<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
____________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21789
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0572810
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
360 E. JACKSON STREET, MEDFORD, OREGON 97501
(Address of principal executive offices) (Zip Code)
541-776-6899
____________________
(Registrant's telephone number including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
CLASS A COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
____________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $25,773,750 as of February 28, 1997 based upon the last sales
price ($10.875) as reported by the Nasdaq National Market System.
The number of shares outstanding of the Registrant's Common Stock as of
February 28, 1997 was: Class A: 2,895,550 shares and Class B: 4,110,000
shares.
The Index to Exhibits appears on page 22 of this document.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K, by reference,
portions of its Information Statement, relating to the 1997 Annual Meeting of
Shareholders.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
LITHIA MOTORS, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 21
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 22
Signatures 26
1
<PAGE>
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10-K contains forward looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward looking statements as a
result of certain risk including those set forth in the Company's initial
public offering prospectus dated December 18, 1996. These risk factors
include, but are not limited to, the cyclical nature of automobile sales, the
intense competition in the automobile retail industry and the Company's
ability to negotiate profitable acquisitions and secure manufacturer
approvals for such acquisitions.
INTRODUCTION
Lithia Motors, Inc. (the "Company" or "Lithia"), an Oregon corporation,
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.
Lithia is one of the larger retailers of new and used vehicles in the western
United States, offering 16 domestic and imported makes of new automobiles and
light trucks at eight 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 percent. The
Company has agreed to acquire certain assets and dealership operations from
Magnussen Dodge Isuzu in Concord, California, and Magnussen - Barbee Ford,
Lincoln Mercury in Napa, California.
DEALERSHIP OPERATIONS
The Company owns and operates eight dealership locations in Oregon, five in
Medford and one each in Grants Pass and Eugene, Oregon and one 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
comprises middle-income customers seeking moderately-priced vehicles. The
Company offers 16 makes of new vehicles, including Chrysler, Toyota,
Plymouth, Dodge, Jeep/Eagle, Honda, Saturn, Mazda, Pontiac, Lincoln, Mercury,
Isuzu, Suzuki, Kia and Volkswagen.
NEW VEHICLE SALES. The Company sells 16 domestic and imported brands ranging
from economy to luxury cars, as well as sport utility vehicles, minivans and
light trucks. 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 also exchanges vehicles with other
dealers from time to time 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 final sales price
does not deviate from the posted price. The Company is
2
<PAGE>
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. 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.
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 Financing and Insurance ("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
3
<PAGE>
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.
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 a minimal number
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 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.
4
<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
effects 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,
through an affiliate, is constructing a new 39,480 square-foot body and paint
facility 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.
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 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.
5
<PAGE>
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,
the Company believes that approximately 75 percent 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.
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
6
<PAGE>
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.
COMPETITION
The new and used automobile dealership business in which the Company operates
is highly competitive. The automobile dealership industry is fragmented and
characterized by a large number of independent operators, many of whom are
individuals, families and small groups. In the sale of new vehicles, the
Company principally competes with other new automobile dealers in the same
general vicinity of the Company's dealership locations. Such competing
dealerships may offer the same or different models and makes of vehicles that
the Company sells. In the sale of used vehicles, the Company principally
competes with other used automobile dealers and with new automobile dealers
that operate used automobile lots in the same general vicinity of the
Company's dealership locations. The Company believes that there are
approximately 14 other new automobile dealerships and 66 other used
automobile stores within a 50-mile radius of Medford, Oregon, near which all
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.
7
<PAGE>
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.
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 percent of the customs value of the
automobiles imported, as classified pursuant to the Harmonized Tariff
Schedule of the United States.
8
<PAGE>
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.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 420 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. The Company
believes it has a good relationship with its employees.
ITEM 2. PROPERTIES
The Company and its various dealerships and other facilities occupy an
aggregate of approximately 39 acres of land, providing approximately 283,000
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, Lithia Dodge of Eugene, in
Eugene, Oregon and Lithia Toyota Kia of Vacaville, located in Vacaville,
California. The Vacaville and the Avis Rent-A-Car facilities and minor
parcels of land are leased from third parties and the new body and paint
facility, the vacant parcel to be held for future expansion and the Lithia
Dodge of Eugene facility are owned by the Company. All other facilities are
leased from Lithia Properties, LLC, an Oregon limited liability company owned
by certain affiliates of the Company.
9
<PAGE>
TOTAL TOTAL
BUILDING/ LAND/
DEALERSHIP/FACILITY SQUARE FT. ACRES
- ------------------- ---------- -----
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 Dodge of Eugene 24,996 3.68
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
___________
(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. Expected to be occupied Spring 1997.
(3) Held for future development.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during the
quarter ended December 31, 1996.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock trades on The Nasdaq National Market
System under the symbol LMTR. The high and low sales prices of the Company's
Common Stock for the period from December 18, 1996 (the date of the Company's
initial public offering) through December 31, 1996 were as follows:
1996 High Low
- ------------------------------------ ------ ------
Quarter 4 (from December 18, 1996) $11.50 $10.94
The number of shareholders of record of the Company's Class A Common Stock at
February 28, 1997 was 36. All shares of the Company's Class B Common Stock
is held by Lithia Holding Company LLC. There were no cash dividends declared
or paid subsequent to the Company's initial public offering in December 1996.
The Company does not anticipate declaring cash dividends in the foreseeable
future.
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 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Sales
New vehicles $ 65,093 $ 53,277 $ 51,154 $ 42,663 $ 34,479
Used vehicles 58,609 44,061 42,381 34,986 29,930
Other operating revenues 19,142 16,858 15,888 14,590 15,030
-------- -------- -------- -------- --------
Total sales 142,844 114,196 109,423 92,239 79,439
Cost of sales 118,647 93,132 90,324 74,780 65,417
-------- -------- -------- -------- --------
Gross profit(1) 24,197 21,064 19,099 17,459 14,022
Selling, general and administrative(2) 20,277 16,735 15,174 15,122 14,124
-------- -------- -------- -------- --------
Operating income (loss) 3,920 4,329 3,925 2,337 (102)
Interest income 193 179 99 216 161
Interest expense (1,353) (1,390) (954) (1,374) (743)
Other income, net 1,156 1,035 902 607 1,200
-------- -------- -------- -------- --------
Income before minority interest and
income taxes 3,916 4,153 3,972 1,786 516
Minority interest in earnings (687) (778) (458) (233) (168)
-------- -------- -------- -------- --------
Income before taxes 3,229 3,375 3,514 1,553 348
Income tax benefit 813 -- -- -- --
-------- -------- -------- -------- --------
Net income(1)(2) 4,042 3,375 3,514 1,553 348
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PRO FORMA CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Income before taxes and minority interest,
as reported $ 3,916 $ 4,153 $ 3,972 $ 1,786
Pro forma provision for taxes(3) (1,521) (1,598) (1,521) (697)
Pro forma minority interest (421) (479) (283) (142)
-------- -------- -------- --------
Pro forma net income 1,974 2,076 2,168 947
-------- -------- -------- --------
-------- -------- -------- --------
Pro forma net income per share $ 0.40 $ 0.42
-------- --------
-------- --------
Shares used in per share calculations(4) 4,973 4,893
-------- --------
-------- --------
CONSOLIDATED BALANCE SHEET DATA
Working capital $ 20,221 $ 5,026 $ 6,034 $ 13 $ 1,369
Total assets 63,754 39,578 36,659 33,381 24,955
Long-term debt, less current maturities 6,160 10,743 6,748 3,789 4,012
Total shareholders' equity 24,736 851 2,80 31,184 1,238
</TABLE>
(1) The Company utilizes and reports on the LIFO (Last In - First Out)
method of accounting. The industry standard is to utilize the specific
identification method of accounting for vehicles and the FIFO (First In -
First Out) method of accounting for parts (collectively referred to as
the "FIFO Method"). If the Company utilized the FIFO Method, gross
profit for the five years ended December 31, 1996 would have been $24.5
million, $20.6 million, $19.7 million, $18.0 million and $14.5,
respectively. Net income for the five years ended December 31, 1996
would have been $4.4 million, $2.9 million, $4.1 million, $2.1 million
and $733,000, 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 ($1.0
million in 1993 and $640,000 in 1992), 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 1992 and
1993 should be adjusted to eliminate such bonus payments.
(3) The Company was an S Corporation prior to December 18, 1996 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 Notes 1 and 10 to the Company's Consolidated Financial Statements.
(4) See Note 1 to the Company's Consolidated Financial Statements for the
calculation of weighted average shares outstanding.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto included elsewhere in this
Form 10-K.
GENERAL
Lithia Motors is one of the larger retailers of new and used vehicles in the
western United States, offering 16 domestic and imported makes of new
automobiles and light trucks at eight 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
percent. The Company has grown primarily by successfully acquiring and
integrating dealerships and by obtaining new dealer franchises. The Company's
strategy is to become a leading acquirer 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 (1996 data is not yet available).
YEAR ENDED DECEMBER 31,
AVERAGE U.S. DEALERSHIP -----------------------
STATEMENT OF OPERATIONS DATA: 1995 1994
-------- --------
Sales:
New vehicles 58.6% 60.3%
Used vehicles 29.0 26.9
Parts and service, other 12.4 12.8
-------- --------
Total sales 100.0% 100.0%
Gross profit 12.9 13.1
Total dealership expense 11.5 11.3
Income before taxes 1.4% 1.8%
________
Source: AUTOMOTIVE EXECUTIVE/August 1996; NADA Industry Analysis Division
THE COMPANY
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. Immediately before the completion of the
Company's initial public offering on December 18, 1996 and in connection with
its restructuring, the Company and its affiliated entities that were S
Corporations terminated their status as S Corporations and became 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.
13
<PAGE>
The Company utilizes the LIFO (Last In-First Out) method of accounting for
inventory ("LIFO Method"). Industry standard is to use 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"). For industry comparability purposes, the following
discussion and analysis of financial condition and results of operations
includes references to both the LIFO and FIFO Methods of accounting.
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.
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles 45.6% 46.6% 46.8%
Used vehicles 41.0 38.6 38.7
Parts and service 9.2 9.6 9.1
Finance, insurance and other 4.2 5.2 5.4
-------- -------- --------
Total sales 100.0% 100.0% 100.0%
Gross profit 16.9 18.4 17.5
Selling, general and administrative 14.2 14.6 13.9
-------- -------- --------
Operating income 2.7 3.8 3.6
Other income (expense), net -- (0.2) 0.0
-------- -------- --------
Income before taxes and minority
interest 2.7% 3.6% 3.6%
-------- -------- --------
-------- -------- --------
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.
14
<PAGE>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
-------- -------- --------
STATEMENT OF OPERATIONS DATA:
Total sales 100.0% 100.0% 100.0%
Gross profit(1) 17.2 18.1 18.0
Selling, general and administrative 14.2 14.7 13.9
-------- -------- --------
Operating income(1) 3.0 3.4 4.1
Other income (expense), net -- (0.2) 0.1
-------- -------- --------
Income before taxes and minority
interest(1) 3.0% 3.2% 4.2%
-------- -------- --------
-------- -------- --------
(1) Using the FIFO Method of accounting for inventory to permit comparisons
to U.S. industry data.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
Net sales for the Company increased $28.6 million, or 25 percent, to $142.8
million for the year ended December 31, 1996 from $114.2 million for 1995.
Total vehicles sold during 1996 increased by 1,921, or 24 percent, to 9,780
in 1996 from 7,859 during 1995. The increase in sales was primarily from
increased new and used vehicle unit sales as a result of increased levels of
promotional activity for certain popular brands, increased availability of
late model used vehicles (both retail and wholesale) which were in high
demand and, although to a lesser extent, from increased average per unit
sales prices on both new and used vehicles. Sales in the third and fourth
quarters of 1996 were also slightly higher due to a hail storm that mildly
damaged vehicles in the Company's lots in and around Medford, Oregon. Such
vehicles were sold at reduced prices, increasing unit sales, but decreasing
the gross margin percentage.
NEW VEHICLE SALES. The Company sells 16 domestic and imported brands ranging
from economy to luxury cars, as well as sport utility vehicles, minivans and
light trucks. In 1996 and 1995, the Company sold 3,272 and 2,715 new
vehicles, generating revenues of $65.1 million and $53.2 million, which
constituted 45.6 percent and 46.6 percent of the Company's total revenues,
respectively. The gross profit margin achieved by the Company (on the FIFO
Method) on new vehicle sales during 1996 and 1995 was 13.1 percent and 12.8
percent, respectively. 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 percent in 1991 to 6.5 percent in 1995.
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.
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
15
<PAGE>
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 1996 and
1995, the Company sold 6,508 and 5,144 used vehicles generating revenues of
$58.6 million and $44.1 million, which constituted 41.0 percent and 38.6
percent of the Company's total revenue, respectively. 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. 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 sales was 13.4 percent in 1996 and 13.5 percent in
1995, as compared to the industry average for 1995 of 11.5 percent.
