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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, 2003
OR
     
o   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: 001-14733

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   14,691,277
Class B common stock without par value   3,762,231
(Class)   (Outstanding at November 10, 2003)



 


TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO 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 6. Exhibits and Reports on Form 8-K
SIGNATURES
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


Table of Contents

LITHIA MOTORS, INC.
FORM 10-Q
INDEX

         
        Page
       
PART I — FINANCIAL INFORMATION    
         
Item 1.   Financial Statements    
         
    Consolidated Balance Sheets – September 30, 2003 (unaudited) and December 31, 2002   2
         
    Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2003 and 2002 (unaudited)   3
         
    Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2003 and 2002 (unaudited)   4
         
    Notes to Consolidated Financial Statements (unaudited)   5
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   11
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   19
         
Item 4.   Controls and Procedures   19
         
PART II — OTHER INFORMATION    
         
Item 6.   Exhibits and Reports on Form 8-K   19
         
Signatures       20

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Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

                       
          September 30,   December 31,
          2003   2002
         
 
          (Unaudited)        
Assets
               
Current Assets:
               
 
Cash and cash equivalents
  $ 50,231     $ 15,932  
 
Contracts in transit
    42,632       41,493  
 
Trade receivables, net of allowance for doubtful accounts of $578 and $455
    42,908       40,680  
 
Notes receivable, current portion, net of allowance for doubtful accounts of $138 and $247
    124       167  
 
Inventories, net
    448,019       445,908  
 
Vehicles leased to others, current portion
    5,507       5,341  
 
Prepaid expenses and other
    3,657       5,707  
 
Deferred income taxes
    3,696       550  
 
   
     
 
     
Total Current Assets
    596,774       555,778  
Land and buildings, net of accumulated depreciation of $5,051 and $3,618
    141,358       118,696  
Equipment and other, net of accumulated depreciation of $18,955 and $14,602
    64,659       58,215  
Notes receivable, less current portion
    706       881  
Vehicles leased to others, less current portion
    19       19  
Goodwill, net
    206,442       185,212  
Other intangible assets, net of accumulated amortization of $345 and $330
    27,837       20,985  
Other non-current assets
    1,841       2,263  
 
   
     
 
     
Total Assets
  $ 1,039,636     $ 942,049  
 
   
     
 
Liabilities and Stockholders’ Equity
               
Current Liabilities:
               
 
Flooring notes payable
  $ 376,337     $ 364,635  
 
Current maturities of long-term debt
    5,166       4,466  
 
Trade payables
    23,785       19,445  
 
Accrued liabilities
    58,378       40,924  
 
   
     
 
     
Total Current Liabilities
    463,666       429,470  
Used Vehicle Flooring
    58,149       63,000  
Real Estate Debt, less current maturities
    79,706       73,798  
Other Long-Term Debt, less current maturities
    59,704       30,914  
Deferred Revenue
    957       1,617  
Other Long-Term Liabilities
    7,863       9,581  
Deferred Income Taxes
    21,383       13,676  
 
   
     
 
     
Total Liabilities
    691,428       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 14,593 and 14,299
    206,840       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
    1,052       929  
 
Accumulated other comprehensive loss
    (1,970 )     (2,517 )
 
Retained earnings
    141,818       117,536  
 
   
     
 
   
Total Stockholders’ Equity
    348,208       319,993  
 
   
     
 
   
Total Liabilities and Stockholders’ Equity
  $ 1,039,636     $ 942,049  
 
   
     
 

The accompanying notes are an integral part of these consolidated 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,
       
 
        2003   2002   2003   2002
       
 
 
 
Revenues:
                               
 
New vehicle sales
  $ 429,434     $ 390,229     $ 1,134,504     $ 958,651  
 
Used vehicle sales
    200,899       199,443       574,205       568,415  
 
Service, body and parts
    71,155       62,964       195,267       169,997  
 
Finance and insurance
    25,908       22,107       70,486       60,186  
 
Fleet and other
    888       12,902       4,833       39,112  
 
   
     
     
     
 
   
Total revenues
    728,284       687,645       1,979,295       1,796,361  
Cost of sales
    611,280       583,039       1,663,896       1,515,226  
 
   
     
     
     
 
Gross profit
    117,004       104,606       315,399       281,135  
Selling, general and administrative
    87,730       80,209       249,342       221,485  
Depreciation — buildings
    543       648       1,483       1,706  
Depreciation and amortization — other
    2,138       1,396       5,923       3,901  
 
