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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______to________
Commission file number: 000-21789
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LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)
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OREGON 93-0572810
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
360 E. JACKSON STREET, MEDFORD, OREGON 97501
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 541-776-6899
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class A Common stock without par value 6,158,171
Class B Common stock without par value 4,110,000
(Class) (Outstanding at May 10, 1999)
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LITHIA MOTORS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - March 31, 1999 and
December 31, 1998 2
Consolidated Statements of Operations (Unaudited) - Three Months
Ended March 31, 1999 and 1998 3
Consolidated Statements of Cash Flows (Unaudited) - Three Months
Ended March 31, 1999 and 1998 4
Notes to Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 24,789 $ 20,879
Trade receivables 16,745 17,287
Notes receivable, current portion, net of allowance
for doubtful accounts of $677 and $714 2,923 3,074
Inventories, net 153,320 157,455
Vehicles leased to others, current portion 865 861
Prepaid expenses and other 931 1,933
Deferred income taxes 1,760 2,707
-------- --------
Total Current Assets 201,333 204,196
Property and Equipment, net of accumulated
depreciation of $4,244 and $3,907 33,200 32,933
Vehicles Leased to Others, less current portion 5,494 5,647
Notes Receivable, less current portion 6,630 7,173
Goodwill, net of accumulated amortization of
$1,473 and $1,180 43,390 42,951
Other Non-Current Assets, net of accumulated
amortization of $123 and $103 1,433 1,498
-------- --------
Total Assets $291,480 $294,398
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 1,612 $ 515
Floorplan notes payable 122,708 124,167
Current maturities of long-term debt 10,645 7,601
Current portion of capital leases 25 27
Trade payables 6,465 6,313
Accrued liabilities 13,401 12,020
-------- --------
Total Current Liabilities 154,856 150,643
Long-Term Debt, less current maturities 28,600 38,994
Long-Term Capital Lease Obligation, less current
portion 2,420 2,426
Deferred Revenue 1,924 2,076
Other Long-Term Liabilities 1,923 1,606
Deferred Income Taxes 6,928 7,142
-------- --------
Total Liabilities 196,651 202,887
-------- --------
-------- --------
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 6,150 and 6,105 71,093 70,871
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 170 150
Retained earnings 23,055 19,979
-------- --------
Total Shareholders' Equity 94,829 91,511
-------- --------
Total Liabilities and Shareholders' Equity $291,480 $294,398
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
2
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LITHIA MOTORS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
--------- ---------
<S> <C> <C>
Revenues:
New vehicle sales $ 116,853 $ 74,908
Used vehicle sales 71,809 49,801
Service, body and parts 23,430 14,592
Other revenues 12,053 6,897
--------- ---------
Total revenues 224,145 146,198
Cost of sales 188,945 123,252
--------- ---------
Gross profit 35,200 22,946
Selling, general and administrative 26,648 17,916
Depreciation and amortization 1,075 720
--------- ---------
Income from operations 7,477 4,310
Other income (expense)
Floorplan interest expense (2,109) (1,636)
Other interest expense (629) (574)
Other income, net 266 366
--------- ---------
(2,472) (1,844)
--------- ---------
Income before income taxes 5,005 2,466
Income tax expense 1,976 947
--------- ---------
Net income $ 3,029 $ 1,519
--------- ---------
--------- ---------
Basic net income per share $ 0.30 $ 0.22
--------- ---------
--------- ---------
Diluted net income per share $ 0.29 $ 0.21
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
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LITHIA MOTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,029 $ 1,519
Adjustments to reconcile net income to net cash flows
provided by (used in) operating activities:
Depreciation and amortization 1,075 720
Compensation related to stock option issuances 20 -
Loss on sale of assets 25 -
(Gain) loss on sale of vehicles leased to others 38 (45)
Equity in income of affiliate (16) (9)
Changes in operating assets and liabilities, net of
effect of acquisitions:
Trade and installment contract receivables, net 369 (2,994)
Inventories 4,164 (19,174)
Prepaid expenses and other 1,002 162
Other noncurrent assets 71 277
Floorplan notes payable (1,459) 4,793
Trade payables 152 (519)
Accrued liabilities 1,381 1,942
Deferred income taxes, net 204 (195)
Other liabilities 165 (196)
-------- ---------
Net cash provided by (used in) operating activities 10,220 (13,719)
Cash flows from investing activities:
Notes receivable issued (769) (54)
Principal payments received on notes receivable 1,463 87
Capital expenditures (1,128) (1,195)
Proceeds from sale of assets 357 -
Expenditures for vehicles leased to others (1,851) (2,046)
Proceeds from sale of vehicles leased to others 1,669 2,191
Cash paid for acquisitions (12) (15,197)
-------- ---------
Net cash used in investing activities (271) (16,214)
Cash flows from financing activities:
Principal payments on long-term debt and capital leases (6,928) (1,010)
Proceeds from issuance of long-term debt 667 26,617
Proceeds from issuance of common stock 222 53
-------- ---------
Net cash provided by (used in) financing activities (6,039) 25,660
-------- ---------
Increase (decrease) in cash and cash equivalents 3,910 (4,273)
Cash and cash equivalents:
Beginning of period 20,879 18,454
-------- ---------
End of period $ 24,789 $ 14,181
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
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LITHIA MOTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The financial information included herein for the three-month periods ended
March 31, 1999 and 1998 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. The
financial information as of December 31, 1998 is derived from Lithia Motors,
Inc.'s 1998 Annual Report to Shareholders on Form 10-K. The interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in Lithia
Motors' 1998 Annual Report to Shareholders.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
NOTE 2. INVENTORIES
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). Detail of inventory is as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<C> <C> <C>
New and demonstrator vehicles $112,878 $112,990
Used vehicles 30,729 34,599
Parts and accessories 9,713 9,866
-------- --------
$153,320 $157,455
-------- --------
-------- --------
</TABLE>
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash paid during the period for income taxes $ 923 $ 650
Cash paid during the period for interest 2,899 1,614
</TABLE>
5
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NOTE 4. EARNINGS PER SHARE
Following is a reconciliation of basic earnings per share ("EPS")
and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999 1998
- ------------------------------ ---------------------------------- --------------------------------
Per Per
Share Share
BASIC EPS Income Shares Amount Income Shares Amount
---------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income available to Common Shareholders
$ 3,029 10,240 $ 0.30 $ 1,519 7,036 $ 0.22
------ ------
------ ------
DILUTED EPS
Effect of dilutive stock options - 365 - 335
------- ------ ------- -----
Income available to Common Shareholders $ 3,029 10,605 $ 0.29 $ 1,519 7,371 $ 0.21
------ ------
------ ------
</TABLE>
Potentially dilutive securities that are not included in the diluted EPS
calculations because they would be antidilutive include 24 and 44 shares,
respectively, issuable pursuant to stock options, for the three month periods
ended March 31, 1999 and 1998, respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS AND RISK FACTORS
This Form 10-Q contains forward-looking statements. These statements are
necessarily subject to risk and uncertainty. Actual results could differ
materially from those projected in these forward-looking statements. These
risk factors include, but are not limited to, the following:
- - The cyclical nature of automobile sales;
- - Lithia's ability to negotiate profitable, accretive acquisitions;
- - Lithia's ability to secure manufacturer approvals for acquisitions; and
- - Lithia's ability to retain existing management.
See Exhibit 99 to Lithia's 1998 Form 10-K for a more complete discussion of
risk factors.
GENERAL
Lithia is a leading operator and retailer in the highly fragmented automotive
industry. We offer 23 brands of new vehicles, through 56 franchises in 28
locations in the western United States. We currently operate 14 dealerships
in California, 9 in Oregon, 2 in Washington and 3 in Nevada. Lithia 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.
6
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The following table shows selected condensed financial data expressed as a
percentage of total revenues for the periods indicated for the average
automotive dealer in the United States.
<TABLE>
<CAPTION>
AVERAGE U.S. DEALERSHIP YEAR ENDED DECEMBER 31,
STATEMENT OF OPERATIONS DATA: ---------------------------
1998 1997
----------- -----------
<S> <C> <C>
Revenues:
New vehicles 59.0% 58.3%
Used vehicles 29.4 29.8
Parts and service, other 11.6 11.9
----------- -----------
100.0% 100.0%
Gross profit 12.9 12.7
Total dealership expense 11.2 11.3
Income before taxes 1.7% 1.4%
</TABLE>
Source: NADA INDUSTRY ANALYSIS DIVISION
The following table sets forth selected condensed financial data for the
Company, expressed as a percentage of total revenues for the periods
indicated below.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales:
New vehicles 52.1% 51.2%
Used vehicles 32.0 34.1
Service, body and parts 10.5 10.0
Other 5.4 4.7
----------- -----------
Total sales 100.0 100.0
Gross profit 15.7 15.7
Selling, general and administrative 11.9 12.3
Depreciation and amortization 0.5 0.5
----------- -----------
Operating income 3.3 2.9
Other income (expense), net (1.1) (1.2)
----------- -----------
Income before taxes 2.2% 1.7%
----------- -----------
----------- -----------
</TABLE>
RESULTS OF OPERATIONS
REVENUES. Revenues increased $77.9 million, or 53.3 percent, to $224.1
million for the quarter ended March 31, 1999 from $146.2 million for the
comparable period of 1998. Total retail vehicles sold during the quarter
ended March 31, 1999 increased 47.1% to 9,484 from 6,449 for the quarter
ended March 31, 1998. The average selling price for new and retail used
vehicles increased 2.0% and 2.4%, respectively, for the quarter ended
March 31, 1999 compared to the quarter ended March 31, 1998. The average
selling price for wholesale used vehicles decreased 2.6% in the first quarter
of 1999 compared to the first quarter of 1998. Same store sales and pre-tax
profit increased 12.9% and 43.5%, respectively, in the first quarter of 1999
compared to the first quarter of 1998. Lithia's newest thirteen stores
7
<PAGE>
showed a 14.6% increase in same-store sales and a 110.3% increase in same
store pre-tax profits.
NEW VEHICLES. Total revenue from new vehicle sales increased 56.0%
to $116.9 million (52.1% of total revenues) in the first quarter of 1999 from
$74.9 million (51.2% of total revenues) in the first quarter of 1998. Lithia
sold 5,231 new vehicles in the first quarter of 1999, a 52.9% increase over
the 3,422 sold in the first quarter of 1998. Average selling prices for new
vehicles increased 2.0% to $22,338 in the first quarter of 1999 compared to
$21,890 in the first quarter of 1998. The increase in units sold is primarily
a result of acquisitions and strong internal growth.
Lithia purchases substantially all of its new car inventory directly from
manufacturers who allocate new vehicles to dealerships based on orders and
the amount of vehicles sold by the dealership and by the dealership's market
area. Lithia also exchanges vehicles with other dealers to accommodate
customer demand and to balance inventory.
RETAIL USED VEHICLES. Total revenue from retail used vehicle sales
increased 43.8% to $55.1 million (24.6% of total revenues) in the first
quarter of 1999 from $38.3 million (26.2% of total revenues) in the first
quarter of 1998. Lithia sold 4,253 retail used vehicles in the first quarter
of 1999, a 40.5% increase over the 3,027 sold in the first quarter of 1998.
The average selling price for retail used vehicles increased 2.4% to $12,948
in the first quarter of 1999 from $12,649 in the first quarter of 1998. The
increase in units sold is primarily a result of acquisitions and strong
internal growth.
SERVICE, BODY AND PARTS. Lithia derives additional revenue from the
sale of parts and accessories, maintenance and repair services and collision
repair work. Revenues from these services increased 60.6% to $23.4 million
(10.5% of total revenues) in the first quarter of 1999 compared to
$14.6 million (10.0% of total revenues) in the first quarter of 1998. The
increase is primarily a result of internal growth and dealership acquisitions.
OTHER REVENUES. Other revenues consist primarily of financing and
insurance ("F&I") transactions. Other revenues increased 74.8% to
$12.1 million (5.4% of total revenues) in the first quarter of 1999 compared to
$6.9 million (4.7% of total revenues) in the first quarter of 1998. The
increase is a result of both internal growth and dealership acquisitions.
GROSS PROFIT. Gross profit increased 53.4% to $35.2 million for the first
quarter of 1999, compared with $22.9 million for the first quarter of 1998,
primarily due to increased revenues as indicated above. The gross profit
margin achieved by the Company on new vehicle sales during the first quarter
of 1999 was 9.7% compared to 10.2% in the first quarter of 1998. 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 1998. Lithia's gross profit margin on retail used vehicle sales during the
first quarter of 1999 was 11.2% compared to 10.6% in the first quarter of
1998, and compared to the industry average for 1998 of 10.9%. Sales of used
vehicles to other dealers and to wholesalers are frequently at, or close to,
cost. Total gross profit margin remained stable at 15.7% in the first quarter
of 1999 and 1998. The decreases in gross profit margin on new vehicle sales
and service, body and parts were offset by increases in gross profit margin
on retail used vehicle sales and finance and lease transactions.
8
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative ("SG&A") expense increased 48.7% to $26.6 million (11.9% of
total revenues) for the first quarter of 1999 compared to $17.9 million
(12.3% of total revenues) for the comparable period of 1998. The increase in
SG&A was due primarily to increased selling, or variable, expense related to
the increase in revenues and the number of total locations. The decrease in
SG&A as a percent of total revenues is a result of economies of scale gained
as the fixed expenses are spread over a larger revenue base and from
economies of scale as Lithia consolidates multiple stores in a single market.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
49.3% to $1.1 million in the first quarter of 1999 compared to $0.7 million in
the first quarter of 1998, primarily as a result of increased property and
equipment and goodwill related to acquisitions in 1998. Depreciation and
amortization was 0.5% of revenues in the first quarter of 1999 and 1998.
FLOORPLAN INTEREST EXPENSE. Floorplan interest expense increased to $2.1
million (0.9% of total revenues) in the first quarter of 1999 compared to
$1.6 million (1.1% of total revenues) in the first quarter of 1998, primarily
as a result of increased flooring notes payable related to increased
inventories as a result of the increase in stores owned and vehicles sold.
Lithia has been able to reduce its floorplan interest expense as a percentage
of total revenues by successfully managing inventory levels.
INCOME TAX EXPENSE. Lithia's effective tax rate for the first quarter of 1999
was 39.5% compared to 38.4% in the first quarter of 1998. The Company's
effective tax rate may be effected by the purchase of new dealerships in
jurisdictions with tax rates either higher or lower than the current
effective rate.
NET INCOME. Net income increased 99.4% to $3.0 million (1.4% of total
revenues) for the first quarter of 1999 compared to $1.5 million (1.0% of
total revenues) for the comparable period of 1998, primarily as a result of
increased revenues and decreased selling, general and administrative expenses
and floorplan and other interest expense as a percent of total revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for capital resources are for 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 public offerings to finance its operations and expansion.
At March 31, 1999 the Company had working capital of $46.5 million, which
included $24.8 million of cash and cash equivalents. The $3.9 million
increase in cash since December 31, 1998 is primarily a result of
$10.2 million provided by operations, offset by $1.1 million used for the
purchase of property and equipment and $6.3 million net payments on long-term
debt. The current ratio at March 31, 1999 was 1.3:1 compared to 1.4:1 at
December 31, 1998.
9
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Ford Credit, Toyota Motor Credit Corporation, Chrysler Financial Corporation
and General Motors Acceptance Corporation have agreed to floor all of
Lithia's new vehicles for their respective brands with Ford serving as the
primary lender for all other brands. There are no formal limits to these
commitments for new vehicle wholesale financing.
Ford Credit has also extended a $60 million revolving line of credit for used
vehicles and a $75 million acquisition line of credit to purchase dealerships
of any brand. These commitments have an expiration date of November 23, 2000
with interest due monthly. Lithia has the right to elect to extend the term
on these lines of credit for an additional two years at November 23, 1999.
Lithia also has the option to convert the acquisition line into a five-year
term loan on November 23, 1999 or November 23, 2000. In addition, U.S. Bank
N.A. has extended a $10 million revolving line of credit for leased vehicles.
The lines with Ford Credit are cross-collateralized and are secured by
inventory, accounts receivable, intangible assets and equipment. The other
new vehicle lines are secured by new vehicle inventory of the relevant
dealerships.
The Ford Credit lines of credit contain financial covenants requiring Lithia
to maintain compliance with, among other things, specified ratios of (i) total
debt to tangible base capital; (ii) total adjusted debt to tangible base
capital; (iii) current ratio; (iv) fixed charge coverage; and (v) net cash.
The Ford Credit lines of credit agreements also preclude the payment of cash
dividends without the prior consent of Ford Credit. Lithia was in compliance
with all such covenants at March 31, 1999.
Interest rates on all of the above facilities ranged from 6.63% to 7.94% at
March 31, 1999. Amounts outstanding on the lines at March 31, 1999 were as
follows (in thousands):
<TABLE>
<S> <C>
Acquisition Line $ -
Used Vehicle Line -
New and Program Vehicle Lines 122,708
Leased Vehicle Line 4,000
--------
$126,708
--------
--------
</TABLE>
Since December 1996 when Lithia completed its initial public offering, it has
acquired 23 dealerships. The aggregate net investment was approximately $74.2
million (excluding borrowings on its credit lines to finance acquired vehicle
inventories and equipment and the purchase of any real estate).
SEASONALITY AND QUARTERLY FLUCTUATIONS
Historically, Lithia'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 may be lower during the
first and fourth quarters than during the other quarters of each fiscal year.
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 in operating results from
quarter to quarter.
10
<PAGE>
YEAR 2000
GENERAL. Lithia has identified three major areas of concern:
1. The functionality of its internal systems and the Company's ability
to run its daily business after January 1, 2000;
2. The visual representation of "2000;" and
3. Third party systems.
Lithia expects to be Year 2000 compliant by July 1, 1999. Lithia is utilizing
the National Auto Dealers Association dealer guide to assist in resolving its
Year 2000 issues and problems.
INTERNAL SYSTEMS. Lithia is in the process of analyzing and updating its
internal systems, including its dealer management systems, dealer
communication systems, personal computer systems, shared port systems and
phone systems. Lithia estimates that it is 90 percent complete with
implementing various manufacturer upgrades to its systems in order to make
them Year 2000 compliant. We estimate that our internal systems we will be
fully Year 2000 compliant by July 1, 1999.
Like all businesses, Lithia is at risk from external infrastructure failures
that could arise from Year 2000 failures. It is not clear that electrical
power, telephone and computer networks, for example, will be fully functional
across the nation in the year 2000. Investigation and assessment of
infrastructures, like the nation's power grid, is beyond the scope and
resources of Lithia. Investors should use their own awareness of the issues
in the nation's infrastructure to make ongoing infrastructure risk
assessments and their potential impact to a company's performance.
VISUAL REPRESENTATION. Lithia is currently working on ensuring that all
report date stamps, timekeeping devices, etc. are Year 2000 compliant. We
estimate that we are approximately 95 percent complete with this process.
THIRD PARTIES. Lithia has begun a Year 2000 supplier audit program. It has
contacted all of its critical suppliers to inform them of its Year 2000
expectations, and requests have been made for each vendor's compliance
program and/or Year 2000 compliance assurance. In regard to the automobile
manufacturers, Lithia has received written or other confirmation that they
are Year 2000 compliant, except for Subaru. Subaru has assured Lithia that
they expect to be Year 2000 compliant prior to January 1, 2000.
It should be noted that there have been predictions of failures of key
components in the transportation infrastructure due to the Year 2000 problem.
It is possible that there could be delays in rail, over-the-road and air
shipments due to failure in transportation control systems. Investigation and
validation of the world's transportation infrastructure is beyond the scope
and the resources of Lithia. Investors should use their own awareness of the
issues in the transportation infrastructure to make ongoing infrastructure
risk assessments and their potential impact to a company's performance.
11
<PAGE>
ACQUISITIONS. Acquisitions in 1999 will be subject to strict due diligence
for Year 2000 compliance.
COST. Lithia expects to incur costs totaling approximately $1,054,000 to
ensure Year 2000 compliance, approximately $845,000 of which has already been
incurred since the end of 1997. A majority of the $1,054,000 represents
replacement of non-compliant systems, and therefore will be capitalized and
amortized over a three to five year period. This estimate could change
depending on variances not anticipated in the initial bids.
RISK. The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect Lithia's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers, Lithia is
unable to determine, at this time, whether the consequences of Year 2000
failures will have a material impact on its results of operations, liquidity
or financial condition. Lithia's efforts to help ensure Year 2000
preparedness have, and will continue to, significantly reduce its level of
uncertainty about the Year 2000 problem. We believe that, with completion of
the above mentioned plans, the possibility of significant interruptions of
normal operations should be reduced.
Lithia has developed contingency plans in regard to its internal systems and
supplier issues and will distribute these plans to all relevant departments
of Lithia by October 1999. The contingency plans consist primarily of manual
processes and procedures to be followed in the event of system failures.
RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities
(SFAS 133). SFAS 133 establishes accounting and reporting standards for all
derivative instruments. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. Lithia does not have any derivative instruments and,
accordingly, the adoption of SFAS 133 will have no impact on its financial
position or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Lithia's only financial instruments with market risk exposure are variable
rate floor plan notes payable and other credit line borrowings. At March 31,
1999 Lithia had $126.7 million outstanding under such facilities at interest
rates ranging from 6.63% to 7.94%. An increase or decrease in the interest
rates would affect interest expense for the period accordingly.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits filed as a part of this report are listed below.
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
10.1 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and Moreland Auto Limited
Partnership, RLLLP and G. Michael Downey and Moreland Auto
Corp.
10.2 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and L.A.H. Automotive Limited
Partnership, RLLLP and L.A.H. Automotive Enterprises, Inc.
10.3 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and William D. Limited
Partnership, RLLLP and James Jannicelli and William D.Corp.
10.4 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and Cherry Creek Dodge Limited
Partnership, RLLLP and Cherry Creek Dodge, Incorporated
10.5 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and Colorado Springs Jeep
Eagle Limited Partnership, RLLP and Alex Jannicelli and
Colorado Springs Jeep/Eagle, Inc.
10.6 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and Foothills Automotive Plaza
Limited Partnership, RLLLP and Jerry Cash and Foothills
Automotive Plaza, Inc.
10.7 Agreement and Plan of Reorganization dated January 1, 1999 by
and between Lithia Motors, Inc. and Reno Auto Sales Limited
Partnership, RLLLP and Reno Auto Sales, Inc.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
Reports on Form 8-K were filed as follows:
- Under Item 5, Other Events, filed on January 11, 1999, regarding
Lithia's listing on the New York Stock Exchange
- Under Item 5, Other Events, filed on March 15, 1999, regarding
a pending acquisition
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
Date: May 10, 1999 LITHIA MOTORS, INC.
By /s/ SIDNEY B. DEBOER
---------------------
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
(Principal Executive Officer)
By /s/ BRIAN R. NEILL
-------------------
Brian R. Neill
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
14
<PAGE>
EXHIBIT 10.1
MORELAND AUTO CORP.
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
MORELAND AUTO LIMITED PARTNERSHIP, RLLLP AND G. MICHAEL DOWNEY
(collectively the "Shareholders")
And
MORELAND AUTO CORP.,
a Colorado corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.1 Shares and Shareholders . . . . . . . . . . . . . . . . . . . . .5
2.2 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.3 Effective Time of the Merger. . . . . . . . . . . . . . . . . . .5
2.4 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . .6
2.5 Merger Consideration. . . . . . . . . . . . . . . . . . . . . . .6
3. FORMATION OF MERGER SUB. . . . . . . . . . . . . . . . . . . . . . . . . .7
4. MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . .8
5. REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
6. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
6.1 Date, Time and Place of Closing . . . . . . . . . . . . . . . . .8
6.2 Documents To Be Delivered at Closing by the Shareholders. . . . .8
6.3 Documents To Be Delivered at Closing by Lithia. . . . . . . . . .9
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS . . . . . . . . . . . .9
7.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . .9
7.2 Incorporation and Good Standing . . . . . . . . . . . . . . . . .9
7.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . 10
7.4 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.6 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.7 Tangible Personal Property. . . . . . . . . . . . . . . . . . . 10
7.8 Parts Inventories . . . . . . . . . . . . . . . . . . . . . . . 10
7.9 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . . 11
7.10 Intellectual Property . . . . . . . . . . . . . . . . . . . . . 11
7.11 Title to Properties; Encumbrances . . . . . . . . . . . . . . . 11
7.12 Financial Statements. . . . . . . . . . . . . . . . . . . . . . 11
7.13 Indebtedness for Borrowed Money; Guaranties . . . . . . . . . . 11
7.14 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.15 Transactions Since Balance Sheet Date . . . . . . . . . . . . . 12
7.16 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.17 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . . 13
7.18 Contracts and Agreements. . . . . . . . . . . . . . . . . . . . 13
7.19 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . 13
7.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.21 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.22 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . 13
7.23 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . 13
7.24 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . 14
7.25 Powers of Attorney; Authorized Signatories. . . . . . . . . . . 14
7.26 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.27 Environmental . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.28 Continuation of Business. . . . . . . . . . . . . . . . . . . . 14
7.29 Contracts in Transit. . . . . . . . . . . . . . . . . . . . . . 14
7.30 Evaluation of Risks in Receiving Lithia Securities. . . . . . . 14
7.31 Limitations on Transfer of Stock. . . . . . . . . . . . . . . . 15
7.32 Lack of Registration of Stock . . . . . . . . . . . . . . . . . 15
7.33 Information Concerning Lithia . . . . . . . . . . . . . . . . . 15
7.34 Investor Status . . . . . . . . . . . . . . . . . . . . . . . . 15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA . . . . . . . . . . . . . . . . 16
8.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . 16
8.4 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.6 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.7 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.8 Transactions Since Latest Balance Sheet Date . . . . . . . . . 17
8.9 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.10 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . . 17
8.11 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . 18
8.12 Delivery of Documents . . . . . . . . . . . . . . . . . . . . . 18
8.13 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 18
9. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.1 Notices and Consents. . . . . . . . . . . . . . . . . . . . . . 18
9.2 Conduct of Business by the Company Prior to the Closing
Date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.3 Lithia's Examination. . . . . . . . . . . . . . . . . . . . . . 18
9.4 Shareholders' Review. . . . . . . . . . . . . . . . . . . . . . 18
9.5 Notice of Changes . . . . . . . . . . . . . . . . . . . . . . . 19
9.6 Standstill Agreement. . . . . . . . . . . . . . . . . . . . . . 19
9.7 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . 19
9.8 Employee Stock Options. . . . . . . . . . . . . . . . . . . . . 19
9.9 Release of Guarantees . . . . . . . . . . . . . . . . . . . . . 19
9.10 Non-Compete . . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.11 Update of Representations . . . . . . . . . . . . . . . . . . . 20
9.12 Service Contract Pricing. . . . . . . . . . . . . . . . . . . . 20
9.13 Hail Damage Reserve . . . . . . . . . . . . . . . . . . . . . . 20
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA . . . . . . . . . . . . . . 21
10.1 Representations, Warranties of the Shareholders and
Covenants of the Company and the Shareholders . . . . . . . . . 21
10.2 No Adverse Change . . . . . . . . . . . . . . . . . . . . . . . 21
10.3 Approval of Lithia's Shareholders . . . . . . . . . . . . . . . 21
10.4 Third Party Approvals . . . . . . . . . . . . . . . . . . . . . 21
10.5 Hart-Scott-Rodino Waiting Period. . . . . . . . . . . . . . . . 21
10.6 Approval of Lithia as the Dealer. . . . . . . . . . . . . . . . 21
10.7 Consent from Lithia's Lender. . . . . . . . . . . . . . . . . . 21
10.8 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.9 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.10 Fulfillment of Conditions in Related Transactions . . . . . . . 22
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
10.11 Employee and Related Party Loans. . . . . . . . . . . . . . . . 22
10.12 Assignment and Licenses of Intangible Assets. . . . . . . . . . 22
10.13 Completion of Audit and Purchase Price Determination. . . . . . 22
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.1 Representations, Warranties and Covenants of Lithia . . . . . . 22
11.2 No Adverse Changes. . . . . . . . . . . . . . . . . . . . . . . 22
11.3 Third Party Approvals . . . . . . . . . . . . . . . . . . . . . 22
11.4 Hart-Scott-Rodino Waiting Period. . . . . . . . . . . . . . . . 22
11.5 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.6 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.7 Fulfillment of Conditions in Related Transactions . . . . . . . 22
11.8 Assignment and Licenses of Intangible Assets. . . . . . . . . . 22
11.9 Completion of Audit and Purchase Price Determination. . . . . . 22
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . 23
13. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
13.1 General Indemnity . . . . . . . . . . . . . . . . . . . . . . . 23
13.2 Defense of Claims . . . . . . . . . . . . . . . . . . . . . . . 23
13.3 Limitations.. . . . . . . . . . . . . . . . . . . . . . . . . . 23
14. HART-SCOTT-RODINO NOTIFICATION . . . . . . . . . . . . . . . . . . . . . 24
15. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
15.1 Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . . 24
15.2 By Lithia . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
15.3 By the Company. . . . . . . . . . . . . . . . . . . . . . . . . 24
15.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . . 25
15.5 Break-Up Fee. . . . . . . . . . . . . . . . . . . . . . . . . . 25
16. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.1 Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.2 Binding Arbitration . . . . . . . . . . . . . . . . . . . . . . 26
16.3 Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.4 Hearing and Award . . . . . . . . . . . . . . . . . . . . . . . 27
17. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.1 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . 27
17.2 Exhibit and Schedules . . . . . . . . . . . . . . . . . . . . . 27
17.3 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.4 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.5 Construction. . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.6 Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.7 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . 27
17.8 Binding Effect and Assignment . . . . . . . . . . . . . . . . . 28
17.9 Applicability of Exceptions and Disclosure. . . . . . . . . . . 28
17.10 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
17.11 Definition of Knowledge . . . . . . . . . . . . . . . . . . . . 29
17.12 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
17.13 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.14 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.15 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.16 No Strict Construction. . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
v
<PAGE>
DEFINED TERMS
<TABLE>
<S> <C>
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . .1
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CLASS A COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . .2
DAILY SALES PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
EMPLOYMENT AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . .2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . 23
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . .3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . .3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . .9
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SERIES M PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SPECIAL HAIL-DAMAGE RESERVE. . . . . . . . . . . . . . . . . . . . . . . . . .5
</TABLE>
vi
<PAGE>
EXHIBITS
Exhibit A Example Calculation of Adjusted Net Worth
Exhibit B Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Series M Preferred Stock
Exhibit E - Foster Pepper & Shefelman PLLC Tax Opinion
Exhibit F - Sherman & Howard L.L.C. Tax Opinion
Exhibit G - Lease Agreement
Exhibit H - Registration Rights Agreement
Exhibit I - W. Douglas Moreland Employment Agreement
Exhibit J - G. Michael Downey Employment Agreement
Exhibit K Sherman & Howard L.L.C. Legal Opinion
Exhibit L Assignment and Licenses of Intangible Assets
Exhibit M Foster Pepper & Shefelman PLLC Legal Opinion
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible Personal
Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
vii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated effective
January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon corporation
("Lithia"); MORELAND AUTO LIMITED PARTNERSHIP, RLLLP and G. MICHAEL DOWNEY
(whether one or more, the "SHAREHOLDERS"); and MORELAND AUTO CORP., a Colorado
corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and outstanding
shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing Jeep and
KIA automobiles and light trucks and related parts and accessories from premises
located at 501 and 505 S. Havana, Denver, Colorado (the "BUSINESS REAL
PROPERTY").
C. All the parties desire to consummate a business combination transaction
pursuant to which the Company will merge with and into a subsidiary of Lithia,
for the consideration and on the other terms set forth in this Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times LIFO
reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from the
total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall be
decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the amount,
if any, by which the total Moreland Transaction Expenses recorded in 1998
exceed the remainder obtained by subtracting $11,000,000 from the aggregate
Net Adjusted Pretax Income of all members of the Moreland Group for 1998.
The Company's proportionate share of the Moreland Transaction Expenses or
the excess transaction expenses shall be determined by multiplying the
total Moreland Transaction Expenses or excess transaction expenses by a
fraction, the numerator of which is the Company's Net Adjusted Pretax
Income for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for
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1998 and the denominator is the aggregate Net Adjusted Pretax Income for 1998
of all members of the Moreland Group.
"CLASS A COMMON STOCK" means Lithia's Class A Common Stock, without par
value.
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J-K
CMC = [ 6(H-I) --- ] + N
L-M
where:
H = the aggregate Net Adjusted Pretax Income of all
members of the Moreland Group for 1999, but H shall
not be less than I or more than I plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax Income
for all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for 1999,
but J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax
Income;
L = the aggregate Net Adjusted Pretax Income for 1999
of all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax Income
of all Qualifying Members.
N = the amount, if any, of the Special-Hail Damage
Reserve existing at March 31, 2000.
"FLOORPLAN RATE" means the rate of interest that the Moreland Group and all
affiliated dealerships would have paid on their floorplan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $7,164,237, adjusted as follows as of
the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(iv) First, the Initial Merger Consideration shall be adjusted to
equal IMC in the equation:
B
IMC = (A x 6)--- - $1,700,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998;
and
C = The aggregate Net Adjusted Pretax Income of all
members of the Moreland Group for 1998.
(v) Second, the adjusted Initial Merger Consideration determined in
(i) above shall be adjusted by adding thereto (if positive) or subtracting
therefrom (if negative) the amount of NWA in the equation:
E
NWA = (D - $28,000,000)---
D
where:
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D = the aggregate Adjusted Net Worth of all members of
the Moreland Group as of December 31, 1998; and
E = the Adjusted Net Worth of the company as of
December 31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration determined in
(ii) above shall be increased by an amount equal to IA in the equation
(F + $1,700,000)G
IA = -------------------
730
where:
F = the adjusted Initial Merger Consideration
determined in (ii) above; and
G = the sum of the Lithia Floorplan Rates in effect on
each day from and including January 1, 1999 to but
excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles followed
in the preparation of the financial statements as of and for the years ended
December 31, 1996 and 1997 for the Moreland Automotive Group (which include
entities not included in the Moreland Group as defined herein) audited by Arthur
Andersen LLP and accompanied by their report thereon dated May 21, 1998.
"MORELAND GROUP" means Cherry Creek Dodge, Incorporated, William D. Corp.,
Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc., L.A.H.
Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado corporations,
and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all members
of the Moreland Group in connection with the transactions contemplated by this
Agreement and the Other Reorganization Agreements including, without limitation,
the fees of Arthur Andersen LLP for services relating to audits of the Moreland
Groups' financial statements for 1998 and subsequent years and other
transaction-related services, fees and expenses of counsel for the Moreland
Group and all filling fees payable to governmental entities relating to the
transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense incurred or
paid to W. Douglas Moreland and the general manager of the dealership owned
by the entity for the period prior to the Effective Date and any bonus paid
to W. Douglas Moreland for the period after the Effective Date shall be
added back to net income.
(iii) The salary and other compensation expenses that would have been
payable for the period prior to the Effective Date to W. Douglas Moreland
and the salary, bonus and other compensation expense that would have been
payable for the period prior to the Effective Date to the general manager
of the dealership owned by the entity under the employment arrangements
between those persons and Lithia or the entity, shall be deducted from net
income. The salary
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payable to W. Douglas Moreland under his Employment Agreement shall be
allocated among the members of the Moreland Group in proportion to their
respective Net Adjusted Pretax Incomes for the year. No bonus payable to W.
Douglas Moreland under his Employment Agreement shall be deducted from net
income under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity after
December 31, 1997 will be added back to or deducted from net income.
(v) All Moreland Transaction Expenses recorded in the period shall be
added back to net income, but only to the extent that such Moreland
Transaction Expenses were taken into account in computing net income in the
first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for credit
life insurance and financing contracts shall be adjusted to the revenues or
expenses that would have been earned or incurred by such entity for the
same contacts under arrangements in effect during 1998. Extended service
contract costs will be based upon the costs charged to the Company pursuant
to Section 9.12.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds paid by such entity to Lithia or any affiliate of Lithia during the
period as a dividend or loan and on the amount of any fees or other charges
paid to Lithia to the extent that such fees are not included as expenses in
calculating Net Adjusted Pretax Income pursuant to clause (xiii) below,
from the date such payment was made to the end of the period or the date of
its repayment.
(ix) Net income shall be decreased by an amount equal to the interest
that would have accrued at the Floorplan Rate on the amount of all funds
provided by Lithia or any affiliate of Lithia to such entity during the
period as a loan or contribution and on the amount of any cost savings
described in clause (xii) below, from the date of such loan or contribution
or the date the savings were realized to the date of repayment or the end
of the period.
(x) Net income shall be increased by all fees paid to Lithia by such
entity under the Consulting Agreement between Lithia and such entity as in
effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring and
extraordinary income or expense items will be deducted or added back to the
net income. Some members of the Moreland Group held, on January 1, 1999,
vehicles which had suffered hail damage in 1998 and a related insurance
damage reserve. Amounts transferred from that insurance damage reserve
shall not be considered non-reoccurring or extraordinary income and shall
be included in net income, subject to Section 9.13.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of which
was previously incurred by the Company or procured from a third party, the
income of the Company will be adjusted to reflect the costs that would have
been incurred by the Company under the arrangements in effect during 1998.
If Lithia provides a service or product not previously utilized by the
Company, the reasonable or agreed costs of such services or product will be
included if W.
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Douglas Moreland agreed or agrees that the cost of such service or product
would be included in determining Net Adjusted Pretax Income hereunder.
In addition to the specific adjustments described above, net income of each
entity for 1999 shall be adjusted in such other respects as may be necessary to
eliminate the effect of any additional costs resulting from changes implemented
by Lithia not concurred in by W. Douglas Moreland. For example, if Lithia makes
capital improvements or increases inventory levels not concurred in by W.
Douglas Moreland, all current operating expenses associated with those
decisions, including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached as
Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net Adjusted
Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax Income.
"SERIES M PREFERRED STOCK" means shares of Lithia's preferred stock,
without par value, designated as Series M-2002 Preferred Stock and Series M-2003
Preferred Stock and having the right and preferences set forth in Lithia's
Articles of Incorporation.
"SPECIAL HAIL-DAMAGE RESERVE" means a reserve established by Cherry Creek
Dodge, Incorporated, Moreland Auto Corp. and William D. Corp. from unallocated
insurance proceeds for hail-damage suffered to vehicles still in inventory at
December 31, 1998, which reserve will be $200,000 for Cherry Creek Dodge,
Incorporated, and $50,000 each for Moreland Auto Corp. and William D. Corp. The
Special Hail-Damage Reserve constitutes only a portion of the total insurance
damage reserve established by those three entities in respect of hail damage
suffered in 1998.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive. Schedule 2.1 also reflects the
proportions in which the Shareholders will share the cash and stock components
of the Merger Consideration, which are different than their percentage ownership
interests in the Company. The Shareholders hereby agree to those proportions and
waive any right they may have to receive all elements of the Merger
Consideration in proportion to their stock ownership of the Company.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which the Company shall be merged with and into Merger Sub, the
separate corporate existence of the Company shall thereupon cease, and Merger
Sub shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders and
the Company will cause the Plan of Merger and Articles of Merger in the form
required by Colorado law to be executed and filed as soon as reasonably possible
following the date of the Closing, or on such other date as Lithia and the
Company may agree, with the Secretary of State for the state of Colorado. The
Merger shall become
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effective at the time at which the Articles of Merger shall have been accepted
for filing by the Secretary of State for the state of Colorado or such time
specified in the Articles of Merger as may be agreed upon by Lithia and the
Company, and such time is hereinafter referred to as the "EFFECTIVE TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding share
of Company Common Stock shall be converted into the right to receive a portion
of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably practicable,
the Company shall cause its auditors to prepare an audited balance sheet and
income statement for the Company as of and for the year ended December 31, 1998
in accordance with Moreland GAAP and shall calculate the Company's Adjusted Net
Worth and Net Adjusted Pretax Income and the Initial Merger Consideration on the
basis thereof. The Company shall deliver such financial statements and
calculations to Lithia. Lithia shall have a period of 15 days after its receipt
of such financial statements and calculations to make any objections it may have
to the Adjusted Net Worth and Net Adjusted Pretax Income of the Company and
Initial Merger Consideration as calculated by the Company. If Lithia does not
give notice of objections within that period, the Adjusted Net Worth, Net
Adjusted Pretax Income and Initial Merger Consideration so calculated shall be
final. If Lithia does give notice of objections within that time, and Lithia and
the Company are unable to resolve the matter by agreement, either side may
submit the matter to PricewaterhouseCoopers LLP or another independent
accounting firm selected by the Shareholders and Lithia for resolution. The
decision of that accounting firm shall be binding on the parties.
2.5.2 PAYMENT OF INITIAL MERGER CONSIDERATION. The Initial Merger
Consideration shall be payable in a combination of cash, Class A Common Stock
and Series M-2002 Preferred Stock. The amount of the Initial Merger
Consideration to be paid in Lithia stock shall equal ISP in the formula:
T + 12,677,500 U
ISP = --------------- x ---
2 V
Where:
T = the Initial Merger Consideration payable under this
Agreement plus the Initial Merger Consideration payable
under all of the Other Reorganization Agreements;
U = the Initial Merger Consideration under this
Agreement; and
V = T minus the Initial Merger Consideration payable
under the Other Reorganization Agreements relating to
the acquisition of L.A.H. Automotive Enterprises, Inc.
and Reno Auto Sales, Inc.
Of the stock portion of the Initial Merger Consideration, 70 percent will be
paid in Class A Common stock and 30 percent in Series M-2002 Preferred Stock.
The balance of the Initial Merger Consideration shall be paid in cash. The Class
A Common Stock shall be valued for purposes of the Initial Merger Consideration
at (i) $19.00 per share. The Series M Preferred Stock shall be valued at $1,000
per share for purposes of the Initial Merger Consideration.
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2.5.3 CONTINGENT MERGER CONSIDERATION. As soon as possible, and in any
event within 120 days after December 31, 1999, Lithia shall cause its auditors
to prepare a balance sheet and income statement for the Company as of December
31, 1999 and for the year then ended and shall calculate the Adjusted Net Worth,
Net Adjusted Pretax Income and Contingent Merger Consideration on the basis
thereof. Lithia shall deliver such financial statements and calculations to the
Shareholders. The Shareholders' opportunity to object, the effect of failure to
do so and the resolution of any dispute shall be determined in the manner
provided in Section 2.5.1 above for determining the Initial Merger
Consideration.
2.5.4 PAYMENT OF CONTINGENT MERGER CONSIDERATION. The Contingent
Merger Consideration shall be paid in a combination of cash, Class A Common
Stock and Series M-2003 Preferred Stock within two business days after the
amount thereof has been determined. The amount of the Contingent Merger
Consideration to be paid in Lithia stock shall equal CSP in the formula:
X Y
CSP = --- x ---
2 Z
Where:
X = the sum of the Contingent Merger Consideration
payable under this Agreement plus the Contingent Merger
Consideration payable under all of the Other
Reorganization Agreements;
Y = the Contingent Merger Consideration payable under
this Agreement; and
Z = X minus the Contingent Merger Consideration payable
under the Other Reorganization Agreements relating to
the acquisition of L.A.H. Automotive Enterprises, Inc.
and Reno Auto Sales, Inc.
The stock portion of the Contingent Merger Consideration will be payable 50
percent in Class A Common Stock and 50 percent in Series M-2003 Preferred Stock.
The balance of the Contingent Merger Consideration will be payable in cash. Any
imputed interest with respect to the payment of the Contingent Merger
Consideration shall be deemed paid from the cash portion of the Contingent
Merger Consideration. The Class A Common Stock shall be valued for purposes of
the Contingent Merger Consideration at the average Daily Sales Price over the 15
trading days ending with the second trading day before the date that such shares
are issued. "DAILY SALES PRICE" means, for any trading day, the last sales price
of the Class A Common Stock reported by the New York Stock Exchange or if the
Class A Common Stock is not then trading on the NYSE, such other source as
Lithia and the Shareholders may agree. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Contingent Merger Consideration.
2.5.5 FRACTIONAL SHARES. Lithia shall not issue fractional shares of
Class A Common Stock. In lieu thereof, Company shareholders will be entitled to
receive cash in the amount of any fractional share valued as set forth in the
preceding paragraph.
2.5.6 ADJUSTMENTS. Anything in this Agreement to the contrary
notwithstanding, all prices per share, share amounts, and per-share amounts
referred to in this Agreement shall be appropriately adjusted to account for
stock dividends, split-ups, mergers, recapitalizations, combinations,
conversions, exchanges of shares or the like occurring between the first day of
each pricing period through the date such shares are issues.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-3, a wholly
owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary, subject to
the satisfaction of all conditions to
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Closing, Lithia will cause to execute the Plan of Merger and the Articles of
Merger. Lithia will cause the Board of Directors of Merger Sub to approve the
Plan of Merger.
4. MERGER CONSIDERATION
Lithia will cause to be adopted and filed Articles of Amendment to Lithia's
Articles of Incorporation pursuant to which 10,500 shares of Lithia's preferred
stock will be designated as Series M-2002 Preferred Stock and 4,500 shares of
Lithia preferred stock will be designated as Series M-2003 Preferred Stock
(collectively, "Series M Preferred Stock"), with the relative rights and
preferences as set forth in the attached Exhibit D. Lithia shall make available
such shares of Series M Preferred Stock, shares of Class A Common Stock and cash
as may be required by the terms of this Agreement and the Plan of Merger. Such
securities are being offered and sold pursuant to exemptions from registration
under both the Securities Act of 1933, as amended, and state securities laws in
reliance upon the representation and warranties of Shareholders herein.
5. REORGANIZATION
The parties intend that the transaction to be effected by the Plan of
Merger will qualify as a reorganization under Section 368(a)(1) of the Code and
the regulations and rules promulgated thereunder. A condition of closing is the
receipt of opinions from the firm of Foster Pepper & Shefelman PLLC to Lithia
and from the firm of Sherman & Howard, L.L.C. to the Company and the
Shareholders that the transaction would qualify as to treatment as a
reorganization under Section 368(a)(1) of the Code, substantially in the form of
Exhibit E and F, respectively, attached hereto. In rendering such opinions,
counsel may require and rely upon representations contained in certificates from
officers of Lithia, the Shareholders and the Company.
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and conditions
set forth in this Agreement, the Closing of this Agreement shall take place at
the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver, Colorado, at
9:00 a.m. on the second business day following the fulfillment of the conditions
to the obligations of the parties under Sections 10 and 11, or at such other
time or place as may be mutually agreed upon by Lithia, the Shareholders and the
Company. Notwithstanding any provision in this Agreement to the contrary, if the
Closing has not occurred on or before June 30, 1999, either Lithia or the
Company, provided that the failure of the Closing to occur did not result from a
breach of this Agreement by such party, shall have the right to terminate this
Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At Closing,
the Shareholders will deliver or cause the Company to deliver to Lithia the
following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Stock certificates representing all of the Shares;
6.2.5 Lease agreements substantially in the form of Exhibit G with
monthly rents in the amount set forth in Schedule G-1 attached to Exhibit G (the
"LEASE AGREEMENT") duly executed by the landlord as specified therein;
6.2.6 The Registration Rights Agreement between Lithia, Moreland Auto
Limited Partnership, RLLLP, and the majority shareholders of the other members
of the Moreland Group
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substantially in the form of Exhibit H (the "REGISTRATION RIGHTS AGREEMENT"),
duly executed by the Shareholders; and
6.2.7 Employment agreements between Lithia and W. Douglas Moreland and
G. Michael Downey substantially in the form of Exhibit I and J (the "EMPLOYMENT
AGREEMENTS") duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia will
deliver, or cause to be delivered, to the Shareholders the following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub
and Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The cash portion of the Initial Merger Consideration
payable as provided in the Plan of Merger;
6.3.5 Stock certificates for the shares of Class A Common Stock and
Series M-2002 Preferred Stock constituting the stock portion of the Initial
Merger Consideration issued in the names of the Shareholders;
6.3.6 The Lease Agreements duly executed by Lithia Real Estate, Inc.,
a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
6.3.7 The Registration Rights Agreement, duly executed by Lithia;
and
6.3.8 The Employment Agreements duly executed on behalf of
Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized, validly
existing and in good standing under the applicable laws of the state of its
incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as
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disclosed in Schedule 7.2, the Company does not have any subsidiaries nor any
direct or indirect equity interest in any corporation, partnership or other
entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists of
50,000 shares of Common Stock, no par value, 50,000 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or commitments obligating the Company to issue any
additional shares of its capital stock of any class or any other securities of
any kind. Except as disclosed in Schedule 7.3, there are no agreements that
relate to the voting or control of the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement nor
the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business Real
Property permits the presently existing improvements and the continuation of the
business presently being conducted on such real property. To the best of the
Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at December 31,
1998 consist of goods of a quality and in quantities that are suitable for sale
in the ordinary course of its business with normal mark-up at prevailing market
prices. All parts and accessories in the inventories of the Company are
undamaged parts and accessories that (i) are still in the original, resalable
merchandising package, and in unbroken lots, (ii) were listed for sale in the
then-current dealer parts and accessories price schedule for the represented
manufacturers, (iii) were purchased directly from the represented manufacturers,
and (iv) are returnable under the terms of the represented manufacturers' sales
and service agreement for credit to the account of the Company.
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7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and accurate
description of all material permits, licenses, franchises, certificates and
similar items and rights, owned or held by the Company (hereinafter collectively
referred to as the "LICENSES AND PERMITS"). The Licenses and Permits are
adequate for the operation of the Company's business; are valid and in full
force and effect, and no basis exists for a grantor of any such Licenses or
Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To the
best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company. No
additional intellectual property is required by the Company for the operation of
its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute and
marketable title to (or, in the case of leased property, valid and subsisting
leasehold interests in) all of its properties and assets, including (without
limitation) the properties and assets that will be listed on Schedules 7.6 and
7.7 except for properties and assets sold, consumed or otherwise disposed of by
the Company in the ordinary course of its business, and will have good, absolute
and marketable title to all assets included in the Audited Balance Sheet. The
Company and the Business Real Property are not subject to any liens, mortgages,
encumbrances, conditional sales agreements, security interests, claims or
restrictions of any kind or character, except for (i) the encumbrances listed on
Schedule 7.11, (ii) liens for current taxes not yet due and payable and (iii)
mechanics and materialmen's liens arising in the ordinary course of business and
securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's Dealer
Financial Statements as of the end of and for the Company's two most recent
fiscal years. These Dealer Financial Statements were prepared in accordance with
the applicable manufacturer's requirements and fairly reflect in all material
respects the results of operations and financial condition of the Company for
the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in accordance
with Moreland GAAP on a LIFO basis and consistent with prior periods, and will
fairly present in all material respects the financial condition of the Company
at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has delivered
to Lithia a complete and accurate copy of all instruments evidencing or relating
to the Company's indebtedness for borrowed money at December 31, 1998. The
Company is not in default or violation of any provision of any agreement
evidencing or relating to its indebtedness for borrowed money. Schedule 7.13
sets forth as
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of December 31, 1998 a complete and accurate description of all guaranties by
the Company of any obligation or liability of any person or entity, including
(without limitation) any guaranties of installment sales contracts, leases or
obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and local
tax returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, sales, use, payroll, unemployment and other taxes
and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the Company are current taxes not yet due
and payable. All current taxes not yet due and payable by the Company have been
properly accrued and are accurately reflected in the Company's balance sheet in
the Financial Statements. The Company has not been delinquent in the payment of
any tax, assessment or governmental charge, nor has any tax deficiency been
proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet Date,
except as anticipated by this Agreement or set forth on Schedule 7.15, (i) the
Company has not incurred any material debts, liabilities or obligations except
current liabilities in the ordinary course of business; discharged or satisfied
any material liens or encumbrances, or paid any material debts, liabilities or
obligations, except in the ordinary course of business; mortgaged, pledged or
otherwise subjected to any lien or other encumbrance any of its properties or
assets; canceled any material debt or claim; sold or transferred any properties
or assets except sales from inventory in the ordinary course of business; nor
entered into any material transaction other than in the ordinary course of
business; (ii) there has not been any change in the financial condition, net
income, assets, liabilities, operations or business of the Company other than
changes in the ordinary course of business, none of which, individually or in
the aggregate, has been materially adverse; (iii) there has not been any
declaration, setting aside or payment of any dividend or other distribution in
respect of, or any repurchase or acquisition of, the capital stock of the
Company; (iv) the Company has not issued any securities or options to purchase
any securities of any nature whatsoever; (v) the Company has not increased the
compensation, commissions, bonuses or other remuneration payable to any officer,
director, employee or to any other person or entity, whether now or hereafter
payable, except in the ordinary course of business, nor paid any bonuses to any
Shareholder, (vi) there has not been any damage, destruction or loss (whether or
not covered by insurance) materially and adversely affecting the assets,
properties or business of the Company; (vii) the Company has not made any
capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
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7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of the
Shareholders' knowledge, there are no existing violations of federal, state or
local laws, ordinances, rules, codes, regulations or orders by the Company which
are reasonably likely to materially affect the properties, assets or business of
the Company. To the best of the Company's and each of the Shareholders'
knowledge, the Company is not subject to any restriction, judgment, order, writ,
injunction, decree or award, which materially and adversely affects or is likely
to materially and adversely affect the business, operations, properties, assets
or condition (financial or otherwise) of the Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list of
all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule 7.21,
the Company does not have any employment agreements or contracts between the
Company and any person or entity. The Company is not a party to or bound by any
collective bargaining agreement, nor has the Company experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
dispute. There are no unions representing any employees of the Company. The
Company has no knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of the
Company. The Company has paid or has made provision for the payment of all
compensation due any person or entity and has complied in all material respects
with all applicable laws, rules and regulations relating to the employment of
labor, including those related to wages, hours, collective bargaining and the
payment and withholding of taxes, and has withheld and paid to the appropriate
governmental authority, or is holding for payment not yet due to such authority,
all amounts required by law or agreement to be withheld from the compensation of
its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and accurate
list of all accounts receivable, notes receivable and vehicle leases of the
Company as of the date indicated thereon and an aging analysis of such accounts.
All receivables of the Company are valid and enforceable claims, arose in the
ordinary course of business, require no further performance by the Company and,
to the Company's knowledge, are not subject to claims or offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
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7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules have been furnished or made
available to Lithia. The Company will make available to Lithia, to the extent
requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has provided
to Lithia (i) the names and addresses of all persons holding a power of attorney
on behalf of the Company, and (ii) the account numbers and names of all banks or
other financial institutions in which the Company currently has an account,
deposit or safe deposit box, with the names of all persons authorized to draw on
the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the Company and
the Shareholders in this Agreement and in the schedules attached hereto, and the
other statements in writing and information furnished or to be furnished to
Lithia by or on behalf of the Company or the Shareholders in connection with the
transactions contemplated by this Agreement, taken as a whole, do not and will
not contain any untrue statement of a material fact, or omit to state a material
fact necessary to make the statements contained herein not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions, circumstances,
activities, practices, incidents, plans or actions, based on or resulting from
the conduct of the business of the Company, including the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling, or the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, chemical or industrial toxic or
hazardous material, substance or waste, which will violate any laws chargeable
to the Company currently in effect relating to pollution or protection of the
environment (the "ENVIRONMENTAL LAWS") or any plan, order, decree, judgment,
injunction, notice or demand letter from a governmental entity applicable to the
Company, or which will give rise to any common law or other legal liability,
including, without limitation, liability under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") or similar state or local
laws in effect as of the date hereof. To the best of the Company's and each of
the Shareholders' knowledge, the Business Real Property contains no spill,
deposit or discharge of any hazardous substance (as that term is currently
defined under CERCLA or any applicable state law), as a result of which there
would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate description of
each underground storage tank of any kind or nature located on the Business Real
Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall allow
Lithia and its consultants access to the Business Real Property for the purpose
of conducting any further environmental assessment it may desire to conduct,
upon execution by Lithia and such consultants of an appropriate indemnity
agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the Shareholders
know of any reason why the Company cannot continue its business in all material
respects in the same manner following the execution of this Agreement and the
Closing as it has been operated prior thereto, except to the extent that Lithia
causes the business of the Company to change following the Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will provide
a complete and accurate description of all contracts in transit for the Company.
