SCHEDULE 14A

(Rule 14a-101)

 

INFORMATION REQUIRED IN PROXY STATEMENT

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

 

Filed by the Registrant x

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

AutoNation, Inc.

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

o  Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 5, 2007

 

Dear Fellow AutoNation Stockholder:

 

We are pleased to invite you to attend the 2007 Annual Meeting of Stockholders of AutoNation, Inc. to be held at 9:00 a.m. Eastern Time on Wednesday, May 9, 2007, at the AutoNation Tower, located at 110 S.E. 6^th Street, Fort Lauderdale, Florida 33301.

 

The accompanying Notice of Annual Meeting and Proxy Statement describe the specific matters to be acted upon at the Annual Meeting. We also will report on our progress and provide an opportunity for you to ask questions of general interest.

 

Whether you own a few or many shares of AutoNation stock and whether or not you plan to attend the Annual Meeting in person, it is important that your shares be represented at the Annual Meeting. We ask that you please cast your vote as soon as possible. The Board of Directors recommends that stockholders vote (i) FOR the election of nominees for director, ratification of the appointment of KPMG LLP as our independent auditor, approval of the AutoNation, Inc. 2007 Non-Employee Director Stock Option Plan, and approval of the AutoNation, Inc. Senior Executive Incentive Bonus Plan and (ii) AGAINST the stockholder proposal, each as described in the accompanying Proxy Statement.

 

We look forward to seeing you on May 9, 2007 in Fort Lauderdale. Thank you.

 

Sincerely,

 

Mike Jackson

Chairman of the Board and

Chief Executive Officer

AutoNation, Inc.
AutoNation Tower
110 S.E. Sixth Street
Fort Lauderdale, Florida 33301

 

NOTICE OF THE 2007 ANNUAL MEETING OF STOCKHOLDERS

 

TO THE STOCKHOLDERS OF AUTONATION, INC.:

 

The 2007 Annual Meeting of Stockholders of AutoNation, Inc. will be held at the AutoNation Tower, located at 110 S.E. 6^th Street, Fort Lauderdale, Florida 33301 on Wednesday, May 9, 2007 at 9:00 a.m. Eastern Time. At the Annual Meeting, we will consider and vote upon the following matters:

 

 

Only stockholders of record as of 5:00 p.m. Eastern Time on March 29, 2007, the record date, are entitled to receive notice of the Annual Meeting and to vote at the Annual Meeting or any adjournments or postponements of the Annual Meeting.

 

We cordially invite you to attend the Annual Meeting in person. Even if you plan to attend the Annual Meeting, we ask that you please cast your vote as soon as possible. You may revoke your proxy and reclaim your right to vote at any time prior to its use.

 

Either an admission ticket or proof of ownership of AutoNation stock, as well as a form of personal photo identification, must be presented in order to be admitted to the Annual Meeting. If you are a stockholder of record, your admission ticket is attached to your proxy card. If your shares are held in the name of a bank, broker or other holder of record, you must bring a brokerage statement or other proof of ownership with you to the Annual Meeting, or you may request an admission ticket in advance. Please see the response to the question “Do I need a ticket to attend the Annual Meeting?” for further details.

 

By Order of the Board of Directors,

 

 

Jonathan P. Ferrando

Executive Vice President,

General Counsel and Secretary

 

April 5, 2007

 

 

 

 

 

TABLE OF CONTENTS

 

AutoNation, Inc.
AutoNation Tower
110 S.E. Sixth Street
Fort Lauderdale, Florida 33301

 

PROXY STATEMENT

 

This Proxy Statement contains information relating to the solicitation of proxies by the Board of Directors of AutoNation, Inc. (“AutoNation” or the “Company”) for use at our 2007 Annual Meeting of Stockholders. Our Annual Meeting will be held at the AutoNation Tower, located at 110 S.E. 6th Street, Fort Lauderdale, Florida 33301 on Wednesday, May 9, 2007 at 9:00 a.m. Eastern Time.

 

This Proxy Statement, the Notice of the 2007 Annual Meeting, the proxy card and our 2006 Annual Report to Stockholders were first mailed to stockholders on or about April 5, 2007.

 

What is the purpose of our Annual Meeting?

 

The purpose of our Annual Meeting is to:

 

 

In addition, senior management will report on our business and financial performance and respond to your questions.

 

Do I need a ticket to attend the Annual Meeting?

 

Yes. You will need an admission ticket or proof of ownership of AutoNation stock as of March 29, 2007 to enter the Annual Meeting. If you are a registered stockholder and hold your shares directly in your own name, an admission ticket is attached to your proxy card. If you plan to attend the Annual Meeting, please vote your proxy, but keep your admission ticket and bring it with you to the Annual Meeting. If your shares are held in the name of a brokerage firm, bank or other holder of record and you plan to attend the Annual Meeting, you must present proof of your ownership of AutoNation stock as of March 29, 2007, such as a bank or brokerage account statement, to be admitted to the Annual Meeting. Stockholders also must present a form of personal photo identification in order to be admitted to the Annual Meeting.

 

Who is entitled to vote at the Annual Meeting?

 

Only our stockholders as of 5:00 p.m. Eastern Time on March 29, 2007, the record date, are entitled to receive notice of the Annual Meeting and to vote at the Annual Meeting, or any postponements or adjournments of the Annual Meeting.

 

What are the voting rights of AutoNation stockholders?

 

Each stockholder is entitled to one vote on each matter properly presented at the Annual Meeting for each share of common stock owned by that stockholder on the record date. Therefore, if you owned 100 shares of common stock as of 5:00 p.m. Eastern Time on March 29, 2007, you can cast 100 votes for each matter properly presented at the Annual Meeting. As of 5:00 p.m. Eastern Time on March 29, 2007, there were 209,802,010 shares of AutoNation common stock issued and outstanding and entitled to vote at the Annual Meeting.

 

What constitutes a quorum?

 

In order for us to conduct business at our Annual Meeting, we must have a quorum of at least 104,901,006 shares of common stock represented at the Annual Meeting, in person or by proxy, and entitled to vote. If you submit a properly executed proxy or vote instruction card or properly cast your vote by telephone or via the Internet, your shares will be considered part of the quorum, even if you abstain from voting or withhold authority to vote as to a particular proposal. We also will consider as present for purposes of determining whether a quorum exists any shares represented by “broker non-votes” as to a particular proposal.

 

What are “broker non-votes”?

 

“Broker non-votes” occur when shares held by a brokerage firm are not voted with respect to a proposal because the firm has not received voting instructions from the stockholder and the firm does not have the authority to vote the shares at its discretion. Under the rules of The New York Stock Exchange (“NYSE”), brokerage firms may have the authority to vote their customers’ shares on certain routine matters for which they do not receive voting instructions, such as the election of our Board’s nominees for director and the ratification of the appointment of KPMG LLP as our independent auditor. However, if other matters are properly brought before the Annual Meeting and they are not considered routine under the applicable NYSE rules, such as our proposals to approve the AutoNation, Inc. 2007 Non-Employee Director Stock Option Plan and the AutoNation, Inc. Senior Executive Incentive Bonus Plan and the stockholder proposal on stockholder rights to call special meetings, shares held by brokerage firms will not be voted on such non-routine matters by the brokerage firms unless they have received voting instructions and, accordingly, any such shares will be “broker non-votes” and will not be counted with respect to such matters.

 

Will my shares be voted if I do not provide my proxy?

 

If your shares are held in the name of a brokerage firm, they may be voted by the brokerage firm in certain circumstances (as described above) even if you do not give the brokerage firm specific voting instructions. If you are a registered stockholder and hold your shares directly in your own name, your shares will not be voted unless you provide a proxy or fill out a written ballot in person at the Annual Meeting. If you hold shares through the AutoNation 401(k) Plan, your shares will be voted as described below even if you do not provide voting instructions.

 

How do I vote my 401(k) shares?

 

If you participate in the AutoNation 401(k) Plan, you may vote the number of shares credited to your account as of 5:00 p.m. Eastern Time on March 29, 2007, by instructing our plan trustee, Merrill Lynch & Co., how

to vote your shares pursuant to the instruction card being mailed with this Proxy Statement to plan participants. If you do not provide clear voting instructions, Merrill Lynch will vote the shares in your account in the same proportion that it votes shares for which it received valid and timely instructions.

 

How do I vote?

 

You can vote in any of the following ways. Please check your proxy card or contact your broker to determine whether you will be able to vote by telephone or via the Internet.

 

 

 

 

 

 

 

 

 

               To vote in person if you hold in “street name:”

 

 

Can I change my vote after I have voted?

 

Yes. If you voted by proxy card, vote instruction card or telephone or via the Internet, you can change your vote at any time before the proxy is exercised. To change your vote:

 

 

 

What vote is required to elect directors or take other action at the Annual Meeting?

 

In order to be approved, any proposal that comes before the Annual Meeting, including the proposal to elect directors, the proposal to ratify the appointment of our independent auditor, the proposal to approve the AutoNation, Inc. 2007 Non-Employee Director Stock Option Plan and AutoNation, Inc. Senior Executive Incentive Bonus Plan and the stockholder proposal, must receive the affirmative vote of a majority of the shares present and entitled to vote at the Annual Meeting with respect to such proposal. If you mark your proxy or vote instruction card “withhold” with respect to any director or “abstain” with respect to any other proposal, you will effectively be voting against the election of such director or the approval of such proposal. If your shares are not voted by your brokerage firm or nominee with respect to a particular proposal, or if you direct your proxy holder not to vote all or a portion of your shares with respect to a particular proposal, such shares will not be considered to be present at the Annual Meeting for purposes of considering such proposal and will not be counted.

 

How does the Board recommend I vote on the proposals?

 

The Board recommends that you vote:

 

 

How will my proxy holders vote?

 

The enclosed proxy card designates Mike Jackson, our Chairman of the Board and Chief Executive Officer, and Jonathan P. Ferrando, our Executive Vice President, General Counsel and Secretary, or their duly named successors, to hold your proxy and vote your shares. With respect to the election of directors, Messrs. Jackson and Ferrando will vote in accordance with the instructions set forth on your duly executed proxy or vote instruction card or as directed by you over the telephone or via the Internet. If you sign and return your proxy card but do not provide instructions or if your instructions are unclear, Messrs. Jackson and Ferrando intend to vote FOR each of the nominees for director, FOR the ratification of the appointment of our independent auditor, FOR the approval of the AutoNation, Inc. 2007 Non-Employee Director Stock Option Plan; FOR the approval of the AutoNation, Inc. Senior Executive Incentive Bonus Plan; and AGAINST the stockholder proposal to amend AutoNation’s bylaws to provide certain stockholders the right to call a special meeting.

 

With respect to any other proposal that properly comes before the Annual Meeting, Messrs. Jackson and Ferrando will vote as recommended by our Board of Directors or, if no recommendation is given, in their own discretion.

 

How much did this proxy solicitation cost?

 

We engaged Innisfree M&A Incorporated to assist with the solicitation of proxies for a fee not to exceed $15,000, plus reimbursement for out-of-pocket expenses. In addition to soliciting proxies by mail, certain of our employees also may solicit proxies personally, by telephone or otherwise, but such persons will not receive any special compensation for such services. As is customary, we will reimburse brokerage firms, banks, fiduciaries, voting trustees and other nominees for forwarding the soliciting material to each beneficial owner of stock held of record by them. We will pay the entire cost of the solicitation.

 

Can I receive materials relating to future AutoNation Annual Meetings via the Internet?

 

Yes. In an effort to reduce our proxy solicitation costs, you may receive future Annual Meeting materials via the Internet. We encourage you to help us reduce our costs by electing to receive our Annual Meeting materials via the Internet. If you are a registered stockholder, log on to http://www.computershare.com/us/sc/auin in order to register to receive our Annual Meeting materials via the Internet. If you hold AutoNation stock through a brokerage firm, bank or other nominee, you may be able to register to receive future Annual Meeting materials via the Internet by voting online and following the instructions provided. Alternatively, you should call your broker for instructions on how to receive our future Annual Meeting materials via the Internet.