   
     
     
     
 
   
Income from operations
    26,593       22,353       58,651       54,043  
Other income (expense)
                               
 
Floorplan interest expense
    (3,413 )     (2,943 )     (10,954 )     (8,162 )
 
Other interest expense
    (1,510 )     (1,581 )     (4,506 )     (4,637 )
 
Other expense, net
    (272 )     (252 )     (724 )     (334 )
 
   
     
     
     
 
 
    (5,195 )     (4,776 )     (16,184 )     (13,133 )
 
   
     
     
     
 
Income before income taxes
    21,398       17,577       42,467       40,910  
Income tax expense
    8,517       6,848       16,902       15,855  
 
   
     
     
     
 
Net income
  $ 12,881     $ 10,729     $ 25,565     $ 25,055  
 
   
     
     
     
 
Basic net income per share
  $ 0.70     $ 0.60     $ 1.40     $ 1.48  
 
   
     
     
     
 
Shares used in basic net income per share
    18,338       17,950       18,234       16,959  
 
   
     
     
     
 
Diluted net income per share
  $ 0.69     $ 0.59     $ 1.39     $ 1.44  
 
   
     
     
     
 
Shares used in diluted net income per share
    18,708       18,269       18,430       17,381  
 
   
     
     
     
 

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,
           
            2003   2002
           
 
Cash flows from operating activities:
               
 
Net income
  $ 25,565     $ 25,055  
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
     
Depreciation and amortization
    7,406       5,607  
     
Compensation expense related to stock option issuances
    144       124  
     
Gain on sale of assets
    (656 )     (4 )
     
Loss on sale of vehicles leased to others
    136       33  
     
Gain on sale of franchise
    (275 )     (50 )
     
Deferred income taxes
    4,288       1,974  
     
Equity in (income) loss of affiliate
    13       (1 )
     
(Increase) decrease, net of effect of acquisitions:
               
       
Trade and installment contract receivables, net
    (2,194 )     (2,560 )
       
Contracts in transit
    (1,139 )     397  
       
Inventories
    37,538       (63,262 )
       
Prepaid expenses and other
    2,244       1,558  
       
Other noncurrent assets
    380       (441 )
     
Increase (decrease), net of effect of acquisitions:
               
       
Flooring notes payable
    (17,470 )     56,591  
       
Trade payables
    4,306       3,872  
       
Accrued liabilities
    17,406       4,368  
       
Other long-term liabilities and deferred revenue
    (2,578 )     2,180  
 
   
     
 
       
Net cash provided by operating activities
    75,114       35,441  
Cash flows from investing activities:
               
 
Notes receivable issued
    (58 )     (159 )
 
Principal payments received on notes receivable
    371       1,407  
 
Capital expenditures:
               
   
Non-financeable
    (3,712 )     (4,799 )
   
Financeable
    (18,598 )     (24,292 )
 
Proceeds from sale of assets
    441       1,635  
 
Expenditures for vehicles leased to others
    (4,626 )     (5,562 )
 
Proceeds from sale of vehicles leased to others
    832       1,274  
 
Cash paid for acquisitions, net of cash acquired
    (48,256 )     (77,163 )
 
Cash from sale of franchises
    252       535  
 
Distribution from affiliate
    33        
 
   
     
 
       
Net cash used in investing activities
    (73,321 )     (107,124 )
Cash flows from financing activities:
               
 
Net borrowings (repayments) on lines of credit
    25,842       (16,000 )
 
Prinicpal payments on long-term debt and capital leases
    (2,983 )     (10,072 )
 
Proceeds from issuance of long-term debt
    7,688       23,026  
 
Repurchase of common stock
    (215 )      
 
Proceeds from issuance of common stock
    3,457       81,067  
 
Redemption of Series M Preferred Stock
          (4,355 )
 
Dividends paid
    (1,283 )      
 
   
     
 
       
Net cash provided by financing activities
    32,506       73,666  
 
   
     
 
Increase in cash and cash equivalents
    34,299       1,983  
Cash and cash equivalents:
               
 
Beginning of period
    15,932       18,814  
 
   
     
 
 
End of period
  $ 50,231     $ 20,797  
 
   
     
 

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, 2003 and for the three and nine-month periods ended September 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 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):

