================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1999511
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
The number of shares of Common Stock, par value $0.01, outstanding on April 25,
2007 was 30,294,017.
================================================================================
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements - Three
months ended March 31, 2007 and 2006 1
Consolidated Balance Sheets - As
of March 31, 2007 and December 31, 2006 2
Consolidated Statements of Cash
Flows - Three months ended March 31, 2007 and 2006 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 28
ITEM 6. EXHIBITS 28
SIGNATURES 29
INDEX OF EXHIBITS 30
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
(Dollars in thousands, except per share data) THREE MONTHS ENDED
MARCH 31,
----------------------------
2007 2006
------------ ------------
REVENUE:
Finance charges $ 51,413 $ 46,007
License fees 82 2,897
Other income 5,856 4,122
------------ ------------
Total revenue 57,351 53,026
------------ ------------
COSTS AND EXPENSES:
Salaries and wages 11,861 10,594
General and administrative 5,967 6,765
Sales and marketing 4,472 4,359
Provision for credit losses 3,873 524
Interest 8,471 3,574
Other expense 25 82
------------ ------------
Total costs and expenses 34,669 25,898
------------ ------------
Operating income 22,682 27,128
Foreign currency gain 4 5
------------ ------------
Income from continuing operations before
provision for income taxes 22,686 27,133
Provision for income taxes 7,299 9,928
------------ ------------
Income from continuing operations 15,387 17,205
------------ ------------
Discontinued operations
Loss from discontinued United
Kingdom operations (38) (13)
Credit for income taxes (11) (5)
------------ ------------
Loss on discontinued operations (27) (8)
------------ ------------
Net income $ 15,360 $ 17,197
============ ============
Net income per common share:
Basic $ 0.51 $ 0.48
============ ============
Diluted $ 0.49 $ 0.45
============ ============
Income from continuing operations
per common share:
Basic $ 0.51 $ 0.48
============ ============
Diluted $ 0.49 $ 0.45
============ ============
Loss from discontinued operations
per common share:
Basic $ (0.00) $ (0.00)
============ ============
Diluted $ (0.00) $ (0.00)
============ ============
Weighted average shares outstanding:
Basic 30,054,349 36,146,994
Diluted 31,283,695 38,609,257
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) AS OF
------------------------
MARCH 31, DECEMBER 31,
2007 2006
(UNAUDITED)
----------- -----------
ASSETS:
Cash and cash equivalents $ 299 $ 8,528
Restricted cash and cash equivalents 54,302 45,609
Restricted securities available for sale 3,878 3,564
Loans receivable (including $18,886 and $23,038
from affiliates as of March 31, 2007 and
December 31, 2006, respectively) 835,850 754,571
Allowance for credit losses (128,249) (128,791)
--------- ---------
Loans receivable, net 707,601 625,780
--------- ---------
Property and equipment, net 16,402 16,203
Income taxes receivable 14,925 11,734
Other assets 15,464 13,795
--------- ---------
Total Assets $ 812,871 $ 725,213
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 84,075 $ 78,294
Line of credit 36,900 38,400
Secured financing 401,797 345,144
Mortgage note and capital lease obligations 8,301 8,631
Deferred income taxes, net 54,941 44,397
--------- ---------
Total Liabilities 586,014 514,866
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000 shares
authorized, 30,291,517 and 30,179,959 shares
issued and outstanding as of March 31, 2007 and
December 31, 2006, respectively 303 302
Paid-in capital 2,055 828
Retained earnings 224,524 209,253
Accumulated other comprehensive loss, net of tax of
$14 and $19 at March 31, 2007 and
December 31, 2006, respectively (25) (36)
--------- ---------
Total Shareholders' Equity 226,857 210,347
--------- ---------
Total Liabilities and Shareholders' Equity $ 812,871 $ 725,213
========= =========
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands) THREE MONTHS ENDED
MARCH 31,
----------------------
2007 2006
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,360 $ 17,197
Adjustments to reconcile cash provided by
operating activities:
Provision for credit losses 3,873 524
Depreciation 1,048 1,270
Loss on retirement of property and equipment 66 38
Provision for deferred income taxes 10,544 5,821
Stock-based compensation 437 (158)
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 5,692 6,163
Income taxes receivable (2,732) 3,291
Other assets (1,527) (1,069)
--------- ---------
Net cash provided by operating activities 32,761 33,077
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash and cash
equivalents (8,693) (2,190)
Purchases of restricted securities available
for sale (504) (198)
Proceeds from sale of restricted securities
available for sale -- 148
Maturities of restricted securities available
for sale 201 --
Principal collected on loans receivable 160,972 147,788
Advances to dealers and accelerated payments
of dealer holdback (212,052) (156,646)
Purchases of consumer loans (14,124) (3,335)
Payments of dealer holdback (20,620) (17,644)
Net change in floorplan receivables, notes
receivable and lines of credit -- 1,746
Purchases of property and equipment (1,262) (391)
--------- ---------
Net cash used in investing activities (96,082) (30,722)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 156,900 103,630
Repayments under line of credit (158,400) (38,000)
Proceeds from secured financing 155,500 75,000
Repayments of secured financing (98,847) (44,000)
Principal payments under mortgage note
and capital lease obligations (381) (368)
Repurchase of common stock -- (104,862)
Proceeds from stock options exercised 332 1,072
--------- ---------
Net cash provided by (used in) financing
activities 55,104 (7,528)
--------- ---------
Effect of exchange rate changes on cash (12) 3
--------- ---------
Net decrease in cash and cash equivalents (8,229) (5,170)
Cash and cash equivalents, beginning of period 8,528 7,090
--------- ---------
Cash and cash equivalents, end of period $ 299 $ 1,920
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 7,991 $ 2,915
Cash paid during the period for income taxes 332 763
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Property and equipment acquired through capital
lease obligations $ 51 $ --
Issuance of restricted stock, net of forfeitures $ 1 $ 1
See accompanying notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles" or "GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for interim periods
are not necessarily indicative of actual results achieved for full fiscal years.
The consolidated balance sheet at December 31, 2006 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 2006 for Credit Acceptance
Corporation (the "Company" or "Credit Acceptance"). Certain prior period amounts
have been reclassified to conform to the current presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Since 1972, Credit Acceptance has provided auto loans to consumers,
regardless of their credit history. The Company's product is offered through a
nationwide network of automobile dealers who benefit from sales of vehicles to
consumers who otherwise could not obtain financing; from repeat and referral
sales generated by these same customers; and from sales to customers responding
to advertisements for the Company's product, but who actually end up qualifying
for traditional financing.
Without the Company's product, consumers are often unable to purchase a
vehicle or they purchase an unreliable one and are not provided the opportunity
to improve their credit standing. As the Company reports to the three national
credit reporting agencies, a significant number of its consumers improve their
lives by improving their credit score and move on to more traditional sources of
financing.
Credit Acceptance was founded to collect retail installment contracts
(referred to as "Consumer Loans") originated by automobile dealerships owned by
the Company's founder, majority shareholder, and current Chairman, Donald Foss.
During the 1980s, the Company began to market this service to non-affiliated
dealers and, at the same time, began to offer dealers a non-recourse cash
payment (referred to as an "advance") against anticipated future collections on
Consumer Loans serviced for that dealer. Today, the Company's program is offered
to dealers throughout the United States. The Company refers to dealers who
participate in its program and who share its commitment to changing consumers'
lives as "dealer-partners".
A consumer who does not qualify for conventional automobile financing can
purchase a used vehicle from a Credit Acceptance dealer-partner and finance the
purchase through the Company. As payment for the vehicle, the dealer-partner
receives the following:
(i) a down payment from the consumer;
(ii) a cash advance from the Company; and
(iii) after the advance has been recovered by the Company, the cash from
payments made on the Consumer Loan, net of certain collection costs
and the Company's servicing fee ("dealer holdback").
The Company's servicing fee is equal to a fixed percentage (typically 20%)
of each payment collected. In addition, the Company receives fees for other
products and services provided in connection with Consumer Loans.
If the Company discovers a misrepresentation by the dealer-partner relating
to a Consumer Loan assigned to the Company, the Company can demand that the
Consumer Loan be repurchased for the current balance of the Consumer Loan less
the amount of any unearned finance charge plus the applicable termination fee,
which is generally $500. Upon receipt of such amount in full, the Company will
reassign the Consumer Loan and its security interest in the financed vehicle to
the dealer-partner. The dealer-partner can also opt to repurchase Consumer Loans
at their own discretion.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The Company is an indirect lender from a legal perspective, meaning the
Consumer Loan is originated by the dealer-partner and immediately assigned to
the Company. Typically, the compensation paid to the dealer-partner in exchange
for the Consumer Loan is paid in two parts. A portion of the compensation is
paid at the time of origination, and a portion is paid over time. The amount
paid at the time of origination is called an advance; the portion paid over time
is based on the performance of the loan and is called dealer holdback.
For accounting purposes, the transactions described above are not
considered to be loans to consumers. Instead, the Company's accounting reflects
that of a lender to the dealer-partner. This classification for accounting
purposes is primarily a result of (i) the dealer-partner's financial interest in
the Consumer Loan and (ii) certain elements of the Company's legal relationship
with the dealer-partner. The cash amount advanced to the dealer-partner (the
"Dealer Loan") is recorded as an asset on the Company's balance sheet. The
aggregate amount of all advances to an individual dealer-partner, plus accrued
income, less repayments comprises the amount recorded in Loans receivable.
A small percentage of Consumer Loans in the United States are assigned to
the Company in exchange for a single payment. Because the dealer-partner does
not retain a financial interest in loans acquired in this manner, these loans
are considered to be purchased loans ("Purchased Loans") for accounting
purposes.
The Company is organized into two primary business segments: United States
and Other. The Other segment consists of a number of discontinued businesses
including a United Kingdom automobile financing business, an automobile leasing
business, a Canadian automobile financing business, and a business offering
secured lines of credit and floorplan financing products. As of March 31, 2007,
substantially all of the Company's capital was invested in the United States
business segment.