SERVICE, BODY, PARTS AND OTHER. The Company's service, body, parts and other
operating revenue increased 13.0 percent to $19.1 million during 1996, from
$16.9 million during 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. 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.
GROSS PROFIT. Gross profit (on the LIFO Method) increased 14.9 percent
during 1996 to $24.2 million, compared with $21.1 million for 1995, primarily
due to an increase in new and used vehicle unit sales during the period.
Gross profit margin decreased to 16.9 percent for 1996 from 18.5 percent for
1995. The decrease in gross profit margins is primarily due to a reduction in
gross profit margins on used vehicle sales, mostly caused by a shift in the
overall mix of vehicles sold, with an increase in wholesale vehicles, which
typically provide profit margins of only 2 percent to 3 percent. 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. The Company's gross profit
margins continue to exceed industry standards and remain in line with
historical gross profit margins.
Gross profit (on the FIFO Method) increased 18.9 percent during 1996 to $24.5
million, compared with $20.6 million for 1995, primarily because of the
increase in new and used vehicle unit sales during the period. Gross profit
margin decreased to 17.2 percent for 1996 from 18.1 percent for 1995. The
decrease in gross profit margins is primarily due to a reduction in gross
profit margins on used vehicle sales, mostly caused by a shift in the
16
<PAGE>
overall mix of vehicles sold, with an increase in wholesale vehicles, which
typically provide profit margins of only 2 percent to 3 percent.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's SG&A expense
increased $3.6 million, or 21.6 percent, to $20.3 million for 1996 compared
to $16.7 million for 1995. SG&A as a percentage of sales decreased to 14.2
percent for 1996 from 14.7 percent for 1995. 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 acquisitions.
INTEREST EXPENSE. The Company distributed to the Principal Owners promissory
notes ("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 Company's interest expense
remained stable at $1.4 million for 1996 and 1995 as a result of such
increase in the Dividend Notes outstanding for 1996, offset by a decrease in
interest rates during 1996.
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 14.9 percent to $1.1 million for
1996 from $1.0 million for 1995. This increase was primarily due to insurance
proceeds received in 1996 related to damage caused by a hail storm.
INCOME TAX BENEFIT. 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. Immediately
before the completion of the Company's initial public offering on December
18, 1996 and in connection with its restructuring, the Company and its
affiliated entities that were S Corporations terminated their status as S
Corporations and became subject to federal and state income tax at applicable
C Corporation rates. As a result of the conversion from S Corporation status
to C Corporation status in December 1996, the Company recorded a deferred tax
asset of $906,000 and a corresponding benefit of $906,000 to income taxes in
the fourth quarter of 1996.
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.
NET INCOME. 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 $314,000 and $(426,000) for the years ended
December 31, 1996 and 1995, respectively, from the reported results under the
LIFO Method.
17
<PAGE>
1995 COMPARED TO 1994
REVENUES. Revenue increased $4.8 million, or 4.4 percent, to $114.2 million
in 1995 from $109.4 million in 1994. New vehicle revenue increased 4.2
percent, while used vehicle revenue increased 4.0 percent. 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 percent. Industry and Company unit
sales were essentially flat from 1994 to 1995.
The Company's other operating revenue increased 6.1 percent 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 percent in
1995 to $21.1 million from $19.1 million in 1994. Gross profit margin
increased to 18.4 percent in 1995 from 17.5 percent in 1994. 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 percent in 1995 to $20.6
million from $19.7 million in 1994. Gross profit margin, at 18.1 percent, 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 $1.5 million, or 10.3 percent, to $16.7 million, or 14.7 percent of
the Company's revenue, in 1995, from $15.2 million, or 13.9 percent of the
Company's revenues, in 1994. A reserve for workers' compensation claims,
expense associated with compensation, primarily from salaries and bonuses for
the Company's managers, and, to a lesser extent, an increase in advertising
expense accounted for a significant portion of the increase.
INTEREST EXPENSE. The Company's interest expense in 1995 increased 41.6
percent to $1.4 million from $954,000 in 1994. The increase was due primarily
to an increase in the Company's average loan balances in 1995 as compared to
1994, and, to a lesser extent, an increase in interest rates on borrowed
funds. Loan balances increased to support increased flooring of inventory,
vehicles leased to others and notes to 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 percent to $1.0 million for
1995 from $902,000 in the prior year. This increase is attributable primarily
to receipt of a judgment in a lawsuit brought by the Company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996 the Company had working capital of $20.2 million, which
included $15.4 million of cash. The $5.7 million increase in cash is mainly
as a result of $24.2 million, net of associated expenses, provided by the
issuance of the Company's Class A Common Stock in its initial public offering
on December 18, 1996, $1.5 million provided by operations, offset by $6.9
million used for acquisitions, $7.6 million net payments on long-
18
<PAGE>
term debt and $6.4 million for the distribution of dividends. The current
ratio at December 31, 1996 and 1995 was 1.7:1 and 1.2:1, respectively.
Inventories increased $10.5 million to $28.2 million at December 31, 1996
from $17.7 million at December 31, 1995 due primarily to the increase in the
number of dealerships to 8 at December 31, 1996 from 6 at December 31, 1995,
as well as same store growth.
The Company's principal needs for capital resources are to finance
acquisitions, capital expenditures and increased working capital
requirements. Historically, the Company has relied primarily upon internally
generated cash flows from operations, borrowings under its credit facility
and borrowings from its shareholders to finance its operations and expansion.
The Company currently has a credit facility with U.S. Bank, giving the
Company access to an aggregate of approximately $44.7 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 December 31, 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.
Management believes that the Flooring Line provides the Company with
financing at rates lower than those available from manufacturers. At
December 31, 1996, there was approximately $8.3 million available to the
Company under the Flooring Line.
The credit facility provides a $7.5 million line of credit to finance the
purchase of vehicles used in the Company's fleet leasing and automobile
rental businesses, at up to 105% of invoice for new vehicles, and 100% of
KELLY WHOLESALE BLUE BOOK price for used vehicles. This line of credit bears
interest at prime plus 1.0% for fleet leases, and at prime plus 0.25% for
rental vehicles. For either program, used vehicles over two years old are
financed at prime plus 1.5%. An additional $1.0 million is available under
the credit facility 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). The borrowings under
this line of credit, $5.2 million at December 31, 1996, bear interest at
prime plus 0.75% (9.0% at December 31, 1996). 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 totaled $126,000 at
December 31, 1996 and bear interest at prime plus 0.5% (8.75% at December 31,
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
19
<PAGE>
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 December 31, 1996, there
were no borrowings under the Capital Line.
Long-term debt, including current portion, decreased $4.8 million to $8.0
million at December 31, 1996 from $12.8 million at December 31, 1995,
primarily as a result of payments made to shareholders and other affiliated
parties related to prior undistributed Subchapter S earnings. At December
31, 1996, long-term debt, including current portion, consisted of $1.8
million real estate loan for Lithia Dodge of Eugene, Oregon, $5.7 million for
vehicles leased to others and $500,000 for equipment notes.
Capital expenditures, exclusive of acquisitions, were $395,000 in 1996. The
principal capital expenditures in 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
currently pending acquisitions. 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.
TOTAL ESTIMATED
ACQUISITIONS PURCHASE PRICE
- ------------ -----------------
Magnussen Dodge Isuzu $7,900,000
Magnussen - Barbee Ford, Lincoln Mercury $6,900,000
The Company anticipates that it will be able to satisfy its cash requirements
through December 31, 1997, including its currently anticipated growth,
primarily with cash flow from operations, borrowings under the Flooring Line
and the Company's other lines of credit and the proceeds from its initial
public offering in December 1996. However, if acquisition opportunities
exceed current projections, further capital could be required.
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 years 1996 and
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.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA
The financial statements and notes thereto required by this item are included
on pages F-1 through F-26 as listed in Item 14 of Part IV of this document.
Quarterly financial data, on the LIFO Method, pro forma for income taxes, for
each of the eight quarters in the two year period ended December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ----------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
- ----
Net sales $32,446 $36,680 $36,440 $37,278
Gross profit 5,481 5,975 6,804 5,937
Income before minority interest and
taxes as reported 819 1,084 1,528 485
Pro forma income taxes 319 422 594 186
Pro forma net income before minority
interest 500 662 934 299
Pro forma net income per share -
LIFO Method 0.10 0.13 0.19 0.06
1995
- ----
Net sales $27,118 $27,278 $31,526 $28,274
Gross profit 4,854 4,909 5,792 5,509
Income before minority interest and
taxes as reported 1,124 745 1,392 892
Pro forma income taxes 432 287 536 343
Pro forma net income before minority
interest 692 458 856 549
Pro forma net income per share -
LIFO Method 0.18 0.12 0.20 0.11
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OF THE REGISTRANT
Information required by this item is included under the captions ELECTION OF
DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE, respectively in the Company's information Statement for
its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
21
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption EXECUTIVE
COMPENSATION in the Company's Information Statement for its 1997 Annual
Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's
Information Statement for its 1997 Annual Meeting of Shareholders and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is included under the caption CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Information Statement
for its 1997 Annual Meeting of Shareholders and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The Consolidated Financial Statements, together with the report thereon of
KPMG Peat Marwick LLP, are included on the pages indicated below:
Page
----
Report of Independent Public Accountants F-1
Consolidated Balance Sheets - December 31, 1996 and 1995 F-2
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-3
Consolidated Statements of Changes in Shareholders'
Equity - December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-5
Notes to Consolidated Financial Statements F-6
22
<PAGE>
FINANCIAL STATEMENT SCHEDULES
None.
EXHIBITS
The following exhibits are filed herewith:
Exhibit No. Description
- ----------- -----------------------------------------------------------------
*3.1 Restated Articles of Incorporation of Lithia Motors, Inc.
*3.2 Bylaws of Lithia Motors, Inc.
*4.1 Specimen Common Stock certificate
*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
10.5.3 Supplemental Agreement, dated December 27, 1996, to Isuzu Dealer
Sales and Service Agreement.
*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
*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 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 (12)
*10.10.2 Toyota Dealer Agreement Standard Provisions (12)
*10.10.3 Agreement, dated September 30, 1996, between Toyota Motor Sales,
U.S.A., Inc. and Lithia Motors, Inc.
23
<PAGE>
Exhibit No. Description
- ----------- -----------------------------------------------------------------
10.10.4 Addendum, dated December 23, 1996, to Section X - Additional
Provisions to Toyota Dealer Agreement dated November 15, 1996
between Toyota Motor Sales, USA, Inc. and Lithia TKV, Inc.
*10.11 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, effective January 1, 1997, between Lithia
Properties, L.L.C. and Lithia Motors, Inc. (3)
10.12.2 First Amendment to Lease Agreement, dated February 7, 1997,
between Lithia Properties, L.L.C. and Lithia Motors (3)
*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 Purchase and Sale Agreement between Lithia Motors, Inc. and Sam
Linder, Inc.
*10.15.1 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 (4)
*10.15.2 Promissory Note by Lithia Motors, Inc. to United States
National Bank of Oregon in the amount of $6.0 million (5)
*10.15.3 Promissory Note by Lithia Leasing, Inc. to United States
National Bank of Oregon in the amount of $1.4 million (6)
*10.16.1 Promissory Note between Lithia Motors, Inc. and Sidney B.
DeBoer in the amount of $500,000 (7)
*10.16.2 Subordination Agreement between Lithia Motors, Inc., Sidney B.
DeBoer and United States National Bank (8)
*10.17.1 Floor Plan Accommodation Agreement (Security Agreement) between
Lithia Motors, Inc. and United States National Bank of Oregon (9)
*10.17.2 Corporate Resolution to Guarantee of Lithia Motors, Inc. (10)
*10.18 Commercial Guaranty under which Sidney B. DeBoer is the
guarantor of obligations of Lithia Motors, Inc. to United
States National Bank of Oregon (11)
*10.19 Management Contract between Lithia Leasing, Inc. and Lithia
Properties LLC.
*10.20 Commercial Security Agreement, dated September 9, 1996, between
Lithia Motors, Inc. and United States National Bank
*10.21 Purchase and Sale Agreement, dated December 13, 1996, between
Lithia Properties and Lithia Real Estate, Inc.
*10.22 Commercial Lease, dated April 1, 1992, between Billy J. Wilson
et al and Wilson/Malasoma, Inc. relating to facility in
Vacaville, California.
10.23 Agreement for Purchase and Sale of Business Assets, between the
Company and Magnussen-Barbee Ford, Lincoln-Mercury, Inc., dated
February 21, 1997.
11 Statement re Computation of Per Share Earnings
*21 Subsidiaries of Lithia Motors, Inc.
23 Consent of KPMG Peat Marwick LLP relating to Lithia Motors, Inc.
27 Financial Data Schedule
24
<PAGE>
* Incorporated by reference to the Company's Registration Statement on Form
S-1, Registration Statement No. 333-14031, as declared effective by the
Securities and Exchange Commission on December 18, 1996.
(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, and between Chrysler Corporation and
Lithia DC, Inc. 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 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 at 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 E. Bartlett, and 401 E. 4th St.,
collectively at a lease rate of $5,309 per month.
