<PAGE> 1
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 September 30, 1997
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 (IRS Employer Identification)
of 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 the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
Outstanding at
Class November 10,1997
----------------------------- ----------------
Common Stock - $.01 par value 46,113,115
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets -
As of December 31, 1996 and September 30, 1997 ............... 1
Consolidated Income Statements -
Three and nine month periods ended September 30, 1996 and
September 30, 1997 ........................................... 2
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1996 and September 30, 1997 .. 3
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1997 ......................... 4
Notes to Consolidated Financial Statements ................... 5
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............. 6
Item 3. Quantitative and Qualitative Disclosures About Market Risk .. 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............................ 13
Signatures ............................................................. 14
Index of Exhibits ....................................................... 15
Exhibits ............................................................. 16
</TABLE>
<PAGE> 3
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
(Dollars in thousands) 12/31/96 9/30/97
---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents $ 229 $ 238
Investments 6,320 9,200
Installment contracts receivable 1,042,146 1,222,542
Allowance for credit losses (12,195) (17,211)
---------- ----------
Installment contracts receivable, net 1,029,951 1,205,331
Floor plan receivables 15,493 19,359
Notes receivable 2,663 1,589
Property and equipment, net 14,958 19,909
Deferred income taxes, net - 10,522
Other assets, net 4,804 6,901
---------- ----------
TOTAL ASSETS $1,074,418 $1,273,049
========== ==========
LIABILITIES
Senior notes 123,400 182,650
Lines of credit 161,482 192,765
Mortgage loan payable to bank 4,017 3,854
Accounts payable and accrued liabilities 29,121 28,974
Income taxes payable 2,569 2,788
Deferred dealer enrollment fees, net 2,264 862
Dealer holdbacks, net 496,434 618,443
Deferred income taxes, net 8,988 -
---------- ----------
TOTAL LIABILITIES 828,275 1,030,336
---------- ----------
SHAREHOLDERS' EQUITY
Common stock 458 461
Paid-in capital 125,398 128,269
Retained earnings 116,486 112,866
Cumulative translation adjustment 3,801 1,117
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 246,143 242,713
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,074,418 $1,273,049
========== ==========
</TABLE>
1
<PAGE> 4
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 3 Months Ended 3 Months Ended 9 Months Ended 9 Months Ended
9/30/96 9/30/97 9/30/96 9/30/97
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUE
Finance charges $23,720 $28,956 $66,252 $92,249
Interest and other income 4,539 7,076 10,998 21,475
Dealer enrollment fees 1,378 1,750 3,603 5,672
Premiums earned 2,855 3,111 7,456 8,119
---------- ---------- ---------- ----------
Total revenue 32,492 40,893 88,309 127,515
COSTS AND EXPENSES
Salaries and wages 2,900 4,278 8,605 12,349
General and administrative 3,881 4,916 10,634 14,410
Provision for credit losses 3,422 64,071 8,869 78,793
Sales and marketing 1,268 2,100 3,115 6,057
Provision for claims 936 1,095 2,470 2,776
Interest 3,801 7,162 8,625 19,639
---------- ---------- ---------- ----------
Total costs and expenses 16,208 83,622 42,318 134,024
---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) 16,284 (42,729) 45,991 (6,509)
---------- ---------- ---------- ----------
Foreign exchange gain(loss) 2 (7) 3 (22)
---------- ---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 16,286 (42,736) 45,994 (6,531)
Provision (credit) for income taxes 5,643 (15,028) 16,026 (2,911)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $10,643 ($27,708) $29,968 ($ 3,620)
========== ========== ========== ==========
Net income (loss) per common share $0.23 $ (0.60) $0.64 $ (0.08)
========== ========== ========== ==========
Weighted average shares outstanding 46,630,208 46,113,115 46,515,428 46,100,670
========== ========== ========== ==========
</TABLE>
2
<PAGE> 5
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) 9 Months Ended 9 Months Ended
9/30/96 9/30/97
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss) $ 29,968 ($ 3,620)
Adjustments to reconcile net income to net cash
provided by operating activities -
Provision (credit) for deferred income taxes 304 (19,510)
