AutoNation 2001 Annual Report Download - page 16

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$60.0 million. However, the exposure is difficult to estimate and we cannot
assure you that our aggregate obligations under these credit enhancements,
guarantees and ANC Rental Agreements will not be materially above the range
indicated above or that we will not be subject to additional claims as a result
of ANC Rental's bankruptcy filing, which could have a material adverse effect on
our business, financial condition, cash flows and prospects.
WE HAVE ENGAGED IN CERTAIN TRANSACTIONS THAT ARE UNDER REVIEW BY THE IRS AND MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION, RESULTS OF OPERATIONS
AND CASH FLOWS.
At December 31, 2001 and December 31, 2000, we had $853.8 million and
$877.2 million, respectively, of net deferred tax liabilities. In 1997 and 1999,
we engaged in certain transactions that are of a type that the Internal Revenue
Service has indicated it intends to challenge. Approximately $680 million of the
net deferred tax liabilities relate to these transactions, including a
significant portion that relates to a transaction that generally had the effect
of accelerating certain future projected tax deductions. The amount of foregone
tax deductions in 2001 relating to that transaction was approximately $44
million. These transactions are currently under review by the Internal Revenue
Service. We believe that our tax returns appropriately reflect such
transactions, and that we have established adequate reserves with respect to any
tax liabilities relating to these transactions. However, an unfavorable
settlement or adverse resolution of these matters could have a material adverse
effect on our financial condition, results of operations and cash flows.
12
WE ARE SUBJECT TO RESIDUAL VALUE RISK AND CONSUMER CREDIT RISK IN CONNECTION
WITH OUR LEASE PORTFOLIO, CONSUMER CREDIT RISK IN CONNECTION WITH OUR FINANCE
RECEIVABLES AND RELATED ASSETS AND UNDERWRITING RISK IN CONNECTION WITH OUR
REINSURANCE OF WARRANTY AND PROTECTION PRODUCTS.
Through AutoNation Financial Services, until December 2001, we underwrote
installment auto loans to our customers and, until mid-1999, we provided our
customers an opportunity to finance vehicles through leases with us. In December
2001, we decided that we would no longer underwrite retail auto loans for
customers at our dealerships. We incurred a pre-tax charge in the fourth quarter
of 2001 of $85.8 million to reflect a write-down of our outstanding auto loans
in our portfolio and to cover costs associated with our exit from that business.
However, we will continue to manage and wind down our outstanding loan
portfolio. Accordingly, we remain subject to consumer credit risk in connection
with our portfolio of installment receivables, our lease portfolio and other
related assets. We also remain subject to residual value risk in connection with
our lease portfolio in the event of a decline in the market value of our leased
vehicles. Although we intend to retain current third-party service providers to
collect outstanding balances from our customers and service our loan portfolio,
we cannot assure you that we will be able to collect payments due on such loans
or that our loan reserves will be sufficient. A continuation or worsening of the
current economic recession could have a material adverse effect on the value of
our installment receivables portfolio, our financial condition, results of
operations and cash flows.
Certain of the vehicle warranty and extended protection products that we
offer to our customers are products that are sold and administered by
independent third parties, including the vehicle manufacturers' captive finance
subsidiaries, and for which we retain some or all of the underwriting risk
through captive insurance subsidiaries. To the extent that we retain some or all
of the underwriting risk associated with particular warranty and extended
protection products, we are subject to the risk that claims under the products
may exceed applicable reserves, which could have a material adverse effect on
our business, results of operations, financial condition, cash flows and
prospects.
OUR REVOLVING CREDIT FACILITIES AND THE INDENTURE RELATING TO OUR SENIOR
UNSECURED NOTES CONTAIN CERTAIN RESTRICTIONS ON OUR ABILITY TO CONDUCT OUR
BUSINESS.