(4) Substantially identical notes exist between the same parties in amounts
of $2.0 million, $2.5 million, and $5.0 million.
(5) A substantially identical note exists between the same parties in the
amount of $400,000.
(6) Substantially identical notes exist between the same parties in amounts
of $750,000, and $1.0 million.
(7) A substantially identical note exists between Lithia Motors, Inc. and
Manfred L. Heimann in the same amount
(8) A substantially identical agreement exists between Lithia Motors, Inc.
and Manfred L. Heimann
(9) 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.
(10) A substantially identical guarantee exists under which Lithia's Grants
Pass Auto Center, L.L.C. is the Guarantor.
(11) A substantially identical guaranty exists under which Manfred L. Heimann
is the Guarantor of Lithia Motors, Inc.
(12) A substantially identical agreement exists between Toyota Motor Sales,
USA, Inc. and Lithia TKV, Inc.
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by the Registrant during the quarter
ended December 31, 1996.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 19, 1997 LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
------------------------------
Sidney B. DeBoer
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on March 19, 1997:
Signature Title
- --------- -----
/s/ SIDNEY B. DEBOER Chairman of the Board, President
- ---------------------------- and Chief Executive Officer
Sidney B. DeBoer (Principal Executive Officer)
/s/ BRIAN R. NEILL Chief Financial Officer
- ---------------------------- (Principal Financial and Accounting Officer)
Brian R. Neill
/s/ M. L. DICK HEIMANN Director, Executive Vice President and
- ---------------------------- Chief Operating Officer
M. L. Dick Heimann
/s/ R. BRADFORD GRAY Director and Vice President, Acquisitions
- ----------------------------
R. Bradford Gray
/s/ THOMAS BECKER Director
- ----------------------------
Thomas Becker
/s/ WILLIAM J. YOUNG Director
- ----------------------------
William J. Young
26
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lithia Motors, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Lithia Motors,
Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Lithia
Motors, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Portland, Oregon
February 19, 1997
F-1
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
(In thousands)
ASSETS 1996 1995
------- -------
Current assets:
Cash and cash equivalents $15,413 9,706
Trade receivables 2,260 1,744
Other receivables, current portion 414 267
Receivable from related parties 308 -
Inventories 28,152 17,700
Vehicles leased to others, current portion 524 727
Prepaid expenses and other current assets 372 273
Deferred tax assets 1,646 -
------- -------
Total current assets 49,089 30,417
------- -------
Property, plant and equipment, net 4,616 3,234
Vehicles leased to others, less current portion 4,500 4,599
Other assets:
Other receivables, less current portion 377 456
Other noncurrent assets 1,071 872
Goodwill, net 4,101 -
------- -------
5,549 1,328
------- -------
$63,754 39,578
------- -------
------- -------
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS' EQUITY 1996 1995
------- -------
Current liabilities:
Notes payable $ 500 625
Flooring notes payable 19,645 19,590
Current maturities of long-term debt 1,855 2,085
Trade payables 2,434 1,455
Accrued liabilities 2,482 1,280
Payable to related parties 1,952 356
------- -------
Total current liabilities 28,868 25,391
Long-term debt, less current maturities 6,160 10,743
Deferred revenue 3,250 1,782
Other long-term liabilities - 62
Deferred tax liability 740 -
------- -------
Total liabilities 39,018 37,978
------- -------
Commitments and contingencies
Minority interest - 749
Shareholders' equity:
Preferred stock - no par value; authorized 15,000 shares;
issued and outstanding none at December 31, 1996
and 1995 - -
Class A common stock - no par value; authorized
100,000 shares; issued and outstanding 2,500 at
December 31, 1996 and none at December 31, 1995 24,172 -
Class B common stock - no par value; authorized
25,000 shares; issued and outstanding 4,110 at
December 31, 1996 and 1995 511 801
Retained earnings 53 50
------- -------
Total shareholders' equity 24,736 851
------- -------
$63,754 39,578
------- -------
------- -------
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1996, 1995 and 1994
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Sales:
Vehicle $123,703 97,338 93,535
Service, body, parts and other 19,141 16,858 15,888
-------- -------- --------
Net sales 142,844 114,196 109,423
-------- -------- --------
Cost of sales:
Vehicle 109,082 81,786 81,141
Service, body, parts and other 9,565 11,346 9,183
-------- -------- --------
Cost of sales 118,647 93,132 90,324
-------- -------- --------
Gross profit 24,197 21,064 19,099
Selling, general and administrative 20,277 16,735 15,174
-------- -------- --------
Operating income 3,920 4,329 3,925
-------- -------- --------
Other income (expense):
Equity in income of affiliate 44 67 55
Interest income 193 179 99
Interest expense (1,353) (1,390) (954)
Other, net 1,112 968 847
-------- -------- --------
(4) (176) 47
-------- -------- --------
Income before minority interest
and income tax benefit 3,916 4,153 3,972
Minority interest (687) (778) (458)
-------- -------- --------
Net income before income tax benefit 3,229 3,375 3,514
Income tax benefit 813 - -
-------- -------- --------
Net income $4,042 3,375 3,514
-------- -------- --------
-------- -------- --------
Net income per share $0.81
--------
--------
Pro forma net income data (unaudited):
Income before income taxes and minority
interest, as reported $3,916 4,153 3,972
Pro forma income taxes (1,521) (1,598) (1,521)
-------- -------- --------
Pro forma net income before minority interest 2,395 2,555 2,451
Pro forma minority interest (421) (479) (283)
-------- -------- --------
Pro forma net income $1,974 2,076 2,168
-------- -------- --------
-------- -------- --------
Pro forma net income per share $0.40 0.42
-------- --------
-------- --------
Shares used in computing per share amounts 4,973 4,893
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Common stock
------------------------------------
Class A Class B
---------------- ---------------- Retained
Shares Amount Shares Amount earnings Total
------ -------- ------ ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 - $ - 2,492 $ 824 360 1,184
Net income - - - - 3,514 3,514
Issuance of Class B common stock - - 743 70 - 70
Cancellation of Class B common stock - - (218) (143) 143 -
Dividends - - - - (1,965) (1,965)
------ -------- ------ ------ -------- -------
Balance, December 31, 1994 - - 3,017 751 2,052 2,803
Net income - - - - 3,375 3,375
Issuance of Class B common stock - - 1,093 50 - 50
Dividends - - - - (5,377) (5,377)
------ -------- ------ ------ -------- -------
Balance, December 31, 1995 - - 4,110 801 50 851
Net income - - - - 4,042 4,042
Dividends - - - - (4,460) (4,460)
Contribution of minority interest to Class B
common stock pursuant to restructuring - - - 131 - 131
Restructuring in connection with initial
public offering - - - (421) 421 -
Issuance of Class A common stock, net
of offering expenses of $3,328 2,500 24,172 - - - 24,172
------ -------- ------ ------ -------- -------
Balance, December 31, 1996 2,500 $24,172 4,110 $511 53 24,736
------ -------- ------ ------ -------- -------
------ -------- ------ ------ -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,042 3,375 3,514
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,756 1,907 1,954
Gain on sale of assets (239) (305) (146)
Deferred income taxes (906) - -
Minority interest in income 687 778 458
Equity in income of affiliate (44) (67) (55)
Changes in operating assets and liabilities:
Trade and installment contract receivables (852) (692) 1,659
Inventories (6,807) 1,432 (2,085)
Prepaid and other current assets (19) 30 (116)
Other noncurrent assets (196) (277) (20)
Trade payables 979 609 (1,793)
Accrued liabilities 797 306 1,002
Other liabilities 3,095 677 358
Proceeds from sale of vehicles leased to others 5,760 4,757 5,239
Expenditures for vehicles leased to others (6,537) (6,308) (6,764)
------- ------- -------
Net cash provided by (used in) operating activities 1,516 6,222 3,205
------- ------- -------
Cash flows from investing activities:
Notes receivable issued (540) (190) (142)
Principal payments received on notes receivable 500 83 309
Proceeds from sale of assets 765 10 3
Capital expenditures (395) (524) (164)
Acquisitions (6,937) - -
------- ------- -------
Net cash provided by (used in) investing activities (6,607) (621) 6
------- ------- -------
Cash flows from financing activities:
Net borrowings (repayments) on notes payable (625) 235 (2,312)
Net borrowings (repayments) on flooring notes payable (3,283) (1,628) 2,170
Principal payments on long-term debt (25,336) (8,070) (9,084)
Proceeds from issuance of long-term debt 21,635 12,529 11,300
Proceeds from issuance of common stock and minority interest 24,172 50 (73)
Proceeds from minority interest share receivable 676 142 144
Dividends and distributions (6,441) (6,105) (2,263)
------- ------- -------
Net cash provided by (used in) financing activities 10,798 (2,847) (118)
------- ------- -------
Net increase in cash and cash equivalents 5,707 2,754 3,093
Cash and cash equivalents at beginning of period 9,706 6,952 3,859
------- ------- -------
Cash and cash equivalents at end of period $15,413 9,706 6,952
------- ------- -------
------- ------- -------
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 1,823 1,828 1,335
------- ------- -------
------- ------- -------
Supplemental schedule of noncash investing and financing activities:
Cancellation of common stock $ - - 143
Issuance of notes receivable - minority interest - 678 -
Debt extinguishment upon transfer of property 1,112 - -
Contribution of minority interest in S Corporation
earnings upon Restructuring to Class B common stock 131 - -
Contribution of excess S Corporation retained earnings
upon Restructuring to Class B common stock 421 - -
------- ------- -------
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION AND BUSINESS
Lithia Motors, Inc. and subsidiaries (the Company) operates in Medford,
Eugene and Grants Pass, Oregon and Vacaville, California. The Company
serves customers located principally in southern Oregon and northern
California. 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 eight
locations, the Company offers, collectively, sixteen makes of new vehicles
including Chrysler, Toyota, Plymouth, Dodge, Jeep/Eagle, Honda, Saturn,
Mazda, Pontiac, Lincoln, Mercury, Isuzu, Suzuki, Kia and Volkswagen.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying financial statements reflect the results of operations,
the financial position, and the cash flows for Lithia Motors, Inc. and its
directly and indirectly wholly-owned subsidiaries. All significant
intercompany accounts and transactions, consisting principally of
intercompany sales, have been eliminated upon consolidation.
The financial results presented for periods prior to the Restructuring (see
note 13) have been restated to reflect the consolidated results of
operations, financial position and cash flows of the Company's dealerships
and those of its affiliated entities under common control whose operations
were combined under the Restructuring, using "as if" pooling of interest
basis of accounting.
Lithia TLM LLC, Lithia Dodge LLC and Lithia Grants Pass Auto Center LLC
were 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 to the date of Restructuring.
(Continued)
F-6
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(c) 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.
(d) 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.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and being depreciated over
their estimated useful lives, principally on the straight-line basis. The
range of estimated useful lives are as follows:
Building and improvements 40 years
Service equipment 5 to 10 years
Furniture, signs and fixtures 5 to 10 years
The cost for maintenance, repairs and minor renewals is 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.
(f) INVESTMENT IN AFFILIATE
The Company has a 20% interest in Lithia Properties, LLC, of which the
other members are Sidney DeBoer (35%), M.L. Dick Heimann (30%) and three of
Mr. DeBoer's children (5% each). The investment is accounted for using the
equity method, with a carrying value of $571 and $491 at December 31, 1996
and 1995, respectively.
(Continued)
F-7
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(g) INCOME TAXES
Prior to the Offering (see note 13), the Company was an S Corporation for
federal and state income tax reporting purposes. Federal and state income
taxes on the income of an S Corporation were payable by the individual
stockholders rather than the corporation.
The Company's S Corporation status terminated immediately prior to the
effectiveness of the initial public offering of its common stock. At that
time the Company established a net deferred tax asset and recorded an
accompanying credit to income tax expense. The accompanying statements of
operations for the years ended December 31, 1996, 1995 and 1994, 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 for the entire year.
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.
(h) 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.
(Continued)
F-8
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(i) COMPUTATION OF PER SHARE AMOUNTS
Net income per share is computed using 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. In
addition, the calculation includes shares deemed issued to fund
S Corporation distributions.
(j) FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables, trade payable,
accrued liabilities 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.
(k) ADVERTISING
The Company expenses production and other costs of advertising as incurred.
Advertising expense was $1,297, $1,136, and $946 for the years ended
December 31, 1996, 1995 and 1994, respectively.
(Continued)
F-9
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(l) INTANGIBLE ASSETS AND GOODWILL
Intangible assets of $199 and $-0-, net of accumulated amortization of $23
and $-0-, at December 31, 1996 and 1995, respectively, represents a
non-compete agreement being amortized on a straight-line basis over
5 years. This intangible asset is included in other noncurrent assets and
is evaluated for impairment each period by determining its net realizable
value.
Goodwill, which represents the excess purchase price over fair value of net
assets acquired, is amortized on the straight-line basis over the expected
period to be benefited of forty years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The assessment of the recoverability of goodwill will be
impacted if estimated future operating cash flows are not achieved.