Depreciation and amortization 1,003 1,543
Loss on retirement of property and equipment - 512
Provision for credit losses 8,869 78,793
Change in operating assets and liabilities -
Accounts payable and accrued liabilities 9,280 (147)
Income taxes payable (214) 219
Unearned insurance premiums, insurance reserves, and fees 2,418 1,604
Deferred dealer enrollment fees, net 886 (1,402)
Other assets 2,421 (2,097)
--------- ----------
Net cash provided by operating activities 54,935 55,895
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Principal collected on installment contracts receivable 207,530 283,253
Purchase of marketable securities (3,526) (2,880)
Increase in floor plan receivables (2,076) (3,866)
Decrease in notes receivable 340 1,074
Purchase of property and equipment (3,844) (7,006)
--------- ----------
Net cash provided by investing activities 198,424 270,575
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of mortgage loan payable to bank (152) (163)
Advances to dealers and payments of dealer holdback (388,615) (417,021)
Net borrowings under line of credit agreement 63,563 31,283
Proceeds from senior note issuance - 71,750
Repayment of senior notes - (12,500)
Proceeds from stock options exercised 1,283 2,874
Payment of stock issuance costs (34) -
--------- ----------
Net cash used in financing activities (253,955) (323,777)
--------- ----------
Effect of exchange rate changes on cash 621 (2,684)
--------- ----------
NET INCREASE IN CASH 25 9
Cash and cash equivalents - beginning of period 1 229
--------- ----------
Cash and cash equivalents - end of period $ 26 $ 238
--------- ----------
</TABLE>
3
<PAGE> 6
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Translation Retained
(Dollars in thousands) Common Stock Paid-In Capital Adjustment Earnings
------------ --------------- ----------- --------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 $ 458 $125,398 $ 3,801 $116,486
Net loss - - - (3,620)
Foreign currency translation
adjustment - - (2,684) -
Stock options exercised 3 2,871 - -
------------ --------------- ----------- --------
Balance as of September 30, 1997 $ 461 $128,269 $ 1,117 $112,866
============ =============== =========== ========
</TABLE>
4
<PAGE> 7
CREDIT ACCEPTANCE CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
1. GENERAL
The unaudited consolidated operating results have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting of normal recurring items,
necessary for a fair presentation of the periods. The results of operations for
interim periods are not necessarily indicative of actual results achieved for
full fiscal years.
As contemplated by the Securities and Exchange Commission under rule
10-01 of Regulation S-X, the accompanying consolidated financial statements and
related notes have been condensed and do not contain certain information
included in the Company's annual consolidated financial statements and notes
thereto. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10K for the year ended December 31, 1996.
2. NET INCOME PER SHARE
The net income per share amounts are based on the average number of
common shares and common stock equivalents outstanding. As the Company
incurred a net loss for the three and nine month periods ended September 30,
1997, common stock equivalents would be antidilutive to earnings per share and
have not been included in the weighted average shares calculation. All per
share amounts have been adjusted to reflect all stock splits declared by the
Company.
3. INCOME TAXES
No valuation allowance for deferred tax assets have been recorded at
September 30, 1997 as the Company believes that it is more likely than not that
the deferred tax assets will be realized in the future.
4. CONTINGENCIES
The Company has obtained waivers from its lenders, including the
holders of its senior notes and the banks under its credit agreement, of
compliance with the fixed charge coverage ratio covenant in agreements relating
to the Company's indebtedness. Such waivers are effective through December 15,
1997. The Company is in the process of negotiating longer term amendments to
the agreements with its lenders which are expected to be executed prior to the
expiration of the waivers. Although the Company believes the agreements will
be modified to the Company's satisfaction, there can be no assurance to that
effect. The failure to modify the fixed charge coverage ratio in such
agreements prior to December 15 will, in the absence of further waivers, result
in a default under such agreement and will require the Company to replace or
refinance the indebtedness thereunder on terms less favorable than those
currently available.
