AutoNation 2003 Annual Report Download - page 79

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Table of Contents
AUTONATION, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced sale or liquidation. Fair value estimates are made at a specific point in time, based on relevant
market information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore cannot be determined with precision. The assumptions used have a significant effect on the estimated
amounts reported.
The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments:
• Cash and cash equivalents, trade and manufacturer receivables, other current assets, floorplan notes payable, accounts
payable, other current liabilities and variable rate debt: The amounts reported in the accompanying Consolidated Balance Sheets
approximate fair value due to their short-term nature.
• Installment loans receivable, investments in securitizations and servicing liability: The fair value of installment loans receivable,
investments in securitized receivables and the servicing liability are estimated based upon the discounted value of the future cash flows
expected to be received. Significant assumptions used to estimate the fair value at December 31, 2002 are as follows: discount rate on
investments in securitizations — 9.15%; discount rate on servicing liability –7.40%; annual loss rate — 2.96% ; and prepayment rate
–1.50%.
• Fixed rate debt: The fair value of fixed rate debt is based on borrowing rates currently available to the Company for debt with similar
terms and maturities.
The following table sets forth the carrying amounts and fair values of the Company’s financial instruments, except for those noted above
for which carrying amounts approximate fair value, as of December 31:
2003 2002
Carrying Fair Carrying Fair
Assets (Liabilities) Amount Value Amount Value
Installment loans receivable, net $ — $ — $35.4 $39.9
Investments in securitizations:
Other retained interests $ — $ — $14.9 $14.9
Interest-only strips $ — $ — $31.7 $31.7
Servicing liability $ — $ — $(12.0) $(12.0)
Fixed rate debt(1) $(494.7) $(557.1) $(498.1) $(509.2)
(1) Primarily consists of amounts outstanding related to senior unsecured notes.
22. BUSINESS AND CREDIT CONCENTRATIONS
The Company owns and operates franchised automotive stores in the United States pursuant to franchise agreements with vehicle
manufacturers. Franchise agreements generally provide the manufacturers or distributors with considerable influence over the operations of
the store. The success of any franchised automotive dealership is dependent, to a large extent, on the financial condition, management,
marketing, production and distribution capabilities of the vehicle manufacturers or distributors of which the Company holds franchises. At
December 31, 2003 and 2002, the Company had receivables from manufacturers or distributors of $177.0 million and $150.5 million,
respectively.
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