 

If you elect to receive our future Annual Meeting materials via the Internet, you will receive a proxy card in the mail or, if you choose, an e-mail notification alerting you when our Annual Meeting materials are available online. Our future proxy statements and annual reports will be available online on the same day as such materials are filed with the Securities and Exchange Commission. You may revoke at any time your election to receive our future Annual Meeting materials via the Internet.

 

This Proxy Statement and our 2006 Annual Report to Stockholders also are available on AutoNation’s corporate website, which you can visit by logging on to http://corp.autonation.com/investors/.  

 

Can different stockholders sharing the same address receive only one Annual Report and Proxy Statement?

 

Yes. The Securities and Exchange Commission permits companies and intermediaries, such as a brokerage firm or a bank, to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more security holders sharing the same address by delivering only one proxy statement and annual report to that address. This process, which is commonly referred to as “householding,” can effectively reduce our printing and postage costs. Under householding, each stockholder would continue to receive a separate proxy card or vote instruction card.

 

Certain of our stockholders whose shares are held in street name and who have consented to householding will receive only one set of our Annual Meeting materials per household. If your household received a single set of our Annual Meeting materials, you can request to receive additional copies of these materials by calling or writing your brokerage firm, bank or other nominee. If you own your shares in street name, you can request householding by calling or writing your brokerage firm, bank or other nominee.

 

Our Board of Directors currently consists of ten members. Each of our current directors was elected by our stockholders at the Annual Meeting of Stockholders in 2006, except for Carlos A. Migoya and Robert R. Grusky, who were appointed to the Board effective June 22, 2006, and Kim C. Goodman, who was appointed to our Board effective February 5, 2007, respectively, by our Board of Directors upon the recommendation of our Nominating Subcommittee, and are standing for election for the first time. A third party search firm engaged by the Nominating Subcommittee to identify potential nominees for director recommended to the Nominating Subcommittee Ms. Goodman as a nominee for director. Messrs. Grusky and Migoya were recommended to the Nominating Subcommittee as nominees for director by an independent director and executive officer, respectively. Our Board, upon the recommendation of the Nominating Subcommittee, has nominated the eight persons listed below to stand for election for a new term expiring at the Annual Meeting of Stockholders in 2008 or until their successors are duly elected and qualified. Each of the nominees listed below is currently serving as a director. Detailed biographical and other information concerning each nominee for director is provided on pages 7 and 8 of this Proxy Statement. Each nominee is willing and able to serve as a director of AutoNation. As previously announced, Edward S. Lampert, who has served as one of our Directors since January 2002, has declined to stand for re-election in order to devote more time to his duties as Chairman and Chief Executive Officer of ESL Investments, Inc. and Chairman of Sears Holdings Corporation. Additionally, as previously announced, Irene Rosenfeld, who has served as one of our Directors since March 1999, has declined to stand for re-election in order to focus her attention on her duties as Chairman and Chief Executive Officer of Kraft Foods Inc.

 

 

 

 

 

Mike Jackson

 

Mike Jackson, age 58, has served as our Chairman of the Board since January 1, 2003 and as our Chief Executive Officer and Director since September 1999. From October 1998 until September 1999, Mr. Jackson served as Chief Executive Officer of Mercedes-Benz USA, LLC, a North American operating unit of DaimlerChrysler AG, a multinational automotive manufacturing company. From April 1997 until September 1999, Mr. Jackson also served as President of Mercedes-Benz USA. From July 1990 until March 1997, Mr. Jackson served in various capacities at Mercedes-Benz USA, including as Executive Vice President immediately prior to his appointment as President of Mercedes-Benz USA. Mr. Jackson was also the managing partner from March 1979 to July 1990 of Euro Motorcars of Bethesda, Maryland, a regional group that owned and operated eleven automotive dealership franchises, including Mercedes-Benz and other brands of automobiles.

 

Robert J. Brown

 

Mr. Brown, age 72, has served as one of our directors since May 1997. Mr. Brown has served as Chairman and Chief Executive Officer of B&C Associates, Inc., a management consulting, marketing research and public relations firm, since 1973. Mr. Brown also serves as a director of Wachovia Corporation, a commercial and retail bank, and Sonoco Products Company, a manufacturer of industrial and consumer packaging products.

 

Rick L. Burdick

 

Mr. Burdick, age 55, has served as one of our directors since May 1991. Since 1988, Mr. Burdick has been a partner in Akin, Gump, Strauss, Hauer & Feld, L.L.P., a global full service law firm. Mr. Burdick serves as a member of the firm’s Executive Committee and Partner-In-Charge of the Washington, D.C. office. Mr. Burdick also serves as non-executive Vice Chairman and Director of CBIZ, Inc. (formerly, Century Business Services, Inc.), a provider of outsourced business services to small and medium-sized companies in the United States.

 

William C. Crowley

 

Mr. Crowley, age 49, has served as one of our directors since January 2002. From March 2005, Mr. Crowley has served as a director of Sears Holdings Corporation, the nation’s third largest broad-line retailer. Mr. Crowley was appointed interim Chief Financial Officer of Sears Holdings Corporation in January 2007 and has served as its Chief Financial Officer from March 2005 until September 2006. From May 2003 until March 2005, Mr. Crowley served as director and Senior Vice President, Finance of Kmart Holding Corporation. Since January 1999, Mr. Crowley has been President and Chief Operating Officer of ESL Investments, Inc., a private investment firm. Prior to joining ESL Investments, Mr. Crowley was a Managing Director at Goldman, Sachs & Co., a leading global investment banking and securities firm.

 

Kim C. Goodman

 

Ms. Goodman, age 41, has served as one of our directors since February 2007. Ms. Goodman has served as Vice President of Software and Peripherals of Dell Inc., a worldwide provider of information technology products and services, since 2005. From 2000 until 2005, Ms. Goodman served in various capacities at Dell Inc., including as Vice President of Public Sector Marketing and Transactional Sales, Vice President of Dell Networking and Vice President of Business Development. Prior to joining Dell Inc., Ms. Goodman was a Partner and Vice President of Bain & Company, Inc., a strategic consulting firm.

 

Robert R. Grusky

 

Mr. Grusky, age 49, has served as one of our directors since June 2006. In 2000, Mr. Grusky founded Hope Capital Management, LLC, an investment firm for which he serves as Managing Member. He co-founded New Mountain Capital, LLC, a private equity firm, in 2000 and was a Principal, Managing Director and Member of New Mountain Capital from 2000 to 2005 and has been a Senior Advisor since then. From 1998 to 2000, Mr. Grusky served as President of RSL Investments Corporation, the primary investment vehicle for the Hon. Ronald S. Lauder. Prior thereto, Mr. Grusky also served in a variety of capacities at Goldman, Sachs & Co. in its Mergers & Acquisitions Department and Principal Investment Area. Mr. Grusky is a director of Strayer Education, Inc., an education services company, and National Medical Health Card Systems, Inc., a national independent pharmacy benefits management company.

 

Michael E. Maroone

 

Mr. Maroone, age 53, has served as one of our directors since July 2005 and as our President and Chief Operating Officer since August 1999. Following our acquisition of the Maroone Automotive Group in January 1997, Mr. Maroone served as President of our New Vehicle Dealer Division. In January 1998, Mr. Maroone was named President of our Automotive Retail Group with responsibility for our new and used vehicle operations. Prior to joining our Company, Mr. Maroone was President and Chief Executive Officer of the Maroone Automotive Group, one of the country’s largest privately-held automotive retail groups prior to its acquisition by us.

 

Carlos A. Migoya

 

Mr. Migoya, age 56, has served as one of our directors since June 2006. Since June 2006, Mr. Migoya has served as State CEO for the Atlantic Region of Wachovia Corporation, a financial services company. In this position, Mr. Migoya has responsibility for Wachovia’s general banking businesses in New Jersey, Connecticut and New York. Since 1989, Mr. Migoya served as Regional President for Wachovia Bank, Florida, a division of Wachovia Corporation, with responsibility for Wachovia’s general banking businesses in Dade and Monroe Counties, Florida. Mr. Migoya has more than 32 years experience in banking.

 

Our business and affairs are managed under the direction of our Board of Directors, which is AutoNation’s ultimate decision-making body except with respect to those matters reserved to our stockholders. Our Board’s mission is to maximize long-term stockholder value. Our Board establishes our overall corporate policies, selects and evaluates our senior management team, which is charged with the conduct of our business, and acts as an advisor and counselor to senior management. Our Board also oversees AutoNation’s business strategy and the performance of management in executing our business strategy and managing our day-to-day operations.

 

Does AutoNation have corporate governance principles?

 

Yes. Our Board is committed to sound corporate governance principles and practices. Our Board’s core principles of corporate governance are set forth in the AutoNation, Inc. Corporate Governance Guidelines (the “Guidelines”), which were adopted by the Board in March 2003 and most recently amended as of February 7, 2006. A copy of the Guidelines is available on AutoNation’s corporate website at http://corp.autonation.com/investors/. You also may obtain a printed copy of the Guidelines by sending a written request to: Investor Relations Department, AutoNation, Inc., 110 S.E. 6th Street, Fort Lauderdale, Florida 33301. The Guidelines, which exceed NYSE corporate governance listing standard requirements, serve as a framework within which our Board conducts its operations. The Corporate Governance Committee of our Board has been charged with periodically reviewing the Guidelines and recommending to our Board appropriate changes in light of applicable laws and regulations, the governance standards identified by leading governance authorities and our Company’s evolving needs.

 

Do we have a policy regarding our Board’s attendance at our Annual Meeting of stockholders?

 

Yes. Our directors are expected to attend our Annual Meeting of stockholders. A director who is unable to attend our Annual Meeting is expected to notify the Chairman of the Board in advance of the Annual Meeting. Six of our seven then current directors attended the 2006 Annual Meeting of Stockholders. One director could not attend the 2006 Annual Meeting of Stockholders due to a scheduling conflict.

 

How many times did our Board meet during 2006?

 

Our Board of Directors held nine meetings and took two actions by unanimous written consent during 2006. During 2006, each of our incumbent directors attended at least 75% of the total number of meetings of our Board of Directors and any Board committee on which he or she served, except for Ms. Rosenfeld who attended 73% of the meetings.

 

What Committees has our Board established?

 

Our Board of Directors has established three separately designated standing committees to assist it in discharging its responsibilities: the Audit Committee, the Compensation Committee and the Corporate Governance Committee. In addition, our Board has established the Executive Compensation Subcommittee, which is a subcommittee of the Compensation Committee, and the Nominating Subcommittee, which is a subcommittee of the Corporate Governance Committee. The charters for our Board committees are in compliance with the provisions of the Sarbanes-Oxley Act of 2002, the rules of the Securities and Exchange Commission and the NYSE’s corporate governance listing standards. Our Board Committee charters are available on AutoNation’s corporate website at http://corp.autonation.com/investors/ and you may obtain a printed copy of these charters by sending a written request to: Investor Relations Department, AutoNation, Inc., 110 S.E. 6th Street, Fort Lauderdale, Florida 33301.

The following chart reflects the current membership of each of our Board’s committees:

 

 

 

 

Audit Committee.  The Audit Committee primarily assists our Board in fulfilling its oversight responsibilities by reviewing our financial reporting and audit processes and our systems of internal control over financial reporting and disclosure controls. Among the Committee’s core responsibilities are the following: (i) overseeing the integrity of our financial statements, for which management is responsible, and reviewing and approving the scope of the annual audit; (ii) appointing, retaining, compensating, overseeing, evaluating and replacing our independent auditor; (iii) reviewing the Company’s critical accounting policies; (iv) reviewing the Company’s quarterly and annual financial statements prior to their filing with the Securities and Exchange Commission; (v) preparing the Audit Committee report for inclusion in our annual proxy statement; and (vi) reviewing with management significant financial risks or exposures and assessing the steps management has taken to minimize, monitor and control such risks or exposures. For a complete description of our Audit Committee’s responsibilities, you should refer to the Audit Committee Charter, which is available at http://corp.autonation.com/investors/.

