<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14C INFORMATION
INFORMATION STATEMENT PURSUANT TO SECTION 14(C) OF THE SECURITIES EXCHANGE
ACT OF 1934
Check the appropriate box:
[ ] Preliminary Information Statement
[X] Definitive Information Statement
LITHIA MOTORS, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing the Information Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-g and 0-11
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
4) Proposed maximum aggregate value of transaction:
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE>
LITHIA MOTORS, INC.
360 E. JACKSON STREET
MEDFORD, OREGON 97501-5289
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 14, 1998
To the Shareholders of Lithia Motors, Inc.:
I am pleased to invite you to the Annual Meeting of Shareholders of LITHIA
MOTORS, INC., which will be held at the Rogue Valley Country Club, 2660
Hillcrest Road, Medford, Oregon 97504, on Thursday, May 14, 1998, at 4:00
p.m., Pacific Daylight Savings Time. I would like the opportunity to meet
you personally, introduce you to our management team and Directors, and
answer any questions you may have.
Very truly yours,
LITHIA MOTORS, INC.
SIDNEY B. DeBOER
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND SECRETARY
<PAGE>
LITHIA MOTORS, INC.
----------------------------
INFORMATION STATEMENT
GENERAL
This Information Statement is being sent to Shareholders of Lithia Motors,
Inc. (the "Company") in connection with the annual meeting of shareholders to
be held on May 14, 1998 for the following purposes:
1. To elect directors of the Company for the ensuing year (Proposal
No. 1);
2. To approve an amendment to the Company's 1996 Stock Incentive Plan
to increase the number of shares of the Company's Common Stock that
may be issued thereunder by 415,000 shares to a total of 1,085,000
shares (Proposal No. 2);
3. To approve the Company's 1998 Employee Stock Purchase Plan
(Proposal No. 3); and
4. To consider and act on such other matters as may properly come
before the meeting.
Only shareholders of record as of March 31, 1998 are entitled to notice of
and to vote at this meeting.
VOTING AT THE MEETING
Class A and Class B Common Stock constitute the only classes of securities
entitled to notice of and to vote at the meeting. As of the record date,
there were 2,925,550 shares of Class A Common Stock and 4,110,000 shares of
Class B Common Stock outstanding and entitled to vote.
Each share of Class A Common Stock is entitled to one vote per share and each
share of Class B Common Stock outstanding is entitled to ten votes at the
Annual Meeting. If a quorum is present at the Annual Meeting (i) the five
nominees for election as directors who receive the greatest number of votes
cast for the election of directors shall be elected directors, (ii) Proposal
No. 2 (to approve an amendment to the Lithia Motors, Inc. 1996 Stock
Incentive Plan) will be approved if it receives the affirmative vote of the
holders of at least a majority of the votes casted of the Common Stock
represented at the meeting and (iii) Proposal No. 3 (to approve the 1998
Lithia Motors, Inc. Employee Stock Purchase Plan) will be approved if it
receives the affirmative vote of the holders of at least a majority of the
votes casted of the Common Stock represented at the meeting.
Directors are elected by a plurality of the votes cast and only votes cast in
favor of a nominee will have an effect on the outcome. Shareholders are not
entitled to cumulate votes for directors. Since the voting control of the
Company is held by Sidney DeBoer, the Company's Chairman of the Board, Chief
Executive Officer and Secretary, the Company is not soliciting proxies in
order to avoid the expense of doing so.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
<PAGE>
BUSINESS TO BE CONDUCTED AT THE MEETING
PROPOSAL NO. 1
ELECTION OF DIRECTORS
The Company's Bylaws provide for not less than two and not more than seven
directors. The Board of Directors has currently established the number of
directors at five. Directors are elected by the shareholders at the
Company's annual meeting and serve until the next annual meeting or until
their successors are elected and qualified. The Board of Directors has
nominated the following persons to serve as directors for the ensuing year:
<TABLE>
<CAPTION>
<S> <C> <C>
NAME AGE HAS BEEN A DIRECTOR SINCE
- ---- --- -------------------------
Sidney B. DeBoer 54 1968
M. L. Dick Heimann 54 1970
Thomas Becker 46 1997
R. Bradford Gray 46 1997
William J. Young 55 1997
</TABLE>
SIDNEY B. DEBOER. Mr. DeBoer has served as the Chairman, Chief Executive
Officer and Secretary of the Company since 1968. He also is a member of
various automobile industry organizations, including the President's Club of
the National Automobile Dealers Association, Oregon Auto Dealers Association,
Medford New Car Dealers Association, Chrysler Dealer Council, Toyota Dealer
Council and Honda Dealer Council.
M.L. DICK HEIMANN. Mr. Heimann has served as the Chief Operating Officer and
Director of the Company since 1970 and was appointed President in 1997. Prior
to joining the Company, he served as a district manager of Chrysler
Corporation from 1967 to 1970. He is a member of various automobile industry
organizations including the Oregon Auto Dealers Association, the Jeep Dealer
Council and the Medford New Car Dealers Association, for which he has
previously served as president. Mr. Heimann is a graduate of University of
Colorado with a Bachelor of Science degree in Biology and Languages.
R. BRADFORD GRAY. Mr. Gray has served as Executive Vice President of the
Company since 1996 and became a Director of the Company in 1996. From 1981 to
1995, he served in various capacities with the Company, including as General
Manager of the Company's Grants Pass (1991-1995) and Lithia Dodge (1989-1991)
dealerships. Since 1975, Mr. Gray has held various positions in the
automobile sales industry, including sales representative, sales manager and
general manager.
