<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1999511
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/. No / /.
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
The number of shares outstanding of Registrant's Common Stock, par value $.01,
on November 10, 1998 was 46,273,115.
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I.--FINANCIAL INFORMATION PAGE
------------------------------ ----
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
As of December 31, 1997 and September 30, 1998............................................................1
Consolidated Income Statements -
Three and nine month periods ended September 30, 1997 and September 30, 1998..............................2
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1997 and September 30, 1998...............................................3
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1998......................................................................4
Notes to Consolidated Financial Statements................................................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................................6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK........................................................................................16
PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS........................................................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.........................................................................17
SIGNATURES.............................................................................................................18
INDEX OF EXHIBITS......................................................................................................19
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
AS OF AS OF
12/31/97 9/30/98
---------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Cash and cash equivalents ............................................... $ 349 $ 10,503
Investments ............................................................. 9,973 9,777
Installment contracts receivable ........................................ 1,049,818 733,788
Allowance for credit losses ............................................. (13,119) (7,661)
---------- --------
Installment contracts receivable, net ............................... 1,036,699 726,127
Retained interest in securitization ..................................... -- 12,745
Floor plan receivables .................................................. 19,800 15,846
Notes receivable ........................................................ 1,231 1,894
Property and equipment, net ............................................. 20,839 20,920
Deferred dealer enrollment costs, net ................................... -- 424
Other assets, net ....................................................... 26,719 11,623
---------- --------
TOTAL ASSETS ................................................................. $1,115,610 $809,859
========== ========
LIABILITIES:
Senior notes ............................................................ $ 175,150 $162,450
Lines of credit ......................................................... 212,717 78,524
Mortgage loan payable to bank ........................................... 3,799 3,625
Income taxes payable .................................................... -- 250
Accounts payable and accrued liabilities ................................ 22,851 27,760
Deferred dealer enrollment fees, net .................................... 421 --
Dealer holdbacks, net ................................................... 437,065 253,495
Deferred income taxes, net .............................................. 14,616 12,101
---------- --------
TOTAL LIABILITIES ............................................................ 866,619 538,205
SHAREHOLDERS' EQUITY
Common stock ............................................................ 461 462
Paid-in capital ......................................................... 128,336 128,920
Retained earnings ....................................................... 118,023 137,964
Cumulative translation adjustment ....................................... 2,171 4,308
---------- --------
TOTAL SHAREHOLDERS' EQUITY ................................................... 248,991 271,654
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................... $1,115,610 $809,859
========== ========
</TABLE>
-1-
<PAGE> 4
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 9/30/97 9/30/98 9/30/97 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUE:
Finance charges ............................... $ 28,956 $ 21,708 $ 92,249 $ 77,657
Premiums earned ............................... 3,111 2,741 8,119 8,294
Dealer enrollment fees ........................ 1,750 693 5,672 3,157
Gain on sale of advance receivables,
net ........................................ -- 685 -- 685
Other income .................................. 7,076 7,401 21,475 20,581
----------- ----------- ----------- -----------
Total revenue ............................. 40,893 33,228 127,515 110,374
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Salaries and wages ............................ 4,278 6,287 12,349 16,884
General and administrative .................... 4,916 7,027 14,410 21,169
Provision for credit losses ................... 64,071 3,438 78,793 13,900
Sales and marketing ........................... 2,100 1,392 6,057 5,293
Provision for claims .......................... 1,095 896 2,776 2,868
Interest ...................................... 7,162 5,923 19,639 20,098
----------- ----------- ----------- -----------
Total costs and expenses .................. 83,622 24,963 134,024 80,212
----------- ----------- ----------- -----------
OPERATING INCOME(LOSS) ............................. (42,729) 8,265 (6,509) 30,162
----------- ----------- ----------- -----------
Foreign exchange loss .............................. (7) (77) (22) (72)
----------- ----------- ----------- -----------
INCOME(LOSS) BEFORE PROVISION
FOR INCOME TAXES ................................... (42,736) 8,188 (6,531) 30,090
Provision(credit) for income taxes ............ (15,028) 2,577 (2,911) 10,149
----------- ----------- ----------- -----------
NET INCOME(LOSS) ................................... $ (27,708) $ 5,611 $ (3,620) $ 19,941
=========== =========== =========== ===========
Net income(loss) per common share:
Basic ......................................... $ (0.60) $ 0.12 $ (0.08) $ 0.43
=========== =========== =========== ===========
Diluted ....................................... $ (0.60) $ 0.12 $ (0.08) $ 0.42
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic ......................................... 46,113,115 46,243,115 46,100,670 46,156,448
=========== =========== =========== ===========
Diluted ....................................... 46,113,115 46,897,388 46,100,670 47,085,750
=========== =========== =========== ===========
</TABLE>
-2-
<PAGE> 5
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------
(DOLLARS IN THOUSANDS) 9/30/97 9/30/98
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income(loss)................................................................... $ (3,620) $ 19,941
Adjustments to reconcile net income(loss) to net cash
provided by operating activities -
Credit for deferred income taxes.......................................... (19,510) (2,515)
Depreciation and amortization............................................. 1,543 2,933
Gain on sale of advance receivables....................................... - (1,261)
Amortization of retained interest in securitization....................... - (467)
Loss on retirement of property and equipment.............................. 512 -
Provision for credit losses............................................... 78,793 13,900
Dealer stock option plan expense.......................................... - 103