 

The Audit Committee currently consists of three directors. Our Board has determined that the Audit Committee members have the requisite independence and other qualifications for audit committee membership under NYSE corporate governance listing standards, the Sarbanes-Oxley Act of 2002, our Audit Committee Charter and the independence standard set forth in the Guidelines (as discussed below). Our Board also has determined that Mr. Grusky is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Audit Committee held six meetings and took no actions by unanimous written consent during 2006. The Audit Committee Report for fiscal year 2006, which contains a description of the Audit Committee’s responsibilities and its recommendation with respect to our audited consolidated financial statements for the year ended December 31, 2006, is set forth on page 15.

 

Compensation Committee.  The Compensation Committee primarily assists our Board in fulfilling its compensation and management development and succession planning oversight responsibilities by, among other things: (i) reviewing our director compensation program; (ii) reviewing and approving the compensation of our chief executive officer and other senior executive officers and, except as expressly delegated to the Executive Compensation Subcommittee, setting annual and long-term performance goals for these individuals; (iii) reviewing and approving the compensation of all of our corporate officers; and (iv) reviewing the Company’s program for management development and succession planning. The Committee reviews executive compensation at its meetings throughout the

year and sets executive compensation. The Committee also reviews director compensation annually. In setting the compensation level of our named executive officers and recommending the form and amount of director compensation, the Committee considers the comparative pay of other specialty retail companies and reviews compensation survey data from an outside compensation consultant. Our CEO reviews the performance of each named executive officer and makes recommendations to the Committee with respect to compensation adjustments for such officers. However, the Committee determines in its sole discretion whether to make any adjustments to the compensation paid to such executive officers. In 2006, an outside consultant (Towers Perrin) was engaged by the Company to conduct a competitive market assessment for the Committee of the annual compensation of our CEO, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer and Executive Vice President, General Counsel and Secretary, as well as our directors. The consultant was engaged to benchmark the key components and mix of our executive compensation and director compensation with a peer group of specialty retail companies that represent a fair cross-section of the competitive marketplace for executives and directors in the retail industry. The Committee reviewed the survey data for informational purposes, but did not structure executive compensation or set the level of compensation of our executive officers, or recommend compensation for our directors, at a set percentage threshold based on the benchmark data. Our Board has determined that the Compensation Committee members have the requisite independence for compensation committee membership under NYSE corporate governance listing standards and the independence standard set forth in the Guidelines. The Compensation Committee held six meetings and took one action by unanimous written consent during 2006. The Compensation Committee and Executive Compensation Subcommittee Report for 2006 is set forth on page 27.

 

Executive Compensation Subcommittee.  The Executive Compensation Subcommittee is a subcommittee of the Compensation Committee. The Subcommittee assists the Board and the Compensation Committee in fulfilling their compensation oversight responsibilities by performing the following duties: (i) reviewing and approving performance-based compensation of executive officers as contemplated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), including bonuses and stock option grants; (ii) administering the AutoNation, Inc. Senior Executive Incentive Bonus Plan, including establishing performance goals and certifying whether such goals are attained as contemplated under Section 162(m) of the Code; and (iii) administering our stock option plans, including approving stock option grants. Our Board has determined that each member of the Subcommittee qualifies as a “non-employee director” within the meaning of Rule 16b-3 under the Exchange Act, and as an “outside director” under Section 162(m) of the Code. The Executive Compensation Subcommittee held three meetings and took one action by unanimous written consent during 2006. A copy of the charter by which the Executive Compensation Subcommittee is governed is available at http://corp.autonation.com/investors/.

 

Corporate Governance Committee.  The Corporate Governance Committee assists our Board in fulfilling its oversight responsibilities by performing the following duties: (i) periodically reviewing the corporate governance principles and practices set forth in the Guidelines, in comparison to the governance standards identified by leading governance authorities and our evolving needs, and making recommendations to the Board with respect to any appropriate amendment to the Guidelines; and (ii) leading annual evaluations of Board and Board committee performance. Our Board has determined that each Corporate Governance Committee member has the requisite independence for Corporate Governance Committee membership under NYSE corporate governance listing standards and the independence standard set forth in the Guidelines. The Corporate Governance Committee held five meetings and took no actions by unanimous written consent during 2006. A copy of the charter by which the Corporate Governance Committee is governed is available at http://corp.autonation.com/investors/.

 

Nominating Subcommittee.  The Nominating Subcommittee is a subcommittee of the Corporate Governance Committee and was established on February 7, 2006. The Nominating Subcommittee assists the Board and the Corporate Governance Committee in fulfilling their responsibilities by

performing the following duties: (i) assessing periodically our Board’s needs in terms of skills and qualifications and recommending to our Board candidates for nomination and election to our Board; (ii) reviewing Board candidates recommended by our stockholders; and (iii) recommending to our Board assignments to committees. Our Board has determined that each Nominating Subcommittee member has the requisite independence for Nominating Subcommittee membership under NYSE corporate governance listing standards and the independence standard set forth in the Guidelines. The Nominating Subcommittee held six meetings and took no actions by unanimous written consent during 2006. A copy of the charter by which the Nominating Subcommittee is governed is available at http://corp.autonation.com/investors/.

 

Is a majority of our Board independent under our Director Independence Standard and applicable New York Stock Exchange rules?

 

Yes. Under our Corporate Governance Guidelines, our Board has committed that a substantial majority of our directors be independent. On October 27, 2003, our Board adopted a Director Independence Standard to assist it in determining whether a director is independent. The full text of our Director Independence Standard (the “Independence Standard”) is set forth in the AutoNation, Inc. Corporate Governance Guidelines, which is available on the AutoNation corporate website at http://corp.autonation.com/investors/.

 

In accordance with the NYSE listing standards, our Board affirmatively determines the independence of each director and nominee for election as a director in accordance with the NYSE listing standards and our Independence Standards. Based on these standards, the Board determined that each of the following non-employee directors is independent and has no material relationship with the Company, except as a director and stockholder of the Company: Robert J. Brown, Rick L. Burdick, William C. Crowley, Kim C. Goodman, Robert R. Grusky, Edward S. Lampert, Carlos A. Migoya, and Irene B. Rosenfeld.

 

In determining the independence of each of the non-employee directors, the Board considered the relationships disclosed under the heading “Does the Board have a policy with regard to related party transactions?” on page 13. In addition, the Board considered the following relationships: (i) AutoNation’s banking relationship with Wachovia Corporation and its affiliates; (ii) ESL Investment Inc.’s (“ESL”) ownership of 24% of our outstanding common stock; (iii) our purchases of computer-related equipment and services from Dell Inc.; (iv) our use of the law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. for certain legal services; and (v) Mr. Grusky’s minority investment in an ESL investment fund. In each case, the relationships did not violate our Independence Standard or the NYSE listing standards and the Board did not conclude that such relationships would impact the independence of our non-employee directors.

 

Do our non-management directors meet at regularly scheduled sessions without management present?

 

Yes. Our non-management directors (each director other than Messrs. Jackson and Maroone) meet in regularly scheduled sessions without management of our Company present. The presiding director for each executive session is rotated among the chairs of our Board committees.

 

Can our stockholders and interested parties communicate with our directors?

 

Yes. To communicate with our Board, any Board committee, any individual director, any group of directors (such as our non-management directors) or our presiding director, our stockholders or interested parties should send written correspondence to AutoNation, Inc. Board of Directors, c/o Corporate Secretary, AutoNation, Inc., 110 S.E. 6 Street, 29th Floor, Fort Lauderdale, Florida 33301. You may also ask questions at the Annual Meeting of Stockholders.

 

How does the Nominating Subcommittee identify and evaluate nominees for director?

 

Potential candidates may come to the attention of the Nominating Subcommittee through recommendations made by current directors, stockholders, executive or director search firms retained by the Nominating Subcommittee or other persons. All of our nominees for director, whether or not recommended by a stockholder, will be selected on the basis of, among other things, broad experience, wisdom, integrity, ability to make independent analytical inquiries, understanding of our business environment, and willingness and ability to devote adequate time to our Board’s duties, all in the context of the needs of our Board at that point in time as assessed by our Nominating Subcommittee and with the objective of ensuring diversity in the background, experience and viewpoints of our Board members. Our Nominating Subcommittee is responsible for assessing the appropriate balance of skills and characteristics required of our Board members.

 

Does the Nominating Subcommittee have a policy with regard to the consideration of any director candidates recommended by our stockholders?

 

Yes. The Nominating Subcommittee has a policy pursuant to which it considers director candidates recommended by our stockholders. As described above, all director candidates recommended by our stockholders are considered for selection to the Board on the same basis as if such candidates were recommended by one or more of our directors or other sources. To recommend a director candidate for consideration by our Nominating Subcommittee, a stockholder must submit the recommendation in writing to our Corporate Secretary not later than one hundred twenty (120) calendar days prior to the anniversary date of our proxy statement distributed to our stockholders in connection with our most recent annual meeting of stockholders, and the recommendation must provide the following information: (i) the name of the stockholder making the recommendation, (ii) the name of the candidate, (iii) the candidate’s resume or a listing of his or her qualifications to be a director, (iv) the proposed candidate’s written consent to being named as a nominee and to serving as one of our directors if elected and (v) a description of all relationships, arrangements or understandings, if any, between the proposed candidate and the recommending stockholder and between the proposed candidate and us so that the candidate’s independence may be assessed. The stockholder or the director candidate also must provide any additional information requested by our Nominating Subcommittee to assist the Subcommittee in appropriately evaluating the candidate.

 

Does AutoNation have a code of ethics?

 

Yes. In order to clearly set forth our commitment to conduct our operations in accordance with our high standards of business ethics and applicable laws and regulations, we have a Company-wide Business Ethics Program, which includes a Code of Business Ethics applicable to all Company employees. We also maintain a 24-hour Alert-Line for employees to report any Company policy violations under our Business Ethics Program. In addition, our Board has adopted the Code of Ethics for Senior Officers and the Code of Business Ethics for the Board of Directors. Copies of these codes are available at http://corp.autonation.com/investors/ and you may obtain a printed copy of these codes by sending a written request to: Investor Relations Department, AutoNation, Inc., 110 S.E. 6th Street, Fort Lauderdale, Florida 33301. These codes comply with NYSE corporate governance listing standards.

 

Does the Board have a policy with regard to related party transactions?

 

Yes. Our Board’s policy requires that transactions with related parties must be entered into in good faith on fair and reasonable terms that are no less favorable to us than those that would be available in a comparable transaction in arm’s-length dealings with an unrelated third party. Based on our experience, we believe that each of the transactions described below complied with our Board’s policy at the time the transaction was effected. Our Board, by a vote of the disinterested directors, must

approve all related party transactions valued over $500,000, while our Audit Committee must approve all related party transactions valued between $100,000 and $500,000 and review with management all other related party transactions. The following is a summary of agreements and transactions with parties related to our directors or us since January 1, 2006.

 

We paid AutoZone approximately $60,000 for parts purchases made during 2006. We received approximately $325,000 from AutoZone for parts sales made during 2006. Mr. Lampert served as a director of AutoZone until December 13, 2006 and is Chairman, Chief Executive Officer and controlling principal of ESL Investments, Inc., which together with its affiliated investment partnerships owns approximately 31% of the outstanding common stock of AutoZone. Mr. Crowley is the President and Chief Operating Officer of ESL Investments, Inc. Payments made by us to AutoZone in any given year, or received by us from AutoZone, represent significantly less than 0.1% of the annual revenue of each of AutoZone and AutoNation, respectively. We expect to enter into similar arrangements with AutoZone in the future.