THOMAS BECKER. Mr. Becker became a Director of the Company on March 1, 1997.
Mr. Becker is the Executive Director of Pacific Retirement Services, Inc. and
Rogue Valley Manor in Medford, Oregon. Pacific Retirement Services, Inc. is
the parent corporation of: Trinity Terrace, Ft. Worth, Texas; Cascade Manor,
Eugene, Oregon; University Retirement Community at Davis, Davis, California;
Rogue Valley Manor Community Services, Inc., Medford, Oregon; 12 Rogue Valley
Manor Community Housing Corporations located in Oregon and California; Rogue
Valley Manor Foundation and Rogue Valley Manor Home Health Care Agency, both
in Medford, Oregon. Mr. Becker began his career with Rogue Valley Manor on
January 1, 1978. Mr. Becker holds a Bachelor of Science degree from the
University of Oregon.
2
<PAGE>
WILLIAM J. YOUNG. Mr. Young became a Director of the Company on March 1,
1997. Mr. Young is the Chairman of the Board, President and Chief Executive
Officer of ARC Capital, a holding company with three wholly-owned
subsidiaries operating in the machine vision industry. Mr. Young has been
with ARC Capital since 1994. Prior to 1994, Mr. Young served with Volkswagen
of America ("VOA") for 18 years, most recently as President and Chief
Executive Officer. During his tenure as President and CEO of VOA, Mr. Young
also served as President of V-Crest Systems, Inc. ("VCI"), a computer
services company serving 1,200 auto dealer agencies, and Director of VCI,
Inc., a $2 billion financial services company.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors held four regular meetings during the year ended
December 31, 1997. No director attended fewer than 75 percent of the meetings
of the Board of Directors and committees thereof, if any, during the period
that he was a member of the Board of Directors during 1997.
The Compensation Committee, consisting of Messrs. Becker and Young, both non-
employee outside directors, and Mr. DeBoer, reviews and approves salaries for
the executive officers, grants of stock options and other incentive
compensation for employees of the Company. The Compensation Committee also
administers the Company's 1996 Stock Incentive Plan and the Company's
Employee Stock Purchase Plan. The Compensation Committee held four meetings
during 1997.
The Audit Committee, consisting of Messrs. Becker and Young, both non-
employee outside directors, and Mr. DeBoer, is responsible for recommending
the selection of auditors for the Company and reviewing the results of the
audit and other reports and services provided by the Company's independent
auditors. The Audit Committee held one meeting during 1997.
The Board of Directors does not have a Nominating Committee. The entire
Board serves this function.
COMPENSATION OF DIRECTORS
Those directors who are not employees of the Company are paid $12,000 per
year and receive an additional $500 per meeting of the Board or a committee
of the Board in excess of one meeting per month. Non-employee directors also
are granted a stock option for 1,500 shares of Class A Common Stock under the
Company's 1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
(the "Directors' Plan") on the January 2 following the date on which they
first join the Board and on each January 2 thereafter. Stock options granted
under the Directors' Plan have an exercise price equal to the average of the
bid and asked price of the Class A Common Stock at the close of trading on
the date of grant. Such options fully vest six months following the date of
grant and expire 10 years following such date subject to earlier termination
one year after the death or disability of the optionee or 90 days after the
optionee ceases to be a director of the Company for any other reason.
Directors of the Company who are employees do not receive any additional
compensation for serving as a director. All directors are also reimbursed
for out-of-pocket expenses which they may incur in connection with their
attendance at Board or committee meetings.
3
<PAGE>
PROPOSAL NO. 2
APPROVAL OF AN AMENDMENT TO THE COMPANY'S 1996 STOCK INCENTIVE PLAN
In April 1996, the Board and the Company's shareholders adopted the Company's
1996 Stock Incentive Plan (the "Plan"). The Plan provides for the granting of
stock-based awards ("Awards") to executive officers (including those who are
directors), to other employees and to non-employee consultants of the
Company. Such Awards may take any form approved by the Board or by a
committee designated by the Board, including stock options, stock bonuses,
stock appreciation rights and restricted stock awards. Stock options granted
under the Plan may be either options that qualify as "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended ("Incentive Options"), or those that do not qualify as such
"incentive stock options" ("Non-qualified Options").
In March 1998, the Company's Board of Directors approved an amendment to the
Plan to increase the number of shares covered by the Plan by 415,000 to a
total of 1,085,000 shares, subject to approval by the Company's shareholders.
A more complete summary of the Plan is set forth in Appendix A.
PROPOSAL NO. 3
APPROVAL OF THE COMPANY'S 1998 EMPLOYEE STOCK PURCHASE PLAN
The Board of Directors of the Company has approved the implementation of an
Employee Stock Purchase Plan (the "Purchase Plan"), subject to shareholder
approval, and has reserved a total of 250,000 shares of Class A Common Stock
for issuance under the Purchase Plan. The Purchase Plan is intended to
qualify as an "Employee Stock Purchase Plan" under Section 423 of the
Internal Revenue Code of 1986, as amended, and will be administered by the
Compensation Committee of the Board.
The Purchase Plan allows eligible employees to purchase shares of the
Company's Class A Common Stock through payroll deductions, which may not
exceed 15% of an employee's total pay. The price of shares purchased under
the Purchase Plan will be at 85% of the lower of the fair market value of the
Class A Common Stock at the beginning or at the end of each calendar quarter.
