<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1998
REGISTRATION NO. 333-47525
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMENDMENT NO. 1
---------------------
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
OREGON 93-0572810 5511
(State or other jurisdiction (I.R.S. Employer (Primary Standard Industrial
of Identification Classification Code Number)
Incorporation or organization) No.)
</TABLE>
360 E. JACKSON STREET, MEDFORD, OREGON 97501
(541) 776-6899
(Address and telephone number of registrant's principal executive offices)
SIDNEY B. DEBOER, CHAIRMAN AND CHIEF EXECUTIVE OFFICER
360 E. JACKSON STREET
MEDFORD, OREGON 97501
(541) 776-6899
(Name, address and telephone number of agent for service)
------------------------
COPIES OF ALL COMMUNICATIONS TO:
KENNETH E. ROBERTS, ESQ. KENNETH J. BARONSKY, ESQ.
Foster Pepper & Shefelman LLP Milbank, Tweed, Hadley & McCloy
101 S.W. Main St., 15th Floor 601 South Figueroa St., 30th Floor
Portland, Oregon 97204 Los Angeles, California 90017
(503) 221-1151 (213) 892-4000
(800) 601-9234 (FAX) (213) 629-5063 (FAX)
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of earlier effective registration
statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to the Rule
434, please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 13, 1998.
PROSPECTUS
3,000,000 SHARES
[LOGO]
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
All of the shares of Class A Common Stock, no par value (the "Class A Common
Stock"), offered hereby are being sold by Lithia Motors, Inc. ("Lithia" or the
"Company"). The Class A Common Stock is quoted on the Nasdaq National Market
under the symbol "LMTR." On April 9, 1998, the last reported sales price of the
Common Stock was $16.25 per share. See "Common Stock Price Range and Dividend
Policy."
The Company has two classes of authorized Common Stock, Class A Common
Stock, which is offered hereby, and Class B Common Stock, no par value (the
"Class B Common Stock"). Holders of Class A Common Stock are entitled to one
vote per share and holders of Class B Common Stock are entitled to ten votes per
share. Class A Common Stock is not convertible but is freely transferable, while
Class B Common Stock is transferable only to certain limited transferees and is
freely convertible into Class A Common Stock on a share for share basis. All of
the outstanding shares of Class B Common Stock, which will represent
approximately 87.4% of the aggregate voting power of the Company upon completion
of this Offering, are held by Lithia Holding Company, L.L.C. ("Lithia Holding")
and controlled by Sidney B. DeBoer. See "Risk Factors--Concentration of Voting
Power; Anti-Takeover Provisions," "Description of Capital Stock-- Common Stock"
and "Principal Shareholders."
--------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE 9.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share..............................................
Total(3)...............................................
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $700,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including the right to reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares will be made against payment therefor at the offices of Furman Selz
LLC in New York, New York or through the facilities of the Depository Trust
Company, on or about May , 1998.
FURMAN SELZ
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
EVEREN SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
--------------------------
The date of this Prospectus is , 1998
<PAGE>
[MAP OF DEALERSHIPS]
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING TRANSACTIONS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND THE SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
AS THE FOLLOWING IS ONLY A SUMMARY, THE READER SHOULD CAREFULLY REVIEW THE
MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS APPEARING LATER IN THIS
PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
THE COMPANY
Lithia Motors is a leading retailer of new and used vehicles in western
United States, offering 21 domestic and imported makes of new automobiles or
light trucks at 22 locations: 12 in California, 7 in Oregon and 3 in Nevada. The
Company sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services, and arranges
related financing and insurance for its automotive customers. Since December
1996 when the Company completed its initial public offering, Lithia has acquired
17 dealerships, has two acquisitions pending and is actively pursuing additional
acquisitions.
In 1997, the Company generated record total sales, net income and unit sales
of new and used vehicles. Total sales increased to $319.8 million in 1997 from
$142.8 million in 1996, an increase of 124%. Same store sales increased 5% while
the addition of new dealerships contributed the balance of the growth in sales.
For the same period, net income increased to $6.0 million from $2.6 million (pro
forma), an increase of 129%. In the fourth quarter of 1997, the Company's total
sales and net income were $113.1 million and $1.9 million, respectively,
representing growth of 203% and 234% compared to the same period in 1996. New
vehicle unit sales increased to 7,493 in 1997 from 3,274 in 1996, an increase of
129%, and retail used vehicle unit retail sales increased from 4,156 to 7,148,
an increase of 72%.
Lithia was founded in 1946 and its two senior executives have managed the
Company for over 27 years. Management has developed and implemented its
acquisition and operating strategies which have enabled the Company to
successfully identify, acquire and integrate dealerships, achieving
profitability superior to industry averages. In 1997, the Company was able to
achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus
12.9% and 1.5%, respectively, for the industry (latest 1996 data).
GROWTH STRATEGY
The Company is a leading acquiror of automobile dealerships in the western
United States and intends to continue to take advantage of the consolidation
opportunities in the $673 billion automotive retailing industry. The Company
pursues a well defined and disciplined acquisition strategy, targeting
acquisitions in certain under-dealered markets where management believes the
Company has the opportunity to acquire a cluster of dealerships over time and
build a significant market presence. This strategy is patterned after the
Company's initial core operations in southern Oregon where it operates six
dealerships.
Over the last 16 months, the Company has completed the purchase of 17
dealerships with pre-acquisition annual revenues of approximately $454 million
for a total purchase price (excluding real estate purchases) of $101.3 million
and an aggregate net investment of $49.3 million (excluding real estate
purchases) for goodwill, working capital, notes issued to sellers and other
initial investments.
3
<PAGE>
The following table sets forth certain information regarding recent
acquisitions:
<TABLE>
<CAPTION>
PRIOR-YEAR
ANNUAL
REVENUES*
REGION LOCATION BRANDS (MILLIONS) DATE ACQUIRED
- ----------------------------------- ------------------- -------------------- ------------- ------------------
<S> <C> <C> <C> <C>
South-Central Oregon Eugene Dodge, Dodge Trucks $ 32 December-96
Medford Nissan, BMW 15 February-98
Northeast Bay Area, California Vacaville Toyota 28 December-96
Concord Dodge, Dodge Trucks,
Isuzu 39 April-97
Napa Ford, Lincoln-
Mercury 24 July-97
Concord Ford 70 August-97
Concord Volkswagen ** August-97
South-Central Valley, California Bakersfield Nissan 41 October-97
Bakersfield BMW, Acura ** October-97
Fresno Ford 60 December-97
Fresno Mazda ** December-97
Fresno Nissan 40 January-98
Fresno Jeep, Hyundai ** January-98
Bakersfield Jeep 18 March-98
Northern Nevada Reno Isuzu, Lincoln-
Mercury, Suzuki,
Audi 78 October-97
Sparks Isuzu, Lincoln-
Mercury, Suzuki ** October-97
Reno Volkswagen 9 February-98
-----
Total $ 454
-----
-----
</TABLE>
- ------------------------
* Revenues derived or estimated by the Company from unaudited dealer financial
statements for the year prior to acquisition.
** Revenues for this dealership not separately reported but are included with
the dealer acquired on the same date and set forth in the preceding entry.
4
<PAGE>
Prior to December 1996, the Company operated five dealerships in Medford,
Oregon. These initial core dealerships generated sales of $136 million in 1997.
Based upon its current dealership locations, the percentage share of the
Company's total revenues from each region is approximately: South-Central
Oregon--31%; Northeast Bay Area, California--27%; South-Central Valley,
California--27%; and Northern Nevada--15%.
OPERATING STRATEGY
The Company's operating strategy consists of the following elements:
MAINTAIN COOPERATIVE RELATIONSHIP WITH MANUFACTURERS. The Company
recognizes that its success is closely tied to its relationships with the
automobile manufacturers. The manufacturers are committed to the franchise
system to sell their vehicles and, accordingly, have a strong interest in the
strength and responsiveness of their franchise dealers. The manufacturers
provide support to the Company in training its employees, designing operating
systems, offering incentives and rebates to sell slower-moving vehicles and
providing regional and national advertising. The Company relies on and
encourages this assistance as a welcomed partner and cooperates with the
manufacturers in the Company's facilities design, marketing efforts and program
support.
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad
range of products and services including a wide selection of new and used cars
and light trucks, vehicle financing and insurance and replacement parts and
service. At its 22 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki,
BMW, Saturn, Pontiac, Mazda and Hyundai.
FOCUS ON USED VEHICLE SALES. In addition to the sale of new vehicles, a key
element of the Company's operating strategy is to focus on the sale of used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales to improve overall
profitability. The Company's goal is to sell 1.5 retail used vehicles for every
new vehicle sold, compared to an industry average ratio of 0.8-to-1. The Company
strives to attract customers and enhance buyer satisfaction by offering multiple
financing options, a 10-day/500-mile "no questions asked" exchange program and a
60-day/3,000-mile warranty on every used vehicle sold.
EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company
generates substantial incremental revenue and achieves higher profitability
through the sale of certain ancillary products and services such as financing
and insurance, extended service contracts and vehicle maintenance. In 1997, the
Company arranged financing for 71% of its new vehicle sales and 74% of its used
vehicle sales, compared to 42% and 51%, respectively, for the average automobile
dealership in the United States (1996 data). Sales of these other ancillary
products and services represent 14% of Lithia's total sales, compared to 12% for
the average U.S. dealership.
EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional
management practices in all aspects of its operations, including information
technology, employee training, profit-based compensation and centralized cash
management. Each dealership is its own profit center and is managed by a trained
and experienced general manager who has primary responsibility for decisions
relating to inventory, advertising, pricing and personnel. In addition, each
dealership is supported by one of the Company's operations teams consisting of
specialists in the areas of new vehicle sales, used vehicle sales, finance and
insurance, service and parts, and back office administration (including
accounting and management information systems). In addition, the Company has an
extensive internal audit program.
5
<PAGE>
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer
satisfaction throughout its organization and continually seeks to maintain its
reputation for quality and fairness. The Company trains its sales personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. In 1996, the Company implemented an innovative customer-oriented
marketing program entitled "Priority You" which provides the Company's retail
customers six value-added services which the Company believes are important to
overall customer satisfaction.
The Company has received a number of dealer quality and customer
satisfaction awards from various manufacturers. Most recently, Lithia's Medford
and Grants Pass, Oregon Chrysler product dealerships achieved Chrysler's highest
recognition for dealer excellence, the Five-Star Certification. The Medford
location was one of the first to receive this certification in the Pacific
Northwest.
The Company maintains its principal executive offices at 360 E. Jackson
Street, Medford, Oregon 97501, and its telephone number is (541) 776-6899.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company... 3,000,000 shares of Class A Common Stock
Common Stock to be outstanding after
the Offering.......................... 5,925,550 shares of Class A Common Stock(1)
4,110,000 shares of Class B Common Stock
Use of proceeds....................... Acquisitions of additional automobile dealerships
and for general corporate purposes. Prior to such
use, the funds will be used to reduce borrowings
under the Company's lines of credit. See "Use of
Proceeds."
Nasdaq National Market symbol......... LMTR
</TABLE>
- ------------------------
(1) Does not include (i) an aggregate of 619,450 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 545,839
of which were subject to outstanding options as of March 31, 1998 (see
"Management--1996 Stock Incentive Plan"); (ii) an aggregate of 15,000 shares
of Class A Common Stock reserved for issuance under the Company's 1997
Non-Discretionary Stock Option Plan for Non-Employee Directors, 6,000 of
which were subject to outstanding options as of March 31, 1998 (see
"Management--Director's Compensation"); (iii) an aggregate of 250,000 shares
of Class A Common Stock reserved for issuance under the Company's Employee
Stock Purchase Plan (see "Management--Employee Stock Purchase Plan"); (iv)
an aggregate of 250,000 shares of Class A Common Stock reserved for issuance
to the Company's profit sharing plan; and (v) an additional 415,000 shares
of Class A Common Stock to be reserved for issuance under the Company's 1996
Stock Incentive Plan, which increase has been approved by the Board of
Directors, subject to completion of this Offering.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table presents summary consolidated financial data of the
Company as of the dates and for the periods indicated. The summary consolidated
financial data should not be construed as representative of future operating
results or financial position. The summary consolidated financial data should be
read in conjunction with the consolidated financial statements and related notes
thereto of the Company and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total sales................................................. $ 92,239 $ 109,423 $ 114,196 $ 142,844 $ 319,795
Cost of sales............................................... 74,224 89,709 93,559 118,333 266,363
--------- --------- --------- --------- ---------
Gross profit................................................ 18,015 19,714 20,637 24,511 53,432
Selling, general and administrative......................... 14,721 14,781 16,333 19,830 40,625
Depreciation and amortization(2)............................ 401 393 402 448 1,169
--------- --------- --------- --------- ---------
Operating income............................................ 2,893 4,540 3,902 4,233 11,638
Other income (expense), net................................. (551) 47 (175) (4) (2,141)
--------- --------- --------- --------- ---------
Income before income taxes(3)............................... 2,342 4,587 3,727 4,229 9,497
Income taxes................................................ 890 1,743 1,430 1,623 3,538
--------- --------- --------- --------- ---------
Net income(4)............................................... $ 1,452 $ 2,844 $ 2,297 $ 2,606 $ 5,959
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic net income per share(4),(5)............................. $ 0.64 $ 1.03 $ 0.50 $ 0.56 $ 0.85
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income per share(4),(5)........................... $ 0.64 $ 1.03 $ 0.50 $ 0.52 $ 0.82
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
OTHER OPERATING DATA:
New vehicles sold........................................... 2,464 2,744 2,715 3,274 7,493
Used vehicles sold (retail and wholesale)................... 4,718 5,206 5,144 6,504 12,138
Gross margin................................................ 19.5% 18.0% 18.1% 17.2% 16.7%
Selling, general and administrative as a percentage of
sales..................................................... 16.0% 13.5% 14.3% 13.9% 12.7%
Operating margin............................................ 3.1% 4.2% 3.4% 3.0% 3.6%
Pre-tax margin.............................................. 2.5% 4.2% 3.3% 3.0% 3.0%
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------
DECEMBER MARCH SEPTEMBER DECEMBER
1996(1) 1997 JUNE 1997 1997 1997
----------- --------- --------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Total sales............................................... $ 37,278 $ 54,704 $ 66,422 $ 85,573 $ 113,096
Gross profit.............................................. 6,337 8,949 10,716 14,185 19,582
Operating income.......................................... 534 1,785 2,299 3,023 4,531
Net income(4)............................................. 560 1,144 1,368 1,579 1,868
Basic net income per share(4)............................. $ 0.12 $ 0.17 $ 0.20 $ 0.23 $ 0.27
Diluted net income per share(4)........................... $ 0.11 $ 0.16 $ 0.19 $ 0.22 $ 0.25
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(6)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................................................... $ 23,870 $ 64,141
Total assets........................................................................ 166,526 166,526
Short-term debt..................................................................... 85,385 45,114
Long-term debt, less current maturities............................................. 26,558 21,558
Total shareholders' equity.......................................................... 37,877 83,148
</TABLE>
- ------------------------------
(1) Restated to give effect for the Company's conversion from the LIFO method
of accounting for inventory to the FIFO method, which was effective January
1, 1997.
(2) Does not include depreciation included in cost of sales related to leased
vehicles. See "Consolidated Statements of Cash Flows" for total depreciation
and amortization.
7
<PAGE>
(3) Prior to 1994, the Company paid cash bonuses to its shareholders and
members in amounts approximating their respective
income tax liability on their undistributed earnings ($1.0 million in 1993),
in addition to their normal salaries. These cash bonuses are reflected in
selling, general & administrative expense. In 1994 and subsequent periods,
cash to meet the shareholders' and members' tax liabilities was distributed
to the shareholders and members as dividends. The Company believes that for
a fair evaluation of its historical performance, results for 1993 should be
adjusted to eliminate the cash bonus payments.
(4) The Company was an S Corporation and accordingly was not subject to federal
and state income taxes prior to 1996. Net income prior to 1996 is presented
on a pro forma basis to reflect the elimination of minority interest
pursuant to the restructuring at the time of the initial public offering,
and 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 8 to the Company's Consolidated
Financial Statements.
(5) The historical capital structure of the Company prior to the restructuring
and the initial public offering was not comparable with the capital
structure subsequent to these events. See Note 1 to the Consolidated
Financial Statements for a reconciliation of the basic and diluted income
per share.
(6) Adjusted to reflect the sale of 3 million shares of Class A Common Stock
offered hereby by the Company (at an assumed public offering price of $16.25
per share and after deducting underwriting discounts and estimated offering
expenses payable by the Company) and the application of the net proceeds
therefrom. See "Use of Proceeds."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements that are based on the
current beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. All statements
other than statements of historical facts included in this Prospectus, including
without limitation, statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" regarding the Company's financial position, business
strategy and plans and objectives of management of the Company for future
operations, are forward-looking statements. When used in this Prospectus, the
words "anticipate," "believe," "estimate," "expect" and "intend" and words or
phrases of similar meaning, as they relate to the Company or Company management,
are intended to identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from the Company's expectations ("cautionary statements") are
disclosed under "Risk Factors" which follows. Based upon changing conditions, if
any one or more of these risks or uncertainties materialize, or if any
underlying assumptions prove incorrect, actual results may vary materially from
those described herein as anticipated, believed, estimated, expected or
intended. The Company does not intend to update these forward-looking statements
subsequent to the consummation of the Offering. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the applicable cautionary
statements.
8
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER AND EVALUATE ALL OF THE
INFORMATION SET FORTH IN THIS PROSPECTUS, INCLUDING THE RISK FACTORS SET FORTH
BELOW.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The U.S. automobile industry is considered a mature industry in which
minimal growth is expected in unit sales of new vehicles. Annual sales of new
vehicles by the Company have fluctuated in the past and no assurance can be
given that the Company will be able to increase or maintain unit sales in the
future. Accordingly, a principal component of the Company's growth strategy is
to make additional acquisitions in its existing and new geographic markets.
Within the past 16 months, the Company purchased 17 new dealerships and has
entered into agreements to acquire two additional dealerships.
The Company's future growth and financial success will be dependent upon a
number of factors including, among others, the Company's ability to identify
acceptable acquisition candidates, consummate the acquisition of such
dealerships on terms favorable to the Company, obtain the consent of automobile
manufacturers, hire and train professional management and sales personnel at
each such acquired dealership, and promptly and profitably integrate the
acquired operations into the Company. See "Business--Growth Strategy."
COSTS OF ACQUISITIONS
Acquisitions of additional dealerships will require substantial capital
investment and could have a significant impact on the Company's financial
position and operating results. Any such acquisitions may involve the use of
cash (including the net proceeds of this Offering) or the issuance of additional
debt or equity securities, which could have a dilutive effect on the
then-outstanding capital stock of the Company. Future acquisitions may result in
the accumulation of additional goodwill and intangible assets, which would
result in higher amortization charges to the Company.
The Company has and may continue to acquire dealerships with net profit
margins which are materially below the Company's historical average net profit
margin. No assurance can be given that the Company will be able to improve the
profitability of such acquired dealerships. To manage its expansion, the Company
will continue to evaluate the adequacy of its existing systems and procedures,
including, among others, its financial and reporting control systems, data
processing systems and management structure. However, no assurance can be given
that the Company will adequately anticipate all of the demands its growth will
impose on such systems, procedures and structure. Any failure to adequately
anticipate and respond to such demands could have a material adverse effect on
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
The Company is significantly dependent upon its relationships with, and the
success of, certain automobile manufacturers or authorized distributors thereof
(collectively referred to herein as "manufacturers"). For the three months ended
December 31, 1997, Chrysler, Ford and Toyota collectively accounted for 71% of
the Company's new vehicle sales. No assurance can be given that the Company will
reduce such dependency on these manufacturers. The Company may become dependent
on additional manufacturers in the future as a result of new acquisitions.
The Company also is dependent upon its manufacturers to provide it with an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the manufacturers. In order to obtain sufficient numbers of these vehicles,
the Company may be required to purchase a larger number of less desirable makes
and
9
<PAGE>
models than it would otherwise purchase. Sales of less desirable makes and
models may result in lower profit margins than sales of the more popular
vehicles. If the Company is unable to obtain sufficient quantities of the most
popular makes and models, its profitability may be adversely affected.
The success of each of the Company's franchises is dependent to a great
extent on the success of the respective manufacturer. The success of the Company
is therefore linked to the financial condition, marketing, vehicle demand,
production capabilities and management of the manufacturers of which the Company
is a franchisee. Events such as labor strikes or negative publicity concerning a
particular manufacturer or vehicle model may adversely affect the Company. The
Company has attempted to lessen its dependence on any one manufacturer by
acquiring franchise agreements with a number of different domestic and foreign
automobile manufacturers.
NO EXCLUSIVE FRANCHISES
With the exception of the Saturn franchise, the Company's franchise
agreements with the manufacturers do not give the Company the exclusive right to
sell that manufacturer's product within a given geographical area. Accordingly,
a manufacturer could grant another dealer a franchise to start a new dealership
in proximity to one or more of the Company's locations or an existing dealer
could move its dealership to a location which would be directly competitive with
the Company. Such an event could have a material adverse effect on the Company
and its operations.
MANUFACTURERS' CONSENT TO OFFERING
Each of the Company's franchise agreements requires the consent of the
manufacturer to any change in the ownership of the franchise. Until recently,
all manufacturers had expressed reluctance to permit the public ownership of
dealerships since franchises are awarded to a named individual to whom the
manufacturer looks to have direct control of the franchise and its operations.
However, within the last 18 months most manufacturers have come to accept some
level of public ownership and have adopted policies to ensure a degree of
control over transfer of ownership. In an attempt to address manufacturers'
concerns regarding the effects of public ownership of the Company, the Company's
principals established Lithia Holding and a dual-class voting structure for the
Company, designed to ensure that Sidney B. DeBoer will have voting control of
the Company for the foreseeable future. After the Offering, Lithia Holding
Company LLC's ownership of all Common Stock will drop below 50%, although it
will continue to hold sufficient voting rights to control the Company.
Four manufacturers (Honda, Saturn, Suzuki and Hyundai) have policies or
agreements with the Company which require their prior written consent to this
Offering. The Company has requested such consent; however, American Honda Motor
Co. has advised it will withhold its consent and Hyundai Motor America has not
yet responded to the Company's request. Each of these manufacturers represents
less than 3% of the Company's total sales. Saturn Corporation and Suzuki Motor
Corporation have indicated they will amend their agreements to permit the
issuance of the shares. While the Company believes that it is not required to
obtain the consent of any other manufacturer to the Offering, there can be no
assurance that any other manufacturer will not take a contrary position.
There can be no assurance that any manufacturer that does not consent to the
Offering will not terminate its franchise agreement, refuse to renew its
franchise agreement, refuse to approve future acquisitions or take other action
which could have a material adverse effect on the Company and its operations.
The Company may have to sell one or more of its franchises or a majority
interest in such franchises in order to avoid termination by a manufacturer who
objects to the Offering. In the event of such a sale, no assurance can be given
that the Company will be able to receive full value for such franchises or
favorable sales terms.
10
<PAGE>
MANUFACTURERS' CONSENT TO ACQUISITIONS
The Company is required to obtain a consent from each relevant manufacturer
prior to the acquisition of a dealership franchise. In determining whether to
approve an acquisition, a manufacturer may consider many factors, including the
financial condition and ownership structure of the acquiror. Most major
manufacturers have now established limitations on the acquisition of new
franchisee locations. These include limitations on the total number of such
manufacturers' dealerships that may be acquired by a company, the number that
may be acquired in any market or region, the percentage of total sales that may
be controlled by one dealer group, the ownership of contiguous dealerships and
the dualing of a franchise with any other brand without consent, and the
frequency of acquisitions. For example, Chrysler currently limits the Company to
10 dealerships nationally, (the Company currently owns seven dealerships); Ford
has a current limitation of 15 Ford and 15 Lincoln-Mercury dealerships (the
Company owns three Ford and three Lincoln-Mercury dealerships) but may limit the
timing of Acquisitions and Toyota recently lifted a seven dealership limitation
for any one dealer group and replaced it with a percentage of national sales
limitation (3% to 5% of National sales) which is not considered a material
limitation by management of the Company (the Company currently owns two Toyota
dealerships). General Motors has advised the Company it may acquire up to five
dealerships at this time (the Company does not currently own any General Motors
dealerships).
The Company's ability to meet manufacturers' requirements for acquisitions
in the future will have a direct bearing on the Company's ability to complete
acquisitions and may affect its growth strategy. Because of the public ownership
structure of the Company, management does not believe it could secure approval
to acquire any new Honda or Acura dealership without a change in the current
policies of the manufacturer or the granting of ownership interests in the
subsidiary operating the individual dealerships, to the designated dealer
principal.
In determining whether to approve an acquisition by the Company, a
manufacturer also considers factors such as the Company's past performance as
measured by the manufacturer's Customer Satisfaction Index ("CSI") scores and
sales performance at the Company's existing franchises. At any point in time, a
small percentage of the Company's franchises will have CSI scores and sales
performance numbers which are below the manufacturers' standards. Currently, two
dealerships are below standards. The Company endeavors to address and cure those
problems when they occur. However, failure of the Company to maintain
satisfactory CSI scores and sales performance goals may adversely affect the
Company's ability to complete additional acquisitions.
TERMINATION OF FRANCHISE AGREEMENTS
Each of the Company's dealerships operates pursuant to a franchise agreement
with each of the respective manufacturers for which it serves as franchisee.
Manufacturers exert significant control over the Company's dealerships through
the terms and conditions of their franchise agreements, including provisions for
termination or non-renewal for a variety of causes. The Company from
time-to-time has failed to comply with certain provisions of its franchise
agreements. These agreements and state law, however, generally afford the
Company a reasonable opportunity to cure violations and no manufacturer has
terminated or failed to renew any franchise agreement with the Company. If a
manufacturer terminates or declines to renew one or more of the Company's
significant franchise agreements, such action could have a material adverse
effect on the Company and its business. See "Business--Relationships with
Automobile Manufacturers."
LIMITATION ON STOCK OWNERSHIP; RESTRICTION ON TRANSFER
Certain manufacturers impose limitations on the amount of the Company's
securities that may be owned by an individual or a group without the prior
approval of such manufacturers. For example, any acquisition of a 20% or greater
ownership share of the Company by any individual or entity without prior
11
<PAGE>
approval from Toyota, Isuzu, Mazda, Nissan or Saturn would be a violation of the
Company's agreement with such manufacturer. The stated policy of Honda requires
its consent to the acquisition of 10% or greater ownership share of the Company.
Without prior written consent, most manufacturers also require that Lithia
Holding and/or Sidney B. DeBoer maintain a controlling interest in the Company
or the subsidiary holding the franchise. These restrictions will limit the
Company's ability to raise additional capital or to consummate acquisitions
through the issuance of equity securities to the extent that such issuance
dilutes the ownership interest of Lithia Holding or Sidney B. DeBoer below
requisite thresholds.
COMPETITION
The automobile dealership business is highly competitive and generally
fragmented. The new and used automobile sectors are characterized by a large
number of private operators. In addition, certain regional and national car
rental companies operate retail used car lots to dispose of their used rental
cars. Private sales of used vehicles is an additional source of competition.
Consolidation has continued to accelerate in the new and used automobile
dealership business as national and regional companies are establishing large
used automobile "mega-stores." No assurances can be made with respect to the
Company's ability to continue to compete effectively with other automobile
dealers. In addition, no assurance can be given that automobile manufacturers
will not attempt to modify the historical automobile manufacturer/dealer
franchise system in such a way to increase competition among dealers or market
their vehicles through other distribution channels. See "Business--Competition."
MATURE INDUSTRY; CYCLICAL NATURE OF AUTOMOBILE SALES
The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
"Business--Growth Strategy."
The automobile industry is cyclical and historically has experienced
periodic downturns characterized by oversupply and weak demand. Many factors
affect the industry, including general economic conditions and consumer
confidence, the level of discretionary personal income, interest rates and
credit availability. For instance, for the six months ended June 30, 1997,
industry retail sales were down 2% as a result of retail automobile sales
declines of 5.3% and retail light truck sales gains of 2.4% from the same period
in 1996. Future recessions may have a material adverse effect on the Company's
business.
AVAILABILITY AND COST OF CAPITAL
The Company's new and used automobile sales operations require significant
capital resources. The Company's future operating results will be directly
related to the availability and cost of its capital. The principal sources of
financing for the Company's new and used automobile inventories have
historically been lines of credit from U.S. Bank N.A. and cash generated from
operations. No assurance can be given that the Company will be able to continue
to obtain capital for its current or expanded operations from these sources or
on terms and conditions acceptable to the Company.
The Company's growth through the acquisition of additional dealerships will
require substantial capital. The Company anticipates that the net proceeds from
this Offering will be used to finance the acquisition of additional dealerships.
If the Company's acquisition strategy is successful, the net proceeds from the
Offering will be fully utilized within a limited period of time and the Company
will require additional capital in order to continue its acquisition strategy.
Such expansion and new acquisitions may involve the Company using cash,
incurring additional debt or issuing equity securities, which could have a
dilutive effect on its then-outstanding capital stock. The Company may seek to
obtain funds through borrowings from institutions or by the public or private
sale of its securities subsequent to this Offering. No assurance can be given
that the Company will be able to obtain capital to finance its growth on terms
and
12
<PAGE>
conditions acceptable to the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
DEPENDENCE ON KEY PERSONNEL AND ADDITIONAL MANAGEMENT
The Company's success will depend largely on the efforts and abilities of
its senior management, particularly Sidney B. DeBoer, the Company's Chairman and
Chief Executive Officer, M. L. Dick Heimann, the Company's President and Chief
Operating Officer, and R. Bradford Gray, the Company's Executive Vice-President.
The Company does not have employment agreements with any of its key management
personnel which would restrict their ability to terminate their employment and
compete with the Company. The Company does not maintain key man insurance on
either Messrs. DeBoer or Heimann. Further, Mr. DeBoer and Mr. Heimann are
identified in the Company's dealership franchise agreements as the individuals
who control the franchises and upon whose financial resources and management
expertise the manufacturers have relied on when awarding such franchises. The
loss of either of those individuals could materially adversely affect the
Company's on-going relationship with its vehicle manufacturers. See
"Business--Relationships with Automobile Manufacturers."
In addition, the Company places substantial responsibility on the general
managers of its dealerships for the profitability of such dealerships. The
Company has increased its number of dealerships from 7 in December 1996 to 22 as
of April 1998. This rapid expansion has resulted in the need to hire additional
managers and, as the Company continues to expand, the need for additional
experienced managers will become even more critical. The market for qualified
employees in the industry, particularly for general managers, is highly
competitive. The loss of the services of key management personnel or the
inability to attract additional qualified managers could have a material adverse
effect on the Company's business and the execution of its growth strategy.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's business is seasonal with a disproportionate amount of sales
occurring in the second and third quarters. Further, the Company incurs a
significant amount of training and integration costs upon the acquisition of
each new dealerships. Accordingly, due to such seasonality and the timing and
frequency of acquisitions, the Company will likely experience quarter-to-quarter
fluctuations in its operating results. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Selected Consolidated
Quarterly Financial Data."
CONCENTRATION OF VOTING POWER; ANTI-TAKEOVER PROVISIONS
Lithia Holding Company, LLC, of which Sidney B. DeBoer, the Company's
Chairman and Chief Executive Officer, is the sole managing member, holds all of
the outstanding shares of Class B Common Stock. Holders of Class B Common Stock
are entitled to ten votes for each share held, while holders of Class A Common
Stock are entitled to one vote per share held. Consequently, upon completion of
the Offering, Lithia Holding will control 87.4% of the aggregate number of votes
eligible to be cast by shareholders for the election of Directors and certain
other shareholder actions. Therefore, Lithia Holding will control the election
of the Board of Directors of the Company and will be in a position to control
the policies and operations of the Company. In addition, because Mr. DeBoer is
the managing member of Lithia Holding, he currently does and will continue to
control all of the outstanding Class B Common Stock, thus allowing him to
control the Company. See "Principal Shareholders." So long as at least 16 2/3%
of the total number of shares outstanding are shares of Class B Common Stock,
the holders of Class B Common Stock will be able to control all matters
requiring approval of 66 2/3% or less of the aggregate number of votes. Absent a
significant increase in the number of shares of Class A Common Stock outstanding
or conversion of Class B Common Stock into Class A Common Stock, the holders of
shares of Class B Common Stock will be entitled to elect all members of the
Board of Directors and control all
13
<PAGE>
matters subject to shareholder approval that do not require a class vote. See
"Description of Capital Stock."
Certain provisions of the Company's Articles of Incorporation may be
considered anti-takeover provisions. For example, the Company's Board of
Directors has the authority to issue additional shares of Common Stock and up to
15,000,000 shares of Preferred Stock and determine the price, rights,
preferences and privileges (including voting rights) of those shares without any
further vote or action by the shareholders. The rights of the holders of Common
Stock are subject to, and may be materially adversely affected by, the rights of
the holders of any outstanding Preferred Stock, if any. The issuance of
Preferred Stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company. The
Company has no present plans to issue shares of Preferred Stock. The Company's
Restated Articles of Incorporation and Bylaws contain certain other provisions
that may have the effect of discouraging offers to acquire the Company. See
"Description of Capital Stock."
IMPORTED PRODUCT RESTRICTIONS AND FOREIGN TRADE RISKS
Certain motor vehicles sold by the Company, as well as certain major
components of vehicles sold by the Company, are of foreign origin. Accordingly,
the Company is subject to the import and export restrictions of various
jurisdictions and is dependent to some extent upon general economic conditions
in and political relations with a number of foreign countries. Additionally,
fluctuations in currency exchange rates may adversely affect the Company's sales
of vehicles produced by foreign manufacturers. Imports into the United States
may also be adversely affected by increased transportation costs and tariffs,
quotas or duties.
SUPERVISION AND REGULATION; ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive regulation, supervision
and licensing under various federal, state and local statutes, ordinances and
regulations. While management believes that it maintains all requisite licenses
and permits and is in substantial compliance with all applicable federal, state
and local regulations, there can be no assurance that the Company will be able
to maintain all requisite licenses and permits. The failure to satisfy those and
other regulatory requirements could have a material adverse effect on the
operations of the Company. The adoption of additional laws, rules and
regulations could also have a material adverse effect on the Company's business.
Various state and regulatory agencies have jurisdiction over the operation of
the Company's dealerships, repair shops, body shops and other operations, with
respect to matters such as consumer protection, workers' safety and laws
regarding clean air and water.
As with automobile dealerships generally, and service, parts and body shop
operations in particular, the Company's business involves the use, handling,
storage and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon,
waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. Accordingly, the Company is subject to
regulation by federal, state and local authorities establishing health and
environmental quality standards, and liability related thereto, and providing
penalties for violations of those standards.
Certain of the properties leased by the Company are located in commercial
areas and have historically been used for gasoline service stations. As a
consequence, it is possible that historical site activities or current
neighboring activities have affected properties leased by the Company and that,
as a result, additional environmental issues may arise in the future, the
precise nature of which the Company cannot now predict. See
"Business--Regulation."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
5,925,550 shares of Class A Common Stock, of which the 3,000,000 shares offered
hereby will, subject to certain exceptions, be freely
14
<PAGE>
tradable without restriction or registration under the Securities Act of 1933,
as amended (the "Securities Act"). In addition, the Company has outstanding
4,110,000 shares of Class B Common Stock held by Lithia Holding which is
convertible on a share for share basis into Class A Common Stock. Of the
Company's outstanding shares, 74,450 shares of Class A Common Stock and all of
the shares of Class B Common Stock are "restricted" securities under the
Securities Act, which the Company believes are subject to volume limitations on
resale. All of the Company's executive officers and directors and Lithia Holding
have agreed not to sell any Class A Common Stock or securities exchangeable for
or convertible into shares of Class A Common Stock, or any option, warrant or
other right to acquire such shares, for a period of 90 days after this offering
without the consent of Furman Selz LLC. An aggregate of 619,450 shares of Class
A Common Stock have been reserved for issuance, and an additional 415,000 shares
of Class A Common Stock are expected to be reserved for issuance, under the
Company's 1996 Stock Incentive Plan. Further, an aggregate of 15,000 shares of
Class A Common Stock are reserved for issuance under the Company's 1997
Non-Discretionary Stock Option Plan for Non-Employee Directors, 250,000 shares
of Class A Common Stock are reserved for issuance under the Company's Stock
Purchase Plan and 250,000 shares of Class A Common Stock are reserved for
issuance to the Company's profit sharing plan. As of the date of this
Prospectus, an aggregate of 178,265 shares of Class A Common Stock were issuable
upon the exercise of vested stock options granted by the Company and an
aggregate of 373,574 shares were subject to issuance upon the exercise of
granted but unvested stock options. The Company has filed a registration
statement on Form S-8 under the Securities Act covering the 619,450 shares of
Class A Common Stock reserved for issuance under the Company's 1996 Stock
Incentive Plan and the 15,000 shares of Class A Common Stock reserved for
issuance under the 1997 Non-Discretionary Stock Option Plan for Non-Employee
Directors and expects to amend such registration statements to include the
additional 415,000 shares to be reserved for issuance under the 1996 Stock
Incentive Plan. Future sales of a substantial number of shares of Class A Common
Stock, or the perception that such sales could occur, could have a material
adverse effect on the prevailing market price for the Company's Class A Common
Stock. See "Management--1996 Stock Incentive Plan" and "Description of Capital
Stock."
VOLATILITY OF STOCK PRICE
The Company's stock price has been volatile. Quarterly and annual operating
results of the Company, variations between such results and the results expected
by investors and analysts, changes in local or general economic conditions or
developments affecting the automobile industry, the Company or its competitors
could cause the market price of the Class A Common Stock to fluctuate
substantially. As a result of these factors, as well as other factors common to
publicly traded companies, the market price could fluctuate substantially.
LACK OF DIVIDENDS
The Company has no plans to pay any cash dividends. See "Common Stock Price
Range and Dividend Policy."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Class A Common Stock
offered hereby at the assumed public offering price of $16.25 per share and
after deducting underwriting discounts and estimated offering expenses payable
by the Company are estimated to be $45,271,250 ($52,166,938 if the Underwriters'
over-allotment option is exercised in full).
