Form 10-K
     

PART I

ITEM 1. BUSINESS

INTRODUCTION

    AutoNation, Inc. is the largest automotive retailer in the United States. As of December 31, 2000, we owned and operated approximately 400 new vehicle franchises from dealership locations in major metropolitan markets in 18 states, predominantly in the Sunbelt. Our dealerships offer new and used vehicles for sale. We also offer financing for vehicle purchases, extended service contracts and other finance and insurance products, as well as other aftermarket products such as vehicle accessories, upgraded sound systems and theft deterrent systems. We also offer a wide range of vehicle maintenance and repair services and we operate collision repair centers in most of our key markets. The core brands of vehicles that we sell, representing almost 90% of the new vehicles that we sold in 2000, are Ford (Ford, Lincoln and Mercury), General Motors (Chevrolet, Pontiac, GMC and Buick), Chrysler (Chrysler, Jeep and Dodge), Nissan, Toyota and Honda. We also sell several luxury vehicle brands, including Mercedes-Benz, BMW, Lexus and Porsche. In total, we offer 35 different brands of vehicles.

    Although we now operate exclusively as an automotive retailer, we have operated businesses in multiple industries over the past several years, including the solid waste services, electronic security service, car rental and outdoor media industries. With the tax-free spin-off to our stockholders of ANC Rental Corporation and the sale of certain other non-core assets in 2000, which we describe in more detail in the "Recent Developments" section of this document, we are now focused exclusively on our operations in the automotive retail business.

    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, and business combinations, you should review the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in this document. You should also review and consider the risks relating to our business, operations, financial performance and cash flows that we describe in the "Risk Factors" section of this document.

RECENT DEVELOPMENTS

    ANC Rental Spin-off. On June 30, 2000, we completed the tax-free spin-off of ANC Rental Corporation, which operates primarily under the Alamo Rent-A-Car and National Car Rental brand names in the leisure travel, business travel and vehicle replacement markets of the automotive rental industry. As a result of the spin-off, our stockholders of record as of June 16, 2000 received one share of ANC Rental common stock for every eight shares of AutoNation common stock they held as of such date. ANC Rental common stock is traded on The Nasdaq Stock Market under the symbol "ANCX." We have reclassified and reported ANC Rental's business as a discontinued operation. Accordingly, except as otherwise noted, the disclosure contained in this document relates solely to our automotive retail business.

    Other Divestitures of Non-Core Assets. In addition to the spin-off of ANC Rental, during 2000 we substantially completed our divestitures of other non-core assets. During 2000, we entered into a sale-leaseback financing of our corporate headquarters facility resulting in proceeds of approximately $52.1 million. We also completed the sale of ANC Rental's corporate headquarters facility for approximately $18.7 million. In connection with the closure during December 1999 of 23 company-owned AutoNation USA used vehicle megastores, during 2000 we sold a majority of the excess real property held for or operated in connection with our former used vehicle megastore business. We intend to continue actively marketing the remaining excess used vehicle megastore properties. In November 2000, we completed the divestiture of our outdoor media business, which operated under the name Republic Media, for a sale price of approximately $104.0 million. In connection with the sale of Republic Media, we entered into a pre-paid $15.0 million advertising agreement with respect to the purchaser's radio stations, billboards and other outdoor advertising media, and, accordingly, we received net proceeds of approximately $89.0 million in connection with the transaction. During 2000, we also completed the sale of various non-core franchised new vehicle dealerships for an aggregate sale price of approximately $89.7 million. With the sale of our Flemington Automotive Group in New Jersey, which we expect to complete in April 2001, we believe that our disposition of significant non-core assets will be substantially complete.

BUSINESS STRATEGY

    Our business strategy consists of the following key elements:

  • Expand our margins by focusing on higher-margin products and services.

  • Continue to leverage our significant scale to improve our operating efficiency, including by managing costs of our business and improving the utilization of our assets.

