10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003
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

LITHIA MOTORS, INC.

(Exact name of registrant as specified in its charter)

Oregon	93-0572810
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
360 E. Jackson Street, Medford, Oregon	97501
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: 541-776-6899

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]     No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). 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	14,570,134
Class B common stock without par value	3,762,231
(Class)	(Outstanding at August 7, 2003)

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

LITHIA MOTORS, INC.
FORM 10-Q
INDEX

		Page
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets – June 30, 2003 (unaudited) and December 31, 2002		2
	Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2003 and 2002 (unaudited)		3
	Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2003 and 2002 (unaudited)		4
	Notes to Condensed Consolidated Financial Statements (unaudited)		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		17
Item 4.	Controls and Procedures		17
PART II - OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders		18
Item 6.	Exhibits and Reports on Form 8-K		19
Signatures			20

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

				June 30,			December 31,
				2003			2002
				(Unaudited)
Assets
Current Assets:
	Cash and cash equivalents			$	55,010		$	15,932
	Contracts in transit				48,284			41,493
	Trade receivables, net of allowance for doubtful accounts of $591 and $455				43,159			40,680
	Notes receivable, current portion, net of allowance for doubtful accounts of $94 and $247				172			167
	Inventories, net				468,201			445,908
	Vehicles leased to others, current portion				6,266			5,341
	Prepaid expenses and other				4,280			5,707
	Deferred income taxes				3,228			550
			Total Current Assets		628,600			555,778
Land and buildings, net of accumulated depreciation of $4,560 and $3,618					128,881			118,696
Equipment and other, net of accumulated depreciation of $17,539 and $14,602					63,455			58,215
Notes receivable, less current portion					768			881
Vehicles leased to others, less current portion					13			19
Goodwill, net					199,269			185,212
Other intangible assets, net of accumulated amortization of $340 and $330					25,970			20,985
Other non-current assets					1,878			2,263
			Total Assets	$	1,048,834		$	942,049
Liabilities and Stockholders’ Equity
Current Liabilities:
	Flooring notes payable			$	409,792		$	364,635
	Current maturities of long-term debt				4,854			4,466
	Trade payables				24,088			19,445
	Accrued liabilities				52,694			40,924
			Total Current Liabilities		491,428			429,470
Used Vehicle Flooring					60,028			63,000
Real Estate Debt, less current maturities					82,961			73,798
Other Long-Term Debt, less current maturities					53,857			30,914
Deferred Revenue					960			1,617
Other Long-Term Liabilities					7,581			9,581
Deferred Income Taxes					17,795			13,676
			Total Liabilities		714,610			622,056
Stockholders’ Equity:
	Preferred stock - no par value; authorized 15,000 shares; none outstanding				—			—
	Class A common stock - no par value; authorized 100,000 shares; issued and outstanding 14,468 and 14,299				205,516			203,577
	Class B common stock - no par value authorized 25,000 shares; issued and outstanding 3,762 and 3,762				468			468
	Additional paid-in capital				1,010			929
	Accumulated other comprehensive loss				(2,990	)		(2,517	)
	Retained earnings				130,220			117,536
		Total Stockholders’ Equity			334,224			319,993
		Total Liabilities and Stockholders’ Equity		$	1,048,834		$	942,049

The accompanying notes are an integral part of these consolidated balance sheets.

2

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)

			Three months ended June 30,						Six months ended June 30,
			2003			2002			2003			2002
Revenues:
	New vehicle sales		$	381,622		$	300,605		$	705,070		$	568,422
	Used vehicle sales			196,320			185,660			373,306			368,972
	Service, body and parts			64,361			54,995			124,112			107,033
	Finance and insurance			23,364			20,247			44,578			38,079
	Fleet and other			1,867			22,811			3,945			26,210
		Total revenues		667,534			584,318			1,251,011			1,108,716
Cost of sales				561,572			491,436			1,052,616			932,187
Gross profit				105,962			92,882			198,395			176,529
Selling, general and administrative				83,550			73,540			161,612			141,276
Depreciation - buildings				481			627			940			1,058
Depreciation and amortization - other				1,957			1,268			3,785			2,505
		Income from operations		19,974			17,447			32,058			31,690
Other income (expense):
	Floorplan interest expense			(3,839	)		(2,882	)		(7,541	)		(5,219	)
	Other interest expense			(1,586	)		(1,464	)		(2,996	)		(3,056	)
	Other expense, net			(280	)		(177	)		(452	)		(82	)
				(5,705	)		(4,523	)		(10,989	)		(8,357	)
Income before income taxes				14,269			12,924			21,069			23,333
Income tax expense				5,750			4,989			8,385			9,007
Net income			$	8,519		$	7,935		$	12,684		$	14,326
Basic net income per share			$	0.47		$	0.44		$	0.70		$	0.87
Shares used in basic net income per share				18,228			17,919			18,181			16,456
Diluted net income per share			$	0.46		$	0.43		$	0.69		$	0.85
Shares used in diluted net income per share				18,379			18,454			18,326			16,927

The accompanying notes are an integral part of these consolidated statements.

3

LITHIA MOTORS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

					Six months ended June 30,
					2003			2002
Cash flows from operating activities:
	Net income				$	12,684		$	14,326
	Adjustments to reconcile net income to net cash flows provided by operating activities:
			Depreciation and amortization			4,725			3,563
			Compensation expense related to stock option issuances			102			82
			Gain on sale of assets			(874	)		(156	)
			Loss on sale of vehicles leased to others			52			72
			Gain on sale of franchise			(275	)		(50	)
			Deferred income taxes			1,750			576
			Equity in loss of affiliate			—			(2	)
			(Increase) decrease, net of effect of acquisitions:
				Trade and installment contract receivables, net		(2,445	)		(4,507	)
				Contracts in transit		(6,791	)		(702	)
				Inventories		9,034			(80,857	)
				Prepaid expenses and other		1,561			1,277
				Other noncurrent assets		375			(324	)
			Increase (decrease), net of effect of acquisitions:
				Floorplan notes payable		21,404			81,465
				Trade payables		4,609			4,414
				Accrued liabilities		10,213			3,923
				Other long-term liabilities and deferred revenue		(2,856	)		59
				Net cash provided by operating activities		53,268			23,159
Cash flows from investing activities:
	Notes receivable issued					(61	)		(102	)
	Principal payments received on notes receivable					240			1,045
	Capital expenditures:
		Non-financeable				(2,997	)		(2,301	)
		Financeable				(10,873	)		(15,128	)
	Proceeds from sale of assets					215			1,178
	Expenditures for vehicles leased to others					(3,512	)		(4,935	)
	Proceeds from sale of vehicles leased to others					386			900
	Cash paid for acquisitions, net of cash acquired					(29,280	)		(62,002	)
	Cash from sales of franchises					252			535
				Net cash used in investing activities		(45,630	)		(80,810	)
Cash flows from financing activities:
	Net borrowings (repayments) on lines of credit					25,613			(21,000	)
	Principal payments on long-term debt and capital leases					(1,334	)		(5,980	)
	Proceeds from issuance of long-term debt					5,243			10,585
	Repurchase of common stock					(215	)		—
	Proceeds from issuance of common stock					2,133			80,106
	Redemption of Series M Preferred Stock					—			(4,355	)
				Net cash provided by financing activities		31,440			59,356
Increase in cash and cash equivalents						39,078			1,705
Cash and cash equivalents:
	Beginning of period					15,932			18,814
	End of period				$	55,010		$	20,519

The accompanying notes are an integral part of these consolidated statements.

4

LITHIA MOTORS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The financial information included herein as of June 30, 2003 and for the three and six-month periods ended June 30, 2003 and 2002 is unaudited; however, such information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are 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, 2002 is derived from our 2002 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2002 Annual Report on Form 10-K. 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 the lower of market value or 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 (in thousands):

	June 30,		December 31,
	2003		2002
New and program vehicles		373,020	$	340,457
Used vehicles		75,035		85,170
Parts and accessories		20,146		20,281
	$	468,201	$	445,908

Note 3. Stock-Based Compensation

We account for stock options using the intrinsic value method as prescribed by Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure,” which we adopted in December 2002, we have computed, for pro forma disclosure purposes, the impact on net income and net income per share as if we had accounted for our stock-based compensation plans in accordance with the fair value method prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows (in thousands):

Three Months Ended June 30,		2003			2002
Net income, as reported		$	8,519		$	7,935
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects			25			26
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			(484	)		(504	)
Net income, pro forma		$	8,060		$	7,457
Basic net income per share:
	As reported	$	0.47		$	0.44
	Pro forma	$	0.44		$	0.42
Diluted net income per share:
	As reported	$	0.46		$	0.43
	Pro forma	$	0.44		$	0.40

5

Six Months Ended June 30,		2003			2002
Net income, as reported		$	12,684		$	14,326
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects			49			52
Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects			(899	)		(1,008	)
Net income, pro forma		$	11,834		$	13,370
Basic net income per share:
	As reported	$	0.70		$	0.87
	Pro forma	$	0.65		$	0.81
Diluted net income per share:
	As reported	$	0.69		$	0.85
	Pro forma	$	0.65		$	0.79

To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

Three and Six Months Ended June 30,		2003		2002
Risk-free interest rate			2.5% - 3.0%		4.0%
Expected dividend yield			0%		0%
Expected lives - 2001 Plan			7.7-8years		8years
	- Purchase Plan		3 months		3 months
Expected volatility			46.24% – 46.79%		46.80%

Note 4. Supplemental Cash Flow Information

Supplemental disclosure of cash flow information is as follows (in thousands):

	Six Months Ended June 30,
	2003		2002
Cash paid during the period for income taxes	$	41	$	3,451
Cash paid during the period for interest		10,191		8,247
Assets acquired through real estate exchange		1,946		—

Note 5. Earnings Per Share

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts).

Three Months Ended June 30,	2003						2002
					Per						Per
					Share						Share
	Income		Shares		Amount		Income		Shares		Amount
Basic EPS
Net income available to common shareholders	$	8,519		18,228	$	0.47	$	7,935		17,919		0.44
Diluted EPS
Effect of dilutive stock options		—		151				—		535
Net income available to common shareholders	$	8,519		18,379	$	0.46	$	7,935		18,454		0.43

Six Months Ended June 30,	2003						2002
					Per						Per
					Share						Share
	Income		Shares		Amount		Income		Shares		Amount
Basic EPS
Net income available to common shareholders	$	12,684		18,181	$	0.70	$	14,326		16,456	$	0.87
Diluted EPS
Effect of dilutive stock options				145				—		471
Net income available to common shareholders	$	12,684		18,326	$	0.69	$	14,326		16,927	$	0.85

6

Potentially dilutive securities that are not included in the diluted EPS calculations because they would be antidilutive are as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Stock options		1,017,863		10,000		1,021,292		10,000

Note 6. Comprehensive Income

Comprehensive income includes the fair value of cash flow hedging instruments that are reflected in shareholders’ equity instead of net income. The following table sets forth the calculation of comprehensive income for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net income	$	8,519		$	7,935		$	12,684		$	14,326
Unrealized gain (loss) on investments, net, subsequently realized		5			1			(6	)		3
Cash flow hedges:
Net derivative losses, net of tax effect of $617, $548, $998 and $515, respectively		(927	)		(874	)		(1,515	)		(822	)
Reclassification adjustment, net of tax effect of $(378), $(235), $(693) and $(468), respectively		549			374			1,048			745
Total comprehensive income	$	8,146		$	7,436		$	12,211		$	14,252

Note 7. Acquisitions

The following acquisitions were made in the first six months of 2003. See Note 12 Subsequent Events for an acquisition that occurred in August 2003.

• In February 2003, we acquired Richardson Chevrolet in Salinas, California, which has anticipated 2003 annual revenues of approximately $35.0 million. This store has been renamed Chevrolet of Salinas.

• In March 2003, we acquired Pacific Hyundai of Anchorage, Alaska, which has anticipated 2003 revenues of approximately $10.0 million. The store has been renamed Lithia Hyundai of Anchorage.

• In March 2003, we acquired Randy Hansen Chevrolet of Twin Falls, Idaho, which has anticipated 2003 annual revenues of approximately $30.0 million. The store has been renamed Chevrolet, Cadillac, Suzuki of Twin Falls.

• In April 2003, we acquired Grizzly Chrysler Dodge of Missoula, Montana, which has anticipated 2003 revenues of approximately $25.0 million. The store has been renamed Lithia Auto Center of Missoula.

• In May 2003, we acquired Expressway Dodge of Broken Arrow, Oklahoma, which has anticipated 2003 revenues of approximately $40.0 million. The store has been renamed Lithia Dodge of Broken Arrow, Oklahoma.

• In June 2003, we acquired Montana Dodge of Billings, Montana, which has anticipated 2003 revenues of approximately $35.0 million. The store has been renamed Lithia Dodge of Billings, Montana.

The above acquisitions were accounted for under the purchase method of accounting. Pro forma results of operations assuming the above acquisitions occurred at the beginning of the respective periods are as follows (in thousands, except per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Total revenues	$	681,973	$	602,505	$	1,313,834	$	1,203,395
Net income		8,713		8,048		13,219		14,838
Basic earnings per share		0.48		0.45		0.73		0.90
Diluted earnings per share		0.47		0.44		0.72		0.88

7

There are no future contingent payouts related to any of the above acquisitions and no portion of the purchase price was paid with our equity securities. The purchase price for the above acquisitions was allocated as follows (in thousands):

Inventory		$	30,693
Other current assets			151
Property and equipment			6,224
Goodwill			12,268
Other intangible assets – franchise value			4,995
	Total assets acquired		54,331
Flooring notes payable			25,055
Other current liabilities			130
	Total liabilities acquired		25,185
Net assets acquired		$	29,146

Within one year from the purchase date, we may update the value allocated to purchased assets and the resulting goodwill balances for new information received regarding the valuation of such assets. We anticipate that approximately 100% of the goodwill acquired in the above acquisitions will be deductible for tax purposes over the period of 15 years.

Note 8. DaimlerChrysler Agreement

In February 2003 we entered into a working capital and used vehicle flooring credit facility with DaimlerChrysler Services North America LLC totaling up to $200 million, which expires in February 2006, with interest due monthly.

The credit line with DaimlerChrysler Services is cross-collateralized and secured by cash and cash equivalents, new and used vehicle and parts inventories, accounts receivable, intangible assets and equipment. We pledged to DaimlerChrysler Services the stock of all of our subsidiaries except entities operating BMW, Honda, Nissan or Toyota stores.

The financial covenants in the agreement with DaimlerChrysler Services require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v) certain working capital levels. We were in compliance with these covenants at June 30, 2003.

Our previous facility with Ford Motor Credit Company was terminated and paid off on February 25, 2003.

Note 9. U.S. Bank Agreement Amendment

In April 2003, our U.S. Bank N.A. agreement was amended to provide for a $35.0 million revolving line of credit for leased vehicles and equipment purchases, which expires January 31, 2005. Previously, the amount available under this line of credit was $27.5 million and it expired January 31, 2004.

Note 10. Recent Accounting Pronouncements

In July 2002, the FASB approved SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management’s intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The adoption of SFAS No. 146 on January 1, 2003 did not have any effect on our financial position or results of operations.

8

The FASB’s Emerging Issues Task Force (EITF) finalized EITF 00-21 “Accounting for Multiple Element Arrangements” in November 2002. EITF 00-21 requires arrangements with multiple elements to be broken out as separate units of accounting based on their relative fair values. Revenue for a separate unit of accounting should be recognized only if the amount due can be reliably measured and the earnings process is substantially complete. Any units that can not be separated must be accounted for as a combined unit. Our accounting policy is consistent with EITF 00-21 and therefore, the adoption on January 1, 2003 did not have any effect on our financial position or results of operations.

In March 2003, the EITF issued EITF 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” EITF 02-16 primarily applies to floorplan interest credits and advertising credits received by us from auto manufacturers and specifies the timing of and appropriate classification of such items in our statement of operations. We recognize floorplan interest credits and advertising credits that are tied to specific vehicles as a reduction to the carrying value of the specific inventory and ultimately as a reduction to cost of goods sold as related vehicles are sold and we recognize other advertising credits as a credit to advertising expense. The adoption of EITF 02-16 on January 1, 2003 resulted in the reclassification of certain expenses, but did not have any effect on our net income or financial position (see Note 11).

In May 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 addresses certain accounting issues related to hedging activity and derivative instruments embedded in other contracts. In general, the amendments require contracts with comparable characteristics to be accounted for similarly. In addition, SFAS No. 149 provides guidance as to when a financing component of a derivative must be given special reporting treatment in the statement of cash flows. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. We are currently evaluating the effects of SFAS No. 149, but do not expect that the adoption of SFAS No. 149 will have a material effect on our financial position or results of operations.

In May 2003, the FASB approved SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150 establishes standards for how to classify and measure financial instruments with characteristics of both liabilities and equity. It requires financial instruments that fall within its scope to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, for pre-existing financial instruments, as of July 1, 2003. We do not have any financial instruments that fall under the guidance of SFAS No. 150 and, therefore, the adoption will not have any effect on our financial position or results of operations.

Note 11. Reclassifications

In the fourth quarter of 2002, we reclassified documentation fees from finance and insurance income to new and used vehicle revenue, as appropriate, in order to bring our reporting in line with industry practice. The resulting effect was a reduction of approximately $100 per vehicle of finance and insurance income and an increase in new and retail used vehicle gross margins of between 20 and 50 basis points. Accordingly, the finance and insurance sales per retail unit, revenue by product line and gross margin percentage disclosures have been recalculated for the first three quarters of 2002. Net income was not affected by this reclassification.

Pursuant to EITF 02-16 “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,” in the second quarter of 2003 we began classifying advertising credits that are tied to specific vehicles as a reduction to cost of goods sold as related vehicles are sold. Accordingly, $1.1 million of credits included in selling, general and administrative costs in the first quarter of 2003 were reclassified as a credit to cost of sales for that period. Net income was not affected by this reclassification.

9

Note 12. Subsequent Events

Quarterly Dividend

In July 2003, our Board of Directors approved a dividend of $0.07 per share for the second quarter of 2003. The dividend will be paid on August 22, 2003 to shareholders of record on August 8, 2003. We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

Acquisition

The following acquisition was made subsequent to June 30, 2003:

• In August 2003, we acquired Sutherland Motors, Inc. in Spokane, Washington, which has anticipated 2003 revenues of approximately $20.0 million. The store has been renamed Mercedes Benz of Spokane.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements and Risk Factors

Some of the statements in this Form 10-Q constitute forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-Q involve known and unknown risks, uncertainties and situations that may cause our actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. Some of the important factors that could cause actual results to differ from our expectations are discussed in Exhibit 99.3 to our 2002 Annual Report on Form 10-K.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

General

We are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of August 8, 2003, we offered 24 brands of new vehicles through 140 franchises in 76 stores in the western United States and over the Internet. As of August 8, 2003, we operate 16 stores in Oregon, 12 in California, 11 in Washington, 7 in Texas, 7 in Idaho, 7 in Colorado, 5 in Nevada, 3 in South Dakota, 3 in Alaska, 2 in Nebraska, 2 in Montana and 1 in Oklahoma. We sell new and used cars and light trucks; sell replacement parts; provide vehicle maintenance, warranty, paint and repair services; and arrange related financing and insurance for our automotive customers. Over 75% of our stores are located in cities where our store does not compete directly with any other franchised dealers selling the same brand in that city.