The Company's business is seasonal with peak Consumer Loan acceptances
occurring during the first quarter of the year. However, this seasonality does
not have a material impact on the Company's interim results.
ACCOUNTING POLICIES
Finance Charges. The Company recognizes finance charge income in a manner
consistent with the provisions of the American Institute of Certified Public
Accountant's Statement of Position ("SOP") 03-3 "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer." SOP 03-3 requires the Company to
recognize finance charges under the interest method such that revenue is
recognized on a level-yield basis based upon forecasted cash flows. As the
forecasted cash flows change, the Company adjusts the yield upwards for positive
changes and recognizes impairment for negative changes in the current period.
Buyers Vehicle Protection Plan, Inc. ("BVPP"), a wholly owned subsidiary of
the Company, has relationships with third party vehicle service contract
administrators ("TPAs") whereby the TPAs process claims on vehicle service
contracts underwritten by third party insurers. BVPP receives a commission for
all such vehicle service contracts sold by its dealer-partners where the vehicle
service contract is financed by the Company, and does not bear any risk of loss
for claims covered on these third party service contracts. The commission is
included in the purchase price of the vehicle service contract included in the
Consumer Loan. The Company advances to dealer-partners an amount based on the
purchase price of the vehicle service contract on Consumer Loans accepted by the
Company that include vehicle service contracts. The Company recognizes the
commission received from the TPAs for contracts financed by the Company as part
of finance charges on a level-yield basis based upon forecasted cash flows.
Commissions on contracts not financed by the Company are recognized as finance
charge income at the time the commissions are received. The Company's agreements
with two of its TPA's allow the Company to receive profit sharing payments
depending upon the performance of the vehicle service contract programs. Profit
sharing payments are received once a year, if eligible. Profit sharing payments
are not estimable and therefore revenue related to these payments is recognized
in the period the payments are received.
BVPP allows dealer-partners to offer a Guaranteed Asset Protection ("GAP")
product to consumers that is underwritten by a third party. GAP provides the
consumer protection by paying the difference between the loan balance and the
consumer's insurance coverage in the event the vehicle is totaled or stolen. The
dealer-partner typically includes the purchase price of GAP in the Consumer
Loan. The Company receives a fee for every GAP product sold by its
dealer-partners. The Company advances to dealer-partners an amount based on the
purchase price of the GAP product on Consumer Loans accepted by the Company that
include GAP. The Company recognizes the fee as part of finance charges on a
level-yield basis based upon forecasted cash flows. The Company is eligible to
receive profit sharing payments depending on the performance of the GAP products
sold. Profit sharing payments from the third party are received once a year, if
eligible. Profit sharing payments are not estimable and therefore revenue
related to these payments is recognized in the period the payments are
received.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
The Company charges dealer-partners a per month license fee for access to
its patented internet-based Credit Approval Processing System ("CAPS"). In
accordance with GAAP, this fee has historically been recorded as revenue in the
month the fee is charged. Based on feedback received from field sales personnel
and dealer-partners, the Company concluded that the way this fee was charged was
a significant factor driving higher than desired dealer-partner attrition.
Effective January 1, 2007, the Company implemented a change designed to
positively impact dealer-partner attrition. The Company will continue to charge
a monthly fee of $599 but, instead of collecting the license fee in the current
period, the Company will collect the license fee from future dealer holdback
payments and recognize it as finance charges over the life of the Dealer Loans.
Loans Receivable and Allowance for Credit Losses. The Company records the
amount advanced to the dealer-partner as a Dealer Loan. The Dealer Loan is
increased as revenue is recognized and decreased as collections are received.
The Company follows an approach similar to the provisions of SOP 03-3 in
determining its allowance for credit losses. Consistent with SOP 03-3, an
allowance for credit losses is maintained at an amount that reduces the net
asset value (Dealer Loan balance less the allowance) to the value of forecasted
future cash flows discounted at the yield established at the inception of the
Dealer Loan. This allowance is calculated on a dealer-partner by dealer-partner
basis. The discounted value of future cash flows is comprised of estimated
future collections on the Consumer Loans, less any estimated dealer holdback
payments. The Company writes off Dealer Loans once there are no forecasted
future collections on any of the associated Consumer Loans.
In estimating future collections and dealer holdback payments for each
dealer-partner, the Company considers: (i) a dealer-partner's actual collection
data on a static pool basis and (ii) the Company's historical collection
experience. The Company's collection forecast for each dealer-partner is updated
monthly and considers the most recent static pool data available for each
dealer-partner and the Company's entire portfolio of Consumer Loans.
Cash flows from any individual Dealer Loan are often different than
estimated cash flows at Dealer Loan inception. If such difference is favorable,
the difference is recognized into income over the remaining life of the Dealer
Loan through a yield adjustment. If such difference is unfavorable, an allowance
for credit losses is established and a corresponding provision for credit losses
is recorded as a current period expense. Because differences between estimated
cash flows at inception and actual cash flows occur often, an allowance is
required for a significant portion of the Company's Dealer Loan portfolio. An
allowance for credit losses does not necessarily indicate that a Dealer Loan is
unprofitable, and in recent years, very seldom are cash flows from a Dealer Loan
insufficient to repay the initial amounts advanced to the dealer-partner.
NEW ACCOUNTING PRONOUNCEMENTS
In July 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an entity's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes" and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax positions taken
or expected to be taken on a tax return. Under FIN 48, the impact of an
uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, FIN 48 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company adopted the provisions of FIN 48 on January 1, 2007. The
cumulative effect of implementation of FIN 48 was approximately a $0.1 million
increase in the liability for unrecognized tax benefits, which was accounted for
as a decrease in the January 1, 2007 balance of retained earnings.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure financial assets and liabilities (except for those
that are specifically exempted from the Statement) at fair value. The election
to measure a financial asset or liability at fair value can be made on an
instrument-by-instrument basis and is irrevocable. The difference between
carrying value and fair value at the election date is recorded as a transition
adjustment to opening retained earnings. Subsequent changes in fair value are
recognized in earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company is not yet able to quantify the impact of SFAS
159, if adopted, on the Company's consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. LOANS RECEIVABLE
A summary of changes in Loans receivable is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2007
-------------------------------------------------
DEALER PURCHASED OTHER
LOANS LOANS LOANS TOTAL
---------- ------------ -------- ---------
Balance, beginning of period $ 724,093 $ 29,926 $ 552 $ 754,571
New loans (1) 212,052 14,124 -- 226,176
Dealer holdback payments 20,620 -- -- 20,620
Net cash collections on loans 154,634) (6,741) -- (161,375)
Write-offs (4,155) (150) -- (4,305)
Recoveries -- 12 -- 12
Net change in floorplan
receivables, notes
receivable, and lines of -- -- 46 46
credit
Other -- -- 93 93
Currency translation 12 -- -- 12
---------- ------------ -------- ---------
Balance, end of period $ 797,988 $ 37,171 $ 691 $ 835,850
========== ============ ======== =========
THREE MONTHS ENDED MARCH 31, 2006
------------------------------------------------
DEALER PURCHASED OTHER
LOANS LOANS LOANS TOTAL
---------- ------------ -------- ---------
Balance, beginning of period $ 675,692 $ 16,486 $ 2,761 $ 694,939
New loans (1) 156,646 3,335 -- 159,981
Dealer holdback payments 17,644 -- -- 17,644
Net cash collections on loans (145,501) (2,848) -- (148,349)
Write-offs (1,255) (62) -- (1,317)
Recoveries -- 36 -- 36
Net change in floorplan
receivables, notes
receivable, and lines of -- -- (1,711) (1,711)
credit
Other -- -- 161 161
Currency translation (3) -- -- (3)
---------- ------------ --------- ---------
Balance, end of period $ 703,223 $ 16,947 $ 1,211 $ 721,381
========== ============ ========= =========
A summary of changes in the Allowance for credit losses is as follows (in
thousands):
THREE MONTHS ENDED MARCH 31, 2007
------------------------------------------------
DEALER PURCHASED OTHER
LOANS LOANS LOANS TOTAL
---------- ------------ -------- ---------
Balance, beginning of period $ 127,881 $ 910 $ -- $ 128,791
Provision for credit
losses (2) 3,451 286 -- 3,737
Write-offs (4,155) (150) -- (4,305)
Recoveries -- 12 -- 12
Currency translation 14 -- -- 14
---------- ----------- -------- ----------
Balance, end of period $ 127,191 $ 1,058 $ -- $ 128,249
========== =========== ======== ==========
THREE MONTHS ENDED MARCH 31, 2006
-------------------------------------------------
DEALER PURCHASED OTHER
LOANS LOANS LOANS TOTAL
---------- ------------ -------- ---------
Balance, beginning of period $ 130,722 $ 689 $ -- $131,411
Provision for credit
losses (3) 78 408 -- 486
Write-offs (1,255) (62) -- (1,317)
Recoveries -- 36 -- 36
Currency translation (2) -- -- (2)
---------- ------------ ------- ---------
Balance, end of period $ 129,543 $ 1,071 $ -- $130,614
========== ============ ======= =========
(1) New Dealer Loans includes advances to dealer-partners and accelerated
payments of dealer holdback.
(2) Does not include a provision for credit losses of $136 related to other
items.
