records, vehicle service
records, and other intangible rights and interests of any value relating to
Seller's Cadillac and Oldsmobile franchises.
(3)One Dollar ($1.00) shall be
allocated to all of the Intangible Assets not identified in subparagraphs
10(a)(1) and 10(a)(2).
(4)The parties agree that there is
no separate value to the nontransferable Honda, Cadillac and Oldsmobile
franchises issued by the Franchisors.
(b) In order for Buyer to receive the full benefit of the intangible
good will being purchased by Buyer, it will be necessary for Buyer to perform
no-charge repair work and vehicle warranty work with respect to vehicles
repaired or sold by Seller prior to Closing. In partial consideration of the
$800,001.00 amount being paid by Buyer for the Intangible Assets, Seller
agrees to reimburse Buyer for fifty percent (50%) of the net cost to Buyer of
repair and warranty services on Used Vehicles which are not covered by
factory or other warranty and which are reported to Buyer within 30 days and
performed by Buyer within 90 days after Closing in order to satisfy:
(i) customers who are dissatisfied with repair services provided by Seller
prior to Closing, and (ii) warranty claims with respect to Used Vehicles
purchased from Seller prior to Closing. Seller agrees to reimburse Buyer
pursuant to the preceding sentence on a monthly basis, with payment to be
made within ten (10) days after Buyer submits a billing for the cost of repair
and warranty services performed during the preceding calendar month. During
the same period of time, Seller shall pay to Buyer the cost of additional
equipment or services furnished by Buyer after Closing pursuant to Customer
purchase orders on New Vehicles sold prior to Closing and for which Seller had
been paid prior to Closing.
(c) Seller agrees that Seller shall not, during the 5 year period
beginning on the Closing Date, directly or indirectly: (i) engage in the sale
or servicing of new or used motor vehicles or the sale of motor vehicle parts
or accessories within the geographical limits of Monterey County, California,
or (ii) suggest, request, advise, encourage or cause any person or entity to
avoid, reduce or terminate any business relationship with Buyer (including
any relationship as a customer, supplier or partner of Buyer). In the event
of any actual or threatened breach of Seller's covenant against competition
or interference, Buyer shall be entitled to an injunction preventing further
breach.
11. LIMITATION ON LIABILITIES ASSUMED. Except as provided in subparagraph
3(e), Paragraph 8 and Paragraph 9, Buyer shall not, by reason of this
Agreement or Buyer's purchase of the Purchased Assets, take responsibility
for any liabilities, debts or obligations of Seller (including Seller's trade
payables, account payables, obligations to employees, or tax liabilities
except such obligations as Buyer expressly assumes under this Agreement or
obligations which are mandated by state or federal law). Buyer and Seller
hereby waive the requirements, if any, relating to compliance with any bulk
sales transfer act. Seller shall indemnify Buyer against any claims not
otherwise assumed by Buyer as a result of any such noncompliance.
12. LIMITED CONFIDENTIALITY. Buyer and Seller each agree to take all
reasonable actions to prevent unnecessary disclosure to any third parties of
any information relating to this transaction and the terms of this Agreement;
provided, however, that in connection with Buyer's intended offering of its
securities, Buyer shall have the right to make a full public disclosure of
such information as Buyer shall determine to be necessary or appropriate
relating to this Agreement and the results of Buyer's due diligence;
<PAGE>
provided further, that Seller takes no responsibility for the accuracy or
completeness of any such disclosure and this Agreement does not create any
rights in third parties.
13. WARRANTIES OF SELLER. Seller makes the following warranties to Buyer,
with the intent that Buyer rely thereon:
(a) CORPORATE ORGANIZATION. Seller is a corporation organized,
validly existing, and in good standing under the laws of the State of
California. Seller is qualified to do business in the State of California,
and has full power and authority to own, use and sell its assets.
(b) CORPORATE AUTHORITY. Seller's board of directors and shareholders
have authorized the execution and delivery of this Agreement to Buyer and the
carrying out of its provisions. This Agreement will not violate any
judicial, governmental or administrative decree, order, writ, injunction, or
judgment, and will not conflict with or constitute a default under Seller's
bylaws, or any contract, agreement, or other instrument to which Seller is a
party or by which it may be bound.
(c) UNDISCLOSED LIABILITIES AND CONTRACTUAL COMMITMENTS. Except as
otherwise disclosed in this Agreement (or in an attached Exhibit), no lawsuit
or action, administrative proceeding, arbitration proceeding, governmental
investigation, or other legal or equitable proceeding of any kind is pending
or threatened against Seller which might adversely affect the value of the
Purchased Assets.
(d) CONDITION OF EQUIPMENT. The condition of the Equipment is
sufficient to permit Seller to operate its business in the ordinary course.
Seller will continue to perform routine maintenance and repair with respect
to the Equipment prior to Closing.
(e) GOOD TITLE. Seller has, and shall transfer to Buyer at Closing,
good and marketable title to all of the Purchased Assets, free and clear of
all security interests or liens. All current and accrued taxes which may
become a lien against any of the Purchased Assets shall have been paid by
Seller prior to Closing (including property taxes, sales taxes and excise
taxes).
(f) TOXIC MATERIALS. Seller has provided to Buyer a report of an
environmental audit dated January 12, 1990 performed by Dames & Moore
relating to the real property referred to as 333 North Main Street, Salinas,
California. To the best of Seller's knowledge, no material unlawful release,
storage or use of toxic materials has occurred on such real property since
the date of such report. For the purposes hereof the phrase "toxic
materials" shall include all substances deemed to be pollutants, toxic
materials or hazardous materials under any California or federal law.
(g) There are no claims by or on behalf of any of Seller's employees
pending in any court or before any governmental agency or other similar
entity charging Seller with any unfair labor practice, unpaid wages or
overtime, discrimination or other claims or grievances relating to terms or
conditions of employment at Seller's business.
(h) INDEMNIFICATION FOR BREACH OF WARRANTIES. Seller shall indemnify
Buyer against all losses, damages and costs (including attorney fees and
court costs) relating to any warranty made by Seller in this Agreement which
is false, misleading, incomplete or inaccurate (either on the date of this
Agreement or at the time of Closing). If at any time prior to Closing Seller
determines that any warranty made by Seller in this Agreement is incorrect,
incomplete or misleading, then Seller shall advise Buyer of that fact and
shall provide to Buyer in writing whatever other information shall be
necessary to cause that warranty to be correct, complete and not misleading.
14. OTHER AGREEMENTS.
(a) EMPLOYEE ISSUES. Within 10 days after the date of this Agreement,
Seller shall provide to Buyer the following: (i) a census of Seller's
employees and (ii) a written disclosure of all benefits made available to
Seller's employees (including qualified and non-qualified retirement plans).
All employee benefit plans maintained by Seller for its employees shall be
fully funded prior to Closing. Seller shall pay all wages, commissions,
accrued vacation pay (if any) and other accrued compensation earned by
Seller's employees prior to Closing (together with all accrued FICA and
withholding taxes). Seller shall terminate the employment of all of Seller's
employees except Sam Linder effective as of the close of business on the
Closing Date. At Buyer's sole discretion, Buyer may (but shall not be
obligated to) hire any of Seller's employees; provided, however, Buyer shall
offer employment to Basil Howell as provided in paragraph 25(g) and provided
further, that Buyer shall offer employment to all of Seller's employees who
are covered by the Collective Bargaining Agreement between Seller and
District Lodge 93 I.A.M. & A.W. as amended May 23, 1996 on the terms and
conditions provided in said Collective Bargaining Agreement. Seller hereby
assigns, subject to the Closing of this Agreement, said Collective Bargaining
Agreement to Buyer, and Buyer agrees to assume and perform the duties and
obligations thereunder. Seller agrees that for a period of six months
following Closing it will not offer employment to any of Seller's terminated
employees unless Buyer shall fail to employ any such employees or shall
subsequently terminate any such employee.
(b) FINANCIAL DISCLOSURES. Buyer (at Buyer's expense) shall have the
right, at any time prior to Closing, to conduct a certified audit (by one or
more certified public accounting firms selected by Buyer) of: (i) Seller's
balance sheet for 1994 and 1995, (ii) Seller's income and cash flow
statements for 1993, 1994 and 1995, and (iii) Seller's balance sheet and
income and cash flow statements for all subsequent interim periods prior to
Closing. Seller agrees to cooperate and assist in the prompt and efficient
<PAGE>
completion of all such audit activities, recognizing that the audit process may
result in inconveniences or inefficiencies to Seller's Business.
(c) FRANCHISORS' CONSENT. The parties shall take all actions which are
reasonably necessary on the part of either of them to obtain the consent of
the Franchisors to the issuance to Buyer of exclusive franchises for the sale
of new Honda, Cadillac and Oldsmobile vehicles in the same geographical area
as Seller's current franchises in Monterey County, California.