7.30 EVALUATION OF RISKS IN RECEIVING LITHIA SECURITIES. Each Shareholder
is capable of evaluating the merits and risks of an investment in the Class A
Common Stock and the Series M Preferred Stock. By reason of their respective
business or financial experience, and/or the business or financial experience of
their respective professional advisors (who are not affiliated, either directly
or indirectly, with Lithia or any affiliate or selling agent of Lithia), each
Shareholder has the capacity to protect their
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interests in connection with an investment in the Lithia securities. Each
Shareholder has had access to and has reviewed such portions of Lithia's SEC
Filings as he or his professional advisors has deemed necessary and has met
either directly or through such respective professional advisors with a
representative of Lithia and has had the opportunity to ask questions of, and
receive answers from, Lithia concerning Lithia, the Class A Common Stock and the
Series M Preferred Stock and the terms and conditions of this transaction. Each
Shareholder has received any information requested by such Shareholder or his
professional advisors. Any questions raised concerning this transaction have
been answered to the satisfaction of each Shareholder or their respective
professional advisor.
7.31 LIMITATIONS ON TRANSFER OF STOCK. The Class A Common Stock and Series
M Preferred Stock to be issued to each Shareholder pursuant to the Plan of
Merger and any additional shares of Class A Common Stock which may be issued
upon a conversion of the Series M Preferred Stock will be held as an investment
and not with a view to distribution.
7.32 LACK OF REGISTRATION OF STOCK. Each Shareholder understands that: (a)
the offer and sale of the Class A Common Stock and Series M Preferred Stock to
be issued to the Shareholder pursuant to the Plan of Merger and any additional
shares of Class A Common Stock which may be issued upon a conversion of the
Series M Preferred Stock have not been registered under the Securities Act of
1933, as amended, or any state securities laws in reliance upon exemptions from
registration; (b) the shares of Class A Common Stock and Series M Preferred
Stock must be held indefinitely, unless their resale is subsequently registered
under the Securities Act of 1933, as amended, and under applicable state
securities laws or unless exemptions from registration are available; (c) except
as provided in the Registration Rights Agreement, Lithia has not agreed to
register the resale of any of the securities to be received by the Shareholders;
(d) the Class A Common Stock and Series M Preferred Stock may not be offered,
sold, transferred, pledged or otherwise disposed of in the absence of either an
effective registration statement under the Securities Act of 1933 and applicable
state securities laws or an opinion of counsel acceptable to Lithia that such
registration is not required; and (e) the certificates representing Series M
Preferred Stock and the Class A Common Stock (including any additional shares of
Class A Common Stock which may be issued upon a conversion of the Series M
Preferred Stock) will contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. NO OFFER, SALE, TRANSFER, PLEDGE OR OTHER
DISPOSITION OF THE SHARES MAY BE EFFECTED IN THE ABSENCE OF EITHER AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
7.33 INFORMATION CONCERNING LITHIA. Each Shareholder acknowledges that they
have received a copy of Lithia's Registration Statement on Form S-1 filed May 1,
1998, Lithia's Form 10-K for the year-end December 31, 1997, Lithia's Form 10-Q
for the period ended September 30, 1998, and Lithia's Information Statement for
the annual meeting of Lithia's shareholders on Form DEF 14C dated May 14, 1998,
and have had the opportunity to review the information contained in these
filings and discuss the same with their respective professional advisors.
7.34 INVESTOR STATUS. Each of the Shareholders is an "accredited investor"
as such term is defined under the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder by the Securities and Exchange
Commission.
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8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement is, and when
executed at the Closing the Plan of Merger will be, a valid and legally binding
obligation of Lithia, enforceable against Lithia in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Lithia has the complete and unrestricted right, power and authority to execute
this Agreement and the Plan of Merger and perform its covenants in accordance
with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under the
applicable laws of the state of its incorporation and has all necessary power
and authority to own, lease and operate its properties and assets and to conduct
its business as its business is now being conducted. Lithia is qualified to do
business and is in good standing in each state in which it transacts business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The Lithia Shares
have been validly authorized and issued, are fully paid and non-assessable, and
have not been issued in violation of any preemptive rights.
The Class A Common Stock and Series M Preferred Stock to be issued as part
of the Merger Consideration, including any Class A Common Stock issued upon
conversion of the Series M Preferred Stock (collectively, the "MERGER SHARES")
have been duly authorized and, when issued in accordance with this Agreement,
the Plan of Merger and the terms of the Series M Preferred Stock, will be
validly issued, fully paid and non-assessable and will not have been issued in
violation of the preemptive or similar rights of any person. Prior to issuance,
all Class A Common Stock to be issued to the Shareholders shall have been
approved for listing on the New York Stock Exchange. The Merger Shares will not
be subject to any restriction on transfer except as contemplated by Section
7.32.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly and
other reports under the Securities Exchange Act of 1934 and various filing with
the Securities and Exchange Commission under
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the Securities Act of 1933 (collectively, Lithia's "SEC FILINGS"). Prior to
Closing, Lithia agrees to file such other filings as the federal securities laws
require and to provide copies of such filings to Shareholders within 5 business
days from the date of such filing. The SEC Filings comply and all additional
filings prior to Closing will comply with the requirements of applicable laws,
regulations and forms, and none of such filings contain or will contain a
material misstatement or omit or will omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All current
taxes not yet due and payable by Lithia have been properly accrued and are
accurately reflected in its balance sheet in the SEC Filings. Lithia has not
been delinquent in the payment of any tax, assessment or governmental charge,
nor has any tax deficiency been proposed or assessed against it, nor has it
executed any waiver of the statute of limitations on the assessment or
collection of any tax.
8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing. Except as set forth in the SEC Filings or Schedule 8.8, Lithia is
not a party to any agreement, letter of intent or other understanding that would
result in the issuance of any equity securities of Lithia, and as of the date
hereof, Lithia is not engaged in discussions with any person that are reasonably
likely to result in such an agreement or understanding. Without the prior
written consent of W. Douglas Moreland, Lithia will not, prior to the Effective
Date, agree to issue any equity securities in any acquisitions, having an
aggregate value in excess of $20,000,000.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate description
of all orders, decrees, writs or injunctions of any court or governmental body
specifically applicable to Lithia and all legal actions, suits, arbitrations,
condemnation actions or other proceedings pending or threatened against Lithia
or its subsidiaries, or any of its properties, assets or business which might
have a material adverse effect on its financial condition or business prospects.
Lithia is not aware of any facts that might result in any other material action,
suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there are no
existing violations of federal, state or local laws, ordinances, rules, codes,
regulations or orders by Lithia which
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are reasonably likely to materially affect the properties, assets or business of
Lithia. To the best of Lithia's knowledge, Lithia is not subject to any
restriction, judgment, order, writ, injunction, decree or award, which
materially and adversely affects or is likely to materially and adversely affect
the business, operations, properties, assets or condition (financial or
otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or indirectly,
any broker or finder or incurred any liability for any brokerage fees or
commissions or finders' fees and no broker or finder has acted directly or
indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules provided herewith have been
furnished to the Shareholders. Lithia will make available to the Shareholders or
their respective professional advisors, to the extent requested by the
Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in this
Agreement and in the schedules provided herewith, and the other statements in
writing and information furnished or to be furnished to the Shareholders by or
on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia mutually
agree to cooperate and use commercially reasonable good faith efforts to prepare
all documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and governmental bodies as may
be necessary to consummate the transactions contemplated by this Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause the
Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 SHAREHOLDERS' REVIEW. Lithia will make available to Shareholders or
their respective professional advisors such books and records and access to its
senior management as Shareholders reasonably request and in a manner so as not
to interfere with the normal business operations of Lithia and the
responsibilities of its senior management, in order to fully evaluate Lithia and
its Class A Common Stock and Series M Preferred Stock to be issued to such
Shareholders pursuant to the Plan of Merger.
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9.5 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.6 STANDSTILL AGREEMENT. Each Shareholder agrees that whenever Lithia
undertakes a firmly underwritten public offering of its securities and, if
requested by the managing underwriter in such offering, the Shareholder will
enter into an agreement not to sell or dispose of any securities of Lithia owned
or controlled by the Shareholder, provided such restriction will not extend
beyond 180 days from the effective date of the registration statement filed in
connection with such offering.
9.7 FURTHER ASSURANCES. From time to time at or after the Closing, as and
when requested by any party hereto, the other party shall execute and deliver,
or cause to be executed and delivered, all such documents and instruments and
shall take, or cause to be taken, all such further or other actions as such
other party may reasonably deem necessary or desirable to consummate the
transactions contemplated by this Agreement.
9.8 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options pursuant
to its 1996 Incentive Stock Plan to management employees remaining with the
Company after Closing. The number of shares available for grant to all employees
in the Moreland Group shall be equal to six percent of the total number of
shares of Class A Common Stock issued to all the shareholders of the companies
in the Moreland Group at the Closing and the simultaneous closings of the Other
Reorganization Agreements including such additional shares that may be issued as
Contingent Merger Consideration, plus six percent of the shares of Class A
Common Stock issuable upon conversion of the shares of Series M Preferred Stock
issued at the Closing and such simultaneous closings including such additional
shares that may be issued as Contingent Merger Consideration, determined as
though such Series M Preferred Stock were converted to Class A Common Stock at
the date of issuance. The options will be granted during 1999 and 2000 to such
persons and in such amounts consistent with Lithia's practices and as proposed
by W. Douglas Moreland.
9.9 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may be created or permitted by this Agreement), and any security agreements
entered or collateral pledged to secure such guarantees, shall be released,
discharged or terminated prior to or at Closing.
9.10 NON-COMPETE. For a term of three years following the Closing date of
the Merger, Shareholders will not, directly or indirectly, within 100 miles of
any dealership currently owned or operated by Lithia or any of its subsidiaries,
own, operate, manage, control, participate in the ownership, management,
operation or control of or be paid or employed by or acquire any interest in or
securities of or otherwise become associated with or provide assistance to, as
an employee, consultant, director, officer, shareholder, partner, agent,
associate, principal, representative or any other capacity, any business entity
engaged in the lease or sale of new or used automobiles or light trucks except
as may otherwise be provided in such Shareholders' Employment Agreements with
Lithia. This covenant against competition shall not prohibit any activity of any
Shareholder with respect to any business entity with which it or he has any such
relationship as of the date of this Agreement or any successor to such a
business entity. If Lithia or one of its subsidiaries acquires or assumes
operation of an additional dealership after the date hereof, this covenant
against competition shall be extended to that additional dealership, but there
shall automatically be excepted from such extended covenant any business entity
that is within 100 miles of such additional dealership and in which any
Shareholder had an interest which did not constitute a breach of this Section
before Lithia or such subsidiary acquired or assumed operation of such
additional dealership. For that purpose, a Shareholder shall be deemed to have
an interest in a business entity if he
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or it had any of the relationships with such entity that constitute competition
under this Section 9.10, had signed a letter of intent, terms sheet, or
agreement contemplating such a relationship or had filed an application with a
manufacturer or franchisor which, if granted, would create such a relationship.
9.11 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.12 SERVICE CONTRACT PRICING. Prior to the Effective Date, the parties
will determine a pricing schedule for extended service contracts which will be
charged to each Moreland Group dealership. The pricing schedule, determined for
each product line, will be the amount determined by the following formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by
the Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that
product line less the inception rebate paid by Ryan
& Associates (in 1998, this inception rebate was
paid to Diamond Financial and was $15.00 on new
vehicles and $40.00 on used vehicles).
C = the percentage of all service contracts written by
the Moreland Group in 1998 with Western National.
D = the price charged by Western National for that
product line less the inception rebate paid by
Western National (in 1998, this inception rebate was
paid to Diamond Financial and was $50.00 on both new
and used vehicles).
9.13 HAIL DAMAGE RESERVE. During 1999, the Shareholders shall be entitled
to cause the Company to transfer to income a reasonable amount from the
insurance damage reserve established in respect of vehicles damaged by hail in
1998 each time a hail-damaged vehicle is sold; provided, however, that no
amounts shall be transferred from the Special Hail-Damage Reserve prior to the
end of 1999. All amounts so transferred shall be included in Net Adjusted Pretax
Income for 1999.
9.13.1 At year end 1999, if any hail-damaged vehicles remain unsold,
the parties will attempt to agree on the amount of the Special Hail-Damage
Reserve that should be allocated to such vehicles to reduce the carrying value
of such vehicles to reflect their market value. If the parties are unable to
agree, the dispute will be determined by PricewaterhouseCoopers LLP or such
other firm as may be agreed upon by Lithia and the Shareholders.
9.13.2 At the end of 1999, the Shareholders shall have the right to
require the Company and Lithia to calculate the average gross profit on
hail-damaged vehicles sold by the Company during 1999 and the average gross
profit on vehicles sold during the year that had not incurred hail damage. If
that right is exercised, the Shareholders may require the Company to transfer
such amount from the Special Hail-Damage Reserve (but not to exceed 80
percent of the initial amount of the Special Hail-Damage Reserve) to income
in 1999 as may be necessary to increase the average gross profit on hail-
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damaged vehicles to 105 percent of the average gross profit on non
hail-damaged vehicles sold during the year. All amounts so transferred shall
be included in Net Adjusted Pretax Income for 1999.
9.13.3 Any amount remaining in the Special Hail-Damage Reserve after
the allocations under 9.13.1 and the transfers under 9.13.2 shall be held in the
reserve until March 31, 2000. Warranty claims for 1998 hail damage made during
the first quarter of 2000 shall be charged against the Special Hail-Damage
Reserve.
9.13.4 Any amount remaining in the Special Hail-Damage Reserve at
March 31, 2000 shall be paid to the Shareholders as part of the Contingent
Merger Consideration as set forth in the definition of that term.
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF THE
COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 APPROVAL OF LITHIA'S SHAREHOLDERS. The shareholders of Lithia shall
have approved this Agreement and the issuances of the Class A Common Stock and
Series M Preferred Stock, if such approval is necessary under the listing
requirements of the New York Stock Exchange.
10.4 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.5 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have expired or
been terminated.
10.6 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been approved
as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.7 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from Ford
Motor Credit Company a waiver or consent to this Agreement and the transactions
contemplated hereby.
10.8 TAX OPINION. Lithia shall have received from Foster Pepper &
Shefelman, PLLC a tax opinion substantially in the form of Exhibit E.
10.9 LEGAL OPINION. Lithia shall have received from Sherman & Howard L.L.C.
its opinion substantially in the form of Exhibit K.
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10.10 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
the Other Reorganization Agreements shall have been fulfilled.
10.11 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value, except for a note from North Avenue Auto, Inc.
10.12 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit L.
10.13 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have expired or
been terminated.
11.5 TAX OPINION. The Shareholders shall have received from Sherman &
Howard, L.L.C. a tax opinion substantially in the form of Exhibit F.
11.6 LEGAL OPINION. The Shareholders shall have received from Foster Pepper
& Shefelman LLP an opinion substantially in the form of Exhibit M.
11.7 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
11.8 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders will
receive fully executed Agreement substantially as set forth in Exhibit L.
11.9 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted Net
Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
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12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or after
the Closing or the decision of any party to complete the Closing, each party
shall be entitled to rely upon the representations and warranties set forth in
this Agreement. All representations and warranties made in this Agreement shall
survive the Closing until March 31, 2001; provided, however, that (i) the
accuracy of each such representation and warranty shall be determined only as of
the date of the Closing, (ii) the representations and warranties in Sections
7.14 and 8.7 shall survive until 30 days after the expiration (without
extension) of the statute of limitations for the Company's or Lithia's (as the
case may be) 1998 federal income tax return, and (iii) any claim based upon
fraud shall survive for its applicable statute of limitation. The period of
survival for each representation and warranty established in this Section 12 is
referred to as the "Survival Period" for such representation and warranty. The
liabilities of the parties with respect to their respective representations and
warranties will expire as of the expiration of the applicable Survival Period;
provided, however, that such expiration will not affect the rights of any party
entitled to rely on a representation and warranty in respect of any breach of
which such party has given notice to the breaching party prior to the expiration
of the Survival Period, specifying in reasonable detail the facts alleged to
constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and severally
indemnify, defend and hold harmless the Company and Lithia and their respective
successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and against any
claims, damages, liabilities, penalties, actions, suits, proceedings, demands,
assessments, costs and expenses, including reasonable attorneys fees and
expenses of investigation ("CLAIMS"), incurred by any Lithia Indemnified Party
arising from or related to (i) any breach of any representation or warranty made
by the Company or the Shareholders in this Agreement, of which notice is given
to the Shareholders by the Lithia Indemnified Parties prior to the expiration of
the Survival Period for such representation or warranty or (ii) any breach of
any covenant or agreement made by the Company or the Shareholders in this
Agreement, to the extent, in the case of the Company, that such covenant or
agreement was to be performed at or before the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly notify
the Shareholders of any Claim against which indemnification will be sought
hereunder. If the Claim involves a claim, investigation, demand, action or suit
by a third party, including a governmental authority, the Shareholders shall
have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section 7.14,
the Lithia Indemnified Parties shall not be entitled to indemnification under
Section 13.1 unless and until the aggregate amounts against which they would
otherwise be entitled to indemnification under Section 13.1 of this Agreement
and the comparable indemnification provisions of the Other Reorganization
Agreements exceed $500,000, and then only to the extent of such excess.
13.3.2 In no event shall the Shareholders be liable in the aggregate
under Section 13.1 for an amount that, when added to the amounts for which the
shareholders of the other members of the Moreland Group are liable under the
comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 7.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
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13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is entitled
to be indemnified hereunder shall be reduced by (i) the amount of any insurance
proceeds available to such Lithia Indemnified Party in respect of the matter
giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties prior
to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia will
assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall, for
these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements (ii) if any
of the warranties and representations of the Company or the Shareholders
contained herein are false in any material respect, (iii) if the conditions of
this Agreement to be complied with or performed by the Shareholders or the
Company at or before Closing are not complied with or performed at the time
required for such compliance or performance and such noncompliance or
nonperformance is not waived by Lithia or (iv) if Lithia terminates any of the
Other Reorganization Agreements in accordance with the terms and conditions of
such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written notice of
termination given by the Company to Lithia (i) if Lithia defaults in any
material respect in the observance of or in the
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due and timely performance by Lithia of any agreements and covenants of Lithia
contained herein or in the Other Reorganization Agreement, (ii) if any of the
representations and warranties of Lithia contained herein are false in any
material respect, (iii) if the conditions of this Agreement to be complied with
or performed by Lithia at or before Closing are not complied with or performed
at the time required for such compliance or performance and such noncompliance
or nonperformance is not waived by the Company or (iv) if one of the other
members of the Moreland Group terminates any of the Other Reorganization
Agreements in accordance with the terms and conditions of such other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement under
Section 15.1, no party to this Agreement shall have any liability or obligation
hereunder. Upon any termination of this Agreement under Section 15.2 or 15.3,
neither party shall have any prospective obligation hereunder except as provided
in Section 15.5, but each party shall have, if otherwise available, the remedy
of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
15.5.1 In the event that this Agreement is terminated by the Company
based upon a willful refusal by Lithia to complete this Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
200% of all amounts paid or payable to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For purposes of this Section 15.5,
a willful refusal by any party to complete this Agreement or any Other
Reorganization Agreement means either such party's refusal to consummate the
transactions contemplated by this Agreement or any Other Reorganization
Agreement even though all of the conditions to its obligations to do so have
been fulfilled or such party's failure to take any action within its reasonable
control that would result in the fulfillment of a condition to such obligations.
15.5.2 In the event that either party terminates this Agreement for
reason of the non-fulfillment of the Designated Condition, Lithia shall pay to
the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement for
any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or (ii) a
willful refusal by the Company or any of the other members of the Moreland Group
or their Shareholders to complete the Agreement or any Other Reorganization
Agreement, Lithia shall pay the Company a break-up fee equal to 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company.
15.5.4 The break-up fees payable under this Section 15.5 shall be due
at the time this Agreement is terminated. Should the transactions contemplated
by this Agreement or the Other Reorganization Agreements fail to close for any
reason other than a willful refusal by the Company or any other member of the
Moreland Group to complete this Agreement or any other Reorganization Agreement,
it is acknowledged that the Company and the Shareholders would suffer damages;
however, the precise amount of such damages would be difficult to establish. The
break-up fees provided in this Section represent a good-faith estimate by the
parties of the damage that the Company and Shareholders would incur. Lithia
acknowledges that the break-up fees payable under Section 15.5.2 and 15.5.3 are
reasonable and appropriate, even though Lithia may not have breached any
representation, warranty or covenant contained herein in the circumstances
described in those sections. To the extent of those break-
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up fees, Lithia has knowingly accepted the risk of the nonfulfillment of the
conditions to its obligations and the obligations of the Company and the
Shareholders in the circumstances described in Sections 15.5.2 and 15.5.3 in
order to induce the Company and the other members of the Moreland Group to enter
into this Agreement and the Other Reorganization Agreements and risk the adverse
effect on their market values that will occur if those agreements are not
completed. Lithia expressly agrees that the break-up fees contemplated by this
Section 15.5 shall be due even though the Company, the Shareholders or any other
member of the Moreland Group or any shareholder thereof may have breached any
representation, warranty or covenant of this Agreement or the Other
Reorganization Agreements, with the sole exception of a willful refusal by any
such party to complete this Agreement or any of the Other Reorganization
Agreements. The right to collect break-up fees pursuant to this Section 15.5
shall be the exclusive remedy of the Company and the Shareholders in the event
of a termination of this Agreement in the circumstances described in Section
15.5.1 or 15.5.2. In the event that the Company or the Shareholders terminate
this Agreement under the circumstances described in Section 15.5.3 as a result
of the nonfulfillment of the condition established in Section 11.1 (or Section
11.7 as it relates to the comparable conditions in the Other Reorganization
Agreements), the liquidated damages payable under Section 15.5.3 shall be deemed
to compensate the Company only for the opportunity cost of having taken itself
off the market while this Agreement was being negotiated and was in effect, and
the Company shall be entitled to prove any other damages and pursue any other
remedy available at law or in equity.
16. DISPUTE RESOLUTION
16.1 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 non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of or
relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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 having jurisdiction over Reno, Nevada 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 corporate law. Whether a claim
is covered by this Agreement shall be determined by the arbitrator(s). All
statutes of limitations which would otherwise be shall apply to any arbitration
proceeding hereunder.
16.3 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
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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.
16.4 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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules hereto
constitutes the entire agreement between the parties regarding the subject
matter hereof and supersedes all prior agreements and understandings between the
parties relating to the subject matter of this Agreement. There are no
agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or terminated
except by an instrument in writing signed by all parties to this Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter gender thereof or to the plurals
of each, as the identity of the person or persons or the context may require.
The descriptive headings contained in this Agreement are for reference purposes
only and are not intended to describe, interpret, define or limit the scope,
extent or intent of this Agreement or any provision contained in this Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall for any
reason be held to be invalid, illegal, void or unenforceable in any respect,
such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, each of the parties to this Agreement shall be
responsible for its own costs and
27
<PAGE>
expenses incurred in connection with the preparation and negotiation of this
Agreement and the transactions contemplated hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective legal
representatives, successors and permitted assigns. No party may assign any of
their rights or delegate any of their obligations hereunder. Any assignment in
violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and agreements
disclosed in the Exhibits and Schedules to this Agreement shall be deemed to be
disclosed for all purposes of this Agreement and to constitute exceptions not
only to the representations and warranties in the specific Sections that refer
to such Exhibits or Schedules, but also to all other representations and
warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be (i)
in writing, dated with the current date of such notice, and signed by the party
giving such notice, and (ii) mailed, postpaid, registered or certified, return
receipt requested, addressed to the party to be notified, or delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses to
accept delivery of the notice. The initial addresses of the parties shall be as
follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: Moreland Auto Corp.
505 S. Havana
Aurora, CO 80012
Attn: W. Douglas Moreland
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
If to the Shareholders: Moreland Auto Limited Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
G. Michael Downey
505 S. Havana
Aurora, CO 80012
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
28
<PAGE>
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's and
the Shareholders' "knowledge" shall be limited to the actual knowledge of the
Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
LITHIA MOTORS, INC.
By:
------------------------------------
Bryan B. DeBoer, Vice President
MORELAND AUTO CORP.
By:
------------------------------------
W. Douglas Moreland, President
SHAREHOLDERS
MORELAND AUTO LIMITED PARTNERSHIP, RLLLP
By: Moreland/MAC, Inc., General Partner
By:
------------------------------------
W. Douglas Moreland, President
------------------------------------
G. Michael Downey
29
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
PERCENT OF MERGER CONSIDERATION
------------------------------------------------
SHAREHOLDER MERGER SHARES(1) CASH
- ----------------------------- ------------------------- --------------------
<S> <C> <C>
</TABLE>
- --------
(1) Each Shareholder will receive the same percentage of Class A Common Stock
and Series M Preferred Stock.
Schedule 2.1
<PAGE>
EXHIBIT 10.2
L.A.H. AUTOMOTIVE ENTERPRISES, INC.
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
L.A.H. AUTOMOTIVE LIMITED PARTNERSHIP, RLLLP
(the "Shareholder")
And
L.A.H. AUTOMOTIVE ENTERPRISES, INC.
a Colorado corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.1 Shares and Shareholders. . . . . . . . . . . . . . . . . . . . .5
2.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . .5
2.4 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . .5
2.5 Merger Consideration . . . . . . . . . . . . . . . . . . . . . .5
3. FORMATION OF MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . .6
4. MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . .6
5. [THIS SECTION IS NOT USED.] . . . . . . . . . . . . . . . . . . . . . .6
6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
6.1 Date, Time and Place of Closing. . . . . . . . . . . . . . . . .6
6.2 Documents To Be Delivered at Closing by the Shareholders . . . .6
6.3 Documents To Be Delivered at Closing by Lithia . . . . . . . . .7
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. . . . . . . . . . .7
7.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . .7
7.2 Incorporation and Good Standing. . . . . . . . . . . . . . . . .7
7.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . .8
7.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . .8
7.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
7.6 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . .8
7.7 Tangible Personal Property . . . . . . . . . . . . . . . . . . .8
7.8 Parts Inventories. . . . . . . . . . . . . . . . . . . . . . . .8
7.9 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . .9
7.10 Intellectual Property. . . . . . . . . . . . . . . . . . . . . .9
7.11 Title to Properties; Encumbrances. . . . . . . . . . . . . . . .9
7.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . .9
7.13 Indebtedness for Borrowed Money; Guaranties. . . . . . . . . . .9
7.14 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.15 Transactions Since Balance Sheet Date. . . . . . . . . . . . . 10
7.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.17 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . 11
7.18 Contracts and Agreements . . . . . . . . . . . . . . . . . . . 11
7.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 11
7.20 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.21 Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
7.22 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 11
7.23 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . 11
7.24 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . 12
7.25 Powers of Attorney; Authorized Signatories . . . . . . . . . . 12
7.26 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.27 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . 12
7.28 Continuation of Business . . . . . . . . . . . . . . . . . . . 12
7.29 Contracts in Transit . . . . . . . . . . . . . . . . . . . . . 12
8. REPRESENTATIONS AND WARRANTIES OF LITHIA. . . . . . . . . . . . . . . 12
8.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 12
8.2 Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . 13
8.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 13
8.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.6 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.7 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 13
8.8 Transactions Since Latest Balance Sheet Date . . . . . . . . . 14
8.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 14
8.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . 14
8.11 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . 14
8.12 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . 14
8.13 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 14
9. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.1 Notices and Consents . . . . . . . . . . . . . . . . . . . . . 15
9.2 Conduct of Business by the Company Prior to the Closing
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
9.3 Lithia's Examination . . . . . . . . . . . . . . . . . . . . . 15
9.4 Notice of Changes. . . . . . . . . . . . . . . . . . . . . . . 15
9.5 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 15
9.6 Employee Stock Options . . . . . . . . . . . . . . . . . . . . 15
9.7 Release of Guarantees. . . . . . . . . . . . . . . . . . . . . 15
9.8 Non-Compete. . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.9 Update of Representations. . . . . . . . . . . . . . . . . . . 16
9.10 Service Contract Pricing . . . . . . . . . . . . . . . . . . . 16
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA. . . . . . . . . . . . . 17
10.1 Representations, Warranties of the Shareholders and
Covenants of the Company and the Shareholders. . . . . . . . . 17
10.2 No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . 17
10.3 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . 17
10.4 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . 17
10.5 Approval of Lithia as the Dealer . . . . . . . . . . . . . . . 17
10.6 Consent from Lithia's Lender . . . . . . . . . . . . . . . . . 17
10.7 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 17
10.8 Fulfillment of Conditions in Related Transactions. . . . . . . 17
10.9 Employee and Related Party Loans . . . . . . . . . . . . . . . 17
10.10 Assignment and Licenses of Intangible Assets . . . . . . . . . 17
10.11 Completion of Audit and Purchase Price Determination . . . . . 17
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
11.1 Representations, Warranties and Covenants of Lithia. . . . . . 18
11.2 No Adverse Changes . . . . . . . . . . . . . . . . . . . . . . 18
11.3 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . 18
11.4 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . 18
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
11.5 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 18
11.6 Fulfillment of Conditions in Related Transactions. . . . . . . 18
11.7 Assignment and Licenses of Intangible Assets . . . . . . . . . 18
11.8 Completion of Audit and Purchase Price Determination . . . . . 18
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 18
13. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
13.1 General Indemnity. . . . . . . . . . . . . . . . . . . . . . . 19
13.2 Defense of Claims. . . . . . . . . . . . . . . . . . . . . . . 19
13.3 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . 19
14. HART-SCOTT-RODINO NOTIFICATION. . . . . . . . . . . . . . . . . . . . 20
15. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.1 Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . 20
15.2 By Lithia. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
15.3 By the Company . . . . . . . . . . . . . . . . . . . . . . . . 20
15.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . 20
15.5 Break-Up Fee.. . . . . . . . . . . . . . . . . . . . . . . . . 20
16. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.1 Mediation. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.2 Binding Arbitration. . . . . . . . . . . . . . . . . . . . . . 22
16.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 22
16.4 Hearing and Award. . . . . . . . . . . . . . . . . . . . . . . 22
17. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 23
17.2 Exhibit and Schedules. . . . . . . . . . . . . . . . . . . . . 23
17.3 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.4 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.6 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.7 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . 23
17.8 Binding Effect and Assignment. . . . . . . . . . . . . . . . . 23
17.9 Applicability of Exceptions and Disclosure . . . . . . . . . . 23
17.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.11 Definition of Knowledge. . . . . . . . . . . . . . . . . . . . 24
17.12 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 24
17.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.16 No Strict Construction . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
iv
<PAGE>
DEFINED TERMS
<TABLE>
<S> <C>
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . .1
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . .2
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
EMPLOYMENT AGREEMENTS(s) . . . . . . . . . . . . . . . . . . . . . . . . . . .7
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . .2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . 19
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . .3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . .3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
</TABLE>
v
<PAGE>
EXHIBITS
Exhibit A - Example Calculation of Adjusted Net Worth
Exhibit B - Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Lease Agreement
Exhibit E - W. Douglas Moreland Employment Agreement
Exhibit F - Sherman & Howard L.L.C. Legal Opinion
Exhibit G - Assignment and Licenses of Intangible Assets
Exhibit H - Foster Pepper & Shefelman PLLC Legal Opinion
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting
Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated effective
January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon corporation
("Lithia"); L.A.H. AUTOMOTIVE LIMITED PARTNERSHIP, RLLLP (whether one or more,
the "SHAREHOLDERS"); and L.A.H. AUTOMOTIVE ENTERPRISES, INC., a Colorado
corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and outstanding
shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Chrysler, Plymouth and Jeep automobile and light trucks and related parts and
accessories from premises located at 9980 E. Arapahoe Rd. and 6780 S. Emporia
St. in Englewood, Colorado (the "BUSINESS REAL PROPERTY").
C. All the parties desire to consummate a business combination transaction
pursuant to which the Company will merge with and into a subsidiary of Lithia,
for the consideration and on the other terms set forth in this Agreement. The
parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times LIFO
reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from the
total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall be
decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the amount,
if any, by which the total Moreland Transaction Expenses recorded in 1998
exceed the remainder obtained by subtracting $11,000,000 from the aggregate
Net Adjusted Pretax Income of all members of the Moreland Group for 1998.
The Company's proportionate share of the Moreland Transaction Expenses or
the excess transaction expenses shall be determined by multiplying the
total Moreland Transaction Expenses or excess transaction expenses by a
fraction, the numerator of which is the Company's Net Adjusted Pretax
Income for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for
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1998 and the denominator is the aggregate Net Adjusted Pretax Income for 1998
of all members of the Moreland Group.
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J-K
CMC = 6(H-I) ---
L-M
where:
H = the aggregate Net Adjusted Pretax Income of all
members of the Moreland Group for 1999, but H shall
not be less than I or more than I plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax Income
for all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for 1999,
but J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax
Income;
L = the aggregate Net Adjusted Pretax Income for 1999
of all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax Income
of all Qualifying Members.
If the Company is not a Qualifying Member, the Contingent Merger
Consideration shall be zero.
"FLOOR PLAN RATE" means the rate of interest that the Moreland Group and
all affiliated dealerships would have paid on their floor plan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $3,870,229, adjusted as follows as of
the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(iv) First, the Initial Merger Consideration shall be adjusted to
equal IMC in the equation:
B
IMC = (A x 6)--- - $920,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998;
and
C = The aggregate Net Adjusted Pretax Income of all
members of the Moreland Group for 1998.
(v) Second, the adjusted Initial Merger Consideration determined in
(i) above shall be adjusted by adding thereto (if positive) or subtracting
therefrom (if negative) the amount of NWA in the equation:
E
NWA = (D - $28,000,000)---
D
where:
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D = the aggregate Adjusted Net Worth of all members of
the Moreland Group as of December 31, 1998; and
E = the Adjusted Net Worth of the company as of
December 31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration determined in
(ii) above shall be increased by an amount equal to IA in the equation
(F + $920,000)G
IA = -----------------
730
where:
F = the adjusted Initial Merger Consideration
determined in (ii) above; and
G = the sum of the Lithia Floor Plan Rates in effect
on each day from and including January 1, 1999 to
but excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles followed
in the preparation of the financial statements as of and for the years ended
December 31, 1996 and 1997 for the Moreland Automotive Group (which include
entities not included in the Moreland Group as defined herein) audited by Arthur
Andersen LLP and accompanied by their report thereon dated May 21, 1998.
"MORELAND GROUP"" means Cherry Creek Dodge, Incorporated, William D. Corp.,
Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc., L.A.H.
Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado corporations,
and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all members
of the Moreland Group in connection with the transactions contemplated by this
Agreement and the Other Reorganization Agreements including, without limitation,
the fees of Arthur Andersen LLP for services relating to audits of the Moreland
Groups' financial statements for 1998 and subsequent years and other
transaction-related services, fees and expenses of counsel for the Moreland
Group and all filling fees payable to governmental entities relating to the
transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense incurred or
paid to W. Douglas Moreland and the general manager of the dealership owned
by the entity for the period prior to the Effective Date and any bonus paid
to W. Douglas Moreland for the period after the Effective Date shall be
added back to net income.
(iii) The salary and other compensation expenses that would have been
payable for the period prior to the Effective Date to W. Douglas Moreland
and the salary, bonus and other compensation expense that would have been
payable for the period prior to the Effective Date to the general manager
of the dealership owned by the entity under the employment arrangements
between those persons and Lithia or the entity, shall be deducted from net
income. The salary payable to W. Douglas Moreland under his Employment
Agreement shall be allocated among the
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members of the Moreland Group in proportion to their respective Net
Adjusted Pretax Incomes for the year. No bonus payable to W. Douglas
Moreland under his Employment Agreement shall be deducted from net income
under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity after
December 31, 1997 will be added back to or deducted from net income.
(v) All Moreland Transaction Expenses recorded in the period shall be
added back to net income, but only to the extent that such Moreland
Transaction Expenses were taken into account in computing net income in the
first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for credit
life insurance and financing contracts shall be adjusted to the revenues or
expenses that would have been earned or incurred by such entity for the
same contacts under arrangements in effect during 1998. Extended service
contract costs will be based upon the costs charged to the Company pursuant
to Section 9.10.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds paid by such entity to Lithia or any affiliate of Lithia during the
period as a dividend or loan and on the amount of any fees or other charges
paid to Lithia to the extent that such fees are not included as expenses in
calculating Net Adjusted Pretax Income pursuant to clause (xiii) below,
from the date such payment was made to the end of the period or the date of
its repayment.
(ix) Net income shall be decreased by an amount equal to the interest
that would have accrued at the Floorplan Rate on the amount of all funds
provided by Lithia or any affiliate of Lithia to such entity during the
period as a loan or contribution and on the amount of any cost savings
described in clause (xii) below, from the date of such loan or contribution
or the date the savings were realized to the date of repayment or the end
of the period.
(x) Net income shall be increased by all fees paid to Lithia by such
entity under the Consulting Agreement between Lithia and such entity as in
effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring and
extraordinary income or expense items will be deducted or added back to the
net income. Some members of the Moreland Group held, on January 1, 1999,
vehicles which had suffered hail damage in 1998 and a related insurance
damage reserve. Amounts transferred from that insurance damage reserve
shall not be considered non-reoccurring or extraordinary income and shall
be included in net income, subject to any limitation imposed by the Other
Reorganization Agreements to which such members are parties.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of which
was previously incurred by the Company or procured from a third party, the
income of the Company will be adjusted to reflect the costs that would have
been incurred by the Company under the arrangements in effect during 1998.
If Lithia provides a service or product not previously utilized by the
Company, the reasonable or agreed costs of such services or product will be
included if W.
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Douglas Moreland agreed or agrees that the cost of such service or product
would be included in determining Net Adjusted Pretax Income hereunder.
In addition to the specific adjustments described above, net income of each
entity for 1999 shall be adjusted in such other respects as may be necessary to
eliminate the effect of any additional costs resulting from changes implemented
by Lithia not concurred in by W. Douglas Moreland. For example, if Lithia makes
capital improvements or increases inventory levels not concurred in by W.
Douglas Moreland, all current operating expenses associated with those
decisions, including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached as
Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net Adjusted
Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax Income.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall thereupon cease, and the
Company shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders and
the Company will cause the Plan of Merger and Articles of Merger in the form
required by Colorado law to be executed and filed as soon as reasonably possible
following the date of the Closing, or on such other date as Lithia and the
Company may agree, with the Secretary of State for the state of Colorado. The
Merger shall become effective at the time at which the Articles of Merger shall
have been accepted for filing by the Secretary of State for the state of
Colorado or such time specified in the Articles of Merger as may be agreed upon
by Lithia and the Company, and such time is hereinafter referred to as the
"EFFECTIVE TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding share
of Company Common Stock shall be converted into the right to receive a portion
of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
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2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably practicable,
the Company shall cause its auditors to prepare an audited balance sheet and
income statement for the Company as of and for the year ended December 31, 1998
in accordance with Moreland GAAP and shall calculate the Company's Adjusted Net
Worth and Net Adjusted Pretax Income and the Initial Merger Consideration on the
basis thereof. The Company shall deliver such financial statements and
calculations to Lithia. Lithia shall have a period of 15 days after its receipt
of such financial statements and calculations to make any objections it may have
to the Adjusted Net Worth and Net Adjusted Pretax Income of the Company and the
Initial Merger Consideration as calculated by the Company. If Lithia does not
give notice of objections within that period, the Adjusted Net Worth, Net
Adjusted Pretax Income and Initial Merger Consideration so calculated shall be
final. If Lithia does give notice of objections within that time, and Lithia and
the Company are unable to resolve the matter by agreement, either side may
submit the matter to PricewaterhouseCoopers LLP or another independent
accounting firm selected by the Shareholders and Lithia for resolution. The
decision of that accounting firm shall be binding on the parties.
2.5.2 CONTINGENT MERGER CONSIDERATION. As soon as possible, and in any
event within 90 days after December 31, 1999, Lithia shall cause its auditors to
prepare a balance sheet and income statement for the Company as of December 31,
1999 and for the year then ended and shall calculate the adjusted net worth, net
adjusted pretax income and contingent merger consideration on the basis thereof.
Lithia shall deliver such financial statements and calculations to the
Shareholders. The opportunity to object, the effect of failure to do and the
resolution of any dispute shall be determined in the manner provided in Section
2.5.1 above for determining the Initial Merger Consideration.
2.5.3 PAYMENT OF MERGER CONSIDERATION. The Initial Merger
Consideration and any Contingent Merger Consideration shall be paid in cash. The
Contingent Merger Consideration shall be paid within two business days after the
amount thereof has been determined.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-6, a wholly
owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary, subject to
the satisfaction of all conditions to Closing, Lithia will cause to execute the
Plan of Merger and the Articles of Merger. Lithia will cause the Board of
Directors of Merger Sub to approve the Plan of Merger.
4. MERGER CONSIDERATION
Lithia shall make available cash as may be required by the terms of this
Agreement and the Plan of Merger.
5. [THIS SECTION IS NOT USED.]
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and conditions
set forth in this Agreement, the Closing of this Agreement shall take place at
the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver, Colorado, at
9:00 a.m. on the second business day following the fulfillment of the conditions
to the obligations of the parties under Sections 10 and 11, or at such other
time or place as may be mutually agreed upon by Lithia, the Shareholders and the
Company. Notwithstanding any provision in this Agreement to the contrary, if the
Closing has not occurred on or before June 30, 1999, either Lithia or the
Company, provided that the failure of the Closing to occur did not result from a
breach of this Agreement by such party, shall have the right to terminate this
Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At Closing,
the Shareholders will deliver or cause the Company to deliver to Lithia the
following:
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6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Lease agreements substantially in the form of Exhibit G with
monthly rents in the amount set forth in Schedule G-1 attached to Exhibit G (the
"LEASE AGREEMENT"), duly executed by the landlord as specified therein;
6.2.5 The employment agreement between Lithia and W. Douglas Moreland
substantially in the form of Exhibit E (the "EMPLOYMENT AGREEMENT") duly
executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia will
deliver, or cause to be delivered, to the Shareholders the following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub
and Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The Initial Merger Consideration payable as provided in the
Plan of Merger;
6.3.5 The Lease Agreements duly executed by Lithia Real Estate, Inc.,
a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia; and
6.3.6 The Employment Agreement duly executed on behalf of Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized, validly
existing and in good standing under the applicable laws of the state of its
incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is
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qualified to do business and is in good standing in each state in which it
transacts business. Except as disclosed in Schedule 7.2, the Company does not
have any subsidiaries nor any direct or indirect equity interest in any
corporation, partnership or other entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists of
500,000 shares of Common Stock, $10 par value, 234,000 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or commitments obligating the Company to issue any
additional shares of its capital stock of any class or any other securities of
any kind. Except as disclosed in Schedule 7.3, there are no agreements that
relate to the voting or control of the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement nor
the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business Real
Property permits the presently existing improvements and the continuation of the
business presently being conducted on such real property. To the best of the
Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at December 31,
1998 consist of goods of a quality and in quantities that are suitable for sale
in the ordinary course of its business with normal mark-up at prevailing market
prices. All parts and accessories in the inventories of the Company are
undamaged parts and accessories that (i) are still in the original, resalable
merchandising package, and in unbroken lots, (ii) were listed for sale in the
then-current dealer parts and accessories price schedule for the represented
manufacturers, (iii) were purchased directly from the represented manufacturers,
and (iv) are returnable under the terms of the represented manufacturers' sales
and service agreement for credit to the account of the Company.
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7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and accurate
description of all material permits, licenses, franchises, certificates and
similar items and rights, owned or held by the Company (hereinafter collectively
referred to as the "LICENSES AND PERMITS"). The Licenses and Permits are
adequate for the operation of the Company's business; are valid and in full
force and effect, and no basis exists for a grantor of any such Licenses or
Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To the
best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company. No
additional intellectual property is required by the Company for the operation of
its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute and
marketable title to (or, in the case of leased property, valid and subsisting
leasehold interests in) all of its properties and assets, including (without
limitation) the properties and assets that will be listed on Schedules 7.6 and
7.7 except for properties and assets sold, consumed or otherwise disposed of by
the Company in the ordinary course of its business, and will have good, absolute
and marketable title to all assets included in the Audited Balance Sheet. The
Company and the Business Real Property are not subject to any liens, mortgages,
encumbrances, conditional sales agreements, security interests, claims or
restrictions of any kind or character, except for (i) the encumbrances listed on
Schedule 7.11, (ii) liens for current taxes not yet due and payable and (iii)
mechanics and materialmen's liens arising in the ordinary course of business and
securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's Dealer
Financial Statements as of the end of and for the Company's two most recent
fiscal years. These Dealer Financial Statements were prepared in accordance with
the applicable manufacturer's requirements and fairly reflect in all material
respects the results of operations and financial condition of the Company for
the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in accordance
with Moreland GAAP on a LIFO basis and consistent with prior periods, and will
fairly present in all material respects the financial condition of the Company
at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has delivered
to Lithia a complete and accurate copy of all instruments evidencing or relating
to the Company's indebtedness for borrowed money at December 31, 1998. The
Company is not in default or violation of any provision of any agreement
evidencing or relating to its indebtedness for borrowed money. Schedule 7.13
sets forth as
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of December 31, 1998 a complete and accurate description of all guaranties by
the Company of any obligation or liability of any person or entity, including
(without limitation) any guaranties of installment sales contracts, leases or
obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and local
tax returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, sales, use, payroll, unemployment and other taxes
and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the Company are current taxes not yet due
and payable. All current taxes not yet due and payable by the Company have been
properly accrued and are accurately reflected in the Company's balance sheet in
the Financial Statements. The Company has not been delinquent in the payment of
any tax, assessment or governmental charge, nor has any tax deficiency been
proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet Date,
except as anticipated by this Agreement or set forth on Schedule 7.15, (i) the
Company has not incurred any material debts, liabilities or obligations except
current liabilities in the ordinary course of business; discharged or satisfied
any material liens or encumbrances, or paid any material debts, liabilities or
obligations, except in the ordinary course of business; mortgaged, pledged or
otherwise subjected to any lien or other encumbrance any of its properties or
assets; canceled any material debt or claim; sold or transferred any properties
or assets except sales from inventory in the ordinary course of business; nor
entered into any material transaction other than in the ordinary course of
business; (ii) there has not been any change in the financial condition, net
income, assets, liabilities, operations or business of the Company other than
changes in the ordinary course of business, none of which, individually or in
the aggregate, has been materially adverse; (iii) there has not been any
declaration, setting aside or payment of any dividend or other distribution in
respect of, or any repurchase or acquisition of, the capital stock of the
Company; (iv) the Company has not issued any securities or options to purchase
any securities of any nature whatsoever; (v) the Company has not increased the
compensation, commissions, bonuses or other remuneration payable to any officer,
director, employee or to any other person or entity, whether now or hereafter
payable, except in the ordinary course of business, nor paid any bonuses to any
Shareholder, (vi) there has not been any damage, destruction or loss (whether or
not covered by insurance) materially and adversely affecting the assets,
properties or business of the Company; (vii) the Company has not made any
capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
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7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of the
Shareholders' knowledge, there are no existing violations of federal, state or
local laws, ordinances, rules, codes, regulations or orders by the Company which
are reasonably likely to materially affect the properties, assets or business of
the Company. To the best of the Company's and each of the Shareholders'
knowledge, the Company is not subject to any restriction, judgment, order, writ,
injunction, decree or award, which materially and adversely affects or is likely
to materially and adversely affect the business, operations, properties, assets
or condition (financial or otherwise) of the Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) workers'
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list of
all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule 7.21,
the Company does not have any employment agreements or contracts between the
Company and any person or entity. The Company is not a party to or bound by any
collective bargaining agreement, nor has the Company experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
dispute. There are no unions representing any employees of the Company. The
Company has no knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of the
Company. The Company has paid or has made provision for the payment of all
compensation due any person or entity and has complied in all material respects
with all applicable laws, rules and regulations relating to the employment of
labor, including those related to wages, hours, collective bargaining and the
payment and withholding of taxes, and has withheld and paid to the appropriate
governmental authority, or is holding for payment not yet due to such authority,
all amounts required by law or agreement to be withheld from the compensation of
its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and accurate
list of all accounts receivable, notes receivable and vehicle leases of the
Company as of the date indicated thereon and an aging analysis of such accounts.
All receivables of the Company are valid and enforceable claims, arose in the
ordinary course of business, require no further performance by the Company and,
to the Company's knowledge, are not subject to claims or offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
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7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules have been furnished or made
available to Lithia. The Company will make available to Lithia, to the extent
requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; Authorized Signatories. The Company has provided
to Lithia (i) the names and addresses of all persons holding a power of attorney
on behalf of the Company, and (ii) the account numbers and names of all banks or
other financial institutions in which the Company currently has an account,
deposit or safe deposit box, with the names of all persons authorized to draw on
the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the Company and
the Shareholders in this Agreement and in the schedules attached hereto, and the
other statements in writing and information furnished or to be furnished to
Lithia by or on behalf of the Company or the Shareholders in connection with the
transactions contemplated by this Agreement, taken as a whole, do not and will
not contain any untrue statement of a material fact, or omit to state a material
fact necessary to make the statements contained herein not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions, circumstances,
activities, practices, incidents, plans or actions, based on or resulting from
the conduct of the business of the Company, including the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling, or the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, chemical or industrial toxic or
hazardous material, substance or waste, which will violate any laws chargeable
to the Company currently in effect relating to pollution or protection of the
environment (the "ENVIRONMENTAL LAWS") or any plan, order, decree, judgment,
injunction, notice or demand letter from a governmental entity applicable to the
Company, or which will give rise to any common law or other legal liability,
including, without limitation, liability under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") or similar state or local
laws in effect as of the date hereof. To the best of the Company's and each of
the Shareholders' knowledge, the Business Real Property contains no spill,
deposit or discharge of any hazardous substance (as that term is currently
defined under CERCLA or any applicable state law), as a result of which there
would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate description of
each underground storage tank of any kind or nature located on the Business Real
Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall allow
Lithia and its consultants access to the Business Real Property for the purpose
of conducting any further environmental assessment it may desire to conduct,
upon execution by Lithia and such consultants of an appropriate indemnity
agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the Shareholders
know of any reason why the Company cannot continue its business in all material
respects in the same manner following the execution of this Agreement and the
Closing as it has been operated prior thereto, except to the extent that Lithia
causes the business of the Company to change following the Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will
provide a complete and accurate description of all contracts in transit for the
Company.
8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly
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executed and delivered by Lithia. Lithia has all necessary corporate authority
to execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement is, and when executed at the Closing the Plan of Merger will be,
a valid and legally binding obligation of Lithia, enforceable against Lithia in
accordance with its terms, except as the enforceability thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to the enforcement of creditors' rights generally and by general
principles of equity (regardless of whether such enforceability is considered in
a proceeding in equity or at law). Lithia has the complete and unrestricted
right, power and authority to execute this Agreement and the Plan of Merger and
perform its covenants in accordance with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under the
applicable laws of the state of its incorporation and has all necessary power
and authority to own, lease and operate its properties and assets and to conduct
its business as its business is now being conducted. Lithia is qualified to do
business and is in good standing in each state in which it transacts business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The
Lithia Shares have been validly authorized and issued, are fully paid and
non-assessable, and have not been issued in violation of any preemptive rights.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly and
other reports under the Securities Exchange Act of 1934 and various filing with
the Securities and Exchange Commission under the Securities Act of 1933
(collectively, Lithia's "SEC FILINGS"). Prior to Closing, Lithia agrees to file
such other filings as the federal securities laws require and to provide copies
of such filings to Shareholders within 5 business days from the date of such
filing. The SEC Filings comply and all additional filings prior to Closing will
comply with the requirements of applicable laws, regulations and forms, and none
of such filings contain or will contain a material misstatement or omit or will
omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All current
taxes not yet due and payable by Lithia have been properly accrued and are
accurately reflected in its balance sheet in the SEC Filings. Lithia has not
been delinquent in the payment of any tax, assessment or governmental charge,
nor has any tax deficiency been
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proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate description
of all orders, decrees, writs or injunctions of any court or governmental body
specifically applicable to Lithia and all legal actions, suits, arbitrations,
condemnation actions or other proceedings pending or threatened against Lithia
or its subsidiaries, or any of its properties, assets or business which might
have a material adverse effect on its financial condition or business prospects.
Lithia is not aware of any facts that might result in any other material action,
suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there are no
existing violations of federal, state or local laws, ordinances, rules, codes,
regulations or orders by Lithia which are reasonably likely to materially affect
the properties, assets or business of Lithia. To the best of Lithia's knowledge,
Lithia is not subject to any restriction, judgment, order, writ, injunction,
decree or award, which materially and adversely affects or is likely to
materially and adversely affect the business, operations, properties, assets or
condition (financial or otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or indirectly,
any broker or finder or incurred any liability for any brokerage fees or
commissions or finders' fees and no broker or finder has acted directly or
indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules provided herewith have been
furnished to the Shareholders. Lithia will make available to the Shareholders or
their respective professional advisors, to the extent requested by the
Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in this
Agreement and in the schedules provided herewith, and the other statements in
writing and information furnished or to be furnished to the Shareholders by or
on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
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9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia mutually
agree to cooperate and use commercially reasonable good faith efforts to prepare
all documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and governmental bodies as may
be necessary to consummate the transactions contemplated by this Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause the
Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.5 FURTHER ASSURANCES. From time to time at or after the Closing, as and
when requested by any party hereto, the other party shall execute and deliver,
or cause to be executed and delivered, all such documents and instruments and
shall take, or cause to be taken, all such further or other actions as such
other party may reasonably deem necessary or desirable to consummate the
transactions contemplated by this Agreement.
9.6 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options pursuant
to its 1996 Incentive Stock Plan to management employees remaining with the
Company after Closing. The number of shares available for grant to all employees
in the Moreland Group shall be equal to six percent of the total number of
shares of Class A Common Stock issued to all the shareholders of the companies
in the Moreland Group at the Closing and the simultaneous closings of the Other
Reorganization Agreements including such additional shares that may be issued as
Contingent Merger Consideration, plus six percent of the shares of Class A
Common Stock issuable upon conversion of the shares of Series M Preferred Stock
issued at the Closing and such simultaneous closings including such additional
shares that may be issued as Contingent Merger Consideration, determined as
though such Series M Preferred Stock were converted to Class A Common Stock at
the date of issuance. The options will be granted during 1999 and 2000 to such
persons and in such amounts consistent with Lithia's practices and as proposed
by W. Douglas Moreland.
