AutoNation, Inc.

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 o

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. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

As of June 28, 2002, the aggregate market value of the common stock of the registrant held by non-affiliates was approximately $3,005,000,000 based on the closing price of the common stock on The New York Stock Exchange on such date.

As of February 26, 2003 the registrant had 289,883,210 shares of common stock outstanding.

Part III — Portions of the Registrant’s Proxy Statement relating to the 2003 Annual Meeting of Stockholders.

AutoNation, Inc. is the largest automotive retailer in the United States. As of December 31, 2002, we owned and operated 369 new vehicle franchises from 282 dealerships located in major metropolitan markets in 17 states, predominantly in the Sunbelt region of the United States. Our dealerships, which we believe include some of the most recognizable and well-known dealerships in our key markets, sell 35 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 95% of the new vehicles that we sold in 2002, are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda and BMW.

We offer a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources. We believe that the significant scale of our operations and the quality of our managerial talent allow us to achieve efficiencies in our key markets by, among other things, reducing redundant operating expenses, improving asset management and sharing and implementing best practices across our dealerships.

Our common stock, par value $.01 per share, is listed on The New York Stock Exchange under the symbol “AN.” For information concerning our financial condition, results of operations and related financial data, you should review the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Financial Statements and Supplementary Data” sections of this document. You also should review and consider the risks relating to our business, operations, financial performance and cash flows that we describe below under “Risk Factors.”

Our corporate website is http://www.AutoNation.com. We make available on this website, free of charge, access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statement on Schedule 14A and amendments to those materials filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after we electronically submit such material to the Securities and Exchange Commission (the “Commission”). In addition, the Commission’s website is http://www.sec.gov. The Commission makes available on this website, free of charge, reports, proxy and information statements, and other information regarding issuers, such as us, that file electronically with the Commission. Information on our website or the Commission’s website is not part of this document.

As a specialty retailer, our business model is focused on developing and maintaining long-term relationships with our customers. The foundation of our business model is operational excellence. We are pursuing the following strategies to achieve our targeted level of operational excellence:


	•	Deliver a superior customer experience at our dealerships.

	•	Leverage our significant scale to improve our operating efficiency.

	•	Increase our productivity.

	•	Build a powerful brand in each of our local markets.

Our strategies are supported by our use of information technology. We have used our significant scale to become an industry leader in marketing our dealerships and vehicle inventory via the Internet. By pursuing our strategies and leveraging information technology to enhance our customer relationships, we hope to convince

Our goal is to deliver a superior customer experience at our dealerships. Our efforts to improve our customers’ experiences at our dealerships include the following practices and initiatives in key areas of our business:


	•	*Customer Service:* The success of our dealerships depends in significant part on our ability to develop positive relationships with our customers. We have developed and are testing at certain of our dealerships standardized customer-friendly sales and service processes that we expect to improve the experiences of our customers. We also base the compensation of our key dealership personnel on, among other things, the quality of customer service they provide in connection with vehicle sales and service, as measured by their dealership’s customer satisfaction index, or CSI, scores. These CSI scores are derived from data accumulated by the vehicle manufacturers through individual customer surveys.

	•	*Parts and Service Sales:* Our dealerships’ goal is to make it easy for customers to service their vehicles with us. Our key initiatives to accomplish this include offering our customers key features that differentiate us from our competitors, such as the variety of services we provide on a “Fast or Free” basis (for example, our dealerships in certain markets offer to complete a customer’s oil change within 30 minutes or it is free), our extended evening and weekend service hours and the competitive pricing we offer for widely available services. Our dealerships utilize our team-based Advanced Production Structure (APS) service process in which small dedicated teams of technicians and customer specialists work together to maximize service efficiency and customer satisfaction. We also are focused on managing our service pricing to ensure that, in addition to being competitive within the local market, it is standardized and transparent to our customers. We expect these efforts, which include market- and brand-specific grid pricing and a menu-driven selection process, to improve our customers’ satisfaction with our service process and improve our margins.

	•	*Finance and Insurance and Other Aftermarket Product Sales:* We continue to improve our finance and insurance business by implementing standardized best operating practices across our dealership network, such as the use of our customer-friendly finance and insurance menu, our standardized district-specific pricing guidelines and our standardized closing process. Additionally, we continue to focus on optimizing the mix of retail finance sources available for our customers’ convenience.

We continue to leverage our status as the largest automotive retailer in the United States to further improve our cost structure by obtaining significant cost savings in our business. The following practices and initiatives reflect our deep commitment to cost management:


	•	*Manage Costs and Maximize Buying Power:* We are managing our business and leveraging our scale to take costs out of our business and to maximize our buying power. We have begun to implement in certain of our operating districts our “Shared Resource Center” (SRC) concept, which we intend to roll out across all of our operating districts. Each SRC will permit us to centralize certain key accounting and administrative activities, including payroll functions, within each of our districts, which we expect to improve our business controls and facilitate asset management and vendor consolidation. We also continue to develop national vendor relationships to standardize our dealerships’ approach to purchasing certain equipment, supplies and services and to leverage our scale to improve our buying power.


	•	*Manage New and Used Vehicle Inventories:* We are managing our new and used vehicle inventories to optimize our dealerships’ supply and mix of vehicle inventory. During 2002, we continued to use our web-based tracking system and began using a proprietary forecasting tool that enables our dealerships to enhance their vehicle inventory management and ordering. We also are (1) managing our new and used vehicle inventories across the dealerships within each of our markets and (2) targeting our inventory purchasing to the more popular model packages.

	•	*Used Vehicle Sales:* We are the largest retailer of used vehicles in the United States. Each of our dealerships offers a variety of used vehicles. We are leveraging our status as the largest retailer of new vehicles in the country to develop competitive advantages over our principal used vehicle competitors and to improve our used vehicle business. We accept as trade-ins more used vehicles than any other auto retailer, which we believe gives us the best access to the most desirable used vehicle inventory. We also believe that, as a result of the scale of our new vehicle dealerships, we are in a superior position to realize the benefits of vehicle manufacturer-supported certified used vehicle programs, which we believe are improving consumers’ attitudes toward used vehicles. Our used vehicle business strategy is focused on (1) using our customized vehicle inventory management system, which is our standardized approach to pricing, inventory mix and used vehicle asset management based on our established best practices, and (2) leveraging our scale with comprehensive used vehicle marketing programs, such as market-wide promotional events and standardized approaches to advertising that we can implement more effectively than smaller retailers because of our size. We also have dedicated management personnel in each of our ten geographic operating districts to oversee and optimize our used vehicle operations. We continue to utilize the Internet to improve our used vehicle operations by providing consumers an easy-to-navigate means to view our large on-line inventory of used vehicles.

The following are examples of key initiatives we have implemented to increase productivity:


	•	*Manage Compensation:* We intend to continue improving the variability of our compensation expense, which is one of our most significant costs, by developing and implementing standardized compensation guidelines at each of our dealerships, taking into account our sales volume objectives, the vehicle brand and the size of the dealership.

	•	*Improve Our Dealerships’ Service Capacity:* We have developed and are implementing at our dealerships our proprietary Production Planning and Tracking System, which is a customized server-based program that allows us to track each of our service technicians on a day-to-day basis to maximize productivity and performance. Additionally, we expect our dealerships’ team-based APS service process to continue to result in gains in labor productivity and customer satisfaction in our service departments.

	•	*Finance and Insurance and Other Aftermarket Product Sales:* Each new or used vehicle sale presents our dealerships with the opportunity to arrange for financing of the vehicle through vehicle manufacturers’ captive finance subsidiaries and other preferred third party lenders and to sell an extended service contract, vehicle protection products and other aftermarket products, such as vehicle accessories, maintenance programs or a theft deterrent system, most of which are offered and administered by independent third parties. We continue to focus on improving this area of our business by (1) implementing initiatives through finance and insurance management personnel in each of our operating districts, (2) utilizing standardized compensation guidelines for all of our finance and insurance associates, (3) focusing on implementing our standardized menu-driven sales process in all of our stores and (4) continuing to add to our product mix to offer additional high-value products to our customers.

	•	*Information Technology:* We are focused on leveraging information technology to enhance our customer relationships and increase both productivity and market share. We continue to use eCompass, our proprietary web-based customer relationship management tool, across all of our


		dealerships. We recently expanded its application beyond eCommerce to handle showroom and telephone traffic. We are focusing on implementing ShowroomCompass, as well as other tools, across all of our stores to better understand our customer traffic flows, manage our showroom sales process and manage our long-term customer relationships. We expect this tool to enable us to promote and sell our vehicles and other products more efficiently and effectively.

In many of our key markets where we have significant market share, we are marketing our dealerships under a single market-specific retail brand. We continue to position these market-specific retail brands to communicate to customers the key features that we believe differentiate our dealerships in our branded markets from our competitors, such as the variety of services we provide on a “Fast or Free” basis, our extended evening and weekend service hours and the competitive pricing we offer for widely available services. We believe that by having our dealerships within each local market speak with one voice to the automobile-buying public we can achieve marketing and advertising cost savings and efficiencies that generally are not available to many of our local competitors. We also believe that we can create superior retail brand awareness in our markets. Since our inaugural launch of the “John Elway” brand across our Denver dealerships in December 1998, we have launched seven other local brands in our key markets, including “Maroone” in South Florida, “AutoWay” in Tampa, Florida, “Courtesy” in Orlando, Florida, “Desert” in Las Vegas, Nevada, “Team” in Atlanta, Georgia, “Mike Shad” in Jacksonville, Florida, and “Dobbs” in Memphis, Tennessee. We expect to launch additional local retail brands during 2003. We expect that the dealerships we own in markets in which we use a single local retail brand as of December 31, 2003 will account for approximately half of our total sales during fiscal 2003.

As of December 31, 2002, we owned and operated 369 new vehicle franchises from 282 dealerships located in major metropolitan markets in 17 states, predominantly in the Sunbelt region of the United States. Our dealerships, which we believe include some of the most recognizable and well-known dealerships in our key markets, sell 35 different brands of new vehicles. The core brands of vehicles that we sell, representing approximately 95% of the new vehicles that we sold in 2002, are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda and BMW.

Our dealerships offer a diversified range of automotive products and services, including new vehicles, used vehicles, vehicle maintenance and repair services, vehicle parts, extended service contracts, vehicle protection products and other aftermarket products. We also arrange financing for vehicle purchases through third-party finance sources. For a discussion of how we intend to leverage our strengths to improve our operations, you should read the “Business Strategy” section of this document.

Each of our dealerships acquires new vehicles for retail sale directly from the applicable automotive manufacturer or distributor. Accordingly, we depend in large part on the automotive manufacturers and distributors to provide us with high quality vehicles that consumers desire and to supply us with such vehicles at suitable locations, quantities and prices. Our operations, particularly our sales of new vehicles, are impacted by the sales incentive programs conducted by the automotive manufacturers to spur consumer demand for their vehicles. We generally acquire used vehicles from customer trade-ins, at the termination of leases and, to a lesser extent, auctions and other sources. We generally recondition used vehicles acquired for retail sale at our dealerships’ service facilities and capitalize costs related thereto as used vehicle inventory. Used vehicles that we do not sell at our dealerships generally are sold at wholesale through auctions.

We provide a wide variety of financial products and services to our customers. We offer to arrange for our customers to finance vehicles through installment loans or leases with third-party lenders, including the vehicle manufacturers’ and distributors’ captive finance subsidiaries, in exchange for a commission payable to us by the third-party lender. Commissions that we receive from these third-party lenders may be subject to chargeback, in full or in part, if loans that we arrange are defaulted or prepaid or upon other specified circumstances. However, our exposure to loss in connection with arranging third-party financing generally is

limited to the commissions that we receive. Since our mid-1999 exit from the vehicle lease underwriting business and our December 2001 exit from the retail auto loan underwriting business, we have not directly financed our customers’ vehicle leases or purchases. We had finance receivables and related assets of approximately $92.9 million at December 31, 2002, however, with respect to auto leases and loans that we previously underwrote. For a further discussion of the risks to which we are subject with respect to our prior auto loan and lease underwriting activities, you should refer to the “Risk Factors” section of this document.

We also offer our customers various vehicle protection and other products, including extended warranties, guaranteed auto protection (known as “GAP,” this protection covers the shortfall between a customer’s loan balance and insurance payoff in the event of a casualty), credit insurance, lease “wear and tear” insurance and theft protection products. The products that we offer include products that are sold and administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries. Pursuant to our arrangements with these third-party finance and vehicle protection product providers, we either sell the products on a straight commission basis or we sell the product, recognize commission and participate in future underwriting profit, if any, pursuant to a retrospective commission arrangement. Commissions that we receive from these third-party providers may be subject to chargebacks, in full or in part, if products that we sell, such as extended warranties, are cancelled. We establish an estimated liability for chargebacks against revenue recognized from sales of finance and vehicle protection products during the period in which the related revenue is recognized.

We retailed approximately 674,000 new and used vehicles through our dealerships in 2002. We sell a broad range of well-known vehicle makes within each of our markets.

Our marketing efforts focus on mass marketing and targeted marketing in our local markets and are designed to build our business with a broad base of repeat, referral and new customers. We engage in marketing and advertising primarily through newspapers, radio, television, direct mail and outdoor billboards in our local markets. As we have consolidated our dealership operations in certain of our key markets under one local retail brand name, we have been able to focus our efforts on building consumer awareness of the selected local retail brand name rather than on the individual legacy names under which our dealerships operated prior to their acquisition by us. We also have begun to develop newspaper, television and radio advertising campaigns that we can modify for use in multiple local markets, which we expect to result in advertising cost savings and efficiencies that are not generally available to smaller retailers. We expect to continue to realize cost savings and efficiencies with respect to advertising expenses, due to our ability to obtain efficiencies in developing advertising campaigns and due to our ability to gain volume discounts and other concessions as we increase our presence within our key markets and consolidate our dealerships under a single retail brand name in our local markets.

We also have been able to use our significant scale to market our dealerships and vehicle inventory via the Internet. According to industry analysts, the majority of new car buyers nationwide consult the Internet for new car information, which is resulting in better-informed customers and a more efficient sales process. The success of our e-commerce marketing strategy will depend on our ability to (i) develop websites and an Internet sales process that appeal to on-line automobile buyers, (ii) obtain high visibility on the Internet, whether through our own websites or through strategic partnerships and alliances with other e-commerce companies, including Microsoft’s MSN Autos, America Online, Edmunds, Kelley Blue Book and Yahoo! Autos, and (iii) develop and maintain a cost structure that permits us to operate efficiently. We use eCompass, our proprietary Internet-based customer relationship management tool, as well as other tools, to respond to and track customer leads and sales.

