Back to GetFilings.com

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 2001 OR

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-21789
 
LITHIA MOTORS, INC.
(Exact name of registrant as specified in its charter)

Oregon		93-0572810
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

360 E. Jackson Street, Medford, Oregon		97501
(Address of principal executive offices)		(Zip Code)

541-776-6899
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, without par value
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X]    No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  [   ]

The aggregate market value of the voting stock held by non-affiliates of the Registrant was $80,334,250 as of February 14, 2002 based upon the last sales price ($19.15) as reported by the New York Stock Exchange for the Company’s Class A Common Stock.

The number of shares outstanding of the Registrant’s Common Stock as of February 14, 2002 was: Class A: 9,226,701 shares and Class B: 4,039,719 shares.

The number of shares outstanding of the Registrant’s Preferred Stock as of February 14, 2002 was: Series M 2003: 4,499 shares.

Documents Incorporated by Reference

The Registrant has incorporated into Part III of Form 10-K, by reference, portions of its Proxy Statement for its 2002 Annual Meeting of Shareholders.

1

Table of Contents

PART I

Item 1. Business

Forward Looking Statements and Risk Factors

Some of the statements under the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this Form 10-K 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-K 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 to this 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.

Overview

We are a leading operator of automotive franchise stores in the western United States. We sell new and used cars, light trucks and sport utility vehicles. We also provide vehicle maintenance, warranty and repair services and arrange finance, extended warranty and insurance contracts for our customers. We achieve gross margins above industry averages by selling a higher ratio of retail used vehicles to new vehicles and by arranging finance and extended warranty contracts for a greater percentage of our customers. In 2001 we achieved a gross margin of 16.4% compared with the industry average of 13.1%. We currently offer 24 brands of new vehicles, through 123 franchises in 65 stores. Our core markets are concentrated in the fastest growing regions in the United States with 16 stores in Oregon, 11 in California, 10 in Washington, 7 in Colorado, 7 in Idaho, 5 in Nevada, 4 in Texas, 3 in South Dakota and 2 in Alaska. Over 65% of our stores are located in markets where our store does not compete directly with any other franchised dealer selling the same brand.

We were founded in 1946. Our two senior executives have managed the company for more than 30 years. Since our initial public offering in 1996, we have grown from 5 to 65 stores primarily through an aggressive acquisition program, increasing annual revenues from $143 million in 1996 to $1.87 billion in 2001. We have achieved five-year compounded annual growth rates through December 31, 2001 of 67% for revenues, 53% for net income and 25% for earnings per share, together with a 5.3% average same store sales increase.

2

Table of Contents

The Industry

At approximately $1.0 trillion in annual sales, automotive retailing is the largest retail trade sector in the United States and comprises roughly 10% of the GDP. The industry is highly fragmented with the 100 largest automotive retailers generating approximately 16% of total industry revenues in 2000. The number of franchised stores has declined significantly since 1960 from more than 36,000 stores to approximately 22,000 in 2001. In the U.S., vehicles can be purchased from approximately 22,000 franchised dealers, 53,000 independent used vehicle dealers, or through casual (person to person) transactions. New vehicles can only be sold through automotive retail stores franchised by auto manufacturers. These franchise stores have designated trade territories under state franchise law protection, which limits the number of new stores that can be opened in any given area.

Consolidation is expected to continue as many smaller automotive retailers are now being forced to consider selling or joining forces with larger retailer groups, given the large capital requirements necessary to operate in today’s retail environment. With many owners reaching retirement age, often without clear succession plans, larger, well-capitalized automotive retailers provide an attractive exit strategy. We believe these factors, in conjunction with an uncertain economic forecast, provide an attractive environment for continuing consolidation.

Unlike other retailing segments, automotive manufacturers provide unparalleled support to the automotive retailer. Manufacturers often bear the burden of markdown risks on slow-moving inventory as they provide aggressive dealer incentives to clear aged inventory in order to free the inventory pipeline for new purchases. In addition, an automotive retailer’s net inventory investment is relatively small, given floorplan financing from manufacturers. Furthermore, manufacturers provide low-cost financing for working capital and acquisitions and credit to consumers to finance vehicle purchases, as well as pay retail prices to their dealers for servicing vehicles under manufacturers’ warranties.

