Reliable Cars, Inc.

I. Summary of Facts A) Market – Used automobile industry 1) History of Reliable Cars, Inc. a) Honest Carl’s Cars – Established in 1945 by Carl and Mary Lou and within the next five years, became the highest volume, single location used car dealership in California. Mary Lou made a point of employing the disabled and providing a friendly work environment. b) Reliable Cars, Inc. – Honest Carl’s Cars changes their name to Reliable Cars, Inc. They target the moderate income, working-class segment of the market. Dealerships projected a clean, comfortable, friendly ambience with employees focusing on meeting customer expectations and Mary Lou’s long term repeat purchase and referral objectives. In 1979, Reliable Cars was able to start two new sister operations, Oxford Finance, Inc., and Honest Service Agreement Enterprises. Both operations improved profitability and improved customer satisfaction. c) Keen Investment, Inc. – Reliable Cars, Inc. was then sold in 2004 to Keen Investment, Inc., a New York based financial conglomerate. Mary Lou received half cash and the other half in Keen stock. Mary Lou was also elected to the board of Keen and named Chair Emeritus for the Reliable board. Martha Macedo of the Compton Group was named as CEO to replace Mary Lou. d) Consolidated sales of $502,646,400 in 2005 and “best in the industry” ranking in customer satisfaction survey results. Reliable Cars Inc. CFO projects 2006 same store sales will reach $543,000,000. 10% profit after taxes and revenues have increased at a real rate of at least 8% a year, continued revenue growth, valuable and a “cash cow” strategic business unit. B) Products – 1) Low mileage, formerly owned automobiles and pickup trucks priced between from $3,999 to $15,999. All vehicles sold come with a thirty day limited warranty and may be exchanged for credit towards another vehicle of equal or greater value during the first ten days after purchase. Customers express a high level of product quality satisfaction. Less than one in ten thousand customers request an exchange. 2) Procurement: Used cars are bought from the seller who is paid the difference between 60% of the average retail blue book value and the lot-ready cost to the dealership (i.e., a vehicle with an average retail value of $5,000 and a lot-ready cost of $2,500 would be a $500 commission for the seller). 3) Help from the “Compton Group” an off-premise buyer. The group continues to oversee the used auto purchase operation and was recognized as the “most sophisticated in the Industry” by the May 10, 2004 Automotive News. 4) Benefits a) Well known, distinctive image. b) High customer satisfaction. c) High employee loyalty. C) Price 1) All vehicles bear an asking price of at least retail blue book value plus 10%. 2) Strong gross margins are reinforced by salesperson and sales manager commission systems which reward margin maximization. Dealership general managers are also given special bonuses for extraordinary average gross margin months. 3) Finance contracts are written for the maximum rate allowed under state usury statutes. These high rates are rarely a concern for customers. Instead, the amount of the required down payment and affordable payments hold a much higher priority for the buyer. 4) Contracts are typically sold to Oxford (Reliable Cars’ finance operations) on a nonrecourse basis at a buy rate between 10% and 18% APR. 5) Insurance products are sold for the carrier’s prescribed price and bear a commission rate of 5% to 27.5% depending on the type. Other F & I products carry a minimum 50% markup on selling price and are frequently manipulated during the finance and insurance (F & I) process to enhance gross margins. Extended service agreements are underwritten by Honest and typically render the highest level of profitability of all Reliable products. 6) “Every deal for every dollar” and “do not leave any money on the table.” 7) Average gross margins are maintained during special promotions. Enhanced margin bonuses and sales contests reinforce the profitability of these endeavors. D) Advertising/Promotion/Publicity 1) Reliable was among the first automobile dealers in the country to utilize television advertising. 2) Continues to dominate overnight television spots in many markets while advertising on cable, radio, Yellow Pages and direct mail. 3) Reoccurring themes of friendly service, the “language of the local community,” easy terms, easy financing, and reliable cars. 4) Broad range of special event promotions such as “sales” for Presidents’ Day, Easter, Memorial Day, Fourth of July, Labor Day and Thanksgiving. Individual dealerships promote sales around local events such as St. Patrick’s Day, Cinco de Mayo, Harvest Day, and county fairs. 5) Carl Foundation – donated almost $50,000,000 to date and is budgeted for $5,500,000 in distributions for 2006. Publicity value of all giving is maximized by Reliable’s professional public relations agency. 6) The general manager at each dealership is encouraged to participate in local communities. Each general manager is expected to be active in the local Chamber of Commerce, a service club and a personally selected charity. Each dealership is budgeted to donate two vehicles a year to worthy local activities such as Meals on Wheels and Community Services.