Employees of the Company and its subsidiaries are eligible to participate in
the Purchase Plan after they have completed at least six months of continuous
employment and work at least 20 hours per week. Mr. DeBoer, Mr. Heimann and
Mr. Gray are not currently eligible to participate in the Purchase Plan since
employees who control 5% or more of the total voting power of all classes of
the Company's stock are not eligible. A more complete summary of the Purchase
Plan is set forth in Appendix B.
4
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 31, 1998, certain information
furnished to the Company with respect to ownership of the Company's Common
Stock of (i) each Director, (ii) the Chief Executive Officer, (iii) the
"Named Executive Officers" (as defined under "Executive Compensation") other
than the Chief Executive Officer, (iv) all persons known by the Company to be
beneficial owners of more than 5 percent of its Common Stock, and (v) all
executive officers and Directors as a group.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
COMMON STOCK (A) (B)
-----------------------------------
NUMBER OF PERCENT OF SHARES
SHAREHOLDER SHARES OUTSTANDING
- ------------------------------------------ -----------------------------------
Lithia Holding Company, LLC (C) (D) Class A -- --
Class B 4,110,000 100%
Sidney B. DeBoer (C) (D) (E) Class A 69,227 2.3%
Class B 4,110,000 100%
J.P. Morgan & Co. Incorporated Class A 417,500 14.3%
60 Wall Street Class B -- --
New York, NY 10260 (F)
Wellington Management Company LLP (G) Class A 324,900 11.1%
75 State Street Class B -- --
Boston, Massachusetts 02109
The Capital Group Companies, Inc. (H) Class A 250,000 8.5%
333 South Hope Street Class B -- --
Los Angeles, CA 90071
Gardner Lewis Asset Management Class A 250,000 8.5%
285 Wilmington West Chester Pike Class B -- --
Chadds Ford, PA 19317 (I)
Investment Advisers, Inc. Class A 167,400 5.7%
3700 First Bank Place Class B -- --
P.O. Box 357
Minneapolis, MN 55440 (J)
M. L. Dick Heimann (D) (K) Class A 99,227 3.3%
Class B -- --
R. Bradford Gray (D) (L) Class A 27,981 *
Class B -- --
Thomas Becker (M) Class A 5,000 *
Class B -- --
William J. Young (N) Class A 1,500 *
Class B -- --
All executive officers and directors as a Class A 232,730 7.6%
group (6 persons) (O) Class B 4,110,000 100%
- -------------------------------------
*Less than one percent
</TABLE>
5
<PAGE>
(A) Applicable percentage of ownership is based on 2,925,550 shares of Class
A Common Stock outstanding and 4,110,000 shares of Class B Common Stock
outstanding as of March 31, 1998 together with applicable options for
such shareholders. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes voting
and investment power with respect to shares. Shares of Common Stock
subject to options or warrants currently exercisable or exercisable
within 60 days after March 31, 1998 are deemed outstanding for computing
the percentage ownership of the person holding such options or warrants,
but are not deemed outstanding for computing the percentage of any other
person.
(B) The Class A Common Stock is entitled to one vote per share and the Class
B Common Stock is entitled to 10 votes per share and is convertible into
Class A Common Stock on a share for share basis at the option of the
holder thereof or under other certain circumstances.
(C) Such person can be reached c/o 360 E. Jackson Street, Medford, Oregon
97501.
(D) Lithia Holding's members are Mr. DeBoer (53.6%), Mr. Heimann (34.9%), Mr.
Gray (7.0%), DeBoer Insurance, L.L.C. (3.8%) and Sid and Karen DeBoer
Foundation (0.7%). Mr. DeBoer, as the manager of Lithia Holding and
pursuant to the terms of its operating agreement, has the sole voting and
investment power with respect to all of the Class B Common Stock held.
DeBoer Insurance, L.L.C. is owned by Mr. DeBoer's adult children.
(E) Class A holdings include 39,227 shares subject to options exercisable
within 60 days of March 31, 1998.
(F) J. P. Morgan & Co. Incorporated ("J. P. Morgan") is the parent holding
company of Morgan Guaranty Trust Company of New York, a bank as defined
in Section 3(a)(6) of the Securities Exchange Act of 1934 and J. P.
Morgan Investment Management, Inc. and J. P. Morgan Florida Federal
Savings Bank, both of which are investment advisers registered under
Section 203 of the Investment Advisers Act of 1940. Based on information
filed with the Securities and Exchange Commission on February 13, 1998,
J.P. Morgan has sole voting power with respect to 346,800 shares and sole
dispositive power with respect to all 417,500 shares.
(G) The securities referred to herein are deemed to be beneficially owned by
Wellington Management Company, LLP ("WMC") as a result of its capacity as
investment adviser. Such securities are owned of record by clients of
WMC. Based on information filed with the Securities and Exchange
Commission on February 10, 1998, WMC has shared voting power with respect
to 144,400 shares and shared dispositive power with respect to all
324,900 shares. WMC is the parent holding company of Wellington Trust
Company, NA, a bank as defined in Section 3(a)(6) of the Securities
Exchange Act of 1934.
(H) The Capital Group Companies, Inc. ("CGC") is the parent holding company
of a group of investment management companies that hold investment power
and, in some cases, voting power over the securities reported herein.