Sales in the automotive sector are affected by general economic conditions including rates of employment, income growth, interest rates and general consumer sentiment. Since 1990, new vehicle revenues have grown at a 5.3% compound annual rate and used vehicles at a 4.7% compound annual rate. New and used unit sales, however, have increased at slower compound annual rates of 2.3% and 0.6%, respectively. Slower unit volume growth over this time period has been offset by rising prices associated with new vehicles as a result of a mix shift in the marketplace to the higher-priced light trucks and SUVs and the higher prices paid for later model used vehicles, which now comprise a growing portion of the used vehicle market. New vehicle sales usually decline during a weak economy; however, the higher margin service and parts business typically benefits in the same environment because consumers tend to keep their vehicles longer. Strong sales of new vehicles in recent years have provided a population of vehicles for future service and parts revenues. Automotive retailers benefit from their designation as an exclusive warranty and recall service provider of a manufacturer. For the typical manufacturer’s warranty, this provides an automotive retailer with a period of at least 3 years of repeat business for service covered by warranty. Extended warranties can add two or more years to this repeat servicing period.

Automotive retailers’ profitability varies widely and depends in part on product mix, effective management of inventory, marketing, quality control and responsiveness to customers. New vehicles account for an estimated 60% of industry revenues, but only 35% of gross profits.

3

Table of Contents

The remaining 40% of revenues are derived from used vehicles sales (26%), service and parts (10%) and finance and insurance (4%), which combine to contribute 65% of the sector’s gross profits. Gross margins on new vehicles typically average approximately 8.5%, versus 11.3% for retail used vehicles. The difference is primarily a function of the non-comparability among used vehicles and lack of standardized pricing.

Automotive retailers have much lower fixed overhead costs than automobile manufacturers, parts suppliers and most specialty retailers. Variable and discretionary costs, such as sales commissions and personnel, advertising and inventory finance expenses, can be adjusted to match new vehicle sales. Variable and discretionary costs account for an estimated 60-65% of the industry’s total expenses. Moreover, an automotive retailer can enhance its profitability from sales of higher margin products and services. Gross margins for the parts and service business are significantly higher at approximately 46%, given the labor-intensive nature of the product category. Gross margins for finance and insurance are virtually 100%. These supplemental, high margin products and services provide substantial incremental revenue and net income, decreasing the reliance on the highly competitive new vehicle sales.

Store Operations

Each store is its own profit center and is managed by an experienced general manager who has primary responsibility for inventory, advertising, pricing and personnel. In order to provide additional support for improving performance, we make available to each store a team of specialists in new vehicle sales, used vehicle sales, finance and insurance, service and parts, and back-office administration. The following tables set forth information about our stores:

