AutoNation (AN)

      The accompanying Consolidated Financial Statements include the accounts of AutoNation, Inc. and its subsidiaries. All of the Company’s automotive dealership subsidiaries are indirectly wholly owned by the parent company, AutoNation, Inc. The Company operates in a single industry segment, automotive retailing. All intercompany accounts and transactions have been eliminated.

      Certain reclassifications of amounts previously reported have been made to the accompanying Consolidated Financial Statements in order to maintain consistency and comparability between periods presented. See Note 18, Supplemental Cash Flow Information, of Notes to Consolidated Financial Statements.

      The Company’s parts and service departments provide reconditioning repair work for used vehicles acquired by the used vehicle department and minor preparatory work for new vehicles. The parts and service departments charge the new and used departments as if they were third parties in order to account for total activity performed by that department. In 2004, the Company determined that the revenue and related cost of sales of both new and used vehicles had not been reduced by the intracompany charge for such work. The Company revised amounts previously reported by reducing new and used vehicle revenue and cost of sales by the amount of the intracompany charge. The adjustments have no impact on total gross profit, operating income, income from continuing operations, net income, earnings per share, cash flow, or financial positions for any period or their respective trends.

      The effect of the adjustments was to reduce both revenue and cost of sales for new vehicles by $84 million, $82 million, and $81 million for the years ended December 31, 2004, 2003, and 2002, respectively, and for used vehicles by $195 million, $191 million and $189 million for the same periods, respectively. These revisions do not have a material impact on the amounts for any period or respective trends.

      During the years ended December 31, 2004, 2003 and 2002, the Company had net income (losses) from discontinued operations totaling $37.2 million, $(21.4) million and $1.5 million, respectively. In 2004, the Company recognized a $52.2 million gain included in discontinued operations related to the settlement of various income tax matters related to items previously reported in discontinued operations. In 2004, the Company also recognized a loss totaling $13.9 million, net of income taxes, related to stores that were sold or for which the Company has entered a definitive agreement to sell. Generally, the sale of a store is completed within 60 to 90 days after a definitive agreement is signed. Accordingly, certain amounts reflected in the accompanying Consolidated Balance Sheets as of December 31, 2004 and 2003, have been adjusted to classify the related assets and liabilities as a component of Other Current Assets and Other Current Liabilities for discontinued operations. In addition, the accompanying Consolidated Income Statements and Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002, have been adjusted to classify the results of the stores described above as discontinued operations.

47

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The preparation of financial statements in conformity with generally accepted accounting principles requires management 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. Significant estimates made by the Company in the accompanying Consolidated Financial Statements include allowances for doubtful accounts, accruals for chargebacks against revenue recognized from the sale of finance and insurance products, certain assumptions related to intangible and long-lived assets, and for accruals related to self-insurance programs, certain legal proceedings and estimated tax liabilities.