AutoNation 2006 Annual Report Download - page 10

Table of Contents
also restricted by various state franchise laws from relocating our stores or establishing new stores of a particular brand within any area
that is served by another dealer of the same brand, and we generally need the manufacturer to approve the relocation or grant a new
franchise in order to relocate or establish a store. However, to the extent that a market has multiple dealers of a particular brand, as most
of our key markets do with respect to most vehicle brands 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 from a broad
range of financial institutions in our finance and insurance and after-market products businesses. 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.
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Our business exposes us to the risk of liabilities arising out of our operations. For example, liabilities may arise out of claims of
employees, customers or other 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 store locations. In our case in particular, our operations are concentrated in states and regions in which natural disasters and
severe weather events (such as hurricanes, earthquakes and hail storms) may subject us to substantial risk of property loss and
operational disruption. 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, workers’ compensation and employee
medical benefits. Costs in excess of this retained risk per claim may be 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.
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As of December 31, 2006, we employed approximately 26,000 full time employees, approximately 300 of whom were covered by
collective bargaining agreements. We believe that we have good relations with our employees.
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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 vehicles and light trucks is generally lower
during the winter months than in other seasons, particularly in regions of the United States where stores may be subject to adverse winter
conditions. Accordingly, we expect our
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