Each of our stores acquires new vehicles for retail sale either directly from
the applicable automotive manufacturer or distributor or through dealer trades
with other stores of the same franchise. Accordingly, we depend in large part
on the automotive manufacturers and distributors to provide us with high-quality
vehicles that consumers desire and to supply us with such vehicles at suitable
quantities and prices and at the right times. Our operations, particularly our
sales of new vehicles, are impacted by the sales incentive programs conducted
by the automotive manufacturers to spur consumer demand for their vehicles. We
generally acquire used vehicles from customer trade-ins, at the termination of
leases and, to a lesser extent, auctions and other sources. We generally recondition
used vehicles acquired for retail sale at our stores' service facilities and capitalize
costs related thereto as used vehicle inventory. Used vehicles that we do not
sell at our stores generally are sold at wholesale through auctions.
We provide a wide variety of financial products and services to our customers
in a convenient manner and at competitive prices. We arrange for our customers
to finance vehicles through installment loans or leases with third-party lenders,
including the vehicle manufacturers' and distributors' captive finance subsidiaries,
in exchange for a commission payable to us by the third-party lender. Commissions
that we receive from these third-party lenders may be subject to chargeback,
in full or in part, if loans that we arrange are defaulted or prepaid or upon
other specified circumstances. However, our exposure to loss in connection with
arranging third-party financing generally is limited to the commissions that
we receive. Since our mid-1999 exit from the vehicle lease underwriting business
and our December 2001 exit from the retail auto loan underwriting business,
we have not directly financed our customers' vehicle leases or purchases. In
July 2003, we sold the remainder of our finance receivables portfolio with respect
to auto leases and loans that we had underwritten and received proceeds equal
to the net carrying value of the financing receivables and servicing liabilities
at the close of the transaction.
We also offer our customers various vehicle warranty and extended protection
products, including extended warranties, maintenance programs, guaranteed auto
protection'(known as 'GAP,' this protection covers the shortfall between a customer's
loan balance and insurance payoff in the event of a casualty), credit insurance,
lease 'wear and tear' insurance and theft protection products at competitive
prices. The vehicle warranty and extended protection products that our stores
currently offer to customers are underwritten and administered by independent
third parties, including the vehicle manufacturers' captive finance subsidiaries.
Pursuant to our arrangements with these third-party finance and vehicle protection
product providers, we primarily sell the products on a straight commission basis;
however, we may sell the product, recognize commission and participate in future
underwriting profit, if any, pursuant to a retrospective commission arrangement.
Commissions that we receive from these third-party providers may be subject
to chargebacks, in full or in part, if products that we sell, such as extended
warranties, are cancelled. We establish an estimated liability for chargebacks
against revenue recognized from sales of finance and vehicle protection products
during the period in which the related revenue is recognized.
Our stores also provide a wide range of parts and vehicle maintenance and repair
services, including warranty work that can be performed only at franchised dealerships
and customer-pay service work. Additionally, we operate collision repair centers
in most of our key markets that provide paint and repair services. We have developed
relationships with national insurance companies that establish our stores and
collision centers as preferred providers of collision repair services.
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