(3) Does not include a provision for credit losses of $38 on license fees
receivable and other items.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. DEBT
The Company and its subsidiaries currently utilize four primary sources of
debt financing: (i) a revolving secured line of credit with a commercial bank
syndicate; (ii) a revolving secured warehouse facility with institutional
investors; (iii) Rule 144A asset backed secured borrowings with qualified
institutional investors; and (iv) a residual credit facility. General
information for each of the outstanding financing transactions is as follows
(dollars in thousands):
ISSUE MATURITY FINANCING INTEREST RATE AT
FINANCINGS NUMBER CLOSE DATE DATE AMOUNT MARCH 31, 2007
------------------- ------ ---------- --------- --------- ----------------
Revolving Line of n/a February June 20, $135,000 Either Eurodollar
Credit 7, 2006 2008 rate plus 130 basisthe
prime points (6.61%)
or rate (8.25%)
Revolving Secured 2003-2 February February $325,000 Commercial paper rate
Warehouse Facility* 14, 2007 13, 2008 plus 65 basis points
(6.00%)
Term ABS 144A 2006-1 April 18, n/a** $100,000 Fixed rate (5.36%)
2006-1* 2006
Term ABS 144A 2006-2 November n/a*** $100,000 Fixed rate (5.38%)
2006-2* 21, 2006
Residual Credit 2006-3 September September $ 50,000 LIBOR or the
Facility* 20, 2006 19, 2007 commercial paper rate
plus 145 basis points
(6.79%)
* Financing made available only to a specified subsidiary of the Company.
** The total expected term of this facility is 15 months.
*** The total expected term of this facility is 22 months.
Additional information related to the amounts outstanding on each facility is as
follows (dollars in thousands):
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
2007 2006
--------- ---------
REVOLVING LINE OF CREDIT
Maximum outstanding balance $ 63,100 $ 101,900
Weighted average outstanding balance 42,300 58,600
REVOLVING SECURED WAREHOUSE FACILITY
Maximum outstanding balance $ 264,000 $ 150,500
Weighted average outstanding balance 216,500 111,000
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. DEBT - (CONTINUED)
AS OF MARCH 31, AS OF DECEMBER 31,
2007 2006
--------------- -----------------
REVOLVING LINE OF CREDIT
Balance outstanding $ 36,900 $ 38,400
Letter(s) of credit 400 900
Amount available for borrowing (1) 97,700 95,740
Interest rate 6.61% 7.06%
REVOLVING SECURED WAREHOUSE FACILITY
Balance outstanding $ 264,000 $ 171,000
Amount available for borrowing 61,000 154,000
Contributed Dealer Loans 367,150 249,247
Interest rate 6.00% 6.00%
TERM ABS 144A 2006-1
Balance outstanding $ 37,797 $ 74,144
Contributed Dealer Loans 93,178 115,664
Interest rate 5.36% 5.36%
TERM ABS 144A 2006-2
Balance outstanding $ 100,000 $ 100,000
Contributed Dealer Loans 125,076 125,178
Interest rate 5.38% 5.38%
RESIDUAL CREDIT FACILITY
Balance outstanding $ -- $ --
Contributed Dealer Loans -- --
Interest rate 6.79% 6.80%
(1) Represents amount available under terms of the agreement. As of March 31,
2007, the borrowing base limitation restricts the Company's borrowing
ability under the line of credit to $90.9 million. Due to this borrowing
base restriction, the amount available for borrowing was $53.6 million as
of March 31, 2007.
LINE OF CREDIT FACILITY
Borrowings under the credit agreement are subject to a borrowing base
limitation equal to 75% of the net book value of Dealer Loans plus 75% of the
net book value of Consumer Loans purchased by the Company, less a hedging
reserve (not exceeding $1.0 million), the amount of letters of credit issued
under the line of credit, and the amount of other debt secured by the collateral
which secures the line of credit. Borrowings under the credit agreement are
secured by a lien on most of the Company's assets. The Company must pay annual
and quarterly fees on the amount of the commitment.
SECURED FINANCING
The Company's wholly-owned subsidiary, CAC Warehouse Funding Corp. II
("Warehouse Funding" or "2003-2"), has a revolving secured financing facility
with institutional investors. Under the facility, Warehouse Funding may receive
80% of the net book value of the contributed Dealer Loans in financing when the
Company conveys Dealer Loans to Warehouse Funding for cash and equity in
Warehouse Funding. Warehouse Funding will in turn pledge the Dealer Loans as
collateral to the institutional investors to secure loans that will fund the
cash portion of the purchase price of the Dealer Loans. In addition to the
maturity of the facility, there is a requirement that certain amounts
outstanding under the facility be refinanced within 360 days of the most recent
renewal. This financing occurred on April 12, 2007. If the refinancing had not
occurred the transaction would have ceased to revolve, would amortize as
collections were received and, at the option of the institutional investors,
would have been subject to acceleration and foreclosure. Although Warehouse
Funding will be liable for any secured financing under the facility, the
financing is non-recourse to the Company, even though Warehouse Funding and the
Company are consolidated for financial reporting purposes.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. DEBT - (CONTINUED)
As Warehouse Funding is organized as a separate legal entity from the
Company, assets of Warehouse Funding (including the conveyed Dealer Loans) will
not be available to satisfy the general obligations of the Company. All the
assets of Warehouse Funding have been encumbered to secure Warehouse Funding's
obligations to its creditors. Interest has been limited to a maximum rate of
6.75% through interest rate cap agreements executed in the first quarter of
2007. The Company receives a monthly servicing fee paid out of collections equal
to 6% of the collections received with respect to the conveyed Dealer Loans.
Except for the servicing fee and payments due to dealer-partners, the Company
does not have any rights in any portion of such collections.
The Company's wholly-owned subsidiary, Credit Acceptance Funding LLC 2006-1
("Funding 2006-1"), completed a secured financing transaction in which Funding
2006-1 received $100.0 million in financing. In connection with this
transaction, the Company conveyed, for cash and the sole membership interest in
Funding 2006-1, Dealer Loans having a net book value of approximately $133.5
million to Funding 2006-1, which, in turn, conveyed the Dealer Loans to a trust
that issued $100.0 million in notes to qualified institutional investors. A
primary and backup financial insurance policy has been issued in connection with
the transaction. The policies guarantee the timely payment of interest and
ultimate repayment of principal on the final scheduled distribution date. The
notes were rated "Aaa" by Moody's Investor Services and "AAA" by Standard &
Poor's Rating Services. The proceeds of the initial conveyance to Funding 2006-1
were used by the Company to purchase Dealer Loans, on an arm's-length basis,
from Warehouse Funding. Through October 16, 2006, the Company conveyed
additional Dealer Loans to Funding 2006-1, which were then conveyed by Funding
2006-1 to the trust. After October 16, 2006, the debt outstanding under this
facility began to amortize. The secured financing creates loans for which the
trust is liable and which are secured by all the assets of the trust. Such loans
are non-recourse to the Company, even though the trust, Funding 2006-1 and the
Company are consolidated for financial reporting purposes. As Funding 2006-1 is
organized as a separate legal entity from the Company, assets of Funding 2006-1
(including the conveyed Dealer Loans) are not available to satisfy the general
obligations of the Company. The expected annualized cost of the secured
financing, including underwriter's fees, the insurance premiums and other costs
is approximately 8.1%. The Company receives a monthly servicing fee paid out of
collections equal to 6% of the collections received with respect to the conveyed
Dealer Loans. Except for the servicing fee and payments due to dealer-partners,
the Company does not receive, or have any rights in, any portion of such
collections, except for a limited right in its capacity as Servicer to exercise
a "clean-up call" option to purchase Dealer Loans from Funding 2006-1 under
certain specified circumstances. Alternatively, when the trust's underlying
indebtedness is paid in full, either through collections or through a prepayment
of the indebtedness, remaining collections would be paid over to Funding 2006-1
as the sole beneficiary of the trust where they would be available to be
distributed to the Company as the sole member of Funding 2006-1.
The Company's wholly-owned subsidiary, Credit Acceptance Funding LLC 2006-2
("Funding 2006-2"), completed a secured financing transaction in which Funding
2006-2 received $100.0 million in financing. In connection with this
transaction, the Company conveyed, for cash and the sole membership interest in
Funding 2006-2, Dealer Loans having a net book value of approximately $125.6
million to Funding 2006-2, which, in turn, conveyed the Dealer Loans to a trust
that issued $100.0 million in notes to qualified institutional investors. A
primary and backup financial insurance policy has been issued in connection with
the transaction. The policies guarantee the timely payment of interest and
ultimate repayment of principal on the final scheduled distribution date. The
notes were rated "Aaa" by Moody's Investor Services and "AAA" by Standard &
Poor's Rating Services. The proceeds of the initial conveyance to Funding 2006-2
were used by the Company to purchase Dealer Loans, on an arm's-length basis,
from Warehouse Funding. Through November 16, 2007, the Company may be required,
and is likely to convey, additional Dealer Loans to Funding 2006-2, which will
be conveyed by Funding 2006-2 to the trust. After November 16, 2007, the debt
outstanding under this facility will begin to amortize. The secured financing
creates loans for which the trust is liable and which are secured by all the
assets of the trust. Such loans are non-recourse to the Company, even though the
trust, Funding 2006-2 and the Company are consolidated for financial reporting
purposes. As Funding 2006-2 is organized as a separate legal entity from the
Company, assets of Funding 2006-2 (including the conveyed Dealer Loans) are not
available to satisfy the general obligations of the Company. The expected
annualized cost of the secured financing, including underwriter's fees, the
insurance premiums and other costs is approximately 7.4%. The Company receives a
monthly servicing fee paid out of collections equal to 6% of the collections
received with respect to the conveyed Dealer Loans. Except for the servicing fee
and payments due to dealer-partners, the Company does not receive, or have any
rights in, any portion of such collections, except for a limited right in its
capacity as Servicer to exercise a "clean-up call" option to purchase Dealer
Loans from Funding 2006-2 under certain specified circumstances. Alternatively,
when the trust's underlying indebtedness is paid in full, either through
collections or through a prepayment of the indebtedness, remaining collections
would be paid over to Funding 2006-2 as the sole beneficiary of the trust where
they would be available to be distributed to the Company as the sole member of
Funding 2006-2.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. DEBT - (CONCLUDED)
The Company's wholly-owned subsidiary, Credit Acceptance Residual Funding
LLC ("Residual Funding"), has a $50.0 million secured credit facility with an
institutional investor. This facility allows Residual Funding to finance its
purchase of trust certificates from special purpose entities (the "Term SPEs")
that purchased loans to dealer-partners under the Company's term securitization
transactions. Historically, the Term SPEs' residual interests in Dealer Loans,
represented by their trust certificates, have proven to have value that
increases as their term securitization obligations amortize. The new facility
enables the Term SPEs to realize and distribute to the Company up to 65% of that
increase in value prior to the time the related term securitization senior notes
are paid in full. Residual Funding's interests in Dealer Loans, represented by
its purchased trust certificates, are subordinated to the interests of term
securitization senior noteholders but the entire arrangement is non-recourse to
the Company. As Residual Funding is organized as a separate legal entity from
the Company, assets of Residual Funding, including purchased trust certificates,
are not available to satisfy the general obligations of the Company, even though
Residual Funding and the Company are consolidated for financial reporting
purposes.
