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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THIS FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
MICHIGAN 38-1999511
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
25505 W. TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (248) 353-2700
-----------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of 14,662,915 shares of the Registrant's
common stock held by nonaffiliates on March 20, 1998 was approximately
$130,133,371. For purposes of this computation all officers, directors and 5%
beneficial owners of the Registrant are assumed to be affiliates. Such
determination should not be deemed an admission that such officers, directors
and beneficial owners are, in fact, affiliates of the Registrant.
At March 20, 1998 there were 46,113,115 shares of the Registrant's
Common Stock issued and outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement pertaining to
the 1998 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant
to Regulation 14A are incorporated herein by reference into Part III.
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CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 1997
INDEX TO FORM 10-K
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ITEM NO. PAGE NO.
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PART I.
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1. Business............................................................................... 1
2. Properties............................................................................. 7
3. Legal Proceedings...................................................................... 7
4. Submission of Matters to a Vote of Security Holders.................................... 8
PART II.
5. Market Price and Dividend Information.................................................. 9
6. Selected Financial Data................................................................ 10
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.................................................................... 11
7A. Quantitative and Qualitative Disclosures About Market Risk............................. 16
8. Financial Statements and Supplemental Data............................................. 18
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................................. 33
PART III.
10. Directors and Executive Officers of the Registrant..................................... 34
11. Executive Compensation................................................................. 34
12. Security Ownership of Certain Beneficial Owners and Management......................... 34
13. Certain Relationships and Related Transactions......................................... 34
PART IV.
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 35
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PART I
ITEM 1. BUSINESS
GENERAL
Credit Acceptance Corporation ("CAC" or the "Company"), incorporated in
Michigan in 1972, is a specialized financial services company which provides
funding, receivables management, collection, sales training and related products
and services to automobile dealers located in the United States, the United
Kingdom, Canada and Ireland. CAC assists such dealers with the sale of used
vehicles by providing an indirect financing source for buyers with limited
access to traditional sources of consumer credit ("Non-prime Consumers"). As of
December 31, 1997, CAC had aggregate gross installment contracts receivable of
approximately $1.25 billion. CAC has developed special-purpose management
information and operating systems, utilizing sophisticated computer and
telephone interface capabilities, which allow it to efficiently accept, manage
and collect installment contracts written by participating dealers.
CAC also provides dealers with enhancements to the Company's program
which provide the Non-prime Consumer with the opportunity to purchase a number
of ancillary products, including point-of-sale dual interest collateral
protection insurance provided by third party insurance carriers, credit life and
disability insurance and vehicle service contracts offered by dealers. Through
wholly-owned subsidiaries, the Company also reinsures certain of the
point-of-sale dual interest collateral protection insurance and credit life and
disability insurance policies issued in conjunction with installment contracts
originated by dealers. To a significantly lesser extent, CAC assists dealers in
financing their inventories and businesses by providing floor plan financing and
secured working capital loans. As of December 31, 1997, floor plan receivables
represented 1.8% of total assets while notes receivable (representing working
capital loans) represented 0.1% of total assets. In addition, the Company's
credit reporting subsidiary provides credit information and consumer reports to
companies serving the Non-prime Consumer market.
PRODUCTS AND SERVICES
CAC derives its revenues from four principal sources: (i) servicing
fees (which are accounted for as finance charges) earned as a result of
servicing and collecting installment contracts originated and assigned to the
Company by dealers; (ii) fees charged to dealers at the time they enroll in the
Company's program; (iii) vehicle service contract fees and other income
earned primarily in connection with loans made directly to dealers for floor
plan financing and secured working capital purposes and fees earned
from third party service contract and credit life and disability products
offered by dealers; and (iv) premiums earned from the Company's reinsurance
activities and service contract programs. The following table sets forth the
percent relationship to total revenue from each of these sources.
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For the years ended December 31,
Percent of Total Revenue 1995 1996 1997
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Finance charges.......................... 77.9% 75.0% 71.2%
Dealer enrollment fees................... 3.3 4.1 4.5
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Total core products................ 81.2 79.1 75.7
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Vehicle service contract fees
and other income....................... 11.2 13.2 17.4
Premiums earned.......................... 7.6 7.7 6.9
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Total ancillary products........... 18.8 20.9 24.3
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Total revenue...................... 100.0% 100.0% 100.0%
========= ======== ========
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PRINCIPAL BUSINESS
CAC's principal business involves: (i) the acceptance of installment
contracts originated and assigned by participating dealers; and (ii) the
subsequent management and collection of such contracts. For installment
contracts meeting the Company's criteria, CAC makes a formula-based cash payment
to the dealer (an "Advance") . The Company may Advance up to 90% of the amount
financed with advances typically ranging between 50% and 75% of the amount
financed. To mitigate its risk, at the time of accepting the assignment of an
installment contract, CAC obtains a security interest in the vehicle and
establishes a dealer holdback equal to the gross amount of the contract, less
the Company's servicing fee, which is recorded as an unearned finance charge.
CAC's acceptance of such contracts is generally without recourse to the general
assets of the dealer.
CAC offers its dealers several Advance alternatives, which are
calculated based upon the dealer's history with the Company, the credit profile
of a particular customer and the year, make, model, and mileage of the used
vehicle to be financed.
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Monthly cash receipts, related to the aggregate installment contracts
accepted from an individual dealer, are remitted to such dealer, but only after:
(i) the Company is reimbursed for certain collection costs
relating to all contracts accepted from such dealer;
(ii) the Company receives a servicing fee (typically 20%) of the
aggregate net monthly receipts (monthly cash receipts less
certain collection costs); and
(iii) the Company has recovered all advances made to such dealer.
OPERATIONS
Dealer Selection and Enrollment Fee. CAC has adopted specific policies
relative to establishing the eligibility of prospective dealers for the
Company's program. A dealer's participation in the Company's program begins with
the execution of a servicing agreement, which requires the dealer to meet
certain criteria.
Pursuant to such agreement, a dealer represents that it will only
submit contracts to CAC which satisfy criteria established by the Company, meet
certain conditions with respect to the binding nature and the status of the
security interest in the purchased vehicle and comply with applicable state,
federal and foreign laws and regulations. Dealers receive a monthly statement
from the Company, summarizing all transactions on contracts originated by such
dealer. Also, where applicable, the dealer will receive a payment from CAC for
any portion of the payments on contracts to which the dealer is entitled under
the servicing agreement.
The servicing agreement may be terminated by the Company or by the
dealer (as long as there is no event of default or an event which, with the
lapse of time, giving of notice or both, would become an event of default) upon
30 days prior written notice. Events of default include, among other things, (i)
the dealer's failure to perform or observe covenants in the servicing agreement;
(ii) the dealer's breach of a representation in the servicing agreement; (iii) a
misrepresentation by the dealer relating to an installment contract submitted to
the Company or a related vehicle or purchaser; and (iv) the appointment of a
receiver for, or the bankruptcy or insolvency of, the dealer. The Company may
terminate the servicing agreement immediately in the case of an event of default
by the dealer. Upon any termination by the dealer or in the event of a default,
the dealer must immediately pay the Company: (i) any unreimbursed collection
costs; (ii) any unpaid advances and all amounts owed by the dealer to the
Company; and (iii) a termination fee equal to 20% of the then outstanding amount
of the installment contracts originated by such dealer and accepted by the
Company. Upon receipt in full of such amounts, the Company will reassign the
installment contract receivable and its security interest in the financed
vehicle to the dealer. In the event of a termination by the Company (or any
other termination if the Company and the dealer agree), the Company may continue
to service installment contracts accepted prior to termination in the normal
course of business without charging a termination fee.
New dealers located in the United States and Canada are generally
charged a $4,500 dealer enrollment fee, which affords the dealer access to the
Company's training material and programs and helps offset the administrative
expenses associated with new dealer enrollment. No dealer enrollment fee is
charged to dealers in the United Kingdom and Ireland.
Assignment of contracts. The dealer assigns title to the installment
contract and the security interest in the vehicle to the Company. Thereafter,
the rights and obligations of the Company and the dealer are defined by the
servicing agreement, which provides that the contract assignment to the Company
is as nominee for the dealer for the purposes of administration, servicing and
collection of the amounts due under the assigned contract, as well as for
security purposes. At the time a contract is submitted, CAC evaluates the
contract to determine if it meets the Company's cash Advance criteria. Contracts
which do not meet the Company's cash Advance criteria may still be accepted for
servicing without an Advance being paid.
Contract Portfolio. The portfolio of installment contracts contains
loans of initial duration generally ranging from six to 36 months, with an
average initial maturity of approximately 31 months. The Company receives a
servicing fee generally equal to 20% of the gross amount of the contract, with
rate of return varying, based upon the amount of the Advance and the maturity of
the contract.
The following table sets forth, for each of the periods indicated, the average
size of installment contracts accepted by the Company, the percent growth in the
average size of contracts accepted, the average initial maturity of the
contracts accepted, the average Advance per installment contract accepted and
the average advance as a percent of the average installment contract accepted.
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As of December 31,
Average Contract Data 1993 1994 1995 1996 1997
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<S> <C> <C> <C> <C> <C>
Average size of installment contracts accepted
during the period ................................. $4,415 $5,922 $6,507 $7,249 $ 8,340
====== ====== ====== ====== ========
Percentage growth in average size of contract ........... 6.1% 34.1% 9.9% 11.4% 15.1%
====== ====== ====== ====== ========
Average initial maturity (in months) .................... 20 25 25 30 31
====== ====== ====== ====== ========
Average Advance per installment contract................. $1,765 $2,637 $3,220 $3,837 $ 4,228
====== ====== ====== ====== ========
Average Advance as a percent of average installment
contract .......................................... 40.0% 44.5% 49.5% 52.9% 50.7%
====== ====== ====== ====== ========
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Servicing and Collections. CAC's staff of professional and experienced
collection personnel collect amounts due on installment contracts, assisted by
highly specialized computer and telephone interface systems. CAC installed a
new, state-of-the-art telephone system during 1994, significantly upgraded this
system in December 1995 and expanded the system in early 1997. This system has
significantly improved the Company's ability to process telephone calls. CAC's
computer system provides personnel with immediate access to all information
contained in the customer's contract and application, including the amount of
the contract, maturity, interest rate, vehicle and reference information and
payment history. See "Systems Overview."
Collectors monitor their assigned contracts, assisted by a computerized
priority system, and typically take action on contracts within 5 days of
delinquency. If a customer is delinquent, the Company's policy is to attempt to
resolve the delinquency by persuading the customer to make some type of payment.
Since the customer generally has a poor credit history, the Company's program
provides the customer with an opportunity to restore his or her credit rating.
The Company believes its interests are best served by permitting the customer to
retain the vehicle and make payments, even if the maturity of the loan needs to
be extended beyond the original term.
The repossession process typically begins when a customer becomes
approximately 60 days past due. However, when a new customer misses their first
payment due, the repossession process typically begins when the customer becomes
approximately 30 days past due. At that time, the Company contracts with a third
party to repossess and sell the vehicle at an auction. These costs, to the
extent permitted by law, are added to the amount due from the customer and the
dealer Advance amount. If the proceeds from the auction are not sufficient to
cover the total balance due, the Company may seek to recover its "deficiency
balance" from the customer through legal means, including wage garnishment to
the extent permitted by applicable law. Although the Company continues to pursue
collection, the deficiency balance is charged-off after nine months of not
receiving any material payments.
Systems Overview. The Company employs three major computer systems in
its U.S. operations: (i) the Application and Contract System ("ACS") which is
used from the time a dealer faxes an application to the Company until the
contract is received and funded, (ii) the Loan Servicing System ("LSS") which
contains all loan and payment information and is the primary source for
management information reporting, and (iii) the Collection System ("CS") which
is used by the Company's collections personnel to track and service all active
customer accounts.
ACS - The ACS system, designed and built by an independent consulting
firm hired by the Company, was installed in May 1997. This system replaced
certain functionality of the Company's previous systems. The system enables the
Company to efficiently process a large volume of application and contract data.
Upon receipt, from the dealer, of a faxed application at the Company's
headquarters in Southfield, Michigan, Company personnel input the application
data into the ACS system. The system automatically pulls all credit bureau and
vehicle guidebook data and includes such data in the application file which is
routed to one of seven analyst teams based on the dealer's location. An analyst
reviews each application file on-line to determine if the transaction is
properly structured and meets the Company's guidelines for an Advance. The ACS
system provides the analyst with information regarding the borrower, including
information on the borrower's residence, employment, wage level and references,
information on the vehicle including the vehicle's age, mileage and guidebook
value, and on the transaction information including sale price, down payment,
interest rate and term. The system computes the Advance amount according to
predefined programs based on dealer and loan variables, provides the analyst
with warning flags on out of tolerance application variables and allows the
analyst to select from a predefined set of stipulations to include on the
Advance approval transmittal, which is automatically faxed to the dealer. After
the sale of the vehicle, the installment contract package is sent to the Company
by the dealer. The contract information is input into the ACS system. The system
compares the contract data to the application data and reviews compliance with
analyst stipulations. After any variances have been addressed, the system sends
an Advance payment to the dealer by either check or electronic transaction. The
system generally enables the Company to approve application files in under one
hour and fund contracts within 24 hours of receipt of all required documents.
The system enables management personnel to report on service level by analyst
and by region, application and contract volumes by dealer and by program,
exceptions granted and various other reports as needed. The ACS system
automatically loads all new contract data into the LSS system.
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LSS - The LSS system, designed and built for the Company by the same
consulting firm, was installed and implemented in the third quarter 1997. This
system contains all loan transaction data, including payments and
charge-offs for loans acquired by the Company since July 1990. The system is
the Company's primary information source for management reporting including
production of monthly statements sent to dealers summarizing the status of
their accounts and the Company's static pool system, which provides the Company
with a static pool analysis on a per dealer basis. This system projects future
collections for each dealer based on actual prior loss history. These
projections are then used to analyze dealer profitability and to estimate and
record the Company's reserve on advances to dealers. The LSS system interfaces
with both the ACS and CS systems.
CS - The CS system which is used by Company collection personnel to
service all active accounts was purchased, modified and installed in 1989. The
collection system provides data on all of the Company's customer accounts
including loan and payment information as well as a log of all account activity
including letters sent and summaries of telephone contact. The system generates
payment books which are sent on all new accounts, generates all collection
letters and notices, allows collectors to record promises to pay and broken
promises, interfaces with a predictive dialing system, assigns accounts to
collection personnel and tracks results on a per collector basis. Repossession
and legal accounts are also processed on this system. The CS system interfaces
with the phone system, predictive dialer and the LSS system.
CAC utilizes certain software that will be affected by the year 2000
date change. Modifications to computer systems to process year 2000 date
transactions and receipt of vendor confirmations that their software is year
2000 compliant began in 1997. CAC expects that all new software installations
or other modifications to its computer systems will be completed by the year
2000. Anticipated spending for modifications will be expensed as incurred,
while the cost for new software will be capitalized and amortized over the
software's useful life. At this time, CAC does not expect that the cost of
these modifications or software will have a material effect on its financial
position, liquidity, or results of operations.
ANCILLARY PRODUCTS
The Company continually explores methods by which its business
relationships with dealers may be enhanced. Since 1993, the Company has
introduced several ancillary products, including insurance and service contract
programs and enhancements to floor plan and Advance programs.
Insurance and Service Contract Programs. CAC has arrangements with
insurance carriers to assist dealers in offering credit life and disability
insurance to Non-prime Consumers. Pursuant to this program, the Company advances
to dealers an amount equal to the credit life and disability insurance premium
on contracts accepted by the Company, which include credit life and disability
insurance written by the Company's designated insurance carriers. The Company is
not involved in the actual sale of insurance; however, as part of the program,
the insurance carriers cede insurance coverages and premiums (less a fee) to a
wholly-owned subsidiary of the Company, which reinsures such coverages. As a
result, the subsidiary bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.
Buyers Vehicle Protection Plan, Inc. ("BVPP"), a subsidiary of CAC,
operates as an administrator of certain vehicle service contract programs
offered by dealers to consumers. Under this program, the Company is paid an
administrative fee and in return agrees to reimburse dealers for designated
amounts that the dealer is required to pay for covered repairs on the vehicles
it sells. The Company advances to dealers an amount equal to the purchase price
of the vehicle service contract on contracts accepted by the Company which
include vehicle service contracts. The Company has, in turn, subcontracted its
obligations to administer these programs to third parties that have operated
such programs for several years. Nevertheless, the risk of loss (reimbursement
obligations in excess of the purchase price of the vehicle service contract)
remains with the Company. In addition, BVPP has relationships with third party
service contract providers which pay BVPP a fee on service contracts included
on installment contracts financed through participating dealers. BVPP does not
bear any risk of loss for covered claims on these third party service
contracts. The income from the non-refundable fee is recognized upon acceptance
of the installment contract.
The Company has an arrangement with insurance carriers and a third
party administrator to market and provide claims administration for a dual
interest collateral protection program. This insurance program, which insures
the financed vehicle against physical damage up to the lesser of the cost to
repair the vehicle or the unpaid balance owed on the related installment
contract, is offered to Non-prime Consumers who finance vehicles through
participating dealers. If desired by a Non-prime Consumer, collateral protection
insurance coverage is written under a group master policy issued by the
unaffiliated insurance carriers to the Company. The Company is not involved in
the actual sale of insurance; however, as part of the program, the insurance
carriers cede insurance coverages and premiums (less a fee) to CAC Reinsurance,
Ltd., a subsidiary of the Company, which acts as a reinsurer of such coverages.
As a result, the subsidiary bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.
Floor Plan Financing and Secured Working Capital Loans. The Company
offers floor plan financing to certain dealers, pursuant to which the Company
makes loans to dealers to finance vehicle inventories, in each case secured by
the inventory, the related proceeds from the future sale of such inventory and
future collections on installment contracts accepted from such dealers. This
financing is provided on a selected basis as an accommodation to both affiliated
and unaffiliated dealers, generally at a floating rate of interest equal to
prime plus 4% (minimum of 12%) on an amount equal to 75% of the market value of
the vehicle financed. On a selected basis, the Company also provides dealers
with working capital loans. These loans are secured by all assets of the dealer,
including any future cash collections owed to the dealer on installment
contracts.
Credit Reporting Services. Montana Investment Group, Inc. a subsidiary
of the Company, supplies risk assessment and fraud alert information and
computerized skiptracing services regarding Non-prime Consumers to companies
serving the Non-prime Consumer market. Such information and services are
generally not available from traditional consumer information sources.
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The Company continually considers other programs that will increase its
services to dealers. The Company intends that such programs, if undertaken, will
be initially marketed selectively in order to establish strong operating systems
and assess the potential profitability of these services. Such programs may be
discontinued at any time.
SALES AND MARKETING
The Company's program is marketed directly to used vehicle dealers and
to new automobile dealers with used vehicle departments. Marketing efforts are
initially concentrated on a particular geographic area through the distribution
of marketing brochures and via advertising in trade journals and other industry
publications directly to automobile dealers. Follow-up is subsequently conducted
through telemarketing, videotapes and monthly newsletters explaining the
Company's program. Free training seminars are available to dealers desiring to
learn more about the Company's program, as well as to participating dealers. The
Company also establishes relationships with dealers through referrals from third
party vendors and participating dealers.
CAC employs experienced sales and marketing professionals (sales
representatives) both at the Company's headquarters and in the field for
purposes of enrolling new dealers and providing services to existing dealers.
The sales force also includes non-employee individuals (sales agents) operating
on a contract basis. Sales personnel are compensated on an incentivized, formula
basis, which provides specific commissions for levels and types of contracts
generated and dealers enrolled in the Company's program.
CAC provides dealers with training regarding the operation of the
Company's program. Seminars are held on a regular basis at the Company's
headquarters and periodically at locations throughout the country. Pursuant to
the servicing agreement, each dealer agrees to attend at least one such seminar
each calendar year.
In an effort to better align the long-term interests of participating
dealers with those of the Company and to increase the volume of contracts per
dealer, the Company has implemented the CAC Century Club. This program offers
dealers the opportunity to profit from the growth of the Company by granting the
dealers stock options based on the number of contracts accepted by the Company
from the dealer. As of December 31, 1997, approximately 450 dealers are included
in the program. Options are generally granted to dealers based on the Company
accepting a minimum of 100 contracts from the dealer in a calendar year. Upon
the Company's acceptance of 100 contracts from a dealer, the dealer receives an
option to purchase 1,000 shares of Common Stock. The dealer receives an option
to purchase an additional 200 shares for each additional 100 contracts accepted
by the Company from the dealer in a calendar year. The exercise price for the
options is equal to the fair market value of the Common Stock on the date of the
grant. Such options become exercisable in three annual installments beginning
one year after grant and expire five years after grant.
The Company has selected ten Century Club dealers as part of a dealer
Advisory Board which meets periodically to discuss the Company's financing
programs and offer suggestions for enhancements of the Company's products and
services.
CREDIT LOSS POLICY AND EXPERIENCE
When an installment contract is acquired, the Company generally pays a
cash advance to the dealer. These advance balances represent the Company's
primary risk of loss related to the funding activity with the dealers. The
Company maintains a reserve on Advances to dealers which reflects Advance
balances that are not expected to be recovered through collections on that
dealer's related installment contract receivable portfolio. For purposes of
establishing the reserve, future collections (including the anticipated
proceeds from repossessed collateral) are reduced to present value 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 1997, the
Company implemented a new loan servicing system 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 took a
charge during 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.
Ultimate losses may vary from current estimates and the amount of provision,
which is a current expense, may be either greater or less than actual charge
offs. The Company charges off dealer Advances against the reserve at such time
and to the extent that the Company's static pool analysis determines that the
Advance is completely or partially impaired.
The Company maintains an allowance for credit losses which, in the opinion
of management, adequately reserves against expected credit losses on
installment contracts that are considered impaired. 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 effective 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 nine months, the gross installment contract
balance is charged off against dealer holdbacks, unearned finance charges, and
the allowance for credit losses.
During 1997, the Company changed its non-accrual policy from 120 days on a
contractual basis to 90 days on a recency basis and changed its charge off
policy to nine months on a recency basis from one year. The Company believes
these changes will allow for earlier identification of underperforming dealer
pools.
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COMPETITION
The Non-prime Consumer finance market is very fragmented and highly
competitive. The Company believes that there are numerous competitors providing,
or capable of providing, financing programs through dealers to purchasers of
used vehicles. The Company also competes, indirectly, with dealers operating
dealer-financed programs. Because the Company's program is directed to provide
financing to individuals who cannot ordinarily qualify for traditional
financing, the Company does not believe that it competes currently with
commercial banks, thrifts, automobile finance companies and others that apply
more traditional lending criteria to the credit approval process. Historically,
these traditional sources of used vehicle financing (some of which are larger,
have significantly greater financial resources and have relationships with
captive dealer networks) have not served the Company's market segment
consistently. The Company's market is primarily served by smaller finance
organizations which solicit business when and as their capital resources allow.
The Company intends to capitalize on this market segment's lack of a major,
consistent financing source. However, if such a competitor were to enter the
Company's market segment, the Company's financial position and results of
operations could be materially adversely affected. The Company believes that it
can compete on the basis of service provided to its participating dealers and
superior collection performance.