15. CONDUCT OF BUSINESS PENDING CLOSING. Seller warrants that during the
period beginning on the date of this Agreement and ending at Closing:
(i) Seller shall continue to operate Seller's Business in the usual and
ordinary course, and in substantial conformity with all applicable laws,
ordinances, regulations, rules or orders; (ii) Seller shall not allow any
liens to be placed against any of the Purchased Assets unless those liens are
discharged prior to Closing; (iii) Seller shall not take any action which may
cause a material adverse change in the operations of Seller's Business;
(iv) Seller shall not conduct any sale which shall use the words or phrases
"Going Out of Business Sale" or other words or phrases having similar meanings,
but Seller may conduct a "Change of Ownership Sale" or similar type sale prior
to Closing; (v) Seller shall use its best efforts to preserve the value of the
Honda, Cadillac and Oldsmobile franchises in Monterey County, California; and
(vi) Buyer shall have the right, at Buyer's expense, to maintain an employee
on Seller's business premises, and Seller agrees to provide that employee
with access to and the right to participate in all aspects of Seller's
Business.
16. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer hereby makes the
following representations and warranties to Seller, with the intent that
Seller rely thereon:
(a) ORGANIZATION. Lithia Motors, Inc. is a corporation organized,
validly existing and in good standing under the laws of the State of Oregon,
and is entitled to own property and to carry on its business.
(b) AUTHORITY. This Agreement has been authorized by the board of
directors of Lithia Motors, Inc. This Agreement will not violate the
provision of any judicial, governmental or administrative decree, order,
writ, injunction, or judgment, or conflict with or constitute a default
under, the Article or bylaws of Lithia Motors, Inc., or any contract,
agreement, or other instrument to which Lithia Motors, Inc. is a party.
(c) PERFORMANCE BY BUYER. Buyer is aware of no facts relating to its
business operations which could cause either of the Franchisors to prevent or
frustrate the consummation of the terms of this Agreement other than the fact
that it intends to offer its securities for sale to the public, and is aware
of no facts which could prevent the Buyer from performing all of the terms
and conditions to be performed by Buyer hereunder.
(d) INDEMNIFICATION FOR BREACH OF WARRANTIES. Buyer shall indemnify
Seller against all losses, damages and costs (including attorney fees and
court costs) relating to any warranty made by Buyer in this Agreement which
is false, misleading, incomplete or inaccurate (either on the date of this
Agreement or at the time of Closing).
17. CONDITIONS TO CLOSING. The obligation of the parties to close this
transaction is subject to each of the following conditions (each of which is
for the benefit of the parties and may be waived by either or both of them),
and either party shall have the right to rescind this Agreement if any of the
following conditions is not satisfied in accordance with its terms:
(a) Buyer shall have obtained from Franchisors, prior to the Final
Closing Date, exclusive franchises to sell new Honda, Cadillac and Oldsmobile
vehicles in the same geographical area as Seller's current franchises in
Monterey County, California (as evidenced by the issuance to Buyer by
Franchisors of appropriate Dealership Sales and Service Agreement, and the
approval of Buyer as the publicly owned Dealer-Operator of the franchises),
and Buyer agrees to use its best reasonable efforts to obtain those
franchises.
(1)If General Motors Corporation
exercises its right of first refusal to purchase all of the assets relating to
Seller's Cadillac and Oldsmobile franchises or declines to permit the transfer
to or purchase by Buyer, then:
(i)Buyer agrees to waive the
requirement set forth in the first sentence of this subparagraph 17(a) with
respect to Seller's Cadillac and Oldsmobile franchises; and
(ii)Buyer shall not be obligated or
entitled to purchase any of Seller's inventory of new or demonstrator Cadillac
or Oldsmobile vehicles;
(iii)Buyer shall not be obligated
or entitled to purchase any of Seller's inventory of Cadillac or Oldsmobile
parts and accessories, or new tools or displays acquired by Seller since
August 1, 1996 relating to the sale, repair or servicing of Cadillac or
Oldsmobile vehicles;
(iv)Buyer shall not be obligated or
entitled to purchase any of the goodwill, service customer lists, sales customer
lists, vehicle sales records, vehicle service records, and other intangible
rights and interests of any value relating to Seller's Cadillac and Oldsmobile
franchises, and the purchase price for Seller's intangible assets shall be
reduced by an amount which is the lesser of (x) the fair market value
<PAGE>
of the intangible assets described in subparagraph 10(a)(2) or (y) $800,000 less
the fair market value of the intangible assets described in subparagraph
10(a)(1).
(v)All other terms of this
Agreement shall remain in effect.
(b) Buyer shall be reasonably satisfied with any facility improvement
requirements which are imposed by American Honda Motor Co., Inc. which have
an aggregate cost of more than $50,000.00.
(c) The leasing of the Business Real Property by Buyer (or a related
entity) shall be closed concurrently with this transaction (in accordance
with the terms of the lease agreement which is attached hereto as Exhibit
"D"), and the Earnest Money Agreement attached hereto as Exhibit "E" shall be
executed by the necessary parties at or prior to Closing.
(d) All of Seller's and Buyer's agreements and warranties set forth in
this Agreement shall be correct, complete and not misleading at Closing;
provided that Buyer's decision to close this transaction shall not release
Seller from liability to Buyer for any warranty which is subsequently
determined to be incorrect, incomplete or misleading unless Buyer had
knowledge of such incorrect or incomplete matter prior to Closing.
18. CLOSING. The parties shall make all reasonable effort to close the
purchase and sale under this Agreement at or before 5:00 p.m., Pacific
Standard Time, on or before the Final Closing Date, at the offices of The
Escrow Forum, in Lake Forest, California, or at such other location as shall
be selected by mutual agreement of the parties.
(a) The parties agree to establish a closing escrow account at The
Escrow Forum, in Lake Forest, California (the "Closing Escrow Agent"). Buyer
and Seller each shall pay one-half (1/2) of the closing escrow fees. Buyer
and Seller agree to execute whatever reasonable escrow instructions may be
required by Closing Escrow Agent in connection with this transaction. In the
event of any conflict between those escrow instructions and this Agreement,
the terms of this Agreement shall prevail.
(b) In all events, the Closing of the transaction contemplated under
this Agreement shall occur (if at all) on or before the Final Closing Date.
(c) If this transaction closes as provided herein, then actual
possession and all risk of loss, damage or destruction with respect to the
Purchased Assets, shall be deemed to have been delivered to Buyer at 11:59
p.m., Pacific Standard Time, on the Closing Date.
(d) At Closing, and coincidentally with the performance of the
obligations to be performed by Buyer at Closing, Seller shall deliver to
Buyer the following: (i) all bills of sale, assignments and other instruments
of transfer, in form and substance reasonably satisfactory to Buyer, which
shall be necessary to convey the Purchased Assets to Buyer; and (ii) all
other payments and documents required under this Agreement.
(e) At Closing, and coincidentally with the performance of all
obligations required of Seller at Closing, Buyer shall deliver to Seller the
following: (1) payment for the Purchased Assets; and (ii) all other payments
and documents required under this Agreement.
(f) If Closing does not take place on or before the Final Closing Date
because there has been a failure of any condition precedent set forth in
Paragraph 17, then: (i) all rights and obligations of both parties under this
Agreement shall terminate, (ii) Buyer shall be entitled to a refund of the
entire $150,000.00 earnest money deposit (and interest earned thereon)
referred to in subparagraph 6(b), and (iii) this Agreement and all
predecessor agreements shall thereafter be void and of no effect.
(g) If Closing does not take place on or before the Final Closing Date
because of Buyer's material breach of this Agreement, then the $150,000.00
earnest money deposit delivered by Buyer to The Escrow Forum (together with
all interest earned thereon while held by The Escrow Forum) shall be
forfeited to Seller as Seller's sole and exclusive remedy for Buyer's breach,
and Seller shall have no other rights or remedies against Buyer by reason of
that breach. If Closing does not take place on or before the Final Closing
Date because of Seller's material breach of this Agreement, then Buyer shall
be entitled to: (i) a refund of the entire $150,000.00 earnest money deposit
previously delivered to Buyer to The Escrow Forum (together with all interest
earned thereon while held by The Escrow Forum), (ii) any and all other rights
and remedies for that breach which are specified in this Agreement or which
may be provided by law or in equity.
(h) Both parties agree to make a good faith effort to execute and
deliver all documents and complete all actions necessary to consummate this
transaction.
19. BOOKS AND RECORDS. Until July 1, 1997, Seller shall maintain Seller's
financial records, and Buyer and its agents shall have full reasonable access
to Seller's financial statements and general ledger and may make copies
thereof.
20. SELLER'S ACCOUNTS RECEIVABLE. Until July 1, 1997, Buyer shall, on
Seller's behalf, and at no charge to Seller, accept any payment with respect
to Seller's customer receivables and other receivables arising out of the
operation of Seller's Business prior to Closing. All collected receivables
from vehicle sales shall be delivered to Seller within ten (10) days after
collection, and all other collected receivables shall
<PAGE>
be delivered to Seller on a monthly basis. Buyer shall have no obligation to
undertake collection efforts with respect to Seller's receivables, and Buyer's
only obligation shall be to account for and pay over Seller's receivables which
are actually received by Buyer.
21. SURVIVAL OF REPRESENTATIONS. All representations, warranties,
indemnification obligations and covenants made in this Agreement shall
survive the Closing, and shall remain in effect for two years following
Closing, except Seller's warranty set forth in paragraph 13(f) which shall
survive for a period of three years and Seller's warranty contained in
paragraph 13(e) which shall survive until the expiration of the latest period
allowable in any applicable statute of limitation. No claim for indemnity or
for breach of warranty or any covenant herein shall be brought by either
party unless such claim or aggregate claims total at least $25,000.