The investment management companies, which include Capital Guardian Trust
Company, a bank as defined in Section 3(a)(6) of the Securities Exchange
Act of 1934, and several investment advisers registered under Section 203
of the Investment Advisers Act of 1940, provide investment advisory and
management services for their respective clients which include registered
investment companies and institutional accounts. Based on information
filed with the Securities and Exchange Commission on February 10, 1998,
CGC does not have investment power or voting power over any of the
securities held, but may be deemed to beneficially own such securities by
virtue of Rule 13d-3 under the Securities and Exchange Act. Capital
Guardian Trust Company is the beneficial owner of 250,000
6
<PAGE>
shares of Class A Common Stock of the Company as a result of its serving
as the investment manager of various institutional accounts.
(I) Gardner Lewis Asset Management is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940. Based on information
filed with the Securities and Exchange Commission on February 13, 1998,
Gardner Lewis Asset Management has sole voting and dispositive power with
respect to all 250,000 shares.
(J) Investment Advisers, Inc. is an investment adviser registered under
Section 203 of the Investment Advisers Act of 1940 and based on
information filed with the Securities and Exchange Commission on March
10, 1998, it has sole voting and dispositive power with respect to
163,100 shares and shared voting and dispositive power with respect to
4,300 shares. The 167,400 shares are held by various custodian banks for
various clients of Investment Advisers, Inc.
(K) Includes 69,227 shares subject to options exercisable within 60 days of
March 31, 1998 and 5,000 shares held by Mr. Heimann's spouse.
(L) Includes 27,981 shares subject to options exercisable within 60 days of
March 31, 1998.
(M) Includes 1,500 shares subject to options exercisable within 60 days of
March 31, 1998.
(N) Includes 1,500 shares subject to options exercisable within 60 days of
March 31, 1998.
(O) Includes 153,280 shares subject to options exercisable within 60 days of
March 31, 1998 and 5,000 shares held by Mr. Heimann's spouse.
EXECUTIVE OFFICERS
The following table identifies the current executive officers of the Company,
the positions they hold, and the year in which they began serving in their
respective capacities. Officers of the Company are elected by the Board of
Directors at the Annual Meeting to hold office until their successors are
elected and qualified.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
POSITION HELD
NAME AGE CURRENT POSITION(S) WITH COMPANY SINCE
- --------------------- --- --------------------------------------------------- ----------------
Sidney B. DeBoer 54 Chairman, Chief Executive Officer and Secretary 1968
M. L. Dick Heimann 54 President, Chief Operating Officer and Director 1970
R. Bradford Gray 46 Executive Vice President and Director 1995
Brian R. Neill 44 Senior Vice President and Chief Financial Officer 1995
</TABLE>
For information on the business background of Messrs. DeBoer, Heimann and
Gray, see "Election of Directors" above.
BRIAN R. NEILL. Mr. Neill has served as the Chief Financial Officer of the
Company since September 1995 and as Senior Vice President since 1997. Prior
to joining the Company, he served as the Senior Vice President and Chief of
Operations of Jackson County Federal Bank in Medford, Oregon from 1977 to
1991. Mr. Neill is a graduate of Northwest Christian College with a Bachelor
of Science degree in Management.
7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table shows compensation paid to the Chief Executive Officer
and each of the two other executive officers who had total compensation
during 1997 exceeding $100,000 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Long Term
Compensation
Annual Compensation Awards
------------------------- ---------------
Securities
Underlying All Other
Name and Principal Position Year Salary Bonus(A) Options (#) Compensation
- ----------------------------------- -------- ------------ ---------- --------------- ------------
Sidney B. DeBoer 1997 $364,800 $4,689 3,636 $9,711(B)
Chairman, Chief Execu- 1996 $344,550 $1,500 68,500 $7,282(B)
tive Officer and Secretary 1995 $331,125 $1,500 -- $2,310(C)
M. L. Dick Heimann 1997 $273,000 $1,996 3,636 $7,262(D)
President, Chief Operat- 1996 $273,000 $1,500 68,500 $5,842(D)
Ing Officer and Director 1995 $277,125 $1,500 -- $2,310(C)
R. Bradford Gray 1997 $238,000 $3,898 2,909 $6,795(E)
Executive Vice President 1996 $196,000 $3,851 68,500 $6,426(E)
And Director 1995 $189,060 $3,645 -- $5,935(F)
- -----------------------------------
</TABLE>
(A) Includes a "wellness bonus" of $1,500 in 1995 and 1996 and $1,000 in
1997 for each of the Named Executive Officers. All full-time employees
are entitled to an annual "wellness bonus" equal to $150 per year in
1995 and 1996 and $120 per year in 1997 for each year of employment
(maximum of $1,500 in 1995 and 1996 and $1,000 in 1997) for undergoing a
physical and other health counseling.
(B) Consists of an automobile allowance of $7,501 and $4,907 and Company
contributions to Mr. DeBoer's 401(k) account of $2,210 and $2,375 in
1997 and 1996, respectively.
(C) Consists of amounts contributed by the Company to the accounts of Mr.
DeBoer and Mr. Heimann pursuant to the Company's 401(k) Plan.
(D) Consists of an automobile allowance of $5,052 and $3,467 and Company
contributions to Mr. Heimann's 401(k) account of $2,210 and $2,375 in
1997 and 1996, respectively.
(E) Consists of an automobile allowance.
(F) Includes $2,310, contributed by the Company to the account of Mr. Gray
pursuant to the Company's 401(k) and Profit Sharing Plan and an
automobile allowance of $3,625.