                 
    September 30,   December 31,
    2003   2002
   
 
New and program vehicles
  $ 354,612     $ 340,457  
Used vehicles
    72,686       85,170  
Parts and accessories
    20,721       20,281  
 
   
     
 
 
  $ 448,019     $ 445,908  
 
   
     
 

Note 3. Supplemental Cash Flow Information

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

                 
    Nine Months Ended
    September 30,
   
    2003   2002
   
 
Cash paid during the period for income taxes
  $ 3,966     $ 10,904  
Cash paid during the period for interest
    15,391       12,530  
Assets acquired through real estate exchange
    1,987        

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,   2003   2002

 
 
                    Per                   Per
                    Share                   Share
    Income   Shares   Amount   Income   Shares   Amount
   
 
 
 
 
 
Basic EPS
                                               
Net income available to common shareholders
  $ 12,881       18,338     $ 0.70     $ 10,729       17,950     $ 0.60  
 
                   
                     
 
Diluted EPS
                                               
Dilutive stock options
            370                       319          
 
           
                     
         
Net income available to common shareholders
  $ 12,881       18,708     $ 0.69     $ 10,729       18,269     $ 0.59  
 
                   
                     
 

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Nine Months Ended September 30,   2003   2002

 
 
                    Per                   Per
                    Share                   Share
    Income   Shares   Amount   Income   Shares   Amount
   
 
 
 
 
 
Basic EPS
                                               
Net income available to common shareholders
  $ 25,565       18,234     $ 1.40     $ 25,055       16,959     $ 1.48  
 
                   
                     
 
Diluted EPS
                                               
Dilutive stock options
            196                       422          
 
           
                     
         
Net income available to common shareholders
  $ 25,565       18,430     $ 1.39     $ 25,055       17,381     $ 1.44  
 
                   
                     
 

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

                                 
    Three Months Ended September 30,   Nine Months Ended September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Stock options
    20       38       609       10  

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,
     
 
      2003   2002   2003   2002
     
 
 
 
Net income
  $ 12,881     $ 10,729     $ 25,565     $ 25,055  
Unrealized gain (loss) on investments, net, subsequently realized
    14       (3 )     8        
Cash flow hedges:
                               
 
Net derivative gains (losses), net of tax effect of $(189), $590, $809 and $1,105, respectively
    412       (923 )     (1,103 )     (1,745 )
 
Reversal of net derivative losses previously recorded due to their recognition in our statements of operations as incremental interest expense, net of tax effect of $(393), $(244), $(1,086) and $(712), respectively
    594       377       1,642       1,122  
 
   
     
     
     
 
Total comprehensive income
  $ 13,901     $ 10,180     $ 26,112     $ 24,432  
 
   
     
     
     
 

Note 6. Acquisitions

The following acquisitions were made in the first nine months of 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 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.

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  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.

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

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

  In August 2003, we acquired Santa Rosa Dodge in California, which has anticipated 2003 revenues of approximately $30.0 million. The store has been renamed Lithia Dodge of Santa Rosa.

See Note 15 Subsequent Events for acquisitions that occurred in October 2003.

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 September 30,   Nine Months Ended September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Total revenues
  $ 735,188     $ 753,337     $ 2,071,025     $ 1,983,842  
Net income
    12,964       11,226       26,681       26,078  
Basic earnings per share
    0.71       0.63       1.46       1.54  
Diluted earnings per share
    0.69       0.61       1.45       1.50  

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
  $ 37,770  
Other current assets
    211  
Property and equipment
    14,529  
Goodwill
    19,421  
Other intangible assets – primarily franchise value
    6,867  
 
   
 
 
Total assets acquired
    78,798  
Flooring notes payable
    30,474  
Other current liabilities
    204  
 
   
 
 
Total liabilities acquired
    30,678  
 
   
 
Net assets acquired
  $ 48,120  
 
   
 

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 7. 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.

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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 September 30, 2003.

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

Note 8. 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. At September 30, 2003, we had $35.0 million outstanding on this line of credit. Previously, the amount available under this line of credit was $27.5 million and it expired January 31, 2004.

Note 9. 2003 Stock Incentive Plan

At our annual shareholders meeting in May 2003, our shareholders approved an amendment to and restatement of our 2001 Stock Option Plan in the form of the 2003 Stock Incentive Plan in order to bring the plan in compliance with new requirements related to the Sarbanes-Oxley Act of 2002. There were no additions made to the number of shares of our common stock reserved for issuance under the restated plan.