During the past year, many of CAC's competitors have disclosed that they have
exited the Non-prime consumer finance market, do not have funding to acquire
additional installment contract receivables from dealers or have strengthened
credit standards which in turn has reduced the volume of new business. These
events suggest that the Non-prime consumer finance market should become less
competitive, however, the dealers appear to continue to have many alternatives
to sell the installment contract receivables.
CUSTOMER AND GEOGRAPHIC CONCENTRATIONS
Installment contracts receivable attributable to contracts accepted
from affiliated dealers owned by the Company's majority shareholder represented
approximately 5%, 4% and 4% of gross installment contracts receivable at the
end of 1995, 1996 and 1997, respectively. Approximately 6%, 3% and 1% of the
value of installment contracts accepted and approximately 5%, 3% and 1% of the
number of installment contracts accepted by the Company during 1995, 1996 and
1997, respectively, were originated by affiliated dealers. Affiliated dealers
are not obligated to continue doing business with CAC, nor are they precluded
from owning or operating businesses which may compete with the Company. As of
December 31, 1997, approximately 33.8% of the participating dealers in the
United States were located in Michigan, Ohio, Indiana, Illinois and Missouri
and these dealers accounted for approximately 34.8% of the number of contracts
accepted from United States dealers in 1997. As of December 31, 1997,
approximately 13.5% of the Company's total dealers were located in the United
Kingdom and during 1997 these dealers accounted for approximately 15.2% of the
new contracts accepted by the Company. No single dealer (including no single
affiliated dealer) accounted for more than 10% of the number of installment
contracts accepted by the Company during 1995, 1996 or 1997.
The following table sets forth, for each of the last three years, the
Company's domestic and foreign operations, the amount of revenues from
customers, operating profits or loss and identifiable assets.
<TABLE>
<CAPTION>
As of and for Years Ended
December 31,
---------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from customers
United States ................ $ 81,820 $ 107,315 $ 134,950
United Kingdom ............... 3,261 16,600 28,598
Ireland ...................... 1 195
Canada ....................... 18 492
Operating profit (loss) (1)
United States ................ $ 45,144 $ 54,302 ($ 9,244)
United Kingdom ............... 349 9,348 10,755
Ireland ...................... (58) (51)
Canada ....................... 16 (116)
Identifiable assets
United States ................ $ 646,601 $ 934,076 $ 949,771
United Kingdom ............... 39,839 139,764 159,675
Ireland ...................... 337 2,479
Canada ....................... 241 3,685
</TABLE>
(1) Calculated after deducting interest expenses, but before provision for
income taxes.
REGULATION
The Company's business is subject to various state, federal and foreign
laws and regulations which require licensing and qualification, limit interest
rates, fees and other charges associated with the installment contracts assigned
to the Company, require specified disclosures by automobile dealers to
consumers, govern the sale and terms of the ancillary products and define the
Company's rights to repossess and sell collateral. Failure to comply with, or an
adverse change in, these laws or regulations could have a material adverse
effect on the Company by, among other things, limiting the states or countries
in which the Company may operate, restricting the Company's ability to realize
the value of the collateral securing the contracts, or resulting in potential
liability related to contracts accepted from dealers. In addition, governmental
regulations which would deplete the supply of used vehicles, such as
environmental protection regulations governing emissions or fuel consumption,
could have a material adverse effect on the Company. The Company is not
6
<PAGE> 10
aware of any such legislation currently pending. The Company has suspended
temporarily its acceptance of contracts in the District of Columbia pending
receipt of regulatory approval of contract forms.
The sale of insurance products by dealers is also subject to state laws and
regulations. As the Company does not deal directly with consumers in the sale of
insurance products, it does not believe that its business is significantly
affected by such laws and regulations. Nevertheless, there can be no assurance
that insurance regulatory authorities in the jurisdictions in which such
products are offered by dealers will not seek to regulate the Company or
restrict the operation of the Company's business in such jurisdictions. Any such
action could materially adversely affect the income received from such products.
CAC's credit life and disability reinsurance subsidiary is licensed, and is
subject to regulation, in the state of Arizona, and CAC's property and casualty
reinsurance subsidiary is licensed in the Turks and Caicos Islands.
The Company's operations in the United Kingdom, Canada and Ireland are also
subject to various laws and regulations. Generally, these requirements tend to
be no more restrictive than those in effect in the United States.
Management believes that the Company maintains all material licenses and
permits required for its current operations and is in substantial compliance
with all applicable laws and regulations. The Company's servicing agreement with
dealers provides that the dealer shall indemnify the Company with respect to any
loss or expense the Company incurs as a result of the dealer's failure to comply
with applicable laws and regulations.
EMPLOYEES
As of December 31, 1997, the Company employed 714 persons, 417 of whom were
collection personnel, 124 were contract origination and processing personnel, 75
were marketing professionals, 19 were accounting professionals and the remainder
were management or support personnel. The Company's employees have no union
affiliations and the Company believes its relationship with its employees is
good.
ITEM 2. PROPERTIES
The Company's headquarters are located at 25505 West Twelve Mile Road,
Southfield, Michigan 48034. The Company purchased the office building in 1993,
which it financed in part by a loan secured by a mortgage on the building. The
office building includes approximately 118,000 square feet of space on five
floors. The Company occupies approximately 54,000 square feet of the building,
with most of the remainder of the building leased to various tenants. The
Company plans to continue to lease out excess space in the building until such
time as the Company's expansion needs require it to occupy additional space.
The Company leases an office building in Worthing, West Sussex, in the
United Kingdom, which is the headquarters for the Company's United Kingdom
operations. The Company occupies approximately 10,000 square feet of the
building under a lease expiring in September 2007.
The Company owns an office building in Norcross, Georgia which houses the
Company's credit reporting services subsidiary. The office building includes
approximately 4,100 square feet of space on two floors. In addition, the Company
occupies approximately 1,200 square feet of space in an adjacent building under
a lease expiring in September 1998.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business and as a result of the consumer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various consumer 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, consumer protection, warranty, debt collection, insurance and
other consumer-oriented laws and regulations. The Company, as the assignee of
finance contracts originated by dealers, may also be named as a co-defendant in
lawsuits filed by consumers principally against dealers. Many of these cases are
filed as purported class actions and seek damages in large dollar amounts and
have received significant attention in recent years due to large punitive awards
by juries, particularly in Alabama, where the plaintiff bar has been very active
in bringing claims against finance companies.
The Company is currently a defendant in a class action proceeding commenced
on October 9, 1997 by Marion Fielder and Deborah Williams which is pending in
the United States District Court for the Western District of Missouri.
Plaintiffs allege that the Company is liable for multiple violations of state
and federal consumer protection laws and are seeking injunctive relief and
damages. The court has certified a class for each of the alleged violations. The
Company is vigorously defending this litigation.
The Company and certain officers and directors of the Company have been
named as defendants in a number of putative class action complaints seeking
money damages for alleged violations of the federal securities laws. The
complaints were filed between January 29, 1998 and March 3, 1998 in the United
States District Court for the Eastern District of Michigan. The complaints
generally allege that the Company's financial statements issued during the
period September 29, 1995 through October 22, 1997 did not accurately reflect
the Company's true financial condition and results of operations because such
reported results failed to be in accordance with
7
<PAGE> 11
generally accepted accounting principles and that such results contained
material accounting irregularities in that they failed to reflect adequate
reserves for credit losses. The complaints further allege that the Company
issued public statements during the alleged class period which fraudulently
created the impression that the Company's accounting practices were proper. The
Company intends to vigorously defend these actions.
Management is of the opinion that the resolution of these proceedings
will not have a material effect on its financial position or results of
operations. Future events and circumstances could alter managements' conclusion
with respect to these matters.
The frequency of litigation has increased as the Company's business
activities have expanded. The Company believes that the structure of its dealer
program and the ancillary products, including the terms and conditions of its
servicing agreement with dealers, may mitigate its risk of loss in any such
litigation. Management believes the Company has taken prudent steps to address
the litigation risks associated with its business activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
<PAGE> 12
PART II.
ITEM 5. MARKET PRICE AND DIVIDEND INFORMATION
The Company's Common Stock is traded on the Nasdaq Stock Market's National
Market (symbol CACC). The high and low sale prices for the Common Stock for each
quarter during the two year period ending December 31, 1997 as reported by the
National Association of Securities Dealers, Inc., are set forth in the following
table.
<TABLE>
<CAPTION>
1996 1997
--------------------------------- --------------------------------
Quarter Ended High Low High Low
-------------------------------------- -------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
March 31.............................. $24.50 $14.75 $26.00 $17.00
June 30............................... 24.00 17.25 18.50 9.38
September 30.......................... 28.50 17.13 16.88 11.25
December 31........................... 27.50 22.25 13.63 2.50
</TABLE>
As of December 31, 1997, the approximate number of beneficial holders
and shareholders of record of the Common Stock was 6,000 based upon securities
position listings furnished to the Company.
Other than the dividend paid in connection with the Company's
conversion from S corporation status to C corporation status during 1992, the
Company has never paid and has no present plans to pay any cash dividends on its
Common Stock. The Company intends to retain its earnings to finance the growth
and development of its business. The Company's credit agreements contain certain
covenants pertaining to the Company's tangible net worth which may indirectly
limit the payment of dividends on Common Stock.
9
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement and balance sheet data presented below
for and as of each of the five years ended December 31, 1997 are derived from
the Company's consolidated financial statements, audited by Arthur Andersen LLP,
independent public accountants. The selected financial data presented below as
of December 31, 1996 and 1997 and for the years ended December 31, 1995, 1996
and 1997 should be read in conjunction with the Company's consolidated audited
financial statements and notes thereto and "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Report.
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
REVENUE:
Finance charges .......................... $ 25,710 $ 44,550 $ 66,276 $ 92,944 $ 117,020
Vehicle service contract fees
and other income ....................... 1,690 4,219 9,491 16,309 28,598
Dealer enrollment fees ................... 1,676 1,950 2,810 5,028 7,313
Premiums earned .......................... 890 3,756 6,504 9,653 11,304
------------ ------------ ------------ ------------ ------------
Total revenue ...................... 29,966 54,475 85,081 123,934 164,235
------------ ------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Salaries and wages ....................... 4,211 6,893 9,499 11,675 16,978
General and administrative ............... 3,517 6,832 9,870 14,305 20,604
Provision for credit losses .............. 1,463 3,603 7,066 13,071 85,472
Sales and marketing ...................... 1,166 1,320 2,347 4,647 8,329
Provision for claims ..................... 431 1,582 1,964 3,060 3,911
Interest ................................. 2,651 8,785 13,568 27,597
------------ ------------ ------------ ------------ ------------
Total costs and expenses ........... 10,788 22,881 39,531 60,326 162,891
------------ ------------ ------------ ------------ ------------
Operating income ................................ 19,178 31,594 45,550 63,608 1,344
Foreign exchange gain (loss) ............. (57) 27 (41)
------------ ------------ ------------ ------------ ------------
Income before income taxes ...................... 19,178 31,594 45,493 63,635 1,303
Provision (credit) for income taxes ...... 6,783 11,024 15,921 22,126 (234)
------------ ------------ ------------ ------------ ------------
Net income ...................................... $ 12,395 $ 20,570 $ 29,572 $ 41,509 $ 1,537
------------ ------------ ------------ ------------ ------------
Net income per common share (A):
Basic .................................... $ .30 $ .50 $ .70 $ .91 $ .03
------------ ------------ ------------ ------------ ------------
Diluted .................................. $ .29 $ .49 $ .68 $ .89 $ .03
------------ ------------ ------------ ------------ ------------
Weighted average shares outstanding (A):
Basic .................................... 41,192,984 41,270,984 42,385,262 45,605,159 46,081,804
Diluted .................................. 42,106,762 42,316,105 43,527,770 46,623,655 46,754,713
BALANCE SHEET DATA:
Installment contracts receivable, net ........... $ 184,273 $ 402,379 $ 652,452 $ 1,029,951 $ 1,036,699
Floor plan receivables .......................... 4,555 7,115 13,249 15,493 19,800
Notes receivables ............................... 1,741 2,459 3,232 2,663 1,231
All other assets ................................ 12,320 13,953 17,507 26,311 57,880
------------ ------------ ------------ ------------ ------------
Total assets .................................... $ 202,889 $ 425,906 $ 686,440 $ 1,074,418 $ 1,115,610
------------ ------------ ------------ ------------ ------------
Dealer holdbacks, net ........................... $ 135,071 $ 251,997 $ 363,519 $ 496,434 $ 437,065
Total debt ...................................... 4,550 79,652 95,780 288,899 391,666
Other liabilities ............................... 8,559 18,517 28,166 42,942 37,888
------------ ------------ ------------ ------------ ------------
Total liabilities .......................... 148,180 350,166 487,465 828,275 866,619
------------ ------------ ------------ ------------ ------------
Shareholders' equity (B) ........................ 54,709 75,740 198,975 246,143 248,991
------------ ------------ ------------ ------------ ------------
Total liabilities and shareholders' equity.. $ 202,889 $ 425,906 $ 686,440 $ 1,074,418 $ 1,115,610
============ ============ ============ ============ ============
</TABLE>
(A) On September 29, 1995 the Company consummated a public offering of 3,900,000
shares of its Common Stock.
(B) No dividends were paid during the periods presented.
10
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a specialized financial services company providing
funding, receivables management, collection, sales training and related products
and services to automobile dealers located in the United States, the United
Kingdom, Ireland and Canada. The Company assists such dealers by providing them
with an indirect source of financing for buyers of used vehicles with limited
access to traditional sources of consumer credit. In addition, but to a
significantly lesser extent, the Company provides floor plan financing and
secured working capital loans to dealers, secured by the related vehicle
inventory and any future cash collections owed to the dealer on contracts
accepted under the Company's program.
The Company's relationship with a dealer is defined by: (i) the
servicing agreement which sets forth the terms and conditions associated with
the Company's acceptance of a contract from a dealer; and (ii) the contract,
which is a retail installment sales contract between a dealer and a purchaser of
a used vehicle, providing for payment over a specified term. The dealer assigns
title to the contract and the security interest in the vehicle to the Company.
Thereafter, the rights and obligations of the Company and the dealer are defined
by the servicing agreement, which provides that a contract is assigned to the
Company as nominee for the dealer for purposes of administration, servicing and
collection of the amount due under the assigned contract, as well as for
security purposes. The Company takes title to the contract as nominee and
records the gross amount of the contract as a gross installment contract
receivable and the amount of its "servicing fee" (see below) as an unearned
finance charge which, for balance sheet purposes, is netted from the gross
amount of the contract. The dealer maintains certain rights in future
collections, with the Company recording the remaining portion of the contract
(the gross amount of the contract less the unearned finance charge) as a "dealer
holdback". For balance sheet purposes, dealer holdbacks are shown net of any
advances made by the Company to the dealer in connection with accepting the
assignment of a contract.
The Company's program allows dealers to establish the interest rate on
contracts, which typically is the maximum rate allowable by the state or country
in which the dealer is doing business. As the majority of the Company's revenue
is derived from the servicing fee it receives on the gross amount due under the
contract (typically 20% of the principal and interest), the Company's revenues
from servicing fees are not materially impacted by changes in interest rates.
The Company's revenue is principally dependent upon the gross value of contracts
accepted, which is determined by the number of contracts accepted and the amount
of the average contract. The contracts assigned to the Company are: (i) secured
by the related vehicle; and (ii) short-term in duration (generally maturing in
six to 36 months, with an initial average maturity of approximately 31 months).
The interest rates charged on floor plan financing and secured working capital
loans are typically prime plus 4%.
The Company's subsidiaries provide additional services to dealers. One
such subsidiary is primarily engaged in the business of reinsuring credit life
and disability insurance policies issued to borrowers under contracts originated
by dealers. Credit life and disability insurance premiums are ceded to the
subsidiary on both an earned and written basis and are earned over the life of
the contracts using pro rata and sum-of-digits methods. Another subsidiary
administers short-term limited extended service contracts offered by dealers. In
connection therewith, the subsidiary bears the risk of loss for any repairs
covered under the service contract. Revenue is recognized on a straight-line
basis over the life of the service contracts. In addition, the subsidiary has
relationships with third party service contract providers which pay the
subsidiary a fee on service contracts included on installment contracts
financed through participating dealers. The subsidiary does not bear the risk
of loss for covered claims on these third party service contracts. The income
from the non-refundable fee is recognized upon acceptance of the installment
contract. A third subsidiary is engaged in the business of reinsuring
collateral protection insurance coverage issued to borrowers under contracts
originated by dealers. Premiums are ceded to the subsidiary on both an earned
and written basis and are earned over the life of the contracts using pro rata
and sum-of-digits methods.
11
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth the percent relationship of certain
items to total revenue for the periods indicated.
<TABLE>
<CAPTION>
For the years ended
December 31,
Percent of Total Revenues 1995 1996 1997
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Finance charges ........................ 77.9% 75.0% 71.2%
Interest and other income .............. 11.2 13.2 17.4
Dealer enrollment fees ................. 3.3 4.1 4.5
Premiums earned ........................ 7.6 7.7 6.9
------- ------- ------
Total revenue .................... 100.0 100.0 100.0
------- ------- ------
Salaries and wages ..................... 11.1 9.4 10.3
General and administrative ............. 11.6 11.5 12.6
Provision for credit losses ............ 8.3 10.5 52.0
Sales and marketing .................... 2.8 3.7 5.1
Provision for claims ................... 2.3 2.5 2.4
Interest ............................... 10.3 10.9 16.8
------- ------- ------
Total costs and expenses ......... 46.4 48.5 99.2
------- ------- ------
Operating income ....................... 53.6 51.5 0.8
Foreign exchange loss ............. (0.1) -- --
------- ------- ------
Income before income taxes ............. 53.5 51.5 0.8
Provision (credit) for income taxes 18.7 18.0 (0.1)
------- ------- ------
Net income ............................. 34.8% 33.5% 0.9%
======= ======= ======
</TABLE>
Year Ended December 31, 1996 Compared To Year Ended December 31, 1997
Total Revenue. Total revenue increased from $123.9 million in 1996 to
$164.2 million in 1997, an increase of $40.3 million or 32.5%. This increase was
primarily due to the increase in finance charge revenue resulting from an
increase in the average installment contracts receivable balance. 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, the growth in which moderated in
1997 and, in particular, in the fourth quarter of 1997, as the Company utilized
enhanced analysis, made possible by a new loan servicing system which became
operational in the third quarter of 1997, to limit business with marginally
profitable dealers. Based on this review of dealer profitability, the Company
has discontinued relationships with certain dealers which had accounted for
approximately 15% of the Company's originations (based upon the gross contract
amount) in the third quarter of 1997. The Company expects to continue to monitor
its relationships with dealers and make additional adjustments to these
relationships as required. It is expected that contract growth will continue to
moderate in 1998 to rates lower than those experienced historically.
The average yield on the Company's portfolio, calculated using finance
charge revenue divided by average net installment contracts receivable, was
approximately 10.9% and 11.2% in 1996 and 1997, respectively. The increase in
the average yield principally resulted from the Company changing its accounting
policy relating to the write-off of installment contracts receivable. The
revised policy requires write-off of delinquent installment contracts receivable
at nine months on a recency basis compared to one year under the old policy.
This change was partially offset by an increase in the percent of non-accrual
installment contracts (which were 34.1% and 37.6% of contracts as of December
31, 1996 and 1997, respectively). The increase in the percent of non-accrual
contracts is principally due to a change in the Company's non-accrual policy in
1997 to 90 days measured on a recency basis from 120 days measured on a
contractual basis, as well as a maturing of the installment contract receivable
portfolio due to lower origination growth. The Company implemented the change in
the non-accrual policy in an effort to more quickly identify unprofitable dealer
relationships.
Also contributing to the increase in total revenue was vehicle service
contract fees and other income which increased as a percent of total revenue
from 13.2% in 1996 to 17.4% in 1997. This increase is primarily due to fees
earned from the sale of third party service contract and credit life products
offered by dealers, which increased from $6.5 million in 1996 to $15.8 million
in 1997, and an increase in interest earned on floor plan financing which
resulted from increased floor plan balances in 1997. Earned dealer enrollment
fees increased, as a percent of total revenue, from 4.1% in 1996 to 4.5% in
1997. This increase is due to the continued increase in the number of new
dealers enrolling in the Company's financing program, particularly during 1996,
as these fees are deferred and amortized over the estimated repayment term of
the outstanding dealer advance. Earned dealer enrollment fees are expected to
be lower in 1998 as a result of the Company's efforts to be more selective of
dealer quality in efforts to improve the performance of its portfolio of
installment contracts receivable. Premiums earned decreased, as a percent of
total revenue, from 7.7% in 1996 to 6.9% in 1997. This decrease is primarily
the result of decreases, as a percent of total revenue, in premiums reinsured
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 9.4% in 1996 to 10.3% in 1997. This increase is 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 increase is due to increases in the Company's average wage rates.
A portion of management personnel compensation paid by the Company is
charged to a company controlled by the Company's Chairman (the "Affiliated
Company"), based upon the percentage of time spent working for the Affiliated
Company. The Company charged the Affiliated Company approximately $311,000 and
$208,000 in 1996 and 1997, respectively. Shared employees devote between 30% and
90% of their time to the Company, depending on their responsibilities. The
Company believes that the amounts charged by the Company are representative of
the respective employees' activities.
General and Administrative. General and administrative expenses, as a
percent of total revenue, increased from 11.5% in 1996 to 12.6% in 1997. This
increase is primarily due to: (i) an increase in depreciation and amortization
resulting from the addition of new computer systems which became operational in
1997 and (ii) an increase in legal expenses resulting from the increase in the
frequency and severity of litigation on 1997 (see Item 3. Legal Proceedings). In
addition, this increase is due to a the $500,000 write-off of computer software
in 1997 no longer used in the Company's operations.
Provision for Credit Losses. The amount provided for credit losses, as a
percent of total revenue, increased from 10.5% in 1996 to 52.0% in 1997. This
increase is primarily the result of a charge recorded to reflect the
enhancements in the Company's methodology for estimating its reserve for
advances made possible by a new loan servicing system implemented by the
Company. 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 additional provisions were recorded in 1997.
Sales and Marketing. Sales and marketing expenses, as a percent of
total revenue, increased from 3.7% in 1996 to 5.1% in 1997. The increase
corresponds with the increase in earned dealer enrollment fees, as the sales
12
<PAGE> 16
commissions paid for dealer enrollments are deferred and amortized to expense
over the estimated repayment term of the outstanding dealer advance. In
addition, the increase is also the result of increases in advertising and other
promotions in 1997.
Provision for Claims. The amount provided for insurance and service
contract claims, as a percent of total revenue, decreased from 2.5% in 1996 to
2.4% in 1997. This decrease corresponds with decreases, as a percent of total
revenue, in premiums earned from 7.7% in 1996 to 6.9% in 1997.
The Company has established claims reserves based on accumulated
estimates of claims reported but unpaid, plus estimates of incurred but
unreported claims. The Company believes the reserves are adequate to cover
future claims associated with the programs.
Interest Expense. Interest expense, as a percent of total revenue,
increased from 10.9% in 1996 to 16.8% in 1997. This increase is 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. The increase
in the average interest rate is primarily the result of the sale of $71.75
million in senior notes, at a fixed rate of interest, in March 1997. The
increase was also attributable to the downgrade of the Company's credit rating
with Moody's Investor Service from Baa3 to Ba2 and with Standard and Poor's from
BBB- to BB effective October 22, 1997. As a result of these 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 Company expects to
continue to borrow in future periods, as needed, to assist in funding the
Company's operations, and may continue to convert portions of its floating rate
debt to longer term fixed rates, which may be higher than rates available on
shorter term floating rate borrowings.