  • Effectively use our free cash flow to reinvest in our business through capital investments, strategic dealership acquisitions and share repurchases.

  • Continue to grow and leverage our e-commerce business.
Expand Our Margins

    While new vehicle sales will continue to be a significant component of our operations, we intend to continue to focus on developing the areas of our automotive retail business that produce the highest margins. In general, parts and service sales, used vehicle sales and sales of finance, insurance and other aftermarket products yield relatively high margins as a percentage of sales compared to new vehicle sales. We intend to emphasize higher-margin areas of our business with the following strategic initiatives:

    PARTS AND SERVICE SALES AND COLLISION REPAIR SERVICES: Almost all of our dealerships have service facilities that provide a wide range of vehicle maintenance and repair services. Additionally, we operate collision repair centers in most of our key markets. We intend to increase our parts and service sales by, among other things: (1) continuing to implement our team-based service process in our service facilities (Advanced Production Structure) and our cycle time solution in our collision centers, (2) implementing comprehensive parts and service marketing programs within our local markets, (3) assuring that our dealerships' parts requirements are fulfilled through purchases from AutoNation dealerships to the extent practicable and (4) developing relationships with national insurance companies that establish our dealerships and collision centers as preferred providers of collision repair services. Accordingly, we also intend to focus on hiring, training and retaining technicians so that we can improve our service bay utilization and increase our parts and service sales without the need for additional capital investment.

    USED VEHICLE SALES: Each of our dealerships offers a variety of brand name used vehicles. We will continue to leverage our status as the largest retailer of new vehicles in the United States to develop competitive advantages over our principal used vehicle competitors and to expand our used vehicle business. We believe that, with our significant scale in our key markets, we have better access than many of our competitors to desirable used vehicle inventory. We intend to leverage our significant scale in our key markets to improve our used vehicle business by (1) completing the implementation at our dealerships of our advanced inventory management system, which will permit us to source and manage used vehicle inventories across our dealerships within a local market, (2) implementing comprehensive used vehicle marketing programs within our local markets, (3) dedicating specific management personnel in each of our geographic operating districts to optimize our used vehicle operations and (4) adopting standardized used vehicle operating policies at our dealerships based on our dealerships' "best practices."

    FINANCE, INSURANCE AND OTHER AFTERMARKET PRODUCT SALES: Each new or used vehicle sale presents our dealerships with the opportunity to finance the vehicle, sell an extended service contract or other finance and insurance product, and sell other aftermarket products, such as vehicle accessories or a theft deterrent system. In order to improve our finance and insurance business, we plan to (1) focus on improving the performance of our dealerships that under-perform our other dealerships with respect to finance and insurance operations, (2) ensure a high level of compliance with our standard finance and insurance operating practices, such as the use of our customer-friendly "full-disclosure" finance and insurance menu, (3) increase sales at our dealerships of finance and insurance products offered by our automotive finance arm, AutoNation Financial Services, and (4) promote further consolidation of the retail finance sources for our customers' vehicle purchases to drive improved pricing and efficiency.


    Improve Our Operating Efficiency

    We plan to leverage our status as the largest automotive retailer in the United States to further improve our cost structure and the utilization of our assets. During 1999 and 2000, in order to improve our cost structure we shut down our cost-intensive used vehicle megastore business and reduced our staff by approximately 2,000 employees, of whom approximately 200 were corporate headquarters staff. These and other cost-reduction initiatives have resulted in cost savings and improved operating margins for us. However, we believe that we still have important opportunities to improve our cost structure and the utilization of our assets. We plan to focus on the following key methods to achieve these goals:

    REDUCE DAYS SUPPLY OF NEW AND USED VEHICLES: We are focused on managing our new and used vehicle inventories to decrease the days supply of vehicles that we have at any given time at our dealerships, with the objective of reducing our inventory financing interest expense and carrying costs. We plan to achieve this by: (1) developing and using a web-based tracking system that enables us to more closely monitor our inventories, (2) establishing days supply targets for each of our vehicle models, (3) managing our new and used vehicle inventories across the dealerships within each of our markets to optimize inventory turnover and (4) focusing our inventory purchasing on the more popular model packages.