9.7 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may
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be created or permitted by this Agreement), and any security agreements entered
or collateral pledged to secure such guarantees, shall be released, discharged
or terminated prior to or at Closing.
9.8 NON-COMPETE. For a term of three years following the Closing date of
the Merger, Shareholders will not, directly or indirectly, within 100 miles of
any dealership currently owned or operated by Lithia or any of its subsidiaries,
own, operate, manage, control, participate in the ownership, management,
operation or control of or be paid or employed by or acquire any interest in or
securities of or otherwise become associated with or provide assistance to, as
an employee, consultant, director, officer, shareholder, partner, agent,
associate, principal, representative or any other capacity, any business entity
engaged in the lease or sale of new or used automobiles or light trucks except
as may otherwise be provided in such Shareholders' Employment Agreements with
Lithia. This covenant against competition shall not prohibit any activity of any
Shareholder with respect to any business entity with which it or he has any such
relationship as of the date of this Agreement or any successor to such a
business entity. If Lithia or one of its subsidiaries acquires or assumes
operation of an additional dealership after the date hereof, this covenant
against competition shall be extended to that additional dealership, but there
shall automatically be excepted from such extended covenant any business entity
that is within 100 miles of such additional dealership and in which any
Shareholder had an interest which did not constitute a breach of this Section
before Lithia or such subsidiary acquired or assumed operation of such
additional dealership. For that purpose, a Shareholder shall be deemed to have
an interest in a business entity if he or it had any of the relationships with
such entity that constitute competition under this Section 9.8, had signed a
letter of intent, terms sheet, or agreement contemplating such a relationship or
had filed an application with a manufacturer or franchisor which, if granted,
would create such a relationship.
9.9 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes aware
of any breach of the representations and warranties contained herein, whether
made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.10 SERVICE CONTRACT PRICING. Prior to the Effective Date, the parties
will determine a pricing schedule for extended service contracts which will be
charged to each Moreland Group dealership. The pricing schedule, determined for
each product line, will be the amount determined by the following formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by
the Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that
product line less the inception rebate paid by Ryan
& Associates (in 1998, this inception rebate was
paid to Diamond Financial and was $15.00 on new
vehicles and $40.00 on used vehicles).
C = the percentage of all service contracts written by
the Moreland Group in 1998 with Western National.
D = the price charged by Western National for that
product line less the inception rebate paid by
Western National (in 1998, this inception rebate was
paid to Diamond Financial and was $50.00 on both new
and used vehicles).
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10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF THE
COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have expired or
been terminated.
10.5 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been approved
as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.6 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from Ford
Motor Credit Company a waiver or consent to this Agreement and the transactions
contemplated hereby.
10.7 LEGAL OPINION. Lithia shall have received from Sherman & Howard L.L.C.
its opinion substantially in the form of Exhibit F.
10.8 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
Other Reorganization Agreements shall have been fulfilled.
10.9 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value, except for a note from North Avenue Auto, Inc.
10.10 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit G.
10.11 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
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11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have expired or
been terminated.
11.5 LEGAL OPINION. The Shareholders shall have received from Foster Pepper
& Shefelman LLP an opinion substantially the form of Exhibit H.
11.6 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
11.7 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders shall
have received a fully executed Agreement substantially as set forth in Exhibit
G.
11.8 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted Net
Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or after
the Closing or the decision of any party to complete the Closing, each party
shall be entitled to rely upon the representations and warranties set forth in
this Agreement. All representations and warranties made in this Agreement shall
survive the Closing until March 31, 2001; provided, however, that (i) the
accuracy of each such representation and warranty shall be determined only as of
the date of the Closing, (ii) the representations and warranties in Sections
7.14 and 8.7 shall survive until 30 days after the expiration (without
extension) of the statute of limitations for the Company's or Lithia's (as the
case may be) 1998 federal income tax return, and (iii) any claim based upon
fraud shall survive for its applicable statute of limitation. The period of
survival for each representation and warranty established in this Section 12 is
referred to as the "Survival Period" for such representation and warranty. The
liabilities of the parties with respect to their respective representations and
warranties will expire as of the expiration of the applicable Survival Period;
provided, however, that such expiration will not affect the rights of any party
entitled to rely on a representation and warranty in respect of any breach of
which such party has given notice to the
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<PAGE>
breaching party prior to the expiration of the Survival Period, specifying in
reasonable detail the facts alleged to constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and severally
indemnify, defend and hold harmless the Company and Lithia and their respective
successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and against any
claims, damages, liabilities, penalties, actions, suits, proceedings, demands,
assessments, costs and expenses, including reasonable attorneys fees and
expenses of investigation ("CLAIMS"), incurred by any Lithia Indemnified Party
arising from or related to (i) any breach of any representation or warranty made
by the Company or the Shareholders in this Agreement, of which notice is given
to the Shareholders by the Lithia Indemnified Parties prior to the expiration of
the Survival Period for such representation or warranty or (ii) any breach of
any covenant or agreement made by the Company or the Shareholders in this
Agreement, to the extent, in the case of the Company, that such covenant or
agreement was to be performed at or before the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly notify
the Shareholders of any Claim against which indemnification will be sought
hereunder. If the Claim involves a claim, investigation, demand, action or suit
by a third party, including a governmental authority, the Shareholders shall
have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section 7.14,
the Lithia Indemnified Parties shall not be entitled to indemnification under
Section 13.1 unless and until the aggregate amounts against which they would
otherwise be entitled to indemnification under Section 13.1 of this Agreement
and the comparable indemnification provisions of the Other Reorganization
Agreements exceed $500,000, and then only to the extent of such excess.
13.3.2 In no event shall the Shareholders be liable in the aggregate
under Section 13.1 for an amount that, when added to the amounts for which the
shareholders of the other members of the Moreland Group are liable under the
comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 17.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is
entitled to be indemnified hereunder shall be reduced by (i) the amount of
any insurance proceeds available to such Lithia Indemnified Party in respect
of the matter giving rise to a Claim or, if greater, the proceeds that would
have been available under the insurance policies maintained by the Company
prior to the Closing, (ii) any tax benefits accruing to the Lithia
Indemnified Party as a result of the Claim or the facts underlying the Claim
not offset by any tax charges to the Lithia Indemnified Party as a result of
the receipt of the indemnification payment, and (iii) any recoveries from
third parties in respect of the Claim or the facts underlying the Claim.
Lithia shall use reasonable commercial efforts to recover from third parties
in respect of any Claim but will not be required to exhaust its efforts to
recover from third parties
19
<PAGE>
prior to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia
will assign to the Shareholders its or the Company's right of recovery from
such third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall, for
these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements, (ii) if
any of the warranties and representations of the Company or the Shareholders
contained herein are false in any material respect, (iii) if the conditions of
this Agreement to be complied with or performed by the Shareholders or the
Company at or before Closing are not complied with or performed at the time
required for such compliance or performance and such noncompliance or
nonperformance is not waived by Lithia or (iv) if Lithia terminates any of the
Other Reorganization Agreements in accordance with the terms and conditions of
such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written notice of
termination given by the Company to Lithia (i) if Lithia defaults in any
material respect in the observance of or in the due and timely performance by
Lithia of any agreements and covenants of Lithia contained herein or in the
Other Reorganization Agreements, (ii) if any of the representations and
warranties of Lithia contained herein are false in any material respect, (iii)
if the conditions of this Agreement to be complied with or performed by Lithia
at or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by the Company or (iv) if one of the other members of the Moreland Group
terminates any of the Other Reorganization Agreements in accordance with the
terms and conditions of such other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement under
Section 15.1, no party to this Agreement shall have any liability or obligation
hereunder. Upon any termination of this Agreement under Section 15.2 or 15.3,
neither party shall have any prospective obligation hereunder except as provided
in Section 15.5, but each party shall have, if otherwise available, the remedy
of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
20
<PAGE>
15.5.1 In the event that this Agreement is terminated by the Company
based upon a willful refusal by Lithia to complete this Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
200% of all amounts paid or payable to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For purposes of this Section 15.5,
a willful refusal by any party to complete this Agreement or any Other
Reorganization Agreement means either such party's refusal to consummate the
transactions contemplated by this Agreement or any Other Reorganization
Agreement even though all of the conditions to its obligations to do so have
been fulfilled or such party's failure to take any action within its reasonable
control that would result in the fulfillment of a condition to such obligations.
15.5.2 In the event that either party terminates this Agreement for
reason of the non-fulfillment of the Designated Condition, Lithia shall pay to
the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement for
any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or (ii) a
willful refusal by the Company or any of the other members of the Moreland Group
or their Shareholders to complete the Agreement or any Other Reorganization
Agreement, Lithia shall pay the Company a break-up fee equal to 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company.
15.5.4 The break-up fees payable under this Section 15.5 shall be due
at the time this Agreement is terminated. Should the transactions contemplated
by this Agreement or the Other Reorganization Agreements fail to close for any
reason other than a willful refusal by the Company or any other member of the
Moreland Group to complete this Agreement or any other Reorganization Agreement,
it is acknowledged that the Company and the Shareholders would suffer damages;
however, the precise amount of such damages would be difficult to establish. The
break-up fees provided in this Section represent a good-faith estimate by the
parties of the damage that the Company and Shareholders would incur. Lithia
acknowledges that the break-up fees payable under Section 15.5.2 and 15.5.3 are
reasonable and appropriate, even though Lithia may not have breached any
representation, warranty or covenant contained herein in the circumstances
described in those sections. To the extent of those break-up fees, Lithia has
knowingly accepted the risk of the nonfulfillment of the conditions to its
obligations and the obligations of the Company and the Shareholders in the
circumstances described in Sections 15.5.2 and 15.5.3 in order to induce the
Company and the other members of the Moreland Group to enter into this Agreement
and the Other Reorganization Agreements and risk the adverse effect on their
market values that will occur if those agreements are not completed. Lithia
expressly agrees that the break-up fees contemplated by this Section 15.5 shall
be due even though the Company, the Shareholders or any other member of the
Moreland Group or any shareholder thereof may have breached any representation,
warranty or covenant of this Agreement or the Other Reorganization Agreements,
with the sole exception of a willful refusal by any such party to complete this
Agreement or any of the Other Reorganization Agreements. The right to collect
break-up fees pursuant to this Section 15.5 shall be the exclusive remedy of the
Company and the Shareholders in the event of a termination of this Agreement in
the circumstances described in Section ERROR! REFERENCE SOURCE NOT FOUND. or
15.5.2. In the event that the Company or the Shareholders terminate this
Agreement under the circumstances described in Section 15.5.3 as a result of the
nonfulfillment of the condition established in Section 11.1 (or Section 11.7 as
it
21
<PAGE>
relates to the comparable conditions in the Other Reorganization Agreements),
the liquidated damages payable under Section 15.5.3 shall be deemed to
compensate the Company only for the opportunity cost of having taken itself off
the market while this Agreement was being negotiated and was in effect, and the
Company shall be entitled to prove any other damages and pursue any other remedy
available at law or in equity.
16. DISPUTE RESOLUTION
16.1 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 non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of or
relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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 having jurisdiction over Reno, Nevada 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 corporate law. Whether a claim
is covered by this Agreement shall be determined by the arbitrator(s). All
statutes of limitations which would otherwise be shall apply to any arbitration
proceeding hereunder.
16.3 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.
16.4 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
22
<PAGE>
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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules hereto
constitutes the entire agreement between the parties regarding the subject
matter hereof and supersedes all prior agreements and understandings between the
parties relating to the subject matter of this Agreement. There are no
agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or terminated
except by an instrument in writing signed by all parties to this Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter gender thereof or to the plurals
of each, as the identity of the person or persons or the context may require.
The descriptive headings contained in this Agreement are for reference purposes
only and are not intended to describe, interpret, define or limit the scope,
extent or intent of this Agreement or any provision contained in this Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall for any
reason be held to be invalid, illegal, void or unenforceable in any respect,
such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, each of the parties to this Agreement shall be
responsible for its own costs and expenses incurred in connection with the
preparation and negotiation of this Agreement and the transactions contemplated
hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective legal
representatives, successors and permitted assigns. No party may assign any of
their rights or delegate any of their obligations hereunder. Any assignment in
violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and agreements
disclosed in the Exhibits and Schedules to this Agreement shall be deemed to be
disclosed for all purposes of this Agreement and to constitute exceptions not
only to the representations and warranties in the specific Sections that refer
to such Exhibits or Schedules, but also to all other representations and
warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be (i)
in writing, dated with the current date of such notice, and signed by the party
giving such notice, and (ii) mailed, postpaid,
23
<PAGE>
registered or certified, return receipt requested, addressed to the party to be
notified, or delivered by personal delivery or by overnight courier. Notice
shall be deemed given when received by the party to be notified or when the
party to be notified refuses to accept delivery of the notice. The initial
addresses of the parties shall be as follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: L.A.H. Automotive
Enterprises, Inc.
9980 E. Arapahoe Rd.
Englewood, CO 80112
Attn: W. Douglas Moreland
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
If to the Shareholders: L.A.H. Automotive Limited Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's and
the Shareholders' "knowledge" shall be limited to the actual knowledge of the
Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
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17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
LITHIA MOTORS, INC.
By:
------------------------------------
Bryan B. DeBoer, Vice President
L.A.H. AUTOMOTIVE ENTERPRISES, INC.
By:
------------------------------------
W. Douglas Moreland, President
SHAREHOLDERS
L.A.H. AUTOMOTIVE LIMITED PARTNERSHIP, RLLLP
By: Moreland/LAH, Inc., General Partner
By:
------------------------------------
W. Douglas Moreland, President
25
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
SHAREHOLDER PERCENT OF MERGER CONSIDERATION
- -------------------------------------------- -------------------------------
<S> <C>
L.A.H. Automotive Limited Partnership, RLLLP 100%
</TABLE>
Schedule 2.1
<PAGE>
EXHIBIT 10.3
WILLIAM D. CORP.
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
WILLIAM D. LIMITED PARTNERSHIP, RLLLP AND JAMES JANNICELLI
(collectively the "Shareholders")
And
WILLIAM D. CORP.,
a Colorado corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.1 Shares and Shareholders. . . . . . . . . . . . . . . . . . . . .5
2.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . .5
2.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . .5
2.4 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . .6
2.5 Merger Consideration . . . . . . . . . . . . . . . . . . . . . .6
3. FORMATION OF MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . .7
4. MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . .8
5. REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
6.1 Date, Time and Place of Closing. . . . . . . . . . . . . . . . .8
6.2 Documents To Be Delivered at Closing by the Shareholders . . . .8
6.3 Documents To Be Delivered at Closing by Lithia . . . . . . . . .9
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. . . . . . . . . . .9
7.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . .9
7.2 Incorporation and Good Standing. . . . . . . . . . . . . . . . .9
7.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 10
7.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.6 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . 10
7.7 Tangible Personal Property . . . . . . . . . . . . . . . . . . 10
7.8 Parts Inventories. . . . . . . . . . . . . . . . . . . . . . . 10
7.9 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . 10
7.10 Intellectual Property. . . . . . . . . . . . . . . . . . . . . 11
7.11 Title to Properties; Encumbrances. . . . . . . . . . . . . . . 11
7.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . 11
7.13 Indebtedness for Borrowed Money; Guaranties. . . . . . . . . . 11
7.14 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.15 Transactions Since Balance Sheet Date. . . . . . . . . . . . . 12
7.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 12
7.17 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . 12
7.18 Contracts and Agreements . . . . . . . . . . . . . . . . . . . 13
7.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . 13
7.20 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.21 Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.22 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . 13
7.23 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . 13
7.24 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . 14
7.25 Powers of Attorney; Authorized Signatories . . . . . . . . . . 14
7.26 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
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<TABLE>
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7.27 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . 14
7.28 Continuation of Business . . . . . . . . . . . . . . . . . . . 14
7.29 Contracts in Transit . . . . . . . . . . . . . . . . . . . . . 14
7.30 Evaluation of Risks in Receiving Lithia Securities . . . . . . 14
7.31 Limitations on Transfer of Stock . . . . . . . . . . . . . . . 15
7.32 Lack of Registration of Stock. . . . . . . . . . . . . . . . . 15
7.33 Information Concerning Lithia. . . . . . . . . . . . . . . . . 15
7.34 Investor Status. . . . . . . . . . . . . . . . . . . . . . . . 15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA. . . . . . . . . . . . . . . 16
8.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . 16
8.2 Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . 16
8.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . 16
8.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.6 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.7 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.8 Transactions Since Latest Balance Sheet Date . . . . . . . . . 17
8.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . 17
8.11 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . 18
8.12 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . 18
8.13 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . 18
9. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.1 Notices and Consents . . . . . . . . . . . . . . . . . . . . . 18
9.2 Conduct of Business by the Company Prior to the Closing
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.3 Lithia's Examination . . . . . . . . . . . . . . . . . . . . . 18
9.4 Shareholders' Review . . . . . . . . . . . . . . . . . . . . . 18
9.5 Notice of Changes. . . . . . . . . . . . . . . . . . . . . . . 19
9.6 Standstill Agreement . . . . . . . . . . . . . . . . . . . . . 19
9.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . 19
9.8 Employee Stock Options . . . . . . . . . . . . . . . . . . . . 19
9.9 Release of Guarantees. . . . . . . . . . . . . . . . . . . . . 19
9.10 Non-Compete. . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.11 Update of Representations. . . . . . . . . . . . . . . . . . . 20
9.12 Service Contract Pricing . . . . . . . . . . . . . . . . . . . 20
9.13 Hail Damage Reserve. . . . . . . . . . . . . . . . . . . . . . 20
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA. . . . . . . . . . . . . 21
10.1 Representations, Warranties of the Shareholders and
Covenants of the Company and the Shareholders. . . . . . . . . 21
10.2 No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . 21
10.3 Approval of Lithia's Shareholders. . . . . . . . . . . . . . . 21
10.4 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . 21
10.5 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . 21
10.6 Approval of Lithia as the Dealer . . . . . . . . . . . . . . . 21
10.7 Consent from Lithia's Lender . . . . . . . . . . . . . . . . . 21
10.8 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . 21
10.9 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 21
10.10 Fulfillment of Conditions in Related Transactions. . . . . . . 22
</TABLE>
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10.11 Employee and Related Party Loans . . . . . . . . . . . . . . . 22
10.12 Assignment and Licenses of Intangible Assets . . . . . . . . . 22
10.13 Completion of Audit and Purchase Price Determination . . . . . 22
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.1 Representations, Warranties and Covenants of Lithia. . . . . . 22
11.2 No Adverse Changes . . . . . . . . . . . . . . . . . . . . . . 22
11.3 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . 22
11.4 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . 22
11.5 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . 22
11.6 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . 22
11.7 Fulfillment of Conditions in Related Transactions. . . . . . . 22
11.8 Assignment and Licenses of Intangible Assets . . . . . . . . . 22
11.9 Completion of Audit and Purchase Price Determination . . . . . 22
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 23
13. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
13.1 General Indemnity. . . . . . . . . . . . . . . . . . . . . . . 23
13.2 Defense of Claims. . . . . . . . . . . . . . . . . . . . . . . 23
13.3 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . 23
14. HART-SCOTT-RODINO NOTIFICATION. . . . . . . . . . . . . . . . . . . . 24
15. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
15.1 Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . 24
15.2 By Lithia. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
15.3 By the Company . . . . . . . . . . . . . . . . . . . . . . . . 24
15.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . 24
15.5 Break-Up Fee.. . . . . . . . . . . . . . . . . . . . . . . . . 25
16. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
16.1 Mediation. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.2 Binding Arbitration. . . . . . . . . . . . . . . . . . . . . . 26
16.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . 26
16.4 Hearing and Award. . . . . . . . . . . . . . . . . . . . . . . 26
17. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . 27
17.2 Exhibit and Schedules. . . . . . . . . . . . . . . . . . . . . 27
17.3 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.4 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.6 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . 27
17.7 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . 27
17.8 Binding Effect and Assignment. . . . . . . . . . . . . . . . . 28
17.9 Applicability of Exceptions and Disclosure . . . . . . . . . . 28
17.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
17.11 Definition of Knowledge. . . . . . . . . . . . . . . . . . . . 29
17.12 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
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17.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . 29
17.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.16 No Strict Construction . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
v
<PAGE>
DEFINED TERMS
<TABLE>
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ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . .1
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CLASS A COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . .2
DAILY SALES PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
EMPLOYMENT AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . .2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . 23
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . .3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . .3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . .9
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SERIES M PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SPECIAL HAIL-DAMAGE RESERVE. . . . . . . . . . . . . . . . . . . . . . . . . .5
</TABLE>
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<PAGE>
EXHIBITS
Exhibit A Example Calculation of Adjusted Net Worth
Exhibit B Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Series M Preferred Stock
Exhibit E - Foster Pepper & Shefelman PLLC Tax Opinion
Exhibit F - Sherman & Howard L.L.C. Tax Opinion
Exhibit G - Lease Agreement
Exhibit H - Registration Rights Agreement
Exhibit I - W. Douglas Moreland Employment Agreement
Exhibit J - James Jannicelli Employment Agreement
Exhibit K Sherman & Howard L.L.C. Legal Opinion
Exhibit L Assignment and Licenses of Intangible Assets
Exhibit M Foster Pepper & Shefelman PLLC Legal Opinion
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting
Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
vii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated
effective January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon
corporation ("Lithia"); WILLIAM D. LIMITED PARTNERSHIP, RLLLP and JAMES
JANNICELLI (whether one or more, the "SHAREHOLDERS"); and WILLIAM D. CORP., a
Colorado corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and
outstanding shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Chrysler and Plymouth automobiles and related parts and accessories from
premises located at 350 S. Havana, Aurora, Colorado and 625 S. Havana, Denver,
Colorado (the "BUSINESS REAL PROPERTY").
C. All the parties desire to consummate a business combination
transaction pursuant to which the Company will merge with and into a subsidiary
of Lithia, for the consideration and on the other terms set forth in this
Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times
LIFO reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from
the total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall
be decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the
amount, if any, by which the total Moreland Transaction Expenses recorded
in 1998 exceed the remainder obtained by subtracting $11,000,000 from the
aggregate Net Adjusted Pretax Income of all members of the Moreland Group
for 1998. The Company's proportionate share of the Moreland Transaction
Expenses or the excess transaction expenses shall be determined by
multiplying the total Moreland Transaction Expenses or excess transaction
expenses by a fraction, the numerator of which is the Company's Net
Adjusted Pretax Income for 1998 and the denominator of which is the
aggregate Net Adjusted Pretax Income of all members of the Moreland Group
for 1998.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for 1998 and the
denominator is the aggregate Net Adjusted Pretax Income for 1998 of all members
of the Moreland Group.
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<PAGE>
"CLASS A COMMON STOCK" means Lithia's Class A Common Stock, without par
value.
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J-K
CMC = [ 6(H-I) --- ] + N
L-M
where:
H = the aggregate Net Adjusted Pretax Income of
all members of the Moreland Group for 1999,
but H shall not be less than I or more than I
plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax
Income for all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for
1999, but J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax
Income;
L = the aggregate Net Adjusted Pretax Income for
1999 of all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax
Income of all Qualifying Members.
N = the amount, if any, of the Special-Hail
Damage Reserve existing at March 31, 2000.
"FLOORPLAN RATE" means the rate of interest that the Moreland Group and
all affiliated dealerships would have paid on their floorplan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $6,276,666 , adjusted as follows as
of the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(i) First, the Initial Merger Consideration shall be adjusted
to equal IMC in the equation:
B
IMC = (A x 6)--- - $1,500,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998;
and
C = The aggregate Net Adjusted Pretax Income of
all members of the Moreland Group for 1998.
(ii) Second, the adjusted Initial Merger Consideration
determined in (i) above shall be adjusted by adding thereto (if positive)
or subtracting therefrom (if negative) the amount of NWA in the equation:
E
NWA = (D - $28,000,000)---
D
where:
2
<PAGE>
D = the aggregate Adjusted Net Worth of all members of
the Moreland Group as of December 31, 1998; and
E = the Adjusted Net Worth of the company as of
December 31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration
determined in (ii) above shall be increased by an amount equal to IA in
the equation
(F + $1,500,000)G
IA = -----------------
730
where:
F = the adjusted Initial Merger Consideration
determined in (ii) above; and
G = the sum of the Lithia Floorplan Rates in
effect on each day from and including January
1, 1999 to but excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles
followed in the preparation of the financial statements as of and for the years
ended December 31, 1996 and 1997 for the Moreland Automotive Group (which
include entities not included in the Moreland Group as defined herein) audited
by Arthur Andersen LLP and accompanied by their report thereon dated May 21,
1998.
"MORELAND GROUP" means Cherry Creek Dodge, Incorporated, William D.
Corp., Colorado Springs Jeep Eagle, Inc., Foothills Automotive Plaza, Inc.,
L.A.H. Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado
corporations, and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all
members of the Moreland Group in connection with the transactions contemplated
by this Agreement and the Other Reorganization Agreements including, without
limitation, the fees of Arthur Andersen LLP for services relating to audits of
the Moreland Groups' financial statements for 1998 and subsequent years and
other transaction-related services, fees and expenses of counsel for the
Moreland Group and all filling fees payable to governmental entities relating to
the transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense
incurred or paid to W. Douglas Moreland and the general manager of the
dealership owned by the entity for the period prior to the Effective Date
and any bonus paid to W. Douglas Moreland for the period after the
Effective Date shall be added back to net income.
(iii) The salary and other compensation expenses that would have
been payable for the period prior to the Effective Date to W. Douglas
Moreland and the salary, bonus and other compensation expense that would
have been payable for the period prior to the Effective Date to the
general manager of the dealership owned by the entity under the
employment arrangements between those persons and Lithia or the entity,
shall be deducted from net income. The salary payable to W. Douglas
Moreland under his Employment Agreement shall be allocated among the
3
<PAGE>
members of the Moreland Group in proportion to their respective Net
Adjusted Pretax Incomes for the year. No bonus payable to W. Douglas
Moreland under his Employment Agreement shall be deducted from net income
under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity
after December 31, 1997 will be added back to or deducted from net
income.
(v) All Moreland Transaction Expenses recorded in the period
shall be added back to net income, but only to the extent that such
Moreland Transaction Expenses were taken into account in computing net
income in the first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for
credit life insurance and financing contracts shall be adjusted to the
revenues or expenses that would have been earned or incurred by such
entity for the same contacts under arrangements in effect during 1998.
Extended service contract costs will be based upon the costs charged to
the Company pursuant to Section 9.12.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of
all funds paid by such entity to Lithia or any affiliate of Lithia during
the period as a dividend or loan and on the amount of any fees or other
charges paid to Lithia to the extent that such fees are not included as
expenses in calculating Net Adjusted Pretax Income pursuant to clause
(xiii) below, from the date such payment was made to the end of the
period or the date of its repayment.
(ix) Net income shall be decreased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of
all funds provided by Lithia or any affiliate of Lithia to such entity
during the period as a loan or contribution and on the amount of any cost
savings described in clause (xii) below, from the date of such loan or
contribution or the date the savings were realized to the date of
repayment or the end of the period.
(x) Net income shall be increased by all fees paid to Lithia by
such entity under the Consulting Agreement between Lithia and such entity
as in effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring
and extraordinary income or expense items will be deducted or added back
to the net income. Some members of the Moreland Group held, on
January 1, 1999, vehicles which had suffered hail damage in 1998 and a
related insurance damage reserve. Amounts transferred from that
insurance damage reserve shall not be considered non-reoccurring or
extraordinary income and shall be included in net income, subject to
Section 9.13.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of
which was previously incurred by the Company or procured from a third
party, the income of the Company will be adjusted to reflect the costs
that would have been incurred by the Company under the arrangements in
effect during 1998. If Lithia provides a service or product not
previously utilized by the Company, the reasonable or agreed costs of
such services or product will be included if W. Douglas Moreland agreed
or agrees that the cost of such service or product would be included in
determining Net Adjusted Pretax Income hereunder.
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In addition to the specific adjustments described above, net income of
each entity for 1999 shall be adjusted in such other respects as may be
necessary to eliminate the effect of any additional costs resulting from changes
implemented by Lithia not concurred in by W. Douglas Moreland. For example, if
Lithia makes capital improvements or increases inventory levels not concurred in
by W. Douglas Moreland, all current operating expenses associated with those
decisions, including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached
as Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net
Adjusted Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax
Income.
"SERIES M PREFERRED STOCK" means shares of Lithia's preferred stock,
without par value, designated as Series M-2002 Preferred Stock and Series M-2003
Preferred Stock and having the right and preferences set forth in Lithia's
Articles of Incorporation.
"SPECIAL HAIL-DAMAGE RESERVE" means a reserve established by Cherry Creek
Dodge, Incorporated, Moreland Auto Corp. and William D. Corp. from unallocated
insurance proceeds for hail-damage suffered to vehicles still in inventory at
December 31, 1998, which reserve will be $200,000 for Cherry Creek Dodge,
Incorporated, and $50,000 each for Moreland Auto Corp. and William D. Corp. The
Special Hail-Damage Reserve constitutes only a portion of the total insurance
damage reserve established by those three entities in respect of hail damage
suffered in 1998.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive. Schedule 2.1 also reflects the
proportions in which the Shareholders will share the cash and stock components
of the Merger Consideration, which are different than their percentage ownership
interests in the Company. The Shareholders hereby agree to those proportions
and waive any right they may have to receive all elements of the Merger
Consideration in proportion to their stock ownership of the Company.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which the Company shall be merged with and into Merger Sub, the
separate corporate existence of the Company shall thereupon cease, and Merger
Sub shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the
Shareholders and the Company will cause the Plan of Merger and Articles of
Merger in the form required by Colorado law to be executed and filed as soon as
reasonably possible following the date of the Closing, or on such other date as
Lithia and the Company may agree, with the Secretary of State for the state of
Colorado. The Merger shall become effective at the time at which the Articles of
Merger shall have been accepted for filing by the Secretary of State for the
state of Colorado or such time specified in the Articles of Merger as may be
agreed upon by Lithia and the Company, and such time is hereinafter referred to
as the "EFFECTIVE TIME."
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2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding
share of Company Common Stock shall be converted into the right to receive a
portion of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably
practicable, the Company shall cause its auditors to prepare an audited balance
sheet and income statement for the Company as of and for the year ended
December 31, 1998 in accordance with Moreland GAAP and shall calculate the
Company's Adjusted Net Worth and Net Adjusted Pretax Income and the Initial
Merger Consideration on the basis thereof. The Company shall deliver such
financial statements and calculations to Lithia. Lithia shall have a period of
15 days after its receipt of such financial statements and calculations to make
any objections it may have to the Adjusted Net Worth and Net Adjusted Pretax
Income of the Company and Initial Merger Consideration as calculated by the
Company. If Lithia does not give notice of objections within that period, the
Adjusted Net Worth, Net Adjusted Pretax Income and Initial Merger Consideration
so calculated shall be final. If Lithia does give notice of objections within
that time, and Lithia and the Company are unable to resolve the matter by
agreement, either side may submit the matter to PricewaterhouseCoopers LLP or
another independent accounting firm selected by the Shareholders and Lithia for
resolution. The decision of that accounting firm shall be binding on the
parties.
2.5.2 PAYMENT OF INITIAL MERGER CONSIDERATION. The Initial
Merger Consideration shall be payable in a combination of cash, Class A Common
Stock and Series M-2002 Preferred Stock. The amount of the Initial Merger
Consideration to be paid in Lithia stock shall equal ISP in the formula:
T+$12,677,500 U
ISP = ------------- x ---
2 V
Where:
T = the Initial Merger Consideration payable
under this Agreement plus the Initial Merger
Consideration payable under all of the Other
Reorganization Agreements;
U = the Initial Merger Consideration under this
Agreement; and
V = T minus the Initial Merger Consideration
payable under the Other Reorganization
Agreements relating to the acquisition of
L.A.H. Automotive Enterprises, Inc. and Reno
Auto Sales, Inc.
Of the stock portion of the Initial Merger Consideration, 70 percent will be
paid in Class A Common stock and 30 percent in Series M-2002 Preferred Stock.
The balance of the Initial Merger Consideration shall be paid in cash. The
Class A Common Stock shall be valued for purposes of the Initial Merger
Consideration at (i) $19.00 per share. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Initial Merger Consideration.
2.5.3 CONTINGENT MERGER CONSIDERATION. As soon as possible, and
in any event within 120 days after December 31, 1999, Lithia shall cause its
auditors to prepare a balance sheet and income statement for the Company as of
December 31, 1999 and for the year then ended and shall calculate the Adjusted
Net Worth, Net Adjusted Pretax Income and Contingent Merger Consideration on the
basis thereof. Lithia shall deliver such financial statements and calculations
to the Shareholders. The
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Shareholders' opportunity to object, the effect of failure to do so and the
resolution of any dispute shall be determined in the manner provided in
Section 2.5.1 above for determining the Initial Merger Consideration.
2.5.4 PAYMENT OF CONTINGENT MERGER CONSIDERATION. The Contingent
Merger Consideration shall be paid in a combination of cash, Class A Common
Stock and Series M-2003 Preferred Stock. The amount of the Contingent Merger
Consideration to be paid in Lithia stock shall equal CSP in the formula:
X Y
CSP = --- x ---
2 Z
Where:
X = the sum of the Contingent Merger Consideration payable
under this Agreement plus the Contingent Merger
Consideration payable under all of the Other Reorganization
Agreements;
Y = the Contingent Merger Consideration payable under this
Agreement; and
Z = X minus the Contingent Merger Consideration payable under
the Other Reorganization Agreements relating to the
acquisition of L.A.H. Automotive Enterprises, Inc. and Reno
Auto Sales, Inc.
The stock portion of the Contingent Merger Consideration will be payable 50
percent in Class A Common Stock and 50 percent in Series M-2003 Preferred Stock.
The balance of the Contingent Merger Consideration will be payable in cash. Any
imputed interest with respect to the payment of the Contingent Merger
Consideration shall be deemed paid from the cash portion of the Contingent
Merger Consideration. The Class A Common Stock shall be valued for purposes of
the Contingent Merger Consideration at the average Daily Sales Price over the 15
trading days ending with the second trading day before the date that such shares
are issued. "DAILY SALES PRICE" means, for any trading day, the last sales
price of the Class A Common Stock reported by the New York Stock Exchange or if
the Class A Common Stock is not then trading on the NYSE, such other source as
Lithia and the Shareholders may agree. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Contingent Merger Consideration.
2.5.5 FRACTIONAL SHARES. Lithia shall not issue fractional
shares of Class A Common Stock. In lieu thereof, Company shareholders will be
entitled to receive cash in the amount of any fractional share valued as set
forth in the preceding paragraph.
2.5.6 ADJUSTMENTS. Anything in this Agreement to the contrary
notwithstanding, all prices per share, share amounts, and per-share amounts
referred to in this Agreement shall be appropriately adjusted to account for
stock dividends, split-ups, mergers, recapitalizations, combinations,
conversions, exchanges of shares or the like occurring between the first day of
each pricing period through the date such shares are issues.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-2, a
wholly owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary,
subject to the satisfaction of all conditions to Closing, Lithia will cause to
execute the Plan of Merger and the Articles of Merger. Lithia will cause the
Board of Directors of Merger Sub to approve the Plan of Merger.
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4. MERGER CONSIDERATION
Lithia will cause to be adopted and filed Articles of Amendment to
Lithia's Articles of Incorporation pursuant to which 10,500 shares of Lithia's
preferred stock will be designated as Series M-2002 Preferred Stock and 4,500
shares of Lithia preferred stock will be designated as Series M-2003 Preferred
Stock (collectively, "Series M Preferred Stock"), with the relative rights and
preferences as set forth in the attached Exhibit D. Lithia shall make available
such shares of Series M Preferred Stock, shares of Class A Common Stock and cash
as may be required by the terms of this Agreement and the Plan of Merger. Such
securities are being offered and sold pursuant to exemptions from registration
under both the Securities Act of 1933, as amended, and state securities laws in
reliance upon the representation and warranties of Shareholders herein.
5. REORGANIZATION
The parties intend that the transaction to be effected by the Plan of
Merger will qualify as a reorganization under Section 368(a)(1) of the Code and
the regulations and rules promulgated thereunder. A condition of closing is the
receipt of opinions from the firm of Foster Pepper & Shefelman PLLC to Lithia
and from the firm of Sherman & Howard, L.L.C. to the Company and the
Shareholders that the transaction would qualify as to treatment as a
reorganization under Section 368(a)(1) of the Code, substantially in the form of
Exhibit E and F, respectively, attached hereto. In rendering such opinions,
counsel may require and rely upon representations contained in certificates from
officers of Lithia, the Shareholders and the Company.
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and
conditions set forth in this Agreement, the Closing of this Agreement shall take
place at the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver,
Colorado, at 9:00 a.m. on the second business day following the fulfillment of
the conditions to the obligations of the parties under Sections 10 and 11, or at
such other time or place as may be mutually agreed upon by Lithia, the
Shareholders and the Company. Notwithstanding any provision in this Agreement
to the contrary, if the Closing has not occurred on or before June 30, 1999,
either Lithia or the Company, provided that the failure of the Closing to occur
did not result from a breach of this Agreement by such party, shall have the
right to terminate this Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At
Closing, the Shareholders will deliver or cause the Company to deliver to Lithia
the following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Stock certificates representing all of the Shares;
6.2.5 Lease agreements substantially in the form of Exhibit G
with monthly rents in the amount set forth in Schedule G-1 attached to Exhibit G
(the "LEASE AGREEMENT") duly executed by the Landlord as specified therein;
6.2.6 The Registration Rights Agreement between Lithia, the
Shareholders and the majority shareholders of the other members of the Moreland
Group substantially in the form of Exhibit H (the "REGISTRATION RIGHTS
AGREEMENT"), duly executed by the Shareholders;and
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6.2.7 Employment agreements between Lithia and W. Douglas
Moreland and James Jannicelli substantially in the form of Exhibit I and J (the
"EMPLOYMENT AGREEMENTS") duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing,
Lithia will deliver, or cause to be delivered, to the Shareholders the
following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub
and Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The cash portion of the Initial Merger Consideration
payable as provided in the Plan of Merger;
6.3.5 Stock certificates for the shares of Class A Common Stock
and Series M-2002 Preferred Stock constituting the stock portion of the Initial
Merger Consideration issued in the names of the Shareholders;
6.3.6 The Lease Agreements duly executed by Lithia Real Estate,
Inc., a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
6.3.7 The Registration Rights Agreement, duly executed by Lithia;
and
6.3.8 The Employment Agreements duly executed on behalf of
Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized,
validly existing and in good standing under the applicable laws of the state of
its incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as disclosed in
Schedule 7.2, the Company does not have any subsidiaries nor any direct or
indirect equity interest in any corporation, partnership or other entity.
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7.3 CAPITALIZATION. The authorized capital stock of the Company
consists of 50,000 shares of Common Stock, no par value, 20,000 shares of which
are outstanding. The Shares constitute all of the issued and outstanding shares
of capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or commitments obligating the Company to issue any
additional shares of its capital stock of any class or any other securities of
any kind. Except as disclosed in Schedule 7.3, there are no agreements that
relate to the voting or control of the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this
Agreement nor the fulfillment of or compliance with the terms and provisions
hereof will violate, conflict with, or result in a breach of the terms,
conditions or provisions of, or constitute a default or an event which, with
notice or lapse of time or both, would constitute a default under, the articles
of incorporation or bylaws of the Company, any contract, agreement, mortgage,
deed of trust or other instrument or obligation to which either the Shareholders
or the Company are parties or by which any of them is bound (assuming receipt of
the consents and approvals disclosed in Schedule 7.5), or violate any provision
of any applicable law or regulation or of any order, decree, writ or injunction
of any court or governmental body, or result in the creation or imposition of
any lien, charge, restriction, security interest or encumbrance of any nature
whatsoever on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no
consent from, or other approval of, any governmental entity or agency or any
other person or entity is necessary in connection with the execution, delivery
or performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and
accurate legal description of the Business Real Property. The zoning of the
Business Real Property permits the presently existing improvements and the
continuation of the business presently being conducted on such real property.
To the best of the Company's and each of the Shareholders' knowledge, there are
no pending or proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete
and accurate description of all equipment, furniture, fixtures and other
tangible personal property (except inventory of vehicles, parts and supplies)
owned by, in possession of, or used by the Company on December 31, 1998 in
connection with its business and a complete and accurate description of all
tangible personal property in which the Company has a leasehold interest,
together with a complete and accurate description of each lease under which the
Company holds such leasehold interests. Each of the leases is in full force and
effect and constitutes a legal, valid and binding obligation of the parties
thereto. The Company has performed in all material respects the covenants
required to be performed by it under each of the leases to which it is a party
and is not in default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at
December 31, 1998 consist of goods of a quality and in quantities that are
suitable for sale in the ordinary course of its business with normal mark-up at
prevailing market prices. All parts and accessories in the inventories of the
Company are undamaged parts and accessories that (i) are still in the original,
resalable merchandising package, and in unbroken lots, (ii) were listed for sale
in the then-current dealer parts and accessories price schedule for the
represented manufacturers, (iii) were purchased directly from the represented
manufacturers, and (iv) are returnable under the terms of the represented
manufacturers' sales and service agreement for credit to the account of the
Company.
7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and
accurate description of all material permits, licenses, franchises, certificates
and similar items and rights, owned or held by the Company (hereinafter
collectively referred to as the "LICENSES AND PERMITS"). The Licenses and
Permits
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are adequate for the operation of the Company's business; are valid and in full
force and effect, and no basis exists for a grantor of any such Licenses or
Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To
the best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company.
No additional intellectual property is required by the Company for the operation
of its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute
and marketable title to (or, in the case of leased property, valid and
subsisting leasehold interests in) all of its properties and assets, including
(without limitation) the properties and assets that will be listed on Schedules
7.6 and 7.7 except for properties and assets sold, consumed or otherwise
disposed of by the Company in the ordinary course of its business, and will have
good, absolute and marketable title to all assets included in the Audited
Balance Sheet. The Company and the Business Real Property are not subject to
any liens, mortgages, encumbrances, conditional sales agreements, security
interests, claims or restrictions of any kind or character, except for (i) the
encumbrances listed on Schedule 7.11, (ii) liens for current taxes not yet due
and payable and (iii) mechanics and materialmen's liens arising in the ordinary
course of business and securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's
Dealer Financial Statements as of the end of and for the Company's two most
recent fiscal years. These Dealer Financial Statements were prepared in
accordance with the applicable manufacturer's requirements and fairly reflect in
all material respects the results of operations and financial condition of the
Company for the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in
accordance with Moreland GAAP on a LIFO basis and consistent with prior periods,
and will fairly present in all material respects the financial condition of the
Company at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has
delivered to Lithia a complete and accurate copy of all instruments evidencing
or relating to the Company's indebtedness for borrowed money at December 31,
1998. The Company is not in default or violation of any provision of any
agreement evidencing or relating to its indebtedness for borrowed money.
Schedule 7.13 sets forth as of December 31, 1998 a complete and accurate
description of all guaranties by the Company of any obligation or liability of
any person or entity, including (without limitation) any guaranties of
installment sales contracts, leases or obligations under service contracts.
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7.14 TAX MATTERS. The Company has duly filed all federal, state and
local tax returns required to be filed by it. All federal, state, local and
foreign income, ad valorem, excise, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the Company are current taxes not yet due
and payable. All current taxes not yet due and payable by the Company have been
properly accrued and are accurately reflected in the Company's balance sheet in
the Financial Statements. The Company has not been delinquent in the payment of
any tax, assessment or governmental charge, nor has any tax deficiency been
proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet
Date, except as anticipated by this Agreement or set forth on Schedule 7.15,
(i) the Company has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of the
Company other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of the Company; (iv) the Company has not issued any securities or options
to purchase any securities of any nature whatsoever; (v) the Company has not
increased the compensation, commissions, bonuses or other remuneration payable
to any officer, director, employee or to any other person or entity, whether now
or hereafter payable, except in the ordinary course of business, nor paid any
bonuses to any Shareholder, (vi) there has not been any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, properties or business of the Company; (vii) the Company has not
made any capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of
the Shareholders' knowledge, there are no existing violations of federal, state
or local laws, ordinances, rules, codes, regulations or orders by the Company
which are reasonably likely to materially affect the properties,
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assets or business of the Company. To the best of the Company's and each of the
Shareholders' knowledge, the Company is not subject to any restriction,
judgment, order, writ, injunction, decree or award, which materially and
adversely affects or is likely to materially and adversely affect the business,
operations, properties, assets or condition (financial or otherwise) of the
Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list
of all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule
7.21, the Company does not have any employment agreements or contracts between
the Company and any person or entity. The Company is not a party to or bound by
any collective bargaining agreement, nor has the Company experienced any
strikes, grievances, claims of unfair labor practices or other collective
bargaining dispute. There are no unions representing any employees of the
Company. The Company has no knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with respect to
employees of the Company. The Company has paid or has made provision for the
payment of all compensation due any person or entity and has complied in all
material respects with all applicable laws, rules and regulations relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes, and has withheld and paid
to the appropriate governmental authority, or is holding for payment not yet due
to such authority, all amounts required by law or agreement to be withheld from
the compensation of its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and
accurate list of all accounts receivable, notes receivable and vehicle leases of
the Company as of the date indicated thereon and an aging analysis of such
accounts. All receivables of the Company are valid and enforceable claims,
arose in the ordinary course of business, require no further performance by the
Company and, to the Company's knowledge, are not subject to claims or offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
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7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all
written instruments listed or described on the schedules have been furnished or
made available to Lithia. The Company will make available to Lithia, to the
extent requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has
provided to Lithia (i) the names and addresses of all persons holding a power of
attorney on behalf of the Company, and (ii) the account numbers and names of all
banks or other financial institutions in which the Company currently has an
account, deposit or safe deposit box, with the names of all persons authorized
to draw on the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the
Company and the Shareholders in this Agreement and in the schedules attached
hereto, and the other statements in writing and information furnished or to be
furnished to Lithia by or on behalf of the Company or the Shareholders in
connection with the transactions contemplated by this Agreement, taken as a
whole, do not and will not contain any untrue statement of a material fact, or
omit to state a material fact necessary to make the statements contained herein
not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions,
circumstances, activities, practices, incidents, plans or actions, based on or
resulting from the conduct of the business of the Company, including the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, chemical or industrial
toxic or hazardous material, substance or waste, which will violate any laws
chargeable to the Company currently in effect relating to pollution or
protection of the environment (the "ENVIRONMENTAL LAWS") or any plan, order,
decree, judgment, injunction, notice or demand letter from a governmental entity
applicable to the Company, or which will give rise to any common law or other
legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
or similar state or local laws in effect as of the date hereof. To the best of
the Company's and each of the Shareholders' knowledge, the Business Real
Property contains no spill, deposit or discharge of any hazardous substance (as
that term is currently defined under CERCLA or any applicable state law), as a
result of which there would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate
description of each underground storage tank of any kind or nature located on
the Business Real Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall
allow Lithia and its consultants access to the Business Real Property for the
purpose of conducting any further environmental assessment it may desire to
conduct, upon execution by Lithia and such consultants of an appropriate
indemnity agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the
Shareholders know of any reason why the Company cannot continue its business in
all material respects in the same manner following the execution of this
Agreement and the Closing as it has been operated prior thereto, except to the
extent that Lithia causes the business of the Company to change following the
Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will
provide a complete and accurate description of all contracts in transit for the
Company.
7.30 EVALUATION OF RISKS IN RECEIVING LITHIA SECURITIES. Each
Shareholder is capable of evaluating the merits and risks of an investment in
the Class A Common Stock and the Series M Preferred Stock. By reason of their
respective business or financial experience, and/or the business or financial
experience of their respective professional advisors (who are not affiliated,
either directly or indirectly, with Lithia or any affiliate or selling agent of
Lithia), each Shareholder has the capacity to protect their
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interests in connection with an investment in the Lithia securities. Each
Shareholder has had access to and has reviewed such portions of Lithia's SEC
Filings as he or his professional advisors has deemed necessary and has met
either directly or through such respective professional advisors with a
representative of Lithia and has had the opportunity to ask questions of, and
receive answers from, Lithia concerning Lithia, the Class A Common Stock and the
Series M Preferred Stock and the terms and conditions of this transaction. Each
Shareholder has received any information requested by such Shareholder or his
professional advisors. Any questions raised concerning this transaction have
been answered to the satisfaction of each Shareholder or their respective
professional advisor.
7.31 LIMITATIONS ON TRANSFER OF STOCK. The Class A Common Stock and
Series M Preferred Stock to be issued to each Shareholder pursuant to the Plan
of Merger and any additional shares of Class A Common Stock which may be issued
upon a conversion of the Series M Preferred Stock will be held as an investment
and not with a view to distribution.
7.32 LACK OF REGISTRATION OF STOCK. Each Shareholder understands that:
(a) the offer and sale of the Class A Common Stock and Series M Preferred Stock
to be issued to the Shareholder pursuant to the Plan of Merger and any
additional shares of Class A Common Stock which may be issued upon a conversion
of the Series M Preferred Stock have not been registered under the Securities
Act of 1933, as amended, or any state securities laws in reliance upon
exemptions from registration; (b) the shares of Class A Common Stock and Series
M Preferred Stock must be held indefinitely, unless their resale is subsequently
registered under the Securities Act of 1933, as amended, and under applicable
state securities laws or unless exemptions from registration are available; (c)
except as provided in the Registration Rights Agreement, Lithia has not agreed
to register the resale of any of the securities to be received by the
Shareholders; (d) the Class A Common Stock and Series M Preferred Stock may not
be offered, sold, transferred, pledged or otherwise disposed of in the absence
of either an effective registration statement under the Securities Act of 1933
and applicable state securities laws or an opinion of counsel acceptable to
Lithia that such registration is not required; and (e) the certificates
representing Series M Preferred Stock and the Class A Common Stock (including
any additional shares of Class A Common Stock which may be issued upon a
conversion of the Series M Preferred Stock) will contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. NO OFFER, SALE,
TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SHARES MAY BE
EFFECTED IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
7.33 INFORMATION CONCERNING LITHIA. Each Shareholder acknowledges that
they have received a copy of Lithia's Registration Statement on Form S-1 filed
May 1, 1998, Lithia's Form 10-K for the year-end December 31, 1997, Lithia's
Form 10-Q for the period ended September 30, 1998, and Lithia's Information
Statement for the annual meeting of Lithia's shareholders on Form DEF 14C dated
May 14, 1998, and have had the opportunity to review the information contained
in these filings and discuss the same with their respective professional
advisors.
7.34 INVESTOR STATUS. Each of the Shareholders is an "accredited
investor" as such term is defined under the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder by the Securities and
Exchange Commission.
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8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement is, and
when executed at the Closing the Plan of Merger will be, a valid and legally
binding obligation of Lithia, enforceable against Lithia in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). Lithia has the complete and unrestricted right, power and
authority to execute this Agreement and the Plan of Merger and perform its
covenants in accordance with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing
under the applicable laws of the state of its incorporation and has all
necessary power and authority to own, lease and operate its properties and
assets and to conduct its business as its business is now being conducted.
Lithia is qualified to do business and is in good standing in each state in
which it transacts business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists
of 100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares
of Class B Common Stock, no par value and 15,000,000 shares of preferred stock,
no par value, of which 10,500 shares will be designated as Series M-2002
Preferred Stock and 4,500 shares will be designated as Series M-2003 Preferred
Stock, prior to Closing. Lithia SEC Filings reflect, as of the dates referred
to in such filings, all shares of capital stock issued and outstanding (the
"LITHIA SHARES") or plans pursuant to which such shares may be issued. The
Lithia Shares have been validly authorized and issued, are fully paid and
non-assessable, and have not been issued in violation of any preemptive rights.
The Class A Common Stock and Series M Preferred Stock to be issued as
part of the Merger Consideration, including any Class A Common Stock issued upon
conversion of the Series M Preferred Stock (collectively, the "MERGER SHARES")
have been duly authorized and, when issued in accordance with this Agreement,
the Plan of Merger and the terms of the Series M Preferred Stock, will be
validly issued, fully paid and non-assessable and will not have been issued in
violation of the preemptive or similar rights of any person. Prior to issuance,
all Class A Common Stock to be issued to the Shareholders shall have been
approved for listing on the New York Stock Exchange. The Merger Shares will not
be subject to any restriction on transfer except as contemplated by Section
7.32.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly
and other reports under the Securities Exchange Act of 1934 and various filing
with the Securities and Exchange Commission under
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the Securities Act of 1933 (collectively, Lithia's "SEC FILINGS"). Prior to
Closing, Lithia agrees to file such other filings as the federal securities laws
require and to provide copies of such filings to Shareholders within 5 business
days from the date of such filing. The SEC Filings comply and all additional
filings prior to Closing will comply with the requirements of applicable laws,
regulations and forms, and none of such filings contain or will contain a
material misstatement or omit or will omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local
tax returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All
current taxes not yet due and payable by Lithia have been properly accrued and
are accurately reflected in its balance sheet in the SEC Filings. Lithia has
not been delinquent in the payment of any tax, assessment or governmental
charge, nor has any tax deficiency been proposed or assessed against it, nor has
it executed any waiver of the statute of limitations on the assessment or
collection of any tax.
8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of
the latest balance sheet in any SEC Filings and except as set forth in
Schedule 8.8 (i) Lithia has not incurred any material debts, liabilities or
obligations except current liabilities in the ordinary course of business;
discharged or satisfied any material liens or encumbrances, or paid any material
debts, liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing. Except as set forth in the SEC Filings or Schedule 8.8, Lithia
is not a party to any agreement, letter of intent or other understanding that
would result in the issuance of any equity securities of Lithia, and as of the
date hereof, Lithia is not engaged in discussions with any person that are
reasonably likely to result in such an agreement or understanding. Without the
prior written consent of W. Douglas Moreland, Lithia will not, prior to the
Effective Date, agree to issue any equity securities in any acquisitions, having
an aggregate value in excess of $20,000,000.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body specifically applicable to Lithia and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or
threatened against Lithia subsidiaries, or any of its properties, assets or
business which might have a material adverse effect on its financial condition
or business prospects. Lithia is not aware of any facts that might result in
any other material action, suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there
are no existing violations of federal, state or local laws, ordinances, rules,
codes, regulations or orders by Lithia which
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are reasonably likely to materially affect the properties, assets or business of
Lithia. To the best of Lithia's knowledge, Lithia is not subject to any
restriction, judgment, order, writ, injunction, decree or award, which
materially and adversely affects or is likely to materially and adversely affect
the business, operations, properties, assets or condition (financial or
otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or
indirectly, any broker or finder or incurred any liability for any brokerage
fees or commissions or finders' fees and no broker or finder has acted directly
or indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all
written instruments listed or described on the schedules provided herewith have
been furnished to the Shareholders. Lithia will make available to the
Shareholders or their respective professional advisors, to the extent requested
by the Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in
this Agreement and in the schedules provided herewith, and the other statements
in writing and information furnished or to be furnished to the Shareholders by
or on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia
mutually agree to cooperate and use commercially reasonable good faith efforts
to prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
bodies as may be necessary to consummate the transactions contemplated by this
Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall
cause the Company to permit representatives of Lithia to have full access to and
to examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 SHAREHOLDERS' REVIEW. Lithia will make available to Shareholders
or their respective professional advisors such books and records and access to
its senior management as Shareholders reasonably request and in a manner so as
not to interfere with the normal business operations of Lithia and the
responsibilities of its senior management, in order to fully evaluate Lithia and
its Class A Common Stock and Series M Preferred Stock to be issued to such
Shareholders pursuant to the Plan of Merger.