Operating Income. As a result of the aforementioned factors,
operating income decreased from $63.6 million in 1996 to $1.3 million in 1997, a
decrease of $62.3 million or 97.9%.
Foreign Exchange Gain (Loss). The Company incurred a foreign exchange
gain of $27,000 in 1996 and a foreign exchange loss of $41,000 in 1997. The
gain and loss were the result 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 $22.1 million in 1996 to ($0.2)
million in 1997. The decrease is due to lower pretax profits in 1997.
Year Ended December 31, 1995 Compared To Year Ended December 31, 1996
Total Revenue. Total revenue increased from $85.1 million in 1995 to
$123.9 million in 1996, an increase of $38.8 million or 45.6%. This increase was
primarily due to the increase in finance charge revenue resulting from an
increase in installment contracts receivable. The increase in installment
contracts receivable was primarily the result of an increase in the number of
dealers participating in the Company's program, and an increase in the average
contract size. The Company enrolled 2,487 new dealers into the Company's program
during 1996, bringing the total number of dealers to 5,385 as of December 31,
1996 (including 947 in the United Kingdom, 41 in Ireland and 36 in Canada),
compared to 3,328 as of December 31, 1995 (including 680 in the United Kingdom
and none in Ireland and Canada). The average yield on the Company's portfolio
was approximately 12.4% and 10.9% in 1995 and 1996, respectively. The decline in
the average yield principally resulted from an increase in the percent of
contracts which were greater than 120 days contractually past due (which were
31.8% and 34.1% of contracts as of December 31, 1995 and 1996, respectively).
The increase in the level of contractual past due contracts, while significant,
is mitigated by the fact that when a contract is 120 days contractually past
due, 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 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 contract portfolio.
Also contributing to the increase in total revenue were premiums earned
on the Company's credit life and service contract programs. Premiums earned
increased as a percent of total revenue from 7.6% in 1995 to 7.7% in 1996.
Vehicle service contract fees and other income increased as a percent of total
revenue from 11.2% in 1995 to 13.2% in 1996. The increase is primarily due to
commissions earned on credit life and service contract products offered by
dealers, as well as an increase in interest earned on floor plan financing
which resulted from higher floor plan balances. Earned dealer enrollment fees
increased as a percent of revenue from 3.3% in 1995 to 4.1% in 1996. These
fees, and the related direct incremental costs of originating these fees, are
deferred and amortized on a straight-line basis over the estimated repayment
term of the outstanding Advance. The increase is due to the continued increase
in the number of dealers enrolled in the Company's financing program.
Salaries and Wages. Salaries and wages, as a percent of total revenue,
decreased from 11.1% in 1995 to 9.4% in 1996. The Company continues to benefit
from increased efficiencies, which have allowed it to increase revenue with a
less than proportionate increase in personnel costs.
A portion of management personnel compensation paid by the Company is
charged to a company controlled by the Company's Chairman (the AAffiliated
Company), based upon the percentage of time spent working for the Affiliated
13
<PAGE> 17
Company. The Company charged the Affiliated Company approximately $354,000 and
$311,000 in 1995 and 1996, respectively. Shared employees devote between 30% and
90% of their time to the Company, depending on their responsibilities. The
Company believes that the amounts charged by the Company are representative of
the respective employees' activities.
General and Administrative. General and administrative expenses, as a
percent of total revenue, decreased from 11.6% in 1995 to 11.5% in 1996. This
decrease reflects the Company's ability to benefit from economies of scale,
increasing revenue with a less than proportionate increase in general and
administrative costs.
Provision for Credit Losses. The amount provided for credit losses,
as a percent of total revenue, increased from 8.3% in 1995 to 10.5% in 1996.
The increase is the result of an increase in amounts provided to cover
anticipated credit losses from certain advances made to dealers which the
Company does not expect to recover and is to a lesser extent a result of an
increase in the percent of installment contracts receivable which are greater
than 120 days contractually past due.
Sales and Marketing. Sales and marketing expenses, as a percent of
total revenue, increased from 2.8% in 1995 to 3.7% in 1996. The increase is
primarily the result of increased sales commissions as a result of the
increased rate of 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, increased from 2.3% in 1995 to
2.5% in 1996. This increase was a result of an increase in the provision for
claims as a percentage of premiums earned from 30.2% in 1995 to 31.7% in 1996
due to slightly higher levels of claims under insurance policies and service
contracts.
The Company has established claims reserves based on accumulated
estimates of claims reported but unpaid, plus estimates of incurred but
unreported claims. The Company believes the reserves are adequate to cover
future claims associated with the programs.
Interest Expense. Interest expense, as a percent of total revenue,
increased from 10.3% in 1995 to 10.9% in 1996. The increase was primarily the
result of an increase in average total outstanding borrowings. The increase was
partially offset by lower average borrowing rates on the revolving credit
facility in 1996. The Company expects to continue to borrow in future periods to
assist in funding the continued growth of the Company.
Operating Income. As a result of the aforementioned factors,
operating income increased from $45.6 million in 1995 to $63.6 million in
1996, an increase of $18.0 million or 39.5%.
Foreign Exchange Gain (Loss). The Company incurred a foreign exchange
loss of $57,000 in 1995 and a foreign exchange gain of $27,000 in 1996. The gain
and loss were the result of the effect of exchange rate fluctuations between the
U.S. dollar and foreign currencies on unhedged intercompany balances between the
Company and its subsidiaries which operate outside the United States.
Provision for Income Taxes. The provision for income taxes increased
from $15.9 million in 1995 to $22.1 million in 1996. The increase is due to a
higher level of pretax income in 1996. The effective tax rate was 35.0% in 1995
and 34.8% in 1996.
CREDIT LOSS POLICY AND EXPERIENCE
When an installment contract is acquired, the Company generally pays a cash
Advance to the dealer. These Advance balances represent the Company's primary
risk of loss related to the funding activity with the dealers.
The Company maintains a reserve against Advances to dealers that are not
expected to be recovered through collections on the related contract portfolio.
For purposes of establishing the reserve, future collections are reduced to
present-value 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 1997, the Company implemented a new loan servicing system 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 took a non-cash charge during 1997 to reflect the impact of this
enhancement in the Company's methodology for estimating the Advance 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. Ultimate losses may vary from current estimates and the
amount of provision, which is a current expense, may be either greater or less
than actual charge offs. The Company charges off dealer Advances against the
reserve at such time and to the extent that the Company's static pool analysis
determines that the Advance is completely or partially impaired.
The Company also maintains an allowance for credit losses which, in the opinion
of management, adequately reserves against expected future losses in the
portfolio of receivables. The risk of loss to the Company related to the
installment contracts receivable balances relates primarily to the earned but
unpaid servicing fee or finance charge 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. In all cases, contracts on which no
14
<PAGE> 18
material payment has been received for nine months are charged off against
dealer holdbacks, unearned finance charges and the allowance for credit losses.
During 1997, the Company changed its non-accrual policy from 120 days
on a contractual basis to 90 days on a recency basis and changed its charge off
policy to nine months on a recency basis from one year. The Company believes
these changes will allow for earlier identification of underperforming dealer
pools.
The following table sets forth information relating to charge offs, the
allowance for credit losses, the reserve on Advances, and dealer holdbacks.
<TABLE>
<CAPTION>
For the years ended December 31,
(Dollars in thousands) 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision for credit losses - installment contracts $ 5,323 $ 7,222 $ 11,072
Provision for credit losses - Advances ............ 1,743 5,849 74,400
Charged against dealer holdbacks (1) .............. 55,648 103,497 374,646
Charged against unearned finance charges (1)....... 11,844 23,045 82,748
Charged against allowance for credit losses (1).... 1,776 2,863 10,138
-------- -------- --------
Total contracts charged off (1).................... $ 69,268 $129,405 $467,532
======== ======== ========
Net charge off against the reserve on Advances .... $ 86 $ 444 $ 71,391
</TABLE>
(1)1997 charge offs based on nine month recency method; 1996 and 1995 based on
one year recency method.
<TABLE>
<CAPTION>
As of December 31,
Credit Ratios 1995 1996 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for credit losses as a percent of gross
installment contracts receivable .............. 1.0% 1.0% 1.0%
Reserve on Advances as a percent of Advances (2)...... 1.2% 1.7% 2.8%
Gross dealer holdbacks as a percent of installment
contracts receivable .......................... 79.5% 79.8% 79.9%
</TABLE>
(2)During the fourth quarter of 1997, the Company reevaluated the timing of the
charge off of advances to dealers and concluded that it was appropriate to
accelerate the recognition of charge offs since the static pool analysis
demonstrated that the advances were uncollectable. Prior to this change, the
reserve percentage would have been approximately 12%.
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 contracts and for the payment of
dealer holdbacks to dealers who have repaid their Advance balances. These cash
outflows to dealers decreased from $540 million in 1996 to $523 million in 1997.
These amounts have been funded from cash collections on installment contracts,
cash provided by operating activities and draws under the Company's credit
agreements. In 1997, the Company borrowed approximately $123 million through the
sale of $71.75 million of senior notes and draws under its credit agreements
to assist in funding the Company's operations. The need for these
borrowings is primarily a result of cash Advances to dealers and payments of
dealer holdbacks exceeding principal collections on installment contracts
receivable. During the fourth quarter of 1997, the Company implemented more
conservative Advance programs and reduced business with marginally profitable
and unprofitable dealers in order to improve the performance of its portfolio of
installment contracts. These changes resulted in reduced levels of originations
and cash Advances to dealers in the fourth quarter of 1997, a trend which is
expected to continue in future periods. To the extent that such growth is
reduced to lower levels, the Company could experience a proportionate decrease
in its 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 140 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 December 31, 1997, there was approximately $210.3 million outstanding
under these facilities. During January and February of 1998, the Company
experienced positive cash flow. As of March 16, 1998, there was
approximately $171.4 million outstanding under these facilities.
During the fourth quarter of 1997, amendments were made to the
Company's $250 million credit agreement and senior note agreements. Such
amendments were required as a result of the Company's violation of a fixed
charge coverage covenant based on the Company's third quarter financial results.
The new amendments modified the required fixed charge coverage ratio and added
several new financial covenants to the Company's senior note and bank
agreements, including limits on the ratio of debt to Advances, the ratio of debt
to gross installment contracts receivable and the ratio of Advances to
installment contracts receivable.
As the Company's $150 million line of credit facility expires on May
15, 1998, the Company is required to refinance any amounts outstanding under
this facility on or before such date. The Company continues to evaluate
alternatives, including the securitization of assets and the sale of senior
notes, for refinancing amounts outstanding under the $150 million credit
facility. The Company has entered into an agreement to contribute dealer
advances and the related installment contracts receivable into a multi-asset
special purpose corporation owned by a large commercial bank. The transaction
is anticipated to close prior to May 15, 1998, with the issuance of commercial
paper by the special purpose corporation generating proceeds of $50 million
which are anticipated to be used to reduce outstandings under the $150 million
credit facility. The agreement with the special purpose corporation includes a
Parallel Purchase Commitment with a large commercial bank which can be
utilized, if necessary, to fund the contemplated transaction. The
Company anticipates extending the existing credit facility with modified terms
and reduced commitment amounts. Based upon anticipated cash flows, management
believes that amounts available under its revolving credit facility, amounts
provided as a result of the above transaction and other available alternatives
will provide sufficient financing for future operations.
If the Company experiences difficulties with its refinancing effort,
the Company may reduce the volume of installment contract acquisitions and,
thereby, reduce capital needs as well. The Company believes that it will be
successful in refinancing any amounts outstanding under this facility. Failure
to complete such refinancing or failure to obtain other financing alternatives
may have a material adverse effect on the Company's operations.
The Company also has a 2.0 million British pound sterling ($3.3
million U.S. dollars) 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 United Kingdom subsidiary. The borrowings are secured by a letter
of credit issued by the Company's principal commercial bank with interest
payable at the United
15
<PAGE> 19
Kingdom bank's base rate (7.25% at December 31, 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 December 31, 1997, there was approximately 1.5 million
British pounds ($2.4 million U.S. dollars) outstanding under this facility which
becomes due on August 31, 1998.
When borrowing to fund the operations of its foreign subsidiaries, the
Company's policy is to borrow funds denominated in the currency of the country
in which the subsidiary operates, thus mitigating the Company's exposure to
foreign exchange fluctuations.
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 , cash flow from the
collection of installment contracts, cash provided by operating activities 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.
CAC utilizes certain software that will be affected by the year 2000
date change. Modifications to computer systems to process year 2000 date
transactions and receipt of vendor confirmations that their software is year
2000 compliant began in 1997. CAC expects that all new software installations
or other modifications to its computer systems will be completed by the year
2000. Anticipated spending for modifications will be expensed as incurred,
while the cost for new software will be capitalized and amortized over the
software's useful life. At this time, CAC does not expect that the cost of
these modifications or software will have a material effect on its financial
position, liquidity, or results of operations.
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,
availability of funding at competitive rates of interest, adverse changes in
applicable laws and 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE> 20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Credit Acceptance Corporation:
We have audited the accompanying consolidated balance sheets of Credit
Acceptance Corporation (a Michigan corporation) and subsidiaries as of December
31, 1996 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Credit
Acceptance Corporation and subsidiaries as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan,
February 2, 1998.
17
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------------
(Dollars in thousands) 1996 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................ $ 229 $ 349
Investments .......................................................... 6,320 9,973
Installment contracts receivable ..................................... 1,042,146 1,049,818
Allowances for credit losses ......................................... (12,195) (13,119)
------------ ------------
Installment contracts receivable, net ........................ 1,029,951 1,036,699
Floor plan receivables:
Nonaffiliated companies ...................................... 3,690 8,137
Affiliated companies ......................................... 11,803 11,663
------------ ------------
15,493 19,800
------------ ------------
Notes receivable:
Nonaffiliated companies ...................................... 1,446 700
Affiliated companies ......................................... 1,217 531
------------ ------------
2,663 1,231
------------ ------------
Property and equipment, net .......................................... 14,958 20,839
Other assets ......................................................... 4,804 26,719
------------ ------------
TOTAL ASSETS ................................................. $ 1,074,418 $ 1,115,610
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Senior notes ......................................................... $ 123,400 $ 175,150
Lines of credit ...................................................... 161,482 212,717
Mortgage loan payable to bank ........................................ 4,017 3,799
Income taxes payable ................................................. 2,569
Accounts payable and accrued liabilities ............................. 29,121 22,851
Deferred dealer enrollment fees, net ................................. 2,264 421
Dealer holdbacks, net ................................................ 496,434 437,065
Deferred income taxes, net ........................................... 8,988 14,616
------------ ------------
TOTAL LIABILITIES ............................................ 828,275 866,619
------------ ------------
CONTINGENCIES (Note 11)
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued
Common stock, $.01 par value, 80,000,000 shares authorized,
45,842,986 and 46,113,115 shares issued and
outstanding in 1996 and 1997, respectively ................... 458 461
Paid-in capital ...................................................... 125,398 128,336
Retained earnings .................................................... 116,486 118,023
Cumulative translation adjustment .................................... 3,801 2,171
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ................................... 246,143 248,991
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 1,074,418 $ 1,115,610
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 22
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------
(Dollars in thousands, except for income per share data) 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE:
Finance charges ................... $ 66,276 $ 92,944 $ 117,020
Vehicle service contract
fees and other income ............ 9,491 16,309 28,598
Dealer enrollment fees ............ 2,810 5,028 7,313
Premiums earned ................... 6,504 9,653 11,304
------------ ------------ ------------
Total revenue ................ 85,081 123,934 164,235
------------ ------------ ------------
COSTS AND EXPENSES:
Salaries and wages ................ 9,499 11,675 16,978
General and administrative ........ 9,870 14,305 20,604
Provision for credit losses ....... 7,066 13,071 85,472
Sales and marketing ............... 2,347 4,647 8,329
Provision for claims .............. 1,964 3,060 3,911
Interest .......................... 8,785 13,568 27,597
------------ ------------ ------------
Total costs and expenses ..... 39,531 60,326 162,891
------------ ------------ ------------
Operating income .......................... 45,550 63,608 1,344
Foreign exchange gain (loss) ...... (57) 27 (41)
------------ ------------ ------------
Income before provision for income taxes .. 45,493 63,635 1,303
Provision (credit) for income taxes 15,921 22,126 (234)
------------ ------------ ------------
Net income ................................ $ 29,572 $ 41,509 $ 1,537
============ ============ ============
Net income per common share:
Basic ............................. $ .70 $ .91 $ .03
============ ============ ============
Diluted ........................... $ .68 $ .89 $ .03
============ ============ ============
Weighted average shares outstanding:
Basic ............................. 42,385,262 45,605,159 46,081,804
Diluted ........................... 43,527,770 46,623,655 46,754,713
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31,
1995, 1996 and 1997
<TABLE>
<CAPTION>
Cumulative
Common Paid-in Retained Translation
(Dollars in thousands) Stock Capital Earnings Adjustment
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance - December 31, 1994 ................. $ 411 $ 29,921 $ 45,405 $ 3
Net income ............................. 29,572
Proceeds from common stock offering, net
of stock issuance costs of $576 . 40 90,683
Foreign currency translation adjustment (338)
Stock options exercised ................ 4 3,274
--------- --------- --------- ---------
Balance - December 31, 1995 ................. 455 123,878 74,977 (335)
Net income ............................. 41,509
Foreign currency translation adjustment 4,136
Stock options exercised ................ 1 1,527
Issuance of 200,000 common shares for
acquisition of subsidiary ....... 2 (7)
--------- --------- --------- ---------
Balance - December 31, 1996 ................. 458 125,398 116,486 3,801
Net income ............................. 1,537
Foreign currency translation adjustment (1,630)
Stock options exercised ................ 3 2,871
Dealer stock option plan expense ....... 67
--------- --------- --------- ---------
Balance - December 31, 1997 ................. $ 461 $ 128,336 $ 118,023 $ 2,171
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE> 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------
(Dollars in thousands) 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................... $ 29,572 $ 41,509 $ 1,537
Adjustments to reconcile cash provided by
operating activities -
Provision for deferred income taxes ............ 2,799 964 5,628
Depreciation and amortization .................. 927 1,369 2,550
Loss on retirement of property and equipment ... 512
Provision for credit losses .................... 7,066 13,071 85,472
Dealer stock option plan expense ............... 67
Change in operating assets and liabilities -
Accounts payable and accrued liabilities ....... 6,050 10,842 (6,270)
Income taxes payable ........................... 201 2,355 (2,569)
Unearned insurance premiums, insurance
reserves and fees .......................... 2,669 2,371 1,450
Deferred dealer enrollment fees, net ........... 599 615 (1,843)
Other assets ................................... (1,614) (165) (21,915)
--------- --------- ---------
Net cash provided by operating activities .. 48,269 72,931 64,619
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on installment contracts receivable .. 193,296 280,051 370,059
Purchase of investments .................................. (1,063) (3,795) (3,653)
Decrease (Increase) in floor plan receivables - affiliated
companies ............................................. (5,771) (815) 140
Increase in floor plan receivables - non-affiliated
companies ............................................. (363) (1,429) (4,447)
Increases in notes receivable - affiliated companies ..... (991) (600) (363)
Decreases in notes receivable - affiliated companies ..... 827 298 1,049
Increases in notes receivable - non-affiliated companies . (2,751) (903) (345)
Decreases in notes receivable - non-affiliated companies . 2,142 1,774 1,091
Issuance of common shares for acquisition ................ (5)
Purchases of property and equipment ...................... (1,908) (5,985) (8,943)
--------- --------- ---------
Net cash provided by investing activities . 183,418 268,591 354,588
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of senior notes ....................... 70,000 71,750
Repayment of senior notes ................................ (6,600) (20,000)
Net borrowings under line of credit agreements ........... 16,319 129,923 51,235
Repayment of other debt .................................. (191) (204) (218)
Advances to dealers and payments of dealer holdback ...... (341,582) (540,077) (523,098)
Proceeds from stock options exercised .................... 3,278 1,528 2,874
Proceeds from public stock offering, net ................. 90,723
--------- --------- ---------
Net cash used in financing activities ..... (231,453) (345,430) (417,457)
--------- --------- ---------
Effect of exchange rate changes on cash ... (338) 4,136 (1,630)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents ........................... (104) 228 120
Cash and cash equivalents beginning of period ............ 105 1 229
--------- --------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD .................. $ 1 $ 229 $ 349
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for interest ................. $ 8,581 $ 11,114 $ 27,464
--------- --------- ---------
Cash paid during the period for income taxes ............. $ 10,520 $ 18,280 $ 14,887
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 25
______________________
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Description Of Business
Credit Acceptance Corporation and its subsidiaries ("CAC" or the "Company") is a
specialized financial services company which provides funding, receivables
management, collection, sales training and related products and services to
automobile dealers located in the United States, the United Kingdom, Canada and
Ireland. The Company assists such dealers by providing an indirect source of
financing for buyers with limited access to traditional sources of consumer
credit due to past credit history. Installment contracts originated and assigned
to the Company by automobile dealers are generally considered to have a high
risk of default. To a significantly lesser extent, CAC provides inventory floor
plan financing and working capital loans for dealers secured by inventory and
the related cash collections owed to the dealer by CAC.
The dealer assigns title to the installment contract and the security interest
in the vehicle to the Company. At the time it accepts the assignment of a
contract, CAC records the gross amount of the contract as a gross installment
contract receivable. The Company records the amount of its servicing fee as an
unearned finance charge with the remaining portion recorded as a dealer
holdback. At the time of acceptance, contracts which meet certain criteria are
eligible for a cash Advance, which is computed on a formula basis. Advances are
non-interest bearing and are secured by the cash collections on all of the
installment contracts receivable assigned from an individual dealer.
Dealer advances are netted against dealer holdbacks in the accompanying
consolidated financial statements, as dealer holdbacks are not paid until such
time as all advances related to such dealer have been recovered.
CAC collects the scheduled monthly payments based on contractual arrangements
with the consumer. Monthly cash collections are remitted to the dealer subject
to the Company first: (i) being reimbursed for certain collection costs
associated with all installment contracts originated by such dealer; (ii)
reducing the collections by the Company's servicing fee; and (iii) recovering
the aggregate advances made to such dealer.
Credit Acceptance Corporation Life Insurance Company ("CAC Life"), Buyers
Vehicle Protection Plan, Inc. ("BVPP"), Credit Acceptance Reinsurance, LTD.
("CAC Reinsurance") and Montana Investment Group, Inc. ("Montana"), all
wholly-owned subsidiaries of the Company, provide additional services to
participating dealers.
CAC Life is engaged primarily in the business of reinsuring credit life and
disability insurance policies issued to borrowers under installment contracts
originated by participating dealers. CAC advances to dealers an amount equal to
the credit life and disability insurance premium on contracts accepted by the
Company which include credit life and disability insurance written by the
Company's designated insurance carriers. The policies insure the holder of the
installment contract for the outstanding balance payable in the event of death
or disability of the debtor. Premiums are ceded to CAC Life on both an earned
and written basis and are earned over the life of the contracts using pro rata
and sum-of-digits methods. CAC Life bears the risk of loss attendant to claims
under the coverages ceded to it.