Note 10. Amendment to 1998 Employee Stock Purchase Plan

At our annual shareholders meeting in May 2003, our shareholders approved an amendment to our 1998 Employee Stock Purchase Plan to increase the number of shares reserved for issuance thereunder from 1,000,000 to 1,500,000.

Note 11. Dividend Payment

In July 2003, our Board of Directors approved a dividend of $0.07 per share for the second quarter of 2003. The dividend totaled $1.3 million and was paid on August 22, 2003 to shareholders of record on August 8, 2003. See Note 15 Subsequent Events for information regarding the declaration of a dividend in October 2003.

Note 12. 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 September 30,   2003   2002

 
 
Net income, as reported
  $ 12,881     $ 10,729  
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects
    25       25  
Deduct — total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects
    (631 )     (527 )
 
   
     
 
Net income, pro forma
  $ 12,275     $ 10,227  
 
   
     
 
Basic net income per share:
               
 
As reported
  $ 0.70     $ 0.60  
 
   
     
 
 
Pro forma
  $ 0.67     $ 0.57  
 
   
     
 
Diluted net income per share:
               
 
As reported
  $ 0.69     $ 0.59  
 
   
     
 
 
Pro forma
  $ 0.67     $ 0.57  
 
   
     
 

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Nine Months Ended September 30,   2003   2002

 
 
Net income, as reported
  $ 25,565     $ 25,055  
Add – Stock-based employee compensation expense included in reported net income, net of related tax effects
    74       76  
Deduct — total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects
    (1,855 )     (1,521 )
 
   
     
 
Net income, pro forma
  $ 23,784     $ 23,610  
 
   
     
 
Basic net income per share:
               
 
As reported
  $ 1.40     $ 1.48  
 
   
     
 
 
Pro forma
  $ 1.30     $ 1.39  
 
   
     
 
Diluted net income per share:
               
 
As reported
  $ 1.39     $ 1.44  
 
   
     
 
 
Pro forma
  $ 1.30     $ 1.38  
 
   
     
 

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 Nine Months Ended September 30,   2003   2002

 
 
Risk-free interest rate
    2.5% - 3.0 %     4.0 %
Expected dividend yield
    0–1.7 %     0 %
Expected lives - 2001 Plan   7.7- 8 years   8 years
                      - Purchase Plan   3 months   3 months
Expected volatility
    45.63% – 46.79 %     46.80 %

Note 13. 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.

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 14).

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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. The adoption of SFAS No. 149 did not 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 did not have any effect on our financial position or results of operations.

Note 14. 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.

Note 15. Subsequent Events

Quarterly Dividend

In October 2003, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.07 per share for the third quarter of 2003. The dividend, which will total approximately $1.3 million, will be paid on November 21, 2003 to shareholders of record on November 7, 2003.

Acquisitions

The following acquisitions were made subsequent to September 30, 2003:

  In October 2003, we acquired Chevrolet Cadillac of Fairbanks, Alaska, which has anticipated 2003 revenues of approximately $15.0 million. The store name will remain the same; and

  In October 2003, we acquired Grapevine Dodge in Grapevine, Texas, which has anticipated 2003 revenues of approximately $70.0 million. The store has been renamed Lithia Dodge of Grapevine.

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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 November 10, 2003, we offered 24 brands of new vehicles through 146 franchises in 78 stores in the western United States and over the Internet. As of November 10, 2003, we operate 16 stores in Oregon, 13 in California, 11 in Washington, 8 in Texas, 7 in Idaho, 7 in Colorado, 5 in Nevada, 4 in Alaska, 2 in South Dakota, 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 warranty insurance for our automotive customers. Approximately 79% of our stores are located in cities where they benefit from little or no competition from 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 first nine months of 2003 have been characterized by a very strong incentive environment, which led to higher than normal new vehicle sales for the period.