 

We paid Sears Holdings Corporation and its affiliates approximately $570,000 primarily for automotive parts and accessories purchases made by our stores in the ordinary course of business during 2006. Mr. Lampert serves as Chairman of the Board of Directors of Sears Holdings and Mr. Crowley serves as a director, interim-Chief Financial Officer and as Executive Vice President, Chief Administrative Officer of Sears Holdings. ESL Investments, Inc., together with its affiliated investment partnerships, owns approximately 42% of the outstanding common stock of Sears Holdings. We expect to continue to enter into purchases of automotive parts and accessories from Sears Holdings and its affiliates in 2007. On March 29, 2007, the Board ratified and approved the transactions with Sears Holdings and future similar transactions entered into by our stores in the ordinary course of business.

 

On March 10, 2006, we commenced a tender offer to purchase up to 50 million shares of our common stock at a price per share of $23 in cash. As previously disclosed, ESL Investments, Inc. agreed to tender all of its shares of our common stock in the offer. Mr. Lampert is the Chief Executive Officer and Mr. Crowley is the President and Chief Operating Officer of ESL Investments, Inc. On April 19, 2006, we accepted for payment 50 million shares of our common stock pursuant to the offer, including 20,353,844 shares of common stock tendered by ESL Investments.

 

The following statement made by our Audit Committee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such statement by reference.

 

During 2006, the Audit Committee consisted of J.P. Bryan (member and Chair until June 1, 2006), Irene B. Rosenfeld (member during 2006 and Chair from June 1, 2006 until December 31, 2006), Robert R. Grusky (member since June 22, 2006 and Chair since January 1, 2007), Carlos A. Migoya (member since June 22, 2006) and Robert J. Brown (member throughout 2006). The current Committee consists of Robert R. Grusky (Chair), Carlos A. Migoya and Robert J. Brown. The charter under which the Audit Committee operates is available on AutoNation’s corporate website at http://corp.autonation.com/investors/. The Board has determined that each Audit Committee member has the requisite independence and other qualifications for audit committee membership under New York Stock Exchange corporate governance listing standards, the Sarbanes-Oxley Act of 2002, the Audit Committee Charter and the independence standard set forth in the AutoNation, Inc. Corporate Governance Guidelines. The Board also determined that each of Ms. Rosenfeld and Mr. Grusky is an “audit committee financial expert” within the meaning of Item 407(d)(5) of Regulation S-K under the Securities Exchange Act of 1934, as amended.

 

Our primary function is to assist the Board in fulfilling its oversight responsibilities by reviewing AutoNation’s financial reporting, audit processes, systems of internal control over financial reporting, and disclosure controls. Management is responsible for the Company’s financial statements and the financial reporting process, including the system of internal control over financial reporting. We also monitor the preparation by management of the Company’s quarterly and annual financial statements. AutoNation’s independent auditor, which is accountable to us, is responsible for expressing an opinion as to whether the consolidated financial statements present fairly, in all material respects, the financial position, results of operations and cash flows of AutoNation in conformity with generally accepted accounting principles in the United States. The independent auditor also is responsible for auditing and reporting on our management’s assessment of, and the effective operation of, internal control over financial reporting. We are solely responsible for selecting and reviewing the performance of AutoNation’s independent auditor and, if we deem appropriate in our sole discretion, terminating and replacing the independent auditor. We also are responsible for reviewing and approving the terms of the independent auditor’s annual engagement, including the scope of audit and non-audit services to be provided by the independent auditor and the fees to be paid for such services, and discussing with the auditor any relationships or services that may impact the objectivity and independence of the auditor.

 

In fulfilling our oversight role, we met and held discussions, both together and separately, with the Company’s management and independent auditor. Management advised us that the Company’s consolidated financial statements were prepared in accordance with generally accepted accounting principles, and we reviewed and discussed the consolidated financial statements and key accounting and reporting issues with management and the independent auditor, both together and separately, in advance of the public release of operating results and filing of annual or quarterly reports with the Securities and Exchange Commission. We discussed with the independent auditor matters deemed significant by the independent auditor, including those matters required to be discussed pursuant to Statement on Auditing Standards No. 61 (Communication with Audit Committees), as amended, and reviewed a letter from the independent auditor disclosing such matters.

 

The independent auditor also provided us with the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and we discussed with the independent auditor matters relating to their independence and considered whether their provision of certain non-audit services is compatible with maintaining their independence. In the letter, the independent auditor confirmed its independence, and we determined that the independent auditor’s provision of non-audit services to AutoNation is compatible with maintaining their independence. We also reviewed a report by the independent auditor describing the firm’s internal quality-control procedures and any material issues raised in the most recent internal quality-control review or external peer review or inspection performed by the Public Company Accounting Oversight Board.

Based on our review with management and the independent auditor of AutoNation’s audited consolidated financial statements and the independent auditor’s report on such financial statements, and based on the discussions and written disclosures described above and our business judgment, we recommended to the Board of Directors that the audited consolidated financial statements be included in AutoNation’s Annual Report on Form 10-K for the year ended December 31, 2006 for filing with the Securities and Exchange Commission.

 

Audit Committee:

 

Robert R. Grusky (Chair)
Robert J. Brown
Carlos A. Migoya

 

The following table sets forth: (i) the aggregate fees billed for professional services rendered by KPMG LLP for the audits of our financial statements and internal control over financial reporting for years 2006 and 2005; and (ii) the aggregate fees billed in 2006 by KPMG for our use of KPMG’s on-line technical research service and the aggregate fees billed in 2005 by KPMG for state unclaimed property audit assistance and our use of KPMG’s on-line technical research service:

 

 

 

Our Audit Committee’s policies require pre-approval of all audit and permissible non-audit services provided by our independent auditor other than services permitted under the de minimus exception under applicable Securities and Exchange Commission rules (which are approved by our Audit Committee prior to our independent auditor’s completion of its annual audit). Under our Audit Committee’s policies, pre-approval generally is detailed as to the particular service or category of services and is subject to a specific budget. Under our Audit Committee’s policies, all tax planning services and services that do not constitute audit, audit-related or tax-compliance services are subject to a formal bidding process and may not be provided by our independent auditor unless our Audit Committee concludes that such services may be provided most effectively or economically by our independent auditor and that the independence of our auditor would not be affected adversely by the provision of such services. Our Audit Committee has delegated to its Chair the authority to approve, within guidelines and limits established by the Committee, specific services to be provided by our independent auditor and the fees to be paid. Any such approval must be reported to the Audit Committee at the next scheduled meeting. As required by Section 10A of the Exchange Act, our Audit Committee has pre-approved all audit and non-audit services provided by our independent auditor during 2006, and the fees paid for such services.

 

The Audit Committee of our Board of Directors has appointed KPMG LLP as our independent auditor for the year ending December 31, 2007. KPMG LLP has served us in this capacity since May 6, 2003. If the appointment of KPMG LLP as our independent auditor is not ratified by our stockholders, the Audit Committee will re-evaluate its appointment, taking into consideration the stockholder vote on the ratification. However, the Audit Committee is solely responsible for appointing and terminating our independent auditor, and may do so at any time at its discretion. A representative of KPMG LLP is expected to attend the Annual Meeting and be available to respond to appropriate questions. The representative also will be afforded an opportunity to make a statement, if he or she desires to do so.

 

 

 

Overview

 

Our compensation programs are administered by the Compensation Committee (the “Committee”) and the Executive Compensation Subcommittee (the “Subcommittee”) of the Committee. The Committee primarily assists the Board in fulfilling its oversight responsibilities by, among other things: (i) reviewing our director compensation program; (ii) reviewing and approving the compensation of our chief executive officer (“CEO”) and other senior executive officers and, except as expressly delegated to the Subcommittee, setting annual and long-term performance goals for these individuals and reviewing the performance of these individuals; and (iii) reviewing and approving the compensation of all of our corporate officers.

 

The Subcommittee assists the Board and the Committee in fulfilling their responsibilities by performing the following duties: (i) reviewing and approving performance-based compensation of executive officers as contemplated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), including bonuses and stock option grants; (ii) administering our Senior Executive Incentive Bonus Plan, including establishing performance goals and certifying whether such goals are attained as contemplated under Section 162(m) of the Code; and (iii) administering our stock option plans, including approving stock option grants.

 

During 2006, the Committee consisted of Edward S. Lampert (Chair), Robert J. Brown, and Irene B. Rosenfeld and the Subcommittee consisted of Ms. Rosenfeld (Chair) and Mr. Brown. The Board has determined that each member of the Committee and the Subcommittee satisfies the requisite director independence standards under our Corporate Governance Guidelines and the corporate governance standards of The New York Stock Exchange. The Board also has determined that each member of the Subcommittee qualifies as an “outside director” under Section 162(m) of the Code and as a “non-employee director” under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. The operations of the Committee and the Subcommittee are governed by written charters adopted by the Board, copies of which are available on our corporate website at http://corp.autonation.com/investors/.

 

For the fiscal year ended December 31, 2006, our named executive officers were the Chairman and CEO (Mike Jackson), President and Chief Operating Officer (Michael E. Maroone), former Executive Vice President and Chief Financial Officer (Craig T. Monaghan), Vice President, Controller and former Interim-Chief Financial Officer (J. Alexander McAllister), Executive Vice President, General Counsel and Secretary (Jonathan P. Ferrando) and Senior Vice President — Sales (Kevin P. Westfall).

 

Compensation Philosophy and Objectives

 

The Committee’s fundamental philosophy is to closely link executive compensation with the achievement of Company performance goals and to create an owner-oriented pay-for-performance culture. The Committee’s objectives in administering our compensation program for executive officers are to ensure that we are able to attract and retain highly-skilled executives and to provide a compensation program that incentivizes management to optimize business performance, deploy capital productively and increase long-term stockholder value. The Committee also believes that overall compensation should be fair for the services rendered and that the compensation structure should be transparent, which is why the key components of executive compensation are limited to a base salary, an annual performance bonus based solely on the achievement of financial targets and stock options.

 

Setting Compensation Levels of Executive Officers

 

The Committee reviews executive compensation at its meetings throughout the year and sets executive compensation based primarily on our financial and operating performance, executive management’s

performance in developing and executing the Company’s business strategy, managing the Company’s day-to-day business operations, optimizing the Company’s business performance and productivity of its business operations and creating stockholder value. The Committee also considers the scope of an executive’s duties and responsibilities and individual executive performance. The CEO reviews the performance of each named executive officer and makes recommendations to the Committee with respect to compensation adjustments for such officers. However, the Committee determines in its sole discretion whether to make any adjustments to the compensation paid to such executive officers.

 

In setting the compensation level of our named executive officers, the Committee also considers the comparative pay of other specialty retail companies and reviews compensation survey data from an outside compensation consultant. In 2006, an outside consultant (Towers Perrin) was engaged to conduct a competitive market assessment of the annual compensation of our CEO, President and Chief Operating Officer, Executive Vice President and Chief Financial Officer, and Executive Vice President, General Counsel and Secretary. The consultant was engaged to benchmark the key components and mix of our executive compensation with a peer group of specialty retail companies that represent a fair cross-section of the competitive marketplace for executives in the retail industry. The Committee reviewed the survey data for informational purposes, but did not structure executive compensation or set the level of compensation of our executive officers at a set percentage threshold based on the benchmark data.

 

The Committee has no pre-established target for the allocation between either cash and non-cash or short-term and long-term incentive compensation. However, pursuant to the Committee’s pay-for-performance philosophy, a significant portion of each executive officer’s total compensation is allocated to incentive compensation in the form of an annual performance-based bonus and non-cash compensation in the form of stock options, which are designed to incentivize management to build long-term stockholder value for the Company over time and to align executives’ and stockholders’ interests. The Committee reviews and considers total compensation in setting each element of compensation for our named executive officers.