5. NEW ACCOUNTING STANDARDS
Effective January 1, 1997 the Company adopted Statement of Financial
Accounting Standard No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." The new accounting
standard provides accounting and reporting guidance for transfers and servicing
of financial assets and extinguishments of liabilities occurring after December
31, 1996 and is applied prospectively. The adoption of this accounting standard
has not affected the Company's financial position or results of operations.
Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings
per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was
issued in February 1997. SFAS 128 requires dual presentation of basic and
diluted earnings per share (EPS) for complex capital structures on the face of
the income statement. Basic EPS is computed by dividing income by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution from the exercise or conversion of
securities into common stock, such as stock options. SFAS 128 is required to be
adopted for year-end 1997; earlier application is not permitted. The Company
does not expect EPS measured under SFAS 128 to be materially different than EPS
measured under APB No. 15.
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information About Capital Structure," was issued in February 1997. The Company
does not expect it to result in any material change in its financial statements.
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," was issued in July 1997. SFAS 130 establishes standards
for reporting and displaying comprehensive income. Management does not expect
the adoption of this statement to have a significant impact on the financial
position and results of the operations of the Company. This statement is
effective for financial statements for fiscal years beginning
after December 15, 1997.
5
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 Compared to Three and
Nine Months Ended September 30, 1996
Total Revenue. Total revenue increased from $32.5 million and $88.3 million
for the three and nine months ended September 30, 1996 to $40.9 million and
$127.5 million for the same periods in 1997, representing increases of 25.9%
and 44.4%, respectively. These increases are primarily the result of increases
in finance charge revenue for the three and nine month periods. The level of
finance charge revenue is a function of the installment contract receivable
balance and the yield realized on these installment contracts. The gross
installment contracts receivable balance increased from $1.12 billion as of
September 30, 1996 to $1.46 billion as of September 30, 1997. The increase in
gross installment contracts receivable is primarily the result of contract
originations for the period exceeding the sum of collections on installment
contracts and charge offs of installment contracts for the period. Future
increases in the installment contracts receivable balance will, in large part,
be dependent on future origination volumes. Based on an internal review of
dealer profitability, the Company discontinued relationships with dealers
representing approximately 15% of the Company's loan volume in the third
quarter. Because the review was conducted late in the third quarter, the
Company anticipates that fourth quarter origination volume will be negatively
impacted as compared to the third quarter. The Company expects to continue to
monitor its relationships with dealers and make appropriate adjustments to
these relationships as required.
The average yield on the Company's installment contract portfolio was
approximately 11.1% and 10.9% for the nine months ended September 30, 1996 and
1997, respectively. The decrease in the average yield resulted from an
increase in the percent of installment contracts which were in non-accrual
status primarily due to the Company changing its non-accrual policy from 120
days on a contractual basis to 90 days on a recency basis (see "Credit Policy
and Experience"). The increase in the level of contractual past due contracts,
while significant, is mitigated by the fact that when an installment contract
is 90 days past due on a recency basis, the Company (i) transfers the contract
to a non-accrual status; and (ii) makes a provision to credit losses equal to
the earned but unpaid revenue previously recognized on such installment
contract. In addition, the decline in the average yield was also the result of
an increase in the average outstanding term of the Company's installment
contract portfolio.
Also contributing to the increase in total revenue was interest and other
income which increased as a percent of total revenue from 14.0% and 12.5% for
the three and nine months ended September 30, 1996 to 17.3% and 16.8% for the
same periods in 1997. These increases are primarily due to increases in fees
earned from third party service contract and credit life products offered by
dealers, and an increase in interest earned on floor plan financing which
results from increased floor plan balances in 1997. Earned dealer enrollment
fees increased, as a percent of total revenue, from 4.2% and 4.1% for the three
and nine months ended September 30, 1996 to 4.3% and 4.4% for the same periods
in 1997. These increases are due to the continued increase in the number of
dealers participating in the Company's financing program. Premiums earned
decreased, as a percent of total revenue, from 8.8% and 8.4% for the three and
nine months ended September 30, 1996 to 7.6% and 6.4% for the same periods in
1997. These decreases are primarily the result of decreases, as a percent of
total revenue, in premiums written under the Company's service contract and
credit life insurance programs.