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9.5 NOTICE OF CHANGES. The Company shall give prompt written notice
to Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.6 STANDSTILL AGREEMENT. Each Shareholder agrees that whenever
Lithia undertakes a firmly underwritten public offering of its securities and,
if requested by the managing underwriter in such offering, the Shareholder will
enter into an agreement not to sell or dispose of any securities of Lithia owned
or controlled by the Shareholder, provided such restriction will not extend
beyond 180 days from the effective date of the registration statement filed in
connection with such offering.
9.7 FURTHER ASSURANCES. From time to time at or after the Closing, as
and when requested by any party hereto, the other party shall execute and
deliver, or cause to be executed and delivered, all such documents and
instruments and shall take, or cause to be taken, all such further or other
actions as such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
9.8 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options
pursuant to its 1996 Incentive Stock Plan to management employees remaining with
the Company after Closing. The number of shares available for grant to all
employees in the Moreland Group shall be equal to six percent of the total
number of shares of Class A Common Stock issued to all the shareholders of the
companies in the Moreland Group at the Closing and the simultaneous closings of
the Other Reorganization Agreements including such additional shares that may be
issued as Contingent Merger Consideration, plus six percent of the shares of
Class A Common Stock issuable upon conversion of the shares of Series M
Preferred Stock issued at the Closing and such simultaneous closings including
such additional shares that may be issued as Contingent Merger Consideration,
determined as though such Series M Preferred Stock were converted to Class A
Common Stock at the date of issuance. The options will be granted during 1999
and 2000 to such persons and in such amounts consistent with Lithia's practices
and as proposed by W. Douglas Moreland.
9.9 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may be created or permitted by this Agreement), and any security agreements
entered or collateral pledged to secure such guarantees, shall be released,
discharged or terminated prior to or at Closing.
9.10 NON-COMPETE. For a term of three years following the Closing date
of the Merger, Shareholders will not, directly or indirectly, within 100 miles
of any dealership currently owned or operated by Lithia or any of its
subsidiaries, own, operate, manage, control, participate in the ownership,
management, operation or control of or be paid or employed by or acquire any
interest in or securities of or otherwise become associated with or provide
assistance to, as an employee, consultant, director, officer, shareholder,
partner, agent, associate, principal, representative or any other capacity, any
business entity engaged in the lease or sale of new or used automobiles or light
trucks except as may otherwise be provided in such Shareholders' Employment
Agreements with Lithia. This covenant against competition shall not prohibit
any activity of any Shareholder with respect to any business entity with which
it or he has any such relationship as of the date of this Agreement or any
successor to such a business entity. If Lithia or one of its subsidiaries
acquires or assumes operation of an additional dealership after the date hereof,
this covenant against competition shall be extended to that additional
dealership, but there shall automatically be excepted from such extended
covenant any business entity that is within 100 miles of such additional
dealership and in which any Shareholder had an interest which did not constitute
a breach of this Section before Lithia or such subsidiary acquired or assumed
operation of such additional dealership. For that purpose, a Shareholder shall
be deemed to have an interest in a business entity if he
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or it had any of the relationships with such entity that constitute competition
under this Section 9.10, had signed a letter of intent, terms sheet, or
agreement contemplating such a relationship or had filed an application with a
manufacturer or franchisor which, if granted, would create such a relationship.
9.11 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.12 SERVICE CONTRACT PRICING. Prior to the Effective Date, the
parties will determine a pricing schedule for extended service contracts which
will be charged to each Moreland Group dealership. The pricing schedule,
determined for each product line, will be the amount determined by the following
formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by
the Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that
product line less the inception rebate paid by Ryan
& Associates (in 1998, this inception rebate was
paid to Diamond Financial and was $15.00 on new
vehicles and $40.00 on used vehicles).
C = the percentage of all service contracts written by
the Moreland Group in 1998 with Western National.
D = the price charged by Western National for that
product line less the inception rebate paid by
Western National (in 1998, this inception rebate was
paid to Diamond Financial and was $50.00 on both new
and used vehicles).
9.13 HAIL DAMAGE RESERVE. During 1999, the Shareholders shall be
entitled to cause the Company to transfer to income a reasonable amount from the
insurance damage reserve established in respect of vehicles damaged by hail in
1998 each time a hail-damaged vehicle is sold; provided, however, that no
amounts shall be transferred from the Special Hail-Damage Reserve prior to the
end of 1999. All amounts so transferred shall be included in Net Adjusted
Pretax Income for 1999.
9.13.1 At year end 1999, if any hail-damaged vehicles remain
unsold, the parties will attempt to agree on the amount of the Special
Hail-Damage Reserve that should be allocated to such vehicles to reduce the
carrying value of such vehicles to reflect their market value. If the parties
are unable to agree, the dispute will be determined by PricewaterhouseCoopers
LLP or such other firm as may be agreed upon by Lithia and the Shareholders.
9.13.2 At the end of 1999, the Shareholders shall have the right
to require the Company and Lithia to calculate the average gross profit on
hail-damaged vehicles sold by the Company during 1999 and the average gross
profit on vehicles sold during the year that had not incurred hail damage. If
that right is exercised, the Shareholders may require the Company to transfer
such amount from the Special Hail-Damaged Reserve (but not to exceed 80 percent
of the initial amount of the Special Hail-Damage Reserve) to income in 1999 as
may be necessary to increase the average gross profit on hail-
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damaged vehicles to 105 percent of the average gross profit on non hail-damaged
vehicles sold during the year. All amounts so transferred shall be included in
Net Adjusted Pretax Income for 1999.
9.13.3 Any amount remaining in the Special Hail-Damage Reserve
after the allocations under 9.13.1 and the transfers under 9.13.2 shall be held
in the reserve until March 31, 2000. Warranty claims for 1998 hail damage made
during the first quarter of 2000 shall be charged against the Special
Hail-Damage Reserve.
9.13.4 Any amount remaining in the Special Hail-Damage Reserve at
March 31, 2000 shall be paid to the Shareholders as part of the Contingent
Merger Consideration as set forth in the definition of that term.
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF
THE COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 APPROVAL OF LITHIA'S SHAREHOLDERS. The shareholders of Lithia
shall have approved this Agreement and the issuances of the Class A Common Stock
and Series M Preferred Stock, if such approval is necessary under the listing
requirements of the New York Stock Exchange.
10.4 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.5 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
10.6 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been
approved as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.7 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from
Ford Motor Credit Company a waiver or consent to this Agreement and the
transactions contemplated hereby.
10.8 TAX OPINION. Lithia shall have received from Foster Pepper &
Shefelman, PLLC a tax opinion substantially in the form of Exhibit F.
10.9 LEGAL OPINION. Lithia shall have received from Sherman &
Howard L.L.C. its opinion substantially in the form of Exhibit K.
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10.10 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
the Other Reorganization Agreements shall have been fulfilled.
10.11 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value.
10.12 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit L.
10.13 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The
Adjusted Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger
Consideration shall have been determined.
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
11.5 TAX OPINION. The Shareholders shall have received from Sherman &
Howard, L.L.C. a tax opinion substantially in the form of Exhibit E.
11.6 LEGAL OPINION. The Shareholders shall have received from Foster
Pepper & Shefelman LLP an opinion substantially in the form of Exhibit M.
11.7 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
11.8 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders
will receive fully executed Agreement substantially as set forth in Exhibit L.
11.9 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The
Adjusted Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger
Consideration shall have been determined.
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12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or
after the Closing or the decision of any party to complete the Closing, each
party shall be entitled to rely upon the representations and warranties set
forth in this Agreement. All representations and warranties made in this
Agreement shall survive the Closing until March 31, 2001; provided, however,
that (i) the accuracy of each such representation and warranty shall be
determined only as of the date of the Closing, (ii) the representations and
warranties in Sections 7.14 and 8.7 shall survive until 30 days after the
expiration (without extension) of the statute of limitations for the Company's
or Lithia's (as the case may be) 1998 federal income tax return, and (iii) any
claim based upon fraud shall survive for its applicable statute of limitation.
The period of survival for each representation and warranty established in this
Section 12 is referred to as the "Survival Period" for such representation and
warranty. The liabilities of the parties with respect to their respective
representations and warranties will expire as of the expiration of the
applicable Survival Period; provided, however, that such expiration will not
affect the rights of any party entitled to rely on a representation and warranty
in respect of any breach of which such party has given notice to the breaching
party prior to the expiration of the Survival Period, specifying in reasonable
detail the facts alleged to constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and
severally indemnify, defend and hold harmless the Company and Lithia and their
respective successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and
against any claims, damages, liabilities, penalties, actions, suits,
proceedings, demands, assessments, costs and expenses, including reasonable
attorneys fees and expenses of investigation ("CLAIMS"), incurred by any Lithia
Indemnified Party arising from or related to (i) any breach of any
representation or warranty made by the Company or the Shareholders in this
Agreement, of which notice is given to the Shareholders by the Lithia
Indemnified Parties prior to the expiration of the Survival Period for such
representation or warranty or (ii) any breach of any covenant or agreement made
by the Company or the Shareholders in this Agreement, to the extent, in the case
of the Company, that such covenant or agreement was to be performed at or before
the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly
notify the Shareholders of any Claim against which indemnification will be
sought hereunder. If the Claim involves a claim, investigation, demand, action
or suit by a third party, including a governmental authority, the Shareholders
shall have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section
7.14, the Lithia Indemnified Parties shall not be entitled to indemnification
under Section 13.1 unless and until the aggregate amounts against which they
would otherwise be entitled to indemnification under Section 13.1 of this
Agreement and the comparable indemnification provisions of the Other
Reorganization Agreements exceed $500,000, and then only to the extent of such
excess.
13.3.2 In no event shall the Shareholders be liable in the
aggregate under Section 13.1 for an amount that, when added to the amounts for
which the shareholders of the other members of the Moreland Group are liable
under the comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 7.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
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13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is
entitled to be indemnified hereunder shall be reduced by (i) the amount of any
insurance proceeds available to such Lithia Indemnified Party in respect of the
matter giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties prior
to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia will
assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall,
for these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements (ii) if any
of the warranties and representations of the Company or the Shareholders
contained herein are false in any material respect, (iii) if the conditions of
this Agreement to be complied with or performed by the Shareholders or the
Company at or before Closing are not complied with or performed at the time
required for such compliance or performance and such noncompliance or
nonperformance is not waived by Lithia or (iv) if Lithia terminates any of the
Other Reorganization Agreements in accordance with the terms and conditions of
such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written
notice of termination given by the Company to Lithia (i) if Lithia defaults in
any material respect in the observance of or in the
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due and timely performance by Lithia of any agreements and covenants of Lithia
contained herein or in the Other Reorganization Agreement, (ii) if any of the
representations and warranties of Lithia contained herein are false in any
material respect, (iii) if the conditions of this Agreement to be complied with
or performed by Lithia at or before Closing are not complied with or performed
at the time required for such compliance or performance and such noncompliance
or nonperformance is not waived by the Company or (iv) if one of the other
members of the Moreland Group terminates any of the Other Reorganization
Agreements in accordance with the terms and conditions of such other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement
under Section 15.1, no party to this Agreement shall have any liability or
obligation hereunder. Upon any termination of this Agreement under Section 15.2
or 15.3, neither party shall have any prospective obligation hereunder except as
provided in Section 15.5, but each party shall have, if otherwise available, the
remedy of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
15.5.1 In the event that this Agreement is terminated by the
Company based upon a willful refusal by Lithia to complete the Agreement or any
Other Reorganization Agreement, Lithia shall pay the Company a break-up fee
equal to 200% of (i) all amounts paid or payable to Lithia under the Consulting
Agreement dated as of January 1, 1999 among Lithia and the members of the
Moreland Group in respect of the net profits of the Company. For purposes of
this Section 15.5, a willful refusal by Lithia to complete the Agreement or any
Other Reorganization Agreement means either Lithia's refusal to consummate the
transactions contemplated by the Agreement or any Other Reorganization Agreement
even though all of the conditions to its obligations to do so have been
fulfilled or Lithia's failure to take any action within its reasonable control
that would result in the fulfillment of a condition to such obligations.
15.5.2 In the event that either party terminates this Agreement
for reason of the non-fulfillment of the Designated Condition, Lithia shall pay
to the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement
for any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or
(ii) a willful refusal by the Company or any of the other members of the
Moreland Group or their Shareholders to complete the Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
100% of all amounts paid or payable by the Company to Lithia under the
Consulting Agreement dated as of January 1, 1999 among Lithia and the members of
the Moreland Group in respect of the net profits of the Company.
15.5.4 The break-up fees payable under this Section 15.5 shall be
due at the time this Agreement is terminated. Should the transactions
contemplated by this Agreement or the Other Reorganization Agreements fail to
close for any reason other than a willful refusal by the Company or any other
member of the Moreland Group to complete this Agreement or any other
Reorganization Agreement, it is acknowledged that the Company and the
Shareholders would suffer damages; however, the precise amount of such damages
would be difficult to establish. The break-up fees provided in this Section
represent a good-faith estimate by the parties of the damage that the Company
and Shareholders would incur. Lithia acknowledges that the break-up fees
payable under Section 15.5.2 and 15.5.3 are reasonable and appropriate, even
though Lithia may not have breached any representation, warranty or covenant
contained herein in the circumstances described in those sections. To the
extent of those break-
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up fees, Lithia has knowingly accepted the risk of the nonfulfillment of the
conditions to its obligations and the obligations of the Company and the
Shareholders in the circumstances described in Sections 15.5.2 and 15.5.3 in
oreder to induce the Company and the other members of the Moreland Group to
enter into this Agreement and the Other Reorganization Agreements and risk the
adverse effect on their market values that will occur if those agreements are
not completed. Lithia expressly agrees that the break-up fees contemplated by
this Section 15.5 shall be due even though the Company, the Shareholders or any
other member of the Moreland Group or any shareholder thereof may have breached
any representation, warranty or covenant of this Agreement or the Other
Reorganization Agreements, with the sole exception of a willful refusal by any
such party to complete this Agreement or any of the Other Reorganization
Agreements. The right to collect break-up fees pursuant to this Section 15.5
shall be the exclusive remedy of the Company and the Shareholders in the event
of a termination of this Agreement in the circumstances described in
Section 15.5.1 or 15.5.2. In the event that the Company or the Shareholders
terminate this Agreement under the circumstances described in Section 15.5.3 as
a result of the nonfulfillment of the condition established in Section 11.1 (or
Section 11.7 as it relates to the comparable conditions in the Other
Reorganization Agreements), the liquidated damages payable under Section 15.5.3
shall be deemed to compensate the Company only for the opportunity cost of
having taken itself off the market while this Agreement was being negotiated and
was in effect, and the Company shall be entitled to prove any other damages and
pursue any other remedy available at law or in equity.
16. DISPUTE RESOLUTION
16.1 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
non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of
or relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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 having jurisdiction over Reno, Nevada 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 corporate law. Whether
a claim is covered by this Agreement shall be determined by the arbitrator(s).
All statutes of limitations which would otherwise be shall apply to any
arbitration proceeding hereunder.
16.3 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
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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.
16.4 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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
hereto constitutes the entire agreement between the parties regarding the
subject matter hereof and supersedes all prior agreements and understandings
between the parties relating to the subject matter of this Agreement. There are
no agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or
terminated except by an instrument in writing signed by all parties to this
Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter gender thereof or to the
plurals of each, as the identity of the person or persons or the context may
require. The descriptive headings contained in this Agreement are for reference
purposes only and are not intended to describe, interpret, define or limit the
scope, extent or intent of this Agreement or any provision contained in this
Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall
for any reason be held to be invalid, illegal, void or unenforceable in any
respect, such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated
by this Agreement are consummated, each of the parties to this Agreement shall
be responsible for its own costs and
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expenses incurred in connection with the preparation and negotiation of this
Agreement and the transactions contemplated hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
legal representatives, successors and permitted assigns. No party may assign
any of their rights or delegate any of their obligations hereunder. Any
assignment in violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and
agreements disclosed in the Exhibits and Schedules to this Agreement shall be
deemed to be disclosed for all purposes of this Agreement and to constitute
exceptions not only to the representations and warranties in the specific
Sections that refer to such Exhibits or Schedules, but also to all other
representations and warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be
(i) in writing, dated with the current date of such notice, and signed by the
party giving such notice, and (ii) mailed, postpaid, registered or certified,
return receipt requested, addressed to the party to be notified, or delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses to
accept delivery of the notice. The initial addresses of the parties shall be as
follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: William D. Corp.
350 S. Havana
Aurora, CO 80012
Attn: W. Douglas Moreland
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
If to the Shareholders: William D. Limited Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
James Jannicelli
350 S. Havana
Aurora, CO 80012
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
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17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's
and the Shareholders' "knowledge" shall be limited to the actual knowledge of
the Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
LITHIA MOTORS, INC.
By:
-----------------------------------------
Bryan B. DeBoer, Vice President
WILLIAM D.CORP.
By:
-----------------------------------------
W. Douglas Moreland
SHAREHOLDERS
WILLIAM D. LIMITED PARTNERSHIP, RLLLP
By: Moreland/WDCorp Inc., General Partner
By:
-----------------------------------------
W. Douglas Moreland, President
-----------------------------------------
James Jannicelli
29
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
PERCENT OF MERGER CONSIDERATION
--------------------------------------------
SHAREHOLDER MERGER SHARES(1) CASH
- ----------------------------- ---------------- ----------------
<S> <C> <C>
</TABLE>
- ----------
(1) Each Shareholder will receive the same percentage of Class A Common Stock
and Series M Preferred Stock.
Schedule 2.1
<PAGE>
EXHIBIT 10.4
CHERRY CREEK DODGE, INCORPORATED
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
CHERRY CREEK DODGE LIMITED PARTNERSHIP, RLLLP
(the "Shareholders")
And
CHERRY CREEK DODGE, INCORPORATED,
a Colorado corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
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PAGE
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1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Shares and Shareholders. . . . . . . . . . . . . . . . . . . . . . 5
2.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . 5
2.4 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . . . 6
2.5 Merger Consideration . . . . . . . . . . . . . . . . . . . . . . . 6
3. FORMATION OF MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . 7
4. MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5. REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 Date, Time and Place of Closing. . . . . . . . . . . . . . . . . . 8
6.2 Documents To Be Delivered at Closing by the Shareholders . . . . . 8
6.3 Documents To Be Delivered at Closing by Lithia . . . . . . . . . . 9
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. . . . . . . . . . . . 9
7.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 Incorporation and Good Standing. . . . . . . . . . . . . . . . . . 9
7.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.6 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.7 Tangible Personal Property . . . . . . . . . . . . . . . . . . . .10
7.8 Parts Inventories. . . . . . . . . . . . . . . . . . . . . . . . .10
7.9 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . .11
7.10 Intellectual Property. . . . . . . . . . . . . . . . . . . . . . .11
7.11 Title to Properties; Encumbrances. . . . . . . . . . . . . . . . .11
7.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . . .11
7.13 Indebtedness for Borrowed Money; Guaranties. . . . . . . . . . . .11
7.14 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.15 Transactions Since Balance Sheet Date. . . . . . . . . . . . . . .12
7.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.17 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . .13
7.18 Contracts and Agreements . . . . . . . . . . . . . . . . . . . . .13
7.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . .13
7.20 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.21 Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.22 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . .13
7.23 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . . .13
7.24 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . . .14
7.25 Powers of Attorney; Authorized Signatories . . . . . . . . . . . .14
7.26 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . .14
7.27 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . . .14
</TABLE>
ii
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7.28 Continuation of Business . . . . . . . . . . . . . . . . . . . . .14
7.29 Contracts in Transit . . . . . . . . . . . . . . . . . . . . . . .14
7.30 Evaluation of Risks in Receiving Lithia Securities . . . . . . . .14
7.31 Limitations on Transfer of Stock . . . . . . . . . . . . . . . . .15
7.32 Lack of Registration of Stock. . . . . . . . . . . . . . . . . . .15
7.33 Information Concerning Lithia. . . . . . . . . . . . . . . . . . .15
7.34 Investor Status. . . . . . . . . . . . . . . . . . . . . . . . . .15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA. . . . . . . . . . . . . . . . .16
8.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.2 Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.6 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.7 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.8 Transactions Since Latest Balance Sheet Date . . . . . . . . . . .17
8.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . .17
8.11 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . . .18
8.12 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . . .18
8.13 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . .18
9. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
9.1 Notices and Consents . . . . . . . . . . . . . . . . . . . . . . .18
9.2 Conduct of Business by the Company Prior to the Closing Date . . .18
9.3 Lithia's Examination . . . . . . . . . . . . . . . . . . . . . . .18
9.4 Shareholders' Review . . . . . . . . . . . . . . . . . . . . . . .18
9.5 Notice of Changes. . . . . . . . . . . . . . . . . . . . . . . . .19
9.6 Standstill Agreement . . . . . . . . . . . . . . . . . . . . . . .19
9.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . .19
9.8 Employee Stock Options . . . . . . . . . . . . . . . . . . . . . .19
9.9 Release of Guarantees. . . . . . . . . . . . . . . . . . . . . . .19
9.10 Non-Compete. . . . . . . . . . . . . . . . . . . . . . . . . . . .19
9.11 Update of Representations. . . . . . . . . . . . . . . . . . . . .20
9.12 Service Contract Pricing . . . . . . . . . . . . . . . . . . . . .20
9.13 Hail Damage Reserve. . . . . . . . . . . . . . . . . . . . . . . .20
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA. . . . . . . . . . . . . . .21
10.1 Representations, Warranties of the Shareholders and Covenants
of the Company and the Shareholders. . . . . . . . . . . . . . . .21
10.2 No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . .21
10.3 Approval of Lithia's Shareholders. . . . . . . . . . . . . . . . .21
10.4 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . . .21
10.5 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . . .21
10.6 Approval of Lithia as the Dealer . . . . . . . . . . . . . . . . .21
10.7 Consent from Lithia's Lender . . . . . . . . . . . . . . . . . . .21
10.8 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.9 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.10 Fulfillment of Conditions in Related Transactions. . . . . . . . .22
10.11 Employee and Related Party Loans . . . . . . . . . . . . . . . . .22
</TABLE>
iii
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10.12 Assignment and Licenses of Intangible Assets . . . . . . . . . . .22
10.13 Completion of Audit and Purchase Price Determination . . . . . . .22
10.14 Dealer Option Agreements . . . . . . . . . . . . . . . . . . . . .22
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.1 Representations, Warranties and Covenants of Lithia. . . . . . . .22
11.2 No Adverse Changes . . . . . . . . . . . . . . . . . . . . . . . .22
11.3 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . . .22
11.4 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . . .22
11.5 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.6 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.7 Fulfillment of Conditions in Related Transactions. . . . . . . . .22
11.8 Assignment and Licenses of Intangible Assets . . . . . . . . . . .23
11.9 Voting Agreement . . . . . . . . . . . . . . . . . . . . . . . . .23
11.10 Completion of Audit and Purchase Price Determination . . . . . . .23
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . .23
13. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
13.1 General Indemnity. . . . . . . . . . . . . . . . . . . . . . . . .23
13.2 Defense of Claims. . . . . . . . . . . . . . . . . . . . . . . . .23
13.3 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . .23
14. HART-SCOTT-RODINO NOTIFICATION. . . . . . . . . . . . . . . . . . . . . .24
15. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.1 Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.2 By Lithia. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.3 By the Company . . . . . . . . . . . . . . . . . . . . . . . . . .25
15.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . . .25
15.5 Break-Up Fee.. . . . . . . . . . . . . . . . . . . . . . . . . . .25
16. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
16.1 Mediation. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
16.2 Binding Arbitration. . . . . . . . . . . . . . . . . . . . . . . .26
16.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
16.4 Hearing and Award. . . . . . . . . . . . . . . . . . . . . . . . .27
17. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . .27
17.2 Exhibit and Schedules. . . . . . . . . . . . . . . . . . . . . . .27
17.3 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.4 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.6 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.7 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . . .28
17.8 Binding Effect and Assignment. . . . . . . . . . . . . . . . . . .28
17.9 Applicability of Exceptions and Disclosure . . . . . . . . . . . .28
17.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.11 Definition of Knowledge. . . . . . . . . . . . . . . . . . . . . .29
17.12 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
</TABLE>
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17.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
17.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . .29
17.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . .29
17.16 No Strict Construction . . . . . . . . . . . . . . . . . . . . . .29
</TABLE>
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<PAGE>
DEFINED TERMS
<TABLE>
<S> <C>
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . .2
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
CLASS A COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . .2
DAILY SALES PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
EMPLOYMENT AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . .2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . 23
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . .3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . .3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . .5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . .9
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SERIES M PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . .5
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SPECIAL HAIL-DAMAGE RESERVE. . . . . . . . . . . . . . . . . . . . . . . . . .5
</TABLE>
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<PAGE>
EXHIBITS
Exhibit A - Example Calculation of Adjusted Net Worth
Exhibit B - Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Series M Preferred Stock
Exhibit E - Foster Pepper & Shefelman PLLC Tax Opinion
Exhibit F - Sherman & Howard L.L.C. Tax Opinion
Exhibit G - Lease Agreement
Exhibit H - Registration Rights Agreement
Exhibit I - W. Douglas Moreland Employment Agreement
Exhibit J - Sherman & Howard L.L.C. Legal Opinion
Exhibit K - Assignment and Licenses of Intangible Assets
Exhibit L - Foster Pepper & Shefelman PLLC Legal Opinion
Exhibit M - Voting Agreement
Exhibit N - North Avenue Auto, Inc. Dealer Option Agreement
Exhibit O - Grand Auto, Inc. Dealer Option Agreement
Exhibit P - Skyline Automotive, Inc. Dealer Option Agreement
Exhibit Q - The Bill Berry Motor Company Dealer Option Agreement
Exhibit R - Avondale Automotive, Inc. Dealer Option Agreement
Exhibit S - Peoples Chrysler Plymouth Jeep Eagle, Inc. Dealer Option
Agreement
Exhibit T - Kids' Automotive, Inc. Dealer Option Agreement
Exhibit U - Brandon Financial, Inc. Dealer Option Agreement
Exhibit V - Moreland Auto Group, LLLP Dealer Option Agreement
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
vii
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Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
viii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated
effective January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon
corporation ("Lithia"); CHERRY CREEK DODGE LIMITED PARTNERSHIP, RLLLP (whether
one or more, the "SHAREHOLDERS"); and CHERRY CREEK DODGE, INCORPORATED, a
Colorado corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and
outstanding shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Dodge automobiles and light trucks and related parts and accessories from
premises located at 2727 S. Havana, Denver, Colorado; 4940 S. Broadway,
Englewood, Colorado; and 658 S. Havana, Aurora, Colorado (the "BUSINESS REAL
PROPERTY").
C. All the parties desire to consummate a business combination
transaction pursuant to which the Company will merge with and into a subsidiary
of Lithia, for the consideration and on the other terms set forth in this
Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times
LIFO reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from
the total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall
be decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the
amount, if any, by which the total Moreland Transaction Expenses recorded
in 1998 exceed the remainder obtained by subtracting $11,000,000 from the
aggregate Net Adjusted Pretax Income of all members of the Moreland Group
for 1998. The Company's proportionate share of the Moreland Transaction
Expenses or the excess transaction expenses shall be determined by
multiplying the total Moreland Transaction Expenses or excess transaction
expenses by a fraction, the numerator of which is the Company's Net
Adjusted Pretax Income for 1998 and the denominator of which is the
aggregate Net Adjusted Pretax Income of all members of the Moreland Group
for 1998.
(iv) The North Avenue Auto, Inc. note of $2,100,000 shall be
valued at the full principal amount of such note.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
1
<PAGE>
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for 1998 and the
denominator is the aggregate Net Adjusted Pretax Income for 1998 of all members
of the Moreland Group.
"CLASS A COMMON STOCK" means Lithia's Class A Common Stock, without par
value.
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J-K
CMC = [ 6(H-I) ----- ] + N
L-M
where:
H = the aggregate Net Adjusted Pretax Income of
all members of the Moreland Group for 1999,
but H shall not be less than I or more than I
plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax
Income for all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for
1999, but J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax
Income;
L = the aggregate Net Adjusted Pretax Income for
1999 of all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax
Income of all Qualifying Members.
N = the amount, if any, of the Special-Hail
Damage Reserve existing at March 31, 2000.
"FLOORPLAN RATE" means the rate of interest that the Moreland Group and
all affiliated dealerships would have paid on their floorplan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $16,189,474 adjusted as follows as
of the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(i) First, the Initial Merger Consideration shall be adjusted
to equal IMC in the equation:
B
IMC = (A x 6) --- - $ 3,850,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998;
and
C = The aggregate Net Adjusted Pretax Income of
all members of the Moreland Group for 1998.
(ii) Second, the adjusted Initial Merger Consideration
determined in (i) above shall be adjusted by adding thereto (if positive)
or subtracting therefrom (if negative) the amount of NWA in the equation:
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E
NWA = (D - $28,000,000) ---
D
where:
D = the aggregate Adjusted Net Worth of all
members of the Moreland Group as of December
31, 1998; and
E = the Adjusted Net Worth of the company as of
December 31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration
determined in (ii) above shall be increased by an amount equal to IA in
the equation
(F + $3,850,000) G
IA = ------------------
730
where:
F = the adjusted Initial Merger Consideration
determined in (ii) above; and
G = the sum of the Lithia Floorplan Rates in
effect on each day from and including January 1,
1999 to but excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles
followed in the preparation of the financial statements as of and for the years
ended December 31, 1996 and 1997 for the Moreland Automotive Group (which
include entities not included in the Moreland Group as defined herein) audited
by Arthur Andersen LLP and accompanied by their report thereon dated May 21,
1998.
"MORELAND GROUP" means Cherry Creek Dodge, Incorporated, William D.
Corp., Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc.,
L.A.H. Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado
corporations, and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all
members of the Moreland Group in connection with the transactions contemplated
by this Agreement and the Other Reorganization Agreements including, without
limitation, the fees of Arthur Andersen LLP for services relating to audits of
the Moreland Groups' financial statements for 1998 and subsequent years and
other transaction-related services, fees and expenses of counsel for the
Moreland Group and all filling fees payable to governmental entities relating to
the transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense
incurred or paid to W. Douglas Moreland and the general manager of the
dealership owned by the entity for the period prior to the Effective Date
and any bonus paid to W. Douglas Moreland for the period after the
Effective Date shall be added back to net income.
(iii) The salary and other compensation expenses that would have
been payable for the period prior to the Effective Date to W. Douglas
Moreland and the salary, bonus and other
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compensation expense that would have been payable for the period prior to
the Effective Date to the general manager of the dealership owned by the
entity under the employment arrangements between those persons and Lithia
or the entity, shall be deducted from net income. The salary payable to
W. Douglas Moreland under his Employment Agreement shall be allocated
among the members of the Moreland Group in proportion to their respective
Net Adjusted Pretax Incomes for the year. No bonus payable to W. Douglas
Moreland under his Employment Agreement shall be deducted from net income
under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity
after December 31, 1997 will be added back to or deducted from net
income.
(v) All Moreland Transaction Expenses recorded in the period
shall be added back to net income, but only to the extent that such
Moreland Transaction Expenses were taken into account in computing net
income in the first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for
credit life insurance and financing contracts shall be adjusted to the
revenues or expenses that would have been earned or incurred by such
entity for the same contacts under arrangements in effect during 1998.
Extended service contract costs will be based upon the costs charged to
the Company pursuant to Section 9.12.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of
all funds paid by such entity to Lithia or any affiliate of Lithia during
the period as a dividend or loan and on the amount of any fees or other
charges paid to Lithia to the extent that such fees are not included as
expenses in calculating Net Adjusted Pretax Income pursuant to clause
(xiii) below, from the date such payment was made to the end of the
period or the date of its repayment.
(ix) Net income shall be decreased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of
all funds provided by Lithia or any affiliate of Lithia to such entity
during the period as a loan or contribution and on the amount of any cost
savings described in clause (xii) below, from the date of such loan or
contribution or the date the savings were realized to the date of
repayment or the end of the period.
(x) Net income shall be increased by all fees paid to Lithia by
such entity under the Consulting Agreement between Lithia and such entity
as in effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring
and extraordinary income or expense items will be deducted or added back
to the net income. Some members of the Moreland Group held, on
January 1, 1999, vehicles which had suffered hail damage in 1998 and a
related insurance damage reserve. Amounts transferred from that
insurance damage reserve shall not be considered non-reoccurring or
extraordinary income and shall be included in net income, subject to
Section 9.13.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of
which was previously incurred by the Company or procured from a third
party, the income of the Company will be adjusted to reflect the costs
that would have been incurred by the Company under the
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arrangements in effect during 1998. If Lithia provides a service or
product not previously utilized by the Company, the reasonable or agreed
costs of such services or product will be included if W. Douglas Moreland
agreed or agrees that the cost of such service or product would be
included in determining Net Adjusted Pretax Income hereunder.
In addition to the specific adjustments described above, net income of
each entity for 1999 shall be adjusted in such other respects as may be
necessary to eliminate the effect of any additional costs resulting from changes
implemented by Lithia not concurred in by W. Douglas Moreland. For example, if
Lithia makes capital improvements or increases inventory levels not concurred in
by W. Douglas Moreland, all current operating expenses associated with those
decisions, including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached
as Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net
Adjusted Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax
Income.
"SERIES M PREFERRED STOCK" means shares of Lithia's preferred stock,
without par value, designated as Series M-2002 Preferred Stock and Series M-2003
Preferred Stock and having the right and preferences set forth in Lithia's
Articles of Incorporation.
"SPECIAL HAIL-DAMAGE RESERVE" means a reserve established by Cherry Creek
Dodge, Incorporated, Moreland Auto Corp. and William D. Corp. from unallocated
insurance proceeds for hail-damage suffered to vehicles still in inventory at
December 31, 1998, which reserve will be $200,000 for Cherry Creek Dodge,
Incorporated, and $50,000 each for Moreland Auto Corp. and William D. Corp. The
Special Hail-Damage Reserve constitutes only a portion of the total insurance
damage reserve established by those three entities in respect of hail damage
suffered in 1998.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive. Schedule 2.1 also reflects the
proportions in which the Shareholders will share the cash and stock components
of the Merger Consideration, which are different than their percentage ownership
interests in the Company. The Shareholders hereby agree to those proportions
and waive any right they may have to receive all elements of the Merger
Consideration in proportion to their stock ownership of the Company.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which the Company shall be merged with and into Merger Sub, the
separate corporate existence of the Company shall thereupon cease, and Merger
Sub shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders
and the Company will cause the Plan of Merger and Articles of Merger in the form
required by Colorado law to be executed and
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filed as soon as reasonably possible following the date of the Closing, or on
such other date as Lithia and the Company may agree, with the Secretary of State
for the state of Colorado. The Merger shall become effective at the time at
which the Articles of Merger shall have been accepted for filing by the
Secretary of State for the state of Colorado or such time specified in the
Articles of Merger as may be agreed upon by Lithia and the Company, and such
time is hereinafter referred to as the "EFFECTIVE TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding
share of Company Common Stock shall be converted into the right to receive a
portion of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably
practicable, the Company shall cause its auditors to prepare an audited balance
sheet and income statement for the Company as of and for the year ended
December 31, 1998 in accordance with Moreland GAAP and shall calculate the
Company's Adjusted Net Worth and Net Adjusted Pretax Income and the Initial
Merger Consideration on the basis thereof. The Company shall deliver such
financial statements and calculations to Lithia. Lithia shall have a period of
15 days after its receipt of such financial statements and calculations to make
any objections it may have to the Adjusted Net Worth and Net Adjusted Pretax
Income of the Company and the Initial Merger Consideration as calculated by the
Company. If Lithia does not give notice of objections within that period, the
Adjusted Net Worth, Net Adjusted Pretax Income and Initial Merger Consideration
so calculated shall be final. If Lithia does give notice of objections within
that time, and Lithia and the Company are unable to resolve the matter by
agreement, either side may submit the matter to PricewaterhouseCoopers LLP or
another independent accounting firm selected by the Shareholders and Lithia for
resolution. The decision of that accounting firm shall be binding on the
parties.
2.5.2 PAYMENT OF INITIAL MERGER CONSIDERATION. The Initial
Merger Consideration shall be payable in a combination of cash, Class A Common
Stock and Series M-2002 Preferred Stock. The amount of the Initial Merger
Consideration to be paid in Lithia stock shall equal ISP in the formula:
T + $12,677,500 U
ISP = --------------- x ---
2 V
WHERE:
T = the Initial Merger Consideration payable under this
Agreement plus the Initial Merger Consideration payable
under all of the other reorganization agreements;
U = the Initial Merger Consideration under this Agreement;
and
V = T minus the Initial Merger Consideration payable under
the Other Reorganization Agreements relating to the
acquisition of L.A.H. Automotive Enterprises, Inc. and
Reno Auto Sales, Inc.
Of the stock portion of the Initial Merger Consideration, 70 percent will be
paid in Class A Common stock and 30 percent in Series M-2002 Preferred Stock.
The balance of the Initial Merger Consideration shall be paid in cash. The
Class A Common stock shall be valued for purposes of the Initial Merger
Consideration at (i) $19.00 per share. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Initial Merger Consideration.
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2.5.3 CONTINGENT MERGER CONSIDERATION. As soon as possible, and
in any event within 120 days after December 31, 1999, Lithia shall cause its
auditors to prepare a balance sheet and income statement for the Company as of
December 31, 1999 and for the year then ended and shall calculate the Adjusted
Net Worth, Net Adjusted Pretax Income and Contingent Merger Consideration on the
basis thereof. Lithia shall deliver such financial statements and calculations
to the Shareholders. The Shareholders' opportunity to object, the effect of
failure to do so and the resolution of any dispute shall be determined in the
manner provided in Section 2.5.1 above for determining the Initial Merger
Consideration.
2.5.4 PAYMENT OF CONTINGENT MERGER CONSIDERATION. The Contingent
Merger Consideration shall be paid in a combination of cash, Class A Common
Stock and Series M-2003 Preferred Stock within two business days after the
amount thereof has been determined. The amount of the Contingent Merger
Consideration to be paid in Lithia stock shall equal CSP in the formula:
X Y
CSP = --- x ---
2 Z
Where:
X = the sum of the Contingent Merger Consideration payable under
this Agreement plus the Contingent Merger Consideration
payable under all of the Other Reorganization Agreements;
Y = the Contingent Merger Consideration payable under this
Agreement; and
Z = X minus the Contingent Merger Consideration payable under the
Other Reorganization Agreements relating to the acquisition
of L.A.H. Automotive Enterprises, Inc. and Reno Auto Sales,
Inc.
The stock portion of the Contingent Merger Consideration will be payable 50
percent in Class A Common Stock and 50 percent in Series M-2003 Preferred Stock.
The balance of the Contingent Merger Consideration will be payable in cash. Any
imputed interest with respect to the payment of the Contingent Merger
Consideration shall be deemed paid from the cash portion of the Contingent
Merger Consideration. The Class A Common Stock shall be valued for purposes of
the Contingent Merger Consideration at the average Daily Sales Price over the 15
trading days ending with the second trading day before the date that such shares
are issued. "DAILY SALES PRICE" means, for any trading day, the last sales
price of the Class A Common Stock reported by the New York Stock Exchange or if
the Class A Common Stock is not then trading on the NYSE, such other source as
Lithia and the Shareholders may agree. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Contingent Merger Consideration.
2.5.4 FRACTIONAL SHARES. Lithia shall not issue fractional
shares of Class A Common Stock. In lieu thereof, Company shareholders will
be entitled to receive cash in the amount of any fractional share valued as
set forth in the preceding paragraph.
2.5.6 ADJUSTMENTS. Anything in this Agreement to the contrary
notwithstanding, all prices per share, share amounts, and per-share amounts
referred to in this Agreement shall be appropriately adjusted to account for
stock dividends, split-ups, mergers, recapitalizations, combinations,
conversions, exchanges of shares or the like occurring between the first day
of each pricing period through the date such shares are issues.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-1, a
wholly owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary,
subject to the satisfaction of all conditions to
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Closing, Lithia will cause to execute the Plan of Merger and the Articles of
Merger. Lithia will cause the Board of Directors of Merger Sub to approve the
Plan of Merger.
4. MERGER CONSIDERATION
Lithia will cause to be adopted and filed Articles of Amendment to
Lithia's Articles of Incorporation pursuant to which 10,500 shares of Lithia's
preferred stock will be designated as Series M-2002 Preferred Stock and 4,500
shares of Lithia preferred stock will be designated as Series M-2003 Preferred
Stock (collectively, "Series M Preferred Stock"), with the relative rights and
preferences as set forth in the attached Exhibit D. Lithia shall make available
such shares of Series M Preferred Stock, shares of Class A Common Stock and cash
as may be required by the terms of this Agreement and the Plan of Merger. Such
securities are being offered and sold pursuant to exemptions from registration
under both the Securities Act of 1933, as amended, and state securities laws in
reliance upon the representation and warranties of Shareholders herein.
5. REORGANIZATION
The parties intend that the transaction to be effected by the Plan of
Merger will qualify as a reorganization under Section 368(a)(1) of the code and
the regulations and rules promulgated thereunder. A condition of closing is the
receipt of opinions from the firm of Foster Pepper & Shefelman PLLC to Lithia
and from the firm of Sherman & Howard, L.L.C. to the Company and the
Shareholders that the transaction would qualify as to treatment as a
reorganization under Section 368(a)(1) of the Code, substantially in the form of
Exhibit E and F, respectively, attached hereto. In rendering such opinions,
counsel may require and rely upon representations contained in certificates from
officers of Lithia, the Shareholders and the Company.
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and conditions
set forth in this Agreement, the Closing of this Agreement shall take place at
the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver, Colorado, at
9:00 a.m. on the second business day following the fulfillment of the conditions
to the obligations of the parties under Sections 10 and 11, or at such other
time or place as may be mutually agreed upon by Lithia, the Shareholders and the
Company. Notwithstanding any provision in this Agreement to the contrary, if
the Closing has not occurred on or before June 30, 1999, either Lithia or the
Company, provided that the failure of the Closing to occur did not result from a
breach of this Agreement by such party, shall have the right to terminate this
Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At
Closing, the Shareholders will deliver or cause the Company to deliver to Lithia
the following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Stock certificates representing all of the Shares;
6.2.5 Lease agreements substantially in the form of Exhibit G and
a mutually acceptable Sublease Agreement for any properties subleased by the
Company from a related party to transfer to the Company the benefits of such
underlying leases, with monthly rents in the amount set forth in Schedule G-1
attached to Exhibit G (the "LEASE AGREEMENT") duly executed by the Landlord as
specified therein;
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6.2.6 The Registration Rights Agreement between Lithia, the
Shareholders and the majority shareholders of the other members of the Moreland
Group substantially in the form of Exhibit H (the "REGISTRATION RIGHTS
AGREEMENT"), duly executed by the Shareholders; and
6.2.7 An employment agreement between Lithia and W. Douglas
Moreland substantially in the form of Exhibit I (the "EMPLOYMENT AGREEMENT")
duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia
will deliver, or cause to be delivered, to the Shareholders the following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub
and Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The cash portion of the Initial Merger Consideration
payable as provided in the Plan of Merger;
6.3.5 Stock certificates for the shares of Class A Common Stock
and Series M-2002 Preferred Stock constituting the stock portion of the Initial
Merger Consideration issued in the names of the Shareholders;
6.3.6 The Lease Agreements duly executed by Lithia Real Estate,
Inc., a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
6.3.7 The Registration Rights Agreement, duly executed by Lithia;
and
6.3.8 The Employment Agreement duly executed on behalf of Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized,
validly existing and in good standing under the applicable laws of the state of
its incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as
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disclosed in Schedule 7.2, the Company does not have any subsidiaries nor any
direct or indirect equity interest in any corporation, partnership or other
entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists
of 500,000 shares of Common Stock, $1 par value, 90,000 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or commitments obligating the Company to issue any
additional shares of its capital stock of any class or any other securities of
any kind. Except as disclosed in Schedule 7.3, there are no agreements that
relate to the voting or control of the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business
Real Property permits the presently existing improvements and the continuation
of the business presently being conducted on such real property. To the best of
the Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at December
31, 1998 consist of goods of a quality and in quantities that are suitable for
sale in the ordinary course of its business with normal mark-up at prevailing
market prices. All parts and accessories in the inventories of the Company are
undamaged parts and accessories that (i) are still in the original, resalable
merchandising package, and in unbroken lots, (ii) were listed for sale in the
then-current dealer parts and accessories price schedule for the represented
manufacturers, (iii) were purchased directly from the represented manufacturers,
and (iv) are returnable under the terms of the represented manufacturers' sales
and service agreement for credit to the account of the Company.
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7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and
accurate description of all material permits, licenses, franchises, certificates
and similar items and rights, owned or held by the Company (hereinafter
collectively referred to as the "LICENSES AND PERMITS"). The Licenses and
Permits are adequate for the operation of the Company's business; are valid and
in full force and effect, and no basis exists for a grantor of any such Licenses
or Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To
the best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company.
No additional intellectual property is required by the Company for the operation
of its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute
and marketable title to (or, in the case of leased property, valid and
subsisting leasehold interests in) all of its properties and assets, including
(without limitation) the properties and assets that will be listed on Schedules
7.6 and 7.7 except for properties and assets sold, consumed or otherwise
disposed of by the Company in the ordinary course of its business, and will have
good, absolute and marketable title to all assets included in the Audited
Balance Sheet. The Company and the Business Real Property are not subject to
any liens, mortgages, encumbrances, conditional sales agreements, security
interests, claims or restrictions of any kind or character, except for (i) the
encumbrances listed on Schedule 7.11, (ii) liens for current taxes not yet due
and payable and (iii) mechanics and materialmen's liens arising in the ordinary
course of business and securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's
Dealer Financial Statements as of the end of and for the Company's two most
recent fiscal years. These Dealer Financial Statements were prepared in
accordance with the applicable manufacturer's requirements and fairly reflect in
all material respects the results of operations and financial condition of the
Company for the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in
accordance with Moreland GAAP on a LIFO basis and consistent with prior periods,
and will fairly present in all material respects the financial condition of the
Company at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has
delivered to Lithia a complete and accurate copy of all instruments evidencing
or relating to the Company's indebtedness for borrowed money at December 31,
1998. The Company is not in default or violation of any provision of any
agreement evidencing or relating to its indebtedness for borrowed money.
Schedule 7.13 sets forth as
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of December 31, 1998 a complete and accurate description of all guaranties by
the Company of any obligation or liability of any person or entity, including
(without limitation) any guaranties of installment sales contracts, leases or
obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and
local tax returns required to be filed by it. All federal, state, local and
foreign income, ad valorem, excise, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the Company are current taxes not yet due
and payable. All current taxes not yet due and payable by the Company have been
properly accrued and are accurately reflected in the Company's balance sheet in
the Financial Statements. The Company has not been delinquent in the payment of
any tax, assessment or governmental charge, nor has any tax deficiency been
proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet
Date, except as anticipated by this Agreement or set forth on Schedule 7.15,
(i) the Company has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of the
Company other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of the Company; (iv) the Company has not issued any securities or options
to purchase any securities of any nature whatsoever; (v) the Company has not
increased the compensation, commissions, bonuses or other remuneration payable
to any officer, director, employee or to any other person or entity, whether now
or hereafter payable, except in the ordinary course of business, nor paid any
bonuses to any Shareholder, (vi) there has not been any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, properties or business of the Company; (vii) the Company has not
made any capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
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7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of
the Shareholders' knowledge, there are no existing violations of federal, state
or local laws, ordinances, rules, codes, regulations or orders by the Company
which are reasonably likely to materially affect the properties, assets or
business of the Company. To the best of the Company's and each of the
Shareholders' knowledge, the Company is not subject to any restriction,
judgment, order, writ, injunction, decree or award, which materially and
adversely affects or is likely to materially and adversely affect the business,
operations, properties, assets or condition (financial or otherwise) of the
Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list
of all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule
7.21, the Company does not have any employment agreements or contracts between
the Company and any person or entity. The Company is not a party to or bound by
any collective bargaining agreement, nor has the Company experienced any
strikes, grievances, claims of unfair labor practices or other collective
bargaining dispute. There are no unions representing any employees of the
Company. The Company has no knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with respect to
employees of the Company. The Company has paid or has made provision for the
payment of all compensation due any person or entity and has complied in all
material respects with all applicable laws, rules and regulations relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes, and has withheld and paid
to the appropriate governmental authority, or is holding for payment not yet due
to such authority, all amounts required by law or agreement to be withheld from
the compensation of its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and
accurate list of all accounts receivable, notes receivable and vehicle leases of
the Company as of the date indicated thereon and an aging analysis of such
accounts. All receivables of the Company are valid and enforceable claims,
arose in the ordinary course of business, require no further performance by
the Company and, to the Company's knowledge, are not subject to claims or
offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
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7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all
written instruments listed or described on the schedules have been furnished or
made available to Lithia. The Company will make available to Lithia, to the
extent requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has
provided to Lithia (i) the names and addresses of all persons holding a power of
attorney on behalf of the Company, and (ii) the account numbers and names of all
banks or other financial institutions in which the Company currently has an
account, deposit or safe deposit box, with the names of all persons authorized
to draw on the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the
Company and the Shareholders in this Agreement and in the schedules attached
hereto, and the other statements in writing and information furnished or to be
furnished to Lithia by or on behalf of the Company or the Shareholders in
connection with the transactions contemplated by this Agreement, taken as a
whole, do not and will not contain any untrue statement of a material fact, or
omit to state a material fact necessary to make the statements contained herein
not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions,
circumstances, activities, practices, incidents, plans or actions, based on or
resulting from the conduct of the business of the Company, including the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, chemical or industrial
toxic or hazardous material, substance or waste, which will violate any laws
chargeable to the Company currently in effect relating to pollution or
protection of the environment (the "ENVIRONMENTAL LAWS") or any plan, order,
decree, judgment, injunction, notice or demand letter from a governmental entity
applicable to the Company, or which will give rise to any common law or other
legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
or similar state or local laws in effect as of the date hereof. To the best of
the Company's and each of the Shareholders' knowledge, the Business Real
Property contains no spill, deposit or discharge of any hazardous substance (as
that term is currently defined under CERCLA or any applicable state law), as a
result of which there would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate
description of each underground storage tank of any kind or nature located on
the Business Real Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall
allow Lithia and its consultants access to the Business Real Property for the
purpose of conducting any further environmental assessment it may desire to
conduct, upon execution by Lithia and such consultants of an appropriate
indemnity agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the
Shareholders know of any reason why the Company cannot continue its business in
all material respects in the same manner following the execution of this
Agreement and the Closing as it has been operated prior thereto, except to the
extent that Lithia causes the business of the Company to change following the
Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will
provide a complete and accurate description of all contracts in transit for the
Company.
7.30 EVALUATION OF RISKS IN RECEIVING LITHIA SECURITIES. Each
Shareholder is capable of evaluating the merits and risks of an investment in
the Class A Common Stock and the Series M Preferred Stock. By reason of their
respective business or financial experience, and/or the business or financial
experience of their respective professional advisors (who are not affiliated,
either directly or indirectly, with Lithia or any affiliate or selling agent of
Lithia), each Shareholder has the capacity to protect their
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interests in connection with an investment in the Lithia securities. Each
Shareholder has had access to and has reviewed such portions of Lithia's SEC
Filings as he or his professional advisors has deemed necessary and has met
either directly or through such respective professional advisors with a
representative of Lithia and has had the opportunity to ask questions of, and
receive answers from, Lithia concerning Lithia, the Class A Common Stock and the
Series M Preferred Stock and the terms and conditions of this transaction. Each
Shareholder has received any information requested by such Shareholder or his
professional advisors. Any questions raised concerning this transaction have
been answered to the satisfaction of each Shareholder or their respective
professional advisor.
7.31 LIMITATIONS ON TRANSFER OF STOCK. The Class A Common Stock and
Series M Preferred Stock to be issued to each Shareholder pursuant to the Plan
of Merger and any additional shares of Class A Common Stock which may be issued
upon a conversion of the Series M Preferred Stock will be held as an investment
and not with a view to distribution.
7.32 LACK OF REGISTRATION OF STOCK. Each Shareholder understands that:
(a) the offer and sale of the Class A Common Stock and Series M Preferred Stock
to be issued to the Shareholder pursuant to the Plan of Merger and any
additional shares of Class A Common Stock which may be issued upon a conversion
of the Series M Preferred Stock have not been registered under the Securities
Act of 1933, as amended, or any state securities laws in reliance upon
exemptions from registration; (b) the shares of Class A Common Stock and Series
M Preferred Stock must be held indefinitely, unless their resale is subsequently
registered under the Securities Act of 1933, as amended, and under applicable
state securities laws or unless exemptions from registration are available; (c)
except as provided in the Registration Rights Agreement, Lithia has not agreed
to register the resale of any of the securities to be received by the
Shareholders; (d) the Class A Common Stock and Series M Preferred Stock may not
be offered, sold, transferred, pledged or otherwise disposed of in the absence
of either an effective registration statement under the Securities Act of 1933
and applicable state securities laws or an opinion of counsel acceptable to
Lithia that such registration is not required; and (e) the certificates
representing Series M Preferred Stock and the Class A Common Stock (including
any additional shares of Class A Common Stock which may be issued upon a
conversion of the Series M Preferred Stock) will contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933. NO OFFER, SALE,
TRANSFER, PLEDGE OR OTHER DISPOSITION OF THE SHARES MAY BE
EFFECTED IN THE ABSENCE OF EITHER AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933 AND APPLICABLE STATE
SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY
THAT SUCH REGISTRATION IS NOT REQUIRED.
7.33 INFORMATION CONCERNING LITHIA. Each Shareholder acknowledges that
they have received a copy of Lithia's Registration Statement on Form S-1 filed
May 1, 1998, Lithia's Form 10-K for the year-end December 31, 1997, Lithia's
Form 10-Q for the period ended September 30, 1998, and Lithia's Information
Statement for the annual meeting of Lithia's shareholders on Form DEF 14C dated
May 14, 1998, and have had the opportunity to review the information contained
in these filings and discuss the same with their respective professional
advisors.
7.34 INVESTOR STATUS. Each of the Shareholders is an "accredited
investor" as such term is defined under the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder by the Securities and
Exchange Commission.
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8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement is, and
when executed at the Closing the Plan of Merger will be, a valid and legally
binding obligation of Lithia, enforceable against Lithia in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). Lithia has the complete and unrestricted right, power and
authority to execute this Agreement and the Plan of Merger and perform its
covenants in accordance with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under
the applicable laws of the state of its incorporation and has all necessary
power and authority to own, lease and operate its properties and assets and to
conduct its business as its business is now being conducted. Lithia is qualified
to do business and is in good standing in each state in which it transacts
business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The Lithia Shares
have been validly authorized and issued, are fully paid and non-assessable, and
have not been issued in violation of any preemptive rights.
