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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 September 30, 2002
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.

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 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 Class B common stock without par value (Class)		14,264,051 3,762,231 (Outstanding at November 11, 2002)

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LITHIA MOTORS, INC.
FORM 10-Q
INDEX

						Page
PART I — FINANCIAL INFORMATION
Item 1.				Financial Statements
				Consolidated Balance Sheets — September 30, 2002 (unaudited) and December 31, 2001			2
				Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)			3
				Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2002 and 2001 (unaudited)			4
				Notes to Consolidated Financial Statements (unaudited)			5
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			9
Item 3.				Quantitative and Qualitative Disclosures About Market Risk			17
Item 4.				Controls and Procedures			17
PART II — OTHER INFORMATION
Item 6.				Exhibits and Reports on Form 8-K			17
Signatures							18
Certifications							19

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

					September 30,				December 31,
					2002				2001
Assets
Current Assets:
	Cash and cash equivalents				$	63,518			$	59,855
	Trade receivables, net of allowance for doubtful accounts of $413 and $504					38,389				33,196
	Notes receivable, current portion, net of allowance for doubtful accounts of $506 and $700					341				1,361
	Inventories, net					399,281				275,398
	Vehicles leased to others, current portion					5,365				5,554
	Prepaid expenses and other					3,019				3,759
	Deferred income taxes					4,000				1,286
			Total Current Assets			513,913				380,409
Land and buildings, net of accumulated depreciation of $3,179 and $2,098						112,677				84,739
Equipment and other, net of accumulated depreciation of $13,265 and $9,695						55,818				37,238
Notes receivable, less current portion						691				244
Vehicles leased to others, less current portion						108				122
Goodwill, net of accumulated amortization of $9,407 and $9,407						182,152				149,742
Other intangible assets						20,519				7,107
Other non-current assets, net of accumulated amortization of $325 and $312						3,873				3,343
			Total Assets		$	889,751			$	662,944
Liabilities and Stockholders’ Equity
Current Liabilities:
	Flooring notes payable				$	312,854			$	211,947
	Current maturities of long-term debt					3,471				10,203
	Trade payables					21,263				16,894
	Accrued liabilities					43,070				36,531
			Total Current Liabilities			380,658				275,575
Used Vehicle Flooring Facility						75,000				69,000
Real Estate Debt, less current maturities						65,372				40,693
Other Long-Term Debt, less current maturities						31,457				55,137
Deferred Revenue						1,175				1,481
Other Long-Term Liabilities						10,882				8,181
Deferred Income Taxes						13,904				9,380
			Total Liabilities			578,448				459,447
Stockholders’ Equity:
	Preferred stock — no par value; authorized 15,000 shares; 15 shares designated Series M Preferred; issued and outstanding 0 and 9.7					—				5,806
	Class A common stock — no par value; authorized 100,000 shares; issued and outstanding 14,188 and 8,894					202,390				113,553
	Class B common stock — no par value; authorized 25,000 shares; issued and outstanding 3,762 and 4,040					468				502
	Additional paid-in capital					884				507
	Accumulated other comprehensive loss					(2,714	)			(2,091	)
	Retained earnings					110,275				85,220
		Total Stockholders’ Equity				311,303				203,497
		Total Liabilities and Stockholders’ Equity			$	889,751			$	662,944

The accompanying notes are an integral part of these statements.

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

				Three months ended September 30,								Nine months ended September 30,
				2002				2001				2002				2001
Revenues:
	New vehicle sales			$	388,811			$	247,487			$	955,125			$	701,095
	Used vehicle sales				198,402				149,795				565,406				428,777
	Service, body and parts				62,964				47,884				169,997				138,540
	Finance and insurance				24,565				18,579				66,721				51,687
	Fleet and other				12,903				7,573				39,112				33,420
		Total revenues			687,645				471,318				1,796,361				1,353,519
Cost of sales					583,039				391,450				1,515,226				1,129,544
Gross profit					104,606				79,868				281,135				223,975
Selling, general and administrative					80,209				59,696				221,485				173,517
Depreciation — buildings					648				383				1,706				948
Depreciation — equipment and other					1,392				1,054				3,888				3,056
Amortization					4				935				13				2,809
		Income from operations			22,353				17,800				54,043				43,645
Other income (expense)
	Floorplan interest expense				(2,943	)			(3,390	)			(8,162	)			(11,877	)
	Other interest expense				(1,581	)			(1,608	)			(4,637	)			(5,953	)
	Other expense, net				(252	)			(241	)			(334	)			(365	)
					(4,776	)			(5,239	)			(13,133	)			(18,195	)
Income before income taxes					17,577				12,561				40,910				25,450
Income tax expense					6,848				4,865				15,855				9,828
Net income				$	10,729			$	7,696			$	25,055			$	15,622
Basic net income per share				$	0.60			$	0.57			$	1.48			$	1.16
Shares used in basic net income per share					17,950				13,516				16,959				13,515
Diluted net income per share				$	0.59			$	0.56			$	1.44			$	1.14
Shares used in diluted net income per share					18,269				13,781				17,381				13,754