22. BROKERAGE COMMISSIONS. Buyer and Seller each agree to pay to National
Business Brokers, Inc., at Closing, the commission required under their
respective commission agreements relating to this transaction.
23. ASSIGNMENT BY BUYER. Lithia Motors, Inc. shall have the right to
assign all rights and obligations of Lithia Motors, Inc. as "Buyer" under
this Agreement. In the event of any such assignment, the assignee shall
assume all rights and obligations of the Buyer under this Agreement, and
Lithia Motors, Inc. shall remain jointly liable for all obligations of the
Buyer.
24. LEASE OF USED CAR LOT. At Closing, Buyer agrees to sublease from
Seller the used car lot located at 301 Main Street, Salinas, California, at a
rental of $2,400.00 per month (on a "triple net" basis) for the period
remaining on Seller's existing lease for that property (which period shall be
less than 18 months at Closing). At Closing, Buyer agrees to purchase from
Seller the office trailer located on the used car lot, at a mutually agreed
upon price to be paid in cash.
25. MISCELLANEOUS.
(a) There are no oral agreements or representations between the
parties which affect this transaction, and this Agreement supersedes all
previous negotiations, warranties, representations and understandings between
the parties. True copies of all documents referenced in this Agreement are
attached hereto. If any provision of this Agreement shall be determined to
be void by any court of competent jurisdiction, then that determination shall
not affect any other provision of this Agreement, and all other provisions
shall remain in full force and effect. If any provision of this Agreement is
capable of two constructions, only one of which would render the provision
valid, then the provision shall have the meaning which renders it valid. The
paragraph heading in this Agreement are for convenience purposes only, and do
not in any way define or construe the contents of this Agreement.
(b) This Agreement shall be governed and performed in accordance with
the laws of the State of Oregon. If suit or action is instituted in
connection with any controversy arising out of this Agreement, the prevailing
party in that suit or action or any appeal therefrom shall be entitled to
recover, in addition to any other relief, the sum which the court may judge
to be reasonable attorney fees.
(c) This Agreement may be executed in multiple counterparts, each of
which shall be an original, and all of which shall constitute a single
instrument, when signed by both of the parties. This Agreement shall inure
to the benefit of and shall be binding upon the successors and assigns of the
respective parties.
(d) Waiver by either party of strict performance of any provision of
this Agreement shall not be a waiver of, and shall not prejudice the party's
right to subsequently require strict performance of, the same provision or
any other provision. The consent or approval of either party to any act by
the other party of a nature requiring consent or approval shall not render
unnecessary the consent to or approval of any subsequent similar act.
(e) All notices provided for herein shall be in writing and shall be
deemed to be duly given when mailed by United States certified mail, postage
prepaid, to the last-known address of the party entitled to receive the
notice, or when personally delivered to that party.
(f) Time is of the essence to this Agreement.
(g) Buyer shall offer employment to Basil Howell in a management
position in connection with the operation of the business purchased at least
until July 1, 1997, on terms and conditions which include the normal rate of
pay and employment rules of equivalent position at Buyer's other dealerships
(adjusted, if appropriate, for the geographic area and competitive
marketplace). Buyer will use its best efforts to reach agreement with Basil
Howell prior to Closing concerning the terms and conditions of the offered
employment. In addition, Buyer shall provide office space at the business
until July 1, 1997 for a person to be designated by Seller who shall have
responsibilities in connection with the collection of accounts receivable of
Seller, repossessions and other matters relating to the transition of
ownership and operations from Seller to Buyer.
(h) References to "the best of Seller's knowledge" or similar language
shall mean the actual knowledge of Sam Linder or Basil Howell. Any
agreement, consent or other action of Buyer's parent company (Lithia Holding
Company, LLC) shall constitute the agreement, consent or action of Buyer if
the same is in writing and communicated to Seller.
<PAGE>
(i) After Closing, Buyer shall cooperate with Seller in connection
with repossessions of vehicles sold by Seller prior to Closing, including the
temporary storage of any such vehicles. If requested by Seller, following
Closing, Buyer will assist Seller in processing financial statements and
related financial information for the period ending on the Closing Date.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
indicated below.
SELLER: SAM LINDER, INC.
By:__________________________
Sam Linder, President Dated
BUYER: LITHIA MOTORS, INC. (OR NOMINEE)
By:___________________________ _______________________________
Sidney B. DeBoer, President Dated
<PAGE>
EXHIBIT "A" TO AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
Between SAM LINDER, INC., as "Seller", and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
LIST OF EQUIPMENT, FURNITURE AND FIXTURES BEING RETAINED BY SELLER
[See pages attached hereto.]
<PAGE>
EXHIBIT "B" TO AGREEMENT FOR PURCHASE AND SALE
OF BUSINESS ASSETS
Between SAM LINDER, INC., as "Seller", and
LITHIA HOLDING COMPANY, L.L.C. (OR NOMINEE), as Buyer
LISTING OF LEASES AND AGREEMENTS BEING ASSUMED
[See pages attached hereto.]
EXHIBIT "C" TO AGREEMENT FOR PURCHASE AND SALE OF BUSINESS
ASSETS
Between SAM LINDER, INC., as "Seller", and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
DISCLOSURE OF TOXIC MATERIALS
[See __ page(s) attached hereto.]
EXHIBIT "D" TO AGREEMENT FOR PURCHASE AND SALE OF BUSINESS
ASSETS
Between SAM LINDER, INC., as "Seller", and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
COPY OF LEASE AGREEMENT
[See __ pages attached hereto.]
<PAGE>
EXHIBIT "E" TO AGREEMENT FOR PURCHASE AND SALE OF BUSINESS
ASSETS
Between SAM LINDER, INC., as "Seller", and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
COPY OF EARNEST MONEY CONTRACT
[See pages attached hereto.]
<PAGE>
"EXHIBIT A" TO AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
1. P/C WITH GOLDEN STATE AUTO FILES
2. CORRAL DE TIERRA MEMBERSHIP
3. ALL DEPOSITS
4. SAM LINDER'S COMPLETE OFFICE FURNISHINGS
5. BLIMP WITH SAM LINDER LOGO
6. P/C IN BUSINESS OFFICE
<PAGE>
EXHIBIT B TO AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
Sam Linder, Inc. and Lithia Motors, Inc.
1. Agreement between International
Association of Machinists & Aerospace Workers District Lodge No. 93 and Sam
Linder Cadillac/Honda/Oldsmobile 1994-1996 and amendment thereto dated May 23,
1996 which extends the agreement through May 31, 1999.
2. Lease Agreement with HLC Financial,
Inc. covering certain equipment described in said lease provided by Market Scan
Information Systems, Inc.
3. Master Services Agreement between
ADP, Inc. and Sam Linder Cadillac/Honda/Oldsmobile dated January 1996.
4. Maintenance Contract between New
Wave Industries, Ltd. and Sam Linder Auto Center relating to a mobile car wash
system renewable annually.
5. Security Service Agreement
effective March 3, 1996 between BRG Services, Inc. dba Monterey Peninsula Mobile
Security and Sam Linder's Town & Country Auto Center for security services
terminating March 2, 1997 and continuing thereafter on a month-to-month basis.
6. Computer Equipment Schedule for
Lease & Maintenance including a Computer Equipment Lease Agreement dated May 16,
1996 between American Honda Motor Co., and Sam Linder Honda, HondaNet 2,000 DCS
Software License Agreement between the same parties and Computer Equipment
Maintenance Agreement between the same parties.
7. Lease and Lease Extension and
Option Agreement relating to premises at 301 N. Main Street, Salinas,
California, for a term ending August 31, 1997 with an option to renew upon 180
days' notice for an additional three years at a negotiated rental. The lessor
is Betty Ann Javorski and the lessee is Sam Linder, Inc.
8. Contract with Cintas Corporation to
supply certain uniforms, shop towels, and other items dated October 1, 1992 and
expiring September 30, 1997 and renewable thereafter unless cancelled upon 60
days' written notice in advance of expiration.
9. Agreement with Automotive
Environmental Services Corporation and Sam Linder Auto Center for the disposal
of waste anti-freeze.
10. Agreement with Evergreen
Environmental Services and Sam Linder Cadillac/Honda/Oldsmobile for the
transportation and disposal of used oil.
11. Lease between Vader, Inc. and Sam
Linder Cadillac/Honda/Oldsmobile for 36 months commencing April 1, 1994 of a CD
Spectrum Modular Office (it is contemplated that this asset will be purchased at
closing).
12. Monthly fees payable to the
Reynolds & Reynolds Company pursuant to an electric parts catalogue system.
13. Monthly payments to Monterey Bay
Office Products for copier usage.
14. Monthly fees payable to Pitney
Bowes, Inc. in connection with mailing machine use.
15. Various utility, garbage disposal,
and similar contracts on a month-to-month or at-will basis necessary or
convenient for the operation of the Seller's business located at 333 N. Main
Street and 301 N. Main Street, Salinas, California.
<PAGE>
EXHIBIT 10.15.1
REORGANIZATION AGREEMENT
This Reorganization Agreement is entered into as of October 18, 1996 by and
among Lithia Motors, Inc. ("Lithia"), 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.
