AutoNation 2006 Annual Report Download - page 16

Table of Contents
return on investment targets. As a result, we cannot assure you that we will be able to acquire stores selling desirable automotive brands at
desirable locations in our key markets or that any such acquisitions can be completed on favorable terms or at all. Acquisitions involve a
number of risks, many of which are unpredictable and difficult to quantify or assess, including, among other matters, risks relating to
known and unknown liabilities of the acquired business and projected operating performance.
We are subject to interest rate risk in connection with our floorplan notes payable, revolving credit facility, term loan facility,
mortgage facility and floating rate senior unsecured notes that could have a material adverse effect on our profitability.
Most of our debt, including our floor plan notes, is subject to variable interest rates. The variable interest rates under our revolving
credit facility, term loan facility, mortgage facility, floating rate senior unsecured notes and certain of our floorplan notes payable all
increased in 2006. Our variable interest rate debt will fluctuate with changing market conditions and, accordingly, our interest expense
will increase if interest rates rise. In addition, our net inventory carrying cost (floorplan interest expense net of floorplan assistance that we
receive from automotive manufacturers) may increase due to changes in interest rates, inventory levels and manufacturer assistance. We
cannot assure you that a significant increase in interest rates would not have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Our revolving credit facility, term loan facility, mortgage facility and the indenture relating to our new senior unsecured notes
contain certain restrictions on our ability to conduct our business.
The indenture relating to our new senior unsecured notes and the amended credit agreement relating to our revolving credit facility
and term loan facility contain numerous financial and operating covenants that limit the discretion of our management with respect to
various business matters. These covenants place significant restrictions on, among other things, our ability to incur additional
indebtedness, to create liens or other encumbrances, to make certain payments (including dividends and repurchases of our shares) and
investments, and to sell or otherwise dispose of assets and merge or consolidate with other entities. Our amended credit agreement also
requires us to meet certain financial ratios and tests that may require us to take action to reduce debt or act in a manner contrary to our
business objectives. A failure by us to comply with the obligations contained in our amended credit agreement or the indenture relating to
our new senior unsecured notes could result in an event of default under our amended credit agreement or the indentures, which could
permit acceleration of the related debt and acceleration of debt under other instruments that may contain cross-acceleration or cross-default
provisions. If any debt is accelerated, our liquid assets may not be sufficient to repay in full such indebtedness and our other
indebtedness. In addition, we have granted certain manufacturers the right to acquire, at fair market value, our automotive stores
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.
Our substantial indebtedness could adversely affect our financial condition and operations and prevent us from fulfilling our
debt service obligations. We may still be able to incur more debt, intensifying these risks.
As of December 31, 2006, we had approximately $1.6 billion of total indebtedness (including amounts outstanding under our
mortgage facility and capital leases but excluding floorplan financing), and our subsidiaries also had $2.3 billion of floorplan financing.
In addition, we had the ability to borrow $413 million additional indebtedness under our revolving credit facility. Our substantial
indebtedness could have important consequences. For example:
• we may have difficulty satisfying our debt service obligations and, if we fail to comply with these requirements, an event of
default could result;
• we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness,
thereby reducing the availability of cash flow for working capital, capital expenditures, acquisitions and other general corporate
activities;
• covenants relating to our indebtedness may limit our ability to obtain additional financing for working capital, capital
expenditures, acquisitions and other general corporate activities;
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