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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

COMMISSION FILE NUMBER: 1-13107

AUTONATION, INC.

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (954) 769-6000

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]       No[   ]

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

     On April 25, 2003 the registrant had 281,339,794 outstanding shares of common stock, par value $.01 per share.

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AUTONATION, INC.

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AUTONATION, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.
UNAUDITED CONSOLIDATED INCOME STATEMENTS
(In millions, except per share data)

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In millions, except share data)

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

The accompanying notes are an integral part of these statements.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except share and per share data)

1. Interim Financial Statements

     The accompanying Unaudited Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries (the “Company”); all intercompany accounts and transactions have been eliminated. The accompanying Unaudited Consolidated Financial Statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, certain information related to the Company’s organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. These Unaudited Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normal recurring adjustments) necessary to fairly state, in all material respects, the financial position and the results of operations for the periods presented.

     Operating results for interim periods are not necessarily indicative of the results that can be expected for a full year. These interim financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s most recent Annual Report on Form 10-K.

     In order to maintain consistency and comparability between periods presented, certain amounts have been reclassified from the previously reported financial statements to conform with the financial statement presentation of the current period.

     As of January 1, 2003, the Company adopted Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” EITF 02-16, as it applies to the Company, addresses the recognition of certain manufacturer allowances and requires manufacturer allowances be treated as a reduction of inventory cost unless specifically identified as reimbursement for services or costs incurred. The adoption of EITF 02-16 resulted in a cumulative effect of accounting change, net of $9.1 million of income tax, totaling $14.6 million to reflect the deferral of certain allowances, primarily floorplan assistance, into inventory cost. The impact of this accounting change for the three months ended March 31, 2003 was an increase of $.9 million in Cost of Operations. On a comparable basis, the impact of this accounting change for the three months ended March 31, 2002 would have been an increase of $.9 million in Cost of Operations. Additionally, the adoption of EITF 02-16 impacted certain manufacturers’ advertising allowances resulting in a reclassification that increased Selling, General and Administrative expenses and, correspondingly, reduced Cost of Operations by $4.3 million for the three months ended March 31, 2003 to now reflect these allowances as a reduction of Cost of Operations. On a comparable basis, the reclassification impact between Selling, General and Administrative Expenses and Cost of Operations for the three months ended March 31, 2002 would have been $4.7 million.

2. Receivables, Net

     The components of receivables, net of allowance for doubtful accounts, are as follows:

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The long-term portion of finance receivables are classified as Other Assets in the accompanying Unaudited Consolidated Balance Sheets. For more information on Finance Receivables, see Note 13, Finance Underwriting and Asset Securitizations.

3. Inventory and Floorplan Notes Payable

     Inventory consists of the following:

     At March 31, 2003 and December 31, 2002, floorplan notes payable totaled $2.6 billion and $2.3 billion, respectively. The Company finances new vehicle inventory through secured floorplan facilities at a LIBOR-based rate of interest primarily with manufacturers’ captive finance subsidiaries and independent financial institutions. As of March 31, 2003, available borrowing capacity under the floorplan credit facilities was approximately $3.7 billion.

     During the three months ended March 31, 2003, the Company entered into a series of interest rate hedge transactions, consisting of a combination of forward starting swaps, and cap and floor options (collars) with a notional value of $600.0 million at March 31, 2003, designed to convert certain floating rate floorplan debt to fixed rate debt with interest rates capped at approximately 3.0%. Subsequent to March 31, 2003, the Company executed an additional $100.0 million of notional value hedges. All of the Company’s hedges mature over the next three years. For the three months ended March 31, 2003, net losses related to hedges included in other comprehensive loss were $1.7 million.

     A summary of the Company’s floorplan assistance, a component of Cost of Operations, and floorplan interest expense from manufacturers in the accompanying Unaudited Consolidated Income Statements is as follows:

4. Restricted Assets and Reinsurance

     The Company had restricted cash totaling $91.7 million and $100.8 million at March 31, 2003 and December 31, 2002, respectively, primarily held 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 relating to its captive insurance subsidiaries.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     At March 31, 2003 and December 31, 2002, current unearned premiums and loss reserves related to the Company’s reinsurance programs were included in Other Current Liabilities and long-term unearned premiums and loss reserves were included in Other Liabilities in the Unaudited Consolidated Balance Sheets as follows:

5. Intangible Assets

     Intangible assets, net, consist of the following:

6. Notes Payable and Long-Term Debt

     Notes payable and long-term debt consist of the following:

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The Company has 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 expires in August 2003 at which time the Company expects to renew the revolving credit facility. The five-year facility which expires 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 of the Company, which directly or indirectly own substantially all of the Company’s dealerships, and are guaranteed by substantially all of the Company’s subsidiaries. No amounts were drawn on these revolving credit facilities at March 31, 2003 and December 31, 2002.