During an economic downturn, customers tend to shift towards the purchase of more reasonably priced new vehicle models or used vehicles. Many customers decide to delay purchasing a new vehicle and instead repair existing vehicles. In addition, manufacturers typically offer increased dealer and customer incentives during an economic downturn in order to support new vehicle sales volume. These factors generally lead to less volatility in earnings for automobile retailers than for automobile manufacturers.

Historically, new vehicle sales have accounted for approximately 50% of our total revenues but less than 30% of total gross profit. The most recent three-month period was characterized by a very strong incentive environment, which led to higher than normal new vehicle sales for the period. We emphasize sales of higher margin products, which generate over 70% of our gross profits.

10

Our revenues and gross profit by product line were as follows:

	Percent of			Gross			Percent of Total
Three Months Ended June 30, 2003	Total Revenues			Margin			Gross Profit
New vehicles		57.2	%		7.8	%		28.1	%
Retail used vehicles(1)		24.4			13.8			21.2
Service, body and parts		9.6			46.9			28.5
Finance and insurance(2)		3.5			99.6			22.0
Fleet and other		0.3			22.5			0.4

	Percent of			Gross			Percent of Total
Three Months Ended June 30, 2002	Total Revenues			Margin			Gross Profit
New vehicles		51.4	%		8.8	%		28.6	%
Retail used vehicles(1)		26.5			12.7			21.1
Service, body and parts		9.4			48.5			28.7
Finance and insurance(2)		3.5			99.2			21.6
Fleet and other		3.9			0.5			0.1

	Percent of			Gross			Percent of Total
Six Months Ended June 30, 2003	Total Revenues			Margin			Gross Profit
New vehicles		56.4	%		7.6	%		27.1	%
Retail used vehicles(1)		24.6			13.4			20.8
Service, body and parts		9.9			47.3			29.6
Finance and insurance(2)		3.6			99.7			22.4
Fleet and other		0.3			17.5			0.3

	Percent of			Gross			Percent of Total
Six Months Ended June 30, 2002	Total Revenues			Margin			Gross Profit
New vehicles		51.3	%		8.6	%		27.8	%
Retail used vehicles(1)		27.5			12.6			21.8
Service, body and parts		9.7			48.2			29.2
Finance and insurance(2)		3.4			99.4			21.4
Fleet and other		2.4			1.7			0.2

(1)	Excludes wholesale used vehicle sales, representing 5.0%, 5.3%, 5.2% and 5.7% of total revenues, respectively, and a negative gross margin contribution of 0.5%, 0.7%, 0.8% and 1.3%, respectively, for the three and six month periods ended June 30, 2003 and 2002.
(2)	Reported net of administration fees and anticipated cancellations.

The following table sets forth selected condensed financial data, expressed as a percentage of total revenues for the periods indicated.

			Three Months Ended June 30,						Six Months Ended June 30,
Lithia Motors, Inc. (1)			2003			2002			2003			2002
Revenues:
	New vehicles			57.2	%		51.4	%		56.4	%		51.3	%
	Used vehicles			29.4			31.8			29.8			33.2
	Service, body and parts			9.6			9.4			9.9			9.7
	Finance and insurance			3.5			3.5			3.6			3.4
	Fleet and other			0.3			3.9			0.3			2.4
		Total revenues		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit				15.9			15.9			15.9			15.9
Selling, general and administrative expenses				12.5			12.6			12.9			12.7
Depreciation and amortization				0.4			0.3			0.4			0.3
Income from operations				3.0			3.0			2.6			2.9
Floorplan interest expense				0.6			0.5			0.6			0.5
Other interest expense				0.2			0.3			0.2			0.3
Income before taxes				2.1			2.2			1.7			2.1
Income tax expense				0.9			0.9			0.7			0.8
Net income				1.3	%		1.4	%		1.0	%		1.3	%

⁽¹⁾ The percentages may not add due to rounding.

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Results of Operations

			Three Months Ended
			June 30,							%
							Increase			Increase
(Dollars in thousands)			2003		2002		(Decrease)			(Decrease)
Revenues:
	New vehicle sales		$	381,622	$	300,605	$	81,017			27.0	%
	Used vehicle sales			196,320		185,660		10,660			5.7
	Service, body and parts			64,361		54,995		9,366			17.0
	Finance and insurance			23,364		20,247		3,117			15.4
	Fleet and other			1,867		22,811		(20,944	)		(91.8	)
		Total revenues		667,534		584,318		83,216			14.2
Cost of sales				561,572		491,436		70,136			14.3
Gross profit				105,962		92,882		13,080			14.1
Selling, general and administrative				83,550		73,540		10,010			13.6
Depreciation and amortization				2,438		1,895		543			28.7
Income from operations				19,974		17,447		2,527			14.5
Floorplan interest expense				3,839		2,882		957			33.2
Other interest expense				1,586		1,464		122			8.3
Other expense, net				280		177		103			58.2
Income before income taxes				14,269		12,924		1,345			10.4
Income tax expense				5,750		4,989		761			15.3
Net income			$	8,519	$	7,935	$	584			7.4	%

	Three Months Ended
	June 30,							%
					Increase			Increase
	2003		2002		(Decrease)			(Decrease)
New units sold		14,431		11,861		2,570			21.7	%
Average selling price per new vehicle	$	26,445	$	25,344	$	1,101			4.3
Used units sold - retail		11,073		10,580		493			4.7
Average selling price per retail used vehicle	$	14,694	$	14,619	$	75			0.5
Used units sold – wholesale		6,989		6,151	$	838			13.6
Average selling price per wholesale used vehicle	$	4,810	$	5,039	$	(229	)		(4.5	)
Finance and insurance sales per retail unit	$	916	$	902	$	14			1.6	%

			Six Months Ended
			June 30,							%
							Increase			Increase
(Dollars in thousands)			2003		2002		(Decrease)			(Decrease)
Revenues:
	New vehicle sales		$	705,070	$	568,422	$	136,648			24.0	%
	Used vehicle sales			373,306		368,972		4,334			1.2
	Service, body and parts			124,112		107,033		17,079			16.0
	Finance and insurance			44,578		38,079		6,499			17.1
	Fleet and other			3,945		26,210		(22,265	)		(84.9	)
		Total revenues		1,251,011		1,108,716		142,295			12.8
Cost of sales				1,052,616		932,187		120,429			12.9
Gross profit				198,395		176,529		21,866			12.4
Selling, general and administrative				161,612		141,276		20,336			14.4
Depreciation and amortization				4,725		3,563		1,162			32.6
Income from operations				32,058		31,690		368			1.2
Floorplan interest expense				7,541		5,219		2,322			44.5
Other interest expense				2,996		3,056		(60	)		(2.0	)
Other expense, net				452		82		370			451.2
Income before income taxes				21,069		23,333		(2,264	)		(9.7	)
Income tax expense				8,385		9,007		(622	)		(6.9	)
Net income			$	12,684	$	14,326	$	(1,642	)		(11.5	)%

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	Six Months Ended
	June 30,							%
					Increase			Increase
	2003		2002		(Decrease)			(Decrease)
New units sold		27,052		22,277		4,775			21.4	%
Average selling price per new vehicle	$	26,064	$	25,516	$	548			2.1
Used units sold - retail		21,079		20,944		135			0.6
Average selling price per retail used vehicle	$	14,584	$	14,548	$	36			0.2
Used units sold – wholesale		13,340		12,257		1,083			8.8
Average selling price per wholesale used vehicle	$	4,939	$	5,245		(306	)		(5.8	)
Finance and insurance sales per retail unit	$	926	$	881	$	45			5.1	%

Revenues. Total revenues increased 14.2% in the second quarter of 2003 compared to the second quarter of 2002 as a result of acquisitions and 5.7% same store retail sales growth. Total revenues increased 12.8% in the first six months of 2003 compared to the first six months of 2002 as a result of acquisitions and 3.0% same store retail sales growth. We achieved same store new vehicle sales growth of 13.3% and 10.7%, respectively, in the three and six-month periods ended June 30, 2003 compared to the same periods of 2002. This compares favorably to an industry decline in new vehicle sales of 0.6% and 2.3%, respectively, for the same periods of 2003 compared to 2002. Same store finance and insurance sales growth was 6.0% and 6.7%, respectively, for the three and six month periods ended June 30, 2003 compared to the same periods of 2002. These increases were offset by decreases in same store used vehicle sales of 7.3% and 10.7%, respectively, for the three and six month periods ended June 30, 2003 compared to the same periods of 2002. Same store parts and service revenues also decreased 0.3% and 1.4%, respectively, for the three and six month periods ended June 30, 2003 compared to the same periods of 2002.

Slowing economies in our markets and higher than normal new vehicle inventories at the end of 2002, coupled with a strong new vehicle incentive environment, spurred our aggressive approach to new vehicle sales in the first and second quarters of 2003. We have utilized an aggressive company-wide marketing campaign based on the “Driving America” theme that is aimed at increasing market share by competitively pricing new vehicles in order to secure a long-term customer base for future parts and service business and repeat and referral business. The used vehicle business was weak in the first half of 2003 due to competition from highly incentivized new vehicles within the overall weaker total vehicle market. However, in the second quarter of 2003, the used vehicle business stabilized and demonstrated improvement throughout the quarter. The service and parts business has been negatively impacted in the past couple of years by substantial improvements in the quality of domestic vehicles, resulting in less warranty work, offset in part by increases in the customer pay portion of the business.

Penetration rates for certain products were as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2003			2002			2003			2002
Finance and insurance		76	%		73	%		77	%		73	%
Service contract		41			41			41			40
Lifetime oil and filter		34			30			34			30

During the first two quarters of 2003, manufacturers offered, and are continuing to offer, incentives, including low interest rates and rebates, in order to attract new vehicle buyers. The availability of cash rebates and zero percent and low interest rate financing have enhanced our ability to sell finance, warranty and insurance products and services.

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Gross Profit. Gross profit increased due to increased total revenues. Certain incentives and rebates received from manufacturers, including floorplan interest credits and advertising credits that are tied to specific vehicles are recorded as a reduction to cost of goods sold at the time of vehicle sale. Gross profit margins achieved were as follows:

	Three Months Ended June 30,
							Lithia
	2003			2002			Margin Change*
New vehicles		7.8	%		8.8	%		(100	)bp
Retail used vehicles		13.8			12.7			110
Service and parts		46.9			48.5			(160	)
Finance and insurance		99.6			99.2			40
Overall		15.9			15.9			—

	Six Months Ended June 30,
							Lithia
	2003			2002			Margin Change*
New vehicles		7.6	%		8.6	%		(100	)bp
Retail used vehicles		13.4			12.6			80
Service and parts		47.3			48.2			(90	)
Finance and insurance		99.7			99.4			30
Overall		15.9			15.9			—

* “bp” stands for basis points (one hundred basis points equals one percent).

Our overall gross profit margin was the same in the three and six month periods ended June 30, 2003 compared to the same periods of 2002. However, our overall gross profit margin was negatively affected by the following factors:

• A significant shift towards our lowest margin new vehicle business as a result of the strong incentive environment;

• Lower floorplan interest credits from the manufacturers on new vehicles due to lower market rates; and

• Aggressive pricing of new vehicles in order to gain market share, which resulted in lower new vehicle margins.

These factors were offset by an increase in the gross margins achieved on our retail used vehicle sales and on our finance and insurance products in the first two quarters of 2003 compared to 2002.

Selling, General and Administrative Expense. Selling, general and administrative expense includes salaries and related personnel expenses, facility lease expense, advertising, legal, accounting, professional services and general corporate expenses. Selling, general and administrative expense increased due to increased selling, or variable, expenses related to the increase in revenues and the number of locations. As a percentage of revenue, selling, general and administrative expense decreased 10 basis points and increased 20 basis points, respectively, in the three and six months ended June 30, 2003 compared to the same periods of 2002. The increase as a percentage of revenue in the six month period is due partially to higher advertising and sales compensation expenses related to our aggressive new vehicle marketing.

Income from Operations. Operating margins were flat in the three months ended June 30, 2003 compared to the same period of 2002 and decreased 30 basis points in the six month period ended June 30, 2003 compared to the six month period ended June 30, 2002. The decrease in the six month period is due to increased operating expenses as a percentage of revenue as discussed above.

Floorplan Interest Expense. The increases in floorplan interest expense in the three and six-month periods ended June 30, 2003 compared to the same periods of 2002 are primarily due to an approximately $876,000 and $1.85 million, respectively, increase in expense as a result of an increase in the average outstanding balances of our floorplan facilities, mainly due to acquisitions. In addition, increased expense from interest rate swaps was responsible for $317,000 and $527,000, respectively,

14

of the increase. These increases were offset in part by a decrease in the LIBOR rate in the first six months of 2003 compared to the first six months of 2002.

Other Interest Expense. Other interest expense includes interest on debt incurred related to acquisitions, real estate mortgages, our used vehicle line of credit and equipment related notes. Lower interest rates in the three and six month periods ended June 30, 2003 compared to the same periods of 2002 decreased other interest expense by $275,000 and $553,000, respectively. Increases in the average outstanding balances in the 2003 periods compared to the 2002 periods resulted in increases to other interest expense of $397,000 and $493,000, respectively.

Income Tax Expense. Our effective tax rate was 39.8% in the first six months of 2003 compared to 38.6% in the first six months of 2002. Our effective tax rate may be affected in the future by the mix of asset acquisitions compared to corporate acquisitions, as well as by the mix of states where our stores are located.

Net Income. Net income as a percentage of revenue decreased 10 basis points and 30 basis points, respectively, for the three and six month periods ended June 30, 2003 compared to the same periods of 2002 as a result of the higher operating expenses, higher floorplan interest expense and an increased effective tax rate.

Seasonality and Quarterly Fluctuations

Historically, our sales have been lower in the first and fourth quarters of each year 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. We believe that interest rates, levels of consumer debt and consumer confidence, as well as general economic conditions, also contribute to fluctuations in sales and operating results. Historically, the timing, performance and frequency of acquisitions have been the largest contributor to fluctuations in our operating results from quarter to quarter.

Liquidity and Capital Resources

Our principal needs for capital resources are to finance acquisitions and capital expenditures, as well as for working capital. We have relied primarily upon internally generated cash flows from operations, borrowings under our credit agreements and the proceeds from public equity offerings to finance operations and expansion. We believe that our available cash, cash equivalents, available lines of credit and cash flows from operations will be sufficient to meet our anticipated operating expenses and capital requirements for at least twelve months from June 30, 2003.

In July 2003, our Board of Directors approved a dividend of $0.07 per share for the second quarter of 2003. The dividend will total approximately $1.0 million and will be paid on August 22, 2003 to shareholders of record on August 8, 2003. We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

Our inventories increased to $468.2 million at June 30, 2003 from $445.9 million at December 31, 2002 due primarily to acquisitions. Accordingly, our new and used flooring notes payable increased to $469.8 million at June 30, 2003 from $427.6 million at December 31, 2002. Despite the overall increase in inventories, our days supply of new vehicles decreased by approximately 20 days at June 30, 2003 compared to December 31, 2002 and decreased by approximately 10 days compared to March 31, 2003. Our used vehicle inventories are at historically low levels for this time of year compared to the last five years. We believe that our new and used vehicle inventories are at appropriate levels going into the third quarter. The third quarter typically represents the strongest sales environment of the year.

Primarily as a result of the acquisition of six stores in the first six months of 2003, our goodwill and other intangibles increased $19.0 million to $225.2 million at June 30, 2003 compared to $206.2 million at December 31, 2002.

15

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. Through July 2003, we have purchased a total of 59,400 shares under this program and may continue to do so from time to time in the future as conditions warrant.

In February 2003 we entered into a working capital and used vehicle flooring credit facility with DaimlerChrysler Services North America LLC totaling up to $200 million, which expires in February 2006, with interest due monthly.

Our previous facility with Ford Motor Credit Company was terminated and paid off on February 25, 2003.

The credit line with DaimlerChrysler Services is cross-collateralized and secured by cash and cash equivalents, new and used vehicle and parts inventories, accounts receivable, intangible assets and equipment. We pledged to DaimlerChrysler Services the stock of all of our subsidiaries except entities operating BMW, Honda, Nissan or Toyota stores.

The financial covenants in our agreement with DaimlerChrysler Services require us to maintain compliance with, among other things, (i) a specified current ratio; (ii) a specified fixed charge coverage ratio; (iii) a specified interest coverage ratio; (iv) a specified adjusted leverage ratio; and (v) certain working capital levels. At June 30, 2003, we were in compliance with all of the covenants of this agreement.

Toyota Motor Credit Corporation, Ford Motor Credit and General Motors Acceptance Corporation have agreed to floor all of our new vehicles for their respective brands with DaimlerChrysler Services serving as the primary lender for substantially all other brands. These new vehicle lines are secured by new vehicle inventory of the relevant brands.

We also have a real estate line of revolving credit with Toyota Motor Credit totaling $40 million, which expires in May 2005. This line of credit is secured by the real estate financed under this line of credit.

In April 2003, our U.S. Bank N.A. agreement was amended to provide for a $35.0 million revolving line of credit for leased vehicles and equipment purchases, which expires January 31, 2005. Previously, the amount available under this line of credit was $27.5 million and it expired January 31, 2004.

Interest rates on all of the above facilities ranged from 2.62% to 3.87% at June 30, 2003. Amounts outstanding on the lines at June 30, 2003 together with amounts remaining available under such lines were as follows (in thousands):

	Outstanding at		Remaining Availability as
	June 30, 2003		of June 30, 2003
New and program vehicle lines	$	409,792	$		*
Working capital and used vehicle line		76,000		117,000	**
Real estate line		19,674		20,326
Equipment/leased vehicle line		35,000		—
	$	540,466	$		*

*	There are no formal limits on the new and program vehicle lines with certain lenders.
**	As limited by the terms of the line regarding the borrowing base.

At June 30, 2003, our long-term debt and lease commitments were as follows (in thousands):

	Long-term
Year Ending December 31,	debt		Leases		Total
2003	$	2,998	$	10,276	$	13,274
2004		4,268		19,821		24,089
2005		39,015		19,564		58,579
2006		79,724		18,751		98,475
2007		3,742		17,728		21,470
Thereafter		71,953		70,940		142,893
Total	$	201,700	$	157,080	$	358,780

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At June 30, 2003, we had capital commitments of approximately $14.7 million for the construction of three new store facilities, additions to three existing facilities and the remodel of four facilities. The three new store facilities will be a Ford store in Boise, Idaho, a body shop in Boise, Idaho and a Hyundai store in Anchorage, Alaska. We have already incurred $6.4 million for these commitments and anticipate incurring $12.8 million during the remaining two quarters of 2003 and the remaining $1.9 million in 2004. We expect to pay for the construction out of existing cash balances until completion of the projects, at which time we anticipate securing long-term financing and general borrowings from third party lenders for 70% to 90% of the amounts expended.