The Company anticipates that the net proceeds will be used primarily to
finance acquisitions of additional automobile dealerships including two pending
acquisitions. Pending such utilization of the net proceeds, the Company intends
to reduce outstanding borrowings (which borrowings totaled approximately $143
million at March 31, 1998) under its lines of credit with U.S. Bank N.A. Such
lines currently bear interest at rates ranging from 7.625% to 8.75% per annum
and mature on October 1, 1998 (subject to the Company's option to convert
amounts outstanding under its acquisition line to a 5-year term loan). After
completion of this Offering, the Company intends to borrow under these lines as
necessary from time to time to fund purchases of new and used automobiles and
additional dealerships and for general corporate purposes.
COMMON STOCK PRICE RANGE AND DIVIDEND POLICY
The Company's Class A Common Stock trades on the Nasdaq National Market
under the symbol LMTR. The quarterly 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 April 9, 1998 were as follows:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1996
Fourth Quarter (from December 18, 1996).................................... $ 11.50 $ 10.94
1997
First Quarter.............................................................. $ 13.13 $ 10.50
Second Quarter............................................................. $ 12.38 $ 9.50
Third Quarter.............................................................. $ 14.25 $ 10.50
Fourth Quarter............................................................. $ 19.00 $ 13.63
1998
First Quarter.............................................................. $ 17.25 $ 12.00
Second Quarter (through April 9, 1998)..................................... $ 17.00 $ 16.25
</TABLE>
On April 9, 1998, the closing sale price as reported on the Nasdaq National
Market was $16.25 per share. As of March 31, 1998, the Company had 28 holders of
record of its Class A Common Stock.
Since the Company's initial public offering in December 1996, it has not and
does not intend to declare or pay cash dividends. The Company intends to retain
any earnings that it may realize in the future to finance its acquisitions and
operations. The payment of any future dividends will be subject to the
discretion of the Board of Directors of the Company and will depend upon the
Company's results of operations, financial position and capital requirements,
general business conditions, restrictions imposed by financing arrangements, if
any, legal restrictions on the payment of dividends and other factors the Board
of Directors deems relevant. See "Management Discussion and Analysis--Liquidity
and Capital Resources" for cash dividend limitations proposed by credit
agreement.
16
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and total consolidated
capitalization of the Company at December 31, 1997 (i) on an actual historical
basis and (ii) as adjusted to reflect the sale of 3,000,000 shares of Class A
Common Stock pursuant to the Offering and the application of the estimated net
proceeds therefrom. This table should be read in conjunction with the
Consolidated Financial Statements and related notes appearing elsewhere in this
Prospectus. See also, "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Flooring notes payable.................................................................... $ 82,598 $ 42,327
Current maturities of long-term debt...................................................... 2,688 2,688
Current portion of capital leases......................................................... 99 99
--------- -----------
Total short-term debt................................................................... $ 85,385 $ 45,114
--------- -----------
--------- -----------
Long-term debt, less current maturities................................................... $ 24,242 $ 19,242
Long-term capital leases, less current portion............................................ 2,316 2,316
--------- -----------
Total long-term debt, less current maturities........................................... 26,558 21,558
--------- -----------
Shareholders' equity:
Preferred Stock, no par value, 15,000,000 shares authorized, none outstanding........... -- --
Common Stock
Class A Common Stock, no par value, 100,000,000 shares authorized and outstanding;
2,925,550 outstanding; actual; and 5,925,550 as adjusted(1)......................... 28,117 73,388
Class B Common Stock, no par value, 25,000,000 shares authorized, 4,110,000
outstanding, actual and as adjusted................................................. 511 511
Additional paid-in capital............................................................ 59 59
Retained earnings....................................................................... 9,190 9,190
--------- -----------
Total shareholders' equity............................................................ 37,877 83,148
--------- -----------
Total capitalization...................................................................... $ 64,435 $ 104,706
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Does not include (i) an aggregate of 619,450 shares of Class A Common Stock
reserved for issuance under the Company's 1996 Stock Incentive Plan, 545,839
of which were subject to outstanding options as of March 1, 1998 (see
"Management--1996 Stock Incentive Plan"); (ii) an aggregate of 15,000 shares
of Class A Common Stock reserved for issuance under the Company's 1997
Non-Discretionary Stock Option Plan for Non-Employee Directors, 6,000 of
which were subject to outstanding options as of March 31, 1998 (see
"Management--Director's Compensation"); (iii) an aggregate of 250,000 shares
of Class A Common Stock reserved for issuance under the Company's Employee
Stock Purchase Plan (see "Management--Employee Stock Purchase Plan"); (iv)
an aggregate of 250,000 shares of Class A Common Stock reserved for issuance
to the Company's profit sharing plan; and (v) an additional 415,000 shares
of Class A Common Stock to be reserved for issuance under the Company's 1996
Stock Incentive Plan, which increase has been approved by the Board of
Directors, subject to completion of this Offering.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data presented below under the
captions "Consolidated Statement of Operations Data" and "Consolidated Balance
Sheet Data" for and as of the end of each of the years in the five-year period
ended December 31, 1997, are derived from the consolidated financial statements
of Lithia Motors, Inc. and Subsidiaries, which consolidated financial statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants. The consolidated financial statements as of December 31, 1996 and
1997 and for each of the years in the three-year period then ended, and the
report thereon, are included elsewhere in this Prospectus. The following
consolidated selected financial data should be read in conjunction with the
Consolidated Financial Statements, including the notes thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993(1) 1994(1) 1995(1) 1996(1) 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles..................................................... $ 42,663 $ 51,154 $ 53,277 $ 65,092 $ 161,294
Used vehicles.................................................... 34,986 42,381 44,061 58,611 113,099
Other............................................................ 14,590 15,888 16,858 19,141 45,402
--------- --------- --------- --------- ---------
Total sales.................................................... 92,239 109,423 114,196 142,844 319,795
Cost of sales...................................................... 74,224 89,709 93,559 118,333 266,363
--------- --------- --------- --------- ---------
Gross profit....................................................... 18,015 19,714 20,637 24,511 53,432
Selling, general and administrative(2)............................. 14,721 14,781 16,333 19,830 40,625
Depreciation and amortization(3)................................... 401 393 402 448 1,169
--------- --------- --------- --------- ---------
Operating income................................................... 2,893 4,540 3,902 4,233 11,638
Interest income.................................................... 216 99 179 193 138
Interest expense................................................... (1,374) (954) (1,390) (1,353) (3,004)
Other income, net.................................................. 607 902 1,036 1,156 725
--------- --------- --------- --------- ---------
Income before minority interest and income taxes................... 2,342 4,587 3,727 4,229 9,497
Minority interest.................................................. (233) (458) (778) (687) --
--------- --------- --------- --------- ---------
Income before income taxes(1),(2).................................. $ 2,109 $ 4,129 $ 2,949 3,542 9,497
--------- --------- ---------
--------- --------- ---------
Income tax (expense) benefit....................................... 813 (3,538)
--------- ---------
Net income......................................................... $ 4,355 $ 5,959
--------- ---------
--------- ---------
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Income before taxes, and minority interest, as reported............ $ 2,342 $ 4,587 $ 3,727 $ 4,229
Pro forma provision for taxes(4)................................... (890) (1,743) (1,430) (1,623)
--------- --------- --------- ---------
Pro forma net income............................................... $ 1,452 $ 2,844 $ 2,297 $ 2,606
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net income per share(5)........................................ $ 0.64 $ 1.03 $ 0.50 $ 0.56 $ 0.85
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted net income per share(5)...................................... $ 0.64 $ 1.03 $ 0.50 $ 0.52 $ 0.82
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital.................................................... $ 2,903 $ 9,325 $ 10,626 $ 25,431 $ 23,870
Total assets....................................................... 38,088 41,981 44,117 68,964 166,526
Short-term debt.................................................... 24,380 23,511 22,300 22,000 85,385
Long-term debt, less current maturities............................ 3,789 6,748 10,743 6,160 26,558
Total shareholders' equity......................................... 4,074 6,094 3,716 27,914 37,877
</TABLE>
- ------------------------------
(1) Effective January 1, 1997, the Company converted from the LIFO method of
accounting for inventories to the FIFO method. Accordingly, the 1993, 1994,
1995 and 1996 data has been restated to reflect this change. See Note 1 of
Notes to Consolidated Financial Statements.
18
<PAGE>
(2) Prior to 1994, the Company and its affiliated entities paid cash bonuses to
their shareholders and members in amounts approximating their respective
income tax liability on their undistributed earnings ($532,000 in 1991,
$640,000 in 1992, and $1.0 million in 1993), in addition to their normal
salaries. These cash bonuses are reflected in the selling, general and
administrative expense above. In 1994 and subsequent periods, cash to meet
the shareholders' and members' tax liabilities was distributed to the
shareholders and members as dividends. The Company believes that for a fair
evaluation of its historical performance, results for 1991, 1992 and 1993
should be adjusted to eliminate such bonus payments.
(3) Does not include depreciation included in cost of sales related to vehicles
leased to others. See "Consolidated Statements of Cash Flows" for total
depreciation and amortization.
(4) The Company was an S Corporation and accordingly was not subject to federal
and state income taxes during the periods indicated. Pro forma net income
reflects federal and state income taxes as if the Company had been a C
Corporation, based on the effective tax rates that would have been in effect
during these periods. See "Company Restructuring and Prior S Corporation
Status" and Notes 1 and 8 to the Company's Consolidated Financial
Statements.
(5) The per share amounts are pro forma for 1993, 1994, 1995 and 1996 and
actual for 1997.
19
<PAGE>
SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA
The following tables set forth the Company's unaudited quarterly financial
data for the quarterly periods presented. This presentation should be read in
conjunction with the audited consolidated financial statements of the Company
and the notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996(1) 1996(1) 1996(1) 1996(1) 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles........................ $ 14,817 $ 16,665 $ 16,524 $ 17,086 $ 24,829 $ 31,627 $ 44,562
Used vehicles....................... 13,239 15,157 15,075 15,140 22,641 25,778 28,963
Other............................... 4,390 4,775 4,924 5,052 7,234 9,017 12,048
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total sales........................... 32,446 36,597 36,523 37,278 54,704 66,422 85,573
Cost of sales......................... 26,847 30,588 29,957 30,941 45,755 55,706 71,388
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 5,599 6,009 6,566 6,337 8,949 10,716 14,185
Selling, general and administrative... 4,410 4,646 5,090 5,684 6,995 8,195 10,849
Depreciation and amortization......... 107 110 112 119 169 222 313
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income...................... 1,082 1,253 1,364 534 1,785 2,299 3,023
Other income (expense), net........... (145) (50) (159) 350 79 (72) (450)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes................... 937 1,203 1,205 884 1,864 2,227 2,573
Income taxes(2)....................... 360 477 462 324 720 859 994
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income(2)......................... $ 577 $ 726 $ 743 $ 560 $ 1,144 $ 1,368 $ 1,579
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Basic net income per share(2)......... $ 0.13 $ 0.16 $ 0.16 $ 0.12 $ 0.17 $ 0.20 $ 0.23
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted net income per share(2)....... $ 0.12 $ 0.15 $ 0.15 $ 0.11 $ 0.16 $ 0.19 $ 0.22
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEP. 30, DEC. 31, MAR. 31, JUN. 30, SEP. 30,
1996(1) 1996(1) 1996(1) 1996(1) 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales:
New vehicles........................ 45.7% 45.6% 45.0% 45.8% 45.4% 47.6% 52.0%
Used vehicles....................... 40.8% 41.4% 41.5% 40.6% 41.4% 38.8% 33.9%
Other............................... 13.5% 13.0% 13.5% 13.6% 13.2% 13.6% 14.1%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total sales........................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 82.8% 83.6% 82.0% 83.0% 83.6% 83.9% 83.4%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit.......................... 17.2% 16.4% 18.0% 17.0% 16.4% 16.1% 16.6%
Selling, general and administrative... 13.6% 12.7% 14.0% 15.3% 12.8% 12.3% 12.7%
Depreciation and amortization......... 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.4%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income...................... 3.3% 3.4% 3.7% 1.4% 3.3% 3.5% 3.5%
Other income (expense), net........... (0.4)% (0.1)% (0.4)% 1.0% 0.1% (0.1)% (0.5)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before taxes................... 2.9% 3.3% 3.3% 2.4% 3.4% 3.4% 3.0%
Income taxes(2)....................... 1.1% 1.3% 1.3% 0.9% 1.3% 1.3% 1.1%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income(2)......................... 1.8% 2.0% 2.0% 1.5% 2.1% 2.1% 1.9%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
DEC. 31,
1997
-----------
<S> <C>
Sales:
New vehicles........................ $ 60,276
Used vehicles....................... 35,717
Other............................... 17,103
-----------
Total sales........................... 113,096
Cost of sales......................... 93,514
-----------
Gross profit.......................... 19,582
Selling, general and administrative... 14,586
Depreciation and amortization......... 465
-----------
Operating income...................... 4,531
Other income (expense), net........... (1,698)
-----------
Income before taxes................... 2,833
Income taxes(2)....................... 965
-----------
Net income(2)......................... $ 1,868
-----------
-----------
Basic net income per share(2)......... $ 0.27
-----------
-----------
Diluted net income per share(2)....... $ 0.25
-----------
-----------
DEC. 31,
1997
-----------
<S> <C>
Sales:
New vehicles........................ 53.3%
Used vehicles....................... 31.6%
Other............................... 15.1%
-----------
Total sales........................... 100.0%
Cost of sales......................... 82.7%
-----------
Gross profit.......................... 17.3%
Selling, general and administrative... 12.9%
Depreciation and amortization......... 0.4%
-----------
Operating income...................... 4.0%
Other income (expense), net........... (1.5)%
-----------
Income before taxes................... 2.5%
Income taxes(2)....................... 0.8%
-----------
Net income(2)......................... 1.7%
-----------
-----------
</TABLE>
- --------------------------
(1) The quarterly data for 1996 has been restated to give effect for the
conversion from the LIFO method of accounting for inventory to the FIFO
method, which was effective January 1, 1997.
(2) The quarterly data for 1996 is pro forma in order to be comparable to 1997
data due to S Corporation status in 1996 and C Corporation status in 1997,
as well as the elimination of minority interest pursuant to the
restructuring at the time of the initial public offering.
20
<PAGE>
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
Prospectus. The following includes a discussion of certain significant business
trends and uncertainties as well as other forward-looking statements. For a
discussion of important factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors."
GENERAL
Lithia Motors is a leading retailer of new and used vehicles in the western
United States, offering 21 domestic and imported makes of new automobiles and
light trucks at 22 locations: 12 in California, 7 in Oregon and 3 in Nevada. The
Company sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services, and arranges
related financing and insurance for its automotive customers. The Company has
grown primarily by successfully acquiring and integrating dealerships and by
obtaining new dealer franchises. The Company's strategy is to continue as a
leading acquirer and operator of dealerships 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 (1997 data is not yet available).
AVERAGE U.S. DEALERSHIP
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C> <C>
Sales:
New vehicles.................................................... 58.6% 58.1%
Used vehicles................................................... 29.0% 29.5%
Parts, service and other........................................ 12.4% 12.4%
----- -----
Total sales................................................... 100.0% 100.0%
Gross profit...................................................... 12.9% 12.9%
Income before taxes............................................... 1.4% 1.5%
</TABLE>
- ------------------------
Source: NADA Industry Analysis Division.
The following table sets forth selected condensed financial data for the
Company expressed as a percentage of total sales for the periods indicated
below.
LITHIA MOTORS, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995(1) 1996(1) 1997
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
New vehicles.................................................... 46.6% 45.6% 50.4%
Used vehicles................................................... 38.6% 41.0% 35.4%
Parts, service and other........................................ 14.8% 13.4% 14.2%
----- ----- -----
Total sales................................................... 100.0% 100.0% 100.0%
Gross profit...................................................... 18.1% 17.2% 16.7%
Income before taxes............................................... 3.3% 3.0% 3.0%
</TABLE>
- ------------------------
(1) Restated to reflect FIFO method of accounting.
21
<PAGE>
Prior to January 1, 1997, the Company utilized 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"). Beginning January 1, 1997, the Company began
using the FIFO Method. Prior period statements have been restated to be
consistent with the current year presentation on the FIFO Method.
RECENT ACQUISITIONS
Since December 1996, the Company has completed the acquisition of 17
dealerships representing 16 makes of new automobiles and light trucks. Two
additional acquisitions are pending. The Company has accounted for each of its
acquisitions by the purchase method of accounting, and the results of operations
of these dealerships have not been included in the Company's results of
operations prior to the date they were acquired by the Company.
1997 COMPARED TO 1996
SALES. Sales for the Company increased $177.0 million, or 123.9% to $319.8
million for the year ended December 31, 1997 from $142.8 million in 1996. Total
vehicles sold during 1997 increased by 9,853, or 100.8%, to 19,631 from 9,778
during 1996. Dealerships acquired in late 1996 and 1997 accounted for 9,836 of
the total vehicles sold in 1997. Same dealership sales growth was 4.8%, due to a
3.1% increase in vehicle sales, and a 20.7% increase in other sales.
- NEW VEHICLES. The Company sells 21 domestic and imported brands
ranging from economy to luxury cars, as well as sport utility vehicles,
minivans and light trucks. In 1997 and 1996, the Company sold 7,493 and
3,274 new vehicles, generating revenues of $161.3 million and $65.1 million,
which constituted 50.4% and 45.6% of the Company's total sales,
respectively.
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.
- USED VEHICLES. 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 1997
and 1996, the Company sold 12,138 and 6,504 used vehicles, respectively,
generating revenues of $113.1 million and $58.6 million, which constituted
35.4% and 41.0% of the Company's total revenue, respectively.
- OTHER. The Company derives additional revenue from the sale of parts
and accessories, maintenance and repair services, auto body work, and
financing and insurance ("F&I") transactions. Other operating revenue
increased 137.7% to $45.4 million during 1997, from $19.1 million during
1996, 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 counter-cyclical 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.
GROSS PROFIT. Gross profit increased 118.0% during 1997 to $53.4 million,
compared with $24.5 million for 1996, primarily because of the increase in new
and used vehicle unit sales during the period. The gross profit margin achieved
by the Company on new vehicle sales during 1997 and 1996 was 11.4% and 13.1%,
respectively. This compares favorably with the average gross profit margin of
6.5% realized by franchised automobile dealers in the United States on sales of
new vehicles in 1996. 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
22
<PAGE>
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 used
vehicle sales was 11.4% in 1997 and 12.8% in 1996, as compared to the industry
average for 1996 of 11.0%. Total gross profit margin decreased to 16.7% for 1997
from 17.2% for 1996. The decrease in gross profit margin was primarily a result
of the acquisition of several new dealerships during 1997 which were generating
gross margins lower than those of the Company. The Company's gross profit margin
continues to exceed the average U.S. dealership gross profit margin of 12.9% for
1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's selling, general
and administrative ("SG&A") expense increased $20.8 million, or 104.9%, to $40.6
million for 1997 compared to $19.8 million for 1996. SG&A as a percentage of
sales decreased to 12.7% for 1997 from 13.9% for 1996. The increase in SG&A was
due primarily to increased selling, or variable, expense related to the increase
in sales resulting from the acquisition of additional dealerships, and increased
costs associated with being a public company. The decrease in SG&A as a percent
of total sales is a result of economies of scale gained as the fixed expenses
are spread over a larger revenue base.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased $721,000 or 160.9% to $1.2 million for the year ended December 31,
1997 compared to $448,000 for 1996 primarily as a result of increased property
and equipment and goodwill related to acquisitions in 1997. Depreciation and
amortization was 0.4% of sales in 1997 compared to 0.3% in 1996. These figures
exclude depreciation related to leased vehicles included in cost of sales.
INTEREST EXPENSE. Interest expense increased $1.6 million or 122.0% to $3.0
million for the year ended December 31, 1997 compared to $1.4 million for 1996,
primarily as a result of increased debt in 1997 related to acquisitions, partly
offset by increased cash balances for a majority of the year related to the
Company's initial public offering.
OTHER INCOME, NET. Other income, net, consisting primarily of management
fees from Lithia Properties, equity in the income of Lithia Properties and other
non-dealer service income, decreased 37.3% to $725,000 for 1997 from $1.2
million for 1996. This decrease was primarily due to the one-time benefit of
insurance proceeds received in 1996 related to damage caused by a hail storm.
INCOME TAX EXPENSE. Prior to December 18, 1996, the Company and its
affiliated entities were treated as S Corporations or as partnerships under the
Internal Revenue Code for federal income tax purposes 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.
The Company's effective tax rate for 1997 was 37.3% compared to 38.4% (on a
pro forma basis) for 1996. The Company's effective tax rate may be affected by
the purchase of new dealerships in jurisdictions with tax rates either higher or
lower than the current estimated rate.
NET INCOME. Net income rose 128.7% to $6.0 million (1.9% of total sales)
for the year ended December 31, 1997 compared to $2.6 million (1.8% of total
sales), on a pro forma basis, for 1996, as a result of the individual line item
changes discussed above.
1996 COMPARED TO 1995
SALES. Sales for the Company increased $28.6 million, or 25% from $114.2
million for 1995, to $142.8 million for the year ended December 31, 1996. Total
vehicles sold increased by 1,919, or 24.4%, from 7,859 during 1995 to 9,778 in
1996. The increase in sales was primarily from increased new and used
23
<PAGE>
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, 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 in July that mildly damaged vehicles in the Company's lots in and around
Medford, Oregon. Such vehicles were sold at reduced prices, increasing unit
sales, and increasing the gross profit margin due to the receipt of insurance
proceeds applied to increase the gross profit rather than repair the vehicles.
Sales in the fourth quarter of 1996 also increased as a result of the
acquisition of two dealerships late in the quarter.
- NEW VEHICLES. In 1996 and 1995, the Company sold 3,274 and 2,715 new
vehicles, respectively, generating revenues of $65.1 million and $53.3
million, which constituted 45.6% and 46.6% of the Company's total revenues,
respectively.
- USED VEHICLES. In 1996 and 1995, the Company sold 6,504 and 5,144
used vehicles, respectively, generating revenues of $58.6 million and $44.1
million, constituting 41.0% and 38.6%, respectively, of the Company's total
revenue.
- OTHER. Revenue from maintenance and repair service, parts and other
operating revenue increased 13.5% 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.
GROSS PROFIT. Gross profit increased 18.8% 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. The gross profit margin achieved
by the Company on new vehicle sales during 1996 and 1995 was 13.1% and 12.8%,
respectively, compared to the average gross profit margin obtained by franchised
automobile dealers in the United States on sales of new vehicles of 6.5% in
1996. Excluding wholesale transactions, the Company's gross profit margin on
used vehicle sales was 12.8% in 1996 and 13.2% in 1995, as compared to the
industry average for 1995 of 11.5%. Gross profit margin decreased to 17.2% for
1996 from 18.1% for 1995. The decrease in gross profit margin is primarily due
to a reduction in gross profit margin on used vehicle sales caused by an
increase in wholesale sales of used vehicles, which typically provide negligible
profit margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. The Company's SG&A expense
increased $3.5 million, or 21.4%, to $19.8 million for 1996 compared to $16.3
million for 1995. SG&A as a percentage of sales decreased to 13.9% for 1996 from
14.3% for 1995. The increase in SG&A expense 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. In connection with the reorganization of the Company
prior to its initial public offering, and the termination of the Company's
status as an S Corporation, the Company distributed to the shareholders
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 because the increase in total debt
outstanding for 1996 caused by the distribution of the Dividend Notes was 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 11.6% to $1.2 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,
24
<PAGE>
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. Net income was $2.6 million (1.8% of total sales) for the year
ended December 31, 1996, on a pro forma basis, compared to $2.3 million (2.0% of
total sales), on a pro forma basis, for 1995, as a result of the individual line
item changes discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for capital resources are to finance
acquisitions, capital expenditures and increased working capital requirements.
Historically, the Company has relied primarily upon internally generated cash
flows from operations, borrowings under its credit facility and the proceeds
from its initial public offering to finance its operations and expansion.
The Company's credit facility with a syndicate of banks, with U.S. Bank N.A.
as agent, provides for aggregate borrowings of $175 million (the "Credit
Facility"). The Credit Facility consists of (i) a $110 million revolving line of
credit to finance new and used vehicle inventory (collectively the "Flooring
Line" and individually, the "New Vehicle Line" and the "Program and Used Vehicle
Line", respectively); (ii) a $30 million revolving line of credit for
acquisitions (the "Acquisition Line"); (iii) a $10 million revolving line of
credit for leased vehicles (the "Lease Line"); (iv) a $10 million revolving line
of credit for equipment (the "Equipment Line"); and (v) a $15 million commitment
for real estate acquisitions (the "Real Estate Line"). The borrowing base with
respect to the (i) New Vehicle Line and the swingline line of credit is 100% of
the value of new vehicles in which the lenders have a perfected security
interest and new vehicles sold but for which payment is not yet due; (ii)
Program and Used Vehicle Line is 80% of the combined value of program and used
vehicle inventory; and (iii) Acquisition Line is an amount equal to the sum of
70% of vehicle equity, franchise value, leased vehicle equity and fixed asset
value. All lines of credit are cross collateralized and secured by substantially
all of the Company's inventory, fixed assets, intangible assets, and accounts.
The Credit Facility has a maturity date of October 1, 1998. At that time,
the Company has the right to elect to convert outstanding loans under the
Acquisition Line and the Equipment Line to a term loan payable over 5 years.
Amounts outstanding at December 31, 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Flooring Line...................................................................... $ 82,598
Acquisition Line................................................................... 5,000
Lease Line......................................................................... 5,211
Equipment and Real Estate Lines.................................................... 4,827
---------
Total............................................................................ $ 97,636
---------
---------
</TABLE>
Loans under the Credit Facility bear interest at LIBOR (London Interbank
Offered Rate) plus 150 to 275 basis points, equivalent to 7.625% to 8.75% at
December 31, 1997.
25
<PAGE>
The Credit Facility contains financial covenants requiring the Company to
maintain compliance with, among other things, specified ratios of (i) minimum
net worth; (ii) total liabilities to net worth; (iii) funded debt to cash flow;
(iv) fixed charge coverage; and (v) maximum allowable capital expenditures. The
Credit Facility precludes the payment of cash dividends without the consent of
the lenders. The Company is currently in compliance with all such financial
covenants.
Since December 1996 when the Company completed its initial public offering,
the Company has acquired 17 dealerships. The aggregate purchase price (excluding
real estate) was $101.3 million, aggregate borrowings (excluding real estate
purchases) was $61.1 million and the net investment by the Company was
approximately $49.3 million (excluding real estate purchases) for the amount of
goodwill, working capital, notes issued to sellers and other initial
investments. Additionally, the Company borrowed $7.9 million to purchase the
real property used by two dealerships.
The Company anticipates that it will be able to satisfy its cash
requirements at least through December 31, 1998, including its currently
anticipated growth, primarily with cash flow from operations, borrowings under
the Flooring Line and the Company's other lines of credit, cash currently
available, and the proceeds of this Offering. In addition, the Company is
exploring various alternative financing arrangements with respect to its real
estate, the result of which would be to provide additional available cash. No
specific plans have been made in that regard as of the date of this Prospectus.
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, the Company's sales have been lower in the first and fourth
quarters 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 first and fourth quarters than during the other
quarters of each fiscal year; however, this did not hold true for the fourth
quarters of 1996 and 1995. Management believes that interest rates, levels of
consumer debt, consumer buying patterns and confidence, as well as general
economic conditions, also contribute to fluctuations in sales and operating
results. The timing of acquisitions may cause substantial fluctuations of
operating results from quarter to quarter.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements.The objective of SFAS 130
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company expects to adopt SFAS 130 in the first
quarter of 1998 and does not expect comprehensive income to be materially
different from currently reported net income.
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). This statement establishes standards for the way that public
business enterprises report information about operating segments in interim and
annual financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company expects to adopt SFAS 131 for its fiscal year beginning January 1,
1998.
INFLATION
The Company believes that the relatively moderate rate of inflation over the
past few years has not had a significant impact on the Company's revenues or
profitability. In the past, the Company has been able to maintain its profit
margins during inflationary periods.
26
<PAGE>
YEAR 2000 CONVERSION
The Company has assessed the ability of its software and other computer
systems to properly utilize dates beyond December 31, 1999 (the "Year 2000
Conversion"). Management believes that the costs of the modifications and
conversions required will not be material. However, if the modifications and
conversions are not made or not completed in a timely fashion, the failure of
its Year 2000 Conversion could have a material adverse effect on the operations
of the Company.
Although Management believes it will not have material Year 2000 Conversion
issues, its future operations are dependent upon the ability of its vendors and
suppliers to successfully address the Year 2000 Conversion issues. There can be
no assurance that the computer systems of other companies upon which the
Company's own computer system relies or upon which its business is dependent,
will be timely converted, or that failure of another company to convert will not
adversely affect the Company.
27
<PAGE>
INDUSTRY
Domestic and foreign automobile manufacturers distribute their vehicles
through franchised dealerships. In 1996, franchised automobile dealers in the
United States sold over $320 billion in new cars and light trucks and over $170
billion in used vehicles. New vehicle sales grew at an average rate of 10.5%
from 1992 to 1996, while new vehicle unit sales grew at an average rate of 4.1%
over the same period. From 1992 through 1996 used vehicle units and revenues
grew at average rates of 6.2% and 14.7%, respectively. See "Risk
Factors--Cyclical Nature of Automobile Sales." The following chart provides
information about new and used vehicle unit and dollar sales of U.S. franchised
dealerships for the years 1992 to 1996. Used vehicle sales reflect sales at
retail and wholesale from franchised dealerships, but do not include sales by
independent used car and truck retailers. Sales by independent used vehicle
retailers were $81.0, $100.3, $134.1, $129.7 and $121.4 billion, respectively,
from 1992 to 1996.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED DEALERS' VEHICLES SALES
-----------------------------------------------------
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales........................................... 12.9 13.9 15.1 14.7 15.1
New vehicle sales revenue........................................ $ 220.6 $ 253.3 $ 289.1 $ 301.2 $ 328.4
Used vehicle unit sales.......................................... 15.1 16.3 17.8 18.5 19.2
Used vehicle sales revenue....................................... $ 99.5 $ 115.0 $ 138.5 $ 157.3 $ 171.8
</TABLE>
- ------------------------
Sources: NADA; CNW Market Research.
Dealerships sell new and used vehicles and offer a range of other services
and products, including repair and warranty work, replacement parts, extended
warranty coverage, financing and credit insurance. In 1996, the average
dealership's revenue consisted of 58.1% new vehicle sales, 29.5% used vehicle
sales and 12.4% for parts, service and other. However, as a result of intense
competition for new vehicle sales, the typical dealership currently generates
substantially all of its profits from the sale of used vehicles and finance and
insurance products, as well as revenues derived from the dealership's parts and
service departments.
Automotive dealership profitability varies widely and depends, in part, on
the effective management of inventory, marketing, competition, quality control
and customer responsiveness. Since 1992, retail automobile dealerships in the
United States have generated between 12.9% and 13.8% average gross profit margin
and between 1.4% and 1.8% pre-tax profit margin, on sales.
In recent years, manufacturers have offered attractive lease terms to reduce
the monthly costs of owning a new automobile, especially on short-term vehicle
leases. Such leases bring the consumer back to the new vehicle market sooner
than if the purchase had been financed through longer-term debt financing and
provide new vehicle dealerships with a steady source of late-model, off-lease
vehicles for their used vehicle inventory. Vehicle leases also enable the parts
and service departments within each dealership to provide repair services under
factory warranty coverage for the term of the lease.
Several economic and industry factors have led to a consolidation of the
highly-fragmented vehicle dealership industry. Dealerships typically have been
owned and operated by one individual who controlled a single franchise. After
significant expansion in the number of franchised dealerships in the 1950's,
competitive and economic pressures during the 1970s and 1980s, particularly the
oil embargo of 1973 and the subsequent loss of market share experienced by U.S.
automobile manufacturers to imported vehicles, forced many dealerships to close
or sell to better-capitalized dealer groups. Continued competitive and economic
pressure on dealers, combined with the easing of restrictions against multiple
dealer ownership, has led to a further reduction in the number of franchised
dealerships.
According to industry data, the number of franchised dealerships has
declined from more than 36,000 dealerships in 1960 to approximately 22,000 in
1996. While the number of dealerships has decreased, there
28
<PAGE>
has been an increase in the formation of larger dealer groups. Despite this
consolidation, however, the Company estimates that the largest 100 dealer groups
generate approximately 10% of total industry revenues and control approximately
5% of all franchised dealerships.
The Company believes that the franchised automobile dealership industry will
continue to consolidate due to the increased capital required to operate
dealerships, the fact that many dealerships are owned by individuals nearing
retirement age and the desire of certain manufacturers to strengthen their
dealer networks through consolidating their franchised dealerships. The Company
believes that an opportunity exists for dealership groups with significant
equity capital and experience in identifying, acquiring and professionally
managing dealerships to acquire additional franchises either for cash, stock,
debt or a combination thereof. Publicly-owned dealership groups, such as the
Company, are able to offer prospective sellers tax-advantaged transactions
through the use of publicly-traded stock which may, in certain circumstances,
make them more attractive acquirors to prospective sellers.
29
<PAGE>
BUSINESS
GENERAL
Lithia Motors is a leading retailer of new and used vehicles in Western
United States, offering 21 domestic and imported makes of new automobile on
light trucks at 22 locations: 12 in California, 7 in Oregon and 3 in Nevada. The
Company sells new and used cars and light trucks, sells replacement parts,
provides vehicle maintenance, warranty, paint and repair services, and arranges
related financing and insurance for its automotive customers. Since December
1996 when the Company completed its initial public offering, Lithia has acquired
17 dealerships, has two acquisitions pending and is actively pursuing additional
acquisitions.
In 1997, the Company generated record total sales, net income and unit sales
of new and used vehicles. Total sales increased to $319.8 million in 1997 from
$142.8 million in 1996, an increase of 124%. Same store sales increased 5% while
the addition of new dealerships contributed the balance of the growth in sales.
For the same period, net income increased to $6.0 million from $2.6 million (pro
forma), an increase of 129%. In the fourth quarter of 1997, the Company's total
sales and net income were $113.1 million and $1.9 million, respectively,
representing growth of 203% and 234% compared to the same period in 1996. New
vehicle unit sales increased to 7,493 in 1997 from 3,274 in 1996, an increase of
129%, and retail used vehicle unit retail sales increased from 4,156 to 7,148,
an increase of 72%.
Lithia was founded in 1946 and its two senior executives have managed the
Company for over 27 years. Management has developed and implemented its
acquisition and operating strategies which have enabled the Company to
successfully identify, acquire and integrate dealerships, achieving
profitability superior to industry averages. In 1997, the Company was able to
achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus
12.9% and 1.5%, respectively, for the industry (latest 1996 data).
The Company intends to continue to take advantage of the consolidation
opportunities in the $673 billion automotive retailing industry. According to
industry data, the number of franchised automobile dealerships has declined from
more than 36,000 dealerships in 1960 to approximately 22,000 in 1997. Currently,
the largest 100 dealer groups generate approximately 10% of total industry sales
and control approximately 5% of all franchised automobile dealerships. Several
economic and industry factors are expected to lead to the further consolidation
of the automobile retailing industry, including increasing capital requirements
necessary to operate an automobile dealership, the fact that many dealerships
are owned by individuals nearing retirement age who are seeking exit
opportunities, and the desire of manufacturers to strengthen their dealer
networks through consolidation. The Company believes that it is well positioned
to continue to capitalize on the highly fragmented and consolidating automotive
retail industry.
GROWTH STRATEGY
The Company is a leading acquiror of automobile dealerships in the western
United States. The Company pursues a well defined and disciplined acquisition
strategy, targeting acquisitions in certain under-dealered markets where
management believes the Company has the opportunity to acquire a cluster of
dealerships over time and build a significant market presence. This strategy is
patterned after the Company's initial core operations in southern Oregon where
it operates six dealerships. The Company's current markets include South-Central
Oregon, the Northeast Bay Area and South-Central Valley regions of California,
and Northern Nevada. Within these existing and new targeted markets, the
Company's evaluation of potential acquisitions takes into account a dealership's
size and reputation, and the brand of vehicles sold by the dealership.
Over the last 16 months, the Company has completed the purchase of 17
dealerships with pre-acquisition annual revenues of approximately $454 million
for a total purchase price (excluding real estate
30
<PAGE>
purchases) of $101.3 million and an aggregate net investment of $49.3 million
(excluding real estate purchases) for goodwill, working capital, notes issued to
sellers and other initial investments.
The following table sets forth certain information regarding recent
acquisitions:
<TABLE>
<CAPTION>
PRIOR-YEAR
ANNUAL
REVENUES*
REGION LOCATION BRANDS (MILLIONS) DATE ACQUIRED
- ----------------------------------- ------------------- ----------------------- ------------- ------------------
<S> <C> <C> <C> <C>
South-Central Oregon Eugene Dodge, Dodge Trucks $ 32 December-96
Medford Nissan, BMW 15 February-98
Northeast Bay Area, California Vacaville Toyota 28 December-96
Concord Dodge, Dodge Trucks,
Isuzu 39 April-97
Napa Ford, Lincoln-Mercury 24 July-97
Concord Ford 70 August-97
Concord Volkswagen ** August-97
South-Central Valley, California Bakersfield Nissan 41 October-97
Bakersfield BMW, Acura ** October-97
Fresno Ford 60 December-97
Fresno Mazda ** December-97
Fresno Nissan 40 January-98
Fresno Jeep, Hyundai ** January-98
Bakersfield Jeep 18 March-98
Northern Nevada Reno Isuzu, Lincoln-Mercury,
Suzuki, Audi 78 October-97
Sparks Isuzu, Lincoln-Mercury,
Suzuki ** October-97
Reno Volkswagen 9 February-98
-----
Total $ 454
-----
-----
</TABLE>
- ------------------------
* Revenues derived or estimated by the Company from unaudited dealer financial
statements for the year prior to acquisition.
** Revenues for this dealership not separately reported but are included with
the dealer acquired on the same date and set forth in the preceding entry.
Prior to December 1996, the Company operated five dealerships in Medford,
Oregon. These initial core dealerships generated sales of $136 million in 1997.