     In the ordinary course of business, the Company is required to post performance and surety bonds, letters of credit, and/or cash deposits as financial guarantees of the Company’s performance. At March 31, 2003, surety bonds, letters of credit and cash deposits totaled $66.5 million, including $37.3 million of letters of credit, and have various expiration dates. The Company does not currently provide cash collateral for outstanding letters of credit. It has negotiated a letter of credit line as part of its multi-year revolving credit facility. Under the terms of the letter of credit line, 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.

     The Company also has $450.0 million of 9.0% senior unsecured notes due August 1, 2008. The senior unsecured notes are guaranteed by substantially all of the Company’s subsidiaries.

     Within the meaning of Regulation S-X, Rule 3-10, AutoNation, Inc. (the parent company) has no independent assets or operations, the guarantees of its subsidiaries are full and unconditional and joint and several, and any subsidiaries other than the guarantor subsidiaries are minor.

     At March 31, 2003, the Company had $214.7 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 the Company’s dealerships’ real property. During the three months ended March 31, 2003, the Company drew additional amounts totaling $63.4 million of its available capacity under one of the mortgage facilities.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     The Company’s revolving credit facilities and the indenture for the Company’s senior unsecured notes contain numerous customary financial and operating covenants that place significant restrictions on the Company, including the Company’s 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 the Company 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 the Company 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 the Company be in violation of the financial covenants, it could be limited in incurring certain additional indebtedness. The Company’s revolving credit facilities, the indenture for the Company’s 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 the Company. At March 31, 2003, the Company was in compliance with the requirements of all such financial covenants.

     In conjunction with the revolving credit facilities and senior unsecured notes offering, the Company 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 the Company’s credit rating, the Company would continue to have access to the revolving credit facilities, but at higher rates of interest.

7. Shareholders’ Equity

     During the three months ended March 31, 2003, the Company repurchased 16.6 million shares of its common stock for an aggregate purchase price of $204.6 million. From 1998 through March 31, 2003, an aggregate of 202.3 million shares of common stock have been acquired under the Company’s share repurchase programs for an aggregate purchase price of $2.3 billion, leaving approximately $165.8 million available for share repurchases under the current program authorized by the Company’s Board of Directors. Future share repurchases are subject to limitations contained in the indenture relating to the Company’s senior unsecured notes and credit agreements relating to its two revolving credit facilities.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

8. Income Taxes

     Income taxes provided are based upon the Company’s anticipated annual effective income tax rate.

     In March 2003, the Company entered into a settlement agreement with the Internal Revenue Service (“IRS”) with respect to the tax treatment of certain transactions entered into by the Company in 1997 and 1999, including a transaction that generally had the effect of accelerating projected tax deductions relating to health and welfare benefits. Under the agreement, the Company owes the IRS net aggregate payments of approximately $470 million. An initial net payment of approximately $350 million is due in March 2004, and three subsequent payments of approximately $40 million each are due in March 2005, 2006 and 2007, respectively. As a result of the settlement, the Company has recognized an income tax benefit of $127.5 million from the reduction of previously recorded deferred tax liabilities.

     As of March 31, 2003, the amounts owed to the IRS as part of the settlement are $479.8 million as reflected in the Company’s Unaudited Consolidated Balance Sheet and have been reclassified from deferred tax liabilities into the captions IRS Tax Settlement Payable — Current ($359.8 million) and IRS Tax Settlement Payable — Long-Term ($120.0 million). These payable amounts include interest from the time of the affected tax returns to the settlement date. The Company will record additional interest expense on the IRS Tax Settlement Payables as appropriate until each payment due date. Total additional interest expense over the next four years until March 2007, given the payment terms described above, is estimated to be approximately $40 million based on current interest rates published by the IRS. Therefore, total gross payments to the IRS are expected to be approximately $520 million over the next four years.

     The Company will receive a federal income tax benefit of an estimated $50 million for deductions for the interest payments. Therefore, the net aggregate payments to the IRS are expected to be approximately $470 million.

9. Earnings Per Share

     Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is based on the combined weighted-average number of common shares and common share equivalents outstanding which include, where appropriate, the assumed exercise or conversion of options and warrants.

     The computation of weighted-average common and common equivalent shares used in the calculation of basic and diluted earnings per share is shown below:

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     At March 31, 2003 and 2002, the Company had approximately 51.6 million and 55.2 million stock options outstanding, respectively, of which 13.2 million and 18.2 million, respectively, have been excluded from the computation of diluted earnings per share since they are anti-dilutive.

10. Stock Options

     In December 2002, the Financial Accounting Standards Board (“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 Company adopted the disclosure provisions of SFAS 148, as of December 31, 2002.

