AutoNation 2001 Annual Report Download - page 15

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as compared to our expectations could cause our actual earnings results to
differ from our projected earnings results. Our sales of used vehicles, finance
and insurance products, vehicle service and parts and collision repair services
also may be subject to variation as a result of the foregoing factors, although
we do not believe such variation is likely to be as significant as with respect
to new vehicle sales.
ANC RENTAL CORPORATION RECENTLY FILED FOR CHAPTER 11 BANKRUPTCY PROTECTION.
ACCORDINGLY, WE HAVE BEEN CALLED ON TO PERFORM UNDER CERTAIN GUARANTEES WITH
RESPECT TO ANC RENTAL, WE MAY BE CALLED ON TO PERFORM UNDER ADDITIONAL CREDIT
ENHANCEMENTS AND GUARANTEES IN THE FUTURE, AND WE MAY HAVE CLAIMS AGAINST ANC
RENTAL THAT MAY BE DISCHARGED IN BANKRUPTCY, ANY OF WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION, CASH FLOWS AND PROSPECTS.
In connection with the spin-off of ANC Rental Corporation and its
subsidiaries ("ANC Rental") in June 2000, we agreed to provide certain
guarantees and credit enhancements with respect to financial and other
performance obligations of ANC Rental, including acting as a guarantor under
certain motor vehicle and real property leases between ANC Rental and Mitsubishi
Motor Sales of America, Inc. ("Mitsubishi") and acting
11
as an indemnitor with respect to certain surety bonds issued on ANC Rental's
behalf. We are also a party to certain agreements with ANC Rental (the "ANC
Rental Agreements"), including a separation and distribution agreement, a
reimbursement agreement and a tax sharing agreement, pursuant to which both ANC
Rental and we have certain obligations. On November 13, 2001, ANC Rental filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code with the U.S. Bankruptcy Court in Wilmington, Delaware. In connection with
ANC Rental's bankruptcy, we were called on to perform under nine of the twelve
real property leases between ANC Rental and Mitsubishi for which we provided
guarantees. As a result, we agreed to assume these real property leases, which
expire in 2017, in order to control and attempt to mitigate our exposure
relating thereto. In the fourth quarter of 2001, we incurred a pre-tax charge of
$20.0 million included in net income from discontinued operations to reflect our
assumption of the nine leases with Mitsubishi and certain other costs that we
expect to incur as a result of ANC Rental's bankruptcy. We continue to guarantee
the remaining three leases with Mitsubishi until their expiration in 2017, and
we remain subject to various other ANC Rental obligations. ANC Rental has been
accounted for as a discontinued operation and, accordingly, we expect that
additional charges recorded by us pursuant to the foregoing credit enhancements
and guarantees or with respect to claims under the ANC Rental Agreements, if
any, would not impact our reported results from continuing operations.
We have reached an agreement with Mitsubishi pursuant to which our
aggregate financial exposure relating to motor vehicles leased by ANC Rental
from Mitsubishi is capped at $10.0 million. Although we believe our financial
exposure under the agreement will likely decrease significantly in 2002, we
could have potential exposure under the agreement for up to five to ten years.
Our indemnification obligations with respect to the surety bonds issued on
behalf of ANC Rental are capped at $29.5 million in the aggregate. We could have
potential exposure under the indemnification obligations for approximately five
years. Due to the bankruptcy of ANC Rental, obligations of ANC Rental to us
under the terms of the ANC Rental Agreements may be extinguished or our claims
against ANC Rental under such agreements may be unenforceable. These claims
could include reimbursement obligations that ANC Rental may have to us in
connection with payments made by us with respect to the foregoing credit
enhancements and guarantees, as well as indemnification rights with respect to
any payments that we make to the Internal Revenue Service as a result of audit
adjustments in our consolidated federal income tax returns relating to ANC
Rental's automotive rental businesses prior to the spin-off. Such audit
adjustments, if any, would likely be resolved in the next three to five years.
We estimate that, based on our assessment of the risks involved in each matter
and excluding the liabilities associated with the $20.0 million charge we
incurred in the fourth quarter of 2001, our remaining potential pre-tax
financial exposure related to ANC Rental may be in the range of $25.0 million to