("Holding"), Sidney B. DeBoer ("DeBoer"), M.L. Dick Heimann ("Heimann"), R.
Bradford Gray ("Gray") and Steve Philips ("Philips").
WHEREAS, Lithia intends to file with the Securities and Exchange
Commission (the "SEC") a registration statement on Form S-1 pursuant to the
Securities Act of 1933, as amended, (the "Registration Statement") for the
public offering of shares of Class A Common Stock to be offered and sold by
Lithia (the "Public Offering"); and
WHEREAS, the Offering is dependent upon the reorganization of Lithia
in the manner set forth in this Reorganization Agreement (the
"Reorganization"); and
WHEREAS, the parties hereto will directly and/or indirectly benefit
from the Offering and, accordingly, wish to reorganize Lithia and the other
entities in the manner set forth herein in order to facilitate the
Offering;
NOW, THEREFORE, in consideration of the foregoing and the benefits to be
received directly or indirectly by the parties hereto from the Offering and/or
this Reorganization, the parties hereto do agree as follows:
1. REORGANIZATION TRANSACTIONS. The parties, in each case to the extent
provided within each of the following paragraphs, shall, effective as of the
Effective Date, as hereinafter defined, do as follows:
1.1 PURCHASE OF PHILIPS' INTEREST IN LITHIA TLM, L.L.C. Lithia will
purchase from Philips and Philips will sell to Lithia the 19.99% ownership
interest of Philips in Lithia TLM, L.L.C. in exchange for a purchase price of
$700,000 payable by delivery by Lithia to Philips within ten days of the
Effective Date of $135,000 and the cancellation of a note payable by Philips to
Lithia which has an unpaid balance owing of $565,000.
1.2 ORGANIZATION OF HOLDING. The organization of Holding will be
completed pursuant to the following actions:
(a) DeBoer will contribute to Holding (i) 1,875,000 shares of Lithia
Series B Common Stock (which shares represent 62.5% of the currently issued
and outstanding share of Lithia), (ii) 1,666 2/3rds shares of the common
stock of Lithia Rentals, Inc. (which shares represent 62.5% of the issued
and outstanding shares of Lithia Rentals, Inc.), (iii) 62.5 shares of the
common stock of Lithia Leasing, Inc. (which shares represent 62.5% of the
issued and outstanding shares of Lithia Leasing, Inc.), (iv) 68.75 shares
of the common stock of Lithia Chrysler Plymouth Jeep Eagle, Inc. (which
shares represent 62.5% of the issued and outstanding shares of Lithia
Chrysler Plymouth Jeep Eagle, Inc.), (v) 4,062.5 shares of the common stock
of Discount Auto & Truck Rental, Inc. (which shares represent 62.5% of the
issued and outstanding shares of Discount Auto & Truck Rental, Inc.),
(vi) his 0.01% membership interest in Lithia TLM, L.L.C., (vii) his
<PAGE>
0.01% membership interest in Lithia's Grants Pass Auto Center, L.L.C. and
(viii) his 0.01% membership interest in Lithia Dodge, L.L.C. In exchange
for the foregoing, DeBoer will become the managing member of Holding and
will receive a 58.125% membership interest in Holding.
(b) Heimann will contribute to Holding (i) 1,125,000 shares of Lithia
Series B Common Stock (which shares represent 37.5% of the currently issued
and outstanding share of Lithia), (ii) 1,000 shares of the common stock of
Lithia Rentals, Inc. (which shares represent 37.5% of the issued and
outstanding shares of Lithia Rentals, Inc.), (iii) 37.5 shares of the
common stock of Lithia Leasing, Inc. (which shares represent 37.5% of the
issued and outstanding shares of Lithia Leasing, Inc.), (iv) 41.25 shares
of the common stock of Lithia Chrysler Plymouth Jeep Eagle, Inc. (which
shares represent 37.5% of the issued and outstanding shares of Lithia
Chrysler Plymouth Jeep Eagle, Inc.) and (v) 2,437.5 shares of the common
stock of Discount Auto & Truck Rental, Inc. (which shares represent 37.5%
of the issued and outstanding shares of Discount Auto & Truck Rental,
Inc.). In exchange for the foregoing, Heimann will receive a 34.875%
membership interest in Holding.
(c) Gray will contribute to Holding (i) his 24.99% membership
interest in Lithia's Grants Pass Auto Center, L.L.C. and (ii) his 24.99%
membership interest in Lithia Dodge, L.L.C. In exchange for the foregoing,
Gray will receive a 7% membership interest in Holding.
As a result of the foregoing, Holding will own (i) 3,000,000 shares of Lithia
Series B Common Stock (which shares represent 100% of the currently issued and
outstanding share of Lithia), (ii) 2,666 2/3rds shares of the common stock of
Lithia Rentals, Inc. (which shares represent 100% of the issued and outstanding
shares of Lithia Rentals, Inc.), (iii) 100 shares of the common stock of Lithia
Leasing, Inc. (which shares represent 100% of the issued and outstanding shares
of Lithia Leasing, Inc.), (iv) 110 shares of the common stock of Lithia Chrysler
Plymouth Jeep Eagle, Inc. (which shares represent 100% of the issued and
outstanding shares of Lithia Chrysler Plymouth Jeep Eagle, Inc.), (v) 6,500
shares of the common stock of Discount Auto & Truck Rental, Inc. (which shares
represent 100% of the issued and outstanding shares of Discount Auto & Truck
Rental, Inc.), (vi) a 0.01% membership interest in Lithia TLM, L.L.C., (vii) a
25% membership interest in Lithia's Grants Pass Auto Center, L.L.C. and (viii) a
25% membership interest in Lithia Dodge, L.L.C.
1.3 ORGANIZATION OF LGPAC, INC. Holding will contribute to Lithia the 25%
ownership interest in Lithia's Grants Pass Auto Center, L.L.C. which was
transferred to Holding by Gray and DeBoer. Lithia will then contribute to
LGPAC, Inc. this 25% ownership interest in Lithia's Grants Pass Auto Center,
L.L.C. (but not Lithia's own 75% ownership interest as the Manager Member of
Lithia's Grants Pass Auto Center, L.L.C.) in exchange for 100 shares of common
stock of LGPAC, Inc. (which shares will represent 100% of the issued and
outstanding shares of LGPAC, Inc.). Since Holding will become the sole
shareholder of Lithia pursuant to this Reorganization Agreement, no additional
shares of capital stock will be issued by Lithia or LGPAC, Inc. to Holding as a
result of these contributions by Holding and no other consideration will be paid
by Lithia or by LGPAC, Inc. in connection with the foregoing. As a result of
the foregoing, LGPAC, Inc. will own a 25% Member interest in Lithia's Grants
Pass Auto Center, L.L.C. and Lithia will continue to own the 75% Manager Member
interest in Lithia's Grants Pass Auto Center, L.L.C. At a later date, Lithia
may, in its sole discretion, contribute to LGPAC, Inc. the remaining 75% Manager
Member interest in Lithia's Grants Pass Auto Center, L.L.C. at which time LGPAC,
Inc. may, at its option, terminate and dissolve Lithia's Grants Pass Auto
Center, L.L.C.
1.4 ORGANIZATION OF LITHIA DM, INC. Holding will contribute to Lithia the
25% ownership interest in Lithia Dodge, L.L.C. which was transferred to Holding
by Gray and DeBoer. Lithia will then contribute to Lithia DM, Inc. this 25%
ownership interest in Lithia Dodge, L.L.C. (but not Lithia's own 75% ownership
interest as the Manager Member of Lithia Dodge, L.L.C.) in exchange
<PAGE>
for 100 shares of common stock of Lithia DM, Inc. (which shares will represent
100% of the issued and outstanding shares of Lithia DM, Inc.). Since Holding
will become the sole shareholder of Lithia pursuant to this Reorganization
Agreement, no additional shares of capital stock will be issued by Lithia or
Lithia DM, Inc. to Holding as a result of these contributions by Holding and no
other consideration will be paid by Lithia or by Lithia DM, Inc. in connection
with the foregoing. As a result of the foregoing, Lithia DM, Inc. will own a
25% Member interest in Lithia Dodge, L.L.C. and Lithia will continue to own the
75% Manager Member interest in Lithia Dodge, L.L.C. At a later date, Lithia
may, in its sole discretion, contribute to Lithia DM, Inc. the remaining 75%
Manager Member interest in Lithia Dodge, L.L.C. at which time Lithia DM, Inc.
may, at its option, terminate and dissolve Lithia Dodge, L.L.C.
1.5 TRANSFER OF OWNERSHIP OF LITHIA CHRYSLER PLYMOUTH JEEP EAGLE, INC.
Holdings will surrender 10 shares of common stock of the Lithia Chrysler
Plymouth Jeep Eagle, Inc. back to the issuer for cancellation. Holding will
then contribute to Lithia DM, Inc. the remaining 100 shares of the common stock
of Lithia Chrysler Plymouth Jeep Eagle, Inc. (which shares now represent 100% of
the issued and outstanding shares of Lithia Chrysler Plymouth Jeep Eagle, Inc.).