Based upon its current dealership locations, the percentage share of the
Company's total revenues from each region is approximately: South-Central
Oregon--31%; Northeast Bay Area, California--27%; South-Central Valley,
California--27%; and Northern Nevada--15%.
31
<PAGE>
OPERATING STRATEGY
The Company's operating strategy consists of the following elements:
MAINTAIN COOPERATIVE RELATIONSHIP WITH MANUFACTURERS. The Company
recognizes that its success is closely tied to its relationships with the
automobile manufacturers. The manufacturers are committed to the franchise
system to sell their vehicles and, accordingly, have a strong interest in the
strength and responsivenss of their franchise dealers. The manufactuers provide
support to the Company in training its employees, designing operating systems,
offering incentives and rebates to sell slower-moving vehicles and providing
regional and national advertising. The Company relies on and encourages this
assistance as a welcomed partner and cooperates with the manufacturers in the
Company's facilities design, marketing efforts and program support.
PROVIDE A BROAD RANGE OF PRODUCTS AND SERVICES. The Company offers a broad
range of products and services including a wide selection of new and used cars
and light trucks, vehicle financing and insurance and replacement parts and
service. At its 22 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki,
BMW, Saturn, Pontiac, Mazda and Hyundai. In addition, the Company sells a
variety of used vehicles at a broad range of prices. By offering new and used
vehicles and an array of complementary services at each of its locations, the
Company seeks to increase customer traffic and meet specific customer needs. The
Company believes that offering numerous new vehicle brands appeals to a variety
of customers, minimizes dependence on any one manufacturer and reduces its
exposure to supply problems and product cycles.
FOCUS ON USED VEHICLE SALES. In addition to the sale of new vehicles, a key
element of the Company's operating strategy is to focus on the sale of used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales to improve overall
profitability. To maintain a broad selection of high quality used vehicles and
to meet local demand preferences, the Company acquires used vehicles from
trade-ins and a variety of sources nationwide, including direct purchases and
manufacturers' and independent auctions. The Company's goal is to sell 1.5
retail used vehicles for every new vehicle sold, compared to an industry average
ratio of 0.8-to-1. The Company strives to attract customers and enhance buyer
satisfaction by offering multiple financing options, a 10-day/500-mile "no
questions asked" exchange program and a 60-day/3,000-mile warranty on every used
vehicle sold.
EMPHASIZE SALES OF HIGHER MARGIN PRODUCTS AND SERVICES. The Company
generates substantial incremental revenue and achieves higher profitability
through the sale of certain ancillary products and services such as financing
and insurance, extended service contracts and vehicle maintenance. Employees
receive special training and are compensated on a commission basis to sell such
products and services. In 1997, the Company arranged financing for 71% of its
new vehicle sales and 74% of its used vehicle sales, compared to 42% and 51%,
respectively, for the average automobile dealership in the United States (1996
data). Sales of these other ancillary products and services represent 14% of
Lithia's total sales, compared to 12% for the average U.S. dealership. The
Company also sells extended service coverage and other vehicle protection
packages which the Company believes enhances the value of the vehicle and
provides a higher level of customer satisfaction.
EMPLOY PROFESSIONAL MANAGEMENT TECHNIQUES. The Company employs professional
management practices in all aspects of its operations, including information
technology, employee training, profit-based compensation and cash management.
These efforts have been critical in managing the rapid growth in new stores over
the last 16 months. Each dealership is its own profit center and is managed by a
trained and
32
<PAGE>
experienced general manager who has primary responsibility for decisions
relating to inventory, advertising, pricing and personnel. In addition, each
dealership is supported by one of the Company's operating teams consisting of
specialists in the areas of new vehicle sales, used vehicle sales, finance and
insurance, service and parts, and back office administration (including
accounting and management information systems). The Company compensates its
general managers and department managers based on the profitability of their
dealerships and departments, respectively. Senior management utilizes computer-
based management information systems to monitor each dealership's sales,
profitability and inventory on a daily basis and to identify areas requiring
improvement. The Company believes the application of its professional management
practices provides it with a competitive advantage over many dealerships and is
critical to its ability to achieve levels of profitability superior to industry
averages.
FOCUS ON CUSTOMER SATISFACTION AND LOYALTY. The Company emphasizes customer
satisfaction throughout its organization and continually seeks to maintain its
reputation for quality and fairness. The Company trains its sales personnel to
identify an appropriate vehicle for each of its customers at an affordable
price. In 1996, the Company implemented an innovative customer-oriented
marketing program entitled "Priority You" which provides the Company's retail
customers six value-added services which the Company believes are important to
overall customer satisfaction, including a commitment to (i) provide a customer
credit check within 10 minutes, (ii) complete a used vehicle appraisal within 30
minutes, (iii) complete the paper work within 90 minutes for a vehicle purchase,
(iv) provide a 10-day/500-mile "no questions asked" right of exchange on any
used vehicle sold, (v) provide a warranty on all used vehicles sold for 60
days/3,000 miles, and (vi) make a donation to a local charity or educational
organization for every vehicle sold. The Company believes "Priority You" will
help differentiate it from many other dealerships, thereby increasing customer
traffic and developing stronger customer loyalty.
The Company has received a number of dealer quality and customer
satisfaction awards from various manufacturers. Most recently, Lithia's Medford
and Grants Pass, Oregon Chrysler product dealerships achieved Chrysler's highest
recognition for dealer excellence, the Five-Star Certification. The
certification, received by less than 20% of the Chrysler dealerships, is awarded
to those dealerships who achieve high service and sales CSI ratings and have
established training programs designed to continue outstanding performance. The
Medford location was one of the first to receive this certification in the
Pacific Northwest.
DEALERSHIP OPERATIONS
The Company owns and operates 12 dealership locations in California, 7 in
Oregon and 3 in Nevada. Each of the Company's dealerships sell 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 21 makes of new vehicles, including Dodge, Dodge Trucks,
Chrysler, Plymouth, Jeep, Ford, Lincoln-Mercury, Toyota, Isuzu, Nissan,
Volkswagen, Audi, Honda, Acura, Suzuki, BMW, Saturn, Pontiac, Mazda and Hyundai.
The operations of each of the Company's locations are overseen by a general
manager, who has primary responsibility for all aspects of the operations of the
dealership, including new and used vehicle inventory, advertising and marketing,
and the selection of personnel. Each location is operated as a profit center and
each general manager's compensation is based on dealership profitability. Each
general manager reports directly to the Company's Chief Operating Officer. In
addition, each dealership's general sales manager, used vehicle manager, parts
manager, service manager and F&I managers report directly to the general manager
and are compensated based on the profitability of their respective departments.
NEW VEHICLE SALES. The Company sells 21 domestic and imported brands
ranging from economy to luxury cars, sport utility vehicles, minivans and light
trucks. In 1997, the Company sold 7,493 new vehicles generating revenues of
$161.3 million, which constituted 50.4% of the Company's total revenues. The
33
<PAGE>
following table sets forth, by manufacturer, the percentage of new vehicle sales
by the Company during the fourth quarter of 1997.
<TABLE>
<CAPTION>
1997 FOURTH QUARTER
PERCENTAGE OF
MANUFACTURER NEW VEHICLE SALES
- --------------------------------------------------------------------------------------------- -----------------------
<S> <C>
Chrysler (Chrysler, Plymouth, Dodge, Jeep, Dodge Trucks)..................................... 32%
Ford (Ford, Lincoln, Mercury)................................................................ 27%
Toyota....................................................................................... 12%
Isuzu........................................................................................ 8%
Nissan....................................................................................... 5%
Volkswagen, Audi............................................................................. 4%
BMW.......................................................................................... 4%
Honda (Acura, Honda)......................................................................... 3%
General Motors (Saturn, Pontiac)............................................................. 2%
Suzuki....................................................................................... 2%
Mazda........................................................................................ 1%
Hyundai...................................................................................... *
---
100%
---
---
</TABLE>
- ------------------------
* Acquired in 1998.
The following table sets forth the Company's sales and gross profit margins
for new vehicle sales for the periods presented.
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Units..................................................... 2,464 2,744 2,715 3,274 7,493
Sales..................................................... $ 42,663 $ 51,154 $ 53,277 $ 65,092 $ 161,294
Gross profit margin....................................... 12.8% 12.5% 12.8% 13.1% 11.4%
</TABLE>
The Company purchases substantially all of its new car inventory directly
from manufacturers who allocate new vehicles to dealerships based on the amount
of vehicles sold by the dealership and by the dealership's market area. The
Company will also exchange vehicles with other dealers to accommodate customer
demand and to balance inventory.
As required by law, the Company posts the manufacturer's suggested retail
price on every new vehicle. As is customary in the automobile industry, the
final sales price of a new vehicle is generally negotiated with the customer.
However, at the Company's Saturn dealership the Company does not deviate from
the posted price. The Company is continually evaluating its pricing practices
and policies in light of changing consumer preferences and competitive factors.
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 1997, the
Company sold 12,138 used vehicles generating revenues of $113.1 million, which
constituted 35.4% of the Company's total revenue. The Company has made a
strategic commitment to emphasize used vehicle sales. As part of its focus on
used vehicle sales, the Company retains a full-time used vehicle manager at each
of its locations and has allocated additional financing and display space to
this effort.
34
<PAGE>
The Company sells used vehicles to retail customers and, in the case of
vehicles in poor condition or vehicles which have not sold within a specified
period of time, to other dealers and to wholesalers. As the table below
reflects, sales to other dealers and to wholesalers are frequently at or close
to cost and, therefore, affect the Company's overall gross profit margin on used
vehicle sales. Excluding wholesale transactions, the Company's gross profit
margin on used vehicle sales was 11.4% in 1997, as compared to the industry
average for 1996 of 11.0%. The following table reflects used vehicle sale
transactions of the Company from 1993 through December 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Retail units..................... 3,076 3,372 3,302 4,156 7,148
Retail sales..................... $ 29,680 $ 36,382 $ 36,997 $ 48,697 $ 88,571
Retail gross margin.............. 13.9% 13.5% 13.2% 12.8% 11.4%
Wholesale units.................. 1,642 1,834 1,842 2,348 4,990
Wholesale sales.................. $ 5,306 $ 5,999 $ 7,064 $ 9,914 $ 24,528
Wholesale gross margin........... 3.0% 3.0% 2.4% 1.7% 0.4%
Total units...................... 4,718 5,206 5,144 6,504 12,138
Total sales...................... $ 34,986 $ 42,381 $ 44,061 $ 58,611 $ 113,099
Total gross margin............... 12.3% 12.0% 11.4% 10.9% 9.1%
</TABLE>
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 1.5 retail used vehicle sales for
every new vehicle sale, the Company employs innovative marketing programs, such
as "Priority You," which offers a 60-day/3,000-mile warranty and a
10-day/500-mile "no questions asked" exchange program on every used vehicle it
sells in order to generate customer confidence in his or her purchasing
decision. Each dealership's used vehicle manager is responsible for the
purchasing and pricing of the used vehicle inventory. The Company strives to
sell each of its used vehicles within 60 days of acquisition and financially
motivates its used vehicle managers to effect such sales within that period.
VEHICLE FINANCING AND LEASING. The Company believes that its customers'
ability to obtain financing at its dealerships is critical to its ability to
sell new and used vehicles and ancillary products and services. The Company
provides a variety of financing and leasing alternatives in order to meet the
specific needs of each potential customer. The Company believes its ability to
obtain customer-tailored financing on a "same day" basis provides it with an
advantage over many of its competitors, particularly smaller competitors who
lack the resources to offer vehicle financing or who do not generate sufficient
volume to attract the diversity of financing sources that are available to the
Company. Because of the high profit margins which are typically generated
through sales of F&I products, the Company employs more than one F&I manager at
its dealership locations. The Company's F&I managers have extensive knowledge
regarding available financing alternatives and sources and are specially trained
to determine the customer's financing needs to enable the customer to purchase
or lease an automobile. The Company seeks to finance or arrange financing for
every vehicle it sells and has financed or arranged financing for a larger
percentage of its transactions than the industry average. During 1997, the
Company financed or arranged for financing for over 71% of its new vehicle sales
and 74% of its used vehicle sales, compared to an industry average of 42% and
51%, respectively (latest 1996 data).
The Company maintains close relationships with a wide variety of financing
sources and arranges financing for its customers with those sources that are
best suited to satisfy its customers' particular needs.
35
<PAGE>
The Company also utilizes financing sources, whenever possible, that maximize
the Company's revenues on the sale of the loan or lease to such source. The
interest rates available and the required down payment, if any, depend to a
large extent, upon the bank or other institution providing the financing and the
credit history of the particular customer. Currently, the Company has
relationships with approximately 30 banks and other financial institutions who
are in a position to provide financing for automobile purchases or leases by the
Company's customers. The Company's F&I managers have close working relationships
with third-party financing sources which enables them to quickly determine a
customer's credit position and confirm the type and level of financing that the
third party can commit to provide. A credit check generally occurs within
minutes while the customer remains at the dealership, allowing the sales manager
to assist the customer in making a fully informed decision regarding the terms
of the transaction.
In most cases, the Company arranges financing for its customers from third
party sources, which relieves the Company from any credit risk. However, in
certain circumstances where the Company believes the credit risk is manageable
and the risk-weighted income is expected to exceed the earnings available upon
the immediate sale of the finance contract, the Company will directly finance or
lease the automobile to such customer. In these cases, the Company bears the
risk of default by the borrower or lessee. Historically, the Company has
provided direct financing for a minimal number of its new and used vehicle
sales.
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 third party 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 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.
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 and body and paint operations to be an integral part of its customer
service program and an important element of establishing customer loyalty. The
Company provides parts and service primarily for the new vehicle brands sold by
the Company's dealerships but may also service other vehicles. In 1997, the
Company's parts and service operations generated $29.8 million in revenues, or
9.3% of total revenues. The Company uses a variable pricing structure designed
to reflect the difficulty and sophistication of different types of repairs. The
mark-up on a part is based upon the cost and availability of such part.
The parts and service business is relatively stable and provides an
important recurring revenue stream to the Company's dealerships. The Company
markets its parts and service products by notifying the owners of vehicles
purchased at its dealerships when their vehicles are due for periodic service.
This practice encourages preventive maintenance rather than post-breakdown
repairs. To a limited extent, revenues from the parts and service department are
countercyclical to new car sales as owners repair existing vehicles rather than
buy new vehicles. The Company believes this helps mitigate the affects of a
downturn in the new vehicle sales cycle.
36
<PAGE>
The Company has operated a full-service body and paint shop since 1970. In
1997, it constructed a new body and paint shop to service 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.
SALES AND MARKETING
The Company places particular emphasis on 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.
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 franchised automobile
dealerships, approximately 75% of the Company's advertising and marketing
expenses are paid for by the automobile manufacturers. The manufacturers also
provide the Company with market research, which assists the Company in
developing its own advertising and marketing campaigns. The Company believes
that it receives significant benefit from manufacturers' advertising,
particularly in the medium-sized markets in which the Company has been the only
representative of a manufacturer.
The Company's marketing efforts focus on a wide range of potential buyers.
The Company offers a variety of new and used cars and light trucks at a wide
range of prices and with various financing terms. The Company utilizes most
forms of media in its advertising, including television, newspaper, radio and
direct mail, including periodic mailers to previous customers. The Company
primarily uses advertising that focuses on developing its image as a reputable
dealer, offering quality service, affordable automobiles and financing for all
potential buyers. In addition, the Company's individual dealerships periodically
sponsor price discounts or other promotions designed to attract additional
customers. Each dealership has substantial control over the content and timing
of its promotions, although all advertising is coordinated by the Company. As
the Company owns several dealerships in most of the markets it serves, it
realizes cost savings on its advertising expenses from volume discounts and
other media concessions. The Company also participates as a member of a number
of advertising cooperatives or associations whose members, among other things,
pool their resources and expertise together with that of the manufacturer to
develop advertising aimed at benefiting all of their members.
MANAGEMENT INFORMATION SYSTEM
The Company's financial information, operational and accounting data and
other related statistical information are consolidated, processed and maintained
at its headquarters in Medford, Oregon, on a network of server computers and
work stations. The flexible nature of the Company's installed network allows for
accumulation, processing and distribution of information using ADP, Inc. and
Reynolds &
37
<PAGE>
Reynolds computing programs. ADP, Inc. and Reynolds & Reynolds are national
software providers for many companies including automotive dealers. All sales
and expense information, and other data related to the operations of each
dealership or other Company facility, are entered at each location. This system
allows senior management to access detailed information on a "real time" basis
from all of the Company's dealerships and other stores regarding, for example,
the makes and models of automobiles in its inventory, the mix of new and used
automobile sales, the number of automobiles being sold or leased, the percentage
of vehicles for which the Company arranged financing or sold ancillary products
and services, the profit margins being obtained on sales and the relative
performances of the Company's dealerships to each other. Such information is
also available to each dealership's general manager. Reports can be generated
that set forth and compare revenue and expense data by department and by store,
allowing management to quickly analyze the results of operations, identify
trends in the business, and focus on areas that require attention or
improvement. The Company believes that its management information system also
allows its general managers to quickly respond to changes in consumer
preferences and purchasing patterns, thereby maximizing inventory turnover.
The Company believes that its management information system is a key factor
in successfully incorporating newly acquired businesses into the Company.
Following each acquisition, the Company installs its management information
system at the dealership location, thereby quickly making the financial,
accounting and other operational data easily accessible to senior management at
the Company's corporate offices. With access to such data, senior management can
more efficiently execute the Company's operating strategy at the newly acquired
dealership.
CASH MANAGEMENT
The Company employs a centralized cash management system designed to
maximize returns and minimize interest expense. The Company's new vehicle
flooring line is supplied by the Company's bank, rather than by automobile
manufacturers, unlike many dealerships that do not have the financial condition
or results of operations that would permit them to obtain bank financing on
terms more favorable than those offered by manufacturers. As a result, the
Company's interest rate for flooring financing is 150 to 200 basis points below
the rates currently available to it from most manufacturers. In addition, in
order to minimize the outstanding balance under the Company's Flooring Line, all
available excess cash in the Company's various checking accounts is
automatically transferred at the end of each weekday to a central collateral
account at U.S. Bank N.A. These funds are used to pay down the balance under the
Flooring Line, thereby reducing interest expense. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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 Motors
Corporation (Chrysler, Plymouth, Dodge, Dodge Trucks, Jeep), American Honda
Motor Co., Inc. (Honda, Acura), American Isuzu Motors Inc. (Isuzu), Ford Motor
Company (Ford, Lincoln, Mercury), General Motors Corporation (Pontiac), Mazda
Motor of America, Inc. (Mazda), Saturn Distribution Corporation (Saturn), Toyota
Motor Sales, U.S.A., Inc. (Toyota), Nissan Motor Corporation in U.S.A. (Nissan),
American Suzuki Motor Corporation (Suzuki), Audi of America, Inc. (Audi), BMW of
North America, Inc. (BMW), Hyundai Motor America (Hyundai), 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
38
<PAGE>
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. Franchise agreements are routinely renewed
unless the franchisee has failed to meet certain requirements. The typical
franchise agreement provides for early termination or non-renewal by the
manufacturer under certain circumstances such as change of management or
ownership without manufacturer consent, insolvency or bankruptcy of the
dealership, death or incapacity of the dealer manager, conviction of a dealer
manager or owner of certain crimes, misrepresentation of certain information by
the dealership, dealer manager or owner to the manufacturer, failure to
adequately operate the dealership, failure to maintain any license, permit or
authorization required for the conduct of business, or a material breach of
other provisions of the franchise agreement including the dealership's poor
sales performance or low customer satisfaction index ("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. Most
manufacturers now have stated public ownership policies which the Company
believes it will be able to satisfy. Some of the policies impose additional
restrictions or conditions on the Company that would not exist under private
ownership. For a summary of the restrictions and conditions applicable to the
Company, see "Risk Factors-- Dependence on Automobile Manufacturers";
"--Manufacturers' Consent to Offering"; "--Manufacturers' Consent to
Acquisitions."
COMPETITION
The new and used automobile dealership business in which the Company
operates is highly competitive. The automobile dealership industry is fragmented
and characterized by a large number of independent operators, many of whom are
individuals, families and small groups. In the sale of new vehicles, the Company
principally competes with other new automobile dealers in the same general
vicinity of the Company's dealership locations. Such competing dealerships may
offer the same or different models and makes of vehicles that the Company sells.
In the sale of used vehicles, the Company principally competes with other used
automobile dealers and with new automobile dealers that operate used automobile
lots in the same general vicinity of the Company's dealership locations. In each
of its markets, the Company competes with numerous other new automobile dealers
selling other brands and a large number of other used automobile stores. 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
"mega-stores," 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
39
<PAGE>
automobile dealers that sell vehicles through nontraditional methods, such as
through direct mail or via the Internet.
The Company believes it is larger and has more financial resources than the
other operators with which it currently competes. However, as it enters other
markets, the Company may face competitors that are more established or have
access to greater financial resources. 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.
In addition to competition for the sale of vehicles, the Company can expect
increased competition for the acquisition of other dealerships. Although it is
currently the only dealer group with public ownership located in western United
States and faces only limited competition from other purchasers of dealerships
for sale, other publicly owned dealerships with significant capital resources
can be expected to be funded or enter the Company's current and targeted market
areas in the future.
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 the
Occupational Safety and Health Administration and the U.S. Environmental
Protection Agency, 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 certain state laws, prohibit a manufacturer
from terminating or failing to renew a franchise without good cause.
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. 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.
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.
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
40
<PAGE>
standards. The Company is also subject to laws, ordinances and regulations
governing remediation of contamination at facilities it operates or to which it
sends hazardous or toxic substances or wastes for treatment, recycling or
disposal. The Company believes that it does not have any material environmental
liabilities and that compliance with environmental laws, ordinances and
regulations will not, individually or in the aggregate, have a material adverse
effect on the Company's results of operations or financial condition. See "Risk
Factors--Supervision and Regulation; Environmental Matters."
EMPLOYEES
As of March 31, 1997, the Company employed approximately 1,300 persons on a
full-time equivalent basis. The service department employees (consisting of
approximately 90 employees) at Lithia Concord, Dodge, Isuzu and Lithia Sun
Valley Ford, Volkswagen are bound by collective bargaining agreements. The
Company believes it has a good relationship with its employees and the union
with whom it has collective bargaining agreements.
PROPERTIES
The Company and its various dealerships and other facilities occupy an
aggregate of approximately 100 acres of land, providing approximately 700,000
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 repair.
The following table sets forth each of the Company's facilities, the
approximate square footage at each facility, the acreage of each location and
whether the facility is owned or leased.
<TABLE>
<CAPTION>
FACILITY
-----------------------------------------------------
TOTAL LEASED FROM
BUILDING/ TOTAL OWNED BY LEASED FROM THIRD LITHIA PROPERTIES
DEALERSHIP/FACILITY SQUARE FEET LAND/ACRES COMPANY PARTY L.L.C.(1)
- ------------------------------------------------- ----------- ------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Lithia Motors, Medford, Oregon................... 5,255 0.51 X
Lithia Honda Pontiac Suzuki Isuzu
Volkswagen, Medford, Oregon.................... 27,114 3.30 X
Lithia Toyota Lincoln-Mercury,
Medford, Oregon................................ 56,658 5.09 X
Lithia Dodge Chrysler Plymouth
Mazda Jeep, Medford, Oregon.................... 64,962 4.35 X
Saturn of Southwest Oregon,
Medford, Oregon................................ 11,226 2.08 X
Grants Pass Auto Center,
Grants Pass, Oregon............................ 32,138 4.12 X
Lithia Toyota of Vacaville, California........... 22,900 4.18 X
Lithia Dodge of Eugene, Oregon................... 35,706 5.58 X
Lithia Nissan Acura BMW,
Bakersfield, California........................ 49,000 7.12 X
Lithia Donnelly Lincoln-Mercury Audi
Suzuki Isuzu, Reno, Nevada..................... 38,373 6.00 X
Lithia Donnelly Isuzu Lincoln-Mercury
Suzuki, Sparks, Nevada......................... 8,448 1.78 X
Lithia Sun Valley Ford Volkswagen,
Concord, California............................ 78,240 12.60 X
Lithia Ford, Napa, California.................... 26,900 6.20 X
Lithia Dodge, Concord California................. 21,722 4.46 X
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
FACILITY
-----------------------------------------------------
TOTAL LEASED FROM
BUILDING/ TOTAL OWNED BY LEASED FROM THIRD LITHIA PROPERTIES
DEALERSHIP/FACILITY SQUARE FEET LAND/ACRES COMPANY PARTY L.L.C.(1)
- ------------------------------------------------- ----------- ------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Lithia Isuzu, Concord, California................ 2,000 1.50 X
Lithia Ford, Fresno, California.................. 60,577 6.10 X
Lithia Mazda, Fresno, California................. 27,947 5.00 X
Lithia Body & Paint, Medford, Oregon............. 42,873 5.01 X
Thrift Auto Supply, Medford, Oregon.............. 11,230 0.46 X
Discount Auto & Truck Rental,
Medford, Oregon................................ 278 -- X
Cellular World, Medford, Oregon.................. 1,850 -- X
Avis Rent-A-Car, Medford, Oregon................. 630 -- X X
Lithia Nissan BMW, Medford, Oregon............... 22,687 4.03 X
Lithia Nissan Jeep, Fresno, California........... 47,914 6.00 X
Lithia Donnelly Volkswagen,
Reno, Nevada................................... 9,120 4.45 X
Lithia Jeep, Bakersfield, California............. 12,030 2.06 X
Vacant Parcels, Medford, Oregon(2)............... -- 5.32 X X
</TABLE>
- ------------------------
(1) Lithia Properties L.L.C., an Oregon limited liability company, is owned by
certain affiliates of the Company.
(2) Adjacent parcels held for future development. Property includes both owned
and leased parcels.
LITIGATION
The Company is, from time to time, a party to litigation that arises in the
normal course of its business. Management does not believe it is presently a
party to litigation that will have a material adverse effect on its business or
operations.
42
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The list identifies certain information regarding the Company's executive
officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Sidney B. DeBoer(1)............ 54 Chairman, Chief Executive Officer and Secretary
M.L. Dick Heimann.............. 54 President, Chief Operating Officer and Director
R. Bradford Gray............... 46 Executive Vice President and Director
Brian R. Neill................. 44 Senior Vice President and Chief Financial Officer
Thomas Becker(1)............... 46 Director
William J. Young(1)............ 55 Director
</TABLE>
- ------------------------
(1) Member of the Audit and Compensation Committees.
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.
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.
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.
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,
43
<PAGE>
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.
The Company's Bylaws provide for not less than two and not more than seven
directors. The Company currently has five directors. Directors are elected by
the shareholders at the Company's annual meeting and serve until the next annual
meeting and until their successors are elected and qualified. Executive officers
are appointed by and serve at the discretion of the Board of Directors.
COMMITTEES OF THE BOARD
The Board has established a Compensation Committee and an Audit Committee.
The Compensation Committee 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 Audit
Committee recommends the selection of auditors for the Company and reviews the
results of the audit and other reports and services provided by the Company's
independent auditors.
OTHER KEY PERSONNEL
<TABLE>
<CAPTION>
YEARS WITH THE
NAME AGE COMPANY CURRENT POSITION
- -------------------------------------------- --- ----------------- -----------------------------------------------
<S> <C> <C> <C>
Stephen R. Philips.......................... 44 21 Vice President, Operations
Dorothy Crockett............................ 49 19 Vice President, Comptroller
Bill E. Daves............................... 55 18 Vice President, Operations
Bryan B. DeBoer............................. 32 9 Vice President, Acquisitions
Don Jones, Jr............................... 35 9 Vice President, Operations
Jeffrey B. DeBoer........................... 33 1 Vice President, Finance/Investor Relations
</TABLE>
STEPHEN R. PHILIPS, VICE PRESIDENT, OPERATIONS. Mr. Philips joined Lithia
in 1977 and has held various positions with the Company, including Sales
Representative, Used Vehicle Manager and General Sales Manager. Since 1985 he
has held the position of General Manager of Lithia Toyota Lincoln Mercury
dealership in Medford and now also serves as the General Manager of the Nissan
BMW dealership in Medford. Mr. Philips has won numerous awards from Toyota for
customer service excellence.
DOROTHY CROCKETT, VICE PRESIDENT, COMPTROLLER. Ms. Crockett serves as the
Company's Comptroller and has served in various administrative management
positions with the Company since 1980, including accounting, personnel and
administration of the Company's profit sharing plan.
BILL E. DAVES, VICE PRESIDENT, OPERATIONS. Mr. Daves serves as the
Company's Operations Manager, a position he has held since 1981. Mr. Daves has
over 36 years of experience in the automotive industry in various positions,
including General Manager, Training Manager, F&I sales, parts and service.
BRYAN B. DEBOER, VICE PRESIDENT, ACQUISITIONS. Mr. DeBoer joined the
Company in 1988 and has served on the acquisition team since the end of 1996.
Prior to 1996, Mr. DeBoer worked in various capacities at Lithia, including
General Manager of the Medford Honda Isuzu Suzuki Pontiac Volkswagen dealership,
Finance Manager and General Sales Manager. He received his Bachelor of Science
degree summa cum laude in Business Administration from Southern Oregon
University in 1989 and is a graduate of the NADA Dealer Academy in Washington,
D.C.
DON JONES, JR., VICE PRESIDENT, OPERATIONS. Mr. Jones has served as
Operations and General Manager of Lithia's Dodge Chrysler Plymouth dealerships
since 1989 and currently serves as the Regional Manager for South-Central Oregon
and the Northeast Bay Area of California. In both 1996 and 1997 he was awarded
the Chrysler Five Star Award for Excellence. Prior to joining Lithia, Mr. Jones
was General Manager at Cottage Grove Motor Company in Cottage Grove, Oregon. He
received his Bachelor of Science degree in Business from the University of
Oregon in 1986.
44
<PAGE>
JEFFREY B. DEBOER, VICE PRESIDENT, FINANCE/INVESTOR RELATIONS. Mr. DeBoer
has been with Lithia since March 1997, serving as Vice President,
Finance/Investor Relations. Prior to joining the Company, Mr. DeBoer was an
equity analyst and sector fund manager at Fidelity Investments Japan from 1994
to 1997 and a Credit Officer at Fuji Bank, Ltd. in Tokyo, Japan from 1988 to
1992. He received his Bachelor of Arts degree cum laude in Asian Studies from
Pomona College in 1988 and a Masters of Business Administration from London
Business School in 1994.
EXECUTIVE 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>
LONG-TERM
COMPENSATION AWARDS
-------------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS(#) COMPENSATION
- ---------------------------------------------- --------- ---------- ----------- ------------------- -------------
<S> <C> <C> <C> <C> <C>
Sidney B. DeBoer.............................. 1997 $ 364,800 $ 4,689 3,636 $ 9,711(2)
Chairman, Chief Executive 1996 $ 344,550 $ 1,500 68,500 $ 7,282(2)
Officer and Secretary 1995 $ 331,125 $ 1,500 -- $ 2,310(3)
M.L. Dick Heimann............................. 1997 $ 273,000 $ 1,996 3,636 $ 7,262(4)
President, Chief Operating 1996 $ 273,000 $ 1,500 68,500 $ 5,842(4)
Officer and Director 1995 $ 277,125 $ 1,500 -- $ 2,310(3)
R. Bradford Gray.............................. 1997 $ 238,000 $ 3,898 2,909 $ 6,795(5)
Executive Vice President 1996 $ 196,000 $ 3,851 68,500 $ 6,296(5)
and Director 1995 $ 189,060 $ 3,645 -- $ 5,935(6)
</TABLE>
- ------------------------
(1) 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 $100 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.
(2) 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.
(3) Consists of amounts contributed by the Company to the accounts of Mr.
DeBoer and Mr. Heimann pursuant to the Company's 401(k) Plan.
(4) 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.
(5) Consists of an automobile allowance.
(6) 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.
45
<PAGE>
1996 STOCK INCENTIVE PLAN
In April 1996, the Board and the Company's shareholders adopted the
Company's 1996 Stock Incentive Plan (the "Plan"). The Plan provides for the
granting of stock-based awards ("Awards") to executive officers (including those
who are directors), to other employees and to non-employee consultants of the
Company. Such Awards may take any form approved by the Board or by a committee
designated by the Board, including stock options, stock bonuses, stock
appreciation rights and restricted stock awards. Stock options granted under the
Plan may be either options that qualify as "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Incentive Options"), or those that do not qualify as such "incentive stock
options" ("Non-qualified Options"). The Plan, which permits up to 670,000 shares
of the Company's Class A Common Stock to be issued, terminates on April 4, 2006.
As of March 1, 1998, Incentive and Non-Qualified Options with respect to a total
of 545,839 shares of Class A Common Stock are outstanding, and Options covering
50,550 shares of the Company's Class A Common Stock have been exercised. An
additional 73,611 shares are available for issuance under the Plan. As of March
1, 1998, options with respect to 175,265 shares are exercisable. The Board has
approved an amendment to the Plan to increase the number of shares under the
Plan by 415,000 shares. This amendment will be submitted to the Company's
shareholders for their approval at the next annual meeting of shareholders.
The Plan is administered by the Board or by a Compensation Committee of the
Board. Subject to the terms of the Plan, the Board or the Compensation Committee
determines the persons to whom Awards are granted and the terms and the number
of shares covered by each Award. The term of each option may not exceed ten
years from the date the option is granted, or five years in the case of an
incentive stock option granted to a holder of more than 10% of the fully-diluted
capital stock of the Company. Options may become exercisable in whole at grant
or in installments over time, as determined by the Committee.
With respect to the stock options granted by the Company to date, such
options generally expire when the optionee ceases to be affiliated with the
Company. Options may not be transferred other than by will or the laws of
descent and distribution, and during the lifetime of an optionee may be
exercised only by the optionee.
The Plan provides that any Award may contain, at the discretion of the
Committee, a provision conditioning or accelerating the receipt of benefits
pursuant to such Award upon the occurrence of specified events, including
continued employment by the Company, a change in control, merger, dissolution or
liquidation of the Company or the sale of substantially all of the Company's
assets. The acceleration of vesting of Awards in the event of a merger or other
similar event may be seen as an anti-takeover provision and may have the effect
of discouraging a proposal for merger, a takeover attempt or other efforts to
gain control of the Company.
Options are generally granted with an exercise price equal to the fair
market value of Class A Common Stock on the date of the grant, but the Committee
may, in its discretion, set the exercise price at a higher or lower amount.
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.
STOCK OPTIONS
In lieu of certain executive annual cash bonuses in 1997, the Company
granted non-qualified stock options covering 21,454 shares exercisable at $1.00
per share. The following table contains information
46
<PAGE>
concerning the grant of stock options under the Company's 1996 Stock Incentive
Plan (the "Plan") to the Named Executive Officers in 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS(1) VALUE AT ASSUMED
---------------------------------------------------------- ANNUAL RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED EXERCISE FOR OPTION TERM(2)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ------------------------------------- ------------- ----------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
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>
- ------------------------
(1) 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.
(2) 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.
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>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE- MONEY OPTIONS AT
SHARES OPTIONS AT FY END FY END(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------- ------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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>
- ------------------------
(1) Market value of the underlying securities at December 31, 1997, ($14.75 per
share), minus exercise price of the unexercised options.
EMPLOYEE STOCK PURCHASE PLAN
The Board has approved the implementation of an Employee Stock Purchase Plan
(the "Purchase Plan") and has reserved a total of 250,000 shares of Class A
Common Stock for issuance under the Purchase Plan. The Purchase Plan is subject
to the approval of the Company's shareholders which will be sought at the next
annual meeting of shareholders. The Purchase Plan is intended to qualify under
Section 423 of the Internal Revenue Code of 1986, as amended, (the "Internal
Revenue Code") and will be administered by the Compensation Committee of the
Board. Under the Purchase Plan, each calendar quarter is a separate offering
period. Employees of the Company and its subsidiaries are eligible to
47
<PAGE>
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. 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. 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. 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 further shareholder approval. The Purchase Plan will terminate on
December 31, 2007.
DIRECTOR COMPENSATION
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.
48
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Common Stock by (i) each director of the Company,
(ii) each executive officer of the Company named in the summary compensation
table, (iii) all directors and officers as a group, and (iv) each person or
entity known by the Company to own beneficially more than 5% of the Common
Stock. The number of shares owned is as of March 31, 1998 and the percentages
are both as of that date and as adjusted to reflect the sale of shares in this
offering. Except as indicated in footnotes to this table, each of the persons
named in the table has sole voting and investment power with respect to all
shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY OWNED
----------------------------------------------------
SHARES BENEFICIALLY
OWNED BEFORE THE OFFERING AFTER THE OFFERING
---------------------- ------------------------ --------------------------
NAME AND ADDRESS CLASS A CLASS B CLASS A CLASS B CLASS A CLASS B
- --------------------------------------------- ----------- --------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Sidney B. DeBoer(2),(3),(4).................. 69,227 4,110,000 2.3% 100.0% 1.2% 100.0%
M.L. Dick Heimann(2),(3),(5)................. 99,227 -- 3.3% -- 1.7% --
R. Bradford Gray(2),(6)...................... 27,981 -- 0.9% -- 0.5% --
Thomas Becker(2),(7)......................... 5,000 -- 0.2% -- 0.1% --
William J. Young(2),(8)...................... 1,500 -- * -- * --
All directors and executive officers as a 232,730 4,110,000 7.6% 100.0% 3.8% 100.0%
group (6 persons)(9).......................
Lithia Holding Company, L.L.C.(2),(3)........ -- 4,110,000 -- 100.0% -- 100.0%
J.P. Morgan & Co. Incorporated(10) .......... 417,500 -- 14.3% -- 7.0% --
60 Wall Street
New York, NY 10260
Wellington Management Co., LLP(11) .......... 324,900 -- 11.1% -- 5.5% --
75 State Street
Boston, MA 02109
The Capital Group of Companies, Inc.(12) .... 250,000 -- 8.5% -- 4.2% --
333 S. Hope Street, 52nd Floor
Los Angeles, CA 90071
Gardner Lewis Asset Management(13) .......... 250,000 -- 8.5% -- 4.2% --
285 Wilmington West Chester Pike
Chadds Ford, PA 19317
Investment Advisors, Inc.(14) ............... 167,400 -- 5.7% -- 2.8% --
3700 First Bank Place
Minneapolis, MN 55440
<CAPTION>
PERCENT OF
VOTING
POWER AFTER
NAME AND ADDRESS OFFERING(1)
- --------------------------------------------- ---------------
<S> <C>
Sidney B. DeBoer(2),(3),(4).................. 87.4%
M.L. Dick Heimann(2),(3),(5)................. *
R. Bradford Gray(2),(6)...................... *
Thomas Becker(2),(7)......................... *
William J. Young(2),(8)...................... *
All directors and executive officers as a 87.6%
group (6 persons)(9).......................