Change in operating assets and liabilities -
Accounts payable and accrued liabilities.................................. (147) 4,909
Income taxes payable...................................................... 219 250
Deferred dealer enrollment costs, net..................................... - (424)
Deferred dealer enrollment fees, net...................................... (1,402) (421)
Unearned insurance premiums, insurance reserves, and fees................. 1,604 (179)
Other assets.............................................................. (2,097) 15,096
---------- ---------
Net cash provided by operating activities............................. 55,895 51,865
========== =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on installment contracts receivable............................ 283,253 288,970
Net proceeds from sale of advance receivables...................................... - 49,275
Net maturities (purchases) of marketable securities................................ (2,880) 196
Decrease(increase) in floor plan receivables....................................... ( 3,866) 3,954
Decrease(increase) in notes receivable............................................. 1,074 (663)
Purchase of property and equipment................................................. (7,006) (3,014)
---------- ---------
Net cash provided by investing activities............................. 270,575 338,718
========== =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage loan payable to bank......................................... (163) (174)
Net borrowings (repayments) under line of credit agreement......................... 31,283 (134,193)
Proceeds from (repayments of) senior notes......................................... 59,250 (12,700)
Advances to dealers and payments of dealer holdback................................ (417,021) (235,981)
Proceeds from stock options exercised.............................................. 2,874 482
---------- ---------
Net cash used in financing activities................................. (323,777) (382,566)
---------- ---------
Effect of exchange rate changes on cash............................... (2,684) 2,137
---------- ---------
NET INCREASE IN CASH.................................................................... 9 10,154
Cash and cash equivalents - beginning of period.................................... 229 349
---------- ---------
Cash and cash equivalents - end of period.......................................... $ 238 $ 10,503
========== =========
</TABLE>
-3-
<PAGE> 6
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON PAID-IN RETAINED TRANSLATION
(DOLLARS IN THOUSANDS) STOCK CAPITAL EARNINGS ADJUSTMENT
----- ------- -------- ----------
<S> <C> <C> <C> <C>
Balance as of December 31, 1997 ............................ $461 $128,336 $118,023 $2,171
Net income ................................................. -- -- 19,941 --
Foreign currency translation adjustment .................... -- -- -- 2,137
Stock options exercised .................................... 1 481 -- --
Dealer stock option plan expense ........................... -- 103 -- --
---- -------- -------- ------
Balance as of September 30, 1998 ........................... $462 $128,920 $137,964 $4,308
==== ======== ======== ======
</TABLE>
-4-
<PAGE> 7
CREDIT ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited consolidated operating results have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of management, include all adjustments, consisting of normal recurring items,
necessary for a fair presentation of the periods. The results of operations for
interim periods are not necessarily indicative of actual results achieved for
full fiscal years.
As contemplated by the Securities and Exchange Commission under rule
10-01 of Regulation S-X, the accompanying consolidated financial statements and
related notes have been condensed and do not contain certain information
included in the Company's annual consolidated financial statements and notes
thereto. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. NET INCOME PER SHARE
Basic net income per share amounts are based on the weighted average
number of common shares outstanding. Diluted net income per share amounts are
based on 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. All per share amounts have been adjusted to reflect all
stock splits declared by the Company.
3. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and displaying comprehensive income
and its components in annual financial statements. Other comprehensive income
may include foreign currency transaction adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale. The Company's total comprehensive income(loss) was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
(DOLLARS IN THOUSANDS) 9/30/97 9/30/98 9/30/97 9/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income(loss)................................... $(27,708) $5,611 $(3,620) $19,941
Foreign currency translation
adjustment, net of tax........................ (1,138) 782 (1,745) 1,389
--------- ------ -------- -------
Total comprehensive income
(loss)................................. $(28,846) $6,393 $(5,365) $21,330
========= ====== ======== =======
</TABLE>
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way companies
report information about operating segments in annual financial statements and
requires that enterprises report selected information about operating segments
after the initial year of adoption in interim financial reports. The new
pronouncement also establishes standards for related
-5-
<PAGE> 8
disclosures about products and services, geographic areas and major customers.
The Company does not expect the adoption of this statement to have a significant
impact on the financial statement disclosures of the Company.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The new standard requires that all
derivatives be recognized as either assets or liabilities on the consolidated
balance sheets and that those instruments be measured at fair value. If certain
conditions are met, a derivative may be specifically designated as a hedging
instrument. The accounting for changes in the fair value of a derivative (that
is, gains and losses) depends on the intended use of the derivative and the
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company does not believe that
adoption of SFAS 133 will have a material effect on the Company's consolidated
financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1998
TOTAL REVENUE. Total revenue decreased from $40.9 million and $127.5 million for
the three and nine months ended September 30, 1997 to $33.2 million and $110.4
million for the same periods in 1998, representing decreases of 18.7% and 13.4%,
respectively. These decreases are primarily due to decreases in finance charge
revenue resulting from decreases in average outstanding installment contracts
receivable. The decreases in average outstanding installment contracts
receivable are primarily the result of collections on and charge offs of
installment contracts exceeding contract originations for the periods. The
Company's volume of contract originations decreased in the fourth quarter of
1997 and in the first three quarters of 1998 as the Company has implemented more
conservative advance programs and has limited business with marginally
profitable and unprofitable dealers. These changes were made primarily as a
result of the Company's enhanced analysis made possible by the Company's loan
servicing system which became operational in the third quarter of 1997. Based on
reviews of dealer profitability, the Company has discontinued relationships with
certain dealers and continues to monitor its relationships with dealers and make
adjustments to these relationships as required. It is expected that the volume
of contract originations will continue at lower levels than those experienced
prior to the implementation of these changes.