Salaries and Wages. Salaries and wages, as a percent of total revenue,
increased from 8.9% and 9.7% for the three and nine months ended September 30,
1996 to 10.5% and 9.7% for the same periods in 1997. The increases are
primarily due to increases in employee headcount, particularly collection
personnel added to service the Company's larger installment contract
portfolio. To a lesser extent, the increases are due to increases in the
Company's average wage rates.
General and Administrative. General and administrative expenses, as a percent
of total revenue, increased from 11.9% for the three months ended September 30,
1996 to 12.0% and for the three months ended September 30, 1997 and decreased
from 12.0% for the nine months ended September 30, 1996 to 11.3% for the nine
months ended September 30, 1997. The decrease for the nine month period
reflects the Company's ability to benefit from economies of scale, increasing
revenue with less than proportionate increases in general and administrative
costs. Partially offsetting this decrease was the $500,000 write-off during
the nine months ended September 30, 1997 of computer software no longer used in
the Company's operations.
6
<PAGE> 9
Provision for Credit Losses. The amount provided for credit losses, as a
percent of total revenue, increased from 10.5% and 10.0% for the three and nine
months ended September 30, 1996 to 156.7% and 61.8% for the same periods in
1997. These increases are primarily the result of a non-cash charge recorded
to reflect an enhancement in the Company's methodology for estimating its
reserve for advances made possible by a new loan servicing system implemented
at the Company's U.S. and Canadian operations during the three months
ended September 30, 1997. Utilizing the new information made available upon the
successful implementation of this new system, the Company undertook an
extensive review of its exposure related to dealer advances using a static pool
analysis on a per dealer basis. In order to reflect the impact of this
analysis on the Company's advance reserve, a provision for credit losses in the
amount of $60.0 million was recorded. In electing to take a charge of this
magnitude, the Company believes that it has reflected the full impact of
implementing the new loan servicing system and the information now available.
Consistent with Statement of Financial Accounting Standards No. 114 "Accounting
by Creditors for Impairment of a Loan", one component of this charge,
approximately $30.0 million, results from the present valuing of future cash
flows used to determine the advance reserve in order to achieve a level yield
over the remaining term of the advance equal to the expected yield at the
origination of the impaired advance.
Sales and Marketing. Sales and marketing expenses, as a percent of total
revenue, increased from 3.9% and 3.5% during the three and nine months ended
September 30, 1996 to 5.1% and 4.8% during the same periods in 1997. These
increases are primarily the result of increased sales commissions as a result
of the increased enrollment of new dealers into the Company's program, as well
as an increase in other costs directly associated with the enrollment of new
dealers.
Provision for Claims. The amount provided for insurance and service contract
claims, as a percent of total revenue, decreased from 2.9% and 2.8% during the
three and nine months ended September 30, 1996 to 2.7% and 2.2% during the same
periods in 1997. These decreases correspond with decreases, as a percent of
total revenue, in premiums earned from 8.8% and 8.4% for the three and nine
months ended September 30, 1996 to 7.6% and 6.4% for the same periods in 1997.
Interest Expense. Interest expense, as a percent of total revenue, increased
from 11.7% and 9.8% for the three and nine months ended September 30, 1996 to
17.5% and 15.4% for the same periods in 1997. These increases are a result of
an increase in the amount of average outstanding borrowings. To a lesser
extent, interest expense increased due to a higher average interest rate as a
result of the sale of $71.75 million in senior notes in March 1997. Effective
October 22, 1997, the Company's credit rating with Moody's Investor Service was
downgraded from Ba2 to Baa3 and the Company's credit rating with Standard and
Poor's was downgraded from BBB- to BB. As a result of the downgrades,
the Company's Eurocurrency based borrowing margins under the $250 million
credit agreement were increased from 82.5 basis points to 120 basis points in
accordance with the terms of the credit agreement. The downgrades will
have a negative impact on the Company's borrowing costs in future periods. The
Company expects to continue to borrow in future periods, as needed, to assist
in funding the Company's operations.