4

Table of Contents

						Year Opened/
Location		Store		Franchises		Acquired
CALIFORNIA
Concord		Lithia Dodge of Concord		Dodge, Dodge Truck		1997
		Lithia Ford of Concord		Ford		1997
		Lithia Volkswagen of Concord		Volkswagen		1997
Fresno		Lithia Ford of Fresno		Ford		1997
		Lithia Hyundai of Fresno		Hyundai		1998
		Lithia Mazda Suzuki of Fresno		Mazda, Suzuki		1997
		Lithia Nissan of Fresno		Nissan		1998
Napa		Lithia Ford Lincoln Mercury of Napa		Ford, Lincoln, Mercury		1997
Redding		Lithia Chevrolet of Redding		Chevrolet		1998
		Lithia Toyota of Redding		Toyota		1998
Vacaville		Lithia Toyota of Vacaville		Toyota		1996
OREGON
Eugene		Lithia Dodge of Eugene		Dodge, Dodge Truck		1996
		Lithia Nissan of Eugene		Nissan		1998
		Saturn of Eugene		Saturn		2000
Grants Pass		Lithia’s Grants Pass Auto Center		Dodge, Dodge Truck, Chrysler, Jeep		Pre-IPO
Klamath Falls		Lithia Klamath Falls Auto Center		Toyota, Dodge, Dodge Truck, Chrysler, Jeep		1999
Medford		Lithia Dodge Chrysler Jeep		Dodge, Dodge Truck, Chrysler, Jeep		Pre-IPO
		Lithia Honda		Honda		Pre-IPO
		Lithia Lincoln Mercury Suzuki Mazda		Lincoln, Mercury, Mazda, Suzuki		Pre-IPO
		Lithia Nissan BMW		Nissan, BMW		1998
		Lithia Toyota		Toyota		Pre-IPO (1)
		Lithia Volkswagen		Volkswagen		Pre-IPO (2)
		Saturn of Southwest Oregon		Saturn		Pre-IPO
Oregon City (Portland)		Lithia Subaru of Oregon City		Subaru		2002
Roseburg		Lithia Ford Lincoln Mercury of Roseburg		Ford, Lincoln, Mercury		1999
		Lithia Dodge Chrysler Jeep of Roseburg		Dodge, Dodge Truck, Chrysler, Jeep		1999
Springfield (Eugene)		Lithia Toyota of Springfield		Toyota		1998
COLORADO
Aurora (Denver)		Lithia Cherry Creek Dodge		Dodge, Dodge Truck		1999
		Lithia Colorado Chrysler Kia		Chrysler, Kia		1999
		Lithia Colorado Jeep		Jeep		1999
Colorado Springs		Lithia Colorado Springs Jeep Chrysler		Jeep, Chrysler		1999
Englewood (Denver)		Lithia Centennial Chrysler Jeep		Chrysler, Jeep		1999
		Lithia Cherry Creek Kia		Kia		1999
Fort Collins		Lithia Foothills Chrysler Hyundai		Dodge, Dodge Truck, Chrysler, Hyundai, Jeep		1999
WASHINGTON
Bellevue (Seattle)		Chevrolet of Bellevue		Chevrolet		2001
Issaquah (Seattle)		Chevrolet of Issaquah		Chevrolet		2001
Kennewick		Honda of Tri-Cities		Honda		2000
		Lithia Dodge of Tri-Cities		Dodge, Dodge Truck		1999
Renton		Lithia Chrysler Jeep of Renton		Chrysler, Jeep		2000
		Lithia Dodge of Renton		Dodge, Dodge Truck		2000
Richland		Lithia Ford of Tri-Cities		Ford		2000
Seattle		BMW of Seattle		BMW		2001
Spokane		Lithia Camp Chevrolet		Chevrolet, Cadillac		1998
		Lithia Camp Imports		Subaru, BMW, Volvo		1998

5

Table of Contents

						Year Opened/
Location		Store		Franchises		Acquired
IDAHO
Boise		Lithia Ford of Boise		Ford		2000
		Chevrolet of Boise		Chevrolet		1999
		Lithia Daewoo of Boise		Daewoo		1999
		Lincoln-Mercury Isuzu of Boise		Lincoln, Mercury, Isuzu		1999
Caldwell		Chevrolet of Caldwell		Chevrolet		2001
Pocatello		Honda of Pocatello		Honda		2001
		Lithia Chrysler Dodge		Chrysler, Dodge, Dodge Truck,		2001
		Hyundai of Pocatello		Hyundai
NEVADA
Reno		Lithia Reno		Suzuki, Audi, Lincoln,		1997
				Mercury, Isuzu
		Lithia Reno Hyundai		Hyundai		1997
		Lithia Reno Subaru		Subaru		1999
		Lithia Volkswagen of Reno		Volkswagen		1998
Sparks		Lithia Sparks (satellite of Lithia Reno)		(Suzuki, Lincoln, Mercury, Isuzu)		1997
SOUTH DAKOTA
Sioux Falls		Chevrolet of Sioux Falls		Chevrolet		2000
		Lithia Dodge of Sioux Falls		Dodge		2001
		Lithia Subaru of Sioux Falls		Subaru		2000
ALASKA
Anchorage		Lithia Chrysler Jeep of Anchorage		Chrysler, Jeep		2001
		Lithia Dodge of South Anchorage		Dodge, Dodge Truck		2001
TEXAS
Big Spring		All American Chrysler		Dodge, Dodge Truck, Jeep, Chrysler		2002
		Jeep Dodge of Big Spring
San Angelo		All American Chrysler		Dodge, Dodge Truck, Jeep, Chrysler		2002
		Jeep Dodge of San Angelo
		All American Chevrolet		Chevrolet, Daewoo		2002
		Daewoo of San Angelo
Odessa		All American Chrysler Jeep Dodge of Odessa		Dodge, Dodge Truck, Jeep, Chrysler		2002

6

Table of Contents

New Vehicle Sales

In 2001, we sold 24 domestic and imported brands ranging from economy to luxury cars, sport utility vehicles, minivans and light trucks.