We have entered into framework agreements with most major vehicle manufacturers and distributors. These agreements, which are in addition to the franchise agreements described in the following paragraph, contain provisions relating to our management, operation, advertising and marketing, and acquisition and

ownership structure of automotive dealerships franchised by such manufacturers. These agreements contain certain requirements pertaining to our operating performance (with respect to matters such as sales volume, sales effectiveness and customer satisfaction), which, if we do not satisfy, may adversely impact our ability to make further acquisitions of such manufacturer’s dealerships. Additionally, these agreements set limits on the number of dealerships that we may acquire of the particular manufacturer, nationally, regionally and in local markets, and contain certain restrictions on our ability to name and brand our dealerships. Some of these framework agreements give the manufacturer or distributor the right to acquire at fair market value, or the right to compel us to sell, the automotive dealerships franchised by that manufacturer or distributor under specified circumstances in the event of a change in control of our company (generally including certain material changes in the composition of our board of directors during a specified time period, the acquisition of 20% or more of the voting stock of our company by another manufacturer or distributor or the acquisition of 50% or more of our voting stock by a person, entity or group not affiliated with a vehicle manufacturer or distributor) or other extraordinary corporate transactions such as a merger or sale of all of our assets.

We operate each of our new vehicle dealerships under a franchise agreement with a vehicle manufacturer or distributor. The franchise agreements grant the franchised automotive dealership a non-exclusive right to sell the manufacturer or distributor’s brand of vehicles and offer related parts and service within a specified market area. The franchise agreements also grant the dealerships the right to use the manufacturer or distributor’s trademarks in connection with dealership operations. The franchise agreements impose numerous operational requirements and restrictions on the automotive dealerships relating to inventory levels, working capital levels, the sales process, marketing and branding, showroom and service facilities and signage, personnel, changes in management and monthly financial reporting, among other things. The franchise agreements also provide for termination of the agreement by the manufacturer or non-renewal for a variety of causes (including performance deficiencies in such areas as sales volume, sales effectiveness and customer satisfaction), subject to applicable state franchise laws that limit a manufacturer’s right to terminate a franchise. Certain major manufacturers have asserted sales and customer satisfaction performance deficiencies under the terms of our framework and franchise agreements at a limited number of our dealerships, and we are working with the manufacturers to address these asserted performance issues.

We operate in a highly regulated industry. A number of state and federal laws and regulations affect our business. In every state in which we operate, we must obtain various licenses in order to operate our businesses, including dealer, sales, finance and insurance related licenses issued by state regulatory authorities. Numerous laws and regulations govern our conduct of business, including those relating to our sales, operations, financing, insurance, advertising and employment practices. These laws and regulations include state franchise laws and regulations, consumer protection laws and other extensive laws and regulations applicable to new and used motor vehicle dealers, as well as a variety of other laws and regulations. These laws also include federal and state wage-hour, anti-discrimination and other employment practices laws.

Our financing activities with customers are subject to federal truth-in-lending, consumer leasing and equal credit opportunity laws and regulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and other installment sales laws and regulations. Some states regulate finance fees and charges that may be paid as a result of vehicle sales. Claims arising out of actual or alleged violations of law may be asserted against us or our dealerships by individuals or governmental entities and may expose us to significant damages or other penalties, including revocation or suspension of our licenses to conduct dealership operations and fines.

Our operations are subject to the National Traffic and Motor Vehicle Safety Act, Federal Motor Vehicle Safety Standards promulgated by the United States Department of Transportation and the rules and regulations of various state motor vehicle regulatory agencies. The imported automobiles we purchase are subject to United States customs duties and, in the ordinary course of our business we may, from time to time, be subject to claims for duties, penalties, liquidated damages or other charges.

Our operations involve the use, handling, storage and contracting for recycling and/or disposal of materials such as motor oil and filters, transmission fluids, antifreeze, refrigerants, paints, thinners, batteries, cleaning products, lubricants, degreasing agents, tires and fuel. Consequently, our business is subject to a complex variety of federal, state and local requirements that regulate the environment and public health and safety.

Most of our dealerships utilize aboveground storage tanks, and to a lesser extent underground storage tanks, primarily for petroleum-based products. Storage tanks are subject to periodic testing, containment, upgrading and removal under the Resource Conservation and Recovery Act and its state law counterparts. Clean-up or other remedial action may be necessary in the event of leaks or other discharges from storage tanks or other sources. In addition, water quality protection programs under the federal Water Pollution Control Act (commonly known as the Clean Water Act), the Safe Drinking Water Act and comparable state and local programs govern certain discharges from some of our operations. Similarly, certain air emissions from operations such as auto body painting may be subject to the federal Clean Air Act and related state and local laws. Certain health and safety standards promulgated by the Occupational Safety and Health Administration of the United States Department of Labor and related state agencies also apply.

Some of our dealerships are parties to proceedings under the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, typically in connection with materials that were sent to former recycling, treatment and/or disposal facilities owned and operated by independent businesses. The remediation or clean-up of facilities where the release of a regulated hazardous substance occurred is required under CERCLA and other laws.

We incur significant costs to comply with applicable environmental, health and safety laws and regulations in the ordinary course of our business. We do not anticipate, however, that the costs of such compliance will have a material adverse effect on our business, results of operations, cash flows or financial condition, although such outcome is possible given the nature of our operations and the extensive environmental, public health and safety regulatory framework. We do not have any material known environmental commitments or contingencies.

We operate in a highly competitive industry. We believe that the principal competitive factors in the automotive retailing business are location, service, price and selection. Each of our markets includes a large number of well-capitalized competitors that have extensive automobile dealership managerial experience and strong retail locations and facilities. According to the National Automotive Dealers Association, Manheim Auctions and reports of various industry analysts, the automotive retail industry is served by approximately 22,000 franchised automotive dealerships and approximately 54,000 independent used vehicle dealers. Several other public companies operate national or regional automotive retail chains. We are subject to competition from dealers that sell the same brands of new vehicles that we sell and from dealers that sell other brands of new vehicles that we do not represent in a particular market. Our new vehicle dealership competitors have franchise agreements with the various vehicle manufacturers and, as such, generally have access to new vehicles on the same terms as us. Additionally, we are subject to competition in the automotive retailing business from private market buyers and sellers of used vehicles.

In general, the vehicle manufacturers have designated specific marketing and sales areas within which only one dealer of a given vehicle line or make may operate. Under most of our framework agreements with the vehicle manufacturers, our ability to acquire multiple dealers of a given line-make within a particular market is limited. We are also restricted by various state franchise laws from relocating our dealerships or establishing new dealerships of a particular line-make within any area that is served by another dealer of the same line-make. Accordingly, to the extent that a market has multiple dealers of a particular line-make, as most of our key markets do with respect to most vehicle lines we sell, we are subject to significant intra-brand competition.

We also are subject to competition from independent automobile service shops and service center chains. We believe that the principal competitive factors in the service and repair industry are price, location, the use of factory-approved replacement parts, expertise with the particular vehicle lines and customer service. In addition to competition for vehicle sales and service, we face competition in our vehicle protection and after-market products business. We believe the principal competitive factors in these businesses are convenience, price, contract terms and the ability to finance vehicle protection and after-market products.

Our business exposes us to the risk of liabilities arising out of our operations. Liabilities involve, for example, claims of employees, customers or third parties for personal injury or property damage occurring in the course of our operations. We could also be subject to fines and civil and criminal penalties in connection with alleged violations of federal and state laws or regulatory requirements.

The automotive retailing business is also subject to substantial risk of property loss due to the significant concentration of property values at dealership locations. Under self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims handling expenses as part of our various insurance programs, including property and casualty and employee medical benefits. Costs in excess of this retained risk per claim are insured under various contracts with third party insurance carriers. We estimate the ultimate costs of these retained insurance risks based on actuarial evaluation and historical claims experience, adjusted for current trends and changes in claims-handling procedures. The level of risk we retain may change in the future as insurance market conditions or other factors affecting the economics of our insurance purchasing change. Although we have, subject to certain limitations and exclusions, substantial insurance, we cannot assure you that we will not be exposed to uninsured or underinsured losses that could have a material adverse effect on our business, financial condition, results of operations or cash flows.

Provisions for retained losses and deductibles are made by charges to expense based upon periodic evaluations of the estimated ultimate liabilities on reported and unreported claims. The insurance companies that underwrite our insurance require that we secure certain of our obligations for deductible reimbursements with collateral. Our collateral requirements are set by the insurance companies and, to date, have been satisfied by posting surety bonds, letters of credit and/or cash deposits. Our collateral requirements may change from time to time based on, among other things, our claims experience. We include additional details about our collateral requirements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this document, as well as in the Notes to our Consolidated Financial Statements.

As of December 31, 2002, we employed approximately 28,500 full time employees, approximately 600 of whom were covered by collective bargaining agreements. We believe that we have good relations with our employees.

Our operations generally experience higher volumes of vehicle sales and service in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, demand for cars and light trucks is generally lower during the winter months than in other seasons, particularly in regions of the United States where dealerships may be subject to harsh winters. Accordingly, we expect our revenue and operating income generally to be lower in our first and fourth quarters as compared to our second and third quarters. However, revenue may be impacted significantly from quarter to quarter by other factors unrelated to season, such as vehicle manufacturer incentive programs.

We own a number of registered service marks and trademarks, including, among other marks, AutoNation (ARTWORK)

® and AutoNation®. Pursuant to agreements with vehicle manufacturers, we have the right to

use and display manufacturers’ trademarks, logos and designs at our dealerships and in our advertising and promotional materials, subject to certain restrictions. We also have licenses pursuant to various agreements with third parties authorizing the use and display of the marks and/or logos of such third parties, subject to certain restrictions. The current registrations of our service marks and trademarks in the United States and foreign countries are effective for varying periods of time, which we may renew periodically, provided that we comply with all applicable laws.

Mike Jackson has served as our Chairman of the Board since January 1, 2003 and as our Chief Executive Officer and Director since September 1999. From October 1998 until September 1999, Mr. Jackson served as Chief Executive Officer of Mercedes-Benz USA, LLC, a North American operating unit of DaimlerChrysler AG, a multinational automotive manufacturing company. From April 1997 until September 1999, Mr. Jackson also served as President of Mercedes-Benz USA. From July 1990 until March 1997, Mr. Jackson served in various capacities at Mercedes-Benz USA, including as Executive Vice President immediately prior to his appointment as President of Mercedes-Benz USA. Mr. Jackson was also the managing partner from March 1979 to July 1990 of Euro Motorcars of Bethesda, Maryland, a regional group that owned and operated eleven automotive dealership franchises, including Mercedes-Benz and other brands of automobiles.

Michael E. Maroone has served as our President and Chief Operating Officer since August 1999. Following our acquisition of the Maroone Automotive Group in January 1997, Mr. Maroone served as President of our New Vehicle Dealer Division. In January 1998, Mr. Maroone was named President of our Automotive Retail Group with responsibility for our new and used vehicle operations. Prior to joining our company, Mr. Maroone was President and Chief Executive Officer of the Maroone Automotive Group, one of the country’s largest privately-held automotive retail groups.

Craig T. Monaghan has served as our Senior Vice President and Chief Financial Officer since May 2000. From June 1998 to May 2000, Mr. Monaghan was Chief Financial Officer of iVillage.com, a leading women’s network on the Internet. From 1991 until June 1998, Mr. Monaghan served in various executive capacities for Reader’s Digest Association, Inc., most recently as Vice President and Treasurer.

Patricia A. McKay has served as our Senior Vice President — Finance since November 1999. From November 1999 until April 2000, Ms. McKay also served as our Acting Chief Financial Officer and Controller. Ms. McKay joined our company in January 1997 as Vice President, Operations Controller. From February 1998 until November 1999, Ms. McKay served as Senior Vice President of Finance of our Automotive Retail Group. Prior to joining our company, Ms. McKay served from October 1988 until December 1996 in various positions with Dole Food Company, Inc., a multinational packaged food company, most recently as Vice President of Finance and Controller.

Jonathan P. Ferrando has served as our Senior Vice President, General Counsel and Secretary since January 2000. Mr. Ferrando joined our Company in July 1996 and served in various capacities within our Legal Department, including as Senior Vice President and General Counsel of our Automotive Retail Group from March 1998 until January 2000. Prior to joining our company, Mr. Ferrando was a corporate attorney in Chicago, Illinois with Skadden, Arps, Slate, Meagher & Flom from 1991 until 1996.

Allan D. Stejskal has served as our Senior Vice President of Operations since September 2001. Since joining our company in September 2000, Mr. Stejskal served in various capacities prior to his appointment as Senior Vice President of Operations, including as Senior Vice President, e-Commerce, and Senior Vice President, Chief Information Officer. From 1995 until joining AutoNation, Mr. Stejskal held various positions at Automatic Data Processing, Inc., a leading national provider of computerized transaction processing, data communication and information services, most recently as Vice President, Dealer Services Division, a position he held since February 1998.

Our business, financial condition, results of operations, cash flows and prospects, and the prevailing market price and performance of our common stock, may be adversely affected by a number of factors, including the matters discussed below. Certain statements and information set forth in this Annual Report on Form 10-K, as well as other written or oral statements made from time to time by us or by our authorized executive officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement and these risk factors in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Annual Report on Form 10-K or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations, plans, intentions and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. The risks, uncertainties and other factors that our stockholders and prospective investors should consider include, but are not limited to, the following:

The automotive retailing industry is cyclical and is sensitive to changing economic conditions and various other factors. We expect industry-wide sales of new vehicles in the United States during 2003 to decrease by an estimated three to five percent compared to 2002 on a unit basis, although sales may decrease by a greater amount due to various factors, including uncertainty relating to the prospects of war. Sales levels are very difficult to predict; lower actual sales levels could materially adversely impact our business.