8
<PAGE>
STOCK OPTIONS
In lieu of certain executive annual cash bonuses in 1997, the Company granted
non-qualified stock options covering a total of 21,454 shares to certain
employees of the Company exercisable at $1.00 per share. The following table
contains information concerning the grant of stock options under the
Company's 1996 Stock Incentive Plan (the "Plan") to the Named Executive
Officers in 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Individual Grants (A) Potential
------------------------------------------------------------- Realizable Value
Number of % of Total At Assumed Annual
Securities Options Rates of Stock Price
Underlying Granted to Appreciation for
Options Employees in Exercise Expiration Option Term (B)
Name Granted Fiscal Year Price ($/Sh.) Date -------------------------
- ---- ------- ----------- ------------- ---- 5% 10%
-- ---
Sidney B. DeBoer 3,636 8.2% $1.00 12/31/05 $75,601 $111,327
M. L. Dick Heimann 3,636 8.2% $1.00 12/31/05 $75,601 $111,327
R. Bradford Gray 2,909 6.5% $1.00 12/31/05 $60,485 $89,068
- -----------------------------------
</TABLE>
(A) All options granted to the named executive officers in 1997 vest as to
20% on the date of grant and as to an additional 20% on each of the first
through fourth anniversaries thereof and have a term of 8 years. The
market value of the underlying securities on the date of grant was $14.75.
(B) These calculations are based on certain assumed annual rates of
appreciation as prescribed by rules adopted by the Securities and
Exchange Commission requiring additional disclosure regarding executive
compensation. Under these rules, an assumption is made that the shares
underlying the stock options shown in this table could appreciate at
rates of 5% and 10% per annum on a compounded basis over the term of the
stock options. Actual gains, if any, on stock option exercises are
dependent on the future performance of the Company's Common Stock and
overall stock market conditions. There can be no assurance that amounts
reflected in this table will be achieved, or may not be exceeded.
9
<PAGE>
OPTION EXERCISES AND HOLDINGS
The following table provides information concerning the exercise of options
during 1997 and unexercised options held as of the end of the fiscal year,
with respect to the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Number of
Securities Underlying
Number of Unexercised Value of Unexercised
Shares Options In-The-Money Options
Acquired Value At FY-End (#) At FY-End (A)
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------ -------- ------------ ------------- ----------- -------------
Sidney B. DeBoer 30,000 $462,777 25,527 16,609 $293,358 $196,533
M. L. Dick Heimann -- -- 55,527 16,609 $636,136 $196,533
R. Bradford Gray -- -- 14,281 57,128 $166,664 $674,709
- -------------------------------
</TABLE>
(A) Market value of the underlying securities at December 31, 1997 ($14.75
per share), minus exercise price of the unexercised options.
BOARD REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors consists of Messrs.
Becker, Young and DeBoer. Messrs. Becker and Young are non-employee, outside
directors and are responsible for establishing compensation of officers who
also serve on the Board of Directors. The entire Board is responsible for
reviewing and providing feedback on non-director executive officer
compensation.
COMPENSATION PHILOSOPHY AND POLICIES
The Company's philosophy is to structure executive officer compensation so
that it will attract, motivate and retain senior management by providing an
opportunity for competitive compensation based on performance. Executive
officer compensation includes competitive base salaries and long-term stock-
based incentive opportunities in the form of options exercisable to purchase
the Company's Class A Common Stock.
It is the policy of the Board that, to the extent possible, compensation will
be structured so that it meets the "performance-based" criteria as defined by
Section 162(m) of the Internal Revenue Code of 1986, as amended and therefore
is not subject to federal income tax deduction limitations.
10
<PAGE>
BASE SALARIES
Base salaries for the Named Executive Officers were determined by the Board
based on factors including, but not limited to, length of service, salaries
for comparable positions within the industry and Company performance.
ANNUAL BONUS
During 1997, the Company provided a "wellness bonus" of $1,000 for each of
the Named Executive Officers. At the discretion of the Board, all full-time
employees are eligible for an annual "wellness bonus" equal to $120 per year
for each year of employment (maximum of $1,000) for undergoing a physical and
other health counseling.
401(K) PLAN
The Company maintains a 401(k) plan, which covers substantially all eligible
full-time employees. Any Company contribution to the 401(k) plan is at the
discretion of the Board of Directors. Messrs. DeBoer and Heimann each
received a contribution of $2,210 and Mr. Gray received a contribution of
$2,310 under this 401(k) plan during 1997.
STOCK OPTION AWARDS FOR 1997
The Company's 1996 Stock Incentive Plan provides for the issuance of
incentive and/or nonqualified stock options to officers and employees of the
Company to purchase shares of the Company's Class A Common Stock. See
"Option Grants in Last Fiscal Year" table for a summary of options granted to
the Named Executive Officers during 1997.
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. DeBoer's 1997 base salary of $364,800, annual bonus of $4,689 and other
compensation of $9,711 were determined in the same manner as the other
executives as described above.
SUBMITTED BY:
Thomas Becker
William J. Young
INDEPENDENT ACCOUNTANTS
A representative of KPMG Peat Marwick LLP is expected to be present at the
Annual Meeting. The representative will be given the opportunity to make a
statement on behalf of the firm if such representative so desires, and will
be available to respond to appropriate shareholder questions. KPMG Peat
Marwick LLP was the Company's independent accountant for the year ended
December 31, 1997.
11
<PAGE>
STOCK PERFORMANCE GRAPH
The SEC requires that registrants include in their information statement a
line-graph presentation comparing cumulative five-year shareholder returns on
an indexed basis, assuming a $100 initial investment and reinvestment of
dividends, of (a) the registrant, (b) a broad-based equity market index and
(c) an industry-specific index or a registrant-constructed peer group index.
