AutoNation 2005 Annual Report Download - page 11

Table of Contents
number of well-capitalized competitors that have extensive automobile store managerial experience and strong retail locations and facilities.
According to the National Automotive Dealers Association, Manheim Auctions and reports of various industry analysts, the automotive retail
industry is served by approximately 21,500 franchised automotive dealerships and approximately 45,000 independent used vehicle dealers.
Several other public companies operate numerous automotive retail stores on a national or regional basis. We are subject to competition from
dealers that sell the same brands of new vehicles that we sell and from dealers that sell other brands of new vehicles that we do not
represent in a particular market. Our new vehicle store competitors have franchise agreements with the various vehicle manufacturers and,
as such, generally have access to new vehicles on the same terms as us. Additionally, we are subject to competition in the automotive
retailing business from private market buyers and sellers of used vehicles.
In general, the vehicle manufacturers have designated specific marketing and sales areas within which only one dealer of a given vehicle
brand may operate. Under most of our framework agreements with the vehicle manufacturers, our ability to acquire multiple dealers of a
given brand within a particular market is limited. We are 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.
Insurance And Bonding
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 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
9