Our unit and dollar sales of new vehicles were as follows:

We purchase our new car inventory directly from manufacturers, who allocate new vehicles to stores based on the number of vehicles sold by the store on a monthly basis and by the store’s market area. We attempt to exchange vehicles with other automotive retailers to accommodate customer demand and to balance inventory.

We post the manufacturer’s suggested retail price on every vehicle, as required by law. We negotiate the final sales price of a new vehicle individually with the customer except at our Saturn stores, where the final sales price does not deviate from the posted price.

7

Table of Contents

'

Used Vehicle Sales

At each new vehicle store, we also sell used vehicles. We employ a used vehicle manager at each location.

Retail used vehicle sales are an important part of our overall profitability. In 2001, retail used vehicle sales generated a gross margin of 12.7% compared with a gross margin of 8.7% for new vehicle sales. Our used vehicle operation gives us an opportunity to:

	•		generate sales to customers financially unable or unwilling to purchase a new vehicle;
	•		increase new and used vehicle sales by aggressively pursuing customer trade-ins; and
	•		increase service contract sales and provide financing to used vehicle purchasers.

We currently sell approximately 0.93 retail used vehicles for every new vehicle sold, compared to the industry average ratio of approximately 0.77 to 1.

In addition to selling late model used cars, as do other new vehicle dealers, our stores emphasize sales of used vehicles three to ten years old. These vehicles sell for lower prices, but generate greater margins. Selling a larger number of used vehicles makes us less susceptible to the effects of changes in the volume of new vehicle sales that result from economic conditions.

We acquire most of our used vehicles through customer trade-ins, but we also buy them at “closed” auctions, attended only by new vehicle automotive retailers with franchises for the brands offered. These auctions offer off-lease, rental and fleet vehicles. We also buy used vehicles at “open” auctions of repossessed vehicles and vehicles being sold by other automotive retailers.

In addition to selling used vehicles to retail customers, we sell vehicles in poor condition and vehicles that have not sold promptly to other automotive retailers and to wholesalers.

Our used vehicle sales are as follows:

Vehicle Financing, Extended Warranty and Insurance

We believe that arranging financing is critical to our ability to sell vehicles and related products and services. We provide a variety of financing and leasing alternatives to meet customer needs. Offering customer financing on a “same day” basis gives us an advantage, particularly over smaller competitors who do not generate enough sales to attract our breadth of financing sources.

8

Table of Contents

Because of greater profit margins from sales of finance and insurance products, we try to arrange financing for every vehicle we sell. Our finance and insurance managers possess extensive knowledge of available financing alternatives and receive training in determining each customer’s financing needs so that the customer can purchase or lease a vehicle. The finance and insurance managers work closely with financing sources to quickly determine a customer’s credit status and to confirm the type and amount of financing available to each customer.

In 2001, we arranged financing for 77% of our new vehicle sales and 74% of our retail used vehicle sales, compared to the industry averages of 55% and 59%, respectively. Our average finance and insurance revenue per vehicle totaled $933 in 2001 compared to the industry average of $438.

We receive a portion of the financing charge as fee income for each sale we finance. In 2001 and 2002, automobile manufacturers have offered zero percent financing as sales incentives to new vehicle purchasers. Zero percent financing reduces, but does not eliminate, our per unit fee income from arranging financing, as we receive a payment from the manufacturers in connection with such financing. Many customers do not qualify for zero percent financing, either because of their credit standing or because they require longer financing terms than offered for zero percent financing. Incentive financing programs, including zero percent programs, usually offer cash rebates as an alternative to reduced interest rates. A majority of eligible customers elect to receive cash rebates instead of incentive financing, usually using the cash rebate as a down payment to complete the purchase of a new vehicle with little or no cash out of pocket.