BVPP administers short-term limited extended service contracts offered by
participating dealers. In connection therewith, BVPP bears the risk of loss for
any repairs covered under the service contract. Income is recognized on a
straight-line basis over the life of the service contracts. In addition,
BVPP has relationships with third party service contract providers which pay
BVPP a fee on service contracts included on installment contracts financed
through participating dealers. BVPP does not bear any risk of loss for covered
claims on these third party service contracts. The income from the
non-refundable fee is recognized upon acceptance of the installment contract.
The Company advances to dealers an amount equal to the purchase price of the
vehicle service contract on contracts accepted by the Company which include
vehicle service contracts.
CAC has arrangements with insurance carriers and a third party administrator to
market and provide claims administration for a dual interest collateral
protection program. This insurance program, which insures the financed vehicle
against physical damage up to the lesser of the cost to repair the vehicle or
the unpaid balance owed on the related installment contract, is made available
to borrowers who finance vehicles through participating dealers. If desired by a
borrower, collateral protection insurance coverage is written under group master
policies issued by unaffiliated insurance carriers to the Company. As part
of the program, the insurance carriers cede insurance coverages and premiums
(less a fee) to CAC Reinsurance, which acts as a reinsurer of such coverages. As
a result, CAC Reinsurance bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.
Montana supplies risk assessment and fraud alert information and computerized
skiptracing services regarding borrowers to companies serving the Non-prime
Consumer market.
Credit Acceptance Corporation UK, Ltd., CAC of Canada, Ltd., and Credit
Acceptance Corporation of Ireland Ltd. are all wholly-owned subsidiaries of the
Company which operate in their respective countries. These subsidiary companies
offer essentially the same dealer programs as are offered in the United States.
Upon enrollment into the Company's financing program, the dealer enters into a
servicing agreement with CAC which defines the rights and obligations of CAC and
the dealer. The servicing agreement may be terminated by the Company or by the
dealer (so long as there is no event of default or
22
<PAGE> 26
an event which with the lapse of time, giving of notice or both, would become an
event of default) upon 30 days prior written notice. The Company may also
terminate the servicing agreement immediately in the case of an event of default
by the dealer. Upon any termination by the dealer or in the event of a default,
the dealer must immediately pay the Company: (i) any unreimbursed collection
costs; (ii) any unpaid advances and all amounts owed by the dealer to the
Company; and (iii) a termination fee equal to the unearned finance charge of
the then outstanding amount of the installment contracts originated by such
dealer and accepted by the Company.
The accounting and reporting policies of the Company require management to make
estimates and assumptions 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. The accounts which are subject to such estimation
techniques include the reserve against advances and the allowances for credit
losses. Actual results could differ from those estimates.
Significant accounting policies are described in the following paragraphs.
Principles Of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany transactions have
been eliminated.
Foreign Currency Translation
The financial position and results of operations of the Company's foreign
operations are measured using the local currency as the functional currency.
Revenues and expenses are translated at average exchange rates during the year
and assets and liabilities are translated at current exchange rates at the
balance sheet date. Translation adjustments are accumulated as a separate
component of shareholders' equity.
Revenue Recognition
Finance Charges. The Company computes its servicing fee based upon the gross
amount due under the installment contract. Income is 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.
Vehicle Service Contract Fees And Other Income. Dealers are charged an initial
fee to floor plan a vehicle. Interest is charged based on the number of days a
vehicle remains on the floor plan. Interest rates are 4% above the prime rate
with a minimum rate of 12% per annum.
Interest on notes receivable is charged based on the outstanding monthly balance
and ranges from 1% to 4% above prime per annum, generally with a minimum rate
of 12% per annum.
Fees received by the Company for the sale of third party vehicle service
contracts are recognized upon acceptance of the related installment contract
receivable as the Company bears no further obligation.
Rental income on office space leased at the Company's office building is
recognized on a straight-line basis over the related lease term.
Dealer Enrollment Fees. Enrollment fees are paid by each dealer in the United
States and Canada signing a servicing agreement and are nonrefundable. These
fees and the related direct incremental costs of originating these fees are
deferred and amortized on a straight-line basis over the estimated repayment
term of the outstanding dealer Advance.
Premiums Earned. Credit life and disability premiums are ceded to CAC Life and
collision premiums are ceded to CAC Reinsurance on both an earned and written
basis and are earned over the life of the contracts using the pro rata and
sum-of-digits methods. Premiums on BVPP warranties are earned on a
straight-line basis over the life of the service contracts.
Cash Equivalents. Cash equivalents consist of readily marketable securities
with original maturities of three months or less.
Investments. Investments consist principally of short-term money market
instruments and U.S. Treasury Bills which the Company has both the intent
and the ability to hold to maturity. Investments are carried at amortized cost
which approximates fair value.
Allowance For Credit Losses. The Company maintains an allowance for credit
losses which, in the opinion of management, adequately reserves against
expected credit losses on installment contracts that are considered to be
impaired. The risk of loss to the Company related to the installment contracts
receivable balances relates primarily to the earned but unpaid servicing
23
<PAGE> 27
fee or finance charge recognized on contractually delinquent accounts. To the
extent that the Company does not collect the gross amount of the contract
balance, the remaining gross installment contract receivable balance is charged
off against dealer holdbacks, unearned finance charges and the allowance for
credit losses. Ultimate losses may vary from current estimates and the amount of
the provision, which is current expense, may be either greater or less than
actual charge-offs.
Installment contracts receivable are collateralized by vehicle titles, and
the Company has the right to repossess the vehicle in the event that the
consumer defaults on the payment terms of the contract. Repossessed collateral
is valued at the lower of cost or estimated fair value, less estimated costs of
disposition, and is classified in installment contracts receivable on the
balance sheets. At December 31, 1997 and 1996, repossessed assets totaled
approximately $13.8 million and $8.4 million, respectively.
The Company changed its policy relating to non-accrual loans in the third
quarter of 1997 to 90 days measured on a recency basis from 120 days measured on
a contractual basis. The Company believes this change will allow for earlier
identification of underperforming dealer pools. As a result of this change and
the resulting increase in non-accrual loans, the 1997 financial results reflect
a higher provision for credit losses related to earned but unpaid revenue on
installment contracts receivable and a lower finance charge yield. As of
December 31, 1996 and 1997, the accrual of finance charge revenue has been
suspended, and fully reserved for, on approximately $426.6 million and $471.8
million of delinquent installment contracts, respectively.
During the fourth quarter of 1997, the Company changed its accounting policies
relating to the write-off of installment contracts receivable based on data
available from the Company's new loan servicing system. The revised policy
requires write-off of delinquent installment contracts at nine months on a
recency basis compared to one year under the old policy.
Reserve On Advances
When an installment contract is acquired, the Company generally pays a cash
advance to the dealer. These advance balances represent the Company's primary
risk of loss related to the funding activity with the dealers. The Company
maintains a reserve on advances to dealers which reflects advance balances that
are not expected to be recovered through collections on the related installment
contract receivable portfolio. To serve as a basis for evaluating the reserve
requirement, management reviews delinquencies, charge-off experience factors,
the payment performance of loan pools, changes in collateral value, economic
conditions and trends and other information. For purposes of establishing the
reserve, future collections (including the anticipated proceeds from repossessed
collateral) are reduced to present-value 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 1997, the Company implemented a new loan
servicing system 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 took a charge during 1997 to reflect the
impact of this enhancement in the Company's methodology for estimating the
reserve. During the fourth quarter of 1997, the Company reevaluated the timing
of the charge off of advances to dealers and concluded that it was appropriate
to accelerate the recognition of charge offs since the static pool analysis
demonstrated that the advances were uncollectable.
The Company charges certain dealers a fee for each installment contract
receivable accepted. These fees are recorded as an addition to the reserve on
advances.
A summary of the change in the reserve against advances (classified with
dealer holdbacks, net in the accompanying balance sheets) is as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended
December 31,
1995 1996 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning of
period................... $1,557 $3,214 $ 8,754
Provision for advance
losses................... 1,743 5,849 74,400
Advance reserve fees........ 4,673
Charge offs, net............ (86) (444) (71,391)
Currency translation........ 135 (67)
---------- ------ -------
Balance - end of period..... $3,214 $8,754 $16,369
========== ====== =======
</TABLE>
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. Estimating cash collections from the installment
contracts receivable is complicated by the unusual payment patterns of the
borrowers who generally cannot obtain traditional financing. The evaluation of
the reserve against advances considers such factors as current delinquencies,
the characteristics of the accounts, the value of the underlying collateral, the
location of the borrower, general economic conditions and trends among other
information. Although the Company uses many resources to assess the adequacy of
the reserve against advances, there is no precise method for accurately
estimating the ultimate losses and actual losses may vary significantly from
current estimates and the amount of provision, which is a current expense, may
be either greater or less than actual charge offs.
Floor Plan Receivables
CAC finances used vehicle inventories for both affiliated dealers and
nonaffiliated dealers. Amounts loaned are secured by the related inventories and
any future cash collections owed to the dealer on outstanding contracts. The
fair value of these receivables is estimated by discounting the future cash
flows associated with the loans, using current interest rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The carrying amounts of these receivables approximate fair
value as of December 31, 1997 and 1996.
Notes Receivable
Notes receivable are primarily working capital loans to dealers and are due on
demand. These notes receivable are secured by all assets of the dealer including
any future cash collections owed to the dealer on outstanding contracts. The
fair value of these receivables is estimated by discounting the future cash
flows associated with the loans, using current interest rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. The carrying amounts of these receivables approximate fair
value as of December 31, 1997 and 1996.
Property And Equipment
Additions to property and equipment are recorded at cost. Depreciation is
provided using both straight-line and accelerated methods over the estimated
useful lives (primarily five to forty years) of the related assets.
24
<PAGE> 28
Property and equipment consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1997
- ---------------------------------------------------------------
<S> <C> <C>
Land.................................. $ 2,251 $ 2,577
Building and improvements............. 6,306 6,761
Data processing equipment............. 7,641 14,814
Office furniture & equipment.......... 1,953 2,061
Leasehold improvements................ 541 711
--------- --------
18,692 26,924
Less accumulated depreciation
and amortization................ 3,734 6,085
---------- --------
$ 14,958 $ 20,839
========= ========
</TABLE>
Income Taxes
Deferred income taxes are provided for all temporary differences between the
book and tax basis of assets and liabilities. Deferred income taxes are adjusted
to reflect new tax rates when they are enacted into law.
Dealer Holdbacks
As part of the dealer servicing agreement, the Company establishes a dealer
holdback to protect the Company from potential losses associated with
installment contracts. This dealer holdback is not paid until such time as all
advances related to such dealer have been recovered.
Dealer holdbacks consisted of the following (in thousands):
<TABLE>
<CAPTION>
As of
December 31,
-----------------------------
1996 1997
- ------------------------------------------------------------------
<S> <C> <C>
Dealer holdbacks....................... $998,593 $1,002,033
Less: advances (net of reserve
of $8,754 and $16,369 in
1996 and 1997, respectively......... (502,159) (564,968)
-------- ----------
Dealer holdbacks, net.................. $496,434 $ 437,065
======== ==========
</TABLE>
Capital Stock Transactions
On September 29, 1995 the Company consummated a public offering of 3,900,000
shares of its Common Stock. The shares were sold at a price of $24.50 per share.
The Company received net proceeds, after deducting underwriting discounts,
commissions, and other fees, of $90,723,000. On December 11, 1996, the Company
acquired all of the outstanding shares of Montana Investment Group, Inc. in
exchange for a total of 200,000 shares of the Company's common stock which were
issued to two shareholders of Montana. The acquisition has been accounted for
under the pooling of interests method. The impact of this acquisition was not
significant to the Company's financial statements. The issuance of such shares
was exempt from registration under Section 4(2) of the Securities Act of 1933.
On May 19, 1997, CAC's Board of Directors and shareholders approved an
amendment to the Articles of Incorporation of the Company increasing the
number of authorized Common shares to 80,000,000.
Net Income Per Share
In accordance with Statement of Financial Accounting Standard No. 128, "Earnings
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 common stock equivalents outstanding.
Common stock equivalents included in the computation represent shares issuable
upon assumed exercise of stock options which would have a dilutive effect.
25
<PAGE> 29
The share effect is as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average common
shares outstanding....... 42,385,262 45,605,159 46,081,804
Common stock
equivalents.............. 1,142,508 1,018,496 672,909
---------------------------------------
Weighted average common
shares and common stock
equivalents.............. 43,527,770 46,623,655 46,754,713
=======================================
</TABLE>
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.
Effective January 1, 1997 the Company adopted Statement of Financial Accounting
Standard No. 129, "Disclosure of Information About Capital Structure." The
adoption of this accounting standard did not materially impact the Company's
financial statement disclosures.
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 statement
disclosures of the Company. This statement is effective for financial
statements for fiscal years beginning after December 15, 1997.
Reclassification
Certain amounts for the prior periods have been reclassified to conform to the
current presentation.
(2) INSTALLMENT CONTRACTS RECEIVABLE
Installment contracts generally have initial terms ranging from six to 36
months and are collateralized by the related vehicles. Contractual maturities
of contracts by year have not been presented as this information is not
meaningful due to the uneven payment patterns of non-prime consumers.
The initial average term of an installment contract was approximately 25
months in 1995, 30 months in 1996 and 31 months in 1997. Installment
contracts receivable consisted of the following (in thousands):
<TABLE>
<CAPTION>
As of December 31,
----------------------------------
1996 1997
- ----------------------------------------------------------------------
<S> <C> <C>
Gross installment contracts
receivable .................. $ 1,251,139 $ 1,254,858
Unearned finance charges ....... (201,760) (196,357)
Unearned insurance premiums,
insurance reserves and fees.. (7,233) (8,683)
----------- -----------
Installment contracts
receivable .................. $ 1,042,146 $ 1,049,818
=========== ===========
Non-accrual installment
contracts as a percent of
total gross installment
contracts ................... 34.1% 37.6%
=========== ===========
</TABLE>
A summary of changes in gross installment contracts receivable is as follows
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1996 1997
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning of
period .................. $ 486,897 $ 790,607 $ 1,251,139
Gross amount of installment
contracts accepted ...... 634,899 965,690 983,459
Cash collections on
installment contracts
accepted ................ (261,921) (388,328) (505,925)
Charge offs ............... (69,268) (129,405) (467,532)
Currency translation ...... 12,575 (6,283)
----------- ----------- -----------
Balance - end of period ... $ 790,607 $ 1,251,139 $ 1,254,858
=========== =========== ===========
</TABLE>
A summary of the allowance for credit losses is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December 31,
1995 1996 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Balance - beginning of
period ................. $ 4,210 $ 7,757 $ 12,195
Provision for loan losses... 5,323 7,222 11,072
Charge offs, net ........... (1,776) (2,863) (10,138)
Currency translation ....... 79 (10)
-------- -------- --------
Balance - end of period .... $ 7,757 $ 12,195 $ 13,119
======== ======== ========
</TABLE>
Recoveries related to charged off contracts are primarily the result of the
recovery of earned but unpaid interest and are netted against charge-offs.
The Company's financing and service program allows dealers to establish the
interest rate on contracts, which typically is the maximum rate allowable by
the state or country in which the dealer is doing business. As the majority of
the Company's revenue is derived from the servicing fee it receives on the
gross amount due under the installment contract (typically 20% of the principal
and interest), the Company's revenues from servicing fees are not materially
impacted by changes in interest rates. As such, the balances recorded on a
historical cost basis in the financial statements related to the financing and
service program which the Company provides to dealers, including net
installment contracts receivable and net dealer holdbacks, approximates fair
value.
(3) SENIOR NOTES
On November 7, 1994, the Company completed the sale of its $60 million 8.87%
Senior Notes due November 1, 2001 to various insurance companies. The Notes are
unsecured and require semi-annual interest payments and annual payments of
principal.
On August 29, 1996, the Company completed the sale of its $70 million 7.99%
Senior Notes due July 1, 2001 to various insurance companies. The Notes are
unsecured and require semi-annual interest payments and annual payments of
principal.
On March 25, 1997, the Company completed the sale of its $71.75 million 7.77%
Senior Notes due October 1, 2001 to various insurance companies. The Notes are
unsecured and require semi-annual payments of interest and annual payments of
principal commencing on October 1, 1998.
The principal maturities of these Notes at December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998......................................... $ 38,985
1999......................................... 42,235
2000......................................... 45,410
2001......................................... 48,520
---------
$ 175,150
=========
</TABLE>
26
<PAGE> 30
The fair value of the Senior Notes is estimated by discounting the future cash
payments using a rate currently offered for a note with a comparable remaining
maturity. The estimated fair value of the Senior Notes at December 31, 1996 and
1997 was approximately $126.2 million and $180.2 million respectively.
(4) LINES OF CREDIT
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 extensions for additional one year periods at the request of
the Company and 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 .6125% and a maximum of 1.4% (1.2% as of December 31, 1997),
dependent on the Company's debt rating, or at the prime rate (8.50% as of
December 31, 1997). The Eurocurrency borrowings may be fixed for periods of up
to one year. The Company must pay an agent's fee of $100,000 annually and a
commitment fee of between .1875% and .60% (.40% as of December 31, 1997)
quarterly on the amount of the commitment, dependent on the Company's debt
rating. As of December 31, 1997, there was approximately $210.3 million
outstanding under this facility. The maximum amount outstanding was
approximately $158.9 million and $213.4 million in 1996 and 1997, respectively.
The weighted average balance outstanding was $91.1 million and $172.5 million
in 1996 and 1997, respectively.
As the Company's $150 million line of credit facility expires on May 15, 1998,
the Company is required to refinance any amounts outstanding under this facility
on or before such date. The Company continues to evaluate alternatives,
including the securitization of assets and the sale of senior notes, for
refinancing amounts outstanding under the $150 million credit facility. The
Company has entered into an agreement to contribute dealer advances and the
related installment contracts receivable into a multi-asset special purpose
corporation owned by a large commercial bank. The transaction is anticipated to
close prior to May 15, 1998, with the issuance of commercial paper by the
special purpose corporation generating proceeds of $50 million which are
anticipated to be used to reduce outstandings under the $150 million credit
facility. The agreement with the special purpose corporation includes a
Parallel Purchase Commitment with a large commercial bank which can be
utilized, if necessary, to fund the contemplated transaction. The Company
anticipates extending the existing credit facility with modified terms and
reduced commitment amounts. Based upon anticipated cash flows, management
believes that amounts available under its revolving credit facility, amounts
provided as a result of the above transaction and other available alternatives
will provide sufficient financing for future operations.
If the Company experiences difficulties with its refinancing effort,
the Company may reduce the volume of installment contract acquisitions and,
thereby, reduce capital needs as well. The Company believes that it will be
successful in refinancing any amounts outstanding under this facility. Failure
to complete such refinancing or failure to obtain other financing alternatives
may have a material adverse effect on the Company's operations.
The Company also has a 2,000,000 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 United Kingdom subsidiary. The
borrowings are secured by a letter of credit issued by the Company's principal
commercial bank, with interest payable at the greater of the United Kingdom
bank's base rate (7.25% as of December 31, 1997) plus 65 basis points or at the
LIBOR rate plus 56.25 basis points. The rates may be fixed for periods of up to
six months. As of December 31, 1997, there was approximately 1.5 million
British pounds ($2.4 million U.S. dollars), outstanding under this facility
which was extended to August 31, 1998. The maximum amount outstanding was 1.8
million British pounds ($2.8 million U.S. dollars) and 2.2 million British
pounds ($3.6 million U.S. dollars) in 1996 and 1997, respectively. The weighted
average balance outstanding was 733,000 British pounds ($1.2 million U.S.
dollars) and 795,000 British pounds ($1.3 million U.S. dollars) in 1996 and
1997, respectively.
During 1995, the Company entered into forward currency exchange contracts to
manage its exposure against foreign currency fluctuations on amounts owed to the
Company from its foreign subsidiary which were denominated in British pounds.
These contracts were short-term in nature, with initial maturities less than 30
days. Gains and losses on these contracts were included in the carrying amount
of those borrowings and were ultimately recognized in income as part of these
carrying amounts. There were no forward currency exchange contracts outstanding
as of December 31, 1995 and the Company did not enter into any contracts during
1996 and 1997.
The weighted average interest rate on line of credit borrowings outstanding was
6.52% and 7.34% as of December 31, 1996 and 1997, respectively.
(5) MORTGAGE LOAN PAYABLE
The Company has a loan from its principal commercial bank secured by a mortgage
on the Company's headquarters building. The loan bears interest at 6.5% and is
secured by a first mortgage lien on the building and an assignment of all
leases, rents, revenues and profits under all present and future leases. There
was $4,017,000 and $3,799,000 outstanding on this loan as of December 31, 1996
and 1997, respectively. The loan matures on May 1, 1999.
The principle maturities of the loan at December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998......................................... $ 236
1999......................................... 3,563
-------
Total mortgage loan payable.................. $ 3,799
=======
</TABLE>
The fair value of the mortgage loan is estimated by discounting the future cash
payments using a rate currently offered for a loan with a comparable remaining
maturity. The carrying amount of the mortgage loan as of December 31, 1996 and
1997 approximates fair value.
(6) DEBT COVENANTS
The Company must comply with various restrictive debt covenants which require
the maintenance of certain financial ratios and other financial conditions. The
most restrictive covenants limit the ratio of the Company's debt-to-equity,
limit the ratio of the Company's fixed charges to net income, limit the
Company's investment in its foreign subsidiaries and require that the Company
maintain specified minimum levels of net worth.
During the fourth quarter of 1997, amendments were made to the Company's $250
million credit agreement and senior note agreements. Such amendments were
required as a result of the Company's violation of a fixed charge coverage
covenant based on the Company's third quarter financial results. The new
amendments modified the required fixed charge coverage ratio and added
27
<PAGE> 31
several new financial covenants to the Company's senior note and bank
agreements, including limits on the ratio of debt to Advances, the ratio of debt
to gross installment contracts receivable and the ratio of Advances to
installment contracts receivable. The Company is currently in compliance with
all debt covenants.
(7) RELATED PARTY TRANSACTIONS
CONTRACT ASSIGNMENTS
In the normal course of its business, the Company regularly accepts assignments
of installment contracts originated by affiliated dealers owned by the
Company's majority shareholder. Installment contracts accepted from affiliated
dealers were approximately $35.1 million, $25.6 million and $13.4 million in
1995, 1996 and 1997 respectively. Remaining installment contracts receivable
from affiliated dealers represented approximately 4.2% and 3.9% of the gross
installment contracts receivable balance as of December 31, 1996 and 1997,
respectively. The Company accepted installment contracts from affiliated
dealers and nonaffiliated dealers on the same terms. Dealer holdbacks recorded
from contracts accepted from affiliated dealers were approximately $28.1
million, $20.5 million and $10.7 million in 1995, 1996 and 1997, respectively.
OTHER AFFILIATED TRANSACTIONS
The Company receives interest income and fees from affiliated dealers on floor
plan receivables and notes receivable. Total income earned was $1,104,000,
$1,409,000 and $1,564,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
The Company shares certain expenses including payroll and related benefits,
occupancy costs and insurance with its affiliated company owned by the Company's
majority shareholder. For the years ended December 31, 1995, 1996 and 1997, the
Company charged its affiliated company approximately $354,000, $311,000 and
$247,000, and was charged $48,000, $97,000 and $45,000 by the affiliated company
for such shared expenses incurred in its operations. This arrangement is covered
under a services agreement. The agreement has an indefinite term, but may be
terminated upon 30 days written notice by either party.