Critical Accounting Policies

We reaffirm our critical accounting policies as described in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 31, 2003.

Recent Accounting Pronouncements

See Note 10 of Notes to Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks or risk management policies since the filing of our 2002 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 31, 2003.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

17

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of the shareholders of the Company was held on May 15, 2003, at which the following actions were approved:

1. To elect the following persons to serve as directors of Lithia Motors, Inc. until the next annual meeting of shareholders and until their successors are duly elected and qualified:

		No. of Shares		No. of Shares
Name		Voting For		Withheld Voting
Sidney B. DeBoer	Class A		9,280,158		99,904
	Class B		3,762,231		—
M. L. Dick Heimann	Class A		9,280,157		99,905
	Class B		3,762,231		—
Thomas Becker	Class A		9,206,257		173,805
	Class B		3,762,231		—
R. Bradford Gray	Class A		9,311,557		68,505
	Class B		3,762,231		—
Phillip J. Romero	Class A		9,311,557		68,505
	Class B		3,762,231		—
Gerald F. Taylor	Class A		9,311,257		68,805
	Class B		3,762,231		—
William J. Young	Class A		9,311,258		68,804
	Class B		3,762,231		—

2. To approve the adoption of the amendment to and restatement of the 2001 Stock Option Plan in the form of the 2003 Stock Incentive Plan:

	Number of				Number of		Number of
	Shares Voting		Number of Shares		Shares		Broker
	For		Voting Against		Abstaining		Non-Votes
Class A		7,203,735		2,176,324		3		—
Class B		3,762,231		—		—		—

3. To approve an amendment to the Lithia Motors, Inc. 1998 Employee Stock Purchase Plan to increase the number of shares issuable under the plan:

	Number of				Number of		Number of
	Shares Voting		Number of Shares		Shares		Broker
	For		Voting Against		Abstaining		Non-Votes
Class A		9,191,204		188,857		1		—
Class B		3,762,231		—		—		—

4. To approve the Lithia Motors, Inc. Executive Bonus Plan:

	Number of				Number of		Number of
	Shares Voting		Number of Shares		Shares		Broker
	For		Voting Against		Abstaining		Non-Votes
Class A		9,138,450		241,015		597		—
Class B		3,762,231		—		—		—

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Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index:

3.1	Restated Articles of Incorporation (filed as Exhibit 3.1 to Form 10-K filed March 30, 2000 and incorporated herein by reference).
3.2	Bylaws (filed as Exhibit 3.2 to Form S-1, Registration Statement No. 333-14031, as declared effective by the Securities and Exchange Commission on December 18, 1996 and incorporated herein by reference).
10.1	Second Amendment, dated April 2, 2003, to Amended and Restated Loan Agreement, dated December 28, 2001, between Lithia Financial Corporation, Lithia Motors, Inc., Lithia Aircraft, Inc. and Lithia SALMIR, Inc. and U.S. Bank National Association. Incorporated by reference to Lithia Motors, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 as filed with the Securities and Exchange Commission on May 15, 2003.
10.2	2003 Stock Incentive Plan (Filed as Exhibit 99.1 to Form 8-K filed April 28, 2003 and incorporated herein by reference).
10.3	Executive Bonus Plan (filed as Exhibit 99.2 to Form 8-K filed April 28, 2003 and incorporated herein by reference).
10.4	1998 Employee Stock Purchase Plan, as amended.
10.5	Modification No. 1 dated June 16, 2003 to Amended and Restated Revolving Loan and Security Agreement and Notes Secured by Deed of Trust.
31.1	Certification of Sidney B. DeBoer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Jeffrey B. DeBoer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Sidney B. DeBoer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Jeffrey B. DeBoer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

The following reports on Form 8-K were filed during the quarter ended June 30, 2003:

• Dated and filed April 9, 2003 pursuant to Item 9. Regulation FD Disclosure regarding an investor presentation to be made;

• Dated and filed April 25, 2003 pursuant to Item 9. Regulation FD Disclosure regarding financial results for the quarter ended March 31, 2003; and

• Dated and filed April 28, 2003 pursuant to Item 5. Other Events and Regulation FD Disclosure regarding the upcoming mailing of Lithia’s proxy materials to shareholders for its 2003 Annual Meeting of Shareholders and the filing of copies of Lithia’s 2003 Stock Incentive Plan and Executive Bonus Plan, both of which were being voted on at the 2003 Annual Meeting of Shareholders.

19

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.

Date: August 14, 2003	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/ JEFFREY B. DEBOER
	Jeffrey B. DeBoer
	Senior Vice President and
	Chief Financial Officer
	(Principal Financial Officer)