Sales of motor vehicles, particularly new vehicles, historically have been subject to substantial cyclical variation characterized by periods of oversupply and weak demand. We believe that many factors affect the industry, including consumer confidence in the economy, the prospects of war, other international conflicts or terrorist attacks, the level of manufacturer incentives (and consumers’ reaction to such offers), the level of personal discretionary spending, product quality, affordability and innovation, interest rates, fuel prices, credit availability, unemployment rates and the number of consumers whose vehicle leases are expiring. We presently expect industry new vehicle sales in the United States during 2003, including sales of fleet vehicles, to decrease by an estimated three to five percent compared to 2002 on a unit basis. Our new vehicle sales may differ from industry sales, including due to particular economic conditions and other factors in the geographic markets in which we operate. We have experienced lower than expected vehicle sales to date during 2003, which we attribute in part to the impact of the prospects of war on consumer demand for vehicles. Continued uncertainty regarding the prospects of war or a prolonged war could materially adversely impact our vehicle sales and overall business. A significant change in new vehicle sales levels in the United States (or in our particular geographic markets) during 2003 as compared to our expectations, including our expectations as to the level of retail sales of new vehicles, could cause our actual earnings results to differ materially from our prior and projected earnings results. Economic conditions and the other factors described above may also materially adversely impact our sales of used vehicles, finance and vehicle protection products, vehicle service and parts and repair services.

We have engaged in certain transactions that the IRS has reviewed and may have a material adverse effect on our financial condition, results of operations and cash flows.

currently foregoing. In October 2002, the IRS announced a settlement initiative aimed at resolving IRS objections to these types of transactions. The settlement initiative includes settlement guidelines for companies that elect to enter into the settlement program offered by the IRS. Based on the settlement guidelines issued by the IRS, we estimate that, in connection with a possible settlement, we could owe the IRS net aggregate payments in the range of approximately $475 million to $550 million, a portion of which might be deferred over a multi-year period. We estimate that the initial net payment in connection with such a settlement could be in the range of approximately $300 million to $400 million and would be payable in early 2004, with the remaining amount deferred. We have been engaged in settlement negotiations with the IRS with respect to the tax treatment of these transactions since the fourth quarter of 2002. We cannot provide any assurance, however, that we will settle the tax treatment of the transactions with the IRS or, if we do, that such settlement will be on the terms outlined above, including with respect to the amount or timing of payments. A settlement or resolution of these matters could have a material adverse effect on our financial condition, results of operations and cash flows.

In connection with ANC Rental Corporation’s bankruptcy, we have been called on to perform under certain guarantees with respect to ANC Rental, we may be called on to perform under additional credit enhancements and guarantees in the future, we may have claims against ANC Rental that may be discharged in bankruptcy and we may be subject to other claims, any of which could have a material adverse effect on our business, financial condition, cash flows and prospects.

In connection with the spin-off of ANC Rental Corporation and its subsidiaries (“ANC Rental”) in June 2000, we agreed to provide certain guarantees and credit enhancements with respect to financial and other performance obligations of ANC Rental, including acting as a guarantor under certain motor vehicle and real property leases between ANC Rental and Mitsubishi Motor Sales of America, Inc. (“Mitsubishi”) and acting as an indemnitor with respect to certain surety bonds issued on ANC Rental’s behalf. We are also a party to certain agreements with ANC Rental (the “ANC Rental Agreements”), including a separation and distribution agreement, a reimbursement agreement and a tax sharing agreement, pursuant to which both ANC Rental and we have certain obligations. On November 13, 2001, ANC Rental filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Wilmington, Delaware. In connection with ANC Rental’s bankruptcy, we were called on in late 2001 to perform under nine of the twelve real property leases between ANC Rental and Mitsubishi for which we provided guarantees. As a result, we agreed to assume these real property leases, which expire in 2017, in order to control and attempt to mitigate our exposure relating thereto. In the fourth quarter of 2001, we incurred a pre-tax charge of $20 million included in net income from discontinued operations to reflect our assumption of the nine leases with Mitsubishi and certain other costs that we expect to incur as a result of ANC Rental’s bankruptcy. We continue to guarantee the remaining three leases with Mitsubishi until their expiration in 2017, and we expect to be called on to perform under at least two of these leases during 2003. As of December 31, 2002, we have accrued liabilities of approximately $11 million with respect to these leases, which we believe will be adequate in light of our probable exposure. ANC Rental has been accounted for as a discontinued operation and, accordingly, we expect that additional charges recorded by us pursuant to the foregoing credit enhancements and guarantees or with respect to claims under the ANC Rental Agreements, if any, would not impact our reported results from continuing operations.

We reached an agreement with Mitsubishi in early 2002 pursuant to which our aggregate financial exposure relating to motor vehicles leased by ANC Rental from Mitsubishi is capped at $10 million. Based on ANC Rental’s continued performance under the motor vehicle lease agreement, we believe our financial exposure under the agreement will be minimal. Our indemnification obligations with respect to the surety bonds issued on behalf of ANC Rental are capped at $29.5 million in the aggregate. We could have potential exposure under the indemnification obligations until approximately 2006. Due to the bankruptcy of ANC Rental, obligations of ANC Rental to us under the terms of the ANC Rental Agreements may be extinguished or our claims against ANC Rental under such agreements may be unenforceable. These claims could include reimbursement obligations that ANC Rental may have to us in connection with payments made by us with respect to the foregoing credit enhancements and guarantees, as well as indemnification rights with respect to any payments that we make to the Internal Revenue Service as a result of audit adjustments in its

consolidated federal income tax returns relating to ANC Rental’s automotive rental businesses prior to the spin-off. Such audit adjustments, if any, would likely be resolved in the next two to four years. We estimate that, based on our assessment of the risks involved in each matter and excluding the liabilities associated with the property leases described above, our remaining potential exposure related to ANC Rental may be in the range of $25 million to $50 million. However, the exposure is difficult to estimate and we cannot provide any assurance that our aggregate obligations under these credit enhancements, guarantees and ANC Rental Agreements will not be materially above the range indicated above, which could have a material adverse affect on our business, financial condition, cash flows and prospects.

We have filed various claims against ANC Rental in the bankruptcy, including claims related to these credit enhancements, guarantees and ANC Rental Agreements. These claims may be discharged, in whole or in part, in the bankruptcy. The Committee of Unsecured Creditors in the bankruptcy is presently investigating potential claims against us in connection with our prior ownership and spin-off of ANC Rental, including claims that ANC Rental was undercapitalized at the time of the spin-off. There can be no assurances that we will not be subject to these or other additional claims as a result of ANC Rental’s bankruptcy filing. If any such potential claims were to be brought against us, we would vigorously defend ourselves and assert available defenses. However, there can be no assurances that we would prevail in any such claims, or that a failure to prevail would not have a material adverse effect on our business, financial condition, cash flows and prospects.

We are subject to restrictions imposed by vehicle manufacturers that may adversely impact our business, financial condition, results of operations, cash flows and prospects, including our ability to acquire additional dealerships.

The franchise agreements to which our dealerships are subject and the framework agreements that we have with many major vehicle manufacturers provide the manufacturers with considerable influence over the operations of our current dealerships, including our performance standards with respect to sales volume, sales effectiveness and customer satisfaction, our ability to acquire additional dealerships, the naming and marketing of our dealerships, the operations of our e-commerce sites, our selection of dealership management, the condition of our dealership facilities and the level at which we capitalize our dealerships. From time to time, we may be precluded under these agreements from acquiring additional franchises, or subject to other adverse actions, to the extent we are not meeting certain performance criteria at our existing dealerships (with respect to matters such as sales volume, sales effectiveness and customer satisfaction) until our performance improves in accordance with the agreements. These agreements also grant the manufacturer the right to terminate our franchise for a variety of reasons (including uncured performance deficiencies, any unapproved change of ownership or management or any unapproved transfer of franchise rights) subject to state laws. Certain major manufacturers have asserted sales and customer satisfaction performance deficiencies under the terms of our framework and franchise agreements at a limited number of our dealerships. While we believe that we will be able to renew all of our franchise agreements, we cannot guarantee that all of our franchise agreements will be renewed or that the terms of the renewals will be favorable to us. We cannot assure you that our dealerships will be able to comply with manufacturers’ sales, customer satisfaction and other performance requirements in the future, which may affect our ability to acquire new dealerships or renew our franchise agreements, or subject us to other adverse actions, including termination of a franchise, any of which could have a material adverse effect on our financial condition, results of operations, cash flows and prospects.

In addition, some of our framework agreements give the manufacturer or distributor the right to acquire, at fair market value, our automotive dealerships franchised by that manufacturer or distributor under specified circumstances in the event of a change in control of our company (generally including certain material changes in the composition of our board of directors during a specified time period, the acquisition of 20% or more of our voting stock by another vehicle manufacturer or distributor, or the acquisition of 50% or more of our voting stock by a person, entity or group not affiliated with a vehicle manufacturer or distributor) or other extraordinary corporate transactions such as a merger or sale of all of our assets. The restrictions in our franchise and framework agreements also may prevent or deter prospective acquirors from acquiring control of us, which may adversely impact our equity value. In addition, we have granted certain manufacturers the right to acquire, at fair market value, our automotive dealerships franchised by that manufacturer in specified

Our dealerships are dependent on the programs and operations of vehicle manufacturers and, therefore, any changes to such programs and operations may adversely affect our dealership operations and, in turn, affect our business, results of operations, financial condition, cash flows and prospects.

The success of our dealerships is dependent on vehicle manufacturers in several key respects. First, we rely exclusively on the various vehicle manufacturers for our new vehicle inventory. Additionally, manufacturers generally support their dealerships by providing direct financial assistance in various areas, including, among others, advertising assistance and inventory financing assistance. Beyond funds paid directly to their dealerships, the manufacturers also from time to time have established various incentive programs designed to spur consumer demand for their vehicles, such as 0% financing offers. From time to time, manufacturers modify and discontinue these dealer assistance and consumer incentive programs, which could have a significant adverse effect on our consolidated results of operations and cash flows. The core brands of vehicles that we sell, representing approximately 95% of the new vehicles that we sold in 2002, are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan, Honda and BMW. Any event that has a material adverse effect on our relationships with these vehicle manufacturers or the financial condition, management or designing, marketing, production or distribution capabilities of these manufacturers or others with whom we hold franchises, such as general economic downturns or recessions, increases in interest rates, labor strikes, supply shortages, adverse publicity, product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, may result in a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.

Our revolving credit facilities and the indenture relating to our senior unsecured notes contain certain restrictions on our ability to conduct our business.

The indenture relating to the $450.0 million of 9% senior unsecured notes that we sold in August 2001 and the credit agreements relating to our two revolving credit facilities contain numerous financial and operating covenants that limit the discretion of our management with respect to various business matters. These covenants place significant restrictions on, among other things, our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments (including dividends and repurchases of our shares) and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. Our revolving credit facilities also require us to meet certain financial ratios and tests that may require us to take action to reduce debt or act in a manner contrary to our business objectives. A failure by us to comply with the obligations contained in our revolving credit facilities or the indenture could result in an event of default under our revolving credit facilities or the indenture, which could permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross-acceleration or cross-default provisions. If any debt is accelerated, our assets may not be sufficient to repay in full such indebtedness and our other indebtedness. In addition, we have granted certain manufacturers the right to acquire, at fair market value, our automotive dealerships franchised by that manufacturer in specified circumstances upon the exercise of remedies under the indenture for our senior unsecured notes and the credit agreements for our two revolving credit facilities.

We are subject to numerous legal and administrative proceedings, which, if the outcomes are adverse to us, could materially adversely affect our business, operating results and prospects.

We are involved, and will continue to be involved, in numerous legal proceedings arising out of the conduct of our business, including litigation with customers, employment related lawsuits, class actions, purported class actions and actions brought by governmental authorities.

behalf the action would proceed. In July 2001, Florida’s Fourth District Court of Appeals upheld the certification of the class. The parties subsequently agreed on settlement terms and have jointly moved the Court for preliminary approval of the settlement, which is currently scheduled to be heard on March 14, 2003. The estimated amounts payable by us under the settlement are not material to our results of operations, financial condition or cash flows.

Many of our Texas dealership subsidiaries have been named in three class action lawsuits brought against the Texas Automobile Dealers Association (“TADA”) and new vehicle dealerships in Texas that are members of the TADA. The three actions allege that since January 1994 Texas dealers have deceived customers with respect to a vehicle inventory tax and violated federal antitrust and other laws as well. In April 2002, in two of the actions (which have been consolidated) the state court certified two classes of consumers on whose behalf the action would proceed. On October 25, 2002, the Texas Court of Appeals affirmed the trial court’s order of class certification in the state action and we are appealing that ruling to the Texas Supreme Court.

In addition to the foregoing cases, we also are a party to numerous other legal proceedings that arose in the conduct of our business. The results of these matters cannot be predicted with certainty, and we cannot provide any assurance that the resolution of one or more of these matters would not have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

We are subject to extensive governmental regulation and, if we are found to be in violation of any of these regulations, our business, operating results and prospects could suffer.

The automotive retailing industry, including our facilities and operations, is subject to a wide range of federal, state and local laws and regulations, such as those relating to sales of finance and vehicle protection products, licensing, insurance, consumer protection, environmental, health and safety, wage-hour, anti-discrimination and other employment practices. Specifically with respect to the sale of finance and vehicle protection products at our dealerships, we are subject to various laws and regulations, the violation of which would likely subject us to consumer class action lawsuits and significant adverse publicity, in addition to administrative, civil or criminal sanctions. The violation of other laws and regulations to which we are subject also can result in administrative, civil or criminal sanctions against us, which may include a cease and desist order against the subject operations or even revocation or suspension of our license to operate the subject business, as well as significant fines and penalties. We currently devote significant resources to comply with applicable federal, state and local regulation of health, safety, environment, zoning and land use regulations, and we may need to spend additional time, effort and money to keep our existing or acquired facilities in compliance therewith.

Our ability to grow our business may be limited by our ability to acquire automotive dealerships in key markets on favorable terms or at all.

The automotive retail industry is a mature industry. Accordingly, the growth of our automotive retail business since our inception has been primarily attributable to acquisitions of franchised automotive dealership groups. The significant consolidation in the industry in our key markets over the last several years has resulted in fewer desirable dealerships or dealership groups being available for purchase on reasonable terms. Acquisitions involve a number of risks, many of which are unpredictable and difficult to quantify or assess, including, among other matters, risks relating to known and unknown liabilities of the acquired business and projected operating performance. As a result, we cannot assure you that we will be able to continue to acquire dealerships selling desirable automotive brands at desirable locations in our key markets or that any such acquisitions can be completed on favorable terms or at all. Additionally, as described above, manufacturer approval of our proposed acquisitions may be subject to our compliance with applicable performance standards (including with respect to matters such as sales volume, sales effectiveness and customer satisfaction) or established acquisition limits, particularly regional and local market limits.

We are subject to interest rate risk in connection with our floorplan notes payable, revolving credit facilities and mortgage facilities that could have a material adverse effect on our profitability.