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

                         
    Percent of   Gross   Percent of Total
Three Months Ended September 30, 2003   Total Revenues   Margin   Gross Profit

 
 
 
New vehicles
    59.0 %     7.6 %     28.0 %
Retail used vehicles(1)
    23.1       14.6       21.0  
Service, body and parts
    9.8       47.3       28.7  
Finance and insurance(2)
    3.6       99.9       22.1  
Fleet and other
    0.1       17.6       0.1  
                         
    Percent of   Gross   Percent of Total
Three Months Ended September 30, 2002   Total Revenues   Margin   Gross Profit

 
 
 
New vehicles
    56.7 %     8.2 %     30.7 %
Retail used vehicles(1)
    24.3       12.5       20.0  
Service, body and parts
    9.2       47.5       28.6  
Finance and insurance(2)
    3.2       99.5       21.0  
Fleet and other
    1.9       1.7       0.2  
                         
    Percent of   Gross   Percent of Total
Nine Months Ended September 30, 2003   Total Revenues   Margin   Gross Profit

 
 
 
New vehicles
    57.3 %     7.6 %     27.4 %
Retail used vehicles(1)
    24.0       13.8       20.9  
Service, body and parts
    9.9       47.3       29.3  
Finance and insurance(2)
    3.6       99.7       22.3  
Fleet and other
    0.2       17.5       0.3  
                         
    Percent of   Gross   Percent of Total
Nine Months Ended September 30, 2002   Total Revenues   Margin   Gross Profit

 
 
 
New vehicles
    53.4 %     8.5 %     28.9 %
Retail used vehicles(1)
    26.3       12.6       21.1  
Service, body and parts
    9.5       47.9       29.0  
Finance and insurance(2)
    3.4       99.4       21.3  
Fleet and other
    2.2       1.7       0.2  


(1)   Excludes wholesale used vehicle sales, representing 4.4%, 4.7%, 5.0% and 5.2% of total revenues, respectively, and a negative gross margin contribution of 0.0%, 0.5%, 0.2% and 0.5%, respectively, for the three and nine month periods ended September 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   Nine Months Ended
Lithia Motors, Inc. (1)   September 30,   September 30,

 
 
        2003   2002   2003   2002
       
 
 
 
Revenues:
                               
 
New vehicles
    59.0 %     56.7 %     57.3 %     53.4 %
 
Used vehicles
    27.5       29.0       29.0       31.5  
 
Service, body and parts
    9.8       9.2       9.9       9.5  
 
Finance and insurance
    3.6       3.2       3.6       3.4  
 
Fleet and other
    0.1       1.9       0.2       2.2  
 
   
     
     
     
 
   
Total revenues
    100.0 %     100.0 %     100.0 %     100.0 %
Gross profit
    16.1       15.2       15.9       15.7  
Selling, general and administrative expenses
    12.0       11.7       12.6       12.3  
Depreciation and amortization
    0.4       0.3       0.4       0.3  
Income from operations
    3.7       3.3       3.0       3.0  
Floorplan interest expense
    0.5       0.4       0.6       0.5  
Other interest expense
    0.2       0.2       0.2       0.3  
Income before taxes
    2.9       2.6       2.1       2.3  
Income tax expense
    1.2       1.0       0.9       0.9  
Net income
    1.8 %     1.6 %     1.3 %     1.4 %


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

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Results of Operations

                                     
        Three Months Ended            
        September 30,           %
       
  Increase   Increase
        2003   2002   (Decrease)   (Decrease)
       
 
 
 
Revenues:
                               
 
New vehicle sales
  $ 429,434     $ 390,229     $ 39,205       10.0 %
 
Used vehicle sales
    200,899       199,443       1,456       0.7  
 
Service, body and parts
    71,155       62,964       8,191       13.0  
 
Finance and insurance
    25,908       22,107       3,801       17.2  
 
Fleet and other
    888       12,902       (12,014 )     (93.1 )
 
   
     
     
     
 
   
Total revenues
    728,284       687,645       40,639       5.9  
Cost of sales
    611,280       583,039       28,241       4.8  
 
   
     
     
     
 
Gross profit
    117,004       104,606       12,398       11.9  
Selling, general and administrative
    87,730       80,209       7,521       9.4  
Depreciation and amortization
    2,681       2,044       637       31.2  
 
   
     
     
     
 
Income from operations
    26,593       22,353       4,240       19.0  
Floorplan interest expense
    (3,413 )     (2,943 )     470       16.0  
Other interest expense
    (1,510 )     (1,581 )     (71 )     (4.5 )
Other, net
    (272 )     (252 )     20       7.9  
 
   
     
     
     
 
Income before income taxes
    21,398       17,577       3,821       21.7  
Income tax expense
    8,517       6,848       1,669       24.4  
 
   
     
     
     