The average yield on the Company's installment contract portfolio, calculated
using finance charge revenue divided by average installment contracts
receivable, was approximately 10.7% and 11.5% for the nine months ended
September 30, 1997 and 1998, respectively. The increase in the average yield is
due to a decrease in the percentage of installment contracts which were in
non-accrual status as well as improvements in collection levels on non-accrual
installment contracts.
Premiums earned increased, as a percent of total revenue, from 7.6% and 6.4% for
the three and nine months ended September 30, 1997 to 8.3% and 7.5% for the same
periods in 1998. Premiums on the Company's service contract program are earned
on a straight-line basis over the life of the service contracts. Premiums
reinsured under the Company's credit life and collateral protection insurance
programs are earned over the life of the contracts using the pro rata and
sum-of-digits methods. As a result of these revenue recognition
-6-
<PAGE> 9
methods, premiums earned decreased at a slower rate than the decrease in finance
charges. In addition, the increase is due to an increase in the penetration rate
of the Company's service contract and credit life insurance programs.
Earned dealer enrollment fees decreased, as a percent of total revenue, from
4.3% and 4.4% for the three and nine months ended September 30, 1997 to 2.1% and
2.9% for the same periods in 1998. The decreases are due to a decline in the
number of new dealers enrolling in the Company's financing program. The Company
has become more selective with respect to the enrollment of new dealers in an
effort to improve the performance of its portfolio of installment contracts
receivable.
In July 1998, the Company recognized a net gain on sale of advance receivables
of approximately $685,000. The gain resulted from the securitization of dealer
advances having a carrying amount of approximately $56 million. See
"Liquidity and Capital Resources". The gain represents the difference between
the sale proceeds to the Company, net of transaction costs, and the Company's
carrying amount of the dealer advances, plus the present value of the estimated
future excess cash flows to be received by the Company. In determining the gain
on sale of advance receivables, the Company assumed an excess cash flow discount
rate of 15%, cumulative credit losses of 14% and an assumed interest rate on the
underlying debt of 7.5%. The present value of such estimated excess cash flows
has been recorded by the Company as a retained interest in securitization of
$12.7 million as of September 30, 1998. The installment contracts supporting the
dealer advances include contracts with origination dates ranging from July 1990
to June 1998, with a weighted average age of 15 months. The amount of such
contracts included on the Company's balance sheet as of June 30, 1998 was $98.6
million, of which $43.8 million was in non-accrual status. In addition, the
advances are supported by installment contracts which had been previously
written off for financial statement purposes. The excess cash flows result from
the amount by which projected collections on the installment contracts less the
monthly servicing fee exceeds i) the principal and interest to be paid to the
investors in the asset-backed securities and ii) the amount of dealer holdback
due to dealers. In addition to excess cash flows, the Company earns monthly
servicing fee income equal to 4% of the collections of the contributed
installment contracts receivable. Except for the servicing fee and amounts
relating to dealer holdback payments, the Company will not receive any portion
of collections on the installment contracts receivable until the underlying
indebtedness has been repaid in full.
Other income increased, as a percent of total revenue, from 17.3% and 16.8% for
the three and nine months ended September 30, 1997 to 22.3% and 18.7% for the
same periods in 1998. The increases are primarily due to i) revenues from the
Company's automobile auction business which the Company began operating in June
1998; ii) an increase in revenues from the Company's credit reporting subsidiary
and iii) servicing fees and interest earned on the retained interest in
securitization resulting from the Company's securitization of advance
receivables in July 1998. The increases are offset by decreases in fees earned
on third party service contract products offered by dealers on installment
contracts, as the volume of this business has declined proportionately with the
decline in contract originations.
SALARIES AND WAGES. Salaries and wages, as a percent of total revenue, increased
from 10.5% and 9.7% for the three and nine months ended September 30, 1997 to
18.9% and 15.3% for the same periods in 1998. The increase for the three month
period is primarily due to salaries and wages at the Company's automobile
auction business which the Company began operating in June 1998. In addition,
the increase for the three month period is due to increases in the Company's
average wage rates necessary to attract and retain quality personnel. The
increase for the nine month period is primarily due to increases in the
Company's average wage rates. To a lesser extent, the increase for the nine
month period is due to salaries and wages at the Company's automobile auction
business and to information technology personnel added
-7-
<PAGE> 10
to maintain the Company's new computer systems and applications.
GENERAL AND ADMINISTRATIVE. General and administrative expenses, as a percent of
total revenue, increased from 12.0% and 11.3% for the three and nine months
ended September 30, 1997 to 21.2% and 19.2% for the same periods in 1998.