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

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

						Nine months ended September 30,
						2002				2001
Cash flows from operating activities:
	Net income					$	25,055			$	15,622
	Adjustments to reconcile net income to net cash provided by operating activities:
			Depreciation and amortization				5,607				6,813
			Compensation expense related to stock option issuances				124				166
			(Gain) loss on sale of assets				(4	)			46
			(Gain) loss on sale of vehicles leased to others				33				(14	)
			Gain on sale of franchise				(50	)			—
			Deferred income taxes				1,974				287
			Equity in income of affiliate				(1	)			96
			(Increase) decrease, net of effect of acquisitions:
				Trade and installment contract receivables, net			(2,560	)			59
				Inventories			(63,262	)			23,238
				Prepaid expenses and other			1,558				1,714
				Other noncurrent assets			(441	)			(942	)
			Increase (decrease), net of effect of acquisitions:
				Floorplan notes payable			56,591				(24,618	)
				Trade payables			3,872				3,293
				Accrued liabilities			4,368				10,940
				Other liabilities			2,180				2,657
				Net cash provided by operating activities			35,044				39,357
Cash flows from investing activities:
	Notes receivable issued						(159	)			(567	)
	Principal payments received on notes receivable						1,407				1,982
	Capital expenditures:
		Maintenance					(4,799	)			(3,186	)
		Financeable real estate and other					(24,292	)			(15,079	)
	Proceeds from sale of assets						1,635				4,797
	Proceeds from sale of vehicles leased to others						1,274				3,397
	Expenditures for vehicles leased to others						(5,562	)			(4,703	)
	Cash paid for acquisitions, net of cash acquired						(75,086	)			(29,952	)
	Cash from sale of franchises						535				1,541
				Net cash used in investing activities			(105,047	)			(41,770	)
Cash flows from financing activities:
	Net borrowing on lines of credit						(16,000	)			9,610
	Payments on capital lease obligations						(7	)			(111	)
	Principal payments on long-term debt						(10,065	)			(4,328	)
	Proceeds from issuance of long-term debt						23,026				637
	Redemption of Series M Preferred Stock						(4,355	)			—
	Proceeds from issuance of common stock						81,067				1,324
				Net cash provided by financing activities			73,666				7,132
Increase in cash and cash equivalents							3,663				4,719
Cash and cash equivalents:
	Beginning of period						59,855				38,789
	End of period					$	63,518			$	43,508

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

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

Note 1. Basis of Presentation

The financial information included herein as of September 30, 2002 and for the three and nine-month periods ended September 30, 2002 and 2001 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, 2001 is derived from our 2001 Annual Report on Form 10-K. The interim consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2001 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 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):

Note 3. Supplemental Cash Flow Information

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

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Note 4. 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 September 30,		2002												2001
										Per												Per
										Share												Share
		Income				Shares				Amount				Income				Shares				Amount
Basic EPS
Net income available to common shareholders		$	10,729				17,950			$	0.60			$	7,696				13,516			$	0.57
Diluted EPS
Dilutive stock options							319												265
Net income available to common shareholders		$	10,729				18,269			$	0.59			$	7,696				13,781			$	0.56

Nine Months Ended September 30,		2002												2001
										Per												Per
										Share												Share
		Income				Shares				Amount				Income				Shares				Amount
Basic EPS
Net income available to common shareholders		$	25,055				16,959			$	1.48			$	15,622				13,515			$	1.16
Diluted EPS
Dilutive stock options							422												239
Net income available to common shareholders		$	25,055				17,381			$	1.44			$	15,622				13,754			$	1.14

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

Note 5. 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								Nine Months Ended
			September 30,								September 30,
			2002				2001				2002				2001
Net income			$	10,729			$	7,696			$	25,055			$	15,622
Unrealized gain on investments, net, subsequently realized				(3	)			—				—				(15	)
Cash flow hedges:
	Cumulative effect of adoption of SFAS 133, net of tax effect of $594			—				—				—				(948	)
	Net derivative losses, net of tax effect of $585, $787, $1,105 and $1,181, respectively			(928	)			(1,255	)			(1,745	)			(1,884	)
	Reclassification adjustment, net of tax effect of $(239), $(148), $(712) and $(305), respectively			382				233				1,122				484
Total comprehensive income			$	10,180			$	6,674			$	24,432			$	13,259