MORTGAGE LOAN
The Company has a mortgage loan from a commercial bank that is secured by a
first mortgage lien on the Company's headquarters building and an assignment of
all leases, rents, revenues and profits under all present and future leases of
the building. There were $6.6 million and $6.8 million outstanding on this loan
as of March 31, 2007 and December 31, 2006, respectively. The loan matures on
June 9, 2009, bears interest at a fixed rate of 5.35%, and requires monthly
payments of $92,156 and a balloon payment at maturity for the balance of the
loan.
CAPITAL LEASE OBLIGATIONS
As of March 31, 2007, the Company has various capital lease obligations
outstanding for computer equipment, with monthly payments totaling $74,000. The
total amount of capital lease obligations outstanding as of March 31, 2007 and
December 31, 2006 was $1.7 million and $1.8 million, respectively. These capital
lease obligations bear interest at rates ranging from 7.23% to 8.71% and have
maturity dates between April 2007 and June 2010.
LETTERS OF CREDIT
Letters of credit are issued by a commercial bank and reduce amounts
available under the Company's line of credit. As of March 31, 2007, the Company
had one letter of credit in the amount of $0.4 million. As of December 31, 2006,
the Company had two letters of credit in the amount of $0.9 million. The letter
of credit relates to reinsurance agreements. The letter of credit expires on May
26, 2007, at which time it will be automatically extended for the period of one
year unless the Company is notified otherwise by the commercial bank.
DEBT COVENANTS
As of March 31, 2007, the Company is in compliance with various restrictive
debt covenants that require the maintenance of certain financial ratios and
other financial conditions. The most restrictive covenants require a minimum
ratio of the Company's assets to debt and its earnings before interest, taxes
and non-cash expenses to fixed charges. The covenants also limit the maximum
ratio of the Company's debt to tangible net worth, and the Company must also
maintain a specified minimum level of net worth, which may indirectly limit the
payment of dividends on common stock.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company has Dealer Loans with
affiliated dealer-partners owned or controlled by: (i) the Company's majority
shareholder and Chairman; (ii) a member of the Chairman's immediate family; and
(iii) the Company's former President, Keith P. McCluskey. Mr. McCluskey resigned
from his position with the Company effective September 1, 2006. Transactions
with Mr. McCluskey are reported below through December 31, 2006. The Company's
Dealer Loans from affiliated dealer-partners and nonaffiliated dealer-partners
are on the same terms. A summary of related party Dealer Loan activity is as
follows (in thousands):
As of March 31, 2007 As of December 31, 2006
-------------------------------- ------------------------------
Affiliated Affiliated
Dealer Loan % of Dealer Loan % of
balance consolidated balance consolidated
------------ ------------- ----------- ------------
Affiliated
Dealer
Loan balance $ 18,886 2.4% $ 22,434 3.1%
For the Three Months ended For the Three Months ended
March 31, 2007 March 31, 2006
--------------------------------- ------------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
activity consolidated activity consolidated
-------------- ------------ -------------- ------------
Advances $ 4,212 2.0% $ 6,099 3.9%
Affiliated
dealer-partner
revenue $ 1,218 2.6% $ 1,594 3.7%
Dealer
holdback
payments $ 557 2.7% $ 389 2.2%
Pursuant to an employment agreement with the Company's former President,
Mr. McCluskey, dated April 19, 2001, the Company loaned Mr. McCluskey's
dealerships $0.9 million. Obligations under this note, including all principal
and interest, were paid in full on August 16, 2006. In addition, pursuant to the
employment agreement, the Company loaned Mr. McCluskey approximately $0.5
million. The note, including all principal and interest, is due on April 19,
2011, bears interest at 5.22% and is unsecured. The balance of the note
including accrued but unpaid interest was approximately $0.6 million as of
December 31, 2006.
The Company paid for air transportation services provided by a company
owned by the Company's majority shareholder and Chairman totaling $10,000 for
the three months ended March 31, 2006. No such services were provided for the
three months ended March 31, 2007.
Beginning in 2002, entities owned by the Company's majority shareholder and
Chairman began offering secured lines of credit to third parties in a manner
similar to a program previously offered by the Company. In December of 2004, the
Company's majority shareholder and Chairman sold his ownership interest in these
entities; however he continues to have indirect control over these entities and
has the right or obligation to reacquire the entities under certain
circumstances until December 31, 2014 or the repayment of the related purchase
money note.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. INCOME TAXES
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate, excluding the results of the discontinued United Kingdom
operations, is as follows:
THREE MONTHS ENDED
MARCH 31,
------------------------
2007 2006
----- ------
U.S. federal statutory rate 35.0% 35.0%
State income taxes 1.9 1.4
Other (4.7) 0.2
---- ----
Effective tax rate 32.2% 36.6%
==== ====
The differences between the U.S. federal statutory rate and the Company's
consolidated effective tax rate are primarily related to state income taxes and
reserves for uncertain tax positions that are included in the provision for
income taxes. The decrease in the effective tax rate to 32.2% for the three
months ended March 31, 2007, from 36.6% for the same period in 2006 is primarily
due to a decrease in the Company's reserve for uncertain tax positions recorded
in the first quarter of 2007.
The Company adopted FIN 48 on January 1, 2007. As a result of the
implementation, the Company recognized a $0.1 million increase to reserves for
uncertain tax positions. This increase was accounted for as an adjustment to the
beginning balance of retained earnings on the balance sheet. Including the
cumulative effect of FIN 48 implementation, at the beginning of 2007, the
Company had approximately $10.0 million of total gross unrecognized tax benefit
that, if recognized, would favorably affect the effective income tax rate in
future periods. During the quarter ended March 31, 2007, the Company recorded an
additional increase in the unrecognized tax benefit of $0.5 million that
resulted in total of $10.5 million of gross unrecognized benefit as of March 31,
2007.
The Company is subject to U.S. federal income tax as well as income tax in
multiple state jurisdictions. The Company has substantially concluded all U.S.
federal income tax matters for years through 2001. Substantially all material
state and local tax matters have been concluded for years through 2002 and
foreign tax matters have been concluded through 2000. The federal income tax
return for 2004 and 2005 is currently under examination. The examination began
during the three months ended March 31, 2007 and the Company expects that it may
not be completed by the end of 2007.
The Company recognizes interest and penalties related to income tax matters
in general and administrative expense. As of January 1, 2007, upon the FIN 48
implementation, the Company had approximately $2.1 million and $0.9 million of
accrued interest and penalties, respectively, related to uncertain tax
positions. During the quarter ended March 31, 2007, the Company recorded an
additional $0.2 million of interest and $0.1 million of penalties related to
uncertain tax matters.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. CAPITAL TRANSACTIONS
NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the total of the weighted
average number of common shares and dilutive common shares outstanding. Dilutive
common shares included in the computation represent shares issuable upon assumed
exercise of stock options that would have a dilutive effect using the treasury
stock method. The share effect is as follows:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
---------- ----------
Weighted average common shares outstanding 30,054,349 36,146,994
Common stock equivalents 1,229,346 2,462,263
---------- ----------
Weighted average common shares and common
stock equivalents 31,283,695 38,609,257
========== ==========
There were no stock options that would be anti-dilutive for the three months
ended March 31, 2007 and 2006.
STOCK COMPENSATION PLANS
Pursuant to the Company's Incentive Compensation Plan (the "Incentive
Plan"), which was approved by shareholders on May 13, 2004, the Company had
reserved 1.0 million shares of its common stock for the future granting of
restricted stock, restricted stock units, stock options, and performance awards
to employees, officers, and directors at any time prior to April 1, 2014.
During the three months ended March 31, 2007, the Company granted 56,669
shares of restricted stock to employees and officers under the Incentive Plan,
all of which vest over a three year period. During the three months ended March
31, 2007, 637 restricted stock shares vested. At March 31, 2007 and December 31,
2006, the Company had 202,626 and 146,028 shares of restricted stock
outstanding, respectively. Shares available for future grants under the
Incentive Plan totaled 497,303 at March 31, 2007.
On February 22, 2007, the Compensation Committee approved an award of
300,000 restricted stock units to the Company's Chief Executive Officer, Brett
A. Roberts. Each restricted stock unit represents and has a value equal to one
share of common stock of the Company. The restricted stock units will be earned
over a five year period based upon the annual increase in the Company's adjusted
economic profit. As a result of this grant, Mr. Roberts will not participate in
other annual cash bonuses or annual restricted stock grants over the five year
period. Any earned shares will be distributed to Mr. Roberts on February 22,
2014. The Company recognized $0.4 million of expense related to the award of
restricted stock units to Mr. Roberts during the three months ended March 31,
2007.
The Company recognized stock-based compensation expense of $0.4 million and
$0.6 million for the three months ended March 31, 2007 and March 31, 2006,
respectively, for outstanding restricted stock and restricted stock units.
Stock-based compensation recognized for the three months ended March 31, 2007
included expenses related to the award of restricted stock units to Mr. Roberts.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. BUSINESS SEGMENT INFORMATION
The Company has two reportable business segments: United States and Other.
The United States segment primarily consists of the Company's United States
automobile financing business. The Other segment consists of the following: a
United Kingdom automobile financing business, an automobile leasing business, a
Canadian automobile financing business and a business that provided secured
lines of credit and floorplan financing. The Company is currently liquidating
all businesses classified in the Other segment.