20 EX-10.4 3 v91823exv10w4.txt EXHIBIT 10.4 EXHIBIT 10.4 LITHIA MOTORS, INC. EMPLOYEE STOCK PURCHASE PLAN 1. PURPOSE. The Lithia Motors, Inc. Employee Stock Purchase Plan (the "Plan") is intended to provide an incentive for employees of Lithia Motors, Inc. (the "Company") and its participating Subsidiaries to acquire or increase their proprietary interests in the Company through the purchase of shares of Common Stock of the Company. The Plan is intended to qualify as an "Employee Stock Purchase Plan" under Sections 421 and 423 of the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan will be construed in a manner consistent with the requirements of such sections of the Code and the regulations issued thereunder. 2. DEFINITIONS. As used in this Plan: 2.1. "Account" Account means the account recorded in the records of the Company established on behalf of a Participant to which the amount of the Participant's payroll deductions authorized under Section 6 and purchases of Common Stock under Section 8 shall be credited, and any distributions of shares of Common Stock under Section 9 and withdrawals under Section 10 shall be charged. 2.2. "Benefits Representative" means the employee benefits department of the Company or any such other person, regardless of whether employed by an Employer, who has been formally, or by operation or practice, designated by the Committee to assist the Committee with the day-to-day administration of the Plan. 2.3. "Board" means the Board of Directors of the Company. 2.4. "Code" means the Internal Revenue Code of 1986, or any successor thereto, as amended and in effect from time to time. Reference in the Plan to any Section of the Code shall be deemed to include any amendments or successor provisions to any Section and any treasury regulations thereunder. 2.5. "Committee" means the Compensation Committee of the Board. The Board shall have the power to fill vacancies on the Committee arising by resignation, death, removal or otherwise. The Board, in its sole discretion, may split the powers and duties of the Committee among one or more separate Committees, or retain all powers and duties of the Committee in a single Committee. The members of the Committee shall serve at the discretion of the Board. 2.6. "Common Stock" or "Stock" means the Class A Common Stock, without par value, of the Company. 2.7. "Company" means Lithia Motors, Inc. an Oregon corporation, and any successor thereto. 2.8. "Disability" means any complete and permanent disability as defined in Section 22(e)(3) of the Code. 2.9. "Effective Date" means the date on which this Plan is approved by the shareholders of the Company which date shall be, the inception date of the Plan. 2.10. "Employee" means any person who, at such time, is in the Employment of and Employer. 2.11. "Employer" means the Company, its successors, any future parent (as defined in Section 424(e) of the Code), each current or future Subsidiary and any company whose operating assets or stock is acquired by the Company or any Subsidiary. 2.12. "Employment" means Employment as an employee or officer by the Company or a Subsidiary as designated in such entity's payroll records, or by any corporation issuing or assuming rights or obligations under the Plan in any transaction described in Section 424(a) of the Code or by a parent corporation or a subsidiary corporation of such corporation. In this regard, neither the transfer of a Participant from Employment by the Company to Employment by a Subsidiary nor the transfer of a Participant from Employment by a Subsidiary to Employment by either the Company or any by any other Subsidiary shall be deemed to be a termination of Employment of the Participant. Moreover, the Employment of a Participant shall not be deemed to have been terminated because of absence from active Employment on account of temporary illness or during authorized vacation, temporary leaves of absence from active Employment granted by Company or any Subsidiary for reasons of professional advancement, education, health, or government service, or during military leave for any period if the Participant returns to active Employment within 90 days after the termination of military leave, or during any period required to be treated as a leave of absence which, by virtue of any valid law or agreement, does not result in a termination of Employment. Any worker treated as an independent contractor by the Company or any Subsidiary who is later reclassified as a common-law employee shall not be in Employment during any period in which such worker was treated by the Company or a Subsidiary as an independent contractor. Any "leased employee", as described in Section 414(n) of the Code, shall not be deemed an Employee hereunder. 2.13. "Entry Date" means the first day of each Fiscal Quarter. 2.14. "Fiscal Quarter" means a three consecutive month period beginning on each January 1, April 1, July 1 and October 1, commencing with the first such date following the Effective Date and continuing until the Plan is terminated. 2.15. "Market Price" means, subject to the next paragraph, the market value of a share of Stock on any date, which shall be determined as (i) the closing sales price on the immediately preceding business day of a share of Stock as reported on the New York Stock Exchange or other principal securities exchange on which shares of Stock are then listed or admitted to trading or (ii) if not so reported, the average of the closing bid and asked prices for a share of Stock on the immediately preceding business day as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), or (iii) if not quoted on NASDAQ, the average of the closing bid and asked prices for a share of Stock as quoted by the National Quotation Bureau's "Pink Sheets" or the National Association of Securities Dealers' OTC Bulletin Board System. If the price of a share of Stock shall not be so reported pursuant to the previous sentence, the fair market value of a share of Stock shall be determined by the Committee in its discretion provided that such method is appropriate for purposes of an employee stock purchase plan under Section 423 of the Code. Notwithstanding the previous paragraph of this definition, the Market Price of a share of Stock solely for purposes of determining the option price on the first or last day of the Fiscal Quarter in accordance with Section 7.2 shall be based on the Market Price on the first or last day of the Fiscal Quarter, as applicable, and not on the immediately preceding business day. 2.16. "Participant" means any Employee who meets the eligibility requirements of Section 3 and who has elected to and is participating in the Plan. 2.17. "Plan" means the Lithia Motors, Inc. Employee Stock Purchase Plan, as set forth herein, and all amendments hereto. 2.18. "Stock" means the Common Stock (as defined above). 2.19. "Subsidiary" means any domestic or foreign corporation, limited liability company, partnership or other form of business entity (other than the Company) (i) which, pursuant to Section 424(f) of the Code, is included in an unbroken chain of entities beginning with the Company if, at the time of the granting of the option, each of the entities other than the last entity in the unbroken chain owns at least a majority of the total combined voting power of all interests in one of the other entities in such chain and (ii) which has been designated by the Board or the Committee as a entity whose Employees are eligible to participate in the Plan. 2.20. "Total Pay" means regular straight-time earnings or base salary, plus payments for overtime, shift differentials, incentive compensation, bonuses, and other special payments, fees, allowances or extraordinary compensation. 3. ELIGIBILITY. 3.1. Eligibility Requirements. Participation in the Plan is voluntary. Each Employee who has completed at least ninety (90) days of continuous Employment with an Employer (calculated from his last date of hire to the termination of his Employment for any reason), is regularly scheduled to work at least 20 hours per week and has reached the age of majority in the jurisdiction of his legal residency, will be eligible to participate in the Plan on the first day of the payroll period commencing on or after the earlier of (i) the Effective Date or (ii) the Entry Date on which the Employee satisfies the aforementioned 8 eligibility requirements. Each Employee whose Employment terminates and who is rehired by an Employer shall be treated as a new Employee for eligibility purposes under the Plan. 3.2. Limitations on Eligibility. Notwithstanding any provision of this Plan to the contrary, no Employee will be granted an option under the Plan: 3.2.1. if, immediately after the grant, the Employee would own stock, and/or hold outstanding options to purchase stock, possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Subsidiary; or 3.2.2. which permits the Employee's rights to purchase stock under this Plan and all other employee stock purchase plans (within the meaning of Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds $25,000 of the fair market value of the stock (determined at the time such option is granted) for each Fiscal year in which such option is outstanding at any time, all as determined in accordance with Section 423(b)(8) of the Code. For purposes of Section 3.2.1 above, pursuant to Section 424(d) of the Code, (i) the Employee with respect to whom such limitation is being determined shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and (ii) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. In addition, for purposes of Section 3.2.2 above, pursuant to Section 423(b)(8) of the Code, (i) the right to purchase stock under an option accrues when the option (or any portion thereof) first becomes exercisable during the calendar year, (ii) the right to purchase stock under an option accrues at the rate provided in the option but in no case may such rate exceed $25,000 of fair market value of such stock (determined at the time such option is granted) for any one calendar year, and (iii) a right to purchase stock which has accrued under one option granted pursuant to the Plan may not be carried over to any other option. 4. SHARES SUBJECT TO THE PLAN. The total number of shares of Common Stock that upon the exercise of options granted under the Plan will not exceed 1,500,000 shares (subject to adjustment as provided in Section 16), and such shares may be originally issued shares, treasury shares, reacquired shares, shares bought in the market, or any combination of the foregoing. If any option which has been granted expires or terminates for any reason without having been exercised in full, the unpurchased shares will again become available for purposes of the Plan. Any shares which are not subject to outstanding options upon the termination of the Plan shall cease to be subject to the Plan. 5. PARTICIPATION. 5.1. Payroll Deduction Authorization. An Employee shall be eligible to participate in the Plan as of the first Entry Date following such Employee's satisfaction of the eligibility requirements of Section 3, or, if later, the first Entry Date following the date on which the Employee's Employer adopted the Plan. At least 10 days (or such other period as may be prescribed by the Committee or a Benefits Representative) prior to the first Entry Date as of which an Employee is eligible to participate in the Plan, the Employee shall execute and deliver to the Benefits Representative, on the form prescribed for such purpose, an authorization for payroll deductions which specifies his chosen rate of payroll deduction contributions pursuant to Section 6, and such other information as is required to be provided by the Employee on such enrollment form. The enrollment form shall authorize the Employer to reduce the Employee's Base Pay by the amount of such authorized contributions. To the extent provided by the Committee or a Benefits Representative, each Participant shall also be required to open a stock brokerage account with a brokerage firm which has been engaged to administer the purchase, holding and sale of Common Stock for Accounts under the Plan and, as a condition of participation hereunder, the Participant shall be required to execute any form required by the brokerage firm to open and maintain such brokerage account. 5.2. Continuing Effect of Payroll Deduction Authorization. Payroll deductions for a Participant will commence with the first payroll period beginning after the Participant's authorization for payroll deductions becomes effective, and will end with the payroll period that ends when terminated by the Participant in accordance with Section 6.3 or due to his termination of Employment in accordance with Section 11. Payroll deductions will also cease when the Participant is suspended from participation due to a withdrawal of payroll deductions in accordance with Section 10. When applicable with respect to Employees who are paid on a hourly wage basis, the authorized payroll deductions shall be withheld from wages when actually paid following the period in which the compensatory services were rendered. Only payroll deductions that are credited to the Participant's Account during the Fiscal Quarter will be used to purchase Common Stock pursuant to Section 8 regardless of when the work was performed. 5.3. Employment and Shareholders Rights. Nothing in this Plan will confer on a Participant the right to continue in the employ of the Employer or will limit or restrict the right of the Employer to terminate the Employment of a Participant at any time with or without cause. A Participant will have no interest in any Common Stock to be purchased under the Plan or any rights as a shareholder with respect to such Stock until the Stock has been purchased and credited to the Participant's Account. 6. PAYROLL DEDUCTIONS. 6.1. Participant Contributions by Payroll Deductions. At the time a Participant files his payroll deduction authorization form, the Participant will elect to have deductions made from the Participant's Base Pay for each payroll period such authorization is in effect in whole percentages at the rate of not less than 1% nor more than 10% of the Participant's Base Pay. 6.2. No Other Participant Contributions Permitted. All payroll deductions made for a Participant will be credited to the Participant's Account under the Plan. A Participant may not make any separate cash payment into such Account. 6.3. Changes in Participant Contributions. Subject to Sections 10 and 21, a Participant may increase, decrease, suspend, or resume payroll deductions under the Plan by giving written notice to a designated Benefits Representative at such time and in such form as the Committee or Benefits Representative may prescribe from time to time. Such increase, decrease, suspension or resumption will be effective as of the first day of the payroll period as soon as administratively practicable after receipt of the Participant's written notice, but not earlier than the first day of the payroll period of the Fiscal Quarter next following receipt and acceptance of such form. Notwithstanding the previous sentence, a Participant may completely discontinue contributions at any time during a Fiscal Quarter, effective as of the first day of the payroll period as soon as administratively practicable following receipt of a written discontinuance notice from the Participant on a form provided by a designated Benefits Representative. Following a discontinuance of contributions, a Participant cannot authorize any payroll contributions to his Account for the remainder of the Fiscal Quarter in which the discontinuance was effective. 7. GRANTING OF OPTION TO PURCHASE STOCK. 7.1. Quarterly Grant of Options. For each Fiscal Quarter, a Participant will be deemed to have been granted an option to purchase, on the first day of the Fiscal Quarter, as many whole and fractional shares as may be purchased with the payroll deductions (and any cash dividends as provided in Section 8) credited to the Participant's Account during the Fiscal Quarter. 7.2. Option Price. The option price of the Common Stock purchased with the amount credited to the Participant's Account during each Fiscal Quarter will be the lower of: 7.2.1. 85% of the Market Price of a share of Stock on the first day of the Fiscal Quarter; or 7.2.2. 85% of the Market Price of a share of Stock on the last day of the Fiscal Quarter. Only the Market Price as of the first day of the Fiscal Quarter and the last day of the Fiscal Quarter shall be considered for purposes of determining the option purchase price; interim fluctuations during the Fiscal Quarter shall not be considered. 8. EXERCISE OF OPTION. 8.1. Automatic Exercise of Options. Unless a Participant has elected to withdraw payroll deductions in accordance with Section 10, the Participant's option for the purchase of Common Stock will be deemed to have been exercised automatically as of the last day of the Fiscal Quarter for the purchase of the number of whole and fractional shares of Common Stock which the accumulated payroll deductions (and cash dividends on the Common Stock as provided in Section 8.2) in the Participant's Account at that time will purchase at the applicable option price. Fractional shares may be issued under the Plan. As of the last day of each Fiscal Quarter, the balance of each Participant's Account shall be applied to purchase the number of whole and fractional shares of Stock as determined by dividing the balance of such Participant's Account as of such date by the option price determined pursuant to Section 7.2. The Participant's Account shall be debited accordingly. The Committee or its delegate shall make all determinations with respect to applicable currency exchange rates when applicable. 8.2. Dividends Generally. Cash dividends paid on shares of Common Stock which have not been delivered to the Participant pending the Participant's request for delivery pursuant to Section 9.3, will be combined with the Participant's payroll deductions and applied to the purchase of Common Stock at the end of the Fiscal Quarter in which the cash dividends are received, subject to the Participant's withdrawal rights set forth in Section 10. Dividends paid in the form of shares of Common Stock or other securities with respect to shares that have been purchased under the Plan, but which have not been delivered to the Participant, will be credited to the shares that are credited to the Participant's Account. 8.3. Pro-rata Allocation of Available Shares. If the total number of shares to be purchased under option by all Participants exceeds the number of shares authorized under Section 4, a pro-rata allocation of the available shares will be made among all Participants authorizing such payroll deductions based on the amount of their respective payroll deductions through the last day of the Fiscal Quarter. 9. OWNERSHIP AND DELIVERY OF SHARES. 9.1. Beneficial Ownership. A Participant will be the beneficial owner of the shares of Common Stock purchased under the Plan on exercise of his option and will have all rights of beneficial ownership in such shares. Any dividends paid with respect to such shares will be credited to the Participant's Account and applied as provided in Section 8 until the shares are delivered to the Participant. 9.2. Registration of Stock. Stock to be delivered to a Participant under the Plan will be registered on the books and records of the Company in the name of the Participant, or if the Participant so directs by written notice to the designated Benefits Representative or brokerage firm, if any, prior to the purchase of Stock hereunder, in the names of the Participant and one such other person as may be designated by the Participant, as joint tenants with rights of survivorship or as tenants by the entireties, to the extent permitted by applicable law. Any such designation shall not apply to shares purchased after a Participant's death by the Participant's beneficiary or estate, as the case may be, pursuant to Section 11.2. If a brokerage firm is engaged by the Company to administer Accounts under the Plan, such firm shall provide such account registration forms as are necessary for each Participant to open and maintain a brokerage account with such firm. 9.3. Delivery of Stock Certificates. The Company, or a brokerage firm or other entity selected by the Company, shall deliver to each Participant a certificate for the number of shares of Common Stock purchased by the Participant hereunder as soon as practicable after the close of each Fiscal Quarter. Alternatively, in the discretion of the Committee, the stock certificate may be delivered to a designated stock brokerage account maintained for the Participant and held in "street name" in order to facilitate the subsequent sale of the purchased shares. 9.4. Regulatory Approval. In the event the Company is required to obtain from any commission or agency the authority to issue any stock certificate hereunder, the Company shall seek to obtain such authority. The inability of the Company to obtain from any such commission or agency the authority which counsel for the Company deems necessary for the lawful issuance of any such certificate shall relieve the Company from liability to any Participant, except to return to the Participant the amount of his Account balance used to exercise the option to purchase the affected shares. 10. WITHDRAWAL OF PAYROLL DEDUCTIONS. At any time during a Fiscal Quarter, but in no event later than 15 days (or such shorter prescribed by the Committee or a Benefits Representative) prior to the last day of the Fiscal Quarter, a Participant may elect to abandon his election to purchase Common Stock under the Plan. By written notice to the designated Benefits Representative on a form provided for such purpose, the Participant may thus elect to withdraw all of the accumulated balance in his Account being held for the purchase of Common Stock in accordance with Section 8.2. Partial withdrawals will not be permitted. All such amounts will be paid to the Participant as soon as administratively practical after receipt of his notice of withdrawal. After receipt and acceptance of such withdrawal notice, no further payroll deductions will be made from the Participant's Base Pay beginning as of the next payroll period during the Fiscal Quarter in which the withdrawal notice is received. The Committee, in its discretion, may determine that amounts otherwise withdrawable hereunder by Participants shall be offset by an amount that the Committee, in its discretion, determines to be reasonable to help defray the administrative costs of effecting the withdrawal, including, without limitation, fees imposed by any brokerage firm which administers such Participant's Account. After a withdrawal, an otherwise eligible Participant may resume participation in the Plan as of the first day of the Fiscal Quarter next following his delivery of a payroll deduction authorization pursuant to the procedures prescribed in Section 5.1. 11. TERMINATION OF EMPLOYMENT. 11.1. General Rule. Upon termination of a Participant's Employment for any reason, his participation in the Plan will immediately terminate. 11.2. Termination Due to Retirement, Death or Disability. If the Participant's termination of Employment is due to (i) retirement from Employment on or after his attainment of age 65, (ii) death or (iii) Disability, the Participant (or the Participant's personal representative or legal guardian in the event of Disability, or the Participant's beneficiary (as defined in Section 12) or the administrator of his will or executor of his estate in the event of death), will have the right to elect, either to: 11.2.1. Withdraw all of the cash and shares of Common Stock credited to the Participant's Account as of his termination date; or 11.2.2. Exercise the Participant's option for the purchase of Common Stock on the last day of the Fiscal Quarter (in which termination of Employment occurs) for the purchase of the number of shares of Common Stock which the cash balance credited to the Participant's Account as of the date of the Participant's termination of Employment will purchase at the applicable option price. The Participant (or, if applicable, such other person designated in the first paragraph of this Section 11.2) must make such election by giving written notice to the Benefits Representative at such time and in such manner as prescribed from time to time by the Committee or Benefits Representative. In the event that no such written notice of election is received by the Benefits Representative within 30 days of the Participant's termination of Employment date, the Participant (or such other designated person) will automatically be deemed to have elected to withdraw the balance in the Participant's Account as of his termination date. Thereafter, any accumulated cash and shares of Common Stock credited to the Participant's Account as of his termination of Employment date will be delivered to or on behalf of the Participant as soon as administratively practicable. 11.3. Termination Other Than for Retirement, Death or Disability. Upon termination of a Participant's Employment for any reason other than retirement, death, or Disability pursuant to Section 11.2, the participation of the Participant in the Plan will immediately terminate. Thereafter, any accumulated cash and shares of Common Stock credited to the Participant's Account as of his termination of Employment date will be delivered to the Participant as soon as administratively practicable. 11.4. Rehired Employees. Any Employee whose Employment terminates and who is subsequently rehired by an Employer shall be treated as a new Employee for purposes of eligibility to participate in the Plan. 12. ADMINISTRATION OF THE PLAN. 12.1. No Participation in Plan by Committee Members. No options may be granted under the Plan to any member of the Committee during the term of his membership on the Committee. 12.2. Authority of the Committee. Subject to the provisions of the Plan, the Committee shall have the plenary authority to (i) interpret the Plan and all options granted under the Plan, (ii) make such rules as it deems necessary for the proper administration of the Plan, (iii) make all other determinations necessary or advisable for the administration of the Plan, and (iv) correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any option granted under the Plan in the manner and to the extent that the Committee deems advisable. Any action taken or determination made by the Committee pursuant to this and the other provisions of the Plan shall be conclusive on all parties. The act or determination of a majority of the Committee shall be deemed to be the act or determination of the Committee. By express written direction, or by the day-to-day operation of Plan administration, the Committee may delegate the authority and responsibility for the day-to-day administrative or ministerial tasks of the Plan to a Benefits Representative, including a brokerage firm or other third party engaged for such purpose. 12.3. Meetings. The Committee shall designate a chairman from among its members to preside at its meetings, and may designate a secretary, without regard to whether that person is a member of the Committee, who shall keep the minutes of the proceedings. Meetings shall be held at such times and places as shall be determined by the Committee, and the Committee may hold telephonic meetings. The Committee may take any action otherwise proper under the Plan by the affirmative vote of a majority of its members, taken at a meeting, or by the affirmative vote of all of its members taken without a meeting. The Committee may authorize any one or more of their members or any officer of the Company to execute and deliver documents on behalf of the Committee. 12.4. Decisions Binding. All determinations and decisions made by the Committee shall be made in its discretion pursuant to the provisions of the Plan, and shall be final, conclusive and binding on all persons including the Company, Participants, and their estates and beneficiaries. 12.5. Expenses of Committee. The Committee may employ legal counsel, including, without limitation, independent legal counsel and counsel regularly employed by the Company, consultants and agents as the Committee may deem appropriate for the administration of the Plan. The Committee may rely upon any opinion or computation received from any such counsel, consultant or agent. All expenses incurred by the Committee in interpreting and administering the Plan, including, without limitation, meeting expenses and professional fees, shall be paid by the Company. 12.6. Indemnification. Each person who is or was a member of the Committee shall be indemnified by the Company against and from any damage, loss, liability, cost and expense that may be imposed upon or reasonably incurred by him in connection with or resulting from any claim, action, suit, or proceeding to which he may be a party or in which he may be involved by reason of any action taken or failure to act under the Plan, except for any such act or omission constituting willful misconduct or gross negligence. Such person shall be indemnified by the Company for all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit, or proceeding against him, provided he shall give the Company an opportunity, at its own expense, to handle and defend the same before he undertakes to handle and defend it on his own behalf. The foregoing right of indemnification shall not be exclusive of any other rights of indemnification to which such persons may be entitled under the Company's Articles of Incorporation or Bylaws, as a matter of law, or otherwise, or any power that the Company may have to indemnify them or hold them harmless. 13. DESIGNATION OF BENEFICIARY. At such time, in such manner, and using such form as shall be prescribed from time to time by the Committee or a Benefits Representative, a Participant may file a written designation of a beneficiary who is to receive any Common Stock and/or cash credited to the Participant's Account at the Participant's death. Such designation of beneficiary may be changed by the Participant at any time by giving written notice to the Benefits Representative at such time and in such form as prescribed. Upon the death of a Participant, and receipt by the Benefits Representative of proof of the identity at the Participant's death of a beneficiary validly designated under the Plan, the Benefits Representative will take appropriate action to ensure delivery of such Common Stock and/or cash to such beneficiary. In the event of the death of a Participant and the absence of a beneficiary validly designated under the Plan who is living at the time of such Participant's death, the Benefits Representative will take appropriate action to ensure delivery of such Common Stock and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Benefits Representative), the Committee, in its discretion, may direct delivery of such Common Stock and/or cash to the spouse or to any one or more dependents of the Participant as the Committee may designate in its discretion. No beneficiary will, prior to the death of the Participant, acquire any interest in any Common Stock or cash credited to the Participant's Account. 14. TRANSFERABILITY. No amounts credited to a Participant's Account, whether cash or Common Stock, nor any rights with regard to the exercise of an option or to receive Common Stock under the Plan, may be assigned, transferred, pledged, or otherwise disposed of in any way by the Participant other than by will or the laws of descent and distribution. Any such attempted assignment, transfer, pledge, or other disposition will be void and without effect. Each option shall be exercisable, during the Participant's lifetime, only by the Employee to whom the option was granted. The Company shall not recognize, and shall be under no duty to recognize, any assignment or purported assignment by an Employee of his option or of any rights under his option. 15. NO RIGHTS AS A SHAREHOLDER UNTIL CERTIFICATE ISSUED. With respect to shares of Stock subject to an option, an optionee shall not be deemed to be a shareholder, and the optionee shall not have any of the rights or privileges of a shareholder. An optionee shall have the rights and privileges of a shareholder when, but not until, a certificate for shares has been issued to the optionee following exercise of his option. 16. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The Board shall make or provide for such adjustments in the maximum number of shares specified in Section 4 and the number and option price of shares subject to options outstanding under the Plan as the Board shall determine is appropriate to prevent dilution or enlargement of the rights of Participants that otherwise would result from any stock dividend, stock split, stock exchange, combination of shares, or other change in the capital structure of the Company, merger, consolidation, spin-off of assets, reorganization, partial or complete liquidation, issuance of rights or warrants to purchase securities, any other corporate transaction or event having an effect similar to any of the foregoing. In the event of a merger of one or more corporations into the Company, or a consolidation of the Company and one or more other corporations in which the Company is the surviving corporation, each Participant, at no additional cost, shall be entitled, upon his payment for all or part of the Common Stock purchasable by him under the Plan, to receive (subject to any required action by shareholders) in lieu of the number of shares of Common Stock which he was entitled to purchase, the number and class of shares of stock or other securities to which such holder would have been entitled pursuant to the terms of the agreement of merger or consolidation if, immediately prior to such merger or consolidation, such holder had been the holder of record of the number of shares of Common Stock equal to the number of shares purchasable by the Participant hereunder. If the Company is not the surviving corporation in any reorganization, merger or consolidation (or survives only as a subsidiary of an entity other than a previously wholly-owned subsidiary of the Company), or if the Company is to be dissolved or liquidated or sell substantially all of its assets or stock to another corporation or other entity, then, unless a surviving corporation assumes or substitutes new options (within the meaning of Section 424(a) of the Code) for all options then outstanding, (i) the date of exercise for all options then outstanding shall be accelerated to dates fixed by the Committee prior to the effective date of such corporate event, (ii) a Participant may, at his election by written notice to the Company, either (x) withdraw from the Plan pursuant to Section 10 and receive a refund from the Company in the amount of the accumulated cash and Stock balance in the Participant's Account, (y) exercise a portion of his outstanding options as of such exercise date to purchase shares of Stock, at the option price, to the extent of the balance in the Participant's Account, or (z) exercise in full his outstanding options as of such exercise date to purchase shares of Stock, at the option price, which exercise shall require such Participant to pay the related option price, and (iii) after such effective date any unexercised option shall expire. The date the Committee selects for the exercise date under the preceding sentence shall be deemed to be the exercise date for purposes of computing the option price per share of Stock. If the Participant elects to exercise all or any portion of the options, the Company shall deliver to such Participant a stock certificate issued pursuant to Section 9.4 for the number of shares of Stock with respect to which such options were exercised and for which such Participant has paid the option price. If the Participant fails to provide the notice set forth above within three days after the exercise date selected by the Committee under this Section 16, the Participant shall be conclusively presumed to have requested to withdraw from the Plan and receive payment of the accumulated balance of his Account. The Committee shall take such steps in connection with such transactions as the Committee shall deem necessary or appropriate to assure that the provisions of this Section 16 are effectuated for the benefit of the Participants. Except as expressly provided in this Section 16, the issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Stock then available for purchase under the Plan. 17. PLAN EXPENSES; USE OF FUNDS; NO INTEREST PAID. The expenses of the Plan shall be paid by the Company except as otherwise provided herein or under the terms and conditions of any agreement entered into between the Participant and any brokerage firm engaged to administer Accounts. All funds received or held by the Company under the Plan shall be included in the general funds of the Company free of any trust or other restriction, and may be used for any corporate purpose. No interest shall be paid to any Participant or credited to his Account under the Plan. 18. TERM OF THE PLAN. The Plan shall become effective upon the approval of the Plan by the holders of the majority of the Common Stock present and represented at a special or annual meeting of the Company's shareholders held on or before 12 months from December 18, 1997. Except with respect to options then outstanding, if not terminated sooner under the provisions of Section 19, no further options shall be granted under the Plan at the earlier of (i) December 31, 2007, or (ii) the point in time when no shares of Stock reserved for issuance under Section 4 are available. 19. AMENDMENT OR TERMINATION OF THE PLAN. The Board shall have the plenary authority to terminate or amend the Plan; provided, however, that the Board shall not, without the approval of the shareholders of the Company, (i) increase the maximum number of shares which may be issued under the Plan pursuant to Section 4, (ii) materially amend the requirements as to the class of employees eligible to purchase Stock under the Plan, or (iii) permit the members of the Committee to purchase Stock under the Plan. No termination, modification, or amendment of the Plan shall adversely affect the rights of a Participant with respect to an option previously granted to him under such option without his written consent. In addition, to the extent that the Committee determines that, in the opinion of counsel, (i) the listing for qualification requirements of any national securities exchange or quotation system on which the Company's Common Stock is then listed or quoted, or (ii) the Code or Treasury regulations issued thereunder, require shareholder approval in order to maintain compliance with such listing or qualification requirements or to maintain any favorable tax advantages or qualifications, then the Plan shall not be amended by the Board in such respect without first obtaining such required approval of the Company's shareholders. 20. SECURITIES LAWS RESTRICTIONS ON EXERCISE. The Committee may, in its discretion, require as conditions to the exercise of any option that the shares of Common Stock reserved for issuance upon the exercise of the option shall have been duly listed, upon official notice of issuance, upon a stock exchange, and that either (i) a Registration Statement under the Securities Act of 1933, as amended, with respect to said shares shall be effective; or (ii) the Participant shall have represented at the time of purchase, in form and substance satisfactory to the Company, that it is his intention to purchase the Stock for investment and not for resale or distribution. 21. SECTION 16 COMPLIANCE. The Plan, and transactions hereunder by persons subject to Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are intended to comply with all applicable conditions of Rule 16b-3 or any successor exemption provision promulgated under the Exchange Act. To the extent that any provision of the Plan or any action by the Committee or the Board fails, or is deemed to fail, to so comply, such provision or action shall be null and void but only to the extent permitted by law and deemed advisable by the Committee in its discretion. 22. WITHHOLDING TAXES FOR DISQUALIFYING DISPOSITION. Whenever shares of Stock that were received upon the exercise of an option granted under the Plan are disposed of within two years after the date of grant of such option or one year from the date of exercise of such option (within the meaning of Section 423(a)(1)), the Company shall have the right to require the participant to remit to the Company in cash an amount sufficient to satisfy federal, state and local withholding and payroll tax requirements, if any, attributable to such disposition prior to authorizing such disposition or permitting the delivery of any certificate or certificates with respect thereto. 23. NO RESTRICTION ON CORPORATE ACTION. Subject to Section 19, nothing contained in the Plan shall be construed to prevent the Board or any Employer from taking any corporate action which is deemed by the Employer to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any option granted under the Plan. No Employee, beneficiary or other person shall have any claim against any Employer as a result of any such action. 24. USE OF FUNDS. The Employers shall promptly transfer all amounts withheld under Section 6 to the Company or to any brokerage firm engaged to administer Accounts, as directed by the Company. All payroll deductions received or held by the Company under the Plan may be used by the Company for any corporate purpose, and the Company will not be obligated to segregate such payroll deductions. 25. MISCELLANEOUS. 25.1. Options Carry Same Rights and Privileges. To the extent required to comply with the requirements of Section 423 of the Code, all Employees granted options under the Plan to purchase Common Stock shall have the same rights and privileges hereunder. 25.2. Headings. Any headings or subheadings in this Plan are inserted for convenience of reference only and are to be ignored in the construction or interpretation of any provisions hereof. 25.3. Gender and Tense. Any words herein used in the masculine shall be read and construed in the feminine when appropriate. Words in the singular shall be read and construed as though in the plural, and vice-versa, when appropriate. 25.4. Governing Law. This Plan shall be governed and construed in accordance with the laws of the State of Oregon to the extent not preempted by federal law. 25.5. Regulatory Approvals and Compliance. The Company's obligation to sell and deliver Common Stock under the Plan is at all times subject to all approvals of and compliance with the (i) regulations of any applicable stock exchanges (including NASDAQ) and (ii) any governmental authorities required in connection with the authorization, issuance, sale or delivery of such Stock, as well as federal, state and foreign securities laws. 25.6. Severability. In the event that any provision of this Plan shall be held illegal, invalid, or unenforceable for any reason, such provision shall be fully severable, but shall not affect the remaining provisions of the Plan, and the Plan shall be construed and enforced as if the illegal, invalid, or unenforceable provision had not been included herein. 25.7. Refund of Contributions on Noncompliance with Tax Law. In the event the Company should receive notice that this Plan fails to qualify as an "employee stock purchase plan" under Section 423 of the Code, all then existing Account balances will be paid to the Participants and the Plan shall immediately terminate. 25.8. No Guarantee of Tax Consequences. The Company, Board, and the Committee do not make any commitment or guarantee that any tax treatment will apply or be available to any person participating or eligible to participate in the Plan, including, without limitation, any tax imposed by the United States or any state thereof, any estate tax, or any tax imposed by a foreign government. 25.9. Company as Agent for the Employers. Each Employer, by adopting the Plan, appoints the Company and the Board as its agents to exercise on its behalf all of the powers and authorities hereby conferred upon the Company and the Board by the terms of the Plan, including, but not by way of limitation, the power to amend and terminate the Plan. EX-10.5 4 v91823exv10w5.txt EXHIBIT 10.5 EXHIBIT 10.5 MODIFICATION NO. 1 TO AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT AND NOTES SECURED BY DEED OF TRUST This Modification Agreement To Amended and Restated Revolving Loan and Security Agreement and Notes Secured by Deed of Trust ("Modification"), dated as of June 16, 2003 ("Effective Date"), is entered into by Toyota Motor Credit Corporation, a California corporation ("TMCC"), Lithia Real Estate, Inc., an Oregon corporation ("Borrower"), with reference to the following: A. TMCC has made Advances to Borrower up to the principal amount of Forty Million Dollars ($40,000,000) and certain Term Loan (collectively the "Loan"). The Loan is evidenced by that certain Amended and Restated Loan and Security Agreement, dated May 10, 2002 ("Loan Agreement"). The Loan Agreement and all other documents now or hereafter executed which evidence or further secure the Loan, as the Loan may from time to time by modified, supplemented, extended or renewed, are hereinafter collectively referred to as the "Loan Documents." B. The parties have agreed to change the definition of "Loan Value" in the Loan Agreement and to allow for TMCC to provide an additional condition to the conversion of an Advance(s) to a Term Loan by the Borrower. NOW THEREFORE, in consideration of the premises and mutual covenants contained in this Modification the parties agree as follows: 1. Definitions. All capitalized terms used herein shall have the meanings given to them in the Loan Agreement unless otherwise specifically defined herein. 2. Modifications to Loan Agreement. a. The definition of "Loan Value" found in Section 1.1 is amended in its entirety to read as follows: "'Loan Value' shall mean with respect to a Property, (i) ninety percent (90%) for Toyota or Lexus dealerships; or (ii) eighty (80%) for non-Toyota/Lexus dealerships, in each case of the appraised value of such real property based upon the MAI appraisal delivered to TMCC pursuant to Section 3.1 hereof." b. Subsection 2.2 b. is amended in its entirety to read as follows: "b. Limitations. In addition to the conditions set forth in Section 4.2 hereof, Borrower's request to convert one or more Advances into a Term Loan shall on each occasion be subject to the following conditions: (i) TMCC shall have 1 approved the Borrower's request in writing, which approval shall be provided in its sole and absolute discretion; (ii) the principal amount of the Term Loan shall not exceed the Loan Value of the Term Loan Collateral; and (iii) the Conversion Date shall be a Business Day not later than the Maturity Date of the Revolving Loan." c. The initial paragraph and the final paragraph of Subsection 2.2 g. are amended by changing the reference to "three hundred (300) months" in each paragraph to "two hundred forty (240) months." d. Exhibit A-2 shall be replaced with the form promissory note attached hereto as Exhibit A-2. 3. Conditions to the Effective Date. The amendment provided for herein shall be effective as of the date indicated above provided that the following conditions shall have been met by Borrower or waived by TMCC or as otherwise specifically provided for herein: a. Borrower shall have paid all legal fees, title insurance fees, and recording costs incurred in connection herewith; b. Borrower shall have paid to TMCC all applicable late charges, accrued interest, and other payments due and payable to TMCC under the Loan Documents as of the date hereof; and c. Borrower shall not be in default under the Loan Documents and no event shall have occurred which with the passing of time or giving of notice would be a default thereunder. d. Borrower shall have executed and delivered such additional instruments and documentation relating to the Loan as TMCC may require, in TMCC's sole discretion. 4. Representations and Warranties. The Borrower and Guarantor each hereby restate and reaffirm to TMCC all of the representations and warranties contained in the Loan Agreement as if made on the date hereof and fully set forth herein. 5. Effect of Agreement. As amended herein, all of the terms, covenants and conditions of the Notes and other Loan Documents remain in full force and effect. All references in the Loan Documents to any Loan Document shall mean as amended by this Modification. Nothing herein shall be deemed or construed to be an impairment of the lien of the Deed of Trust, and the lien of the Deed of Trust shall remain a first lien encumbering the Property. To the extent of any conflict between the provisions of the Notes, the Loan Agreement or other Loan Documents and the provisions of this Modification, the provisions of Modification shall prevail and control. Borrower hereby acknowledges, certifies and reaffirms its obligations under the Loan Documents as modified hereby. 2 6. Further Documentation. The parties agree to execute such further documents as TMCC may from time to time require in order to give full force and effect to this Modification. 7. Applicable Law. This Modification shall be governed by the laws of the State of Oregon. IN WITNESS WHEREOF, the parties hereto have executed this Modification No. 2. BORROWER: LITHIA REAL ESTATE, INC., an Oregon corporation, By:/s/ JEFFREY B. DEBOER ----------------------------------------------- Name: Jeffrey B. Deboer Title: Senior Vice President and Chief Financial Officer TMCC: TOYOTA MOTOR CREDIT CORPORATION, a California corporation By:/s/ DAVID PELLICCIONI ----------------------------------------------- David Pelliccioni Group Vice President 3 EXHIBIT A-2 PROMISSORY NOTE (Term Loan) $_____________.00 ____________ FOR VALUE RECEIVED, the undersigned, Lithia Real Estate, Inc., an Oregon corporation (the "Borrower"), promises to pay to Toyota Motor Credit Corporation, a California corporation ("TMCC"), or its order, at 19001 So. Western Avenue, P.O. Box 2958, Torrance, California 90509-2958, on October 1, 2007 or such later date as may be established in accordance with Section 2.2 of the Loan Agreement (as defined below) (as extended from time to time, the "Maturity Date") the principal sum of ____________________ ($______________), together with interest thereon as provided in this Promissory Note (the "Note"). This Note is issued under and is subject to the terms of that certain Amended and Restated Loan and Security Agreement dated as of May 10, 2002, as amended by that certain Modification to Amended and Restated Revolving Loan and Security Agreement And Notes Secured by Deed of Trust dated _____________, 2003 (as amended or otherwise modified from time to time, the "Loan Agreement"), executed by Borrower and TMCC. The Loan Agreement contains terms upon which the Term Loan is made and this Note is issued. In the event of any inconsistency or conflict between the terms of this Note and the terms of the Loan Agreement, the terms of this Note shall control. Capitalized terms used in this Note which are not defined herein have the meanings set forth in the Loan Agreement. This Note is subject to acceleration upon the terms provided herein and in the Loan Agreement. Pursuant to the terms of the Loan Agreement, Borrower has elected to convert one or more of Advances evidenced by that certain Promissory Note (Revolving Loan) made by Borrower in favor of TMCC dated May 10, 2002 in the face amount of Forty Million Dollars ($40,000,000) (the "Prior Note") into a single term loan in the principal sum of this Note (the "Term Loan"). This Note continues a portion of the Prior Note and the Advances evidenced thereby and converted into the Term Loan evidenced by this Note. Such Advances have not been repaid, satisfied or discharged and nothing herein shall constitute a repayment, satisfaction or discharge of such indebtedness. [SELECT ONE] [1. Interest. The Term Loan evidenced by this Note shall bear interest at a per annum rate two (2.00%)/two and one-half (2.50%)(non-toyota rate) percentage points above the one (1) month London Interbank Offered Rate ("LIBOR"), as published by the Wall Street Journal in its "Money Rates" section, in effect on the last business day of the month preceding the date of this Note. The LIBOR Rate shall be adjusted, as necessary, on the first calendar day of each month, based on the LIBOR Rate in effect as of the last business day of the preceding month. Should the method of establishing the LIBOR Rate, or the publication of the London Interbank Offered Rates for one (1) month deposits in the Wall Street Journal cease or be abolished, then the 4 LIBOR Rate shall be based on a comparable index selected by TMCC. Interest shall be calculated on the basis of a year of three hundred sixty (360) days applied to the actual number of days elapsed on the unpaid principal balance. 2. Payment Terms. Payments of principal owing under this Note shall be determined based on an amortization of the principal over three hundred (300) months. Interest shall be payable monthly, in arrears, on the first day of each month, and equal consecutive monthly principal payments shall be due and payable on the first Business Day of the month following the date of this Note and continue on the first Business Day of each month thereafter. Borrower shall repay the balance of the principal outstanding of the Term Loan evidenced by this Note on the Maturity Date. Accrued but unpaid interest on the Term Loan evidenced by this Note shall be paid in arrears on the first Business Day of each month and on the Maturity Date. Unpaid interest accruing on amounts in default shall be payable on demand. All amounts payable under this Note shall be payable only in lawful money of the United States of America, in immediately available funds.] [-OR-] [1. Interest. The Term Loan evidenced by this Note shall bear interest at a per annum rate two (2.00%)/ two and one-half (2.50%)(non-toyota rate)percentage points above the five (5) year swap rate published by Bloomberg Financial as the mid-price "USSWAP 5 Index" in effect on the date of this Note. Interest shall be calculated on the basis of a year of three hundred sixty (360) days applied to the actual number of days elapsed on the unpaid principal balance. 2. Payment Terms. The principal and interest owing under this Note shall be amortized over two hundred forty (240) months. Equal consecutive monthly payments of principal and interest shall be payable monthly commencing on the first Business Day of the month following the date of this Note and continue on the first Business Day of each month thereafter. Borrower shall repay the balance of the principal outstanding of the Term Loan evidenced by this Note on the Maturity Date. Accrued but unpaid interest on the Term Loan evidenced by this Note shall be paid in arrears on the first Business Day of each month and on the Maturity Date. Unpaid interest accruing on amounts in default shall be payable on demand. All amounts payable under this Note shall be payable only in lawful money of the United States of America, in immediately available funds.] 3. Application of Payments. Each payment received by TMCC shall be credited first to interest then due and any late charges, fees or expenses owed, and the remainder to principal. TMCC is hereby authorized to record the date and amount of the Term Loan made and the date and amount of each payment of principal and interest thereon on a schedule annexed hereto and constituting a part of this Note or maintained in connection herewith. Any such recordation by TMCC shall constitute prima facie evidence of the accuracy of the information so recorded; provided, however, that the failure to make any such recordation or any error in any such recordation shall not affect the obligations of Borrower hereunder. 5. Prepayment. If all or any part of the principal of this Note is prepaid within twelve (12) months from the date of this Note, whether voluntarily made or upon acceleration of the Term Loan (including, without limitation, upon any violation by Borrower of the "Due on 5 Sale" provisions of any mortgage or deed of trust securing this Note), Borrower shall pay a prepayment charge equal to two percent (2.00%) of the amount prepaid, but in no event greater than the maximum amount permitted by applicable law. No prepayment charge shall apply to any prepayment of the principal of this Note made after twelve (12) months from the date of this Note. 6. Late Payments; Default Interest. Time is of the essence of this Note. Should Borrower fail to make any payment within fifteen (15) days of it being due, Borrower agrees to pay a late charge, to the extent allowed by applicable law, of two percent (2.00%) of the late payment, but only once for each such late payment. Borrower acknowledges that TMCC will incur additional expenses in handling the delinquent payment, the exact amount of which is difficult to ascertain, but that said late charge is a reasonable estimate of TMCC's expenses so incurred. Upon the occurrence and during the continuation of an Event of Default, the Term Loan evidenced by this Note shall bear interest at a per annum rate two (2.00%) percentage points above the interest rate provided in Section 1 of this Note, but in no event greater than the maximum rate of interest permitted by applicable law. 7. Security for Note. This Note is secured by all mortgages, deeds of trust, security agreements, collateral assignments, and other liens and security now or at any time hereafter executed or granted by Borrower to TMCC, to secure the Term Loan evidenced by this Note, and by any rights of subrogation accruing to TMCC by reason of any indebtedness discharged by the proceeds of the Term Loan. The deeds of trust or mortgages securing this Note (collectively, the "Deeds of Trust") provide that all amounts due under this Note may be made immediately due and payable in the event that, among other defaults as described in the Deeds of Trust, the property described in any of the Deeds of Trust is sold, transferred, conveyed, encumbered or otherwise alienated without TMCC's prior written consent, all as specifically set forth in the Deeds of Trust. 8. Acceleration. Upon the occurrence of an Event of Default, unless all such Event of Default shall have been cured within the time provided in the Loan Agreement, or waived in writing by TMCC, all amounts outstanding hereunder and all interest accrued hereon, shall, at the option of TMCC, without presentment, demand, protest or notice of acceleration, notice of intent to accelerate or notice of any kind (all of which are hereby expressly waived), be immediately due and payable; provided, however, that upon the occurrence of one or more of the other Events of Default set forth in subsection g of Section 8.1 of the Loan Agreement, all amounts outstanding hereunder and all interest accrued hereon shall be immediately due and payable without presentment, demand, protest or notice of acceleration, notice of intent to accelerate or notice of any kind (all of which are hereby expressly waived). No failure by TMCC to exercise its option under this Section shall not constitute a waiver of the right to exercise it upon the occurrence of any subsequent Event of Default. 9. Guarantor. This Note is guaranteed by the Guarantor(s) referenced in the Loan Agreement pursuant to the terms of certain Continuing and Irrevocable Guaranty(ies) executed from time to time by such Guarantor(s). 6 10. No Amendment. Neither this Note, nor any term hereof, may be amended, changed, waived, discharged, terminated or otherwise modified without the prior written consent of TMCC. 11. Waivers. The makers, endorsers, guarantors and sureties of this Note, and each of them, hereby waive diligence, all notices, including notice of intent to accelerate and notice of acceleration, demand, presentment for payment, notice of non-payment, protest and notice of protest; and expressly agree that this Note, or any payment hereunder may be extended or modified from time to time; and consent to the acceptance of further security for this Note, including other types of security; and the release of security; all without in any way affecting their liability. The right to plead any and all statutes of limitations as a defense to any demand secured by the Deeds of Trust or any other security securing this Note, against makers, endorsers, guarantors or sureties is expressly waived by each and all said parties. 12. Legal Fees. If this Note is referred to an attorney for collection or legal advice following a default, or if any other judicial or non-judicial action is instituted or an attorney is employed to reclaim, sequester, protect, preserve or enforce any interest in real property or other security for this Note, including but not limited to proceedings under the United States Bankruptcy Code or eminent domain, Borrower agrees to pay the holder's attorneys' fees and costs. 13. Applicable Law. The validity of this Note, its construction, interpretation and enforcement, and the rights of the parties hereunder shall be determined under, governed by and construed in accordance with the laws of the State of Oregon. 14. Severability. If any of the provisions of this Note shall be determined to be invalid, such invalidity shall not invalidate any other provision of this Note, but it shall be construed as if not containing the particular provision or provisions held to be invalid, and all rights and obligations of the parties shall be construed and enforced accordingly. The headings in this Note are for convenience only and shall not affect the construction hereof. 15. Successors And Assigns. The duties, covenants, conditions and obligations of Borrower in this Note shall be binding obligations of Borrower's heirs, executors, administrators, personal representatives, successors and assigns. Each and every party signing or endorsing this Note binds himself or herself as principal and not as surety, and each shall be jointly and severally liable hereunder. 16. Jurisdiction. BORROWER HEREBY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF OREGON AND THE UNITED STATES DISTRICT COURTS FOR THE DISTRICT OF OREGON SITTING IN PORTLAND, MULTNOMAH COUNTY, OREGON, AS WELL AS TO THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING ARISING OUT OF ANY OF BORROWER'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS NOTE, AND EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE IN ANY OF SUCH COURTS. 7 17. Waiver Of Jury Trial. BORROWER AND TMCC MUTUALLY HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS NOTE OR ANY OTHER LOAN DOCUMENT CONTEMPLATED TO BE EXECUTED IN CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR TMCC TO ACCEPT THIS NOTE AND MAKE THE TERM LOAN. 18. Commercial Transaction. BORROWER ACKNOWLEDGES THAT THE TERM LOAN EVIDENCED BY THIS NOTE IS FOR COMMERCIAL, INVESTMENT OR BUSINESS PURPOSES. IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of the date first indicated above. BORROWER: LITHIA REAL ESTATE, INC., an Oregon corporation By:_________________________________________ Name:_______________________________________ Title:______________________________________ 8 EX-31.1 5 v91823exv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Sidney B. DeBoer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/Sidney B. DeBoer - ------------------- Sidney B. DeBoer Chairman of the Board, Chief Executive Officer and Secretary Lithia Motors, Inc. EX-31.2 6 v91823exv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey B. DeBoer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2003 /s/Jeffrey B. DeBoer - -------------------- Jeffrey B. DeBoer Senior Vice President and Chief Financial Officer Lithia Motors, Inc. EX-32.1 7 v91823exv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Lithia Motors, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Sidney B. DeBoer, Chairman of the Board, Chief Executive Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Sidney B. DeBoer - -------------------- Sidney B. DeBoer Chairman of the Board, Chief Executive Officer and Secretary Lithia Motors, Inc. August 14, 2003 EX-32.2 8 v91823exv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Lithia Motors, Inc. (the "Company") on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey B. DeBoer, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Jeffrey B. DeBoer - --------------------- Jeffrey B. DeBoer Senior Vice President and Chief Financial Officer Lithia Motors, Inc. August 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.4