The broad-based market index used is the Nasdaq Stock Market U.S. Total
Return Index and the peer group index used is composed of Cross Continent
Auto Retailers, United Auto Group, Inc., Republic Industries, Inc., Sonic
Automotive, Inc. and Group 1 Automotive, Inc., the only other publicly traded
automobile dealerships in the United States as of December 31, 1997. The
peer group index used utilizes the same methods of presentation and
assumptions for the total return calculation as the Company and the Nasdaq
U.S. Index. All companies in the peer group index are weighted in accordance
with their market capitalizations.
<TABLE>
<CAPTION>
<S> <C> <C>
Annual Percentage Return
Year Ended
-------------------------
Company/Index 12/31/96 12/31/97
- ----------------------- ---------- -----------
Lithia Motors, Inc. 1.18 32.52
Nasdaq U.S. Index (0.88) 23.80
Peer Group Index 0.41 (26.58)
Indexed Returns
Base Year Ended
Period ---------------------
Company/Index 12/18/96 12/31/96 12/31/97
- --------------------------- --------- --------- --------
Lithia Motors, Inc. $100.00 $101.18 $134.09
Nasdaq U.S. Index 100.00 99.12 122.71
Peer Group Index 100.00 100.41 73.72
</TABLE>
12
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LEASE AND PURCHASE OF REAL ESTATE FROM LITHIA PROPERTIES
Several of the parcels of real property on which the Company's businesses are
located are owned by Lithia Properties, the members of which are the Company
(20%), Sidney B. DeBoer (35%), M. L. Dick Heimann (30%) and three of
Mr. DeBoer's children, who own 5% each. The Company and the affiliated
entities paid an aggregate of $1.4 million in lease payments to Lithia
Properties during the years ended December 31, 1997.
The Company and Lithia Properties have entered into lease agreements with
respect to each facility, effective January 1, 1997. The leases have terms of
30 years and have aggregate annual lease payments of $1.75 million in 1998.
The Company is also responsible for property taxes, insurance and maintenance
expenses. The 1997 lease payments are determined by a formula which sets the
monthly payment at 0.83% of the fair market value of the properties according
to independent appraisals. Lease payments are paid monthly and are adjusted
each year beginning January 1998 to an amount equal to any increase in the
cost of living based on the Consumer Price Index entitled U.S. CITY AVERAGE -
ALL ITEMS FOR ALL URBAN CONSUMERS (base year 1982-84 = 100) published by the
Bureau of Labor Statistics of the U.S. Department of Labor.
Lithia Properties constructed a new body and paint shop for use by the
Company, which was completed in April 1997. The Company purchased the
facility and improvements together with a 5.3 acre parcel held for future
development in Medford, Oregon, in 1997. The total purchase price for these
properties was $2.7 million. Lithia Properties retained and after purchase of
the facility, the Company continued to retain, Mark DeBoer Construction, Inc.
as the general contractor for the project. Mark DeBoer, the owner of Mark
DeBoer Construction, Inc., is the son of Sidney B. DeBoer and is one of the
members of Lithia Properties. The general contractor fee was $128,000, an
arrangement the Company believes is fair in comparison with fees negotiated
with independent third parties.
The Company has generally chosen to lease its facilities in the past. It may
continue this practice in the future and assign any rights it acquires to
purchase real estate in connection with the acquisition of dealerships to
Lithia Properties or others. No future transfers to or leases with Lithia
Properties will be undertaken without the unanimous approval of the
independent directors on the Company's Board of Directors and a determination
by such independent directors that such transactions are the equivalent of a
negotiated arm's-length transaction with a third party.
GUARANTEE OF LITHIA PROPERTIES INDEBTEDNESS; SHORT-TERM LOAN FROM LITHIA
PROPERTIES
The Company has guaranteed and has committed to guarantee certain
indebtedness of Lithia Properties incurred in connection with the purchase or
refinancing of real property which secures mortgage loans. All of the
properties securing these loans are occupied by the Company under long-term
leases with Lithia Properties. The loans have a total outstanding principal
balance of approximately $9.3 million with interest rates from 8.25% to 10.0%
and remaining terms of from one to 11 years.
13
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the 1934 Act requires the Company's directors and executive
officers and persons who own more than ten percent of the outstanding shares
of the Company's Common Stock ("ten percent shareholders"), to file with the
SEC initial reports of beneficial ownership and reports of changes in
beneficial ownership of shares of Common Stock and other equity securities of
the Company. To the Company's knowledge, based solely on review of the
copies of such reports furnished to the Company or otherwise in its files and
on written representations from its directors, executive officers and ten
percent shareholders that no other reports were required, during the fiscal
year ended December 31, 1997, the Company's officers, directors and ten
percent shareholders complied with all applicable Section 16(a) filing
requirements, except that Brian R. Neill, an Officer of the Company, filed
one late report on Form 4 relating to one stock option exercise transaction.
OTHER BUSINESS
The Company knows of no other business to be conducted at the meeting.
FORM 10-K
The Company will provide, without charge, on the written request of any
beneficial owner of shares of the Company's Common Stock a copy of the
Company's Annual report on Form 10-K as filed with the Securities and
Exchange Commission for the Company's fiscal year ended December 31, 1997.