We usually arrange financing for customers from outside sources on a non-recourse basis to avoid the risk of default. During 2001, we directly financed less than 0.01% of our vehicle sales.

Our finance and insurance managers also market third-party extended warranty contracts and insurance contracts to our new and used vehicle buyers. These products and services yield higher profit margins than vehicle sales and contribute significantly to our profitability. Extended warranty contracts provide additional coverage for new vehicles beyond the duration or scope of the manufacturer’s warranty. The service contracts we sell to used vehicle buyers provide coverage for certain major repairs.

We also offer our customers credit life, and health and accident insurance when they finance an automobile purchase and receive a commission on each policy sold. We also offer other products, such as protective coatings and automobile alarms.

Service, Body and Parts

Our automotive service, body and parts operations are an integral part of establishing customer loyalty and contribute significantly to our overall revenue and profits. We provide parts and service primarily for the new vehicle brands sold by our stores, but we also service other vehicles. In 2001, our service, body and parts operations generated $187.7 million in revenues, or 10.0% of total revenues. We set prices to reflect the difficulty of the types of repair and the cost and availability of parts.

9

Table of Contents

The service, body and parts businesses provide important repeat revenues to the stores. We market our parts and service products by notifying the owners of vehicles purchased at our stores when their vehicles are due for periodic service. This encourages preventive maintenance rather than post-breakdown repairs. We offer a lifetime oil and filter service, which in 2001 was purchased by 30% of our new and used vehicle buyers. This service helps us retain customers, and provides opportunities for repeat parts and service business. Revenues from the service, body and parts departments are important during economic downturns as owners tend to repair existing used vehicles rather than buy new vehicles during such periods. This limits the effects of a drop in new vehicle sales.

We operate twelve collision repair centers: two each in Oregon, Idaho and South Dakota and one each in California, Washington, Colorado, Nevada, Texas and Alaska. We work closely with the automobile insurance companies to provide collision repair services on claims at preferred rates based on the high volume of business. At our Medford, Oregon body shop, we provide office space to casualty insurers to process automobile claims. This helps generate further repair business.

Marketing

We market ourselves as “America’s Car & Truck Store.” We use most types of advertising, including television, newspaper, radio and direct mail, and an Internet web site. We advertise to develop our image as a reputable automotive retailer, offering quality service, affordable automobiles and financing for all buyers. The automobile manufacturers pay for many of our advertising and marketing expenditures. The manufacturers also provide us with market research, which assists us in developing our own advertising and marketing campaigns. In addition, our stores advertise discounts or other promotions to attract customers. By owning a cluster of stores in a particular market, we save money from volume discounts and other media concessions. We also participate as a member of advertising cooperatives and associations, whose members pool their resources and expertise with manufacturers to develop advertising campaigns.

We maintain a web site (www.lithia.com) that generates leads and provides information for our customers. We use the Internet site as a marketing tool to familiarize customers with us, our stores and the products we sell, rather than to complete purchases. Although many customers use the Internet to research information about new vehicles, nearly all ultimately visit a store to complete the sale and take delivery of the vehicle. Our web site enables a customer to:

	•		locate our stores and identify the new vehicle brands sold at each store;
	•		view new and used vehicle inventory;
	•		schedule service appointments;
	•		view Kelley Blue Book values;
	•		visit our investor relations site; and
	•		view employment opportunities.

We emphasize customer satisfaction and strive to develop a reputation for quality and fairness. We train our sales personnel to identify an appropriate vehicle for each of our customers at an affordable price.

10

Table of Contents

We believe that our “Priority You” customer-oriented plan differentiates us from other automotive retail stores. “Priority You” commits us to provide:

	•		a complimentary credit check;
	•		a complimentary used vehicle appraisal;
	•		a 60-day/3,000 mile warranty on all used vehicles sold; and
	•		a community donation for every vehicle sold.

Management Information System

We consolidate, process and maintain financial information, operational and accounting data, and other related statistical information on computers at our headquarters. Our systems are based on an ADP platform for the main database, and information is processed and analyzed utilizing customized financial reporting software from Hyperion Solutions. Senior management can access detailed information from all of our locations regarding:

	•		inventory;
	•		cash balances;
	•		total unit sales and mix of new and used vehicle sales;
	•		lease and finance transactions;
	•		sales of ancillary products and services;
	•		key cost items and profit margins; and
	•		the relative performance of the stores.