                                                                    EXHIBIT 10.4

                               LITHIA MOTORS, INC.

                          EMPLOYEE STOCK PURCHASE PLAN

         1.       PURPOSE. The Lithia Motors, Inc. Employee Stock Purchase Plan
(the "Plan") is intended to provide an incentive for employees of Lithia Motors,
Inc. (the "Company") and its participating Subsidiaries to acquire or increase
their proprietary interests in the Company through the purchase of shares of
Common Stock of the Company. The Plan is intended to qualify as an "Employee
Stock Purchase Plan" under Sections 421 and 423 of the Internal Revenue Code of
1986, as amended (the "Code"). The provisions of the Plan will be construed in a
manner consistent with the requirements of such sections of the Code and the
regulations issued thereunder.

         2.       DEFINITIONS. As used in this Plan:

                  2.1.     "Account" Account means the account recorded in the
records of the Company established on behalf of a Participant to which the
amount of the Participant's payroll deductions authorized under Section 6 and
purchases of Common Stock under Section 8 shall be credited, and any
distributions of shares of Common Stock under Section 9 and withdrawals under
Section 10 shall be charged.

                  2.2.     "Benefits Representative" means the employee
benefits department of the Company or any such other person, regardless of
whether employed by an Employer, who has been formally, or by operation or
practice, designated by the Committee to assist the Committee with the
day-to-day administration of the Plan.

                  2.3.     "Board" means the Board of Directors of the Company.

                  2.4.     "Code" means the Internal Revenue Code of 1986, or
any successor thereto, as amended and in effect from time to time. Reference in
the Plan to any Section of the Code shall be deemed to include any amendments or
successor provisions to any Section and any treasury regulations thereunder.

                  2.5.     "Committee" means the Compensation Committee of the
Board. The Board shall have the power to fill vacancies on the Committee arising
by resignation, death, removal or otherwise. The Board, in its sole discretion,
may split the powers and duties of the Committee among one or more separate
Committees, or retain all powers and duties of the Committee in a single
Committee. The members of the Committee shall serve at the discretion of the
Board.

                  2.6.     "Common Stock" or "Stock" means the Class A Common
Stock, without par value, of the Company.

                  2.7.     "Company" means Lithia Motors, Inc. an Oregon
corporation, and any successor thereto.



                  2.8.     "Disability" means any complete and permanent
disability as defined in Section 22(e)(3) of the Code.

                  2.9.     "Effective Date" means the date on which this Plan
is approved by the shareholders of the Company which date shall be, the
inception date of the Plan.

                  2.10.    "Employee" means any person who, at such time, is in
the Employment of and Employer.

                  2.11.    "Employer" means the Company, its successors, any
future parent (as defined in Section 424(e) of the Code), each current or future
Subsidiary and any company whose operating assets or stock is acquired by the
Company or any Subsidiary.

                  2.12.    "Employment" means Employment as an employee or
officer by the Company or a Subsidiary as designated in such entity's payroll
records, or by any corporation issuing or assuming rights or obligations under
the Plan in any transaction described in Section 424(a) of the Code or by a
parent corporation or a subsidiary corporation of such corporation. In this
regard, neither the transfer of a Participant from Employment by the Company to
Employment by a Subsidiary nor the transfer of a Participant from Employment by
a Subsidiary to Employment by either the Company or any by any other Subsidiary
shall be deemed to be a termination of Employment of the Participant. Moreover,
the Employment of a Participant shall not be deemed to have been terminated
because of absence from active Employment on account of temporary illness or
during authorized vacation, temporary leaves of absence from active Employment
granted by Company or any Subsidiary for reasons of professional advancement,
education, health, or government service, or during military leave for any
period if the Participant returns to active Employment within 90 days after the
termination of military leave, or during any period required to be treated as a
leave of absence which, by virtue of any valid law or agreement, does not result
in a termination of Employment. Any worker treated as an independent contractor
by the Company or any Subsidiary who is later reclassified as a common-law
employee shall not be in Employment during any period in which such worker was
treated by the Company or a Subsidiary as an independent contractor. Any "leased
employee", as described in Section 414(n) of the Code, shall not be deemed an
Employee hereunder.

                  2.13.    "Entry Date" means the first day of each Fiscal
Quarter.

                  2.14.    "Fiscal Quarter" means a three consecutive month
period beginning on each January 1, April 1, July 1 and October 1, commencing
with the first such date following the Effective Date and continuing until the
Plan is terminated.

                  2.15.    "Market Price" means, subject to the next paragraph,
the market value of a share of Stock on any date, which shall be determined as
(i) the closing sales price on the immediately preceding business day of a share
of Stock as reported on the New York Stock Exchange or other principal
securities exchange on which shares of Stock are then listed or admitted to
trading or (ii) if not so reported, the average of the closing bid and asked
prices for a share of Stock on the immediately preceding business day as quoted
on the National Association of Securities Dealers Automated Quotation System
("NASDAQ"), or (iii) if not quoted on NASDAQ, the average of the closing bid and
asked prices for a share of Stock as quoted by the National Quotation Bureau's
"Pink Sheets" or the National Association of Securities Dealers' OTC Bulletin
Board System. If the price of a share of Stock shall not be so reported pursuant
to the previous sentence, the fair market value of a share of Stock shall be



determined by the Committee in its discretion provided that such method is
appropriate for purposes of an employee stock purchase plan under Section 423 of
the Code.

         Notwithstanding the previous paragraph of this definition, the Market
Price of a share of Stock solely for purposes of determining the option price on
the first or last day of the Fiscal Quarter in accordance with Section 7.2 shall
be based on the Market Price on the first or last day of the Fiscal Quarter, as
applicable, and not on the immediately preceding business day.

                  2.16.    "Participant" means any Employee who meets the
eligibility requirements of Section 3 and who has elected to and is
participating in the Plan.

                  2.17.    "Plan" means the Lithia Motors, Inc. Employee Stock
Purchase Plan, as set forth herein, and all amendments hereto.

                  2.18.    "Stock" means the Common Stock (as defined above).

                  2.19.    "Subsidiary" means any domestic or foreign
corporation, limited liability company, partnership or other form of business
entity (other than the Company) (i) which, pursuant to Section 424(f) of the
Code, is included in an unbroken chain of entities beginning with the Company
if, at the time of the granting of the option, each of the entities other than
the last entity in the unbroken chain owns at least a majority of the total
combined voting power of all interests in one of the other entities in such
chain and (ii) which has been designated by the Board or the Committee as a
entity whose Employees are eligible to participate in the Plan.

                  2.20.    "Total Pay" means regular straight-time earnings or
base salary, plus payments for overtime, shift differentials, incentive
compensation, bonuses, and other special payments, fees, allowances or
extraordinary compensation.

         3.       ELIGIBILITY.

                  3.1.     Eligibility Requirements. Participation in the Plan
is voluntary. Each Employee who has completed at least ninety (90) days of
continuous Employment with an Employer (calculated from his last date of hire to
the termination of his Employment for any reason), is regularly scheduled to
work at least 20 hours per week and has reached the age of majority in the
jurisdiction of his legal residency, will be eligible to participate in the Plan
on the first day of the payroll period commencing on or after the earlier of (i)
the Effective Date or (ii) the Entry Date on which the Employee satisfies the
aforementioned 8 eligibility requirements. Each Employee whose Employment
terminates and who is rehired by an Employer shall be treated as a new Employee
for eligibility purposes under the Plan.

                  3.2.     Limitations on Eligibility. Notwithstanding any
provision of this Plan to the contrary, no Employee will be granted an option
under the Plan:

                           3.2.1.   if, immediately after the grant, the
         Employee would own stock, and/or hold outstanding options to purchase
         stock, possessing five percent (5%) or more of the total combined
         voting power or value of all classes of stock of the Company or of any
         Subsidiary; or

                           3.2.2.   which permits the Employee's rights to
         purchase stock under this Plan and all other employee stock purchase
         plans (within the meaning of Section 423 of the Code) of



         the Company and its Subsidiaries to accrue at a rate which exceeds
         $25,000 of the fair market value of the stock (determined at the time
         such option is granted) for each Fiscal year in which such option is
         outstanding at any time, all as determined in accordance with Section
         423(b)(8) of the Code.

         For purposes of Section 3.2.1 above, pursuant to Section 424(d) of the
Code, (i) the Employee with respect to whom such limitation is being determined
shall be considered as owning the stock owned, directly or indirectly, by or for
his brothers and sisters (whether by the whole or half blood), spouse,
ancestors, and lineal descendants; and (ii) stock owned, directly or indirectly,
by or for a corporation, partnership, estate, or trust, shall be considered as
being owned proportionately by or for its shareholders, partners, or
beneficiaries. In addition, for purposes of Section 3.2.2 above, pursuant to
Section 423(b)(8) of the Code, (i) the right to purchase stock under an option
accrues when the option (or any portion thereof) first becomes exercisable
during the calendar year, (ii) the right to purchase stock under an option
accrues at the rate provided in the option but in no case may such rate exceed
$25,000 of fair market value of such stock (determined at the time such option
is granted) for any one calendar year, and (iii) a right to purchase stock which
has accrued under one option granted pursuant to the Plan may not be carried
over to any other option.

         4.       SHARES SUBJECT TO THE PLAN. The total number of shares of
Common Stock that upon the exercise of options granted under the Plan will not
exceed 1,500,000 shares (subject to adjustment as provided in Section 16), and
such shares may be originally issued shares, treasury shares, reacquired shares,
shares bought in the market, or any combination of the foregoing. If any option
which has been granted expires or terminates for any reason without having been
exercised in full, the unpurchased shares will again become available for
purposes of the Plan. Any shares which are not subject to outstanding options
upon the termination of the Plan shall cease to be subject to the Plan.

         5.       PARTICIPATION.

                  5.1.     Payroll Deduction Authorization. An Employee shall be
eligible to participate in the Plan as of the first Entry Date following such
Employee's satisfaction of the eligibility requirements of Section 3, or, if
later, the first Entry Date following the date on which the Employee's Employer
adopted the Plan. At least 10 days (or such other period as may be prescribed by
the Committee or a Benefits Representative) prior to the first Entry Date as of
which an Employee is eligible to participate in the Plan, the Employee shall
execute and deliver to the Benefits Representative, on the form prescribed for
such purpose, an authorization for payroll deductions which specifies his chosen
rate of payroll deduction contributions pursuant to Section 6, and such other
information as is required to be provided by the Employee on such enrollment
form. The enrollment form shall authorize the Employer to reduce the Employee's
Base Pay by the amount of such authorized contributions. To the extent provided
by the Committee or a Benefits Representative, each Participant shall also be
required to open a stock brokerage account with a brokerage firm which has been
engaged to administer the purchase, holding and sale of Common Stock for
Accounts under the Plan and, as a condition of participation hereunder, the
Participant shall be required to execute any form required by the brokerage firm
to open and maintain such brokerage account.

                  5.2.     Continuing Effect of Payroll Deduction Authorization.
Payroll deductions for a Participant will commence with the first payroll period
beginning after the Participant's authorization for payroll deductions becomes
effective, and will end with the payroll period that ends when terminated by



the Participant in accordance with Section 6.3 or due to his termination of
Employment in accordance with Section 11. Payroll deductions will also cease
when the Participant is suspended from participation due to a withdrawal of
payroll deductions in accordance with Section 10. When applicable with respect
to Employees who are paid on a hourly wage basis, the authorized payroll
deductions shall be withheld from wages when actually paid following the period
in which the compensatory services were rendered. Only payroll deductions that
are credited to the Participant's Account during the Fiscal Quarter will be used
to purchase Common Stock pursuant to Section 8 regardless of when the work was
performed.

                  5.3.     Employment and Shareholders Rights. Nothing in this
Plan will confer on a Participant the right to continue in the employ of the
Employer or will limit or restrict the right of the Employer to terminate the
Employment of a Participant at any time with or without cause. A Participant
will have no interest in any Common Stock to be purchased under the Plan or any
rights as a shareholder with respect to such Stock until the Stock has been
purchased and credited to the Participant's Account.

         6.       PAYROLL DEDUCTIONS.

                  6.1.     Participant Contributions by Payroll Deductions. At
the time a Participant files his payroll deduction authorization form, the
Participant will elect to have deductions made from the Participant's Base Pay
for each payroll period such authorization is in effect in whole percentages at
the rate of not less than 1% nor more than 10% of the Participant's Base Pay.

                  6.2.     No Other Participant Contributions Permitted. All
payroll deductions made for a Participant will be credited to the Participant's
Account under the Plan. A Participant may not make any separate cash payment
into such Account.

                  6.3.     Changes in Participant Contributions. Subject to
Sections 10 and 21, a Participant may increase, decrease, suspend, or resume
payroll deductions under the Plan by giving written notice to a designated
Benefits Representative at such time and in such form as the Committee or
Benefits Representative may prescribe from time to time. Such increase,
decrease, suspension or resumption will be effective as of the first day of the
payroll period as soon as administratively practicable after receipt of the
Participant's written notice, but not earlier than the first day of the payroll
period of the Fiscal Quarter next following receipt and acceptance of such form.
Notwithstanding the previous sentence, a Participant may completely discontinue
contributions at any time during a Fiscal Quarter, effective as of the first day
of the payroll period as soon as administratively practicable following receipt
of a written discontinuance notice from the Participant on a form provided by a
designated Benefits Representative. Following a discontinuance of contributions,
a Participant cannot authorize any payroll contributions to his Account for the
remainder of the Fiscal Quarter in which the discontinuance was effective.

         7.       GRANTING OF OPTION TO PURCHASE STOCK.

                  7.1.     Quarterly Grant of Options. For each Fiscal Quarter,
a Participant will be deemed to have been granted an option to purchase, on the
first day of the Fiscal Quarter, as many whole and fractional shares as may be
purchased with the payroll deductions (and any cash dividends as provided in
Section 8) credited to the Participant's Account during the Fiscal Quarter.



                  7.2.     Option Price. The option price of the Common Stock
purchased with the amount credited to the Participant's Account during each
Fiscal Quarter will be the lower of:

                           7.2.1.   85% of the Market Price of a share of Stock
         on the first day of the Fiscal Quarter; or

                           7.2.2.   85% of the Market Price of a share of Stock
         on the last day of the Fiscal Quarter.

Only the Market Price as of the first day of the Fiscal Quarter and the last day
of the Fiscal Quarter shall be considered for purposes of determining the option
purchase price; interim fluctuations during the Fiscal Quarter shall not be
considered.

         8.       EXERCISE OF OPTION.

                  8.1.     Automatic Exercise of Options. Unless a Participant
has elected to withdraw payroll deductions in accordance with Section 10, the
Participant's option for the purchase of Common Stock will be deemed to have
been exercised automatically as of the last day of the Fiscal Quarter for the
purchase of the number of whole and fractional shares of Common Stock which the
accumulated payroll deductions (and cash dividends on the Common Stock as
provided in Section 8.2) in the Participant's Account at that time will purchase
at the applicable option price. Fractional shares may be issued under the Plan.
As of the last day of each Fiscal Quarter, the balance of each Participant's
Account shall be applied to purchase the number of whole and fractional shares
of Stock as determined by dividing the balance of such Participant's Account as
of such date by the option price determined pursuant to Section 7.2. The
Participant's Account shall be debited accordingly. The Committee or its
delegate shall make all determinations with respect to applicable currency
exchange rates when applicable.

                  8.2.     Dividends Generally. Cash dividends paid on shares of
Common Stock which have not been delivered to the Participant pending the
Participant's request for delivery pursuant to Section 9.3, will be combined
with the Participant's payroll deductions and applied to the purchase of Common
Stock at the end of the Fiscal Quarter in which the cash dividends are received,
subject to the Participant's withdrawal rights set forth in Section 10.
Dividends paid in the form of shares of Common Stock or other securities with
respect to shares that have been purchased under the Plan, but which have not
been delivered to the Participant, will be credited to the shares that are
credited to the Participant's Account.

                  8.3.     Pro-rata Allocation of Available Shares. If the total
number of shares to be purchased under option by all Participants exceeds the
number of shares authorized under Section 4, a pro-rata allocation of the
available shares will be made among all Participants authorizing such payroll
deductions based on the amount of their respective payroll deductions through
the last day of the Fiscal Quarter.

         9.       OWNERSHIP AND DELIVERY OF SHARES.

                  9.1.     Beneficial Ownership. A Participant will be the
beneficial owner of the shares of Common Stock purchased under the Plan on
exercise of his option and will have all rights of beneficial ownership in such
shares. Any dividends paid with respect to such shares will be credited to the



Participant's Account and applied as provided in Section 8 until the shares are
delivered to the Participant.

                  9.2.     Registration of Stock. Stock to be delivered to a
Participant under the Plan will be registered on the books and records of the
Company in the name of the Participant, or if the Participant so directs by
written notice to the designated Benefits Representative or brokerage firm, if
any, prior to the purchase of Stock hereunder, in the names of the Participant
and one such other person as may be designated by the Participant, as joint
tenants with rights of survivorship or as tenants by the entireties, to the
extent permitted by applicable law. Any such designation shall not apply to
shares purchased after a Participant's death by the Participant's beneficiary or
estate, as the case may be, pursuant to Section 11.2. If a brokerage firm is
engaged by the Company to administer Accounts under the Plan, such firm shall
provide such account registration forms as are necessary for each Participant to
open and maintain a brokerage account with such firm.

                  9.3.     Delivery of Stock Certificates. The Company, or a
brokerage firm or other entity selected by the Company, shall deliver to each
Participant a certificate for the number of shares of Common Stock purchased by
the Participant hereunder as soon as practicable after the close of each Fiscal
Quarter. Alternatively, in the discretion of the Committee, the stock
certificate may be delivered to a designated stock brokerage account maintained
for the Participant and held in "street name" in order to facilitate the
subsequent sale of the purchased shares.

                  9.4.     Regulatory Approval. In the event the Company is
required to obtain from any commission or agency the authority to issue any
stock certificate hereunder, the Company shall seek to obtain such authority.
The inability of the Company to obtain from any such commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
of any such certificate shall relieve the Company from liability to any
Participant, except to return to the Participant the amount of his Account
balance used to exercise the option to purchase the affected shares.

         10.      WITHDRAWAL OF PAYROLL DEDUCTIONS. At any time during a Fiscal
Quarter, but in no event later than 15 days (or such shorter prescribed by the
Committee or a Benefits Representative) prior to the last day of the Fiscal
Quarter, a Participant may elect to abandon his election to purchase Common
Stock under the Plan. By written notice to the designated Benefits
Representative on a form provided for such purpose, the Participant may thus
elect to withdraw all of the accumulated balance in his Account being held for
the purchase of Common Stock in accordance with Section 8.2. Partial withdrawals
will not be permitted. All such amounts will be paid to the Participant as soon
as administratively practical after receipt of his notice of withdrawal. After
receipt and acceptance of such withdrawal notice, no further payroll deductions
will be made from the Participant's Base Pay beginning as of the next payroll
period during the Fiscal Quarter in which the withdrawal notice is received. The
Committee, in its discretion, may determine that amounts otherwise withdrawable
hereunder by Participants shall be offset by an amount that the Committee, in
its discretion, determines to be reasonable to help defray the administrative
costs of effecting the withdrawal, including, without limitation, fees imposed
by any brokerage firm which administers such Participant's Account. After a
withdrawal, an otherwise eligible Participant may resume participation in the
Plan as of the first day of the Fiscal Quarter next following his delivery of a
payroll deduction authorization pursuant to the procedures prescribed in Section
5.1.



         11.      TERMINATION OF EMPLOYMENT.

                  11.1.    General Rule. Upon termination of a Participant's
Employment for any reason, his participation in the Plan will immediately
terminate.