    DECREASE TIME TO CONVERT RECEIVABLES INTO CASH: We intend to focus on decreasing the amount of time that our dealerships take to receive payment on retail receivables (or "contracts-in-transit"). We plan to accomplish this goal, in part, by (1) adopting "best practices" concerning sales and contracts-in-transit flow processing, (2) developing and using a web-based tool to monitor our dealerships' contracts-in-transit and (3) developing relationships with preferred lenders who can expeditiously process our dealerships' contracts-in-transit. By more quickly converting our contracts-in-transit into cash, we expect to be able to more quickly use our capital to pursue our strategic initiatives, including those described below under the "Effectively Use Free Cash Flow" heading.

    Effectively Use Free Cash Flow

    A key component of our strategy is to maximize the return on investment generated by the use of the free cash flow that our business generates. We expect to use our free cash flow to make capital investments in our current businesses, to complete strategic dealership acquisitions in our key markets and to repurchase shares of our common stock pursuant to our Board-authorized share repurchase program. The considerations in determining how we will allocate our free cash flow among such uses include the following:

    CAPITAL INVESTMENTS: During 2000, we invested $148.2 million on capital investments, including to upgrade and improve certain of our dealership facilities. We expect to make additional facility and infrastructure upgrades and improvements from time to time, such as the construction of new vehicle dealership facilities, with a focus on projects that we expect to provide a reasonable return on our investment.

    STRATEGIC DEALERSHIP ACQUISITIONS: We believe that we will have additional opportunities to acquire dealerships in our key markets. The factors that will impact whether we make additional strategic dealership acquisitions include the brand, location and price of available dealerships and whether such dealerships complement and can be integrated into our existing operations.

    SHARE REPURCHASES: During 2000, we repurchased 27.6 million shares of our common stock for an aggregate price of $188.9 million. As of March 26, 2001, we are authorized to repurchase up to an additional $179.2 million of our common stock pursuant to our latest Board-authorized share repurchase program. The decision to make additional purchases of our stock 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.

    Grow Our E-Commerce Business

    Due to the scale of our operations and our e-commerce infrastructure, we believe that we are uniquely positioned to compete in the automotive retail e-commerce marketplace. During 2000, we developed relationships with certain Internet service providers and websites, as well as other parties, to purchase leads or referrals of customers who are shopping for a vehicle. Using "Compass," our proprietary web-based lead-management software tool, we provide these customer leads to our dealerships for fulfillment to the extent possible. Specially-trained Internet Sales Guides at our dealerships then use the Internet-based Compass system to respond to customer inquiries 24 hours a day, seven days a week. During 2000, our average customer response time was approximately 1.2 hours, which is well below reported industry average response times.

    During 2000, we also entered into lead referral agreements with over 1,600 franchises operating from more than 1,000 independent dealerships. Under these agreements, we sell customer leads that we cannot fulfill within our dealership network. We plan to continue to enter into lead referral agreements with dealers that are able to provide fulfillment capability for vehicle makes and geographic areas that our dealerships do not cover. As we enter into additional lead referral agreements, we intend to continue to set service and other standards that these independent dealerships must meet to participate in our lead referral program.

OPERATIONS

    As of December 31, 2000, we owned and operated approximately 400 automotive franchises from dealership locations in 18 states. We own and operate franchises granted by the manufacturers of 35 different makes of vehicles. The core brands of vehicles that we sell are Ford (Ford, Lincoln and Mercury), General Motors (Chevrolet, Pontiac, GMC and Buick), Chrysler (Chrysler, Jeep and Dodge), Nissan, Toyota and Honda. Our management structure is focused on our local markets, where day-to-day decision-makers can be more responsive to the needs of local customers. We have established ten districts to manage our automotive retail business. The number of dealerships within each district varies from district to district.