Increases in general and administrative expenses include increases in (i) legal
fees and settlement provisions resulting from an increase in the frequency and
magnitude of litigation against the Company; (ii) depreciation and amortization
primarily resulting from the addition of new computer systems in 1997 and (iii)
audit fees charged by the Company's independent accountants. In addition, the
increase results from general and administrative expenses at the Company's
automobile auction business.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, the Company is currently a defendant in a class action
proceeding in the United States District Court for the Western District of
Missouri seeking money damages resulting from multiple violations of state and
federal consumer protection laws (the "Missouri Litigation"). On August 4, 1998,
the Court granted partial summary judgment on liability in favor of the
plaintiffs based upon the Court's finding of certain violations while denying
summary judgment on certain other claims. The Court also entered a number of
permanent injunctions restraining the Company from collecting the amounts found
to be uncollectible. The Court also ruled in favor of the Company on certain
claims raised by class plaintiffs. Because the entry of an injunction is
immediately appealable as of right, the Company has appealed the summary
judgment order to the United States Court of Appeals for the Eighth Circuit and
the Company believes that its appeal has substantial merit. Plaintiffs have
filed a cross appeal. A trial on the remaining claims, as well as on damages, is
currently scheduled to commence on January 25, 1999. The Company has assessed
its exposure related to this litigation and has recorded a reserve based on this
assessment for the nine months ended September 30, 1998. Should the Company's
appeals be unsuccessful, the potential damages could have a material impact on
the Company's financial position, liquidity and results of operations.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses, as a percent
of total revenue, decreased from 156.7% and 61.8% for the three and nine months
ended September 30, 1997 to 10.4% and 12.6% for the same periods in 1998. The
provision for the three and nine months ended September 30, 1997 included 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.
The provision for credit losses consists of two components: (i) a provision for
loan losses for the earned but unpaid servicing fees or finance charges
recognized on contractually delinquent installment contracts and (ii) a
provision for losses on advances to dealers that are not expected to be
recovered through collections on the related installment contract receivable
portfolio. The decreases were primarily due to lower provisions needed for
advance losses, based on the Company's static pool analysis. Advance balances
are continually reviewed by management utilizing the Company's loan servicing
system which allows management to estimate future collections for each dealer
pool using historical loss experience and a dealer by dealer static pool
analysis. In addition, the decreases were also due to lower provisions needed
for loan losses primarily resulting from a decrease in the percent of
non-accrual installment contracts receivable, which were 42.2% and 32.1% of
gross receivables as of September 30, 1997 and 1998, respectively.
SALES AND MARKETING. Sales and marketing expenses, as a percent of total
revenue, were 5.1% and
-8-
<PAGE> 11
4.8% during the three and nine months ended September 30, 1997 and 4.2% and 4.8%
during the same periods in 1998. The decrease for the three month period is
primarily due to reductions in sales commission expenses as a result of the
decrease in the enrollment of new dealers into the Company's financing program
and reductions in the Company's total sales force. The Company has become more
selective with respect to the enrollment of new dealers in an effort to improve
the performance of its portfolio of installment contracts receivable.
PROVISION FOR CLAIMS. The amount provided for insurance and service contract
claims, as a percent of total revenue, was 2.7% and 2.2% during the three and
nine months ended September 30, 1997 and was 2.7% and 2.6% during the same
periods in 1998. The increase for the nine month period corresponds with the
increase, as a percent of total revenue, in premiums earned from 6.4% in 1997 to
7.5% in 1998.
The Company has established claims reserves 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 17.5% and 15.4% for the three and nine months ended September 30, 1997 to
17.8% and 18.2% for the same periods in 1998. Total interest expense decreased
from $7.2 million for the three month period ended September 30, 1997 to $5.9
million for the same period in 1998, and increased from $19.6 million for the
nine month period ended September 30, 1997 to $20.1 million for the same period
in 1998. The $1.3 million decrease for the three month period is primarily the
result of a decrease in the amount of average outstanding borrowings, which
resulted from i) the positive cash flow generated primarily from collections on
installment contracts receivable exceeding cash advances to dealers and payments
of dealer holdbacks and ii) $49.3 million raised in July 1998 from the
securitization of advance receivables. The decrease for the three month period
was partially offset by higher average interest rates in 1998. The increase for
the nine month period is primarily due to higher average interest rates in 1998
and increased amortization of up-front fees and costs relating to the Company's
indebtedness. The increase in the average interest rate is primarily the result
of increases in the Company's Eurocurrency based borrowing and facility fee
margins under its credit agreement with a commercial bank syndicate. In
accordance with the terms of the credit agreement, the Eurocurrency and facility
fee margins increased from 82.5 basis points to 120 basis and from 22.5 basis
points to 40 basis points annually, respectively, on October 22, 1997 as a
result of 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. In
addition, the Company's credit rating was further downgraded on June 24, 1998 by
Moody's Investor Service from Ba2 to Ba3, resulting in an increase in the
Eurocurrency and facility fee margins from 120 basis points to 140 basis points
and from 40 basis points to 60 basis points annually, respectively, in
accordance with the terms of the credit agreement. On July 30, 1998, the credit
agreement was amended, pursuant to which the Eurocurrency based borrowing margin
thereunder was fixed at 140 basis points and the facility fee margin was fixed
at 60 basis points annually. In connection with the Company's $50 million
securitization of advance receivables, the Company's note purchase agreements
with various insurance companies were amended on July 1, 1998. The amendments
provided for a 25 basis point increase in the interest rate on outstanding
borrowings under the note purchase agreements. See "Liquidity and Capital
Resources".
OPERATING INCOME(LOSS). As a result of the aforementioned factors, operating
income(loss) increased from ($42.7) million and ($6.5) million for the three and
nine months ended September 30, 1997 to $8.2 million and $30.1 million for the
same periods in 1998.