(8) CONCENTRATION OF CREDIT RISKS
As of December 31, 1997, approximately 13.5% of the Company's total dealers were
located in the United Kingdom and during 1997, these dealers accounted for
approximately 15.2% of the new contracts accepted by the Company.
The following table sets forth, for each of the last three years for the
Company's domestic and foreign operations, the amount of revenues, net income,
and identifiable assets (in thousands):
<TABLE>
<CAPTION>
As of and for Years Ended
December 31,
------------------------------------
1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Revenues from
customers
United States........... $ 81,820 $107,315 $134,950
United Kingdom.......... 3,261 16,600 28,598
Ireland................. 1 195
Canada.................. 18 492
Operating income (loss)
United States........... $ 45,144 $ 54,302 ($ 9,244)
United Kingdom.......... 349 9,348 10,755
Ireland................. (58) (51)
Canada.................. 16 (116)
Identifiable assets
United States........... $646,601 $934,076 $949,771
United Kingdom.......... 39,839 139,764 159,675
Ireland................. 337 2,479
Canada.................. 241 3,685
</TABLE>
The Company's operations are structured to achieve consolidated objectives. As a
result, significant interdependencies and overlaps exist among the Company's
domestic and foreign operations. Accordingly, the revenue, operating income, and
identifiable assets shown may not be indicative of the amounts which would have
been reported if the domestic and foreign operations were independent of one
another.
The demographic and geographic dispersion of the Company's installment contract
portfolio mitigates any concentration of risk. As of December 31, 1997,
approximately 33.8% of the participating dealers in the United States were
located in Michigan, Ohio, Indiana, Illinois and Missouri and these dealers
accounted for approximately 34.8% of the number of contracts accepted from
United States dealers in 1997. No single dealer accounted for more than 10% of
the contracts accepted by the Company during 1995, 1996 or 1997.
28
<PAGE> 32
(9) INCOME TAXES
The income tax provision (credit) consists of the following (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1995 1996 1997
- --------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before provision
(benefit) for income taxes:
Domestic .......................... $ 45,144 $ 54,329 ($ 9,285)
Foreign ........................... 349 9,306 10,588
-------- -------- --------
$ 45,493 $ 63,635 $ 1,303
======== ======== ========
Domestic provision (benefit)
for income taxes:
Current ........................... $ 13,111 $ 18,044 ($ 6,516)
Deferred .......................... 2,687 1,009 2,799
Foreign provision (benefit)
for income taxes:
Current ........................... 11 3,118 654
Deferred .......................... 112 (45) 2,829
-------- -------- --------
Provision (credit) for income
taxes ............................. $ 15,921 $ 22,126 ($ 234)
======== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities consist of the following
(in thousands):
<TABLE>
<CAPTION>
As of December 31,
-----------------------
1996 1997
- ----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses .... $ 7,744 $11,165
Reserve on advances ............ 2,272 1,731
Deferred dealer enrollment
fees ......................... 793 166
Accrued warranty claims ........ 555 646
Deferred commissions ........... 190 2
Other, net ..................... 666 46
------- -------
Total deferred tax assets .... $12,220 $13,756
======= =======
Deferred tax liabilities:
Unearned finance charges ....... $20,343 $27,233
Accumulated depreciation ....... 383 642
Deferred credit life and
warranty costs ............... 482 497
------- -------
Total deferred tax liabilities $21,208 $28,372
------- -------
Net deferred tax liability ... $ 8,988 $14,616
======= =======
</TABLE>
No valuation allowances were considered necessary in the calculation of deferred
tax assets as of December 31, 1996 and 1997.
The Company's effective income tax rate was approximately equal to the domestic
and foreign statutory rates in 1995, 1996 and 1997.
Deferred U.S. federal income taxes and withholding taxes have not been provided
on the undistributed earnings of the Company's foreign subsidiaries as such
amounts are considered to be permanently reinvested. The cumulative
undistributed earnings at December 31, 1997 on which the Company had not
provided additional national income taxes and withholding taxes were
approximately $13.4 million.
(10) STOCK OPTION PLANS
Pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), the Company
has reserved 5,000,000 shares of its common stock for the future granting of
options to officers and other key employees. The exercise price of the options
is equal to the fair market value on the date of the grant. Options under the
1992 Plan become exercisable over a three to five year period, or immediately
upon a change of control. Nonvested options are forfeited upon termination of
employment and otherwise expire ten years from the date of grant. Shares
available for future grants totaled 1,767,500, 1,179,559 and 967,066 as of
December 31, 1995, 1996 and 1997, respectively.
Pursuant to the Company's Stock Option Plan for dealers (the "Dealer Plan") the
Company has reserved 1,000,000 shares of its common stock for the future
granting of options to participating dealers. Options are generally granted to
participating dealers based on the Company accepting a minimum of 100 retail
installment contracts from the dealer in a calendar year. Upon the Company's
acceptance of 100 contracts from a dealer, the dealer receives an option to
purchase 1,000 shares of the Company's Common Stock. The dealer receives an
option to purchase an additional 200 shares for each additional 100 contracts
accepted by the Company. The exercise price of the options is equal to the fair
market value on the date of grant. The options become exercisable over a three
year period. Nonvested options are forfeited upon the termination of the
dealer's servicing agreement by the Company or the dealer and otherwise expire
five years from the date of grant. Shares available for future grants totaled
440,200, 235,600 and 185,600 as of December 31, 1995, 1996 and 1997,
respectively.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 establishes financial accounting and reporting standards for stock-based
compensation plans such as stock purchase plans and stock options.
As permitted by the standard, the Company accounts for the 1992 Plan under APB
Opinion No. 25, under which no compensation cost has been recognized. The
Company has elected to provide the pro forma disclosures, as permitted under the
provisions of SFAS 123. Had compensation cost for the 1992 Plan been determined
consistent with SFAS 123, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
Years ended
December 31,
-------------------------------------
1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
As reported.............. $29,572 $41,509 $1,537
Pro forma................ 29,412 36,972 (2,519)
Net income (loss) per common
share:
As reported - basic...... $ 0.70 $ 0.91 $ 0.03
As reported - diluted.... $ 0.68 $ 0.89 $ 0.03
Pro forma - basic........ $ 0.69 $ 0.81 ($ 0.05)
Pro forma - diluted...... $ 0.68 $ 0.79 ($ 0.05)
</TABLE>
The Company accounts for the compensation costs related to its grants under the
Dealer Plan in accordance with SFAS 123. The sales and marketing cost that has
been charged against income for the non-employee Dealer Plan
29
<PAGE> 33
was $67,000 in 1997. No costs were charged against income for 1995 or 1996.
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995 (December 15, 1995 for the Dealer Plan), the
resulting cost is not necessarily indicative of costs which may be recognized in
future years.
The fair value of each option granted included in the above calculations is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for the years ended December 31,
1995, 1996 and 1997:
<TABLE>
<CAPTION>
For the years ended
December 31,
1992 Plan 1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate..... 5.45% 6.42% 6.50%
Expected life............... 7.0 years 7.0 years 6.0 years
Expected volatility......... 36.74% 37.73% 43.97%
Dividend yield.............. 0% 0% 0%
<CAPTION>
For the years ended
December 31,
Dealer Plan 1995 1996 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate..... 5.25% 6.21% 5.89%
Expected life............... 3.5 years 3.5 years 5.0 years
Expected volatility......... 36.74% 37.73% 48.40%
Dividend yield.............. 0% 0% 0%
</TABLE>
Additional information relating to the Stock Option Plans are as follows:
<TABLE>
<CAPTION>
1992 Plan Dealer Plan
-----------------------------------------------
Weighted Weighted
average average
exercise exercise
price price
Number per Number per
of options share of options share
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at:
December 31, 1994 1,574,000 $ 5.77 382,900 $ 14.59
Options granted . 562,500 19.50 200,000 23.08
Options exercised (323,166) 2.50 (10,888) 12.94
Options forfeited - - (23,100) 13.87
--------- -------
Outstanding at:
December 31, 1995 1,813,334 10.63 548,912 17.75
Options granted . 606,275 21.60 205,600 24.37
Options exercised (103,000) 3.44 (34,948) 13.00
Options forfeited (18,334) 20.50 (1,000) 23.88
--------- -------
Outstanding at:
December 31, 1996 2,298,275 13.73 718,564 18.60
Options granted . 3,020,129 9.42 173,400 11.49
Options exercised (266,532) 4.11 (3,597) 13.95
Options forfeited (1,807,636) 20.70 (123,400) 21.35
--------- -------
Outstanding at:
December 31, 1997 3,244,236 $ 6.63 764,967 $ 17.76
========= =======
Exercisable at:
December 31,
1995 .......... 277,661 $ 8.44 109,613 $ 14.91
1996 .......... 795,988 10.49 260,762 17.10
1997 .......... 894,167 $ 7.95 481,318 $ 17.90
</TABLE>
Options granted and options forfeited under the 1992 Plan for 1997 include
1,713,577 options which were repriced on November 3, 1997. The options which
were repriced were originally granted between September 30, 1995 and
September 2, 1997 with original exercise prices between $12.75 and $27.50.
These options were cancelled on November 3, 1997 and reissued at an exercise
price of $6.00 per share with a new three year vesting period.
The weighted average fair value of options granted during 1995, 1996 and 1997
was $10.17, $10.92 and $4.68 respectively, for the 1992 Plan and $7.42,
$8.88 and $4.06, respectively, for the Dealer Plan.
As of December 31, 1997, the options outstanding under the 1992 Plan had
exercise prices between $2.17 and $22.25 and a weighted average remaining
contractual life of 8.6 years and the options outstanding under the Dealer Plan
had exercise prices between $7.53 and $27.63 and a weighted average remaining
contractual life of 2.8 years.
(11) LITIGATION AND CONTINGENT
LIABILITIES
In the normal course of its business, the Company is named as a defendant in
legal proceedings. A number of such actions, including one case which has been
brought as a class action, are pending in the various states in which the
Company does business. It is the policy of the Company to vigorously defend
litigation, but the Company has and may in the future enter into settlements of
claims where management deems appropriate.
The Company is currently a defendant in a class action proceeding commenced on
October 9, 1997 by Marion Fielder and Deborah Williams which is pending in
United States District Court for the Western District of Missouri. Plaintiffs
allege that the Company is liable for money damages resulting from multiple
violations of state and federal consumer protection laws, and the court has
certified a class for each of the alleged violations. The Company is vigorously
defending this litigation.
The Company and certain officers and directors of the Company have been
named as defendants in a number of putative class action complaints seeking
money damages for alleged violations of the federal securities laws. The
complaints were filed between January 29, 1998 and March 3, 1998 in the United
States District Court for the Eastern District of Michigan. The complaints
generally allege that the Company's financial statements issued during the
period September 29, 1995 through October 22, 1997 did not accurately reflect
the Company's true financial condition and results of operations because such
reported results failed to be in accordance with generally accepted accounting
principles and that such results contained material accounting irregularities
in that they failed to reflect adequate reserves for credit losses. The
complaints
30
<PAGE> 34
further allege that the Company issued public statements during the alleged
class period which fraudulently created the impression that the Company's
accounting practices were proper. The Company intends to vigorously defend these
actions.
Management is of the opinion that the resolution of these proceedings
will not have a material effect on the financial position of the Company.
Future events and circumstances could alter management's conclusion with respect
to these matters.
31
<PAGE> 35
(12) QUARTERLY FINANCIAL DATA (unaudited)
The following is a summary of quarterly financial position and results of
operations for the years ended December 31, 1996 and 1997.
<TABLE>
<CAPTION>
1996
----
(Dollars in thousands,
except per share data) 1st Q 2nd Q 3rd Q 4th Q
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE SHEETS
Installment contracts
receivable, net ............ $ 729,523 $ 809,594 $ 920,291 $ 1,029,951
Floor plan receivables ........ 14,491 14,996 15,325 15,493
Notes receivables ............. 3,078 3,008 2,892 2,663
All other assets .............. 17,936 19,453 21,478 26,311
----------- ----------- ----------- -----------
Total assets ............... $ 765,028 $ 847,051 $ 959,986 $ 1,074,418
============ =========== =========== ===========
Dealer holdbacks, net ......... $ 401,718 $ 426,693 $ 461,560 $ 496,434
Total debt .................... 119,748 169,710 229,191 288,899
Other liabilities ............. 35,720 31,373 38,422 42,942
----------- ----------- ----------- -----------
Total liabilities .......... 557,186 627,776 729,173 828,275
Shareholders' equity .......... 207,842 219,275 230,813 246,143
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity ...... $ 765,028 $ 847,051 $ 959,986 $ 1,074,418
=========== =========== =========== ===========
INCOME STATEMENTS
Revenue:
Finance charges ............ $ 20,373 $ 22,159 $ 23,720 $ 26,692
Vehicle service
contract fees and
other income ............. 2,903 3,556 4,539 5,311
Dealer enrollment fees ..... 964 1,261 1,378 1,425
Premiums earned ............ 2,365 2,236 2,855 2,197
----------- ----------- ----------- -----------
Total revenue ............. $ 26,605 $ 29,212 $ 32,492 $ 35,625
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Salaries and wages .......... $ 2,740 $ 2,965 $ 2,900 $ 3,070
General & administrative .... 3,240 3,513 3,881 3,671
Provision for credit losses . 2,726 2,721 3,422 4,202
Sales and marketing ......... 902 945 1,268 1,532
Provision for insurance and
warranty claims ........ 757 777 936 590
Interest ................... 2,073 2,751 3,801 4,943
----------- ----------- ----------- -----------
Total costs and
expenses ............ $ 12,438 $ 13,672 $ 16,208 $ 18,008
----------- ----------- ----------- -----------
OPERATING INCOME
(LOSS) ...................... $ 14,167 $ 15,540 $ 16,284 $ 17,617
Foreign exchange gain
(loss) ................... (2) 3 2 24
----------- ----------- ----------- -----------
Income (loss) before
income taxes ............. 14,165 15,543 16,286 17,641
Provision (credit) for
income taxes ............. 4,977 5,406 5,643 6,100
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............. $ 9,188 $ 10,137 $ 10,643 $ 11,541
=========== =========== =========== ===========
Net income (loss) per common
share
Basic ................... $ 0.20 $ .22 $ .23 $ 0.25
Diluted ................. $ 0.20 $ .22 $ .23 $ 0.25
Weighted average shares
outstanding
Basic ..................... 45,505 45,577 45,629 45,843
Diluted ................... 46,436 46,480 46,630 46,948
<CAPTION>
1997
----
(Dollars in thousands,
except per share data) 1st Q 2nd Q 3rd Q 4th Q
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE SHEETS
Installment contracts
receivable, net ............ $ 1,119,314 $ 1,171,036 $ 1,205,331 $ 1,036,699
Floor plan receivables ........ 15,667 16,320 19,359 19,800
Notes receivables ............. 1,746 1,818 1,589 1,231
All other assets .............. 28,529 30,776 46,770 57,880
----------- ----------- ----------- -----------
Total assets ............... $ 1,165,256 $ 1,219,950 $ 1,273,049 $ 1,115,610
=========== =========== =========== ===========
Dealer holdbacks, net ......... $ 534,162 $ 552,840 $ 618,443 $ 437,065
Total debt .................... 326,487 354,834 379,269 391,666
Other liabilities ............. 45,540 40,112 32,624 37,888
----------- ----------- ----------- -----------
Total liabilities .......... 906,189 947,786 1,030,336 866,619
Shareholders' equity .......... 259,067 272,164 242,713 248,991
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity ...... $ 1,165,256 $ 1,219,950 $ 1,273,049 $ 1,115,610
=========== =========== =========== ===========
INCOME STATEMENTS
Revenue:
Finance charges ............ $ 30,691 $ 32,602 $ 28,956 $ 24,771
Vehicle service
contract fees and other
income ................... 6,905 7,494 7,076 7,123
Dealer enrollment fees ..... 1,790 2,132 1,750 1,641
Premiums earned ............ 2,383 2,625 3,111 3,185
----------- ----------- ----------- -----------
Total revenue ............. $ 41,769 $ 44,853 $ 40,893 $ 36,720
----------- ----------- ----------- -----------
COSTS AND EXPENSES
Salaries and wages .......... $ 3,810 $ 4,261 $ 4,278 $ 4,629
General & administrative .... 4,179 5,315 4,916 6,194
Provision for credit losses . 7,053 7,669 64,071 6,679
Sales and marketing ......... 1,898 2,059 2,100 2,272
Provision for insurance and
warranty claims ........ 803 878 1,095 1,135
Interest ................... 5,669 6,808 7,162 7,958
----------- ----------- ----------- -----------
Total costs and
expenses ............ $ 23,412 $ 26,990 $ 83,622 $ 28,867
----------- ----------- ----------- -----------
OPERATING INCOME
(LOSS) ...................... $ 18,357 $ 17,863 ($ 42,729) $ 7,853
Foreign exchange gain
(loss) ................... (20) 5 (7) (19)
----------- ----------- ----------- -----------
Income (loss) before
income taxes ............. 18,337 17,868 (42,736) 7,834
Provision (credit) for
income taxes .............. 6,299 5,818 (15,028) 2,677
----------- ----------- ----------- -----------
NET INCOME (LOSS) ............. $ 12,038 $ 12,050 $ (27,708) $ 5,157
=========== =========== =========== ===========
Net income (loss) per common
share
Basic ................... $ 0.26 $ 0.26 ($ 0.60) $ 0.11
Diluted ................. $ 0.26 $ 0.26 ($ 0.60) $ 0.11
Weighted average shares
outstanding
Basic ..................... 46,076 46,112 46,113 46,113
Diluted ................... 46,902 46,595 46,113 46,679
</TABLE>
32
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
33
<PAGE> 37
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Matters to Come
Before the Meeting - Election of Directors" in the Company's Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the caption "Compensation of
Executive Officers" (excluding the Report of the Executive
Compensation Committee, the Report on Stock Option Repricing, the
Ten Year Option Repricing Table and the stock performance graph)
in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information is contained under the caption "Common Stock Ownership
of Certain Beneficial Owners and Management" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Certain Relationships
and Transactions" in the Company's Proxy Statement and is
incorporated herein by reference.
34
<PAGE> 38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company
and Report of Independent Public Accountants are contained
"Item 8 - Financial Statements and Supplementary Data."
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS:
-Consolidated Balance Sheets as of December 31, 1996 and 1997
-Consolidated Income Statements for the years ended
December 31, 1995, 1996 and 1997
-Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
-Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1995, 1996 and 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Financial Statement Schedules have been omitted because they are
not applicable or are not required or the information required to
be set forth therein is included in the Consolidated Financial
Statements or Notes thereto.
(3) The Exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index . Included in such list as Item 10(f)
(2) and 10 (f)(3) (Stock Option Plans) and 10(n)(4) and 10(n)(5)
(Management Incentive Plans) are the Company's management
contracts and compensatory plans and arrangements which are
required to be filed as exhibits to this Form 10-K.
(b) During the quarter ended December 31, 1997, the Company filed
Current Reports on Form 8-K on October 23, 1997 and December 15,
1997. Each of the reports reported information under Item 5 and
neither Report contained financial statements.
35
<PAGE> 39
The following documents are filed as part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below.
Exhibits not required for this report have been omitted.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3(a) 3 Articles of Incorporation, as amended
3(a)(1) 9 Articles of Incorporation, as amended July 1, 1997
3(b) 3 Bylaws of the Company, as amended
4(a) 2 Note Purchase Agreement dated October 1, 1994 between
various insurance companies and the Company and
related form of note.
4(a)(1) 4 First Amendment dated November 15, 1995 to Note Purchase Agreement
dated October 1, 1994 between various insurance companies and the Company.
4(a)(2) 6 Second Amendment dated August 29, 1996 to Note Purchase Agreement
dated October 1, 1994 between various insurance companies and the Company.
4(a)(3) 10 Third Amendment dated December 12, 1997 to Note Purchase Agreement dated
October 1, 1994 between various insurance companies and the Company
4(b) 6 Note Purchase Agreement dated August 1, 1996 between various
insurance companies and the Company and the related form of note
4(b)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated August 1, 1996 between various insurance companies and the Company
4(c) 12 Second Amended and Restated $150,000,000 Line of
Credit and $100,000,000 Revolving Credit Agreement
dated December 4, 1996 between the Company, Comerica
Bank as agent and LaSalle National Bank and The Bank
of New York as co-agents, and various commercial
banks.
4(c)(1) 9 First Amendment and Consent, dated June 4, 1997, to
Second Amended and Restated Credit Agreement dated as
of December 4, 1996 and a memorandum evidencing
extension of maturity dates
4(c)(2) 10 Second Amendment dated December 12, 1997 to Second Amended and Restated
Credit Agreement dated as of December 4, 1996
4(e) 8 Note Purchase Agreement dated March 25, 1997 between various insurance
companies and the Company and related form of note
4(e)(1) 10 First Amendment dated December 12, 1997 to Note Purchase Agreement
dated March 25, 1997 between various insurance companies and the Company
</TABLE>
Other instruments, notes or extracts from agreements defining
the rights of holders of long-term debt of the Company or
its subsidiaries have not been filed because (i) in each case
the total amount of long-term debt permitted thereunder does not
exceed 10% of the Company's consolidated assets, and (ii) the
Company hereby agrees that it will furnish such instruments,
notes and extracts to the Securities and Exchange Commission
upon its request.
36
<PAGE> 40
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10(b)(1) 5 Amended and Restated Services Agreement dated April 17, 1996
between the Company and Larry Lee's Auto Finance Center, Inc. d/b/a Dealer
Enterprise Group.
10(d) (4) 2 Form of Addendum 3 to Servicing Agreement (Multiple Lots).
10(d) (5) 4 Current form of Servicing Agreement, including form of Addendum 1
to Servicing Agreement (CAC Life) and form of Addendum 2
to Servicing Agreement (BVPP, Inc.).
10(e)1 Promissory Notes dated various dates, to the Company,
from various affiliated companies.
10(f)(2) 7 Credit Acceptance Corporation 1992 Stock Option Plan, as amended
effective December 1, 1996.
10(f)(3) 9 Credit Acceptance Corporation 1992 Stock Option Plan, as amended
and restated May 1997
10(g)1 Promissory Note dated May 3, 1991 to the Company from Richard E. Beckman
and related assignment
10(n)(4) 7 Credit Acceptance Corporation Management Incentive Plan B Fiscal Year 1997
10(n)(5) 10 Credit Acceptance Corporation Management Incentive Plan - Fiscal Year 1998
10(o)(1) 7 Credit Acceptance Corporation Stock Option Plan for Dealers, as amended January 22, 1997
21(1) 10 Schedule of Credit Acceptance Corporation Subsidiaries
23(1) 10 Consent of Arthur Andersen LLP
27 10 Financial Data Schedule
</TABLE>
1 reference to the Company's Registration Statement on Form S-1, File No.
33-46772.
2 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1994, and incorporated herein by reference.
3 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1994, and incorporated herein by reference.
4 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1995, and incorporated herein by reference.
5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1996, and incorporated herein by reference.
6 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1996 and incorporated herein by reference.