A significant increase in interest rates will cause our interest rates under our revolving credit facilities, mortgage facilities and certain of our floorplan notes payable to increase. Although we expect increases in our interest rates under our floorplan notes payable to be partially offset by increases in floorplan assistance from the automotive manufacturers and by interest rate hedge transactions that we enter into from time to time, we cannot provide you with any assurance that a significant increase in interest rates would not have a material adverse effect on our business, financial condition, results of operations or cash flows.

We are subject to residual value risk and consumer credit risk in connection with our lease portfolio, consumer credit risk in connection with our finance receivables and related assets and underwriting risk in connection with our reinsurance of warranty and protection products.

Through AutoNation Financial Services, until December 2001, we underwrote installment auto loans to our customers and, until mid-1999, we provided our customers an opportunity to finance vehicles through leases with us. In December 2001, we decided that we would no longer underwrite retail auto loans for customers at our dealerships. However, we will continue to manage and wind down our outstanding finance receivables, which totaled $92.9 million as of December 31, 2002, and, therefore, we remain subject to consumer credit risk and residual value risk in connection with our lease portfolio in the event of a decline in the market value of our leased vehicles. A worsening of the current economic environment could have a material adverse effect on the value of our finance receivables, our financial condition, results of operations and cash flows.

Certain of the vehicle warranty and extended protection products that we offer to our customers are products that are sold and administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries, and for which we may retain some of the underwriting risk through captive insurance subsidiaries. To the extent that we retain underwriting risk associated with particular warranty and extended protection products, we are subject to the risk that claims under the products may exceed applicable reserves, which could have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.

Under Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we must test our intangible assets for impairment at least annually, which may result in a material, non-cash write down of goodwill and could have a material adverse impact on our results of operations and shareholders’ equity.

On June 30, 2001, the Financial Accounting Standards Board (FASB) finalized and issued Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 eliminates goodwill and indefinite-lived intangibles amortization over an estimated useful life. However, goodwill and indefinite-lived intangibles will be subject to at least an annual assessment for impairment by applying a fair-value based test. Our principal identifiable intangible assets are our rights under our franchise agreements with vehicle manufacturers. Subject to certain limited exceptions, these franchise agreements have indefinite lives.

We must continue to test our intangible assets for impairment at least annually or more frequently when events or circumstances indicate that an impairment may have occurred, which may result in a material, non-cash write-down of goodwill or franchise values. An impairment would have a material adverse impact on our results of operations and shareholders’ equity.

We lease our corporate headquarters facility pursuant to a lease expiring in 2010. We also own or lease numerous facilities relating to our operations in 17 states. These facilities consist primarily of automobile showrooms, display lots, service facilities, collision repair centers, supply facilities, automobile storage lots,

In an action filed in Florida state court in 1999, one of our subsidiaries was accused of violating, among other things, the Florida Motor Vehicle Retail Sales Finance Act and the Florida Deceptive and Unfair Trade Practices Act by allegedly failing to deliver executed copies of retail installment contracts to customers of our former used vehicle megastores. On October 31, 2000, the court certified the class of customers on whose behalf the action would proceed. In July 2001, Florida’s Fourth District Court of Appeals upheld the certification of the class. The parties subsequently agreed on settlement terms and have jointly moved the Court for preliminary approval of the settlement, which is currently scheduled to be heard on March 14, 2003. The estimated amounts payable by us under the settlement are not material to our results of operations, financial condition or cash flows.

We intend to vigorously defend ourselves and assert available defenses with respect to each of the foregoing matters. Further, we may have certain insurance coverage and rights of indemnification with respect to certain aspects of the foregoing matters. However, a settlement or an adverse resolution of one or more of these matters may result in the payment of significant costs and damages, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

In addition to the foregoing cases, we are also a party to numerous other legal proceedings that arose in the conduct of our business. We do not believe that the ultimate resolution of these matters will have a material adverse effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

On October 24, 2002, we commenced a solicitation of consents from holders of our $450.0 million of 9% Senior Notes due 2008 (the “Notes”) to amend the Indenture governing the Notes. On November 8, 2002, we amended the Indenture to increase by $400.0 million our capacity to make restricted payments under the terms of the Indenture, including payments for the repurchase of our common stock. As a result of this solicitation, we obtained consents to the amendment from holders of Notes representing $441,880,000 (or 98.2%) of the outstanding aggregate principal amount of the Notes.

Our common stock is traded on The New York Stock Exchange under the symbol “AN.” The following table sets forth, for the periods indicated, the high and low sales prices per share of the common stock as reported on the consolidated transaction reporting system.

On February 26, 2003, the closing price of our common stock was $13.05 per share as reported by the NYSE. As of February 26, 2003, there were approximately 3,200 holders of record of our common stock.

We have not declared or paid any cash dividends on our common stock during our two most recent fiscal years. We do not anticipate paying cash dividends in the foreseeable future. The indenture for our senior unsecured notes and the credit agreements for our two revolving credit facilities restrict our ability to declare and pay cash dividends.

You should read the following Selected Financial Data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our Consolidated Financial Statements and Notes thereto and other financial information included elsewhere in this Form 10-K.

See Notes 11, 13, 14, 16, 17 and 19 of Notes to Consolidated Financial Statements for discussion of shareholders’ equity, finance underwriting and asset securitizations, restructuring activities and impairment charges, earnings (loss) per share, discontinued operations, and acquisitions and divestitures, respectively, and their effect on comparability of year-to-year data. See “Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters” for a discussion of our dividend policy.

You should read the following discussion in conjunction with the “Introduction,” “Business,” “Business Strategy,” and “Risk Factors” sections of this Form 10-K and our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.

As further discussed in Note 25, Prior Year Reclassifications and Disaggregations, of Notes to Consolidated Financial Statements, certain amounts have been reclassified from the previously reported financial statements and disaggregations of certain disclosures have been made to conform with the financial statement presentation of the current period. The reclassifications include the presentation of floorplan interest expense below operating income. Floorplan interest expense was classified as a component of cost of operations in previously reported financial information, including in the unaudited income statements and financial information presented in our 2002 Quarterly Reports on Form 10-Q and our press release announcing our 2002 fourth-quarter and full-year results of operations on Thursday, February 6, 2003. The reclassification of floorplan interest expense had no impact to net income and earnings per share.

The following is a summary of our Consolidated Income Statements both in gross dollars and on a diluted per share basis for the periods indicated (in millions, except per share data):

The following factors have impacted our financial condition and results of operations and may cause our reported financial data not to be indicative of our future financial condition and operating results:


	•	Elimination of Goodwill Amortization: Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which eliminated goodwill amortization. See further discussion under the heading “New Accounting Pronouncements.”

	•	Share Repurchases: In October 2002, our Board of Directors extended our share repurchase program by authorizing us to acquire an additional $500.0 million of our common stock. Including the program authorized in October 2002, our Board has authorized us to acquire $2.5 billion of our common stock since 1998 and, through December 31, 2002, we have acquired 185.7 million shares of our common stock for an aggregate purchase price of $2.1 billion, leaving approximately $370.4 million authorized for repurchases at December 31, 2002. See further discussion under the heading “Financial Condition.”

	•	Exit from Auto Loan Underwriting Business: In 2001, we recorded an after-tax charge of $52.3 million to reflect a write-down of outstanding auto loans and related assets in our retail auto loan portfolio and to cover costs associated with our exit from the auto loan underwriting business. See further discussion under the heading “Auto Loan and Lease Underwriting Activities.”

	•	Non-core Businesses: In 2001 and 2000, we recorded gains and losses in connection with the divestiture of our interests in certain non-core businesses. These divestitures included: (1) the spin-off of ANC Rental Corporation in June 2000 and the related after-tax charge of $12.7 million incurred in 2001 as a result of assuming certain obligations, which has been included in discontinued operations; (2) the sale of the Flemington dealership group; (3) the divestiture of our former outdoor media business; and (4) the sale of our remaining interest of Republic Services, Inc., our former solid waste business.

	•	Investment Write-down: In 2000, we recorded an after-tax charge of $18.8 million to reflect a write-down of an equity-method investment in a privately held salvage and parts recycling business, as well as an after-tax charge of $3.1 million to reflect a write-down to fair value of another equity-method investment, subsequently sold in early 2001 at no additional gain or loss.

The following table provides a detailed reconciliation of how certain after-tax charges and gains have impacted reported Net Income for the periods indicated (in millions, except per share data):


⁽¹⁾	Loan and lease underwriting activity, net, consists of 2002 activity for the finance underwriting business exited in December 2001.


(2)	Other items, net, consist of restructuring and related impairment charges and write-downs of finance lease receivable residual values.

Net Income, Excluding Certain Charges and Gains above is presented on a basis other than accounting principles generally accepted in the United States of America. The above information is presented for informational purposes only and may not necessarily reflect our future results of operations.

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual outcomes could differ from those estimates. Set forth below are the policies that we have identified as critical to our business operations and the understanding of our results of operations or that involve significant estimates. For detailed discussion of other significant accounting policies see Note 1, Summary of Significant Accounting Policies, of Notes to Consolidated Financial Statements.

Intangible Assets — Our policies related to intangible assets determine the valuation of intangible assets, which is a significant component of our consolidated balance sheets. Additionally, these policies affect the amount of future amortization and possible impairment charges we may incur. Intangible assets consist primarily of the cost of acquired businesses in excess of the fair value of net assets acquired. We have adopted the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations,” which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method, eliminating the pooling of interests method. Additionally, acquired intangible assets are separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. Our principal identifiable intangible assets are franchise agreements with vehicle manufacturers. These franchise agreements have indefinite lives. Effective January 1, 2002, we also adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.” Goodwill and intangible assets with identified lives existing at June 30, 2001 were amortized primarily over forty years on a straight-line basis until December 31, 2001. Effective January 1, 2002, such amortization ceased. Other intangibles with definite lives continue to be amortized primarily over three to fifteen years. Goodwill and intangibles with indefinite lives will be tested for impairment annually at June 30 or more frequently when events or circumstances indicate that impairment may have occurred. We are subject to financial statement risk to the extent that intangible assets become impaired due to decreases in the fair market value of the related underlying business.

Self-Insurance — Under self-insurance programs, we retain various levels of aggregate loss limits, per claim deductibles and claims handling expenses, as part of our various insurance programs, including property and casualty and employee medical benefits. Costs in excess of this retained risk per claim are insured under various contracts with third-party insurance carriers. The ultimate costs of these retained insurance risks are estimated by management and by actuarial evaluation based on historical claim settlement experience, adjusted for current trends and changes in claims-handling procedures. While we believe our assumptions are appropriate, the estimated liability for these reserves could be significantly affected if future occurrences and claims differ from these assumptions. See further discussion in Note 8, Insurance, of Notes to Consolidated Financial Statements.

Commitments and Contingencies — As further discussed in Note 10, Commitments and Contingencies, of Notes to Consolidated Financial Statements we are involved, and will continue to be involved, in numerous legal proceedings arising out of the conduct of our business, including litigation with customers, employment-related lawsuits, class actions, purported class actions and actions brought by governmental authorities. We intend to vigorously defend ourselves and assert available defenses with respect to each of these matters. Where necessary, we have accrued our estimate of the probable costs for the resolution of these proceedings based on consultation with outside counsel, assuming various strategies. Further, we may have certain

insurance coverage and rights of indemnification with respect to certain aspects of these matters. However, a settlement or an adverse resolution of one or more of these matters may result in the payment of significant costs and damages, which could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects.

In June 2000, we completed the tax-free spin-off of our former automotive rental business, ANC Rental. ANC Rental declared bankruptcy in November 2001. We were called on to perform under certain of our credit enhancements and guarantees in 2001 and may be subject to future exposure related to these credit enhancements, guarantees or additional claims. See further discussion under the heading “Discontinued Business Segments.”

Revenue Recognition — The majority of our revenue is from the sales of new and used vehicles, including any commissions from related vehicle financings. We recognize revenue in the period in which products are sold or services are provided. We recognize vehicle revenue when a sales contract has been executed and the vehicle has been delivered. Rebates and holdbacks received from manufacturers are recorded as offsets to the cost of the vehicle and recognized into income upon the sale of the vehicle or when earned under a specific manufacturer program, whichever is later. Revenue on finance products represents commissions earned by us for loans and leases placed with financial institutions in connection with customer vehicle purchases financed and is recognized upon acceptance of customer credit by the financial institution. An estimated liability for chargebacks against revenue recognized from sales of finance and vehicle protection products is established during the period in which the related revenue is recognized. We may also participate in future underwriting profit, pursuant to retrospective commission arrangements, that would be recognized over the life of the policies. Through 2002, we reinsured some or all of the underwriting risk related to extended warranty and credit insurance products sold and administered by certain independent third parties through our captive insurance subsidiaries. Revenue and related direct costs from these reinsurance transactions were deferred and are recognized over the life of the policies. Effective January 1, 2003, we no longer reinsure any new extended warranty and credit insurance products. In the future, should changes in conditions cause us to determine that these criteria have not been met, revenue recognized for any reporting period could be adversely affected.

Finance and Lease Underwriting — In December 2001, we decided that we would no longer underwrite retail auto loans for customers at our dealerships and incurred a pre-tax charge in 2001 of $85.8 million to reflect a write-down of our outstanding auto loans and related assets in our portfolio and to cover costs associated with our exit from that business. We continue to manage and wind down our outstanding loan and lease portfolios and related assets. Accordingly, we remain subject to consumer credit risk in connection with our portfolio of installment receivables, our lease portfolio and other related assets. Additionally, we are subject to the risk that based on certain estimates and assumptions used, our portfolio of installment receivables, our lease portfolio and other related assets could be overvalued and require additional write-down. See further discussion in Note 13, Finance Underwriting and Asset Securitizations, of Notes to Consolidated Financial Statements.

Income Taxes — Our income tax policy provides for deferred income taxes to show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). In 1997 and 1999, we engaged in certain transactions that the Internal Revenue Service (“IRS”) is challenging. Approximately $670 million of the net deferred tax liabilities relate to these transactions. See further discussion under the heading “Financial Condition.”

Our historical operating results include the results of acquired businesses from the date of acquisition. The following table sets forth: (1) the components of revenue; (2) the components of gross profit; (3) selling, general and administrative expenses; (4) retail vehicle unit sales; (5) gross profit per vehicle retailed; and (6) related metrics:

The following table details net inventory carrying costs consisting of floorplan assistance, a component of new vehicle gross profit, and floorplan interest expense.