Lithia Holding Company, L.L.C.(2),(3)........ 87.4%
J.P. Morgan & Co. Incorporated(10) .......... 0.9%
60 Wall Street
New York, NY 10260
Wellington Management Co., LLP(11) .......... 0.7%
75 State Street
Boston, MA 02109
The Capital Group of Companies, Inc.(12) .... 0.5%
333 S. Hope Street, 52nd Floor
Los Angeles, CA 90071
Gardner Lewis Asset Management(13) .......... 0.5%
285 Wilmington West Chester Pike
Chadds Ford, PA 19317
Investment Advisors, Inc.(14) ............... 0.4%
3700 First Bank Place
Minneapolis, MN 55440
</TABLE>
- ------------------------------
* Less than 0.1%
(1) Class A Common Stock is entitled to 1 vote per share and Class B Common
Stock is entitled to 10 votes per share.
(2) All such persons can be reached c/o 360 E. Jackson Street, Medford, Oregon
97501.
(3) 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.
(4) Mr. DeBoer holds options to purchase 39,227 shares of Class A Common Stock
which are exercisable within 60 days of March 31, 1998. See
"Management--Executive Compensation" and "--1996 Stock Incentive Plan."
(5) Mr. Heimann holds options to purchase 69,227 shares of Class A Common Stock
which are exercisable within 60 days of March 31, 1998. See
"Management--Executive Compensation" and "--1996 Stock Incentive Plan."
Includes 5,000 shares held by his spouse.
(6) Mr. Gray holds options to purchase 27,981 shares of Class A Common Stock
which are exercisable within 60 days of March 31, 1998. See
"Management--Executive Compensation" and "--1996 Stock Incentive Plan."
(7) Mr. Becker holds an option to purchase 1,500 shares of Class A Common Stock
which are exercisable within 60 days of March 31, 1998. See
"Management--Director Compensation."
49
<PAGE>
(8) Mr. Young holds an option to purchase 1,500 shares of Class A Common Stock
which is exercisable within 60 days of March 31, 1998. See
"Management--Director Compensation."
(9) Directors and executive officers as a group hold options to purchase
153,280 shares of Class A Common Stock which are exercisable within 60 days
of March 31, 1998. See "Management--Executive Compensation," "--1996 Stock
Incentive Plan" and "--Director Compensation." Also includes 5,000 shares
held by a spouse.
(10) 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.
(11) 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.
(12) 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 shares of Class A Common Stock of the Company as
a result of its serving as the investment manager of various institutional
accounts.
(13) 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.
(14) Investment Advisers, Inc. is an investment adviser registered under Section
203 of the Investment Advisers Act of 1940 and, based upon information filed
with the Securities and Exchange Commission on March 10, 1998, it has sole
voting power and sole dispositive power as to 163,100 shares and shared
voting power and shared 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.
50
<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
year 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 remaining
initial terms of 14 years and have aggregate annual lease payments during 1998
of $1.75 million. 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.
51
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares of
Class A Common Stock, no par value, 25,000,000 shares of Class B Common Stock,
no par value, and 15,000,000 shares of Preferred Stock, no par value. The Board
of Directors may, by its own action, decrease the number of authorized shares of
Class B Common Stock. If it does so, the number of shares of Class A Common
Stock will automatically be increased on a share for share basis.
COMMON STOCK
Each share of Common Stock is designated as either Class A Common Stock or
Class B Common Stock. As of the date hereof, there are 2,925,550 shares of Class
A Common Stock outstanding and 4,110,000 shares of Class B Common Stock
outstanding. All of the outstanding Class B Common Stock is held by Lithia
Holding. Upon completion of this Offering, there will be 5,925,550 shares
(6,375,550 shares if the Underwriters' over-allotment option is exercised) of
Class A Common Stock and 4,110,000 shares of Class B Common Stock outstanding.
The issued and outstanding shares of Class B Common Stock have been, and the
shares of Class A Common Stock offered hereby will be, duly authorized, validly
issued, fully paid and nonassessable.
No additional shares of Class B Common Stock can be issued without the prior
approval of shareholders holding a majority of all Class A Common Stock
outstanding, except in conjunction with stock splits, stock dividends,
reclassification and similar transactions and events regarding the Class A
Common Stock that would otherwise have the effect of changing conversion rights
of the Class B Common Stock relative to the Class A Common Stock (the
"Adjustments").
Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of the Company. Shares of Common Stock are
not redeemable and there are no sinking fund provisions.
While the shares of Class A Common Stock are not convertible into any other
series or class of the Company's securities, each share of Class B Common Stock
is freely convertible into one share (subject to the Adjustments) of Class A
Common Stock at the option of the holder of the Class B Common Stock. All shares
of Class B Common Stock shall automatically convert to shares of Class A Common
Stock (on a share-for-share basis, subject to the Adjustments) on the earliest
record date for an annual meeting of the Company shareholders on which the
number of shares of Class B Common Stock outstanding is less than 1% of the
total number of shares of Common Stock outstanding. Shares of Class B Common
Stock may not be transferred to third parties (except for transfers to certain
family members and in other limited circumstances). Any purported transfer of
Class B Common Stock to a person who is not a permitted transferee under the
Articles of Incorporation is automatically void.
Subject to the preferences applicable to any Preferred Stock outstanding at
the time, holders of shares of Common Stock are entitled to dividends if, when
and as declared by the Board of Directors from funds legally available therefor,
and are entitled, in the event of liquidation, to share ratably in all assets
remaining after payment of liabilities and Preferred Stock preferences, if any.
Each share of Class A Common Stock and Class B Common Stock will be treated
equally with respect to dividends and distributions.
Holders of Class A Common Stock are entitled to one vote for each share held
of record, and holders of Class B Common Stock are entitled to ten votes for
each share held of record. The Class A Common Stock and Class B Common Stock
vote together as a single class on all matters submitted to a vote of
shareholders (including the election of directors). However, the Oregon Business
Corporation Act would entitle either the Class A Common Stock or the Class B
Common Stock to vote as a separate voting group on any proposed amendment of the
Company's Articles of Incorporation otherwise requiring shareholder
52
<PAGE>
approval if the proposed amendment would (i) increase or decrease the aggregate
number of authorized shares of the class, (ii) effect an exchange or
reclassification of all or part of the shares of the class into shares of
another class or create a right to do so, (iii) change the shares of all or part
of the class into a different number of shares of the same class, (iv) create a
new class having rights or preferences with respect to distributions or
dissolution that are prior to superior or substantially equal to shares of the
class or (v) otherwise alter the rights, preferences or limitations of all or
part of the shares of the class. In these circumstances, the class of Common
Stock to be altered shall vote on the amendment as a separate class. Shares of
Common Stock do not have cumulative voting rights with respect to the election
of directors. Immediately after this Offering, Lithia Holding will hold shares
of Class B Common Stock constituting approximately 87.4% of the voting power of
the outstanding Common Stock (or 86.6% if the underwriters' over-allotment
option is exercised), which will allow it to control all actions to be taken by
the shareholders, except as noted above, including the election of all directors
to the Board of Directors. See "Principal Shareholders" and "Risk
Factors--Concentration of Voting Power; Anti-Takeover Provisions."
PREFERRED STOCK
The Board of Directors may, without further action of the shareholders of
the Company, issue shares of Preferred Stock in one or more series and fix the
rights and preferences thereof, including the dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), redemption price or prices, liquidation preferences
and the number of shares constituting any series or the designations of such
series, and increase or decrease the number of shares of any such series (but
not below the number of such shares then outstanding). The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of holders of any Preferred Stock that may be issued in the future. Issuance of
Preferred Stock provides desirable flexibility in connection with possible
acquisitions and other corporate purposes. However, the Board of Directors,
without further shareholder approval, can issue Preferred Stock with voting and
conversion rights that would adversely affect the voting power and other rights
of the holders of Common Stock. In addition, the Board of Directors can issue
and sell shares of Preferred Stock to designated persons, the impact of which
could make it more difficult for a holder of a substantial block of Common Stock
to remove incumbent directors or otherwise gain control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE OREGON BUSINESS CORPORATIONS ACT
The Company is subject to the Oregon Control Share Act (Oregon Revised
Statutes Sections 60.801-60.816). The Oregon Control Share Act generally
provides that a person (the "Acquiring Person") who acquires voting stock of an
Oregon corporation in a transaction which results in such Acquiring Person
holding more than 20%, 33 1/3% or 50% of the total voting power of such
corporation (a "Control Share Acquisition") cannot vote the shares it acquires
in the Control Share Acquisition ("control shares") unless voting rights are
accorded to such control shares by the holders of a majority of the outstanding
voting shares, excluding the control shares held by the Acquiring Person and
shares held by the Company's officers and inside directors ("interested
shares"), and by the holders of a majority of the outstanding voting shares,
including interested shares. This vote would be required at the time an
Acquiring Person's holdings exceed 20% of the total voting power of a company,
and again at the time the Acquiring Person's holdings exceed 33 1/3% and 50%,
respectively. The term "Acquiring Person" is broadly defined to include persons
acting as a group. A transaction in which voting power is acquired solely by
receipt of an immediately revocable proxy does not constitute a "Control Share
Acquisition."
The Acquiring Person may, but is not required to, submit to the Company an
"Acquiring Person Statement" setting forth certain information about the
Acquiring Person and its plans with respect to the Company. The Acquiring Person
Statement may also request that the Company call a special meeting of
shareholders to determine whether the control shares will be allowed to retain
voting rights. If the
53
<PAGE>
Acquiring Person does not request a special meeting of shareholders, the issue
of voting rights of control shares will be considered at the next annual meeting
or special meeting of shareholders that is held more than 60 days after the date
of the Control Share Acquisition. If the Acquiring Person's control shares are
accorded voting rights and represent a majority or more of all voting power,
shareholders who do not vote in favor of the restoration of such voting rights
will have the right to receive the appraised "fair value" of their shares, which
may not be less than the highest price paid per share by the Acquiring Person
for the control shares.
The Company is also subject to the Oregon Business Combination Act (Oregon
Revised Statutes Sections 60.825-60.845). The Oregon Business Combination Act
generally provides that in the event a person or entity acquires 15% or more of
the voting stock of an Oregon corporation (an "Interested Shareholder"), the
corporation and the Interested Shareholder, or any affiliated entity, may not
engage in certain business combination transactions for a period of three years
following the date the person became an Interested Shareholder. Business
combination transactions for this purpose include (a) a merger or plan of share
exchange, (b) any sale, lease, mortgage or other disposition of the assets of
the corporation where the assets have an aggregate market value equal to 10% or
more of the aggregate market value of the corporation's assets or outstanding
capital stock, and (c) certain transactions that result in the issuance of
capital stock of the corporation to the Interested Shareholder. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting stock of the corporation (disregarding shares
owned by directors who are also officers and certain employee benefit plans),
(ii) the Board of Directors approves the share acquisition or business
combination before the Interested Shareholder acquired 15% or more of the
corporation's voting stock, or (iii) the Board of Directors and the holders of
at least two-thirds of the outstanding voting stock of the corporation
(disregarding shares owned by the Interested Shareholder) approve the
transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock.
The Oregon Control Share Act and the Oregon Business Combination Act will
have the effect of encouraging any potential acquiror to negotiate with the
Company's Board of Directors and will also discourage certain potential
acquirors unwilling to comply with the provisions of these laws. A corporation
may provide in its articles of incorporation or bylaws that the laws described
above do not apply to its shares. The Company has not adopted such a provision
and does not currently intend to do so. These laws may make the Company less
attractive for takeover, and thus shareholders may not benefit from a rise in
the price of the Common Stock that a takeover could cause.
LIMITATION OF LIABILITY AND INDEMNIFICATION
As allowed by the Oregon Business Corporation Act, the Company's Articles of
Incorporation provide that the liability of the directors of the Company for
monetary damages will be eliminated to the fullest extent permissible under
Oregon law. This is intended to eliminate the personal liability of a director
for monetary damages in an action brought by or in the right of the Company for
breach of a director's duties to the Company or its shareholders except for
liability: (i) for any breach of the director's duty of loyalty to the Company
or its shareholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law; (iii) for any
unlawful distribution to shareholders; or (iv) for any transaction from which
the director derived an improper personal benefit. This provision does not limit
or eliminate the rights of the Company or any shareholder to seek non-monetary
relief, such as an injunction or rescission, in the event of a breach of a
director's duty of care. This provision also does not affect the director's
responsibilities under any other laws, such as the federal or state securities
or environmental laws.
The Articles of Incorporation and the Bylaws also provide that the Company
shall indemnify, to the fullest extent permitted under Oregon law, any person
who has been made, or is threatened to be made, a party to an action, suit or
legal proceeding by reason of the fact that the person is or was a director or
54
<PAGE>
officer of the corporation. The Articles provide that the Company shall
indemnify directors and officers against certain liabilities that may arise by
reason of their status or service as a director or officer and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified.
TRANSFER AGENT
The transfer agent and registrar for the Class A Common Stock is American
Securities Transfer & Trust, Inc., Denver, Colorado.
55
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters"), for which Furman Selz
LLC, Dain Rauscher Wessels a division of Dain Rauscher Incorporated, EVEREN
Securities, Inc. and BancAmerica Robertson Stephens are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company the number of shares of Class A Common Stock indicated below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
Furman Selz LLC..................................................................
Dain Rauscher Wessels............................................................
EVEREN Securities, Inc...........................................................
BancAmerica Robertson Stephens...................................................
----------
Total...................................................................... 3,000,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the shares of Class A Common Stock listed above are subject to the
approval of certain legal matters by counsel and various other conditions. The
Underwriting Agreement also provides that the Underwriters are committed to
purchase all of the shares of Class A Common Stock offered hereby, if any are
purchased (except for any shares that may be purchased through exercise of the
Underwriters' over-allotment option which may be exercised by the Underwriters
in whole or in part).
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Class A Common Stock to the public at the public offering
price set forth on the cover of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to certain other dealers. After the Offering, the public offering price
and other selling terms may be changed by the Representatives. The Class A
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company has granted the Underwriters an option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 450,000
additional shares of Class A Common Stock at the public offering price set forth
on the cover page of this Prospectus, less underwriting discounts and
commissions. To the extent the Underwriters exercise the option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase such number of additional shares of Class A Common Stock as is
proportionate to such Underwriter's initial commitment to purchase shares from
the Company. The Underwriters may exercise such option solely to cover
over-allotments, if any, incurred in connection with the sale of shares of Class
A Common Stock offered hereby.
The Underwriting Agreement provides that the Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company and each of the Company's executive officers and directors and
Lithia Holding have agreed that, for a period of 90 days after the day on which
the Registration Statement becomes effective by order of the Commission, they
will not, without the prior written consent of Furman Selz LLC, directly or
indirectly, offer for sale, sell, contract to sell, or grant any option to sell
(including, without limitation, any short sale), pledge, establish an open
"put-equivalent position" within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, transfer, assign or otherwise dispose of any
shares of the Company's Class A Common Stock or securities exchangeable for or
convertible into shares of the Company's Class A Common Stock, or any option,
warrant or other right to acquire such shares, or publicly announce the
intention to do any of the foregoing; provided, that the Company may issue, and
grant options to purchase, shares of Class A Common Stock under its current
stock option and purchase plans and other currently
56
<PAGE>
outstanding options. In addition, the Company may issue shares of Class A Common
Stock in connection with any acquisition of another company if the terms of such
issuance provide that such Class A Common Stock shall not be resold prior to the
expiration of the 90-day period referenced in the preceding sentence.
In connection with this Offering, certain Underwriters may engage in passive
market making transactions in the Class A Common Stock on the Nasdaq National
Market immediately prior to the commencement of sales in this Offering in
accordance with Rule 103 of Regulation M. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the bid prices of
independent market makers and making purchases limited by such prices and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the Class A Common Stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Class A Common Stock at a level
above that which might otherwise prevail and, if commenced, may be discontinued
at any time.
Subject to applicable limitations, the Underwriters, in connection with this
Offering, may place bids for or make purchases of the Class A Common Stock in
the open market or otherwise, for long or short account, or cover short
positions incurred, to stabilize, maintain or otherwise affect the price of the
Class A Common Stock, which may be higher than the price that might otherwise
prevail in the open market. There can be no assurance that the price of the
Class A Common Stock will be stabilized, or that stabilizing, if commenced, will
not be discontinued at any time. Subject to applicable limitations, the
Underwriters may also place bids or make purchases on behalf of the underwriting
syndicate to reduce a short position created in connection with this Offering.
The Underwriters are not required to engage in these activities and may end
these activities at any time.
LEGAL MATTERS
The validity of the Company's Class A Common Stock being offered hereby will
be passed upon for the Company by Foster Pepper & Shefelman LLP, Portland,
Oregon. Kenneth E. Roberts, a partner with Foster Pepper & Shefelman LLP, owned
30,000 shares of Class A Common Stock as of March 31, 1998.
Certain legal matters will be passed upon for the Underwriters by Milbank,
Tweed, Hadley & McCloy, Los Angeles, California. Milbank, Tweed, Hadley & McCloy
represented the Company in certain matters unrelated to this Offering during
1997.
EXPERTS
The consolidated financial statements of Lithia Motors, Inc. and
Subsidiaries as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997 have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering the December 31, 1997 financial statements refers
to a change in the FIFO method of valuing inventories.
The financial statements of Sun Valley Ford included in this Prospectus and
in the Registration Statement, have been audited by Moss Adams LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement, and
are included in reliance upon such reports given upon the authority of said firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act,
with respect to the Class A Common Stock
57
<PAGE>
offered hereby. This Prospectus, which is part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement
and the exhibits and financial schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
herein are not necessarily complete, and in each instance that a reference is
made to a contract or other document filed as an exhibit to the Registration
Statement, each such statement is qualified in all respects by such reference. A
copy of the Registration Statement may be examined without charge at the
Commission's principal offices at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the regional offices of the Commission located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or
any part thereof may be obtained from the Public Reference Section of the
Commission upon payment of certain fees prescribed by the Commission. Copies of
such materials may also be obtained from the web site that the Commission
maintains at http://www.sec.gov.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith, files reports, proxy or
information statements and other information with the Commission. Such reports,
proxy statements and other information can be inspected and copies may be
obtained from the sources indicated above. In addition, the Company's Class A
Common Stock is traded on the Nasdaq National Market, and the Company's reports,
proxy or information statements and other information may be inspected at the
offices of the National Association of Securities Dealers, Inc., 1735 K Street,
N.W., Washington, D.C. 20006.
No manufacturer (as defined in this Prospectus) has been involved, directly
or indirectly, in the preparation of this Prospectus or in the Offering being
made hereby. No manufacturer has made any statements or representations in
connection with the Offering or has provided any information or materials that
were used in connection with the Offering, and no manufacturer has any
responsibility for the accuracy or completeness of this Prospectus.
58
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Lithia Motors, Inc. and Subsidiaries
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets.............................................................................. F-3
Consolidated Statements of Operations.................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity............................................... F-5
Consolidated Statements of Cash Flows.................................................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
Sun Valley Ford
Report of Independent Auditors........................................................................... F-23
Balance Sheets........................................................................................... F-24
Statements of Income and Retained Earnings............................................................... F-25
Statements of Cash Flows................................................................................. F-26
Notes to Financial Statements............................................................................ F-27
Lithia Motors, Inc. and Subsidiaries Pro Forma Statements................................................ F-34
</TABLE>
F-1
<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 1997, 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, 1997.
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 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for inventories, effective January 1, 1997.
KPMG PEAT MARWICK LLP
Portland, Oregon
February 6, 1998
F-2
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996(1) 1997
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................ $ 15,413 $ 18,454
Trade receivables........................................................................ 2,260 7,655
Notes receivable, current portion........................................................ 414 427
Notes receivable, related party.......................................................... 308 --
Inventories, net......................................................................... 33,362 89,845
Vehicles leased to others, current portion............................................... 524 738
Prepaid expenses and other............................................................... 372 913
Deferred income taxes.................................................................... 1,646 1,855
--------- ----------
Total current assets................................................................... 54,299 119,887
Property and equipment, net of accumulated depreciation of $2,073 and $2,822............... 4,616 16,265
Vehicles leased to others, less current portion............................................ 4,500 4,588
Notes receivable, less current portion..................................................... 377 309
Goodwill, net of accumulated amortization of $0 and $293................................... 4,101 24,062
Other non-current assets, net.............................................................. 1,071 1,415
--------- ----------
Total assets........................................................................... $ 68,964 $ 166,526
--------- ----------
--------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable............................................................................ $ 500 $ --
Flooring notes payable................................................................... 19,645 82,598
Current maturities of long-term debt..................................................... 1,855 2,688
Current portion of capital leases........................................................ -- 99
Trade payables........................................................................... 2,434 3,874
Accrued liabilities...................................................................... 2,482 6,758
Payable to related parties............................................................... 1,952 --
--------- ----------
Total current liabilities.............................................................. 28,868 96,017
Long-term debt, less current maturities.................................................... 6,160 24,242
Long-term capital leases, less current portion............................................. -- 2,316
Deferred revenue........................................................................... 3,250 2,519
Other long-term liabilities................................................................ -- 447
Deferred income taxes...................................................................... 2,772 3,108
--------- ----------
Total liabilities...................................................................... 41,050 128,649
--------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, no par value; authorized 15,000 shares; issued and outstanding none....... -- --
Class A Common Stock, no par value; authorized 100,000 shares; issued and outstanding 2,500
and 2,926................................................................................ 24,172 28,117
Class B Common Stock, no par value; authorized 25,000 shares; issued and outstanding 4,110
and 4,110................................................................................ 511 511
Additional paid-in capital................................................................. -- 59
Retained earnings.......................................................................... 3,231 9,190
--------- ----------
Total shareholders' equity................................................................. 27,914 37,877
--------- ----------
Total liabilities and shareholders' equity................................................. $ 68,964 $ 166,526
--------- ----------
--------- ----------
</TABLE>
- --------------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995(1) 1996(1) 1997
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Sales:
Vehicles................................................................ $ 97,338 $ 123,703 $ 274,393
Service, body, parts and other.......................................... 16,858 19,141 45,402
---------- ---------- ----------
Total sales........................................................... 114,196 142,844 319,795
---------- ---------- ----------
Cost of sales
Vehicles................................................................ 85,381 108,743 245,812
Service, body, parts and other.......................................... 8,178 9,590 20,551
---------- ---------- ----------
Cost of sales......................................................... 93,559 118,333 266,363
---------- ---------- ----------
Gross profit.......................................................... 20,637 24,511 53,432
Selling, general and administrative....................................... 16,333 19,830 40,625
Depreciation and amortization............................................. 402 448 1,169
---------- ---------- ----------
Operating income...................................................... 3,902 4,233 11,638
---------- ---------- ----------
Other income (expense)
Equity in income of affiliate........................................... 67 44 102
Interest income......................................................... 179 193 138
Interest expense........................................................ (1,390) (1,353) (3,004)
Other, net.............................................................. 969 1,112 623
---------- ---------- ----------
(175) (4) (2,141)
---------- ---------- ----------
Income before minority interest and income taxes.......................... 3,727 4,229 9,497
Minority interest......................................................... (778) (687) --
---------- ---------- ----------
Income before income taxes................................................ 2,949 3,542 9,497
Income tax (expense) benefit.............................................. -- 813 (3,538)
---------- ---------- ----------
Net income................................................................ $ 2,949 $ 4,355 $ 5,959
---------- ---------- ----------
---------- ---------- ----------
Basic net income per share................................................ $ 0.64(2) $ 0.94(2) $ 0.85
---------- ---------- ----------
---------- ---------- ----------
Diluted net income per share.............................................. $ 0.64(2) $ 0.88(2) $ 0.82
---------- ---------- ----------
---------- ---------- ----------
PRO FORMA NET INCOME DATA (UNAUDITED)
Income before minority interest and income taxes, as reported............. $ 3,727 $ 4,229
Pro forma income taxes.................................................... (1,430) (1,623)
---------- ----------
Pro forma net income...................................................... $ 2,297 $ 2,606
---------- ----------
---------- ----------
Pro forma basic net income per share...................................... $ 0.50 $ 0.56
---------- ----------
---------- ----------
Pro forma diluted net income per share.................................... $ 0.50 $ 0.52
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
(2) Not comparable to 1997 data due to S Corporation status in 1996; therefore,
this is a pre-tax earnings per share amount. See Note 8 of Notes to
Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------------------
CLASS A CLASS B ADDITIONAL TOTAL
---------------------- ------------------------ PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS(1) EQUITY(1)
----------- --------- ----------- ----------- ------------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994............. -- $ -- 3,017 $ 751 $ -- $ 5,343 $ 6,094
Net income............................. -- -- -- -- -- 2,949 2,949
Issuance of Class B Common Stock....... -- -- 1,093 50 -- -- 50
Dividends.............................. -- -- -- -- -- (5,377) (5,377)
----- --------- ----- ----- ----- ----------- -------------
BALANCE, DECEMBER 31, 1995............. -- -- 4,110 801 -- 2,915 3,716
Net income............................. -- -- -- -- -- 4,355 4,355
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 -- 3,231 27,914
Net income............................. -- -- -- -- -- 5,959 5,959
Underwriters' over-allotment option.... 375 3,783 -- -- -- -- 3,783
Compensation for stock option
issuances............................ -- -- -- -- 59 -- 59
Exercise of stock options.............. 51 162 -- -- -- -- 162
----- --------- ----- ----- ----- ----------- -------------
BALANCE, DECEMBER 31, 1997............. 2,926 $ 28,117 4,110 $ 511 $ 59 $ 9,190 $ 37,877
----- --------- ----- ----- ----- ----------- -------------
----- --------- ----- ----- ----- ----------- -------------
</TABLE>
- ------------------------
(1) Restated, see Note 1 of Notes to Consolidated Financial Statements.
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................................................... $ 2,949 $ 4,355 $ 5,959
Adjustments to reconcile net income to net cash flows provided
by (used in) operating activities:
Depreciation and amortization..................................................... 1,907 1,756 2,483
Compensation related to stock option issuances.................................... -- -- 59
(Gain) loss on sale of assets..................................................... (305) (239) (1)
Gain on sale of vehicles leased to others......................................... -- -- (286)
Deferred income taxes............................................................. -- (906) 336
Minority interest in income....................................................... 778 687 --
Equity in income of affiliate..................................................... (67) (44) (102)
(Increase) decrease in operating assets:
Trade and installment contract receivables, net................................. (692) (852) (5,087)
Inventories..................................................................... 1,858 (7,120) (9,009)
Prepaid expenses and other...................................................... 30 (19) (678)
Other noncurrent assets......................................................... (277) (196) (486)
Increase (decrease) in operating liabilities:
Flooring notes payable.......................................................... (1,628) (3,283) 24,622
Trade payables.................................................................. 609 979 1,440
Accrued liabilities............................................................. 306 797 4,252
Other liabilities............................................................... 677 3,095 (2,274)
Proceeds from sale of vehicles leased to others................................... 4,757 5,760 5,330
Expenditures for vehicles leased to others........................................ (6,308) (6,537) (6,750)
--------- --------- ---------
Net cash provided by (used in) operating activities........................... 4,594 (1,767) 19,808
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable issued............................................................. (190) (540) (249)
Principal payments received on notes receivable..................................... 83 500 304
Capital expenditures................................................................ (524) (395) (8,801)
Proceeds from sale of assets........................................................ 10 765 16
Cash paid for acquisitions.......................................................... -- (6,937) (25,220)
Distribution from affiliate......................................................... -- -- 204
--------- --------- ---------
Net cash used in investing activities......................................... (621) (6,607) (33,746)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes payable........................................ 235 (625) --
Principal payments on long-term debt................................................ (8,070) (25,336) (15,917)
Proceeds from issuance of long-term debt............................................ 12,529 21,635 28,951
Proceeds from issuance of common stock.............................................. 50 24,172 3,945
Proceeds from minority interest share receivable.................................... 142 676 --
Dividends and distributions......................................................... (6,105) (6,441) --
--------- --------- ---------
Net cash provided by (used in) financing activities........................... (1,219) 14,081 16,979
--------- --------- ---------
Increase in cash and cash equivalents................................................. 2,754 5,707 3,041
CASH AND CASH EQUIVALENTS:
Beginning of period................................................................. 6,952 9,706 15,413
--------- --------- ---------
End of period....................................................................... $ 9,706 $ 15,413 $ 18,454
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest............................................ $ 1,828 $ 1,823 $ 3,206
Cash paid during the period for income taxes -- -- 3,011
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Lithia Motors is one of the larger retailers of new and used vehicles in the
western United States, offering 21 domestic and imported makes of new
automobiles and light trucks at 22 locations, 12 in California, seven in Oregon
and three in Nevada. As an integral part of its operations, the Company arranges
related financing (non-recourse) and insurance and sells parts, service and
ancillary products. The Company's headquarters are currently located in Medford,
Oregon, where it has a market share of over 40%. The Company has grown primarily
by successfully acquiring and integrating dealerships and by obtaining new
dealer franchises. The Company's strategy is to become a leading acquirer and
operator of dealerships in the western United States.
At its 22 locations, the Company offers, collectively, 21 makes of new
vehicles including Dodge, Dodge Trucks, Chrysler, Plymouth, Jeep, Ford,
Lincoln-Mercury, Toyota, Isuzu, Nissan, Volkswagen, Audi, Honda, Acura, Suzuki,
BMW, Saturn, Pontiac, Mazda and Hyundai.
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 11) 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.
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.
Contracts in transit represent amounts due to the Company from financial
institutions for vehicle sales. Contracts in transit are considered cash
equivalents and are typically funded within five to ten business days. At
December 31, 1996 and 1997, contracts in transit were approximately $3,471 and
$7,995, respectively.
INVENTORIES
Effective January 1, 1997, the Company changed its method of accounting for
inventories from the last-in first-out (LIFO) method to the specific
identification method for vehicles and the first-in first-out (FIFO) method of
accounting for parts (collectively, the FIFO method). Management believes the
FIFO method is preferable because the FIFO method of valuing inventories more
accurately presents the
F-7
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company's financial position as it reflects more recent costs at the balance
sheet date, more accurately matches revenues with costs reported during the
period presented and provides comparability to industry information. The
financial statements of prior periods have been restated to apply the new method
of accounting for inventories retroactively. The effect of this restatement was
to increase retained earnings as of January 1, 1996 by $4,896. The restatement
increased (decreased) net income by $(426), or $(0.09) per diluted share and
$314, or $0.06 per diluted share, for the years ended December 31, 1995 and
1996, respectively.
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:
<TABLE>
<S> <C>
Building and improvements..................... 40 years
5 to 10
Service equipment............................. years
5 to 10
Furniture, signs and fixtures................. years
</TABLE>
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 accounts, and any gain or loss is credited or charged to
income.
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 $468 at December 31, 1996 and 1997,
respectively.
INCOME TAXES
Prior to the Company's initial public offering of its Common Stock in
December 1996 (see note 11), 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 Company's initial public offering. 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, 1995 and 1996, reflect provisions for income taxes on an
unaudited pro forma basis, using the asset and liability method, as if the
Company had been a C Corporation, fully subject to federal and state income
taxes for those periods.
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
F-8
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred income tax assets and liabilities of changes in
tax rates is recognized in income in the period that includes the enactment
date.
ENVIRONMENTAL LIABILITIES AND EXPENDITURES
Accruals for environmental matters, if any, are recorded in operating
expenses when it is probable that a liability has been incurred and the amount
of the liability can be reasonably estimated. Accrued liabilities are exclusive
of claims against third parties and are not discounted.
In general, costs related to environmental remediation are charged to
expense. Environmental costs are capitalized if the costs increase the value of
the property and/or mitigate or prevent contamination from future operations.
COMPUTATION OF PER SHARE AMOUNTS
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS
are computed using the methods prescribed by Statement of Financial Accounting
Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic EPS is calculated using
the weighted average number of common shares outstanding for the period and
diluted EPS is computed using the weighted average number of common shares and
dilutive common equivalent shares outstanding. Prior period amounts have been
restated to conform with the presentation requirements of SFAS 128. Following is
a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996
------------------------------------- -------------------------------------
PER SHARE PER SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income available to Common Shareholders..... $ 2,949 4,577 $ 0.64 $ 4,355 4,657 $ 0.94
----- -----
----- -----
EFFECT OF DILUTIVE SECURITIES
Stock Options............................... -- -- -- 316
----------- ----- ----------- -----
DILUTED EPS
Income available to Common Shareholders..... $ 2,949 4,577 $ 0.64 $ 4,355 4,973 $ 0.88
----- -----
----- -----
<CAPTION>
1997
-------------------------------------
PER SHARE
INCOME SHARES AMOUNT
----------- ----------- -----------
<S> <C> <C> <C>
BASIC EPS
Income available to Common Shareholders..... $ 5,959 6,988 $ 0.85
-----
-----
EFFECT OF DILUTIVE SECURITIES
Stock Options............................... -- 315
----------- -----
DILUTED EPS
Income available to Common Shareholders..... $ 5,959 7,303 $ 0.82
-----
-----
</TABLE>
FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables, trade payables,
accrued liabilities and short term borrowings 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
F-9
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
ADVERTISING
The Company expenses production and other costs of advertising as incurred.
Advertising expense was $1,136, $1,297 and $2,678 for the years ended December
31, 1995, 1996 and 1997, respectively.
INTANGIBLE ASSETS AND GOODWILL
Intangible assets of $176 and $136, net of accumulated amortization of $23
and $63, at December 31, 1996 and 1997, respectively, represents a non-compete
agreement being amortized on a straight-line basis over 5 years. This intangible
asset is included in other non-current 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.
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 is exposed to credit risk from balances on deposit in financial
institutions in excess of the FDIC-insured limit.
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.
REVENUE RECOGNITION
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. Finance fees were approximately $1,198 and $2,792 in 1996 and 1997,
respectively. 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. Commissions from third party service
contracts are recognized upon sale. Insurance commissions are recognized in
income upon customer acceptance of the insurance terms as evidenced by contract
execution. Finance fees
F-10
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and insurance commissions, net of charge-backs, are classified as other
operating revenue in the accompanying consolidated statements of operations.
Revenue from the sale of vehicles 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.
Prior to January 1, 1997, the Company had sold extended warranty contracts
in which the revenue was deferred. The deferred revenue is recognized on a
straight-line basis over the life of the contract, generally three to seven
years.
MAJOR SUPPLIER AND DEALER AGREEMENTS
The Company purchases substantially all of its new vehicles and inventory
from various manufacturers at the prevailing prices charged by the auto maker to
all franchised dealers. The Company's overall sales could be impacted by the
auto maker'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 Agreements generally limit the location of the
dealership and retain auto maker approval rights over changes in dealership
management and ownership. The auto makers are also entitled to terminate the
Dealer Agreements 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 manufacturers for the acquisition of additional dealerships.
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plan under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
25). Effective January 1, 1996, the Company adopted the disclosure option of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 requires that companies which do not choose
to account for stock-based compensation as prescribed by this statement shall
disclose the pro forma effects on earnings and earnings per share as if SFAS 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123.
RECLASSIFICATIONS
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the 1997 presentation.
(2) INVENTORIES AND RELATED NOTES PAYABLE
Inventories are valued at cost, using the specific identification method for
vehicles and the first-in first-out (FIFO) method of accounting for parts
(collectively, the FIFO method).
F-11
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) INVENTORIES AND RELATED NOTES PAYABLE (CONTINUED)
The new and used vehicle inventory, collateralizing related notes payable,
and other inventory were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1997
---------------------- ----------------------
INVENTORY NOTES INVENTORY NOTES
COST PAYABLE COST PAYABLE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
New and demonstrator vehicles..................... $ 19,402 $ 19,645 $ 63,457 $ 67,098
Used vehicles..................................... 12,199 -- 21,524 15,500
Parts and accessories............................. 1,761 -- 4,864 --
----------- --------- ----------- ---------
Total inventories............................. $ 33,362 $ 19,645 $ 89,845 $ 82,598
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
Flooring notes payable consist of flooring notes from a bank secured by new
and used vehicles. The flooring arrangements permit the Company to borrow up to
$27.9 million in 1996 and $110 million in 1997, 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.
(3) PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Buildings and improvements............................................... $ 1,131 $ 7,449
Service equipment........................................................ 1,641 3,992
Furniture, signs and fixtures............................................ 2,545 4,340
--------- ---------
5,317 15,781
Less accumulated depreciation............................................ (2,073) (2,822)
--------- ---------
3,244 12,959
Land..................................................................... 1,272 2,924
Construction in progress................................................. 100 382
--------- ---------
$ 4,616 $ 16,265
--------- ---------
--------- ---------
</TABLE>
F-12
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) VEHICLES LEASED TO OTHERS AND RELATED LEASE RECEIVABLES
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Vehicles leased to others................................................ $ 6,378 $ 6,531
Less accumulated depreciation............................................ (1,354) (1,205)
--------- ---------
5,024 5,326
Less current portion..................................................... (524) (738)
--------- ---------
$ 4,500 $ 4,588
--------- ---------
--------- ---------
</TABLE>
The Company leases vehicles to customers under operating leases, with terms
ranging from twelve to 60 months. Vehicles leased to customers under these lease
arrangements are stated at historical cost less accumulated depreciation, which
is provided on a straight-line basis over the estimated useful life of the
vehicle (5 years). These operating leases are cancellable at the option of the
leasee.
(5) NOTES PAYABLE
Notes payable at December 31, 1996 consisted of an 8.5% note payable in
connection with the Robert's Dodge acquisition.
(6) LINES OF CREDIT AND LONG-TERM DEBT
In September 1997, the Company announced an agreement with U.S. Bank N.A.
for $175 million in credit lines, including $110 million in new, used and
program flooring lines, $30 million in acquisition capital and $35 million for
other corporate purposes. The lines bear interest at LIBOR plus 150 to 275 basis
points, 7.625% to 8.75% at December 31, 1997. The limits and interest rates
associated with the lines are reviewed annually, with the current term expiring
on October 1, 1998. Upon expiring on October 1, 1998, the acquisition line and
the equipment line convert to 5-year term notes.