Each store’s general manager has access to this same information. With this information, we can quickly analyze the results of operations, identify trends and focus on areas that require attention or improvement. Our management information system also allows our general managers to respond quickly to changes in consumer preferences and purchasing patterns, maximizing our inventory turnover.

Our management information system is particularly important to successfully operating new stores. Following each acquisition, we immediately install our management information system at each location. This quickly makes financial, accounting and other operational data easily available throughout the company. With this information, we can more efficiently execute our operating strategy at the new store.

Franchise Agreements

Each of our store subsidiaries signs a franchise or dealer sales and service agreement with each manufacturer of the new vehicles it sells.

The typical automobile franchise agreement specifies the locations within a designated market area at which the store may sell vehicles and related products and perform certain approved services. The designation of such areas and the allocation of new vehicles among stores are at the discretion of the manufacturer. Except for Saturn franchises, franchise agreements do not guarantee exclusivity within a specified territory.

11

Table of Contents

A franchise agreement may impose requirements on the store with respect to:

	•		the showroom;
	•		service facilities and equipment;
	•		inventories of vehicles and parts;
	•		minimum working capital;
	•		training of personnel; and
	•		performance standards for sales volume and customer satisfaction.

Each manufacturer closely monitors compliance with these requirements and requires each store to submit monthly and annual financial statements. Franchise agreements also grant a store the right to use and display manufacturers’ trademarks, service marks and designs in the manner approved by each manufacturer.

Most franchise agreements expire after one to five years. However, all of our agreements have been renewed and we expect that manufacturers will continue to renew them in the future. In addition, state franchise laws limit the ability of manufacturers to terminate or fail to renew automotive franchises. Some franchise agreements, including those with DaimlerChrysler, have no termination date. Each franchise agreement authorizes at least one person to manage the store’s operations. The typical franchise agreement provides for early termination or non-renewal by the manufacturer upon:

	•		a change of management or ownership without manufacturer consent;
	•		insolvency or bankruptcy of the dealer;
	•		death or incapacity of the dealer/manager;
	•		conviction of a dealer/manager or owner of certain crimes;
	•		misrepresentation of certain information by the store, dealer/manager or owner to the manufacturer;
	•		failure to adequately operate the store;
	•		failure to maintain any license, permit or authorization required for the conduct of business; or
	•		poor sales performance or low customer satisfaction index scores.

We sign master framework agreements with most manufacturers that impose additional requirements on our stores. See Exhibit 99 “Risk Factors” for further details.

Competition

The retail automotive business is highly competitive, consisting of a large number of independent operators, many of whom are individuals, families and small retail groups. We compete primarily with other automotive retailers, both publicly and privately-held, near our store locations. In addition, regional and national car rental companies operate retail used car lots to dispose of their used rental cars.

We are larger and have more financial resources than the other automotive retailers with which we currently compete in most markets. As we enter other markets, we may face competitors that are larger or have access to greater financial resources. We do not have any cost advantage in purchasing new vehicles from manufacturers. We rely on advertising and merchandising, sales expertise, service reputation and location of our stores to sell new vehicles.

12

Table of Contents

In addition to competition for the sale of vehicles, we expect increased competition for the acquisition of other stores. We have faced only limited competition with respect to our acquisitions to date, primarily from privately-held automotive retailers. Other publicly-owned automotive retailers with significant capital resources may enter our current and targeted market areas in the future.

Regulation

Our business is subject to extensive regulation, supervision and licensing under federal, state and local laws, ordinances and regulations. State and federal regulatory agencies, such as the Occupational Safety and Health Administration and the U.S. Environmental Protection Agency, have jurisdiction over the operation of our stores, service centers, collision repair shops and other operations. They regulate matters such as consumer protection, workers’ safety and air and water quality.

Laws also protect franchised automotive retailers from the unequal bargaining power held by the manufacturers. Under those laws, a manufacturer may not:

	•		terminate or fail to renew a franchise without good cause; or
	•		prevent any reasonable changes in the capital structure or financing of a store.

