AutoNation 2006 Annual Report Download - page 14

Table of Contents
dealer assistance and consumer incentive and marketing programs, which could have a significant adverse effect on our new vehicle and
aftermarket product sales, consolidated results of operations and cash flows.
Natural disasters and adverse weather events can disrupt our business.
Our stores are concentrated in states and regions in the United States, including primarily Florida, Texas and California, in which
actual or threatened natural disasters and severe weather events (such as hurricanes, earthquakes and hail storms) may disrupt our store
operations, which may adversely impact our business, results of operations, financial condition and cash flows. In addition to business
interruption, the automotive retailing business is subject to substantial risk of property loss due to the significant concentration of
property values at store locations. 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.
We are subject to restrictions imposed by, and significant influence from, vehicle manufacturers that may adversely impact our
business, financial condition, results of operations, cash flows and prospects, including our ability to acquire additional stores.
Vehicle manufacturers and distributors with whom we hold franchises have significant influence over the operations of our stores.
The terms and conditions of our framework, franchise and related agreements and the manufacturers’ interests and objectives may, in
certain circumstances, conflict with our interests and objectives. For example, manufacturers can set performance standards with respect
to sales volume, sales effectiveness and customer satisfaction, and can influence our ability to acquire additional stores, the naming and
marketing of our stores, the operations of our e-commerce sites, our selection of store management, the condition of our store facilities,
product stocking and advertising spending levels, and the level at which we capitalize our stores. Manufacturers may also have certain
rights to restrict our ability to provide guaranties of our operating companies, pledges of the capital stock of our subsidiaries and liens on
our assets, which could adversely impact our ability to obtain financing for our business and operations on favorable terms or at desired
levels. From time to time, we are precluded under agreements with certain manufacturers from acquiring additional franchises, or subject
to other adverse actions, to the extent we are not meeting certain performance criteria at our existing stores (with respect to matters such as
sales volume, sales effectiveness and customer satisfaction) until our performance improves in accordance with the agreements, subject to
applicable state franchise laws.
Manufacturers also have the right to establish new franchises or relocate existing franchises, subject to applicable state franchise
laws. The establishment or relocation of franchises in our markets could have a material adverse effect on the financial condition, results
of operations, cash flows and prospects of our stores in the market in which the franchise action is taken.
Our framework, franchise and related agreements also grant the manufacturer the right to terminate or compel us to sell our franchise
for a variety of reasons (including uncured performance deficiencies, any unapproved change of ownership or management or any
unapproved transfer of franchise rights or impairment of financial standing or failure to meet capital requirements), subject to state laws.
From time to time, certain major manufacturers assert sales and customer satisfaction performance deficiencies under the terms of our
framework and franchise agreements at a limited number of our stores. While we believe that we will be able to renew all of our franchise
agreements, we cannot guarantee that all of our franchise agreements will be renewed or that the terms of the renewals will be favorable to
us. We cannot assure you that our stores will be able to comply with manufacturers’ sales, customer satisfaction and other performance
requirements in the future, which may affect our ability to acquire new stores or renew our franchise agreements, or subject us to other
adverse actions, including termination or compelled sale of a franchise, any of which could have a material adverse effect on our financial
condition, results of operations, cash flows and prospects.
In addition, we have granted certain manufacturers the right to acquire, at fair market value, our automotive dealerships franchised
by that manufacturer in specified circumstances in the event of our default under the indenture for our new senior unsecured notes or the
amended credit agreement for our revolving credit facility and term loan facility.
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