The Class A Common Stock and Series M Preferred Stock to be issued as
part of the Merger Consideration, including any Class A Common Stock issued upon
conversion of the Series M Preferred Stock (collectively, the "MERGER SHARES")
have been duly authorized and, when issued in accordance with this Agreement,
the Plan of Merger and the terms of the Series M Preferred Stock, will be
validly issued, fully paid and non-assessable and will not have been issued in
violation of the preemptive or similar rights of any person. Prior to issuance,
all Class A Common Stock to be issued to the Shareholders shall have been
approved for listing on the New York Stock Exchange. The Merger Shares will not
be subject to any restriction on transfer except as contemplated by Section
7.32.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly
and other reports under the Securities Exchange Act of 1934 and various filing
with the Securities and Exchange Commission under
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the Securities Act of 1933 (collectively, Lithia's "SEC FILINGS"). Prior to
Closing, Lithia agrees to file such other filings as the federal securities laws
require and to provide copies of such filings to Shareholders within 5 business
days from the date of such filing. The SEC Filings comply and all additional
filings prior to Closing will comply with the requirements of applicable laws,
regulations and forms, and none of such filings contain or will contain a
material misstatement or omit or will omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All current
taxes not yet due and payable by Lithia have been properly accrued and are
accurately reflected in its balance sheet in the SEC Filings. Lithia has not
been delinquent in the payment of any tax, assessment or governmental charge,
nor has any tax deficiency been proposed or assessed against it, nor has it
executed any waiver of the statute of limitations on the assessment or
collection of any tax.
8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing. Except as set forth in the SEC Filings or Schedule 8.8, Lithia is
not a party to any agreement, letter of intent or other understanding that would
result in the issuance of any equity securities of Lithia, and as of the date
hereof, Lithia is not engaged in discussions with any person that are reasonably
likely to result in such an agreement or understanding. Without the prior
written consent of W. Douglas Moreland, Lithia will not, prior to the Effective
Date, agree to issue any equity securities in any acquisitions, having an
aggregate value in excess of $20,000,000.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body specifically applicable to Lithia and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or
threatened against Lithia or its subsidiaries, or any of its properties, assets
or business which might have a material adverse effect on its financial
condition or business prospects. Lithia is not aware of any facts that might
result in any other material action, suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there
are no existing violations of federal, state or local laws, ordinances, rules,
codes, regulations or orders by Lithia which
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are reasonably likely to materially affect the properties, assets or business of
Lithia. To the best of Lithia's knowledge, Lithia is not subject to any
restriction, judgment, order, writ, injunction, decree or award, which
materially and adversely affects or is likely to materially and adversely affect
the business, operations, properties, assets or condition (financial or
otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or
indirectly, any broker or finder or incurred any liability for any brokerage
fees or commissions or finders' fees and no broker or finder has acted directly
or indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all
written instruments listed or described on the schedules provided herewith have
been furnished to the Shareholders. Lithia will make available to the
Shareholders or their respective professional advisors, to the extent requested
by the Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in
this Agreement and in the schedules provided herewith, and the other statements
in writing and information furnished or to be furnished to the Shareholders by
or on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia
mutually agree to cooperate and use commercially reasonable good faith efforts
to prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
bodies as may be necessary to consummate the transactions contemplated by this
Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause
the Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 SHAREHOLDERS' REVIEW. Lithia will make available to Shareholders or
their respective professional advisors such books and records and access to its
senior management as Shareholders reasonably request and in a manner so as not
to interfere with the normal business operations of Lithia and the
responsibilities of its senior management, in order to fully evaluate Lithia and
its Class A Common Stock and Series M Preferred Stock to be issued to such
Shareholders pursuant to the Plan of Merger.
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9.5 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.6 STANDSTILL AGREEMENT. Each Shareholder agrees that whenever Lithia
undertakes a firmly underwritten public offering of its securities and, if
requested by the managing underwriter in such offering, the Shareholder will
enter into an agreement not to sell or dispose of any securities of Lithia owned
or controlled by the Shareholder, provided such restriction will not extend
beyond 180 days from the effective date of the registration statement filed in
connection with such offering.
9.7 FURTHER ASSURANCES. From time to time at or after the Closing, as
and when requested by any party hereto, the other party shall execute and
deliver, or cause to be executed and delivered, all such documents and
instruments and shall take, or cause to be taken, all such further or other
actions as such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
9.8 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options
pursuant to its 1996 Incentive Stock Plan to management employees remaining with
the Company after Closing. The number of shares available for grant to all
employees in the Moreland Group shall be equal to six percent of the total
number of shares of Class A Common Stock issued to all the shareholders of the
companies in the Moreland Group at the Closing and the simultaneous closings of
the Other Reorganization Agreements including such additional shares that may be
issued as Contingent Merger Consideration, plus six percent of the shares of
Class A Common Stock issuable upon conversion of the shares of Series M
Preferred Stock issued at the Closing and such simultaneous closings including
such additional shares that may be issued as Contingent Merger Consideration,
determined as though such Series M Preferred Stock were converted to Class A
Common Stock at the date of issuance. The options will be granted during 1999
and 2000 to such persons and in such amounts consistent with Lithia's practices
and as proposed by W. Douglas Moreland.
9.9 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may be created or permitted by this Agreement), and any security agreements
entered or collateral pledged to secure such guarantees, shall be released,
discharged or terminated prior to or at Closing.
9.10 NON-COMPETE. For a term of three years following the Closing date
of the Merger, Shareholders will not, directly or indirectly, within 100 miles
of any dealership currently owned or operated by Lithia or any of its
subsidiaries, own, operate, manage, control, participate in the ownership,
management, operation or control of or be paid or employed by or acquire any
interest in or securities of or otherwise become associated with or provide
assistance to, as an employee, consultant, director, officer, shareholder,
partner, agent, associate, principal, representative or any other capacity, any
business entity engaged in the lease or sale of new or used automobiles or light
trucks except as may otherwise be provided in such Shareholders' Employment
Agreements with Lithia. This covenant against competition shall not prohibit
any activity of any Shareholder with respect to any business entity with which
it or he has any such relationship as of the date of this Agreement or any
successor to such a business entity. If Lithia or one of its subsidiaries
acquires or assumes operation of an additional dealership after the date hereof,
this covenant against competition shall be extended to that additional
dealership, but there shall automatically be excepted from such extended
covenant any business entity that is within 100 miles of such additional
dealership and in which any Shareholder had an interest which did not constitute
a breach of this Section before Lithia or such subsidiary acquired or assumed
operation of such additional dealership. For that purpose, a Shareholder shall
be deemed to have an interest in a business entity if he
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or it had any of the relationships with such entity that constitute competition
under this Section 9.10, had signed a letter of intent, terms sheet, or
agreement contemplating such a relationship or had filed an application with a
manufacturer or franchisor which, if granted, would create such a relationship.
9.11 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.12 SERVICE CONTRACT PRICING. Prior to the Effective Date, the
parties will determine a pricing schedule for extended service contracts which
will be charged to each Moreland Group dealership. The pricing schedule,
determined for each product line, will be the amount determined by the following
formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by
the Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that
product line less the inception rebate paid by Ryan
& Associates (in 1998, this inception rebate was
paid to Diamond Financial and was $15.00 on new
vehicles and $40.00 on used vehicles).
C = the percentage of all service contracts written by
the Moreland Group in 1998 with Western National.
D = the price charged by Western National for that
product line less the inception rebate paid by
Western National (in 1998, this inception rebate was
paid to Diamond Financial and was $50.00 on both new
and used vehicles).
9.13 HAIL DAMAGE RESERVE. During 1999, the Shareholders shall be
entitled to cause the Company to transfer to income a reasonable amount from the
insurance damage reserve established in respect of vehicles damaged by hail in
1998 each time a hail-damaged vehicle is sold; provided, however, that no
amounts shall be transferred from the Special Hail-Damage Reserve prior to the
end of 1999. All amounts so transferred shall be included in Net Adjusted
Pretax Income for 1999.
9.13.1 At year end 1999, if any hail-damaged vehicles remain
unsold, the parties will attempt to agree on the amount of the Special
Hail-Damage Reserve that should be allocated to such vehicles to reduce the
carrying value of such vehicles to reflect their market value. If the
parties are unable to agree, the dispute will be determined by
PricewaterhouseCoopers LLP or such other firm as may be agreed upon by Lithia
and the Shareholders.
9.13.2 At the end of 1999, the Shareholders shall have the right
to require the Company and Lithia to calculate the average gross profit on
hail-damaged vehicles sold by the Company during 1999 and the average gross
profit on vehicles sold during the year that had not incurred hail damage. If
that right is exercised, the Shareholders may require the Company to transfer
such amount from the Special Hail-Damage Reserve (but not to exceed 80 percent
of the initial amount of the Special Hail-Damage Reserve) to income in 1999 as
may be necessary to increase the average gross profit on hail-
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damaged vehicles to 105 percent of the average gross profit on non hail-damaged
vehicles sold during the year. All amounts so transferred shall be included in
Net Adjusted Pretax Income for 1999.
9.13.3 Any amount remaining in the Special Hail-Damage Reserve
after the allocations under 9.13.1 and the transfers under 9.13.2 shall be
held in the reserve until March 31, 2000. Warranty claims for 1998 hail
damage made during the first quarter of 2000 shall be charged against the
Special Hail-Damage Reserve.
9.13.4 Any amount remaining in the Special Hail-Damage Reserve at
March 31, 2000 shall be paid to the Shareholders as part of the Contingent
Merger Consideration as set forth in the definition of that term.
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF
THE COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 APPROVAL OF LITHIA'S SHAREHOLDERS. The shareholders of Lithia
shall have approved this Agreement and the issuances of the Class A Common Stock
and Series M Preferred Stock, if such approval is necessary under the listing
requirements of the New York Stock Exchange.
10.4 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.5 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
10.6 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been
approved as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.7 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from
Ford Motor Credit Company a waiver or consent to this Agreement and the
transactions contemplated hereby.
10.8 TAX OPINION. Lithia shall have received from Foster Pepper &
Shefelman, PLLC a tax opinion substantially in the form of Exhibit E.
10.9 LEGAL OPINION. Lithia shall have received from Sherman &
Howard L.L.C. its opinion substantially in the form of Exhibit J.
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10.10 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
the Other Reorganization Agreements shall have been fulfilled.
10.11 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value, except for a note from North Avenue Auto, Inc.
10.12 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit K.
10.13 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The
Adjusted Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger
Consideration shall have been determined.
10.14 DEALER OPTION AGREEMENTS. Lithia shall have received fully
executed Dealer Option Agreements with respect to North Avenue Auto, Inc., Grand
Auto, Inc., Skyline Automotive, Inc., The Bill Berry Motor Company, Avondale
Automotive, Inc., Peoples Chrysler Plymouth Jeep Eagle, Inc., Kids' Automotive,
Inc. (dba J. D. Byrider, Inc.), Brandon Financial, Inc. and Moreland Auto Group,
LLLP., substantially in the form of Exhibits N through V.
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
11.5 TAX OPINION. The Shareholders shall have received from Sherman &
Howard, L.L.C. a tax opinion substantially in the form of Exhibit F.
11.6 LEGAL OPINION. The Shareholders shall have received from Foster
Pepper & Shefelman LLP an opinion substantially in the form of Exhibit L.
11.7 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
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11.8 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders
will receive fully executed Agreement substantially as set forth in Exhibit K.
11.9 VOTING AGREEMENT. Receipt by W. Douglas Moreland of a fully
executed Voting Agreement substantially in the form of Exhibit M.
11.10 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The
Adjusted Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger
Consideration shall have been determined.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or
after the Closing or the decision of any party to complete the Closing, each
party shall be entitled to rely upon the representations and warranties set
forth in this Agreement. All representations and warranties made in this
Agreement shall survive the Closing until March 31, 2001; provided, however,
that (i) the accuracy of each such representation and warranty shall be
determined only as of the date of the Closing, (ii) the representations and
warranties in Sections 7.14 and 8.7 shall survive until 30 days after the
expiration (without extension) of the statute of limitations for the Company's
or Lithia's (as the case may be) 1998 federal income tax return, and (iii) any
claim based upon fraud shall survive for its applicable statute of limitation.
The period of survival for each representation and warranty established in this
Section 12 is referred to as the "Survival Period" for such representation and
warranty. The liabilities of the parties with respect to their respective
representations and warranties will expire as of the expiration of the
applicable Survival Period; provided, however, that such expiration will not
affect the rights of any party entitled to rely on a representation and warranty
in respect of any breach of which such party has given notice to the breaching
party prior to the expiration of the Survival Period, specifying in reasonable
detail the facts alleged to constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and
severally indemnify, defend and hold harmless the Company and Lithia and their
respective successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and
against any claims, damages, liabilities, penalties, actions, suits,
proceedings, demands, assessments, costs and expenses, including reasonable
attorneys fees and expenses of investigation ("CLAIMS"), incurred by any Lithia
Indemnified Party arising from or related to (i) any breach of any
representation or warranty made by the Company or the Shareholders in this
Agreement, of which notice is given to the Shareholders by the Lithia
Indemnified Parties prior to the expiration of the Survival Period for such
representation or warranty or (ii) any breach of any covenant or agreement made
by the Company or the Shareholders in this Agreement, to the extent, in the case
of the Company, that such covenant or agreement was to be performed at or before
the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly
notify the Shareholders of any Claim against which indemnification will be
sought hereunder. If the Claim involves a claim, investigation, demand, action
or suit by a third party, including a governmental authority, the Shareholders
shall have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section
7.14, the Lithia Indemnified Parties shall not be entitled to indemnification
under Section 13.1 unless and until the aggregate amounts against which they
would otherwise be entitled to indemnification under Section 13.1
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of this Agreement and the comparable indemnification provisions of the Other
Reorganization Agreements exceed $500,000, and then only to the extent of such
excess.
13.3.2 In no event shall the Shareholders be liable in the
aggregate under Section 13.1 for an amount that, when added to the amounts for
which the shareholders of the other members of the Moreland Group are liable
under the comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 7.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is
entitled to be indemnified hereunder shall be reduced by (i) the amount of any
insurance proceeds available to such Lithia Indemnified Party in respect of the
matter giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties prior
to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia will
assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall,
for these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements (ii) if any
of the
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warranties and representations of the Company or the Shareholders contained
herein are false in any material respect, (iii) if the conditions of this
Agreement to be complied with or performed by the Shareholders or the Company at
or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by Lithia or (iv) if Lithia terminates any of the Other Reorganization
Agreements in accordance with the terms and conditions of such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written
notice of termination given by the Company to Lithia (i) if Lithia defaults
in any material respect in the observance of or in the due and timely
performance by Lithia of any agreements and covenants of Lithia contained
herein or in the Other Reorganization Agreement, (ii) if any of the
representations and warranties of Lithia contained herein are false in any
material respect, (iii) if the conditions of this Agreement to be complied
with or performed by Lithia at or before Closing are not complied with or
performed at the time required for such compliance or performance and such
noncompliance or nonperformance is not waived by the Company or (iv) if one
of the other members of the Moreland Group terminates any of the Other
Reorganization Agreements in accordance with the terms and conditions of such
other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement
under Section 15.1, no party to this Agreement shall have any liability or
obligation hereunder. Upon any termination of this Agreement under Section 15.2
or 15.3, neither party shall have any prospective obligation hereunder except as
provided in Section 15.5, but each party shall have, if otherwise available, the
remedy of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
15.5.1 In the event that this Agreement is terminated by the
Company based upon a willful refusal by Lithia to complete this Agreement or any
Other Reorganization Agreement, Lithia shall pay the Company a break-up fee
equal to 200% of all amounts paid or payable to Lithia under the Consulting
Agreement dated as of January 1, 1999 among Lithia and the members of the
Moreland Group in respect of the net profits of the Company. For purposes of
this Section 15.5, a willful refusal by any party to complete this Agreement or
any Other Reorganization Agreement means either such party's refusal to
consummate the transactions contemplated by this Agreement or any Other
Reorganization Agreement even though all of the conditions to its obligations to
do so have been fulfilled or such party's failure to take any action within its
reasonable control that would result in the fulfillment of a condition to such
obligations.
15.5.2 In the event that either party terminates this Agreement
for reason of the non-fulfillment of the Designated Condition, Lithia shall pay
to the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement
for any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or
(ii) a willful refusal by the Company or any of the other members of the
Moreland Group or their Shareholders to complete the Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
100% of all amounts paid or payable by the Company to Lithia under the
Consulting Agreement dated as of January 1, 1999 among Lithia and the members of
the Moreland Group in respect of the net profits of the Company.
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15.5.4 The break-up fees payable under this Section 15.5 shall be
due at the time this Agreement is terminated. Should the transactions
contemplated by this Agreement or the Other Reorganization Agreements fail to
close for any reason other than a willful refusal by the Company or any other
member of the Moreland Group to complete this Agreement or any other
Reorganization Agreement, it is acknowledged that the Company and the
Shareholders would suffer damages; however, the precise amount of such damages
would be difficult to establish. The break-up fees provided in this Section
represent a good-faith estimate by the parties of the damage that the Company
and Shareholders would incur. Lithia acknowledges that the break-up fees payable
under Section 15.5.2 and 15.5.3 are reasonable and appropriate, even though
Lithia may not have breached any representation, warranty or covenant contained
herein in the circumstances described in those sections. To the extent of those
break-up fees, Lithia has knowingly accepted the risk of the nonfulfillment of
the conditions to its obligations and the obligations of the Company and the
Shareholders in the circumstances described in Sections 15.5.2 and 15.5.3 in
order to induce the Company and the other members of the Moreland Group to enter
into this Agreement and the Other Reorganization Agreements and risk the adverse
effect on their market values that will occur if those agreements are not
completed. Lithia expressly agrees that the break-up fees contemplated by this
Section 15.5 shall be due even though the Company, the Shareholders or any other
member of the Moreland Group or any shareholder thereof may have breached any
representation, warranty or covenant of this Agreement or the Other
Reorganization Agreements, with the sole exception of a willful refusal by any
such party to complete this Agreement or any of the Other Reorganization
Agreements. The right to collect break-up fees pursuant to this Section 15.5
shall be the exclusive remedy of the Company and the Shareholders in the event
of a termination of this Agreement in the circumstances described in Section
15.5.1 or 15.5.2. In the event that the Company or the Shareholders terminate
this Agreement under the circumstances described in Section 15.5.3 as a result
of the nonfulfillment of the condition established in Section 11.1 (or Section
11.7 as it relates to the comparable conditions in the Other Reorganization
Agreements), the liquidated damages payable under Section 15.5.3 shall be deemed
to compensate the Company only for the opportunity cost of having taken itself
off the market while this Agreement was being negotiated and was in effect, and
the Company shall be entitled to prove any other damages and pursue any other
remedy available at law or in equity.
16. DISPUTE RESOLUTION
16.1 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 non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of
or relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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 having jurisdiction over Reno, Nevada from its Large, Complex Case Panel
(or have similar professional credentials). Each
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arbitrator shall be an attorney with at least fifteen (15) years' experience in
corporate law. Whether a claim is covered by this Agreement shall be determined
by the arbitrator(s). All statutes of limitations which would otherwise be shall
apply to any arbitration proceeding hereunder.
16.3 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.
16.4 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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
hereto constitutes the entire agreement between the parties regarding the
subject matter hereof and supersedes all prior agreements and understandings
between the parties relating to the subject matter of this Agreement. There are
no agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or
terminated except by an instrument in writing signed by all parties to this
Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter gender thereof or to the
plurals of each, as the identity of the person or persons or the context may
require. The descriptive headings contained in this Agreement are
27
<PAGE>
for reference purposes only and are not intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provision
contained in this Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall
for any reason be held to be invalid, illegal, void or unenforceable in any
respect, such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated
by this Agreement are consummated, each of the parties to this Agreement shall
be responsible for its own costs and expenses incurred in connection with the
preparation and negotiation of this Agreement and the transactions contemplated
hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
legal representatives, successors and permitted assigns. No party may assign any
of their rights or delegate any of their obligations hereunder. Any assignment
in violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and
agreements disclosed in the Exhibits and Schedules to this Agreement shall be
deemed to be disclosed for all purposes of this Agreement and to constitute
exceptions not only to the representations and warranties in the specific
Sections that refer to such Exhibits or Schedules, but also to all other
representations and warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be
(i) in writing, dated with the current date of such notice, and signed by the
party giving such notice, and (ii) mailed, postpaid, registered or certified,
return receipt requested, addressed to the party to be notified, or delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses to
accept delivery of the notice. The initial addresses of the parties shall be as
follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: Cherry Creek Dodge, Incorporated
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
28
<PAGE>
If to the Shareholders: Cherry Creek Dodge Limited
Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's
and the Shareholders' "knowledge" shall be limited to the actual knowledge of
the Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
29
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
LITHIA MOTORS, INC.
By:
--------------------------------------
Bryan B. DeBoer, Vice President
CHERRY CREEK DODGE, INCORPORATED
By:
--------------------------------------
W. Douglas Moreland, President
SHAREHOLDERS
CHERRY CREEK DODGE LIMITED PARTNERSHIP, RLLLP
By: Moreland/Cherry Creek, Inc.
General Partner
By:
--------------------------------------
W. Douglas Moreland, President
30
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
PERCENT OF MERGER CONSIDERATION
------------------------------------------
SHAREHOLDER MERGER SHARES(1) CASH
- ------------------------------------ -------------------- ------------------
<S> <C> <C>
</TABLE>
- ----------
(1) Each Shareholder will receive the same percentage of Class A Common Stock
and Series M Preferred Stock.
Schedule 2.1
<PAGE>
EXHIBIT 10.5
COLORADO SPRINGS JEEP EAGLE
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
COLORADO SPRINGS JEEP EAGLE LIMITED PARTNERSHIP, RLLP
AND
ALEX JANNICELLI
(the "Shareholders")
And
COLORADO SPRINGS JEEP/EAGLE, INC.
a Colorado corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Shares and Shareholders . . . . . . . . . . . . . . . . . . . . 5
2.2 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Effective Time of the Merger. . . . . . . . . . . . . . . . . . 5
2.4 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . 5
2.5 Merger Consideration. . . . . . . . . . . . . . . . . . . . . . 6
3. FORMATION OF MERGER SUB. . . . . . . . . . . . . . . . . . . . . . . . . 7
4. MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . 7
5. REORGANIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.1 Date, Time and Place of Closing . . . . . . . . . . . . . . . . 8
6.2 Documents To Be Delivered at Closing by the Shareholders. . . . 8
6.3 Documents To Be Delivered at Closing by Lithia. . . . . . . . . 8
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS . . . . . . . . . . . 9
7.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.2 Incorporation and Good Standing . . . . . . . . . . . . . . . . 9
7.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . 9
7.4 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . .10
7.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.6 Real Property . . . . . . . . . . . . . . . . . . . . . . . . .10
7.7 Tangible Personal Property. . . . . . . . . . . . . . . . . . .10
7.8 Parts Inventories . . . . . . . . . . . . . . . . . . . . . . .10
7.9 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . .10
7.10 Intellectual Property . . . . . . . . . . . . . . . . . . . . .11
7.11 Title to Properties; Encumbrances . . . . . . . . . . . . . . .11
7.12 Financial Statements. . . . . . . . . . . . . . . . . . . . . .11
7.13 Indebtedness for Borrowed Money; Guaranties . . . . . . . . . .11
7.14 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . .11
7.15 Transactions Since Balance Sheet Date . . . . . . . . . . . . .12
7.16 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.17 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . .12
7.18 Contracts and Agreements. . . . . . . . . . . . . . . . . . . .13
7.19 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . .13
7.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.21 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.22 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . .13
7.23 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . .13
7.24 Delivery of Documents . . . . . . . . . . . . . . . . . . . . .13
7.25 Powers of Attorney; Authorized Signatories. . . . . . . . . . .13
7.26 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . .14
7.27 Environmental . . . . . . . . . . . . . . . . . . . . . . . . .14
7.28 Continuation of Business. . . . . . . . . . . . . . . . . . . .14
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.29 Contracts in Transit. . . . . . . . . . . . . . . . . . . . . .14
7.30 Evaluation of Risks in Receiving Lithia Securities. . . . . . .14
7.31 Limitations on Transfer of Stock. . . . . . . . . . . . . . . .15
7.32 Lack of Registration of Stock . . . . . . . . . . . . . . . . .15
7.33 Information Concerning Lithia . . . . . . . . . . . . . . . . .15
7.34 Investor Status . . . . . . . . . . . . . . . . . . . . . . . .15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA . . . . . . . . . . . . . . . .15
8.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . .15
8.2 Incorporation . . . . . . . . . . . . . . . . . . . . . . . . .16
8.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . .16
8.4 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . .16
8.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.6 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.7 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.8 Transactions Since Latest Balance Sheet Date. . . . . . . . . .17
8.9 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.10 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . .17
8.11 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . .17
8.12 Delivery of Documents . . . . . . . . . . . . . . . . . . . . .18
8.13 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . .18
9. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
9.1 Notices and Consents. . . . . . . . . . . . . . . . . . . . . .18
9.2 Conduct of Business by the Company Prior to the Closing Date. .18
9.3 Lithia's Examination. . . . . . . . . . . . . . . . . . . . . .18
9.4 Shareholders' Review. . . . . . . . . . . . . . . . . . . . . .18
9.5 Notice of Changes . . . . . . . . . . . . . . . . . . . . . . .18
9.6 Standstill Agreement. . . . . . . . . . . . . . . . . . . . . .18
9.7 Further Assurances. . . . . . . . . . . . . . . . . . . . . . .19
9.8 Employee Stock Options. . . . . . . . . . . . . . . . . . . . .19
9.9 Release of Guarantees . . . . . . . . . . . . . . . . . . . . .19
9.10 Non-Compete . . . . . . . . . . . . . . . . . . . . . . . . . .19
9.11 Update of Representations . . . . . . . . . . . . . . . . . . .19
9.12 Service Contract Pricing. . . . . . . . . . . . . . . . . . . .20
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA . . . . . . . . . . . . . .20
10.1 Representations, Warranties of the Shareholders and
Covenants of the Company and the Shareholders . . . . . . . . .20
10.2 No Adverse Change . . . . . . . . . . . . . . . . . . . . . . .20
10.3 Approval of Lithia's Shareholders . . . . . . . . . . . . . . .20
10.4 Third Party Approvals . . . . . . . . . . . . . . . . . . . . .20
10.5 Hart-Scott-Rodino Waiting Period. . . . . . . . . . . . . . . .21
10.6 Approval of Lithia as the Dealer. . . . . . . . . . . . . . . .21
10.7 Consent from Lithia's Lender. . . . . . . . . . . . . . . . . .21
10.8 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.9 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . .21
10.10 Fulfillment of Conditions in Related Transactions . . . . . . .21
10.11 Employee and Related Party Loans. . . . . . . . . . . . . . . .21
10.12 Assignment and Licenses of Intangible Assets. . . . . . . . . .21
10.13 Completion of Audit and Purchase Price Determination. . . . . .21
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
11.1 Representations, Warranties and Covenants of Lithia . . . . . .21
11.2 No Adverse Changes. . . . . . . . . . . . . . . . . . . . . . .21
11.3 Third Party Approvals . . . . . . . . . . . . . . . . . . . . .21
11.4 Hart-Scott-Rodino Waiting Period. . . . . . . . . . . . . . . .21
11.5 Tax Opinion . . . . . . . . . . . . . . . . . . . . . . . . . .22
11.6 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . .22
11.7 Fulfillment of Conditions in Related Transactions . . . . . . .22
11.8 Assignment and Licenses of Intangible Assets. . . . . . . . . .22
11.9 Completion of Audit and Purchase Price Determination. . . . . .22
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . .22
13. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
13.1 General Indemnity . . . . . . . . . . . . . . . . . . . . . . .22
13.2 Defense of Claims . . . . . . . . . . . . . . . . . . . . . . .22
13.3 Limitations.. . . . . . . . . . . . . . . . . . . . . . . . . .23
14. HART-SCOTT-RODINO NOTIFICATION . . . . . . . . . . . . . . . . . . . . .23
15. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
15.1 Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . .23
15.2 By Lithia . . . . . . . . . . . . . . . . . . . . . . . . . . .24
15.3 By the Company. . . . . . . . . . . . . . . . . . . . . . . . .24
15.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . .24
15.5 Break-Up Fee. . . . . . . . . . . . . . . . . . . . . . . . . .24
16. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . .25
16.1 Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . .25
16.2 Binding Arbitration . . . . . . . . . . . . . . . . . . . . . .25
16.3 Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . .26
16.4 Hearing and Award . . . . . . . . . . . . . . . . . . . . . . .26
17. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.1 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . .26
17.2 Exhibit and Schedules . . . . . . . . . . . . . . . . . . . . .26
17.3 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.4 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.5 Construction. . . . . . . . . . . . . . . . . . . . . . . . . .27
17.6 Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.7 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . .27
17.8 Binding Effect and Assignment . . . . . . . . . . . . . . . . .27
17.9 Applicability of Exceptions and Disclosure. . . . . . . . . . .27
17.10 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.11 Definition of Knowledge . . . . . . . . . . . . . . . . . . . .28
17.12 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.13 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.14 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .28
17.15 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . .28
17.16 No Strict Construction. . . . . . . . . . . . . . . . . . . . .28
</TABLE>
iv
<PAGE>
DEFINED TERMS
<TABLE>
<S> <C>
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . 1
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
CLASS A COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . 2
DAILY SALES PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
EMPLOYMENT AGREEMENTS(S) . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . 2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . .22
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
MERGER SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . 3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . 8
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
SERIES M PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
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EXHIBITS
Exhibit A Example Calculation of Adjusted Net Worth
Exhibit B Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Series M Preferred Stock
Exhibit E - Foster Pepper & Shefelman PLLC Tax Opinion
Exhibit F - Sherman & Howard L.L.C. Tax Opinion
Exhibit G - Lease Agreement
Exhibit H - Registration Rights Agreement
Exhibit I - W. Douglas Moreland Employment Agreement
Exhibit J - Alex Jannicelli Employment Agreement
Exhibit K Sherman & Howard L.L.C. Legal Opinion
Exhibit L Assignment and Licenses of Intangible Assets
Exhibit M Foster Pepper & Shefelman PLLC Legal Opinion
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting
Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated
effective January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon
corporation ("Lithia"); COLORADO SPRINGS JEEP EAGLE LIMITED PARTNERSHIP, RLLLP
and ALEX JANNICELLI (whether one or more, the "SHAREHOLDERS"); and COLORADO
SPRINGS JEEP/EAGLE, INC., a Colorado corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and outstanding
shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Chrysler, Plymouth and Jeep automobiles and light trucks and related parts and
accessories from premises located at 1250 S. Nevada, 25 and 35 W. Arvada, and 15
E. Arvada in Colorado Springs, Colorado (the "BUSINESS REAL PROPERTY").
C. All the parties desire to consummate a business combination
transaction pursuant to which the Company will merge with and into a subsidiary
of Lithia, for the consideration and on the other terms set forth in this
Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times
LIFO reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from the
total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall
be decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the amount,
if any, by which the total Moreland Transaction Expenses recorded in 1998
exceed the remainder obtained by subtracting $11,000,000 from the aggregate
Net Adjusted Pretax Income of all members of the Moreland Group for 1998.
The Company's proportionate share of the Moreland Transaction Expenses or
the excess transaction expenses shall be determined by multiplying the
total Moreland Transaction Expenses or excess transaction expenses by a
fraction, the numerator of which is the Company's Net Adjusted Pretax
Income for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for
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1998 and the denominator is the aggregate Net Adjusted Pretax Income for 1998
of all members of the Moreland Group.
"CLASS A COMMON STOCK" means Lithia's Class A Common Stock, without par
value.
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J - K
CMC = [ 6(H - I) ----- ]
L - M
where:
H = the aggregate Net Adjusted Pretax Income of all members
of the Moreland Group for 1999, but H shall not be less
than I or more than I plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax Income for
all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for 1999, but
J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax Income;
L = the aggregate Net Adjusted Pretax Income for 1999 of
all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax Income of
all Qualifying Members.
"FLOORPLAN RATE" means the rate of interest that the Moreland Group and all
affiliated dealerships would have paid on their floorplan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $9,042,698, adjusted as follows as of
the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(i) First, the Initial Merger Consideration shall be adjusted to
equal IMC in the equation:
B
IMC = (A x 6) --- - $ 2,157,500
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998; and
C = The aggregate Net Adjusted Pretax Income of all members
of the Moreland Group for 1998.
(ii) Second, the adjusted Initial Merger Consideration determined
in (i) above shall be adjusted by adding thereto (if positive) or
subtracting therefrom (if negative) the amount of NWA in the equation:
E
NWA = (D - $28,000,000) ---
D
where:
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D = the aggregate Adjusted Net Worth of all members of the
Moreland Group as of December 31, 1998; and
E = the Adjusted Net Worth of the company as of December
31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration determined
in (ii) above shall be increased by an amount equal to IA in the equation
(F + $2,157,500) G
IA = ------------------
730
where:
F = the adjusted Initial Merger Consideration determined in
(ii) above; and
G = the sum of the Lithia Floorplan Rates in effect on each
day from and including January 1, 1999 to but excluding
the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles followed
in the preparation of the financial statements as of and for the years ended
December 31, 1996 and 1997 for the Moreland Automotive Group (which include
entities not included in the Moreland Group as defined herein) audited by Arthur
Andersen LLP and accompanied by their report thereon dated May 21, 1998.
"MORELAND GROUP" means Cherry Creek Dodge, Incorporated, William D. Corp.,
Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc., L.A.H.
Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado corporations,
and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all members
of the Moreland Group in connection with the transactions contemplated by this
Agreement and the Other Reorganization Agreements including, without limitation,
the fees of Arthur Andersen LLP for services relating to audits of the Moreland
Groups' financial statements for 1998 and subsequent years and other
transaction-related services, fees and expenses of counsel for the Moreland
Group and all filling fees payable to governmental entities relating to the
transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense incurred
or paid to W. Douglas Moreland and the general manager of the dealership
owned by the entity for the period prior to the Effective Date and any
bonus paid to W. Douglas Moreland for the period after the Effective Date
shall be added back to net income.
(iii) The salary and other compensation expenses that would have
been payable for the period prior to the Effective Date to W. Douglas
Moreland and the salary, bonus and other compensation expense that would
have been payable for the period prior to the Effective Date to the general
manager of the dealership owned by the entity under the employment
arrangements between those persons and Lithia or the entity, shall be
deducted from net income. The salary payable to W. Douglas Moreland under
his Employment Agreement shall be allocated among the
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<PAGE>
members of the Moreland Group in proportion to their respective Net
Adjusted Pretax Incomes for the year. No bonus payable to W. Douglas
Moreland under his Employment Agreement shall be deducted from net income
under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity
after December 31, 1997 will be added back to or deducted from net income.
(v) All Moreland Transaction Expenses recorded in the period
shall be added back to net income, but only to the extent that such
Moreland Transaction Expenses were taken into account in computing net
income in the first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for
credit life insurance and financing contracts shall be adjusted to the
revenues or expenses that would have been earned or incurred by such entity
for the same contacts under arrangements in effect during 1998. Extended
service contract costs will be based upon the costs charged to the Company
pursuant to Section 9.12.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds paid by such entity to Lithia or any affiliate of Lithia during the
period as a dividend or loan and on the amount of any fees or other charges
paid to Lithia to the extent that such fees are not included as expenses in
calculating Net Adjusted Pretax Income pursuant to clause (xiii) below,
from the date such payment was made to the end of the period or the date of
its repayment.
(ix) Net income shall be decreased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds provided by Lithia or any affiliate of Lithia to such entity during
the period as a loan or contribution and on the amount of any cost savings
described in clause (xii) below, from the date of such loan or contribution
or the date the savings were realized to the date of repayment or the end
of the period.
(x) Net income shall be increased by all fees paid to Lithia by
such entity under the Consulting Agreement between Lithia and such entity
as in effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring and
extraordinary income or expense items will be deducted or added back to the
net income. Some members of the Moreland Group held, on January 1, 1999,
vehicles which had suffered hail damage in 1998 and a related insurance
damage reserve. Amounts transferred from that insurance damage reserve
shall not be considered non-reoccurring or extraordinary income and shall
be included in net income, subject to any limitation imposed by the Other
Reorganization Agreements to which such members are parties.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of which
was previously incurred by the Company or procured from a third party, the
income of the Company will be adjusted to reflect the costs that would have
been incurred by the Company under the arrangements in effect during 1998.
If Lithia provides a service or product not previously utilized by the
Company, the reasonable or agreed costs of such services or product will be
included if W.
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<PAGE>
Douglas Moreland agreed or agrees that the cost of such service or product
would be included in determining Net Adjusted Pretax Income hereunder.
In addition to the specific adjustments described above, net income of each
entity for 1999 shall be adjusted in such other respects as may be necessary to
eliminate the effect of any additional costs resulting from changes implemented
by Lithia not concurred in by W. Douglas Moreland. For example, if Lithia makes
capital improvements or increases inventory levels not concurred in by W.
Douglas Moreland, all current operating expenses associated with those
decisions, including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached
as Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net Adjusted
Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax Income.
"SERIES M PREFERRED STOCK" means shares of Lithia's preferred stock,
without par value, designated as Series M-2002 Preferred Stock and Series M-2003
Preferred Stock and having the right and preferences set forth in Lithia's
Articles of Incorporation.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive. Schedule 2.1 also reflects the
proportions in which the Shareholders will share the cash and stock components
of the Merger Consideration, which are different than their percentage ownership
interests in the Company. The Shareholders hereby agree to those proportions
and waive any right they may have to receive all elements of the Merger
Consideration in proportion to their stock ownership of the Company.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which the Company shall be merged with and into Merger Sub, the
separate corporate existence of the Company shall thereupon cease, and Merger
Sub shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders
and the Company will cause the Plan of Merger and Articles of Merger in the form
required by Colorado law to be executed and filed as soon as reasonably possible
following the date of the Closing, or on such other date as Lithia and the
Company may agree, with the Secretary of State for the state of Colorado. The
Merger shall become effective at the time at which the Articles of Merger shall
have been accepted for filing by the Secretary of State for the state of
Colorado or such time specified in the Articles of Merger as may be agreed upon
by Lithia and the Company, and such time is hereinafter referred to as the
"EFFECTIVE TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
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<PAGE>
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding
share of Company Common Stock shall be converted into the right to receive a
portion of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably
practicable, the Company shall cause its auditors to prepare an audited balance
sheet and income statement for the Company as of and for the year ended
December 31, 1998 in accordance with Moreland GAAP and shall calculate the
Company's Adjusted Net Worth and Net Adjusted Pretax Income and the Initial
Merger Consideration on the basis thereof. The Company shall deliver such
financial statements and calculations to Lithia. Lithia shall have a period of
15 days after its receipt of such financial statements and calculations to make
any objections it may have to the Adjusted Net Worth and Net Adjusted Pretax
Income of the Company and Initial Merger Consideration as calculated by the
Company. If Lithia does not give notice of objections within that period, the
Adjusted Net Worth, Net Adjusted Pretax Income and the Initial Merger
Consideration so calculated shall be final. If Lithia does give notice of
objections within that time, and Lithia and the Company are unable to resolve
the matter by agreement, either side may submit the matter to
PricewaterhouseCoopers LLP or another independent accounting firm selected by
the Shareholders and Lithia for resolution. The decision of that accounting
firm shall be binding on the parties.
2.5.2 PAYMENT OF INITIAL MERGER CONSIDERATION. The Initial Merger
Consideration shall be payable in a combination of cash, Class A Common Stock
and Series M-2002 Preferred Stock. The amount of the Initial Merger
Consideration to be paid in Lithia stock shall equal ISP in the formula:
T + $12,677,500 U
ISP = --------------- x ---
2 V
Where:
T = the Initial Merger Consideration payable under this
Agreement plus the Initial Merger Consideration payable
under all of the Other Reorganization Agreements;
U = the Initial Merger Consideration under this Agreement;
and
V = T minus the Initial Merger Consideration payable under
the Other Reorganization Agreements relating to the
acquisition of L.A.H. Automotive Enterprises, Inc. and
Reno Auto Sales, Inc.
Of the stock portion of the Initial Merger Consideration, 70 percent will be
paid in Class A Common stock and 30 percent in Series M-2002 Preferred Stock.
The balance of the Initial Merger Consideration shall be paid in cash. The
Class A Common Stock shall be valued for purposes of the Initial Merger
Consideration at (i) $19.00 per share. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Initial Merger Consideration.
2.5.3 CONTINGENT MERGER CONSIDERATION. As soon as possible, and in
any event within 120 days after December 31, 1999, Lithia shall cause its
auditors to prepare a balance sheet and income statement for the Company as of
December 31, 1999 and for the year then ended and shall calculate the Adjusted
Net Worth, Net Adjusted Pretax Income and Contingent Merger Consideration on the
basis thereof. Lithia shall deliver such financial statements and calculations
to the Shareholders. The Shareholders' opportunity to object, the effect of
failure to do so and the resolution of any dispute shall be determined in the
manner provided in Section 2.5.1 above for determining the Initial Merger
Consideration.
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<PAGE>
2.5.4 PAYMENT OF CONTINGENT MERGER CONSIDERATION. The Contingent
Merger Consideration shall be paid in a combination of cash, Class A Common
Stock and Series M-2003 Preferred Stock within two business days after the
amount thereof has been determined. The amount of the Contingent Merger
Consideration to be paid in Lithia stock shall equal CSP in the formula:
X Y
CSP = --- x ---
2 Z
Where:
X = the sum of the Contingent Merger Consideration payable under
this Agreement plus the Contingent Merger Consideration
payable under all of the Other Reorganization Agreements;
Y = the Contingent Merger Consideration payable under this
Agreement; and
Z = X minus the Contingent Merger Consideration payable under the
Other Reorganization Agreements relating to the acquisition
of L.A.H. Automotive Enterprises, Inc. and Reno Auto Sales,
Inc.
The stock portion of the Contingent Merger Consideration will be payable 50
percent in Class A Common Stock and 50 percent in Series M-2003 Preferred Stock.
The balance of the Contingent Merger Consideration will be payable in cash. Any
imputed interest with respect to the payment of the Contingent Merger
Consideration shall be deemed paid from the cash portion of the Contingent
Merger Consideration. The Class A Common Stock shall be valued for purposes of
the Contingent Merger Consideration at the average Daily Sales Price over the 15
trading days ending with the second trading day before the date that such shares
are issued. "DAILY SALES PRICE" means, for any trading day, the last sales
price of the Class A Common Stock reported by the New York Stock Exchange or if
the Class A Common Stock is not then trading on the NYSE, such other source as
Lithia and the Shareholders may agree. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Contingent Merger Consideration.
2.5.5 FRACTIONAL SHARES. Lithia shall not issue fractional shares
of Class A Common Stock. In lieu thereof, Company shareholders will be entitled
to receive cash in the amount of any fractional share valued as set forth in the
preceding paragraph.
2.5.6 ADJUSTMENTS. Anything in this Agreement to the contrary
notwithstanding, all prices per share, share amounts, and per-share amounts
referred to in this Agreement shall be appropriately adjusted to account for
stock dividends, split-ups, mergers, recapitalizations, combinations,
conversions, exchanges of shares or the like occurring between the first day of
each pricing period through the date such shares are issues.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-4, a wholly
owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary, subject to
the satisfaction of all conditions to Closing, Lithia will cause to execute the
Plan of Merger and the Articles of Merger. Lithia will cause the Board of
Directors of Merger Sub to approve the Plan of Merger.
4. MERGER CONSIDERATION
Lithia will cause to be adopted and filed Articles of Amendment to Lithia's
Articles of Incorporation pursuant to which 10,500 shares of Lithia's preferred
stock will be designated as Series M-2002 Preferred Stock and 4,500 shares of
Lithia preferred stock will be designated as Series M-2003 Preferred Stock
(collectively, "Series M Preferred Stock"), with the relative rights and
preferences as set forth in the attached Exhibit D. Lithia shall make available
such shares of Series M Preferred Stock,
7
<PAGE>
shares of Class A Common Stock and cash as may be required by the terms of this
Agreement and the Plan of Merger. Such securities are being offered and sold
pursuant to exemptions from registration under both the Securities Act of 1933,
as amended, and state securities laws in reliance upon the representation and
warranties of Shareholders herein.
5. REORGANIZATION
The parties intend that the transaction to be effected by the Plan of
Merger will qualify as a reorganization under Section 368(a)(1) of the Code and
the regulations and rules promulgated thereunder. A condition of closing is the
receipt of opinions from the firm of Foster Pepper & Shefelman PLLC to Lithia
and from the firm of Sherman & Howard, L.L.C. to the Company and the
Shareholders that the transaction would qualify as to treatment as a
reorganization under Section 368(a)(1) of the Code, substantially in the form of
Exhibit E and F, respectively, attached hereto. In rendering such opinions,
counsel may require and rely upon representations contained in certificates from
officers of Lithia, the Shareholders and the Company.
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and
conditions set forth in this Agreement, the Closing of this Agreement shall take
place at the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver,
Colorado, at 9:00 a.m. on the second business day following the fulfillment of
the conditions to the obligations of the parties under Sections 10 and 11, or at
such other time or place as may be mutually agreed upon by Lithia, the
Shareholders and the Company. Notwithstanding any provision in this Agreement
to the contrary, if the Closing has not occurred on or before June 30, 1999,
either Lithia or the Company, provided that the failure of the Closing to occur
did not result from a breach of this Agreement by such party, shall have the
right to terminate this Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At
Closing, the Shareholders will deliver or cause the Company to deliver to Lithia
the following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Stock certificates representing all of the Shares;
6.2.5 Lease agreements substantially in the form of Exhibit G and a
mutually acceptable Sublease Agreement for any properties subleased by the
Company from a related party to transfer to the Company the benefits of such
underlying leases, with monthly rents in the amount set forth in Schedule G-1
attached to Exhibit G (the "LEASE AGREEMENT") duly executed by the Landlord as
specified therein;
6.2.6 The Registration Rights Agreement between Lithia, Colorado
Springs Jeep Eagle Limited Partnership, RLLP, and the majority shareholders of
the other members of the Moreland Group substantially in the form of Exhibit H
(the "REGISTRATION RIGHTS AGREEMENT"), duly executed by the Shareholders; and
6.2.7 Employment agreements between Lithia and W. Douglas Moreland
and Alex Jannicelli substantially in the form of Exhibit I and J (the
"EMPLOYMENT AGREEMENTS(S)") duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia
will deliver, or cause to be delivered, to the Shareholders the following:
8
<PAGE>
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub and
Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The cash portion of the Initial Merger Consideration payable
as provided in the Plan of Merger;
6.3.5 Stock certificates for the shares of Class A Common Stock and
Series M-2002 Preferred Stock constituting the stock portion of the Initial
Merger Consideration issued in the names of the Shareholders;
6.3.6 The Lease Agreements duly executed by Lithia Real Estate,
Inc., a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
6.3.7 The Registration Rights Agreement, duly executed by Lithia;
and
6.3.8 The Employment Agreement(s) duly executed on behalf of
Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized,
validly existing and in good standing under the applicable laws of the state of
its incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as disclosed in
Schedule 7.2, the Company does not have any subsidiaries nor any direct or
indirect equity interest in any corporation, partnership or other entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists
of 50,000 shares of Common Stock, no par value, 10,000 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or
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commitments obligating the Company to issue any additional shares of its capital
stock of any class or any other securities of any kind. Except as disclosed in
Schedule 7.3, there are no agreements that relate to the voting or control of
the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business
Real Property permits the presently existing improvements and the continuation
of the business presently being conducted on such real property. To the best of
the Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at
December 31, 1998 consist of goods of a quality and in quantities that are
suitable for sale in the ordinary course of its business with normal mark-up at
prevailing market prices. All parts and accessories in the inventories of the
Company are undamaged parts and accessories that (i) are still in the original,
resalable merchandising package, and in unbroken lots, (ii) were listed for sale
in the then-current dealer parts and accessories price schedule for the
represented manufacturers, (iii) were purchased directly from the represented
manufacturers, and (iv) are returnable under the terms of the represented
manufacturers' sales and service agreement for credit to the account of the
Company.
7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and
accurate description of all material permits, licenses, franchises, certificates
and similar items and rights, owned or held by the Company (hereinafter
collectively referred to as the "LICENSES AND PERMITS"). The Licenses and
Permits are adequate for the operation of the Company's business; are valid and
in full force and effect, and no basis exists for a grantor of any such Licenses
or Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
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7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To
the best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company.
No additional intellectual property is required by the Company for the operation
of its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute
and marketable title to (or, in the case of leased property, valid and
subsisting leasehold interests in) all of its properties and assets, including
(without limitation) the properties and assets that will be listed on Schedules
7.6 and 7.7 except for properties and assets sold, consumed or otherwise
disposed of by the Company in the ordinary course of its business, and will have
good, absolute and marketable title to all assets included in the Audited
Balance Sheet. The Company and the Business Real Property are not subject to
any liens, mortgages, encumbrances, conditional sales agreements, security
interests, claims or restrictions of any kind or character, except for (i) the
encumbrances listed on Schedule 7.11, (ii) liens for current taxes not yet due
and payable and (iii) mechanics and materialmen's liens arising in the ordinary
course of business and securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's Dealer
Financial Statements as of the end of and for the Company's two most recent
fiscal years. These Dealer Financial Statements were prepared in accordance
with the applicable manufacturer's requirements and fairly reflect in all
material respects the results of operations and financial condition of the
Company for the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in
accordance with Moreland GAAP on a LIFO basis and consistent with prior periods,
and will fairly present in all material respects the financial condition of the
Company at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has
delivered to Lithia a complete and accurate copy of all instruments evidencing
or relating to the Company's indebtedness for borrowed money at December 31,
1998. The Company is not in default or violation of any provision of any
agreement evidencing or relating to its indebtedness for borrowed money.
Schedule 7.13 sets forth as of December 31, 1998 a complete and accurate
description of all guaranties by the Company of any obligation or liability of
any person or entity, including (without limitation) any guaranties of
installment sales contracts, leases or obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and
local tax returns required to be filed by it. All federal, state, local and
foreign income, ad valorem, excise, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the
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Company are current taxes not yet due and payable. All current taxes not yet
due and payable by the Company have been properly accrued and are accurately
reflected in the Company's balance sheet in the Financial Statements. The
Company has not been delinquent in the payment of any tax, assessment or
governmental charge, nor has any tax deficiency been proposed or assessed
against it, nor has it executed any waiver of the statute of limitations on the
assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet
Date, except as anticipated by this Agreement or set forth on Schedule 7.15,
(i) the Company has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of the
Company other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of the Company; (iv) the Company has not issued any securities or options
to purchase any securities of any nature whatsoever; (v) the Company has not
increased the compensation, commissions, bonuses or other remuneration payable
to any officer, director, employee or to any other person or entity, whether now
or hereafter payable, except in the ordinary course of business, nor paid any
bonuses to any Shareholder, (vi) there has not been any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, properties or business of the Company; (vii) the Company has not
made any capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of the
Shareholders' knowledge, there are no existing violations of federal, state or
local laws, ordinances, rules, codes, regulations or orders by the Company which
are reasonably likely to materially affect the properties, assets or business of
the Company. To the best of the Company's and each of the Shareholders'
knowledge, the Company is not subject to any restriction, judgment, order, writ,
injunction, decree or award, which materially and adversely affects or is likely
to materially and adversely affect the business, operations, properties, assets
or condition (financial or otherwise) of the Company.
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7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list of
all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule
7.21, the Company does not have any employment agreements or contracts between
the Company and any person or entity. The Company is not a party to or bound by
any collective bargaining agreement, nor has the Company experienced any
strikes, grievances, claims of unfair labor practices or other collective
bargaining dispute. There are no unions representing any employees of the
Company. The Company has no knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with respect to
employees of the Company. The Company has paid or has made provision for the
payment of all compensation due any person or entity and has complied in all
material respects with all applicable laws, rules and regulations relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes, and has withheld and paid
to the appropriate governmental authority, or is holding for payment not yet due
to such authority, all amounts required by law or agreement to be withheld from
the compensation of its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and
accurate list of all accounts receivable, notes receivable and vehicle leases of
the Company as of the date indicated thereon and an aging analysis of such
accounts. All receivables of the Company are valid and enforceable claims,
arose in the ordinary course of business, require no further performance by the
Company and, to the Company's knowledge, are not subject to claims or offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules have been furnished or made
available to Lithia. The Company will make available to Lithia, to the extent
requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has
provided to Lithia (i) the names and addresses of all persons holding a power of
attorney on behalf of the Company, and (ii) the account numbers and names of all
banks or other financial institutions in which the Company
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currently has an account, deposit or safe deposit box, with the names of all
persons authorized to draw on the accounts or deposits or to have access to the
boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the Company
and the Shareholders in this Agreement and in the schedules attached hereto, and
the other statements in writing and information furnished or to be furnished to
Lithia by or on behalf of the Company or the Shareholders in connection with the
transactions contemplated by this Agreement, taken as a whole, do not and will
not contain any untrue statement of a material fact, or omit to state a material
fact necessary to make the statements contained herein not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions,
circumstances, activities, practices, incidents, plans or actions, based on or
resulting from the conduct of the business of the Company, including the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, chemical or industrial
toxic or hazardous material, substance or waste, which will violate any laws
chargeable to the Company currently in effect relating to pollution or
protection of the environment (the "ENVIRONMENTAL LAWS") or any plan, order,
decree, judgment, injunction, notice or demand letter from a governmental entity
applicable to the Company, or which will give rise to any common law or other
legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
or similar state or local laws in effect as of the date hereof. To the best of
the Company's and each of the Shareholders' knowledge, the Business Real
Property contains no spill, deposit or discharge of any hazardous substance (as
that term is currently defined under CERCLA or any applicable state law), as a
result of which there would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate description
of each underground storage tank of any kind or nature located on the Business
Real Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall
allow Lithia and its consultants access to the Business Real Property for the
purpose of conducting any further environmental assessment it may desire to
conduct, upon execution by Lithia and such consultants of an appropriate
indemnity agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the Shareholders
know of any reason why the Company cannot continue its business in all material
respects in the same manner following the execution of this Agreement and the
Closing as it has been operated prior thereto, except to the extent that Lithia
causes the business of the Company to change following the Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will
provide a complete and accurate description of all contracts in transit for the
Company.
7.30 EVALUATION OF RISKS IN RECEIVING LITHIA SECURITIES. Each
Shareholder is capable of evaluating the merits and risks of an investment in
the Class A Common Stock and the Series M Preferred Stock. By reason of their
respective business or financial experience, and/or the business or financial
experience of their respective professional advisors (who are not affiliated,
either directly or indirectly, with Lithia or any affiliate or selling agent of
Lithia), each Shareholder has the capacity to protect their interests in
connection with an investment in the Lithia securities. Each Shareholder has
had access to and has reviewed such portions of Lithia's SEC Filings as he or
his professional advisors has deemed necessary and has met either directly or
through such respective professional advisors with a representative of Lithia
and has had the opportunity to ask questions of, and receive answers from,
Lithia concerning Lithia, the Class A Common Stock and the Series M Preferred
Stock and the terms and conditions of this transaction. Each Shareholder has
received any information requested by such
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Shareholder or his professional advisors. Any questions raised concerning this
transaction have been answered to the satisfaction of each Shareholder or their
respective professional advisor.