(m) 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.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and related notes to financial statements. Changes in such
estimates may affect amounts reported in future periods.
(Continued)
F-10
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(o) 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. 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
consolidated 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.
(p) 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.
(q) RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1996 presentation.
(Continued)
F-11
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(2) INVENTORIES AND RELATED NOTES PAYABLE
The new and used vehicle inventory, collateralizing related notes payable,
and other inventory were as follows:
December 31
---------------------------------------
1996 1995
------------------- ------------------
Inventory Notes Inventory Notes
cost payable cost payable
--------- ------- --------- -------
New and demonstrator vehicles $19,402 19,645 13,972 15,346
Used vehicles 12,199 - 7,532 4,244
Parts and accessories 1,761 - 1,092 -
--------- ------- --------- -------
Inventories at FIFO 33,362 19,645 22,596 19,590
Less LIFO reserve for new
and used vehicles and
parts inventories 5,210 - 4,896 -
--------- ------- --------- -------
Inventories at LIFO $28,152 19,645 17,700 19,590
--------- ------- --------- -------
--------- ------- --------- -------
If the first-in, first-out (FIFO) method of inventory accounting were used
by the Company, net income would have been higher (lower) by $314, $(426)
and $615 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Flooring notes payable consist of 8.25% to 8.75% flooring notes from a bank
secured by new and used vehicles. The flooring arrangements permit the
Company to borrow up to $27,900 in 1996 and $21,900 in 1995, restricted by
new and used vehicle levels. The notes are due within 5 days of the
vehicle being sold or after the vehicle has been in inventory for 1 year
for new vehicles, 6 months for program vehicles, and on a revolving basis
for used vehicles.
(Continued)
F-12
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(3) PROPERTY, PLANT AND EQUIPMENT
December 31
-----------------
1996 1995
------ -----
Buildings and improvements $1,131 1,445
Service equipment 1,641 1,431
Furniture, signs and fixtures 2,545 1,607
------ -----
5,317 4,483
Less accumulated depreciation 2,073 1,840
------ -----
3,241 2,643
Land 1,272 591
Construction in progress 100 -
------ -----
$4,616 3,234
------ -----
------ -----
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
December 31
-----------------
1996 1995
------ -----
Vehicles leased to others $6,378 6,678
Less accumulated depreciation (1,354) (1,352)
------ -----
5,024 5,326
Less current portion, net 524 727
------ -----
$4,500 4,599
------ -----
------ -----
Vehicles leased to others are stated at cost and depreciated over their
estimated useful lives (5 years) on a straight-line basis. Lease
receivables result from customer, employee and fleet leases of vehicles
under agreements which qualify as operating leases. Leases are cancelable
at the option of the lessee after providing 30 days written notice.
(Continued)
F-13
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(5) NOTES PAYABLE
Notes payable consist of a 9.0% 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 December 31, 1996.
The Company incurred a $500 8.5% note payable in connection with the
acquisition of Roberts Dodge, Inc. in Eugene, Oregon. The note became due
and payable upon the consummation of the Restructuring and Offering.
(6) LINES OF CREDIT
The Company has a $7.5 million line of credit to finance the purchase of
vehicles used in the Company's fleet leasing and automobile rental
businesses. The borrowings under this line of credit, $5,196 at
December 31, 1996, are secured by the leased vehicles and bear interest at
prime plus .25% to 1.5% (8.5% to 9.75% at December 31, 1996).
The Company has a $6.0 million line of credit to finance acquisitions which
bears interest at prime plus .75% and secured by the Company's inventory,
receivables, equipment and real property. During the first year in which
the 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 December 31, 1996, no borrowings
were outstanding under this line.
An additional line of credit of $2.15 million is available for the purchase
of equipment, $1.4 million of which is available for the purchase of
equipment associated with acquisitions. The borrowings under this line of
credit, $126 at December 31, 1996, are secured by the equipment and bear
interest at prime plus 0.5% (8.75% at December 31, 1996). The borrowings
are payable in monthly installments, maturing at various dates through
2000.
(Continued)
F-14
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(7) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31
-----------------
1996 1995
------- ------
<S> <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 $ - 3,865
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 - 1,234
Notes payable in monthly installments, including interest
at 8.75%; maturing at various dates through 2000;
secured by equipment 1,019 1,404
Notes payable in monthly installments, including interest
at prime plus .25% to 1.5% (8.5% to 9.75% at
December 31, 1996); maturing at various dates
through 2000; secured by vehicles leased to others 5,196 5,466
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 - 858
Notes payable in monthly installments of $14, including
interest at 8.27%, maturing December 2008; secured
by land and buildings 1,800 -
Other - 1
------- ------
8,015 12,828
Less current maturities 1,855 2,085
------- ------
$6,160 10,743
------- ------
------- ------
</TABLE>
(Continued)
F-15
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
The schedule of future principal payments on long-term debt after
December 31, 1996 is as follows:
Year ending December 31:
1997 $1,855
1998 3,877
1999 388
2000 142
2001 88
2002 and thereafter 1,665
------
$8,015
------
(8) MINORITY INTEREST
At December 31, 1995, the Company held notes receivable of $678, from
minority owners of the Company. These notes were secured by the minority
owners' interest in the Company and bore interest at .5% over prime rate.
The notes receivable were presented as a reduction to minority interest.
In connection with the Restructuring and Offering, the notes receivable
were paid by the minority interest shareholders.
(9) SHAREHOLDERS' EQUITY
The shares of Class A common stock are not convertible into any other
series or class of the Company's securities. However, 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.
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.
(Continued)
F-16
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(10) INCOME TAXES
At the date of the Restructuring, the Company terminated its S Corporation
election and is now taxed as a C Corporation. Income taxes on the
Company's earnings from the date of the Restructuring to December 31, 1996
is as follows:
Current:
Federal $(77)
State (16)
----
Total current income tax expense (93)
Deferred:
Federal 750
State 156
----
Total deferred income tax benefit 906
----
Total income tax benefit $813
----
----
The significant components of deferred income tax benefit for the year
ended December 31, 1996 are as follows:
Deferred tax expense (exclusive of the effects
of other components listed below) $ -
Adjustment to deferred tax assets and liabilities
for conversion from S Corporation to C Corporation
status 906
----
$906
----
----
(Continued)
F-17
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and liability as of December 31,
1996, are presented below:
Deferred tax assets:
Allowance and accruals $ 277
Deferred revenue 1,244
------
Total deferred tax assets 1,521
Deferred tax liability:
Property and equipment, principally
due to differences in depreciation (615)
------
Net deferred tax assets $ 906
------
------
The unaudited pro forma provision for income taxes reflects the income tax
expense that would have been reported if the Company had been subject to
Federal and state income taxes as a C Corporation for the entire year and
for all periods presented. The components of unaudited pro forma income
taxes are as follows:
Year ended
December 31
-------------------------
1996 1995 1994
------ ------ ------
Pro forma income taxes:
Current:
Federal $1,860 1,487 1,292
State 387 309 269
------ ------ ------
Total current 2,247 1,796 1,561
------ ------ ------
Deferred:
Federal (601) (164) (33)
State (125) (34) (7)
------ ------ ------
Total deferred (726) (198) (40)
------ ------ ------
Total pro forma
income taxes $1,521 1,598 1,521
------ ------ ------
------ ------ ------
(Continued)
F-18
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
The following tabulation reconciles the expected corporate federal income
tax expense (computed by multiplying the Company's income before minority
interest by 34%) to the Company's unaudited pro forma income tax expense:
Year ended
December 31
-------------------------
1996 1995 1994
------ ------ ------
Expected pro forma income
tax expense $1,331 1,412 1,350
State income taxes, net of
federal tax effect 171 181 173
Other, net 19 5 (2)
------ ------ ------
$1,521 1,598 1,521
------ ------ ------
------ ------ ------
The Company intends to change 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 two to six year period, thereby
increasing current taxes payable. This amortization will create a
corresponding reduction in the deferred tax liability related to
inventory and will not impact the Company's effective tax rate.
(11) COMMITMENTS AND CONTINGENCIES
(a) RECOURSE PAPER
The Company is contingently liable to banks for recourse paper from the
financing of vehicle sales. The contingent liability at December 31, 1996,
1995 and 1994 was approximately $88, $206 and $77, respectively.
(b) OPERATING LEASES
Substantially all of the Company's operations are conducted in leased
facilities under noncancelable operating leases. These leases expire at
various dates through 2012. Beginning in 1998, certain lease commitments
are subject to escalation clauses of an amount equal to the cost of living
based on the "Consumer Price Index - U.S. Cities Average - All stems for
all Urban Consumers" published by the U.S. Department of Labor.
(Continued)
F-19
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
The minimum rental commitments under operating leases after December 31,
1996 are as follows:
Year ending December 31:
1997 $ 2,253
1998 2,253
1999 2,251
2000 2,229
2001 1,882
2002 and thereafter 17,471
-------
$28,339
-------
-------
Rental expense for all operating leases was $2,353 $1,993 and $1,888 for
the years ended December 31, 1996, 1995 and 1994, respectively.
(c) 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 Lithia Motors, Inc.
Contributions of $100, $84 and $100 were recognized for the years ended
December 31, 1996, 1995 and 1994, respectively. Employees may contribute
to the plan under certain circumstances.
(Continued)
F-20
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(13) RESTRUCTURING AND OFFERING
On December 18, 1996, the Company offered 2,500 shares of its Class A
common stock to the public (the Offering). Prior to the public stock
offering, the Company consummated a restructuring (the Restructuring) which
resulted in each of the Company's dealerships and operating divisions
becoming direct or indirect wholly-owned subsidiaries of the Company with
Lithia Holding Company, LLC owning all the outstanding Class B common stock
of the Company. All shareholders prior to the Restructuring exchanged
their interests in the Company and its affiliated entities for shares of
Lithia Holding Company, LLC with the exception of (i) one shareholder who
exchanged his interest in one entity for cancellation of a note due to
Lithia TLM, LLC and cash and (ii) Lithia TKV, Inc. whose stock was
purchased by the Company from the Company's principals subsequent to the
public stock offering.
(14) STOCK INCENTIVE PLAN
In April 1996, the Board of Directors (the Board) and the Company's
shareholders adopted the Company's 1996 Stock Incentive Plan (the Plan),
which provides for the granting of incentive and nonqualified stock options
to officers, key employees, and non-employee consultants of the Company and
its subsidiaries. The Plan is administered by the Board or by a
Compensation Committee of the Board and permits accelerated vesting of
outstanding options upon the occurrence of certain changes in control of
the Company.
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123 ACCOUNTING FOR STOCK-BASED
COMPENSATION (SFAS 123), which defines a fair value based method of
accounting for an employee stock option and similar equity instrument. As
permitted under SFAS 123, the Company has elected to continue to account
for its stock-based compensation plan under Accounting Principal Board
Opinion No. 25 ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25), and
related interpretations. Accordingly, no compensation expense has been
recognized for the Plan. The Company has computed, for pro forma
disclosure purposes, the value of options granted under the Plan, using the
Black-Scholes option pricing model as prescribed by SFAS 123, using the
weighted average assumptions for grants as follows: a risk free interest
rate of 6.5%, an expected divided yield of 0%, expected lives of 6.5 years,
and expected volatility of 60%.
(Continued)
F-21
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
Using the Black-Scholes methodology, the total value of options granted
during 1996 was $709, which would be amortized on a pro forma basis over
the vesting period of the options. The weighted average fair value of
options granted during 1996 was $1.62 per share. If the Company had
accounted for its stock-based compensation plan in accordance with
SFAS 123, the Company's net income and net income per share would
approximate the pro forma disclosures below:
1996
-----------------
As Pro
reported forma
-------- -----
Net income $4,042 3,612
-------- -----
-------- -----
Net income per share $0.81 0.73
-------- -----
-------- -----
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
January 1, 1995, and additional awards are anticipated in future years.
Options become exercisable over a period of up to ten years from the date
of grant as determined by the Board, at prices generally not less than the
fair market value at the date of grant. At December 31, 1996, options for
167 shares were exercisable, with a weighted average exercise price of
$3.27. 685 shares were reserved for issuance and 246 shares were available
for future grant.
The following table summarizes stock options outstanding at December 31,
1996:
Weighted -
average
Shares price
------ -----
Outstanding options at December 31, 1995 - $ -
Granted 439 3.11
Exercised - -
Canceled - -
------ -----
Outstanding options at December 31, 1996 439 $3.11
------ -----
------ -----
At December 31, 1996, the weighted average remaining contractual life of
outstanding options was 6.3 years.
(Continued)
F-22
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(15) RELATED PARTY TRANSACTIONS
Substantially all of the real property on which the Company's business is
located is owned by Lithia Properties, LLC. The Company, leases its
facilities under various lease agreements from Lithia Properties, LLC
(note 11). Recorded in other current assets are deposits relating to these
operating leases of $-0- and $175 as of December 31, 1996 and 1995,
respectively. Selling, general and administrative expense includes rental
expense of $2,132, $1,929 and $1,808 for the years ended December 31, 1996,
1995 and 1994, respectively.