Total revenue was $19.5 billion, $20.0 billion and $20.6 billion for the years ended December 31, 2002, 2001 and 2000, respectively. Gross profit was $3.0 billion in each of the years ended December 31, 2002, 2001 and 2000, respectively. The primary components of these changes are described below.

New vehicle revenue decreased 2.5% to $11.7 billion in 2002 compared to 2001 due to a decrease in same store revenue partially offset by the impact of acquisitions. On a same store basis, new vehicle revenue decreased 4.6% in 2002 compared to 2001 due to a decrease in volume of 7.1% partially offset by a 2.5% increase in average revenue per unit. Although we have continued to benefit from high levels of consumer incentive programs from the manufacturers introduced during the fourth quarter of 2001, we experienced a decrease in volume in 2002 consistent with industry declines of retail unit sales. We expect industry-wide new vehicles sales in the United States during 2003 to decrease by an estimated three to five percent compared to

2002 on a unit basis. However, the level of retail sales for 2003 is very difficult to predict. We have experienced lower than expected vehicle sales to date during 2003, which we attribute in part to the impact of the prospects of war on consumer demand for vehicles. Continued uncertainty regarding the prospects of war or a prolonged war could materially adversely impact our vehicle sales and overall business. In 2001, new vehicle sales were affected by lower demand experienced in the domestic product lines. The introduction of significant manufacturer incentives greatly increased the pace of new vehicle sales during the final three months of 2001.

Reported new vehicle gross profit decreased 5.7% in 2002 to $909.9 million, primarily the result of a decrease in same store gross profit partially offset by the impact of acquisitions. On a same store basis, new vehicle gross profit decreased 8.2%, in large part due to volume decreases as well as slight margin compression.

New vehicle days supply was 79 days at December 31, 2002 up 18 days from December 31, 2001. We believe that the 2002 level is appropriately balanced as we enter the 2003 selling season. We manage our inventory to minimize inventory carrying costs (floorplan interest expense net of floorplan assistance from manufacturers), which decreased $39 million in 2002 versus 2001, primarily as the result of lower interest rates. While interest rates are at an all time low, we expect modest increases in floorplan interest rates in 2003. We believe the effect of the increases will be partially offset by increases in floorplan interest assistance from the vehicle manufacturers, which is also interest rate sensitive, although we do not expect to realize the same level of benefit from net inventory carrying costs as we did during 2002. Net inventory carrying costs decreased $18.7 million in 2001 versus 2000 due to inventory management activities and lower interest rates.

Used vehicle revenue decreased 2.5% to $3.8 billion in 2002 compared to 2001 due to a decrease in same store revenue partially offset by the impact of acquisitions. On a same store basis, used vehicle revenue decreased 4.8% in 2002 compared to 2001 primarily as a result of a decrease in volume of 5.4%, which was in large part caused by continued strong manufacturer incentives and zero percent financing for new vehicles as well as a more restrictive financing environment for used vehicles. Reported used vehicle gross profit decreased 5.5% to $403.0 million in 2002 compared to 2001 primarily due to a decrease in same store revenue partially offset by the impact of acquisitions. Same store used vehicle gross profit as a percentage of revenue decreased 30 basis points to 10.7% compared to 2001 due to pricing pressures resulting from manufacturer new vehicle incentives and an oversupply of used vehicles in the marketplace. Consistent with decreases in new vehicle sales, we have experienced lower than expected used vehicle sales to date during 2003. In 2001, used vehicle revenue on a reported basis was relatively flat compared to 2000. Gross profit in 2001 decreased compared to 2000 due to an uncertain wholesale market, which resulted in our decision to retail used vehicle inventory whenever possible as part of our inventory management practices.

Parts and service revenue increased 2.0% to $2.5 billion in 2002 compared to 2001 driven by the impact of acquisitions. On a reported basis, parts and service gross profit increased 2.8% to $1.1 billion during the year ended December 31, 2002, as a result of higher revenue coupled with margin expansion of 30 basis points to 43.5%. Revenue and gross profit remained relatively flat in 2002 compared to 2001 on a same store basis. Revenue was impacted by reduced warranty volume from domestic manufacturers, a soft collision repair market and comparisons to 2001, which included a large manufacturer recall. As a percentage of same store revenue, parts and service same store gross profit increased 20 basis points to 43.4% as a result of our continued implementation of a pricing strategy, a team-based service process and a comprehensive marketing plan. Parts and service revenue and gross profit increased in 2001 compared to 2000 primarily driven by parts and service initiatives.

Despite a 2.5% decrease in vehicle sales during 2002, finance and insurance revenue and gross profit increased 4.2% to $510.2 million in 2002 compared to 2001. On a same store basis, finance and insurance revenue and gross profit increased 2.4%. Finance and insurance revenue and gross profit increased 13.4% to $489.6 million in 2001 compared to 2000. Finance and insurance gross profit per vehicle retailed increased 10.2% in 2002 to $757 compared to $687 in 2001. Increases are primarily due to increased product penetration as a result of our continued standardization of product pricing and our menu-based finance and insurance sales process, which facilitates sales particularly in a low interest rate environment.

Other revenue, primarily consisting of wholesale revenue from the sale of used vehicles, decreased 14.7% to $1.0 billion in 2002 compared to 2001. This revenue decrease primarily reflects a reduction in the number of

units wholesaled due to an overall decline in new and used vehicle sales. Other gross profit, which includes the results of reinsurance and retrospective basis commissions on extended warranty contracts, fees from preferred lender arrangements, and wholesale and fleet operations, increased $14.4 million or 17.8% to $95.1 million in 2002 compared to 2001. The increase was driven by income realized due to claims experience improvements on our extended warranty portfolio as well as higher fees from preferred lender financing arrangements, which may not be indicative of future performance. In 2001, other revenue decreased 18.3% compared to 2000 due to a reduction in the number of units wholesaled. Other gross profit decreased 15.8% in 2001 compared to 2000 as a result of a reduction in wholesale and fleet revenue.

In 2002, we focused on cost management initiatives in the areas of compensation, advertising and general and administrative expenses. Store selling, general and administrative expenses remained relatively flat in 2002 compared to 2001. On a same store basis, store selling, general and administrative expenses decreased 2.1% or $42.7 million. The decrease in store selling, general and administrative expenses during 2002 was driven by decreased compensation expenses in part due to staffing reductions partially offset by slightly higher advertising and other miscellaneous expenses. The increase in 2001 compared to 2000 is primarily due to increased advertising and other miscellaneous expenses.

Corporate selling, general and administrative expenses were $141.1 million, $135.2 million and $156.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in absolute dollars in 2002 is primarily the result of investments in strategic initiatives and related infrastructure. The 2001 decrease is primarily the result of the continued disposal of excess properties. As a percentage of gross profit, corporate selling, general and administrative expenses were 4.7%, 4.5% and 5.2% in 2002, 2001 and 2000, respectively. Corporate selling, general and administrative expenses are expected to total approximately $150 million to $155 million in 2003.

We will continue our focus on cost management in 2003, although we expect increased insurance, strategic initiative and employee medical benefit costs, which would have the effect of offsetting some of the expected cost savings at both the store and corporate levels.

Depreciation was $67.3 million, $70.7 million and $54.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. The 2001 increase was primarily the result of capital expenditures. Due to higher capital expenditure levels in 2002, depreciation in 2003 is expected to total approximately $75 million to $80 million. Amortization was $2.4 million, $81.2 million and $79.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in 2002 is due to the elimination of goodwill amortization as a result of the adoption of new goodwill accounting rules effective January 1, 2002. See further discussion under the heading “New Accounting Pronouncements.”

Loan and lease underwriting losses (income) were $(13.9) million, $89.6 million and $6.0 million for the years ended December 31, 2002, 2001 and 2000, respectively. See discussion under heading “Loan and Lease Underwriting Activities.”

Restructuring and related impairment charges (recoveries), net were $1.4 million, $4.5 million and $(20.4) million for the years ended December 31, 2002, 2001 and 2000, respectively. In 2002, additional impairment charges totaling $4.2 million were recorded based on the re-evaluation of the fair value of certain properties held for sale which were part of the restructuring plan, partially offset by a net gain on the sale of a property of $2.8 million. The net charge in 2001 is primarily the result of an additional impairment charge based on the re-evaluation of the fair value of certain properties. In 2000 the net recovery is primarily due to a net gain on properties placed back in service or retained totaling $36.2 million offset by an additional impairment charge of $11.6 million recognized primarily as a result of a decision in 2000 to close an additional megastore property as part of the restructuring. See discussion under heading “Restructuring Activities.”

Other losses of $2.0 million for the year ended December 31, 2002 were primarily the result of a property write-down partially offset by a gain on the transfer of reinsurance agreements as further discussed under the heading “Financial Condition.” Other gains in 2001 of $19.3 million primarily consists of the pre-tax gain from the sale of the New Jersey-based Flemington dealership group.

We have presented below our operating results for the years ended December 31, 2002 and 2001 on a same store basis to reflect our internal performance. Same store operating results include the results of stores for identical months in both years included in the comparison, starting with the first month of our ownership or operation.

The following table sets forth: (1) the components of same store revenue; (2) the components of same store gross profit; (3) same store selling, general and administrative expenses; (4) retail vehicle same store unit sales; (5) gross profit per vehicle retailed; and (6) related metrics:

In 2002, we focused on operational improvements in the high profit areas of our business — parts and service and finance and insurance. Although these areas collectively comprise 15.2% of total same store revenue, they contributed 53.1% of total same store gross profit in 2002. We also benefited from our focus on cost management initiatives, resulting in a decrease to same store selling, general and administrative expenses of $42.7 million or 2.1% compared to 2001.

On June 30, 2000, we completed the spin-off of our former automotive rental businesses, which were organized under ANC Rental Corporation together with its subsidiaries (“ANC Rental”), by distributing 100% of ANC Rental’s common stock to AutoNation’s stockholders as a tax-free dividend. As a result of the spin-off, AutoNation stockholders received one share of ANC Rental common stock for every eight shares of AutoNation common stock owned as of the June 16, 2000 record date. As discussed in Note 17, Discontinued Operations, of Notes to Consolidated Financial Statements, ANC Rental has been accounted for as discontinued operations in the accompanying Consolidated Financial Statements and accordingly, the operating results of ANC Rental have been classified as discontinued operations in the accompanying Consolidated Financial Statements.

In connection with the spin-off of ANC Rental Corporation in June 2000, we agreed to provide certain guarantees and credit enhancements with respect to financial and other performance obligations of ANC Rental, including acting as a guarantor under certain motor vehicle and real property leases between ANC Rental and Mitsubishi Motor Sales of America, Inc. (“Mitsubishi”) and acting as an indemnitor with respect to certain surety bonds issued on ANC Rental’s behalf. We are also a party to certain agreements with ANC Rental (the “ANC Rental Agreements”), including a separation and distribution agreement, a reimbursement agreement and a tax sharing agreement, pursuant to which both ANC Rental and we have certain obligations. On November 13, 2001, ANC Rental filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code with the U.S. Bankruptcy Court in Wilmington, Delaware. In connection with ANC Rental’s bankruptcy, we were called on to perform under nine of the twelve real property leases between ANC Rental and Mitsubishi for which we provided guarantees. As a result, we agreed to assume these real property leases, which expire in 2017, in order to control and attempt to mitigate our exposure relating thereto. In the fourth quarter of 2001, we incurred a pre-tax charge of $20.0 million included in net income from discontinued operations to reflect our assumption of the nine leases with Mitsubishi and certain other costs that we expect to incur as a result of ANC Rental’s bankruptcy. We continue to guarantee the remaining three leases with Mitsubishi until their expiration in 2017, and we expect to be called on to perform under at least two of these leases during 2003. As of December 31, 2002, we have accrued liabilities of approximately $11 million that we believe are adequate to cover our probable exposures related to these leases. ANC Rental has been accounted for as a discontinued operation and, accordingly, we expect that additional charges recorded by us pursuant to the foregoing credit enhancements and guarantees or with respect to claims under the ANC Rental Agreements, if any, would not impact our reported results from continuing operations.

exposure under the agreement will be minimal. Our indemnification obligations with respect to the surety bonds issued on behalf of ANC Rental are capped at $29.5 million in the aggregate. We could have potential exposure under the indemnification obligations until approximately 2006. Due to the bankruptcy of ANC Rental, obligations of ANC Rental to us under the terms of the ANC Rental Agreements may be extinguished or our claims against ANC Rental under such agreements may be unenforceable. These claims could include reimbursement obligations that ANC Rental may have to us in connection with payments made by us with respect to the foregoing credit enhancements and guarantees, as well as indemnification rights with respect to any payments that we make to the Internal Revenue Service as a result of audit adjustments in our consolidated federal income tax returns relating to ANC Rental’s automotive rental businesses prior to the spin-off. Such audit adjustments, if any, would likely be resolved in the next two to four years. We estimate that, based on our assessment of the risks involved in each matter and excluding the liabilities associated with the property leases discussed above, our remaining potential exposure related to ANC Rental may be in the range of $25.0 million to $50.0 million. However, the exposure is difficult to estimate and we cannot assure you that our aggregate obligations under these credit enhancements, guarantees and ANC Rental Agreements will not be materially above the range indicated above, which could have a material adverse effect on our business, financial condition, cash flows and prospects.

In July 1998, our former solid waste subsidiary, Republic Services, Inc., completed an initial public offering of 36.1% of its common stock. In May 1999, we sold substantially all of our interest in Republic Services in a public offering. Our remaining interest was sold in 2000.

During the years ended December 31, 2002, 2001 and 2000, we acquired various automotive retail businesses. We paid approximately $158.4 million, $69.7 million and $190.9 million, respectively, in cash for these acquisitions, all of which were accounted for under the purchase method of accounting. We also paid $8.1 million, $22.3 million and $122.4 million during the years ended December 31, 2002, 2001 and 2000, respectively, in deferred purchase price for certain prior year automotive retail acquisitions. As of December 31, 2002, approximately $9.7 million of deferred purchase price due to former owners of acquired businesses had been accrued.

In April 2001, we completed the sale of our New Jersey-based Flemington dealership group for net proceeds of $59.0 million and a pre-tax gain of approximately $19.0 million.

In November 2000, we completed the divestiture of our outdoor media business for a purchase price of approximately $104.0 million. In connection with the sale, we entered into a prepaid $15.0 million advertising agreement and, therefore, we received net proceeds of $89.0 million. A pre-tax gain of $53.5 million was recognized on the sale.

See Note 19, Acquisitions and Divestitures, of Notes to Consolidated Financial Statements, for further discussion of business combinations.