    Each of our automotive franchises offers new and used vehicles for sale. Each of our dealerships also offers financing for vehicle purchases, extended service contracts and other finance and insurance products, as well as other aftermarket products such as vehicle accessories, upgraded sound systems and theft deterrent systems. Almost all of our dealerships have service facilities that provide a wide range of vehicle maintenance and repair services. Additionally, we operate collision repair centers in most of our key markets.

    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. We generally acquire used vehicles from customer trade-ins, off-lease programs and, to a lesser extent, auctions and other sources. We recondition used vehicles acquired for retail sale at our dealerships' service facilities.

    We provide financial products and services to our customers through third parties, including the vehicle manufacturers' and distributors' captive finance companies, as well as our automotive finance arm, AutoNation Financial Services. AutoNation Financial Services' products include retail installment loan financing, extended service contracts, vehicle protection and maintenance programs and insurance products.

SALES AND MARKETING

    In 2000, we retailed approximately 744,000 vehicles through our dealerships. We sell a broad range of well-known vehicle makes within each of our key markets.

    Our marketing efforts focus on mass marketing in our local markets and are designed to build our business with a broad base of repeat and new customers. We engage in mass marketing and advertising primarily through newspapers, radio, outdoor billboards, television and the Internet in our local markets. As we have consolidated our dealership operations in certain of our key markets under one local brand name, we have been able to focus our efforts on building consumer awareness of the selected local 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 brand name in our local markets.

    We market our vehicle inventory via the Internet through AutoNation.com, our dealership websites and a site co-branded with America Online. We also have entered into lead referral agreements pursuant to which we purchase customer leads generated by various third-party websites, including Microsoft's MSN Carpoint, and other sources. We provide these customer leads to our dealerships for fulfillment to the extent possible. During 2000, we entered into lead referral agreements with over 1,600 franchises operating from more than 1,000 independent dealerships by which we sell customer leads that we cannot fulfill within our dealership network.

AGREEMENTS WITH VEHICLE MANUFACTURERS

    We have entered into framework agreements with most major vehicle manufacturers and distributors. These agreements contain provisions relating to our management, operation, advertising and marketing, acquisition and ownership structure of automotive dealerships franchised by such manufacturers. The agreements also 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. In addition, some of these framework agreements give the manufacturer or distributor the right to acquire, at fair market value, the automotive dealerships franchised by that manufacturer or distributor under specified circumstances in the event of a change in control of our company, the acquisition of 20% or more of the voting stock of our company by another 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's 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's 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 requirements, the sales process, marketing and branding, showroom, 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, subject to applicable state franchise laws that limit a manufacturer's right to terminate a franchise.

REGULATIONS

    Automotive and Other Laws and Regulations

    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, operating, financing, advertising and employment practices. These laws and regulations include state franchise laws and regulations 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 regulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and other installment sales laws. 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 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.

    Environmental, Health and Safety Laws and Regulations

    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.

COMPETITION

    We operate in a highly competitive industry. We believe that the principal competitive factors in the automotive retail business are location, service, price and selection. Each of our key markets includes a large number of well-capitalized competitors that have extensive automobile dealership managerial experience and strong retail locations and facilities. 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. We also are subject to competition from independent automobile service and repair shops and service center chains.

    In general, the vehicle manufacturers have designated specific marketing and sales areas within which only one dealer of a given vehicle line or make operates. 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.

    According to the National Automotive Dealers Association, Automotive News and reports of various financial analysts, the automotive retail industry is served by approximately 22,000 franchised automotive dealerships, approximately 56,000 independent used vehicle dealers, and individual consumers who sell used vehicles in casual private transactions primarily through classified ads and by word of mouth. Several other public companies are attempting to establish national or regional automotive retail chains. Additionally, certain vehicle manufacturers are engaged in the retail sale and service of vehicles, either independently or in conjunction with their franchised dealers, and may do so on an expanded basis in the future, subject to various state laws that restrict or prohibit manufacturer ownership of dealerships.

