AutoNation 2005 Annual Report Download - page 61

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Table of Contents
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
operating leases that are incurred during a construction period to be recognized as rental expense. FSP No. FAS 13-1 is effective for reporting
periods beginning after December 15, 2005 and is not expected to have a material impact on the Company’s consolidated financial
statements.
Other Matters
The Company, acting through its subsidiaries, is the lessee under many real estate leases that provide for the use by the Company’s
subsidiaries of their respective dealership premises. Pursuant to these leases, the Company’s subsidiaries generally agree to indemnify the
lessor and other related parties from certain liabilities arising as a result of the use of the leased premises, including environmental liabilities,
or a breach of the lease by the lessee. Additionally, from time to time, the Company enters into agreements with third parties in connection
with the sale of assets or businesses in which it agrees to indemnify the purchaser or related parties from certain liabilities or costs arising in
connection with the assets or business. Also, in the ordinary course of business in connection with purchases or sales of goods and services,
the Company enters into agreements that may contain indemnification provisions. In the event that an indemnification claim is asserted,
liability would be limited by the terms of the applicable agreement.
From time to time, primarily in connection with dispositions of automotive stores, the Company’s subsidiaries assign or sublet to the
dealership purchaser the subsidiaries’ interests in any real property leases associated with such stores. In general, the Company’s
subsidiaries retain responsibility for the performance of certain obligations under such leases to the extent that the assignee or sublessee
does not perform, whether such performance is required prior to or following the assignment or subletting of the lease. Additionally, the
Company and its subsidiaries generally remain subject to the terms of any guarantees made by the Company and its subsidiaries in
connection with such leases. Although the Company generally has indemnification rights against the assignee or sublessee in the event of
non-performance under these leases, as well as certain defenses, and the Company presently has no reason to believe that it or its
subsidiaries will be called on to perform under any such assigned leases or subleases, the Company estimates that lessee rental payment
obligations during the remaining terms of these leases are approximately $70 million at December 31, 2005. The Company and its
subsidiaries also may be called on to perform other obligations under these leases, such as environmental remediation of the leased
premises or repair of the leased premises upon termination of the lease, although the Company presently has no reason to believe that it or
its subsidiaries will be called on to so perform and such obligations cannot be quantified at this time. The Company’s exposure under these
leases is difficult to estimate and there can be no assurance that any performance of the Company or its subsidiaries required under these
leases would not have a material adverse effect on the Company’s business, financial condition and cash flows.
At December 31, 2005, surety bonds, letters of credit and cash deposits totaled $120.3 million, including $87.6 million of letters of credit.
In the ordinary course of business, the Company is required to post performance and surety bonds, letter of credit, and/or cash deposits as
financial guarantees of the Company’s performance. The Company does not currently provide cash collateral for outstanding letters of credit.
In the ordinary course of business, the Company is subject to numerous laws and regulations, including automotive, environmental,
health and safety and other laws and regulations. The Company does not anticipate that the costs of such compliance will have a material
adverse effect on its business, consolidated results of operations, cash flows or financial condition, although such outcome is possible given
the nature of the Company’s operations and the extensive legal and regulatory framework applicable to its business. The Company does not
have any material known environmental commitments or contingencies.
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