In December 2001, we decided to exit the business of underwriting retail automobile loans for customers at our dealerships, which we determined was not a part of our core automotive retail business. We continue to

The decision to exit the loan underwriting business and the impact of the economic conditions referenced above caused us to incur asset impairment and related charges totaling $85.8 million recorded in December 2001. These charges mainly reflect the impact of expected increases in loan losses and prepayments, as well as higher expected loan-servicing costs. The charges also include $1.5 million of direct exit costs for asset write-offs and other costs. In addition, during 2001 and 2000, we recognized impairment charges totaling $4.1 million and $16.6 million, respectively, primarily associated with the deterioration in residual values of finance lease receivables. We discontinued the writing of finance leases in mid-1999.

Loan and lease underwriting income was $13.9 million for the year ended December 31, 2002. The income in 2002 is the result of our continued focus on the management of our finance receivables and improved collections as part of our exit from the business of underwriting retail automobile loans. At December 31, 2002, we had finance receivables totaling $92.9 million which are expected to be substantially collected through 2004. See discussion of key economic assumptions and other information in Note 13, Finance Underwriting and Asset Securitizations, of Notes to Consolidated Financial Statements.

During 1999, we approved a restructuring plan to exit the used vehicle megastore business and reduce the corporate workforce. Approximately 2,000 positions were eliminated as a result of the restructuring plan of which 1,800 were megastore positions and 200 were corporate positions. These restructuring activities resulted in pre-tax charges of $443.7 million in 1999. The restructuring plan also included divesting of certain non-core franchised dealerships. During 2001 and 2000, we received $2.2 million and $89.7 million, respectively, of cash from the divestiture of certain automotive dealerships as part of our 1999 restructuring activities.

We continue to dispose of our closed megastores and other properties, including closed lease properties, through sales to third parties. At December 31, 2002, properties held for sale, net totaled $59.9 million, including properties with total asset value of $49.8 million remaining to be sold of the total $285.3 million identified as part of the restructuring plan. Despite a softening market, these properties continue to be aggressively marketed.

See further discussion in Note 14, Restructuring Activities and Impairment Charges, of Notes to Consolidated Financial Statements.

Floorplan interest expense was $74.8 million, $126.7 million and $198.6 million for the years ended December 31, 2002, 2001 and 2000, respectively. Decreases are primarily related to lower interest rates in 2002 and 2001. While interest rates are at an all time low, we expect modest increases in floorplan interest rates in 2003. We believe the effect of the increases will be partially offset by increases in floorplan interest assistance from the vehicle manufacturers, which is also interest rate sensitive, although we do not expect to realize the same level of benefit from net inventory carrying costs as we did during 2002.

Subsequent to year-end, we entered into a series of interest rate hedge transactions designed to mitigate our exposure to certain floating interest rate liabilities. As of February 26, 2003, we have executed $500.0 million of notional value hedges which mature over the next three years.

During 2002, other interest expense was incurred primarily on borrowings under our mortgage facilities and the outstanding senior unsecured notes. Other interest expense was $50.4 million, $43.7 million and $47.7 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in 2002 was

Interest income was $10.4 million, $9.0 million and $14.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. The 2002 increase is primarily due to higher average cash and investment balances, partially offset by lower interest rates. The 2001 decrease is primarily due to lower interest rates. We expect interest income in 2003 to decrease compared to 2002 due to the sale of our restricted investments in 2002.

For the year ended December 31, 2002, other income, net was $6.4 million. As discussed under the heading “Financial Condition,” in September 2002, one of our captive insurance companies terminated a reinsurance agreement with a third-party insurance company and transferred our risk pertaining to certain extended warranty products under the reinsurance agreement back to such insurance company. As a result of the transaction, we liquidated related restricted assets, realizing a $3.1 million gain on the sale. Additionally, in 2002, we converted our remaining restricted investments to restricted cash, realizing a $2.7 million gain on the sale. Other expense, net for the year ended December 31, 2001, was $4.5 million. Other income for the year ended December 31, 2000 was $33.4 million, and primarily included gains of approximately $24.0 million on the sale of approximately 3.1 million shares of common stock of our former solid waste subsidiary, Republic Services, and approximately $53.5 million on the sale of our former outdoor media business, offset by a $30.0 million valuation write-down related to an equity-method investment in a privately held vehicle salvage and parts recycling business as well as a $5.0 million write-down to fair value of another equity-method investment, subsequently sold in early 2001 at no additional gain or loss.

The provision for income taxes from continuing operations was $236.4 million, $155.8 million and $196.9 million for the years ended December 31, 2002, 2001 and 2000, respectively. The effective income tax rate was 38.3%, 38.9% and 37.5% for the years ended December 31, 2002, 2001 and 2000, respectively. The decrease in the effective tax rate in 2002 primarily reflects the impact of the elimination of goodwill amortization, partially offset by increases to our effective state tax rates. As further discussed under the heading “Financial Condition,” we have been engaged in settlement negotiations with the IRS with respect to the tax treatment of certain transactions. Excluding the impact of any settlement with IRS, we anticipate that our effective income tax rate will be approximately 38.5% in 2003, an increase from the 2002 rate due to increases to our effective state tax rates.

At December 31, 2002, we had $176.2 million of unrestricted cash and cash equivalents. We have two revolving credit facilities with an aggregate borrowing capacity of $500.0 million. The 364-day revolving credit facility provides borrowings up to $200.0 million at a LIBOR-based interest rate and was renewed in August 2002 for another 364-day term to August 2003. The five-year facility, which expires in August 2006, provides borrowings up to $300.0 million at a LIBOR-based interest rate. These facilities are secured by a pledge of the capital stock of certain subsidiaries, which directly or indirectly own substantially all of our dealerships, and are guaranteed by substantially all of our subsidiaries. No amounts are drawn on these revolving credit facilities.

In the ordinary course of business, we are required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of our performance. At December 31, 2002, surety bonds, letters of credit and cash deposits totaled $62.2 million and have various expiration dates. We do not currently provide cash collateral for outstanding letters of credit. We have negotiated a letter of credit line as part of our

multi-year revolving credit facility. The amount available to be borrowed under the $300 million multi-year revolving credit facility is reduced on a dollar-for-dollar basis by the cumulative face amount of any outstanding letters of credit. At December 31, 2002, we had $21.8 million in letters of credit outstanding. Due to changes in insurance requirements, letters of credit outstanding are expected to be in the range of $55 million to $60 million in 2003.

We also have $450.0 million of 9.0% senior unsecured notes due August 1, 2008. The senior unsecured notes are guaranteed by substantially all of our subsidiaries.

Our revolving credit facilities and the indenture for our senior unsecured notes contain numerous customary financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, to create liens or other encumbrances, to make certain payments (including dividends and share repurchases), and investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. The revolving credit facilities also require us to meet certain financial ratios and tests, including financial covenants requiring the maintenance of consolidated maximum cash flow leverage, minimum interest coverage, and maximum balance sheet leverage. Over the life of the revolving credit facilities, certain of the financial covenants become more restrictive as prescribed by a predetermined schedule. In addition, the senior unsecured notes contain a minimum fixed charge coverage incurrence covenant, and the mortgage facilities contain both maximum cash flow leverage and minimum interest coverage covenants. In the event that we were to default in the observance or performance of any of the financial covenants in the revolving credit facilities or mortgage facilities and such default were to continue beyond any cure period or waiver, the lender under the respective facility could elect to terminate the facility and declare all outstanding obligations under such facility immediately payable. Under the senior unsecured notes, should we be in violation of the financial covenants, we could be limited in incurring certain additional indebtedness. Our revolving credit facilities, the indenture for our senior unsecured notes and the mortgage facilities have cross-default provisions that trigger a default in the event of an uncured default under other material indebtedness of ours. At December 31, 2002, we were in compliance with the requirements of all such financial covenants and do not anticipate any events of default.

In conjunction with the revolving credit facilities and senior unsecured notes offering, we received corporate credit ratings from rating agencies. The revolving credit facilities and the senior unsecured notes have provisions linked to credit ratings. The interest rates for the revolving credit facilities are impacted by changes in credit ratings, and certain covenants related to the senior unsecured notes would be eliminated with certain upgrades in ratings to investment grade. In the event of a downgrade in our credit ratings, none of the covenants would be impacted and we would continue to have access to the revolving credit facilities, but at higher rates of interest.

At December 31, 2002, we had an aggregate $153.2 million outstanding under two mortgage facilities with automotive manufacturers’ captive finance subsidiaries. Each facility has an aggregate capacity of $150.0 million, bears interest at a LIBOR-based interest rate, and is secured by mortgages on certain of our dealerships’ real property.

We finance our new vehicle inventory through secured financings, primarily floorplan facilities, with automotive manufacturers’ captive finance subsidiaries as well as independent financial institutions. As of December 31, 2002, aggregate capacity of the facilities was approximately $3.6 billion. We finance our used vehicle inventory primarily through our cash flow from operations.

We sell and receive commissions on the following types of vehicle protection and other products: extended warranties, guaranteed auto protection, credit insurance, lease “wear and tear” insurance, and theft protection products. The products we offer include products that are sold and administered by independent third parties, including the vehicle manufacturers’ captive finance subsidiaries. Pursuant to our arrangements with these third-party finance and vehicle protection product providers, we either sell the products on a straight commission basis or sell the product, recognize commission and participate in future underwriting profit pursuant to retrospective commission arrangements. Through 2002, we assumed some of the underwriting risk through reinsurance agreements with our captive insurance subsidiaries. Effective January 1, 2003, we no longer reinsure any new extended warranties and credit insurance products. We maintain restricted cash in

trust accounts in accordance with the terms and conditions of certain reinsurance agreements to secure the payments of outstanding losses and loss adjustment expenses related to our captive insurance subsidiaries. At December 31, 2002, we had restricted assets in excess of requirements totaling approximately $8 million. We closely monitor excess amounts and periodically obtain authorization to transfer excess amounts to unrestricted accounts, if necessary.

In September 2002, one of our captive insurance companies terminated a reinsurance agreement with a third-party insurance company and transferred our risk pertaining to certain extended warranty products under the reinsurance agreement back to such insurance company, resulting in an $8.1 million gain. As a result of the transaction, we reduced our insurance reserves and liquidated related restricted assets, realizing a $3.1 million gain on the sale. We transferred $66.6 million of restricted assets to the third-party insurance company in exchange for the assumption of the related insurance reserves.

During 2002, we repurchased 30.7 million shares of our common stock for an aggregate purchase price of $389.9 million. In October 2002, our Board of Directors extended our share repurchase program by authorizing us to acquire an additional $500.0 million of our common stock. Including the program authorized in October 2002, our Board has authorized us to acquire $2.5 billion of our common stock since 1998 and, through December 31, 2002, we have acquired 185.7 million shares of our common stock for an aggregate purchase price of $2.1 billion, leaving approximately $370.4 million authorized for repurchases at December 31, 2002. In October 2002, we obtained consents from the holders of our $450.0 million of 9.0% senior unsecured notes due August 1, 2008 to amend the indenture governing such notes (the “Indenture”), and we obtained consents from the lenders to amend our revolving credit facilities. The principal purpose of the amendments was to modify the restricted payments covenant under the Indenture and the revolving credit facilities to increase our share repurchase capacity by $400 million. As of February 26, 2003, we repurchased an additional 8.8 million shares of common stock for an aggregate purchase price of $108.8 million, leaving approximately $261.6 million authorized by our Board for share repurchases. We expect to continue repurchasing shares under this program. Repurchases are made pursuant to Rule 10b-18 of the Securities Exchange Act of 1934, as amended. While we expect to continue repurchasing shares, the decision to make additional share repurchases will be based on such factors as the market price of our common stock, the potential impact on our capital structure and the expected return on competing uses of our capital such as strategic dealership acquisitions and capital investments in our current businesses. Our future share repurchases are also subject to limitations, as modified, contained in the indenture relating to our senior unsecured notes and our credit agreements for our two senior secured revolving credit facilities.

In connection with the spin-off of ANC Rental in June 2000, we agreed to provide certain guarantees and credit enhancements with respect to financial and other performance obligations of ANC Rental, including acting as a guarantor under certain motor vehicle and real property leases between ANC Rental and Mitsubishi and acting as an indemnitor with respect to certain surety bonds issued on ANC Rental’s behalf. We are also a party to ANC Rental Agreements, including a separation and distribution agreement, a reimbursement agreement and a tax sharing agreement, pursuant to which both ANC Rental and we have certain obligations. See further discussion under the heading “Discontinued Business Segments.”

At December 31, 2002 and December 31, 2001, we had $891.2 million and $853.8 million, respectively, of net deferred tax liabilities. In 1997 and 1999, we engaged in certain transactions with tax implications that the Internal Revenue Service is challenging. Approximately $670 million of the net deferred tax liabilities at December 31, 2002 relates to these transactions, including a significant portion that relates to a transaction that generally had the effect of accelerating projected tax deductions relating to health and welfare benefits to which we would have been entitled upon providing such benefits in the future, and which deductions we are currently foregoing. In October 2002, the IRS announced a settlement initiative aimed at resolving IRS objections to these types of transactions. The settlement initiative includes settlement guidelines for companies that elect to enter into the settlement program offered by the IRS. Based on the settlement guidelines issued by the IRS, we estimate that, in connection with a possible settlement, we could owe the IRS net aggregate payments in the range of approximately $475 million to $550 million, a portion of which might be deferred over a multi-year period. We estimate that the initial net payment in connection with such a settlement could be in the range of approximately $300 million to $400 million and would be payable in early

2004, with the remaining amount deferred. We have been engaged in settlement negotiations with the IRS with respect to the tax treatment of these transactions since the fourth quarter of 2002. We cannot provide any assurance, however, that we will settle the tax treatment of the transactions with the IRS or, if we do, that such settlement will be on the terms outlined above, including with respect to the amount or timing of payments. A settlement or resolution of these matters could have a material adverse effect on our financial condition, results of operations and cash flows.

Cash and cash equivalents increased (decreased) by $48.1 million, $43.5 million and $(153.6) million during the years ended December 31, 2002, 2001 and 2000, respectively. The major components of these changes are discussed below.

Cash provided by operating activities was $542.5 million, $540.1 million and $431.4 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Cash flows from operating activities include net income adjusted for non-cash items and the effects of changes in working capital including changes in floorplan notes payable which directly relate to new vehicle inventory. The 2001 change in inventory, net of floorplan notes payable, is attributable to lower inventory levels maintained in 2001 as compared to 2000. The 2001 change in other liabilities is the result of megastore and other exit payments made in 2000 as part of 1999 restructuring activities.