    We believe that a growing number of consumers are utilizing the Internet, to differing degrees, in connection with the purchase of vehicles. Accordingly, we may face increasing competitive pressures from on-line automotive websites, including those developed by vehicle manufacturers and other dealership groups. Consumers use the Internet to compare pricing for cars and related finance and insurance services, which may cause price convergence and reduced margins for new vehicles, used vehicles and related finance and insurance services.

INSURANCE AND BONDING

    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 regulatory requirements.

    The automotive retail business is also subject to substantial risk of property loss due to the significant concentration of property values at dealership locations. Accordingly, we have purchased liability and property insurance subject to certain deductibles or loss retentions. We purchase umbrella liability insurance to provide insurance in excess of our primary insurance policies. 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 our obligation 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 cash deposits. Our collateral requirements may change from time to time based on, among other things, our claims experience.

EMPLOYEES

    As of December 31, 2000, we employed approximately 31,000 full time employees, approximately 800 of whom were covered by collective bargaining agreements. We believe that we have good relations with our employees. Due to our dependence on the vehicle manufacturers, however, we may be adversely affected by labor strikes or work stoppages at the manufacturers' manufacturing facilities.

SEASONALITY

    Our operations generally experience higher volumes of vehicle sales 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 to be generally lower in our first and fourth quarters as compared to our second and third quarters.

TRADEMARKS

    We own a number of registered service marks and trademarks and also have a number of applications pending to register, among other marks, AutoNation SM and AutoNationSM. 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, and we may renew them periodically provided that we comply with all applicable laws.

EXECUTIVE OFFICERS OF AUTONATION

    We provide below information regarding each of our executive officers.

    H. Wayne Huizenga, age 63, has served as our Chairman of the Board since August 1995. He also served as our Chief Executive Officer from August 1995 until October 1996, and as Co-Chief Executive Officer from October 1996 through September 1999. Since May 1998, Mr. Huizenga has been Chairman of the Board of Republic Services, Inc., a solid waste services company, and served as its Chief Executive Officer from May 1998 until December 1998. Since May 2000, Mr. Huizenga has been Vice Chairman of ZixIt Corporation, a provider of security services and products for Internet use. Since September 1996, Mr. Huizenga has been Chairman of the Board of Boca Resorts, Inc., an owner and operator of luxury resort hotels, a professional sports franchise and other facilities. Since January 1995, Mr. Huizenga also has been Chairman of the Board of Extended Stay America, Inc., an operator of extended stay lodging facilities. Mr. Huizenga served as the Vice Chairman of Viacom Inc., a diversified entertainment and communications company, from September 1994 until October 1995. From April 1987 through September 1994, Mr. Huizenga served as the Chairman of the Board and Chief Executive Officer of Blockbuster Entertainment Corporation, a video rental company. In September 1994, Blockbuster merged with Viacom. In 1971, Mr. Huizenga co-founded Waste Management, Inc., a solid waste services company, and he served in various capacities, including as President, Chief Operating Officer and director, from its inception until 1984. Mr. Huizenga also owns the Miami Dolphins, as well as Pro Player Stadium in South Florida, and is a director of NationsRent, Inc., a national equipment rental company, and ANC Rental Corporation, a car rental company that we spun off to our stockholders in June 2000.

    Michael J. Jackson, age 52, has served as our Chief Executive Officer and as one of our Directors since September 1999. From October 1998 until September 1999, Mr. Jackson served as President and Chief Executive Officer of Mercedes-Benz USA, Inc., a North American operating unit of DaimlerChrysler AG, a multinational automotive manufacturing company. From April 1997 until October 1999, Mr. Jackson served as President of Mercedes-Benz USA, Inc. From July 1990 until March 1997, Mr. Jackson served in various capacities at Mercedes-Benz USA, Inc., including as Executive Vice President immediately prior to his appointment as President of Mercedes-Benz USA, Inc. 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. Prior to joining Euro Motorcars, Mr. Jackson was a District Manager for Mercedes-Benz of North America.