Written requests should be mailed to the Secretary, Lithia Motors, Inc., 360
E. Jackson Street, Medford, Oregon 97501.
By Order of the Board of Directors:
SIDNEY B. DeBOER
CHAIRMAN, CHIEF EXECUTIVE
OFFICER AND SECRETARY
Dated: April 16, 1998
14
<PAGE>
APPENDIX A
1996 STOCK INCENTIVE PLAN SUMMARY
GENERAL
In April 1996, the Board and the Company's shareholders adopted the Company's
1996 Stock Incentive Plan (the "Plan"). The Plan provides for the granting of
stock-based awards ("Awards") to executive officers (including those who are
directors), to other employees and to non-employee consultants of the
Company. Such Awards may take any form approved by the Board or by a
committee designated by the Board, including stock options, stock bonuses,
stock appreciation rights and restricted stock awards. Stock options granted
under the Plan may be either options that qualify as "incentive stock
options," within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended ("ISOs"), or those that do not qualify as such "incentive
stock options" ("NQSOs"). The Plan, which permits up to 670,000 shares of the
Company's Class A Common Stock to be issued, terminates on April 4, 2006. As
of March 31, 1998, Incentive and Non-Qualified Options with respect to a
total of 565,839 shares of Class A Common Stock were outstanding, and Options
covering 50,550 shares of the Company's Class A Common Stock have been
exercised. An additional 53,611 shares are available for issuance under the
Plan. As of March 31, 1998, options with respect to 179,265 shares were
exercisable. The Board has approved an amendment to the Plan to increase the
number of shares under the Plan by 415,000 shares, subject to shareholder
approval. At December 31, 1996, four officers of the Company and 34 other
employees were eligible to participate in the Plan.
ADMINISTRATION
The Plan is administered by the Compensation Committee of the Board. Subject
to the terms of the Plan, the Compensation Committee determines the persons
to whom Awards are granted and the terms and the number of shares covered by
each Award. The term of each option may not exceed ten years from the date
the option is granted, or five years in the case of an incentive stock option
granted to a holder of more than 10% of the fully-diluted capital stock of
the Company. Options may become exercisable in whole at grant or in
installments over time, as determined by the Committee.
TERMINATION
With respect to the stock options granted by the Company to date, such
options generally expire when the optionee ceases to be affiliated with the
Company. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee.
VESTING
Awards under the Plan generally vest over a five year period. The Plan
provides, however, that any Award may contain, at the discretion of the
Committee, a provision conditioning or accelerating the receipt of benefits
pursuant to such Award upon the occurrence of specified events, including
continued employment by the Company, a change in control, merger, dissolution
or liquidation of the Company or the sale of substantially all of the
Company's assets. The acceleration of vesting of Awards in the event of a
merger or other similar event
A-1
<PAGE>
may be seen as an anti-takeover provision and may have the effect of
discouraging a proposal for merger, a takeover attempt or other efforts to
gain control of the Company.
MEANS OF EXERCISING OPTIONS
Under the terms of the stock options issued to date, payment upon the
exercise of an option may be in cash, by check or by delivery of shares of
Class A Common Stock with a "fair market value," as defined in the Plan,
equal to the aggregate exercise price.
MINIMUM OPTION PRICE
The exercise prices of ISOs under the Program must equal or exceed the fair
market value of the Common Stock on the date of grant (110% of the fair
market value in the case of employees who holds 10% or more of the voting
power of the Common Stock (a "10% Stockholder")).
DURATION OF OPTIONS
Subject to earlier termination of the option as a result of termination of
employment, death or disability, each option granted under the Plan shall
expire on the date specified by the Compensation Committee, but in no event
more than (i) ten years and one day from the date of grant in the case of
NQSOs, (ii) ten years from the date of grant in the case of ISOs generally,
and (iii) five years from the date of grant in the case of ISOs granted to a
10% Stockholder. Awards generally terminate eight years from the date of
grant.
FEDERAL TAX EFFECTS OF ISOS
The Company intends that ISOs granted under the Plan will qualify as
incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended. An optionee acquiring stock pursuant to an ISO receives
favorable tax treatment in that the optionee does not recognize any taxable
income at the time of the grant of the ISO or upon exercise. The tax
treatment of the disposition of ISO stock depends upon whether the stock is
disposed of within the holding period, which is the later of two years from
the date the ISO is granted or one year from the date the ISO is exercised.
If the optionee disposes of ISO stock after completion of the holding period,
the optionee will recognize as capital gains income the difference between
the amount received in such disposition and the basis in the ISO stock, i.e.
the option's exercise price. If the optionee disposes of ISO stock before
the holding period expires, it is considered a disqualifying disposition and
the optionee must recognize the gain on the disposition as ordinary income in
the year of the disqualifying disposition. Generally, the gain is equal to
the difference between the option's exercise price and the stock's fair
market value at the time the option is exercised and sold (the "bargain
purchase element"). While the exercise of an ISO does not result in taxable
income, there are implications with regard to the alternative minimum tax
("AMT"). When calculating income for AMT purposes, the favorable tax
treatment granted ISOs is
A-2
<PAGE>
disregarded and the bargain purchase element of the ISO will be considered as
part of AMT income. Just as the optionee does not recognize any taxable
income on the grant or exercise of an ISO, the Company is not entitled to a
deduction on the grant or exercise of an ISO. Upon a disqualifying
disposition of ISO stock, the Company may deduct from taxable income in the
year of the disqualifying disposition an amount generally equal to the amount
that the optionee recognizes as ordinary income due to the disqualifying
disposition.
