TO OUR SHAREHOLDERS: Lithia Motors had a very successful ...

TO OUR SHAREHOLDERS:

Lithia Motors had a very successful year in 1997. During our first complete year as a public

company, we had significant growth in revenue due to the acquisition of quality automobile

dealerships. Ongoing margin improvements as a result of our operational model also contributed

to our financial success. Lithia Motors is on track to become one of the largest automobile

retailers in the United States.

During 1997 your company:

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Successfully completed the acquisition of ten automobile dealerships, raising the total

number of locations to seventeen in California, Nevada and Oregon.

Completed a $175 million syndicated credit facility with U.S. Bank.

More than doubled our sales while improving our gross margins.

Met or exceeded Wall Street consensus estimates for every quarter since our IPO.

The year 1997 was also one of financial success. Total revenues increased 124% to $319.8

million from $142.8 million in 1996. Earnings for the year increased 129% to $6.0 million

compared to $2.6 million in 1996 or $.82 per share on 7.3 million shares outstanding versus $.52

per share on 5.0 million shares in 1996. Lithia sold a total of 7,493 new vehicles and 7,148 retail

used vehicles in 1997 compared to 3,274 and 4,156, respectively, during 1996. In addition, samestore sales increased 4.8% during 1997.

The automotive retail industry remains poised to consolidate its ranks. Increasing capital

requirements, growing competition, and manufacturer consolidation plans are fueling the

consolidation trend. Lithia has positioned itself to take advantage of the trend by continuing to

raise acquisition capital, by hiring and training the best employees, and by working to refine its

operations and systems to maximize profitability.

We are very excited about our future as we look to what lies ahead in 1998. Lithia filed for a

secondary offering of 3 million shares of Class A Common Stock on March 6, 1998. We

anticipate completing this offering during the Spring of 1998. These additional shares should be

available from our network of supporting brokerage firms. With the additional capital, we will

continue our growth strategy by acquiring quality automotive dealerships in the western United

States.

All of us at Lithia Motors would like to express our appreciation to you for your support this

year. We are proud of our accomplishments and will make every effort in the coming year to

build on our success.

Sincerely,

LITHIA MOTORS, INC.

/s/ Sidney B. DeBoer

Sidney B. DeBoer

Chairman and

Chief Executive Officer

LITHIA MOTORS INC

( LAD )

360 E JACKSON ST

MEDFORD, OR, 97501

541?776?6899



10?K

Annual report pursuant to section 13 and 15(d)

Filed on 3/31/1998

Filed Period 12/31/1997

--------------------------------------------------------------------------------------------------------------------------------------------------------------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, 1997

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

(State or other jurisdiction of incorporation

or organization)

360 E. JACKSON STREET, MEDFORD, OREGON

(Address of principal executive offices)

93-0572810

(I.R.S. Employer

Identification No.)

97501

(Zip Code)

541-776-6899

(Registrant's telephone number including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

CLASS A COMMON STOCK, WITHOUT PAR VALUE

(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 is $22,921,600 as of February 27, 1998 based upon the last sales

price ($16.00) as reported by the Nasdaq National Market System.

The number of shares outstanding of the Registrant's Common Stock as of February

27, 1998 was: Class A: 2,925,550 shares and Class B: 4,110,000 shares.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant has incorporated into Part III of Form 10-K, by reference,

portions of its Information Statement, relating to the 1998 Annual Meeting of

Shareholders.

---------------------------------------------------------------------------------------------------------------------------------------------------------------

LITHIA MOTORS, INC.

1997 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Page

---PART I

Item 1.

Business

2

Item 2.

Properties

14

Item 3.

Legal Proceedings

16

Item 4.

Submission of Matters to a Vote of Security Holders

16

PART II

Item 5.

Market for Registrant's Common Equity and Related Stockholder

Matters

16

Item 6.

Selected Financial Data

17

Item 7.

Management's Discussion and Analysis of Financial Condition and

Results of Operations

18

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 8.

Financial Statements and Supplementary Data

25

Item 9.

Changes in and Disagreements With Accountants on Accounting and

Financial Disclosure

25

PART III

Item 10.

Directors and Executive Officers of the Registrant

26

Item 11.

Executive Compensation

26

Item 12.

Security Ownership of Certain Beneficial Owners and Management

26

Item 13.

Certain Relationships and Related Transactions

26

PART IV

Item 14.

Exhibits, Financial Statement Schedules and Reports on Form 8-K

Signatures

27

33

1

PART I

ITEM 1.

BUSINESS

FORWARD LOOKING STATEMENTS AND RISK FACTORS

This Form 10-K contains forward-looking statements. These statements are

necessarily subject to risk and uncertainty. Actual results could differ

materially from those projected in these forward looking statements. These risk

factors include, but are not limited to, the cyclical nature of automobile

sales, the intense competition in the automobile retail industry and the

Company's ability to negotiate profitable acquisitions and secure manufacturer

approvals for such acquisitions.

GENERAL

Lithia Motors is a leading automotive retailer offering a total of 21 brands in

22 locations in the western United States. The Company currently operates 12

dealerships in California, 7 in Oregon and 3 in Nevada. The Company sells new

and used cars and light trucks, sells replacement parts, provides vehicle

maintenance, warranty, paint and repair services, and arranges related financing

and insurance for its automotive customers. Since December 1996 when the

Company completed its initial public offering, Lithia has acquired

17 dealerships and is actively pursuing additional acquisitions.

In 1997, the Company generated record total sales, net income and unit sales of

new and used vehicles. Total sales increased to $319.8 million in 1997 from

$142.8 million in 1996, an increase of 124%. For the same period, net income

increased to $6.0 million from $2.6 million (pro forma), an increase of 129%.

In the fourth quarter of 1997, the Company's total sales and net income were

$113.1 million and $1.9 million, respectively, representing growth of 203% and

234% compared to the same period in 1996. New vehicle unit sales increased to

7,493 in 1997 from 3,274 in 1996, an increase of 129%, and retail used vehicle

unit retail sales increased from 4,156 to 7,148, an increase of 72%.

Lithia was founded in 1946 and its two senior executives have managed the

Company for over 27 years. Management has developed and implemented its

acquisition and operating strategies which have enabled the Company to

successfully identify, acquire and integrate dealerships, achieving

profitability superior to industry averages. In 1997, the Company was able to

achieve a gross profit margin of 16.7% and a pre-tax margin of 3.0%, versus

12.9% and 1.5%, respectively, for the industry (latest 1996 data).

The Company intends to continue to take advantage of the consolidation

opportunities in the $640 billion automotive retailing industry. According to

industry data, the number of franchised automobile dealerships has declined from

more than 36,000 dealerships in 1960 to approximately 22,000 in 1997. Currently,

the largest 100 dealer groups generate less than 10% of total industry sales and

control approximately 5% of all franchised automobile dealerships. Several

economic and industry factors are expected to lead to the further consolidation

of the automobile retailing industry, including increasing capital requirements

necessary to operate an automobile dealership, the fact that many dealerships

are owned by individuals nearing retirement age who are seeking exit

opportunities, and the desire of manufacturers to strengthen their dealer

networks through consolidation. The Company believes that it is well positioned

to continue to capitalize on the highly fragmented and consolidating automotive

retail industry.

2

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