Manufacturers may object to a sale of a store or change of management based on character, financial ability or business experience of the proposed new operator.

Automotive retailers and manufacturers are also subject to laws to protect consumers, including so-called “Lemon Laws.” A manufacturer must replace a new vehicle or accept it for a full refund within one year after initial purchase if:

	•		the vehicle does not conform to the manufacturer’s express warranties; and
	•		the automotive retailer or manufacturer, after a reasonable number of attempts, is unable to correct or repair the defect.

We must provide written disclosures on new vehicles of mileage and pricing information. Financing and insurance activities are subject to credit reporting, debt collection, and insurance industry regulation.

Our business, particularly parts, service and collision repair operations, involves hazardous or toxic substances or wastes, such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Federal, state and local authorities establishing health and environmental quality standards regulate the handling, storage, treatment, recycling and disposal of hazardous substances and wastes and remediation of contaminated sites, both at our facilities and at sites to which we send hazardous or toxic substances or wastes for treatment, recycling or disposal. We are aware of contamination at certain of our current and former facilities, and we are in the process of conducting investigations and/or remediation at some of these properties. Based on our current information, any costs or liabilities relating to such contamination, other environmental matters or compliance with environmental regulations are not expected to have a material adverse effect on our results of operations or financial condition. There can be no assurances, however, that additional environmental matters will not arise or that new

13

Table of Contents

conditions or facts will not develop in the future at our current or formerly owned or operated facilities, or at sites that we may acquire in the future, or that these matters, conditions or facts will not result in a material adverse effect on our results of operations or financial condition.

Employees

As of December 31, 2001, we employed approximately 3,800 persons on a full-time equivalent basis. The service department employees at our Dodge, Ford and Volkswagen stores in Concord, California are unionized. We believe we have good relationships with our employees.

Item 2. Properties

Our stores and other facilities consist primarily of automobile showrooms, display lots, service facilities, twelve collision repair and paint shops, rental agencies, supply facilities, automobile storage lots, parking lots and offices. We believe our facilities are currently adequate for our needs and are in good repair. We own some of our properties, but also lease many properties, providing future flexibility to relocate our retail stores as demographics change. Most leases give us the option to renew the lease for one or more lease extension periods. We also hold some undeveloped land for future expansion.

Item 3. Legal Proceedings

We are a party to litigation that arises in the normal course of our business operations. We do not believe that we are presently a party to litigation that will have a material adverse effect on our business or operations.

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

No matters were submitted to a vote of our shareholders during the quarter ended December 31, 2001.

14

Table of Contents

PART II

Our Class A Common Stock trades on the New York Stock Exchange under the symbol LAD. The following table presents the high and low sale prices for our Class A common stock, as reported on the New York Stock Exchange Composite Tape for each of the quarters in 2000 and 2001:

The number of shareholders of record and approximate number of beneficial holders of Class A Common Stock at February 14, 2002 was 1,692 and 4,300, respectively. All shares of Lithia’s Class B Common Stock are held by Lithia Holding Company LLC.

Dividends

We have never declared or paid any cash dividends on our common stock and do not anticipate paying dividends for the foreseeable future. We intend to retain future earnings for acquisitions and operations. Our credit agreement with Ford Motor Credit Company precludes the payment of cash dividends without its prior consent. The payment of future dividends is also subject to the discretion of our Board of Directors.

15

Table of Contents

Item 6. Selected Financial Data

16

Table of Contents

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a leading operator of automotive franchises and retailer of new and used vehicles and services. As of February 22, 2002, we offered 24 brands of new vehicles through 123 franchises in 65 stores in the western United States and over the Internet. As of February 22, 2002, we operate 16 stores in Oregon, 11 in California, 10 in Washington, 7 in Colorado, 7 in Idaho, 5 in Nevada, 4 in Texas, 3 in South Dakota and 2 in Alaska. 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.

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 lead to less volatility in earnings for automobile retailers than for automobile manufacturers.

Historically, new vehicle sales account for approximately 50% of our total revenues but less than 30% of total gross profit. We emphasize sales of higher margin products, which generate over 70% of our gross profits. Our revenues and gross profit by product line were as follows for 2001:

17

Table of Contents

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

Results of Operations — 2000 Compared to 2001