 

2006 Executive Compensation Elements

 

The key elements of our executive compensation program for the year ended December 31, 2006 were:

 

 

Executive officers are also entitled to limited perquisites and other benefits as outlined below. The following is a summary of the considerations underlying each component of compensation paid to our named executive officers for 2006.

 

Base Salary

 

We provide our named executive officers and other officers with a base salary to compensate them for services rendered during the fiscal year. The Committee reviews and, as appropriate, adjusts the base salaries for our named executive officers. The factors that the Committee considers in setting salaries include the scope of job responsibilities, individual contributions to our success, Company-wide performance and market compensation. However, the Committee does not as a practice grant annual base salary adjustments for executive officers, and it did not grant any base salary adjustments during 2006 for any of the named executive officers except for Mr. McAllister, who received a $10,000 increase to his base salary in 2006.

 

Annual Incentive Bonus

 

A core component of our compensation program is the AutoNation Operating Performance Plan (the “AOP”), the annual bonus program in which bonus-eligible corporate-level employees participate. The AOP is designed to incentivize management to continually improve our operating performance and to use capital to maximize returns. The Subcommittee structured the AOP for 2006 to reward participants upon the achievement of specified levels of operating income per share (75% weight) and operating income as a percentage of gross profit (25% weight). Bonus awards under the AOP for 2006 were payable on a sliding scale based on our actual achievement relative to the predetermined goals, with the possibility that bonuses earned may exceed or be less than the targeted level. In calculating the level of our performance under the AOP, operating income per share is adjusted to reflect a capital charge for acquisitions and the repurchase of shares of our common stock, as well as to exclude the effect of certain extraordinary or one-time items. Certain other adjustments are made as well to ensure operating performance is measured to incentivize management appropriately (for example, floorplan interest expense is charged against operating income to ensure management manages this expense; on a generally accepted accounting principles basis floorplan interest expense is not included in operating income). The capital charge is designed to encourage more productive use of capital and discourage less productive uses of capital. The operating income as a percentage of gross profit metric is designed to incentivize management to increase variability in our expense structure and to increase the productivity of our operations so that bottom-line profitability and stockholder value are maximized.

 

In accordance with the terms and objectives of the AOP, the Subcommittee established an incentive bonus program for 2006 for our named executive officers under our Senior Executive Incentive Bonus Plan (the “Executive Incentive Bonus Plan”), which was approved by stockholders in 2002. For 2006, the Committee selected Mike Jackson, Chairman and CEO, Michael E. Maroone, Director, President and Chief Operating Officer, Craig T. Monaghan, Executive Vice President and Chief Financial Officer, and Jonathan P. Ferrando, Executive Vice President, General Counsel and Secretary, to participate in the Executive Incentive Bonus Plan. Under the terms of the Executive Incentive Bonus Plan, the Subcommittee set specific annual performance goals (actual performance relative to the target remains substantially uncertain within the meaning of Section 162(m) of the Code) and established an objective formula for calculating the amount of the target awards for participants. The Subcommittee had absolute “negative discretion” to eliminate or reduce the amount of any award under the Executive Incentive Bonus Plan. The target incentive award percentages assigned to our select named executive officers are set forth below.

 

 

The performance goals that the Subcommittee established for 2006 under the Executive Incentive Bonus Plan for the executives named above — operating income per share (75% weight) and operating income as a percentage of gross profit (25% weight) — were the same as those the Committee established for 2006 under the AOP for all other corporate bonus plan participants, including Messrs. Westfall and McAllister, who were eligible to receive a target award as a percentage of their base salary of 45% and 40%, respectively. The Subcommittee believes this symmetry assures that all participants are appropriately aligned to achieve our objectives. One hundred percent of the final bonus payment for each participant in the Executive Incentive Bonus Plan is based upon achievement against the predetermined performance goals. After the end of the year, the Subcommittee calculated the level of our actual performance against the goals set for 2006 (after reflecting the capital charges and other adjustments noted above) and made corresponding bonus awards to Messrs. Jackson, Maroone and Ferrando under the Executive Incentive Bonus Plan and to other corporate bonus plan participants under the AOP. Mr. Monaghan resigned from his employment with us effective August 31, 2006 and, therefore, he did not receive any pay-out under the Executive Incentive Bonus Plan for the fiscal year ended December 31, 2006 or any severance or other payments triggered by a separation from service.

 

Based on financial performance against the bonus targets, bonus awards under the Executive Incentive Bonus Plan and the AOP were paid at 72.81% of the targeted levels. Actual payouts to our named executive officers for 2006 are shown in the Summary Compensation Table on page 28. The Executive Incentive Bonus Plan was the only bonus program in which our named executive officers participated in 2006 (other than Messrs. McAllister and Westfall who participated in the AOP only). As part of our retention efforts with respect to Mr. Jackson, a portion of the target bonus for Mr. Jackson under the Executive Incentive Bonus Plan (equal to 331/3% of his base salary) are payable to him on a deferred basis (without interest), subject to certain terms and conditions. In February 2007, Mr. Jackson received an aggregate amount equal to $918,165 in deferred bonus payments under the Executive Incentive Bonus Plan ($279,105 for 2006, $329,404 for 2005 and $309,656 for 2004). The payment of a similar portion of bonuses earned by Mr. Jackson in 2007, 2008 and 2009 under the New Executive Incentive Bonus Plan (defined below) would be deferred until February 2010.

 

The Executive Incentive Bonus Plan, which was approved by the Board and the stockholders of the Company in 2002, expired upon the payment of all awards for the year ended December 31, 2006. On February 5, 2007, our Board adopted a new Senior Executive Incentive Bonus Plan (the “New Executive Incentive Bonus Plan”). The New Executive Incentive Bonus Plan, which is administered by the Subcommittee, is subject to approval by our stockholders at the 2007 Annual Meeting. The New Executive Incentive Bonus Plan, which is substantially identical to and is intended to replace the Executive Incentive Bonus Plan approved by the Board and the Company’s stockholders in 2002, is designed to create a direct link between pay and performance for our named executive officers and to ensure that annual cash performance bonuses payable to executive officers of the Company are tax deductible by the Company pursuant to Section 162(m) of the Internal Revenue Code.

 

Under the New Executive Incentive Bonus Plan, the Subcommittee, in its sole discretion, shall determine which of our named executive officers or other key employees shall participate in the plan in any particular year. In addition, the Subcommittee is responsible for identifying annual “performance factors” and establishing specific performance targets with respect thereto that must be met in order for annual bonuses to be paid under the New Executive Incentive Bonus Plan. The Subcommittee retains absolute “negative discretion” to eliminate or reduce the amount of any award under the New Executive Incentive Bonus Plan and to make all determinations under the New Executive Incentive Bonus Plan.

 

On February 5, 2007, the Subcommittee selected participants in the New Executive Incentive Bonus Plan for 2007, established specific annual performance goals and set target awards for participants in the New Executive Incentive Bonus Plan for 2007 (subject to stockholder approval of the New Executive Incentive Bonus Plan). The Subcommittee selected the following named executive officers to participate in the New Executive Incentive Bonus Plan for 2007: our Chairman and CEO; President and Chief Operating Officer; Executive Vice President and Chief Financial Officer (Michael J. Short, who was appointed to the position on January 15, 2007); and Executive Vice President, General Counsel and Secretary. The performance goals under the New Executive Incentive Bonus Plan for 2007 that were established by the Subcommittee are based upon the achievement of specified levels of operating income per share (minus a charge for capital deployed for acquisitions or share repurchases) and operating income as a percentage of our gross profit during 2007. The Subcommittee also established an objective standard for calculating the amount of the target award for each New Executive Incentive Bonus Plan participant. The performance goals established under the New Executive Incentive Bonus Plan for 2007 also constitute the performance goals that have been established for our bonus-eligible corporate employees to ensure that our corporate management team is fully aligned to achieve improved operating performance for our existing business and to deploy capital effectively and profitably. The target incentive award percentages assigned to our eligible named executive officers for 2007 are set forth below.

 

 

Kevin Westfall’s target award as a percentage of base salary under the 2007 AOP plan is 45%, and based on his performance and an increase in the scope of his responsibilities, his salary was increased by $18,000 to $468,000 in February 2007. Mr. Monaghan, our former Executive Vice President and Chief Financial Officer, announced his resignation in July 2006 effective as of August 31, 2006. In July 2006, Mr. McAllister, who had previously announced his decision to retire from the Company, agreed to stay until year-end 2006 and also to serve as Interim Chief Financial Officer, without additional compensation, in addition to his Vice President — Corporate Controller role commencing September 1, 2006 (thereby functioning as both our “principal financial officer” and “principal accounting officer” for Securities and Exchange Commission purposes). He continued to work at his existing base salary of $260,000 with a target bonus of 40% for 2006, and given his expected departure at year-end he did not receive a stock option grant in July 2006. In December, in light of the status of our searches for a new Chief Financial Officer and Controller, Mr. McAllister agreed to continue to serve, and was appointed by the Board to serve, as Interim Chief Financial Officer and Vice President, Controller until March 31, 2007 (or earlier upon appointment of a new Chief Financial Officer and/or Corporate Controller, which occurred with the appointments of Michael J. Short as our Executive Vice President and Chief Financial Officer effective as of January 15, 2007 and Michael J. Stephan as our Vice President-Corporate Controller effective as of March 30, 2007). In light of the importance of Mr. McAllister’s roles with our Company and his loyalty and dedication in serving the Company in dual roles since September 1, 2006 and his willingness to extend his role, on December 18, 2006, the Committee approved a $100,000 retention bonus payable to Mr. McAllister on March 31, 2007.

 

Stock Options

 

In order to align the long-term interests of management and our stockholders, the Subcommittee awards stock options to our named executive officers. The Committee believes that stock options motivate our named executive officers to focus on optimizing our long-term business performance and stockholder value. For fiscal 2006, the Subcommittee administered our stock option plans and approved all grants of stock option awards. Stock option grants are made on an annual basis in competitive amounts determined by the Subcommittee, and are designed to motivate our executives as outlined above, while carefully considering the cost to us and our stockholders of the issuance of the options, including common stock dilution. With respect to stock option recipients other than our named executive officers, stock option grants are based on the position of the recipient, with adjustments up or down to reflect the recipient’s individual performance rating for the prior year. In general, the Subcommittee endeavors to limit aggregate annual stock option grants to an amount equal to approximately one percent (1%) of our outstanding shares of common stock. Stock options generally vest annually in equal installments over four years commencing with the first anniversary of the grant date and expire ten years after the grant date. Under our stock option plans, stock options are granted at an exercise price that equals or exceeds the closing price of our common stock on the last trading day immediately preceding the grant.

 

Since 2000, annual stock option grants have been awarded during the third fiscal quarter in late July or early August at meetings of the Subcommittee (or predecessor committees responsible for option grants at the time), and the grants were all made effective after public release of the Company’s second-quarter earnings results. Annual grants are made to executive officers and other stock option-eligible employees at the same time and on the same terms (other than the number of options granted, which varies primarily by position and based on individual performance). Consistent with past practice, in 2006 the Subcommittee awarded stock options to our executive officers and other employees at the Subcommittee’s regularly scheduled meeting during the third quarter of the Company’s fiscal year. This meeting was held on July 25, 2006. Also consistent with past practice, the Subcommittee granted options effective after the second quarter earnings release was

made in order to ensure that the earnings information was publicly disseminated prior to the option grants. Accordingly, the annual option grant was approved by the Subcommittee on July 25, 2006 with an effective grant date of Monday, July 31, 2006, two trading days after the Company’s second quarter earnings release was made on Thursday, July 27, 2006. The exercise price as specified under the Company’s stock option plans was $20.08 per share, which was the closing price of the Company’s common stock on Friday, July 28, 2006, the trading day immediately preceding the grant date.

 

The Subcommittee also, at its discretion, may award stock options to our named executive officers upon commencement of employment. In this instance, the Subcommittee’s practice has been for the effective date of the option grant to be the date the executive officer commences employment.