                  11.2.    Termination Due to Retirement, Death or Disability.
If the Participant's termination of Employment is due to (i) retirement from
Employment on or after his attainment of age 65, (ii) death or (iii) Disability,
the Participant (or the Participant's personal representative or legal guardian
in the event of Disability, or the Participant's beneficiary (as defined in
Section 12) or the administrator of his will or executor of his estate in the
event of death), will have the right to elect, either to:

                           11.2.1. Withdraw all of the cash and shares of
         Common Stock credited to the Participant's Account as of his
         termination date; or

                           11.2.2. Exercise the Participant's option for the
         purchase of Common Stock on the last day of the Fiscal Quarter (in
         which termination of Employment occurs) for the purchase of the number
         of shares of Common Stock which the cash balance credited to the
         Participant's Account as of the date of the Participant's termination
         of Employment will purchase at the applicable option price.

         The Participant (or, if applicable, such other person designated in the
first paragraph of this Section 11.2) must make such election by giving written
notice to the Benefits Representative at such time and in such manner as
prescribed from time to time by the Committee or Benefits Representative. In the
event that no such written notice of election is received by the Benefits
Representative within 30 days of the Participant's termination of Employment
date, the Participant (or such other designated person) will automatically be
deemed to have elected to withdraw the balance in the Participant's Account as
of his termination date. Thereafter, any accumulated cash and shares of Common
Stock credited to the Participant's Account as of his termination of Employment
date will be delivered to or on behalf of the Participant as soon as
administratively practicable.

                  11.3.    Termination Other Than for Retirement, Death or
Disability. Upon termination of a Participant's Employment for any reason other
than retirement, death, or Disability pursuant to Section 11.2, the
participation of the Participant in the Plan will immediately terminate.
Thereafter, any accumulated cash and shares of Common Stock credited to the
Participant's Account as of his termination of Employment date will be delivered
to the Participant as soon as administratively practicable.

                  11.4.    Rehired Employees. Any Employee whose Employment
terminates and who is subsequently rehired by an Employer shall be treated as a
new Employee for purposes of eligibility to participate in the Plan.

         12.      ADMINISTRATION OF THE PLAN.

                  12.1.    No Participation in Plan by Committee Members. No
options may be granted under the Plan to any member of the Committee during the
term of his membership on the Committee.

                  12.2.    Authority of the Committee. Subject to the provisions
of the Plan, the Committee shall have the plenary authority to (i) interpret the
Plan and all options granted under the Plan, (ii) make such rules as it deems
necessary for the proper administration of the Plan, (iii) make all other



determinations necessary or advisable for the administration of the Plan, and
(iv) correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any option granted under the Plan in the manner and to the extent
that the Committee deems advisable. Any action taken or determination made by
the Committee pursuant to this and the other provisions of the Plan shall be
conclusive on all parties. The act or determination of a majority of the
Committee shall be deemed to be the act or determination of the Committee. By
express written direction, or by the day-to-day operation of Plan
administration, the Committee may delegate the authority and responsibility for
the day-to-day administrative or ministerial tasks of the Plan to a Benefits
Representative, including a brokerage firm or other third party engaged for such
purpose.

                  12.3.    Meetings. The Committee shall designate a chairman
from among its members to preside at its meetings, and may designate a
secretary, without regard to whether that person is a member of the Committee,
who shall keep the minutes of the proceedings. Meetings shall be held at such
times and places as shall be determined by the Committee, and the Committee may
hold telephonic meetings. The Committee may take any action otherwise proper
under the Plan by the affirmative vote of a majority of its members, taken at a
meeting, or by the affirmative vote of all of its members taken without a
meeting. The Committee may authorize any one or more of their members or any
officer of the Company to execute and deliver documents on behalf of the
Committee.

                  12.4.    Decisions Binding. All determinations and decisions
made by the Committee shall be made in its discretion pursuant to the provisions
of the Plan, and shall be final, conclusive and binding on all persons including
the Company, Participants, and their estates and beneficiaries.

                  12.5.    Expenses of Committee. The Committee may employ legal
counsel, including, without limitation, independent legal counsel and counsel
regularly employed by the Company, consultants and agents as the Committee may
deem appropriate for the administration of the Plan. The Committee may rely upon
any opinion or computation received from any such counsel, consultant or agent.
All expenses incurred by the Committee in interpreting and administering the
Plan, including, without limitation, meeting expenses and professional fees,
shall be paid by the Company.

                  12.6.    Indemnification. Each person who is or was a member
of the Committee shall be indemnified by the Company against and from any
damage, loss, liability, cost and expense that may be imposed upon or reasonably
incurred by him in connection with or resulting from any claim, action, suit, or
proceeding to which he may be a party or in which he may be involved by reason
of any action taken or failure to act under the Plan, except for any such act or
omission constituting willful misconduct or gross negligence. Such person shall
be indemnified by the Company for all amounts paid by him in settlement thereof,
with the Company's approval, or paid by him in satisfaction of any judgment in
any such action, suit, or proceeding against him, provided he shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which such persons may be entitled under the Company's Articles of Incorporation
or Bylaws, as a matter of law, or otherwise, or any power that the Company may
have to indemnify them or hold them harmless.

         13.      DESIGNATION OF BENEFICIARY. At such time, in such manner, and
using such form as shall be prescribed from time to time by the Committee or a
Benefits Representative, a Participant may file a written designation of a
beneficiary who is to receive any Common Stock and/or cash credited to the
Participant's Account at the Participant's death. Such designation of
beneficiary may be changed



by the Participant at any time by giving written notice to the Benefits
Representative at such time and in such form as prescribed. Upon the death of a
Participant, and receipt by the Benefits Representative of proof of the identity
at the Participant's death of a beneficiary validly designated under the Plan,
the Benefits Representative will take appropriate action to ensure delivery of
such Common Stock and/or cash to such beneficiary. In the event of the death of
a Participant and the absence of a beneficiary validly designated under the Plan
who is living at the time of such Participant's death, the Benefits
Representative will take appropriate action to ensure delivery of such Common
Stock and/or cash to the executor or administrator of the estate of the
Participant, or if no such executor or administrator has been appointed (to the
knowledge of the Benefits Representative), the Committee, in its discretion, may
direct delivery of such Common Stock and/or cash to the spouse or to any one or
more dependents of the Participant as the Committee may designate in its
discretion. No beneficiary will, prior to the death of the Participant, acquire
any interest in any Common Stock or cash credited to the Participant's Account.

         14.      TRANSFERABILITY. No amounts credited to a Participant's
Account, whether cash or Common Stock, nor any rights with regard to the
exercise of an option or to receive Common Stock under the Plan, may be
assigned, transferred, pledged, or otherwise disposed of in any way by the
Participant other than by will or the laws of descent and distribution. Any such
attempted assignment, transfer, pledge, or other disposition will be void and
without effect. Each option shall be exercisable, during the Participant's
lifetime, only by the Employee to whom the option was granted. The Company shall
not recognize, and shall be under no duty to recognize, any assignment or
purported assignment by an Employee of his option or of any rights under his
option.

         15.      NO RIGHTS AS A SHAREHOLDER UNTIL CERTIFICATE ISSUED. With
respect to shares of Stock subject to an option, an optionee shall not be deemed
to be a shareholder, and the optionee shall not have any of the rights or
privileges of a shareholder. An optionee shall have the rights and privileges of
a shareholder when, but not until, a certificate for shares has been issued to
the optionee following exercise of his option.

         16.      CHANGES IN THE COMPANY'S CAPITAL STRUCTURE. The Board shall
make or provide for such adjustments in the maximum number of shares specified
in Section 4 and the number and option price of shares subject to options
outstanding under the Plan as the Board shall determine is appropriate to
prevent dilution or enlargement of the rights of Participants that otherwise
would result from any stock dividend, stock split, stock exchange, combination
of shares, or other change in the capital structure of the Company, merger,
consolidation, spin-off of assets, reorganization, partial or complete
liquidation, issuance of rights or warrants to purchase securities, any other
corporate transaction or event having an effect similar to any of the foregoing.

         In the event of a merger of one or more corporations into the Company,
or a consolidation of the Company and one or more other corporations in which
the Company is the surviving corporation, each Participant, at no additional
cost, shall be entitled, upon his payment for all or part of the Common Stock
purchasable by him under the Plan, to receive (subject to any required action by
shareholders) in lieu of the number of shares of Common Stock which he was
entitled to purchase, the number and class of shares of stock or other
securities to which such holder would have been entitled pursuant to the terms
of the agreement of merger or consolidation if, immediately prior to such merger
or consolidation, such holder had been the holder of record of the number of
shares of Common Stock equal to the number of shares purchasable by the
Participant hereunder.



         If the Company is not the surviving corporation in any reorganization,
merger or consolidation (or survives only as a subsidiary of an entity other
than a previously wholly-owned subsidiary of the Company), or if the Company is
to be dissolved or liquidated or sell substantially all of its assets or stock
to another corporation or other entity, then, unless a surviving corporation
assumes or substitutes new options (within the meaning of Section 424(a) of the
Code) for all options then outstanding, (i) the date of exercise for all options
then outstanding shall be accelerated to dates fixed by the Committee prior to
the effective date of such corporate event, (ii) a Participant may, at his
election by written notice to the Company, either (x) withdraw from the Plan
pursuant to Section 10 and receive a refund from the Company in the amount of
the accumulated cash and Stock balance in the Participant's Account, (y)
exercise a portion of his outstanding options as of such exercise date to
purchase shares of Stock, at the option price, to the extent of the balance in
the Participant's Account, or (z) exercise in full his outstanding options as of
such exercise date to purchase shares of Stock, at the option price, which
exercise shall require such Participant to pay the related option price, and
(iii) after such effective date any unexercised option shall expire. The date
the Committee selects for the exercise date under the preceding sentence shall
be deemed to be the exercise date for purposes of computing the option price per
share of Stock. If the Participant elects to exercise all or any portion of the
options, the Company shall deliver to such Participant a stock certificate
issued pursuant to Section 9.4 for the number of shares of Stock with respect to
which such options were exercised and for which such Participant has paid the
option price. If the Participant fails to provide the notice set forth above
within three days after the exercise date selected by the Committee under this
Section 16, the Participant shall be conclusively presumed to have requested to
withdraw from the Plan and receive payment of the accumulated balance of his
Account. The Committee shall take such steps in connection with such
transactions as the Committee shall deem necessary or appropriate to assure that
the provisions of this Section 16 are effectuated for the benefit of the
Participants.

         Except as expressly provided in this Section 16, the issue by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property, or for labor or services either
upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of shares of
Stock then available for purchase under the Plan.

         17.      PLAN EXPENSES; USE OF FUNDS; NO INTEREST PAID. The expenses of
the Plan shall be paid by the Company except as otherwise provided herein or
under the terms and conditions of any agreement entered into between the
Participant and any brokerage firm engaged to administer Accounts. All funds
received or held by the Company under the Plan shall be included in the general
funds of the Company free of any trust or other restriction, and may be used for
any corporate purpose. No interest shall be paid to any Participant or credited
to his Account under the Plan.

         18.      TERM OF THE PLAN. The Plan shall become effective upon the
approval of the Plan by the holders of the majority of the Common Stock present
and represented at a special or annual meeting of the Company's shareholders
held on or before 12 months from December 18, 1997. Except with respect to
options then outstanding, if not terminated sooner under the provisions of
Section 19, no further options shall be granted under the Plan at the earlier of
(i) December 31, 2007, or (ii) the point in time when no shares of Stock
reserved for issuance under Section 4 are available.



         19.      AMENDMENT OR TERMINATION OF THE PLAN. The Board shall have the
plenary authority to terminate or amend the Plan; provided, however, that the
Board shall not, without the approval of the shareholders of the Company, (i)
increase the maximum number of shares which may be issued under the Plan
pursuant to Section 4, (ii) materially amend the requirements as to the class of
employees eligible to purchase Stock under the Plan, or (iii) permit the members
of the Committee to purchase Stock under the Plan. No termination, modification,
or amendment of the Plan shall adversely affect the rights of a Participant with
respect to an option previously granted to him under such option without his
written consent.

         In addition, to the extent that the Committee determines that, in the
opinion of counsel, (i) the listing for qualification requirements of any
national securities exchange or quotation system on which the Company's Common
Stock is then listed or quoted, or (ii) the Code or Treasury regulations issued
thereunder, require shareholder approval in order to maintain compliance with
such listing or qualification requirements or to maintain any favorable tax
advantages or qualifications, then the Plan shall not be amended by the Board in
such respect without first obtaining such required approval of the Company's
shareholders.

         20.      SECURITIES LAWS RESTRICTIONS ON EXERCISE. The Committee may,
in its discretion, require as conditions to the exercise of any option that the
shares of Common Stock reserved for issuance upon the exercise of the option
shall have been duly listed, upon official notice of issuance, upon a stock
exchange, and that either (i) a Registration Statement under the Securities Act
of 1933, as amended, with respect to said shares shall be effective; or (ii) the
Participant shall have represented at the time of purchase, in form and
substance satisfactory to the Company, that it is his intention to purchase the
Stock for investment and not for resale or distribution.

         21.      SECTION 16 COMPLIANCE. The Plan, and transactions hereunder by
persons subject to Section 16 of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), are intended to comply with all applicable conditions of
Rule 16b-3 or any successor exemption provision promulgated under the Exchange
Act. To the extent that any provision of the Plan or any action by the Committee
or the Board fails, or is deemed to fail, to so comply, such provision or action
shall be null and void but only to the extent permitted by law and deemed
advisable by the Committee in its discretion.

         22.      WITHHOLDING TAXES FOR DISQUALIFYING DISPOSITION. Whenever
shares of Stock that were received upon the exercise of an option granted under
the Plan are disposed of within two years after the date of grant of such option
or one year from the date of exercise of such option (within the meaning of
Section 423(a)(1)), the Company shall have the right to require the participant
to remit to the Company in cash an amount sufficient to satisfy federal, state
and local withholding and payroll tax requirements, if any, attributable to such
disposition prior to authorizing such disposition or permitting the delivery of
any certificate or certificates with respect thereto.

         23.      NO RESTRICTION ON CORPORATE ACTION. Subject to Section 19,
nothing contained in the Plan shall be construed to prevent the Board or any
Employer from taking any corporate action which is deemed by the Employer to be
appropriate or in its best interest, whether or not such



action would have an adverse effect on the Plan or any option granted under the
Plan. No Employee, beneficiary or other person shall have any claim against any
Employer as a result of any such action.

         24.      USE OF FUNDS. The Employers shall promptly transfer all
amounts withheld under Section 6 to the Company or to any brokerage firm engaged
to administer Accounts, as directed by the Company. All payroll deductions
received or held by the Company under the Plan may be used by the Company for
any corporate purpose, and the Company will not be obligated to segregate such
payroll deductions.

         25.      MISCELLANEOUS.

                  25.1.    Options Carry Same Rights and Privileges. To the
extent required to comply with the requirements of Section 423 of the Code, all
Employees granted options under the Plan to purchase Common Stock shall have the
same rights and privileges hereunder.

                  25.2.    Headings. Any headings or subheadings in this Plan
are inserted for convenience of reference only and are to be ignored in the
construction or interpretation of any provisions hereof.

                  25.3.    Gender and Tense. Any words herein used in the
masculine shall be read and construed in the feminine when appropriate. Words in
the singular shall be read and construed as though in the plural, and
vice-versa, when appropriate.

                  25.4.    Governing Law. This Plan shall be governed and
construed in accordance with the laws of the State of Oregon to the extent not
preempted by federal law.

                  25.5.    Regulatory Approvals and Compliance. The Company's
obligation to sell and deliver Common Stock under the Plan is at all times
subject to all approvals of and compliance with the (i) regulations of any
applicable stock exchanges (including NASDAQ) and (ii) any governmental
authorities required in connection with the authorization, issuance, sale or
delivery of such Stock, as well as federal, state and foreign securities laws.

                  25.6.    Severability. In the event that any provision of this
Plan shall be held illegal, invalid, or unenforceable for any reason, such
provision shall be fully severable, but shall not affect the remaining
provisions of the Plan, and the Plan shall be construed and enforced as if the
illegal, invalid, or unenforceable provision had not been included herein.

                  25.7.    Refund of Contributions on Noncompliance with Tax
Law. In the event the Company should receive notice that this Plan fails to
qualify as an "employee stock purchase plan" under Section 423 of the Code, all
then existing Account balances will be paid to the Participants and the Plan
shall immediately terminate.

                  25.8.    No Guarantee of Tax Consequences. The Company, Board,
and the Committee do not make any commitment or guarantee that any tax treatment
will apply or be available to any person participating or eligible to
participate in the Plan, including, without limitation, any tax imposed by the
United States or any state thereof, any estate tax, or any tax imposed by a
foreign government.



                  25.9.    Company as Agent for the Employers. Each Employer, by
adopting the Plan, appoints the Company and the Board as its agents to exercise
on its behalf all of the powers and authorities hereby conferred upon the
Company and the Board by the terms of the Plan, including, but not by way of
limitation, the power to amend and terminate the Plan.

EX-10.5

                                                                    EXHIBIT 10.5

 MODIFICATION NO. 1 TO AMENDED AND RESTATED REVOLVING LOAN AND SECURITY
                  AGREEMENT AND NOTES SECURED BY DEED OF TRUST

This Modification Agreement To Amended and Restated Revolving Loan and Security
Agreement and Notes Secured by Deed of Trust ("Modification"), dated as of June
16, 2003 ("Effective Date"), is entered into by Toyota Motor Credit Corporation,
a California corporation ("TMCC"), Lithia Real Estate, Inc., an Oregon
corporation ("Borrower"), with reference to the following:

         A.       TMCC has made Advances to Borrower up to the principal amount
of Forty Million Dollars ($40,000,000) and certain Term Loan (collectively the
"Loan"). The Loan is evidenced by that certain Amended and Restated Loan and
Security Agreement, dated May 10, 2002 ("Loan Agreement"). The Loan Agreement
and all other documents now or hereafter executed which evidence or further
secure the Loan, as the Loan may from time to time by modified, supplemented,
extended or renewed, are hereinafter collectively referred to as the "Loan
Documents."

         B.       The parties have agreed to change the definition of "Loan
Value" in the Loan Agreement and to allow for TMCC to provide an additional
condition to the conversion of an Advance(s) to a Term Loan by the Borrower.

         NOW THEREFORE, in consideration of the premises and mutual covenants
contained in this Modification the parties agree as follows:

         1.       Definitions. All capitalized terms used herein shall have the
meanings given to them in the Loan Agreement unless otherwise specifically
defined herein.