7 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1996, and incorporated herein by reference.
8 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1997 and incorporated herein by reference.
9 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference.
10 Filed herewith
37
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 20, 1998.
CREDIT ACCEPTANCE CORPORATION
By: /S/ Donald A. Foss
--------------------------------
Donald A. Foss
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on March 20, 1998 on behalf of the
registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/S/ Donald A. Foss Chairman of the Board and
- -------------------------- Chief Executive Officer
Donald A. Foss (Principal Executive Officer)
/S/ Brett A. Roberts Executive Vice President and
- -------------------------- Chief Financial Officer
Brett A. Roberts (Principal Financial Officer)
/S/ John P. Cavanaugh Corporate Controller and Assistant Secretary
- -------------------------- (Principal Accounting Officer)
John P. Cavanaugh
/S/ Harry E. Craig Director
- --------------------------
Harry E. Craig
/S/ Thomas A. FitzSimmons Director
- --------------------------
Thomas A. FitzSimmons
/S/ David T. Harrison Director
- --------------------------
David T. Harrison
/S/ Sam M. LaFata Director
- --------------------------
Sam M. LaFata
</TABLE>
38
<PAGE> 1
Exhibit 4(a)(3)
THIRD AMENDMENT TO NOTE PURCHASE AGREEMENT
RE:
CREDIT ACCEPTANCE CORPORATION
8.87% SENIOR NOTES DUE NOVEMBER 1, 2001
Dated as of December 12, 1997
To the Noteholders listed on Annex I hereto
Ladies and Gentlemen:
Credit Acceptance Corporation, a Michigan corporation (together with
its successors and assigns, the "Company"), hereby agrees with you as follows:
SECTION 1. INTRODUCTORY MATTERS.
1.1 DESCRIPTION OF OUTSTANDING NOTES. The Company currently has
outstanding $45,900,000 in aggregate unpaid principal amount of its 8.87% Senior
Notes due November 1, 2001 (the "Notes) which it issued pursuant to the separate
Note Purchase Agreements, each dated as of October 1, 1994 (collectively, as
amended by the First Amendment to Note Purchase Agreement dated as of November
15, 1995 and the Second Amendment to Note Purchase Agreement dated as of August
29, 1996, the "Agreement"), entered into by the Company with each of you,
respectively. Terms used herein but not otherwise defined herein shall have the
meanings assigned thereto in the Agreement.
1.2 PURPOSE OF AMENDMENT. The Company and you desire to amend the
Agreement to modify various covenants in and add certain definitions to the
Agreement.
SECTION 2. AMENDMENT TO THE AGREEMENT.
Pursuant to Section 10.5 of the Agreement, the Company hereby agrees
with you that the Agreement shall be amended by this Third Amendment to Note
Purchase Agreement (the "Third Amendment"), effective as of September 30, 1997,
in the following respects:
2.1 SECTION 6.1
(a) The heading for Section 6.1 is hereby modified to
read "Debt and Advances".
(b) Paragraph (a) of Section 6.1 is hereby amended and
restated in its entirety as follows:
<PAGE> 2
"(a) TOTAL DEBT. The Company will not at any time
permit Consolidated Total Debt to exceed any of the following:
(i) two hundred seventy-five percent (275%) of
Consolidated Tangible Net Worth;
(ii) ninety percent (90%) of Advances; or
(iii) sixty percent (60%) of Gross Current
Installment Contract Receivables."
(c) Section 6.1 is hereby further amended by adding, immediately after
paragraph (e), the following:
"(f) GROSS ADVANCES. The Company will not at any time
permit Gross Advances to exceed sixty-five percent (65%) of Net Installment
Contract Receivables."
2.2 SECTION 6.2 Section 6.2 is hereby amended and restated in
its entirety as follows:
"The Company will not at any time permit the ratio of
(a) Consolidated Income Available for Fixed Charges
for the period of four (4) consecutive fiscal quarters of the
Company most recently ended at such time to
(b) Consolidated Fixed Charges for such period
to be less than (i) 2.5 to 1.0 for any period of four fiscal quarters
ended on or prior to September 30, 1997, (ii) 1.9 to 1.0 for the
four fiscal quarters ended December 31, 1997, (iii) 1.7 to 1.0 for the
four fiscal quarters ended March 31, 1998, (iv) 1.6 to 1.0 for the
four fiscal quarters ended June 30, 1998, and (v) 2.0 to 1.0 for any
four fiscal quarters ended on or after September 30, 1998."
2.3 SECTION 9.1
(a) The definition of "Consolidated Income Available for Fixed
Charges" in Section 9.1 of the Agreement is hereby amended by adding immediately
after clause (b) and before the final clause of such definition the following:
"plus (c) with respect to the periods ending September 30,
1997, December 31, 1997, March 31, 1998 and June 30, 1998, $30,000,000
2
<PAGE> 3
representing the portion of the non-cash charge recorded by the
Company during the period ended September 30, 1997 attributable to the
present valuing of future cash flows consistent with Statement of
Financial Accounting Standards No. 114 'Accounting by Creditors for
Impairment of a Loan',"
(B) The definition of "Net Dealer Holdbacks" in Section 9.1 of
the Agreement is hereby amended by deleting the definitions of "Advances,"
"Charged-Off Advances," "Established Dealer" and "Trailing Twelve Months
Payments" therefrom.
(C) The following new definitions are added to Section 9.1 of
the Agreement:
"ADVANCES means, at any time, the dollar amount of
advances, as such amount would appear in the footnotes to the
financial statements of the Company and the Restricted Subsidiaries
prepared in accordance with GAAP (if such amount would not appear net
of reserves, then net of any reserves established by the Company as an
allowance for credit losses related to such advances not expected to
be recovered), provided that Advances shall not include Charged-Off
Advances to the extent that such Charged-Off Advances exceed the
portion of the Company's allowance for credit losses related to
reserves against advances not expected to be recovered as such
allowance would appear in the footnotes to the financial statements of
the Company and the Restricted Subsidiaries prepared in accordance
with GAAP and provided further, that Advances shall not include Excess
New Dealer Advances."
"CHARGED-OFF ADVANCES means, with respect to an
Established Dealer, at any time, the dollar amount of the
advance balance related to the pool of installment contract
receivables of such Established Dealer which exceeds the
Trailing Twelve Months Payments for such pool multiplied by
three (3)."
"ESTABLISHED DEALER means, at any time, a dealer that
has participated in the Company's program of financing and
collecting installment contract receivables for the
immediately preceding period of twelve (12) consecutive
complete calendar months and has an advance balance in excess
of Ten Thousand Dollars ($10,000) at such time."
"EXCESS NEW DEALER ADVANCES means, at any time, the
aggregate amount of advances to New Dealers to the extent such
amount exceeds 10% of Gross Advances."
"GROSS ADVANCES means, as of any applicable date of
determination, the dollar amount of Advances (without giving
effect to the last proviso to the
3
<PAGE> 4
definition of such term), plus any reserves established by the Company
as an allowance for credit losses related to such advances not
expected to be recovered, plus Charged-Off Advances to the extent
Charged-Off Advances exceed the amount of such reserves."
"GROSS CURRENT INSTALLMENT CONTRACT RECEIVABLES
means, as of any applicable date of determination, the
aggregate amount of Net Installment Contract Receivables, plus
unearned finance charges, plus allowance for credit losses,
minus the amount of such receivables which can be classified
as being on 'non-accrual' under the '90 days measured on a
recency basis' method."
"INVESTMENT GRADE RATING means a rating of at least, but
not lower than:
(i) "Baa3" by Moody's Investors Service, Inc.,
(ii) "BBB-" by Standard & Poor's Ratings Group,
(iii) a category "1" or category "2" designation from the
National Association of Insurance Commissioners, and
(iv) "BBB-" by Fitch Investors Services, Inc."
"NEW DEALER means, at any time, a dealer who
participates in the Company's program of financing and collecting
installment contract receivables, whose oldest pool of installment
contracts held by the Company is dated as of a date which is not more
than six months prior to such time and who has an advance balance in
excess of ten thousand dollars ($10,000) at such time."
"RESTRICTED PAYMENT means (x) any dividend or other
distribution, direct or indirect and whether payable in cash or
property, on account of any capital stock or other equity
interest of the Company or any of its Restricted Subsidiaries and (y)
any redemption, retirement, purchase, or other acquisition, direct or
indirect, of any capital stock or other equity interests of the
Company or any of its Restricted Subsidiaries now or hereafter
outstanding, or of any warrants, rights or options to acquire any such
capital stock or other equity interests or any securities convertible
into such capital stock or other equity interests, except to the
extent that any such dividend or distribution, or any such redemption,
retirement, purchase or other acquisition (i) is payable to the
Company or any of its Restricted Subsidiaries
4
<PAGE> 5
or (ii) is payable solely in capital stock or other equity
interests of the Company or any such Restricted Subsidiary."
"TRAILING TWELVE MONTHS PAYMENTS means, at any time,
the gross amount of payments on installment contract
receivables received by the Company for the account of an
Established Dealer during the immediately preceding period of
twelve (12) consecutive complete calendar months."
2.4 INTEREST RATE APPLICABLE TO NOTES.
(a) Notwithstanding anything to the contrary set forth in the
Agreement or in the Notes, the interest rate applicable to the Notes shall be
9.37% per annum effective as of October 23, 1997; provided, however, that such
interest rate shall be 8.87% per annum effective as of the first date that at
least two of the following four organizations shall have assigned an Investment
Grade Rating to the Company, the Notes or any other senior unsecured debt
obligation of the Company: Moody's Investors Service, Inc., Standard & Poor's
Ratings Group, the National Association of Insurance Commissioners (the "NAIC"),
or Fitch Investors Services, Inc.
(b) The signatories hereto specifically acknowledge that the
NAIC is not in any way a rating agency with functions such as those performed by
Moody's Investors Service, Inc., Standard & Poor's Ratings Group, or Fitch
Investors Services, Inc. Further, the signatories hereto specifically
acknowledge that any rating given to the Notes by the NAIC is not to be
interpreted as an expression by the NAIC with respect to the suitability of an
investment in the Notes or the likelihood of any payment in respect thereof. In
addition, the signatories hereto specifically affirm that the holders of the
Notes will not obtain any benefit from satisfaction of the condition set forth
in the proviso to Section 2.4(a) or in Section 2.5.
2.5 RESTRICTED PAYMENTS. The Company shall not, and shall not permit
any Restricted Subsidiary to, directly or indirectly, declare, make, set apart
any funds or other property for, or incur any liability to make any Restricted
Payment unless, at the time of such action, at least two of the following four
organizations shall have assigned an Investment Grade Rating to the Company, the
Notes or any other senior unsecured debt obligation of the Company: Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, the NAIC, or Fitch
Investors Services, Inc.
2.6 ADVERSE ACTION. If the NAIC makes specific reference to this Third
Amendment and states that it will withdraw any rating or designation of the
Notes, or will take any other action adverse to any one or more of the holders
of the Notes, as a result of the agreement set forth in Section 2.4(a) or in
Section 2.5, the parties hereto hereby agree that (x) the proviso to Section
2.4(a) and Section 2.5 shall, in lieu of the requirement set forth therein, be
deemed to require an Investment Grade Rating from at least two of the following
three organizations: Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, or Fitch Investors Services, Inc. and (y) clause (iii) of the definition
of "Investment Grade Rating" shall be deemed to have been deleted. Such changes
shall take effect upon delivery of written notice to the Company by the Required
Holders referring to such
5
<PAGE> 6
proposed withdrawal or other action and stating that the condition set forth in
this Section 2.6 has occurred.
SECTION 3. MISCELLANEOUS
3.1 COUNTERPARTS. This Third Amendment may be executed in any number of
counterparts, each executed counterpart constituting an original, but all
together only one Third Amendment.
3.2 HEADINGS. The headings of the sections of this Third Amendment are
for purposes of convenience only and shall not be construed to affect the
meaning or construction of any of the provisions hereof.
3.3 GOVERNING LAW. This Third Amendment shall be governed by and
construed in accordance with the internal laws of the State of Connecticut.
3.4 EFFECT OF AMENDMENT. Except as expressly provided herein (a) no
other terms and provisions of the Agreement shall be modified or changed by this
Amendment and (b) the terms and provisions of the Agreement, as amended by this
Third Amendment, shall continue in full force and effect. The Company hereby
acknowledges and reaffirms all of its obligations and duties under the Agreement
as modified by this Third Amendment and under the Notes issued thereunder.
3.5 REFERENCES TO THE AGREEMENT. Any and all notices, requests,
certificates and other instruments executed and delivered concurrently with or
after the execution of the Third Amendment may refer to the Agreement without
making specific reference to this Third Amendment but nevertheless all such
references shall be deemed to include, to the extent applicable, this Third
Amendment unless the context shall otherwise require.
3.6 COMPLIANCE. The Company certifies that immediately before and after
giving effect to this Third Amendment, no Default or Event of Default exists or
would exist after giving effect hereto.
3.7 FEE. In consideration of the amendment set forth herein, the
Company agrees to pay, promptly following the execution hereof, to each holder
of a Note a fee in an amount equal to 0.05% of the outstanding principal amount
of each Note held by such holder as of the date hereof.
3.8 EFFECTIVENESS. This Third Amendment shall become effective
(retroactive to September 30, 1997) at the time the Second Amendment to the
Credit Agreement becomes effective, provided that such effectiveness shall occur
on or before December 31, 1997.
3.9 AMENDMENT TO CREDIT AGREEMENT. The Company represents that
the Second Amendment to the Credit Agreement is in the form attached as
Exhibit A hereto.
6
<PAGE> 7
[Remainder of page intentionally blank. Next page is signature page.]
7
<PAGE> 8
ACCEPTED: J. ROMEO & CO.
By /S/ Robert Kissiel
------------------------------
Name: Robert Kissiel
Title: Director of Investments
[Signature Page to Third Amendment to Note Purchase Agreement in respect of
8.87% Senior Notes Due November 1, 2001 of Credit Acceptance Corporation]
8
<PAGE> 9
ACCEPTED: AID ASSOCIATION FOR LUTHERANS
By /S/ James Abitz
-----------------------------
Name: James Abitz
Title: Vice President - Investments
By /S/ R. Jerry Scheel
-----------------------------
Name: R. Jerry Scheel
Title: Second Vice President - Securities
[Signature Page to Third Amendment to Note Purchase Agreement in respect of
8.87% Senior Notes Due November 1, 2001 of Credit Acceptance Corporation]
9
<PAGE> 10
ACCEPTED: CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
By Cigna Investments, Inc.
By /S/ James F. Coggins, Jr.
--------------------------------
Name: James F. Coggins, Jr.
Title: Managing Director
CONNECTICUT GENERAL LIFE
INSURANCE COMPANY
On behalf of one ore more separate
accounts By Cigna Investments, Inc.
By /S/ James F. Coggins, Jr.
--------------------------------
Name: James F. Coggins, Jr.
Title: Managing Director
[Signature Page to Third Amendment to Note Purchase Agreement in respect of
8.87% Senior Notes Due November 1, 2001 of Credit Acceptance Corporation]
10
<PAGE> 11
ACCEPTED: THE OHIO CASUALTY INSURANCE
COMPANY
By /S/ Barry S. Porter
-------------------------------
Name: Barry S. Porter
Title: CFO and Treasurer
THE OHIO LIFE INSURANCE COMPANY
By /S/ Barry S. Porter
--------------------------------
Name: Barry S. Porter
Title: CFO and Treasurer
[Signature Page to Third Amendment to Note Purchase Agreement in respect of
8.87% Senior Notes Due November 1, 2001 of Credit Acceptance Corporation]
11
<PAGE> 12
ACCEPTED: WESTERN FARM BUREAU LIFE INSURANCE
COMPANY
By /S/ Richard D. Warming
------------------------------
Name: Richard D. Warming
Title: VP - Chief Investment Officer
FARM BUREAU LIFE INSURANCE COMPANY
By /S/ Richard D. Warming
------------------------------
Name: Richard D. Warming
Title: VP - Chief Investment Officer
[Signature Page to Third Amendment to Note Purchase Agreement in respect of
8.87% Senior Notes Due November 1, 2001 of Credit Acceptance Corporation]
12
<PAGE> 13
ACCEPTED: WASHINGTON NATIONAL INSURANCE
COMPANY
By /S/ C. Bruce Dunn
-------------------------------
Name: C. Bruce Dunnl
Title: Director of Investments
[Signature Page to Third Amendment to Note Purchase Agreement in respect of
8.87% Senior Notes Due November 1, 2001 of Credit Acceptance Corporation]
13
<PAGE> 1
EXHIBIT 4(b)(1)
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT
RE:
CREDIT ACCEPTANCE CORPORATION
7.99% SENIOR NOTES DUE JULY 1, 2001
Dated as of December 12, 1997
To the Noteholders listed on Annex I hereto
Ladies and Gentlemen:
Credit Acceptance Corporation, a Michigan corporation (together with
its successors and assigns, the "Company"), hereby agrees with you as follows:
SECTION 1. INTRODUCTORY MATTERS.
1.1 DESCRIPTION OF OUTSTANDING NOTES. The Company currently has
outstanding $57,500,000 in aggregate unpaid principal amount of its 7.99%
Senior Notes due July 1, 2001 (the "Notes") which it issued pursuant to the
separate Note Purchase Agreements, each dated as of August 1, 1996
(collectively, the "Agreement"), entered into by the Company with each of you,
respectively. Terms used herein but not otherwise defined herein shall have
the meanings assigned thereto in the Agreement.
1.2 PURPOSE OF AMENDMENT. The Company and you desire to amend the
Agreement to modify various covenants in and add certain definitions to the
Agreement.
SECTION 2. AMENDMENT TO THE AGREEMENT.
Pursuant to Section 10.5 of the Agreement, the Company hereby agrees
with you that the Agreement shall be amended by this First Amendment to Note
Purchase Agreement (the "First Amendment"), effective as of September 30, 1997,
in the following respects:
2.1 SECTION 6.1
(A) The heading for Section 6.1 is hereby modified to read
"Debt and Advances".
(B) Paragraph (a) of Section 6.1 is hereby amended and
restated in its entirety as follows:
"(A) TOTAL DEBT. The Company will not at any time
permit Consolidated Total Debt to exceed any of the following:
<PAGE> 2
(i) two hundred seventy-five percent (275%)
of Consolidated Tangible Net Worth;
(ii) ninety percent (90%) of Advances; or
(iii) sixty percent (60%) of Gross Current
Installment Contract Receivables."
(C) Section 6.1 is hereby further amended by adding,
immediately after paragraph (e), the following:
"(F) GROSS ADVANCES. The Company will not at any
time permit Gross Advances to exceed sixty-five percent (65%)
of Net Installment Contract Receivables."
2.2 SECTION 6.2 Section 6.2 is hereby amended and restated in its
entirety as follows:
"The Company will not at any time permit the ratio of
(a) Consolidated Income Available for Fixed
Charges for the period of four (4) consecutive fiscal
quarters of the Company most recently ended at such time to
(b) Consolidated Fixed Charges for such period
to be less than (i) 2.5 to 1.0 for any period of four fiscal
quarters ended on or prior to September 30, 1997, (ii) 1.9 to
1.0 for the four fiscal quarters ended December 31, 1997, (iii)
1.7 to 1.0 for the four fiscal quarters ended March 31, 1998,
(iv) 1.6 to 1.0 for the four fiscal quarters ended June 30,
1998, and (v) 2.0 to 1.0 for any four fiscal quarters ended on
or after September 30, 1998."
2.3 SECTION 9.1
(A) The definition of "Consolidated Income Available for
Fixed Charges" in Section 9.1 of the Agreement is hereby amended by adding
immediately after clause (b) and before the final clause of such definition
the following:
"plus (c) with respect to the periods ending September
30, 1997, December 31, 1997, March 31, 1998 and June
30, 1998, $30,000,000 representing the portion of the
non-cash charge recorded by the Company during the
period ended September 30, 1997 attributable to the
present valuing of future cash flows consistent with
Statement of Financial
2
<PAGE> 3
Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan","
(B) The definition of "Net Dealer Holdbacks" in Section 9.1
of the Agreement is hereby amended by deleting the definitions of "Advances,"
"Charged-Off Advances," "Established Dealer" and "Trailing Twelve Months
Payments" therefrom.
(C) The following new definitions are added to Section 9.1
of the Agreement:
"ADVANCES means, at any time, the dollar amount
of advances, as such amount would appear in the
footnotes to the financial statements of the Company
and the Restricted Subsidiaries prepared in accordance
with GAAP (if such amount would not appear net of
reserves, then net of any reserves established by the
Company as an allowance for credit losses related to
such advances not expected to be recovered), provided
that Advances shall not include Charged-Off Advances
to the extent that such Charged-Off Advances exceed
the portion of the Company"s allowance for credit
losses related to reserves against advances not
expected to be recovered as such allowance would
appear in the footnotes to the financial statements of
the Company and the Restricted Subsidiaries prepared
in accordance with GAAP and provided further, that
Advances shall not include Excess New Dealer
Advances."
"CHARGED-OFF ADVANCES means, with respect to an
Established Dealer, at any time, the dollar amount of
the advance balance related to the pool of installment
contract receivables of such Established Dealer which
exceeds the Trailing Twelve Months Payments for such
pool multiplied by three (3)."
"ESTABLISHED DEALER means, at any time, a dealer
that has participated in the Company"s program of
financing and collecting installment contract
receivables for the immediately preceding period of
twelve (12) consecutive complete calendar months and
has an advance balance in excess of Ten Thousand
Dollars ($10,000) at such time."
"EXCESS NEW DEALER ADVANCES means, at any time,
the aggregate amount of advances to New Dealers to the
extent such amount exceeds 10% of Gross Advances."
"GROSS ADVANCES means, as of any applicable date
of determination, the dollar amount of Advances
(without giving effect to the last proviso to the
definition of such term), plus any reserves
established by the Company as an allowance for credit
losses related to such advances not expected to be
3
<PAGE> 4
recovered, plus Charged-Off Advances to the extent
Charged-Off Advances exceed the amount of such
reserves."
"GROSS CURRENT INSTALLMENT CONTRACT RECEIVABLES
means, as of any applicable date of determination, the
aggregate amount of Net Installment Contract
Receivables, plus unearned finance charges, plus
allowance for credit losses, minus the amount of such
receivables which can be classified as being on
"non-accrual" under the "90 days measured on a recency
basis" method."
"INVESTMENT GRADE RATING means a rating of at
least, but not lower than:
(i) "Baa3" by Moody's Investors Service, Inc.,
(ii) "BBB-" by Standard & Poor's Ratings Group,
(iii) a category "1" or category "2" designation from
the National Association of Insurance Commissioners,
and
(iv) "BBB-" by Fitch Investors Services, Inc."
"NEW DEALER means, at any time, a dealer who
participates in the Company"s program of financing and
collecting installment contract receivables, whose
oldest pool of installment contracts held by the
Company is dated as of a date which is not more than
six months prior to such time and who has an advance
balance in excess of ten thousand dollars ($10,000) at
such time."