 

As noted above, in accordance with our stock option plans, the exercise price for all options granted is the closing price of a share of our common stock on the New York Stock Exchange as of the trading day immediately preceding the effective date of the grant (or a higher price designated by the Subcommittee). Therefore, stock options will have value only if the market price of our common stock increases after that date.

 

Perquisites and Other Benefits

 

Our compensation program for named executive officers also includes limited perquisites and other benefits, including participation in the Company’s life and health insurance and similar benefit programs (including our AutoNation 401(k) Plan and our AutoNation Deferred Compensation Plan) on the same general terms as other participants in these programs, participation in Company car programs entitling the executives to vehicle use or a vehicle allowance, use of an on-site gymnasium facility and, pursuant to their employment agreements, limited personal use of corporate aircraft for each of Messrs. Jackson and Maroone. The employment agreements with each of Messrs. Jackson and Maroone, respectively, provide for personal use of corporate aircraft of up to 70 hours per year.

 

Employment Agreements with Executive Officers

 

We have entered into an employment agreement with each of the CEO (Mike Jackson) and Chief Operating Officer (Michael E. Maroone) and an Employment Letter with our Chief Financial Officer (Michael J. Short). The Committee believes that entering into the employment agreements with Messrs. Jackson and Maroone, and the employment letter with Mr. Short furthered our efforts to attract and retain such executives. For a summary of the material terms of Messrs. Jackson’s, Maroone’s and Short’s employment arrangements, please refer to page 44.

 

Severance Policy and Agreements for Post-Termination Payments

 

We have a policy governing severance and change in control agreements with the Company’s named executive officers, which is set forth in our Corporate Governance Guidelines. Generally, the policy provides that we will not enter into any severance agreements with senior executives that provide specified benefits in an amount exceeding 299% of the sum of such executive’s base salary plus bonus unless such severance agreement has been submitted to a stockholder vote. Further, unless such severance agreement has been submitted to a stockholder vote, we will not enter into a severance agreement that provides for the payment of specified benefits to an executive triggered by (i) a change in control of our Company that is approved by stockholders but not completed or (ii) a completed change in control of the Company in which the named executive officer remains employed in a substantially similar capacity by the successor entity.

 

We have entered into stock option agreements with all of our named executive officers and employment agreements with our CEO (Mr. Jackson) and President and Chief Operating Officer (Mr. Maroone) and an Employment Letter with our Executive Vice President and Chief Financial Officer (Mr. Short) that provide for payments or benefits to the senior executive officer at, following, or in connection with, termination under certain circumstances. We have not entered into any change in control agreements with any

of our named executive officers. The payment or benefits provisions contained in the employment agreements and stock option agreements are designed to promote stability and continuity of senior management. A description of the applicable payments under such agreements for the named executive officers are provided under the section entitled “Potential Payments Upon Termination or Change in Control” on page 34.

 

Company Policy on Internal Revenue Code Section 162(m) Limits on Deductibility of Compensation

 

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to public corporations for compensation over $1,000,000 paid for any fiscal year to the corporation’s CEO and four other most highly compensated executive officers as of the end of any fiscal year. However, the statute exempts qualifying performance-based compensation from the deduction limit if certain requirements are met.

 

The Committee administers the executive compensation program in general, and our Senior Executive Incentive Bonus Plan in particular, in a manner that maximizes the tax deductibility of compensation paid to the Company’s executives under Internal Revenue Code Section 162(m) to the extent practicable. The Committee believes, however, that our priority is to attract and retain highly-skilled executives to manage our Company and, in some cases, the loss of a tax deduction may be necessary to accomplish that goal. Accordingly, the Committee has from time to time approved elements of compensation for certain officers that are not fully deductible, and the Committee reserves the right to do so in the future in appropriate circumstances. For 2006, the compensation of our named executive officers was fully deductible under Internal Revenue Code Section 162(m), except with respect to an amount equal to $150,000 of our CEO’s base salary and certain portions of other elements of non-performance-based compensation for the Company’s CEO and President and Chief Operating Officer.

 

Executive Stock Ownership Guidelines

 

In order to further align the long-term interests of management and stockholders and to ensure an owner-oriented culture, the Committee believes that our senior executive officers should have a significant financial stake in our Company. Accordingly, in February 2006, the Board of Directors adopted a policy setting forth its expectation that the CEO and the President and Chief Operating Officer will attain ownership of our common stock with a fair market value of not less than four times his or her annual base compensation, and each Executive Vice President will attain ownership of AutoNation’s common stock with a fair market value of not less than two times his or her annual base compensation, in each case within five years of such person first becoming an executive officer or the adoption of this policy (February 7, 2006). Exceptions to this requirement may only be made by the Board of Directors under compelling mitigating circumstances. The Committee believes these ownership guidelines are an important tool in aligning the interests of our senior executive officers with the long term interests of our stockholders. As of December 31, 2006, all of our senior executive officers had met their guidelines or were making significant progress toward their milestone guidelines as set forth in the chart below:

 

 

 

 

 

Conclusion

 

The Committee believes that our compensation programs are designed and administered in a manner consistent with the Committee’s philosophy as described above. The Committee also believes that the programs appropriately reward executive performance and align the interests of the Company’s named executive officers and key employees with the long-term interests of stockholders, while also enabling the Company to attract and retain talented executives. The Committee will continue to evolve and administer our compensation program in a manner that the Committee believes will be in the best interests of our stockholders.

 

The following statement made by our Compensation Committee and Executive Compensation Subcommittee does not constitute soliciting material and should not be deemed filed or incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate such statement by reference.

 

The Compensation Committee and Executive Compensation Subcommittee of the Company have reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K and, based on such review and discussions, the Compensation Committee and Executive Compensation Subcommittee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement and incorporated by reference into the Company’s annual report on Form 10-K for the year ended December 31, 2006.

 

Compensation Committee:

 

Edward S. Lampert (Chair)
Robert J. Brown
Irene B. Rosenfeld

 

Executive Compensation Subcommittee:

 

Irene B. Rosenfeld (Chair)
Robert J. Brown

 

The following table shows compensation earned by our Chief Executive Officer, each person who served as our Chief Financial Officer during any part of 2006, and each of our three other most highly compensated executive officers at December 31, 2006.

 

 

 

 

GRANTS OF PLAN-BASED AWARDS

 

The Executive Incentive Bonus Plan was approved by the Board and the stockholders of the Company in 2002. For 2006, the Executive Compensation Subcommittee (the “Subcommittee”) of the Compensation Committee (the “Committee”) of the Board of Directors selected Mike Jackson, Chairman and CEO, Michael E. Maroone, Director, President and Chief Operating Officer, Craig T. Monaghan, Executive Vice President and Chief Financial Officer, and Jonathan P. Ferrando, Executive Vice President, General Counsel and Secretary, to participate in the Executive Incentive Bonus Plan. Under the terms of the Executive Incentive Bonus Plan, the Subcommittee set specific annual performance goals (actual performance relative to the target remains substantially uncertain within the meaning of Section 162(m) of the Code) and established an objective formula for calculating the amount of the target awards for participants. The Subcommittee had absolute “negative discretion” to eliminate or reduce the amount of any award under the Executive Incentive Bonus Plan. The target incentive award, as a percentage of base salary, assigned to our select named executive officers are: Mike Jackson 1331/3%; Michael E. Maroone 100%; Craig T. Monaghan 60%; and, Jonathan P. Ferrando 60%.

 

The performance goals that the Subcommittee established for 2006 under the Executive Incentive Bonus Plan for the executives named above — operating income per share (75% weight) and operating income as a percentage of gross profit (25% weight) — were the same as those the Committee established for 2006 under the AOP for all other corporate bonus plan participants, including Messrs. Westfall and McAllister, who were eligible to receive a target award as a percentage of their base salary of 45% and 40%, respectively. The Subcommittee believes this symmetry assures that all participants are appropriately aligned to achieve our objectives. One hundred percent of the final bonus payment for each participant in the Executive Incentive Bonus Plan is based upon achievement against the predetermined performance goals. Assuming exceptional performance by the Company, the named executive officers may be eligible to receive Awards in excess of their respective target inventive awards. However, in no event shall payment in respect of Awards granted hereunder exceed $5,000,000 to any one participant in any one year.

 

After the end of the year, the Subcommittee calculated the level of our actual performance against the goals set for 2006 (after reflecting the capital charges and other adjustments noted in the “Compensation Discussion and Analysis”) and made corresponding bonus awards to Messrs. Jackson, Maroone and Ferrando under the Executive Incentive Bonus Plan and to other corporate bonus plan participants under the AOP. Mr. Monaghan resigned from his employment with us effective August 31, 2006 and, therefore, he did not receive any pay-out under the Executive Incentive Bonus Plan for the fiscal year ended December 31, 2006 or any severance or other payments triggered by a separation from service.

 

The Executive Incentive Bonus Plan was the only bonus program in which our named executive officers participated in 2006 (other than Messrs. McAllister and Westfall who participated in the AOP only). As part of our retention efforts with respect to Mr. Jackson, a portion of the target bonus for Mr. Jackson under the Executive Incentive Bonus Plan (equal to 331/3% of his base salary) are payable to him on a deferred basis (without interest), subject to certain terms and conditions.

 

The following table sets forth certain information with respect to grants of awards to the named executive officers of the Company under our non-equity incentive plans and stock option plans during 2006. The grants include the 2006 cash incentive bonus plan awards and annual stock option grants. We do not grant restricted stock or other stock awards, and we do not have long-term cash incentive plans.

 

 

 

 

Our stock option programs are administered by the Committee and the Subcommittee. Stock option grants are made on an annual basis in competitive amounts determined by the Subcommittee. In general, the Subcommittee endeavors to limit aggregate annual stock option grants to an amount equal to approximately one percent (1%) of our outstanding shares of common stock. Stock options generally vest in equal installments over four years. In accordance with our stock option plans, the exercise price for all options granted is equal to or higher than the closing price of a share of our common stock on the New York Stock Exchange as of the trading day immediately preceding the effective date of the grant (or a higher price designated by the Subcommittee). Therefore, stock options will have value only if the market price of our common stock increases after that date.

 

The following table sets forth certain information regarding equity-based awards held by our named executive officers as of December 31, 2006, which consists solely of stock options. We do not grant restricted stock or other stock awards.

 

 

 

 

The unexercisable stock options disclosed in the table above will vest as follows:

 

 

 

The following table sets forth certain information regarding exercises of options by each of our named executive officers during 2006.

 

 

The AutoNation Deferred Compensation Plan (“DCP”) affords a select group of management and highly compensated employees the opportunity to defer up to 75% of base salary and 90% of annual bonus and/or commissions on a pre-tax basis. We also provide a 50% matching contribution, with vesting, up to the first $8,000 deferred to the DCP for certain participants including our named executive officers. Participants eligible for a matching contribution under the DCP are not eligible for the matching contribution in the AutoNation 401(k) plan. Earnings on deferrals are based on “deemed” investments in funds, selected for inclusion in the DCP by us, investing in equity instruments or debt securities. The DCP provides daily processing of account transactions including participant deemed investment election changes. The DCP provides for payment of vested deferrals and earnings upon separation from service, death, and disability as well as upon specified in-service payment dates selected by the participants. Participants may elect to receive payments upon specified in-service dates or upon separation from service in the form of lump sum payments or annual installments up to 10 years. Specified in-service date payments may be paid in a lump sum or in up to five (5) annual installments. The DCP is intended to meet the requirements of Section 409A of the Internal Revenue Code and other relevant provisions thereunder and related Treasury Regulations.

 

 

 

 

The following tables reflect the amount of compensation that would have been payable to each of our named executive officers under any contract, agreement, plan or arrangement with us that provides for payment(s) to such executive in the event of termination of such executive’s employment or a change in control of the Company, in each case assuming the termination or change in control occurred effective as of December 29, 2006, the last business day of our most recent fiscal year. The amount of compensation payable to each named executive officer upon “termination for cause,” “voluntary termination” (or “voluntary termination for good reason” and “voluntary termination without good reason”), “death or disability,” “retirement,” “involuntary termination without cause,” and “change in control,” as applicable, is shown below.

