AutoNation 2005 Annual Report Download - page 9

Table of Contents
contain provisions relating to our management, operation, advertising and marketing, and acquisition and ownership structure of automotive
stores franchised by such manufacturers. These agreements contain certain requirements pertaining to our operating performance (with
respect to matters such as sales volume, sales effectiveness and customer satisfaction), which, if we do not satisfy, adversely impact our
ability to make further acquisitions of such manufacturer’s stores or could result in us being compelled to take certain actions, such as
divesting a significantly underperforming store, subject to applicable state franchise laws. Additionally, these agreements set limits
(nationally, regionally and in local markets) on the number of stores that we may acquire of the particular manufacturer and contain certain
restrictions on our ability to name and brand our stores. Some of these framework agreements give the manufacturer or distributor the right
to acquire at fair market value, or the right to compel us to sell, the automotive stores franchised by that manufacturer or distributor under
specified circumstances in the event of a change in control of our company (generally including certain material changes in the composition
of our board of directors during a specified time period, the acquisition of 20% or more of the voting stock of our company by another vehicle
manufacturer or distributor or the acquisition of 50% or more of our voting stock by a person, entity or group not affiliated with a vehicle
manufacturer or distributor) or other extraordinary corporate transactions such as a merger or sale of all of our assets. In addition, we have
granted certain manufacturers the right to acquire, at fair market value, our automotive dealerships franchised by that manufacturer in
specified circumstances in the event of our default under the indenture for our senior unsecured notes due 2008 or the credit agreement for
our revolving credit facility.
We operate each of our new vehicle stores under a franchise agreement with a vehicle manufacturer or distributor. The franchise
agreements grant the franchised automotive store a non-exclusive right to sell the manufacturer or distributor’s brand of vehicles and offer
related parts and service within a specified market area. These franchise agreements grant our stores the right to use the manufacturer or
distributor’s trademarks in connection with their operations, and they also impose numerous operational requirements and restrictions
relating to inventory levels, working capital levels, the sales process, marketing and branding, showroom and service facilities and signage,
personnel, changes in management and monthly financial reporting, among other things. The contractual terms of our stores’ franchise
agreements provide for various durations, ranging from one year to no expiration date, and in certain cases manufacturers have undertaken
to renew such franchises upon expiration so long as the store is in compliance with the terms of the agreement. We generally expect our
franchise agreements to survive for the foreseeable future and, when the agreements do not have indefinite terms, anticipate routine
renewals of the agreements without substantial cost or modification. Our stores’ franchise agreements provide for termination of the
agreement by the manufacturer or non-renewal for a variety of causes (including performance deficiencies in such areas as sales volume,
sales effectiveness and customer satisfaction). However, in general, the states in which we operate have automotive dealership franchise
laws that provide that, notwithstanding the terms of any franchise agreement, it is unlawful for a manufacturer to terminate or not renew a
franchise unless “good cause” exists. It generally is difficult for a manufacturer to terminate, or not renew, a franchise under these laws,
which were designed to protect dealers. In addition, in our experience and historically in the automotive retail industry, dealership franchise
agreements are rarely involuntarily terminated or not renewed by the manufacturer. From time to time, certain manufacturers assert sales
and customer satisfaction performance deficiencies under the terms of our framework and franchise agreements at a limited number of our
stores. We generally work with these manufacturers to address the asserted performance issues. For a further discussion, please refer to the
risk factor captioned “We are subject to restrictions imposed by, and significant influence from, vehicle manufacturers that may
adversely impact our business, financial condition, results of operations, cash flows and prospects, including our ability to acquire
additional stores” in the “Risk Factors” section of this document.
Regulations
Automotive and Other Laws and Regulations
We operate in a highly regulated industry. A number of state and federal laws and regulations affect our business. In every state in which
we operate, we must obtain various licenses in order to operate our businesses, including dealer, sales and finance and insurance licenses
issued by state regulatory authorities.
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