II. Problem A) Primary issue(s) – What should Keen Investment, Inc. do with Reliable Cars, Inc. 1) Split board of directors. Half of the board of directors Reliable Cars as a predatory operation, out-of-step with the times. Sees over pricing, forced selling, charging outrageous rates of interest and manipulating the socially disadvantaged as unconscionable. Reliable Cars is seen as a liability to Keen’s reputation. Keen’s principal bank threatens to “rethink relationship with Keen if changes are not made quickly.” Other half of the board of directors sees Reliable as the best business unit under Keen with consistent profits and increasing rates of returns. B) Threats 1) Reliable has been severely criticized for decades by consumer groups and community activists for ostensible price gouging and a broad array of deceptive selling practices. 2) Federal, state and local authorities have conducted thousands of audits and shopped each dealership with undercover agents but have never been convicted of any violation of law. 3) Two year investigation by the Dallas, Texas District Attorney reports Reliable’s methods is questionable but the firm closely adheres to the letter of the law and no evidence was uncovered to connect them to any illicit activities. C) Possible plans of action 1) Maintain the status quo and harvest the income. 2) Embrace a more socially responsible operation by implanting changes a) Cut interest rates and sell only to “A” buyers. b) Adopt a non-negotiated, flat pricing scheme at 10% under retail blue book. c) Utilize straight-salary sales consultants to ensure the best value for the customers. d) Thoroughly disclose the nature, value and cost of all F & I products. e) Drop the aggressive Compton Group in favor of local dealership efforts and contracts with rental car companies. f) Discontinue support of community and charitable activities. g) Dropping all advertising with the exception of listings in yellow pages. h) Dropping the thirty day limited warranty and exchange program. i) Cutting payroll by 40% across the board and retain only the most productive and efficient workers. 3) Sell the Reliable Cars operations, possible to Mary Lou.

III. Recommended Action A) Primary recommended action 1) Each company has corporate responsibilities such making a profit for stockholders and social responsibilities such as conducting business practices with respect for employees, the environment and the community. For Reliable Cars Inc., the successfully meet these responsibilities despite some criticism in their practices. They make a profit for their stockholders (Keen Investment, Inc.), 10% of sales after-taxes with revenues increasing by at least 8% over the last ten years. Reliable Cars, Inc. is also viewed as a valuable and important “cash cow” business unit for Keen Investment. Reliable Cars also benefits from a high employee loyalty while giving back to the community via the Carl Foundation and through general managers who participate in the local community and donating to local activities such as Meals on Wheels. Because of these, I believe the board of directors for Keen Investments should maintain the status quo and continue to harvest the income. A plan of action however should be ready in the event Reliable Cars is found to conduct in illegal activity or practice.

Reliable Cars, Inc. Started back in 1945 by Carl and Mary Lou, Reliable Cars, Inc. has grown small family owned used car dealership to the highest volume, single location used car dealership in just five years. Known back then as Honest Carl’s Cars, the dealership grew to the largest and most successful chain of used car dealerships in the United States. They focused on employing the disabled and providing a friendly work environment. Changing their target market to the moderate income, working-class segment, Honest Carl’s Cars changed their name to Reliable Cars, Inc. and turned their focus towards meeting customer expectations and meet Mary Lou’s long term repeat purchase and referral objectives. The company continued to grow and in 1979 spawned two sister operations, Oxford Finance, Inc. and Honest Service Agreement Enterprises. Reliable Cars, Inc. was then sold to Keen investments in 2004 and recorded record consolidated sales of $502,646,400 in 2005 with projected same-store sales of $543,000,000 in 2006. Reliable Cars Inc., sells low mileage, formerly owned automobiles and pickup trucks from the $3,999 to $15,999 price range. Each vehicle sold includes a thirty day limited warranty and may be exchanged for credit towards another vehicle of equal or greater value during the first ten days after purchase. Customers express a high level of product quality satisfaction and on the rare occasion a customer is disappointed, replacements can be made but less than one in ten thousand customers request an exchange. Each used car is acquired with the help of the “Compton Group” a family ran off-premise buyer with a reputation as professional buyers throughout North America. The dealerships pay the used car seller the difference between 60% of average retail blue book value and the lot-ready cost to the dealership. The used car purchase operation was cited as the “most sophisticated in the Industry” by the May 10, 2004 Automotive News. Sales employees employ a “soft” version of the typical take-over automotive selling system. A salesperson makes first contact with the potential customer until the sales manager comes in to help close the deal while working subtly to maximize the margin in the deal. During the process of closing a car sale, the finance and insurance manager works to upsell financing, vehicle insurance, credit life and credit disability insurance, security systems and special care products. The finance and insurance manager receives a commission for each sale and a special bonus for deals which include full benefits or all F & I products. Prices for Reliable’s products bear an asking price of at least retail blue book value plus ten percent which leads to an average gross margin of forty five percent. Strong gross margins are reinforced by salesperson and sales manager commission system which rewards margin maximization. In addition, dealership general managers are given special bonuses for extraordinary average gross margin months. Finance contracts are written for the maximum rate allowed under state usury statutes. In California, dealerships charge a twelve percent add-on rate, which is roughly equivalent to a 21.5% APR. This however is rarely a concern for customers since required down payment and affordable payments hold a much higher priority in their minds. Insurance products are sold for the carrier’s prescribed price and have a commission rate of 5% to 27.5% depending on the type. Other products such as security systems and special care products carry a minimum 50% markup on selling price and is frequently manipulated during the F &I process to enhance gross margins for the dealership. Any extended service agreements sold are underwritten by Honest Service Agreement Enterprises and typically render the highest level of profitability of all Reliable’s products.