FOREIGN EXCHANGE LOSS. The Company incurred foreign exchange losses of $7,000
and $22,000 for the three and nine months ended September 30, 1997 and foreign
exchange losses of $77,000 and
-9-
<PAGE> 12
$72,000 for the same periods in 1998. The losses result from 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 (CREDIT) FOR INCOME TAXES. The provision(credit) for income taxes
increased from ($15.0) million and ($2.9) million during the three and nine
months ended September 30, 1997 to $2.6 million and $10.1 million during the
same periods in 1998. The increase is due to a higher level of pretax income in
1998.
For the three months ended September 30, the effective tax rate was 35.2% in
1997 and 31.5% in 1998. The decrease in the effective tax rate is primarily due
to a higher level of pretax income earned by the Company's United Kingdom
subsidiary, which is taxed at a lower rate.
INSTALLMENT CONTRACTS RECEIVABLE
The following table summarizes the composition of installment contracts
receivable at the dates indicated:
<TABLE>
<CAPTION>
AS OF AS OF
(DOLLARS IN THOUSANDS) 12/31/97 9/30/98
-------- -------
(UNAUDITED)
<S> <C> <C>
Gross installment contracts receivable................... $1,254,858 $ 871,704
Unearned finance charges................................. (196,357) (129,412)
Unearned insurance premiums, insurance
reserves, and fees.................................. (8,683) (8,504)
---------- ----------
Installment contracts receivable......................... $1,049,818 $ 733,788
========== =========
</TABLE>
A summary of changes in gross installment contracts receivable is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
(DOLLARS IN THOUSANDS) 9/30/97 9/30/98 9/30/97 9/30/98
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Balance - beginning of period .......................... $1,420,620 $1,040,670 $1,251,139 $1,254,858
Gross amount of installment
contracts accepted .................................. 241,890 121,487 775,531 477,967
Gross installment contracts underlying
advance receivables securitized ..................... -- (98,591) -- (98,591)
Cash collections on installment
contracts receivable ................................ (128,130) (113,293) (386,936) (389,536)
Charge offs (a) ........................................ (63,641) (80,959) (165,235) (377,637)
Currency translation ................................... (6,717) 2,390 (10,477) 4,643
---------- ---------- ---------- ----------
Balance - end of period ................................ $1,464,022 $ 871,704 $1,464,022 $ 871,704
========== ========== ========== ==========
</TABLE>
(a) 1998 charge offs based on nine month recency method; 1997 based on one year
recency method.
-10-
<PAGE> 13
DEALER HOLDBACKS
The following table summarizes the composition of dealer holdbacks at the dates
indicated:
<TABLE>
<CAPTION>
AS OF AS OF
(DOLLARS IN THOUSANDS) 12/31/97 9/30/98
-------- -------
(UNAUDITED)
<S> <C> <C>
Dealer holdbacks......................................... $1,002,033 $695,689
Less: Advances (net of reserves of $16,369
and $19,655 at December 31, 1997 and
September 30, 1998, respectively)..................... (564,968) (442,194)
----------- --------
Dealer holdbacks, net.................................... $ 437,065 $253,495
========== ========
</TABLE>
CREDIT POLICY AND EXPERIENCE
When an installment contract is originated, 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 installment 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. 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 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 previously recognized on contractually
delinquent accounts.
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
material payment has been received for nine months are charged off against
dealer holdbacks, unearned finance charges and the allowance for credit losses.
During the third quarter of 1997, the Company changed its non-accrual policy
from 120 days on a contractual basis to 90 days on a recency basis and, during
the fourth quarter of 1997, changed its charge off policy to nine months on a
recency basis from one year on a recency basis. The Company believes these
changes allow for earlier recognition of under performing dealer pools.
The following tables set forth information relating to charge offs, the
allowance for credit losses and the
-11-
<PAGE> 14
reserve on advances.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
(DOLLARS IN THOUSANDS) 1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Charged against dealer holdbacks ....................... $50,978 $64,759 $132,201 $302,087
Charged against unearned
finance charges ..................................... 11,302 14,848 29,435 68,329
Charged against allowance
for credit losses ................................... 1,361 1,352 3,599 7,221
------- ------- -------- --------
Total contracts charged off ............................ $63,641 $80,959 $165,235 $377,637
======= ======= ======== ========
Net charge offs against the
reserve on advances ................................. $ 3,513 $ 8,240 $ 4,834 $ 8,240
======= ======= ======== ========
</TABLE>
The 1998 contract charge offs are based on a nine month recency method. The 1997
contract charge offs are based on a one year recency method. The increase in net
charge offs against the reserve on advances is primarily due to the application
of the Company's advance charge off methodology to the Company's United Kingdom
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
(DOLLARS IN THOUSANDS) 1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ALLOWANCE FOR CREDIT LOSSES
Balance - beginning of period ...................... $14,556 $9,174 $12,195 $13,119
Provision for loan losses .......................... 4,091 922 8,706 2,827
Allowance on installment contracts
underlying advance receivables
securitized ..................................... -- (1,107) -- (1,107)
Charge offs ........................................ (1,361) (1,352) (3,599) (7,221)
Currency translation ............................... (75) 24 (91) 43
------- ------ ------- -------
Balance - end of period ............................ $17,211 $7,661 $17,211 $ 7,661
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
(DOLLARS IN THOUSANDS) 1997 1998 1997 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
RESERVE ON ADVANCES
Balance - beginning of period ...................... $19,816 $25,274 $ 8,754 $16,369
Provision for advance losses ....................... 59,980 2,516 70,087 11,073
Advance reserve fees ............................... 1,231 7 3,505 174
Charge offs ........................................ (3,513) (8,240) (4,834) (8,240)
Currency translation ............................... (206) 98 (204) 279
------- ------- ------- -------
Balance - end of period ............................ $77,308 $19,655 $77,308 $19,655
======= ======= ======= =======
</TABLE>
-12-
<PAGE> 15
<TABLE>
<CAPTION>
AS OF
-----
SEPTEMBER 30
------------
1997 1998
---- ----
<S> <C> <C>
Allowance for credit losses as a percent of gross
installment contracts receivable........................... 1.2% 0.9%
Reserve on advances as a percent of advances (a).............. 12.3% 4.3%
Gross dealer holdbacks as a percent of gross
installment contracts receivable........................... 79.9% 79.8%
</TABLE>
(a) The decrease in the reserve on advances as a percent of advances relates to
the provision recorded in the third quarter of 1997 and subsequently charged off
in the fourth quarter of 1997 based on the Company's advance charge off
methodology.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for capital is to fund cash advances made to
dealers in connection with the acceptance of installment contracts and for the
payment of dealer holdbacks to dealers who have repaid their advance balances.