We have prepared the tables based on the following general assumptions, and the tables should be considered in conjunction with the assumptions and the disclosures below the tables.

 

General Assumptions

 

Stock Options

 

In certain cases upon a termination or change in control, the vesting of unvested options is accelerated. In such cases, the following tables assume the exercise of all unvested stock options that are accelerated at the time of the termination event or a change in control using the closing price per share of our common stock on the New York Stock Exchange as of the last business day of our most recent fiscal year ($21.32).

 

Benefits

 

Messrs. Jackson and Maroone are eligible for health and welfare benefits, including disability and life insurance, in connection with certain termination events and in such events the following tables reflect our expense in connection with such executive’s elections.

 

Change in Control

 

We have not entered into any “change in control” agreements with any of our named executive officers. However, under our stock option plans, in the event of a “change in control” (as defined in our stock option plans), all outstanding options held by such executive shall become immediately exercisable in full and, unless waived in advance of such change in control by our Board, such executive shall have the right to require us to pay, in cancellation of options, an amount equal to the product of (i) the excess of (a) the fair market value per share of the stock over (b) the option price times (ii) the number of shares of stock specified by such executive in a written notice to us. Accordingly, the following tables disclose the value of unvested stock options realized by each of our named executive officers in connection with a “change in control” based on the excess of $21.32, the closing price on the last business day of 2006, over the exercise price times the number of outstanding options held by such executive.

 

Restrictive Covenant Agreements

 

Our named executive officers have entered into restrictive covenants and other obligations as contained in various stock option agreements, confidentiality, non-solicitation/no-hire and non-compete agreements, and other similar agreements with us in connection with employment or the grant of stock options. Generally, these restrictive covenants provide a restriction of one (1) year in which the named executive officer may not perform certain activities within specified geographic regions. The competitive activities include generally (i) participating or owning an interest in an entity engaged in the auto business (as defined in the applicable agreement) or any other business of the type and character engaged by us, (ii) employing any person that was employed by us within the prior six (6) months or seeking to induce any such person to leave his or her employment, (iii) soliciting any customer to patronize any business in competition with our business, or (iv) requesting or advising our customers or vendors to withdraw, curtail or cancel their business with us. In certain cases, the receipt of post-termination payments by our named executive officers is conditioned upon their compliance with these restrictive covenants.

 

Description of Triggering Events and Quantification

 

1.  Under our employment agreements with each of Messrs. Jackson and Maroone, termination for “cause” generally shall mean termination because of (i) the executive’s breach of any of his covenants contained in the applicable employment agreement, (ii) the executive’s failure or refusal to perform the duties and responsibilities required to be performed by the executive under the terms of the applicable employment agreement, (iii) the executive’s willfully engaging in illegal conduct or gross misconduct in the performance of his duties

hereunder (provided, that no act or failure to act shall be deemed “willful” if done, or omitted to be done, in good faith and with the reasonable belief that such action or omission was in our best interest), (iv) the executive’s commission of an act of fraud or dishonesty affecting us or the commission of an act constituting a felony, or (v) the executive’s violation of our policies in any material respect.

 

2.  Under our employee stock option plans, termination for “cause” generally shall mean termination because of (i) the executive’s conviction for commission of a felony or other crime, (ii) the commission by the executive of any act against us constituting willful misconduct, dishonesty, fraud, theft or embezzlement, (iii) the executive’s failure, inability or refusal to perform any of the material services, duties or responsibilities required of him by us or to materially comply with the policies or procedures established from time to time by us, for any reason other than his illness or physical or mental incapacity, (iv) the executive’s dependence, as determined in good faith by us, on any addictive substance, including, but not limited to, alcohol or any illegal or narcotic drugs, (v) the destruction of or material damage to our property caused by the executive’s willful or grossly negligent conduct, and (vi) the willful engaging by the executive in any other conduct which is demonstrably injurious to us or our subsidiaries, monetarily or otherwise.

 

3.  Under our employment agreements with each of Messrs. Jackson and Maroone, termination by Messrs. Jackson or Maroone for “good reason” generally shall mean the occurrence of (i) a material change by us in the executive’s duties or responsibilities which would cause executive’s position to become of materially and substantially less responsibility and importance than those associated with his duties or responsibilities as of the date of the applicable employment agreement, or (ii) a material breach of the applicable employment agreement by us, which breach is not cured within ten days after written notice is received by us.

 

4.  Retirement generally shall mean the named executive officer’s termination of employment or other service from us or a subsidiary of ours after attainment of age 55 and completion of at least six (6) years of service with us or a subsidiary of ours (disregarding any service with an entity prior to becoming a subsidiary or after ceasing to be a subsidiary).

 

5.  Change in Control (as defined in our stock option plans) generally shall mean if any person shall (i) acquire direct or indirect beneficial ownership of more than 50% of the total combined voting power with respect to the election of directors of our issued and outstanding stock (except that no change in control shall be deemed to have occurred if the persons who were our stockholders immediately before such acquisition own all or substantially all of the voting stock or other interests of such person immediately after such transaction), or (ii) have the power (whether as a result of stock ownership, revocable or irrevocable proxies, contract or otherwise) or ability to elect or cause the election of directors consisting at the time of such election of a majority of the board.

 

Mike Jackson

 

 

 

 

Termination for Cause

 

If we terminate Mr. Jackson’s employment for “cause,” he is not entitled to any payments triggered by the termination and options held by Mr. Jackson on the date of termination, whether vested or unvested, will be cancelled.

 

Voluntary Termination for Good Reason

 

If Mr. Jackson terminates his employment with us for “good reason”, as long as Mr. Jackson is in compliance with the restrictive covenants and confidentiality provision of his employment agreement and signs a reasonable and mutually acceptable severance agreement (including a release and a covenant of reasonable cooperation), he will be entitled to receive an amount equal to: (i) the sum of his then-current annual base salary plus annual bonus awarded to him in the calendar year prior to such termination of his employment, as well as (ii) the pro-rata portion (based on the portion of the calendar year actually served by Mr. Jackson) of his annual bonus to which he would have been entitled had his employment not been terminated, to the extent applicable performance targets are met. Payment of the amount due under clause (i) above would be made by us (by lump sum or otherwise) within thirty (30) days following the termination and payment of the amount due under clause (ii) above would be made by us (in lump sum) at the same time as year 2006 annual bonuses are paid to our bonus-eligible employees. (Given the assumed date of termination of December 29, 2006, which we assume to be year-end for purposes of our Senior Executive Incentive Bonus Plan, payment of the amount due under clause (ii) is included under “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table” on page 28, not “Cash Severance” in the table above.) Mr. Jackson and his dependents also will be entitled to continue to participate in our group health and welfare benefit plans for a period of eighteen (18) months following the termination at the same cost to Mr. Jackson as provided to him prior to termination (or we will procure and pay for comparable benefits during such time period). Moreover, all vested stock options held by Mr. Jackson will survive and be exercisable for the remainder of their initial ten-year term and all unvested stock options held by him will immediately vest on such termination and will survive and be exercisable for one year following such termination. The value of the immediate vesting of unvested options is reflected in the table above assuming they were exercised on December 29, 2006. Since vested stock options are already exercisable upon termination, no value is attributable in the table to the extension of the exercise period for such vested options. In addition, Mr. Jackson shall be entitled to receipt of his deferred bonuses from 2004 and 2005, respectively, to be paid in full (by lump sum or otherwise) within thirty (30) days from such event.

 

Voluntary Termination without Good Reason

 

If Mr. Jackson terminates his employment with us without “good reason,” he is not entitled to any payments triggered by the termination and options held by Mr. Jackson, to the extent exercisable on the date of termination, shall remain exercisable until the date of such option and sixty (60) days following the date of such termination. All other options held by Mr. Jackson shall terminate immediately and he shall have no further right to purchase shares of stock pursuant to the options.

 

Termination due to Death or Disability

 

If Mr. Jackson’s employment is terminated because of death or inability to perform his duties and responsibilities due to a physical or mental disability or sickness for more than ninety (90) days (whether or not consecutive) during any period of twelve (12) consecutive months or a physical or mental disability which is reasonably expected to extend for greater than three (3) months, Mr. Jackson shall be entitled to receipt of his deferred bonuses from 2004 and 2005 respectively, to be paid in full (by lump sum or otherwise) within thirty (30) days from such event. Also, all options held by Mr. Jackson at the time of termination shall become immediately vested and exercisable in full and shall remain exercisable until the earlier of the expiration date of the option or the third anniversary of the date of termination.

 

Retirement

 

In the event of Mr. Jackson’s retirement, all options held by Mr. Jackson at the time of termination shall become immediately vested and exercisable in full and shall remain exercisable until the earlier of the expiration date of the option or the third anniversary of the date of termination.

 

Involuntary Termination Without Cause

 

If we terminate Mr. Jackson’s employment without “cause,” as long as Mr. Jackson is in compliance with the restrictive covenants and confidentiality provision of his employment agreement and signs a reasonable and mutually acceptable severance agreement (including a release and a covenant of reasonable cooperation), he will be entitled to receive the same payments and other benefits as described in the “Voluntary Termination for Good Reason” paragraph above.

 

Material Conditions and Obligations

 

Mr. Jackson will be subject to the restrictive covenant agreements described under the section “Restrictive Covenant Agreements” on page 35.

 

Michael E. Maroone

 

 

 

 

Termination For Cause

 

If we terminate Mr. Maroone’s employment for “cause,” he is not entitled to any payments triggered by the termination and options held by Mr. Maroone on the date of termination, whether vested or unvested, will be cancelled, except any stock options granted before March 26, 1999 which would continue to be exercisable through the duration of their original ten-year terms.

 

Voluntary Termination for Good Reason

 

If Mr. Maroone terminates his employment with us for “good reason,” as long as Mr. Maroone is in compliance with the restrictive covenants and confidentiality provision of his employment agreement and signs a reasonable and mutually acceptable severance agreement (including a release and a covenant of reasonable cooperation), he will be entitled to receive an amount equal to: (i) the sum of his then-current annual base salary plus annual bonus awarded to him in the calendar year prior to such termination of his employment, as well as (ii) the pro-rata portion (based on the portion of the calendar year actually served by Mr. Maroone) of his annual bonus to which he would have been entitled had his employment not been terminated, to the extent applicable performance targets are met. Payment of the amount due under clause (i) above will be made by us (by lump sum or otherwise) within thirty (30) days following the termination and payment of the amount due under clause (ii) above will be made by us (in lump sum) at the same time as year 2006 annual bonuses are paid to our bonus-eligible employees. (Given the assumed date of termination of December 29, 2006, which we assume to be year-end for purposes of our Senior Executive Incentive Bonus Plan, payment of the amount due under clause (ii) is included under “Non-Equity Incentive Plan Compensation” column in the “Summary Compensation Table” on page 28 not “Cash Severance” in the table above.) Also, Mr. Maroone and his dependents will also be entitled to continue to participate in our group health and welfare benefit plans for a period of eighteen (18) months following the termination at the same cost to Mr. Maroone as provided to him

prior to termination (or we will procure and pay for comparable benefits during such time period). Moreover, all vested stock options held by Mr. Maroone will survive and be exercisable for the remainder of their initial ten-year term and all unvested stock options held by him will immediately vest on such termination and will survive and be exercisable for one year following such termination. The value of the immediate vesting of unvested options is reflected in the table above assuming they were exercised on December 29, 2006. Since vested stock options are already exercisable upon termination, no value is attributable in the table to the extension of the exercise period for such vested options.