As a result of the foregoing, Lithia Chrysler Plymouth Jeep Eagle, Inc. will be
a wholly-owned subsidiary of Lithia DM, Inc. Since Holding will become the sole
shareholder of Lithia pursuant to this Reorganization Agreement and upon the
Effective Date Lithia will become the sole shareholder of Lithia DM, Inc., no
additional shares of capital stock will be issued by Lithia to Holding or by
Lithia DM, Inc. to Lithia as a result of the foregoing and no other
consideration will be paid by Lithia DM, Inc. to either Lithia or Holding in
connection with the foregoing.
1.6 ORGANIZATION OF LITHIA MTLM, INC. Holding will contribute to Lithia
the 0.01% ownership interest in Lithia TLM, L.L.C. which was transferred to
Holding by DeBoer. Lithia will then contribute to Lithia MTLM, Inc. this 0.01%
ownership interest together with the 19.99% ownership interest in Lithia TLM,
L.L.C. which Lithia purchased from Philips (but not Lithia's own 80% ownership
interest as the Manager Member of Lithia TLM, L.L.C.) in exchange for 100 shares
of common stock of Lithia MTLM, Inc. (which shares will represent 100% of the
issued and outstanding shares of Lithia MTLM, Inc.). Since Holding will become
the sole shareholder of Lithia pursuant to this Reorganization Agreement, no
additional shares of capital stock will be issued by Lithia or Lithia MTLM, Inc.
to Holding as a result of this contribution by Holding and no other
consideration will be paid by Lithia or by Lithia MTLM, Inc. in connection with
the foregoing. As a result of the foregoing, Lithia MTLM, Inc. will own a 20%
Member interest in Lithia TLM, L.L.C. and Lithia will continue to own the 80%
Manager Member interest in Lithia TLM, L.L.C. At a later date, Lithia may, in
its sole discretion, contribute to Lithia MTLM, Inc. the remaining 80% Manager
Member interest in Lithia TLM, L.L.C. at which time Lithia MTLM, Inc. may, at
its option, terminate and dissolve Lithia TLM, L.L.C.
1.7 ORGANIZATION OF LITHIA HPI, INC. Lithia will contribute to Lithia
HPI, Inc. all of the assets and liabilities of Lithia's "Lithia Honda Pontiac
Suzuki Isuzu Volkswagen" operating division in exchange for 100 shares of common
stock of Lithia HPI, Inc. (which shares will represent 100% of the issued and
outstanding shares of Lithia HPI, Inc.) and the assumption by Lithia HPI, Inc.
of all the liabilities of Lithia's "Lithia Honda Pontiac Suzuki Isuzu
Volkswagen" operating division. As a result of the foregoing, Lithia HPI, Inc.
will be a wholly-owned subsidiary of Lithia.
1.8 ORGANIZATION OF LITHIA SSO, INC. Lithia will contribute to Lithia
SSO, Inc. all of the assets and liabilities of Lithia's "Saturn of Southwest
Oregon" operating division in exchange for 100 shares of common stock of Lithia
SSO, Inc. (which shares will represent 100% of the issued and outstanding shares
of Lithia SSO, Inc.) and the assumption by Lithia SSO, Inc. of all the
liabilities of Lithia's "Saturn of Southwest Oregon" operating division. As a
result of the foregoing, Lithia SSO, Inc. will be a wholly-owned subsidiary of
Lithia.
1.9 TRANSFER OF OWNERSHIP OF LITHIA LEASING, INC. AND CHANGE OF CORPORATE
NAME. Holdings will contribute to Lithia 100 shares of the common stock of
Lithia Leasing, Inc. (which shares
<PAGE>
represent 100% of the issued and outstanding shares of Lithia Leasing, Inc.).
As a result of the foregoing, Lithia Leasing, Inc. will be a wholly-owned
subsidiary of Lithia and the S-Corporation status of Lithia Leasing, Inc. will
be terminated as of the Effective Date. Since Holding will become the sole
shareholder of Lithia pursuant to this Reorganization Agreement, no additional
shares of capital stock will be issued by Lithia to Holding as a result of the
foregoing and no other consideration will be paid by Lithia in connection with
the foregoing. The directors and shareholders of Lithia Leasing, Inc. have
previously approved an amendment to and restatement of the Articles of
Incorporation of Lithia Leasing, Inc. pursuant to which the name of Lithia
Leasing, Inc. shall, on or before the Effective Date, be changed to Lithia
Financial Corporation.
1.10 TRANSFER OF OWNERSHIP OF LITHIA RENTALS, INC. Holdings will
surrender 2,566 2/3rds shares of common stock of the Lithia Rentals, Inc. back
to the issuer for cancellation. Holding will then contribute to Lithia the
remaining 100 shares of the common stock of Lithia Rentals, Inc. (which shares
now represent 100% of the issued and outstanding shares of Lithia Rentals,
Inc.). As a result of the foregoing, Lithia Rentals, Inc. will be a
wholly-owned subsidiary of Lithia and the S-Corporation status of Lithia
Rentals, Inc. will be terminated as of the Effective Date. Since Holding will
become the sole shareholder of Lithia pursuant to this Reorganization Agreement,
no additional shares of capital stock will be issued by Lithia to Holding as a
result of the foregoing and no other consideration will be paid by Lithia in
connection with the foregoing.
1.11 MERGER OF DISCOUNT AUTO & TRUCK RENTAL, INC. WITH AND INTO LITHIA
RENTALS, INC. As of the Effective Date, Discount Auto & Truck Rental, Inc. will
be merged with and into Lithia Rentals, Inc. In this merger, Lithia Rentals,
Inc. will be the surviving corporation, the articles of incorporation, bylaws,
officers and directors of Lithia Rentals, Inc. immediately prior to this merger
shall, after the merger, be the articles of incorporation, bylaws, officers and
directors of the surviving corporation and the separate existence of Discount
Auto & Truck Rental, Inc. shall terminate. Since Holding will become the sole
shareholder of both Lithia and Discount Auto & Truck Rental, Inc. pursuant to
this Reorganization Agreement and pursuant to this Reorganization Agreement
Lithia will become the sole shareholder of Lithia Rentals, Inc., no additional
shares of capital stock will be issued by Lithia to Holding or by Lithia
Rentals, Inc. to Holding as a result of this merger or in exchange for the
previously outstanding shares of capital stock Discount Auto & Truck Rental,
Inc. and all of the previously outstanding shares of capital stock of Discount
Auto & Truck Rental, Inc. shall be cancelled without any other consideration
being paid by Lithia Rentals, Inc. or by Lithia to Holding in this merger.
Lithia Rentals, Inc. may thereafter file for an assumed business name
registration for the name "Discount Auto & Truck Rental."
1.12 ORGANIZATION OF LITHIA AUTO SERVICES, INC. Lithia will contribute to
Lithia Auto Services, Inc. all of the assets and liabilities of Lithia's "Lithia
Body & Paint" operating division together with all of the assets and liabilities
of Lithia's "Thrift Auto Supply" operating division in exchange for 100 shares
of common stock of Lithia Auto Services, Inc. (which shares will represent 100%
of the issued and outstanding shares of Lithia Auto Services, Inc.) and the
assumption by Lithia Auto Services, Inc. of all the liabilities of Lithia's
"Lithia Body & Paint" operating division and all the liabilities of Lithia's
"Thrift Auto Supply" operating division. As a result of the foregoing, Lithia
Auto Services, Inc. will be a wholly-owned subsidiary of Lithia.
1.13 ASSUMPTION AND PAYMENT OF DISTRIBUTION NOTES. It is understood and
agreed by the parties that each of Lithia, Lithia Dodge, L.L.C., Lithia TLM,
L.L.C., Lithia's Grants Pass Auto Center, L.L.C., Lithia Rentals, Inc., Lithia
Leasing, Inc., and Discount Auto & Truck, Inc. have distributed to their members
or shareholders, as the case may be, promissory notes in an aggregate amount of
$3,865,000 representing all of the previously taxed undistributed earnings of
these entities through December 31, 1995 and that, on or before the Effective
Date, each of these entities will make an additional distribution to their
members or shareholders, as the case may be, cash or promissory notes in an
amount equal to the undistributed taxable income of the respective entity from
January 1, 1996 through the Effective Date. Lithia, for itself and on behalf of
each of
<PAGE>
the other entities, hereby agrees and undertakes to prepay all of these
promissory notes within 30 days after the Effective Date.
1.14 TRANSFER OF OWNERSHIP OF LITHIA TKV, INC. On the Effective Date,
DeBoer and Heimann will sell the shares of the common stock of Lithia TKV, Inc.
(which shares collectively represent 100% of the issued and outstanding shares
of Lithia TKV, Inc.) to Lithia for a purchase price of $2,437,500.00 with
respect to the 62.5 shares owned by DeBoer and $1,462,500.00 with respect to the
37.5 shares owned by Heimann. As a result of the foregoing, Lithia TKV, Inc.
will be a wholly-owned subsidiary of Lithia as of the Effective Date.
1.15 ORGANIZATION OR TRANSFER OF OWNERSHIP OF LITHIA HS, INC. If Lithia
HS, Inc. has not be organized and shares of its stock have not been issued prior
to the earlier to occur of the Effective Date or January 1, 1997, then Lithia
HS, Inc. will be organized with 100% of the initially issued shares being issued
to Lithia. If, however, Lithia HS, Inc. is organized and shares of stock have
been issued by it prior to the earlier of such dates, then on the Effective Date
the holders of those shares will sell the shares to Lithia for a purchase price
equal to the amount paid by them for those shares As a result of the foregoing,
Lithia HS, Inc. will be a wholly-owned subsidiary of Lithia as of the Effective
Date.