The Company provides management services to Lithia Properties, LLC. Other
income includes management fees of $408, $288 and $288 for the years ended
December 31, 1996, 1995 and 1994, respectively.
The Company has notes payable included in long-term debt of $-0- and $3,865
as of December 31, 1996 and 1995, 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 guaranteed certain indebtedness of Lithia Properties, LLC
incurred in connection with purchases of real property which secures the
loan. This indebtedness amounts to approximately $13,000.
The Company and Lithia Properties, LLC share a "pooled" cash account in the
Company's name. At December 31, 1996 and 1995, amounts due to Lithia
Properties, LLC related to this arrangement amounted to $1,703 and $356,
respectively, and are included in payable to related parties. Also
included in payable to related parties at December 31, 1996 is $249 due to
former S Corporation minority interest shareholders for distributions of
their investment in the Company prior to the Restructuring.
Receivable from related parties at December 31, 1996 represents amounts due
to the Company for overpayments on distributions to shareholders in
connection with the Restructuring.
(Continued)
F-23
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(16) ACQUISITIONS
During the fourth quarter of 1996, the Company acquired two new and used
car dealerships, Roberts Dodge, Inc. and Melody Vacaville, Inc., now Lithia
TKV and Lithia DE, respectively. For each acquisition, the Company
acquired certain assets, set forth below each of which was accounted for as
a purchase. Accordingly, the consolidated statement of operations include
the operating results from the date of purchase.
Roberts Melody
Dodge, Vacaville,
Inc. Inc.
------- ----------
Assets acquired $6,233 3,309
Goodwill 1,900 2,201
Less liabilities assumed or incurred (3,390) (2,816)
------- ----------
Total consideration $ 4,743 2,694
------- ----------
------- ----------
The pro forma results shown below reflect accounting adjustments assuming
the acquisitions described above occurred as of the beginning of each of
the periods presented:
1996 1995
-------- -------
(Unaudited)
Revenues $208,236 173,900
Net income 2,704 1,435
Net income per share 0.54 0.29
The pro forma results are not necessarily indicative of what actually would
have occurred had the acquisitions been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results that may be achieved from the combined operations.
(Continued)
F-24
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
(17) OTHER INCOME
December 31
------------------------
1996 1995 1994
------ ------ ------
Management fees $477 288 288
Hail damage settlement 206 - -
Lawsuit settlement - 160 -
Miscellaneous, net 429 520 559
------ ------ ------
Other income, net $1,112 968 847
------ ------ ------
------ ------ ------
(18) SUBSEQUENT EVENTS
(a) EXERCISE OF OVER-ALLOTMENT OPTIONS
On January 20, 1997, the underwriters for the Company's initial public
offering exercised an option to purchase 375 shares of Class A common stock
to cover over-allotments. Gross proceeds to the Company was approximately
$4,125.
(b) PENDING ACQUISITIONS
The Company has signed definitive agreements to purchase two 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.
(Continued)
F-25
<PAGE>
LITHIA MOTORS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands)
The Company has agreed to acquire the assets of Magnussen-Barbee Ford,
Lincoln-Mercury, including the new and used vehicles, in a cash and debt
transaction valued at $6.9 million. The dealership's sales facility and
real estate will be leased. Closing is expected to occur in the second
quarter of 1997.
The Company has agreed to pay $2.25 million plus the fair value of the
operating assets to acquire Magnussen Dodge, a Dodge and Isuzu dealer in
Concord, California. The dealership's sales facilities and real estate
will be leased. Closing is expected to occur in the second quarter of
1997.
F-26
<PAGE> EXHIBIT 10.23
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
THIS AGREEMENT is entered into by and between MAGNUSSEN-BARBEE FORD,
LINCOLN-MERCURY, INC., a California corporation, (hereinafter referred to as
"Seller"), and LITHIA MOTORS, INC., an Oregon corporation, (hereinafter
referred to as the "Buyer").
RECITALS:
Seller is a California business corporation engaged in the business of
selling and servicing Ford and Lincoln-Mercury motor vehicles and related
parts and accessories from premises located at 300 Soscol Avenue, Napa,
California 94559 (the Business Real Property), under franchises issued by the
Ford Motor Company.
Buyer wishes to purchase from Seller, and Seller is willing to sell to
Buyer, all assets relating to Seller's Ford and Lincoln-Mercury franchises,
conditioned upon the granting to Buyer of exclusive franchises for the sale
of new Ford and Lincoln-Mercury motor vehicles in the same geographical area
as Seller's current franchises in Napa, California.
Buyer also wishes to assume the Lease of the Business Real Property, and
the purchase of Seller's business assets shall be conditioned upon the
assignment to Buyer of the Lease of the Business Real Property.
NOW, THEREFORE, IN CONSIDERATION OF the mutual premises 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 May 1, 1997 "FINAL CLOSING DATE" shall refer to the
earlier of (i) May 30, 1997, or (ii) the 10th business day after the
condition precedent set forth in subparagraph 17(a) (the issuance of
Franchisors' approvals) has been satisfied.
(b) "SELLER'S BUSINESS" shall refer to any and all activities
conducted by Seller in Napa County, California, relating to the marketing and
sale of new Ford and Lincoln-Mercury vehicles and associated parts and
accessories, and the repair and servicing of new or used Ford and
Lincoln-Mercury vehicles.
(c) "PURCHASED ASSETS" shall refer to those assets which are
identified in Paragraph 2 as being purchased and sold by the parties
hereunder.
1
<PAGE>
(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 assets listed on Seller's financial statements as
of December 31, 1996. Seller's leasehold improvements to the Business Real
Property also shag be included with the definition of Seller's "Equipment".
(e) Seller's "INTANGIBLE ASSETS" shall refer to Seller's name
("Magnussen-Barbee Ford, Lincoln-Mercury, Inc."), 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.
(f) "BUSINESS REAL PROPERTY" shall refer to the real property located
at 300 Soscol Avenue, Napa, California, which has been used in connection
with Seller's business.
(g) "FRANCHISOR" or "FRANCHISORS" shall refer to the Ford Motor
Company.
(h) "NEW VEHICLE" shall refer to a Ford and Lincoln-Mercury motor
vehicle which: (i) is unregistered and unused, (ii) is from the 1996 or 1997
model year, and (iii) may be represented or warranted to consumers as "new"
under California law. "ROLLBACK VEHICLE" shall mean an unregistered vehicle
which has been sold to a customer by Seller but returned because of the
customer's inability to obtain financing for the purchase. "DEMONSTRATOR
VEHICLE" shall mean an unregistered vehicle used and operated by Seller on
dealer plates for sales demonstration purposes. "USED VEHICLE" shall mean
any vehicle which is not a new vehicle, a demonstrator vehicle or rollback
vehicle.
(i) "DATE OF THIS AGREEMENT" shall refer to the first date upon which
this Agreement has been signed by all of the parties.
2. PURCHASED ASSETS. Seller agrees to sell to Buyer, and the Buyer agrees
to purchase from Seller, the assets identified in Paragraphs 3, 4, 5, 6, 7,
8, 9, 10 and 11 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
Paragraphs 3, 4, 5, 6, 7, 8, 9, 10, and 11 of this Agreement.
3. INVENTORY OF NEW VEHICLES. Buyer shall purchase Seller's entire
inventory of new Ford and Lincoln-Mercury vehicles, as that inventory exists
on the Closing Date. Buyer also shall purchase Seller's entire inventory of
demonstrator vehicles and (up to five) rollback 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 holdbacks, factory rebates, factory incentives, carry-over model
allowances, floor plan allowances, finance cost
2
<PAGE>
allowances, advertising allowances, 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 vehicles shall include
Seller's actual net cost for any and all parts and accessories reasonably
installed by Seller to new vehicles in the ordinary course of business, but
shall not include any other vehicle preparation charges, labor charges or
other dealer charges of any kind.
(b) DEDUCTION FOR DAMAGE TO NEW VEHICLES. Immediately prior to
Closing, Buyer and seller shall jointly inspect Seller's inventory of new
vehicles. If any new 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.
(c) PAYMENT FOR NEW VEHICLES. The aggregate purchase price for all
new vehicles purchased by Buyer from Seller shall be paid in full at Closing.
(d) 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 Buyer'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 not acceptable to Buyer. At Closing, Seller shall turn over
to Buyer all customer deposits on ordered but undelivered new vehicles.
(e) PRICE FOR DEMONSTRATORS AND ROLLBACKS. Regarding 1996
demonstrators, the price for each vehicle shall be determined as above less
$500 per vehicle and 30 CENTS per mile for miles in excess of 4,000 miles.
Regarding 1997 demonstrators, the price for each vehicle will be determined
as above less 30 CENTS per mile for all miles in excess of 4,000. miles.
Regarding rollbacks, the purchase price for each such vehicle shall be
determined as above less 30 CENTS per mile for miles in excess of 200 miles.
The purchase price so determined for the demonstrators and rollbacks shall be
paid at Closing.
4. INVENTORY OF USED VEHICLES. Buyer intends to purchase Seller's entire
inventory of used vehicles, as that inventory exists at Closing. However,
Buyer shall not be obligated to purchase any used vehicle for which Buyer and
Seller are unable to agree upon a purchase price.
(a) Seller shall be obligated to: (i) disclose to Buyer any and all
facts 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.
3
<PAGE>
(b) PRICE FOR USED VEHICLES. Used vehicles shall be purchased
on an individual basis. It is Buyer's intention to purchase all of the used
vehicles, however, in the event Buyer and Seller cannot agree on a value as
to one or more vehicles, then those vehicles whose value is not agreed upon,
shall remain the property of the Seller and Buyer shall not be obligated to
purchase same. Buyer and Seller agree to establish the proposed purchase
price for seller's used vehicles at least three business days prior to the
anticipated Closing Date. Regarding any used vehicles not purchased by
Buyer, Seller shall have 14 days subsequent to Closing to remove same from
the Business Real Property. So long as Buyer stores Seller's used vehicles
on the Business Real Property in accordance with standard business practices,
Seller shall have sole and exclusive risk and liability for any damage or
loss to Seller's used vehicles while so stored on the Business Real Property
after Closing, and Buyer shall have no liability or obligation of any kind by
reason of such damage or loss.
(c) PAYMENT FOR USED VEHICLES. The aggregate purchase price for
Seller's inventory of used vehicles 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 Ford and
Lincoln-Mercury vehicle parts and accessories manufactured by Franchisors
and/or third party suppliers, as that inventory exists on the Closing Date.
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
pats 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 Ford and Lincoln-Mercury vehicles (whether manufactured by a
Franchisor or third party suppliers) shall be the net cost for 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 Ford and Lincoln-Mercury 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.
4
<PAGE>
(d) In addition to the vehicle accessories being purchased by Buyer,
Buyer agrees to purchase a quantity of other non-factory accessories the
amount of which shall be determined by the price of same which shall not
exceed $____________________.
6. EQUIPMENT. Buyer shall purchase Seller's Equipment. Buyer
acknowledges that Seller is retaining, and is not selling to Buyer, those
personal items of Seller's Equipment, if any, which are listed on Exhibit "A"
attached hereto.
(a) PRICE FOR EQUIPMENT. The aggregate purchase price for Seller's
Equipment shall be determined by a mutually agreed upon appraiser whose cost
shall be equally shared by the parties. This purchase price for the
Equipment shall be paid at the Closing.
7. SUPPLIES. Buyer shall purchase all of the gas, oil, nuts, bolts, and
other automotive supplies which are held for use in Seller's business. The
price for all such supplies shall be Seller's actual net cost, 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. PREPAID EXPENSES WHICH ACCRUE TO BUYER'S BENEFIT. Buyer agrees to
reimburse Seller for those prepaid expenses which accrue to Buyer's benefit
which shall be at Seller's cost and shall be paid at closing.
11. INTANGIBLE ASSETS. Buyer shall purchase all of Seller's Intangible
Assets.
(a) The aggregate purchase price for Seller's Intangible Assets shall
be Two Million Seven Hundred Thousand and 00/100 Dollars ($2,700,000),
$2,100,000 of which shall be paid outside of Escrow at the Closing. The
$600,000 balance of the purchase price for the Intangible Assets ($2,700,000
minus $2,100,000) shall be amortized and paid by Buyer to Seller as follows:
(1) During the period beginning on the Closing Date and ending
when the entire deferred balance of this purchase price has been paid in
full, interest shall accrue on the outstanding balance of this purchase price
at nine percent (9%) per annum. The interest accruing on the outstanding
balance of this purchase price shall be due and payable in
5
<PAGE>
quarter annual installments, with the first interest payment being due and
payable on the date which is three calendar months after the Closing Date,
and with subsequent interest payments being due and payable at regular three
month intervals thereafter.
