PART I

ITEM 3. LEGAL PROCEEDINGS

    In October 2000, the California Department of Motor Vehicles filed an administrative proceeding that, among other things, alleged that two finance and insurance managers who had been employed for approximately one year by El Monte Motors, Inc., a wholly-owned subsidiary of ours doing business as Gunderson Chevrolet in El Monte, California, had defrauded customers. The California DMV seeks to have Gunderson Chevrolet's license to do business in California either suspended or revoked. The case is scheduled for trial before an Administrative Law Judge beginning in April 2001. Three civil class actions and other related lawsuits have been filed against Gunderson Chevrolet based on the allegations underlying the California DMV case. Additionally, the Los Angeles District Attorney's Office has been conducting an investigation into the allegations underlying the California DMV case. The class of customers to which these actions relate may be significant. Accordingly, a settlement or an adverse resolution of these matters may result in the payment of significant costs and damages or the suspension or revocation of Gunderson Chevrolet's license. Further, a resolution of the California DMV case that results in Gunderson Chevrolet being closed, even temporarily, may subject us to termination of the dealership's franchise agreement with General Motors.

    In an action filed in state court in Palm Beach County, Florida in August 1999, Jamie R. Miranda and other plaintiffs accused one of our wholly-owned subsidiaries, AutoNation USA Corporation, of, among other things, violating 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 used vehicle megastores. The claims relate to nine of our used vehicle megastore businesses located in Florida, eight of which have since closed and one of which is currently operating as a new vehicle dealership. Mr. Miranda has filed the complaint on behalf of all customers of our former Florida used vehicle megastores who signed retail installment contracts in connection with vehicle purchases but did not receive copies of the contracts signed by the megastores. On October 31, 2000, the court certified the class of customers on whose behalf the action would proceed. We have appealed this decision to Florida's 4th District Court of Appeals.

    Several of our Texas dealership subsidiaries have been named in three class actions brought against the Texas Automobile Dealer's Association and new vehicle dealerships in Texas that are members of the TADA. The first of these actions was filed in November 1997. The actions allege, among other things, 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. Two of the cases are currently pending in Texas state courts and the third is pending in the federal district court for the Eastern District of Texas. The allegations involve dozens of our dealerships.

    We intend to vigorously defend ourselves and assert available defenses with respect to each of the foregoing matters. Further, we 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 and, in the case of the Gunderson Chevrolet matter, the suspension or revocation of our dealership license, 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.