Selected segment information is set forth below (in thousands):
THREE MONTHS ENDED
MARCH 31,
-----------------------------
2007 2006
-------- -------
Revenue:
United States $ 57,313 $ 53,042
Other 38 (16)
-------- --------
Total revenue $ 57,351 $ 53,026
======== ========
Income from continuing
operations before
provision for income taxes:
United States $ 22,691 $ 27,212
Other (5) (79)
-------- --------
Total income from
continuing operations
before provision for
income taxes $ 22,686 $ 27,133
======== ========
AS OF AS OF
MARCH 31, 2007 DECEMBER 31, 2006
-------------- -----------------
Segment Assets
United States $ 811,568 $ 724,008
Other 1,303 1,205
-------------- -----------------
Total Assets $ 812,871 $ 725,213
============== =================
9. DEBT ISSUANCE COSTS
As of March 31, 2007 and December 31, 2006, deferred debt issuance costs
were $2.0 million (net of amortization expense of $5.1 million) and $3.0 million
(net of amortization expense of $4.1 million), respectively. Expenses associated
with the issuance of debt instruments are capitalized and amortized over the
term of the debt instrument on a level-yield basis for term secured financings
and on a straight-line basis for lines of credit and revolving secured
financings.
10. COMPREHENSIVE INCOME
The Company's comprehensive income for the three months ended March 31,
2007 and 2006 is set forth below (in thousands):
THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
-------- --------
Net income $ 15,360 $ 17,197
Other comprehensive gain
(loss), net of tax 11 (19)
-------- --------
Comprehensive income $ 15,371 $ 17,178
======== ========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(UNAUDITED)
11. SUBSEQUENT EVENT
On April 12, 2007, the Company's wholly-owned subsidiary, Credit Acceptance
Funding LLC 2007-1 ("Funding 2007-1"), completed a secured financing transaction
in which Funding 2007-1 received $100.0 million in financing. In connection with
this transaction, the Company conveyed, for cash and the sole membership
interest in Funding 2007-1, Dealer Loans having a net book value of
approximately $125.7 million to Funding 2007-1, which, in turn, conveyed the
Dealer Loans to a trust that issued $100.0 million in notes to qualified
institutional investors bearing fixed interest rates of 5.32%. A primary
financial insurance policy has been issued in connection with the transaction
that guarantees the timely payment of interest and ultimate repayment of
principal on the final scheduled distribution date. The notes were rated "Aaa"
by Moody's Investor Services and "AAA" by Standard & Poor's Rating Services.
The proceeds of the initial conveyance to Funding 2007-1 were used by the
Company to purchase Dealer Loans, on an arm's-length basis, from Warehouse
Funding. Through April 15, 2008, the Company may be required, and is likely, to
convey additional Dealer Loans to Funding 2007-1, which will be conveyed by
Funding 2007-1 to the trust. After April 15, 2008, the debt outstanding under
this facility will begin to amortize. The total expected term of the facility is
24 months. The secured financing creates loans for which the trust is liable and
which are secured by all the assets of the trust and of Funding 2007-1. Such
loans are non-recourse to the Company, even though the trust, Funding 2007-1 and
the Company are consolidated for financial reporting purposes.
As Funding 2007-1 is organized as a separate legal entity from the Company,
assets of Funding 2007-1 (including the conveyed Dealer Loans) are not available
to satisfy the general obligations of the Company. The expected annualized cost
of the secured financing, including underwriter's fees, the insurance premiums
and other costs is approximately 7.2%. The Company receives a monthly servicing
fee paid out of collections equal to 6% of the collections received with respect
to the conveyed Dealer Loans. Except for the servicing fee and payments due to
dealer-partners, the Company does not receive, or have any rights in, any
portion of such collections, except for a limited right in its capacity as
Servicer to exercise a "clean-up call" option to purchase Dealer Loans from
Funding 2007-1 under certain specified circumstances. Alternatively, when the
trust's underlying indebtedness is paid in full, either through collections or
through a prepayment of the indebtedness, remaining collections would be paid
over to Funding 2007-1 as the sole beneficiary of the trust where they would be
available to be distributed to the Company as the sole member of Funding 2007-1.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
Since 1972, Credit Acceptance has provided auto loans to consumers,
regardless of their credit history. The Company's product is offered through a
nationwide network of automobile dealers who benefit from sales of vehicles to
consumers who otherwise could not obtain financing; from repeat and referral
sales generated by these same customers; and from sales to customers responding
to advertisements for the Company's product, but who actually end up qualifying
for traditional financing.
The Company is an indirect lender from a legal perspective, meaning the
Consumer Loan is originated by the dealer-partner and immediately assigned to
the Company. Typically, the compensation paid to the dealer-partner in exchange
for the Consumer Loan is paid in two parts. A portion of the compensation is
paid at the time of origination, and a portion is paid over time. The amount
paid at the time of origination is called an advance; the portion paid over time
is based on the performance of the loan and is called dealer holdback.
For accounting purposes, the transactions described above are not
considered to be loans to consumers. Instead, the Company's accounting reflects
that of a lender to the dealer-partner. This classification for accounting
purposes is primarily a result of (i) the dealer-partner's financial interest in
the Consumer Loan and (ii) certain elements of the Company's legal relationship
with the dealer-partner. The cash amount advanced to the dealer-partner is
recorded as an asset on the Company's balance sheet. The aggregate amount of all
advances to an individual dealer-partner, plus accrued income, less repayments
comprises the amount recorded in Loans receivable.
A small percentage of Consumer Loans in the United States are assigned to
the Company in exchange for a single payment. Because the dealer-partner does
not retain a financial interest in loans acquired in this manner, these loans
are considered to be Purchased Loans for accounting purposes.
Critical success factors for the Company include access to capital and the
ability to accurately forecast Consumer Loan performance. The Company's strategy
for accessing the capital required to grow its business is to: (i) maintain
consistent financial performance, (ii) maintain modest financial leverage, and
(iii) maintain multiple funding sources. The Company's funded debt to equity
ratio is 2.0 to 1.0 at March 31, 2007. The Company currently funds its business
through four primary sources of financing: (i) a revolving secured line of
credit with a commercial bank syndicate; (ii) a revolving secured warehouse
facility with institutional investors; (iii) 144A asset backed securitizations
with qualified institutional investors; and (iv) a residual credit facility.
The ability to accurately forecast Consumer Loan performance is critical
to the Company. At the time of Consumer Loan acceptance, the Company forecasts
future expected cash flows from the Consumer Loan. Based on these forecasts, an
advance is made to the related dealer-partner at a level designated to achieve
an acceptable return on capital. If Consumer Loan performance equals or exceeds
the Company's original expectation, it is likely the Company's target return on
capital will be achieved.
17
CONSUMER LOAN PERFORMANCE
Although the majority of loan originations are recorded in the Company's
financial statements as Dealer Loans, each transaction starts with a loan from
the dealer-partner to the individual purchasing the vehicle. Since the cash
flows available to repay the Dealer Loans are generated, in most cases, from the
underlying Consumer Loan, the performance of the Consumer Loans is critical to
the Company's financial results. The following table presents forecasted
Consumer Loan collection rates, advance rates, the spread (the forecasted
collection rate less the advance rate), and the percentage of the forecasted
collections that have been realized as of March 31, 2007 for the United States
business segment. Payments of dealer holdback and accelerated payments of dealer
holdback are not included in the analysis of the initial advance paid to the
dealer-partner. All amounts are presented as a percentage of the initial balance
of the Consumer Loan (principal + interest).
As of March 31, 2007
--------------------------------------------------------------
Year of Forecasted % of Forecast
Origination Collection % Advance % Spread % Realized
----------- ------------ --------- -------- -------------
1997 58.4% 47.9% 10.5% 99.9%
1998 67.4% 46.0% 21.4% 99.4%
1999 72.4% 48.7% 23.7% 98.6%
2000 72.9% 47.9% 25.0% 97.8%
2001 67.8% 46.0% 21.8% 97.2%
2002 70.8% 42.2% 28.6% 97.0%
2003 74.3% 43.4% 30.9% 95.8%
2004 74.1% 44.0% 30.1% 87.0%
2005 74.0% 46.9% 27.1% 70.6%
2006 71.0% 46.6% 24.4% 33.3%
2007 69.1% 46.1% 23.0% 4.4%
Accurately forecasting future collection rates is critical to the
Company's success. The risk of a forecasting error declines as Consumer Loans
age. For example, the risk of a material forecasting error for business written
in 1999 is very small since 98.6% of the total amount forecasted has already
been realized. In contrast, the Company's forecast for recent Consumer Loans is
less certain. If the Company produces disappointing operating results, it will
likely be because the Company overestimated future Consumer Loan performance.
Although the Company believes its forecasted collection rates are as accurate as
possible, there can be no assurance that the Company's estimates will be
accurate or that Consumer Loan performance will be as expected.
A wider spread between the forecasted collection rate and the advance rate
reduces the Company's risk of credit losses. Because collections are applied to
advances on an individual dealer-partner basis, a wide spread does not eliminate
the risk of losses, but it does reduce the risk significantly. While the spread
has decreased from 2003 to 2007, the Company believes it is still at a
sufficient level to minimize the Company's risk of being able to recover the
cash advance.
The following table compares the Company's forecast of Consumer Loan
collection rates as of March 31, 2007 with the forecast as of December 31, 2006:
March 31, 2007 December 31, 2006
Loan Origination Year Forecasted Collection % Forecasted Collection % Variance
--------------------- ----------------------- ----------------------- --------
1997 58.4% 58.4% 0.0%
1998 67.4% 67.5% (0.1)%
1999 72.4% 72.4% 0.0%
2000 72.9% 73.0% (0.1)%
2001 67.8% 67.7% 0.1%
2002 70.8% 70.7% 0.1%
2003 74.3% 74.2% 0.1%
2004 74.1% 73.9% 0.2%
2005 74.0% 74.2%* (0.2)%
2006 71.0% 71.1%* (0.1)%
* The forecasted collection percentage amounts differ from those
previously reported as they have been revised for a seasonality factor.