Operating Income (Loss). As a result of the aforementioned factors, operating
income (loss) decreased from $16.3 million and $46.0 million for the three and
nine months ended September 30, 1996 to ($42.7) million and ($6.5) million for
the same periods in 1997, representing decreases of 362.4% and 114.2%
respectively.
Foreign Exchange Loss. The Company incurred a foreign exchange gain of $2,000
and $3,000 for the three and nine months ended September 30, 1996 and a foreign
exchange loss of $7,000 and $22,000 for the same periods in 1997. The gains and
losses result from the effect of exchange rate fluctuations between the U.S.
dollar and foreign currency on unhedged intercompany balances between the
Company and subsidiaries which operate outside the United States.
Provision (Credit) for Income Taxes. The provision (credit) for income taxes
decreased from $5.6 million and $16.0 million during the three and
nine months ended September 30, 1996 to ($15.0) million and ($2.9) million
during the same periods in 1997. The decrease is due to pretax losses in 1997.
7
<PAGE> 10
INSTALLMENT CONTRACTS RECEIVABLE
The following table summarizes the composition of installment contracts
receivable at the dates indicated:
<TABLE>
<CAPTION>
AS OF AS OF
(Dollars in thousands) 12/31/96 09/30/97
---------- ----------
(Unaudited)
<S> <C> <C>
Gross installment contracts receivable $1,251,139 $1,464,022
Unearned finance charges (201,760) (232,643)
Unearned insurance premiums, insurance
reserves, and fees (7,233) (8,837)
---------- ----------
Installment contracts receivable $1,042,146 $1,222,542
========== ==========
Non-accrual installment contracts as a percent
of total gross installment contracts 34.1% 42.2%
===== =====
</TABLE>
A summary of changes in gross installment contracts receivable is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in thousands) SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance, beginning of period $ 981,145 $1,420,620 $ 790,607 $1,251,139
Gross amount of installment
contracts accepted 272,836 241,890 697,050 775,531
Cash collections on installment
contracts receivable (98,794) (128,130) (278,586) (386,936)
Charge offs (36,857) (63,641) (90,741) (165,235)
Currency translation (a) (6,717) (a) (10,477)
---------- ---------- ---------- ----------
Balance, end of period $1,118,330 $1,464,022 $1,118,330 $1,464,022
========== ========== ========== ==========
</TABLE>
(a) Immaterial
DEALER HOLDBACKS
The following table summarizes the composition of dealer holdbacks at the
dates indicated:
<TABLE>
<CAPTION>
AS OF AS OF
(Dollars in thousands) 12/31/96 09/30/97
-------- --------
(Unaudited)
<S> <C> <C>
Dealer holdbacks $998,593 $1,169,894
Less: Advances (net of reserves of $8,754
and $77,308 at December 31, 1996 and
September 30, 1997, respectively) (502,159) (551,451)
-------- ----------
Dealer holdbacks, net $496,434 $ 618,443
======== ==========
</TABLE>
8
<PAGE> 11
CREDIT POLICY AND EXPERIENCE
The Company maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against expected future losses. The
risk of loss to the Company related to the installment contracts receivable
balance relates to earned but unpaid servicing fees or finance charges
recognized on contractually delinquent accounts. Servicing fees, which are
booked as finance charges, are recognized under the interest method of
accounting until the underlying obligation is 90 days past due on a recency
basis. At such time, the Company suspends the accrual of revenue and makes a
provision for credit losses equal to the earned but unpaid revenue. On all
accounts which no material payment has been received for one year the gross
installment receivable contract balance is charged off against dealer
holdbacks, unearned finance charges, and the allowance for credit losses.