 

Voluntary Termination without Good Reason

 

If Mr. Maroone terminates his employment with us without “good reason,” he is not entitled to any payments triggered by the termination. Options held by Mr. Maroone shall immediately terminate and he shall have no further right to purchase shares of stock pursuant to the options, except that options, to the extent exercisable on the date of termination, shall remain exercisable until the date of such option and sixty (60) days following the date of such termination. Also, notwithstanding the above, any stock options granted before March 26, 1999 would continue to vest and be exercisable through the duration of their original ten-year terms.

 

Termination due to Death or Disability

 

If we terminate Mr. Maroone’s employment because of death or inability to perform his duties and responsibilities due to a physical or mental disability or sickness for more than ninety (90) days (whether or not consecutive) during any period of twelve (12) consecutive months or a physical or mental disability which is reasonably expected to extend for greater than three (3) months, all options held by Mr. Maroone at the time of termination shall become immediately vested and exercisable in full and shall remain exercisable until the earlier of the expiration date of the option or the third anniversary of the date of termination.

 

Retirement

 

In the event of Mr. Maroone’s retirement, he will be entitled to receive the same payments and other benefits as described under the section “Voluntary Termination Without Good Reason” above.

 

Involuntary Termination Without Cause

 

If we terminate Mr. Maroone’s employment without “cause,” as long as Mr. Maroone is in compliance with the restrictive covenants and the confidentiality provision of his employment agreement and signs a reasonable and mutually acceptable severance agreement (including a release and a covenant of reasonable cooperation), he will be entitled to receive the same payments and other benefits as described in the “Voluntary Termination for Good Reason” paragraph above.

 

Material Conditions and Obligations

 

Mr. Maroone will be subject to the restrictive covenant agreements described under the section “Restrictive Covenant Agreements” on page 35.

 

Jonathan P. Ferrando

 

 

J. Alexander McAllister

 

 

Kevin P. Westfall

 

 

Termination for Cause

 

If we terminate Messrs. Ferrando, McAllister, or Westfall’s employment for “cause,” they are not entitled to any payments triggered by the termination and options held by such executive on the date of termination, whether vested or unvested, will be cancelled.

 

Voluntary Termination

 

If Messrs. Ferrando, McAllister, or Westfall voluntarily terminate their employment for any reason, they are not entitled to any payments triggered by the termination and options held by such executive, to the extent exercisable on the date of termination, shall remain exercisable until the earlier of the expiration date of the options or sixty (60) days following the date of termination.

 

Termination due to Death or Disability

 

If Messrs. Ferrando, McAllister, or Westfall’s employment is terminated because of death or disability, they are not entitled to any payments triggered by the termination, and options held by such executive at the time of termination shall become immediately vested and exercisable in full and shall remain exercisable until the earlier of the expiration date of the option or the third anniversary of the date of termination.

 

Retirement

 

In the event of Messrs. Ferrando, McAllister or Westfall’s retirement, they will be entitled to receive the same payments and other benefits as described under the section “Voluntary Termination” above.

 

Involuntary Termination Without Cause

 

If we terminate Messrs. Ferrando, McAllister, or Westfall’s employment without “cause,” they are not entitled to any payments triggered by the termination and options held by such executive, to the extent exercisable on the date of termination, shall remain exercisable until the earlier of the expiration date of the options or sixty (60) days following the date of the termination.

 

Material Conditions and Obligations

 

No material conditions and obligations exist with respect to post-termination payments for Messrs. Ferrando, McAllister, or Westfall.

 

Craig T. Monaghan

 

Mr. Monaghan voluntarily terminated his employment with us effective August 31, 2006. Mr. Monaghan did not receive any payments under any contract, agreement, plan or arrangement at, following or in connection with his termination of employment.

 

Each of our non-employee directors receives the following annual fees for service on our Board of Directors:

 

 

Additionally, our 1995 Amended and Restated Non-Employee Director Stock Option Plan provided for an initial grant of options to purchase 50,000 shares of our stock immediately upon the appointment of a non-employee director to our Board. This plan also provided for an annual grant of options to purchase 20,000 shares of our stock at the beginning of each fiscal year to each non-employee director serving on the Board at such date. Unless otherwise provided, all options granted under this plan are fully vested and immediately exercisable. Under this plan, each grant of options to a non-employee director remains exercisable for a term of ten years from the grant date so long as the director remains a member of the Board. The options are exercisable at a price per share equal to the closing price per share of our stock on the NYSE on the date immediately prior to the grant date. In accordance with the plan, on January 3, 2006, Messrs. Brown, J.P. Bryan (a former director), Burdick, Crowley and Lampert and Ms. Rosenfeld each received an automatic grant of options to purchase 20,000 shares of our stock at an exercise price of $21.73 per share. Additionally, each of Messrs. Grusky and Migoya received an automatic grant of options to purchase 46,616 shares of our stock on June 22, 2006 at an exercise price of $20.97 per share in connection with their appointment to our Board of Directors. Under the terms of our 1995 Amended and Restated Non-Employee Director Stock Option Plan, Messrs. Grusky and Migoya each are entitled to receive 50,000 stock options on the date of their appointment to the Board. However, only 93,233 shares remained available for grant under the plan. Accordingly, in accordance with the proration provision set forth in the plan, Messrs. Grusky and Migoya each were automatically granted options to purchase 46,616 shares under the plan.

 

The table below sets forth compensation paid to our directors during fiscal 2006.

 

 

 

 

 

 

DIRECTOR STOCK OWNERSHIP GUIDELINES

 

The Board believes that directors should be stockholders and have a financial stake in the Company. Toward this end, the Board expects that each director will own shares of the Company’s common stock having a market value of at least $100,000 within five years of first becoming a director or adoption of the Director Stock Ownership guideline (October 28, 2003). Exceptions to this requirement may only be made by the Board under compelling mitigating circumstances. This table reflects the number of shares of our common stock (excluding stock options) beneficially owned by our directors, as of March 29, 2007.

 

 

 

 

During 2006, Messrs. Brown and Lampert and Ms. Rosenfeld served on our Compensation Committee. Please refer to pages 13 and 14 for a description of certain transactions we entered into since January 1, 2006 in which Mr. Lampert has an indirect interest. None of our Compensation Committee members have ever

been an officer or employee of AutoNation or any of our subsidiaries and none of our executive officers has served on the Compensation Committee or Board of Directors of any Company of which any of our other directors is an executive officer.

 

We have entered into employment agreements with Mike Jackson and Michael E. Maroone and an employment letter with Michael J. Short. Summaries of these employment agreements and other employment arrangements are set forth below.

 

Mike Jackson.  In December 2004, we entered into an employment agreement with Mr. Jackson pursuant to which he serves as our Chairman and Chief Executive Officer. The agreement, which expires on September 24, 2007 (subject to earlier termination in certain circumstances), effectively extends Mr. Jackson’s prior employment agreement and provides for a continuation of his base salary of $1,150,000 per year, subject to future increases as determined by the Compensation Committee (or the Executive Compensation Subcommittee, as applicable). Mr. Jackson’s employment agreement also provides for his participation in the AutoNation, Inc. Senior Executive Incentive Bonus Plan, with bonus eligibility (which shall be no less than 1331/3% of his base salary) and performance objectives as established by the Executive Compensation Subcommittee during the first quarter of each year. A portion of the bonus awards under the AutoNation, Inc. Senior Executive Incentive Bonus Plan are payable to Mr. Jackson on a deferred basis (without interest), subject to certain terms and conditions. The agreement provides that Mr. Jackson will participate in our stock option program during each year of his employment at the discretion of the Executive Compensation Subcommittee. Under the terms of the agreement, if we terminate Mr. Jackson’s employment for any reason other than “cause,” or if he terminates his employment with us for “good reason” (each as defined in the employment agreement), he is entitled to receive an amount equal to the sum of his then-current annual base salary plus annual bonus awarded to him in the calendar year prior to such termination of his employment, as well as the pro rata portion of his annual bonus to which he would have been entitled had his employment not been terminated, to the extent applicable performance targets are met. Additionally, if we terminate Mr. Jackson’s employment without cause or if he terminates employment for good reason, all vested stock options held by him will survive and be exercisable for the remainder of their initial ten-year term and all unvested stock options held by him will immediately vest on such termination and will survive and be exercisable for one year following such termination. The agreement also contains non-competition covenants and provides that Mr. Jackson is entitled to certain benefits during his employment, including limited personal use of our corporate aircraft.

 

Michael E. Maroone.  On July 27, 2005, we entered into an employment agreement with Michael E. Maroone pursuant to which he serves as our President and Chief Operating Officer. The term of the employment agreement ends on December 31, 2007. Our agreement with Mr. Maroone provides for an annual base salary of $1,000,000. The employment agreement also provides for Mr. Maroone’s participation in the AutoNation, Inc. Senior Executive Incentive Bonus Plan, with bonus eligibility (which shall be no less than 100% of his base salary) and performance objectives as established by the Executive Compensation Subcommittee during the first quarter of each year. The agreement provides that Mr. Maroone will participate in our stock option program during each year of his employment at the discretion of the Executive Compensation Subcommittee. Under the terms of the agreement, if we terminate Mr. Maroone’s employment for any reason other than “cause,” or if he terminates his employment with us for “good reason” (each as defined in the employment agreement), he is entitled to receive an amount equivalent to his then-current annual base salary plus annual bonus awarded to him in the calendar year prior to such termination of his employment. In such circumstances, Mr. Maroone would also be entitled to receive the pro rata portion of his annual performance bonus applicable to the period prior to the termination of his employment, provided that the applicable performance targets are met. Additionally, if we terminate Mr. Maroone’s employment without cause or if he terminates employment for good reason, all vested stock options held by him will survive and be exercisable for the remainder of their initial ten-year term and all unvested stock options held by him will immediately vest on such termination and will survive and be exercisable for one year following such termination. The agreement also contains non-competition covenants and provides that Mr. Maroone is entitled to certain

benefits during his employment, including limited personal use of our corporate aircraft. By letter to Mr. Maroone dated March 26, 1999, we agreed that upon the termination of Mr. Maroone’s employment with us any stock options granted to Mr. Maroone prior to March 26, 1999 would continue to vest in accordance with their initial vesting schedule and would be exercisable through the duration of their original ten-year terms.

 

Michael J. Short.  On December 27, 2006, we entered into an employment letter with Michael J. Short pursuant to which he serves as our Executive Vice President and Chief Financial Officer. Our letter with Mr. Short provides for Mr. Short’s employment with us at an annual base salary of $525,000. Mr. Short is entitled to participate in the Company’s senior executive incentive bonus plan commencing in 2007 with a bonus target of not less than 60% of base salary, with the performance goals and other terms of the bonus as established by the Executive Compensation Subcommittee of the Board. Pursuant to the letter, on January 15, 2007, his start date with us, he received 200,000 options to purchase shares of our common stock at an exercise price of $21.56 per share, the closing price of our common stock on Friday, January 12, 2007, the trading day preceding the grant date. Under the terms of the letter, if Mr. Short’s employment is terminated by us during the first twenty-four (24) months of his employment for any reason other than “cause,” death or disability, he is entitled to receive an amount equivalent to eighteen (18) months of his base salary.

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires that our directors, executive officers and persons who beneficially own 10% or more of our stock file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our stock and our other equity securities. To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the year ended December 31, 2006, our directors, executive officers and greater than 10% beneficial owners complied with all such applicable filing requirements.

 

 

The following table sets forth certain information as of March 29, 2007 with respect to the beneficial ownership of our stock by (1) each person who is known by us to be a beneficial owner of more than 5% of our stock outstanding, (2) each of our directors, (3) our Chairman and Chief Executive Officer and the other persons named in the Summary Compensation Table in this Proxy Statement and (4) all of our current directors and executive officers as a group. Share amounts and percentages include shares of our stock that may be acquired by such individual, entity or group upon exercise of all options exercisable on March 29, 2007 or within sixty days thereafter. As of March 29, 2007, there were 209,802,010 shares of our common stock outstanding.