1.16 FURTHER ASSURANCES. Each of the parties hereto agrees that it will
take such actions, including the execution and delivery of documents, and cause
any and all other entities controlled by such party to take such actions,
including the execution and delivery of documents, as may be necessary or
desirable in order to fully effectuate the reorganization in the manner set
forth in this Reorganization Agreement. Each of the parties hereto further
agrees that it will refrain from taking any action and will cause any and all
other entities controlled by such party to refrain from taking any action which
would prevent or impede the full effectuation of the reorganization in the
manner set forth in this Reorganization Agreement.
2. EFFECTIVE DATE. For purposes of this Reorganization Agreement, the
"Effective Date" shall be that date on which Lithia's Registration Statement is
declared effective by the SEC. However, if, for any reason, the Public Offering
does not occur and closing thereon is not completed within ten (10) days of the
Effective Date (or such longer period as the parties hereto may agree upon),
then the reorganization set forth in this Reorganization Agreement shall be
fully rescinded and this Reorganization Agreement shall become null and void.
3. MISCELLANEOUS.
3.1 ENTIRE AGREEMENT. This Reorganization Agreement and the various other
documents referenced herein or executed in connection with the effectuation of
the reorganization in the manner set forth in this Reorganization Agreement
constitute the final and complete expression of the parties intentions with
respect to the transactions contemplated herein and replaces and supersedes any
prior agreements, representations or understandings, whether written or oral.
3.2 HEADINGS. Headings set forth herein are for convenience only and will
not control or affect the meaning or construction of the provisions of this
Reorganization Agreement.
3.3 AMENDMENT AND WAIVER. The terms of this Reorganization Agreement may
not be modified, altered, amended or superseded except by an agreement in
writing signed by the party against whom such change is to be enforced. No
waiver of any term of this Reorganization Agreement shall be effective unless
acknowledged in writing by the party granting such waiver.
<PAGE>
3.4 GOVERNING LAW. The construction and performance of this
Reorganization Agreement will be governed by the laws of the State of Oregon
(except for the choice of law provisions thereof).
3.5 BENEFIT AND ASSIGNMENT. This Reorganization Agreement shall be
binding on and shall inure to the benefit of the parties hereto and their
respective successors and assigns. No party may voluntarily or involuntarily
assign such party's rights or obligations under this Reorganization Agreement
without the prior written consent of all of the other parties.
IN WITNESS WHEREOF, the parties have executed this Reorganization Agreement
on or as of the date first written above.
LITHIA MOTORS, INC. LGPAC, INC.
By: By:
-------------------------------------
Its: Its:
-------------------------------------
LITHIA DM, INC. LITHIA MTLM, INC.
By: By:
-------------------------------------
Its: Its:
-------------------------------------
LITHIA HPI, INC. LITHIA SSO, INC.
By: By:
-------------------------------------
Its: Its:
-------------------------------------
LITHIA RENTALS, INC. DISCOUNT AUTO & TRUCK RENTAL, INC.
By: By:
-------------------------------------
Its: Its:
-------------------------------------
LITHIA AUTO SERVICES, INC. LITHIA HOLDING COMPANY L.L.C.
By: By:
-------------------------------------
Its: Its:
-------------------------------------
SIDNEY B. DEBOER M.L. DICK HEIMANN
- ----------------------------------------
R. BRADFORD GRAY STEVE PHILIPS
- ----------------------------------------
<PAGE>
EXHIBIT 10.19.1
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F 5311162 16245
P
A
- ------------------------------------------------------------------------------------------------------
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.
- ------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: Lender:
Lithia Motors, Inc. United States National Bank of Oregon
360 E. Jackson Dealer Finance Division
Medford, OR 97504 131 E. Main
Medford, OR 97501
Guarantor: Sidney B. DeBoer
___________, OR
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AMOUNT OF GUARANTY. The amount of this Guaranty is Unlimited.
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, Manfred
Heimann ("Guarantor") absolutely and unconditionally guarantees and promises to
pay to United States National Bank of Oregon ("Lender") or its order, on demand,
in legal tender of the United States of America, the Indebtedness (as that term
is defined below) of Lithia Motors, Inc. ("Borrower") to Lender on the terms and
conditions set forth in this Guaranty. Under this Guaranty, the liability of
Guarantor is unlimited and the obligations of Guarantor are continuing.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
Borrower. The word "Borrower" means Lithia Motors, Inc.
Guarantor. The word "Guarantor" means Sidney B. DeBoer.
Guaranty. The word "Guaranty" means this Guaranty made by Guarantor for
the benefit of Lender dated September 9, 1996.
Indebtedness. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
incurred or created, including, without limitation, all loans, advances,
interest, cost, debt, overdrafts, indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any
of them, and any present or future judgments against Borrower, or any of
them; and whether any such Indebtedness is voluntarily or involuntarily
incurred, due or not due, absolute or contingent, liquidated or
unliquidated, determined or undetermined; whether Borrower may be liable
individually or jointly with others, or primarily or secondarily, or as
guarantor or surety; whether recovery on the Indebtedness may be or may
become barred or unenforceable against Borrower for any reason whatsoever;
and whether the Indebtedness arises from transactions which may be voidable
on account of infancy, insanity, ultra vires, or otherwise.
Lender. The word "Lender" means United States National Bank of Oregon, its
successors and assigns.
<PAGE>
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contracted.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice of revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at the address
of Lender listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose, and without limitation, the term "new
Indebtedness" does not include Indebtedness which at the time of notice of
revocation is contingent, unliquidated, undetermined or not due and which later
becomes absolute, liquidated, determined or due. This Guaranty will continue to
bind Guarantor for all Indebtedness incurred by Borrower or committed by Lender
prior to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitutions or modifications of the Indebtedness. All
renewals, extensions, substitutions, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind the estate of Guarantor as to Indebtedness created both before and after
the death or incapacity of Guarantor, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation received by Lender from any one or more Guarantors shall
not affect the liability of any remaining Guarantors under this Guaranty. It is
anticipated that fluctuations may occur in the aggregate amount of Indebtedness
covered by this Guaranty, and it is specifically acknowledged and agreed by
Guarantor that reductions in the amount of Indebtedness, even to zero dollars
($0.00), prior to written revocation of this Guaranty by Guarantor shall not
constitute a termination of this Guaranty. This Guaranty is binding upon
Guarantor and Guarantor's heirs, successors and assigns so long as any of the
guaranteed Indebtedness remains unpaid and even though the Indebtedness
guaranteed may from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, without notice or demand and without lessening
Guarantor's liability under this Guaranty, from time to time: (a) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (b) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness, including increases and decreases of
the rate of interest on the Indebtedness; extensions may be repeated and may be
for longer than the original loan term; (c) to take and hold security for the
payment of this Guaranty or the Indebtedness, and exchange, enforce, waive,
subordinate, fail or decide not to perfect, and release any such security, with
or without the substitution of new collateral; (d) to release, substitute, agree
not to
<PAGE>
sue, or deal with any one or more of Borrower's sureties, endorsers, or other
guarantors on any terms or in any manner Lender may choose; (e) to determine
how, when and what application of payments and credits shall be made on the
Indebtedness; (f) to apply such security and direct the order or manner of sale
thereof, including without limitation, any nonjudicial sale permitted by the
terms of the controlling security agreement or deed of trust, as Lender in its
discretion may determine; (g) to sell, transfer, assign, or grant participations
in all or any part of the Indebtedness; and (h) to assign or transfer this
Guaranty in whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (e) Guarantor has not and will not, without the prior
written consent of Lender sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (f) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information which will be provided to Lender is and will be true and correct in
all material respects and fairly present the financial condition of Guarantor as
of the dates the financial information is provided; (g) no material adverse
change has occurred in Guarantor's financial condition since the date of the
most recent financial statements provided to Lender and no event has occurred
which may materially adversely affect Guarantor's financial condition; (h) no
litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Guarantor is pending or threatened;
(i) Lender has made no representation to Guarantor as to the creditworthiness of
Borrower; and (j) Guarantor has established adequate means of obtaining from
Borrower on a continuing basis information regarding Borrower's financial
condition. Guarantor agrees to keep adequately informed from such means of any
facts, events, or circumstances which might in any way affect Guarantor's risks
under this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral 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,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
<PAGE>
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, or any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and
agrees that each of the waivers set forth above is made with Guarantor's full
knowledge of its significance and consequences and that, under the
circumstances, the waivers are reasonable and not contrary to public policy or
law. If any such waiver is determined to be contrary to any applicable law or
public policy, such waiver shall be effective only to the extent permitted by
law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower through bankruptcy, by an assignment for the benefit of creditors,
by voluntary liquidation, or otherwise, the
<PAGE>
assets of Borrower applicable to the payment of the claims of both Lender and
Guarantor shall be paid to Lender and shall be first applied by Lender to the
Indebtedness of Borrower to Lender. Guarantor does hereby assign to Lender all
claims which it may have or acquire against Borrower or against any assignee or
trustee in bankruptcy of Borrower; provided however, that such assignment shall
be effective only for the purpose of assuring to Lender full payment in legal
tender of the Indebtedness. If Lender so requests, any notes or credit
agreements now or hereafter evidencing any debts or obligations of Borrower to
Guarantor shall be marked with a legend that the same are subject to this
Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby
is authorized, in the name of Guarantor, from time to time to execute and file
financing statements and continuation statements and to execute such other
documents and to take such other actions as Lender deems necessary or
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
Amendments. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Guaranty. No alteration of or amendment to this
Guaranty shall be effective unless given in writing and signed by the party
or parties sought to be charged or bound by the alteration or amendment.