(2) The $600,000 deferred principal balance of this purchase price
shall be due and payable in four equal annual installments of One Hundred
Fifty Thousand and 00/100 Dollars ($150,000) each, with the first installment
being due and payable on April 1, 1998, and with subsequent installments
being due and payable at regular one year intervals thereafter.
(A) Buyer shall have the right at any time to prepay all or any
portion of the unpaid balance of this purchase price, without penalty or
premium. Any prepayment shall be applied against the last maturing
installment of principal then due (with the principal balance being reduced
accordingly), and shall not excuse Buyer from making the regular installment
payments subsequently due until the principal balance has been paid in full.
(B) If Buyer fails to pay any amount of principal or interest
upon the due date or within ten (10) days thereof, and if thereafter Seller
notifies Buyer in writing of said default and Buyer fails to cure said
default within ten (10) days after receipt of that written notice from
Seller, then Seller shall have the right, at any time prior to the moment
when Buyer cures that default, to declare (and thereby cause) the entire
unpaid balance of the purchase price to be immediately due and payable.
(C) Buyer's deferred payment obligation as set forth in this
paragraph 11 shall be evidenced by a negotiable promissory note (hereinafter
the "Promissory Note") to be executed by Buyer and delivered to Seller at
Closing. The Promissory Note shall be unsecured and shall contain an
attorney's fee clause.
(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 with respect to vehicles repaired or sold by Seller
prior to Closing. In partial consideration of the $2,700,000 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 service which are not
covered by factory warranty and which are performed by Buyer within two (2)
months after Closing with said reimbursement not exceeding a maximum of
$4,000 in order to satisfy customers who are dissatisfied with repair
services provided by 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 services performed during the preceding calendar month.
12. BULK TRANSFERS. It is the intention of the parties that this
transaction comply with Division Six of the California Uniform Commercial
Code, more commonly known as Uniform Commercial Code - Bulk Transfers. As a
result thereof, upon the execution of this agreement the parties shall
immediately open an escrow at Capitol City Escrow, Inc., 2720 Gateway Oaks
Drive, # 140, Sacramento, California, for this purpose. At this same time,
Buyer shall deliver to said escrow the sum of $250,000 (the deposit), which
amount shall
6
<PAGE>
immediately be placed into an interest bearing account. The deposit plus
interest shall be credited to Buyer and shall be applied against the purchase
price for the Purchased Assets, other than the Intangible Assets, at the
closing or if the closing fails to occur, then the deposit shall be disbursed
as set forth hereinafter.
13. LIMITATION ON LIABILITIES ASSUMED. Except as provided in
subparagraph 3(c), 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, is of Seller
(including Seller's trade payables, account payables, obligations to
employees, or tax liabilities).
14. 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) 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, (ii) a written disclosure of all benefits made available to
Seller's employees (including qualified and non-qualified retirement plans),
and (iii) access to all personnel files for seller's employees. 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 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 effective as of the
close of business on the Closing Date. Buyer will consider any of Seller's
employees who apply for employment on an equal basis with all other
applicants. Employment will be offered to Buyer's selected applicants on
terms and conditions to be established by Buyer. Seller agre
(d) FINANCIAL. Seller shall furnish to Buyer such financial and
operating data and other information as to the business and properties of
Seller's business as Buyer shall request. The review of such materials will
be at Buyer's expense, including a certified audit, if Buyer deems it to be
necessary.
7
<PAGE>
(e) UNDISCLOSED LIABILITIES AND CONTRACTUAL COMMITMENTS. Except as
otherwise disclosed in this Agreement (or in an attached Exhibit): (i) Seller
does not have any liabilities which might have a material impact on Buyer's
use of the Purchased Assets, (ii) Seller is not a party to any contracts or
commitments which might have a material impact on Buyer's use of the
Purchased Assets, and (iii) no law suit or action, administrative proceeding,
arbitration proceeding, governmental investigation, or other legal or
equitable proceedings of any kind is pending or threatened against Seller
which might adversely affect the value of the Purchased Assets. If any claim
is asserted against Buyer after Closing with respect to any obligation of
seller which Seller has failed to disclose to Buyer in writing, or which
Seller has disclosed but failed to pay, then Buyer shall give prompt. written
notice of that claim to Seller. Seller shall indemnify Buyer with respect to
all such obligations.
(f) CONDITION OF EQUIPMENT. Each item of the equipment shall be in
good operating condition at Closing. Seller will continue to perform routine
maintenance and repairs with respect to the Equipment prior to Closing. In
addition, the roof, ventilation (including the air conditioning), heating,
plumbing, electrical systems and structural members, collectively referred to
as the "Structural Building Systems" of the buildings located on the Business
Real Property, are in good working order and condition and shall be so on the
Closing Date. Buyer shall have thirty (30) days from the Closing Date to
advise Seller in writing if any of the foregoing assets were not in good
working order on the Closing Date.
(g) 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, liens, equitable interests, leases, assessments,
restrictions, restrictions, reservations, or other burdens of any kind. All
current and accrued taxes which may become a lien against any of the
Purchased Assets prior to closing shall have been paid by Seller prior to
Closing (including property taxes, sales taxes and excise taxes).
(h) TOXIC MATERIALS. Upon the execution of this agreement, Seller at
its cost shall engage an appropriate environmental firm to conduct an
investigation and who will thereafter produce a Phase One Environmental
Report regarding the Business Real Property. In addition, Seller shall make
available to Buyer copies of all other environmental reports and certificates
(of which Seller has knowledge) with respect to the Business Real Property.
Regarding any deficiencies set forth in the Phase One Environmental Report,
Buyer can waive same or Seller shall have until the Closing Date to remedy
same. In the event it is apparent that a remedy can not be completed by the
Closing Date, then in such event, Seller can either elect to rescind the
transaction in its entirety or place sufficient funds into the escrow at the
Closing Date to cover the expense of the required remedy.
Except as disclosed by Seller on Exhibit "C" attached hereto, (i) no
activity in connection with Seller's business prior to Closing shall have
produced any toxic materials, the presence or use of which upon the Business
Real Property would violate any federal, state, local or other governmental
law, regulation or order or would require reporting to any governmental
authority and (ii) the Business Real Property is otherwise free and clear of
any toxic materials. For purposes or this subparagraph (h), the phrase
"toxic materials" shall include but not be limited to any and all substances
deemed to be pollutants, toxic materials or hazardous materials under any
state or federal law.
8
<PAGE>
(i) FRANCHISERS' CONSENT. Seller shall take all actions which are
reasonably necessary on Seller's part to obtain the consent of the
Franchisors to the issuance to Buyer of exclusive franchises for the sale of
new Ford and Lincoln-Mercury vehicles in the same geographical area as
Seller's current franchises in Napa, California.
(j) 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 Buyer
determines that any warranty made by Seller in this Agreement is incorrect,
incomplete or misleading, then Buyer shall advise Seller of that fact and
Seller shall provide to Buyer in writing whatever other information shall be
necessary to cause that warranty to be correct, complete and not misleading.
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 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 "Change of Ownership Sale" or other words or phrases having
similar meanings and; (v) Seller shall use its best efforts to preserve the
value of the Ford and Lincoln-Mercury franchises in Napa, California.
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 has been qualified by the appropriate California authorities 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
provisions 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.
17. ADDITIONAL CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The
obligation of Buyer to close this transaction is subject to each of the
following conditions (each of which is for the benefit of Buyer and may be
waived by Buyer), and Buyer 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 Ford and Lincoln-Mercury
vehicles in the same
9
<PAGE>
geographical area as Seller's current franchises in Napa, 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.
(b) Buyer shall be reasonably satisfied with any facility improvement
requirement which are imposed by Franchisors which have an aggregate cost of
more than $25,000.
(c) The lease assigned to Buyer, or a related entity, of the Business
Real Property shall occur prior to or concurrently with this transaction.
(d) All of Seller'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.
(e) The Phase One Environmental Report must indicate that there are
no toxic materials present on, under, or about the Business Real Property or
if such toxic materials are so indicated Seller must have cured same either
by completing the required remedy by the Closing Date or by placing
sufficient funds into Escrow at the Closing Date to cover the expense of the
required remedy.
18. CLOSING. The parties shall make all reasonable effort to close the
purchase and sale under this Agreement at or before 5:00 PM, Pacific Standard
Time, on or before the Final Closing Date, at the offices of Capitol City
Escrow, Inc. in Sacramento, California, or at some other location as shall be
selected by mutual agreement of the parties.
(a) The parties agree to establish a closing escrow account at
Capitol City Escrow, Inc. in Sacramento, California, (the "Closing Escrow
Agent"). Buyer and Seller each shall pay one-half (1/2) of the 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
PM, 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 documents required under this Agreement.
10
<PAGE>
(e) At Closing, and coincidentally with the performance of all
obligations required of Seller at Closing, Buyer shall deliver to Seller the
following: (i) payment for the Purchased Assets; and (ii) all other payments
and documents required under this Agreement. Buyer shall be responsible for
all sales taxes payable in connection with the transaction. 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.
(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 or because Seller has elected to rescind the agreement pursuant
to paragraph 14(h), then: (i) all rights and obligations of both parties
under this Agreement shall terminate, (ii) Buyer shall be entitled to a
refired of the entire $250,000 deposit (and interest earned thereon) which is
referred to in paragraph 12, 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 $250,000
deposit delivered by Buyer to the Closing Escrow Agent together with all
interest earned thereon while held by the Closing Escrow Agent 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. THIS SUM REPRESENTS A REASONABLE ESTATE BY BUYER AND SELLER OF
SELLER'S DAMAGES IN THE EVENT OF SUCH A DEFAULT, IT BEING EXTREMELY DIFFICULT
TO ASCERTAIN SELLER'S PRECISE DAMAGES. IF CLOSING DOES NOT OCCUR ON OR
BEFORE THE CLOSING DATE FOR ANY REASON OTHER THAN BUYER'S DEFAULT, SELLER AND
BUYER IRREVOCABLY AUTHORIZE AND INSTRUCT THE CLOSING ESCROW AGENT TO
IMMEDIATELY DELIVER TO BUYER, ON DEMAND, BUYER'S DEPOSIT TOGETHER WITH THE
INTEREST EARNED THEREON, LESS ESCROW CANCELLATION COSTS.
(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. Seller shall have the right at any time and from
time to time, for a period of five (5) years after the Closing Date, to
examine and make copies of all books and records acquired by Buyer hereunder.
In addition, Buyer agrees to store for a period of five (5) years all books
and records of Seller which Buyer is not acquiring hereunder. Lastly, Buyer
agrees to make its staff available to Seller for a period of five (5) days
subsequent to the Closing Date so that Seller can close out its books.
20. SELLER'S ACCOUNTS RECEIVABLE. For a period of six (6) months after
Closing, 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 vehicles sales shall be delivered to
Seller within ten (10) days after collection, and all other collected
receivables shall be
11
<PAGE>
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 until the expiration of the
latest period allowable in any applicable statute of limitations.
22. 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 and severally liable for all
obligations of the Buyer. In addition and in this event, Lithia Motors, Inc.
will unconditionally guarantee the promissory note referred to in paragraph
11 above.
23. 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 headings in this Agreement are for convenience purposes only, and
do not in any way define or construe and contents of this Agreement.
(b) This Agreement shall be governed and performed in accordance with
the laws of the State of California. Each of the parties hereby irrevocably
submits to the jurisdiction of the courts of Napa County, California, and
agrees that any legal proceedings with respect to this Agreement shall be
filed and heard in the appropriate court in Napa County, California.
(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.
12
<PAGE>
(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) Should any party hereto institute any action or proceedings to
enforce or interpret any provision hereof, or for damages by reason of any
alleged breach of any provision of this Agreement, the prevailing party shall
be entitled to recover from the losing party or parties such amount as the
court may adjudge to be reasonable attorney's fees for services rendered to
the prevailing party in such action or proceeding. The term "prevailing
party" as used in this section shall include, without limitation, any party
who is made a defendant in litigation in which damages and/or other relief
may be sought against such party and a final judgment or dismissal or decree
is entered in such litigation in favor of such party defendant.
13
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
indicated below:
SELLER: MAGNUSSEN-BARBEE FORD, LINCOLN-MERCURY, INC.
BY: /s/ Bernard L. Magnessen 2/18/97
------------------------------------------------- ----------------
Bernard L. Magnussen, President Dated
BUYER: LITHIA MOTORS, INC.
BY: /s/ Sidney B. DeBoer 2/21/97
------------------------------------------------- ----------------
Sidney B. Deboer, President Dated
14
<PAGE>
EXHIBIT "A"
List of Equipment Seller is Retaining pursuant to Paragraph 6 above.
NONE
15
<PAGE>
EXHIBIT "B"
List of Leases and Agreements being assumed by Buyer pursuant to Paragraph 8
above.
16
<PAGE>
EXHIBIT "C"
Activities in connection with Seller's business prior to Closing which
produced toxic material which violated governmental law, regulations or
orders or would require reporting to any governmental authority - pursuant to
paragraph 14h) above.