These cash outflows to dealers decreased from $417.0 million during the nine
months ended September 30, 1997 to $236.0 million during the same period in
1998. These amounts have historically been funded from cash collections on
installment contracts, cash provided by operating activities and draws under the
Company's credit agreements. During the first nine months of 1998, the Company
paid down approximately $134.2 million on its credit agreement with a commercial
bank syndicate and repaid $12.7 million on its outstanding senior notes. The
positive cash flow during the period is primarily a result of collections on
installment contracts receivable exceeding cash advances to dealers and payments
of dealer holdbacks. In addition, the Company raised approximately $49.3 million
through the securitization of dealer advances during the third quarter of 1998.
To a lesser extent, the positive cash flow is a result of refunds received from
the overpayment of 1997 U.S. federal income taxes. During the fourth quarter of
1997 and first nine months of 1998, 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 have resulted in reduced levels of
originations and cash advances to dealers in the fourth quarter of 1997 and the
first nine months of 1998, a trend which is expected to continue in future
periods. To the extent that this trend continues, the Company could continue to
experience a decrease in its need for capital in future periods.
At July 1, 1998, the Company had a $200 million credit agreement with a
commercial bank syndicate. Pursuant to this agreement, upon the completion of
the $50 million securitization of advance receivables, the amount of this
facility was reduced to $160 million. On July 31, 1998, this facility was
amended to provide for a $115 million credit agreement with a commitment period
through June 15, 1999. As of September 30, 1998, there was approximately $78.5
million outstanding under this facility. As provided for by this agreement, on
October 19, 1998, an additional lender joined the commercial bank syndicate
thereby increasing the size of the facility from $115 to $125 million. The
facility has a commitment period through June 15, 1999 and is subject to annual
extensions for additional one year periods at the request of the Company with
the consent of each of the banks in the facility. The agreement provides that
the Company must execute documents to secure borrowings under the credit
agreement with a lien on most of the Company's assets on an equal and ratable
basis with the Company's unsecured senior notes by November 30, 1998. The
agreement also provides that interest is payable at the Eurocurrency rate plus
140 basis points, or at the prime rate. The Eurocurrency borrowings may be fixed
for periods up to six months. The credit agreement has certain restrictive
covenants, including limits on the ratio of the Company's debt-to-equity, debt
to
-13-
<PAGE> 16
advances, debt to gross installment contracts receivable, advances to
installment contracts receivable, 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.
On July 8, 1998, the Company completed a $50 million securitization of advance
receivables. Pursuant to this transaction, the Company contributed dealer
advances having a carrying amount of approximately $56 million to a wholly owned
special purpose corporation (the SPC) and received approximately $49.3 million
in financing from an institutional investor. The financing, which is nonrecourse
to the Company, bears interest at a floating rate equal to the thirty day
commercial paper rate plus 1% with a maximum of 7.5% and is anticipated to fully
amortize within thirty months. The financing is secured by the dealer advances,
the rights to collections on the related installment contracts receivable
contributed to the SPC and certain related assets up to the sum of the related
dealer advance and the Company's servicing fee. The Company will receive a
monthly servicing fee equal to 4% of the collections of the contributed
installment contracts receivable. Except for a servicing fee and amounts
relating to dealer holdback payments, the Company will not receive any portion
of collections on the installment contracts receivable until the underlying
indebtedness has been repaid in full. The proceeds of the securitization were
used to reduce indebtedness under the Company's credit agreement.
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 expects 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 fund cash
advances to dealers in connection with the acceptance of installment contracts
would be limited to earnings from operations and cash flow from the collection
of installment contracts. As of November 13, 1998, the Company had approximately
$84.3 million outstanding on its $125 million credit agreement. Following the
damage phase in January 1999 and pending the appeal of the Missouri Litigation,
the Company may be required to post a bond or letter of credit, which would
reduce availability under the Company's credit agreement. Based upon anticipated
cash flows, management believes that amounts available under its credit
agreement, cash flow from operations and other financing alternatives available
will provide sufficient financing for future operations.