 
Net income
  $ 12,881     $ 10,729     $ 2,152       20.1 %
 
   
     
     
     
 
New units sold
    16,056       14,972       1,084       7.2 %
Average selling price per new vehicle
  $ 26,746     $ 26,064     $ 682       2.6  
Used units sold — retail
    11,732       11,538       194       1.7  
Average selling price per retail used vehicle
  $ 14,358     $ 14,472     $ (114 )     (0.8 )
Used units sold – wholesale
    7,207       6,923       284       4.1  
Average selling price per wholesale used vehicle
  $ 4,503     $ 4,690     $ (187 )     (4.0 )
Finance and insurance sales per retail unit
  $ 932     $ 834     $ 98       11.8 %
                                     
        Nine Months Ended            
        September 30,           %
       
  Increase   Increase
        2003   2002   (Decrease)   (Decrease)
       
 
 
 
Revenues:
                               
 
New vehicle sales
  $ 1,134,504     $ 958,651     $ 175,853       18.3 %
 
Used vehicle sales
    574,205       568,415       5,790       1.0  
 
Service, body and parts
    195,267       169,997       25,270       14.9  
 
Finance and insurance
    70,486       60,186       10,300       17.1  
 
Fleet and other
    4,833       39,112       (34,279 )     (87.6 )
 
   
     
     
     
 
   
Total revenues
    1,979,295       1,796,361       182,934       10.2  
Cost of sales
    1,663,896       1,515,226       148,670       9.8  
 
   
     
     
     
 
Gross profit
    315,399       281,135       34,264       12.2  
Selling, general and administrative
    249,342       221,485       27,857       12.6  
Depreciation and amortization
    7,406       5,607       1,799       32.1  
 
   
     
     
     
 
Income from operations
    58,651       54,043       4,608       8.5  
Floorplan interest expense
    (10,954 )     (8,162 )     2,792       34.2  
Other interest expense
    (4,506 )     (4,637 )     (131 )     (2.8 )
Other, net
    (724 )     (334 )     390       116.8  
 
   
     
     
     
 
Income before income taxes
    42,467       40,910       1,557       3.8  
Income tax expense
    16,902       15,855       1,047       6.6  
 
   
     
     
     
 
Net income
  $ 25,565     $ 25,055     $ 510       2.0 %
 
   
     
     
     
 

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    Nine Months Ended            
    September 30,           %
   
  Increase   Increase
    2003   2002   (Decrease)   (Decrease)
   
 
 
 
New units sold
    43,108       37,249       5,859       15.7 %
Average selling price per new vehicle
  $ 26,318     $ 25,736     $ 582       2.3  
Used units sold — retail
    32,811       32,482       329       1.0  
Average selling price per retail used vehicle
  $ 14,503     $ 14,521     $ (18 )     (0.1 )
Used units sold – wholesale
    20,547       19,180       1,367       7.1  
Average selling price per wholesale used vehicle
  $ 4,786     $ 5,044     $ (258 )     (5.1 )
Finance and insurance sales per retail unit
  $ 928     $ 863     $ 65       7.5 %

Revenues. Total revenues increased 5.9% in the third quarter of 2003 compared to the third quarter of 2002 as a result of acquisitions, which were partially offset by an overall same store retail sales decrease of 0.6% Total revenues increased 10.2% in the first nine months of 2003 compared to the first nine months of 2002 as a result of acquisitions and 1.6% growth in same store retail sales.

Same store retail sales increases (decreases) for the 2003 periods compared to the 2002 periods were as follows:

                 
    Three Months Ended   Nine Months Ended
    September 30, 2003   September 30,2003
   
 
New vehicles
    1.5 %     6.9 %
Retail used vehicles
    (7.9 )     (9.7 )
Service, body and parts
    3.9       0.6  
Finance and insurance
    5.0       6.1  

The automotive retailing industry reported declines in new vehicle sales of approximately 0.2% and 1.6%, respectively, for the same three and nine month periods of 2003 compared to 2002. The industry has reported an approximate 6.0% decrease in sales of Chrysler products, which is our largest brand, in the first nine months of 2003 compared to the first nine months of 2002. Our same-store Chrysler sales have increased approximately 6.3% in the same period. We have same-store sales increases in the nine month period ended September 30, 2003 compared to the same period of 2002 for all domestic brands, which is counter to national trends. We are able to generate positive sales trends that run contrary to industry and specific brand trends due to our operating model that is focused on increasing market share at the stores and the market dynamics of smaller, non-metropolitan, western markets where domestic trucks and SUVs are still the staple.