7.31 LIMITATIONS ON TRANSFER OF STOCK. The Class A Common Stock and
Series M Preferred Stock to be issued to each Shareholder pursuant to the Plan
of Merger and any additional shares of Class A Common Stock which may be issued
upon a conversion of the Series M Preferred Stock will be held as an investment
and not with a view to distribution.
7.32 LACK OF REGISTRATION OF STOCK. Each Shareholder understands that:
(a) the offer and sale of the Class A Common Stock and Series M Preferred Stock
to be issued to the Shareholder pursuant to the Plan of Merger and any
additional shares of Class A Common Stock which may be issued upon a conversion
of the Series M Preferred Stock have not been registered under the Securities
Act of 1933, as amended, or any state securities laws in reliance upon
exemptions from registration; (b) the shares of Class A Common Stock and Series
M Preferred Stock must be held indefinitely, unless their resale is subsequently
registered under the Securities Act of 1933, as amended, and under applicable
state securities laws or unless exemptions from registration are available; (c)
except as provided in the Registration Rights Agreement, Lithia has not agreed
to register the resale of any of the securities to be received by the
Shareholders; (d) the Class A Common Stock and Series M Preferred Stock may not
be offered, sold, transferred, pledged or otherwise disposed of in the absence
of either an effective registration statement under the Securities Act of 1933
and applicable state securities laws or an opinion of counsel acceptable to
Lithia that such registration is not required; and (e) the certificates
representing Series M Preferred Stock and the Class A Common Stock (including
any additional shares of Class A Common Stock which may be issued upon a
conversion of the Series M Preferred Stock) will contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. NO OFFER, SALE, TRANSFER, PLEDGE OR OTHER
DISPOSITION OF THE SHARES MAY BE EFFECTED IN THE ABSENCE OF EITHER AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
7.33 INFORMATION CONCERNING LITHIA. Each Shareholder acknowledges that
they have received a copy of Lithia's Registration Statement on Form S-1 filed
May 1, 1998, Lithia's Form 10-K for the year-end December 31, 1997, Lithia's
Form 10-Q for the period ended September 30, 1998, and Lithia's Information
Statement for the annual meeting of Lithia's shareholders on Form DEF 14C dated
May 14, 1998, and have had the opportunity to review the information contained
in these filings and discuss the same with their respective professional
advisors.
7.34 INVESTOR STATUS. Each of the Shareholders is an "accredited
investor" as such term is defined under the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder by the Securities and
Exchange Commission.
8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement is, and
when executed at the Closing the Plan of Merger will be, a valid and legally
binding obligation of Lithia, enforceable against Lithia in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
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insolvency, reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). Lithia has the complete and unrestricted right, power and
authority to execute this Agreement and the Plan of Merger and perform its
covenants in accordance with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under
the applicable laws of the state of its incorporation and has all necessary
power and authority to own, lease and operate its properties and assets and to
conduct its business as its business is now being conducted. Lithia is
qualified to do business and is in good standing in each state in which it
transacts business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The Lithia
Shares have been validly authorized and issued, are fully paid and
non-assessable, and have not been issued in violation of any preemptive rights.
The Class A Common Stock and Series M Preferred Stock to be issued as part
of the Merger Consideration, including any Class A Common Stock issued upon
conversion of the Series M Preferred Stock (collectively, the "MERGER SHARES")
have been duly authorized and, when issued in accordance with this Agreement,
the Plan of Merger and the terms of the Series M Preferred Stock, will be
validly issued, fully paid and non-assessable and will not have been issued in
violation of the preemptive or similar rights of any person. Prior to issuance,
all Class A Common Stock to be issued to the Shareholders shall have been
approved for listing on the New York Stock Exchange. The Merger Shares will not
be subject to any restriction on transfer except as contemplated by Section
7.32.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly
and other reports under the Securities Exchange Act of 1934 and various filing
with the Securities and Exchange Commission under the Securities Act of 1933
(collectively, Lithia's "SEC FILINGS"). Prior to Closing, Lithia agrees to file
such other filings as the federal securities laws require and to provide copies
of such filings to Shareholders within 5 business days from the date of such
filing. The SEC Filings comply and all additional filings prior to Closing will
comply with the requirements of applicable laws, regulations and forms, and none
of such filings contain or will contain a material misstatement or omit or will
omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll,
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unemployment and other taxes and assessments that are due and payable by Lithia
and have been properly computed, duly reported, fully paid and discharged. The
only unpaid taxes that require payment by Lithia are current taxes not yet due
and payable. All current taxes not yet due and payable by Lithia have been
properly accrued and are accurately reflected in its balance sheet in the SEC
Filings. Lithia has not been delinquent in the payment of any tax, assessment
or governmental charge, nor has any tax deficiency been proposed or assessed
against it, nor has it executed any waiver of the statute of limitations on the
assessment or collection of any tax.
8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing. Except as set forth in the SEC Filings or Schedule 8.8, Lithia
is not a party to any agreement, letter of intent or other understanding that
would result in the issuance of any equity securities of Lithia, and as of the
date hereof, Lithia is not engaged in discussions with any person that are
reasonably likely to result in such an agreement or understanding. Without the
prior written consent of W. Douglas Moreland, Lithia will not, prior to the
Effective Date, agree to issue any equity securities in any acquisitions, having
an aggregate value in excess of $20,000,000.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body specifically applicable to Lithia and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or
threatened against Lithia or its subsidiaries, or any of its properties, assets
or business which might have a material adverse effect on its financial
condition or business prospects. Lithia is not aware of any facts that might
result in any other material action, suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there are
no existing violations of federal, state or local laws, ordinances, rules,
codes, regulations or orders by Lithia which are reasonably likely to materially
affect the properties, assets or business of Lithia. To the best of Lithia's
knowledge, Lithia is not subject to any restriction, judgment, order, writ,
injunction, decree or award, which materially and adversely affects or is likely
to materially and adversely affect the business, operations, properties, assets
or condition (financial or otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or
indirectly, any broker or finder or incurred any liability for any brokerage
fees or commissions or finders' fees and no broker or finder has acted directly
or indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
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8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules provided herewith have been
furnished to the Shareholders. Lithia will make available to the Shareholders
or their respective professional advisors, to the extent requested by the
Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in
this Agreement and in the schedules provided herewith, and the other statements
in writing and information furnished or to be furnished to the Shareholders by
or on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia
mutually agree to cooperate and use commercially reasonable good faith efforts
to prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
bodies as may be necessary to consummate the transactions contemplated by this
Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause
the Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 SHAREHOLDERS' REVIEW. Lithia will make available to Shareholders or
their respective professional advisors such books and records and access to its
senior management as Shareholders reasonably request and in a manner so as not
to interfere with the normal business operations of Lithia and the
responsibilities of its senior management, in order to fully evaluate Lithia and
its Class A Common Stock and Series M Preferred Stock to be issued to such
Shareholders pursuant to the Plan of Merger.
9.5 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.6 STANDSTILL AGREEMENT. Each Shareholder agrees that whenever Lithia
undertakes a firmly underwritten public offering of its securities and, if
requested by the managing underwriter in such offering, the Shareholder will
enter into an agreement not to sell or dispose of any securities of Lithia
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owned or controlled by the Shareholder, provided such restriction will not
extend beyond 180 days from the effective date of the registration statement
filed in connection with such offering.
9.7 FURTHER ASSURANCES. From time to time at or after the Closing, as
and when requested by any party hereto, the other party shall execute and
deliver, or cause to be executed and delivered, all such documents and
instruments and shall take, or cause to be taken, all such further or other
actions as such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
9.8 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options
pursuant to its 1996 Incentive Stock Plan to management employees remaining with
the Company after Closing. The number of shares available for grant to all
employees in the Moreland Group shall be equal to six percent of the total
number of shares of Class A Common Stock issued to all the shareholders of the
companies in the Moreland Group at the Closing and the simultaneous closings of
the Other Reorganization Agreements including such additional shares that may be
issued as Contingent Merger Consideration, plus six percent of the shares of
Class A Common Stock issuable upon conversion of the shares of Series M
Preferred Stock issued at the Closing and such simultaneous closings including
such additional shares that may be issued as Contingent Merger Consideration,
determined as though such Series M Preferred Stock were converted to Class A
Common Stock at the date of issuance. The options will be granted during 1999
and 2000 to such persons and in such amounts consistent with Lithia's practices
and as proposed by W. Douglas Moreland.
9.9 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may be created or permitted by this Agreement), and any security agreements
entered or collateral pledged to secure such guarantees, shall be released,
discharged or terminated prior to or at Closing.
9.10 NON-COMPETE. For a term of three years following the Closing date
of the Merger, Shareholders will not, directly or indirectly, within 100 miles
of any dealership currently owned or operated by Lithia or any of its
subsidiaries, own, operate, manage, control, participate in the ownership,
management, operation or control of or be paid or employed by or acquire any
interest in or securities of or otherwise become associated with or provide
assistance to, as an employee, consultant, director, officer, shareholder,
partner, agent, associate, principal, representative or any other capacity, any
business entity engaged in the lease or sale of new or used automobiles or light
trucks except as may otherwise be provided in such Shareholders' Employment
Agreements with Lithia. This covenant against competition shall not prohibit
any activity of any Shareholder with respect to any business entity with which
it or he has any such relationship as of the date of this Agreement or any
successor to such a business entity. If Lithia or one of its subsidiaries
acquires or assumes operation of an additional dealership after the date hereof,
this covenant against competition shall be extended to that additional
dealership, but there shall automatically be excepted from such extended
covenant any business entity that is within 100 miles of such additional
dealership and in which any Shareholder had an interest which did not constitute
a breach of this Section before Lithia or such subsidiary acquired or assumed
operation of such additional dealership. For that purpose, a Shareholder shall
be deemed to have an interest in a business entity if he or it had any of the
relationships with such entity that constitute competition under this Section
9.10, had signed a letter of intent, terms sheet, or agreement contemplating
such a relationship or had filed an application with a manufacturer or
franchisor which, if granted, would create such a relationship.
9.11 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any
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right they may have to terminate this Agreement on the basis of such breach, but
if they elect to proceed with the Closing rather than terminating, the breach so
disclosed and all remedies in respect thereof shall be deemed to have been
waived.
9.12 SERVICE CONTRACT PRICING. Prior to the Effective Date, the parties
will determine a pricing schedule for extended service contracts which will be
charged to each Moreland Group dealership. The pricing schedule, determined for
each product line, will be the amount determined by the following formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by the
Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that product
line less the inception rebate paid by Ryan &
Associates (in 1998, this inception rebate was paid to
Diamond Financial and was $15.00 on new vehicles and
$40.00 on used vehicles).
C = the percentage of all service contracts written by the
Moreland Group in 1998 with Western National.
D = the price charged by Western National for that product
line less the inception rebate paid by Western National
(in 1998, this inception rebate was paid to Diamond
Financial and was $50.00 on both new and used
vehicles).
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF THE
COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 APPROVAL OF LITHIA'S SHAREHOLDERS. The shareholders of Lithia shall
have approved this Agreement and the issuances of the Class A Common Stock and
Series M Preferred Stock, if such approval is necessary under the listing
requirements of the New York Stock Exchange.
10.4 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
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10.5 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
10.6 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been
approved as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.7 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from Ford
Motor Credit Company a waiver or consent to this Agreement and the transactions
contemplated hereby.
10.8 TAX OPINION. Lithia shall have received from Foster Pepper &
Shefelman, PLLC a tax opinion substantially in the form of Exhibit E.
10.9 LEGAL OPINION. Lithia shall have received from Sherman &
Howard L.L.C. its opinion substantially in the form of Exhibit J.
10.10 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
the Other Reorganization Agreements shall have been fulfilled.
10.11 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value, except for a note from North Avenue Auto, Inc.
10.12 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit K.
10.13 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
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11.5 TAX OPINION. The Shareholders shall have received from Sherman &
Howard, L.L.C. a tax opinion substantially in the form of Exhibit F.
11.6 LEGAL OPINION. The Shareholders shall have received from Foster
Pepper & Shefelman LLP an opinion substantially in the form of Exhibit L.
11.7 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
11.8 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders will
receive fully executed Agreement substantially as set forth in Exhibit L.
11.9 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or after
the Closing or the decision of any party to complete the Closing, each party
shall be entitled to rely upon the representations and warranties set forth in
this Agreement. All representations and warranties made in this Agreement shall
survive the Closing until March 31, 2001; provided, however, that (i) the
accuracy of each such representation and warranty shall be determined only as of
the date of the Closing, (ii) the representations and warranties in Sections
7.14 and 8.7 shall survive until 30 days after the expiration (without
extension) of the statute of limitations for the Company's or Lithia's (as the
case may be) 1998 federal income tax return, and (iii) any claim based upon
fraud shall survive for its applicable statute of limitation. The period of
survival for each representation and warranty established in this Section 12 is
referred to as the "Survival Period" for such representation and warranty. The
liabilities of the parties with respect to their respective representations and
warranties will expire as of the expiration of the applicable Survival Period;
provided, however, that such expiration will not affect the rights of any party
entitled to rely on a representation and warranty in respect of any breach of
which such party has given notice to the breaching party prior to the expiration
of the Survival Period, specifying in reasonable detail the facts alleged to
constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and severally
indemnify, defend and hold harmless the Company and Lithia and their respective
successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and against any
claims, damages, liabilities, penalties, actions, suits, proceedings, demands,
assessments, costs and expenses, including reasonable attorneys fees and
expenses of investigation ("CLAIMS"), incurred by any Lithia Indemnified Party
arising from or related to (i) any breach of any representation or warranty made
by the Company or the Shareholders in this Agreement, of which notice is given
to the Shareholders by the Lithia Indemnified Parties prior to the expiration of
the Survival Period for such representation or warranty or (ii) any breach of
any covenant or agreement made by the Company or the Shareholders in this
Agreement, to the extent, in the case of the Company, that such covenant or
agreement was to be performed at or before the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly
notify the Shareholders of any Claim against which indemnification will be
sought hereunder. If the Claim involves a claim, investigation, demand, action
or suit by a third party, including a governmental authority, the Shareholders
shall have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
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13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section
7.14, the Lithia Indemnified Parties shall not be entitled to indemnification
under Section 13.1 unless and until the aggregate amounts against which they
would otherwise be entitled to indemnification under Section 13.1 of this
Agreement and the comparable indemnification provisions of the Other
Reorganization Agreements exceed $500,000, and then only to the extent of such
excess.
13.3.2 In no event shall the Shareholders be liable in the aggregate
under Section 13.1 for an amount that, when added to the amounts for which the
shareholders of the other members of the Moreland Group are liable under the
comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 7.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is
entitled to be indemnified hereunder shall be reduced by (i) the amount of any
insurance proceeds available to such Lithia Indemnified Party in respect of the
matter giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties prior
to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia will
assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall,
for these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
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15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements (ii) if any
of the warranties and representations of the Company or the Shareholders
contained herein are false in any material respect, (iii) if the conditions of
this Agreement to be complied with or performed by the Shareholders or the
Company at or before Closing are not complied with or performed at the time
required for such compliance or performance and such noncompliance or
nonperformance is not waived by Lithia or (iv) if Lithia terminates any of the
Other Reorganization Agreements in accordance with the terms and conditions of
such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written notice
of termination given by the Company to Lithia (i) if Lithia defaults in any
material respect in the observance of or in the due and timely performance by
Lithia of any agreements and covenants of Lithia contained herein or in the
Other Reorganization Agreement, (ii) if any of the representations and
warranties of Lithia contained herein are false in any material respect, (iii)
if the conditions of this Agreement to be complied with or performed by Lithia
at or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by the Company or (iv) if one of the other members of the Moreland Group
terminates any of the Other Reorganization Agreements in accordance with the
terms and conditions of such other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement under
Section 15.1, no party to this Agreement shall have any liability or obligation
hereunder. Upon any termination of this Agreement under Section 15.2 or 15.3,
neither party shall have any prospective obligation hereunder except as provided
in Section 15.5, but each party shall have, if otherwise available, the remedy
of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
15.5.1 In the event that this Agreement is terminated by the Company
based upon a willful refusal by Lithia to complete this Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
200% of all amounts paid or payable to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For purposes of this Section
15.5, a willful refusal by any party to complete this Agreement or any Other
Reorganization Agreement means either such party's refusal to consummate the
transactions contemplated by this Agreement or any Other Reorganization
Agreement even though all of the conditions to its obligations to do so have
been fulfilled or such party's failure to take any action within its reasonable
control that would result in the fulfillment of a condition to such obligations.
15.5.2 In the event that either party terminates this Agreement for
reason of the non-fulfillment of the Designated Condition, Lithia shall pay to
the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement for
any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or (ii) a
willful refusal by the Company or any of the other members of the Moreland Group
or their Shareholders to complete the Agreement or any Other Reorganization
Agreement, Lithia shall pay the Company a break-up fee equal to 100% of all
amounts
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paid or payable by the Company to Lithia under the Consulting Agreement dated as
of January 1, 1999 among Lithia and the members of the Moreland Group in respect
of the net profits of the Company.
15.5.4 The break-up fees payable under this Section 15.5 shall be
due at the time this Agreement is terminated. Should the transactions
contemplated by this Agreement or the Other Reorganization Agreements fail to
close for any reason other than a willful refusal by the Company or any other
member of the Moreland Group to complete this Agreement or any other
Reorganization Agreement, it is acknowledged that the Company and the
Shareholders would suffer damages; however, the precise amount of such damages
would be difficult to establish. The break-up fees provided in this Section
represent a good-faith estimate by the parties of the damage that the Company
and Shareholders would incur. Lithia acknowledges that the break-up fees
payable under Section 15.5.2 and 15.5.3 are reasonable and appropriate, even
though Lithia may not have breached any representation, warranty or covenant
contained herein in the circumstances described in those sections. To the
extent of those break-up fees, Lithia has knowingly accepted the risk of the
nonfulfillment of the conditions to its obligations and the obligations of the
Company and the Shareholders in the circumstances described in Sections 15.5.2
and 15.5.3 in order to induce the Company and the other members of the Moreland
Group to enter into this Agreement and the Other Reorganization Agreements and
risk the adverse effect on their market values that will occur if those
agreements are not completed. Lithia expressly agrees that the break-up fees
contemplated by this Section 15.5 shall be due even though the Company, the
Shareholders or any other member of the Moreland Group or any shareholder
thereof may have breached any representation, warranty or covenant of this
Agreement or the Other Reorganization Agreements, with the sole exception of a
willful refusal by any such party to complete this Agreement or any of the Other
Reorganization Agreements. The right to collect break-up fees pursuant to this
Section 15.5 shall be the exclusive remedy of the Company and the Shareholders
in the event of a termination of this Agreement in the circumstances described
in Section 15.5.1 or 15.5.2. In the event that the Company or the Shareholders
terminate this Agreement under the circumstances described in Section 15.5.3 as
a result of the nonfulfillment of the condition established in Section 11.1 (or
Section 11.7 as it relates to the comparable conditions in the Other
Reorganization Agreements), the liquidated damages payable under Section 15.5.3
shall be deemed to compensate the Company only for the opportunity cost of
having taken itself off the market while this Agreement was being negotiated and
was in effect, and the Company shall be entitled to prove any other damages and
pursue any other remedy available at law or in equity.
16. DISPUTE RESOLUTION
16.1 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
non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of
or relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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
25
<PAGE>
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 having jurisdiction over Reno, Nevada 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
corporate law. Whether a claim is covered by this Agreement shall be determined
by the arbitrator(s). All statutes of limitations which would otherwise be
shall apply to any arbitration proceeding hereunder.
16.3 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.
16.4 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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
hereto constitutes the entire agreement between the parties regarding the
subject matter hereof and supersedes all prior agreements and understandings
between the parties relating to the subject matter of this Agreement. There are
no agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or
terminated except by an instrument in writing signed by all parties to this
Agreement.
26
<PAGE>
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter gender thereof or to the
plurals of each, as the identity of the person or persons or the context may
require. The descriptive headings contained in this Agreement are for reference
purposes only and are not intended to describe, interpret, define or limit the
scope, extent or intent of this Agreement or any provision contained in this
Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall for
any reason be held to be invalid, illegal, void or unenforceable in any respect,
such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated
by this Agreement are consummated, each of the parties to this Agreement shall
be responsible for its own costs and expenses incurred in connection with the
preparation and negotiation of this Agreement and the transactions contemplated
hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective legal
representatives, successors and permitted assigns. No party may assign any of
their rights or delegate any of their obligations hereunder. Any assignment in
violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and
agreements disclosed in the Exhibits and Schedules to this Agreement shall be
deemed to be disclosed for all purposes of this Agreement and to constitute
exceptions not only to the representations and warranties in the specific
Sections that refer to such Exhibits or Schedules, but also to all other
representations and warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be
(i) in writing, dated with the current date of such notice, and signed by the
party giving such notice, and (ii) mailed, postpaid, registered or certified,
return receipt requested, addressed to the party to be notified, or delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses to
accept delivery of the notice. The initial addresses of the parties shall be as
follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: Foothills Automotive Plaza, Inc.
1250 S. Nevada
Colorado Springs, CO 80903
Attn: W. Douglas Moreland
27
<PAGE>
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
If to the Shareholders: Colorado Springs Jeep Eagle Limited
Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
Alex Jannicelli
1250 S. Nevada
Colorado Springs, CO 80903
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's
and the Shareholders' "knowledge" shall be limited to the actual knowledge of
the Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
28
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
LITHIA MOTORS, INC.
By:
----------------------------------------
Bryan B. DeBoer, Vice President
COLORADO SPRINGS JEEP/EAGLE, INC.
By:
----------------------------------------
W. Douglas Moreland, President
SHAREHOLDERS
COLORADO SPRINGS JEEP EAGLE LIMITED
PARTNERSHIP, RLLLP
By: Moreland/CS, Inc., General Partner
By:
----------------------------------------
W. Douglas Moreland, President
----------------------------------------
Alex Jannicelli
29
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
PERCENT OF MERGER CONSIDERATION
----------------------------------------
SHAREHOLDER MERGER SHARES(1) CASH
- ----------------------------- ---------------------- ------------
<S> <C> <C>
</TABLE>
- -----------
(1) Each Shareholder will receive the same percentage of Class A Common Stock
and Series M Preferred Stock.
Schedule 2.1
<PAGE>
EXHIBIT 10.6
FOOTHILLS AUTOMOTIVE PLAZA, INC.
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
FOOTHILLS AUTOMOTIVE PLAZA LIMITED PARTNERSHIP, RLLLP
AND
JERRY CASH
(the "Shareholders")
And
FOOTHILLS AUTOMOTIVE PLAZA, INC.
a Colorado corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..5
2.1 Shares and Shareholders. . . . . . . . . . . . . . . . . . . . ..5
2.2 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . ..5
2.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . ..5
2.4 Shareholder Approval . . . . . . . . . . . . . . . . . . . . . ..5
2.5 Merger Consideration . . . . . . . . . . . . . . . . . . . . . ..5
3. FORMATION OF MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . ..7
4. MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . . ..7
5. REORGANIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..8
6. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..8
6.1 Date, Time and Place of Closing. . . . . . . . . . . . . . . . ..8
6.2 Documents To Be Delivered at Closing by the Shareholders . . . ..8
6.3 Documents To Be Delivered at Closing by Lithia . . . . . . . . ..8
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. . . . . . . . . . ..9
7.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . ..9
7.2 Incorporation and Good Standing. . . . . . . . . . . . . . . . ..9
7.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . ..9
7.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.6 Real Property. . . . . . . . . . . . . . . . . . . . . . . . . .10
7.7 Tangible Personal Property . . . . . . . . . . . . . . . . . . .10
7.8 Parts Inventories. . . . . . . . . . . . . . . . . . . . . . . .10
7.9 Licenses and Permits . . . . . . . . . . . . . . . . . . . . . .10
7.10 Intellectual Property. . . . . . . . . . . . . . . . . . . . . .10
7.11 Title to Properties; Encumbrances. . . . . . . . . . . . . . . .11
7.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . .11
7.13 Indebtedness for Borrowed Money; Guaranties. . . . . . . . . . .11
7.14 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . .11
7.15 Transactions Since Balance Sheet Date. . . . . . . . . . . . . .12
7.16 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . .12
7.17 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . .12
7.18 Contracts and Agreements . . . . . . . . . . . . . . . . . . . .12
7.19 Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . .13
7.20 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.21 Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
7.22 Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . .13
7.23 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . .13
7.24 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . .13
7.25 Powers of Attorney; Authorized Signatories . . . . . . . . . . .13
7.26 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . .13
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.27 Environmental. . . . . . . . . . . . . . . . . . . . . . . . . .14
7.28 Continuation of Business . . . . . . . . . . . . . . . . . . . .14
7.29 Contracts in Transit . . . . . . . . . . . . . . . . . . . . . .14
7.30 Evaluation of Risks in Receiving Lithia Securities . . . . . . .14
7.31 Limitations on Transfer of Stock . . . . . . . . . . . . . . . .14
7.32 Lack of Registration of Stock. . . . . . . . . . . . . . . . . .15
7.33 Information Concerning Lithia. . . . . . . . . . . . . . . . . .15
7.34 Investor Status. . . . . . . . . . . . . . . . . . . . . . . . .15
8. REPRESENTATIONS AND WARRANTIES OF LITHIA. . . . . . . . . . . . . . . .15
8.1 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . .15
8.2 Incorporation. . . . . . . . . . . . . . . . . . . . . . . . . .15
8.3 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . .16
8.4 No Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.6 SEC Filings. . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.7 Tax Matters. . . . . . . . . . . . . . . . . . . . . . . . . . .16
8.8 Transactions Since Latest Balance Sheet Date . . . . . . . . . .17
8.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . .17
8.10 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . .17
8.11 Brokers and Finders. . . . . . . . . . . . . . . . . . . . . . .17
8.12 Delivery of Documents. . . . . . . . . . . . . . . . . . . . . .17
8.13 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . .17
9. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
9.1 Notices and Consents . . . . . . . . . . . . . . . . . . . . . .18
9.2 Conduct of Business by the Company Prior to the Closing
Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
9.3 Lithia's Examination . . . . . . . . . . . . . . . . . . . . . .18
9.4 Shareholders' Review . . . . . . . . . . . . . . . . . . . . . .18
9.5 Notice of Changes. . . . . . . . . . . . . . . . . . . . . . . .18
9.6 Standstill Agreement . . . . . . . . . . . . . . . . . . . . . .18
9.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . .18
9.8 Employee Stock Options . . . . . . . . . . . . . . . . . . . . .19
9.9 Release of Guarantees. . . . . . . . . . . . . . . . . . . . . .19
9.10 Non-Compete. . . . . . . . . . . . . . . . . . . . . . . . . . .19
9.11 Update of Representations. . . . . . . . . . . . . . . . . . . .19
9.12 Service Contract Pricing . . . . . . . . . . . . . . . . . . . .19
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA. . . . . . . . . . . . . .20
10.1 Representations, Warranties of the Shareholders and
Covenants of the Company and the Shareholders. . . . . . . . . .20
10.2 No Adverse Change. . . . . . . . . . . . . . . . . . . . . . . .20
10.3 Approval of Lithia's Shareholders. . . . . . . . . . . . . . . .20
10.4 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . .20
10.5 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . .20
10.6 Approval of Lithia as the Dealer . . . . . . . . . . . . . . . .20
10.7 Consent from Lithia's Lender . . . . . . . . . . . . . . . . . .21
10.8 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .21
10.9 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . .21
10.10 Fulfillment of Conditions in Related Transactions. . . . . . . .21
10.11 Employee and Related Party Loans . . . . . . . . . . . . . . . .21
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
10.12 Assignment and Licenses of Intangible Assets . . . . . . . . . .21
10.13 Completion of Audit and Purchase Price Determination . . . . . .21
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
11.1 Representations, Warranties and Covenants of Lithia. . . . . . .21
11.2 No Adverse Changes . . . . . . . . . . . . . . . . . . . . . . .21
11.3 Third Party Approvals. . . . . . . . . . . . . . . . . . . . . .21
11.4 Hart-Scott-Rodino Waiting Period . . . . . . . . . . . . . . . .21
11.5 Tax Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . .21
11.6 Legal Opinion. . . . . . . . . . . . . . . . . . . . . . . . . .21
11.7 Fulfillment of Conditions in Related Transactions. . . . . . . .22
11.8 Assignment and Licenses of Intangible Assets . . . . . . . . . .22
11.9 Completion of Audit and Purchase Price Determination . . . . . .22
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . .22
13. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
13.1 General Indemnity. . . . . . . . . . . . . . . . . . . . . . . .22
13.2 Defense of Claims. . . . . . . . . . . . . . . . . . . . . . . .22
13.3 Limitations. . . . . . . . . . . . . . . . . . . . . . . . . . .22
14. HART-SCOTT-RODINO NOTIFICATION. . . . . . . . . . . . . . . . . . . . .23
15. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
15.1 Mutual Consent . . . . . . . . . . . . . . . . . . . . . . . . .23
15.2 By Lithia. . . . . . . . . . . . . . . . . . . . . . . . . . . .23
15.3 By the Company . . . . . . . . . . . . . . . . . . . . . . . . .24
15.4 Effect of Termination. . . . . . . . . . . . . . . . . . . . . .24
15.5 Break-Up Fee.. . . . . . . . . . . . . . . . . . . . . . . . . .24
16. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . . .25
16.1 Mediation. . . . . . . . . . . . . . . . . . . . . . . . . . . .25
16.2 Binding Arbitration. . . . . . . . . . . . . . . . . . . . . . .25
16.3 Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . .26
16.4 Hearing and Award. . . . . . . . . . . . . . . . . . . . . . . .26
17. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . .26
17.2 Exhibit and Schedules. . . . . . . . . . . . . . . . . . . . . .26
17.3 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.4 Amendment. . . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.5 Construction . . . . . . . . . . . . . . . . . . . . . . . . . .26
17.6 Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.7 Payment of Expenses. . . . . . . . . . . . . . . . . . . . . . .27
17.8 Binding Effect and Assignment. . . . . . . . . . . . . . . . . .27
17.9 Applicability of Exceptions and Disclosure . . . . . . . . . . .27
17.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
17.11 Definition of Knowledge. . . . . . . . . . . . . . . . . . . . .28
17.12 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C>
17.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . .28
17.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . .28
17.16 No Strict Construction . . . . . . . . . . . . . . . . . . . . .28
</TABLE>
v
<PAGE>
DEFINED TERMS
<TABLE>
<S> <C>
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . ..1
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
CLASS A COMMON STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . ..2
DAILY SALES PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..6
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..5
EMPLOYMENT AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . ..8
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . ..2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..8
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . ..3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . .22
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
MERGER SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..7
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . ..3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . ..3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . ..5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..5
REGISTRATION RIGHTS AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . ..8
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
SERIES M PREFERRED STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . ..5
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1
</TABLE>
vi
<PAGE>
EXHIBITS
Exhibit A Example Calculation of Adjusted Net Worth
Exhibit B Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Series M Preferred Stock
Exhibit E - Foster Pepper & Shefelman PLLC Tax Opinion
Exhibit F - Sherman & Howard L.L.C. Tax Opinion
Exhibit G - Lease Agreement
Exhibit H - Registration Rights Agreement
Exhibit I - W. Douglas Moreland Employment Agreement
Exhibit J - Jerry Cash Employment Agreement
Exhibit K Sherman & Howard L.L.C. Legal Opinion
Exhibit L Assignment and Licenses of Intangible Assets
Exhibit M Foster Pepper & Shefelman PLLC Legal Opinion
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting
Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
vii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated effective
January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon corporation
("Lithia"); FOOTHILLS AUTOMOTIVE PLAZA LIMITED PARTNERSHIP, RLLLP and JERRY CASH
(whether one or more, the "SHAREHOLDERS"); and FOOTHILLS AUTOMOTIVE PLAZA, INC.,
a Colorado corporation (the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and outstanding
shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Chrysler, Plymouth, Dodge, Jeep and Suzuki automobiles and light trucks and
related parts and accessories from premises located at 3835 and 3701 S. College,
Fort Collins, Colorado (the "BUSINESS REAL PROPERTY").
C. All the parties desire to consummate a business combination transaction
pursuant to which the Company will merge with and into a subsidiary of Lithia,
for the consideration and on the other terms set forth in this Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times LIFO
reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from the
total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall be
decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the amount,
if any, by which the total Moreland Transaction Expenses recorded in 1998
exceed the remainder obtained by subtracting $11,000,000 from the aggregate
Net Adjusted Pretax Income of all members of the Moreland Group for 1998.
The Company's proportionate share of the Moreland Transaction Expenses or
the excess transaction expenses shall be determined by multiplying the
total Moreland Transaction Expenses or excess transaction expenses by a
fraction, the numerator of which is the Company's Net Adjusted Pretax
Income for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for 1998 and the
denominator is the aggregate Net Adjusted Pretax Income for 1998 of all members
of the Moreland Group.
"CLASS A COMMON STOCK" means Lithia's Class A Common Stock, without par
value.
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<PAGE>
"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J-K
CMC = [ 6(H-I) --- ]
L-M
where:
H = the aggregate Net Adjusted Pretax Income of all
members of the Moreland Group for 1999, but H shall
not be less than I or more than I plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax Income
for all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for 1999,
but J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax
Income;
L = the aggregate Net Adjusted Pretax Income for 1999
of all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax Income
of all Qualifying Members.
"FLOORPLAN RATE" means the rate of interest that the Moreland Group and all
affiliated dealerships would have paid on their floorplan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $6,031,379, adjusted as follows as of
the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(iv) First, the Initial Merger Consideration shall be adjusted to
equal IMC in the equation:
B
IMC = (A x 6)--- - $1,425,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998;
and
C = The aggregate Net Adjusted Pretax Income of all
members of the Moreland Group for 1998.
(v) Second, the adjusted Initial Merger Consideration determined in
(i) above shall be adjusted by adding thereto (if positive) or subtracting
therefrom (if negative) the amount of NWA in the equation:
E
NWA = (D - $28,000,000) ---
D
where:
D = the aggregate Adjusted Net Worth of all members of
the Moreland Group as of December 31, 1998; and
E = the Adjusted Net Worth of the company as of
December 31, 1998.
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<PAGE>
(iii) Finally, the adjusted Initial Merger Consideration determined in
(ii) above shall be increased by an amount equal to IA in the equation
(F + $1,425,000)G
IA = -------------------
730
where:
F = the adjusted Initial Merger Consideration
determined in (ii) above; and
G = the sum of the Lithia Floorplan Rates in effect on
each day from and including January 1, 1999 to but
excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles followed
in the preparation of the financial statements as of and for the years ended
December 31, 1996 and 1997 for the Moreland Automotive Group (which include
entities not included in the Moreland Group as defined herein) audited by Arthur
Andersen LLP and accompanied by their report thereon dated May 21, 1998.
"MORELAND GROUP" means Cherry Creek Dodge, Incorporated, William D.
Corp., Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc.,
L.A.H. Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado
corporations, and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all
members of the Moreland Group in connection with the transactions contemplated
by this Agreement and the Other Reorganization Agreements including, without
limitation, the fees of Arthur Andersen LLP for services relating to audits of
the Moreland Groups' financial statements for 1998 and subsequent years and
other transaction-related services, fees and expenses of counsel for the
Moreland Group and all filling fees payable to governmental entities relating to
the transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense incurred or
paid to W. Douglas Moreland and the general manager of the dealership owned
by the entity for the period prior to the Effective Date and any bonus paid
to W. Douglas Moreland for the period after the Effective Date shall be
added back to net income.
(iii) The salary and other compensation expenses that would have been
payable for the period prior to the Effective Date to W. Douglas Moreland
and the salary, bonus and other compensation expense that would have been
payable for the period prior to the Effective Date to the general manager
of the dealership owned by the entity under the employment arrangements
between those persons and Lithia or the entity, shall be deducted from net
income. The salary payable to W. Douglas Moreland under his Employment
Agreement shall be allocated among the members of the Moreland Group in
proportion to their respective Net Adjusted Pretax Incomes for the year. No
bonus payable to W. Douglas Moreland under his Employment Agreement shall
be deducted from net income under this clause (iii).
(iv) Any increase or decrease in the LIFO reserve of such entity after
December 31, 1997 will be added back to or deducted from net income.
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<PAGE>
(v) All Moreland Transaction Expenses recorded in the period shall be
added back to net income, but only to the extent that such Moreland
Transaction Expenses were taken into account in computing net income in the
first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for credit
life insurance and financing contracts shall be adjusted to the revenues or
expenses that would have been earned or incurred by such entity for the
same contacts under arrangements in effect during 1998. Extended service
contract costs will be based upon the costs charged to the Company pursuant
to Section 9.12.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds paid by such entity to Lithia or any affiliate of Lithia during the
period as a dividend or loan and on the amount of any fees or other charges
paid to Lithia to the extent that such fees are not included as expenses in
calculating Net Adjusted Pretax Income pursuant to clause (xiii) below,
from the date such payment was made to the end of the period or the date of
its repayment.
(ix) Net income shall be decreased by an amount equal to the interest
that would have accrued at the Floorplan Rate on the amount of all funds
provided by Lithia or any affiliate of Lithia to such entity during the
period as a loan or contribution and on the amount of any cost savings
described in clause (xii) below, from the date of such loan or contribution
or the date the savings were realized to the date of repayment or the end
of the period.
(x) Net income shall be increased by all fees paid to Lithia by such
entity under the Consulting Agreement between Lithia and such entity as in
effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring and
extraordinary income or expense items will be deducted or added back to the
net income. Some members of the Moreland Group held, on January 1, 1999,
vehicles which had suffered hail damage in 1998 and a related insurance
damage reserve. Amounts transferred from that insurance damage reserve
shall not be considered non-reoccurring or extraordinary income and shall
be included in net income, subject to any limitation imposed by the Other
Reorganization Agreements to which such members are parties.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of which
was previously incurred by the Company or procured from a third party, the
income of the Company will be adjusted to reflect the costs that would have
been incurred by the Company under the arrangements in effect during 1998.
If Lithia provides a service or product not previously utilized by the
Company, the reasonable or agreed costs of such services or product will be
included if W. Douglas Moreland agreed or agrees that the cost of such
service or product would be included in determining Net Adjusted Pretax
Income hereunder.
In addition to the specific adjustments described above, net income of each
entity for 1999 shall be adjusted in such other respects as may be necessary to
eliminate the effect of any additional costs resulting from changes implemented
by Lithia not concurred in by W. Douglas Moreland. For example, if Lithia makes
capital improvements or increases inventory levels not concurred in by W.
Douglas
4
<PAGE>
Moreland, all current operating expenses associated with those decisions,
including financing costs, would be added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached as
Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net Adjusted
Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax Income.
"SERIES M PREFERRED STOCK" means shares of Lithia's preferred stock,
without par value, designated as Series M-2002 Preferred Stock and Series M-2003
Preferred Stock and having the right and preferences set forth in Lithia's
Articles of Incorporation.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive. Schedule 2.1 also reflects the
proportions in which the Shareholders will share the cash and stock components
of the Merger Consideration, which are different than their percentage ownership
interests in the Company. The Shareholders hereby agree to those proportions and
waive any right they may have to receive all elements of the Merger
Consideration in proportion to their stock ownership of the Company.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which the Company shall be merged with and into Merger Sub, the
separate corporate existence of the Company shall thereupon cease, and Merger
Sub shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders and
the Company will cause the Plan of Merger and Articles of Merger in the form
required by Colorado law to be executed and filed as soon as reasonably possible
following the date of the Closing, or on such other date as Lithia and the
Company may agree, with the Secretary of State for the state of Colorado. The
Merger shall become effective at the time at which the Articles of Merger shall
have been accepted for filing by the Secretary of State for the state of
Colorado or such time specified in the Articles of Merger as may be agreed upon
by Lithia and the Company, and such time is hereinafter referred to as the
"EFFECTIVE TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding share
of Company Common Stock shall be converted into the right to receive a portion
of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common
5
<PAGE>
Stock outstanding. The Initial Merger Consideration and the Contingent Merger
Consideration (collectively referred to as the "Merger Consideration") will be
calculated and paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably practicable,
the Company shall cause its auditors to prepare an audited balance sheet and
income statement for the Company as of and for the year ended December 31, 1998
in accordance with Moreland GAAP and shall calculate the Company's Adjusted Net
Worth and Net Adjusted Pretax Income and the Initial Merger Consideration on the
basis thereof. The Company shall deliver such financial statements and
calculations to Lithia. Lithia shall have a period of 15 days after its receipt
of such financial statements and calculations to make any objections it may have
to the Adjusted Net Worth and Net Adjusted Pretax Income of the Company and
Initial Merger Consideration as calculated by the Company. If Lithia does not
give notice of objections within that period, the Adjusted Net Worth, Net
Adjusted Pretax Income and Initial Merger Consideration so calculated shall be
final. If Lithia does give notice of objections within that time, and Lithia and
the Company are unable to resolve the matter by agreement, either side may
submit the matter to PricewaterhouseCoopers LLP or another independent
accounting firm selected by the Shareholders and Lithia for resolution. The
decision of that accounting firm shall be binding on the parties.
2.5.2 PAYMENT OF INITIAL MERGER CONSIDERATION. The Initial Merger
Consideration shall be payable in a combination of cash, Class A Common Stock
and Series M-2002 Preferred Stock. The amount of the Initial Merger
Consideration to be paid in Lithia stock shall equal ISP in the formula:
T + $12,677,500 U
ISP = ----------------- x ---
2 V
Where:
T = the Initial Merger Consideration payable under this
Agreement plus the Initial Merger Consideration payable
under all of the Other Reorganization Agreements;
U = the Initial Merger Consideration under this Agreement; and
V = T minus the Initial Merger Consideration payable under the
Other Reorganization Agreements relating to the acquisition
of L.A.H. Automotive Enterprises, Inc. and Reno Auto Sales,
Inc.
Of the stock portion of the Initial Merger Consideration, 70 percent will be
paid in Class A Common stock and 30 percent in Series M-2002 Preferred Stock.
The balance of the Initial Merger Consideration shall be paid in cash. The Class
A Common Stock shall be valued for purposes of the Initial Merger Consideration
at (i) $19.00 per share. The Series M Preferred Stock shall be valued at $1,000
per share for purposes of the Initial Merger Consideration.
2.5.3 CONTINGENT MERGER CONSIDERATION. As soon as possible, and in any
event within 120 days after December 31, 1999, Lithia shall cause its auditors
to prepare a balance sheet and income statement for the Company as of December
31, 1999 and for the year then ended and shall calculate the Adjusted Net Worth,
Net Adjusted Pretax Income and Contingent Merger Consideration on the basis
thereof. Lithia shall deliver such financial statements and calculations to the
Shareholders. The Shareholders' opportunity to object, the effect of failure to
do so and the resolution of any dispute shall be determined in the manner
provided in Section 2.5.1 above for determining the Initial Merger
Consideration.
2.5.4 PAYMENT OF CONTINGENT MERGER CONSIDERATION. The Contingent
Merger Consideration shall be paid in a combination of cash, Class A Common
Stock and Series M-2003 Preferred Stock within two business days after the
amount thereof has been determined. The amount of the Contingent Merger
Consideration to be paid in Lithia stock shall equal CSP in the formula:
6
<PAGE>
X Y
CSP = --- x ---
2 Z
Where:
X = the sum of the Contingent Merger Consideration payable
under this Agreement plus the Contingent Merger
Consideration payable under all of the Other Reorganization
Agreements;
Y = the Contingent Merger Consideration payable under this
Agreement; and
Z = X minus the Contingent Merger Consideration payable under
the Other Reorganization Agreements relating to the
acquisition of L.A.H. Automotive Enterprises, Inc. and Reno
Auto Sales, Inc.
The stock portion of the Contingent Merger Consideration will be payable 50
percent in Class A Common Stock and 50 percent in Series M-2003 Preferred Stock.
The balance of the Contingent Merger Consideration will be payable in cash. Any
imputed interest with respect to the payment of the Contingent Merger
Consideration shall be deemed paid from the cash portion of the Contingent
Merger Consideration. The Class A Common Stock shall be valued for purposes of
the Contingent Merger Consideration at the average Daily Sales Price over the 15
trading days ending with the second trading day before the date that such shares
are issued. "DAILY SALES PRICE" means, for any trading day, the last sales price
of the Class A Common Stock reported by the New York Stock Exchange or if the
Class A Common Stock is not then trading on the NYSE, such other source as
Lithia and the Shareholders may agree. The Series M Preferred Stock shall be
valued at $1,000 per share for purposes of the Contingent Merger Consideration.
2.5.5 FRACTIONAL SHARES. Lithia shall not issue fractional shares of
Class A Common Stock. In lieu thereof, Company shareholders will be entitled to
receive cash in the amount of any fractional share valued as set forth in the
preceding paragraph.
2.5.6 ADJUSTMENTS. Anything in this Agreement to the contrary
notwithstanding, all prices per share, share amounts, and per-share amounts
referred to in this Agreement shall be appropriately adjusted to account for
stock dividends, split-ups, mergers, recapitalizations, combinations,
conversions, exchanges of shares or the like occurring between the first day of
each pricing period through the date such shares are issues.
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-5, a wholly
owned subsidiary under Colorado law ("MERGER SUB"), which subsidiary, subject to
the satisfaction of all conditions to Closing, Lithia will cause to execute the
Plan of Merger and the Articles of Merger. Lithia will cause the Board of
Directors of Merger Sub to approve the Plan of Merger.
4. MERGER CONSIDERATION
Lithia will cause to be adopted and filed Articles of Amendment to Lithia's
Articles of Incorporation pursuant to which 10,500 shares of Lithia's preferred
stock will be designated as Series M-2002 Preferred Stock and 4,500 shares of
Lithia preferred stock will be designated as Series M-2003 Preferred Stock
(collectively, "Series M Preferred Stock"), with the relative rights and
preferences as set forth in the attached Exhibit D. Lithia shall make available
such shares of Series M Preferred Stock, shares of Class A Common Stock and cash
as may be required by the terms of this Agreement and the Plan of Merger. Such
securities are being offered and sold pursuant to exemptions from registration
under both the Securities Act of 1933, as amended, and state securities laws in
reliance upon the representation and warranties of Shareholders herein.
7
<PAGE>
5. REORGANIZATION
The parties intend that the transaction to be effected by the Plan of
Merger will qualify as a reorganization under Section 368(a)(1) of the Code and
the regulations and rules promulgated thereunder. A condition of closing is the
receipt of opinions from the firm of Foster Pepper & Shefelman PLLC to Lithia
and from the firm of Sherman & Howard, L.L.C. to the Company and the
Shareholders that the transaction would qualify as to treatment as a
reorganization under Section 368(a)(1) of the Code, substantially in the form of
Exhibit E and F, respectively, attached hereto. In rendering such opinions,
counsel may require and rely upon representations contained in certificates from
officers of Lithia, the Shareholders and the Company.
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and conditions
set forth in this Agreement, the Closing of this Agreement shall take place at
the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver, Colorado, at
9:00 a.m. on the second business day following the fulfillment of the conditions
to the obligations of the parties under Sections 10 and 11, or at such other
time or place as may be mutually agreed upon by Lithia, the Shareholders and the
Company. Notwithstanding any provision in this Agreement to the contrary, if the
Closing has not occurred on or before June 30, 1999, either Lithia or the
Company, provided that the failure of the Closing to occur did not result from a
breach of this Agreement by such party, shall have the right to terminate this
Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At Closing,
the Shareholders will deliver or cause the Company to deliver to Lithia the
following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
6.2.4 Stock certificates representing all of the Shares;
6.2.5 Lease agreements substantially in the form of Exhibit G with
monthly rents in the amount set forth in Schedule G-1 attached to Exhibit G (the
"LEASE AGREEMENT"), duly executed by the landlord as specified therein;
6.2.6 The Registration Rights Agreement between Lithia, Foothills
Automotive Plaza, Limited Partnership, RLLP, and the majority shareholders of
the other members of the Moreland Group substantially in the form of Exhibit H
(the "REGISTRATION RIGHTS AGREEMENT"), duly executed by the Shareholders; and
6.2.7 Employment agreements between Lithia and W. Douglas Moreland and
Jerry Cash substantially in the form of Exhibit I and J (the "EMPLOYMENT
AGREEMENTS") duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia will
deliver, or cause to be delivered, to the Shareholders the following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub
and Lithia;
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6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The cash portion of the Initial Merger Consideration
payable as provided in the Plan of Merger;
6.3.5 Stock certificates for the shares of Class A Common Stock and
Series M-2002 Preferred Stock constituting the stock portion of the Initial
Merger Consideration issued in the names of the Shareholders;
6.3.6 The Lease Agreements duly executed by Lithia Real Estate, Inc.,
a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
6.3.7 The Registration Rights Agreement, duly executed by Lithia; and
6.3.8 The Employment Agreements duly executed on behalf of Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized, validly
existing and in good standing under the applicable laws of the state of its
incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as disclosed in
Schedule 7.2, the Company does not have any subsidiaries nor any direct or
indirect equity interest in any corporation, partnership or other entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists of
50,000 shares of Common Stock, no par value, 37,500 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized and
issued, are fully paid and non-assessable, and have not been issued in violation
of any preemptive rights or of any federal or state securities law. On the date
hereof, the Shares are owned beneficially and of record by the Shareholders as
set forth on Schedule 2.1. There are and will be on the Closing Date no
outstanding subscriptions, options, rights, warrants, convertible securities,
buy-in or other agreements or commitments obligating the Company to issue any
additional shares of its capital stock of any class or any other securities of
any kind. Except as disclosed in Schedule 7.3, there are no agreements that
relate to the voting or control of the Shares.
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7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement nor
the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business Real
Property permits the presently existing improvements and the continuation of the
business presently being conducted on such real property. To the best of the
Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at December 31,
1998 consist of goods of a quality and in quantities that are suitable for sale
in the ordinary course of its business with normal mark-up at prevailing market
prices. All parts and accessories in the inventories of the Company are
undamaged parts and accessories that (i) are still in the original, resalable
merchandising package, and in unbroken lots, (ii) were listed for sale in the
then-current dealer parts and accessories price schedule for the represented
manufacturers, (iii) were purchased directly from the represented manufacturers,
and (iv) are returnable under the terms of the represented manufacturers' sales
and service agreement for credit to the account of the Company.
7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and accurate
description of all material permits, licenses, franchises, certificates and
similar items and rights, owned or held by the Company (hereinafter collectively
referred to as the "LICENSES AND PERMITS"). The Licenses and Permits are
adequate for the operation of the Company's business; are valid and in full
force and effect, and no basis exists for a grantor of any such Licenses or
Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation of its business. Except as set forth on Schedule 7.9, the
Company's rights under the Licenses and Permits will, by operation of law,
vested in Merger Sub upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or
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consents to third parties granting the right to use any intellectual property
owned by the Company. To the best of the Company's and each of the Shareholders'
knowledge and except as disclosed in Schedule 7.10, the Company owns and has the
right to use its intellectual property free and clear of any claims and without
any conflict with the rights of others and no royalties or fees are payable by
the Company to any third party by reason of the use of any intellectual property
by the Company. No additional intellectual property is required by the Company
for the operation of its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute and
marketable title to (or, in the case of leased property, valid and subsisting
leasehold interests in) all of its properties and assets, including (without
limitation) the properties and assets that will be listed on Schedules 7.6 and
7.7 except for properties and assets sold, consumed or otherwise disposed of by
the Company in the ordinary course of its business, and will have good, absolute
and marketable title to all assets included in the Audited Balance Sheet. The
Company and the Business Real Property are not subject to any liens, mortgages,
encumbrances, conditional sales agreements, security interests, claims or
restrictions of any kind or character, except for (i) the encumbrances listed on
Schedule 7.11, (ii) liens for current taxes not yet due and payable and (iii)
mechanics and materialmen's liens arising in the ordinary course of business and
securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's Dealer
Financial Statements as of the end of and for the Company's two most recent
fiscal years. These Dealer Financial Statements were prepared in accordance with
the applicable manufacturer's requirements and fairly reflect in all material
respects the results of operations and financial condition of the Company for
the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in accordance
with Moreland GAAP on a LIFO basis and consistent with prior periods, and will
fairly present in all material respects the financial condition of the Company
at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has delivered
to Lithia a complete and accurate copy of all instruments evidencing or relating
to the Company's indebtedness for borrowed money at December 31, 1998. The
Company is not in default or violation of any provision of any agreement
evidencing or relating to its indebtedness for borrowed money. Schedule 7.13
sets forth as of December 31, 1998 a complete and accurate description of all
guaranties by the Company of any obligation or liability of any person or
entity, including (without limitation) any guaranties of installment sales
contracts, leases or obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and local
tax returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, sales, use, payroll, unemployment and other taxes
and assessments that are due and payable by the Company have been properly
computed, duly reported, fully paid, and discharged and the Company has
conformed with applicable requirements to maintain its LIFO election. The only
unpaid taxes that require payment by the Company are current taxes not yet due
and payable. All current taxes not yet due and payable by the Company have been
properly accrued and are accurately reflected in the Company's balance sheet in
the Financial Statements. The Company has not been delinquent in the payment of
any tax, assessment or governmental charge, nor has any tax deficiency been
proposed or assessed against it, nor has it executed any waiver of the statute
of limitations on the assessment or collection of any tax.
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7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet Date,
except as anticipated by this Agreement or set forth on Schedule 7.15, (i) the
Company has not incurred any material debts, liabilities or obligations except
current liabilities in the ordinary course of business; discharged or satisfied
any material liens or encumbrances, or paid any material debts, liabilities or
obligations, except in the ordinary course of business; mortgaged, pledged or
otherwise subjected to any lien or other encumbrance any of its properties or
assets; canceled any material debt or claim; sold or transferred any properties
or assets except sales from inventory in the ordinary course of business; nor
entered into any material transaction other than in the ordinary course of
business; (ii) there has not been any change in the financial condition, net
income, assets, liabilities, operations or business of the Company other than
changes in the ordinary course of business, none of which, individually or in
the aggregate, has been materially adverse; (iii) there has not been any
declaration, setting aside or payment of any dividend or other distribution in
respect of, or any repurchase or acquisition of, the capital stock of the
Company; (iv) the Company has not issued any securities or options to purchase
any securities of any nature whatsoever; (v) the Company has not increased the
compensation, commissions, bonuses or other remuneration payable to any officer,
director, employee or to any other person or entity, whether now or hereafter
payable, except in the ordinary course of business, nor paid any bonuses to any
Shareholder, (vi) there has not been any damage, destruction or loss (whether or
not covered by insurance) materially and adversely affecting the assets,
properties or business of the Company; (vii) the Company has not made any
capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of the
Shareholders' knowledge, there are no existing violations of federal, state or
local laws, ordinances, rules, codes, regulations or orders by the Company which
are reasonably likely to materially affect the properties, assets or business of
the Company. To the best of the Company's and each of the Shareholders'
knowledge, the Company is not subject to any restriction, judgment, order, writ,
injunction, decree or award, which materially and adversely affects or is likely
to materially and adversely affect the business, operations, properties, assets
or condition (financial or otherwise) of the Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or
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agreement which materially and adversely affects or is likely to materially or
adversely affect the business, operations, properties, assets or condition
(financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) worker's
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list of
all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule 7.21,
the Company does not have any employment agreements or contracts between the
Company and any person or entity. The Company is not a party to or bound by any
collective bargaining agreement, nor has the Company experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
dispute. There are no unions representing any employees of the Company. The
Company has no knowledge of any organizational effort presently being made or
threatened by or on behalf of any labor union with respect to employees of the
Company. The Company has paid or has made provision for the payment of all
compensation due any person or entity and has complied in all material respects
with all applicable laws, rules and regulations relating to the employment of
labor, including those related to wages, hours, collective bargaining and the
payment and withholding of taxes, and has withheld and paid to the appropriate
governmental authority, or is holding for payment not yet due to such authority,
all amounts required by law or agreement to be withheld from the compensation of
its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and accurate
list of all accounts receivable, notes receivable and vehicle leases of the
Company as of the date indicated thereon and an aging analysis of such accounts.