NONE
17
<PAGE>
EXHIBIT 10.5.3
SUPPLEMENTAL AGREEMENT TO
DEALER SALES AND SERVICE AGREEMENT
(PUBLICLY TRADED COMPANY)
THIS SUPPLEMENTAL AGREEMENT (this "Supplemental Agreement"), dated as of
December 27, 1996, is entered into among Lithia HPI, Inc. ("Dealer"). Lithia
Motors, Inc, ("Public Company") and American Isuzu Motors Inc. ("Distributor).
WHEREAS, contemporaneously herewith, Distributor and Dealer are entering
into a Dealer Sales and Service Agreement (the "Dealer Agreement") which
authorizes Dealer to conduct dealership operations from the Dealership
locations identified in the Dealer Agreement;
WHEREAS, the organization and ownership of Dealer is such that the terms
of the Dealer Agreement are not wholly adequate to address the legitimate
business needs and concerns of Distributor and Dealer; and
WHEREAS, Distributor and Dealer have entered into the Dealer Agreement
in consideration for and in reliance upon certain understandings, assurances
and representations which the parties wish to document.
NOW, THEREFORE, in consideration of the premises and mutual covenant
contained herein, the parties hereby agree as follows:
1. LIMITATIONS UPON CHANGE OF EXECUTIVE MANAGER
A. DESIGNATION OF EXECUTIVE MANAGER. As set forth in Section 4
of the Dealer Agreement, Sidney B. DeBoer shall Executive Manager of Dealer.
Dealer agrees that Executive Manager shall have complete and irrevocable
authority to make all decisions, and enter into any and all necessary
business commitments, required in the normal course of conducting dealership
operations on behalf of Dealer. Dealer shall not revoke, modify or otherwise
impose limitations upon such authority without the prior written consent of
Distributor.
B. CHANGE OF EXECUTIVE MANAGER. Without limiting the
restrictions set forth in the Dealer Agreement, the removal or withdrawal of
Executive Manager with Distributor's prior written consent shall constitute
grounds for termination of the Dealer Agreement, subject to applicable law.
2. LIMITATIONS UPON CHANGES IN OWNERSHIP
A. CHANGE IN OWNERSHIP. Dealer and Public Company hereby
represent and warrant that (i) Dealer is a wholly-owned subsidiary of Public
Company, (ii) at least 55% of the capital stock of Public Company is owned by
Lithia Holding, LLC (Holding Company), and (iii) the membership interests in
Holding Company are held as follows: M.L. Dirk Heimann - 34.875%, Sidney B.
DeBoer -58.125%, and R. Bradford Gray - 7%. Given the control of Public
Company over Dealer, the control of Holding Company over Public Company, and
the control of the above-named individuals over Holding Company, and
Distributor's strong interest in assuring that those who own and control
Distributor's dealerships have interests consistent with those of
Distributor, Dealer and Public Company agree that (i) any change in the
ownership of Dealer or Holding Company, or (ii) the acquisition by any person
or entity (other than Holding Company) of more then 20% of the issued and
outstanding capital stack of Public. Company, shall be consider a change in
ownership of Dealer under the terms of the Dealer Agreement, and shall be
subject to the provisions of the Dealer Agreement and subparagraph B below.
B. DISTRIBUTOR'S RIGHTS UPON CHANGE IN OWNERSHIP. Upon the
occurrence of any event described in subparagraph A above, if Distributor
reasonably concludes that the transferee or acquiring person or entity does
not have interests compatible with those of Distributor or is otherwise not
qualified to have an ownership interest in the dealerships at the Dealership
Locations, then within 90 days of receipt of written notice from Distributor,
Dealer agrees to: (i) transfer the assets associated with Dealer to a third
party acceptable to the Distributor, (ii) voluntarily terminate the Dealer
Agreement, or (iii) provide evidence to Distributor that such person or
entity no longer has such an ownership interest in Public Company. In the
event that Dealer enters into an agreement to transfer its assets to a third
party as set forth in (i) above, Distributor shall have a right of person or
entity no longer has such an ownership interest in Public Company. In the
event that Dealer enters into an agreement to transfer its assets to a third
party as set forth in (i) above, Distributor shall have a right of
1
<PAGE>
first refusal to purchase such assets in accordance with the terms and
procedures set forth in subparagraph C below. Dealer and Public Company
agree that if an ownership interest is acquired in Public Company by a person
or entity which notifies Public Company via Schedule 13D filed with the
Securities and Exchange Commission, Dealer shall advise Distributor in
writing, and attach a copy of that Schedule.
C. EXERCISE OF RIGHT OF FIRST REFUSAL. Prior to exercising its
right of first refusal pursuant to subparagraph B above, Distributor shall
have a reasonable opportunity to inspect the assets, including real estate,
before making its decision. If Dealer has entered into a bona fide written
buy/sell agreement, the purchase price and other terms of sale shall be those
set forth in such agreement and any related documents, unless Dealer and
Distributor agree to other terms. Upon Distributor request, Dealer agrees to
provide all documents relating to the proposed transfer. If Dealer refuses
to provide such documentation or states that such documents do not exist, it
will be presumed that the agreement is not bona fide. In the absence of a
bona fide written buy/sell agreement, the purchase price of the dealership
assets will be determined by good faith negotiations by Dealer and
Distributor. If agreement cannot be reached within a reasonable time, the
price and other terms of sale shall be established by arbitration according
to the rules of the American Arbitration Association. Dealer agrees to
transfer the assets by Warranty Deed where possible, conveying marketable
title free and clear of liens and encumbrances. The Deed will be in proper
form for recording and Dealer will deliver complete possession of the assets
when the Deed is delivered. Dealer will also furnish copies of any
easements, licenses or other documents affecting the property and assign any
permit or licenses necessary for the conduct of Dealers operations.
Distributor's rights under this section may be assigned to any third party
and in connection with any such assignment, Distributor will guarantee full
payment of the purchase price by the assignee.
3. LIMITATIONS UPON NUMBER AND LOCATIONS OF DEALERSHIPS
Dealer and Public Company agree to be bound by the provisions of
Distributors standard policies in effect from time to time which limit the
number and locations of Distributor's dealerships which may be owned by
Dealer and/or its parent companies, subsidiary companies and companies under
common control with it. Dealer shall provide such documentation as is
reasonably requested by Distributor regarding the ownership interests of all
such persons and entities in Distributor's dealerships. In the event that
Dealer or Public Company shall acquire ownership or control of more than one
of Distributor's dealerships, then Dealer and/or Public Company shall obtain
separate motor vehicle licenses, and shall maintain separate financial
statements for each dealership.
4. WORKING CAPITAL REQUIREMENTS
Dealer shall maintain, at all times, sufficient working capital to
meet or exceed the minimum net working capital standards for Dealer as
determined from time to time by Distributor consistent with its standard
policies. Dealer shall provide such documentation as is reasonably requested
by Distributor to assure compliance with this requirement. Public Company
agrees to submit an annual consolidated balance sheet for the combined
dealership operations of Public Company. Public Company agrees, upon
Distributor's request, to provide Distributor with copies of the materials
filed by Public Company with the Securities and Exchange Commission.
5. INDEMNITY
Public Company agrees to indemnity and hold Distributor harmless
from and against any and all claims, liabilities, losses, damages, costs and
expenses arising out of or in connection with the sale of stock in Public
Company. Public Company further agrees to indemnify and hold Distributor
harmless from and against any and all claims of the shareholder of Public
Company, and all liabilities, losses, damages, costs and expenses incurred in
connection therewith, unless a final determination is made that Distributor
was in fact liable for such claims, liabilities, losses, damages, costs or
expenses.
6. MISCELLANEOUS
A. EFFECT OF SUPPLEMENTAL AGREEMENT. The parties agree that this
Supplemental Agreement is intended to supplement the terms of the Dealer
Agreement and not to limit the rights and obligations of the parties
contained therein. This Supplemental Agreement is hereby incorporated into
the Dealer Agreement and made a part thereof. In the event that any of the
provisions of this Supplemental Agreement are in actual conflict with other
provisions of the Dealer Agreement, the provisions of contained in this
Supplemental Agreement shall govern. In the event that the policies of
Distributor with regard to the issues
2
<PAGE>
address herein are hereinafter modified, the parties agree to review such
modifications to determine whether modifications of this Supplemental
Agreement are appropriate.
B. CONSTRUCTION. This Supplemental Agreement shall be governed
by and construed in accordance with the laws of the State of California. The
failure of either party to enforce any of the provisions of this Supplemental
Agreement or the failure to exercise any election provided for herein shall
in no way be considered to be a waiver of such provisions or elections. All
capitalized terms used herein and not defined herein shall have the meanings
set forth in the Dealer Agreement.
C. ALTERNATIVE DISPUTE RESOLUTION. In the event of any dispute
between the parties regarding the Dealer Agreement or this Supplemental
Agreement, Dealer and Public Company agrees to participate in any alterative
dispute resolution procedures specified in the standard policies of
Distributor. Upon final determination through such dispute resolution, each
party shall have recourse to a review de novo by the appropriate state court
or administrative agency consistent with the provisions of state law. The
parties agree that should a party making such appeal lose the issues
presented on appeal, then that party shall pay the reasonable expenses,
including reasonable attorneys' fees, of the other party for the defense of
such de novo review.
D. NO THIRD PARTY BENEFICIARIES. Nothing in this Supplemental
Agreement or the dealer Agreement shall be construed to confer any rights
upon any person not a party hereto or thereto, nor shall it create in any
party an interest as a third party beneficiary of this Supplemental Agreement
or the Dealer Agreement. Dealer and Public Company agree to indemnify and
hold harmless Distributor, its affiliates, subsidiaries, directors, officers,
employees, agents and representatives from and against all claims, actions,
liabilities, damages, costs and expenses (including reasonable attorneys'
fees) arising from or in connection with any action by a third party in its
capacity as a stockholder of Public Company other than through a derivative
stockholder suit authorized by the Board of Directors of Public Company.
E. CONDITION PRECEDENT. Notwithstanding anything to the contrary
contained herein, the parties acknowledge that the provisions of this
Supplemental Agreement shall not be applicable until such time a Public
Company completes a public offering of its stock.
3
<PAGE>
IN WITNESS WHEREOF, THE PARTIES HAVE EXECUTED THIS SUPPLEMENTAL AGREEMENT
EFFECTIVE AS OF THE DATE SET FORTH IN THE INTRODUCTORY PARAGRAPH HEREOF.
AMERICAN ISUZU MOTORS INC. LITHIA HPI, INC.
By: By:
------------------ -----------------
J.T. Maloney Sidney B. DeBoer
Title: Title:
---------------- -----------------
By:
-----------------
Manfred L. Heimann
Title:
-----------------
LITHIA MOTORS, INC.
By:
-----------------
Sidney B. DeBoer
Title:
-----------------
By:
-----------------
Manfred L. Heimann
Title:
-----------------
4
<PAGE>
EXHIBIT 10.10.4
ADDENDUM TO SECTION X - ADDITIONAL PROVISIONS
These Additional Provisions to Toyota Dealer Agreement ("Additional
Provisions") are entered into as of DECEMBER 23, 1996 among DISTRIBUTOR,
DEALER, LITHIA MOTORS, INC., an Oregon corporation, (hereinafter "LITHIA"),
LITHIA HOLDING COMPANY, L.L.C., an Oregon limited liability company
("hereinafter "HOLDING") and SIDNEY B. DEBOER (hereinafter "DeBoer") and form
a part of and are incorporated into the Dealer Agreement.
RECITALS
--------
1. DISTRIBUTOR and DEALER have entered Into a Toyota Dealer Agreement
(the "Dealer Agreement") dated as of NOVEMBER 15, 1996.
2. LITHIA is the 100% shareholder of DEALER, HOLDING is the controlling
(defined below) shareholder of LITHIA, DeBoer is the controlling
manager of HOLDING. For the purposes of these Additional Provisions,
the terms "control", "controlling" and "controlled" have meanings
given to them in Rule 405 under the Rules and Regulations of the
Securities Act of 1933, as amended.
3. The current ownership of the outstanding stock of LITHIA is as
follows:
<TABLE>
<CAPTION>
Share of Total Type of Votes Per Share of
Outstanding Stock Stock Share Total
---------------------------------------------------------
<S> <C> <C> <C> <C>
HOLDING NOT LESS THAN COMMON 10 NOT LESS THAN
55% CLASS B 93.75%
OTHERS NOT MORE THAN COMMON 1 NOT MORE THAN
45% CLASS A 6.25%
</TABLE>
4. The Members of HOLDING are as follows:
Share of Units
--------------
Sidney B. DeBoer 58.125%
Manfred L. Heimann 34.875%
R. Bradford Gray 7.000%
The controlling Manager of HOLDING Is:
Sidney B. DeBoer
1
<PAGE>
5. HOLDING, DEALER, DeBoer and LITHIA are hereinafter collectively
referred to as the "LITHIA Parties". DISTRIBUTOR and the LITHIA
Parties are hereinafter referred to as the "Parties".
6. The Parties wish to enter into these Additional Provisions for the
purpose of agreeing to be bound by the terms of these Additional
Provisions, which are a part of and are incorporated into the Dealer
Agreement.