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 three 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 increases in new vehicle sales also led to increases in same-store finance and insurance sales, as we have been able to maintain our high penetration rate for such sales.

The industry used vehicle business was weak in the first nine months of 2003 due to competition from highly incentivized new vehicles within the overall weaker total vehicle market. However, in the second and third quarters of 2003, Lithia’s used vehicle business demonstrated improvement over the first quarter of the year. We were able to substantially improve our used vehicle margins by 160 basis points and 80 basis points in the third quarter of 2003 compared to the first two quarters of 2003, respectively. The improvements in used vehicle margins in the 2003 periods more than offset the

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declines in same-store sales resulting in positive same-store gross profit growth for the three and nine month periods ended September 30, 2003.

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. However, in the third quarter of 2003 we saw positive trends with the decline in domestic warranty repairs slowing in comparison to declines in previous quarters and customer-pay service and parts growth increasing 4.5% and 3.8%, respectively, on a same store basis in the three and nine month periods ended September 30, 2003 compared to the same periods of 2002.

Penetration rates for certain products were as follows:

                                 
    Three Months Ended   Nine Months Ended
    September 30,   September 30,
   
 
    2003   2002   2003   2002
   
 
 
 
Finance and insurance
    76 %     76 %     75 %     75 %
Service contract
    42       40       42       40  
Lifetime oil and filter
    34       32       35       30  

During the first three 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.

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 September 30,    
   
  Lithia
    2003   2002   Margin Change*
   
 
 
New vehicles     7.6 %     8.2 %   (60 )bp
Retail used vehicles
    14.6       12.5       210  
Service and parts
    47.3       47.5       (20 )
Finance and insurance
    99.9       99.5       40  
Overall
    16.1 %     15.2 %     90  
                         
    Nine Months Ended September 30,    
   
  Lithia
    2003   2002   Margin Change*
   
 
 
New vehicles     7.6 %     8.5 %   (90 )bp
Retail used vehicles
    13.8       12.6       120  
Service and parts
    47.3       47.9       (60 )
Finance and insurance
    99.7       99.4       30  
Overall
    15.9 %     15.7 %     20  


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

Our overall gross profit margin increased in the three and nine month periods ended September 30, 2003 compared to the same periods of 2002 due primarily to increases in margins achieved on used vehicle sales as a result of selling older aged vehicles which carry a higher margin and improved inventory management. These increases in the used vehicle gross profit margin also contributed to a same store increase in total gross margin dollars per used vehicle sold.

The improvements in our gross profit margin were offset by the following factors:

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

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  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.

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 increased 30 basis points in both the three and nine month periods ended September 30, 2003 compared to the same periods of 2002. The increases as a percentage of revenue are due partially to higher advertising and sales compensation expenses related to our aggressive new vehicle marketing.

Income from Operations. Operating margins improved by 40 basis points in the three months ended September 30, 2003 compared to the same period of 2002 and was flat in the nine month period ended September 30, 2003 compared to the nine month period ended September 30, 2002. The increase in the three month period is due to the improved overall gross profit margin as discussed above, partially offset by higher operating expenses as a percentage of revenue.

Floorplan Interest Expense. The increases in floorplan interest expense in the three and nine-month periods ended September 30, 2003 compared to the same periods of 2002 are primarily due to an approximately $509,000 and $2.36 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 $367,000 and $0.9 million, respectively, of the increase. These increases were offset in part by a decrease in the LIBOR and the prime rate in the first nine months of 2003 compared to the first nine 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. Changes in the weighted average interest rate on our debt in the three and nine month periods ended September 30, 2003 compared to the same periods of 2002 increased (decreased) other interest expense by $152,000 and $(401,000), respectively. Changes in the average outstanding balances in the 2003 periods compared to the 2002 periods resulted in increases (decreases) to other interest expense of $(223,000) and $270,000, respectively.

Income Tax Expense. Our effective tax rate was 39.8% in the first nine months of 2003 compared to 38.8% in the first nine 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 increased 20 basis points and decreased 10 basis points, respectively, for the three and nine month periods ended September 30, 2003 compared to the same periods of 2002. The increase in the three month period is primarily due to the increase in the overall gross profit margin discussed above, offset in part by higher operating expenses and income taxes as a percentage of revenue.