The following table compares the Company's forecast of Consumer Loan
collection rates as of March 31, 2007, with the forecast as of
December 31, 2006 without the revised seasonality factors:
Loan Origination Year March 31, 2007 December 31, 2006 Variance
--------------------- -------------- ----------------- --------
2005 74.2% 73.8% 0.4%
2006 71.9% 70.5% 1.4%
Forecasted collection percentage amounts prior to 2005 are not impacted by
the seasonality factor.
Collection results for the 2007 first quarter were generally consistent
with the Company's expectations.
18
The Company modified its loan pricing model during the third quarter of
2006. As a result, the composition of new loan originations changed during the
three months ended March 31, 2007 compared to the same period in 2006 as
follows: (1) the average loan size was larger by 12.2%, (2) the average loan
term increased from 34 to 40 months, (3) the projected return on capital has
decreased by approximately 125 basis points, and (4) the average spread between
the advance rate and the expected collection rate has decreased by approximately
300 basis points. The Company also increased its Consumer Loan unit volume by
26.3% and believes this higher volume was primarily due to the pricing
modification.
There were no other material changes in credit policy or pricing during
2007, other than routine changes designed to maintain profitability levels.
19
RESULTS OF OPERATIONS
Three Months Ended March 31, 2007 Compared to
Three Months Ended March 31, 2006
The following is a discussion of the results of operations and income
statement data for the Company on a consolidated basis.
(Dollars in thousands) THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 31, % OF MARCH 31, % OF
2007 REVENUE 2006 REVENUE
------------ --------- --------- ------------
REVENUE:
Finance charges $ 51,413 89.7% $ 46,007 86.7%
License fees 82 0.1 2,897 5.5
Other income 5,856 10.2 4,122 7.8
------------ -------- -------- -----------
Total revenue 57,351 100.0 53,026 100.0
COSTS AND EXPENSES:
Salaries and wages 11,861 20.7 10,594 19.9
General and administrative 5,967 10.4 6,765 12.8
Sales and marketing 4,472 7.8 4,359 8.2
Provision for credit losses 3,873 6.8 524 1.0
Interest 8,471 14.8 3,574 6.7
Other expense 25 -- 82 0.2
------------ -------- -------- -----------
Total costs and expenses 34,669 60.5 25,898 48.8
------------ -------- -------- -----------
Operating income 22,682 39.5 27,128 51.2
Foreign currency gain 4 -- 5 --
------------ -------- -------- -----------
Income from continuing operations
before provision for income taxes 22,686 39.5 27,133 51.2
Provision for income taxes 7,299 12.7 9,928 18.7
------------ -------- -------- -----------
Income from continuing operations 15,387 26.8 17,205 32.5
------------ -------- -------- -----------
Discontinued operations
Loss from discontinued
United Kingdom operations (38) -- (13) --
Credit for income taxes (11) -- (5) --
------------ -------- -------- -----------
Loss on discontinued
operations (27) -- (8) --
------------ -------- -------- -----------
Net income $ 15,360 26.8% $ 17,197 32.5%
============ ======== ======== ===========
Net income per common share:
Basic $ 0.51 $ 0.48
============ ===========
Diluted $ 0.49 $ 0.45
============ ===========
Income from continuing
operations per common share:
Basic $ 0.51 $ 0.48
============ ===========
Diluted $ 0.49 $ 0.45
============ ===========
Loss from discontinued
operations per common share:
Basic $ (0.00) $ (0.00)
============ ===========
Diluted $ (0.00) $ (0.00)
============ ===========
Weighted average shares
outstanding:
Basic 30,054,349 36,146,994
Diluted 31,283,695 38,609,257
20
For the three months ended March 31, 2007, net income decreased to $15.4
million, or $0.49 per diluted share, compared to $17.2 million, or $0.45 per
diluted share, for the same period in 2006. The decrease in net income primarily
reflects the following:
- Interest expense increased $4.9 million primarily due to a 150.2%
increase in the amount of average outstanding debt as a result of
borrowings used to fund stock repurchases during 2006 and new Dealer
Loan originations.
- The provision for credit losses increased $3.3 million primarily due
to an increase in the provision required to maintain the initial
yield established at the inception of the Dealer Loan.
- License fees decreased $2.8 million due to the change in the
Company's methodology of collecting dealer-partners monthly CAPS
fees. Effective January 1, 2007, the Company implemented a change
designed to positively impact dealer-partner attrition. The Company
will continue to charge a monthly fee of $599 but, instead of
collecting and recognizing the license fee revenue in the current
period, the Company will collect the license fee from future
dealer-holdback payments and recognize it as finance charges over
the life of the Dealer Loans.
Partially offsetting these decreases to net income:
- Finance charges increased to $51.4 million (11.8%) primarily due to
a 15.6% increase in the average size of the combined Dealer and
Purchased Loan portfolio as a result of an increase in the number of
active dealer-partners, partially offset by a decrease in the number
of transactions per dealer-partner. The increase was partially
offset by an 86 basis point decrease in the combined average yield
on Dealer and Purchased Loans primarily due to pricing changes
implemented during the third quarter of 2006.
- Other income increased to $5.9 million (42.1%) primarily due to
profit sharing payments received from ancillary product providers
during the first quarter of 2007.
- General and administrative expenses decreased primarily due to
increased accounting fees in the first quarter of 2006 related to
the Company's restatement of its financial statements and a decrease
in corporate legal expenses in the first quarter of 2007.
- The Company's effective tax rate decreased from 36.6% to 32.2%
primarily due to a decrease in the Company's reserve for uncertain
tax positions recorded in the first quarter of 2007.
Finance Charges. Finance charges increased to $51.4 million for the three
months ended March 31, 2007 from $46.0 million for the same period in 2006
primarily due to a 15.6% increase in the average size of the combined Dealer and
Purchased Loan portfolio as a result of an increase in the number of active
dealer-partners, partially offset by a decrease in the number of transactions
per dealer-partner. The increase was partially offset by an 86 basis point
decrease in the combined average yield on Dealer and Purchased Loans primarily
due to pricing changes implemented in the third quarter of 2006.
The following table summarizes the changes in active dealer-partners and
corresponding Consumer Loan unit volume for the three months ended March 31,
2007 and 2006:
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2007 2006 % CHANGE
------ ------ --------
Consumer Loan unit volume 36,609 28,994 26.3%
Active dealer-partners (1) 1,910 1,491 28.1%
------ ------
Average volume per dealer-partner 19.2 19.4 -1.0%
Consumer Loan unit volume from
dealer-partners active both
periods 24,319 23,830 2.1%
Dealer-partners active both
periods 1,021 1,021 0%
------ ------
Average volume per dealer-partner
active both periods 23.8 23.3 2.1%
Consumer Loan unit volume from
new dealer-partners 2,578 2,099 22.8%
New active dealer-partners (2) 321 220 45.9%
------ ------
Average volume per new active
dealer-partner 8.0 9.5 -15.8%
Attrition (3) -17.8% -16.8%
(1) Active dealer-partners are dealer-partners who submit at least one
Consumer Loan during the period.
(2) New active dealer-partners are dealer-partners that have enrolled in the
Company's program and have submitted their first Consumer Loan to the
Company during the period.
(3) Attrition is measured according to the following formula: decrease in
Consumer Loan unit volume from dealer-partners who submitted at least one
Consumer Loan during the comparable period of the prior year but who
submitted no Consumer Loans during the current period divided by prior
year comparable period Consumer Loan unit volume.
21
Dealer-partners that enroll in the Company's program have the option to
pay an initial $9,850 enrollment fee or can defer their fee. Dealer-partners
choosing the latter option agree to allow the Company to keep 50% of the first
accelerated dealer holdback payment. This payment, called Portfolio Profit
Express, is paid to qualifying dealer-partners after 100 Consumer Loans have
been originated and assigned to the Company. While the Company will lose
enrollment fee revenue on those dealer-partners choosing this option and not
reaching 100 Consumer Loans or otherwise qualifying for a Portfolio Profit
Express payment, the Company estimates that it will realize higher per
dealer-partner enrollment fee revenue from those dealer-partners choosing this
option and qualifying for a Portfolio Profit Express payment. Based on the
historical average of Portfolio Profit Express payments, the Company expects
average enrollment fee revenue per dealer-partner for those dealer-partners
electing the deferred option and reaching 100 Consumer Loans will be
approximately $13,000. Approximately 75% of the dealer-partners that enrolled
during the first quarter of 2007 took advantage of the deferred enrollment
option.
License Fees. License fees decreased to $0.1 million for the three months
ended March 31, 2007 from $2.9 million for the same period in 2006. License fees
represent CAPS fees charged to dealer-partners on a monthly basis. The decrease
is primarily due to a change in the Company's method of collecting the monthly
CAPS fee. Effective January 1, 2007, the Company implemented a change designed
to positively impact dealer-partner attrition. The Company will continue to
charge a monthly fee of $599, but instead of collecting and recognizing the
revenue from the fee in the current period, the Company will collect it from
future dealer holdback payments. As a result of this change, the Company now
records license fees as a yield adjustment, recognizing these fees as finance
charge revenue over the term of the Dealer Loan. The Company will continue to
recognize a small amount of license fee revenue related to dealer-partners
originating Purchased Loans.
To allow shareholders to more precisely track the Company's financial
performance and make comparisons between periods possible, the Company will
provide non-GAAP adjusted license fees reflecting the amount of revenue if the
license fees had always been recorded as a yield adjustment. For the three
months ended March 31, 2007 and 2006, total revenue would have changed as
follows:
(Dollars in thousands) AS OF MARCH 31,
----------------------------
2007 2006
-------- --------
Total revenue $ 57,351 $ 53,026
License fee yield adjustment 2,483 (1,050)
-------- --------
Adjusted total revenue $ 59,834 $ 51,976
======== ========
Other Income. Other income increased to $5.9 million for the three months
ended March 31, 2007 from $4.1 million for the same period in 2006. The increase
is primarily related to profit sharing payments received from ancillary product
providers during the first quarter of 2007. The amounts received in the first
quarter of 2007 are the first profit sharing amounts received. Future payments
of this kind are not estimable, and will therefore be recorded as revenue when
received. No additional payments are expected in 2007.