    Harris W. Hudson, age 58, has served as one of our Directors since August 1995, and has served as our Vice Chairman since October 1996. From August 1995 until October 1996, Mr. Hudson served as our President. Since May 1998, Mr. Hudson has served as Vice Chairman and Secretary of Republic Services. Mr. Hudson founded Hudson Management Corporation, a solid waste collection company, in 1983 and served as its Chairman of the Board, Chief Executive Officer and President from its inception until it was acquired by AutoNation in August 1995. Mr. Hudson also serves as a director of Boca Resorts and NationsRent.

    Michael E. Maroone, age 47, 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, age 44, has served as our Senior Vice President and Chief Financial Officer since May 2000. From June 1998 to April 2000, Mr. Monaghan was Chief Financial Officer of iVillage.com, a leading women's network on the Internet. From 1991 until 1998, Mr. Monaghan served in various executive capacities for Reader's Digest Association, Inc., most recently as Vice President and Treasurer.

    Patricia A. McKay, age 43, 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. From June 1983 through July 1988, Ms. McKay served as Senior Audit Manager with Arthur Andersen LLP.

    Jonathan P. Ferrando, age 35, 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, a global full service law firm, from 1991 until 1996. Mr. Ferrando's practice at Skadden, Arps, Slate, Meagher & Flom was concentrated in the areas of mergers and acquisition and corporate finance.

    Kevin P. Westfall, age 45, has served as President of AutoNation Financial Services, our wholly owned captive finance and insurance company, since April 1997. Prior to joining AutoNation, from 1990 until 1997, Mr. Westfall served as the President of BMW Financial Services, a captive finance company. Mr. Westfall is a member of the Board of Directors for the American Financial Services Association and the Consumer Banker's Association.

RISK FACTORS; FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE

    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 Form 10-K or the Annual Report mailed to our stockholders with this 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 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 Retail Industry Is Cyclical and Is Highly Sensitive to Changing Economic Conditions; We Are in the Midst of an Industry and General Economic Slowdown That 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 level of personal discretionary spending, interest rates, fuel prices and credit availability. While 1999 and 2000 were record years for the automotive industry in general and us specifically in terms of volume of new vehicles sold, during 2001 the automotive industry will likely experience significant fall-off in demand for new vehicles. We experienced a rapid slowdown in new vehicle sales in late 2000. Industry experts have predicted a decrease in new vehicle sales in the United States during 2001 of up to ten percent or more as compared to sales during 2000. Similarly, we expect that our new vehicle sales, the single largest component of our aggregate revenue, will significantly decrease during 2001. In addition, although we generate diversified revenue and profit streams from the sale of used vehicles, financial services, vehicle service, parts and collision repair services, which we do not expect to be adversely impacted in a general economic downturn as dramatically as new vehicle sales, we cannot assure you that our business will not be materially adversely affected as a result of an industry or general economic downturn.

    We Are Substantially Dependent on Vehicle Manufacturers. 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 favorable inventory financing. Beyond funds paid directly to their dealerships, the manufacturers also have established various incentive programs designed to spur consumer demand for their vehicles. 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. Any event that may have a material adverse effect on the financial condition, management, marketing, production and distribution capabilities of the vehicle manufacturers with whom we hold franchises, such as general economic downturns or recessions, increases in interest rates, labor strikes, supply shortages, adverse publicity or product defects, may have a material adverse effect on our business, results of operations, financial condition, cash flows and prospects.

    We Are Subject to Operating Restrictions Imposed by Vehicle Manufacturers. The franchise agreements to which our dealerships are subject and the framework agreements that we have with many major vehicle manufacturers impose significant restrictions on our ability to operate our dealerships. These agreements provide the manufacturers with considerable influence over the operations of our dealerships, including the level at which we capitalize our dealerships, the condition of our dealership facilities, our performance standards with respect to sales volume and customer satisfaction, our selection of dealership management, naming and marketing of our dealerships and the operations of our e-commerce sites, and other factors. They also grant the manufacturer the right to terminate our franchise for a variety of causes, subject to state laws.