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,

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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 September 30, 2003.

Our inventories increased slightly to $448.0 million at September 30, 2003 from $445.9 million at December 31, 2002 due primarily to acquisitions, offset by efficiencies gained from the implementation of our new centralized inventory control process. Accordingly, our new and used flooring notes payable increased to $434.5 million at September 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 19 days at September 30, 2003 compared to December 31, 2002 and decreased by approximately 15 days compared to June 30, 2003. Our days supply of used vehicles decreased by approximately 20 days at September 30, 2003 compared to December 31, 2002 and decreased by approximately 8 days compared to June 30, 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 at this time.

Primarily as a result of the acquisition of eight stores in the first nine months of 2003, our goodwill and other intangibles increased $28.1 million to $234.3 million at September 30, 2003 compared to $206.2 million at December 31, 2002.

In July 2003, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.07 per share for the second quarter of 2003. The dividend totaled $1.3 million and was paid on August 22, 2003 to shareholders of record on August 8, 2003. In October 2003, our Board of Directors approved a dividend on our Class A and Class B common stock of $0.07 per share for the third quarter of 2003. The dividend will total approximately $1.3 million and will be paid on November 21, 2003 to shareholders of record on November 7, 2003. We anticipate recommending to the Board of Directors the approval of a cash dividend each quarter.

In June 2000, our Board of Directors authorized the repurchase of up to 1,000,000 shares of our Class A common stock. Through October 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. However, the recent change in the tax law tends to equalize the benefits of dividends and share repurchases as a means to return capital or earnings to shareholders. As a result, we believe it is now advantageous to shareholders to have a dividend in place. With the dividend, we are able to offer an immediate and tangible return to our shareholders without reducing our market float, which occurs when we repurchase shares.

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 $150 million used vehicle flooring 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

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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 September 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 was set to expire January 31, 2004.

Interest rates on all of the above facilities ranged from 2.66% to 3.87% at September 30, 2003. Amounts outstanding on the lines at September 30, 2003 together with amounts remaining available under such lines were as follows (in thousands):

                 
    Outstanding at   Remaining Availability as
    September 30, 2003   of September 30, 2003
   
 
New and program vehicle lines
  $ 376,337     $ *
Working capital and used vehicle line
    80,000       112,000 **
Real estate line
    15,903       24,097  
Equipment/leased vehicle line
    35,000        
 
   
     
 
 
  $ 507,240     $ 136,097 *
 
   
     
 


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

                         
    Long-term        
Year Ending December 31,   debt   Leases   Total

 
 
 
2003
  $ 2,422     $ 5,442     $ 7,864  
2004
    3,707       20,274       23,981  
2005
    40,556       19,829       60,385  
2006
    83,624       19,015       102,639  
2007
    11,768       18,026       29,794  
Thereafter
    60,648       72,538       133,186  
 
   
     
     
 
Total
  $ 202,725     $ 155,124     $ 357,849  
 
   
     
     
 

At September 30, 2003, we had capital commitments totaling approximately $11.1 million for the construction of one new store facility, additions to two existing facilities and the remodel of five facilities. The new facility will be a Hyundai store in Anchorage, Alaska. We have already incurred $2.9 million for these commitments and anticipate incurring $9.3 million during the remaining quarter of 2003 and the remaining $1.8 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.

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Recent Accounting Pronouncements

See Note 13 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.

PART II — OTHER INFORMATION

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 (filed as Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2003 as filed August 14, 2003 and incorporated herein by reference).

  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 (filed as Exhibit 10.5 to Form 10-Q for the quarter ended June 30, 2003 as filed August 14, 2003 and incorporated herein by reference).

  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 September 30, 2003:

  Dated and filed July 24, 2003 pursuant to Item 9. Regulation FD Disclosure regarding operating results for the quarter ended June 30, 2003; and

  Dated and filed July 24, 2003 pursuant to Item 9. Regulation FD Disclosure regarding the declaration of a cash dividend.

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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: November 13, 2003   LITHIA MOTORS, INC
         
    By   /s/ JEFFREY B. DEBOER
       
    Jeffrey B. DeBoer
    Senior Vice President and Chief Financial Officer (Principal Financial Officer)
         
    By   /s/ LINDA A. GANIM
       
    Linda A. Ganim
    Vice President and Chief Accounting Officer (Principal Accounting Officer)

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