NOW THEREFORE, in consideration for the mutual agreements contained
herein and in the Dealer Agreement, the Parties agree as follows:
A. GENERAL
1. DISTRIBUTOR and LITHIA have entered into an Agreement dated SEPTEMBER
30, 1996 (the "Agreement") relating, among other matters, to the
number of Toyota and Lexus dealerships which may be acquired by LITHIA
and its affiliates and to certain aspects of the management of Toyota
and Lexus dealerships owned by LITHIA. The LITHIA Parties agree that
the Agreement is incorporated into and forms a part of the Dealer
Agreement and these Additional Provisions. To the extent that any
provision of the Agreement is inconsistent with the Dealer Agreement
or these Additional Provisions, the provisions of the Agreement shall
be controlling.
2. The LITHIA Parties acknowledge and agree that if any provision of
these Additional Provisions is violated in any material respect by any
of the LITHIA Parties, DISTRIBUTOR will have the right to terminate
the Dealer Agreement on sixty (60) days' written notice to DEALER, if
DEALER fails to cure such violation prior to the expiration of such
sixty (60) days.
3. The LITHIA Parties agree to comply with all Toyota policies, including
all Market Representation policies.
B. PROVISIONS RELATING TO THE STRUCTURE OF DEALER
1. SINGLE PURPOSE ENTITY. DEALER will be maintained as a separate legal
entity, and will not engage in any business other than the operation
of this Toyota Kia dealership and activities related hereto.
2. NO MERGER, CONSOLIDATION, ETC. DEALER will not be merged with or
into, or be consolidated with, or acquire substantially all of the
assets of, any other entity, without the prior written consent of
DISTRIBUTOR, in its sole discretion.
2
<PAGE>
C. PROVISIONS RELATING TO MANAGEMENT
1. ROLE OF DEBOER. DeBoer will remain actively involved in the
management of all aspects of the operations of DEALER. The LITHIA
Parties have identified DeBoer as the LITHIA contact official set
forth in paragraph 8 of the Agreement.
a). DeBoer will be an officer of DEALER. DeBoer, in
consultation with management of LITHIA, will have complete
control over all management decisions of DEALER or relating
to DEALER.
b). The General Manager will report directly to and be
responsible to DeBoer.
c). DISTRIBUTOR may rely on oral or written communications and
agreements from DeBoer as being the binding agreements of
DEALER, without any duty of the DISTRIBUTOR to confirm that
such communication or agreement has been duly authorized by
the Board of Directors of DEALER, LITHIA, or any other
individual or entity.
2. SUCCESSORS TO DEBOER. In the event that DeBoer wishes to discontinue
his role in the management of DEALER as set forth in Section C.1.,
such action may be taken only with the prior written consent of
DISTRIBUTOR. Such consent of DISTRIBUTOR may be conditioned on
transfer of DeBoer's management responsibilities to an individual or
individuals approved by DISTRIBUTOR, taking into amount such factors
as DISTRIBUTOR reasonably deems to be relevant and are consistent with
all applicable laws.
3. ROLE OF THE GENERAL MANAGER.
a). STEPHEN R. PHILLIPS or any subsequent General Manager of DEALER
approved by DISTRIBUTOR, will serve exclusively as General
Manager of the Toyota operation and any other line-make that
DISTRIBUTOR has consented may be dueled with Toyota, on a full
time basis and will not have any management responsibilities with
inspect to any other dealership or business.
b). The General Manager will have responsibility for and authority
with respect to the day-to-day operations of DEALER in the
ordinary course of business, under the supervision of LITHIA, and
the General Manager will have the following authority, without
the need for obtaining the prior approval
3
<PAGE>
of any other person:
(i) the authority to hire or terminate and employee of DEALER.
(ii) the authority to order vehicles and other products.
(iii) the authority to place advertising.
(iv) the authority to communicate with DISTRIBUTOR with respect
to all aspects of the business of DEALER,
(v) the authority to approve expenditure by DEALER in the
ordinary course of business in amounts of less than
$50,000 per item.
D. PROVISIONS RELATING TO CAPITALIZATION AND ACCOUNTING
1. No distributions will be made by DEALER to LITHIA if such
distributions would cause DEALER to fail to meet any of DISTRIBUTOR's
capitalization requirements, including but not limited to net working
capital requirements.
2. The operations and financial results of DEALER will be reported to
DISTRIBUTOR separately from those of any other entity, business or
activity, including but not limited to any of the LITHIA Parties and
any other dealerships directly or Indirectly owned or controlled by
any of the LITHIA Parties.
3. DEALER is currently dueled with KIA. There should be no change in the
line makes operating in DEALER's facility without the prior written
consent of DISTRIBUTOR. DEALER will maintain a separate and permanent
personnel staff and separate retail operations from other dealerships
directly or Indirectly owned by any of the LITHIA Parties.
4. DEALER shall not combine Its used car operation with that of any other
entity, including any other dealerships direct or indirectly owned by
any of the LITHIA Parties.
E. PROVISIONS RELATING TO OWNERSHIP
1. CHANGES IN INDIRECT OWNERSHIP. In addition to the right of
DISTRIBUTOR to approve changes in ownership of DEALER, as Set forth in
the Dealer Agreement and the Agreement, DISTRIBUTOR shall also have
the right, in compliance with applicable laws, to approve transfers In
ownership in LITHIA by HOLDING, will have the
4
<PAGE>
right to approve any transfer in management or ownership of HOLDING
which results in DeBoer no longer being the controlling manager of
HOLDING, and will have the right to approve any change in this
ownership or capital structure of LITHIA which results in DeBoer's no
longer having a majority of the voting power of LITHIA.
2. DIRECTORS. LITHIA shall provide a list of all current members of its
Board of Directors, and resumes for each Director, to DISTRIBUTOR, and
provide such Information for each now member.
3. SUCCESSORS AND ASSIGNS. In the event there is a request for transfer
of any interest of the LITHIA Parties in accordance with the
provisions of the Dealer Agreement, the Agreement and these Additional
Provisions, as a condition to such transfer, the transferee must
agree, in writing, to be bound by all of the terms and provisions of
the Dealer Agreement, the Agreement and these Additional Provisions,
such agreement to be in form and substance reasonably acceptable to
DISTRIBUTOR.
F. FACILITIES
1. DEALER acknowledges that its current facility, designated in Section
VII of this Agreement, is deficient in the following respects:
Service Dept. (3,375)
Service Stalls (5)
DEALER understands and agrees that, to the extent DISTRIBUTOR has
permitted or will permit DEALER to continue Toyota operations without
full compliance with Toyota facility national minimum standards or
DISTRIBUTOR directives, or both, such conduct by the DISTRIBUTOR shall
not constitute a waiver of such standards or directives.
Further, DISTRIBUTOR may, at any time, amend this Agreement to establish a
timetable for DEALER to fully comply with DISTRIBUTOR's minimum facility
requirements.
2. DEALER acknowledges that the facility designated In Section VII of this
Toyota Dealer Agreement is severely deficient in its appearance and does
not project Toyota's #1 image, nor does it most Image USA requirements.
DEALER agrees to rectify these deficiencies in accordance with the
following timetable:
5
<PAGE>
DATE OF
ACTION COMPLETION
------ ----------
Complete an exterior/fascia upgrade 12/01/97
utilizing the Image USA theme.
Complete an interior modernization/ 12/01/97
upgrade utilizing the Image USA themes.
DEALER understands and agrees that any provision set forth above that
contemplate action to be taken by DEALER after the expiration of this
Agreement are advisory only and that DISTRIBUTOR shall have no obligation
to extend this Agreement or to offer DEALER a subsequent Toyota Dealer
Agreement. DISTRIBUTOR does intend, however, to grant a subsequent Toyota
Dealer Agreement to DEALER provided that DEALER is in full compliance with
all of the terms and conditions of this Agreement, as well as any
reasonable requirements imposed by DISTRIBUTOR from time to time.
IN WITNESS WHEREOF, the Parties have executed these Additional Provisions as of
the date first above written.
TOYOTA MOTOR SALES, USA., INC. LITHIA MOTORS, INC.
By:/s/JIM LENTZ By:/s/SIDNEY B. DEBOER
------------ -------------------
Jim Lentz
Title:General Manager Title:President
--------------- ---------
LITHIA HOLDING CO., L.L.C.
By:/s/SIDNEY B.DEBOER /s/SIDNEY B. DEBOER
------------------ -------------------
Title: Sidney B. DeBoer
---------------
LITHIA TKV, INC.
By:/S/SIDNEY B. DEBOER
-------------------
Title:President
---------
TOYOTA MOTOR SALES, USA., INC.
By:/s/YOSHIO ISHIZAKA
-------------------
Mr. Yoshio Ishizaka
Title:President
---------
6
<PAGE>
FIRST AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.12.2
This Amendment is made as of February 7, 1997, to that certain Lease
Agreement (the "Lease Agreement"), dated December 13, 1996, between Lithia
Properties, L.L.C., an Oregon limited liability company ("Landlord") and
Lithia Motors, Inc., an Oregon corporation ("Tenant") relating to the real
property located in Medford, Oregon, at the following addresses:
360 E. Jackson St. 401 E. 4th St.
325 E. Jackson St. 326 N. Bartlett
345 E. Bartlett St.
Whereas Landlord and Tenant desire to modify certain provisions of the
Lease Agreement, and Section 13.16 of such Lease Agreement provides that any
change to the Lease Agreement must be in writing executed by the parties
thereto;
The undersigned Landlord and Tenant hereby agree as follows:
1. Section 1.3 of the Lease Agreement is amended to read as follows:
"EXPIRATION DATE. December 31, 2011."
2. Section 1.9 of the Lease Agreement is amended to read as follows:
"TERM. Fifteen-year period commencing on the Commencement
Date and expiring December 31, 2011, if not terminated
earlier pursuant to the terms of this Lease."
3. The last sentence of the first paragraph of Section 3.3 of the Lease
Agreement is amended to read:
"As soon as the monthly rent for the ensuing year is
established, Landlord shall give Tenant notice of the amount
of monthly rent therefor."
4. All other provisions of the Lease Agreement are hereby ratified and
confirmed and remain in full force and effect.
Landlord and Tenant have executed this First Amendment as of February 7,
1997.
Landlord: LITHIA PROPERTIES, L.L.C.
By /s/ Sidney B. DeBoer, Managing Member
--------------------------------------------
Tenant: LITHIA MOTORS, INC.
By /s/ Sidney B. DeBoer
--------------------------------------------
Its President
--------------------------------------
<PAGE>
LITHIA MOTORS, INC.
CALCULATIONS OF NET INCOME PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------
1996 1995
----------------------- ----------------------
Primary Fully Diluted Primary Fully Diluted
----------------------- ----------------------
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding for the Period:
Class A Common Stock 96 96 - -
Class B Common Stock 4,110 4,110 4,110 4,110
S Corp. termination (note 1) 451 451 467 467
Dilutive Common Stock
Options Using the Treasury
Stock Method 316 316 316 316
----------------------- ----------------------
Total Shares Used for Per
Share Calculations 4,973 4,973 4,893 4,893
----------------------- ----------------------
----------------------- ----------------------
Net Income 4,042 4,042 $ 3,375 $ 3,375
----------------------- ----------------------
----------------------- ----------------------
Net Income Per Share $ 0.81 $ 0.81 $ 0.69 $ 0.69
----------------------- ----------------------
----------------------- ----------------------
</TABLE>
Note 1: Reflects shares issued to pay S Corporation earnings dividends of
approximately $5,150 to shareholders through the date of the Company's
initial public offering on December 18, 1996.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Lithia Motors, Inc. and subsidiaries:
We consent to incorporation by reference in the registration statement (No.
333-21673) on Form S-8 of Lithia Motors, Inc. of our report dated February
19, 1997, relating to the consolidated balance sheets of Lithia Motors, Inc.
and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996, which report appears in the December 31, 1996 annual report on Form
10-K of Lithia Motors, Inc.
KPMG PEAT MARWICK LLP
Portland, Oregon,
March 21, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,413
<SECURITIES> 0
<RECEIVABLES> 2,260
<ALLOWANCES> 13
<INVENTORY> 28,152
<CURRENT-ASSETS> 49,089
<PP&E> 4,616
<DEPRECIATION> 2,073
<TOTAL-ASSETS> 63,754
<CURRENT-LIABILITIES> 28,868
<BONDS> 27,660
0
0
<COMMON> 24,683
<OTHER-SE> 53
<TOTAL-LIABILITY-AND-EQUITY> 63,754
<SALES> 142,844
<TOTAL-REVENUES> 142,844
<CGS> 118,647
<TOTAL-COSTS> 118,647
<OTHER-EXPENSES> 20,277
<LOSS-PROVISION> 29
<INTEREST-EXPENSE> 1,353
<INCOME-PRETAX> 3,916
<INCOME-TAX> (813)
<INCOME-CONTINUING> 4,042
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,042
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
