TO OUR SHAREHOLDERS Lithia Motors had a very successful year in 1998. During our second complete year as a public company we had significant growth in revenue. This was due to a combination of acquisitions and an industry-leading internal growth rate of 14.7% in same-store sales. Our operational model continued to contribute to our financial success. Lithia has improved its operating margin from 3.0% at the time of the IPO in 1996 to 3.7% at the end of 1998. Our actual revenues increased more than five-fold over the same period. These achievements are superior to any other public auto retailer and demonstrate Lithia’s position as the premier operator in the industry. Lithia Motors is on track to become "America’s Car & Truck Store" and has already established itself as a leader in a number of key areas. During 1998 and early 1999 your company: o Listed its shares on the New York Stock Exchange. This has dramatically improved the volume of trading activity and reduced the day-to-day volatility of our shares; o Continued to build upon our track record of meeting or exceeding Wall Street consensus estimates for all nine quarters since our IPO; o Completed the first secondary offering in our sector. We sold 3.15 million shares of Class A Common Stock at $14.50 in May of 1998. This raised approximately $43 million for continued growth; o Established an operating division named "Lithia.com – America’s Car and Truck Stores on the Internet". This division will expand the marketing of "Lithia.com", monitor and control the Internet sales process, and continue to improve the web- sites; o Successfully completed the acquisition of eleven automobile dealerships with annual revenues of $310 million. This raised the total number of locations to twenty-eight in California, Oregon, Washington and Nevada; o Signed a definitive agreement to acquire the seven core dealerships of the Moreland Group in Colorado and Nevada. This brings our annual revenue run rate to well over $1.2 billion; o Improved sales at our first ten acquisitions by 22% and pre-tax profits by 44% and achieved a return on invested capital in excess of our cost by implementing Lithia’s proven operating model; o Entered into a strategic partnership with Ford Credit for over $350 million in initial credit lines. This includes a $75 million acquisition credit facility that remains completely untapped as this is written; and o Expanded analyst coverage to ten brokerage firms, all of whom have given Lithia high investment ratings and have established price targets of between $25 and $32 over a 12 to 18 month period. (Of course, this is independent research and the Company does not necessarily endorse the reports’ conclusions.) The year 1998 was also one of financial success. Total revenues increased 123% to $714.7 million from $319.8 million in 1997. Earnings for the year increased 80% to $10.8 million compared to $6.0 million in 1997 or $1.14 per share on 9.5 million shares outstanding versus $.82 per share on 7.3 million shares in 1997. Lithia sold a total of 17,708 new vehicles and 13,645 retail used vehicles in 1998 compared to 7,493 and 7,148 respectively during 1997. In addition, same-store sales accelerated from 4.8% in 1997 to 14.7% during 1998. As a result of our success, Lithia’s share price has increased from $11 at the IPO to $18.938 at the close of trading as of April 16, 1999. This is an increase of 72.2% in just over two years and a 30.9% average annual increase in share price. Please refer to page twelve of your proxy statement for stock performance graphs relative to our peer group and the broader indices. The automotive retail industry remains poised to consolidate its ranks. Increasing capital requirements, growing competition, and manufacturer consolidation plans are fueling the consolidation. 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 lower costs, maximize profitability, and better serve our customers. We are very excited about our future as we look to what lies ahead. All of us at Lithia Motors would like to express our appreciation 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 AUTOMOTIVE GROUP /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 www.lithia.com 10−K Annual report pursuant to section 13 and 15(d) Filed on 3/31/1999 Filed Period 12/31/1998 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 000-21789 LITHIA MOTORS, INC. (Exact name of registrant as specified in its charter) OREGON 93-0572810 (State or other jurisdiction of (I.R.S. Employer incorporation Identification No.) or organization) 360 E. JACKSON STREET, MEDFORD, OREGON 97501 (Address of principal executive offices) (Zip Code) 541-776-6899 ------------ (Registrant's telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: CLASS A COMMON STOCK, WITHOUT PAR VALUE Securities registered pursuant to Section 12(g) of the Act: NONE (Title of Class) -------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant is $54,895,978 as of February 26, 1999 based upon the last sales price ($18.44) as reported by the New York Stock Exchange. The number of shares outstanding of the Registrant's Common Stock as of March 12, 1999 was: Class A: 6,149,688 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 Proxy Statement for its 1999 Annual Meeting of Shareholders. LITHIA MOTORS, INC. 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I Item 1. Business 2 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related 12 Stockholder Matters Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 21 Item 8. Financial Statements and Supplementary Data 21 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 21 PART III Item 10. Directors and Executive Officers of the Registrant 22 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and 22 Management Item 13. Certain Relationships and Related Transactions 22 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 23 8-K Signatures 30 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 following: - The cyclical nature of automobile sales; - The Company's ability to negotiate profitable, accretive acquisitions; - The Company's ability to secure manufacturer approvals for acquisitions; nd - The Company's ability to retain existing management. See Exhibit 99 for a discussion of risk factors. GENERAL Lithia is a leading operator and retailer in the highly fragmented automotive industry. We offer 23 brands of new vehicles, through 56 franchises in 28 locations in the western United States. We currently operate 14 dealerships in California, 9 in Oregon, 2 in Washington and 3 in Nevada. Lithia 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. Lithia Motors, Inc. was founded in 1946 and its two senior executives have managed Lithia for over 28 years. Management has developed and implemented its acquisition and operating strategies which have enabled Lithia to successfully identify, acquire and integrate dealerships, achieving financial performance superior to industry averages. Since December 1996 when we completed our initial public offering, we have acquired 23 dealerships and are actively pursuing additional acquisitions. During 1998, the Company's skill in integrating dealerships resulted in 22% sales growth and 44% pre tax income growth at the first ten stores that were purchased since Lithia's initial public offering.