         2.       Modifications to Loan Agreement.

         a.       The definition of "Loan Value" found in Section 1.1 is amended
         in its entirety to read as follows:

                  "'Loan Value' shall mean with respect to a Property, (i)
                  ninety percent (90%) for Toyota or Lexus dealerships; or (ii)
                  eighty (80%) for non-Toyota/Lexus dealerships, in each case of
                  the appraised value of such real property based upon the MAI
                  appraisal delivered to TMCC pursuant to Section 3.1 hereof."

         b.       Subsection 2.2 b. is amended in its entirety to read as
         follows:

                  "b. Limitations. In addition to the conditions set forth in
                  Section 4.2 hereof, Borrower's request to convert one or more
                  Advances into a Term Loan shall on each occasion be subject to
                  the following conditions: (i) TMCC shall have

                                       1



                  approved the Borrower's request in writing, which approval
                  shall be provided in its sole and absolute discretion; (ii)
                  the principal amount of the Term Loan shall not exceed the
                  Loan Value of the Term Loan Collateral; and (iii) the
                  Conversion Date shall be a Business Day not later than the
                  Maturity Date of the Revolving Loan."

         c.       The initial paragraph and the final paragraph of Subsection
         2.2 g. are amended by changing the reference to "three hundred (300)
         months" in each paragraph to "two hundred forty (240) months."

         d.       Exhibit A-2 shall be replaced with the form promissory note
         attached hereto as Exhibit A-2.

         3. Conditions to the Effective Date. The amendment provided for herein
shall be effective as of the date indicated above provided that the following
conditions shall have been met by Borrower or waived by TMCC or as otherwise
specifically provided for herein:

         a.       Borrower shall have paid all legal fees, title insurance fees,
         and recording costs incurred in connection herewith;

         b.       Borrower shall have paid to TMCC all applicable late charges,
         accrued interest, and other payments due and payable to TMCC under the
         Loan Documents as of the date hereof; and

         c.       Borrower shall not be in default under the Loan Documents and
         no event shall have occurred which with the passing of time or giving
         of notice would be a default thereunder.

         d.       Borrower shall have executed and delivered such additional
         instruments and documentation relating to the Loan as TMCC may require,
         in TMCC's sole discretion.

         4.       Representations and Warranties. The Borrower and Guarantor
each hereby restate and reaffirm to TMCC all of the representations and
warranties contained in the Loan Agreement as if made on the date hereof and
fully set forth herein.

         5.       Effect of Agreement. As amended herein, all of the terms,
covenants and conditions of the Notes and other Loan Documents remain in full
force and effect. All references in the Loan Documents to any Loan Document
shall mean as amended by this Modification. Nothing herein shall be deemed or
construed to be an impairment of the lien of the Deed of Trust, and the lien of
the Deed of Trust shall remain a first lien encumbering the Property. To the
extent of any conflict between the provisions of the Notes, the Loan Agreement
or other Loan Documents and the provisions of this Modification, the provisions
of Modification shall prevail and control. Borrower hereby acknowledges,
certifies and reaffirms its obligations under the Loan Documents as modified
hereby.

                                       2



         6.       Further Documentation. The parties agree to execute such
further documents as TMCC may from time to time require in order to give full
force and effect to this Modification.

         7.       Applicable Law. This Modification shall be governed by the
laws of the State of Oregon.

         IN WITNESS WHEREOF, the parties hereto have executed this Modification
No. 2.

BORROWER:                      LITHIA REAL ESTATE, INC.,
                               an Oregon corporation,

                               By:/s/ JEFFREY B. DEBOER
                                 -----------------------------------------------
                               Name: Jeffrey B. Deboer
                               Title: Senior Vice President and Chief Financial
                               Officer

TMCC:                          TOYOTA MOTOR CREDIT CORPORATION,
                               a California corporation

                               By:/s/ DAVID PELLICCIONI
                                 -----------------------------------------------
                                 David Pelliccioni
                                 Group Vice President

                                       3



                                   EXHIBIT A-2

                                 PROMISSORY NOTE
                                   (Term Loan)

$_____________.00                                                   ____________

         FOR VALUE RECEIVED, the undersigned, Lithia Real Estate, Inc., an
Oregon corporation (the "Borrower"), promises to pay to Toyota Motor Credit
Corporation, a California corporation ("TMCC"), or its order, at 19001 So.
Western Avenue, P.O. Box 2958, Torrance, California 90509-2958, on October 1,
2007 or such later date as may be established in accordance with Section 2.2 of
the Loan Agreement (as defined below) (as extended from time to time, the
"Maturity Date") the principal sum of ____________________ ($______________),
together with interest thereon as provided in this Promissory Note (the "Note").

         This Note is issued under and is subject to the terms of that certain
Amended and Restated Loan and Security Agreement dated as of May 10, 2002, as
amended by that certain Modification to Amended and Restated Revolving Loan and
Security Agreement And Notes Secured by Deed of Trust dated _____________, 2003
(as amended or otherwise modified from time to time, the "Loan Agreement"),
executed by Borrower and TMCC. The Loan Agreement contains terms upon which the
Term Loan is made and this Note is issued. In the event of any inconsistency or
conflict between the terms of this Note and the terms of the Loan Agreement, the
terms of this Note shall control. Capitalized terms used in this Note which are
not defined herein have the meanings set forth in the Loan Agreement. This Note
is subject to acceleration upon the terms provided herein and in the Loan
Agreement.

         Pursuant to the terms of the Loan Agreement, Borrower has elected to
convert one or more of Advances evidenced by that certain Promissory Note
(Revolving Loan) made by Borrower in favor of TMCC dated May 10, 2002 in the
face amount of Forty Million Dollars ($40,000,000) (the "Prior Note") into a
single term loan in the principal sum of this Note (the "Term Loan"). This Note
continues a portion of the Prior Note and the Advances evidenced thereby and
converted into the Term Loan evidenced by this Note. Such Advances have not been
repaid, satisfied or discharged and nothing herein shall constitute a repayment,
satisfaction or discharge of such indebtedness.

                                  [SELECT ONE]

         [1.      Interest. The Term Loan evidenced by this Note shall bear
interest at a per annum rate two (2.00%)/two and one-half (2.50%)(non-toyota
rate) percentage points above the one (1) month London Interbank Offered Rate
("LIBOR"), as published by the Wall Street Journal in its "Money Rates" section,
in effect on the last business day of the month preceding the date of this Note.
The LIBOR Rate shall be adjusted, as necessary, on the first calendar day of
each month, based on the LIBOR Rate in effect as of the last business day of the
preceding month. Should the method of establishing the LIBOR Rate, or the
publication of the London Interbank Offered Rates for one (1) month deposits in
the Wall Street Journal cease or be abolished, then the

                                       4



LIBOR Rate shall be based on a comparable index selected by TMCC. Interest shall
be calculated on the basis of a year of three hundred sixty (360) days applied
to the actual number of days elapsed on the unpaid principal balance.

                  2.       Payment Terms. Payments of principal owing under this
Note shall be determined based on an amortization of the principal over three
hundred (300) months. Interest shall be payable monthly, in arrears, on the
first day of each month, and equal consecutive monthly principal payments shall
be due and payable on the first Business Day of the month following the date of
this Note and continue on the first Business Day of each month thereafter.
Borrower shall repay the balance of the principal outstanding of the Term Loan
evidenced by this Note on the Maturity Date. Accrued but unpaid interest on the
Term Loan evidenced by this Note shall be paid in arrears on the first Business
Day of each month and on the Maturity Date. Unpaid interest accruing on amounts
in default shall be payable on demand. All amounts payable under this Note shall
be payable only in lawful money of the United States of America, in immediately
available funds.]

                                     [-OR-]

         [1.      Interest. The Term Loan evidenced by this Note shall bear
interest at a per annum rate two (2.00%)/ two and one-half (2.50%)(non-toyota
rate)percentage points above the five (5) year swap rate published by Bloomberg
Financial as the mid-price "USSWAP 5 Index" in effect on the date of this Note.
Interest shall be calculated on the basis of a year of three hundred sixty (360)
days applied to the actual number of days elapsed on the unpaid principal
balance.

         2.       Payment Terms. The principal and interest owing under this
Note shall be amortized over two hundred forty (240) months. Equal consecutive
monthly payments of principal and interest shall be payable monthly commencing
on the first Business Day of the month following the date of this Note and
continue on the first Business Day of each month thereafter. Borrower shall
repay the balance of the principal outstanding of the Term Loan evidenced by
this Note on the Maturity Date. Accrued but unpaid interest on the Term Loan
evidenced by this Note shall be paid in arrears on the first Business Day of
each month and on the Maturity Date. Unpaid interest accruing on amounts in
default shall be payable on demand. All amounts payable under this Note shall be
payable only in lawful money of the United States of America, in immediately
available funds.]

         3.       Application of Payments. Each payment received by TMCC shall
be credited first to interest then due and any late charges, fees or expenses
owed, and the remainder to principal. TMCC is hereby authorized to record the
date and amount of the Term Loan made and the date and amount of each payment of
principal and interest thereon on a schedule annexed hereto and constituting a
part of this Note or maintained in connection herewith. Any such recordation by
TMCC shall constitute prima facie evidence of the accuracy of the information so
recorded; provided, however, that the failure to make any such recordation or
any error in any such recordation shall not affect the obligations of Borrower
hereunder.

         5.       Prepayment. If all or any part of the principal of this Note
is prepaid within twelve (12) months from the date of this Note, whether
voluntarily made or upon acceleration of the Term Loan (including, without
limitation, upon any violation by Borrower of the "Due on

                                       5



Sale" provisions of any mortgage or deed of trust securing this Note), Borrower
shall pay a prepayment charge equal to two percent (2.00%) of the amount
prepaid, but in no event greater than the maximum amount permitted by applicable
law. No prepayment charge shall apply to any prepayment of the principal of this
Note made after twelve (12) months from the date of this Note.

         6.       Late Payments; Default Interest. Time is of the essence of
this Note. Should Borrower fail to make any payment within fifteen (15) days of
it being due, Borrower agrees to pay a late charge, to the extent allowed by
applicable law, of two percent (2.00%) of the late payment, but only once for
each such late payment. Borrower acknowledges that TMCC will incur additional
expenses in handling the delinquent payment, the exact amount of which is
difficult to ascertain, but that said late charge is a reasonable estimate of
TMCC's expenses so incurred. Upon the occurrence and during the continuation of
an Event of Default, the Term Loan evidenced by this Note shall bear interest at
a per annum rate two (2.00%) percentage points above the interest rate provided
in Section 1 of this Note, but in no event greater than the maximum rate of
interest permitted by applicable law.

         7.       Security for Note. This Note is secured by all mortgages,
deeds of trust, security agreements, collateral assignments, and other liens and
security now or at any time hereafter executed or granted by Borrower to TMCC,
to secure the Term Loan evidenced by this Note, and by any rights of subrogation
accruing to TMCC by reason of any indebtedness discharged by the proceeds of the
Term Loan. The deeds of trust or mortgages securing this Note (collectively, the
"Deeds of Trust") provide that all amounts due under this Note may be made
immediately due and payable in the event that, among other defaults as described
in the Deeds of Trust, the property described in any of the Deeds of Trust is
sold, transferred, conveyed, encumbered or otherwise alienated without TMCC's
prior written consent, all as specifically set forth in the Deeds of Trust.

         8.       Acceleration. Upon the occurrence of an Event of Default,
unless all such Event of Default shall have been cured within the time provided
in the Loan Agreement, or waived in writing by TMCC, all amounts outstanding
hereunder and all interest accrued hereon, shall, at the option of TMCC, without
presentment, demand, protest or notice of acceleration, notice of intent to
accelerate or notice of any kind (all of which are hereby expressly waived), be
immediately due and payable; provided, however, that upon the occurrence of one
or more of the other Events of Default set forth in subsection g of Section 8.1
of the Loan Agreement, all amounts outstanding hereunder and all interest
accrued hereon shall be immediately due and payable without presentment, demand,
protest or notice of acceleration, notice of intent to accelerate or notice of
any kind (all of which are hereby expressly waived). No failure by TMCC to
exercise its option under this Section shall not constitute a waiver of the
right to exercise it upon the occurrence of any subsequent Event of Default.

         9.       Guarantor. This Note is guaranteed by the Guarantor(s)
referenced in the Loan Agreement pursuant to the terms of certain Continuing and
Irrevocable Guaranty(ies) executed from time to time by such Guarantor(s).

                                       6



         10.      No Amendment. Neither this Note, nor any term hereof, may be
amended, changed, waived, discharged, terminated or otherwise modified without
the prior written consent of TMCC.

         11.      Waivers. The makers, endorsers, guarantors and sureties of
this Note, and each of them, hereby waive diligence, all notices, including
notice of intent to accelerate and notice of acceleration, demand, presentment
for payment, notice of non-payment, protest and notice of protest; and expressly
agree that this Note, or any payment hereunder may be extended or modified from
time to time; and consent to the acceptance of further security for this Note,
including other types of security; and the release of security; all without in
any way affecting their liability. The right to plead any and all statutes of
limitations as a defense to any demand secured by the Deeds of Trust or any
other security securing this Note, against makers, endorsers, guarantors or
sureties is expressly waived by each and all said parties.

         12.      Legal Fees. If this Note is referred to an attorney for
collection or legal advice following a default, or if any other judicial or
non-judicial action is instituted or an attorney is employed to reclaim,
sequester, protect, preserve or enforce any interest in real property or other
security for this Note, including but not limited to proceedings under the
United States Bankruptcy Code or eminent domain, Borrower agrees to pay the
holder's attorneys' fees and costs.

         13.      Applicable Law. The validity of this Note, its construction,
interpretation and enforcement, and the rights of the parties hereunder shall be
determined under, governed by and construed in accordance with the laws of the
State of Oregon.

         14.      Severability. If any of the provisions of this Note shall be
determined to be invalid, such invalidity shall not invalidate any other
provision of this Note, but it shall be construed as if not containing the
particular provision or provisions held to be invalid, and all rights and
obligations of the parties shall be construed and enforced accordingly. The
headings in this Note are for convenience only and shall not affect the
construction hereof.

         15.      Successors And Assigns. The duties, covenants, conditions and
obligations of Borrower in this Note shall be binding obligations of Borrower's
heirs, executors, administrators, personal representatives, successors and
assigns. Each and every party signing or endorsing this Note binds himself or
herself as principal and not as surety, and each shall be jointly and severally
liable hereunder.

         16.      Jurisdiction. BORROWER HEREBY SUBMITS TO THE JURISDICTION OF
THE COURTS OF THE STATE OF OREGON AND THE UNITED STATES DISTRICT COURTS FOR THE
DISTRICT OF OREGON SITTING IN PORTLAND, MULTNOMAH COUNTY, OREGON, AS WELL AS TO
THE JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN FROM THE
AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING
ARISING OUT OF ANY OF BORROWER'S OBLIGATIONS UNDER OR WITH RESPECT TO THIS NOTE,
AND EXPRESSLY WAIVES ANY RIGHT IT MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON
CONVENIENS OR TO OBJECT TO VENUE IN ANY OF SUCH COURTS.

                                       7



         17.      Waiver Of Jury Trial. BORROWER AND TMCC MUTUALLY HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION BASED HEREON, ARISING OUT OF, UNDER OR IN CONNECTION
WITH THIS NOTE OR ANY OTHER LOAN DOCUMENT CONTEMPLATED TO BE EXECUTED IN
CONNECTION HEREWITH, OR ANY COURSE OF CONDUCT, COURSE OF DEALINGS, STATEMENTS
(WHETHER VERBAL OR WRITTEN) OR ACTIONS OF ANY PARTY. THIS WAIVER CONSTITUTES A
MATERIAL INDUCEMENT FOR TMCC TO ACCEPT THIS NOTE AND MAKE THE TERM LOAN.

         18.      Commercial Transaction. BORROWER ACKNOWLEDGES THAT THE TERM
LOAN EVIDENCED BY THIS NOTE IS FOR COMMERCIAL, INVESTMENT OR BUSINESS PURPOSES.

         IN WITNESS WHEREOF, Borrower has executed and delivered this Note as of
the date first indicated above.

                                    BORROWER:

                                    LITHIA REAL ESTATE, INC., an Oregon
                                    corporation

                                    By:_________________________________________
                                    Name:_______________________________________
                                    Title:______________________________________

                                       8

EX-31.1

                                                                    EXHIBIT 31.1

                            CERTIFICATION PURSUANT TO
                SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Sidney B. DeBoer, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     (b)  Evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     (c)  Disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's fourth fiscal quarter in
          the case of an annual report) that has materially affected, or is
          reasonably likely to materially affect, the registrant's internal
          control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     (a)  All significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.

Date: August 14, 2003

/s/Sidney B. DeBoer
- -------------------
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
Lithia Motors, Inc.

EX-31.2

                                                                    EXHIBIT 31.2

                            CERTIFICATION PURSUANT TO
                SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, Jeffrey B. DeBoer, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Lithia Motors, Inc.;

2.   Based on my knowledge, this report does not contain any untrue statement of
     a material fact or omit to state a material fact necessary to make the
     statements made, in light of the circumstances under which such statements
     were made, not misleading with respect to the period covered by this
     report;

3.   Based on my knowledge, the financial statements, and other financial
     information included in this report, fairly present in all material
     respects the financial condition, results of operations and cash flows of
     the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

     (a)  Designed such disclosure controls and procedures, or caused such
          disclosure controls and procedures to be designed under our
          supervision, to ensure that material information relating to the
          registrant, including its consolidated subsidiaries, is made known to
          us by others within those entities, particularly during the period in
          which this report is being prepared;

     (b)  Evaluated the effectiveness of the registrant's disclosure controls
          and procedures and presented in this report our conclusions about the
          effectiveness of the disclosure controls and procedures, as of the end
          of the period covered by this report based on such evaluation; and

     (c)  Disclosed in this report any change in the registrant's internal
          control over financial reporting that occurred during the registrant's
          most recent fiscal quarter (the registrant's fourth fiscal quarter in
          the case of an annual report) that has materially affected, or is
          reasonably likely to materially affect, the registrant's internal
          control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on
     our most recent evaluation of internal control over financial reporting, to
     the registrant's auditors and the audit committee of the registrant's board
     of directors (or persons performing the equivalent functions):

     (a)  All significant deficiencies and material weaknesses in the design or
          operation of internal control over financial reporting which are
          reasonably likely to adversely affect the registrant's ability to
          record, process, summarize and report financial information; and

     (b)  Any fraud, whether or not material, that involves management or other
          employees who have a significant role in the registrant's internal
          control over financial reporting.

Date: August 14, 2003

/s/Jeffrey B. DeBoer
- --------------------
Jeffrey B. DeBoer
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.

EX-32.1

                                                                    EXHIBIT 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lithia Motors, Inc. (the "Company")
on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Sidney B. DeBoer,
Chairman of the Board, Chief Executive Officer and Secretary of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

         (1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

/s/ Sidney B. DeBoer
- --------------------
Sidney B. DeBoer
Chairman of the Board,
Chief Executive Officer and Secretary
Lithia Motors, Inc.
August 14, 2003

EX-32.2

                                                                    EXHIBIT 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Lithia Motors, Inc. (the "Company")
on Form 10-Q for the period ended June 30, 2003 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Jeffrey B. DeBoer,
Senior Vice President and Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:

         (1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and

         (2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.

/s/ Jeffrey B. DeBoer
- ---------------------
Jeffrey B. DeBoer
Senior Vice President
and Chief Financial Officer
Lithia Motors, Inc.
August 14, 2003