Applicable Law. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Oregon. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of
Jackson County, State of Oregon. Subject to the provisions or arbitration,
this Guaranty shall be governed by and construed in accordance with the
laws of the State of Oregon.
Arbitration. Lender and Guarantor agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Guaranty 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 Guaranty 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. Guarantor agrees 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 Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
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'
<PAGE>
fees and legal expenses for bankruptcy proceedings (and including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Guarantor also shall pay
all court costs and such additional fees as may be directed by the court.
Notices. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimilie,
and, except for revocation notices by Guarantor, shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier, or when deposited in the United States mail, first class postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above or to such other addresses as either party may
designate to the other in writing. All revocation notices by Guarantor
shall be in writing and shall be effective only upon delivery to Lender as
provided above in the section titled "DURATION OF GUARANTY." If there is
more than one Guarantor, notice to any Guarantor will constitute notice to
all Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
Interpretation. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of
Borrower or Guarantor are corporations or partnerships, it is not necessary
for Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
Waiver. Lender shall not be deemed to have waived any rights under this
Guaranty 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 Guaranty 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 Guaranty. No prior waiver by Lender, nor
any course of dealing between Lender and Guarantor, shall constitute a
waiver of any of Lender's rights or of any of Guarantor's obligations as to
any future transactions. Whenever the consent of Lender is required under
this Guaranty, 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.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT THIS
GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS GUARANTY
TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE MANNER SET
FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL ACCEPTANCE BY
LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY IS DATED
SEPTEMBER 9, 1996.
<PAGE>
GUARANTOR:
X /s/ Sidney B. DeBoer
--------------------------------
Sidney B. DeBoer
LENDER:
United States National Bank of Oregon
By: [signature]
-----------------------------
Authorized Officer
<PAGE>
EXHIBIT 10.23.1
COMMERCIAL SECURITY AGREEMENT
PRINCIPAL: $6,000,000.00
LOAN DATE: 09-09-1996
MATURITY:
LOAN NO.:
CALL: FPA
COLLATERAL:
ACCOUNT: 5311162
OFFICER: 16245
INITIALS:
BORROWER: LITHIA MOTORS, INC.
360 E. JACKSON
MEDFORD, OR 97504
LENDER: UNITED STATES NATIONAL BANK OF OREGON
DEALER FINANCE DIVISION
131 E. MAIN
MEDFORD, OR 97501
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN LITHIA MOTORS, INC.
(REFERRED TO BELOW AS "GRANTOR"); AND UNITED STATES NATIONAL BANK OF OREGON
(REFERRED TO BELOW AS "LEADER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
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 Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
<PAGE>
COLLATERAL. The word "Collateral" means the following described property
of Grantor, whether now owned or hereafter acquired, whether now existing
or hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS AND GENERAL INTANGIBLES,
TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY: ALL
INVENTORY HELD FOR SALE OR LEASE, INCLUDING TRADE-INS,
REPOSSESSIONS, AND INVENTORY HELD FOR DISPLAY OR DEMONSTRATION
PURPOSES, NOW OWNED AND HEREAFTER ACQUIRED. ALL ACCOUNTS
RECEIVABLE, SPECIFICALLY ASSIGNMENT OF LEASE PROCEEDS. ALL
CHATTEL PAPER, INCLUDING BUT NOT LIMITED TO CONTRACTS AND LEASES
GENERATED FROM THE SALE OR LEASE OF ALL INVENTORY, NOW OWNED AND
HEREAFTER ACQUIRED. ALL REBATES, CREDITS, GENERAL INTANGIBLES,
FACTORY HOLDBACKS AND INCENTIVE PAYMENTS DUE OR TO BECOME DUE
FROM ANY FACTORY OR DISTRIBUTOR. ALL PRODUCTS AND PROCEEDS OF
ANY OF THE FOREGOING.
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means Lithia Motors, Inc., its successors and
assigns.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
LEADER. The word "Lender" means United Slates National Bank of Oregon, its
successors and assigns.
<PAGE>
NOTE. The word "Note" means the note or credit agreement dated
September 9, 1996, in the principal amount of $6,000,000.00 from Lithia
Motors, Inc. to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of and substitutions for
the note or credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor 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. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
ORGANIZATION. Grantor is a corporation which is duty organized, validly
existing, and in good standing under the laws of the state of Grantor's
incorporation. Grantor has its chief executive office at 360 E. Jackson,
Medford, OR 97504. Grantor will notify Lender of any change in the
location of Grantor's chief executive office.
AUTHORIZATION. The execution, delivery and performance of this Agreement
by Grantor have been duly authorized by all necessary action by Grantor and
do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws, or any agreement or other instrument binding upon Grantor or
(b) any law, governmental regulation, court decree, or order applicable to
Grantor.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue the security interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name, including any change to the assumed business names of
Grantor.
NO VIOLATION. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution,
<PAGE>
and all persons appearing to be obligated on the Collateral have authority
and capacity to contract and are in fact obligated as they appear to be on
the Collateral. At the time any account becomes subject to a security
interest in favor of Lender, the account shall be a good and valid account
representing an undisputed, bona fide indebtedness incurred by the account
debtor, for merchandise held subject to delivery instructions or
theretofore shipped or delivered pursuant to a contract of sale, or for
services theretofore performed by Grantor with or for the account debtor,
there shall be no setoffs or counterclaims against any such account and no
agreement under which any deductions or discount any be claimed shall have
been made with the account debtor except those disclosed to Lender in
writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased
by Grantor, (b) all real property being rented or leased by Grantor,
(c) all storage facilities owned, rented, leased, or being used by Grantor,
and (d) all other properties where Collateral is or may be located. Except
in the ordinary course of its business, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of Oregon, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who quality as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall
not pledge, mortgage, encumber or otherwise permit the Collateral to be
subject to any lien, security interest encumbrance, or charge, other than
the security interest provided for in this Agreement without the prior
written consent of Lender. This includes security interests even if junior
in right to the security interests granted under this Agreement. Unless
waived by Lender, all proceeds from any disposition of the Collateral (for
whatever reason) shall be held in trust for Lender and shall not be
commingled with any other funds; provided however, this requirement shall
not constitute consent by Lender to any sale or other disposition. Upon
receipt, Grantor shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
conveying any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often to Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation
<PAGE>
names and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory, Grantor
shall deliver to Lender, as often as Lender shall require, such lists,
descriptions, and designations of such Collateral as Lender may require to
identify the nature, extent and location of such Collateral. Such
information shall be submitted for Grantor and each of its subsidiaries or
related companies.
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part 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. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral; of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement upon any promissory note or notes evidencing the indebtedness, or
upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement________________
_________________________________of any hazardous waste or substance, as
those terms are defined in the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, 42 U.S.C.
Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing or intended to protect human health or the environment
("Environmental Laws"). The terms "hazardous waste" and "hazardous
substance" shall also include, without limitation, petroleum and petroleum
by-products or any fraction thereof and asbestos. The representations and
warranties contained herein are based on Grantor's due diligence in
investigating the Collateral for hazardous wastes and substances. Grantor
hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Grantor becomes liable for cleanup
or other costs under any Environmental Laws, and (b) agrees to indemnify
and hold harmless Lender against any and all claims and losses resulting
<PAGE>
from a breach of this provision of this Agreement, or as a result of a
violation of any Environmental Laws. This obligation to indemnify shall
survive the payment of the indebtedness and the satisfaction of this
Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the Insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance," which will cover only Lender's
interest in the Collateral.
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
indebtedness, and shall pay the balance to Grantor. Any proceeds which
have not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are insufficient
Grantor shall upon demand pay any deficiency to Lender. The reserve funds
shall be had by Lender as a general deposit and shall constitute a non-
interest-bearing account which Lender may satisfy by payment of the
insurance premiums required to be paid by Grantor as they become due.
Lender does not hold the reserve funds in trust for Grantor, and Lender is
not the agent of Grantor for payment of the insurance premiums required to
be paid by Grantor. The responsibility for the payment of premiums shall
remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request including the following:
(a) the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have
<PAGE>
an independent appraiser satisfactory to Lender determine, as applicable,
the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts and above in the paragraph
titled "Transactions Involving Collateral", Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. Until
otherwise notified by Lender, Grantor may collect any of the Collateral
consisting of accounts. At any time and even though no Event of Default exists,
Lender may exercise its rights to collect the accounts and to notify account
debtors to make payments directly to Lender for application to the Indebtedness.