FEDERAL TAX EFFECTS OF NQSOS
If an option does not meet the statutory requirements of Section 422 of the
Internal Revenue Code and therefore does not qualify as an ISO, the
difference, if any, between the option's exercise price and the fair market
value of the stock on the date the option is exercised is considered
compensation and is taxable as ordinary income to the optionee in the year
the option is exercised, and is deductible by the Company for federal income
tax purposes in such year. Although an optionee will generally realize
ordinary income at the time the NQSO is exercised, if the stock issued upon
exercise of the option is considered subject to a "substantial risk of
forfeiture" and no "Section 83 Election" has been filed, then the optionee is
not taxed when the option is exercised, but rather when the forfeiture
restriction lapses. At that time, the optionee will realize ordinary income
in an amount equal to the difference between the option's exercise price and
the fair market value of the stock on the date the forfeiture restriction
lapses.
The foregoing summary of federal income tax consequences of stock options
does not purport to be complete, nor does it discuss the provisions of the
income tax laws of any state or foreign country in which the optionee
resides.
NEW PLAN BENEFITS
1996 PLAN
The following options have been granted under the Company's 1996 Plan through
March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Name and Position Number of Units (A)
----------------- -------------------
Sidney B. DeBoer, Chairman, Chief Executive Officer and Secretary 12,000
M. L. Dick Heimann, President, Chief Operating Officer and Director 12,000
R. Bradford Gray, Executive Vice President 8,000
Brian R. Neill, Senior Vice President and Chief Financial Officer 4,000
Thomas Becker, Director --
William J. Young, Director --
All Current Executive Officers as a Group (4 people) 36,000
All Non-Executive Officer Directors as a Group (2 people) --
All Non-Executive Officer Employees as a Group (996 people) 99,850
- -----------------------------------
</TABLE>
(A) Such options were granted at an exercise price per share that is equal to
the fair market value of the Company's Class A Common Stock on the date
of grant. The average per share exercise price of all option grants
included in the above table is $15.38. Options granted vest over two to
five-year periods and expire five to eight years from the date of grant.
Option grants under the 1996 Plan are discretionary and therefore, grants
for the remainder of 1998 or thereafter cannot be determined. The fair
market value of the Company's Common Stock, as reported by the Nasdaq
National Market System, on March 31, 1998 was $16.75.
A-3
<PAGE>
APPENDIX B
1998 EMPLOYEE STOCK PURCHASE PLAN
GENERAL
The Board has approved the implementation of an Employee Stock Purchase Plan
(the "Purchase Plan") subject to shareholder approval and has reserved a
total of 250,000 shares of Class A Common Stock for issuance under the
Purchase Plan.
ADMINISTRATION
The Purchase Plan is intended to qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended, and will
be administered by the Compensation Committee of the Board.
ELIGIBILITY
Employees of the Company and its subsidiaries are eligible to participate in
the Purchase Plan after they have completed at least six months of continuous
employment and work at least 20 hours per week. Mr. DeBoer, Mr. Heimann and
Mr. Gray are not currently eligible to participate in the Purchase Plan since
employees who control 5% or more of the total voting power of all classes of
the Company's stock are not eligible. Employees may end their participation
in the Purchase Plan at any time during the calendar quarter and their
participation ends automatically on the termination of their employment.
OPTION PRICE
The Purchase Plan allows eligible employees to purchase shares of the
Company's Class A Common Stock through payroll deductions, which may not
exceed 15% of an employee's total pay. The price of shares purchased under
the Purchase Plan will be 85% of the lower of the fair market value of the
Class A Common Stock at the beginning or at the end of each calendar quarter.
AMENDMENT OF THE PURCHASE PLAN
The Board may amend or terminate the Purchase Plan at any time but may not
increase the number of shares covered by the Purchase Plan, amend the
eligibility requirements or permit members of the Compensation Committee to
participate in the Purchase Plan, without subsequent shareholder approval.
TERM OF PURCHASE PLAN
The Purchase Plan will terminate on December 31, 2007.
B-1
<PAGE>
FEDERAL TAX EFFECTS
A participant acquiring stock pursuant to a qualified employee stock purchase
plan receives favorable tax treatment in that the participant does not
recognize any taxable income at the time of the grant of the option to
purchase or upon exercise of such option to purchase. The tax treatment of
the disposition of the stock depends upon whether the stock is disposed of
within the holding period, which is two years from the date of grant. If the
participant disposes of the stock after completion of the holding period, the
lesser of (a) the sales price less the purchase price, or (b) 15 percent of
the market value of the shares on the first day of the offering period, is
taxable as ordinary income, and any further profit is taxable as long-term
capital gain. Any loss is treated as a capital loss. If the participant
disposes of the stock before the holding period expires (disqualifying
disposition), the difference between the price paid by the employee and the
market value of the shares at the date of purchase is taxable as ordinary
income, and the difference between the amount received by the employee on the
disposition of the shares and the market value of the shares at the date of
purchase is treated as a capital gain or loss. Upon a disqualifying
disposition of the stock, the Company may deduct from taxable income in the
year of the disqualifying disposition an amount equal to the difference
between the price paid by the employee and the market value of the shares at
the date of purchase.
NEW PLAN BENEFITS
1998 EMPLOYEE STOCK PURCHASE PLAN
Participation in the Purchase Plan is voluntary and is dependent on each
eligible employee's election to participate and his or her determination as
to the level of payroll deductions. Accordingly, future purchases under the
Purchase Plan are not determinable. Non-employee directors are not eligible
to participate. As of the date of this information statement, no options to
purchase shares of the Company's Class A Common Stock have been granted under
the 1998 Employee Stock Purchase Plan.
B-2