"RESTRICTED PAYMENT means (x) any dividend or
other distribution, direct or indirect and whether
payable in cash or property, on account of any capital
stock or other equity interest of the Company or any
of its Restricted Subsidiaries and (y) any redemption,
retirement, purchase, or other acquisition, direct or
indirect, of any capital stock or other equity
interests of the Company or any of its Restricted
Subsidiaries now or hereafter outstanding, or of any
warrants, rights or options to acquire any such
capital stock or other equity interests or any
securities convertible into such capital stock or
other equity interests, except to the extent that any
such dividend or distribution, or any such redemption,
retirement, purchase or other acquisition (i) is
payable to the Company or any of its Restricted
Subsidiaries or (ii) is payable solely in capital
stock or other equity interests of the Company or any
such Restricted Subsidiary."
4
<PAGE> 5
"TRAILING TWELVE MONTHS PAYMENTS means, at any
time, the gross amount of payments on installment
contract receivables received by the Company for the
account of an Established Dealer during the
immediately preceding period of twelve (12)
consecutive complete calendar months."
2.4 INTEREST RATE APPLICABLE TO NOTES.
(A) Notwithstanding anything to the contrary set forth in
the Agreement or in the Notes, the interest rate applicable to the Notes
shall be 8.49% per annum effective as of October 23, 1997; provided, however,
that such interest rate shall be 7.99% per annum effective as of the first date
that at least two of the following four organizations shall have assigned an
Investment Grade Rating to the Company, the Notes or any other senior unsecured
debt obligation of the Company: Moody's Investors Service, Inc., Standard &
Poor's Ratings Group, the National Association of Insurance Commissioners (the
"NAIC"), or Fitch Investors Services, Inc.
(B) The signatories hereto specifically acknowledge that
the NAIC is not in any way a rating agency with functions such as those
performed by Moody's Investors Service, Inc., Standard & Poor's Ratings Group,
or Fitch Investors Services, Inc. Further, the signatories hereto specifically
acknowledge that any rating given to the Notes by the NAIC is not to be
interpreted as an expression by the NAIC with respect to the suitability of an
investment in the Notes or the likelihood of any payment in respect thereof.
In addition, the signatories hereto specifically affirm that the holders of the
Notes will not obtain any benefit from satisfaction of the condition set forth
in the proviso to Section 2.4(a) or in Section 2.5.
2.5 RESTRICTED PAYMENTS. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, declare,
make, set apart any funds or other property for, or incur any liability to make
any Restricted Payment unless, at the time of such action, at least two of the
following four organizations shall have assigned an Investment Grade Rating to
the Company, the Notes or any other senior unsecured debt obligation of the
Company: Moody's Investors Service, Inc., Standard & Poor's Ratings Group, the
NAIC, or Fitch Investors Services, Inc.
2.6 ADVERSE ACTION. If the NAIC makes specific reference to this
First Amendment and states that it will withdraw any rating or designation
of the Notes, or will take any other action adverse to any one or more of the
holders of the Notes, as a result of the agreement set forth in Section 2.4(a)
or in Section 2.5, the parties hereto hereby agree that (x) the proviso to
Section 2.4(a) and Section 2.5 shall, in lieu of the requirement set forth
therein, be deemed to require an Investment Grade Rating from at least two of
the following three organizations: Moody's Investors Service, Inc., Standard &
Poor's Ratings Group, or Fitch Investors Services, Inc. and (y) clause (iii) of
the definition of "Investment Grade Rating" shall be deemed to have been
deleted. Such changes shall take effect upon delivery of written notice to the
Company by the Required Holders referring to such proposed withdrawal or other
action and stating that the condition set forth in this Section 2.6 has
occurred.
5
<PAGE> 6
SECTION 3. MISCELLANEOUS
3.1 COUNTERPARTS. This First Amendment may be executed in any
number of counterparts, each executed counterpart constituting an original, but
all together only one First Amendment.
3.2 HEADINGS. The headings of the sections of this First
Amendment are for purposes of convenience only and shall not be construed to
affect the meaning or construction of any of the provisions hereof.
3.3 GOVERNING LAW. This First Amendment shall be governed by and
construed in accordance with the internal laws of the State of Connecticut.
3.4 EFFECT OF AMENDMENT. Except as expressly provided herein
(a) no other terms and provisions of the Agreement shall be modified or changed
by this Amendment and (b) the terms and provisions of the Agreement, as amended
by this First Amendment, shall continue in full force and effect. The Company
hereby acknowledges and reaffirms all of its obligations and duties under the
Agreement as modified by this First Amendment and under the Notes issued
thereunder.
3.5 REFERENCES TO THE AGREEMENT. Any and all notices, requests,
certificates and other instruments executed and delivered concurrently with or
after the execution of the First Amendment may refer to the Agreement without
making specific reference to this First Amendment but nevertheless all such
references shall be deemed to include, to the extent applicable, this First
Amendment unless the context shall otherwise require.
3.6 COMPLIANCE. The Company certifies that immediately before
and after giving effect to this First Amendment, no Default or Event of Default
exists or would exist after giving effect hereto.
3.7 FEE. In consideration of the amendment set forth herein, the
Company agrees to pay, promptly following the execution hereof, to each holder
of a Note a fee in an amount equal to 0.05% of the outstanding principal amount
of each Note held by such holder as of the date hereof.
3.8 EFFECTIVENESS. This First Amendment shall become effective
(retroactive to September 30, 1997) at the time the Second Amendment to the
Credit Agreement becomes effective, provided that such effectiveness shall
occur on or before December 31, 1997.
3.9 AMENDMENT TO CREDIT AGREEMENT. The Company represents that
the Second Amendment to the Credit Agreement is in the form attached as Exhibit
A hereto.
[Remainder of page intentionally blank. Next page is signature page.]
6
<PAGE> 7
ACCEPTED: CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
By Cigna Investments, Inc.
By /S/ James F. Coggins, Jr.
------------------------------------
Name: James F. Coggins, Jr.
Title: Managing Director
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
On behalf of one ore more separate
accounts
By Cigna Investments, Inc.
By /S/ James F. Coggins, Jr.
------------------------------------
Name: James F. Coggins, Jr.
Title: Managing Director
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
7
<PAGE> 8
ACCEPTED: NATIONWIDE LIFE INSURANCE COMPANY
By /S/ Edwin P. McCausland, Jr.
------------------------------------
Name:Edwin P. McCausland, Jr.
Title: Vice President
Fixed-Income Securities
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
8
<PAGE> 9
ACCEPTED: PHOENIX HOME LIFE MUTUAL INSURANCE
COMPANY
By Phoenix Investment Counsel, Inc.
By /S/ Rosemary T. Strekel
------------------------------------
Name: Rosemary T. Strekel
Title: Senior Vice President
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
9
<PAGE> 10
ACCEPTED: AID ASSOCIATION FOR LUTHERANS
By /S/ James Abitz
------------------------------------
Name: James Abitz
Title: Vice President -
Investments
By /S/ R. Jerry Scheel
------------------------------------
Name: R. Jerry Scheel
Title: Second Vice President -
Securities
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
10
<PAGE> 11
ACCEPTED: SECURITY BENEFIT LIFE INSURANCE
COMPANY
By /S/ Steven M. Bowser
------------------------------------
Name: Steven M. Bowser
Title: Second VP - Portfolio
Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
11
<PAGE> 12
ACCEPTED: COMBINED INSURANCE COMPANY OF
AMERICA
BY: AON ADVISORS, INC.
By /S/ Keith Lemmer
------------------------------------
Name: Keith Lemmer
Title: Senior Portfolio Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
12
<PAGE> 13
ACCEPTED: PAN AMERICAN LIFE INSURANCE
COMPANY
By /S/ F. Anderson Stone
------------------------------------
Name: F. Anderson Stone
Title: Vice President Corporate
Securities
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
13
<PAGE> 14
ACCEPTED: ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR CENTRAL
STATES HEALTH & LIFE COMPANY OF
OMAHA
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR THE CHARLES
SCHWAB TRUST COMPANY FBO GUARANTY
INCOME LIFE INSURANCE COMPANY
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR AMERICAN
COMMUNITY MUTUAL INSURANCE
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR CENTRAL RE
CORP. & PHOENIX
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
14
<PAGE> 15
ACCEPTED: ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR LONE STAR
LIFE INSURANCE COMPANY
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR OZARK
NATIONAL LIFE INSURANCE COMPANY
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR CSA
FRATERNAL LIFE
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR KANAWHA
INSURANCE COMPANY
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
15
<PAGE> 16
ACCEPTED: ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR OLD GUARD
MUTUAL INSURANCE COMPANY
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
16
<PAGE> 17
ACCEPTED: MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By /S/ Richard E. Spencer II
------------------------------------
Name: Richard E. Spencer
Title: Managing Director
CM LIFE INSURANCE COMPANY
By /S/ Thomas Li
------------------------------------
Name: Thomas Li
Title: Managing Director
Signature Page to First Amendment to Note Purchase Agreement in respect of
7.99% Senior Notes Due July 1, 2001 of Credit Acceptance Corporation]
17
<PAGE> 1
EXHIBIT 4(C)(2)
REVISED
EXECUTION COPY
SECOND AMENDMENT TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT ("Second Amendment") is made
as of this 12th day of December, 1997 by and among Credit Acceptance
Corporation, a Michigan corporation ("Company"), the Permitted Borrowers
signatory hereto (each, a "Permitted Borrower" and collectively, the "Permitted
Borrowers"), Comerica Bank and the other banks signatory hereto (individually, a
"Bank" and collectively, the "Banks") and Comerica Bank, as agent for the Banks
(in such capacity, "Agent").
RECITALS
A. Company, Permitted Borrowers, Agent and the Banks entered into that
certain Second Amended and Restated Credit Agreement dated as of December 4,
1996, as amended by First Amendment and Consent dated as of June 4, 1997 (the
"Credit Agreement") under which the Banks renewed and extended (or committed to
extend) credit to the Company and the Permitted Borrowers, as set forth therein.
B. The Company and the Permitted Borrowers have requested that Agent
and the Banks agree to make certain amendments to the Credit Agreement, and
Agent and the Banks are willing to do so, but only on the terms and conditions
set forth in this Second Amendment.
NOW, THEREFORE, Company, Permitted Borrowers, Agent and the Banks
agree:
1. Section 1 of the Credit Agreement is hereby amended, as
follows:
(a) (i) The first sentence of the definition of "Advances to
Dealers" is amended (in the second, third and fourth lines thereof) to
replace the phrase "as such amount would appear in the footnotes to the
financial statements of the Company and its Subsidiaries prepared in
accordance with GAAP at such time, provided that" with the phrase "as
such amount would appear in the footnotes to the financial statements
of the Company and its Subsidiaries prepared in accordance with GAAP
(and if such amount is not shown net of such reserves, then net of any
reserves established by the Company as an allowance for credit losses
related to such advances not expected to be recovered), provided that
Advances to Dealers shall not include Excess New Dealer Advances and
provided further that", and
<PAGE> 2
(ii) the second sentence of the definition of "Advances to Dealers" is
amended to add at the end of such sentence the following:
"and (iv) "Excess New Dealer Advances' means, at any time, the
aggregate amount of advances to New Dealers to the extent such amount
exceeds 10% of Gross Advances to Dealers; and (v) "New Dealer' means,
at any time, a Dealer who participates in the Company"s program of
financing and collecting installment contract receivables, whose oldest
pool of Installment Contracts held by the Company is dated as of a date
which is not more than six months prior to such time and who has an
advance balance in excess of Ten Thousand Dollars ($10,000) at such
time".
(b) The definition of "Consolidated Income Available for Fixed
Charges" is amended to add at the end of such definition (following the word
"GAAP") the words:
", plus (c) for the next succeeding four fiscal quarters of the Company
(commencing with the fiscal quarter ending September 30, 1997), the
non-cash charge in the amount of $30,000,000 taken by the Company in
its financial statements for its fiscal quarter ending September 30,
1997 relating to the application of Statement of Financial Accounting
Standards No. 114 "Accounting by Creditors for Impairment of a Loan'."
(c) A new definition of "Gross Current Installment Contracts
Receivable" is added to the Credit Agreement (to be inserted in alphabetical
order), as follows:
"'Gross Current Installment Contract Receivables' shall mean,
as of any applicable date of determination, the aggregate
amount of Gross Installment Contract Receivables, less the
amount of such receivables which can be classified as being on
"non-accrual" under the "90 days measured on a recency basis"
method."
(d) A new definition of "Gross Advances to Dealers" is added to the
Credit Agreement (to be inserted in alphabetical order), as follows:
"'Gross Advances to Dealers' shall mean, as of any applicable
date of determination, the dollar amount of Advances to Dealers
(without giving effect to the first proviso to the definition of such
term), plus any reserves established by the Company as an allowance for
credit losses related to such advances not expected to be recovered,
plus Charged-off Advances to the extent Charged-off Advances exceed the
amount of such reserves."
(e) The definition of "Rating Level 5" is amended and restated in its
entirety, as follows:
"'Rating Level 5" shall mean (a) so long as no Debt Rating
from S&P or Moody's is obtained by the Company, then a Debt Rating of
BB+ from Fitch, and (b) in the event that a Debt Rating is obtained
from S&P and/or Moody's, then (i) if both ratings are obtained, the
lower of, and (ii) if only one rating is obtained, then either a Debt
Rating of BB (or higher) from S&P or Ba2 (or higher) from Moody's."
2
<PAGE> 3
(f) The definition of "Rating Level 6" is added to the Credit
Agreement (immediately following the definition of "Rating Level 5"), as
follows:
'Rating Level 6' shall mean the Rating Level (if any) which
exists whenever the Company does not qualify for Rating Level 1, 2, 3,
4 or 5."
2. Section 7 of the Credit Agreement is amended, as follows:
(a) Section 7.4 is amended and restated in its entirety as
follows:
"7.4 Maintain Total Debt Level.On a Consolidated basis,
maintain as of the end of each fiscal quarter, Consolidated Total
Debt at a level equal to or less than:
(a) Two Hundred Seventy-Five Percent (275%) of Company"s
Consolidated Tangible Net Worth;
(b) Ninety Percent (90%) of Advances to Dealers; and
(c) Sixty Percent (60%) of Gross Current Installment
Contract Receivables.
(b) Section 7.8 is amended and restated in its entirety, as
follows:
"7.8 Maintain Gross Dealer Advances to Net Installment
Contract Receivables Level. On a Consolidated Basis, maintain as
of the end of each fiscal quarter Gross Advances to Dealers at a
level not to exceed Sixty-Five Percent (65%) of Net Installment
Contract Receivables."
(c) Section 7.9 is amended and restated in its entirety, as
follows:
"7.9 Maintain Fixed Charge Coverage Ratio. On a Consolidated
basis, maintain as of the end of each fiscal quarter a Fixed
Charge Coverage Ratio of not less than:
(a) from the date hereof to December 30, 1997, 2.5 to 1.0;
(b) from December 31, 1997 to March 30, 1998, 1.9 to 1.0;
(c) from March 31, 1998 to June 29, 1998, 1.7 to 1.0;
(d) from June 30, 1998 to September 29, 1998, 1.6 to 1.0;
and
(e) from and after September 30, 1998, 2.0 to 1.0."
3
<PAGE> 4
3. Section 8 of the Credit Agreement is hereby amended to add new
Section 8.15, as follows:
"8.15 'Limitation on Dividends'.Declare, make or otherwise set
apart, directly or indirectly, any funds or other property for,
or incur any liability to make any dividend or other
distribution, direct or indirect and whether payable in cash or
property, on account of any capital stock or other equity
interest of the Company or any of its Subsidiaries, except to the
extent that any such dividend or distribution (i) is payable to
the Company or any of its Subsidiaries or (ii) is payable solely
in capital stock or other equity interests of the Company or any
such Subsidiary, unless, at the time of such action (and giving
effect thereto) such dividend or distribution is permitted under
Section 2.5 of each of the amendments to the note agreements
which constitute Senior Debt Documents executed concurrently with
the execution of the Second Amendment to this Agreement (the
"December 1997 Note Agreement Amendments"), as such note
agreements are presently in effect (after giving effect to the
December 1997 Note Agreement Amendments) without giving effect to
any subsequent amendments, modifications or waivers thereof,
except to the extent expressly provided in Section 2.6 of the
December 1997 Note Agreement Amendments."
4. The consent of the Majority Banks (the "Consent") under paragraph
3 of the First Amendment to Credit Agreement and Consent dated as of June 4,
1997 to Stock Repurchases (as such term is defined therein) is hereby modified
such that, notwithstanding the terms of such Consent, Stock Repurchases shall
not be permitted unless, at the time of any such Stock Repurchase, Company is
permitted to make such repurchases under Section 2.5 of each of the amendments
to the note agreements which constitute Senior Debt Documents executed
concurrently with the execution of this Second Amendment (the "December 1997
Note Agreement Amendments"), as such note agreements are presently in effect
(after giving effect to the December 1997 Note Agreement Amendments) without
giving effect to any amendments, modifications or waivers thereof, except to the
extent expressly provided in Section 2.6 of the December 1997 Note Agreement
Amendments.
5. This Second Amendment shall become effective (according to the
terms hereof) upon satisfaction by the Company and the Permitted Borrowers, on
or before December 15, 1997, of the following conditions:
(a) Agent shall have received counterpart originals of this
Second Amendment, in each case duly executed and delivered by Company,
the Permitted Borrowers and the requisite Banks, in form satisfactory
to Agent and the Banks;
(b) Agent shall have received, with a copy for each of the
Banks, amendments to the Senior Debt Documents executed and delivered
by the Company and the requisite holders of the Senior Debt reflecting
amendments to the applicable Senior Debt Documents identical in
substance (or more favorable to the Company) to the amendments set
forth in paragraphs 1 and 2 of this Second Amendment;
(c) Agent shall have received from the Company and each of the
Permitted Borrowers a certification (i) that all necessary actions have
been taken by such parties to
4
<PAGE> 5
authorize execution and delivery of this Second Amendment, supported by
such resolutions or other evidence of corporate authority or action as
reasonably required by Agent and the Majority Banks; and (ii) that,
after giving effect to this Second Amendment, no Default or Event of
Default has occurred and is continuing on the proposed effective date
of the Second Amendment; and
(d) Company shall have paid (through Agent) to those Banks
which have approved (in writing) the execution and delivery of this
Second Amendment on or before the close of business on December 3, 1997
an amendment fee in the amount of five basis points on the aggregate
commitment of each such Bank under the Line of Credit and the Revolving
Credit as of the date of the Second Amendment.
provided, however, that subject to the foregoing, the Amendment set forth in
paragraph 1(a) of this Second Amendment shall be given retroactive effect to
September 30, 1997.
If the foregoing conditions have not been satisfied or waived on or before
December 15, 1997, this Second Amendment shall lapse and be of no further force
and effect.
6. New Exhibit F (Request for Swing Line Advance) attached hereto as
Attachment 1 shall replace existing Exhibit F in its entirety and new Schedule
4.1 (Pricing Matrix) attached hereto as Attachment 2 shall replace existing
Schedule 4.1 in its entirety. New Schedule 6.15 (Litigation) attached hereto as
Attachment 3 shall replace existing Schedule 6.15 in its entirety.
7. Each of the Company and the Permitted Borrowers ratifies and
confirms, as of the date hereof and after giving effect to the amendments
contained herein, each of the representations and warranties set forth in
Sections 6.1 through 6.22, inclusive, of the Credit Agreement and acknowledges
that such representations and warranties are and shall remain continuing
representations and warranties during the entire life of the Credit Agreement.
8. Except as specifically set forth above, this Second Amendment
shall not be deemed to amend or alter in any respect the terms and conditions
of the Credit Agreement, any of the Notes issued thereunder or any of the other
Loan Documents, or to constitute a waiver by the Banks or Agent of any right or
remedy under or a consent to any transaction not meeting the terms and
conditions of the Credit Agreement, any of the Notes issued thereunder or any
of the other Loan Documents.
9. Unless otherwise defined to the contrary herein, all capitalized
terms used in this Second Amendment shall have the meaning set forth in the
Credit Agreement.
10. This Second Amendment may be executed in counterpart in
accordance with Section 13.10 of the Credit Agreement.
[SIGNATURES FOLLOW ON SUCCEEDING PAGES]
5
<PAGE> 6
WITNESS the due execution hereof as of the day and year first above
written.
COMERICA BANK, CREDIT ACCEPTANCE CORPORATION
as Agent
By: /S/ Jatinder P. Kalia By: /S/ Richard E.Beckman
-------------------------------- ---------------------------------
Its: Corporate Finance Officer Its: President
------------------------------- --------------------------------
One Detroit Center
500 Woodward Avenue
Detroit, Michigan 48226
Attention: Michael P. Stapleton
CREDIT ACCEPTANCE CORPORATION
UK LIMITED
By: /S/ Richard E. Beckman
--------------------------------
Its: Secretary
-------------------------------
CAC OF CANCAND LIMITED
By: /S/ Richard E. Beckman
--------------------------------
Its: Secretary
-------------------------------
CREDIT ACCEPTANCE CORPORATION
IRELAND LIMITED
By: /S/ Richard E. Beckman
--------------------------------
Its: Secretary
-------------------------------
6
<PAGE> 7
BANKS: COMERICA BANK
By: /S/ Michael P. Stapleton
--------------------------------
Its: Vice President
--------------------------------
LASALLE NATIONAL BANK THE BANK OF NEW YORK
By: /S/ Terry Keating By: /S/ William Barnum
--------------------------------- ---------------------------------
Its: 1st Vice President Its: Vice President
-------------------------------- --------------------------------
THE FIRST NATIONAL BANK OF THE FIFTH THIRD BANK OF NORTHWESTERN
CHICAGO OHIO, N.A.
By: /S/ Craig Goldsmith By: /S/ Brent J. Lochbihler
--------------------------------- ---------------------------------
Its: Assistant Vice President
-------------------------------- Its: Vice President
--------------------------------
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH U.S. BANK NATIONAL ASSOCIATION, AS
SUCCESSOR BY MERGER to United States
National Bank of Oregon
By: /S/ H.W. Redding
---------------------------------
Its: Vice President and Manager
-------------------------------- By: /S/ David Larson
---------------------------------
and Its: Vice President
--------------------------------
By: /S/ Thomas A. Garza
-------------------------------- THE BANK OF TOKYO-MITSUBISHI, LTD.
Its: Vice President (CHICAGO BRANCH)
--------------------------------
HARRIS TRUST AND SAVINGS BANK
By:
----------------------------------
Its:
---------------------------------
By: /S/ Robert G. Bomben
---------------------------------
7
<PAGE> 8
Its: Vice President
-------------------------------- THE LONG-TERM CREDIT BANK OF JAPAN,
LTD. (CHICAGO BRANCH)
By: /S/ Mark Thompson
----------------------------------
Its: Senior Vice President
---------------------------------
CREDIT LYONNAIS FIRSTAR BANK MILWAUKEE, N.A.
NEW YORK BRANCH
By: /S/ Sebastian Rocco By: /S/ Thomas Richtman
--------------------------------- ----------------------------------
Its: First Vice President Its: Vice President
-------------------------------- ---------------------------------
NATIONSBANK, N.A.
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
By: /S/ Elizabeth Kurilecz
----------------------------------
Its: Senior Vice President
---------------------------------
By:
--------------------------------
Its:
--------------------------------
THE BANK OF NOVA SCOTIA CIBC INC.