YEAR 2000 UPDATE
The year 2000 issue is the result of computer programs and microprocessors using
two digits rather than four to define the applicable year (the "Year 2000
Issue"). Such programs or microprocessors may recognize a date using "00" as the
year 1900 rather than the year 2000. This could result in system failures or
miscalculations leading to disruptions in the Company's activities and
operations. If the Company or third parties with which it has a significant
relationship fail to make necessary modifications, conversions and contingency
plans on a timely basis, the Year 2000 Issue could have a material adverse
effect on the Company's business, financial condition and results of operations.
However, the effect cannot be quantified at this time because the Company cannot
accurately estimate the magnitude, duration or ultimate impact of noncompliance
by its systems or those of vendors and other third parties. The Company believes
that its competitors face a similar risk. Although the risk is not presently
quantifiable, the disclosure below is
-14-
<PAGE> 17
intended to summarize the Company's actions to minimize its risk from the Year
2000 Issue. Programs that will operate in the year 2000 unaffected by the change
in year from 1999 to 2000 are referred to herein as "year 2000 compliant".
STATE OF READINESS. 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. The ACS
and LSS systems went into production in 1997 and were developed by the Company
in Oracle 7.3 and Oracle Forms 4.5 which are year 2000 compliant. The CS system
is a third party software package. The vendor has indicated that it has a
version of the software that is year 2000 compliant to which the Company plans
to upgrade by December 31, 1998.
The Company employs one major computer system in its United Kingdom operations
which is a third party software package. The vendor has certified to the Company
that the system is year 2000 compliant. The Company has begun testing on this
system as well as all other non-mission critical systems to ensure year 2000
compliance, which it expects to have completed by December 31, 1998.
The Company has completed a comprehensive inventory of all other computer
hardware, software, third party vendors and other non-information technology
systems. All items identified were prioritized and assigned to a responsible
party to investigate and ensure that the item becomes year 2000 compliant by the
end of 1998. At this time, the Company continues along this plan and anticipates
that 90% of all mission critical systems will be compliant by December 31, 1998.
The remaining 10% of the mission critical systems and all other non-mission
critical systems are anticipated to be year 2000 compliant by March 31, 1999.
COSTS. The Company expects that all software installations or other
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, the
Company anticipates spending no more than $100,000 in its efforts to become year
2000 compliant, of which approximately $10,000 has been spent to date. Estimates
of time, cost and risks are based on currently available information.
Developments that could affect estimates include, without limitation, the
availability of trained personnel, the ability to locate and correct all
noncompliant systems, cooperation and remediation success of third parties
material to the Company, and the ability to correctly anticipate risks and
implement suitable contingency plans in the event of system failures at the
Company or third parties.
RISKS. Because the Company expects that the systems within its control will be
year 2000 compliant before the end of 1999, the Company believes that the most
reasonably likely worst case scenario is a compliance failure by a third party
upon which the Company relies. Such a failure would likely have an effect on the
Company's business, financial condition and results of operations. The magnitude
of that effect however, cannot be quantified at this time because of variables
such as the type and importance of the third party, the possible effect on the
Company's operations and the Company's ability to respond. Thus, there can be no
assurance that there will not be a material adverse effect on the Company if
such third parties do not remediate their systems in a timely manner. In
addition, it is possible that the Company could experience a failure of a
non-mission critical system for a period of time, which could result in a minor
disruption in some internal operations.
CONTINGENCY PLANS. The Company plans to document its preliminary contingency
plans by
-15-
<PAGE> 18
December 31, 1998 and to finalize these plans no later than March 31, 1999.
Readers are cautioned that forward-looking statements contained in the Year 2000
Update should be read in conjunction with the Company's disclosures under the
heading "Forward-Looking Statements".
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains a number of forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 with respect to expectations for future periods which are subject to
various risks and uncertainties. The risks and uncertainties are detailed from
time to time in reports filed by the Company with the Securities and Exchange
Commission, including forms 8-K, 10-Q, and 10-K, and include, among others,
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, year
2000 compliance by the Company or third parties to the Company, adverse changes
in the automobile or finance industries or in the non-prime consumer finance
market, the Company's ability to maintain or increase the volume of installment
contracts accepted and historical collection rates and the Company's ability to
complete various financing alternatives.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
-16-
<PAGE> 19
PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997 and the Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, the Company is currently a defendant in a class action
proceeding in the United States District Court for the Western District of
Missouri seeking money damages resulting from multiple violations of state and
federal consumer protection laws (the "Missouri Litigation"). On August 4, 1998,
the Court granted partial summary judgment on liability in favor of the
plaintiffs based upon the Court's finding of certain violations while denying
summary judgment on certain other claims. The Court also entered a number of
permanent injunctions restraining the Company from collecting the amounts found
to be uncollectible. The Court also ruled in favor of the Company on certain
claims raised by class plaintiffs. Because the entry of an injunction is
immediately appealable as of right, the Company has appealed the summary
judgment order to the United States Court of Appeals for the Eighth Circuit and
the Company believes that its appeal has substantial merit. Plaintiffs have
filed a cross appeal. A trial on the remaining claims, as well as on damages, is
currently scheduled to commence on January 25, 1999. Should the Company's
appeals be unsuccessful, the potential damages could have a material impact on
the Company's financial position, liquidity and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits following the signature page.
(b) Reports on Form 8-K
The Company was not required to file a current report on Form 8-K
during the quarter ended September 30, 1998 and none were filed
during that period.