During the three months ended September 30, 1997, the Company changed
its non-accrual policy from 120 days on a contractual basis to 90 days on a
recency basis. The Company, believes this change will allow for earlier
identification of underperforming dealer pools.
The Company also maintains a reserve on advances to dealers. This
reserve consists of two components. The first component of the reserve
reflects advance balances that are not expected to be recovered through the
collections on the related installment contracts receivable portfolio. The
second component of the reserve results from the present valuing of estimated
future cash flows in order to achieve a level yield over the remaining term of
the advance equal to the expected yield at the origination of the impaired
advance. During the third quarter, the Company implemented a new loan servicing
system for its U.S. and Canadian operations which allows the Company to better
estimate future collections for each dealer pool using historical loss
experience and a dealer by dealer static pool analysis. The Company plans to
implement a similar such system for its operations in the United Kingdom and
Ireland. As discussed previously, the Company took a non-cash charge during
the three months ended September 30, 1997 to reflect the impact of this
enhancement in the Company's methodology for estimating the reserve. Future
reserve requirements will depend in part on the magnitude of the variance
between management's prediction of future collections and the actual
collections that are realized. The Company charges off dealer advances against
the reserve at such time and to the extent that the advance balance for an
individual dealer exceeds the related installment contracts receivable balance.
The following table sets forth information relating to charge offs, the
allowance for credit losses, the reserve on advances, and dealer holdbacks.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in thousands) SEPTEMBER 30, SEPTEMBER 30,
-------------------- ------------------------
1996 1997 1996 1997
------- ------- ------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Provision for credit losses-installment contracts $ 2,090 $ 4,091 $ 4,904 $ 8,706
Provision for credit losses-advances 1,332 59,980 3,965 70,087
Charged against dealer holdbacks 29,493 50,978 72,585 132,201
Charged against unearned finance charges 6,573 11,302 16,151 29,435
Charged against allowance for credit losses 791 1,361 2,005 3,599
------- ------- ------- --------
Total contracts charged off $36,857 $63,641 $90,741 $165,235
======= ======= ======= ========
Net charge offs against the reserve on advances $ 184 $ 3,513 $ 251 $ 4,834
</TABLE>
9
<PAGE> 12
A summary of changes in the allowance for credit losses and the reserve on
advances is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------
1996 1997 1996 1997
------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance, beginning of period.. $ 9,357 $ 14,556 $ 7,757 $ 12,195
Provision for loan losses..... 2,092 4,091 4,906 8,706
Charge offs................... (791) (1,361) (2,005) (3,599)
Currency translation.......... (a) (75) (a) (91)
--------- --------- --------- ---------
Balance, end of period........ $ 10,658 $ 17,211 $ 10,658 $ 17,211
========= ========= ========= =========
</TABLE>
(a) Immaterial
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------
1996 1997 1996 1997
------------------------------------------
<S> <C> <C> <C> <C>
RESERVE ON ADVANCES
Balance, beginning of period.. $ 5,780 $ 19,816 $ 3,214 $ 8,754
Provision for advance losses.. 1,332 59,980 3,965 70,087
Advance reserve fees.......... - 1,231 - 3,505
Charge offs................... (184) (3,513) (251) (4,834)
Currency translation.......... (a) (206) (a) (204)
--------- --------- --------- ---------
Balance, end of period........ $ 6,928 $ 77,308 $ 6,928 $ 77,308
========= ========= ========= =========
</TABLE>
(a) Immaterial
<TABLE>
<CAPTION>
AS OF AS OF
(Dollars in thousands) SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
------------------ ------------------
(Unaudited)
<S> <C> <C>
Allowance for credit losses as a percent of gross
installment contracts receivable 1.0% 1.2%
Reserve on advances as a percent of advances 1.2% 12.3%
Dealer holdbacks as a percent of gross installment
contracts receivable 79.4% 79.9%
</TABLE>
The Company's relatively low level of amounts charged against the
allowance for credit losses is due to, among other factors:
(i) the requirement that each installment contract accepted must
meet established, formula-based criteria prior to the Company making
an advance on such contract;
(ii) experienced personnel, using computer-assisted accounts
receivable management and collection systems;
(iii) the security interest the Company receives in the vehicle at
the time it accepts an installment contract; and