     The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for stock-based employee compensation arrangements whereby compensation cost related to stock options is generally not recognized in determining net income. Had compensation cost for the Company’s stock option plans been determined pursuant to SFAS No. 123, the Company’s net income and earnings per share would have decreased accordingly. Using the Black-Scholes option pricing model for all options granted after December 31, 1994, the Company’s pro forma net income, pro forma earnings per share and pro forma weighted average fair value of options granted, with related assumptions, are as follows for the three months ended March 31:

11. Comprehensive Income

     Comprehensive income (loss) is as follows:

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

12. Business Acquisitions

     Businesses acquired through March 31, 2003 were accounted for under the purchase method of accounting and are included in the unaudited consolidated financial statements from the date of acquisition.

     The Company acquired twelve automotive retail franchises during the three months ended March 31, 2003 and eight automotive retail franchises during the three months ended March 31, 2002. The Company paid approximately $43.0 million and $122.1 million, respectively, in cash for these acquisitions. During the three months ended March 31, 2003 and 2002, the Company also paid approximately $2.1 million and $5.6 million, respectively, in deferred purchase price for certain prior year automotive retail acquisitions.

     Purchase price allocations for 2003 are tentative and subject to final adjustment due to their recent closing date. Preliminary purchase price allocations for business combinations for the three months ended March 31 were as follows:

     The Company’s unaudited pro forma consolidated results of operations assuming acquisitions accounted for under the purchase method of accounting had occurred at January 1, 2002 are as follows for the three months ended March 31:

     The unaudited pro forma results of operations are presented for informational purposes only and may not necessarily reflect the future results of operations of the Company or what the results of operations would have been had the Company owned and operated these businesses as of the beginning of each period presented.

13. Finance Underwriting and Asset Securitizations

     In December 2001, the Company decided to exit the business of underwriting retail automobile loans for customers at its dealerships, which it determined was not a part of the Company’s core automotive retail business. The Company continues to provide automotive loans for its customers through unrelated third party finance sources, which historically had provided more than 95% of the auto loans made to its customers.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

     Through 2001, the Company sold installment loan finance receivables in securitization transactions through unrelated financial institutions. When the Company sold receivables in these securitization transactions, it retained interest-only strips, one or more subordinated tranches, servicing rights, and cash reserve accounts, all of which were classified as investments in securitizations. The remaining finance leases, installment loans and investments in securitizations are expected to be substantially collected through 2004. Finance receivables due within one year totaling $26.4 million and $29.9 million at March 31, 2003 and December 31, 2002, respectively, are classified as Receivables, Net in the accompanying Unaudited Consolidated Balance Sheets. Finance receivables due after one year totaling $54.3 million and $63.0 million at March 31, 2003 and December 31, 2002, respectively, are classified as Other Assets, Net in the accompanying Unaudited Consolidated Balance Sheets.

     Finance receivables consist of the following:

     Until December 2001, the Company securitized installment loan receivables through the issuance of asset-backed notes through non-consolidated qualified special purpose entities under a shelf registration statement. The Company provides credit enhancements related to these notes in the form of a 1% over-collateralization, a reserve fund and a third party surety bond. The Company retains responsibility for servicing the loans for which it is paid a servicing fee. The Company in turn has a sub-servicing arrangement with a third party. Included in Other Current Liabilities and Other Liabilities at March 31, 2003, is the current portion of the net servicing liability of $4.3 million and the long-term portion of the net servicing liability of $6.7 million, respectively, relating to these arrangements. The servicing liability relates to loans that have been sold and continue to be serviced by the Company. The servicing liability is the present value, discounted at 7.4%, of the estimated excess of future sub-servicing costs over the future estimated servicing income. Substantially all of the beneficial interests in the debt of the qualified special purpose entities are held by unrelated third parties. The investors and the securitization trusts have no recourse to the Company’s assets for failure of debtors to pay when due, except to the extent of the Company’s remaining investments in securitizations.

     At March 31, 2003, included in investments in securitizations are interest-only strips valued at $30.0 million and cash reserve accounts valued at $13.5 million, which have an aggregate weighted-average life of 1.0 year. The sensitivity of the current fair value of the investments in securitizations at March 31, 2003 to immediate 10 percent and 20 percent unfavorable changes in assumptions are presented in the table below. These sensitivities are hypothetical and should not be considered to be predictive of future performance. As the figures indicate, the change in fair value based on a 10 percent variation in assumptions cannot necessarily be extrapolated because the relationship of the change in assumption to the change in the indicated fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the investments in securitizations is calculated independently from any change in the other assumptions. In reality, changes in one factor may contribute to changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities. Furthermore, the disclosed estimated fair values should not be considered indicative of future earnings on these assets. The current rate assumptions below reflect the expected performance of the total loans securitized as of March 31, 2003.

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AUTONATION, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)