AutoNation 2007 Annual Report Download - page 17

Table of Contents
Goodwill and other intangible assets comprise a significant portion of our total assets. We must test our intangible assets for
impairment at least annually, which may result in a material, non-cash write down of goodwill or franchise rights and could have a
material adverse impact on our results of operations and shareholders’ equity.
Goodwill and indefinite-lived intangibles are subject to impairment assessments at least annually (or more frequently when events or
circumstances indicate that an impairment may have occurred) by applying a fair-value based test. Our principal intangible assets are goodwill
and our rights under our franchise agreements with vehicle manufacturers. The risk of impairment losses may increase to the extent our market
capitalization and earnings decline. Impairment losses may result in a material, non-cash write-down of goodwill or franchise values.
Furthermore, impairment losses could have an adverse impact on our ability to satisfy the financial ratios or other covenants under our debt
agreements and could have a material adverse impact on our results of operations and shareholders’ equity.
Our ability to grow our business may be limited by our ability to acquire automotive stores on favorable terms or at all.
The automotive retail industry is a mature industry. Accordingly, the growth of our automotive retail business since our inception has been
primarily attributable to acquisitions of franchised automotive dealership groups. As described above, manufacturer approval of our proposed
acquisitions generally is subject to our compliance with applicable performance standards (including with respect to matters such as sales
volume, sales effectiveness, and customer satisfaction) or established acquisition limits, particularly regional and local market limits. In
addition, in the current environment, it has been difficult to identify dealership acquisitions in our core markets that meet our return on
investment targets. As a result, we cannot assure you that we will be able to acquire stores selling desirable automotive brands at desirable
locations in our key markets or that any such acquisitions can be completed on favorable terms or at all. Acquisitions involve a number of
risks, many of which are unpredictable and difficult to quantify or assess, including, among other matters, risks relating to known and
unknown liabilities of the acquired business and projected operating performance.
We are subject to interest rate risk in connection with our floorplan notes payable, revolving credit facility, term loan facility, and
floating rate senior unsecured notes that could have a material adverse effect on our profitability.
Most of our debt, including our floorplan notes, is subject to variable interest rates. The variable interest rates under our revolving credit
facility, term loan facility, mortgage facility (variable interest rate through November 20, 2007, fixed interest rate thereafter), floating rate senior
unsecured notes, and certain of our floorplan notes payable all increased in 2006 and 2007. Our variable interest rate debt will fluctuate with
changing market conditions and, accordingly, our interest expense will increase if interest rates rise. In addition, our net inventory carrying cost
(floorplan interest expense net of floorplan assistance that we receive from automotive manufacturers) may increase due to changes in interest
rates, inventory levels, and manufacturer assistance. We cannot assure you that a significant increase in interest rates would not have a material
adverse effect on our business, financial condition, results of operations, or cash flows.
Our revolving credit facility, term loan facility, mortgage facility, and the indenture relating to our senior unsecured notes contain
certain restrictions on our ability to conduct our business.
The indenture relating to our senior unsecured notes and the amended credit agreement relating to our revolving credit facility and term loan
facility contain numerous financial and operating covenants that limit the discretion of our management with respect to various business
matters. These covenants place significant restrictions on, among other things, our ability to incur additional indebtedness, to create liens or
other encumbrances, to make certain payments (including dividends and repurchases of our shares) and investments, and to sell or otherwise
dispose of assets and merge or consolidate with other entities. Our amended credit agreement also requires us to meet certain financial ratios and
tests that may require us to take action to reduce debt or act in a manner contrary to our business objectives. A failure by us to comply with the
obligations contained in our amended credit agreement or the indenture relating to our senior unsecured notes
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