By: /S/ F.C.H. Ashby By: /S/ Gerald Girardi
--------------------------------- ----------------------------------
Its: Senior Manager Loan Operations Its: Executive Director
-------------------------------- ---------------------------------
8
<PAGE> 1
EXHIBIT 4(e)(1)
FIRST AMENDMENT TO NOTE PURCHASE AGREEMENT
RE:
CREDIT ACCEPTANCE CORPORATION
7.77% SENIOR NOTES DUE OCTOBER 1, 2001
Dated as of December 12, 1997
To the Noteholders listed on Annex I hereto
Ladies and Gentlemen:
Credit Acceptance Corporation, a Michigan corporation (together with its
successors and assigns, the "Company"), hereby agrees with you as follows:
SECTION 1. INTRODUCTORY MATTERS.
1.1 DESCRIPTION OF OUTSTANDING NOTES. The Company currently has
outstanding $71,750,000 in aggregate unpaid principal amount of its 7.77%
Senior Notes due October 1, 2001 (the "Notes") which it issued pursuant to the
separate Note Purchase Agreements, each dated as of March 25, 1997
(collectively, the "Agreement"), entered into by the Company with each of you,
respectively. Terms used herein but not otherwise defined herein shall have
the meanings assigned thereto in the Agreement.
1.2 PURPOSE OF AMENDMENT. The Company and you desire to amend the
Agreement to modify various covenants in and add certain definitions to the
Agreement.
SECTION 2. AMENDMENT TO THE AGREEMENT.
Pursuant to Section 10.5 of the Agreement, the Company hereby agrees with
you that the Agreement shall be amended by this First Amendment to Note
Purchase Agreement (the "First Amendment"), effective as of September 30, 1997,
in the following respects:
2.1 SECTION 6.1
(A) The heading for Section 6.1 is hereby modified to read "Debt and
Advances".
(B) Paragraph (a) of Section 6.1 is hereby amended and restated in its
entirety as follows:
"(A) TOTAL DEBT. The Company will not at any time
permit Consolidated Total Debt to exceed any of the following:
<PAGE> 2
(i) two hundred seventy-five percent (275%) of
Consolidated Tangible Net Worth;
(ii) ninety percent (90%) of Advances; or
(iii) sixty percent (60%) of Gross Current
Installment Contract Receivables."
(C) Section 6.1 is hereby further amended by adding, immediately after
paragraph (e), the following:
"(F) GROSS ADVANCES. The Company will not at any time permit
Gross Advances to exceed sixty-five percent (65%) of Net Installment
Contract Receivables."
2.2 SECTION 6.2 Section 6.2 is hereby amended and restated in its entirety
as follows:
"The Company will not at any time permit the ratio of
(a) Consolidated Income Available for Fixed Charges for the
period of four (4) consecutive fiscal quarters of the Company most
recently ended at such time to
(b) Consolidated Fixed Charges for such period
to be less than (i) 2.5 to 1.0 for any period of four fiscal
quarters ended on or prior to September 30, 1997, (ii) 1.9 to 1.0 for
the four fiscal quarters ended December 31, 1997, (iii) 1.7 to 1.0 for
the four fiscal quarters ended March 31, 1998, (iv) 1.6 to 1.0 for the
four fiscal quarters ended June 30, 1998, and (v) 2.0 to 1.0 for any
four fiscal quarters ended on or after September 30, 1998."
2.3 SECTION 9.1
(A) The definition of "Consolidated Income Available for Fixed
Charges" in Section 9.1 of the Agreement is hereby amended by adding
immediately after clause (b) and before the final clause of such definition
the following:
"plus (c) with respect to the periods ending September 30,
1997, December 31, 1997, March 31, 1998 and June 30, 1998, $30,000,000
representing the portion of the non-cash charge recorded by the
Company during the period ended September 30, 1997 attributable to the
present valuing of future cash flows consistent with Statement of
Financial
2
<PAGE> 3
Accounting Standards No. 114 "Accounting by Creditors for
Impairment of a Loan","
(B) The definition of "Net Dealer Holdbacks" in Section 9.1 of the
Agreement is hereby amended by deleting the definitions of "Advances,"
"Charged-Off Advances," "Established Dealer" and "Trailing Twelve Months
Payments" therefrom.
(C) The following new definitions are added to Section 9.1 of the
Agreement:
"ADVANCES means, at any time, the dollar amount of advances, as
such amount would appear in the footnotes to the financial statements
of the Company and the Restricted Subsidiaries prepared in accordance
with GAAP (if such amount would not appear net of reserves, then net
of any reserves established by the Company as an allowance for credit
losses related to such advances not expected to be recovered),
provided that Advances shall not include Charged-Off Advances to the
extent that such Charged-Off Advances exceed the portion of the
Company"s allowance for credit losses related to reserves against
advances not expected to be recovered as such allowance would appear
in the footnotes to the financial statements of the Company and the
Restricted Subsidiaries prepared in accordance with GAAP and provided
further, that Advances shall not include Excess New Dealer Advances."
"CHARGED-OFF ADVANCES means, with respect to an Established
Dealer, at any time, the dollar amount of the advance balance related
to the pool of installment contract receivables of such Established
Dealer which exceeds the Trailing Twelve Months Payments for such pool
multiplied by three (3)."
"ESTABLISHED DEALER means, at any time, a dealer that has
participated in the Company"s program of financing and collecting
installment contract receivables for the immediately preceding period
of twelve (12) consecutive complete calendar months and has an advance
balance in excess of Ten Thousand Dollars ($10,000) at such time."
"EXCESS NEW DEALER ADVANCES means, at any time, the aggregate
amount of advances to New Dealers to the extent such amount exceeds
10% of Gross Advances."
"GROSS ADVANCES means, as of any applicable date of
determination, the dollar amount of Advances (without giving effect to
the last proviso to the definition of such term), plus any reserves
established by the Company as an allowance for credit losses related
to such advances not expected to be
3
<PAGE> 4
recovered, plus Charged-Off Advances to the extent Charged-Off
Advances exceed the amount of such reserves."
"GROSS CURRENT INSTALLMENT CONTRACT RECEIVABLES means, as of
any applicable date of determination, the aggregate amount of Net
Installment Contract Receivables, plus unearned finance charges, plus
allowance for credit losses, minus the amount of such receivables
which can be classified as being on "non-accrual" under the "90 days
measured on a recency basis" method."
"INVESTMENT GRADE RATING means a rating of at least, but not
lower than:
(i) "Baa3" by Moody's Investors Service, Inc.,
(ii) "BBB-" by Standard & Poor's Ratings Group,
(iii) a category "1" or category "2"
designation from the National Association of Insurance
Commissioners, and
(iv) "BBB-" by Fitch Investors Services, Inc."
"NEW DEALER means, at any time, a dealer who participates in
the Company"s program of financing and collecting installment
contract receivables, whose oldest pool of installment contracts held
by the Company is dated as of a date which is not more than six months
prior to such time and who has an advance balance in excess of ten
thousand dollars ($10,000) at such time."
"RESTRICTED PAYMENT means (x) any dividend or other
distribution, direct or indirect and whether payable in cash or
property, on account of any capital stock or other equity interest of
the Company or any of its Restricted Subsidiaries and (y) any
redemption, retirement, purchase, or other acquisition, direct or
indirect, of any capital stock or other equity interests of the
Company or any of its Restricted Subsidiaries now or hereafter
outstanding, or of any warrants, rights or options to acquire any such
capital stock or other equity interests or any securities convertible
into such capital stock or other equity interests, except to the
extent that any such dividend or distribution, or any such redemption,
retirement, purchase or other acquisition (i) is payable to the
Company or any of its Restricted Subsidiaries or (ii) is payable
solely in capital stock or other equity interests of the Company or
any such Restricted Subsidiary."
4
<PAGE> 5
"TRAILING TWELVE MONTHS PAYMENTS means, at any
time, the gross amount of payments on installment contract receivables
received by the Company for the account of an Established Dealer during
the immediately preceding period of twelve (12) consecutive complete
calendar months."
2.4 INTEREST RATE APPLICABLE TO NOTES.
(A) Notwithstanding anything to the contrary set forth in the Agreement or
in the Notes, the interest rate applicable to the Notes shall be 8.27% per
annum effective as of October 23, 1997; provided, however, that such interest
rate shall be 7.77% per annum effective as of the first date that at least two
of the following four organizations shall have assigned an Investment Grade
Rating to the Company, the Notes or any other senior unsecured debt obligation
of the Company: Moody's Investors Service, Inc., Standard & Poor's Ratings
Group, the National Association of Insurance Commissioners (the "NAIC"), or
Fitch Investors Services, Inc.
(B) The signatories hereto specifically acknowledge that the NAIC is not
in any way a rating agency with functions such as those performed by Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, or Fitch Investors
Services, Inc. Further, the signatories hereto specifically acknowledge that
any rating given to the Notes by the NAIC is not to be interpreted as an
expression by the NAIC with respect to the suitability of an investment in the
Notes or the likelihood of any payment in respect thereof. In addition, the
signatories hereto specifically affirm that the holders of the Notes will not
obtain any benefit from satisfaction of the condition set forth in the proviso
to Section 2.4(a) or in Section 2.5.
2.5 RESTRICTED PAYMENTS. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, declare, make, set apart any
funds or other property for, or incur any liability to make any Restricted
Payment unless, at the time of such action, at least two of the following four
organizations shall have assigned an Investment Grade Rating to the Company,
the Notes or any other senior unsecured debt obligation of the Company: Moody's
Investors Service, Inc., Standard & Poor's Ratings Group, the NAIC, or Fitch
Investors Services, Inc.
2.6 ADVERSE ACTION. If the NAIC makes specific reference to this First
Amendment and states that it will withdraw any rating or designation of
the Notes, or will take any other action adverse to any one or more of the
holders of the Notes, as a result of the agreement set forth in Section 2.4(a)
or in Section 2.5, the parties hereto hereby agree that (x) the proviso to
Section 2.4(a) and Section 2.5 shall, in lieu of the requirement set forth
therein, be deemed to require an Investment Grade Rating from at least two of
the following three organizations: Moody's Investors Service, Inc., Standard &
Poor's Ratings Group, or Fitch Investors Services, Inc. and (y) clause (iii) of
the definition of "Investment Grade Rating" shall be deemed to have been
deleted. Such changes shall take effect upon delivery of written notice to
the Company by the Required Holders referring to such proposed withdrawal or
other action and stating that the condition set forth in this Section 2.6 has
occurred.
5
<PAGE> 6
SECTION 3. MISCELLANEOUS
3.1 COUNTERPARTS. This First Amendment may be executed in any number of
counterparts, each executed counterpart constituting an original, but all
together only one First Amendment.
3.2 HEADINGS. The headings of the sections of this First Amendment are for
purposes of convenience only and shall not be construed to affect the meaning
or construction of any of the provisions hereof.
3.3 GOVERNING LAW. This First Amendment shall be governed by and construed
in accordance with the internal laws of the State of New York.
3.4 EFFECT OF AMENDMENT. Except as expressly provided herein (a) no other
terms and provisions of the Agreement shall be modified or changed by this
Amendment and (b) the terms and provisions of the Agreement, as amended by this
First Amendment, shall continue in full force and effect. The Company hereby
acknowledges and reaffirms all of its obligations and duties under the
Agreement as modified by this First Amendment and under the Notes issued
thereunder.
3.5 REFERENCES TO THE AGREEMENT. Any and all notices, requests,
certificates and other instruments executed and delivered concurrently with or
after the execution of the First Amendment may refer to the Agreement without
making specific reference to this First Amendment but nevertheless all such
references shall be deemed to include, to the extent applicable, this First
Amendment unless the context shall otherwise require.
3.6 COMPLIANCE. The Company certifies that immediately before and after
giving effect to this First Amendment, no Default or Event of Default exists or
would exist after giving effect hereto.
3.7 FEE. In consideration of the amendment set forth herein, the Company
agrees to pay, promptly following the execution hereof, to each holder of a
Note a fee in an amount equal to 0.05% of the outstanding principal amount of
each Note held by such holder as of the date hereof.
3.8 EFFECTIVENESS. This First Amendment shall become effective
(retroactive to September 30, 1997) at the time the Second Amendment to the
Credit Agreement becomes effective, provided that such effectiveness shall
occur on or before December 31, 1997.
3.9 AMENDMENT TO CREDIT AGREEMENT. The Company represents that the Second
Amendment to the Credit Agreement is in the form attached as Exhibit A hereto.
[Remainder of page intentionally blank. Next page is signature page.]
6
<PAGE> 7
ACCEPTED: THE GUARDIAN LIFE INSURANCE COMPANY
OF AMERICA
By /S/ Thomas. M. Donohue
---------------------------------
Name: Thomas M. Donohue
Title: Vice President
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
7
<PAGE> 8
ACCEPTED: NATIONWIDE LIFE INSURANCE COMPANY
By /S/ Edwin P. McCausland, Jr.
-------------------------------------------------
Name: Edwin P. McCausland, Jr.
Title: Vice President Fixed Income Securities
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
8
<PAGE> 9
ACCEPTED: AID ASSOCIATION FOR LUTHERANS
By /S/ James Abitz
----------------------------------------------
Name: James Abitz
Title: Vice President - Investments
By /S/ R. Jerry Scheel
----------------------------------------------
Name: R. Jerry Scheel
Title: Second Vice President - Securities
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
9
<PAGE> 10
ACCEPTED: AMERICAN BANKERS INSURANCE COMPANY
OF FLORIDA
By /S/ Gus Rodriguez
-----------------------------------
Name: Gus Rodriguez
Title: Director of Investments
VOYAGER PROPERTY & CASUALTY
INSURANCE COMPANY
By /S/ Gus Rodriguez
-----------------------------------
Name: Gus Rodriguez
Title: Director of Investments
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
10
<PAGE> 11
ACCEPTED: FARM BUREAU LIFE INSURANCE COMPANY
By /S/ Richard D. Warming
-------------------------------------
Name: Richard D. Warming
Title: VP - Chief Investment Officer
FARM BUREAU MUTUAL INSURANCE
COMPANY
By /S/ Richard D. Warming
-------------------------------------
Name: Richard D. Warming
Title: VP - Chief Investment Officer
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
11
<PAGE> 12
ACCEPTED: GENERAL AMERICAN LIFE INSURANCE
COMPANY
By: Corning Asset Management Company
By /S/ Douglas R. Koester
----------------------------------
Name: Douglas R. Koester
Title: Senior Vice President
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
13
<PAGE> 13
ACCEPTED: ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR PHYSICIANS
LIFE INSURANCE COMPANY VISTA 500
By /S/ Kathy Lange
---------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR WORLD
INSURANCE COMPANY
By /S/ Kathy Lange
---------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR UNITED
TEACHERS ASSOCIATES INSURANCE
COMPANY
By /S/ Kathy Lange
---------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
14
<PAGE> 14
ACCEPTED: ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR AMERICAN
PIONEER LIFE INSURANCE COMPANY
OF NEW YORK
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR AMERICAN
PROGRESSIVE LIFE AND HEALTH
INSURANCE COMPANY OF NEW YORK
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR FEDERATED
RURAL ELECTRIC INSURANCE CORP.
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
ASSET ALLOCATION & MANAGEMENT
COMPANY AS AGENT FOR TOWER LIFE
INSURANCE COMPANY
By /S/ Kathy Lange
------------------------------------
Name: Kathy R. Lange
Title: Portfolio Manager
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
15
<PAGE> 15
ACCEPTED: MASSACHUSETTS MUTUAL LIFE
INSURANCE COMPANY
By /S/ Richard E. Spencer II
------------------------------------
Name: Richard E. Spencer II
Title: Managing Director
[Signature Page to First Amendment to Note Purchase Agreement in respect of
7.77% Senior Notes Due October 1, 2001 of Credit Acceptance Corporation]
16
<PAGE> 1
Exhibit 10 (n)(5)
CREDIT ACCEPTANCE CORPORATION
MANAGEMENT INCENTIVE PLAN
Fiscal Year 1998
1. Purpose
The purpose of this Management Incentive Plan - Fiscal Year 1998 ("Plan")
of Credit Acceptance Corporation ("Company") is to promote the interests of the
Company and its shareholders by providing incentives to selected key employees
("Participants") of the Company and its subsidiaries who have principal
responsibility for the Company's long-term profitability and growth. Awards
will be made in the form of cash bonuses contingent on attainment of defined
performance goals.
2. Administration
The Plan shall be administered by the Compensation Committee ("Committee")
of the Company's Board of Directors ("Board"). Only directors who are not
employees of the Company may be members of the Committee. The Committee shall
have power and authority to construe and interpret the Plan, to establish and
amend rules for administration of the Plan, and to exercise all powers granted
to it pursuant to the Plan.
3. Participants
Participants in the Plan shall be not more than 30 key employees of the
Company or its subsidiaries (including officers who are also members of the
Board) as the Committee may select from time to time. The selection of
Participants and the determination of their respective participation, shall be
made in accordance with paragraph 5 hereof. No Participant shall be entitled
to share in any awards under the Plan if he or she is not an employee of the
Company on December 31, 1998 unless the Committee makes a special exception for
him or her or his or her estate.
4. Bonus Pool
A Bonus Pool will be established pursuant to this paragraph 4 not later
than March 1, 1999 (provided that the Company has by such date completed its
financial statements for the year ended December 31, 1998, or otherwise, as
soon thereafter as practicable), from which awards in cash, as determined by
the Committee, will be paid to Participants as soon thereafter as practicable.
The Bonus Pool for the fiscal year ending December 31, 1998 (the "Plan Year")
shall be equal to 20% of the amount by which the Company's net income exceeds
12.5% multiplied by the Company's Consolidated Shareholders Equity of December
31, 1997 (the "Earnings Target"). A portion of the Bonus Pool, (the "Deferred
Amount"), may be deferred in the discretion of the Committee for payment as
follows: 50% of the Deferred Amount shall be paid on December 31, 1999; and
50% of the Deferred Amount shall be paid on December 31, 2000. If the
Committee decides to defer any portion of the Bonus Pool, such deferral shall
apply to all Participants; provided that if a Participant's portion of the
deferred amount is equal to or less than $10,000, such amount may, on the
discretion of the Committee be paid to such participant without such deferral.
No Participant shall be entitled to receive any portion of the Deferred Amount
if he or she is not an employee of the Company on December 31, 1999 or December
31, 2000, as the case may be, unless the Committee makes a special exception
for him or her or his or her estate. The Committee reserves the right to pay
any amount less than 100% of the total Bonus Pool and in every case an
individual award will not exceed 100% of the employee's base salary.
5. Manner and Extent of Participants
The Committee, after consultation with the chief executive officer of the
Company, shall determine the number, identity and participation of the
Participants. Each Participant shall be entitled to receive the amount of his
participation if a Bonus Pool is established only if he equals or exceeds, in
the sole judgment of the Committee, after consultation with the chief executive
officer, the specific performance goals or other requirements established for
him by the chief executive officer at the time that he is notified that he will
be a Participant. Participants scoring below the median score of all
Participants with respect to any numerical
<PAGE> 2
assessment of performance utilized by the Committee shall not be eligible to
receive any portion of the amounts he or she otherwise would have been
eligible to receive.
6. Adjustments
In the event of a change of control of the Company during the Plan Year,
as set forth below, the Company will be deemed to have achieved the Earnings
Target and the Committee shall establish a Bonus Pool which, in its judgment
reflects, by annualizing results to the then current date for the Plan Year,
results to be expected for the full year. In such event, individual awards
will be prorated, based on the months in such year that have elapsed prior to
the effective time of such change of control. For the purposes of the Plan, a
change of control shall consist of:
(a) the election of a Board of Directors of the Company, a majority
of the members of whom were nominees of a person (including an
individual, a corporation, partnership, joint venture, trust or other
entity), or a group of persons acting together (other than persons
who were members of the Board of Directors or officers of the Company
as of the date of the Plan or an employee stock ownership plan
approved by a majority of such members of the Board of Directors),
following the acquisition by such person, group of persons or plan of
ownership (directly or indirectly or beneficially or of record) of
25% or more of the outstanding stock;
(b) the acquisition of ownership by a person or group of persons
described in subparagraph (a) above of 51% or more of the Stock;
(c) a sale of all or substantially all of the assets of the Company
to any entity not controlled by the persons who were members of the
Board of Directors or officers of the Company as of the date of the
Plan or by an employee stock ownership plan approved by a majority of
the members of such Board of Directors, or
(d) a merger, consolidation or similar transaction between the
Company and another entity if a majority of the members of the Board
of Directors of the surviving corporation are not persons who were
members of the Board of Directors of the Company as of the date of
the Plan.
7. Termination and Amendment
The Board may terminate the Plan at any time. No bonus participation may
be granted after such termination of the Plan, but the termination of the Plan
shall not affect the rights of any participant previously granted and then
outstanding. The Board may amend or modify the Plan at any time. No such
amendment or modification shall affect the rights of any participant with
respect to any bonus participation previously granted and then outstanding
without his consent.
8. Miscellaneous
(a) Neither the adoption of the Plan nor the granting of any awards
pursuant to it shall be deemed to create any right in any individual
to be retained or continued in the employment of the Company or any
of its subsidiaries.
(b) As used in the Plan, the terms "net income" shall mean the
after-tax earnings of the Company to be reported by the Company in
its Annual Report to shareholders for the Plan Year, adjusted by the
Committee, in its sole judgment, after consultation with the
independent auditors then retained by the Company and with the chief
executive officer and the chief financial officer of the Company, to
take into account the effect of any material extraordinary or
non-recurring items and of any bonuses accrued pursuant to the Plan.
(c) The existence of the Plan or the making of awards to
participants shall not preclude the Board from paying bonuses or
granting other benefits to them outside of the Plan.
<PAGE> 1
EXHIBIT 21
The following is a list of subsidiaries as of the date of this filing of Credit
Acceptance Corporation, other than subsidiaries which, considered in the
aggregate as a single subsidiary, would not constitute a significant
subsidiary, as defined by the Securities and Exchange Commission Regulation S-X.
BUYERS VEHICLE PROTECTION PLAN, INC.
CREDIT ACCEPTANCE CORPORATION LIFE INSURANCE COMPANY
CAC INTERNATIONAL, INC.
CREDIT ACCEPTANCE CORPORATION UK LIMITED
CAC OF CANADA LIMITED
CREDIT ACCEPTANCE CORPORATION IRELAND LIMITED
CAC LEASING, INC.
CAC REINSURANCE, LTD.
MONTANA INVESTMENT GROUP, INC.
VEHICLE REMARKETING SERVICES, INC.
<PAGE> 1
EXHIBIT 23
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 33-80339, 33-64876, 33-75246 (as amended),
333-18301 and 333-30661.
ARTHUR ANDERSEN LLP
Detroit, Michigan
March 20, 1998
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<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 349
<SECURITIES> 9,973
<RECEIVABLES> 1,049,818
<ALLOWANCES> 13,119
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 26,924
<DEPRECIATION> 6,085
<TOTAL-ASSETS> 1,115,610
<CURRENT-LIABILITIES> 0
<BONDS> 3,799
0
0
<COMMON> 461
<OTHER-SE> 248,530
<TOTAL-LIABILITY-AND-EQUITY> 1,115,610
<SALES> 0
<TOTAL-REVENUES> 164,235
<CGS> 0
<TOTAL-COSTS> 45,952
<OTHER-EXPENSES> 3,911
<LOSS-PROVISION> 85,472
<INTEREST-EXPENSE> 27,597
<INCOME-PRETAX> 1,303
<INCOME-TAX> (234)
<INCOME-CONTINUING> 1,537
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,537
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
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