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Lease Line............................................................... $ 5,196 $ 5,211
Acquisition Line......................................................... -- 5,000
Equipment and Real Estate Lines.......................................... 1,019 4,827
Notes payable in monthly installments of $35, including interest between
8.27% and 10.63%, maturing fully December 2009; secured by land and
buildings.............................................................. 1,800 11,892
--------- ---------
8,015 26,930
Less current maturities.................................................. (1,855) (2,688)
--------- ---------
$ 6,160 $ 24,242
--------- ---------
--------- ---------
</TABLE>
F-13
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) LINES OF CREDIT AND LONG-TERM DEBT (CONTINUED)
The schedule of future principal payments on long-term debt after December
31, 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 2,688
1999............................................................................... 8,531
2000............................................................................... 3,905
2001............................................................................... 3,160
2002............................................................................... 3,471
Thereafter......................................................................... 5,175
---------
Total principal payments........................................................... $ 26,930
---------
---------
</TABLE>
(7) 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.
(8) INCOME TAXES
At the date of the Company's restructuring (see note 11), the Company
terminated its S Corporation election and is now taxed as a C Corporation in
accordance with SFAS 109, ACCOUNTING FOR INCOME TAXES.
F-14
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
Pro forma income taxes on the Company's earnings for 1995 (unaudited) and 1996
(unaudited) and income taxes for 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal..................................................... $ 1,487 $ 1,860 $ 2,967
State....................................................... 309 387 444
--------- --------- ---------
1,796 2,247 3,411
Deferred:
Federal..................................................... (303) (517) 114
State....................................................... (63) (107) 13
--------- --------- ---------
(366) (624) 127
--------- --------- ---------
Total..................................................... $ 1,430 $ 1,623 $ 3,538
--------- --------- ---------
--------- --------- ---------
</TABLE>
Individually significant components of the deferred tax assets and
liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Allowance and accruals................................................. $ 277 $ 470
Deferred revenue....................................................... 1,244 1,126
--------- ---------
Total deferred tax assets............................................ 1,521 1,596
--------- ---------
Deferred tax liabilities:
LIFO recapture......................................................... (2,032) (1,841)
Property and equipment, principally due to differences in
depreciation......................................................... (615) (1,008)
--------- ---------
Total deferred tax liabilities......................................... (2,647) (2,849)
--------- ---------
Total................................................................ $ (1,126) $ (1,253)
--------- ---------
--------- ---------
</TABLE>
The reconciliation between the statutory federal income tax expense at 34%
and the Company's income tax expense for 1997 is shown in the following
tabulation. The following tabulation also reconciles the expected corporate
federal income tax expense for 1995 and 1996 (computed by multiplying the
F-15
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) INCOME TAXES (CONTINUED)
Company's income before minority interest by 34%) with the Company's unaudited
pro forma income tax expense:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal taxes at 34%................................ $ 1,267 $ 1,438 $ 3,229
State taxes, net of federal income tax benefit................ 162 184 278
Other......................................................... 1 1 31
--------- --------- ---------
Income tax expense............................................ $ 1,430 $ 1,623 $ 3,538
--------- --------- ---------
--------- --------- ---------
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
RECOURSE PAPER
The Company is contingently liable to banks for recourse paper from the
financing of vehicle sales. The contingent liability at December 31, 1995, 1996
and 1997 was approximately $206, $88 and $64, respectively.
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.
The minimum rental commitments under operating leases after December 31,
1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1998............................................................................... $ 4,815
1999............................................................................... 4,753
2000............................................................................... 4,449
2001............................................................................... 4,447
2002............................................................................... 4,012
Thereafter......................................................................... 34,378
---------
Total principal payments......................................................... $ 56,854
---------
---------
</TABLE>
Rental expense for all operating leases was $1,993, $2,353 and $2,764 for
the years ended December 31, 1995, 1996 and 1997, respectively.
F-16
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
(10) 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
$84, $100 and $138 were recognized for the years ended December 31, 1995, 1996
and 1997, respectively. Employees may contribute to the plan under certain
circumstances.
(11) 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 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
Offering.
(12) STOCK INCENTIVE PLANS
In April 1996, the Board of Directors (the Board) and the Company's
shareholders adopted the Company's 1996 Stock Incentive Plan for the granting of
up to 670 incentive and nonqualified stock options to officers, key employees
and consultants of the Company and its subsidiaries, and in 1997, the Board
adopted a Non-Discretionary Stock Option Plan for Non-Employee Directors and
reserved 15 shares under that plan (collectively, the "Plan"). 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. 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, 1997, 634 shares of Class A common stock were reserved for issuance
under the Plan and 201 shares were available for future grant.
F-17
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK INCENTIVE PLANS (CONTINUED)
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
SHARES SHARES WEIGHTED
AVAILABLE SUBJECT TO AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
----------- ------------- ---------------
<S> <C> <C> <C>
Balances, December 31, 1995............................. -- -- $ --
Shares reserved......................................... 685
Options granted......................................... (439) 439 3.11
Options canceled........................................ -- -- --
Options exercised....................................... -- -- --
--- --- -----
Balances, December 31, 1996............................. 246 439 3.11
Options granted......................................... (45) 45 6.05
Options canceled........................................ -- -- --
Options exercised....................................... -- (51) 3.20
--- --- -----
Balances, December 31, 1997............................. 201 433 $ 3.41
--- ---
--- ---
</TABLE>
The Company issued non-qualified options during 1997 to certain members of
management at an exercise price of $1.00 per share. Compensation expense is
recognized ratably in accordance with the 5-year vesting schedule. During the
year ended December 31, 1997, the Company recognized approximately $59 in
compensation expense related to stock options.
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 employee
stock options and similar equity instruments. 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. Except as noted above, no
additional 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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1996 1997
---------- ----------
<S> <C> <C>
Risk-free interest rate............................................... 6.50% 6.25%
Expected dividend yield............................................... 0.00% 0.00%
Expected lives........................................................ 6.5 years 6.8 years
Expected volatility................................................... 60.00% 45.50%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1996 and 1997 was $709 and $320, respectively, which would be amortized
on a pro forma basis over the vesting period of the options, typically five
years. The weighted average fair value of options granted during 1996 and 1997
was
F-18
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) STOCK INCENTIVE PLANS (CONTINUED)
$1.62 per share and $7.20 per share, respectively. 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:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1997
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income................................ $ 4,355 $ 3,612 $ 5,959 $ 5,723
Basic net income per share................ $ 0.94 $ 0.78 $ 0.85 $ 0.82
Diluted net income per share.............. $ 0.88 $ 0.73 $ 0.82 $ 0.79
</TABLE>
The following table summarizes stock options outstanding at December 31,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- --------------------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED ------------------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE SHARES EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- -------------- --------------- --------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$1.00 21 8.0 $ 1.00 4 $ 1.00
3.02 282 6.3 3.02 64 3.02
3.32 107 3.3 3.32 80 3.32
10.75 20 7.2 10.75 -- --
10.88 3 9.2 10.88 3 10.88
--
- -------------- --- ------ --- ------
$1.00-10.88 433 5.6 $ 3.41 151 $ 3.28
--
--
- -------------- --- ------ --- ------
- -------------- --- ------ --- ------
</TABLE>
At December 31, 1996, 167 shares were exercisable at a weighted average
exercise price of $3.27.
(13) RELATED PARTY TRANSACTIONS
Certain of the real property on which the Company's business is located is
owned by Lithia Properties, LLC. The Company leases such facilities under
various lease agreements from Lithia Properties, LLC (Note 9). Selling, general
and administrative expense includes rental expense of $1,929, $2,132 and $1,442
for the years ended December 31, 1995, 1996 and 1996, respectively relating to
these properties.
The Company provides management services to Lithia Properties, LLC. Other
income includes management fees of $288, $477 and $12 for the years ended
December 31, 1995, 1996 and 1997, respectively.
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 $9,266 at December 31, 1997.
Through December 1996, the Company and Lithia Properties, LLC share a
"pooled" cash account in the Company's name. At December 31, 1996, amounts due
to Lithia Properties, LLC related to this arrangement amounted to $1,703, and
are included in payable to related parties. Also included in payable
F-19
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) RELATED PARTY TRANSACTIONS (CONTINUED)
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. There were no amounts due to related parties
at December 31, 1997. 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.
(14) ACQUISITIONS
The following table sets forth the total purchase price, cash paid, debt
incurred and the net investment for acquisitions made by the Company during 1996
and 1997:
<TABLE>
<CAPTION>
TOTAL DEBT NET
NAME DATE PAID CASH PAID INCURRED INVESTMENT(1)
- -------------------------------------------- ------------------ --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Roberts Dodge(2)............................ December 1996 $ 5,751 $ 1,913 $ 3,838 $ 3,507
Melody Vacaville Toyota..................... December 1996 5,740 2,946 2,794 3,854
--------- --------- --------- -------------
1996 Total.............................. $ 11,491 $ 4,859 $ 6,632 $ 7,361
--------- --------- --------- -------------
--------- --------- --------- -------------
Magnussen
Dodge Isuzu............................... April 1997 $ 10,905 $ 2,822 $ 8,083 $ 3,760
Magnussen-
Barbee Ford, L/M.......................... July 1997 7,916 3,093 4,823 3,720
Sun Valley Ford, Volkswagen................. August 1997 17,962 5,356 12,606 7,573
Dick Donnelly
Lincoln/Mercury, Isuzu, Suzuki, Audi...... October 1997 12,916 6,139 6,777 6,676
Bakersfield
Nissan-BMW................................ October 1997 9,240 4,274 4,966 5,814
Century Ford
Mazda..................................... December 1997 12,915 4,023 8,892 5,314
--------- --------- --------- -------------
1997 Total.............................. $ 71,854 $ 25,707 $ 46,147 $ 32,857
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
- ------------------------------
(1) Net investment consists of the amount of goodwill, working capital, any
notes issued to sellers and other initial investments.
(2) Excludes real property purchased for $2,330 (cash of $530 and note payable
of $1,800).
All of the above acquisitions were accounted for as purchase transactions.
The excess of the aggregate purchase price over assets acquired (goodwill)
approximated $4,100 and $19,944 in 1996 and 1997, respectively, and is being
amortized over 40 years. The aggregate purchase price of the dealerships
acquired in the respective periods has been allocated to the assets and
liabilities acquired at their estimated fair market value at the acquisition
dates.
The unaudited pro forma results of operations including Roberts Dodge, Inc.,
Melody Vacaville, Inc., Sun Valley Ford, Inc. and Dick Donnelly Automotive
Enterprises, Inc., are as follows. The results of
F-20
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) ACQUISITIONS (CONTINUED)
operations for the remaining acquisitions are not included in the unaudited pro
forma information as they are not materially different from actual results of
the Company.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1997
---------- ----------
Total revenues........................................................ $ 361,195 $ 419,675
Net income............................................................ 3,429 6,919
Basic earnings per share.............................................. 0.74 0.99
Diluted earnings per share............................................ 0.69 0.95
</TABLE>
The unaudited 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.
(15) OTHER INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1995 1996 1997
--------- --------- ---------
Management fees...................................................... $ 288 $ 477 $ 12
Hail damage settlement............................................... -- 206 281
Lawsuit settlement................................................... 160 -- --
Miscellaneous, net................................................... 521 429 330
--------- --------- ---------
Other income, net.................................................... $ 969 $ 1,112 $ 623
--------- --------- ---------
--------- --------- ---------
</TABLE>
(16) SUBSEQUENT EVENTS
The following table sets forth the total purchase price, cash paid, debt
incurred and the net investment for acquisitions made by the Company to date in
1998 (unaudited):
<TABLE>
<CAPTION>
TOTAL DEBT NET
NAME DATE PAID CASH PAID INCURRED INVESTMENT(1)
- --------------------------------------------- ---------------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Quality Nissan Jeep(2)....................... January 1998 $ 8,404 $ 7,097 $ 1,307 $ 4,405
Reno Volkswagen.............................. February 1998 1,400 411 989 293
Medford Nissan, BMW.......................... February 1998 3,231 546 2,685 2,326
Haddad Jeep.................................. March 1998 4,912 1,528 3,384 2,063
--------- --------- --------- -------------
Total 1998................................. $ 17,947 $ 9,582 $ 8,365 $ 9,087
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
- ------------------------------
(1) Net investment consists of the amount of goodwill, working capital, any
notes issued to the seller and other initial investments.
(2) Excludes real property purchased for $5,560, cash.
F-21
<PAGE>
LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) SUBSEQUENT EVENTS (CONTINUED)
In February 1998, subject to shareholder approval, the Board of Directors
approved the reservation of 250 shares of Class A Common Stock for issuance
under an employee stock purchase plan.
In March 1998, subject to shareholder approval, the Board of Directors of
the Company approved the reservation of an additional 415 shares of Class A
Common Stock under its 1996 Stock Incentive Plan.
Also in March 1998, the Company filed a registration statement on Form S-1
with the Securities and Exchange Commission for the sale of 3,000 shares (3,450
shares with the Underwriters' over-allotment option) of Class A Common Stock.
F-22
<PAGE>
[INSIDE BACK COVER OF PROSPECTUS]
[PRIORITY YOU CAMPAIGN]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Disclosure Regarding Forward-Looking Statements........................... 8
Risk Factors.............................................................. 9
Use of Proceeds........................................................... 16
Common Stock Price Range and Dividend Policy.............................. 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Selected Consolidated Quarterly Financial Data............................ 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 21
Industry.................................................................. 28
Business.................................................................. 30
Management................................................................ 43
Principal Shareholders.................................................... 49
Certain Relationships and Related Transactions............................ 51
Description of Capital Stock.............................................. 52
Underwriting.............................................................. 56
Legal Matters............................................................. 57
Experts................................................................... 57
Available Information..................................................... 57
Index to Financial Statements............................................. F-1
</TABLE>
3,000,000 SHARES
[LOGO]
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
FURMAN SELZ
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED
EVEREN SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
DATED , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
(ITEMS NOT REQUIRED IN PROSPECTUS)
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses incurred by the Company
in connection with the Offering. Except for the SEC registration fees, NASD
filing fees, and Nasdaq initial listing fees, all expenses are estimates:
<TABLE>
<S> <C>
SEC Registration Fees............................................. $ 16,793
NASD Filing Fees.................................................. 6,193
Nasdaq Listing Fee................................................ 17,500
Blue Sky Fees and Expenses (including legal fees)................. 5,000
Costs of Printing................................................. 140,000
Accounting Fees and Expenses...................................... 120,000
Legal Fees........................................................ 220,000
Miscellaneous Expenses............................................ 174,514
---------
Total Expenses................................................ $ 700,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
As an Oregon corporation, the Company is subject to the Oregon Business
Corporation Act (the "Business Corporation Act"). Under the Business Corporation
Act, a corporation may provide in its Articles of Incorporation or in its Bylaws
for the indemnification of directors and officers against liability where the
director or officer has acted in good faith and with a reasonable belief that
actions taken were in the best interests of the corporation or at least not
adverse to the corporation's best interests and, if in a criminal proceeding,
the individual had no reasonable cause to believe that the conduct in question
was unlawful. Under the Business Corporation Act, a corporation may not
indemnify an officer or director against liability in connection with a claim by
or in the right of the corporation in which such officer or director was
adjudged liable to the corporation or in connection with any other proceeding in
which the officer or director was adjudged liable for receiving an improper
personal benefit; however, a corporation may indemnify against the reasonable
expenses associated with such proceeding. A corporation may not indemnify
against breaches of the duty of loyalty. The Business Corporation Act provides
for mandatory indemnification of directors against all reasonable expenses
incurred in the successful defense of any claim made or threatened whether or
not such claim was by or in the right of the corporation. A court may order
indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant circumstances
whether or not the director or officer met the good faith and reasonable belief
standards of conduct set out in the statute. Unless otherwise stated in the
Articles of Incorporation, officers of the corporation are also entitled to the
benefit of the above statutory provisions.
The Business Corporation Act also provides that the corporation may, by so
providing in its Articles of Incorporation, eliminate or limit the personal
liability of a director to the corporation or its shareholders for monetary
damages for conduct as a director, provided that the Articles of Incorporation
may not eliminate or limit liability for any breach of the director's duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, any unlawful distribution, or any
transaction from which the director received an improper personal benefit.
In accordance with Oregon law, the Articles of Incorporation of the Company
provide that directors are not personally liable to the corporation or its
shareholders for monetary damages for conduct as a director, except for (i) any
breach of a director's duty of loyalty to the corporation, (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of the law, (iii) any
II-1
<PAGE>
distribution to shareholders which is unlawful, or (iv) any transaction from
which the director received an improper personal benefit.
The Articles of Incorporation also provide for indemnification of any person
who is or was a party, or is threatened to be made a party, to any civil,
administrative or criminal proceeding by reason of the fact that the person is
or was a director or officer of the corporation or any of its subsidiaries, or
is or was serving at the request of the corporation as a director, officer,
partner, agent or employee of another corporation or entity, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement,
actually and reasonably incurred by that person if (i) the person acted in good
faith and in a manner reasonably believed to not be opposed to the best
interests of the corporation, or (ii) the act or omission giving rise to such
action or proceeding is ratified, adopted or confirmed by the corporation, or
the benefit thereof was received by the corporation. Indemnification is
available under this provision of the Articles of Incorporation in the case of
derivative actions, unless the person is adjudged to be liable for gross
negligence or deliberate misconduct in the performance of the person's duty to
the corporation. To the extent a director, officer, employee or agent (including
an attorney) is successful on the merits or otherwise in defense of any action
to which this provision is applicable, the person is entitled to indemnification
for expenses actually and reasonably incurred by the person in connection with
that defense.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On April 5, 1996, the Company issued 4,110,000 shares of Class B Common
Stock pursuant to the terms of a Plan of Recapitalization under which Sidney B.
DeBoer exchanged 75 shares of the Company's Common Stock for 2,568,750 shares of
Class B Common Stock and M.L. Dick Heimann exchanged 45 shares of the Company's
Common Stock for 1,541,250 shares of Class B Common Stock. The issuance of these
securities was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
The index of exhibits being filed with this Registration Statement is
attached on page E-1.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(A) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant Rule 424(b)(1) or (4), or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared it effective.
(B) For the purpose of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended, (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and
II-2
<PAGE>
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Medford, state of Oregon,
April 13, 1998.
<TABLE>
<S> <C> <C>
LITHIA MOTORS, INC.
By: /s/ SIDNEY B. DEBOER
-----------------------------------------
Sidney B. DeBoer
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose individual signature appears below hereby authorizes and
appoints SIDNEY B. DeBOER and BRIAN R. NEILL, and each of them, with full power
of substitution, to act as his true and lawful attorney-in-fact and agent to act
in his name, place and stead, and to execute in the name and on behalf of each
person, individually and in each capacity stated below, and to file any and all
amendments to this Registration Statement, including any and all post-effective
amendments or a new registration pursuant to Rule 462.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement and Power of Attorney has been signed by the following
persons in the capacities indicated on April 13, 1998:
/s/ SIDNEY B. DEBOER
- ------------------------------ Chairman and Chief
Sidney B. DeBoer Executive Officer
(Principal Executive
Officer)
/s/ M.L. DICK HEIMANN
- ------------------------------ Director
M.L. Dick Heimann
/s/ R. BRADFORD GRAY
- ------------------------------ Director
R. Bradford Gray
/s/ THOMAS BECKER
- ------------------------------ Director
Thomas Becker
/s/ WILLIAM J. YOUNG
- ------------------------------ Director
William J. Young
/s/ BRIAN R. NEILL
- ------------------------------ Senior Vice President
Brian R. Neill and Chief Financial
Officer (Principal
Financial and Accounting
Officer)
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.1 Form of Underwriting Agreement
3.1 (a) Restated Articles of Incorporation of Lithia Motors, Inc.
3.2 (a) Bylaws of Lithia Motors, Inc.
4.1 (a) Specimen Common Stock certificate
5.1 Opinion of Foster Pepper & Shefelman LLP
10.1.1 (a) 1996 Stock Incentive Plan
10.1.2 (a) Form of Incentive Stock Option Agreement
10.1.3 (a) Form of Non-Qualified Stock Option Agreement
10.1.4 (a) Form of Incentive Stock Option Agreement
10.2.1 (b) 1997 Non-Discretionary Stock Option Plan for Non-Employee Directors
10.3.1 (k) Employee Stock Purchase Plan
10.4.1 (a) Chrysler Corporation Chrysler Sales and Service Agreement, dated January 10, 1994, between
Chrysler Corporation and Lithia Chrysler Plymouth Jeep Eagle, Inc. (Additional Terms and
Provisions to the Sales and Service Agreements are in Exhibit 10.4.2 hereto)(1)
10.4.2 (a) Chrysler Corporation Dealer Agreement Additional Terms and Provisions
10.5.1 (k) Honda Automobile Dealer Sales and Service Agreement dated October 14, 1997, between American
Honda Motor Company, Inc. and Lithia HPI, Inc. dba Lithia Honda (standard provisions are in
Exhibit 10.5.3 hereto)
10.5.2 (k) Acura Automobile Dealer Sales and Service Agreement dated October 2, 1997, between American
Honda Motor Company, Inc. and Lithia BB, Inc. dba Lithia Acura of Bakersfield (standard
provisions are in Exhibit 10.5.3 hereto)
10.5.3 (k) American Honda Automobile Dealer Sales and Service Agreement Standard Provisions
10.5.4 (k) Agreement between American Honda Motor Company, Inc. and Lithia Motors, Inc. et al. dated
December 17, 1996
10.5.5 (k) Amendment dated October 2, 1997, to Agreement between American Honda Motor Company, Inc. and
Lithia Motors, Inc. et al. dated December 17, 1996
10.6.1 (a) Isuzu Dealer Sales and Service Agreement, dated June 5, 1996 between American Isuzu Motors,
Inc. and Lithia Motors, Inc. (Additional Provisions to Dealer Sales and Service Agreements
are in Exhibit 10.6.2 hereto)(2)
10.6.2 (a) Isuzu Dealer Sales and Service Agreement Additional Provisions
10.6.3 (c) Supplemental Agreement, dated December 27, 1996 to Isuzu Dealer Sales and Service
Agreement(3)
10.7.1 (k) Mercury Sales and Service Agreement, dated June 1, 1997, between Ford Motor Company and
Lithia TLM, LLC dba Lithia Lincoln Mercury (general provisions are in Exhibit 10.7.3
hereto)(4)
10.7.2 (k) Supplemental Terms and Conditions agreement between Ford Motor Company and Lithia Motors,
Inc. dated June 12, 1997
10.7.3 (a) Mercury Sales and Service Agreement General Provisions
</TABLE>
E-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.8.1 (k) Supplemental Agreement dated January 16, 1998, to General Motors Corporation Dealer Sales
and Service Agreement between General Motors Corporation and Lithia Motors, Inc.
10.8.2 (a) 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
(general provisions are in Exhibit 10.8.3 hereto)
10.8.3 (a) General Motors Dealer Sales and Service Agreement Standard Provisions
10.9.1 (a) Mazda Dealer Agreement, dated April 11, 1994 between Mazda Motor of America, Inc. and Lithia
Dodge, L.L.C. dba Lithia Mazda
10.10.1 (k) Saturn Distribution Corporation Retailer Agreement, dated June 16, 1997, between Saturn
Distribution Corporation and Saturn of Southwest Oregon, Inc.
10.10.2 (k) Supplemental Agreement to Saturn Retailer Agreement, dated August 26, 1997, between Saturn
of Southwest Oregon, Inc., Lithia Motors, Inc., Sidney B. DeBoer, Lithia Holding, LLC, and
Saturn Distribution Corporation
10.11.1 (a) Toyota Dealer Agreement, dated January 30, 1990, between Toyota Motor Distributors, Inc. and
Lithia Motors, Inc. dba Medford Toyota(5)
10.11.2 (a) Toyota Dealer Agreement Standard Provisions
10.11.3 (a) Agreement, dated September 30, 1996, between Toyota Motor Sales, U.S.A., Inc. and Lithia
Motors, Inc.
10.11.4 (c) Addendum dated December 26, 1996, to Section X-- additional provisions to Toyota Dealer
Agreement, dated November 15, 1996 between Toyota Motor Sales, USA, Inc. and Lithia TKV,
Inc.
10.12.1 (k) Suzuki Term Dealer Sales and Service Agreement, dated May 14, 1997, between American Suzuki
Motor Corporation and Lithia HPI, Inc. dba Lithia Suzuki (standard provisions are in Exhibit
10.12.2 hereto)(6)
10.12.2 (k) Suzuki Dealer Sales and Service Agreement Standard Provisions
10.13.1 (k) BMW Dealer Agreement, dated October 3, 1997, between BMW of North America, Inc. and Lithia
BB, Inc.
10.14.1 (k) Hyundai Motor America Dealer Sales and Service Agreement, dated January 26, 1998, between
Hyundai Motor America and Lithia JEF, Inc.
10.15.1 (k) Nissan Dealer Term Sales and Service Agreement between Lithia Motors, Inc., Lithia NF, Inc.,
and the Nissan Division of Nissan Motor Corporation In USA dated January 2, 1998. (standard
provisions are in Exhibit 10.15.2 hereto)(7)
10.15.2 (k) Nissan Standard Provisions
10.16.1 (k) Volkswagen Dealer Agreement dated April 5, 1996, between Volkswagen United States, Inc. and
Lithia Motors, Inc. dba Lithia Volkswagen. (standard provisions are in Exhibit 10.16.2
hereto)
10.16.2 (k) Volkswagen Dealer Agreement Standard Provisions
10.17.1 (a) Commercial Lease, dated September 20, 1996, between Lithia Properties, L.L.C. and Lithia
Motors, Inc.(8)
10.17.2 (a) Form of Commercial Lease, effective January 1, 1997, between Lithia Properties, L.L.C. and
Lithia Motors, Inc.(9)
</TABLE>
E-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.18.1 (a) Asset Purchase Agreement, dated August 2, 1996, between Lithia Motors, Inc. and Roberts
Dodge, Inc.
10.18.2 (a) Land Sale Contract, dated August 2, 1996, between Lithia Properties, L.L.C. and Milford G.
Roberts, Sr. and Sandra L. Roberts
10.18.3 (a) Assignment of Land Sale Contract, dated November 5, 1996, between Lithia Properties, LLC and
Lithia Motors, Inc.
10.19.1 (a) Commercial Lease, dated April 1, 1992, between Billy J. Wilson et al and Wilson/ Malasoma,
Inc. relating to facility in Vacaville, California
10.20.1 (d) Agreement for Purchase and Sale of Business Assets between Magnussen Dodge, Inc. and Lithia
Motors, Inc. dated January 21, 1997
10.20.2 (d) Lease between Solano Way Partnership and Lithia Real Estate, Inc. dated February 14, 1997
10.21.1 (c) Agreement for Purchase and Sale of Business Assets between Magnussen-Barbee Ford,
Lincoln-Mercury, Inc. and Lithia Motors, Inc. dated February 21, 1997
10.21.2 (e) Lease between John Ferrogiaro and Bernard L. Magnussen et al., as amended by Second
Amendment to Lease, dated December 12, 1996, and Consent to Assignment and Third Amendment
to Lease, by and among John Ferrogiaro, Magnussen Dealership Group and Lithia Real Estate,
Inc.
10.22.1 (f) Agreement for Purchase and Sale of Business Assets between Sun Valley Ford, Inc. and Lithia
Motors, Inc. dated April 2, 1997
10.22.2 (g) Promissory Note for Leasehold Improvements issued by Lithia Motors, Inc. to Sun Valley Ford,
Inc. dated August 8, 1997
10.22.3 (g) Promissory Note for Intangible Assets issued by Lithia Motors, Inc. to Sun Valley Ford, Inc.
dated August 8, 1997
10.22.4 (h) Standard Industrial Lease, as amended and assignment thereof, among Edmund C. Bartlett, Jr.,
Anna Bartlett, Sun Valley Ford, Inc. and Lithia Motors, Inc. dated July 16, 1997
10.22.5 (h) Lease Agreement and assignment thereof, among George Valente and Lena E. Valente as trustees
of the George and Lena E. Valente Trust, Sun Valley Ford, Inc. and Lithia Motors, Inc. dated
August 4, 1997
10.23.1 (f) Agreement for Purchase and Sale of Business Assets between Dick Donnelly Automotive
Enterprises, Inc. dba Dick Donnelly Lincoln-Mercury, Audi, Suzuki, Isuzu and Lithia Motors,
Inc. dated April 2, 1997
10.23.2 (k) Lease Agreement among Paul H. Snider and Dick Donnelly Automotive Enterprises, Inc. dated
October 17, 1989
10.23.3 (k) Lease Agreement among Richard M. Donnelly and Susan K. Donnelly and Lithia Real Estate, Inc.
dated October 1, 1997
10.24.1 (f) Agreement for Purchase and Sale of Business Assets between Nissan BMW, Inc. dba Bakersfield
Nissan, Acura, BMW and Lithia Motors, Inc. dated June 26, 1997
10.24.2 (k) Real Property Lease Agreement among Eloy C. Renfrow and Lithia Real Estate, Inc. dated
October 2, 1997
10.25.1 (i) Agreement for Purchase and Sale of Business Assets between Century Ford, Inc. and Lithia
Motors, Inc. dated September 1, 1997
</TABLE>
E-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
10.25.2 (k) Lease Agreement among BR Enterprises and Lithia Motors, Inc. dated September 3, 1997
10.26.1 (j) Agreement for Purchase and Sale of Business Assets between Daniel A. Haus Group, Inc. dba
Quality Nissan and Quality Jeep/Eagle Hyundai and Lithia Motors, Inc. dated October 10, 1997
10.27.1 (k) Agreement for Purchase and Sale of Business Assets between Medford Nissan, Inc. dba "Medford
Nissan BMW Kia", Lithia Motors, Inc, or its nominee, and James D. Plummer, dated September
8, 1997
10.27.2 (k) Real Property Lease Agreement among James D. Plummer and Lithia Real Estate, Inc. dated
October 14, 1997
10.28.1 (k) Agreement for Purchase and Sale of Business Assets between United American Funding, Inc. dba
"Reno Volkswagen" and Lithia Motors, Inc., or its nominee, dated December 31, 1997
10.28.2 (k) Lease Agreement among Teddy Bear Havas Motors, Inc., and United American Funding, Inc. dated
July 28, 1992
10.29.1 (a) Reorganization Agreement, dated as of October 10, 1996, by and among Lithia Motors, Inc.,
LGPAC, Inc., Lithia DM, Inc., Lithia MTLM, Inc., Lithia HPI, Inc., Lithia SSO, Inc., Lithia
Rentals, Inc., Discount Auto & Truck Rental, Inc., Lithia Auto Services, Inc., Lithia
Holding Company L.L.C., Sidney B. DeBoer, M.L. Dick Heimann, R. Bradford Gray, and Steve R.
Philips
10.30.1 (k) Credit Agreement among U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22, 1997
10.30.2 (k) Security Agreement among U.S. Bank National Association, as Agent and Lender, and Lithia
Motors, Inc. and its Affiliates and Subsidiaries dated December 22, 1997
10.30.3 (k) Guaranty among U.S. Bank National Association, as Agent and Lender, and Lithia Motors, Inc.
and its Affiliates and Subsidiaries dated December 22, 1997
10.31.1 (a) Management Contract between Lithia Leasing, Inc. and Lithia Properties LLC
10.32.1 (a) Purchase and Sale Agreement, dated December 13, 1996, between Lithia Properties and Lithia
Real Estate, Inc.
10.33.1 (k) Agreement for Purchase and Sale of Business Assets between E.W.H. Group, Inc. d/b/a Haddad
Jeep/Eagle and Lithia Motors, Inc. dated October 14, 1997 and Addendum to such agreement(10)
10.34.1 Agreement for Purchase and Sale of Business Assets between Boyland Auto Group dba Boyland
Toyota, Dorian Boyland, and Lithia Motors, Inc.
21.1 Subsidiaries of Lithia Motors, Inc
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Moss Adams LLP
23.3 Consent of Foster Pepper & Shefelman LLP (included in Exhibit 5.1)
24.1 Powers of Attorney (included in the signature page of the Registration Statement)
27.1 ** Financial Data Schedule
</TABLE>
- ------------------------
** Previously filed
E-4
<PAGE>
(a) Incorporated by reference from the Company's Registration Statement on
Form S-1, Registration Statement No. 333-14031, as declared effective by
the Securities Exchange Commission on December 18, 1996.
(b) Incorporated by reference from the Company's Registration Statement on
Form S-8, Registration Statement No. 333-45553, as filed with the
Securities Exchange Commission on February 4, 1998.
(c) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1996, as filed with the Securities
Exchange Commission on March 31, 1997.
(d) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on June 6, 1997.
(e) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on July 16, 1997.
(f) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997, as filed with the Securities Exchange
Commission on August 12, 1997.
(g) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on August 21, 1997.
(h) Incorporated by reference from the Company's Form 8-K/A as filed with the
Securities Exchange Commission on October 14, 1997.
(i) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on December 30, 1997.
(j) Incorporated by reference from the Company's Form 8-K as filed with the
Securities Exchange Commission on January 30, 1998.
(k) Incorporated by reference from the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, as filed with the Securities
Exchange Commission on March 31, 1998.
(1) Substantially identical agreements exist between Chrysler Corporation and
Lithia Chrysler Plymouth Jeep Eagle, Inc., with respect to Jeep, Eagle,
and Plymouth sales and service; between Chrysler Corporation and Lithia's
Grants Pass Auto Mart, with respect to Jeep, Eagle, Dodge and Plymouth
sales and service; between Chrysler Corporation and Medford Dodge with
respect to Dodge sales and service; and between Chrysler Corporation and
Lithia DC, Inc., with respect to Dodge sales and service.
(2) A substantially identical agreement exists between American Isuzu Motors,
Inc and Lithia SALMIR, Inc. with respect to Isuzu sales and service.
(3) Substantially identical agreements exist between American Isuzu Motors,
Inc., Lithia Motors, Inc. and Lithia DC, Inc. and between American Isuzu
Motors, Inc., Lithia Motors, Inc. and Lithia SALMIR, Inc.
(4) A substantially identical agreement exists between the same parties with
respect to Lincoln Sales and Services; between Ford Motor Company and
Lithia FN, Inc. with respect to Lincoln and Mercury sales and service; and
between Ford Motor Company and Lithia FVHC with respect to Ford sales and
service.
(5) A substantially identical agreement exists between Toyota Motor Sales,
USA, Inc. and Lithia TKV, Inc. dba Lithia Toyota Vacaville dated November
15, 1996 with respect to Toyota Sales and Service.
(6) A substantially identical agreement exists between American Suzuki Motor
Corporation and Lithia SALMIR, Inc., dated October 6, 1997, with respect
to Suzuki sales and service.
E-5
<PAGE>
(7) A substantially identical agreement exists between Nissan Motor
Corporation and Lithia NB, Inc., dated October 2, 1997, with respect to
Nissan sales and service.
(8) Substantially identical leases of the same date exist between Lithia
Properties L.L.C. and (i) Lithia TLM, L.L.C. and Lithia MTLM, Inc.,
relating to the properties located in Medford, Oregon at 360 E. Jackson
St., 400 N. Central Ave., 325 E. Jackson St., 343-345 Apple St., 440-448
Front St., 3rd & Front St. and 344 Bartlett, collectively at a lease rate
of $42,828 per month; (ii) Lithia Motors, Inc. dba Lithia Body and Paint,
relating to the properties in Medford, Oregon, located at 4th & Bartlett,
235 Bartlett, 220 N. Bartlett, and 275 E. 5th; and in Grants Pass, Oregon,
at 1470 N.E. 7th, collectively at a lease rate of $16,890 per month; (iii)
Discount Auto and Truck Rental, Inc., relating to properties located in
Medford, Oregon, at 326 N. Bartlett, 315 & 321 Apple St., and in Grants
Pass, Oregon, at 1470 N.E. 7th, collectively at a lease rate of $2,609 per
month; (iv) Lithia Dodge, L.L.C. and Lithia DM, Inc., relating to
properties located in Medford, Oregon, at 322 E. 4th, 315 & 324 E. 5th
St., 225, 319 & 323 E. 6th, Riverside & 4th, Riverside & 6th, and 129 N.
Riverside, collectively at a lease rate of $53,490 per month; (v) Lithia
Grants Pass Auto Center and L.L.C., LGPAC, Inc., relating to the property
located in Grants Pass, Oregon, at 1421 N.E. 6th at a lease rate of
$25,625 per month; (vi) Lithia Motors, Inc. and Lithia SSO, Inc., relating
to properties located in Medford, Oregon, at 400, 705-717 N. Riverside
Ave., 712 and 716 Pine St., and 502 Maple St., collectively at a lease
rate of $20,048 per month; (vii) Lithia Motors, Inc. dba Thrift Auto
Supply, relating to the properties located in Medford, Oregon, at 801 N.
Riverside Ave, and 503 Maple St., collectively at a lease rate of $6,265
per month; and (viii) Lithia Motors, Inc. and Lithia HPI, Inc., relating
to properties located in Medford, Oregon, at 700 and 800 N. Central Ave,
217 and 220 N. Beatty St., 710 and 815-817 Niantic St., and 311 & 313
Maple St., collectively at a lease rate of $30,350 per month.
(9) Substantially identical lease will exist between Lithia Properties L.L.C.
and (i) Lithia MTLM, Inc., relating to the properties located in Medford,
Oregon at 360 E. Jackson St., 400 N. Central Ave., 325 E. Jackson St.,
343-345 Apple St., 440-448 Front St., 3rd & Front St. and 344 Bartlett,
315 & 321 Apple St., and 401 E. 4th St., collectively at a lease rate of
$33,728 per month; (ii) Lithia Auto Services, Inc. dba Lithia Body and
Paint, relating to the properties in Medford, Oregon, located at 401 E.