(iv) the high level of dealer holdbacks, relative to the amount of
installment contracts.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for capital is to fund cash advances made
to dealers in connection with the acceptance of installment contracts and for
the payment of dealer holdbacks to dealers who have repaid their advance
balances. These cash outflows to dealers increased from $388.6 million during
the nine months ended September 30, 1996 to $417.0 million during the same
period in 1997. These amounts have been funded from cash collections on
installment contracts, income from operations, and advances under the Company's
credit agreement. During the first nine months of 1997, the Company borrowed
approximately $90.5 million to assist in funding the Company's operations. The
borrowings were provided by the Company's line of credit agreements and through
the sale of senior notes. These borrowings are primarily a result of cash
advances to dealers and payments of dealer holdbacks exceeding principal
collection on installment contracts receivable. To the extent the Company's
new system enables the Company to be more selective in its dealer
relationships, contract originations could be negatively impacted resulting in
a proportionate decrease in the Company's need for capital in future periods.
The Company has a $250 million credit agreement with a commercial bank
syndicate. The agreement consists of a $150 million line of credit facility
with a commitment period through May 15, 1998 and a $100 million revolving
credit facility with a commitment period through May 15, 2000. Both facilities
are subject to annual extension for additional one year periods at the request
of the Company with the consent of each of the banks in the facility. The
borrowings are unsecured with interest payable at the Eurocurrency rate plus a
minimum of 61.25 basis points and a maximum of 120 basis points (currently 120
basis points) dependent on the Company's debt ratings, or at the prime rate. The
Eurocurrency borrowings may be fixed for periods up to one year. The credit
agreement has certain restrictive covenants, including limits on the ratio of
the Company's debt-to-equity, limits on the ratio of fixed charges to net
income, limits on the Company's investment in its foreign subsidiaries, and
requirements that the Company maintain a specified minimum level of net worth.
As of September 30, 1997, there was approximately $191.9 million outstanding
under these facilities.
As discussed previously, on October 22, 1997, the Company's credit
rating with Moody's Investor Service was downgraded from Baa3 to Ba2 and the
Company's credit rating with Standard & Poor's was downgraded from BBB- to BB.
As a result of the downgrades, the Company's Eurocurrency based borrowing
margins under the $250 million credit agreement were increased from 82.5 basis
points to 120 basis points in accordance with the terms of the credit
agreement. These downgrades will have a negative impact on the Company's
borrowing rates and other borrowing costs in future periods. In addition, the
downgrades may have a negative impact on the Company's ability to obtain
additional capital in future periods.
The Company has obtained waivers from its lenders, including the
holders of its senior notes and the banks under its credit agreement, of
compliance with the fixed charge coverage ratio covenant in agreements relating
to the Company's indebtedness. Such waivers are effective through December 15,
1997. The Company is in the process of negotiating longer term amendments to
the agreements with its lenders which are expected to be executed prior to the
expiration of the waivers. Although the Company believes the agreements will
be modified to the Company's satisfaction, there can be no assurance to that
effect. The failure to modify the fixed charge coverage ratio in such
agreements prior to December 15, 1997 will, in the absence of further waivers,
result in a default under such agreements and will require the Company to
replace or refinance the indebtedness thereunder on terms less favorable than
those currently available.
The Company also has a 2.0 million British pound sterling line of credit
agreement with a commercial bank in the United Kingdom, which is used to fund
the day to day cash flow requirements of the Company's subsidiary which operates
in the United Kingdom. The borrowings are secured by a letter of credit issued
by the Company's principal commercial bank with interest payable at the United
Kingdom bank's base rate (7.25% at September 30, 1997) plus 65 basis points or
at the LIBOR rate plus 56.25 basis points. The rates may be fixed for periods
up to six months. As of September 30, 1997, there was approximately 567,000
British pounds ($915,000 U.S. dollars) outstanding under this facility.