    We Are Subject to Extensive Governmental Regulation. The automotive retail industry is subject to a wide range of federal, state and local laws and regulations, such as local licensing requirements, retail financing and consumer protection laws and regulations and federal and state environmental, health and safety, wage-hour, anti-discrimination and other employment practices laws and regulations. The violation of these laws and regulations 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. We describe certain pending license revocation proceedings with respect to one of our dealerships in California under the "Legal Proceedings". In addition, as the on-line automotive business expands, there may be new laws and regulations adopted, or increased regulatory scrutiny and enforcement of existing laws and regulations, that could have a material adverse effect on our e-commerce business. We may need to spend considerable time, effort and money to keep our existing or acquired facilities in compliance with applicable federal, state and local regulation of health, safety, environment, zoning and land use.

    We Are Subject to Numerous Legal and Administrative Proceedings. 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 and actions brought by governmental authorities. We have several class action lawsuits pending against us. A significant judgment against us or the imposition of a significant fine could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects. We cannot assure you with respect to the outcome of these administrative and legal proceedings and the effect such outcomes may have on us. We describe certain significant pending litigation matters under the heading "Legal Proceedings" below.

    We May Be Required to Perform Under Certain Credit Enhancements and Guarantees with respect to ANC Rental Corporation. In connection with the spin-off of ANC Rental Corporation, we agreed to provide certain guarantees and credit enhancements with respect to certain indebtedness and certain property and vehicle lease obligations. ANC Rental recently reported a net loss for the fourth quarter of 2000 of $44.0 million, resulting in an aggregate net loss for 2000 of $2.0 million. To the extent that ANC Rental is not able to meet its obligations, we are likely to be called on to perform under the guarantees and credit enhancements we provided, which could have a material adverse effect on our business, financial condition, cash flows and prospects.

    We Face Significant Competition in the Automotive Retail Industry. We operate in a highly competitive environment. Our competition includes publicly and privately-owned dealerships, some of which operate large groups, and any of which may sell the same or similar makes of new and used vehicles in our markets at competitive prices. Other competitors include franchised automotive dealerships selling other brands of vehicles, private market buyers and sellers of used vehicles, used vehicle dealers, service center chains, independent service and repair shops and publicly and privately-owned finance companies, including those of vehicle manufacturers, and, as we describe below, on-line automotive retailers and lead-referral companies. Our franchise agreements generally do not give us the exclusive right to sell a manufacturer's product within a given geographic area, although state franchise laws do provide certain protections. These and other competitive pressures could materially adversely affect our business, financial condition, results of operations, cash flows and prospects.

    We also face competition in the rapidly evolving automotive retail e-commerce business. A number of e-commerce companies and traditional companies, including the vehicle manufacturers and other franchised dealership groups, have established automotive-related websites over the past few years and compete with us in two areas of our e-commerce business: (1) sales of vehicles to retail customers via the Internet sales channel and (2) generation and sales to other automobile dealers of customer referrals or "leads" obtained via the Internet. Additionally, we believe that, as customers use the Internet and gain increased access to information on prices for vehicles and related finance and insurance products, margins for new and used vehicle sales and related finance and insurance products may decrease, whether sales are made via the Internet or through traditional channels. The success of our e-commerce business will depend on our ability to develop a strategy that appeals to Internet automobile buyers, to obtain high visibility on the Internet, whether through our own websites or through strategic partnerships and alliances with other e-commerce companies, and to develop and maintain a cost structure that permits us to operate profitably.