Cash flows from investing activities consist primarily of cash used in capital additions, activity from business acquisitions and divestitures, property dispositions, activity from installment loan receivables, purchases and sales of investments and other transactions as further described below.

Capital expenditures, excluding property operating lease buy-outs, were $163.4 million, $156.5 million and $138.7 million during the years ended December 31, 2002, 2001 and 2000, respectively. Property operating lease buy-outs were $19.8 million and $7.1 million for the years ended December 31, 2002 and 2001, respectively. We are in the process of analyzing certain of our higher cost operating leases and evaluating alternatives in order to lower the effective financing costs. Approximately half of our capital investments during 2002 related to required improvements of our existing dealership facilities. The balance of our capital investments during 2002 related to upgrades to existing dealership facilities and construction of new facilities that we generally target to generate rates of return consistent with our investment goal of a 15% after-tax rate of return. We will make additional facility and infrastructure upgrades and improvements from time to time as we identify projects that are required to maintain our current business or that we expect to provide us with acceptable rates of return. We expect capital expenditures in 2003 to be approximately $150 million.

Proceeds from the disposal of assets held for sale were $34.8 million, $71.9 million and $75.1 million during the years ended December 31, 2002, 2001 and 2000, respectively. These amounts are primarily from the sales of megastore and other properties held for sale. The 2000 amount also includes proceeds from the sale of the building occupied by ANC Rental.

Collections of installment loan receivables and other related items totaled $86.7 million, $551.5 million and $632.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. There was no funding or proceeds from securitizations of installment loans receivables for the year ended December 31, 2002 as a result of our decision to exit the business of underwriting retail automobile loans in December 2001, as discussed under the heading “Loan and Lease Underwriting Activities.”

In September 2002, one of our captive insurance companies terminated a reinsurance agreement with a third-party insurance company and transferred our risk pertaining to certain extended warranty products under the reinsurance agreement back to such insurance company. We transferred $66.6 million of restricted assets to the third-party insurance company in exchange for the assumption of the related insurance reserves. During

Cash used in business acquisitions, net of cash acquired, was $166.5 million, $92.0 million and $313.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. The increase in cash used in business acquisitions in 2002 was due to acquisitions of the Chicago-based Laurel dealership group, Hudiburg Chevrolet in Fort Worth, Texas, and Claridge’s BMW in Fremont, California. The decrease in cash used in business acquisitions in 2001 is primarily due to a planned reduction in acquisition activity including our shift in 2000 to acquire single dealerships or small dealership groups focused in key existing markets. Cash used in business acquisitions during 2002, 2001 and 2000 includes $8.1 million, $22.3 million and $122.4 million in deferred purchase price for certain prior year automotive retail acquisitions. See discussion under the heading “Business Acquisitions and Divestitures” and in Note 19, Acquisitions and Divestitures, of Notes to Consolidated Financial Statements.

In 2001, we received $59.0 million of cash from the divestiture of our New Jersey-based Flemington dealership group. As part of our restructuring activities, in 2001 and 2000 we divested of certain non-core franchised automotive dealerships for which we received $2.2 million and $89.7 million, respectively, of cash. In 2000, we completed the divestiture of our outdoor media business for the net proceeds price of $89.0 million. See further discussion under the heading, “Business Acquisitions and Divestitures” and in Note 19, Acquisitions and Divestitures, of Notes to Consolidated Financial Statements.

In July 1998, our former solid waste subsidiary, Republic Services, completed an initial public offering resulting in proceeds of approximately $1.4 billion. In May 1999, we sold substantially all of our interest in Republic Services in a public offering resulting in proceeds of approximately $1.8 billion. Proceeds from the offerings were used to repay non-vehicle debt, finance acquisitions, acquire shares under our share repurchase programs and invest in our business. During 2000, we sold substantially all of our remaining common stock of Republic Services, resulting in proceeds of approximately $48.2 million.

Cash flows from financing activities include proceeds from senior unsecured notes issued, repayments of acquired debt, treasury stock purchases and other transactions as further described below.

We have repurchased approximately 30.7 million, 27.3 million and 27.6 million shares of our common stock during the years ended December 31, 2002, 2001 and 2000, respectively, for an aggregate price of $389.9 million, $256.8 million and $188.9 million, respectively, under our Board approved share repurchase programs.

During the years ended December 31, 2002, 2001 and 2000, proceeds from the exercises of stock options were $78.7 million, $9.1 million and $1.3 million, respectively. Increased activity in 2002 was due to higher market prices for our common stock, which resulted in more exercises of stock options outstanding. A substantial portion of stock option exercises during the first six months of 2002 were made by former employees who had retained stock options as part of the ANC Rental spin-off on June 30, 2000. These options generally expired on June 30, 2002.

During 2001, we received net proceeds from the issuance of senior unsecured notes of $434.7 million. Additionally, during 2001 we received proceeds of $153.3 million relating to new mortgage facilities. See further discussion under the heading “Financial Condition” and in Note 9, Notes Payable and Long-Term Debt, of Notes to Consolidated Financial Statements. These amounts were used to repay outstanding amounts under revolving credit facilities totaling $615.0 million and certain other debt.

Other cash used in financing activities totaled $11.8 million in 2002 and includes amounts paid in November 2002 related to consents obtained from the holders of our $450.0 million of 9.0% senior unsecured notes to amend the indenture governing such notes and from the lenders to amend our revolving credit facilities.

During 2000, we entered into a sale-leaseback transaction involving our corporate headquarters, which resulted in net proceeds of approximately $52.1 million.

During the years ended December 31, 2001 and 2000, we repaid approximately $178.3 million and $197.0 million, respectively, of debt obligations primarily related to amounts financed under a lease facility. See Note 9, Notes Payable and Long-Term Debt, of Notes to Consolidated Financial Statements for further discussion.

We will continue to evaluate the best use of our operating cash flow between capital expenditures, share repurchases, acquisitions and debt reduction. We have not declared or paid any cash dividends on our common stock during our three most recent fiscal years. We do not anticipate paying cash dividends in the foreseeable future. The indenture for our senior unsecured notes and the credit agreements for our two revolving credit facilities restrict our ability to declare cash dividends.

Cash used in discontinued operations was as follows during the years ended December 31 (in millions):

Cash used in 2002 relates to payments made in conjunction with property leases assumed from ANC Rental. See further discussion under the heading “Discontinued Business Segments.” Cash used in our former automotive rental business during 2000 consists primarily of cash used to replace maturing letters of credit which provided credit enhancement for ANC Rental’s vehicle financing.

We require cash to fund working capital needs, finance acquisitions of new dealerships, fund capital expenditures and common stock repurchases and for a potential settlement with the IRS as discussed under the heading “Financial Condition.” These requirements are met principally from cash flows from operations, borrowings under floorplan financings, mortgage notes and credit facilities.

We believe that our funds generated through future operations and availability of borrowings under our floorplan facilities, our revolving credit facilities and our mortgage facilities will be sufficient to fund our debt service and working capital requirements, commitments and contingencies and any seasonal operating requirements for the foreseeable future. We intend to finance capital expenditures, business acquisitions, and share repurchases through cash flow from operations, our revolving credit facilities, and other financings. We do not foresee any difficulty in continuing to comply with the covenants of our various financing facilities.

The following table summarizes our significant payment obligations under certain contracts at December 31, 2002 (in millions):

provide cash collateral for outstanding letters of credit. We have negotiated a letter of credit line as part of our multi-year revolving credit facility. The amount available to be borrowed under the $300 million multi-year revolving credit facility is reduced on a dollar-for-dollar basis by the cumulative face amount of any outstanding letters of credit. At December 31, 2002, we had $21.8 million in letters of credit outstanding. Due to changes in insurance requirements, letters of credit outstanding are expected to be in the range of $55 million to $60 million in 2003.

We have been engaged in settlement negotiations with the IRS with respect to the tax treatment of certain transactions. See further discussion under the heading “Financial Condition.”

As further discussed under the heading “Discontinued Business Segments,” in connection with ANC Rental’s spin-off, we provide certain credit enhancements and guarantees with respect to financial and other performance obligations of ANC Rental. The timing of when these obligations will be satisfied is difficult to estimate, although we believe it is likely that the majority will be satisfied in the next five years.

Our operations generally experience higher volumes of vehicle sales and service in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, demand for cars and light trucks is generally lower during the winter months than in other seasons, particularly in regions of the United States where dealerships may be subject to harsh winters. Accordingly, we expect our revenue and operating results to be generally lower in our first and fourth quarters as compared to our second and third quarters. However, revenue may be impacted significantly from quarter to quarter by other factors unrelated to season, such as automotive manufacturer incentives programs.

In 2001, we adopted the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”), which requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method, eliminating the pooling of interests method. Additionally, acquired intangible assets should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented or exchanged, regardless of the acquirer’s intent to do so.

Effective January 1, 2002, we also adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). Goodwill and intangible assets with indefinite lives existing at June 30, 2001 were amortized primarily over forty years on a straight-line basis until December 31, 2001. Effective January 1, 2002, such amortization ceased. Other intangibles with definite lives continue to be amortized primarily over three to fifteen years. See additional discussion in Note 6, Intangible Assets, of Notes to Consolidated Financial Statements.

Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supersedes Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,” and Accounting Principles Board Opinion No. 30, “Reporting the Results of Operations – Reporting the Effect of the Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”). SFAS 144 establishes a single accounting model for assets to be disposed of by sale whether previously held and used or newly acquired. SFAS 144 retains the provisions of APB 30 for the presentation of discontinued operations in the income statement but broadens the presentation to include a component of an entity. The adoption of SFAS 144 did not have a material impact on our consolidated financial position, results of operations or cash flows.

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 supersedes Emerging Issues Task Force Issue No. 94-3. SFAS 146 requires that the

liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, not at the date of an entity’s commitment to an exit or disposal plan. The provisions of SFAS 146 are effective for exit or disposal activities initiated after December 31, 2002. The adoption of SFAS 146 will not have an impact on our consolidated financial position, results of operations or cash flows.

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS 148”). SFAS 148 amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to provide alternative methods of transition for companies that voluntarily change to a fair value-based method of accounting for stock-based employee compensation. SFAS 148 also amends the disclosure provisions of SFAS 123. The provisions of SFAS 148 are effective for fiscal years ending after December 15, 2002. We have adopted the disclosure provisions of SFAS 148 as of December 31, 2002.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires the recognition of a liability for certain guarantee obligations issued or modified after December 31, 2002. FIN 45 also clarifies disclosure requirements to be made by a guarantor for certain guarantees. The disclosure provisions of FIN 45 are effective for fiscal years ending after December 15, 2002. We have adopted the disclosure provisions of FIN 45 as of December 31, 2002.

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of APB No. 50” (“FIN 46”). FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of FIN 46 will not have an impact on our financial position, results of operations and cash flows.


	•	The automotive retailing industry is cyclical and is sensitive to changing economic conditions and various other factors; we expect industry-wide sales of new vehicles in the United States during 2003 to decrease by an estimated three to five percent compared to 2002 on a unit basis, although sales levels may decrease by a greater amount due to various factors, including uncertainty relating


		to the prospects of war. Sales levels are very difficult to predict; lower actual sales could materially adversely impact our business.

	•	We have engaged in certain transactions that the IRS has reviewed and may have a material adverse effect on our financial condition, results of operations and cash flows.

	•	In connection with ANC Rental Corporation’s bankruptcy, we have been called on to perform under certain guarantees with respect to ANC Rental, we may be called on to perform under additional credit enhancements and guarantees in the future, we may have claims against ANC Rental that may be discharged in bankruptcy, and we may be subject to other claims, any of which could have a material adverse effect on our business, financial condition, cash flows and prospects.

	•	We are subject to restrictions imposed by vehicle manufacturers that may adversely impact our business, financial condition, results of operations, cash flows and prospects, including our ability to acquire additional dealerships.

	•	Our dealerships are dependent on the programs and operations of vehicle manufacturers and, therefore, any changes to such programs and operations may adversely affect our dealership operations and, in turn, affect our business, results of operations, financial condition, cash flows and prospects.

	•	Our revolving credit facilities and the indenture relating to our senior unsecured notes contain certain restrictions on our ability to conduct our business.

	•	We are subject to numerous legal and administrative proceedings, which, if the outcomes are adverse to us, could materially adversely affect our business, operating results and prospects.

	•	We are subject to extensive governmental regulation and if we are found to be in violation of any of these regulations, our business, operating results and prospects could suffer.

	•	Our ability to grow our business may be limited by our ability to acquire automotive dealerships in key markets on favorable terms or at all.

	•	We are subject to interest rate risk in connection with our floorplan notes payable, revolving credit facilities and mortgage facilities that could have a material adverse effect on our profitability.

	•	We are subject to residual value risk and consumer credit risk in connection with our lease portfolio, consumer credit risk in connection with our finance receivables and related assets and underwriting risk in connection with our reinsurance of warranty, credit life and protection products.

	•	Under SFAS 142, we must test our intangibles for impairment at least annually, which may result in a material, non-cash write-down of goodwill and could have a material adverse impact on our results of operations and shareholders’ equity.

Our primary market risk exposure is changing interest rates. Our policy is to manage interest rates through the use of a combination of fixed and floating rate debt. Interest rate derivatives may be used to adjust interest rate exposures when appropriate, based upon market conditions.

At December 31, 2002 and 2001, we had variable rate floorplan notes payable totaling $2.3 billion and $1.9 billion, respectively. Based on these amounts at December 31, 2002 and 2001, a 100 basis point change in interest rates would result in an approximate $23.0 million and $19.0 million, respectively, change to our annual floorplan interest expense. Our exposure to changes in interest rates with respect to floorplan notes payable is partially mitigated by manufacturers’ floorplan assistance which in some cases is based on variable interest rates. Net of floorplan assistance, at December 31, 2002 and 2001, a 100 basis point change in interest

At December 31, 2002 and 2001, we had other variable rate debt outstanding totaling $153.2 million and $153.4 million, respectively. Based on the amounts outstanding at December 31, 2002 and 2001, a 100 basis point change in interest rates would result in an approximate $1.5 million change to interest expense for both years.

During 2001, to minimize the risk of changes in interest rates we used interest rate derivatives related to a commercial paper warehouse facility in connection with our financing underwriting business exited in 2001, which consisted of interest rate swaps, caps and floors which were entered into with a group of financial institutions with investment-grade credit ratings. At December 31, 2002 and 2001, we did not have any derivative instruments outstanding.