The Company maintains a significant dealer holdback on installment
contracts accepted which assists the Company in funding its long-term cash flow
requirements. In future periods, the Company's short and long-term cash flow
requirements will continue to be funded primarily through earnings from
operations, cash flow from the collection of installment contracts, and the
Company's credit facilities. The Company will continue to utilize various
sources of financing available from time to time to fund the operations of the
Company. Should such financing become limited, the Company's ability to
maintain or increase loan originations will be funded through earnings from
operations and cash flow from the collection of installment contracts.
The foregoing discussion and analysis contains a number of "forward
looking statements" within the meaning of the Securities Act of 1933 and the
Securities Exchange Act of 1934, both as amended, with respect to expectations
for future periods which are subject to various uncertainties, including
competition from traditional financing sources and from non-traditional lenders,
adverse changes in applicable laws and
11
<PAGE> 14
regulations, adverse changes in economic conditions, adverse changes in the
automobile or finance industries or in the non-prime consumer finance market
and the Company's ability to increase or maintain the volume of installment
contracts accepted and historical collection rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
12
<PAGE> 15
PART II.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Index of Exhibits following the signature page.
(b) Reports on Form 8-K
The Company was not required to file a current report on Form
8-K during the quarter ended September 30, 1997 and none were
filed during that period. A Form 8-K was filed on October 23,
1997 disclosing certain information under Item 5. No financial
statements were filed therewith.
13
<PAGE> 16
SIGNATURES
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)
Date: November 13, 1997 /S/Brett A. Roberts
-------------------------------------------
Brett A. Roberts
Executive Vice President and Chief Financial
Officer
Signing on behalf of the registrant and as
principal financial officer.
Date: November 13, 1997 /S/John P. Cavanaugh
-------------------------------------------
John P. Cavanaugh
Vice President, Corporate Controller and
Assistant Secretary
Principal accounting officer.
14
<PAGE> 17
INDEX OF EXHIBITS
Exhibit Number Description
- -------------- -----------
11 Statement of Computation of Net Income Per Common Share
27 Financial Data Schedule
15
<PAGE> 1
CREDIT ACCEPTANCE CORPORATION Exhibit 11
STATEMENT OF COMPUTATION OF NET
INCOME PER COMMON SHARE
(Unaudited)
<TABLE>
(Dollars in thousands, except per share data) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1996 1997 1996 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Actual
Net income (loss) ............................................... $10,643 ($27,708) $29,968 ($3,620)
Weighted average common shares outstanding ...................... 45,629,053 46,113,115 45,570,328 46,100,670
Common stock equivalents ........................................ 1,001,155 -- 945,100 --
Weighted average common shares and
common stock equivalents ....................................... 46,630,208 46,113,115 46,515,428 46,100,670
------------ ------------ ------------ ------------
Net earnings (loss) per share ................................... $.23 ($.60) $.64 ($.08)
==== ====== ==== ======
</TABLE>
16
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 238
<SECURITIES> 9,200
<RECEIVABLES> 1,222,542
<ALLOWANCES> 17,211
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 25,186
<DEPRECIATION> 5,277
<TOTAL-ASSETS> 1,273,049
<CURRENT-LIABILITIES> 0
<BONDS> 186,504
0
0
<COMMON> 461
<OTHER-SE> 242,254
<TOTAL-LIABILITY-AND-EQUITY> 1,273,049
<SALES> 0
<TOTAL-REVENUES> 127,515
<CGS> 0
<TOTAL-COSTS> 32,816
<OTHER-EXPENSES> 2,776
<LOSS-PROVISION> 78,793
<INTEREST-EXPENSE> 19,369
<INCOME-PRETAX> (6,509)
<INCOME-TAX> (2,911)
<INCOME-CONTINUING> (3,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,620)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)
</TABLE>