4th St., 4th & Bartlett, 235 Bartlett, 220 N. Bartlett, and 275 E. 5th;
and in Grants Pass, Oregon, at 1470 N.E. 7th, and 801 N. Riverside Ave,
collectively at a lease rate of $17,439 per month; (iii) Lithia Rentals,
Inc., dba Discount Auto and Truck Rental, relating to properties located
in Medford, Oregon, at 971 Gilman Rd., and in Grants Pass, Oregon, at 1470
N.E. 7th, collectively at a lease rate of $962 per month; (iv) Lithia
Dodge, L.L.C. and Lithia DM, Inc., relating to properties located in
Medford, Oregon, at 322 E. 4th, 315 & 324 E. 5th St., 225, 319 & 323 E.
6th, Riverside & 4th, Riverside & 6th, and 129 N. Riverside, collectively
at a lease rate of $53,490 per month; (v) LGPAC, Inc., relating to the
property located in Grants Pass, Oregon, at 1421 N.E. 6th and 1470 N.E.
7th, collectively at a lease rate of $18,023 per month; (vi) Lithia SSO,
Inc., relating to properties located in Medford, Oregon, at 400, 705-717
N. Riverside Ave., collectively at a lease rate of $16,364 per month;
(vii) Lithia DM, Inc., relating to properties located in Medford, Oregon,
at 324 E. 5th, 319 & 323 E. 6th St., 6th & Riverside, 129 N. Riverside,
4th & Riverside, 225 E. 6th, 315 E. 5th, 322 E. 4th, 201 N. Riverside,
309, 315, 333, and 329 N. Riverside, 334 & 346 Apple St. and 401 E. 4th,
collectively at a lease rate of $30,557 per month; and (viii) Lithia
Motors, Inc., relating to properties located in Medford, Oregon, at 360 E.
Jackson, 325 E. Jackson, 345 B. Bartlett, and 401 E. 4th St., collectively
at a lease rate of $5,309 per month. Substantially identical lease
agreements also exist between Lithia Real Estate, Inc., and (i) Lithia
FVHC, Inc. relating to the properties in Concord, California, located at
1260 Diamond Way and 2285 Diamond Way; (ii) Lithia BB, Inc., relating to
the property in Bakersfield, California, located at 3201 Cattle Drive;
(iii) Lithia DE, Inc., relating to the properties in Eugene, Oregon,
located at 2121 Centennial Boulevard and 80 Centennial Loop; (iv) Lithia
TKV, Inc. relating to the property in Vacaville, California, located at
100 Auto Center Drive; (v) Lithia Auto Services, Inc. relating to the
property in Medford, Oregon,
E-6
<PAGE>
located at 2665 Bullock Road; (vi) Lithia FN, Inc. relating to the
property in Napa, California, located at 300 Soscol Avenue; (vii) Lithia
NB, Inc. relating to the properties in Bakersfield, California, located at
3101 and 3201 Cattle Drive and 2800 and 2808 Pacheco Road; (viii) Lithia
MMF, Inc. relating to the properties in Fresno, California, located and
155 and 165 East Auto Center Drive; (ix) Lithia FMF, Inc. relating to the
properties in Fresno, California, located at 175 and 195 East Auto Center
Drive; (x) Lithia DC, Inc. relating to the property in Concord,
California, located at 4901 Marsh Drive; (xi) Lithia SALMIR, Inc. relating
to the properties in Reno, Nevada, located at 7063 and 7175 South Virginia
Street and the property in Sparks, Nevada, located at 40 Victorian Avenue;
and (xii) Lithia NF, Inc., relating to the property in Fresno, California,
located at 5580 North Blackstone Avenue.
(10) A substantially identical agreement (except for the purchase price and the
purchase rather than leasing of the business property) exists between
Rodway Chevrolet Co., and Lithia Motors, Inc., dated March 19, 1998, with
respect to the purchase and sale of business assets of Rodway Chevrolet
located in Redding, California.
E-7
<PAGE>
3,000,000 (1) SHARES
LITHIA MOTORS, INC.
CLASS A COMMON STOCK
NO PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
----------------------
______ __, 1998
FURMAN SELZ LLC
DAIN RAUSCHER WESSELS
EVEREN SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
As Representatives of the
several Underwriters
c/o Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
Dear Sirs:
1. INTRODUCTION. Lithia Motors, Inc., an Oregon corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters"), for which Furman Selz LLC, Dain Rauscher
Wessels, a division of Dain Rauscher Incorporated, EVEREN Securities, Inc. and
BancAmerica Robertson Stephens are acting as representatives (the
"Representatives"), an aggregate of 3,450,000 shares of the Company's Class A
Common Stock, no par value per share (the "Common Stock"). The 3,000,000 shares
of Common Stock to be sold by the Company are referred to herein as the "Firm
Shares." The Company also proposes to issue and sell to the several
Underwriters an aggregate of not more than 450,000 additional shares of Common
Stock (the "Additional Shares"), if requested by the Underwriters in accordance
with Section 9 hereof. The issuance and sale of the Firm Shares by the Company
to the Underwriters, as contemplated hereby, is referred to herein as the
"Offering." The Firm Shares and the Additional Shares are collectively referred
to herein as the "Shares." The words "you" and "your" refer to the
Representatives of the Underwriters.
- -----------------
(1) Excludes the Underwriters' option to purchase the Additional Shares to
cover over-allotments, if any.
<PAGE>
The Company hereby agrees with the several Underwriters as follows:
2. REPRESENTATIONS AND WARRANTIES. The Company represents, warrants
and agrees with each of the Underwriters that:
(a) A registration statement on Form S-1, (File No.
333-47525) under the Securities Act of 1933, as amended (the "Act"), with
respect to the Shares, including a form of prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Act and the rules and regulations of the Securities and Exchange Commission
(the "Commission") thereunder (the "Rules and Regulations"). Such
registration statement has been filed with the Commission under the Act, and
one or more amendments to such registration statement may also have been so
filed. After the execution of this Agreement, the Company shall file with
the Commission either (A) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act, a
prospectus in the form most recently included in an amendment to such
registration statement filed with the Commission (or, if no such amendment
shall have been filed, in such registration statement), with such insertions
and changes as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act as shall have been provided to and approved by the
Representatives prior to the filing thereof, or (B) if such registration
statement, as it may have been amended, has not been declared by the
Commission to be effective under the Act, an amendment to such registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Representatives prior to the filing thereof.
As used in this Agreement, the term "Registration Statement" means such
registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto; the
Registration Statement shall be deemed to include any information omitted
therefrom pursuant to Rule 430A under the Act and included in the Prospectus
(as hereinafter defined); the term "Registration Statement" shall also
include any registration statement relating to the Common Stock that is filed
and becomes effective pursuant to Rule 462(b) under the Act; the term
"Preliminary Prospectus" means each prospectus subject to completion
contained in such registration statement or any amendment thereto (including
the prospectus subject to completion, if any, included in the Registration
Statement or any amendment thereto or filed pursuant to Rule 424(a) under the
Act at the time it was or is declared effective); and the term "Prospectus"
means the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or, if no prospectus is required to be filed pursuant to said
- 2 -
<PAGE>
Rule 424(b), such term means the prospectus included in the Registration
Statement.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus and has not instituted
or threatened to institute any proceedings with respect to such an order. When
any Preliminary Prospectus was filed with the Commission it (A) contained all
statements required to be stated therein in accordance with, and complied in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not include any untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. When the Registration Statement or any amendment thereto was or is
declared effective, it (A) contained or will contain all statements required to
be stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the Rules and
Regulations and (B) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. When the Prospectus and when any amendment or supplement
thereto is filed with the Commission pursuant to Rule 424(b) (or, if the
Prospectus or such amendment or supplement is not required to be so filed, when
the Registration Statement and when any amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and at
all times subsequent thereto up to and including the Closing Date (as defined in
Section 3 hereof) and the Option Closing Date (as defined in Section 9 hereof),
the Prospectus, as amended or supplemented at any such time, (A) contained or
will contain all statements required to be stated therein in accordance with,
and complied or will comply in all material respects with the requirements of,
the Act and the Rules and Regulations and (B) did not or will not include any,
untrue statement of a material fact or omit to state any material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The foregoing provisions of this
paragraph (b) shall not apply to statements or omissions made in any Preliminary
Prospectus, the Registration Statement or any amendment thereto or the
Prospectus or any amendment or supplement thereto in reliance upon, and in
conformity with, information furnished in writing to the Company by or on behalf
of the Underwriters through the Representatives expressly for use therein. The
Company has not distributed any offering material in connection with the
Offering or sale of the Shares other than the Registration Statement, the
Preliminary Prospectus or the Prospectus.
- 3 -
<PAGE>
(c) Each of the Company and (i) LGPAC, Inc., (ii) Lithia DM, Inc.,
(iii) Lithia Chrysler Plymouth Jeep Eagle, Inc., (iv) Lithia MTLM, Inc., (v)
Lithia HPI, Inc., (vi) Lithia BNM, Inc., (vii) Lithia Financial Corporation,
(viii) Lithia Rentals, Inc., (ix) Lithia Auto Services, Inc., (x) Lithia DE,
Inc., (xi) Lithia Real Estate, Inc., (xii) Lithia Aircraft, Inc., and (xiii)
Saturn of Southwest Oregon, Inc., each an Oregon corporation, and (xiv) Lithia's
Grants Pass Auto Center, L.L.C., (xv) Lithia Dodge, L.L.C., (xvi) Lithia TLM,
L.L.C., each an Oregon limited liability company and (xvii) Lithia TKV, Inc.,
(xviii) Lithia MB, Inc., (xix) Lithia Auto Services of California Inc., (xx)
Lithia DC, Inc., (xxi) Lithia FN, Inc., (xxii) Lithia JEB, Inc., (xxiii) Lithia
FVHC, Inc., (xxiv) Lithia VWC, Inc., (xxv) Lithia NB, Inc., (xxvi) Lithia BB,
Inc., (xxvii) Lithia JEF, Inc., (xxviii) Lithia NF, Inc., (xxix) Lithia FMF,
Inc. and (xxx) Lithia MMF, Inc., each a California corporation, and (xxxi)
Lithia SALMIR, Inc., a Nevada corporation (collectively, the Company's
"Subsidiaries" or individually, a "Subsidiary") (A) is a duly incorporated and
validly existing corporation or limited liability company under the laws of its
jurisdiction of incorporation or organization, with full power and authority
(corporate and other) to own or lease its properties and to conduct its business
as described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus); and
(B) is duly qualified to do business as a foreign corporation or limited
liability company in each jurisdiction in which the conduct of its business
requires such qualification (except for those jurisdictions in which the failure
so to qualify has not had and will not have a Material Adverse Effect (as
hereinafter defined)). "Material Adverse Effect" means, when used in connection
with the Company or its Subsidiaries, any development, change or effect that is
materially adverse to the business, properties, assets, net worth, condition
(financial or other), results of operations or prospects of the Company and its
Subsidiaries taken as a whole. Except for the Subsidiaries or as disclosed in
the Registration Statement, the Company does not own, and at the Closing Date
will not own, directly or indirectly, any shares of stock or any other equity or
long-term debt securities of any corporation or have any equity interest in any
firm, partnership, joint venture, association or other entity. Complete and
correct copies of the articles of organization, articles of incorporation and of
the bylaws of the Company and each of its Subsidiaries and all amendments
thereto have been made available to counsel to the Underwriters, and no changes
therein will be made subsequent to the date hereof and prior to the Closing
Date.
(d) The Company has the duly authorized and validly outstanding
capitalization set forth under the caption "Capi-
- 4 -
<PAGE>
talization" in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) and will have the adjusted capitalization
set forth therein on the Closing Date and the Option Closing Date, based on the
assumptions set forth therein. The securities of the Company conform to the
descriptions thereof contained in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus). The outstanding shares
of Common Stock have been duly authorized and validly issued by the Company and
are fully paid and nonassessable. Except as created hereby, referred to in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or pursuant to the Company's 1996 Stock Incentive Plan,
the Employee Stock Purchase Plan or the 1997 Non-Discretionary Stock Option Plan
for Non-Employee Directors, there are no outstanding options, warrants or rights
to acquire, or instruments convertible into or exchangeable for or any contracts
or commitments or liens related to or entitling any person to purchase or
otherwise acquire, any shares of capital stock or other equity interest in the
Company or any Subsidiary. No holders of outstanding shares of capital stock of
the Company are entitled as such to any preemptive or other rights to subscribe
for any of the Shares and neither the filing of the registration statement nor
the offering or sale of the Shares as contemplated by this Agreement gives rise
to any rights, other than those which have been waived or satisfied, for or
relating to the registration of any securities of the Company. The Shares have
been duly authorized. On the Closing Date or the Option Closing Date (as the
case may be), after payment therefor in accordance with the terms of this
Agreement, (A) the Firm Shares and the Additional Shares to be sold by the
Company hereunder will be validly issued, fully paid and nonassessable, and
(B) good and marketable title to the Shares will pass to the Underwriters on the
Closing Date or the Option Closing Date (as the case may be) free and clear of
any pledge, lien, encumbrance, security interest, claim or other restriction
whatsoever. All the outstanding shares of capital stock of each Subsidiary have
been duly authorized and validly issued, are fully paid and nonassessable and
are owned directly or indirectly by the Company, free and clear of any pledge,
lien, encumbrance, security interest, claim or other restriction whatsoever.
The Common Stock is registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and is eligible for quotation on the Nasdaq
National Market and the Shares are approved for quotation on the Nasdaq National
Market upon notice of issuance, and the Company knows of no reason or set of
facts which is likely to adversely affect such approval.
(e) The consolidated financial statements and the related notes and
schedules thereto included in the Registration Statement and the Prospectus (or,
if the Prospectus is not in
- 5 -
<PAGE>
existence, the most recent Preliminary Prospectus) fairly present the
consolidated financial condition, results of operations, owners' equity and cash
flows of the Company and its subsidiaries at the dates and for the periods
specified therein. Such financial statements and the related notes and
schedules thereto have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved
(except as otherwise noted therein) and such financial statements as are audited
have been examined by KPMG Peat Marwick LLP, who are independent public
accountants within the meaning of the Act and the Rules and Regulations, as
indicated in their reports filed therewith. The selected, summary and quarterly
financial information and statistical data set forth under the respective
captions "Selected Consolidated Financial Data," "Summary of Consolidated
Financial Data" and "Selected Consolidated Quarterly Financial Data" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) have been prepared on a basis consistent with the
financial statements of the Company and its subsidiaries. The statements
included in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) with respect to the
accountants pursuant to Rule 509 of Regulation S-K of the Act are true and
correct in all material respects. The statistical and market-related data
included in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus) are derived from
sources that the Company believes are reliable and accurate.
(f) The Company and each of its Subsidiaries have filed all necessary
federal, state and local and foreign income, franchise and other material tax
returns and have paid all taxes shown as due thereunder, and the Company has no
knowledge of any tax deficiency which might be assessed against the Company
which, if so assessed, would have a Material Adverse Effect.
(g) The Company and each of its Subsidiaries maintains insurance of
the types and in amounts which they reasonably believe to be adequate for their
businesses in such amounts and with such deductibles as is customary for
companies in the same or similar businesses. All such insurance is outstanding
and fully in force on the date hereof and will be outstanding and duly in force
on the Closing Date and the Option Closing Date, if any.
(h) Except as disclosed in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there is no pending action, suit, proceeding or
investigation or threatened action, suit, proceeding or investigation before or
by any court,
- 6 -
<PAGE>
regulatory body or administrative agency or any other governmental agency or
body, domestic or foreign, which (A) questions the validity of the capital stock
of the Company or this Agreement or of any action taken or to be taken by the
Company pursuant to or in connection with this Agreement or as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or (B) is required to be
disclosed in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) which is
not so disclosed (and such proceedings, if any, as are summarized therein are
accurately summarized in all material respects).
(i) The Company has full legal right, power and authority to enter
into this Agreement and to consummate the transactions provided for herein.
This Agreement has been duly authorized, executed and delivered by the Company
and, assuming it is a binding agreement of yours, constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting the enforcement of creditors' rights
generally and the application of general equitable principles relating to the
availability of remedies, and except as rights to indemnity or contribution may
be limited by federal or state securities laws and the public policy underlying
such laws), and none of the Company's execution or delivery of this Agreement,
its performance hereunder, its consummation of the transactions contemplated
herein, its application of the net proceeds of the offering in the manner set
forth under the caption "Use of Proceeds" or the conduct of its business as
described in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), conflicts or will conflict with or results or
will result in any breach or violation of any of the terms or provisions of, or
constitutes or will constitute a default under, causes or will cause (or permits
or will permit) the maturation or acceleration of any liability or obligation or
the termination of any right under, or results or will result in the creation or
imposition of any lien, charge, or encumbrance upon, any property or assets of
the Company or any of its Subsidiaries pursuant to the terms of (A) the articles
of organization, articles of incorporation or bylaws of the Company or any of
its Subsidiaries, (B) any indenture, mortgage, deed of trust, voting trust
agreement, stockholders agreement, note agreement, dealership or franchise
agreement (except as identified in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) with respect to such
dealership or franchise
- 7 -
<PAGE>
agreement) or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them are or may be bound or to which
any of their respective property is or may be subject or (C) any statute,
judgment, decree, order, rule or regulation applicable to the Company or any of
its Subsidiaries of any government, arbitrator, court, regulatory body or
administrative agency or other governmental agency or body, domestic or foreign,
having jurisdiction over the Company, any of its Subsidiaries or any of their
respective activities or properties.
(j) All executed agreements or copies of executed agreements filed as
exhibits to the Registration Statement to which the Company or any of its
Subsidiaries is a party or by which any of them are or may be bound or to which
any of their assets, properties or businesses is or may be subject have been
duly and validly authorized, executed and delivered by the Company or such
Subsidiary, as the case may be, and constitute the legal, valid and binding
agreements of the Company or such Subsidiary, as the case may be, enforceable
against each of them in accordance with their respective terms (except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
enforcement of creditors' rights generally, and the application of general
equitable principles relating to the availability of remedies, and except as
rights to indemnity or contribution may be limited by federal or state
securities laws and the public policy underlying such laws). The descriptions
in the Registration Statement of contracts and other documents are accurate and
fairly present the information required to be shown with respect thereto by the
Act and the Rules and Regulations, and there are no contracts or other documents
which are required by the Act or the Rules and Regulations to be described in
the Registration Statement or filed as exhibits to the Registration Statement
which are not described or filed as required, and the exhibits which have been
filed are complete and correct copies of the documents of which they purport to
be copies.
(k) Subsequent to the most recent respective dates as of which
information is given in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), and
except as expressly contemplated therein, neither the Company nor any of its
Subsidiaries has incurred, other than in the ordinary course of its business,
any material liabilities or obligations, direct or contingent, purchased any of
its outstanding capital stock, paid or declared any dividends or other
distributions on its capital stock, or entered into any material transactions
not in the ordinary course of business, except as disclosed in the
- 8 -
<PAGE>
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) under the heading "BUSINESS -
Growth Strategy," and there has been no material change in capital stock or debt
or any material adverse change in the business, properties, assets, net worth,
condition (financial or other), or results of operations or prospects of the
Company and its Subsidiaries taken as a whole. Neither the Company nor any of
its Subsidiaries (nor the manner in which any of them conducts its business) is
in breach or violation of, or in default under, any term or provision of (A) its
articles of organization, articles of incorporation or bylaws, (B) any
indenture, mortgage, deed of trust, voting trust agreement, stockholders
agreement, note agreement, dealership or franchise agreement or other agreement
or instrument to which it is a party or by which it is or may be bound or to
which any of its property is or may be subject, or any indebtedness, the effect
of which breach or default singly or in the aggregate may have a Material
Adverse Effect, or (C) any statute, judgment, decree, order, rule or regulation
applicable to the Company or any of its Subsidiaries or of any arbitrator,
court, regulatory body, administrative agency or any other governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or any of their respective activities or properties and the effect
of which breach or default singly or in the aggregate may have a Material
Adverse Effect.
(l) There is (i) no significant unfair labor practice complaint
pending against the Company or any of its Subsidiaries before the National Labor
Relations Board or any state or local labor relations board, and no significant
grievance or more significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Company or any of its
Subsidiaries, or to the best knowledge of the Company, threatened against any of
them, and (ii) no significant strike, labor dispute, slowdown or stoppage
pending against the Company or any of its Subsidiaries or, to the best knowledge
of the Company, threatened against any of them except for such actions specified
in clause (i) or (ii) above or otherwise disclosed in the Prospectus, which,
singly or in the aggregate could not reasonably be expected to have a Material
Adverse Effect.
(m) Since its inception, the Company has not incurred any material
liability arising under or as a result of the application of the provisions of
the Act.
(n) Each of the Company and its Subsidiaries owns, or is licensed or
otherwise has sufficient right to use, the proprietary knowledge, inventions,
patents, trademarks, service marks, trade names, logo marks and copyrights used
in or
- 9 -
<PAGE>
necessary for the conduct of its business (collectively "Rights") as described
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), except where the absence
of such right could not reasonably be expected to have a Material Adverse
Effect. No claims have been asserted against the Company or any of its
Subsidiaries by any person with respect to the use of any such Rights, except
where such claim could not reasonably be expected to have a Material Adverse
Effect or challenging or questioning the validity or effectiveness of any such
Rights. The use, in connection with the business and operations of the Company
and its Subsidiaries of such Rights does not, to the Company's best knowledge,
infringe on the rights of any person, where such infringement could not
reasonably be expected to have a Material Adverse Effect.
(o) No consent, approval, authorization or order of or filing with
any court, regulatory body, administrative agency or any other governmental
agency or body, domestic or foreign, is required for the performance of this
Agreement or the consummation of the transactions contemplated hereby or in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), except such as have been or
may be obtained under the Act or may be required under state securities or Blue
Sky laws in connection with the Underwriters' purchase and distribution of the
Shares.
(p) No consent, approval, authorization of or notice to, or filing
with any third party is required for the performance of this Agreement or the
consummation or the transactions contemplated hereby or in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), except those that have been disclosed in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), or those which would not
have a Material Adverse Effect on the Company and its Subsidiaries taken as a
whole. Neither the Company nor any of its Subsidiaries has any reason to
believe that any such consent, approval, authorization or filing with any third
party necessary in the future to conduct the business of the Company and its
Subsidiaries as described in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus)
will not be granted upon application, except as disclosed therein, or that any
third party is investigating the Company or any of its Subsidiaries other than
in the ordinary course of business or in a review of the transactions
contemplated hereby.
- 10 -
<PAGE>
(q) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the Company to
include such securities under the Registration Statement (other than those that
have been disclosed in the Prospectus or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), that have not been waived with respect
to the Registration Statement.
(r) Neither the Company nor any of its officers, directors or
affiliates (within the meaning of the Rules and Regulations) has taken, directly
or indirectly, any action designed to stabilize or manipulate the price of any
security of the Company, or which has constituted or which might in the future
reasonably be expected to cause or result in stabilization or manipulation of
the price of any security of the Company, to facilitate the sale or resale of
the Shares or otherwise.
(s) Each of the Company and its Subsidiaries has good and marketable
title to, or valid and enforceable leasehold interests in, all properties and
assets owned or leased by it, free and clear of all liens, encumbrances,
security interests, claims, restrictions, equities, claims and defects, except
(A) such as are described in the Registration Statement and Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus), or
such as do not materially adversely affect the value of any of such properties
or assets taken as a whole and do not materially interfere with the use made and
proposed to be made of any of such properties or assets, and (B) liens for taxes
not yet due and payable as to which appropriate reserves have been established
and reflected in the financial statements included in the Registration
Statement. Each of the Company and its Subsidiaries own or lease all such
properties as are necessary to its operations as now conducted, and as proposed
to be conducted as set forth in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus); and the properties and business of the Company and its Subsidiaries
conform in all material respects to the descriptions thereof contained in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All the material leases and
subleases of the Company and its Subsidiaries, and under which the Company or
any Subsidiary holds properties or assets as lessee or sublessee, constitute
valid leasehold interests of the Company or such Subsidiary free and clear of
any lien, encumbrance, security interest, restriction, equity, claim or defect,
are in full force and effect, and neither the Company nor any Subsidiary is in
- 11 -
<PAGE>
default in respect of any of the material terms or provisions of any such
material leases or subleases, and neither the Company nor any Subsidiary has
notice of any claim which has been asserted by anyone adverse to the Company's
or any of its Subsidiary's rights as lessee or sublessee under either the
material lease or sublease, or affecting or questioning the Company's or any
Subsidiary's right to the continued possession of the leased or subleased
premises under any such material lease or sublease, which may have a Material
Adverse Effect.
(t) Neither the Company nor any Subsidiary has violated any
applicable environmental, safety, health or similar law applicable to the
business of the Company, nor any federal or state law relating to discrimination
in the hiring, promotion or pay of employees, nor any applicable federal or
state wages and hours laws, nor any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or the rules and regulations promulgated
thereunder, the consequences of which violation may have a Material Adverse
Effect.
(u) To the Company's best knowledge, the Company has reasonably
concluded that the costs and liabilities associated with the effect of
environmental laws on the business, operations and properties of the Company and
its Subsidiaries (including, without limitation, any capital or operating
expenditures required for clean-up, closure of properties or compliance with
environmental laws or any permit, license or approval, any related constraints
on operating activities and any potential liabilities to third parties), would
not, singly or in the aggregate, have a Material Adverse Effect on the Company
and its Subsidiaries, taken as a whole.
(v) Each of the Company and its Subsidiaries holds all franchises,
licenses, permits, approvals, certificates and other authorizations from
federal, state and other governmental or regulatory authorities (including
foreign regulatory authorities), all self-regulatory organizations, all domestic
or foreign courts and other tribunals and third parties, including without
limitation, all automobile manufacturers and distributors necessary to the
ownership, leasing and operation of its properties or required for the present
and proposed conduct of its business, and such franchises, licenses, permits,
approvals, certificates and other authorizations are in full force and effect
and the Company and its Subsidiaries are in compliance therewith in all material
respects except as otherwise disclosed in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or where the failure so to obtain, maintain or comply
with would not have a Material Adverse Effect. Neither the Company nor any of
its Subsidiaries has received any actual
- 12 -
<PAGE>
notice of any proceeding relating to revocation or modification of any such
franchise, license, permit, approval, certificate or authorization, except as
described in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(w) No Subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such Subsidiary's capital stock, from repaying to the Company
any loans or advances to such Subsidiary from the Company or from transferring
any of such Subsidiary's property or assets to the Company or any other
Subsidiary of the Company, except as described in or contemplated by the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or as set forth in that certain Credit Agreement dated
as of December 22, 1997 between the Company, and its Affiliates and Subsidiaries
listed on Schedule 1-A thereto, and U.S. Bank National Association (the "Credit
Agreement").
(x) Neither the Company nor any of its Subsidiaries is an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(y) Neither the Company nor any affiliate of the Company does
business with the government of Cuba or with any person or affiliate located in
Cuba and the Company and each affiliate thereof has complied with all provisions
of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida).
(z) Except as disclosed in the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), there are no business
relationships or related party transactions required to be disclosed therein by
Item 404 of Regulation S-K under the Act.
(aa) The Company and each of its Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
- 13 -
<PAGE>
(ab) Each agreement to which the Company or any of its Subsidiaries is
a party and pursuant to which the Company or any of its Subsidiaries acts as a
franchisee or dealer, whereby it sells products, including without limitation
the Dealer, Dealer Sales and Service, and Sales and Service Agreements and the
standard provisions relating thereto between the Company and/or its Subsidiaries
and each of Chrysler Motors Corporation, American Honda Motor Co., Inc.,
American Isuzu Motors, Inc., Ford Motor Company, General Motors Corporation,
Mazda Motor of America, Inc., Saturn Distribution Corporation, Toyota Motor
Sales, U.S.A., Inc., American Suzuki Motor Corporation, Audi of America, BMW of
North America, Inc., Hyundai Motor America, Nissan Motor Corporation in U.S.A.
and Volkswagen of America, Inc. (each a "Dealer Agreement"), each such Dealer
Agreement being listed as an Exhibit to the Registration Statement, is a valid
and binding agreement and, except as disclosed in the Registration Statement or
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) under the heading "Risk Factors -- Manufacturers'
Consent to Offering," no default has occurred or is continuing thereunder which
might result in any Material Adverse Effect.
(ac) The Company has obtained and delivered to you the agreement of
each of the persons listed on Annex I hereto to the effect that each such person
will not, for a period of 90 days following the effective date of the
Registration Statement, without the written consent of Furman Selz LLC, which
shall not be unreasonably withheld or delayed, directly or indirectly offer for
sale, sell, contract to sell, grant any option to sell (including, without
limitation, any short sale), pledge, establish an open "put-equivalent position"
within the meaning of Rule 16a-1(h) under the Exchange Act, transfer, assign or
otherwise dispose of any shares of Common Stock or securities exchangeable for
or convertible into shares of Common Stock, or any option, warrant or other
right to acquire such shares, or publicly announce the intention to do any of
the foregoing.
(ad) Any certificates signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty of the Company to the Underwriters as to the matters
covered thereby. Any certificate delivered by the Company to its counsel for
purposes of enabling such counsel to render the opinions referred to in
Section 7 will also be furnished to you and counsel for the Underwriters and
shall be deemed to be additional representations and warranties by the Company
to the Underwriters as to the matters covered thereby.
(ae) Except as set forth in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence,
- 14 -
<PAGE>
the most recent Preliminary Prospectus), the Company has not consummated the
acquisition or disposition of any business or property which is "significant" to
the Company within the meaning of Regulation S-X under the Act, and no such
acquisition or disposition is probable (within the meaning of such Regulation).
(af) The Directors' and Officers' Questionnaires delivered by the
Company to the Representatives on or prior to the Closing Date are true and
correct in all material respects.
(ag) The Company has timely filed, and will have timely filed as of
the Closing Date, all reports, forms or other documents required to be filed
under the Act, the Rules and Regulations, the Exchange Act and the rules and
regulations thereunder, and all such reports, forms and documents filed, or to
be filed, complied, or will comply when filed, as to form and substance with the
applicable requirements of the Act, the Rules and Regulations, the Exchange Act
and the rules and regulations thereunder.
3. PURCHASE, SALE AND DELIVERY OF THE SHARES. On the basis of the
representations, warranties, covenants and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to sell
to each Underwriter and each Underwriter, severally and not jointly, agrees to
purchase from the Company at a purchase price of $_____ per Share, the number of
Firm Shares set forth opposite the name of such Underwriter in Column (1) of
Schedule I hereto.
Delivery of certificates, and payment of the purchase price, for the
Firm Shares shall be made at the offices of Furman Selz LLC at 230 Park Avenue,
New York, New York 10169, or such other location as shall be agreed upon by the
Company and the Representatives. Such delivery and payment shall be made at
10:00 a.m., New York City time, on ________ __, 1998 or at such other time and
date thereafter as shall be agreed upon by the Representatives and the Company.
The time and date of such delivery and payment are herein called the "Closing
Date." Delivery of the certificates for the Firm Shares shall be made to the
Representatives for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representatives of the purchase
price for the Firm Shares by Federal or other funds immediately available in New
York City drawn to the order of the Company for the Firm Shares sold by it. The
certificates for the Firm Shares to be so delivered will be in definitive, fully
registered form, will bear no restrictive legends and will be in such
denominations and registered in such names as the Representatives shall request,
not less than two full business days prior to the Closing Date. The
certificates for the Firm Shares will be made available to the Representatives
- 15 -
<PAGE>
at such office or such other place as the Representatives may designate for
inspection, checking and packaging not later than 9:30 a.m., New York time on
the business day prior to the Closing Date.
4. PUBLIC OFFERING OF THE SHARES. It is understood that the Underwriters
propose to make a public offering of the Shares at the price and upon the other
terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY. The Company covenants and agrees with each
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and any amendments thereto, if not effective at the time of execution
of this Agreement, to become effective as promptly as practicable. If required,
the Company will file the Prospectus and any amendment or supplement thereto
with the Commission in the manner and within the time period required by
Rule 424(b) under the Act. During any time when a prospectus relating to the
Shares is required to be delivered under the Act, the Company (A) will comply
with all requirements imposed upon it by the Act and the Rules and Regulations
to the extent necessary to permit the continuance of sales of or dealings in the
Shares in accordance with the provisions hereof and of the Prospectus, as then
amended or supplemented, and (B) will not file with the Commission the
prospectus or the amendment referred to in the third sentence of Section 2(a)
hereof, any amendment or supplement to such prospectus or any amendment to the
Registration Statement of which the Representatives shall not previously have
been advised and furnished with a copy a reasonable period of time prior to the
proposed filing and as to which filing the Representatives shall not have given
its their consent, which consent shall not be unreasonably withheld or delayed.
(b) As soon as the Company is advised or obtains knowledge thereof,
the Company will advise the Representatives (A) when the Registration Statement,
as amended, has become effective; if the provisions of Rule 430A promulgated
under the Act will be relied upon, when the Prospectus has been filed in
accordance with said Rule 430A and when any post-effective amendment to the
Registration Statement becomes effective; (B) of any request made by the
Commission for amending the Registration Statement, for supplementing any
Preliminary Prospectus or the Prospectus or for additional information, or
(C) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective amendment
thereto or any order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or any amendment or
- 16 -
<PAGE>
supplement thereto or the institution or threat of any investigation or
proceeding for that purpose, and will use its best efforts to prevent the
issuance of any such order and, if issued, to obtain the lifting thereof as soon
as possible.
(c) The Company will (A) use its best efforts to arrange for the
qualification of the Shares for offer and sale under the state securities or
blue sky laws of such jurisdictions as the Representatives may designate,
(B) continue such qualifications in effect for as long as may be necessary to
complete the distribution of the Shares, and (C) make such applications, file
such documents and furnish such information as may be required for the purposes
set forth in clauses (A) and (B); PROVIDED, HOWEVER, that the Company shall not
be required to qualify as a foreign corporation or file a general or unlimited
consent to service of process in any such jurisdiction.
(d) The Company consents to the use of the Prospectus (and any
amendment or supplement thereto) by the Underwriters and all dealers to whom the
Shares may be sold, in connection with the offering or sale of the Shares and
for such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating
to the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or if it becomes
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules and Regulations, the Company promptly will so notify the
Representatives and, subject to Section 5(a)(i) hereof, will prepare and file
with the Commission an amendment to the Registration Statement or an amendment
or supplement to the Prospectus which will correct such statement or omission or
effect such compliance, each such amendment or supplement to be reasonably
satisfactory to counsel to the Underwriters.
(e) As soon as practicable, but in any event not later than 45 days
after the end of the 12-month period beginning on the day after the end of the
fiscal quarter of the Company during which the effective date of the
Registration Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company will make
generally available to its security holders, in the manner specified in
Rule 158(b) of the Rules and Regulations, and to the Representatives, an
earnings statement which will be in the detail required by, and will otherwise
comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the
Rules and Regulations, which statement need not be audited unless required by
the Act or the Rules and Regulations, covering a
- 17 -
<PAGE>
period of at least 12 consecutive months after the effective date of the
Registration Statement.
(f) During a period of five years after the date hereof, the Company
will furnish to its shareholders, as soon as practicable, annual reports
(including financial statements audited by independent public accountants) and
unaudited quarterly reports of earnings, and will deliver to the
Representatives:
(i) concurrently with furnishing such quarterly reports to its
shareholders, statements of operations of the Company for each quarter in
the form furnished to the Company's shareholders and certified by the
Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual reports to its
shareholders, a balance sheet of the Company as at the end of the preceding
fiscal year, together with statements of operations, owners' equity, and
cash flows of the Company for such fiscal year, accompanied by a copy of
the report thereon of independent public accountants;
(iii) as soon as they are available copies of all information
(financial or other) mailed to shareholders;
(iv) as soon as they are available, copies of all reports and
financial statements furnished to or filed with the Commission, the
National Association of Securities Dealers, Inc. (the "NASD") or any
securities exchange;
(v) every press release and every material news item or article
of interest to the financial community in respect of the Company or its
affairs which was released or prepared by the Company; and
(vi) any additional information of a public nature concerning
the Company or its business which the Representatives may reasonably
request.
During such five-year period, if the Company has active subsidiaries,
the foregoing financial statements will be on a consolidated basis to the extent
that the accounts of the Company and its subsidiaries are consolidated, and will
be accompanied by similar financial statements for any significant subsidiary
which is not so consolidated.
(g) The Company will maintain a Transfer Agent and, if necessary
under the jurisdiction of incorporation of the Company,
- 18 -
<PAGE>
a Registrar (which may be the same entity as the Transfer Agent) for its Common
Stock.
(h) The Company will furnish, without charge, to the Representatives
or on the Representatives' order, at such place as the Representatives may
designate, copies of the each Preliminary Prospectus, the Registration Statement
and any pre-effective or post-effective amendments thereto (four of which copies
will be signed and will include all financial statements and exhibits) and the
Prospectus, and all amendments and supplements thereto, in each case as soon as
available and in such quantities as the Representatives may reasonably request.
(i) The Company will not, for a period of 90 days after the effective
date of the Registration Statement, without the prior written consent of Furman
Selz LLC, which shall not be unreasonably withheld or delayed, directly or
indirectly, issue, offer for sale, sell, contract to sell, or grant any option
to sell (including, without limitation, any short sale), pledge, establish an
open "put-equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, transfer, assign or otherwise dispose of any shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock,
or any option, warrant or other right to acquire such shares, or publicly
announce the intention to do any of the foregoing; PROVIDED, that the company
may issue, and grant options to purchase, shares of Common Stock under its
current stock option and purchase plans and other currently outstanding options.
In addition, the Company may issue shares of Common Stock in connection with any
acquisition of another company if the terms of such issuance provide that such
Common Stock shall not be resold prior to the expiration of the 90-day period
referenced in the preceding sentence.
(j) The Company will cause the Shares to be duly included for
quotation on the Nasdaq National Market prior to the Closing Date.
(k) Neither the Company nor any of its officers or directors, nor
affiliates of any of them (within the meaning of the Rules and Regulations) will
take, directly or indirectly, any action designed to, or which might in the
future reasonably be expected to cause or result in, stabilization or
manipulation of the price of any securities of the Company.
(l) The Company will apply the net proceeds of the offering received
by it in the manner set forth under the caption "Use of Proceeds" in the
Prospectus.
- 19 -
<PAGE>
(m) The Company will timely file all such reports, forms or other
documents as may be required from time to time, under the Act, the Rules and
Regulations, the Exchange Act and the rules and regulations thereunder, and all
such reports, forms and documents filed will comply as to form and substance
with the applicable requirements under the Act, the Rules and Regulations, the
Exchange Act and the rules and regulations thereunder.