We have audited the accompanying consolidated balance sheet of AutoNation, Inc. and subsidiaries (the “Company”) as of December 31, 2002 and the related consolidated statements of income, shareholders’ equity and comprehensive income (loss) and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 2002, listed in the Index at Item 15. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and the financial statement schedule based on our audit. The Company’s consolidated financial statements and financial statement schedules for each of the years in the two-year period ended December 31, 2001, before the revisions described in Note 1 and Note 25 to the consolidated financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 7, 2002.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule for the year ended December 31, 2002, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002 to conform to Statement of Financial Accounting Standards No. 142.

As discussed above, the consolidated financial statements of AutoNation, Inc. as of December 31, 2001 and for each of the years in the two-year period then ended were audited by other auditors who have ceased operations. These consolidated financial statements have been revised as follows: (a) as described in Note 1 under the heading “Intangible Assets”, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which was adopted by the Company as of January 1, 2002. Our audit procedures with respect to the disclosures in Note 1 with respect to 2001 and 2000 included (i) agreeing the previously reported net income to the previously issued consolidated financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts; (b) as described in Note 25, these consolidated financial statements and related notes as of December 31, 2001 and for each of the years in the two-year period ended December 31, 2001 have been revised to provide disaggregations of certain financial statement amounts and note disclosures. Our audit procedures with respect to the financial statement amounts and note disclosures described in Note 25 included (i) agreeing the previously reported amounts to the Company’s underlying records obtained from management, and (ii) testing the mathematical accuracy of the disaggregation; (c) as described in Note 25, these consolidated financial statements for each of the years in the two-year period ended December 31, 2001 have been revised to reflect the reclassification of floorplan interest expense. Our audit procedures with respect to the reclassification of floorplan interest expense described in Note 25 included (i) agreeing the reported amounts to the previously issued consolidated financial statements, and (ii) testing the mathematical accuracy of the reclassification. In our opinion, such disclosures and reclassifications are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 consolidated financial statements of the Company other than with respect to such disclosures and reclassifications, and accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 consolidated financial statements taken as a whole.

We have audited the accompanying consolidated balance sheets of AutoNation, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and comprehensive income (loss) and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements and the schedule referred to below are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AutoNation, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to consolidated financial statements is presented for the purpose of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

NOTE: The report of Arthur Andersen LLP presented above is a copy of a previously issued Arthur Andersen LLP report. This report has not been reissued by Arthur Andersen LLP nor has Arthur Andersen LLP provided a consent to the inclusion of its report in this Form 10-K.

NOTE: The consolidated financial statements as of December 31, 2001 and for each of the years in the two-year period then ended have been revised to include: (i) the transitional disclosures required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (see Note 1 under the heading “Intangible Assets”) and (ii) disaggregations of certain financial statement amounts and note disclosures (see Note 25). Additionally, as described in Note 25, the consolidated income statements for the years ended December 31, 2001 and 2000 have been revised to reflect the reclassification of floorplan interest expense. The report of Arthur Andersen LLP presented above does not extend to these changes.


(Mark One)
[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the fiscal year ended December 31, 2002
		OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to


Delaware (State or Other Jurisdiction of Incorporation or Organization)		73-1105145 (I.R.S. Employer Identification No.)

110 S.E. 6th Street, Fort Lauderdale, Florida (Address of Principal Executive Offices)		33301 (Zip Code)


PART I
Item 1. BUSINESS
Item 2. PROPERTIES
Item 3. LEGAL PROCEEDINGS
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Item 6. SELECTED FINANCIAL DATA
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED INCOME STATEMENTS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
PART III
Item 14. CONTROLS AND PROCEDURES
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II
SIGNATURES
EXHIBIT INDEX
Supplemental Indenture
Subsidiaries of the Company
Consent of Deloitte & Touche LLP


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		16
Item 3.	Legal Proceedings		17
Item 4.	Submission of Matters to a Vote of Security Holders		17
PART II
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters		18
Item 6.	Selected Financial Data		18
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		39
Item 8.	Financial Statements and Supplementary Data		41
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		80
PART III
Item 10.	Directors and Executive Officers of the Registrant		80
Item 11.	Executive Compensation		80
Item 12.	Security Ownership of Certain Beneficial Owners and Management		80
Item 13.	Certain Relationships and Related Transactions		80
Item 14.	Controls and Procedures		80
PART IV
Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		80


	High		Low

2002
Fourth Quarter	$	12.63	$	9.05
Third Quarter	$	14.79	$	10.17
Second Quarter	$	18.73	$	13.50
First Quarter	$	14.30	$	10.64
2001
Fourth Quarter	$	13.07	$	8.53
Third Quarter	$	12.24	$	7.75
Second Quarter	$	12.59	$	8.61
First Quarter	$	9.24	$	4.94


Title Of Each Class Common Stock, Par Value $.01 Per Share		Name Of Each Exchange On Which Registered The New York Stock Exchange


Name	Age		Position

Mike Jackson		54	Chairman of the Board and Chief Executive Officer
Michael E. Maroone		49	President and Chief Operating Officer
Craig T. Monaghan		46	Senior Vice President and Chief Financial Officer
Patricia A. McKay		45	Senior Vice President — Finance
Jonathan P. Ferrando		37	Senior Vice President, General Counsel and Secretary
Allan D. Stejskal		44	Senior Vice President — Operations


Item 5.	*MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS*



		As of and for the Years Ended December 31,

		2002		2001			2000		1999			1998


		(In millions, except per share data)
Revenue		$	19,478.5	$	19,989.3		$	20,599.0	$	20,099.0		$	12,653.7
Income (loss) from continuing operations		$	381.6	$	245.0		$	328.1	$	(31.5	)	$	225.8
Net income		$	381.6	$	232.3		$	329.9	$	282.9		$	499.5
Basic earnings (loss) per share:
	Continuing operations	$	1.20	$	.74		$	.91	$	(.07	)	$	.50
	Discontinued operations		—		(.04	)		—		.73			.60

	Net income	$	1.20	$	.70		$	.91	$	.66		$	1.10

Diluted earnings (loss) per share:
	Continuing operations	$	1.19	$	.73		$	.91	$	(.07	)	$	.48
	Discontinued operations		—		(.04	)		—		.73			.58

	Net income	$	1.19	$	.69		$	.91	$	.66		$	1.06

Diluted weighted average common shares outstanding			321.5		335.2			361.4		429.8			470.9
Total assets		$	8,584.8	$	8,065.4		$	8,867.3	$	9,583.1		$	8,412.2
Long-term debt, net of current maturities		$	642.7	$	647.3		$	850.4	$	836.1		$	520.9
Shareholders’ equity		$	3,910.2	$	3,827.9		$	3,842.5	$	4,601.2		$	5,424.2


Item 7.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*



			Years ended December 31,


									2002 vs. 2001									2001 vs. 2000

									Variance									Variance
									Favorable/									Favorable/
			2002			2001			(Unfavorable)			% Variance			2000			(Unfavorable)			% Variance
($ in millions, except per vehicle and % data)
Revenue:
	New vehicle		$	11,694.8		$	12,000.0		$	(305.2	)		(2.5	)	$	12,489.3		$	(489.3	)		(3.9	)
	Used vehicle			3,786.6			3,883.2			(96.6	)		(2.5	)		3,860.2			23.0			.6
	Parts and service			2,453.3			2,404.9			48.4			2.0			2,334.9			70.0			3.0
	Finance and insurance, net			510.2			489.6			20.6			4.2			431.8			57.8			13.4
	Other			1,033.6			1,211.6			(178.0	)		(14.7	)		1,482.8			(271.2	)		(18.3	)

		Total revenue	$	19,478.5		$	19,989.3		$	(510.8	)		(2.6	)	$	20,599.0		$	(609.7	)		(3.0	)

Gross profit:
	New vehicle		$	909.9		$	964.6		$	(54.7	)		(5.7	)	$	1,056.0		$	(91.4	)		(8.7	)
	Used vehicle			403.0			426.5			(23.5	)		(5.5	)		437.4			(10.9	)		(2.5	)
	Parts and service			1,068.3			1,039.2			29.1			2.8			999.7			39.5			4.0
	Finance and insurance			510.2			489.6			20.6			4.2			431.8			57.8			13.4
	Other			95.1			80.7			14.4			17.8			95.8			(15.1	)		(15.8	)

		Total gross profit		2,986.5			3,000.6			(14.1	)		(.5	)		3,020.7			(20.1	)		(.7	)
S,G&A — Store				2,059.8			2,072.0			12.2			.6			2,021.6			(50.4	)		(2.5	)
S,G&A — Corporate				141.1			135.2			(5.9	)		(4.4	)		156.1			20.9			13.4
Depreciation				67.3			70.7			3.4						54.7			(16.0	)
Amortization				2.4			81.2			78.8						79.1			(2.1	)
Loan and lease underwriting losses (income)				(13.9	)		89.6			103.5						6.0			(83.6	)
Restructuring and related impairment charges (recoveries), net				1.4			4.5			3.1						(20.4	)		(24.9	)
Other losses (gains)				2.0			(19.3	)		(21.3	)					—			19.3

	Operating income			726.4			566.7			159.7			28.2			723.6			(156.9	)		(21.7	)
Floorplan interest expense				(74.8	)		(126.7	)		51.9			41.0			(198.6	)		71.9			36.2
Other interest expense				(50.4	)		(43.7	)		(6.7	)		(15.3	)		(47.7	)		4.0			8.4
Interest income				10.4			9.0			1.4			15.6			14.3			(5.3	)		(37.1	)
Other income (expense), net				6.4			(4.5	)		10.9						33.4			(37.9	)

	Income from continuing operations before income taxes		$	618.0		$	400.8		$	217.2			54.2		$	525.0		$	(124.2	)		(23.7	)

Retail vehicle unit sales:
	New			426,706			453,857			(27,151	)		(6.0	)		489,431			(35,574	)		(7.3	)
	Used			247,365			258,523			(11,158	)		(4.3	)		255,123			3,400			1.3

				674,071			712,380			(38,309	)		(5.4	)		744,554			(32,174	)		(4.3	)

Gross profit per vehicle retailed:
	New vehicle		$	2,132		$	2,125		$	7			.3		$	2,158		$	(33	)		(1.5	)
	Used vehicle		$	1,629		$	1,650		$	(21	)		(1.3	)	$	1,714		$	(64	)		(3.7	)
	Finance and insurance		$	757		$	687		$	70			10.2		$	580		$	107			18.4



			Years Ended December 31,

			% 2002		% 2001		% 2000

Revenue mix percentages:
	New vehicle			60.0		60.0		60.6
	Used vehicle			19.4		19.4		18.7
	Parts and service			12.6		12.0		11.3
	Finance and insurance			2.6		2.4		2.1
	Other			5.4		6.2		7.3

		Total		100.0		100.0		100.0

Operating items as a percentage of revenue:
Gross profit:
	New vehicle			7.8		8.0		8.5
	Used vehicle			10.6		11.0		11.3
	Parts and service			43.5		43.2		42.8
	Finance and insurance			100.0		100.0		100.0
	Other			9.2		6.7		6.5
		Total		15.3		15.0		14.7
S,G&A — store				10.6		10.4		9.8
S,G&A — corporate				.7		.7		.8
Operating income				3.7		2.8		3.5
Other operating items as a percentage of total gross profit:
S,G&A — store				69.0		69.1		66.9
S,G&A — corporate				4.7		4.5		5.2
Total S,G&A				73.7		73.6		72.1
Operating income				24.3		18.9		24.0



		December 31,

		2002		2001

Days supply (trailing 30 days):
	New		79 days		61 days
	Used		40 days		35 days



			Years Ended
			December 31,

			% 2002		% 2001

Revenue mix percentages:
	New vehicle			60.3		60.2
	Used vehicle			19.4		19.4
	Parts and service			12.6		12.0
	Finance and insurance			2.6		2.5
	Other			5.1		5.9

		Total		100.0		100.0



		Payments Due by Period

		Total		1 Year		2-3 Years		4-5 Years		After 5 Years

Floorplan notes payable (Note 3)		$	2,302.5	$	2,302.5	$	—	$	—	$	—
Notes payable and long-term debt (Note 9)			651.3		8.6		19.2		58.1		565.4
Operating lease commitments (Note 10)			425.9		75.9		107.4		83.9		158.7
Acquisition purchase price commitments (Note 19)			59.3		54.5		4.8		—		—

	Total	$	3,439.0	$	2,441.5	$	131.4	$	142.0	$	724.1


			2002			2001

ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	176.2		$	128.1
	Receivables, net			759.8			802.2
	Inventory			2,598.4			2,178.5
	Other current assets			94.7			43.7

		Total Current Assets		3,629.1			3,152.5
RESTRICTED ASSETS				100.8			199.9
PROPERTY AND EQUIPMENT, NET				1,678.4			1,583.3
INTANGIBLE ASSETS, NET				2,975.8			2,865.2
OTHER ASSETS				200.7			264.5

		Total Assets	$	8,584.8		$	8,065.4

LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
	Floorplan notes payable		$	2,302.5		$	1,900.7
	Accounts payable			163.3			149.7
	Notes payable and current maturities of long-term debt			8.6			7.9
	Other current liabilities			506.3			519.8

		Total Current Liabilities		2,980.7			2,578.1
LONG-TERM DEBT, NET OF CURRENT MATURITIES				642.7			647.3
DEFERRED INCOME TAXES				947.4			853.8
OTHER LIABILITIES				103.8			158.3
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
	Preferred stock, par value $.01 per share; 5,000,000 shares authorized; none issued			—			—
	Common stock, par value $.01 per share; 1,500,000,000 shares authorized; 333,505,325 and 476,472,730 shares issued and outstanding including shares held in treasury, respectively			3.3			4.8
	Additional paid-in capital			3,044.1			4,674.0
	Retained earnings			1,263.2			881.6
	Accumulated other comprehensive income			4.2			1.6
	Treasury stock, at cost; 35,489,909 and 154,759,709 shares held, respectively			(404.6	)		(1,734.1	)

		Total Shareholders’ Equity		3,910.2			3,827.9


	Page

Reports of Auditors		42

Consolidated Balance Sheets as of December 31, 2002 and 2001		44

Consolidated Income Statements for the Years Ended December 31, 2002, 2001 and 2000		45

Consolidated Statements of Shareholders’ Equity and Comprehensive Income (Loss) for the Years Ended December 31, 2002, 2001 and 2000		46

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000		47

Notes to Consolidated Financial Statements		48