All receivables of the Company are valid and enforceable claims, arose in the
ordinary course of business, require no further performance by the Company and,
to the Company's knowledge, are not subject to claims or offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules have been furnished or made
available to Lithia. The Company will make available to Lithia, to the extent
requested by Lithia, all books, records and facilities of the Company.
7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has provided
to Lithia (i) the names and addresses of all persons holding a power of attorney
on behalf of the Company, and (ii) the account numbers and names of all banks or
other financial institutions in which the Company currently has an account,
deposit or safe deposit box, with the names of all persons authorized to draw on
the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the Company and
the Shareholders in this Agreement and in the schedules attached hereto, and the
other statements in writing and information furnished or to be furnished to
Lithia by or on behalf of the Company or the Shareholders
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in connection with the transactions contemplated by this Agreement, taken as a
whole, do not and will not contain any untrue statement of a material fact, or
omit to state a material fact necessary to make the statements contained herein
not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions, circumstances,
activities, practices, incidents, plans or actions, based on or resulting from
the conduct of the business of the Company, including the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling, or the emission, discharge, release or threatened release into the
environment, of any pollutant, contaminant, chemical or industrial toxic or
hazardous material, substance or waste, which will violate any laws chargeable
to the Company currently in effect relating to pollution or protection of the
environment (the "ENVIRONMENTAL LAWS") or any plan, order, decree, judgment,
injunction, notice or demand letter from a governmental entity applicable to the
Company, or which will give rise to any common law or other legal liability,
including, without limitation, liability under the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") or similar state or local
laws in effect as of the date hereof. To the best of the Company's and each of
the Shareholders' knowledge, the Business Real Property contains no spill,
deposit or discharge of any hazardous substance (as that term is currently
defined under CERCLA or any applicable state law), as a result of which there
would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate description of
each underground storage tank of any kind or nature located on the Business Real
Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall allow
Lithia and its consultants access to the Business Real Property for the purpose
of conducting any further environmental assessment it may desire to conduct,
upon execution by Lithia and such consultants of an appropriate indemnity
agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the Shareholders
know of any reason why the Company cannot continue its business in all material
respects in the same manner following the execution of this Agreement and the
Closing as it has been operated prior thereto, except to the extent that Lithia
causes the business of the Company to change following the Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will provide
a complete and accurate description of all contracts in transit for the Company.
7.30 EVALUATION OF RISKS IN RECEIVING LITHIA SECURITIES. Each Shareholder
is capable of evaluating the merits and risks of an investment in the Class A
Common Stock and the Series M Preferred Stock. By reason of their respective
business or financial experience, and/or the business or financial experience of
their respective professional advisors (who are not affiliated, either directly
or indirectly, with Lithia or any affiliate or selling agent of Lithia), each
Shareholder has the capacity to protect their interests in connection with an
investment in the Lithia securities. Each Shareholder has had access to and has
reviewed such portions of Lithia's SEC Filings as he or his professional
advisors has deemed necessary and has met either directly or through such
respective professional advisors with a representative of Lithia and has had the
opportunity to ask questions of, and receive answers from, Lithia concerning
Lithia, the Class A Common Stock and the Series M Preferred Stock and the terms
and conditions of this transaction. Each Shareholder has received any
information requested by such Shareholder or his professional advisors. Any
questions raised concerning this transaction have been answered to the
satisfaction of each Shareholder or their respective professional advisor.
7.31 LIMITATIONS ON TRANSFER OF STOCK. The Class A Common Stock and Series
M Preferred Stock to be issued to each Shareholder pursuant to the Plan of
Merger and any additional shares of Class A Common Stock which may be issued
upon a conversion of the Series M Preferred Stock will be held as an investment
and not with a view to distribution.
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7.32 LACK OF REGISTRATION OF STOCK. Each Shareholder understands that: (a)
the offer and sale of the Class A Common Stock and Series M Preferred Stock to
be issued to the Shareholder pursuant to the Plan of Merger and any additional
shares of Class A Common Stock which may be issued upon a conversion of the
Series M Preferred Stock have not been registered under the Securities Act of
1933, as amended, or any state securities laws in reliance upon exemptions from
registration; (b) the shares of Class A Common Stock and Series M Preferred
Stock must be held indefinitely, unless their resale is subsequently registered
under the Securities Act of 1933, as amended, and under applicable state
securities laws or unless exemptions from registration are available; (c) except
as provided in the Registration Rights Agreement, Lithia has not agreed to
register the resale of any of the securities to be received by the Shareholders;
(d) the Class A Common Stock and Series M Preferred Stock may not be offered,
sold, transferred, pledged or otherwise disposed of in the absence of either an
effective registration statement under the Securities Act of 1933 and applicable
state securities laws or an opinion of counsel acceptable to Lithia that such
registration is not required; and (e) the certificates representing Series M
Preferred Stock and the Class A Common Stock (including any additional shares of
Class A Common Stock which may be issued upon a conversion of the Series M
Preferred Stock) will contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933. NO OFFER, SALE, TRANSFER, PLEDGE OR OTHER
DISPOSITION OF THE SHARES MAY BE EFFECTED IN THE ABSENCE OF EITHER AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 AND
APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
7.33 INFORMATION CONCERNING LITHIA. Each Shareholder acknowledges that they
have received a copy of Lithia's Registration Statement on Form S-1 filed May 1,
1998, Lithia's Form 10-K for the year-end December 31, 1997, Lithia's Form 10-Q
for the period ended September 30, 1998, and Lithia's Information Statement for
the annual meeting of Lithia's shareholders on Form DEF 14C dated May 14, 1998,
and have had the opportunity to review the information contained in these
filings and discuss the same with their respective professional advisors.
7.34 INVESTOR STATUS. Each of the Shareholders is an "accredited investor"
as such term is defined under the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder by the Securities and Exchange
Commission.
8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement is, and when
executed at the Closing the Plan of Merger will be, a valid and legally binding
obligation of Lithia, enforceable against Lithia in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
Lithia has the complete and unrestricted right, power and authority to execute
this Agreement and the Plan of Merger and perform its covenants in accordance
with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under the
applicable laws of the state of its incorporation and has all necessary power
and authority to own, lease and operate its properties
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and assets and to conduct its business as its business is now being conducted.
Lithia is qualified to do business and is in good standing in each state in
which it transacts business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The Lithia Shares
have been validly authorized and issued, are fully paid and non-assessable, and
have not been issued in violation of any preemptive rights.
The Class A Common Stock and Series M Preferred Stock to be issued as part
of the Merger Consideration, including any Class A Common Stock issued upon
conversion of the Series M Preferred Stock (collectively, the "MERGER SHARES")
have been duly authorized and, when issued in accordance with this Agreement,
the Plan of Merger and the terms of the Series M Preferred Stock, will be
validly issued, fully paid and non-assessable and will not have been issued in
violation of the preemptive or similar rights of any person. Prior to issuance,
all Class A Common Stock to be issued to the Shareholders shall have been
approved for listing on the New York Stock Exchange. The Merger Shares will not
be subject to any restriction on transfer except as contemplated by Section
7.32.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly and
other reports under the Securities Exchange Act of 1934 and various filing with
the Securities and Exchange Commission under the Securities Act of 1933
(collectively, Lithia's "SEC FILINGS"). Prior to Closing, Lithia agrees to file
such other filings as the federal securities laws require and to provide copies
of such filings to Shareholders within 5 business days from the date of such
filing. The SEC Filings comply and all additional filings prior to Closing will
comply with the requirements of applicable laws, regulations and forms, and none
of such filings contain or will contain a material misstatement or omit or will
omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All current
taxes not yet due and payable by Lithia have been properly accrued and are
accurately reflected in its balance sheet in the SEC Filings. Lithia has not
been delinquent in the payment of any tax, assessment or governmental charge,
nor has any tax deficiency been proposed or assessed against it, nor has it
executed any waiver of the statute of limitations on the assessment or
collection of any tax.
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8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing. Except as set forth in the SEC Filings or Schedule 8.8, Lithia is
not a party to any agreement, letter of intent or other understanding that would
result in the issuance of any equity securities of Lithia, and as of the date
hereof, Lithia is not engaged in discussions with any person that are reasonably
likely to result in such an agreement or understanding. Without the prior
written consent of W. Douglas Moreland, Lithia will not, prior to the Effective
Date, agree to issue any equity securities in any acquisitions, having an
aggregate value in excess of $20,000,000.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate description
of all orders, decrees, writs or injunctions of any court or governmental body
specifically applicable to Lithia and all legal actions, suits, arbitrations,
condemnation actions or other proceedings pending or threatened against Lithia
or its subsidiaries, or any of its properties, assets or business which might
have a material adverse effect on its financial condition or business prospects.
Lithia is not aware of any facts that might result in any other material action,
suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there are no
existing violations of federal, state or local laws, ordinances, rules, codes,
regulations or orders by Lithia which are reasonably likely to materially affect
the properties, assets or business of Lithia. To the best of Lithia's knowledge,
Lithia is not subject to any restriction, judgment, order, writ, injunction,
decree or award, which materially and adversely affects or is likely to
materially and adversely affect the business, operations, properties, assets or
condition (financial or otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or indirectly,
any broker or finder or incurred any liability for any brokerage fees or
commissions or finders' fees and no broker or finder has acted directly or
indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules provided herewith have been
furnished to the Shareholders. Lithia will make available to the Shareholders or
their respective professional advisors, to the extent requested by the
Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in this
Agreement and in the schedules provided herewith, and the other statements in
writing and information furnished or to be
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furnished to the Shareholders by or on behalf of Lithia in connection with the
transactions contemplated by this Agreement, taken as a whole, do not and will
not contain any untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make the statements contained herein not
misleading.
9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia mutually
agree to cooperate and use commercially reasonable good faith efforts to prepare
all documentation, to effect all filings and to obtain all permits, consents,
approvals and authorizations of all third parties and governmental bodies as may
be necessary to consummate the transactions contemplated by this Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause the
Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 SHAREHOLDERS' REVIEW. Lithia will make available to Shareholders or
their respective professional advisors such books and records and access to its
senior management as Shareholders reasonably request and in a manner so as not
to interfere with the normal business operations of Lithia and the
responsibilities of its senior management, in order to fully evaluate Lithia and
its Class A Common Stock and Series M Preferred Stock to be issued to such
Shareholders pursuant to the Plan of Merger.
9.5 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.6 STANDSTILL AGREEMENT. Each Shareholder agrees that whenever Lithia
undertakes a firmly underwritten public offering of its securities and, if
requested by the managing underwriter in such offering, the Shareholder will
enter into an agreement not to sell or dispose of any securities of Lithia owned
or controlled by the Shareholder, provided such restriction will not extend
beyond 180 days from the effective date of the registration statement filed in
connection with such offering.
9.7 FURTHER ASSURANCES. From time to time at or after the Closing, as and
when requested by any party hereto, the other party shall execute and deliver,
or cause to be executed and delivered, all such documents and instruments and
shall take, or cause to be taken, all such further or other actions as such
other party may reasonably deem necessary or desirable to consummate the
transactions contemplated by this Agreement.
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9.8 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options pursuant
to its 1996 Incentive Stock Plan to management employees remaining with the
Company after Closing. The number of shares available for grant to all employees
in the Moreland Group shall be equal to six percent of the total number of
shares of Class A Common Stock issued to all the shareholders of the companies
in the Moreland Group at the Closing and the simultaneous closings of the Other
Reorganization Agreements including such additional shares that may be issued as
Contingent Merger Consideration, plus six percent of the shares of Class A
Common Stock issuable upon conversion of the shares of Series M Preferred Stock
issued at the Closing and such simultaneous closings including such additional
shares that may be issued as Contingent Merger Consideration, determined as
though such Series M Preferred Stock were converted to Class A Common Stock at
the date of issuance. The options will be granted during 1999 and 2000 to such
persons and in such amounts consistent with Lithia's practices and as proposed
by W. Douglas Moreland.
9.9 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may be created or permitted by this Agreement), and any security agreements
entered or collateral pledged to secure such guarantees, shall be released,
discharged or terminated prior to or at Closing.
9.10 NON-COMPETE. For a term of three years following the Closing date of
the Merger, Shareholders will not, directly or indirectly, within 100 miles of
any dealership currently owned or operated by Lithia or any of its subsidiaries,
own, operate, manage, control, participate in the ownership, management,
operation or control of or be paid or employed by or acquire any interest in or
securities of or otherwise become associated with or provide assistance to, as
an employee, consultant, director, officer, shareholder, partner, agent,
associate, principal, representative or any other capacity, any business entity
engaged in the lease or sale of new or used automobiles or light trucks except
as may otherwise be provided in such Shareholders' Employment Agreements with
Lithia. This covenant against competition shall not prohibit any activity of any
Shareholder with respect to any business entity with which it or he has any such
relationship as of the date of this Agreement or any successor to such a
business entity. If Lithia or one of its subsidiaries acquires or assumes
operation of an additional dealership after the date hereof, this covenant
against competition shall be extended to that additional dealership, but there
shall automatically be excepted from such extended covenant any business entity
that is within 100 miles of such additional dealership and in which any
Shareholder had an interest which did not constitute a breach of this Section
before Lithia or such subsidiary acquired or assumed operation of such
additional dealership. For that purpose, a Shareholder shall be deemed to have
an interest in a business entity if he or it had any of the relationships with
such entity that constitute competition under this Section 9.10, had signed a
letter of intent, terms sheet, or agreement contemplating such a relationship or
had filed an application with a manufacturer or franchisor which, if granted,
would create such a relationship.
9.11 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.12 SERVICE CONTRACT PRICING. Prior to the Effective Date, the parties
will determine a pricing schedule for extended service contracts which will be
charged to each Moreland Group dealership. The pricing schedule, determined for
each product line, will be the amount determined by the following formula:
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(A x B) + (C x D)
where:
A = the percentage of all service contracts written by
the Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that
product line less the inception rebate paid by Ryan
& Associates (in 1998, this inception rebate was
paid to Diamond Financial and was $15.00 on new
vehicles and $40.00 on used vehicles).
C = the percentage of all service contracts written by
the Moreland Group in 1998 with Western National.
D = the price charged by Western National for that
product line less the inception rebate paid by
Western National (in 1998, this inception rebate was
paid to Diamond Financial and was $50.00 on both new
and used vehicles).
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF THE
COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 APPROVAL OF LITHIA'S SHAREHOLDERS. The shareholders of Lithia shall
have approved this Agreement and the issuances of the Class A Common Stock and
Series M Preferred Stock, if such approval is necessary under the listing
requirements of the New York Stock Exchange.
10.4 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.5 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have expired or
been terminated.
10.6 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been approved
as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
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10.7 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from Ford
Motor Credit Company a waiver or consent to this Agreement and the transactions
contemplated hereby.
10.8 TAX OPINION. Lithia shall have received from Foster Pepper &
Shefelman, PLLC a tax opinion substantially in the form of Exhibit E.
10.9 LEGAL OPINION. Lithia shall have received from Sherman & Howard L.L.C.
its opinion substantially in the form of Exhibit K.
10.10 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
the Other Reorganization Agreements shall have been fulfilled.
10.11 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value, except for a note from North Avenue Auto, Inc.
10.12 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit L.
10.13 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period under
the HSR Act, and the regulations promulgated thereunder, shall have expired or
been terminated.
11.5 TAX OPINION. The Shareholders shall have received from Sherman &
Howard, L.L.C. a tax opinion substantially in the form of Exhibit E.
11.6 LEGAL OPINION. The Shareholders shall have received from Foster Pepper
& Shefelman LLP an opinion substantially in the form of Exhibit M.
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11.7 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
11.8 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders will
receive fully executed Agreement substantially as set forth in Exhibit L.
11.9 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted Net
Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or after
the Closing or the decision of any party to complete the Closing, each party
shall be entitled to rely upon the representations and warranties set forth in
this Agreement. All representations and warranties made in this Agreement shall
survive the Closing until March 31, 2001; provided, however, that (i) the
accuracy of each such representation and warranty shall be determined only as of
the date of the Closing, (ii) the representations and warranties in Sections
7.14 and 8.7 shall survive until 30 days after the expiration (without
extension) of the statute of limitations for the Company's or Lithia's (as the
case may be) 1998 federal income tax return, and (iii) any claim based upon
fraud shall survive for its applicable statute of limitation. The period of
survival for each representation and warranty established in this Section 12 is
referred to as the "Survival Period" for such representation and warranty. The
liabilities of the parties with respect to their respective representations and
warranties will expire as of the expiration of the applicable Survival Period;
provided, however, that such expiration will not affect the rights of any party
entitled to rely on a representation and warranty in respect of any breach of
which such party has given notice to the breaching party prior to the expiration
of the Survival Period, specifying in reasonable detail the facts alleged to
constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and severally
indemnify, defend and hold harmless the Company and Lithia and their respective
successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and against any
claims, damages, liabilities, penalties, actions, suits, proceedings, demands,
assessments, costs and expenses, including reasonable attorneys fees and
expenses of investigation ("CLAIMS"), incurred by any Lithia Indemnified Party
arising from or related to (i) any breach of any representation or warranty made
by the Company or the Shareholders in this Agreement, of which notice is given
to the Shareholders by the Lithia Indemnified Parties prior to the expiration of
the Survival Period for such representation or warranty or (ii) any breach of
any covenant or agreement made by the Company or the Shareholders in this
Agreement, to the extent, in the case of the Company, that such covenant or
agreement was to be performed at or before the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly notify
the Shareholders of any Claim against which indemnification will be sought
hereunder. If the Claim involves a claim, investigation, demand, action or suit
by a third party, including a governmental authority, the Shareholders shall
have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of Section 7.14,
the Lithia Indemnified Parties shall not be entitled to indemnification under
Section 13.1 unless and until the aggregate amounts against which they would
otherwise be entitled to indemnification under Section 13.1
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of this Agreement and the comparable indemnification provisions of the Other
Reorganization Agreements exceed $500,000, and then only to the extent of such
excess.
13.3.2 In no event shall the Shareholders be liable in the aggregate
under Section 13.1 for an amount that, when added to the amounts for which the
shareholders of the other members of the Moreland Group are liable under the
comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 7.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is entitled
to be indemnified hereunder shall be reduced by (i) the amount of any insurance
proceeds available to such Lithia Indemnified Party in respect of the matter
giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties prior
to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia will
assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall, for
these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements, (ii) if
any of the
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warranties and representations of the Company or the Shareholders contained
herein are false in any material respect, (iii) if the conditions of this
Agreement to be complied with or performed by the Shareholders or the Company at
or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by Lithia or (iv) if Lithia terminates any of the Other Reorganization
Agreements in accordance with the terms and conditions of such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written notice of
termination given by the Company to Lithia (i) if Lithia defaults in any
material respect in the observance of or in the due and timely performance by
Lithia of any agreements and covenants of Lithia contained herein or in the
Other Reorganization Agreement, (ii) if any of the representations and
warranties of Lithia contained herein are false in any material respect, (iii)
if the conditions of this Agreement to be complied with or performed by Lithia
at or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by the Company or (iv) if one of the other members of the Moreland Group
terminates any of the Other Reorganization Agreements in accordance with the
terms and conditions of such other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement under
Section 15.1, no party to this Agreement shall have any liability or obligation
hereunder. Upon any termination of this Agreement under Section 15.2 or 15.3,
neither party shall have any prospective obligation hereunder except as provided
in Section 15.5, but each party shall have, if otherwise available, the remedy
of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
15.5.1 In the event that this Agreement is terminated by the Company
based upon a willful refusal by Lithia to complete this Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
200% of all amounts paid or payable to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For purposes of this Section 15.5,
a willful refusal by any party to complete this Agreement or any Other
Reorganization Agreement means either such party's refusal to consummate the
transactions contemplated by this Agreement or any Other Reorganization
Agreement even though all of the conditions to its obligations to do so have
been fulfilled or such party's failure to take any action within its reasonable
control that would result in the fulfillment of a condition to such obligations.
15.5.2 In the event that either party terminates this Agreement for
reason of the non-fulfillment of the Designated Condition, Lithia shall pay to
the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement for
any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or (ii) a
willful refusal by the Company or any of the other members of the Moreland Group
or their Shareholders to complete the Agreement or any Other Reorganization
Agreement, Lithia shall pay the Company a break-up fee equal to 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company.
24
<PAGE>
15.5.4 The break-up fees payable under this Section 15.5 shall be due
at the time this Agreement is terminated. Should the transactions contemplated
by this Agreement or the Other Reorganization Agreements fail to close for any
reason other than a willful refusal by the Company or any other member of the
Moreland Group to complete this Agreement or any other Reorganization Agreement,
it is acknowledged that the Company and the Shareholders would suffer damages;
however, the precise amount of such damages would be difficult to establish. The
break-up fees provided in this Section represent a good-faith estimate by the
parties of the damage that the Company and Shareholders would incur. Lithia
acknowledges that the break-up fees payable under Section 15.5.2 and 15.5.3 are
reasonable and appropriate, even though Lithia may not have breached any
representation, warranty or covenant contained herein in the circumstances
described in those sections. To the extent of those break-up fees, Lithia has
knowingly accepted the risk of the nonfulfillment of the conditions to its
obligations and the obligations of the Company and the Shareholders in the
circumstances described in Sections 15.5.2 and 15.5.3 in order to induce the
Company and the other members of the Moreland Group to enter into this Agreement
and the Other Reorganization Agreements and risk the adverse effect on their
market values that will occur if those agreements are not completed. Lithia
expressly agrees that the break-up fees contemplated by this Section 15.5 shall
be due even though the Company, the Shareholders or any other member of the
Moreland Group or any shareholder thereof may have breached any representation,
warranty or covenant of this Agreement or the Other Reorganization Agreements,
with the sole exception of a willful refusal by any such party to complete this
Agreement or any of the Other Reorganization Agreements. The right to collect
break-up fees pursuant to this Section 15.5 shall be the exclusive remedy of the
Company and the Shareholders in the event of a termination of this Agreement in
the circumstances described in Section 15.5.1 or 15.5.2. In the event that the
Company or the Shareholders terminate this Agreement under the circumstances
described in Section 15.5.3 as a result of the nonfulfillment of the condition
established in Section 11.1 (or Section 11.7 as it relates to the comparable
conditions in the Other Reorganization Agreements), the liquidated damages
payable under Section 15.5.3 shall be deemed to compensate the Company only for
the opportunity cost of having taken itself off the market while this Agreement
was being negotiated and was in effect, and the Company shall be entitled to
prove any other damages and pursue any other remedy available at law or in
equity.
16. DISPUTE RESOLUTION
16.1 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 non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of or
relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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 having jurisdiction over Reno, Nevada from its Large, Complex Case Panel
(or have similar professional credentials). Each
25
<PAGE>
arbitrator shall be an attorney with at least fifteen (15) years' experience in
corporate law. Whether a claim is covered by this Agreement shall be determined
by the arbitrator(s). All statutes of limitations which would otherwise be shall
apply to any arbitration proceeding hereunder.
16.3 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.
16.4 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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules hereto
constitutes the entire agreement between the parties regarding the subject
matter hereof and supersedes all prior agreements and understandings between the
parties relating to the subject matter of this Agreement. There are no
agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or terminated
except by an instrument in writing signed by all parties to this Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be deemed
to refer to the masculine, feminine or neuter gender thereof or to the plurals
of each, as the identity of the person or persons or the context may require.
The descriptive headings contained in this Agreement are for
26
<PAGE>
reference purposes only and are not intended to describe, interpret, define or
limit the scope, extent or intent of this Agreement or any provision contained
in this Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall for any
reason be held to be invalid, illegal, void or unenforceable in any respect,
such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated, each of the parties to this Agreement shall be
responsible for its own costs and expenses incurred in connection with the
preparation and negotiation of this Agreement and the transactions contemplated
hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective legal
representatives, successors and permitted assigns. No party may assign any of
their rights or delegate any of their obligations hereunder. Any assignment in
violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and agreements
disclosed in the Exhibits and Schedules to this Agreement shall be deemed to be
disclosed for all purposes of this Agreement and to constitute exceptions not
only to the representations and warranties in the specific Sections that refer
to such Exhibits or Schedules, but also to all other representations and
warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be (i)
in writing, dated with the current date of such notice, and signed by the party
giving such notice, and (ii) mailed, postpaid, registered or certified, return
receipt requested, addressed to the party to be notified, or delivered by
personal delivery or by overnight courier. Notice shall be deemed given when
received by the party to be notified or when the party to be notified refuses to
accept delivery of the notice. The initial addresses of the parties shall be as
follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: Foothills Automotive Plaza, Inc.
3835 S. College
Fort Collins, CO 80525
Attn: W. Douglas Moreland
27
<PAGE>
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
If to the Shareholders: Foothills Automotive Plaza Limited
Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
Jerry Cash
3835 S. College
Fort Collins, CO 80525
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's
and the Shareholders' "knowledge" shall be limited to the actual knowledge of
the Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
28
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
LITHIA MOTORS, INC.
By:
----------------------------------------------
Bryan B. DeBoer, Vice President
FOOTHILLS AUTOMOTIVE PLAZA, INC.
By:
---------------------------------------------
W. Douglas Moreland, President
SHAREHOLDERS
FOOTHILLS AUTOMOTIVE PLAZA LIMITED PARTNERSHIP, RLLLP
By: Moreland/Foothills, Inc., General Partner
By:
----------------------------------------------
W. Douglas Moreland, President
----------------------------------------------
Jerry Cash
29
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
PERCENT OF MERGER CONSIDERATION
---------------------------------
SHAREHOLDER MERGER SHARES(1) CASH
- --------------------------------------- ------------------- --------
<S> <C> <C>
</TABLE>
- --------
(1) Each Shareholder will receive the same percentage of Class A Common Stock
and Series M Preferred Stock.
Schedule 2.1
<PAGE>
EXHIBIT 10.7
RENO AUTO SALES, INC.
AGREEMENT AND PLAN OF REORGANIZATION
By and Between
LITHIA MOTORS, INC.,
an Oregon corporation
("Lithia")
And
RENO AUTO SALES LIMITED PARTNERSHIP, RLLLP
(the "Shareholder")
And
RENO AUTO SALES, INC.
a Nevada corporation
(the "Company")
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.1 Shares and Shareholders . . . . . . . . . . . . . . . . . . . . 5
2.2 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Effective Time of the Merger. . . . . . . . . . . . . . . . . . 5
2.4 Shareholder Approval. . . . . . . . . . . . . . . . . . . . . . 5
2.5 Merger Consideration. . . . . . . . . . . . . . . . . . . . . . 5
3. FORMATION OF MERGER SUB. . . . . . . . . . . . . . . . . . . . . . . . . 6
4. MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . 6
5. [THIS SECTION IS NOT USED.]. . . . . . . . . . . . . . . . . . . . . . . 6
6. CLOSING 6
6.1 Date, Time and Place of Closing . . . . . . . . . . . . . . . . 6
6.2 Documents To Be Delivered at Closing by the Shareholders. . . . 6
6.3 Documents To Be Delivered at Closing by Lithia. . . . . . . . . 7
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS . . . . . . . . . . . 7
7.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . 7
7.2 Incorporation and Good Standing . . . . . . . . . . . . . . . . 7
7.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . 7
7.4 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.6 Real Property . . . . . . . . . . . . . . . . . . . . . . . . . 8
7.7 Tangible Personal Property. . . . . . . . . . . . . . . . . . . 8
7.8 Parts Inventories . . . . . . . . . . . . . . . . . . . . . . . 8
7.9 Licenses and Permits. . . . . . . . . . . . . . . . . . . . . . 8
7.10 Intellectual Property . . . . . . . . . . . . . . . . . . . . . 9
7.11 Title to Properties; Encumbrances . . . . . . . . . . . . . . . 9
7.12 Financial Statements. . . . . . . . . . . . . . . . . . . . . . 9
7.13 Indebtedness for Borrowed Money; Guaranties . . . . . . . . . . 9
7.14 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 9
7.15 Transactions Since Balance Sheet Date . . . . . . . . . . . . .10
7.16 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . .10
7.17 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . .10
7.18 Contracts and Agreements. . . . . . . . . . . . . . . . . . . .11
7.19 Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . .11
7.20 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .11
7.21 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . .11
7.22 Accounts Receivable . . . . . . . . . . . . . . . . . . . . . .11
7.23 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . .11
7.24 Delivery of Documents . . . . . . . . . . . . . . . . . . . . .11
7.25 Powers of Attorney; Authorized Signatories. . . . . . . . . . .12
7.26 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . .12
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
7.27 Environmental . . . . . . . . . . . . . . . . . . . . . . . . .12
7.28 Continuation of Business. . . . . . . . . . . . . . . . . . . .12
7.29 Contracts in Transit. . . . . . . . . . . . . . . . . . . . . .12
8. REPRESENTATIONS AND WARRANTIES OF LITHIA . . . . . . . . . . . . . . . .12
8.1 Authorization . . . . . . . . . . . . . . . . . . . . . . . . .12
8.2 Incorporation . . . . . . . . . . . . . . . . . . . . . . . . .13
8.3 Capitalization. . . . . . . . . . . . . . . . . . . . . . . . .13
8.4 No Conflicts. . . . . . . . . . . . . . . . . . . . . . . . . .13
8.5 Consents. . . . . . . . . . . . . . . . . . . . . . . . . . . .13
8.6 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . . . .13
8.7 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . .13
8.8 Transactions Since Latest Balance Sheet Date. . . . . . . . . .14
8.9 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . .14
8.10 Compliance With Laws. . . . . . . . . . . . . . . . . . . . . .14
8.11 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . .14
8.12 Delivery of Documents . . . . . . . . . . . . . . . . . . . . .14
8.13 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . .14
9. COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
9.1 Notices and Consents. . . . . . . . . . . . . . . . . . . . . .15
9.2 Conduct of Business by the Company Prior to the Closing Date. .15
9.3 Lithia's Examination. . . . . . . . . . . . . . . . . . . . . .15
9.4 Notice of Changes . . . . . . . . . . . . . . . . . . . . . . .15
9.5 Further Assurances. . . . . . . . . . . . . . . . . . . . . . .15
9.6 Employee Stock Options. . . . . . . . . . . . . . . . . . . . .15
9.7 Release of Guarantees . . . . . . . . . . . . . . . . . . . . .15
9.8 Non-Compete . . . . . . . . . . . . . . . . . . . . . . . . . .16
9.9 Update of Representations . . . . . . . . . . . . . . . . . . .16
9.10 Service Contract Pricing. . . . . . . . . . . . . . . . . . . .16
10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA . . . . . . . . . . . . . .17
10.1 Representations, Warranties of the Shareholders and
Covenants of the Company and the Shareholders . . . . . . . . .17
10.2 No Adverse Change . . . . . . . . . . . . . . . . . . . . . . .17
10.3 Third Party Approvals . . . . . . . . . . . . . . . . . . . . .17
10.4 Hart-Scott-Rodino Waiting Period. . . . . . . . . . . . . . . .17
10.5 Approval of Lithia as the Dealer. . . . . . . . . . . . . . . .17
10.6 Consent from Lithia's Lender. . . . . . . . . . . . . . . . . .17
10.7 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . .17
10.8 Fulfillment of Conditions in Related Transactions . . . . . . .17
10.9 Employee and Related Party Loans. . . . . . . . . . . . . . . .17
10.10 Assignment and Licenses of Intangible Assets. . . . . . . . . .17
10.11 Completion of Audit and Purchase Price Determination. . . . . .17
11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
11.1 Representations, Warranties and Covenants of Lithia . . . . . .18
11.2 No Adverse Changes. . . . . . . . . . . . . . . . . . . . . . .18
11.3 Third Party Approvals . . . . . . . . . . . . . . . . . . . . .18
11.4 Hart-Scott-Rodino Waiting Period. . . . . . . . . . . . . . . .18
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
11.5 Legal Opinion . . . . . . . . . . . . . . . . . . . . . . . . .18
11.6 Fulfillment of Conditions in Related Transactions . . . . . . .18
11.7 Assignment and Licenses of Intangible Assets. . . . . . . . . .18
11.8 Completion of Audit and Purchase Price Determination. . . . . .18
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . .18
13. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
13.1 General Indemnity . . . . . . . . . . . . . . . . . . . . . . .19
13.2 Defense of Claims . . . . . . . . . . . . . . . . . . . . . . .19
13.3 Limitations.. . . . . . . . . . . . . . . . . . . . . . . . . .19
14. HART-SCOTT-RODINO NOTIFICATION . . . . . . . . . . . . . . . . . . . . .20
15. TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
15.1 Mutual Consent. . . . . . . . . . . . . . . . . . . . . . . . .20
15.2 By Lithia . . . . . . . . . . . . . . . . . . . . . . . . . . .20
15.3 By the Company. . . . . . . . . . . . . . . . . . . . . . . . .20
15.4 Effect of Termination . . . . . . . . . . . . . . . . . . . . .20
15.5 Break-Up Fee. . . . . . . . . . . . . . . . . . . . . . . . . .20
16. DISPUTE RESOLUTION . . . . . . . . . . . . . . . . . . . . . . . . . . .22
16.1 Mediation . . . . . . . . . . . . . . . . . . . . . . . . . . .22
16.2 Binding Arbitration . . . . . . . . . . . . . . . . . . . . . .22
16.3 Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . .22
16.4 Hearing and Award . . . . . . . . . . . . . . . . . . . . . . .22
17. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . .23
17.1 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . .23
17.2 Exhibit and Schedules . . . . . . . . . . . . . . . . . . . . .23
17.3 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . .23
17.4 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . .23
17.5 Construction. . . . . . . . . . . . . . . . . . . . . . . . . .23
17.6 Invalidity. . . . . . . . . . . . . . . . . . . . . . . . . . .23
17.7 Payment of Expenses . . . . . . . . . . . . . . . . . . . . . .23
17.8 Binding Effect and Assignment . . . . . . . . . . . . . . . . .23
17.9 Applicability of Exceptions and Disclosure. . . . . . . . . . .23
17.10 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
17.11 Definition of Knowledge . . . . . . . . . . . . . . . . . . . .24
17.12 Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . .24
17.13 Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . .24
17.14 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .24
17.15 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . .24
17.16 No Strict Construction. . . . . . . . . . . . . . . . . . . . .25
</TABLE>
iv
<PAGE>
DEFINED TERMS
<TABLE>
<S> <C>
ADJUSTED NET WORTH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
BALANCE SHEET DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
BASE 1999 NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . 1
BUSINESS REAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CERCLA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
CONTINGENT MERGER CONSIDERATION. . . . . . . . . . . . . . . . . . . . . . . . 2
DOJ. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
EFFECTIVE TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
EMPLOYMENT AGREEMENTS(S) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ENVIRONMENTAL LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
FLOORPLAN RATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
FTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
INITIAL MERGER CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . 2
LEASE AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
LICENSES AND PERMITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LITHIA FLOORPLAN RATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
LITHIA INDEMNIFIED PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . .19
LITHIA SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
MERGER SUB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
MORELAND GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MORELAND GROUP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MORELAND TRANSACTION EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . 3
NET ADJUSTED PRETAX INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . 3
OTHER REORGANIZATION AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 5
QUALIFYING MEMBER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
SEC FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
</TABLE>
v
<PAGE>
EXHIBITS
Exhibit A - Example Calculation of Adjusted Net Worth
Exhibit B - Example Calculation of Net Adjusted Pretax Income
Exhibit C - Plan of Merger
Exhibit D - Lease Agreement
Exhibit E - W. Douglas Moreland Employment Agreement
Exhibit F - Sherman & Howard L.L.C. Legal Opinion
Exhibit G - Assignment and Licenses of Intangible Assets
Exhibit H - Foster Pepper & Shefelman PLLC Legal Opinion
SCHEDULES
Schedule 2.1 - Company Shareholders List
Schedule 7.2 - Subsidiaries and Equity Interests of the Company
Schedule 7.3 - Rights to Purchase Securities of the Company/Voting
Rights
Schedule 7.5 - Company Consents and Approvals
Schedule 7.6 - Legal Description of Real Property of the Company
Schedule 7.7 - Equipment, Furniture, Fixtures and Other Tangible
Personal Property of the Company
Schedule 7.9 - Permits and Licenses of the Company
Schedule 7.10 - Intellectual Property of the Company
Schedule 7.11 - Encumbrances of the Company
Schedule 7.12 - Financial Statements of the Company
Schedule 7.13 - Guaranties and Obligations of the Company
Schedule 7.15 - Changes Since Balance Sheet Date of the Company
Schedule 7.16 - Orders and Legal Proceedings of the Company
Schedule 7.18 - Material Contracts of the Company
Schedule 7.19 - Employee Benefit Plans of the Company
Schedule 7.20 - Insurance of the Company
Schedule 7.21 - Employees of the Company
Schedule 7.22 - Receivables of the Company
Schedule 7.27 - Underground Storage Tanks of the Company
Schedule 8.4 - Lithia Conflicts
Schedule 8.5 - Lithia Required Consents
Schedule 8.8 - Lithia Changes in Business
Schedule 8.9 - Lithia Orders and Legal Proceedings
vi
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") dated
effective January 1, 1999, by and between LITHIA MOTORS, INC., an Oregon
corporation ("Lithia"); RENO AUTO SALES LIMITED PARTNERSHIP, RLLLP (whether one
or more, the "SHAREHOLDERS"); and RENO AUTO SALES, INC., a Nevada corporation
(the "COMPANY").
R E C I T A L S :
A. The Shareholders are the owners of all of the issued and outstanding
shares of capital stock of the Company (the "SHARES").
B. The Company is engaged in the business of selling and servicing
Subaru and Hyundai automobiles and related parts and accessories from premises
located at 2270 Kietzke Ln., Reno, Nevada (the "BUSINESS REAL PROPERTY").
C. All the parties desire to consummate a business combination
transaction pursuant to which the Company will merge with and into a subsidiary
of Lithia, for the consideration and on the other terms set forth in this
Agreement.
The parties intending to be legally bound, agree as follows:
1. DEFINITIONS
As used herein, the following terms have the indicated meanings:
"ADJUSTED NET WORTH" of the Company or any other member of the Moreland
Group as of December 31, 1998 means the excess of the total assets of such
entity over its total liabilities as of that date, determined in accordance with
Moreland GAAP, with the following adjustments:
(i) Assets will be increased by an amount equal to 0.63 times
LIFO reserves at December 31, 1998; and
(ii) Any good will or other intangibles will be deducted from the
total assets.
(iii) Net Worth shall be increased by the Company's proportionate
share of Moreland Transaction Expenses recorded in 1998. Net Worth shall
be decreased by the Company's proportionate share of "excess transaction
expenses." For that purpose, excess transaction expenses means the amount,
if any, by which the total Moreland Transaction Expenses recorded in 1998
exceed the remainder obtained by subtracting $11,000,000 from the aggregate
Net Adjusted Pretax Income of all members of the Moreland Group for 1998.
The Company's proportionate share of the Moreland Transaction Expenses or
the excess transaction expenses shall be determined by multiplying the
total Moreland Transaction Expenses or excess transaction expenses by a
fraction, the numerator of which is the Company's Net Adjusted Pretax
Income for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998.
An example of the calculation of the Adjusted Net Worth of the Company
using unaudited numbers is attached as Exhibit A.
"BASE 1999 NET ADJUSTED PRETAX INCOME" means, for each member of the
Moreland Group, the lesser of (i) 110 percent of such member's Net Adjusted
Pretax Income for 1998 or (ii) the product of $12,100,000 times a fraction of
which the numerator is such member's Net Adjusted Pretax Income for 1998 and the
denominator is the aggregate Net Adjusted Pretax Income for 1998 of all members
of the Moreland Group.
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"CONTINGENT MERGER CONSIDERATION" means an amount equal to CMC in the
formula
J - K
CMC = 6 (H-I) -----
L - M
where:
H = the aggregate Net Adjusted Pretax Income of all members
of the Moreland Group for 1999, but H shall not be less
than I or more than I plus $3,000,000.
I = the aggregate Base 1999 Net Adjusted Pretax Income for
all members of the Moreland Group;
J = the Company's Net Adjusted Pretax Income for 1999, but
J shall not be less than K;
K = the Company's Base 1999 Net Adjusted Pretax Income;
L = the aggregate Net Adjusted Pretax Income for 1999 of
all Qualifying Members; and
M = the aggregate Base 1999 Net Adjusted Pretax Income of
all Qualifying Members.
If the Company is not a Qualifying Member, the Contingent Merger
Consideration shall be zero.
"FLOOR PLAN RATE" means the rate of interest that the Moreland Group and
all affiliated dealerships would have paid on their floor plan financing with
Chrysler Financial Company LLC during 1999 had the Moreland Group not been
acquired by Lithia.
"INITIAL MERGER CONSIDERATION" means $4,747,817, adjusted as follows as of
the Effective Date or as soon thereafter as the information necessary to make
such adjustments is available:
(iv) First, the Initial Merger Consideration shall be adjusted to
equal IMC in the equation:
B
IMC = (A x 6) --- - $1,125,000
C
where:
A = the lesser of $11,000,000 or C;
B = the Company's Net Adjusted Pretax Income for 1998; and
C = The aggregate Net Adjusted Pretax Income of all members
of the Moreland Group for 1998.
(v) Second, the adjusted Initial Merger Consideration determined
in (i) above shall be adjusted by adding thereto (if positive) or
subtracting therefrom (if negative) the amount of NWA in the equation:
E
NWA = (D - $28,000,000) ---
D
where:
D = the aggregate Adjusted Net Worth of all members of the
Moreland Group as of December 31, 1998; and
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<PAGE>
E = the Adjusted Net Worth of the company as of December
31, 1998.
(iii) Finally, the adjusted Initial Merger Consideration determined
in (ii) above shall be increased by an amount equal to IA in the equation
(F + $1,125,000)G
IA = ------------------
730
where:
F = the adjusted Initial Merger Consideration determined in
(ii) above; and
G = the sum of the Lithia Floor Plan Rates in effect on
each day from and including January 1, 1999 to but
excluding the Effective Date.
"LITHIA FLOORING PLAN RATES" means the rate of interest that Lithia is
paying on its least expensive new vehicle flooring line from time to time.
"MORELAND GAAP" means the generally accepted accounting principles followed
in the preparation of the financial statements as of and for the years ended
December 31, 1996 and 1997 for the Moreland Automotive Group (which include
entities not included in the Moreland Group as defined herein) audited by Arthur
Andersen LLP and accompanied by their report thereon dated May 21, 1998.
"MORELAND GROUP"" means Cherry Creek Dodge, Incorporated, William D. Corp.,
Colorado Springs Jeep/Eagle, Inc., Foothills Automotive Plaza, Inc., L.A.H.
Automotive Enterprises, Inc. and Moreland Auto Corp., all Colorado corporations,
and Reno Auto Sales, Inc., a Nevada corporation.
"MORELAND TRANSACTION EXPENSES" means all expenses incurred by all members
of the Moreland Group in connection with the transactions contemplated by this
Agreement and the Other Reorganization Agreements including, without limitation,
the fees of Arthur Andersen LLP for services relating to audits of the Moreland
Groups' financial statements for 1998 and subsequent years and other
transaction-related services, fees and expenses of counsel for the Moreland
Group and all filling fees payable to governmental entities relating to the
transactions contemplated hereby.
"NET ADJUSTED PRETAX INCOME" of the Company or any other member of the
Moreland Group for any period means the net income of such entity for the
period, determined in accordance with Moreland GAAP, with the following
adjustments:
(i) Income taxes shall be added back to net income.
(ii) All salaries, bonuses and other compensation expense incurred
or paid to W. Douglas Moreland and the general manager of the dealership
owned by the entity for the period prior to the Effective Date and any
bonus paid to W. Douglas Moreland for the period after the Effective Date
shall be added back to net income.
(iii) The salary and other compensation expenses that would have
been payable for the period prior to the Effective Date to W. Douglas
Moreland and the salary, bonus and other compensation expense that would
have been payable for the period prior to the Effective Date to the general
manager of the dealership owned by the entity under the employment
arrangements between those persons and Lithia or the entity, shall be
deducted from net income. The salary payable to W. Douglas Moreland under
his Employment Agreement shall be allocated among the members of the
Moreland Group in proportion to their respective Net Adjusted Pretax
Incomes for the year. No bonus payable to W. Douglas Moreland under his
Employment Agreement shall be deducted from net income under this clause
(iii).
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<PAGE>
(iv) Any increase or decrease in the LIFO reserve of such entity
after December 31, 1997 will be added back to or deducted from net income.
(v) All Moreland Transaction Expenses recorded in the period
shall be added back to net income, but only to the extent that such
Moreland Transaction Expenses were taken into account in computing net
income in the first instance.
(vi) Any goodwill or other intangibles booked or other purchase
accounting adjustments made as a result of the acquisition of such entity
by Lithia and any amortization thereof shall be backed out of the
calculation of net income.
(vii) Revenues earned or expenses incurred by such entity for
credit life insurance and financing contracts shall be adjusted to the
revenues or expenses that would have been earned or incurred by such entity
for the same contacts under arrangements in effect during 1998. Extended
service contract costs will be based upon the costs charged to the Company
pursuant to Section 9.10.
(viii) Net income shall be increased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds paid by such entity to Lithia or any affiliate of Lithia during the
period as a dividend or loan and on the amount of any fees or other charges
paid to Lithia to the extent that such fees are not included as expenses in
calculating Net Adjusted Pretax Income pursuant to clause (xiii) below,
from the date such payment was made to the end of the period or the date of
its repayment.
(ix) Net income shall be decreased by an amount equal to the
interest that would have accrued at the Floorplan Rate on the amount of all
funds provided by Lithia or any affiliate of Lithia to such entity during
the period as a loan or contribution and on the amount of any cost savings
described in clause (xii) below, from the date of such loan or contribution
or the date the savings were realized to the date of repayment or the end
of the period.
(x) Net income shall be increased by all fees paid to Lithia by
such entity under the Consulting Agreement between Lithia and such entity
as in effect from January 1, 1999 to the Effective Date.
(xi) Except as provided in this subparagraph, non-reoccurring and
extraordinary income or expense items will be deducted or added back to the
net income. Some members of the Moreland Group held, on January 1, 1999,
vehicles which had suffered hail damage in 1998 and a related insurance
damage reserve. Amounts transferred from that insurance damage reserve
shall not be considered non-reoccurring or extraordinary income and shall
be included in net income, subject to any limitation imposed by the Other
Reorganization Agreements to which such members are parties.
(xii) If Lithia is able to reduce operating costs to the Moreland
Group by using its systems (e.g. MIS), purchasing power (e.g. fuels,
lubricants, etc.) or preferential rates (e.g. workers' compensation
premiums) the savings will be added back as an expense item.
(xiii) To the extent that Lithia provides services the cost of which
was previously incurred by the Company or procured from a third party, the
income of the Company will be adjusted to reflect the costs that would have
been incurred by the Company under the arrangements in effect during 1998.
If Lithia provides a service or product not previously utilized by the
Company, the reasonable or agreed costs of such services or product will be
included if W. Douglas Moreland agreed or agrees that the cost of such
service or product would be included in determining Net Adjusted Pretax
Income hereunder.
In addition to the specific adjustments described above, net income of each
entity for 1999 shall be adjusted in such other respects as may be necessary to
eliminate the effect of any additional costs
4
<PAGE>
resulting from changes implemented by Lithia not concurred in by W. Douglas
Moreland. For example, if Lithia makes capital improvements or increases
inventory levels not concurred in by W. Douglas Moreland, all current operating
expenses associated with those decisions, including financing costs, would be
added back to net income.
It is the intent of the parties that, subject to the specific adjustments
described above, the Net Adjusted Pretax Income of each entity for 1999 will
reflect the net pretax income that such entity would have earned in 1999 had it
been operated during that year in the same manner that it was operated during
1998. An example of the calculation of Net Adjusted Pretax Income is attached
as Exhibit B.
"OTHER REORGANIZATION AGREEMENTS" means the six separate Agreements and
Plans of Reorganization of even date herewith whereunder Lithia is acquiring the
other members of the Moreland Group.
"QUALIFYING MEMBER" means a member of the Moreland Group whose Net Adjusted
Pretax Income for 1999 exceeds its Base 1999 Net Adjusted Pretax Income.
2. THE MERGER
2.1 SHARES AND SHAREHOLDERS. Schedule 2.1 sets forth the name, as it
appears in the Company's corporate records, of each record owner of shares of
the Company's capital stock, the number and class or series of the shares of
capital stock held by each Shareholder, and the percentage of the Merger
Consideration each Shareholder is to receive.
2.2 THE MERGER. Subject to the terms and conditions set forth in this
Agreement, and in accordance with the applicable provisions of law, at the
Effective Time, Merger Sub (hereinafter defined) and the Company shall
consummate a merger as set forth in the Plan of Merger (attached as Exhibit C),
pursuant to which Merger Sub shall be merged with and into the Company, the
separate corporate existence of Merger Sub shall thereupon cease, and the
Company shall continue as the surviving corporation.
2.3 EFFECTIVE TIME OF THE MERGER. Lithia, Merger Sub, the Shareholders
and the Company will cause the Plan of Merger and Articles of Merger in the form
required by Nevada law to be executed and filed as soon as reasonably possible
following the date of the Closing, or on such other date as Lithia and the
Company may agree, with the Secretary of State for the state of Nevada. The
Merger shall become effective at the time at which the Articles of Merger shall
have been accepted for filing by the Secretary of State for the state of Nevada
or such time specified in the Articles of Merger as may be agreed upon by Lithia
and the Company, and such time is hereinafter referred to as the "EFFECTIVE
TIME."
2.4 SHAREHOLDER APPROVAL. The signature of each Shareholder on this
Agreement shall be deemed such Shareholder's irrevocable written consent
approving the Plan of Merger and this Agreement in lieu of a shareholders'
meeting of the Company. The signature of Lithia on this Agreement shall be
deemed its irrevocable written consent approving the Plan of Merger and this
Agreement as the sole shareholder of Merger Sub.
2.5 MERGER CONSIDERATION. Upon the Effective Date, each outstanding
share of Company Common Stock shall be converted into the right to receive a
portion of the Merger Consideration determined by dividing the total Merger
Consideration by the number of shares of Company Common Stock outstanding. The
Initial Merger Consideration and the Contingent Merger Consideration
(collectively referred to as the "Merger Consideration") will be calculated and
paid as follows:
2.5.1 INITIAL MERGER CONSIDERATION. As soon as reasonably
practicable, the Company shall cause its auditors to prepare an audited balance
sheet and income statement for the Company as of and for the year ended
December 31, 1998 in accordance with Moreland GAAP and shall calculate the
Company's Adjusted Net Worth and Net Adjusted Pretax Income and the Initial
Merger Consideration on the basis thereof. The Company shall deliver such
financial statements and calculations to Lithia. Lithia
5
<PAGE>
shall have a period of 15 days after its receipt of such financial statements
and calculations to make any objections it may have to the Adjusted Net Worth
and Net Adjusted Pretax Income of the Company and Initial Merger Consideration
as calculated by the Company. If Lithia does not give notice of objections
within that period, the Adjusted Net Worth, Net Adjusted Pretax Income and
Initial Merger Consideration so calculated shall be final. If Lithia does give
notice of objections within that time, and Lithia and the Company are unable to
resolve the matter by agreement, either side may submit the matter to
PricewaterhouseCoopers LLP or another independent accounting firm selected by
the Shareholders and Lithia for resolution. The decision of that accounting
firm shall be binding on the parties.
2.5.2 CONTINGENT MERGER CONSIDERATION. As soon as possible, and in
any event within 90 days after December 31, 1999, Lithia shall cause its
auditors to prepare a balance sheet and income statement for the Company as of
December 31, 1999 and for the year then ended and shall calculate the Adjusted
Net Worth, Net Adjusted Pretax Income and Contingent Merger Consideration on the
basis thereof. Lithia shall deliver such financial statements and calculations
to the Shareholders. The opportunity to object, the effect of failure to do and
the resolution of any dispute shall be determined in the manner provided in
Section 2.5.1 above for determining the Initial Merger Consideration.
2.5.3 PAYMENT OF MERGER CONSIDERATION. The Initial Merger
Consideration and any Contingent Merger Consideration shall be paid in cash.
The Contingent Merger Consideration shall be paid within two business days after
the amount thereof has been determined..
3. FORMATION OF MERGER SUB
Prior to Closing, Lithia will form Lithia Acquisition Corp. #99-7, a wholly
owned subsidiary under Nevada law ("MERGER SUB"), which subsidiary, subject to
the satisfaction of all conditions to Closing, Lithia will cause to execute the
Plan of Merger and the Articles of Merger. Lithia will cause the Board of
Directors of Merger Sub to approve the Plan of Merger.
4. MERGER CONSIDERATION
Lithia shall make available cash as may be required by the terms of this
Agreement and the Plan of Merger.
5. [THIS SECTION IS NOT USED.]
6. CLOSING
6.1 DATE, TIME AND PLACE OF CLOSING. Subject to the terms and
conditions set forth in this Agreement, the Closing of this Agreement shall take
place at the offices of Sherman & Howard, L.L.C. at 633 17th Street, Denver,
Colorado, at 9:00 a.m. on the second business day following the fulfillment of
the conditions to the obligations of the parties under Sections 10 and 11, or at
such other time or place as may be mutually agreed upon by Lithia, the
Shareholders and the Company. Notwithstanding any provision in this Agreement
to the contrary, if the Closing has not occurred on or before June 30, 1999,
either Lithia or the Company, provided that the failure of the Closing to occur
did not result from a breach of this Agreement by such party, shall have the
right to terminate this Agreement pursuant to Section 15.
6.2 DOCUMENTS TO BE DELIVERED AT CLOSING BY THE SHAREHOLDERS. At
Closing, the Shareholders will deliver or cause the Company to deliver to Lithia
the following:
6.2.1 Certified copies of resolutions adopted by the board of
directors of the Company approving the Agreement and the Plan of Merger and the
transactions contemplated hereby;
6.2.2 The Plan of Merger duly executed on behalf of the Company;
6.2.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Company;
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<PAGE>
6.2.4 Lease agreements substantially in the form of Exhibit D with
monthly rents in the amount set forth in Schedule D-1 attached to Exhibit D (the
"LEASE AGREEMENT"), duly executed by the Landlord as specified therein;
6.2.5 The employment agreement between Lithia and W. Douglas
Moreland substantially in the form of Exhibit E (the "EMPLOYMENT AGREEMENT")
duly executed by the employee as specified therein.
6.3 DOCUMENTS TO BE DELIVERED AT CLOSING BY LITHIA. At Closing, Lithia
will deliver, or cause to be delivered, to the Shareholders the following:
6.3.1 Certified copies of resolutions adopted by the board of
directors of Lithia and of resolutions adopted by the board of directors and
shareholder of Merger Sub approving this Agreement and the Plan of Merger and
the transactions contemplated hereby.