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Note 6. Acquisitions

The following acquisitions were made in the first nine months of 2002:

•		In January 2002, we acquired the Lynn Alexander Auto Group, which is comprised of All American Chrysler/Jeep/Dodge and All American Chevrolet located in San Angelo, Texas and All American Chrysler/Jeep/Dodge in Big Spring, Texas. The stores have anticipated 2002 annual revenues of $115.0 million.
•		In January 2002, we acquired Premier Chrysler/Jeep/Dodge in Odessa, Texas, which has anticipated 2002 annual revenues of $33.0 million.
•		In February 2002, we acquired Thomason Subaru in Oregon City, Oregon, which has anticipated 2002 annual revenues of $20.0 million. The store has been renamed to Lithia Subaru of Oregon City.
•		In April 2002, we acquired Village Dodge-Hyundai in Midland, Texas, which has anticipated 2002 annual revenues of $35.0 million.
•		In May 2002, we opened a newly awarded Hummer franchise in Bellevue, Washington.
•		In June 2002, we acquired Jay Wolfe Ford in Omaha, Nebraska, which has anticipated 2002 annual revenues of $55.0 million.
•		In June 2002, we acquired Broncho Chevrolet in Odessa, Texas and Sherman Chevrolet in Midland, Texas. The stores have combined anticipated 2002 revenues of $115.0 million. The stores were renamed Chevrolet of Odessa and Chevrolet of Midland, respectively.
•		In July 2002, we acquired Mercedes of Omaha in Omaha, Nebraska, which has anticipated 2002 revenues of $22.0 million.
•		In August 2002, we acquired Skyline Volkswagen in a suburb of Denver, Colorado, which has anticipated 2002 revenues of $20.0 million

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

There are no future contingent payouts related to any of the 2002 acquisitions. The purchase price for the 2002 acquisitions was allocated as follows (in thousands):

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We anticipate that approximately 90 percent of the goodwill acquired in 2002 will be deductible for tax purposes over the period of 15 years.

Note 7. Conversion and Redemption of Series M Preferred Stock

On January 24, 2002, 5,177 shares of Series M Preferred Stock were converted at a price of $20.77 per common share into 249,311 shares of Class A common stock. On May 2, 2002, we redeemed the remaining 4,499 outstanding shares of Series M Preferred Stock for a total of $4.4 million from our existing cash balances. No shares of Series M Preferred Stock remain outstanding following the May 2, 2002 redemption.

Note 8. Offering of Class A Common Stock

In March 2002, we registered and sold 4.5 million newly issued shares of Class A common stock and 1.25 million shares from existing stockholders. Proceeds to the Company, net of offering expenses, totaled approximately $77.2 million. In connection with the sale of shares by existing stockholders, 121,488 shares of Class B common stock were converted into a like number of shares of Class A common stock.

Note 9. 2001 Stock Option Plan

At the Annual Meeting of Shareholders held on May 8, 2002, the shareholders approved the reservation of an additional 600,000 shares of our Class A common stock for issuance under our 2001 Stock Option Plan.

Note 10. 1998 Employee Stock Purchase Plan

At the Annual Meeting of Shareholders held on May 8, 2002, the shareholders approved the reservation of an additional 500,000 shares of our Class A common stock for issuance under our 1998 Employee Stock Purchase Plan.

Note 11. Adoption of SFAS No. 142

In July 2001, the Financial Accounting Standards Board issued SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”

We adopted the provisions of SFAS No. 142 effective January 1, 2002. SFAS No. 141 “Business Combinations” requires, upon adoption of SFAS No. 142, that we evaluate our existing intangible assets and goodwill that were acquired in prior purchase business combinations, and make any necessary reclassifications in order to conform with the criteria in SFAS No. 141 for recognition apart from goodwill. We did not reclassify any intangibles upon adoption of SFAS No. 142. We tested our goodwill and other intangible assets with indefinite useful lives for impairment in accordance with the provisions of SFAS No. 142

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during the first quarter of 2002. We determined that no impairment losses were required to be recognized.

The following table discloses what reported net income would have been in all periods presented prior to the adoption of SFAS No. 142 exclusive of amortization expense (including any related tax effects) recognized in those periods related to goodwill and other intangible assets that are no longer being amortized.

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 to our 2001 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 October 31, 2002, we offered 25 brands of new vehicles through 128 franchises in 69 stores in the western United States and over the Internet. As of October 31, 2002, we operate 16 stores in Oregon, 10 in California, 9 in Washington, 8 in Texas, 7 in Colorado, 7 in Idaho, 5 in Nevada, 3 in South Dakota, 2 in Alaska and 2 in Nebraska. We sell new and used cars and light trucks; sell replacement parts; provide vehicle

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