6. EXPENSES.
(a) Regardless of whether the transactions contemplated in this
Agreement are consummated, and regardless of whether for any reason this
Agreement is terminated, the Company will pay, and hereby agrees to indemnify
each Underwriter against, all fees and expenses incident to the performance of
the obligations of the Company under this Agreement, including, but not limited
to, (i) fees and expenses of accountants and counsel for the Company, (ii) all
costs and expenses incurred in connection with the preparation, duplication,
printing, filing, delivery and shipping of copies of the Registration Statement
and any pre-effective or post-effective amendments thereto, any Preliminary
Prospectus and the Prospectus and any amendments or supplements thereto
(including postage costs related to the delivery by the Underwriters of any
Preliminary Prospectus or Prospectus, or any amendment or supplement thereto),
this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreement,
Underwriters' Questionnaire, Underwriters' Power of Attorney and all other
documents in connection with the transactions contemplated herein, including the
cost of all copies thereof (iii) fees and expenses relating to qualification of
the Shares under state securities or blue sky laws, including the cost of
preparing and mailing the preliminary and final blue sky memoranda and filing
fees and disbursements and fees of counsel and other related expenses, if any,
in connection therewith, (iv) filing fees of the Commission and the NASD
relating to the Shares, (v) any fees and expenses in connection with the
quotation of the Shares on the Nasdaq National Market, (vi) costs and expenses
incident to the preparation, issuance and delivery to the Underwriters of any
certificates evidencing the Shares, including transfer agent's and registrar's
fees and any applicable transfer taxes incurred in connection with the delivery
to the Underwriters of the Shares to be sold by the Company pursuant to this
Agreement, (vii) costs and expenses incident to any meetings with prospective
investors in the Shares (other than as shall have been specifically approved by
the Representatives to be paid for by the Underwriters) and (viii) costs and
expenses of advertising relating to the offering of the Shares (other than as
shall have been specifically approved by the Representatives to be paid for by
the Underwriters).
- 20 -
<PAGE>
(b) If the purchase of the Shares as herein contemplated is not
consummated for any reason other than the Underwriters' default under this
Agreement, including the failure or refusal of an Underwriter to purchase and
pay for Shares pursuant to Section 12 of this Agreement, or other than by reason
of Section 11(a), the Company shall reimburse the several Underwriters for their
out-of-pocket expenses (including reasonable counsel fees and disbursements) in
connection with any investigation made by them, and any preparation made by them
in respect of marketing of the Shares or in contemplation of the performance by
them of their obligations hereunder.
7. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligation of each
Underwriter to purchase and pay for the Shares set forth opposite the name of
such Underwriter in Schedule I is subject to the continuing accuracy of the
representations and warranties of the Company herein as of the date hereof and
as of the Closing Date as if they had been made on and as of the Closing Date;
the accuracy on and as of the Closing Date of the statements of officers of the
Company made pursuant to the provisions hereof; the performance by the Company
on and as of the Closing Date of its covenants and agreements hereunder; and the
following additional conditions:
(a) If the Company has elected to rely on Rule 430A under the Act,
the Registration Statement shall have been declared effective, and the
Prospectus (containing the information omitted pursuant to Rule 430A) shall have
been filed with the Commission not later than the Commission's close of business
on the second business day following the date hereof or such later time and date
to which the Representatives shall have consented; if the Company does not elect
to rely on Rule 430A, the Registration Statement shall have been declared
effective not later than 11:00 A.M., New York time, on the date hereof or such
later time and date to which the Representatives shall have consented; if
required, in the case of any changes in or amendments or supplements to the
Prospectus in addition to those contemplated above, the Company shall have filed
such Prospectus as amended or supplemented with the Commission in the manner and
within the time period required by Rule 424(b) under the Act; no stop order
suspending the effectiveness of the Registration Statement or any amendment
thereto shall have been issued, and no proceedings for that purpose shall have
been instituted or threatened or, to the knowledge of the Company or the
Representatives, shall be contemplated by the Commission; and the Company shall
have complied with any request of the Commission for additional information (to
be included in the Registration Statement or the Prospectus or otherwise).
- 21 -
<PAGE>
(b) The Representatives shall not have advised the Company that the
Registration Statement, or any amendment thereto, contains an untrue statement
of fact which, in the Representatives' opinion, is material, or omits to state a
fact which, in the Representatives' opinion, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or that the
Prospectus, or any supplement thereto, contains an untrue statement of fact
which, in the Representatives' opinion, is material, or omits to state a fact
which, in the Representatives' opinion, is material and is required to be stated
therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) On or prior to the Closing Date, the Representatives shall have
received from counsel to the Underwriters, such opinion or opinions with respect
to the issuance and sale of the Firm Shares, the Registration Statement and the
Prospectus and such other related matters as the Representatives reasonably may
request and such counsel shall have received such documents and other
information as they request to enable them to pass upon such matters.
(d) On the Closing Date the Underwriters shall have received the
opinion, dated the Closing Date, of Foster, Pepper & Shefelman, counsel to the
Company ("Company Counsel"), to the effect set forth below:
(i) Each of the Company and each of its Subsidiaries (A) is a
duly incorporated and validly existing corporation or limited liability
company under the laws of its jurisdiction of incorporation or organization
with full power and authority to own or lease its properties and to conduct
its business as described in the Registration Statement and the Prospectus,
and (B) is duly qualified to do business as a foreign corporation or
limited liability company in each jurisdiction in which the conduct of its
business requires such qualification (except for those jurisdictions in
which the failure so to qualify can be cured without having a Material
Adverse Effect);
(ii) The Company has authorized capital stock as set forth in
the Prospectus; the securities of the Company conform in all material
respects to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock have been duly authorized and validly
issued by the Company, are fully paid and nonassessable, and are free of
any preemptive or other rights to subscribe for any of the Shares; the
Company has duly authorized the issuance and
- 22 -
<PAGE>
sale of the Shares to be sold by it hereunder; such Shares, when issued by
the Company and paid for in accordance with the terms hereof, will be
validly issued, fully paid and nonassessable and will conform in all
material respects to the description thereof contained in the Prospectus
and will not be subject to any preemptive, subscription or other similar
rights; and the Shares have been duly authorized for quotation on the
Nasdaq National Market upon notice of issuance;
(iii) The Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and no stop
order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have
been instituted or are pending or, to the best knowledge of such counsel,
are threatened or contemplated under the Act; the registration statement
originally filed with respect to the Shares and each amendment thereto and
the Prospectus and, if any, each amendment and supplement thereto (except
for the financial statements, schedules and other financial data included
therein, as to which such counsel need not express any opinion), complied
as to form in all material respects with the requirements of the Act and
the Rules and Regulations; the descriptions contained and summarized in the
Registration Statement and the Prospectus of the terms and provisions of
contracts and other documents, including, without limitation, the terms and
provisions of the Dealer Agreements and employee benefit plans, are
accurate and fairly represent in all material respects the information
required to be shown by the Act and the Rules and Regulations and do not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; to the best knowledge of such counsel, there are no contracts
or documents which are required by the Act to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required by the
Act and the Rules and Regulations; to the best knowledge of such counsel,
there is not pending or threatened against the Company or any of its
Subsidiaries any action, suit, proceeding or investigation before or by any
court, regulatory body, or administrative agency or any other governmental
agency or body, domestic or foreign, of a character required to be
disclosed in the Registration Statement or the Prospectus which is not so
disclosed
- 23 -
<PAGE>
therein; and the statements set forth under the headings
"Business--Regulation" and "Business--Litigation," in the Registration
Statement and the Prospectus, insofar as such statements constitute a
summary of the legal matters or proceedings referred to therein, provide an
accurate summary of such legal matters and proceedings;
(iv) The Company has the requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
provided for herein; this Agreement has been duly authorized, executed and
delivered by the Company; and this Agreement, assuming due authorization,
execution and delivery by each other party hereto, is a valid and binding
agreement of the Company, enforceable in accordance with its terms, except
as limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other laws now or hereafter in effect relating to or affecting
creditors' rights generally or by the application of general principles of
equity relating to the availability of remedies and except as rights to
indemnity and contribution may be limited by federal or state securities
laws or the public policy underlying such laws. Except as otherwise set
forth in the Prospectus, none of the Company's execution or delivery of
this Agreement, its performance hereof, its consummation of the
transactions contemplated herein or its application of the net proceeds of
the offering in the manner set forth under the caption "Use of Proceeds,"
conflicts or will conflict with or results or will result in any breach or
violation of any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon, any property or assets of the Company or any of its
Subsidiaries pursuant to the terms of the articles of organization,
articles of incorporation or bylaws of the Company or any of its
Subsidiaries; the terms of any indenture, mortgage, deed of trust, voting
trust agreement, shareholder's agreement, note agreement, dealership or
franchise agreement or other agreement or instrument known to such counsel
after reasonable investigation to which the Company or any of its
Subsidiaries is a party or by which it or any of its Subsidiaries is or may
be bound or to which any of their respective properties may be subject; any
statute, rule or regulation of any regulatory body or administrative agency
or other governmental agency or body, domestic or foreign, having
jurisdiction over the Company or any of its Subsidiaries or any of their
respective activities or properties; or any judgment, decree or order,
known to such counsel after reasonable investigation, of any government,
arbitrator, court, regulatory body or administrative agency or other
governmental agency or
- 24 -
<PAGE>
body, domestic or foreign, having such jurisdiction; and no consent,
approval, authorization or order of any court, regulatory body or
administrative agency or other governmental agency or body, domestic or
foreign, has been or is required for the Company's execution of this
Agreement or the consummation of the transactions contemplated hereby,
except such as have been obtained under the Act or may be required under
state securities or blue sky laws in connection with the purchase and
distribution by the Underwriters of the Shares;
(v) To the best of such counsel's knowledge, the conduct of
the businesses of the Company and its Subsidiaries is not in violation of
any federal, state or local statute, administrative regulation or other
law, which violation is likely to have a Material Adverse Effect; and each
of the Company and its Subsidiaries has obtained all licenses, permits,
franchises, certificates and other authorizations from state, federal and
other regulatory authorities as are necessary or required for the
ownership, leasing and operation of its properties and the conduct of its
business as presently conducted and as contemplated in the Prospectus;
(vi) The issued shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid
and nonassessable and are owned by the Company free and clear of any
perfected security interests or, to the best knowledge of such counsel, any
other liens, encumbrances, claims or security interests; no Subsidiary of
the Company is currently prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on such
Subsidiary's capital stock, from repaying to the Company any loans or
advances to such Subsidiary from the Company or from transferring any of
such Subsidiary's property or assets to the Company or any other Subsidiary
of the Company, except as described in or contemplated by the Prospectus or
in the Credit Agreement;
(vii) To the best of such counsel's knowledge, except as
described in the Prospectus, no claims have been asserted against the
Company or any of its Subsidiaries by any person to the use of any of the
Rights of the Company or any of its Subsidiaries or challenging or
questioning the validity or effectiveness of any such Rights, except such
claims that could not reasonably be expected to have a Material Adverse
Effect. The use, in connection with the businesses and operations of the
Company and its Subsidiaries of such Rights, does not, to the best of such
- 25 -
<PAGE>
counsel's knowledge, infringe on the rights of any person, except where
such infringement could not reasonably be expected to have a Material
Adverse Effect; and
(viii) Neither the Company nor any of its subsidiaries is, or
will be upon the issuance and sale of the Shares by the Company and
compliance with the terms of the Agreement, an "investment company" or a
company "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
In addition, such counsel shall state that in the course of the
preparation of the Registration Statement and the Prospectus, such counsel has
participated in conferences with officers and representatives of the Company and
with the Company's independent public accountants, at which conferences such
counsel made inquiries of such officers, representatives and accountants and
discussed the contents of the Registration Statement and the Prospectus and
(without taking any further action to verify independently the statements made
in the Registration Statement and the Prospectus and, except as stated in the
foregoing opinion, without assuming responsibility for the accuracy,
completeness or fairness of such statements) nothing has come to such counsel's
attention that causes such counsel to believe that either the Registration
Statement as of the date it is declared effective and as of the Closing Date or
the Prospectus as of the date thereof and as of the Closing Date contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading (it being understood that such counsel need not express
any opinion with respect to the financial statements, schedules and other
financial data included in the Registration Statement or the Prospectus).
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials.
References to the Registration Statement and the Prospectus in this
paragraph (d) shall include any amendment or supplement thereto at the date of
such opinion.
(e) On or prior to the Closing Date, counsel to the Underwriters
shall have been furnished such documents, certificates and opinions as they may
reasonably require in order to evidence the accuracy, completeness or
satisfaction of any of the representations or warranties of the Company or
conditions herein contained.
- 26 -
<PAGE>
(f) At the time that this Agreement is executed by the Company, the
Underwriters shall have received from KPMG Peat Marwick LLP a letter as of the
date this Agreement is executed by the Company in form and substance
satisfactory to you (the "Original Letter"), and on the Closing Date the
Underwriters shall have received from such firm a letter dated the Closing Date
stating that, as of a specified date not earlier than five (5) days prior to the
Closing Date, nothing has come to the attention of such firm to suggest that the
statements made in the Original Letter are not true and correct.
(g) On the Closing Date, the Underwriters shall have received a
certificate, dated the Closing Date, of the principal executive officer and the
principal financial or accounting officer of the Company to the effect that each
of such persons has carefully examined the Registration Statement and the
Prospectus and any amendments or supplements thereto and this Agreement, and
that:
(i) The representations and warranties of the Company in this
Agreement are true and correct, as if made on and as of the Closing Date,
and the Company and each of its Subsidiaries has complied with all
agreements and covenants and satisfied all conditions contained, in this
Agreement on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose
have been instituted or are pending or, to the best knowledge of each of
such persons are contemplated or threatened under the Act and any and all
filings required by Rule 424 and Rule 430A have been timely made;
(iii) The Registration Statement and Prospectus and, if any,
each amendment and each supplement thereto, contain all statements and
information required to be included therein, and neither the Registration
Statement nor any amendment thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and
neither the Prospectus (nor any supplement thereto) nor any Preliminary
Prospectus includes or included any untrue statement of a material fact or
omits or omitted to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading; and
- 27 -
<PAGE>
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus up to and
including the Closing Date, neither the Company nor any of the Subsidiaries
has incurred, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent; neither the
Company nor any of the Subsidiaries has purchased any of its outstanding
capital stock or paid or declared any dividends or other distributions on
its capital stock; neither the Company nor any of the Subsidiaries has
entered into any transactions not in the ordinary course of business; and
there has not been any change in the capital stock or long-term debt or any
increase in the short-term borrowings (other than any increase in
short-term borrowings in the ordinary course of business) of the Company or
any material adverse change to the business properties, assets, net worth,
condition (financial or other), results of operations or prospects of the
Company and its Subsidiaries taken as a whole; neither the Company nor any
of the Subsidiaries has sustained any material loss or damage to its
property or assets, whether or not insured; there is no litigation which is
pending or threatened against the Company or any of its Subsidiaries which
is required under the Act or the Rules and Regulations to be set forth in
an amended or supplemented Prospectus which has not been set forth; and
there has not occurred any event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
References to the Registration Statement and the Prospectus in this
paragraph (g) are to such documents as amended and supplemented at the date of
the certificate.
(h) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus up to and including the
Closing Date there has not been (i) any change or decrease specified in the
letter or letters referred to in paragraph (f) of this Section 7 or (ii) any
change, or any development involving a prospective change, in the business or
properties of the Company or its Subsidiaries which change or decrease in the
case of clause (i) or change or development in the case of clause (ii) makes it
impractical or inadvisable in the Representatives' judgment to proceed with the
public offering or the delivery of the Shares as contemplated by the Prospectus.
(i) No order suspending the sale of the Shares in any jurisdiction
designated by you pursuant to Section 5(c)(A) hereof has been issued on or prior
to the Closing Date and no
- 28 -
<PAGE>
proceedings for that purpose have been instituted or, to your knowledge or that
of the Company, have been or are contemplated.
(j) The Representatives shall have received from each person listed
on Annex I hereto an agreement to the effect that such person will not, for a
period of 90 days following the effective date of the Registration Statement,
without the prior written consent of Furman Selz LLC, which shall not be
unreasonably withheld or delayed, directly or indirectly offer for sale, sell,
contract to sell, grant any option to sell (including, without limitation, any
short sale), pledge, establish an open "put-equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, transfer, assign or otherwise
dispose of any shares of Common Stock or securities exchangeable for or
convertible into shares of Common Stock, or any option, warrant or other right
to acquire such shares, or publicly announce the intention to do any of the
foregoing.
(k) The Company shall have furnished the Underwriters with such
further opinions, letters, certificates or documents as you or counsel for the
Underwriters may reasonably request. All opinions, certificates, letters and
documents to be furnished by the Company will comply with the provisions hereof
only if they are reasonably satisfactory in all material respects to the
Underwriters and to counsel for the Underwriters. The Company shall furnish the
Underwriters with conformed copies of such opinions, certificates, letters and
documents in such quantities as you reasonably request. The certificates
delivered under this Section 7 shall constitute representations, warranties and
agreements of the Company, as the case may be, as to all matters set forth
therein as fully and effectively as if such matters had been set forth in
Section 2 of this Agreement.
(l) The Shares have been duly authorized for quotation on the Nasdaq
National Market.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any
and all losses, claims, damages or liabilities, joint or several (and actions in
respect thereof), to which such Underwriter or such controlling person may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary
- 29 -
<PAGE>
Prospectus, or any amendment or supplement thereto, or any blue sky application
or other document executed by the Company specifically for the purpose of
qualifying, or based upon written information furnished by the Company filed in
any state or other jurisdiction in order to qualify, any or all of the Shares
under the securities or blue sky laws thereof (any such application, document or
information being hereinafter called a "Blue Sky Application"), or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading and will reimburse, as incurred, such Underwriter or such
controlling persons for any legal or other expenses incurred by such Underwriter
or such controlling persons in connection with investigating, defending or
appearing as a third party witness in connection with any such loss, claim,
damage, liability or action; PROVIDED, HOWEVER, that the Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in any of such
documents in reliance upon and in conformity with information furnished in
writing to the Company on behalf of such Underwriter through the Representatives
expressly for use therein, and PROVIDED, FURTHER, that such indemnity with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter (or to the benefit of any person controlling such Underwriter) from
whom the person asserting any such loss, claim, damage, liability or action
purchased Shares which are the subject thereof to the extent that any such loss,
claim, damage, liability or action (i) results from the fact that such
Underwriter failed to send or give a copy of the Prospectus (as amended or
supplemented) to such person at or prior to the confirmation of the sale of such
Shares to such person in any case where such delivery is required by the Act and
(ii) arises out of or is based upon an untrue statement or omission of a
material fact contained in such Preliminary Prospectus that was corrected in the
Prospectus (as amended and supplemented), unless such failure resulted from
non-compliance by the Company with Section 5(h) hereof.
The indemnity agreement in this paragraph (a) shall be in addition to
any liability which the Company may otherwise have.
(b) Each of the Underwriters agrees severally, but not jointly, to
indemnify and hold harmless the Company, each of its directors, and each of its
officers who has signed the Registration Statement, each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act against any and all losses, claims, damages or liabilities
(and actions in respect thereof) to which the
- 30 -
<PAGE>
Company or any of the Company's directors, officers, or controlling persons may
become subject, under the Act or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or actions arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or the Prospectus or any Preliminary Prospectus, or any amendment or
supplement thereto or in any Blue Sky Application, or arise out of or are based
upon the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with information furnished in writing by that
Underwriter through the Representatives to the Company expressly for use
therein; and will reimburse, as incurred, all legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action. The Company acknowledges that the statements with respect
to the public offering of the Shares set forth under the heading "Underwriting"
and the stabilization legend in the Prospectus have been furnished by the
Underwriters to the Company expressly for use therein and constitute the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Prospectus. The indemnity agreement contained in this
subsection (b) shall be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against one or more
indemnifying parties under this Section 8, notify such indemnifying party or
parties of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve it from any liability which it may have to
any indemnified party otherwise than under subsection (a) or (b) of this
Section 8 or to the extent that the indemnifying party was not adversely
affected by such omission. In case any such action is brought against an
indemnified party and it notifies an indemnifying party or parties of the
commencement thereof, the indemnifying party or parties against which a claim is
to be made will be entitled to participate therein and, to the extent that it or
they may wish, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, that if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party has reasonably concluded that there
may be legal defenses available to it and/or
- 31 -
<PAGE>
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and otherwise
to participate in the defense of such action on behalf of such indemnified party
or parties. Upon receipt of notice from the indemnifying party to such
indemnified party of its election so to assume the defense of such action and
approval by the indemnified party of counsel, the indemnifying party will not be
liable to such indemnified party under this Section 8 for any legal or other
expenses (other than the reasonable costs of investigation) subsequently
incurred by such indemnified party in connection with the defense thereof unless
(i) the indemnified party has employed such counsel in connection with the
assumption of such different or additional legal defenses in accordance with the
proviso to the immediately preceding sentence, (ii) the indemnifying party has
not employed counsel reasonably satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized in
writing the employment of counsel for the indemnified party at the expense of
the indemnifying party.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) above in respect of any losses, claims, damages, expenses
or liabilities (or actions in respect thereof) referred to therein, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages or liabilities (or
actions in respect thereof) (i) in such proportion as is appropriate to reflect
the relative benefits received by each of the contributing parties, on the one
hand, and the party to be indemnified, on the other hand, from the offering of
the Shares or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of each of the contributing parties, on the one hand, and the party to be
indemnified, on the other hand in connection with the statements or omissions
that resulted in such losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. In any case where the Company is a
contributing party and the Underwriters are the indemnified party, the relative
benefits received by the Company on the one hand, and the Underwriters, on the
other, shall be deemed to be in the same proportion as the total net proceeds
from the offering of the Shares (before deducting expenses) bear to the total
underwriting discounts received by the Underwriters hereunder, in each case as
set forth in the table on the cover page of the Prospectus. Relative fault
shall be determined by reference to, among other
- 32 -
<PAGE>
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters, and the parties, relative
intent, knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this paragraph (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this paragraph (d), the Underwriters shall not
be required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by the Underwriters hereunder. The
Underwriters, obligations to contribute pursuant to this paragraph (d) are
several in proportion to their respective underwriting obligations, and not
joint. No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
paragraph (d), (i) each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter and (ii) each director of
the Company, each officer of the Company who has signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act shall have the same
rights to contribution as the Company, subject in each case to this
paragraph (d). Any party entitled to contribution will, promptly after receipt
of notice of commencement of any action, suit or proceeding against such party
in respect to which a claim for contribution may be made against another party
or parties under this paragraph (d), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any other obligation (x) it or they may have hereunder or otherwise than under
this paragraph (d) or (y) to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party may
otherwise have.
9. RIGHT TO INCREASE OFFERING. At anytime during a period of 30 days
from the date of the Prospectus, the Underwriters, by no less than two business
days' prior notice to the Company, may designate a closing (which may be
concurrent with, and part of, the closing on the Closing Date with respect to
the Firm Shares or may be a second closing held on a date subsequent to the
- 33 -
<PAGE>
Closing Date, in either case such date shall be referred to herein as the
"Option Closing Date") at which the Underwriters may purchase all or less than
all of the Additional Shares in accordance with the provisions of this Section 9
at the purchase price per share to be paid for the Firm Shares. In no event
shall the option Closing Date be later than 10 business days after written
notice of election to purchase Additional Shares is given.
The Company agrees to sell to the several Underwriters on the Option
Closing Date the number of Additional Shares specified in such notice and the
Underwriters agree severally and not jointly, to purchase such Additional Shares
on the Option Closing Date. Such Additional Shares shall be purchased for the
account of each Underwriter in the same proportion as the number of Firm Shares
set forth opposite the name of such Underwriter listed on Schedule I bears to
the total number of Firm Shares (subject to adjustment by you to eliminate
fractions) and may be purchased by the Underwriters only for the purpose of
covering over-allotments made in connection with the sale of the Firm Shares.
No Additional Shares shall be sold or delivered unless the Firm Shares
previously have been, or simultaneously are, sold and delivered. The right to
purchase the Additional Shares or any portion thereof may be surrendered and
terminated at any time upon notice by you to the Company.
Except to the extent modified by this Section 9, all provisions of
this Agreement relating to the transactions contemplated to occur on the Closing
Date for the sale of the Firm Shares shall apply, MUTATIS MUTANDIS, to the
Option Closing Date for the sale of the Additional Shares.
10. REPRESENTATIONS, ETC. TO SURVIVE DELIVERY. The respective
representations, warranties, agreements, covenants, indemnities and statements
of, and on behalf of, the Company and its officers and the Underwriters,
respectively, set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Underwriters, and will survive delivery of and payment for the Shares. Any
successors to the Underwriters shall be entitled to the indemnity, contribution
and reimbursement agreements contained in this Agreement.
11. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at 11:00 A.M., New York
time on the first business day following the date hereof, or at such earlier
time after the Registration Statement
- 34 -
<PAGE>
becomes effective as the Representatives, in their sole discretion, shall
release the Shares for the sale to the public unless prior to such time the
Representatives shall have received written notice from the Company that it
elects that this Agreement shall not become effective, or the Representatives
shall have given written notice to the Company that the Representatives on
behalf of the Underwriters elect that this Agreement shall not become effective;
PROVIDED, HOWEVER, that the provisions of this Section and of Section 6 and
Section 8 hereof shall at all times be effective. For purposes of this
Section 11(a), the Shares to be purchased hereunder shall be deemed to have been
so released upon the earlier of notification by the Representatives to
securities dealers releasing such Shares for offering or the release by the
Representatives for publication of the first newspaper advertisement which is
subsequently published relating to the Shares.
(b) This Agreement (except for the provisions of Sections 6 and 8
hereof) may be terminated by the Representatives by notice to the Company in the
event that the Company has failed to comply in any respect with any of the
provisions of this Agreement required on its part to be performed at or prior to
the Closing Date or the Option Closing Date, or if any of the representations or
warranties of the Company is not accurate in any respect or if the covenants,
agreements or conditions of, or applicable to the Company herein contained have
not been complied with in any respect or satisfied within the time specified on
the Closing Date or the Option Closing Date, respectively, or if prior to the
Closing Date or the Option Closing Date:
(i) the Company or any of its Subsidiaries shall have sustained
a loss by strike, fire, flood, accident or other calamity of such a
character as to have a Material Adverse Effect on Company and its
Subsidiaries taken as a whole regardless of whether or not such loss was
insured;
(ii) trading in the Common Stock shall have been suspended by
the Commission or the Nasdaq National Market or trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market
shall have been suspended or a material limitation on such trading shall
have been imposed or minimum or maximum prices shall have been established
on any such exchange or market system;
(iii) a banking moratorium shall have been declared by New York
or United States authorities;
(iv) there shall have been an outbreak or escalation of
hostilities between the United States and any foreign power or an outbreak
or escalation of any other
- 35 -
<PAGE>
insurrection or armed conflict involving the United States; or
(v) there shall have been a material adverse change in (A)
general economic, political or financial conditions or (B) the present or
prospective business or condition (financial or other) of the Company and
its Subsidiaries taken as a whole that, in each case, in the
Representatives' judgment makes it impracticable or inadvisable to make or
consummate the public offering, sale or delivery of the Company's Shares on
the terms and in the manner contemplated in the Prospectus and the
Registration Statement.
(c) Termination of this Agreement under this Section 11 or Section 12
after the Firm Shares have been purchased by the Underwriters hereunder shall be
applicable only to the Additional Shares. Termination of this Agreement shall
be without liability of any party to any other party other than as provided in
Sections 6 and 8 hereof.
12. SUBSTITUTION OF UNDERWRITERS. If one or more of the Underwriters
shall fail or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 7 or 11 hereof) to
purchase and pay for (a) in the case of the Closing Date, the number of Firm
Shares agreed to be purchased by such Underwriter or Underwriters upon tender to
you of such Firm Shares in accordance with the terms hereof or (b) in the case
of the Option Closing Date, the number of Additional Shares agreed to be
purchased by such Underwriter or Underwriters upon tender to you of such
Additional Shares in accordance with the terms hereof, and the number of such
Shares shall not exceed 10% of the Firm Shares or Additional Shares required to
be purchased on the Closing Date or the Option Closing Date, as the case may be,
then, each of the non-defaulting Underwriters shall purchase and pay for (in
addition to the number of such Shares which it has severally agreed to purchase
hereunder) that proportion of the number of Shares which the defaulting
Underwriter or Underwriters shall have so failed or refused to purchase on such
Closing Date or Option Closing Date, as the case may be, which the number of
Shares agreed to be purchased by such nondefaulting Underwriter bears to the
aggregate number of Shares so agreed to be purchased by all such non-defaulting
Underwriters on such Closing Date or Option Closing Date, as the case may be.
In such case, you shall have the right to postpone the Closing Date or the
Option Closing Date, as the case may be, to a date not exceeding seven full
business days after the date originally fixed as such Closing Date or the Option
Closing Date, as the case may be, pursuant to the terms hereof in order that any
necessary changes in the Registration
- 36 -
<PAGE>
Statement, the Prospectus or any other documents or arrangements may be made.
If one or more of the Underwriters shall fail or refuse (otherwise
than for a reason sufficient to justify the termination of this Agreement under
the provisions of Section 7 or 11 hereof) to purchase and pay for (a) in the
case of the Closing Date, the number of Firm Shares agreed to be purchased by
such Underwriter or Underwriters upon tender to you of such Firm Shares in
accordance with the terms hereof or (b) in the case of the Option Closing Date,
the number of Additional Shares agreed to be purchased by such Underwriter or
Underwriters upon tender to you of such Additional Shares in accordance with the
terms hereof, and the number of such Shares shall exceed 10% of the Firm Shares
or Additional Shares required to be purchased by all the Underwriters on the
Closing Date or the Option Closing Date, as the case may be, then (unless within
48 hours after such default arrangements to your satisfaction shall have been
made for the purchase of the defaulted Shares by an Underwriter or Underwriters)
and subject to the provisions of Section 11(b) hereof, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or on
the part of the Company except as otherwise provided in Sections 6 and 8 hereof.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this paragraph. Nothing in this
Section 12, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
13. NOTICES. All communications hereunder shall be in writing and if
sent to the Representatives or the Underwriters shall be mailed or delivered or
telecopied and confirmed by letter to c/o Furman Selz LLC at 230 Park Avenue,
New York, New York 10169, Attention: Syndicate Department or, if sent to the
Company, shall be mailed or delivered or telecopied and confirmed by letter to
the Company at 360 E. Jackson Street, Medford, Oregon 97501, Attention: Sidney
B. DeBoer.
14. SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Company and each Underwriter and the Company's and each
Underwriter's respective successors and legal representatives, and nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any other person any legal or equitable right, remedy or claim under or in
respect of this Agreement, or any provisions herein contained, this Agreement
and all conditions and provisions hereof being intended to be and being for the
sole and exclusive benefit of such persons and for the benefit of no other
person, except that the representations, warranties, indemnities and
contribution agreements of the Company contained in this Agreement shall also
- 37 -
<PAGE>
be for the benefit of any person or persons, if any, who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and except that the Underwriters' indemnity and contribution agreements shall
also be for the benefit of the directors of the Company, the officers of the
Company who have signed the Registration Statement, any person or persons, if
any, who control the Company within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act. No purchaser of Shares from the Underwriters
will be deemed a successor because of such purchase.
15. APPLICABLE LAW; JURISDICTION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without giving
effect to the choice of law or conflict of law principles thereof. Each party
hereto consents to the jurisdiction of each court in which any action is
commenced seeking indemnity or contribution pursuant to Section 8 above and
agrees to accept, either directly or through an agent, service of process of
each such court.
16. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
- 38 -
<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate the Underwriters' acceptance thereof in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
LITHIA MOTORS, INC.
By:
----------------------------------------
Name: Sidney B. DeBoer
Title: President, Chief Executive
Officer and Secretary
Accepted as of the date first above written:
FURMAN SELZ LLC
DAIN RAUSCHER WESSELS
EVEREN SECURITIES, INC.
BANCAMERICA ROBERTSON STEPHENS
By: Furman Selz LLC
Acting on its own behalf and as one of the Representatives of the several
Underwriters referred to in the foregoing Agreement
By:
----------------------------------
Title:
-------------------------------
- 39 -
<PAGE>
SCHEDULE I
UNDERWRITERS
Underwriting Agreement dated ________ __, 1998
<TABLE>
<CAPTION>
Number of Firm
Shares to be
Purchased from
the Company
-----------
Name
- ----
<S> <C>
Furman Selz LLC. . . . . . . . . . . . . . . . . . . . . . . . .
Dain Rauscher Wessels. . . . . . . . . . . . . . . . . . . . . .
EVEREN Securities, Inc.. . . . . . . . . . . . . . . . . . . . .
BancAmerica Robertson Stephens . . . . . . . . . . . . . . . . .
</TABLE>
- 40 -
<PAGE>
ANNEX I
PERSONS DELIVERING LOCK-UP
AGREEMENTS
Underwriting Agreement dated ________ __, 1998
Lithia Holding Company, L.L.C., an Oregon limited liability company
Sidney B. DeBoer
M.L. Dick Heimann
R. Bradford Gray
Brian R. Neill
Thomas Becker
William J. Young
- 41 -
<PAGE>
[LETTERHEAD]
April 14, 1998
Board of Directors
Lithia Motors, Inc.
360 E. Jackson St.
Medford, Oregon 97501
Re: Proposed Public Offering of Lithia Motors, Inc. Class A Common Stock
Gentlemen:
The undersigned has acted as counsel to Lithia Motors, Inc. (the
"Company") in the preparation and filing of a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended, covering 3,450,000 shares (the "Shares") of the Company's Class A
Common Stock, including 450,000 shares that may be sold by the Company upon
exercise of an option granted to the Underwriters to cover over-allotments.
In the course of our representation we have examined the Registration
Statement, copies of the Articles of Incorporation, Bylaws, and excerpts of
minutes of meetings of the Boards of Directors of the Company. We have also
received from officers of the Company certain other documents, corporate
records, and representations concerning factual matters. We have reviewed
such documents and have made such review of laws as we consider necessary for
purposes of this opinion.
We have relied as to matters of fact upon the above documents and
investigation. We have assumed without investigation the genuineness of all
signatures and the authenticity and completeness of all documents submitted
to us as originals and the conformity to authentic and complete original
documents of all documents submitted to us as certified or photostatic copies.
Based upon the foregoing and subject to the qualifications and exceptions
heretofore and hereinafter set forth, we are of the opinion that, when the
Registration Statement has been declared effective, the applicable
provisions of state securities laws have been complied with and the Company
has issued the Shares against payment therefor in the manner described the
Registration Statement, the shares will be validly issued and fully paid, and
non-assessable.
<PAGE>
Board of Directors
April 14, 1998
Page 2
The opinion herein expressed are specifically subject to and qualified by
the following:
This opinion is limited to the present laws of the State of Oregon and
the United States of America and to the facts bearing on this opinion as they
exist on the date of this letter.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to our firm under the heading
"Legal Matters" in the prospectus.
Very truly yours,
FOSTER PEPPER & SHEFELMAN LLP
By: /s/ Kenneth E. Roberts
------------------------
Kenneth E. Roberts
<PAGE>
EXHIBIT 10.34.1
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
THIS AGREEMENT is entered into by and between BOYLAND AUTO GROUP, an
Oregon corporation, dba "Boyland Toyota" (hereinafter referred to as "Seller"),
DORIAN BOYLAND (hereinafter "Owner"), and LITHIA MOTORS, INC. or its nominee
(hereinafter referred to as the "Buyer" or as "Lithia").
R E C I T A L S :
Seller is an Oregon business corporation engaged in the business of
selling and servicing Toyota motor vehicles and related parts and accessories
from premises located at 250 East Cypress, Redding, California (the "Business
Real Property"), under franchises issued by Toyota Motor Sales U.S.A., Inc.
Owner owns [all] [a majority] of the outstanding shares of Seller.
Buyer wishes to purchase from Seller, and Seller is willing to sell to
Buyer, all assets relating to Seller's Toyota franchise at the Business Real
Property, conditioned upon the granting to Buyer of an exclusive franchise for
the sale of new Toyota motor vehicles in the same geographical area as Seller's
current franchise.
Buyer (or a related entity) also wishes to purchase all of the real
property and improvements which constitute the Business Real Property, and the
purchase of Seller's business assets shall be conditioned upon the simultaneous
closing of the purchase of that real property by Buyer. Boyland Properties, LLC,
also owned by Owner, is the owner of the Business Real Property.
NOW, THEREFORE, IN CONSIDERATION OF the mutual promises set forth herein,
the parties agree as follows:
1. Definitions. In this Agreement, the following words shall have
the indicated meanings:
(a) "Closing" shall refer to the consummation of the transaction
contemplated under this Agreement in accordance with the terms hereof, and
"Closing Date" shall refer to the actual date of Closing. "Target Closing Date"
shall refer to June 15, 1998 "Final Closing Date" shall refer to July 15, 1998.
(b) "Seller's Business" shall refer to any and all activities
conducted by Seller in Redding, California, relating to the marketing and sale
of new Toyota vehicles and associated parts and accessories, and the repair and
servicing of new or used Toyota vehicles.
(c) "Purchased Assets" shall refer to those assets which are
identified in Paragraph 2 as being purchased and sold by the parties hereunder.
(d) Seller's "Equipment" shall refer to all non-inventory items of
tangible personal property presently owned or used by Seller in connection with
Seller's Business, including all of Seller's machinery, tools, generic or
marquee signs, office equipment, computer equipment, computer programs,
microfiches, parts lists, repair manuals, sales or service brochures, furniture
and fixtures, and all of Seller's leasehold improvements to the Business Real
Property, and further including all assets listed on Seller's financial
statements as of December 31, 1997 previously provided to Buyer, but shall not
include Seller's loaner vehicles .
(e) Seller's "Intangible Assets" shall refer to Seller's business
name ("Boyland Toyota"), 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 (in the Redding area),
and all other intangible rights and interests of any value relating to Seller's
Business.
Page 1 of 18
<PAGE>
(f) "Business Real Property" shall refer to all of the real property
used in connection with Seller's business, including but not limited to the
premises at 250 East Cypress, Redding, California.