    We Need Substantial Capital. We need substantial capital to operate our business and to execute our long-term strategy effectively. As of December 31, 2000, we had two unsecured revolving credit facilities in place in the aggregate principal amount of $1.5 billion. One facility provides $1.0 billion of financing under a multi-year structure and matures in April 2002. The other facility, a $500.0 million 364-day facility that was scheduled to mature in March 2001, was amended to provide $250.0 million of borrowing capacity until the earlier of September 30, 2001 or the early renewal of the multi-year facility. Additionally, as of December 31, 2000, we had approximately $2.4 billion of floor plan indebtedness outstanding under credit facilities with various financing sources, primarily the vehicle manufacturers' captive finance subsidiaries. Our floor plan indebtedness, which we use to finance our vehicle inventory, is secured by our vehicle inventory. This may limit our ability to borrow from other sources or for other uses. We also have been negotiating with several of the vehicle manufacturers' captive finance subsidiaries to provide mortgage-backed credit facilities with respect to certain of our dealership properties. We cannot assure you that we will be able to execute definitive loan agreements with the captives or enter into new unsecured revolving credit facilities with sufficient capacity, or otherwise obtain sufficient financing for our business and operations, on a timely basis or on terms acceptable to us.

    A substantial portion of our outstanding indebtedness is at floating interest rates. At times, we have used interest rate swaps, caps and floors to manage the risk of interest rate fluctuations, but a substantial increase in interest rates could adversely affect our cost of indebtedness for borrowed money.

    We May Not Be Able to Successfully Execute Our Strategy. The success of our business model depends in large part on our ability to implement and execute the strategic initiatives that we describe under the "Business Strategy" heading above across all of our dealerships, and thereby obtain business efficiencies, economies of scale and related cost savings and margin performance improvements. These tasks are made more difficult by the fact that the dealerships within each of our key markets were acquired from independent organizations and historically have operated independently, with unique business, sales and marketing practices. Accordingly, the implementation of our strategy across each of our markets will require significant managerial focus and time, and we cannot assure you that it will result in improved operating performance or increased cost savings in a timely manner or at all.

    We May Have Difficulty Expanding Through Acquisitions of Franchised Automotive Dealerships in Our Key Markets. The growth of our automotive retail business since our inception has been primarily attributable to acquisitions of franchised automotive dealership groups. However, 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. Although we have negotiated with the major manufacturers limits on the number of dealerships that we may acquire nationally, regionally or within any given market, each particular acquisition remains subject to specific approval from the applicable vehicle manufacturer. We have approached certain acquisition limits set forth in certain of our framework agreements, particularly certain market limits, and may approach them in other markets in the future as we continue to expand, although we do not believe that such limits will materially adversely impact our ability to execute our acquisition strategy in the foreseeable future. We cannot assure you that we will be able to execute our growth strategy in the future by acquiring dealerships selling desirable automotive brands at desirable locations in our key markets, or that any such acquisitions can be completed on favorable terms.

    The Loss of Key Personnel Could Affect Our Operations. Our success depends to a significant degree upon the continued contributions of our key corporate officers. Additionally, our success depends on the key management personnel at our district offices and the dealerships in our local markets. The market for qualified employees in the industry and in the markets in which we operate, particularly for qualified general managers and sales and service personnel, is highly competitive and may subject us to increased labor costs during periods of low unemployment. We also believe that many of our sales and service personnel are pursued from time to time by our competitors. The loss of a group of key employees in any of our markets could have a material adverse effect on our business and results of operations in that market.

    We Are Subject to Residual Value Risk and Consumer Credit Risk in Connection with Our Lease Portfolio; We Are Also Subject to Consumer Credit Risk in Connection with Our Installment Receivables Portfolio. Through AutoNation Financial Services, we provide installment loans to our customers and, until mid-1999, we provided our customers an opportunity to finance vehicles through leases with us. We are subject to residual value risk in connection with our lease portfolio, particularly in the event of a decline in the market value of our leased vehicles. We also are subject to consumer credit risk in connection with our lease portfolio and our portfolio of installment receivables. If an economic downturn occurs, we may face an increase in the rate of payment defaults by our customers, which may have a material adverse effect on our financial condition, results of operations and cash flows.