6.3.2 The Plan of Merger duly executed on behalf of Merger Sub and
Lithia;
6.3.3 Articles of Merger in the appropriate form for filing duly
executed on behalf of the Merger Sub;
6.3.4 The Initial Merger Consideration payable as provided in the
Plan of Merger;
6.3.5 The Lease Agreements duly executed by Lithia Real Estate,
Inc., a wholly owned subsidiary of Lithia, as lessee, and guaranteed by Lithia;
and
6.3.6 The Employment Agreement duly executed on behalf of Lithia.
7. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS
The Shareholders jointly and severally represent and warrant to Lithia as
follows:
7.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors and the shareholders of the Company, and this Agreement has been duly
executed and delivered by the Company and each Shareholder. The Company has all
necessary corporate authority to execute and deliver this Agreement and to
perform the Company's obligations hereunder. This Agreement is a valid and
legally binding obligation of the Company and the Shareholders, enforceable
against the Company and the Shareholders in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to the enforcement of
creditors' rights generally and by general principles of equity (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
The Shareholders have the complete and unrestricted right, power and authority
to execute this Agreement and perform their covenants in accordance with this
Agreement and will have at Closing good, absolute and marketable title to the
Shares, free and clear of any liens, claims, encumbrances or restrictions of any
kind.
7.2 INCORPORATION AND GOOD STANDING. The Company is duly organized,
validly existing and in good standing under the applicable laws of the state of
its incorporation and has all necessary power and authority to own, lease and
operate its properties and assets and to conduct its business as its business is
now being conducted. The Company has delivered to Lithia complete and accurate
copies of the Company's articles of incorporation and bylaws, including all
amendments thereto. The Company is qualified to do business and is in good
standing in each state in which it transacts business. Except as disclosed in
Schedule 7.2, the Company does not have any subsidiaries nor any direct or
indirect equity interest in any corporation, partnership or other entity.
7.3 CAPITALIZATION. The authorized capital stock of the Company consists
of 50,000 shares of Common Stock, $1 par value, 20,000 shares of which are
outstanding. The Shares constitute all of the issued and outstanding shares of
capital stock of the Company. The Shares have been validly authorized
7
<PAGE>
and issued, are fully paid and non-assessable, and have not been issued in
violation of any preemptive rights or of any federal or state securities law.
On the date hereof, the Shares are owned beneficially and of record by the
Shareholders as set forth on Schedule 2.1. There are and will be on the Closing
Date no outstanding subscriptions, options, rights, warrants, convertible
securities, buy-in or other agreements or commitments obligating the Company to
issue any additional shares of its capital stock of any class or any other
securities of any kind. Except as disclosed in Schedule 7.3, there are no
agreements that relate to the voting or control of the Shares.
7.4 NO CONFLICTS. Neither the execution and delivery of this Agreement
nor the fulfillment of or compliance with the terms and provisions hereof will
violate, conflict with, or result in a breach of the terms, conditions or
provisions of, or constitute a default or an event which, with notice or lapse
of time or both, would constitute a default under, the articles of incorporation
or bylaws of the Company, any contract, agreement, mortgage, deed of trust or
other instrument or obligation to which either the Shareholders or the Company
are parties or by which any of them is bound (assuming receipt of the consents
and approvals disclosed in Schedule 7.5), or violate any provision of any
applicable law or regulation or of any order, decree, writ or injunction of any
court or governmental body, or result in the creation or imposition of any lien,
charge, restriction, security interest or encumbrance of any nature whatsoever
on any property or asset of the Company or on the Shares.
7.5 CONSENTS. Except as otherwise set forth in Schedule 7.5, no consent
from, or other approval of, any governmental entity or agency or any other
person or entity is necessary in connection with the execution, delivery or
performance of this Agreement by the Company.
7.6 REAL PROPERTY. Set forth in Schedule 7.6 is a complete and accurate
legal description of the Business Real Property. The zoning of the Business
Real Property permits the presently existing improvements and the continuation
of the business presently being conducted on such real property. To the best of
the Company's and each of the Shareholders' knowledge, there are no pending or
proposed changes to such zoning.
7.7 TANGIBLE PERSONAL PROPERTY. Schedule 7.7 sets forth a complete and
accurate description of all equipment, furniture, fixtures and other tangible
personal property (except inventory of vehicles, parts and supplies) owned by,
in possession of, or used by the Company on December 31, 1998 in connection with
its business and a complete and accurate description of all tangible personal
property in which the Company has a leasehold interest, together with a complete
and accurate description of each lease under which the Company holds such
leasehold interests. Each of the leases is in full force and effect and
constitutes a legal, valid and binding obligation of the parties thereto. The
Company has performed in all material respects the covenants required to be
performed by it under each of the leases to which it is a party and is not in
default under any of the leases to which it is a party.
7.8 PARTS INVENTORIES. The parts inventories of the Company at
December 31, 1998 consist of goods of a quality and in quantities that are
suitable for sale in the ordinary course of its business with normal mark-up at
prevailing market prices. All parts and accessories in the inventories of the
Company are undamaged parts and accessories that (i) are still in the original,
resalable merchandising package, and in unbroken lots, (ii) were listed for sale
in the then-current dealer parts and accessories price schedule for the
represented manufacturers, (iii) were purchased directly from the represented
manufacturers, and (iv) are returnable under the terms of the represented
manufacturers' sales and service agreement for credit to the account of the
Company.
7.9 LICENSES AND PERMITS. Schedule 7.9 sets forth a complete and
accurate description of all material permits, licenses, franchises, certificates
and similar items and rights, owned or held by the Company (hereinafter
collectively referred to as the "LICENSES AND PERMITS"). The Licenses and
Permits are adequate for the operation of the Company's business; are valid and
in full force and effect, and no basis exists for a grantor of any such Licenses
or Permits to terminate the same. No additional material permit, license,
franchise, certificate or similar item or right is required by the Company for
the operation
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of its business. Except as set forth on Schedule 7.9, the Company's rights
under the Licenses and Permits will, by operation of law, vested in Merger Sub
upon the Effective Time.
7.10 INTELLECTUAL PROPERTY. Schedule 7.10 sets forth a complete and
accurate description of all intellectual property presently in use by the
Company, which intellectual property includes (without limitation) patents,
trademarks, trade names, service marks, copyrights, trade secrets, customer
lists, inventions, formulas, methods, processes, advertising materials, Internet
sites and any other proprietary information or property. Except as disclosed in
Schedule 7.10, there are no outstanding licenses or consents to third parties
granting the right to use any intellectual property owned by the Company. To
the best of the Company's and each of the Shareholders' knowledge and except as
disclosed in Schedule 7.10, the Company owns and has the right to use its
intellectual property free and clear of any claims and without any conflict with
the rights of others and no royalties or fees are payable by the Company to any
third party by reason of the use of any intellectual property by the Company.
No additional intellectual property is required by the Company for the operation
of its business.
7.11 TITLE TO PROPERTIES; ENCUMBRANCES. The Company has good, absolute
and marketable title to (or, in the case of leased property, valid and
subsisting leasehold interests in) all of its properties and assets, including
(without limitation) the properties and assets that will be listed on Schedules
7.6 and 7.7 except for properties and assets sold, consumed or otherwise
disposed of by the Company in the ordinary course of its business, and will have
good, absolute and marketable title to all assets included in the Audited
Balance Sheet. The Company and the Business Real Property are not subject to
any liens, mortgages, encumbrances, conditional sales agreements, security
interests, claims or restrictions of any kind or character, except for (i) the
encumbrances listed on Schedule 7.11, (ii) liens for current taxes not yet due
and payable and (iii) mechanics and materialmen's liens arising in the ordinary
course of business and securing obligations that are not overdue.
7.12 FINANCIAL STATEMENTS. Schedule 7.12 sets forth the Company's Dealer
Financial Statements as of the end of and for the Company's two most recent
fiscal years. These Dealer Financial Statements were prepared in accordance
with the applicable manufacturer's requirements and fairly reflect in all
material respects the results of operations and financial condition of the
Company for the periods and at the dates indicated.
The Company will, prior to Closing, deliver to Lithia copies of balance
sheets for the Company dated December 31, 1998 (the "BALANCE SHEET DATE") and
December 31, 1997, and the related statements of income for each of the three
years ended December 31, 1998 (hereinafter collectively referred to as the
"FINANCIAL STATEMENTS"). The Financial Statements will be prepared in
accordance with Moreland GAAP on a LIFO basis and consistent with prior periods,
and will fairly present in all material respects the financial condition of the
Company at the dates mentioned and the results of its operations for the periods
specified. The Financial Statements will be accompanied with an unqualified
audit report from the Company's accountants, Arthur Andersen, LLP. KPMG Peat
Marwick LLP, Lithia's accountants, will be permitted to review the work papers
of Arthur Andersen LLP prior to the issuance of Arthur Andersen LLP's report for
the Financial Statements at and for the periods through December 31, 1998.
7.13 INDEBTEDNESS FOR BORROWED MONEY; GUARANTIES. The Company has
delivered to Lithia a complete and accurate copy of all instruments evidencing
or relating to the Company's indebtedness for borrowed money at December 31,
1998. The Company is not in default or violation of any provision of any
agreement evidencing or relating to its indebtedness for borrowed money.
Schedule 7.13 sets forth as of December 31, 1998 a complete and accurate
description of all guaranties by the Company of any obligation or liability of
any person or entity, including (without limitation) any guaranties of
installment sales contracts, leases or obligations under service contracts.
7.14 TAX MATTERS. The Company has duly filed all federal, state and
local tax returns required to be filed by it. All federal, state, local and
foreign income, ad valorem, excise, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by the Company have
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been properly computed, duly reported, fully paid, and discharged and the
Company has conformed with applicable requirements to maintain its LIFO
election. The only unpaid taxes that require payment by the Company are current
taxes not yet due and payable. All current taxes not yet due and payable by the
Company have been properly accrued and are accurately reflected in the Company's
balance sheet in the Financial Statements. The Company has not been delinquent
in the payment of any tax, assessment or governmental charge, nor has any tax
deficiency been proposed or assessed against it, nor has it executed any waiver
of the statute of limitations on the assessment or collection of any tax.
7.15 TRANSACTIONS SINCE BALANCE SHEET DATE. Since the Balance Sheet
Date, except as anticipated by this Agreement or set forth on Schedule 7.15,
(i) the Company has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of the
Company other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of the Company; (iv) the Company has not issued any securities or options
to purchase any securities of any nature whatsoever; (v) the Company has not
increased the compensation, commissions, bonuses or other remuneration payable
to any officer, director, employee or to any other person or entity, whether now
or hereafter payable, except in the ordinary course of business, nor paid any
bonuses to any Shareholder, (vi) there has not been any damage, destruction or
loss (whether or not covered by insurance) materially and adversely affecting
the assets, properties or business of the Company; (vii) the Company has not
made any capital expenditure or commitment in excess of $50,000 for additions to
property, plant or equipment; (viii) the Company has not made any loan or
advance to any person or entity, other than advances to commission salespersons
in the ordinary course of business; guaranteed any obligation or liability of
any person or entity, including (without limitation) any guaranties of any
installment sales contracts or leases, or given any indemnification to any
person or entity; (ix) the Company has not made any sale, assignment or transfer
of, additions to or transactions involving any tangible asset other than in the
ordinary course of business; (x) the Company has not made any change in its
method of accounting or accounting practices, including (without limitation) any
change in depreciation or amortization policies or rates; (xi) the Company has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (xii) the Company has not amended or
terminated any material contract, agreement or license to which it is a party;
(xiii) the Company has not agreed, in writing or otherwise, to do or permit any
of the foregoing.
7.16 LITIGATION. Schedule 7.16 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body applicable specifically to the Company and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or, to
the knowledge of the Shareholders, threatened against the Shareholders with
respect to their Shares or against the Company or any of its properties, assets
or business. The Company has no knowledge of any facts that might result in any
other material action, suit, arbitration or proceeding.
7.17 COMPLIANCE WITH LAWS. To the best of the Company's and each of the
Shareholders' knowledge, there are no existing violations of federal, state or
local laws, ordinances, rules, codes, regulations or orders by the Company which
are reasonably likely to materially affect the properties, assets or business of
the Company. To the best of the Company's and each of the Shareholders'
knowledge, the Company is not subject to any restriction, judgment, order, writ,
injunction, decree or
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award, which materially and adversely affects or is likely to materially and
adversely affect the business, operations, properties, assets or condition
(financial or otherwise) of the Company.
7.18 CONTRACTS AND AGREEMENTS. Schedule 7.18 sets forth a complete and
accurate description of all material contracts and agreements to which the
Company is a party or by which it or any of its property is bound. All such
contracts and agreements are in full force and effect and neither the Company
nor, to the Company's knowledge, the other parties thereto are in breach of any
of the provisions thereof. Except as set forth on Schedule 7.18, the Company is
not a party to any contract or agreement which materially and adversely affects
or is likely to materially or adversely affect the business, operations,
properties, assets or condition (financial or otherwise) of the Company.
7.19 EMPLOYEE BENEFIT PLANS. Schedule 7.19 sets forth a complete and
accurate description of all pension, profit sharing, bonus, deferred
compensation, percentage compensation, severance pay, retirement, health, stock
option, stock buy-in, insurance and other employee benefit plans and
arrangements binding upon the Company. The Company has complied with the
provisions of and has performed the obligations required of it under such plans
and arrangements, and the Company is not in default under any provision thereof
in any material respect. There have been no material defaults, breaches or
omissions by the Company or any fiduciary under any of these plans or
arrangements.
7.20 INSURANCE. Schedule 7.20 sets forth a complete and accurate
description of all insurance, including (without limitation) workers'
compensation, maintained by the Company and summarizes the coverage provided by
each of the insurance policies, including (without limitation) whether the
insurance policies are "claims made" or "occurrence" policies. All of the
insurance is in full force and effect, and the Company will keep such insurance
in full force and effect until the Closing Date.
7.21 PERSONNEL. Schedule 7.21 sets forth a complete and accurate list of
all employees of the Company as of the date indicated thereon and all
independent contractors regularly performing services on behalf of the Company
and their respective rates of compensation, including any salary, bonus or other
payment arrangement made with any of them. Except as disclosed in Schedule
7.21, the Company does not have any employment agreements or contracts between
the Company and any person or entity. The Company is not a party to or bound by
any collective bargaining agreement, nor has the Company experienced any
strikes, grievances, claims of unfair labor practices or other collective
bargaining dispute. There are no unions representing any employees of the
Company. The Company has no knowledge of any organizational effort presently
being made or threatened by or on behalf of any labor union with respect to
employees of the Company. The Company has paid or has made provision for the
payment of all compensation due any person or entity and has complied in all
material respects with all applicable laws, rules and regulations relating to
the employment of labor, including those related to wages, hours, collective
bargaining and the payment and withholding of taxes, and has withheld and paid
to the appropriate governmental authority, or is holding for payment not yet due
to such authority, all amounts required by law or agreement to be withheld from
the compensation of its employees.
7.22 ACCOUNTS RECEIVABLE. Schedule 7.22 sets forth a complete and
accurate list of all accounts receivable, notes receivable and vehicle leases of
the Company as of the date indicated thereon and an aging analysis of such
accounts. All receivables of the Company are valid and enforceable claims,
arose in the ordinary course of business, require no further performance by the
Company and, to the Company's knowledge, are not subject to claims or offset.
7.23 BROKERS AND FINDERS. The Company has not employed, directly or
indirectly, any broker or finder, nor incurred any liability for any brokerage
fees, commissions or finders fees.
7.24 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules have been furnished or made
available to Lithia. The Company will make available to Lithia, to the extent
requested by Lithia, all books, records and facilities of the Company.
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7.25 POWERS OF ATTORNEY; AUTHORIZED SIGNATORIES. The Company has
provided to Lithia (i) the names and addresses of all persons holding a power of
attorney on behalf of the Company, and (ii) the account numbers and names of all
banks or other financial institutions in which the Company currently has an
account, deposit or safe deposit box, with the names of all persons authorized
to draw on the accounts or deposits or to have access to the boxes.
7.26 FULL DISCLOSURE. The representations and warranties by the Company
and the Shareholders in this Agreement and in the schedules attached hereto, and
the other statements in writing and information furnished or to be furnished to
Lithia by or on behalf of the Company or the Shareholders in connection with the
transactions contemplated by this Agreement, taken as a whole, do not and will
not contain any untrue statement of a material fact, or omit to state a material
fact necessary to make the statements contained herein not misleading.
7.27 ENVIRONMENTAL
7.27.1 There are no past or present events, conditions,
circumstances, activities, practices, incidents, plans or actions, based on or
resulting from the conduct of the business of the Company, including the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge, release or threatened release
into the environment, of any pollutant, contaminant, chemical or industrial
toxic or hazardous material, substance or waste, which will violate any laws
chargeable to the Company currently in effect relating to pollution or
protection of the environment (the "ENVIRONMENTAL LAWS") or any plan, order,
decree, judgment, injunction, notice or demand letter from a governmental entity
applicable to the Company, or which will give rise to any common law or other
legal liability, including, without limitation, liability under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
or similar state or local laws in effect as of the date hereof. To the best of
the Company's and each of the Shareholders' knowledge, the Business Real
Property contains no spill, deposit or discharge of any hazardous substance (as
that term is currently defined under CERCLA or any applicable state law), as a
result of which there would be a materially adverse effect on the Company.
7.27.2 Schedule 7.27 sets forth a complete and accurate description
of each underground storage tank of any kind or nature located on the Business
Real Property and known to the Shareholders.
7.27.3 The Company has delivered to Lithia copies of all existing
environmental site audits on the Business Real Property. The Company shall
allow Lithia and its consultants access to the Business Real Property for the
purpose of conducting any further environmental assessment it may desire to
conduct, upon execution by Lithia and such consultants of an appropriate
indemnity agreement.
7.28 CONTINUATION OF BUSINESS. Neither the Company nor the Shareholders
know of any reason why the Company cannot continue its business in all material
respects in the same manner following the execution of this Agreement and the
Closing as it has been operated prior thereto, except to the extent that Lithia
causes the business of the Company to change following the Closing.
7.29 CONTRACTS IN TRANSIT. At the time of Closing, the Company will
provide a complete and accurate description of all contracts in transit for the
Company.
8. REPRESENTATIONS AND WARRANTIES OF LITHIA
Lithia represents and warrants to the Shareholders as follows:
8.1 AUTHORIZATION. The execution, delivery and performance of this
Agreement and the Plan of Merger have been duly authorized by the Board of
Directors of Lithia and this Agreement has been duly executed and delivered by
Lithia. Lithia has all necessary corporate authority to execute and deliver
this Agreement and to perform its obligations hereunder. This Agreement is, and
when executed at the Closing the Plan of Merger will be, a valid and legally
binding obligation of Lithia, enforceable against Lithia in accordance with its
terms, except as the enforceability thereof may be limited by bankruptcy,
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insolvency, reorganization, moratorium or other similar laws relating to the
enforcement of creditors' rights generally and by general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law). Lithia has the complete and unrestricted right, power and
authority to execute this Agreement and the Plan of Merger and perform its
covenants in accordance with this Agreement and the Plan of Merger.
8.2 INCORPORATION. Lithia is duly organized and validly existing under
the applicable laws of the state of its incorporation and has all necessary
power and authority to own, lease and operate its properties and assets and to
conduct its business as its business is now being conducted. Lithia is
qualified to do business and is in good standing in each state in which it
transacts business.
8.3 CAPITALIZATION. The authorized capital stock of Lithia consists of
100,000,000 shares of Class A Common Stock, no par share, 25,000,000 shares of
Class B Common Stock, no par value and 15,000,000 shares of preferred stock, no
par value, of which 10,500 shares will be designated as Series M-2002 Preferred
Stock and 4,500 shares will be designated as Series M-2003 Preferred Stock,
prior to Closing. Lithia SEC Filings reflect, as of the dates referred to in
such filings, all shares of capital stock issued and outstanding (the "LITHIA
SHARES") or plans pursuant to which such shares may be issued. The Lithia
Shares have been validly authorized and issued, are fully paid and
non-assessable, and have not been issued in violation of any preemptive rights.
8.4 NO CONFLICTS. Except as identified in Schedule 8.4, neither the
execution and delivery of this Agreement nor the fulfillment of or compliance
with the terms and provisions hereof will violate, conflict with or result in a
breach of the terms, conditions or provisions of, or constitute a default or an
event which, with notice or lapse of time or both, would constitute a default
under, the articles of incorporation or bylaws of Lithia, any contract,
agreement, mortgage, deed of trust or other instrument or obligation to which
Lithia is bound (assuming receipt of the consents and approvals disclosed in
Schedule 8.5), or violate any provision of any applicable law or regulation or
of any order, decree, writ or injunction of any court or governmental body, or
result in the creation or imposition of any lien, charge, restriction, security
interest or encumbrance of any nature whatsoever on any property or asset of
Lithia.
8.5 CONSENTS. Except as otherwise identified in this Agreement or in
Schedule 8.5, no consent from, or other approval of, any governmental entity or
agency or any other person or entity is necessary in connection with the
execution, delivery or performance of this Agreement by Lithia.
8.6 SEC FILINGS. Lithia has filed a Form 10 and subsequent quarterly
and other reports under the Securities Exchange Act of 1934 and various filing
with the Securities and Exchange Commission under the Securities Act of 1933
(collectively, Lithia's "SEC FILINGS"). Prior to Closing, Lithia agrees to file
such other filings as the federal securities laws require and to provide copies
of such filings to Shareholders within 5 business days from the date of such
filing. The SEC Filings comply and all additional filings prior to Closing will
comply with the requirements of applicable laws, regulations and forms, and none
of such filings contain or will contain a material misstatement or omit or will
omit to state a material fact.
8.7 TAX MATTERS. Lithia has duly filed all federal, state and local tax
returns required to be filed by it. All federal, state, local and foreign
income, ad valorem, excise, b&o, sales, use, payroll, unemployment and other
taxes and assessments that are due and payable by Lithia and have been properly
computed, duly reported, fully paid and discharged. The only unpaid taxes that
require payment by Lithia are current taxes not yet due and payable. All
current taxes not yet due and payable by Lithia have been properly accrued and
are accurately reflected in its balance sheet in the SEC Filings. Lithia has
not been delinquent in the payment of any tax, assessment or governmental
charge, nor has any tax deficiency been proposed or assessed against it, nor has
it executed any waiver of the statute of limitations on the assessment or
collection of any tax.
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8.8 TRANSACTIONS SINCE LATEST BALANCE SHEET DATE. Since the date of the
latest balance sheet in any SEC Filings and except as set forth in Schedule 8.8
(i) Lithia has not incurred any material debts, liabilities or obligations
except current liabilities in the ordinary course of business; discharged or
satisfied any material liens or encumbrances, or paid any material debts,
liabilities or obligations, except in the ordinary course of business;
mortgaged, pledged or otherwise subjected to any lien or other encumbrance any
of its properties or assets; canceled any material debt or claim; sold or
transferred any properties or assets except sales from inventory in the ordinary
course of business; nor entered into any material transaction other than in the
ordinary course of business; (ii) there has not been any change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
other than changes in the ordinary course of business, none of which,
individually or in the aggregate, has been materially adverse; (iii) there has
not been any declaration, setting aside or payment of any dividend or other
distribution in respect of, or any repurchase or acquisition of, the capital
stock of Lithia except pursuant to plans identified in SEC Filings; (iv) Lithia
has not issued any securities or options to purchase any securities of any
nature whatsoever; (v) there has not been any damage, destruction or loss
(whether or not covered by insurance) materially and adversely affecting the
assets, properties or business of Lithia; (vi) Lithia has not made any sale,
assignment or transfer of, additions to or transactions involving any of its
tangible assets other than in the ordinary course of business; (vii) Lithia has
not granted any waiver or release of any material claim or right, or canceled
any material debt or claim held by it; (viii) Lithia has not amended or
terminated any material contract, agreement or license to which it is a party;
or (ix) Lithia has not agreed, in writing or otherwise, to do or permit any of
the foregoing.
8.9 LITIGATION. Schedule 8.9 sets forth a complete and accurate
description of all orders, decrees, writs or injunctions of any court or
governmental body specifically applicable to Lithia and all legal actions,
suits, arbitrations, condemnation actions or other proceedings pending or
threatened against Lithia or its subsidiaries, or any of its properties, assets
or business which might have a material adverse effect on its financial
condition or business prospects. Lithia is not aware of any facts that might
result in any other material action, suit, arbitration or proceeding.
8.10 COMPLIANCE WITH LAWS. To the best of Lithia's knowledge, there are
no existing violations of federal, state or local laws, ordinances, rules,
codes, regulations or orders by Lithia which are reasonably likely to materially
affect the properties, assets or business of Lithia. To the best of Lithia's
knowledge, Lithia is not subject to any restriction, judgment, order, writ,
injunction, decree or award, which materially and adversely affects or is likely
to materially and adversely affect the business, operations, properties, assets
or condition (financial or otherwise) of Lithia.
8.11 BROKERS AND FINDERS. Lithia has not employed, directly or
indirectly, any broker or finder or incurred any liability for any brokerage
fees or commissions or finders' fees and no broker or finder has acted directly
or indirectly for Lithia in connection with this Agreement or the transactions
contemplated by this Agreement.
8.12 DELIVERY OF DOCUMENTS. Complete and accurate copies of all written
instruments listed or described on the schedules provided herewith have been
furnished to the Shareholders. Lithia will make available to the Shareholders
or their respective professional advisors, to the extent requested by the
Shareholders, all books, records and facilities of Lithia.
8.13 FULL DISCLOSURE. The representations and warranties by Lithia in
this Agreement and in the schedules provided herewith, and the other statements
in writing and information furnished or to be furnished to the Shareholders by
or on behalf of Lithia in connection with the transactions contemplated by this
Agreement, taken as a whole, do not and will not contain any untrue statement of
a material fact, or omits or will omit to state a material fact necessary to
make the statements contained herein not misleading.
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9. COVENANTS
Lithia, the Shareholders and the Company agree that:
9.1 NOTICES AND CONSENTS. The Shareholders, the Company and Lithia
mutually agree to cooperate and use commercially reasonable good faith efforts
to prepare all documentation, to effect all filings and to obtain all permits,
consents, approvals and authorizations of all third parties and governmental
bodies as may be necessary to consummate the transactions contemplated by this
Agreement.
9.2 CONDUCT OF BUSINESS BY THE COMPANY PRIOR TO THE CLOSING DATE. The
Company and the Shareholders shall cause the Company to conduct its operations
according to the ordinary and usual course of business reasonably consistent
with past and current practices, to use commercially reasonable good faith
efforts to maintain and preserve its assets, properties, insurance policies,
business organization, and advantageous business relationships and to retain the
services of its officers, employees, agents and independent contractors, and
shall not allow the Company to engage in any practice, take any material action,
or enter into any material transaction outside of the ordinary course of
business. From the date of the execution of this Agreement to the date of
Closing of the transaction contemplated hereby, neither the Shareholders nor the
Company will commit to or make any obligation which binds the Company to an
expense in excess of $50,000.00 without Lithia's prior consent, other than the
purchase of inventory in the ordinary course of business.
9.3 LITHIA'S EXAMINATION. The Company and the Shareholders shall cause
the Company to permit representatives of Lithia to have full access to and to
examine, at all reasonable times, and in a manner so as not to interfere with
the normal business operations of the Company, the books, records, properties
and assets of the Company and the Business Real Property.
9.4 NOTICE OF CHANGES. The Company shall give prompt written notice to
Lithia of any material adverse change in the financial condition, net income,
assets, liabilities, operations or business of the Company. Lithia shall give
prompt written notice to the Shareholders of any material adverse change in the
financial condition, net income, assets, liabilities, operations or business of
the Company.
9.5 FURTHER ASSURANCES. From time to time at or after the Closing, as
and when requested by any party hereto, the other party shall execute and
deliver, or cause to be executed and delivered, all such documents and
instruments and shall take, or cause to be taken, all such further or other
actions as such other party may reasonably deem necessary or desirable to
consummate the transactions contemplated by this Agreement.
9.6 EMPLOYEE STOCK OPTIONS. Lithia agrees to grant stock options
pursuant to its 1996 Incentive Stock Plan to management employees remaining with
the Company after Closing. The number of shares available for grant to all
employees in the Moreland Group shall be equal to six percent of the total
number of shares of Class A Common Stock issued to all the shareholders of the
companies in the Moreland Group at the Closing and the simultaneous closings of
the Other Reorganization Agreements including such additional shares that may be
issued as Contingent Merger Consideration, plus six percent of the shares of
Class A Common Stock issuable upon conversion of the shares of Series M
Preferred Stock issued at the Closing and such simultaneous closings including
such additional shares that may be issued as Contingent Merger Consideration,
determined as though such Series M Preferred Stock were converted to Class A
Common Stock at the date of issuance. The options will be granted during 1999
and 2000 to such persons and in such amounts consistent with Lithia's practices
and as proposed by W. Douglas Moreland.
9.7 RELEASE OF GUARANTEES. All guarantees by the Company of the
indebtedness or obligations of any other party or person (other than the other
members of the Moreland Group) and the guaranty of W. Douglas Moreland or any
general manager of any dealership in the Moreland Group of any indebtedness or
obligation of the Company or any other member of the Moreland Group (except as
may
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be created or permitted by this Agreement), and any security agreements entered
or collateral pledged to secure such guarantees, shall be released, discharged
or terminated prior to or at Closing.
9.8 NON-COMPETE. For a term of three years following the Closing date
of the Merger, Shareholders will not, directly or indirectly, within 100 miles
of any dealership currently owned or operated by Lithia or any of its
subsidiaries, own, operate, manage, control, participate in the ownership,
management, operation or control of or be paid or employed by or acquire any
interest in or securities of or otherwise become associated with or provide
assistance to, as an employee, consultant, director, officer, shareholder,
partner, agent, associate, principal, representative or any other capacity, any
business entity engaged in the lease or sale of new or used automobiles or light
trucks except as may otherwise be provided in such Shareholders' Employment
Agreements with Lithia. This covenant against competition shall not prohibit
any activity of any Shareholder with respect to any business entity with which
it or he has any such relationship as of the date of this Agreement or any
successor to such a business entity. If Lithia or one of its subsidiaries
acquires or assumes operation of an additional dealership after the date hereof,
this covenant against competition shall be extended to that additional
dealership, but there shall automatically be excepted from such extended
covenant any business entity that is within 100 miles of such additional
dealership and in which any Shareholder had an interest which did not constitute
a breach of this Section before Lithia or such subsidiary acquired or assumed
operation of such additional dealership. For that purpose, a Shareholder shall
be deemed to have an interest in a business entity if he or it had any of the
relationships with such entity that constitute competition under this
Section 9.8, had signed a letter of intent, terms sheet, or agreement
contemplating such a relationship or had filed an application with a
manufacturer or franchisor which, if granted, would create such a relationship.
9.9 UPDATE OF REPRESENTATIONS. If any party to this Agreement becomes
aware of any breach of the representations and warranties contained herein,
whether made by such party or any other party, such party shall notify all other
parties, by the delivery of a new or revised Schedule disclosing the facts
constituting such breach or otherwise. The non-breaching parties shall be
entitled to exercise any right they may have to terminate this Agreement on the
basis of such breach, but if they elect to proceed with the Closing rather than
terminating, the breach so disclosed and all remedies in respect thereof shall
be deemed to have been waived.
9.10 SERVICE CONTRACT PRICING. Prior to the Effective Date, the parties
will determine a pricing schedule for extended service contracts which will be
charged to each Moreland Group dealership. The pricing schedule, determined for
each product line, will be the amount determined by the following formula:
(A x B) + (C x D)
where:
A = the percentage of all service contracts written by the
Moreland Group in 1998 with Ryan & Associates.
B = the price charged by Ryan & Associates for that product
line less the inception rebate paid by Ryan &
Associates (in 1998, this inception rebate was paid to
Diamond Financial and was $15.00 on new vehicles and
$40.00 on used vehicles).
C = the percentage of all service contracts written by the
Moreland Group in 1998 with Western National.
D = the price charged by Western National for that product
line less the inception rebate paid by Western National
(in 1998, this inception rebate was paid to Diamond
Financial and was $50.00 on both new and used
vehicles).
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10. CONDITIONS PRECEDENT TO OBLIGATION OF LITHIA
The obligation of Lithia to effect the transactions contemplated by this
Agreement is subject to the satisfaction on or prior to the Closing Date of the
following conditions, each of which may be waived by Lithia:
10.1 REPRESENTATIONS, WARRANTIES OF THE SHAREHOLDERS AND COVENANTS OF THE
COMPANY AND THE SHAREHOLDERS. All representations and warranties of the
Shareholders contained in this Agreement shall be true and correct in all
material respects as of the Closing Date with the same effect as though such
representations and warranties were made on the Closing Date, except to the
extent that such representations and warranties expressly relate to any earlier
date, and the Company and the Shareholders shall have performed and complied in
all material respects with all the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by the Company and each of the Shareholders on or
prior to the Closing Date. The Company and each of the Shareholders must have
delivered to Lithia a certificate dated as of the Closing Date certifying that
this condition has been fulfilled.
10.2 NO ADVERSE CHANGE. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of the
Company shall have occurred.
10.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required and copies of such approvals and consents shall have been delivered to
Lithia.
10.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
10.5 APPROVAL OF LITHIA AS THE DEALER. Merger Sub shall have been
approved as the dealer by the manufacturers represented by the Company without
restrictions or requirements deemed unacceptable to Lithia at its sole
discretion.
10.6 CONSENT FROM LITHIA'S LENDER. Lithia shall have received from Ford
Motor Credit Company a waiver or consent to this Agreement and the transactions
contemplated hereby.
10.7 LEGAL OPINION. Lithia shall have received from Sherman &
Howard L.L.C. its opinion substantially in the form of Exhibit F.
10.8 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to Lithia's obligations to effect the transactions contemplated by
Other Reorganization Agreements shall have been fulfilled.
10.9 EMPLOYEE AND RELATED PARTY LOANS. With the exception of employee
advances in the normal course of business, all employee loans and loans from
Affiliates will be paid in full or otherwise transferred to third parties for
cash at their book value.
10.10 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. Lithia shall have
received fully executed Agreement substantially as set forth in Exhibit G.
10.11 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
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11. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY AND THE SHAREHOLDERS
The obligations of the Shareholders and the Company to effect the
transactions contemplated by this Agreement are subject to the satisfaction on
or prior to the Closing Date of the following conditions, each of which may be
waived by the Company or by the Shareholders:
11.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF LITHIA. All
representations and warranties of Lithia contained in this Agreement shall be
true and correct in all material respects as of the Closing Date with the same
effect as though such representations and warranties were made on the Closing
Date, except to the extent that such representations and warranties expressly
relate to an earlier date, and Lithia shall have performed and complied in all
material respects with all of the covenants and agreements and satisfied in all
material respects all the conditions required by this Agreement to be performed,
complied with or satisfied by Lithia on or prior to the Closing Date. Lithia
must have delivered to the Company a certificate dated as of the Closing Date
certifying that this condition has been fulfilled.
11.2 NO ADVERSE CHANGES. No material adverse change in the financial
condition, net income, assets, liabilities, operations or business of Lithia
shall have occurred.
11.3 THIRD PARTY APPROVALS. This Agreement and the transactions
contemplated by this Agreement shall have received all required material
approvals and consents from all Company lenders, lessors, automobile
manufacturers and federal, state or local regulatory agencies whose consent is
required, and copies of such approvals and consents shall have been delivered to
the Company.
11.4 HART-SCOTT-RODINO WAITING PERIOD. The applicable waiting period
under the HSR Act, and the regulations promulgated thereunder, shall have
expired or been terminated.
11.5 LEGAL OPINION. The Shareholders shall have received from Foster
Pepper & Shefelman LLP an opinion substantially the form of Exhibit H.
11.6 FULFILLMENT OF CONDITIONS IN RELATED TRANSACTIONS. All of the
conditions to the obligations of the other members of the Moreland Group to
effect the Other Reorganization Agreements shall have been fulfilled.
11.7 ASSIGNMENT AND LICENSES OF INTANGIBLE ASSETS. The Shareholders
shall have received a fully executed Agreement substantially as set forth in
Exhibit G.
11.8 COMPLETION OF AUDIT AND PURCHASE PRICE DETERMINATION. The Adjusted
Net Worth, Net Adjusted Pretax Income for 1998 and Initial Merger Consideration
shall have been determined.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
Notwithstanding any investigation or examination conducted before or after
the Closing or the decision of any party to complete the Closing, each party
shall be entitled to rely upon the representations and warranties set forth in
this Agreement. All representations and warranties made in this Agreement shall
survive the Closing until March 31, 2001; provided, however, that (i) the
accuracy of each such representation and warranty shall be determined only as of
the date of the Closing, (ii) the representations and warranties in
Sections 7.14 and 8.7 shall survive until 30 days after the expiration (without
extension) of the statute of limitations for the Company's or Lithia's (as the
case may be) 1998 federal income tax return, and (iii) any claim based upon
fraud shall survive for its applicable statute of limitation. The period of
survival for each representation and warranty established in this Section 12 is
referred to as the "Survival Period" for such representation and warranty. The
liabilities of the parties with respect to their respective representations and
warranties will expire as of the expiration of the applicable Survival Period;
provided, however, that such expiration will not affect the rights of any party
entitled to rely on a representation and warranty in respect of any breach of
which such party has given notice to the
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breaching party prior to the expiration of the Survival Period, specifying in
reasonable detail the facts alleged to constitute the breach.
13. INDEMNIFICATION
13.1 GENERAL INDEMNITY. The Shareholders agree to jointly and severally
indemnify, defend and hold harmless the Company and Lithia and their respective
successors and assigns (the "LITHIA INDEMNIFIED PARTIES") from and against any
claims, damages, liabilities, penalties, actions, suits, proceedings, demands,
assessments, costs and expenses, including reasonable attorneys fees and
expenses of investigation ("CLAIMS"), incurred by any Lithia Indemnified Party
arising from or related to (i) any breach of any representation or warranty made
by the Company or the Shareholders in this Agreement, of which notice is given
to the Shareholders by the Lithia Indemnified Parties prior to the expiration of
the Survival Period for such representation or warranty or (ii) any breach of
any covenant or agreement made by the Company or the Shareholders in this
Agreement, to the extent, in the case of the Company, that such covenant or
agreement was to be performed at or before the Closing.
13.2 DEFENSE OF CLAIMS. Each Lithia Indemnified Party shall promptly
notify the Shareholders of any Claim against which indemnification will be
sought hereunder. If the Claim involves a claim, investigation, demand, action
or suit by a third party, including a governmental authority, the Shareholders
shall have the right to defend the claim with counsel of their choosing, but the
Lithia Indemnified Party shall be entitled to participate in the defense at its
expense. If the Shareholders do not assume the defense of the Claim, the Lithia
Indemnified Party may do so, but the Shareholders will have the right to
participate in the defense at their expense. The party defending a Claim shall
not settle the Claim without the consent of the other party, which consent shall
not be unreasonably withheld.
13.3 LIMITATIONS.
13.3.1 Except for Claims based upon fraud or a breach of
Section 7.14, the Lithia Indemnified Parties shall not be entitled to
indemnification under Section 13.1 unless and until the aggregate amounts
against which they would otherwise be entitled to indemnification under
Section 13.1 of this Agreement and the comparable indemnification provisions of
the Other Reorganization Agreements exceed $500,000, and then only to the extent
of such excess.
13.3.2 In no event shall the Shareholders be liable in the aggregate
under Section 13.1 for an amount that, when added to the amounts for which the
shareholders of the other members of the Moreland Group are liable under the
comparable provisions of the Other Reorganization Agreements exceeds
$20,000,000; provided, however, that Claims based upon fraud or based upon a
breach of Section 17.14 are not limited by this subsection. Further, no
Shareholder shall be liable for an amount in excess of the total Merger
Consideration received by such Shareholder.
13.3.3 Following the Closing, the right to be indemnified under
Section 13.1 shall be the sole and exclusive remedy of the Lithia Indemnified
Parties for any breach by the Shareholders or the Company of any representation
or warranty made at or before the Closing or any covenant or agreement to be
performed at or before the Closing.
13.3.4 Any amount against which a Lithia Indemnified Party is
entitled to be indemnified hereunder shall be reduced by (i) the amount of any
insurance proceeds available to such Lithia Indemnified Party in respect of the
matter giving rise to a Claim or, if greater, the proceeds that would have been
available under the insurance policies maintained by the Company prior to the
Closing, (ii) any tax benefits accruing to the Lithia Indemnified Party as a
result of the Claim or the facts underlying the Claim not offset by any tax
charges to the Lithia Indemnified Party as a result of the receipt of the
indemnification payment, and (iii) any recoveries from third parties in respect
of the Claim or the facts underlying the Claim. Lithia shall use reasonable
commercial efforts to recover from third parties in respect of any Claim but
will not be required to exhaust its efforts to recover from third parties
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prior to seeking indemnity hereunder. If Shareholders pay the Claim, Lithia
will assign to the Shareholders its or the Company's right of recovery from such
third parties.
13.3.5 Notwithstanding any other provision of this Agreement, the
obligations of the Shareholders to indemnify a Lithia Indemnified Party may be
satisfied in total or in part by the delivery to such party of Series M
Preferred Stock or Class A Common Stock. The Series M Preferred Stock shall,
for these purposes, be valued at its $1,000 stated value per share. The Class A
Common Stock shall, for these purposes, be valued at the average Daily Sales
Price over the 15 consecutive trading days ending the second trading day prior
to its tender to the Lithia Indemnified Party.
14. HART-SCOTT-RODINO NOTIFICATION
Prior to the Closing Date, the parties shall file all reports or other
documents required or requested by the Federal Trade Commission (the "FTC") or
the Department of Justice (the "DOJ") under the HSR Act, and all regulations
promulgated thereunder, concerning the transactions contemplated by this
Agreement, and comply promptly with any request by the FTC or the DOJ for
additional information concerning such transactions, so that the waiting period
specified in the HSR Act will expire an soon as commercially reasonable after
the execution and delivery of this Agreement. The parties agree to furnish to
one another such information concerning Lithia, the Company, and the
Shareholders as the parties need to perform their obligations hereunder. Lithia
and the Company agree to share the filing fees and costs due governmental
agencies with regard to the HSR Act notification and compliance.
15. TERMINATION
15.1 MUTUAL CONSENT. This Agreement may be terminated by the written
consent of the parties.
15.2 BY LITHIA. This Agreement may be terminated by written notice of
termination given by Lithia to the Company and the Shareholders (i) if the
Company or the Shareholders default in any material respect in the observance of
or in the due and timely performance by them of any of the agreements and
covenants contained herein or in the Other Reorganization Agreements, (ii) if
any of the warranties and representations of the Company or the Shareholders
contained herein are false in any material respect, (iii) if the conditions of
this Agreement to be complied with or performed by the Shareholders or the
Company at or before Closing are not complied with or performed at the time
required for such compliance or performance and such noncompliance or
nonperformance is not waived by Lithia or (iv) if Lithia terminates any of the
Other Reorganization Agreements in accordance with the terms and conditions of
such other agreements.
15.3 BY THE COMPANY. This Agreement may be terminated by written notice
of termination given by the Company to Lithia (i) if Lithia defaults in any
material respect in the observance of or in the due and timely performance by
Lithia of any agreements and covenants of Lithia contained herein or in the
Other Reorganization Agreements, (ii) if any of the representations and
warranties of Lithia contained herein are false in any material respect, (iii)
if the conditions of this Agreement to be complied with or performed by Lithia
at or before Closing are not complied with or performed at the time required for
such compliance or performance and such noncompliance or nonperformance is not
waived by the Company or (iv) if one of the other members of the Moreland Group
terminates any of the Other Reorganization Agreements in accordance with the
terms and conditions of such other agreements.
15.4 EFFECT OF TERMINATION. Upon any termination of this Agreement under
Section 15.1, no party to this Agreement shall have any liability or obligation
hereunder. Upon any termination of this Agreement under Section 15.2 or 15.3,
neither party shall have any prospective obligation hereunder except as provided
in Section 15.5, but each party shall have, if otherwise available, the remedy
of specific enforcement, prior to termination.
15.5 BREAK-UP FEE.
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15.5.1 In the event that this Agreement is terminated by the Company
based upon a willful refusal by Lithia to complete this Agreement or any Other
Reorganization Agreement, Lithia shall pay the Company a break-up fee equal to
200% of all amounts paid or payable to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For purposes of this Section
15.5, a willful refusal by any party to complete this Agreement or any Other
Reorganization Agreement means either such party's refusal to consummate the
transactions contemplated by this Agreement or any Other Reorganization
Agreement even though all of the conditions to its obligations to do so have
been fulfilled or such party's failure to take any action within its reasonable
control that would result in the fulfillment of a condition to such obligations.
15.5.2 In the event that either party terminates this Agreement for
reason of the non-fulfillment of the Designated Condition, Lithia shall pay to
the Company a break-up fee equal to the sum of (i) $150,000 multiplied by a
fraction, the numerator of which is the Net Adjusted Pretax Income of the
Company for 1998 and the denominator of which is the aggregate Net Adjusted
Pretax Income of all members of the Moreland Group for 1998 and (ii) 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company. For this purpose, the Designated
Condition means the failure of Lithia to have received approvals from any
manufacturer represented by the Company or another member of the Moreland Group.
15.5.3 In the event that either party terminates this Agreement for
any reason other than (i) those set forth in Sections 15.5.1 or 15.5.2 or (ii) a
willful refusal by the Company or any of the other members of the Moreland Group
or their Shareholders to complete the Agreement or any Other Reorganization
Agreement, Lithia shall pay the Company a break-up fee equal to 100% of all
amounts paid or payable by the Company to Lithia under the Consulting Agreement
dated as of January 1, 1999 among Lithia and the members of the Moreland Group
in respect of the net profits of the Company.
15.5.4 The break-up fees payable under this Section 15.5 shall be
due at the time this Agreement is terminated. Should the transactions
contemplated by this Agreement or the Other Reorganization Agreements fail to
close for any reason other than a willful refusal by the Company or any other
member of the Moreland Group to complete this Agreement or any other
Reorganization Agreement, it is acknowledged that the Company and the
Shareholders would suffer damages; however, the precise amount of such damages
would be difficult to establish. The break-up fees provided in this Section
represent a good-faith estimate by the parties of the damage that the Company
and Shareholders would incur. Lithia acknowledges that the break-up fees
payable under Section 15.5.2 and 15.5.3 are reasonable and appropriate, even
though Lithia may not have breached any representation, warranty or covenant
contained herein in the circumstances described in those sections. To the
extent of those break-up fees, Lithia has knowingly accepted the risk of the
nonfulfillment of the conditions to its obligations and the obligations of the
Company and the Shareholders in the circumstances described in Sections 15.5.2
and 15.5.3 in order to induce the Company and the other members of the Moreland
Group to enter into this Agreement and the Other Reorganization Agreements and
risk the adverse effect on their market values that will occur if those
agreements are not completed. Lithia expressly agrees that the break-up fees
contemplated by this Section 15.5 shall be due even though the Company, the
Shareholders or any other member of the Moreland Group or any shareholder
thereof may have breached any representation, warranty or covenant of this
Agreement or the Other Reorganization Agreements, with the sole exception of a
willful refusal by any such party to complete this Agreement or any of the Other
Reorganization Agreements. The right to collect break-up fees pursuant to this
Section 15.5 shall be the exclusive remedy of the Company and the Shareholders
in the event of a termination of this Agreement in the circumstances described
in Section ERROR! REFERENCE SOURCE NOT FOUND. or 15.5.2. In the event that the
Company or the Shareholders terminate this Agreement under the circumstances
described in Section 15.5.3 as a result of the nonfulfillment of the condition
established in Section 11.1 (or Section 11.7 as it
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relates to the comparable conditions in the Other Reorganization Agreements),
the liquidated damages payable under Section 15.5.3 shall be deemed to
compensate the Company only for the opportunity cost of having taken itself off
the market while this Agreement was being negotiated and was in effect, and the
Company shall be entitled to prove any other damages and pursue any other remedy
available at law or in equity.
16. DISPUTE RESOLUTION
16.1 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
non-binding 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.
16.2 BINDING ARBITRATION. Any claim between the parties arising out of
or relating to this Agreement shall be determined by arbitration in Reno, Nevada
(or some other place as the parties may agree). The arbitration shall be
conducted before one neutral arbitrator; provided, however, that 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 having jurisdiction over Reno, Nevada 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 corporate law. Whether
a claim is covered by this Agreement shall be determined by the arbitrator(s).
All statutes of limitations which would otherwise be shall apply to any
arbitration proceeding hereunder.
16.3 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.
16.4 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
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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. If the arbitration is conducted by three arbitrators, the
decision and award of the arbitrators need not be unanimous; rather, the
decision and award of two arbitrators shall be final.
17. GENERAL PROVISIONS
17.1 ENTIRE AGREEMENT. This Agreement and the exhibits and schedules
hereto constitutes the entire agreement between the parties regarding the
subject matter hereof and supersedes all prior agreements and understandings
between the parties relating to the subject matter of this Agreement. There are
no agreements, understandings, restrictions, warranties, representations between
the parties relating to the subject matter hereof other than those set forth in
this Agreement.
17.2 EXHIBIT AND SCHEDULES. The exhibits attached and the schedules
provided pursuant to this Agreement are made a part of this Agreement by this
reference.
17.3 PUBLICITY. The parties hereto agree that no public release or
announcement concerning the terms of the transactions contemplated by this
Agreement shall be issued by any party without the prior consent of the other
party (which consent shall not be unreasonably withheld), except as such release
or announcement may be required by law.
17.4 AMENDMENT. This Agreement may not be amended, modified or
terminated except by an instrument in writing signed by all parties to this
Agreement.
17.5 CONSTRUCTION. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter gender thereof or to the
plurals of each, as the identity of the person or persons or the context may
require. The descriptive headings contained in this Agreement are for reference
purposes only and are not intended to describe, interpret, define or limit the
scope, extent or intent of this Agreement or any provision contained in this
Agreement.
17.6 INVALIDITY. If any provision contained in this Agreement shall for
any reason be held to be invalid, illegal, void or unenforceable in any respect,
such provision shall be deemed modified so as to constitute a provision
conforming as nearly as possible to such invalid, illegal, void or unenforceable
provision while still remaining valid and enforceable; and the remaining terms
or provisions contained herein shall not be affected thereby.
17.7 PAYMENT OF EXPENSES. Whether or not the transactions contemplated
by this Agreement are consummated, each of the parties to this Agreement shall
be responsible for its own costs and expenses incurred in connection with the
preparation and negotiation of this Agreement and the transactions contemplated
hereby.
17.8 BINDING EFFECT AND ASSIGNMENT. This Agreement shall be binding upon
and shall inure to the benefit of the parties hereto and their respective legal
representatives, successors and permitted assigns. No party may assign any of
their rights or delegate any of their obligations hereunder. Any assignment in
violation hereof shall be void.
17.9 APPLICABILITY OF EXCEPTIONS AND DISCLOSURE. All facts and
agreements disclosed in the Exhibits and Schedules to this Agreement shall be
deemed to be disclosed for all purposes of this Agreement and to constitute
exceptions not only to the representations and warranties in the specific
Sections that refer to such Exhibits or Schedules, but also to all other
representations and warranties to which such disclosures are relevant.
17.10 NOTICES. All notices and other communications hereunder shall be
(i) in writing, dated with the current date of such notice, and signed by the
party giving such notice, and (ii) mailed, postpaid,
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registered or certified, return receipt requested, addressed to the party to be
notified, or delivered by personal delivery or by overnight courier. Notice
shall be deemed given when received by the party to be notified or when the
party to be notified refuses to accept delivery of the notice. The initial
addresses of the parties shall be as follows:
If to Lithia: Lithia Motors, Inc.
360 E. Jackson
Medford, Oregon 97501
Attn: Sidney B. DeBoer
With a copy to: Foster Pepper & Shefelman LLP
101 S.W. Main Street, 15th Floor
Portland, Oregon 97204
Attn: Kenneth E. Roberts
If to the Company: Reno Auto Sales, Inc.
2270 Kietzke Ln.
Reno, NV 89502
Attn: W. Douglas Moreland
With a copy to: Sherman & Howard, L.L.C.
3000 First Interstate Tower North
633 17th Street
Denver, Colorado 80202
Attn: Andrew L. Blair, Jr.
If to the Shareholders: Reno Auto Sales Limited Partnership, RLLLP
2727 S. Havana
Aurora, CO 80014
Attn: W. Douglas Moreland
The parties hereto shall have the right from time to time to change their
respective addresses by written notice to the other parties.
17.11 DEFINITION OF KNOWLEDGE. As used in this Agreement, the Company's
and the Shareholders' "knowledge" shall be limited to the actual knowledge of
the Shareholders and W. Douglas Moreland.
17.12 REMEDIES. Except as may be expressly set forth in this Agreement,
none of the remedies provided for in this Agreement shall be the exclusive
remedy of either party for a breach of this Agreement. The parties hereto shall
have the right to seek any other remedy at law or in equity in lieu of or in
addition to any remedies provided for in this Agreement.
17.13 WAIVER. No waiver of any breach or default hereunder shall be
considered valid unless in writing and signed by the party giving such waiver,
and no such waiver shall be deemed a waiver of any subsequent breach or default
of the same or similar nature.
17.14 GOVERNING LAW. This Agreement shall be construed, enforced and
governed in accordance with the laws of the State of Oregon.
17.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
instrument.
24
<PAGE>
17.16 NO STRICT CONSTRUCTION. The parties and their counsel have
participated jointly in the negotiation and drafting of this Agreement. In the
event an ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the parties hereto and no
presumption or burden of proof shall arise favoring or disfavoring any party by
virtue of the authorship of any provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
LITHIA MOTORS, INC.
By:
------------------------------------------
Bryan B. DeBoer, Vice President
RENO AUTO SALES, INC.
By:
------------------------------------------
W. Douglas Moreland, President
SHAREHOLDER
RENO AUTO SALESLIMITED PARTNERSHIP, RLLLP
By: Moreland/Reno, Inc., General Partner
By:
------------------------------------------
W. Douglas Moreland, President
25
<PAGE>
SCHEDULE 2.1
SHAREHOLDERS LIST
<TABLE>
<CAPTION>
SHAREHOLDER PERCENT OF MERGER CONSIDERATION
- ---------------------------------------- -------------------------------
<S> <C>
L.A.H. Automotive Limited 100%
Partnership, RLLLP
</TABLE>
Schedule 2.1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 24,789
<SECURITIES> 0
<RECEIVABLES> 26,975
<ALLOWANCES> 677
<INVENTORY> 153,320
<CURRENT-ASSETS> 201,333
<PP&E> 37,444
<DEPRECIATION> 4,244
<TOTAL-ASSETS> 291,480
<CURRENT-LIABILITIES> 154,856
<BONDS> 166,010
0
0
<COMMON> 71,604
<OTHER-SE> 23,225
<TOTAL-LIABILITY-AND-EQUITY> 291,480
<SALES> 212,092
<TOTAL-REVENUES> 224,145
<CGS> 188,599
<TOTAL-COSTS> 188,945
<OTHER-EXPENSES> 27,723
<LOSS-PROVISION> 36
<INTEREST-EXPENSE> 2,738
<INCOME-PRETAX> 5,005
<INCOME-TAX> 1,976
<INCOME-CONTINUING> 3,029
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,029
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.29
</TABLE>