Salaries and Wages. Salaries and wages, as a percentage of revenue,
increased to 20.7% for the three months ended March 31, 2007 from 19.9% for the
same period in 2006. The increase in salaries and wages, as a percentage of
revenue, was primarily due to an increase in stock compensation expense related
to restricted stock and restricted stock units granted in the first quarter of
2007.
General and Administrative. General and administrative expenses, as a
percentage of revenue, decreased to 10.4% for the three months ended March 31,
2007 compared to 12.8% for the same period in 2006. The decrease, as a
percentage of revenue, was primarily due to higher accounting and legal fees in
the first quarter of 2006 associated primarily with the restatement of the
Company's financial statements and a decrease in depreciation expense.
Provision for Credit Losses. The provision for credit losses increased to
$3.9 million for the three months ended March 31, 2007 compared to $0.5 million
for the same period in 2006. The provision for credit losses consists primarily
of a provision to reduce the carrying value of Dealer Loans to maintain the
initial yield established at the inception of each Dealer Loan. Additionally,
the provision for credit losses includes a provision for losses on Purchased
Loans and a provision for losses on notes receivable. The increase in the
provision for the three months ended March 31, 2007 was primarily due to an
increase in the provision for credit losses required to maintain the initial
yield established at the inception of each Dealer Loan.
Interest. Interest expense increased to $8.5 million for the three months
ended March 31, 2007 from $3.6 million for the same period in 2006. The increase
in interest expense during the three months ended March 31, 2007 was primarily
due to a 150.2% increase in the amount of average outstanding debt as a result
of borrowings used to fund stock repurchases during
22
2006 and new Dealer Loan originations and also due to a 50 basis point increase
in interest rates. The increase in interest expense was partially offset by the
decreased impact of fixed fees on the Company's secured financings and line of
credit facility due to higher outstanding borrowings.
Provision for Income Taxes. The effective tax rate decreased to 32.2% for
the three months ended March 31, 2007 from 36.6% for the same period in 2006
primarily due to a decrease in the Company's reserve for uncertain tax positions
recorded in the first quarter of 2007.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flows from operating
activities, collections of Consumer Loans and borrowings under the Company's
lines of credit and secured financings. The Company's principal need for capital
is to fund Dealer Loan originations, for the payment of dealer holdback, and to
fund stock repurchases. In addition, on February 9, 2007 the Company signed a
Memorandum of Understanding to settle a consumer class action lawsuit discussed
in Part II Item 1 of this Report. Credit Acceptance has agreed to pay $12.5
million in full and final settlement of all claims against the Company. The
settlement is subject to court approval.
The Company's cash and cash equivalents decreased to $0.3 million as of
March 31, 2007 from $8.5 million at December 31, 2006. The Company's total
balance sheet indebtedness increased to $447.0 million at March 31, 2007 from
$392.2 million at December 31, 2006. This increase was primarily a result of
borrowings used to fund new loan originations in 2007.
Restricted Cash and Cash Equivalents increased to $54.3 million as of
March 31, 2007 from $45.6 million at December 31, 2006. The balance consists
primarily of cash collections related to secured financings and amounts held in
trusts for future vehicle service contract claims.
RESTRICTED SECURITIES
The Company determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities for which the Company
does not have the intent or ability to hold to maturity are classified as
available for sale, and stated at fair value with unrealized gains and losses,
net of income taxes included in the determination of comprehensive income and
reported as a component of shareholders' equity.
Restricted securities available for sale consisted of the following:
AS OF MARCH 31, 2007
--------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED
(in thousands) COST GAINS LOSSES FAIR VALUE
---------- ---------- ---------- ----------
US Government and
agency securities $ 1,930 $ -- $ (1) $ 1,929
Corporate bonds 1,987 -- (38) 1,949
---------- ---------- ---------- ----------
Total restricted
securities available
for sale $ 3,917 $ -- $ (39) $ 3,878
========== ========== ========== ==========
AS OF DECEMBER 31, 2006
---------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
US Government and
agency securities $ 1,578 $ -- $ (8) $ 1,570
Corporate bonds 2,041 -- (47) 1,994
--------- -------- -------- --------------
Total restricted
securities
available for sale$ 3,619 $ -- $ (55) $ 3,564
========= ======== ======== ==============
23
The cost and estimated fair values of securities available for sale by
contractual maturity as of the dates shown are set forth in the table below
(securities with multiple maturity dates are classified in the period of final
maturity). Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
(in thousands) AS OF MARCH 31, 2007 AS OF DECEMBER 31, 2006
------------------------------ ----------------------------
COST ESTIMATED FAIR COST ESTIMATED FAIR
VALUE VALUE
------------ --------------- ----------- --------------
Contractual
Maturity
Within
one year $ 746 $ 745 $ 898 $ 893
Over one
year to
five years 3,171 3,133 2,721 2,671
Over five
years to
ten years -- -- -- --
Over ten
years -- -- -- --
------------ --------------- ----------- --------------
Total
restricted
securities
available
for sale $ 3,917 $ 3,878 $ 3,619 $ 3,564
============ ============== =========== ==============
CONTRACTUAL OBLIGATIONS
In addition to the balance sheet indebtedness as of March 31, 2007, the
Company also has contractual obligations resulting in future minimum payments
under operating leases. A summary of the total future contractual obligations
requiring repayments is as follows (in thousands):
PAYMENTS DUE BY PERIOD
--------------------------------------------------
TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS > 5 YEARS
--------- ------------ ------------ --------- ---------
Long-term
debt
obligations (1) $ 445,335 $ 346,150 $ 99,185 $ -- $ --
Capital lease
obligations 1,663 597 1,066 -- --
Operating lease
obligations 1,409 526 883 -- --
Purchase
obligations -- -- -- -- --
Other long-term
obligations -- -- -- -- --
--------- ------------ ------------ --------- ---------
Total
contractual
obligations $ 448,407 $ 347,273 $ 101,134 $ -- $ --
========= ============ ============ ========= =========
(1) Long-term debt obligations included in the above table consist solely of
principal repayments. The Company is also obligated to make interest
payments at the applicable interest rates, as discussed in Note 4 in the
consolidated financial statements, which is incorporated herein by
reference. Based on the amount of debt outstanding and the interest rates
as of March 31, 2007, interest is expected to be approximately $18.8
million during 2007 and $1.9 million during 2008 and 2009.
CRITICAL ACCOUNTING ESTIMATES
The Company's consolidated financial statements are prepared in accordance
with GAAP. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, the Company evaluates its
estimates, including those related to the recognition of finance charge revenue
and the allowance for credit losses. Item 7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 2006 discusses several critical
accounting policies, which the Company believes involve a high degree of
judgment and complexity. There have been no material changes to the estimates
and assumptions associated with these accounting policies from those discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
2006.
24
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements in this report and may make
such statements in future filings with the Securities and Exchange Commission.
It may also make forward-looking statements in its press releases or other
public or shareholder communications. The Company's forward-looking statements
are subject to risks and uncertainties and include information about its
expectations and possible or assumed future results of operations. When the
Company uses any of the words "may," "will," "should," "believes," "expects,"
"anticipates," "assumes," "forecasts," "estimates," "intends," "plans" or
similar expressions, it is making forward-looking statements.
The Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
all of its forward-looking statements. These forward-looking statements
represent the Company's outlook only as of the date of this report. While the
Company believes that its forward-looking statements are reasonable, actual
results could differ materially since the statements are based on our current
expectations, which are subject to risks and uncertainties. Factors that might
cause such a difference include, but are not limited to, the factors set forth
in Item 1A of the Company's Form 10-K for the year ended December 31, 2006,
other risk factors discussed herein or listed from time to time in the Company's
reports filed with the Securities and Exchange Commission and the following:
- The Company's inability to accurately forecast the amount and timing
of future collections could have a material adverse effect on
results of operations.
- Due to increased competition from traditional financing sources and
non-traditional lenders, the Company may not be able to compete
successfully.
- The Company's ability to maintain and grow the business is dependent
on the ability to continue to access funding sources and obtain
capital on favorable terms.
- The Company may not be able to generate sufficient cash flow to
service its outstanding debt and fund operations.
- The substantial regulation to which the Company is subject limits
the business, and such regulation or changes in such regulation
could result in potential liability.
- Adverse changes in economic conditions, or in the automobile or
finance industries or the non-prime consumer finance market, could
adversely affect the Company's financial position, liquidity and
results of operations and its ability to enter into future financing
transactions.
- Litigation the Company is involved in from time to time may
adversely affect its financial condition, results of operations and
cash flows.
- The Company is dependent on its senior management and the loss of
any of these individuals or an inability to hire additional
personnel could adversely affect its ability to operate profitably.
- Natural disasters, acts of war, terrorist attacks and threats or the
escalation of military activity in response to such attacks or
otherwise may negatively affect the business, financial condition
and results of operations.
Other factors not currently anticipated by management may also materially
and adversely affect the Company's results of operations. The Company does not
undertake, and expressly disclaims any obligation, to update or alter its
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.
25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2006 for a complete discussion of the Company's market risk. There
have been no material changes to the market risk information included in the
Company's 2006 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
The Company maintains disclosure controls and procedures that are designed
to ensure material information required to be disclosed in the Company's reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
financial disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that a control system, no matter how well
designed and operated, can provide only reasonable, not absolute, assurance that
the objectives of the control system are met. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any, with
a company have been detected.
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective, at the reasonable assurance level, as of
the end of the period covered by this report to cause the material information
required to be disclosed by the Company in the reports that it files or submits
under the Securities Exchange Act of 1934 to be recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms.