If Lender at any time has possession of any Collateral, whether before or after
an Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, nor to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to date of repayment by Grantor. All such expenses
shall become a part of the Indebtedness and, at Lenders option, will (a) be
payable on demand, (b) be added to the balance of the Note and be apportioned
among and be payable with any installment payments to become due during either
(i) the term of any applicable Insurance policy or (ii) the remaining term of
the Note, or (c) be treated as a balloon payment which will be due and payable
at the Note's maturity. This Agreement also will secure payment of these
amounts. Such right shall be in addition to all other rights and remedies to
which Lender may be entitled upon the occurrence of an Event of Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement.
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due
on the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other note, security agreement,
lease agreement or lease schedule, loan agreement or other agreement
whether now existing or hereafter made, between Grantor and U.S. Bancorp or
any direct or indirect subsidiary of U.S. Bancorp.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
<PAGE>
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
proceeding under any bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Oregon Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all
or any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If
the collateral contains other goods not covered by this Agreement at the
time of repossession, Grantor agrees Lender may take such other goods,
provided that Lender makes reasonable efforts to return them to Grantor
after repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease,
transfer, or otherwise deal with the Collateral or proceeds thereof in its
own name or that of Grantor. Lender may sell the Collateral at public
auction or private sale. Unless the Collateral threatens to decline
speedily in value or is of a type customarily sold on a recognized market,
Lender will give Grantor reasonable notice of to time after which any
private sale or my other intended disposition of the Collateral is to be
made unless Grantor has signed, after an Event of Default occurs, a
statement renouncing or modifying Grantor's right to notification of sale.
The requirements of reasonable notice shall be met if such notice is given
at least ten (10) days before the time of the sale or
<PAGE>
disposition. All expenses relating to the disposition of the Collateral,
including without limitation the expenses of retaking, holding, insuring,
preparing for sale and selling the Collateral, shall become a part of the
Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference a Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, chosen in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor change any address to which mail and payments we to
want and endorsement notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account
debtors and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies
of a secured creditor under the provisions of the Uniform Commercial Code,
as may be amended from time to time. In addition, Lender shall have and my
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement, after
Grantor's failure to perform, shall not affect Lender's right to declare a
default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
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 given in writing and signed by me party
or parties sought to be charged or bound by the alteration or amendment.
<PAGE>
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted
by Lender in the State of Oregon. If there is a lawsuit, Grantor agrees
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.
ARBITRATION. Lender and Grantor 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
CUT OFF ON HARD COPY
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. Grantor agrees 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 Grantor
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 expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay so court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATION AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the Borrowers
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimilie, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giving formal
<PAGE>
written notice to the other parties, specifying that the purpose of the
notice is to change the party's address. To the extent permitted by
applicable law, if there is more than one Grantor, notice to any Grantor
will constitute notice to all Grantors. For notice purposes, Grantor will
keep Lender, informed at all times of Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
raising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
PREFERENCE PAYMENTS. Any monies Lender pays because of an asserted
preference claim in borrowees bankruptcy will become a part of the
Indebtedness and, at Lender's option, shall be payable by Borrower as
provided above in the "EXPENDITURES BY LENDER" paragraph.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits
of enforceability or validity; however, if the offending provision cannot
be so modified, it shall be stricken and all other provisions of this
Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the irritations set forth above on
transfer of the Collateral, this Agreement shall be binding upon and inure
to the benefit of the parties, their successors and assigns.
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 Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor'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.
WAIVER OF CO-OBLIGOR'S RIGHTS. If more than one person is obligated for
the Indebtedness, Borrower irrevocably waives, disclaims and relinquishes
all claims against such other person which Borrower has or would otherwise
have by virtue of payment of the indebtedness or any part thereof,
specifically including but not limited to all rights of indemnity,
contribution or exoneration.
SPECIAL PROVISIONS:
<PAGE>
The above collateral is pledged to secure the obligations of Lithia Motors,
Inc. evidenced by a note dated 9/9/96 in the amount of $6,000,000.00
payable to the United States National Bank of Oregon.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL
SECURITY AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS
DATED SEPTEMBER 9, 1996.
GRANTOR:
Lithia Motors, Inc.
By:
-------------------------------------------------------
Lithia Motors, Inc., By: Sidney B. DeBoer, President
By:
-------------------------------------------------------
Lithia Grants Pass Auto Center, L.L.C.,
By: Lithia Motors, Inc. Managing Member
By: Sideny 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
By:
-------------------------------------------------------
Lithia Leasing, Inc., By: Sidney B. DeBoer, President
By:
-------------------------------------------------------
Lithia Leasing, Inc., By: Sidney B. DeBoer, President
By:
-------------------------------------------------------
Lithia Properties, L.L.C., By: Sidney B. DeBoer,
Managing Member
LENDER:
United States National Bank of Oregon
By:
-----------------------------------
Authorized Officer
<PAGE>
EXHIBIT 11.1
LITHIA MOTORS, INC.
CALCULATIONS OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31, Nine Month Period Ended September 30,
---------------------------- ---------------------------------------------------------
1995 1995 1996
---------------------------- ---------------------------- ---------------------------
Primary Fully Diluted Primary Fully Diluted Primary Fully Diluted
---------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Shares
Outstanding for the Period 4,110,000 4,110,000 4,110,000 4,110,000 4,110,000 4,110,000
S. Corp. Termination (Note 1) 367,857 367,857 367,857 367,857 367,857 367,857
Shares Added Pursuant to
SAB 83 (Note 2) 341,545 341,545 341,545 341,545 341,545 341,545
----------- ----------- ----------- ----------- ----------- ------------
Total Shares Used for Per
Share Calculations 4,819,402 4,819,402 4,819,402 4,819,402 4,819,402 4,819,402
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
Net Income $ 2,076,000 $ 2,076,000 $ 1,628,000 $ 1,628,000 $ 1,713,000 $ 1,713,000
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
Net Income Per Share $ .43 $ .43 $ .34 $ .34 $ .36 $ .36
----------- ----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ----------- ------------
</TABLE>
Note 1: Reflects shares issued to pay S Corp. earnings dividend of
approximately $5,150,000 to shareholderS.
Note 2: Amount is calculated using the "Treasury Stock Method" using the
expected initial offering price per share of the Company's Common Stock.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF LITHIA MOTORS, INC.
<TABLE>
<CAPTION>
Name of Jurisdiction Names under which
Subsidiary of Incorporation Business is Conducted
- ---------- ----------------- ---------------------
<S> <C> <C>
LGPAC, Inc. Oregon LGPAC, Inc.
Lithia's Grants Pass Auto Oregon Lithia's Grants Pass Auto Center;
Center, L.L.C. Grants Pass Tire & Wheel;
Xpress Lube
Lithia DM, Inc. Oregon Lithia DM, Inc.
Lithia Dodge, L.L.C. Oregon Lithia Dodge; Lithia Mazda
Lithia Chrysler Plymouth Oregon Lithia Dodge Chry Ply Jeep Eagle;
Jeep Eagle, Inc. Lithia Chrysler Plymouth
Lithia MTLM, Inc. Oregon Lithia MTLM, Inc.
Lithia TLM, L.L.C. Oregon Lithia Lincoln Mazda;
Lithia Toyota Lincoln Mercury
Lithia HPI, Inc. Oregon Lithia Isuzu;
Lithia Pontiac Oldsmobile GMC
Lithia SSO, Inc. Oregon Saturn of Southwest Oregon
Lithia Financial Corporation Oregon Lithia Financial Corporation;
Lithia Leasing; Lithia Credit
Lithia Rentals, Inc. Oregon Discount Rent-A-Car
Avis Rent-A-Car
Lithia Auto Services, Inc. Oregon Lithia Body & Paint;
Thrift Auto Supply
Lithia TKV, Inc. California Lithia Toyota;
Lithia Kia
Lithia HS, Inc. California Lithia Honda
Lithia DE, Inc. Oregon Lithia Dodge
Lithia Real Estate, Inc. Oregon Lithia Real Estate, Inc.
</TABLE>
<PAGE>
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
November 22, 1996
-80-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Roberts Dodge, Inc. and Affiliated Company
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
November 22, 1996
<PAGE>
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 November 22, 1996 for the registration of Common Stock.
Moss Adams LLP
Seattle, Washington
November 22, 1996
<PAGE>
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 October 25, 1996 on our audits of the financial
statements of Melody Vacaville, Inc. in the Lithia Motors, Inc. Registration
Statement (No. 333-14031) dated November 22, 1996 for the registration of
Common Stock.
Moss Adams LLP
Seattle, Washington
November 22, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS AT AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 9,822
<SECURITIES> 0
<RECEIVABLES> 2,827
<ALLOWANCES> 0
<INVENTORY> 15,517
<CURRENT-ASSETS> 32,986
<PP&E> 1,269
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,922
<CURRENT-LIABILITIES> 23,040
<BONDS> 10,565
0
0
<COMMON> 801
<OTHER-SE> 2,279
<TOTAL-LIABILITY-AND-EQUITY> 37,922
<SALES> 105,566
<TOTAL-REVENUES> 105,566
<CGS> 87,306
<TOTAL-COSTS> 101,780
<OTHER-EXPENSES> (355)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,013
<INCOME-PRETAX> 2,804
<INCOME-TAX> 0<F1>
<INCOME-CONTINUING> 2,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,804
<EPS-PRIMARY> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Company is an S-Corporation
<F2>not meaningful
</FN>
</TABLE>
