AutoNation 2003 Annual Report Download - page 14

Table of Contents
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. 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. The 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) 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, some of our framework agreements give the manufacturer or distributor the right to acquire, at fair market value, our
automotive stores franchised by that manufacturer in specified circumstances upon the exercise of remedies under the indenture for our
senior unsecured notes and the credit agreements for our two revolving credit facilities.
Our stores are dependent on the programs and operations of vehicle manufacturers and, therefore, any changes to such
programs and operations may adversely affect our store operations and, in turn, affect our business, results of operations,
financial condition, cash flows and prospects.
The success of our stores is dependent on vehicle manufacturers in several key respects. First, we rely exclusively on the various vehicle
manufacturers for our new vehicle inventory. The success of our stores is dependent on a vehicle manufacturer’s ability to produce and
allocate to our stores an attractive, high quality and desirable product mix at the right time in order to satisfy customer demand. Additionally,
manufacturers generally support their franchisees by providing direct financial assistance in various areas, including, among others,
advertising assistance and inventory financing assistance. Beyond funds paid directly to their franchisees, the manufacturers also from time
to time have established various incentive programs designed to spur consumer demand for their vehicles, such as 0% financing offers.
From time to time, manufacturers modify and discontinue these dealer assistance and consumer incentive programs, which could have a
significant adverse effect on our consolidated results of operations and cash flows. The core brands of vehicles that we sell, representing
approximately 98% of the new vehicles that we sold in 2003, are manufactured by Ford, General Motors, DaimlerChrysler, Toyota, Nissan,
Honda and BMW. Any event that has a material adverse effect on our relationships with these vehicle manufacturers or the financial
condition, management or designing, marketing, production or distribution capabilities of these manufacturers or others with whom we hold
franchises, such as general economic downturns or recessions, increases in interest rates, labor strikes, supply shortages, adverse
publicity, product defects, vehicle recall campaigns, litigation, poor product mix or unappealing vehicle design, may result in a material
adverse effect on our business, results of operations, financial condition, cash flows and prospects.
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