Changes in Internal Controls Over Financial Reporting. As of March 31,
2005, in response to a material weakness noted in its internal controls over
financial reporting related to accounting for income taxes as of December 31,
2004, the Company implemented changes in internal controls. These changes
included engaging external tax advisors to assist in the review of our income
tax calculations. Beginning with the quarter ended March 31, 2007, the Company
no longer engages external tax advisors to assist in an independent review of
our income tax calculations. The Company has determined that the remaining
controls implemented simultaneously (particularly the strengthening of internal
resources used in preparation of accounting for income taxes) have been
effectively designed and demonstrated operational effectiveness to enable
management to consider the independent review a redundant control over the
Company's accounting for income taxes.
There have been no other changes in the Company's internal controls over
financial reporting during the quarter ended March 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
controls over financial reporting.
26
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business and as a result of the customer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various customer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth-in-lending, credit availability,
credit reporting, customer protection, warranty, debt collection, insurance and
other customer-oriented laws and regulations, including claims seeking damages
for physical and mental damages relating to the Company's repossession and sale
of the customer's vehicle and other debt collection activities. The Company, as
the assignee of Consumer Loans originated by dealer-partners, may also be named
as a co-defendant in lawsuits filed by customers principally against
dealer-partners. Many of these cases are filed as purported class actions and
seek damages in large dollar amounts. An adverse ultimate disposition in any
such action could have a material adverse impact on the Company's financial
position, liquidity and results of operations.
The Company is currently a defendant in a class action proceeding
commenced on October 15, 1996 in the Circuit Court of Jackson County, Missouri
and removed to the United States District Court for the Western District of
Missouri. The complaint seeks unspecified money damages for alleged violations
of a number of state and federal consumer protection laws. On October 9, 1997,
the District Court certified two classes on the claims brought against the
Company, one relating to alleged overcharges of official fees, the other
relating to alleged overcharges of post-maturity interest and a subclass
relating to allegedly inadequate repossession notices. On August 4, 1998, the
District Court granted partial summary judgment on liability in favor of the
plaintiffs on the interest overcharge claims based upon the District Court's
finding of certain violations but denied summary judgment on certain other
claims. The District Court also entered a number of permanent injunctions, which
among other things, restrained the Company from collecting on certain class
accounts. The Court also ruled in favor of the Company on certain claims raised
by class plaintiffs. Because the entry of an injunction is immediately
appealable, the Company appealed the summary judgment order to the United States
Court of Appeals for the Eighth Circuit. Oral argument on the appeals was heard
on April 19, 1999. On September 1, 1999, the United States Court of Appeals for
the Eighth Circuit overturned the August 4, 1998 partial summary judgment order
and injunctions against the Company. The Court of Appeals held that the District
Court lacked jurisdiction over the interest overcharge claims and directed the
District Court to sever those claims and remand them to state court. On February
18, 2000, the District Court entered an order remanding the post-maturity
interest class to the Circuit Court of Jackson County, Missouri while retaining
jurisdiction on the official fee class. The Company then filed a motion
requesting that the District Court reconsider that portion of its order of
August 4, 1998, in which the District Court had denied the Company's motion for
summary judgment on the federal Truth-In-Lending Act ("TILA") claim. On May 26,
2000, the District Court entered summary judgment in favor of the Company on the
TILA claim and directed the Clerk of the Court to remand the remaining state law
official fee claims to the appropriate state court.
On July 18, 2002, the Circuit Court of Jackson County, Missouri granted
plaintiffs leave to file a fourth amended petition which was filed on October
28, 2002. Instead of a subclass of Class 2, that petition alleges a new,
expanded Class 3 relating to allegedly inadequate repossession notices. The
Company filed a motion to dismiss the plaintiff's fourth amended complaint on
November 4, 2002. On November 18, 2002, the Company filed a memorandum urging
the decertification of the classes. On February 21, 2003, the plaintiffs filed a
brief opposing the Company's November 4, 2002 motion to dismiss the case. On May
19, 2004, the Circuit Court released an order, dated January 9, 2004, that
denied the Company's motion to dismiss. On November 16, 2005 the Circuit Court
issued an order that, among other things, adopted the District Court's order
certifying classes. By adopting the District Court's order, the Circuit Court's
order certified only the two original classes and did not certify the new,
expanded Class 3. On January 13, 2006, plaintiffs filed a motion entitled
Plaintiffs' Motion to Adjust Class 2 Definition to Correspond with Allegations
of Their Fourth Amended Complaint which requested that the "repossession
subclass" be deleted from Class 2 and a new Class 3 be adopted. The Company
filed a response arguing that the new, expanded Class 3 is inappropriate for a
number of reasons including the expiration of the statute of limitations. On May
23, 2006, the Circuit Court issued several orders, including an order granting
plaintiffs' motion and adding the new Class 3. On June 2, 2006 the Company filed
for leave to appeal the Circuit Court's decision to allow the expanded
repossession class as well as its November 16, 2005 certification order. The
Court of Appeals denied the Company's request for leave to appeal the Circuit
Court's decision on August 31, 2006.
In October 2006, the Company and plaintiffs' counsel commenced settlement
discussions, agreeing to use a third party facilitator in face to face
discussions in November and December 2006. These discussions led to the
execution of a February 9, 2007 Memorandum of Understanding whereby the parties
agreed to settle the lawsuit. The Company, without any admission of liability,
agreed to pay $12.5 million in full and final settlement of all claims against
the Company. The settlement is subject to court approval.
27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
TOTAL MAXIMUM
NUMBER OF DOLLAR VALUE
SHARES THAT MAY
PURCHASED AS YET BE USED
PART OF TO PURCHASE
TOTAL PUBLICLY SHARES
NUMBER OF AVERAGE ANNOUNCED UNDER THE
SHARES PRICE PLANS PLANS
PERIOD PURCHASED PAID PER SHARE OR PROGRAMS OR PROGRAMS
--------- ------------ --------------- ------------- ------------
January 1
through
January
31, 2007 - $ - - $ 8,631,953
February 1
through
February
28, 2007 71* - - 8,631,953
March 1
through
March
31, 2007 - - - 8,631,953
------------- --------------- -------------
- $ - -
============= =============== =============
* Amount represents shares of common stock forfeited to the Company by
employees as payment of tax withholdings due to the Company upon the
vesting of restricted stock.
ITEM 6. EXHIBITS
See Index of Exhibits following the signature page, which is incorporated
herein by reference.
28
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT ACCEPTANCE CORPORATION
(Registrant)
By: /s/ Kenneth S. Booth
------------------------------------------------------
Kenneth S. Booth
Chief Financial Officer
April 30, 2007
(Principal Financial Officer, Principal Accounting
Officer and Duly Authorized Officer)
29
INDEX OF EXHIBITS
EXHIBIT
NO. NOTE DESCRIPTION
---------- -------- ------------------------------------------------------
4(f)(86) 1 Amendment No. 3, dated February 14, 2007 to First
Amended and Restated Loan and Security Agreement dated
as of February 15, 2006 among the Company, CAC
Warehouse Funding Corporation II, Wachovia Capital
Markets, LLC, Wachovia Bank, National Association,
Variable Funding Capital Company LLC, Park Avenue
Receivables Company LLC and JPMorgan Chase Bank, N.A.
4(f)(87) 2 Indenture dated April 12, 2007 between Credit
Acceptance Auto Dealer Loan Trust 2007-1 and Wells
Fargo Bank National Association.
4(f)(88) 2 Sale and Servicing Agreement dated April 12, 2007 among
the Company, Credit Acceptance Auto Dealer Loan Trust
2007-1, Credit Acceptance Funding LLC 2007-1, and Wells
Fargo Bank, National Association.
4(f)(89) 2 Backup Servicing Agreement dated April 12, 2007 among
the Company, Credit Acceptance Funding LLC 2007-1,
Credit Acceptance Auto Dealer Loan Trust 2007-1, Wells
Fargo Bank, National Association, and XL Capital
Assurance Inc.
4(f)(90) 2 Amended and Restated Trust Agreement dated April 12,
2007 between Credit Acceptance Funding LLC 2007-1 and
U.S. Bank Trust National Association.
4(f)(91) 2 Contribution Agreement dated April 12, 2007 between the
Company and Credit Acceptance Funding LLC 2007-1.
4(f)(92) 2 Intercreditor Agreement dated April 12, 2007 among the
Company, CAC Warehouse Funding Corporation II, Credit
Acceptance Funding LLC 2006-1, Credit Acceptance Auto
Dealer Loan Trust 2006-1, Credit Acceptance Funding LLC
2006-2, Credit Acceptance Auto Dealer Loan Trust
2006-2, Credit Acceptance Funding LLC 2007-1, Credit
Acceptance Auto Dealer Loan Trust 2007-1, Wachovia
Capital Markets, LLC, as agent, The Bank of New York
(as successor-in-interest to the corporate trust
business of JPMorgan Chase Bank, N.A.), as agent,
Deutsche Bank Trust Company Americas, as agent, Wells
Fargo Bank, National Association, as agent, Comerica
Bank, as agent.
10(d)(10) 4 Form of Purchase Program Agreement as of March 2007.
10(q)(4) 3 Form of Restricted Stock Grant Agreement dated
February 22, 2007.
10(q)(5) 3 Credit Acceptance Corporation Restricted Stock Unit
Award Agreement dated February 22, 2007.
31(a) 4 Certification of Chief Executive Officer, pursuant
to Rule 13a-14(a) of the Securities Exchange Act of
1934.
31(b) 4 Certification of Chief Financial Officer, pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934.
32(a) 4 Certification of Chief Executive Officer, pursuant to
18 U.S.C. Section 1350 and Rule 13a-14(b) of the
Securities Exchange Act of 1934.
32(b) 4 Certification of Chief Financial Officer, pursuant to
18 U.S.C. Section 1350 and Rule 13a-14(b) of the
Securities Exchange Act of 1934.
1 Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 9, 2007, and incorporated herein by reference.
2 Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated April 12, 2007.
3 Previously filed as an exhibit to the Company's Current Report on Form
8-K, dated February 22, 2007, and incorporated herein by reference.
4 Filed herewith.
30