(g) "Franchisor" shall refer to Toyota Motor Sales U.S.A., Inc..
(h) "New Vehicle" shall refer to a Toyota motor vehicle which: (i)
is unregistered and unused, (ii) is from the 1997 or 1998 model year, (iii) has
been driven for less than 200 odometer miles, and (iv) may be represented or
warranted to consumers as "new" under California law. "Rollback Vehicle" shall
mean an unregistered vehicle from the 1997 or 1998 model year 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 from the 1997 or 1998 model year which has been 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 a "Rollback Vehicle" as defined in the three preceding sentences,
and includes Seller's loaner vehicles.
(i) "Date of this Agreement" shall refer to the first date upon
which this Agreement has been signed by all of the parties.
(j) All amounts payable by Buyer to Seller at Closing shall be paid
by certified check drawn against a bank of Buyer's choice having offices located
in Jackson County, Oregon, or by whatever other means shall be acceptable to
Seller.
2. Purchased Assets. Seller agrees to sell to Buyer, and Buyer agrees to
purchase from Seller, the assets identified in Paragraphs 3 through 9 of this
Agreement, plus any Pre-paid accounts assumed by Buyer (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 through 9 of this Agreement.
3. Inventory Of New Vehicles, Demonstrator Vehicles and Rollback Vehicles.
Buyer shall purchase Seller's entire inventory of new Toyota vehicles, as that
inventory exists on the Closing Date. Buyer also shall purchase Seller's entire
inventory of Demonstrator Vehicles and Rollback Vehicles (up to a maximum of
five Rollback Vehicles unless such maximum is waived by Buyer), as that
inventory exists on the Closing Date.
(a) Price of New Vehicles. The purchase price for each of Seller's
New Vehicles shall be equal to Seller's factory invoice cost, reduced by any
factory hold-backs, factory rebates, factory incentives, carry-over model
allowances, floor plan allowances, finance cost allowances, advertising
allowances, and any other items which should reasonably be deducted in order to
establish Seller's actual net cost for each vehicle, and further reduced by the
actual net cost for any and all accessories, equipment and parts which are
missing from a vehicle. Seller's actual net cost for 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 vehicle in Seller's inventory of New Vehicles is damaged, and
if the cost of repairing that damage would be more than $1,000.00, then
notwithstanding anything herein to the contrary, that vehicle shall be treated
as a Used Vehicle for purposes of Paragraph 4 and this Paragraph 3, rather than
as a New Vehicle. If any vehicle in Seller's inventory of New Vehicles is
damaged, and if the cost of repairing that damage is less than $1,000.00, then
Buyer shall be obligated to purchase that vehicle as a New Vehicle, but the
price for that vehicle, as determined under subparagraph 3(a), shall be reduced
by the actual net cost to Buyer of repairing such damage. If Buyer and Seller
Page 2 of 18
<PAGE>
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 and transfer to Buyer, and Buyer shall
assume from Seller, all of Seller's rights (including customer deposits) and
obligations (including sales commissions) under such purchase orders; provided,
however, that Buyer shall not be obligated to assume Seller's rights or
obligations with respect to any New Vehicle purchase order which is at a price
less than factory invoice, or which provides for a trade-in at a price or under
terms unacceptable to Buyer.
(e) Price for Demonstrator Vehicles and Rollback Vehicles. The price
for each Demonstrator Vehicle shall be determined as provided in subparagraphs
3(a) and 3(b) and then reduced by $250 per vehicle and further reduced by
30(cent) per mile for each odometer mile on that vehicle in excess of 200 miles.
The price for each Rollback Vehicle shall be determined as provided in
subparagraphs 3(a) and 3(b) and then reduced by 30(cent) per mile for each
odometer mile on that vehicle in excess of 200 miles. The purchase price for
Demonstrator Vehicles and Rollback Vehicles 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) Disclosures. Seller shall be obligated, prior to Closing, 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.
(b) Price for Used Vehicles. Used Vehicles shall be purchased on an
individual basis. It is Buyer's intention to purchase all of Seller's Used
Vehicles. However, if Buyer and Seller cannot agree on the value of one or more
Used 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 those
vehicles. Buyer and Seller agree to establish the proposed purchase price for
all of Seller's Used Vehicles at least three business days prior to the
anticipated Closing Date.
(c) Payment for Used Vehicles. The aggregate purchase price for
Seller's inventory of Used Vehicles shall be paid in full at Closing.
(d) Storage of Used Vehicles Which Are Not Purchased by Buyer.
Seller shall have 10 days after Closing within which to remove from the Business
Real Property any of Seller's Used Vehicles which are not purchased by Buyer.
Buyer shall store those vehicles in accordance with Buyer's normal 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 any such damage or loss.
5. Inventory Of New Parts and Accessories. Buyer shall purchase Seller's
entire inventory of new, current (non-obsolete), undamaged Toyota vehicle parts
and accessories manufactured by Franchisor 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
Page 3 of 18
<PAGE>
and parts books. Prior to Closing, Seller shall maintain Seller's inventory of
parts and accessories at a level consistent with good business practices and
Seller's normal and regular course of business.
(a) Price for Parts and Accessories. The purchase price for each
item in Seller's inventory of new, current and undamaged parts and accessories
for Toyota vehicles (whether manufactured by 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 (including quantity purchase or stock order discounts), rebates,
incentives or allowances received by Seller 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 Toyota 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 percent of the fees charged by the inventory service for
conducting the inventory.
(c) Payment for Inventory of New Parts and Accessories. The purchase
price for Seller's inventory of parts and accessories shall be paid in full at
Closing.
6. Equipment. Seller agrees to sell all of the Equipment to Buyer, and
Buyer agrees to purchase the Equipment from Seller.
(a) Identification of Equipment. Within 10 days after the date of
this Agreement, Seller shall provide to Buyer a list of the Equipment, which
list shall be attached hereto as Exhibit "A." Seller is retaining, and is not
selling to Buyer, those personal items of Seller's Equipment which are listed on
Exhibit "B" attached hereto. Seller warrants to Buyer that the items listed on
Exhibit "A" constitute all of the items of tangible personal property (other
than inventory, consumable supplies or those items listed on Exhibit "B") which,
during the six months preceding Closing, shall have been owned or used by Seller
in connection with Seller's Business. Buyer shall have the right to fully
inspect the Equipment. If Buyer is dissatisfied with the kind, quality and/or
value of the items listed on Exhibit "A," Buyer shall have 10 days after receipt
of Exhibit "A" from Seller within which to notify Seller, in writing, of Buyer's
determination to rescind the transaction contemplated hereunder based on that
dissatisfaction.
(b) Price and Payment for Equipment. The aggregate purchase price
for all items of Seller's Equipment (including leasehold improvements) which are
being purchased hereunder shall be the book value of the Equipment being
purchased on the current financial statements of Seller. Notwithstanding the
preceding sentence, if one or more items listed on Seller's current financial
statements are not delivered to Buyer at Closing, then the aggregate purchase
price for the Equipment shall be reduced by the fair market value of those
missing items. Seller agrees that (with Sellers approval), Buyer shall have the
right to allocate the aggregate purchase price for the Equipment among the
various items of Equipment in whatever manner Buyer, in the exercise of its
discretion, believes will best reflect the relative fair market values of those
items. The purchase price for the Equipment shall be paid in full at 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; provided,
however, that Buyer shall not be obligated to purchase used, damaged or obsolete
items or supplies. For purposes of this Paragraph 7, an item shall be "obsolete"
on the Closing Date if not then returnable to the supplier from which that item
was originally purchased, or if not then listed in the supplier's then-current
price books. Prior to Closing, Seller shall maintain Seller's inventory of
supplies at a level consistent with good business practices and Seller's normal
and regular course of business. The price for each item of the purchased
supplies shall be Seller's actual net cost, as determined by mutual agreement of
the parties, reduced by any discounts (including quantity purchase or stock
order discounts), rebates, incentives or allowances received by Seller which
Page 4 of 18
<PAGE>
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. The purchase price for Seller's supplies
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 "C" attached hereto, provided, however, that
Buyer shall have the right at any time up to Closing to refuse to assume any one
or more of Seller's leases or other contracts to be included in Exhibit "C," and
Seller shall remain solely responsible for any such obligations rejected by
Buyer. Exhibit "C" shall be prepared and attached hereto within 10 days after
the date of this Agreement with full copies of all such leases and other
contracts delivered to Buyer at the time Exhibit "C" is provided. Seller
warrants that all of Seller's obligations under the contracts listed on Exhibit
"C" shall be current at the time of Closing. Seller agrees to indemnify Buyer
against all obligations under the contracts identified on Exhibit "C" which
relate to periods prior to Closing. Buyer agrees to indemnify Seller against all
obligations under the contracts assumed by Buyer which relate to periods after
Closing.
9. Intangible Assets. Buyer shall purchase all of Seller's Intangible
Assets.
(a) The aggregate purchase price for Seller's Intangible Assets
shall be One Million Eight Hundred Fifty Thousand and 00/100 Dollars
($1,850,000.00). The purchase price shall be allocated among the items which
constitute the Intangible Assets as determined by Buyer in the reasonable
exercise of Buyer's discretion; provided, however, that no value shall be
allocated to the non-transferable Toyota franchise issued by the Franchisor. The
purchase price for the Intangible Assets shall be paid in full at Closing.
(b) In order for Buyer to receive the full benefit of the
intangible good will being purchased by Buyer, it will be necessary for Buyer to
perform no-charge repair work and vehicle warranty work with respect to vehicles
repaired or sold by Seller prior to Closing. In partial consideration of the
$1,850,000.00 amount being paid by Buyer for the Intangible Assets, Seller
agrees to reimburse Buyer for the net cost to Buyer of repair and warranty
services which are not covered by factory warranty and which are performed by
Buyer within six months after Closing in order to satisfy: (i) customers who are
dissatisfied with repair services provided by Seller prior to Closing, and (ii)
warranty claims with respect to new or Used Vehicles purchased from Seller prior
to Closing. All repairs shall be authorized by Seller or his representative.
Seller agrees to reimburse Buyer pursuant to the preceding sentence on a monthly
basis, with payment to be made within 10 days after Buyer submits a billing for
the cost of repair and warranty services performed during the preceding calendar
month.
10. 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, and Seller
shall take all actions necessary to comply therewith.
11. Limitation On Liabilities Assumed. Except as provided in subparagraph
3(d) and Paragraph 8, Buyer shall not, by reason of this Agreement or Buyer's
purchase of the Purchased Assets, take responsibility for any liabilities, debts
or obligations of Seller (including Seller's trade payables, account payables,
obligations to employees, or tax liabilities).
12. Warranties Of Seller. Owner and Seller make 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 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
Page 5 of 18
<PAGE>
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. No employees of Seller are members of any
union. 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. At Buyer's
sole discretion, Buyer may (but shall not be obligated to) hire any of Seller's
employees. Seller and Buyer will not, for a period of two years following
Closing, offer employment to any person who was an employee of Seller's Business
at any time within the 180 day period immediately preceding Closing unless
either: (1) Buyer consents in writing to Seller's employment of that employee,
or (2) a period of at least six months shall have elapsed since the later of:
(i) the date of Closing, or (ii) the last date when that employee is employed by
Buyer.
(d) Financial and Business Disclosures. Seller shall promptly
furnish to Buyer such financial and operating data and other information,
including but not limited to computer, phone, inventory and accounting systems,
relating to Seller's Business and the Business Real Property as Buyer shall
request. The review of such materials will be at Buyer's expense. Seller
warrants that all financial statements and related materials provided to Buyer
fairly present the financial position of Seller's Business and the results of
operation of Seller's Business for the periods covered thereby. Buyer (at
Buyer's expense) shall have the right, at any time prior to Closing, to conduct
a certified audit (by a certified public accounting firm selected by Buyer) of
Seller's balance sheets and income and cash flow statements for one or more
fiscal years or interim periods, and Seller agrees to cooperate and assist in
the prompt and efficient completion of all such audit activities, recognizing
that the audit process may result in inconveniences or inefficiencies to
Seller's Business, and would require the delivery of a representation letter to
such accounting firm.
(e) Undisclosed Liabilities and Contractual Commitments. Except as
otherwise disclosed in this Agreement (or in an attached Exhibit), the following
statements are true as of the date of this Agreement and shall be true at
Closing: (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; (iii) no lawsuit or action, administrative proceeding,
arbitration proceeding, governmental investigation, or other legal or equitable
proceeding of any kind is pending or threatened against Seller or the Business
Real Property which might adversely affect the value of the Purchased Assets,
the operation of the Business or the Business Real Property, (iv) Seller has all
licenses, permits and authorizations required by any federal, state or local
governmental or regulatory agency in order to operate Seller's Business, and
knows of no reason why any such license or permit might be subject to
revocation; and (v) the construction, occupancy and operation of the Business
Real Property materially conform to and comply with all applicable city, county,
state and federal laws, statutes, ordinances and regulations. 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.
Page 6 of 18
<PAGE>
(f) Condition of Equipment and Business Real Property. Each item of
Equipment and Business Real Property (including the roof, the electrical,
plumbing, heating, ventilation, air conditioning and other utility systems)
shall be in good operating condition at Closing and needing no repairs. Seller
will continue to perform routine maintenance and repairs with respect to the
Equipment and the Business Real Property prior to Closing. Buyer shall have 30
days after Closing within which to advise Seller in writing if any item of
Equipment is not in good operating condition at Closing, and Seller shall
thereupon be obligated to repair or replace that item (or reimburse Buyer for
doing so). There are no material structural defects in the building, nor are
there any major repairs required to operate the building in a lawful, safe and
efficient manner. The Seller has not received any notices from any insurance
company of any defects or inadequacies in the Business Real Property. Any
licenses and permits obtained by the Seller have been fully paid for and are not
subject to any liens, encumbrances, or claims of any kind.
(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, reservations, or other burdens of any kind. All current and
accrued taxes which may become a lien against any of the Purchased Assets shall
have been paid by Seller prior to Closing (including property taxes, sales taxes
and excise taxes).
(h) No Hazardous Materials Discharged. Except as disclosed by Seller
on Exhibit "D" attached hereto, (i) at all times prior to Closing, Seller and
all of Seller's predecessors in title, and all lessees, tenants, employees,
agents, sublessees, franchisees, licensees, permitees, contractors, vendees and
customers of Seller and/or Seller's predecessors in title, and all other persons
permitted by Seller and/or Seller's predecessors in title to have access to the
Business Real Property, shall have used, stored, transported, disposed of and
treated Hazardous Materials in strict accordance with all applicable federal,
state and local laws and regulations (collectively referred to for the remainder
of this Paragraph 12(h) as the "Laws"), and (ii) there are no in-ground hoists,
underground gas tanks, underground fuel tanks, or underground waste oil tanks
located on the Business Real Property, and (iii) at Closing the Business Real
Property shall not be contaminated by the presence on, under or about the
Business Real Property of any Hazardous Material, and (iii) at Closing no other
parcel of real property (including but not limited to properties adjacent to or
in the immediate vicinity of the Business Real Property) is or at any time in
the future will be contaminated by the presence on, under or about that parcel
of any Hazardous Material which was released to, on, under, about or from the
Business Real Property prior to Closing. For purposes or this subparagraph (h),
the phrase "Hazardous Material" shall refer to and include any hazardous or
toxic substance, material or waste which is or becomes regulated by any federal,
state or local governmental authority or political subdivision. The term
"Hazardous Materials" includes, without limitation, any material or substance
that is (i) defined as a "hazardous substance" under applicable federal, state
or local law, (ii) petroleum, (iii) asbestos, (iv) polychlorinated biphenyl
("PCB"), (v) designated as a "hazardous substance" pursuant to Section 311 of
the Federal Water Pollution Control Act (33 U.S.C. ss. 1321), (vi) defined as a
"hazardous waste" pursuant to Section 1004 of the Solid Waste Disposal Act (42
U.S.C. ss. 6903), (vii) defined as a "hazardous substance" pursuant to Section
101 of the Comprehensive Environmental Response, Compensation and Liability Act
(42 U.S.C. ss. 9601), (viii) defined as a "regulated substance" pursuant to
Section 9001 of the Solid Waste Disposal Act (Regulation of Underground Storage
Tanks), 42 U.S.C. ss. 6991, (ix) considered a "hazardous chemical substance and
mixture" pursuant to Section 6 of the Toxic Substance Control Act (15 U.S.C. ss.
2605), or (x) defined as a "pesticide" pursuant to Section 2 of the Federal
Insecticide, Fungicide and Rodenticide Act (7 U.S.C. ss. 136), and (xi) any and
all substances which now or in the future are deemed to be pollutants, toxic
materials or hazardous materials under any other state or federal law. Seller
has furnished to Buyer, prior to the date of this Agreement, copies of all
environmental reports and certificates of compliance relating to Seller's
Business and the Business Real Property. Upon the execution of this Agreement,
Seller shall, engage an appropriate environmental firm which is acceptable to
Page 7 of 18
<PAGE>
Buyer to conduct an investigation and produce a Phase One Environmental Report
regarding the Business Real Property, fees for said report shall be divided
equally between Buyer and Seller. If the Phase One Environmental Report
discloses that the Business Real Property is, or is likely to be, contaminated
by the presence of Hazardous Materials, and if Buyer provides Seller with a
written demand to remediate, cleanup, detoxify and decontaminate any and all
such contamination as a condition of Closing, then Seller shall be obligated (at
Seller's sole expense) either to: (i) complete such remediation, cleanup,
detoxification and/or decontamination prior to, and as a condition of, Closing,
or (ii) place sufficient funds into escrow at Closing to cover the expense of
the required remediation or (iii) rescind the entire transaction.
(i) Franchisors' Consent. Seller shall take all actions which are
commercially necessary on Seller's part to obtain the consent of the Franchisor
to the issuance to Buyer of an exclusive franchise for the sale of new Toyota
vehicles in the same geographical area as Seller's current franchise in Redding,
California.
(j) Indemnification for Breach of Warranties. Seller and Owner
shall jointly and severally indemnify and hold harmless Buyer against all
losses, damages and costs (including attorney fees and court costs) relating to
any warranty, (for a period of two years) 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 or to cure or
remedy the breach. If any claim, action or proceeding is filed or brought
against Buyer which is or may be subject to Seller's obligation to indemnify
Buyer as set forth in this subparagraph, then Buyer shall promptly give Seller
written notice of that claim and Seller thereafter shall have the option to
defend that claim at Seller's expense using attorneys selected by Seller. Seller
and Owners agree to indemnify Buyer on demand for any claim made hereunder.
13. Conduct Of Business Pending Closing. Seller warrants that during the
period beginning on the date of this Agreement and ending at Closing: (i) Seller
shall continue to operate Seller's Business in the usual and ordinary course and
in substantial conformity with all applicable laws, ordinances, regulations,
rules or orders and will not institute any new, novel or unusual business
practices; (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; (v) Seller
shall use its best efforts to preserve the value of the Toyota franchise in
Redding, California; (vi) Seller shall not hire any new employees except in the
ordinary course of business; (vii) Seller shall not transfer any existing
employee(s) of Seller's Business to any other business location operated by
Seller or any affiliate of Seller; and (viii) Seller shall preserve the good
will and business relationships of the Business.
15. 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 and validly existing under the laws of the State of Oregon, and
is entitled to own property and to carry on its business.
(b) Authority. This Agreement shall be binding upon Lithia only if
authorized by the board of directors of Lithia within 10 days after the date of
this Agreement. This Agreement will not violate the provision of any judicial,
governmental or administrative decree, order, writ, injunction, or judgment, or
conflict with or constitute a default under, the Articles or bylaws of Lithia or
any contract, agreement, or other instrument to which Lithia is a party.
Page 8 of 18
<PAGE>
16. Additional Conditions Precedent To Buyer's Obligations. The obligation
of Buyer to close this transaction is subject to each of the following
conditions being true or satisfied as of the date of Closing (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 Franchisor, prior to the Final
Closing Date, a commitment for the issuance of an exclusive franchise to sell
new Toyota vehicles in the same geographical area as Seller's current franchise
in Redding, California (as evidenced by the issuance to Buyer by Franchisor of
an appropriate Dealership Sales and Service Agreement, and the approval of Buyer
as the publicly owned Dealer-Operator of the franchise) on terms reasonably
acceptable to Buyer, and Buyer agrees to use reasonable efforts to obtain that
franchise.
(b) Buyer shall be reasonably satisfied with any facility
improvement requirements which are imposed by Franchisor.
(c) Buyer shall have been permitted to fully inspect the Business
Real Property promptly after the execution of this Agreement (but in no event
longer than 10 days), and Buyer shall be reasonably satisfied with the physical
condition of the Business Real Property and with all other aspects of the
Business Real Property. If Buyer is not so satisfied, it will give written
notice within 10 days of the inspection to Seller who shall either agree to
remedy the deficiencies (if practicable) prior to and as a condition of Closing,
or the Agreement may be terminated by either party. The purchase by Buyer of the
Business Real Property shall be closed concurrently with this transaction under
terms and conditions which are reasonably acceptable to Buyer.
(d) All of Seller's agreements and warranties set forth in this
Agreement shall be true, 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) Buyer shall be reasonably satisfied with the kind, quality
and/or value of the items listed on Exhibit "A," and does not notify Seller to
the contrary pursuant to Paragraph 6.
(f) This Agreement shall have been authorized by the board of
directors of Lithia within 10 days after the date of this Agreement.
(g) The aggregate Purchase Price for all of the Purchased Assets and
the Business Real Property shall be less than Fifteen Million and No/100 Dollars
($15,000,000.00).
(h) If the transaction contemplated by this Agreement requires a
filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, the parties agree to cooperate in providing the information required
for the filing, to share the cost of the filing fee, and all applicable waiting
periods for such filing shall have expired or been terminated with no injunction
having been filed or threatened by any governmental agency.
16. Closing. The parties shall make all reasonable effort to close the
purchase and sale under this Agreement at or before 5:00 p.m., Pacific Standard
Time, on or before the Final Closing Date, at the offices of Capital City
Escrow, Inc. in Sacramento, California, or at such other location as shall be
selected by mutual agreement of the parties.
(a) The parties agree to establish a closing escrow account at
Capital City Escrow, Inc. in Sacramento, California, (the "Closing Escrow
Agent"). Buyer and Seller each shall pay one-half (1/2) of the closing escrow
fees. Buyer and Seller agree to execute whatever reasonable escrow instructions
may be required by Closing Escrow Agent in connection with this transaction. In
the event of any conflict between those escrow instructions and this Agreement,
the terms of this Agreement shall prevail. Upon the execution of this Agreement,
Page 9 of 18
<PAGE>
Buyer shall deliver to Closing Escrow Agent the sum of $100,000, which amount
shall immediately be placed into an interest bearing account. The deposit plus
interest (collectively the "Deposit") shall be credited to Buyer and shall be
applied against the purchase price for the Equipment at Closing, or if the
Closing fails to occur, then the Deposit shall be disbursed as set forth
hereinafter.
(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 Closing.
(d) At Closing (and from time to time thereafter as may be
reasonably requested by Buyer to vest in Buyer the Purchased Assets), and
coincidentally with the performance of the obligations to be performed by Buyer
at Closing, Seller shall deliver to Buyer: (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.
(e) At Closing, and coincidentally with the performance of all
obligations required of Seller at Closing, Buyer shall deliver to Seller: (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.
(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 15 without the fault or breach of either party, then: (i) all rights
and obligations of both parties under this Agreement shall terminate, (ii) Buyer
shall be entitled to a refund of the Deposit, and (iii) this Agreement 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 Deposit
shall be paid 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. IT WOULD BE EXTREMELY DIFFICULT TO ASCERTAIN SELLER'S
PRECISE MONETARY DAMAGES IN THE EVENT OF A BREACH BY BUYER, AND THE PARTIES
STIPULATE THAT THE DEPOSIT REPRESENTS A REASONABLE ESTIMATE BY BUYER AND SELLER
OF SELLER'S DAMAGES IN THE EVENT OF A BREACH BY BUYER. If Closing does not take
place on or before the Final Closing Date because of Seller's material breach of
this Agreement, then Buyer shall be entitled to: (i) a refund of the Deposit and
(ii) any and all other rights and remedies for that breach which are specified
in this Agreement or which may be provided by law or in equity, including
specific performance. A breach may not be declared if the action or inaction of
a party is capable of cure and the party intending to declare the breach has not
given the other party at least 10 days prior written notice within which such
impending breach may be cured.
(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.
(i) At or following Closing, Seller agrees to execute an Asset
Acquisition Statement (IRS Form 8594) prepared by Buyer, and approved by Seller
which reflects the allocation of the total purchase price among the Purchased
Assets in the manner determined in accordance with this Agreement.
17. Seller's Accounts Receivable. For a period of six 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 vehicle sales shall be delivered to Seller within 10
days after collection, and all other collected receivables shall be delivered to
Page 10 of 18
<PAGE>
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.
18. Survival Of Representations. All representations, warranties,
indemnification obligations and covenants made in this Agreement shall survive
Closing, and shall remain in effect until the expiration of the latest period
allowable under any applicable statute of limitations.
19. Assignment By Buyer. Lithia shall have the right to assign all rights
and obligations of Lithia 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; however, Lithia shall remain jointly liable for all
obligations of the Buyer.
20. Purchase of Business Real Property. As a condition to the Closing of
the transaction contemplated under this Agreement, Buyer (or a related entity)
is purchasing the Business Real Property, and Buyer's obligation to close the
transaction contemplated under this Agreement shall be subject to the condition
that Buyer is simultaneously able to enter into an agreement with the owner of
the Business Real Property which allows Buyer to purchase the Business Real
Property for a price of One Million Five Hundred Fifty Thousand Dollars
($1,550,000) and under such additional terms as are reasonably satisfactory to
Buyer: The full purchase price for property shall be payable at closing of
purchase. Seller must convey the Business Real Property free of all liens and
encumbrances.
21. Books And Records. For a period of three years after Closing, Seller
shall maintain Seller's financial records, and Buyer and its agents shall have
full reasonable access to Seller's financial statements and general ledger and
may make copies thereof.
22. Dispute Resolution.
(a) Mediation. The parties hope there will be no disputes arising
out of this transaction. To that end, each commits to cooperate in good faith
and to deal fairly in performing its duties under this Agreement in order to
accomplish their mutual objectives and avoid disputes. But if a dispute arises,
the parties agree to resolve all disputes by the following alternate dispute
resolution process. The parties will seek a fair and prompt negotiated
resolution, but if this is not successful, all disputes shall be resolved by
binding arbitration; provided, however, that during this process, at the request
of either party made not later than twenty-five (25) days after the initial
arbitration demand, the parties will attempt to resolve any dispute by
nonbinding mediation (but without delaying the arbitration hearing date). The
parties recognize that negotiation or mediation may not be appropriate to
resolve some disputes and agree that either party may proceed with arbitration
without negotiating or mediating. The parties confirm that by agreeing to this
alternate dispute resolution process, they intend to give up their right to have
any dispute decided in court by a judge or jury.
(b) Binding Arbitration. Any claim between the parties, including
but not limited to those arising out of or relating to this Agreement and any
claim based on or arising from an alleged tort, shall be determined by
arbitration in Medford, Oregon (or some other place as the parties may agree).
If either party demands a total award greater than $250,000, including interest,
attorneys' fees and costs, then either party may require that there be three (3)
neutral arbitrators. If the parties cannot agree on the identity of the
arbitrator(s) within ten (10) days of the arbitration demand, the arbitrator(s)
shall be selected by the administrator of the American Arbitration Association
(AAA) office in having jurisdiction over Medford, Oregon, from its Large,
Complex Case Panel (or have similar professional credentials). Each arbitrator
shall be an attorney with at least fifteen (15) years' experience in commercial
law and shall reside in Oregon. Whether a claim is covered by this Agreement
shall be determined by the arbitrator(s). All statutes of limitations which
would otherwise be applicable shall apply to any arbitration proceeding
hereunder.
Page 11 of 18
<PAGE>
(c) Procedures. The arbitration shall be conducted in accordance
with the AAA Commercial Arbitration Rules with Expedited Procedures, as modified
by this Agreement. There shall be no dispositive motion practice. As may be
shown to be necessary to ensure a fair hearing, the arbitrator(s) may authorize
limited discovery, and may enter pre-hearing orders regarding (without
limitation) scheduling, document exchange, witness disclosure and issues to be
heard. The arbitrator(s) shall not be bound by the rules of evidence or of civil
procedure, but may consider such writings and oral presentations as reasonable
business people would use in the conduct of their day-to-day affairs, and may
require the parties to submit some or all of their case by written declaration
or such other manner of presentation as the arbitrator(s) may determine to be
appropriate. The parties intend to limit live testimony and cross-examination to
the extent necessary to ensure a fair hearing on material issues.
(d) Hearing and Award. The arbitrator(s) shall take such steps as
may be necessary to hold a private hearing within ninety (90) days of the
initial demand for arbitration and to conclude the hearing within three (3)
days; and the arbitrator(s)'s written decision shall be made not later than
fourteen (14) calendar days after the hearing. The parties have included these
time limits in order to expedite the proceeding, but they are not
jurisdictional, and the arbitrator(s) may for good cause afford or permit
reasonable extensions or delays, which shall not affect the validity of the
award. The written decision shall contain a brief statement of the claim(s)
determined and the award made on each claim. In making the decision and award,
the arbitrator(s) shall apply applicable substantive law. Absent fraud,
collusion or willful misconduct by an arbitrator, the award shall be final, and
judgment may be entered in any court having jurisdiction thereof. The
arbitrator(s) may award injunctive relief or any other remedy available from a
judge, including the joinder of parties or consolidation of this arbitration
with any other involving common issues of law or fact or which may promote
judicial economy, and may award attorneys' fees and costs to the prevailing
party but shall not have the power to award punitive or exemplary damages. The
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
25. Miscellaneous.
(a) There are no oral agreements or representations between the
parties which affect this transaction, and this Agreement supersedes all
previous negotiations, warranties, representations and understandings between
the parties. True copies of all documents referenced in this Agreement are
attached hereto. If any provision of this Agreement shall be determined to be
void by any court of competent jurisdiction, then that determination shall not
affect any other provision of this Agreement, and all other provisions shall
remain in full force and effect. If any provision of this Agreement is capable
of two constructions only one of which would render the provision valid, then
the provision shall have the meaning which renders it valid. The paragraph
headings in this Agreement are for convenience purposes only, and do not in any
way define or construe the contents of this Agreement.
(b) This Agreement shall be governed and performed in accordance
with the laws of the state of Oregon. Each of the parties hereby irrevocably
submits to the jurisdiction of the courts of Jackson County, Oregon, and agrees
that any legal proceedings with respect to this Agreement shall be filed and
heard in the appropriate court in Jackson County, Oregon.
(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.
Page 12 of 18
<PAGE>
(e) Time is of the essence to this Agreement.
(f) 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, including any proceeding in
bankruptcy. 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.
(g) All notices, requests and demands shall be in writing and shall
be addressed or sent as follows:
Seller and Owners: Dorian Boyland
BOYLAND TOYOTA
250 EAST CYPRESS
REDDING, CALIFORNIA 96002
Facsimile No. ____________________
Buyer Sidney DeBoer
LITHIA MOTORS, INC.
360 E. Jackson Street
Medford, OR 97501
Facsimile No. (541)776-6477
Any party may change its address or facsimile number for notice by
written notice as provided herein. Notices shall be deemed duly given only (i)
when actually received by personal service, facsimile, overnight mail or courier
service, or (ii) 72 hours after being sent by registered or certified mail,
postage prepaid, return receipt requested. The giving of notice may be waived in
writing by the person or persons entitled to receive such notice, either before
or after the time established for the giving of such notice.
(h) Attorney Fees. If any arbitration, any action or proceeding
("Proceeding") is brought to enforce or interpret the provisions of this
Agreement, the prevailing party shall be entitled to recover all costs and
expenses incurred in such Proceeding, or on appeal, including reasonable
attorney fees as fixed by the arbitrator or court, and including a reasonable
amount for costs and attorney fees to be incurred in collection any money
judgment or award or otherwise enforcing each order, judgment, or decree entered
in the claim for relief, action, or other proceeding. If either party becomes
the subject of any bankruptcy or other insolvency proceedings, the party which
becomes the subject of such proceedings shall pay all legal costs and expenses
incurred by the other party in connection with such proceedings, whether such
amounts are incurred in connection with issues of state law, federal law,
bankruptcy law or otherwise.
Page 13 of 18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
indicated below.
SELLER: BOYLAND TOYOTA
By: /s/ Dorian Boyland
----------------------------------
Dorian Boyland, President
OWNER:
/s/ Dorian Boyland
- ---------------------------------------
Dorian Boyland
BUYER: LITHIA MOTORS, INC. (OR NOMINEE)
By: /s/ Brad Gray
----------------------------------
Brad Gray, Vice President
Date:
----------------------------------
Page 14 of 18
<PAGE>
EXHIBIT "A"
TO
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
Between NAME OF CORPORATION, INC., as "Seller," and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
LIST OF EQUIPMENT, FURNITURE AND FIXTURES BEING SOLD BY SELLER
[See ___ pages attached hereto.]
Page 15 of 18
<PAGE>
EXHIBIT "B"
TO
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
Between NAME OF CORPORATION, INC., as "Seller," and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
LIST OF EQUIPMENT, FURNITURE AND FIXTURES BEING RETAINED BY SELLER
[See ___ pages attached hereto.]
Page 16 of 18
<PAGE>
EXHIBIT "C"
TO
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
Between NAME OF CORPORATION, INC., as "Seller," and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
LISTING OF LEASES AND AGREEMENTS BEING ASSUMED
[See ____ pages attached hereto.]
Page 17 of 18
<PAGE>
EXHIBIT "D"
TO
AGREEMENT FOR PURCHASE AND SALE OF BUSINESS ASSETS
Between NAME OF CORPORATION, INC., as "Seller," and
LITHIA MOTORS, INC. (OR NOMINEE), as Buyer
DISCLOSURE OF TOXIC MATERIALS
[See ____ page(s) attached hereto.]
Page 18 of 18
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF LITHIA MOTORS, INC.
<TABLE>
<CAPTION>
JURISDICTION
OF NAME UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION BUSINESS IS CONDUCTED
- ------------------------------------------ ------------- ----------------------------------------
<S> <C> <C>
Lithia TLM, LLC Oregon Lithia Toyota Lincoln Mercury;
Lithia Lincoln Mercury
Lithia Grants Pass Auto Center, LLC Oregon Lithia's Grants Pass Auto Center;
Xpress Lube
Lithia Dodge, LLC Oregon Lithia Dodge; Lithia Mazda; Xpress Lube;
Lithia Dodge Chry Ply Mazda Jeep Eagle
Lithia MTLM, Inc. Oregon Lithia Toyota Lincoln Mercury
LGPAC, Inc. Oregon Lithia's Grants Pass Auto Center
Lithia DM, Inc. Oregon Lithia Chrysler Plymouth Jeep Eagle,
Inc.; Lithia Dodge Chry Ply Mazda Jeep
Eagle
Lithia HPI, Inc. Oregon Lithia Honda Pontiac Suzuki Isuzu;
Lithia Honda; Honda Automobiles of
Medford; Lithia Isuzu; Lithia Pontiac;
Lithia Suzuki; Lithia Volkswagen Audi
Saturn of Southwest Oregon, Inc. Oregon Saturn of Southwest Oregon
Lithia DE, Inc. Oregon Lithia Dodge of Eugene
Lithia Chrysler Plymouth Jeep Eagle, Inc. Oregon Lithia Chrysler Plymouth; Lithia Dodge
Chry Ply Mazda Jeep Eagle
Lithia BNM, Inc. Oregon Lithia Nissan; Medford BMW
Lithia DC, Inc. California Lithia Dodge of Concord; Lithia Isuzu of
Concord
Lithia FN, Inc. California Lithia Ford of Napa
Lithia TKV, Inc. California Lithia Toyota of Vacaville
Lithia FVHC, Inc. California Lithia Sun Valley Ford
Lithia VWC, Inc. California Lithia Sun Valley Volkswagen
Lithia NB, Inc. California Lithia Nissan of Bakersfield
Lithia BB, Inc. California Lithia BMW of Bakersfield; Lithia Acura
of Bakersfield
Lithia MB, Inc. California Lithia Mitsubishi of Bakersfield
Lithia JEB, Inc. California Lithia Jeep Eagle of Bakersfield
Lithia JEF, Inc. California Lithia Jeep Eagle of Fresno
Lithia NF, Inc. California Lithia Nissan of Fresno
Lithia FMF, Inc. California Lithia Ford of Fresno
Lithia MMF, Inc. California Lithia Mazda of Fresno
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
JURISDICTION
OF NAME UNDER WHICH
NAME OF SUBSIDIARY INCORPORATION BUSINESS IS CONDUCTED
- ------------------------------------------ ------------- ----------------------------------------
<S> <C> <C>
Lithia Real Estate, Inc. Oregon Lithia Real Estate, Inc.
Lithia Financial Corporation Oregon Lithia Financial Corporation
Lithia Rentals Oregon Avis Rent A Car; Discount Rent-A-Car
Lithia Auto Services, Inc. Oregon Cellular World; Lithia Body & Paint;
Thrift Auto Supply
Lithia Auto Services of California, Inc. California Lithia Auto Services of California, Inc.
Lithia Aircraft, Inc. Oregon Lithia Aircraft, Inc.
Lithia SALMIR, Inc. Nevada Dick Donnelly Isuzu; Dick Donnelly
Suzuki; Dick Donnelly Audi; Dick
Donnelly Lincoln/Mercury
</TABLE>
<PAGE>
EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Lithia Motors, Inc. and Subsidiaries
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and "Experts"
in the prospectus. Our report refers to a change to the FIFO method of valuing
inventory effective January 1, 1997.
/s/ KPMG Peat Marwick LLP
Portland, Oregon
April 13, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated June 24, 1997, on our audit of the
financial statements of Sun Valley Ford, included in this Form S-1, into Lithia
Motors, Inc.'s previously filed Registration Statement File Nos. 333-21673,
333-45553 and 333-43593 on Form S-8 and to the reference to our firm under the
heading "Experts" in this Prospectus.
/s/ MOSS ADAMS LLP
Santa Rosa, California
April 13, 1998