-17-
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) CREDIT ACCEPTANCE CORPORATION
/S/ BRETT A. ROBERTS
--------------------------------------------
BRETT A. ROBERTS
Executive Vice President and Chief Financial Officer
November 13, 1998
(Duly Authorized Officer and Principal Financial Officer)
/S/ JOHN P. CAVANAUGH
--------------------------------------------
JOHN P. CAVANAUGH
Corporate Controller and Assistant Secretary
November 13, 1998
(Principal Accounting Officer)
-18-
<PAGE> 21
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- - ------- -----------
10(o)(2) Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended and restated September 21, 1998.
27 Financial Data Schedule
-19-
<PAGE> 1
CREDIT ACCEPTANCE CORPORATION
STOCK OPTION PLAN FOR DEALERS
AS AMENDED AND RESTATED
9/21/98
1. Purpose. The purpose of the Credit Acceptance Corporation Stock
Option Plan for Dealers (the "Plan") is to promote the best interests of Credit
Acceptance Corporation (the "Company") and its shareholders by providing
additional incentive to its participating dealers to increase the number of
contracts submitted to the Company for servicing.
2. Eligibility. "Participants" in the Plan shall be each business
entity executing a Servicing Agreement with the Company pursuant to which
vehicle financing contracts are submitted by such business entity to the Company
(a "Servicing Agreement") and who are selected by the Board of Directors from
time to time to receive options; provided, that to the extent a business entity
which has executed a Servicing Agreement submits vehicle financing contracts
originating from vehicle sales at more than one geographic location, each
location shall be considered a separate Participant for purposes of determining
eligibility to receive Century Options (as defined in Section 5).
3. Administration. The Plan shall be administered by the Board of
Directors of the Company according to its terms. The Board of Directors shall
interpret the Plan, prescribe, amend, and rescind rules and regulations relating
to the Plan, and make all other determinations necessary or advisable for its
administration. The decision of the Board of Directors on any question
concerning the interpretation of the Plan or any option granted under the Plan
shall be final and binding upon all Participants. The Board of Directors may
delegate to one or more officers of the Company, or a committee of such
officers, the authority, subject to Section 9 and such terms and limitations as
the Board of Directors shall determine, described in this Section 3 to
administer the Plan on behalf of the Board of Directors.
4. Stock. The stock subject to options under the Plan shall be the
Common Stock of the Company ("Common Stock") and may be either authorized and
unissued shares or shares reacquired by the Company. The total amount of Common
Stock for which options may be granted under the Plan shall not exceed 1,000,000
shares (as adjusted for the December 1994 2-for-1 stock split), subject to
adjustment in accordance with Section 7. Shares subject to any forfeited,
cancelled or expired portion of an option granted under the Plan shall be
available for purchase upon exercise of subsequent option grants under the Plan.
5. Option Grants.
(a) Discretionary Option Grants. Subject to the limitations
set forth in the Plan, the Board of Directors may from time to time grant to
Participants options for such number of shares and having such terms and
conditions as the Board of Directors may determine in its discretion.
(b) Automatic Grants. Until the Plan terminates in accordance
with Section 9 (by Board action or otherwise) or shares are no longer available
under the Plan, (i) a Participant shall receive a grant of an option to purchase
1,000 shares of Common Stock as of the last day of the calendar quarter in which
the Company processes and accepts the 100th Financing Contract (as defined
below) so accepted from such Participant during the calendar year, and (ii) a
Participant shall
<PAGE> 2
receive an additional grant of an option to purchase 200 shares of Common Stock
for each additional 100 Financing Contracts processed and accepted by the
Company during the calendar year as of the last day of the calendar quarter in
which the Company processes and accepts from the Participant the Financing
Contract which is an integral multiple of 100 (i.e. the 200th, 300th, 400th
etc.); provided, that with respect to any Participant which is an "affiliate"
(as such term is defined under the federal securities laws), any option to be
granted to such affiliate under this Section 5(b) shall, in lieu of being
granted to such affiliate, be granted to an employee or employees of such
affiliate designated by such affiliate and references in the Plan to
"Participant(s)" shall include such employees unless the context otherwise
requires. The numbers of shares set forth in the preceding sentence shall be in
effect on and after December 20, 1994. Options granted under this Section 5(b)
are referred to herein as "Century Options". A Century Option shall become
exercisable in three equal annual installments beginning on the first
anniversary of the date of grant, which shall be the last day of the calendar
quarter in which the Company accepted the 100th financing contract (or integral
multiple thereof) from such Participant. For purposes of this Section 5, a
"Financing Contract" shall mean a vehicle financing contract submitted to the
Company during the applicable calendar year pursuant to a Servicing Agreement
and meeting the Company's normal advance criteria.
(c) Each option granted under the Plan shall have the
following terms:
(i) The exercise price per share of an option shall
be equal to the fair market value of the Common Stock on the date of grant.
"Fair Market Value" shall mean the average of the high and low sale prices per
share of Common Stock reported in the Wall Street Journal for the last preceding
day on which the Common Stock was traded prior to the date of grant.
(ii) Once exercisable, a Participant may exercise all
or part of an option by delivering written notice to the Company and tendering
payment for the portion of the option that the Participant wishes to exercise.
The purchase price for shares of Common Stock to be acquired upon exercise of an
option granted hereunder shall be paid in full in cash or by certified check,
bank draft or money order at the time of exercise.
(iii) An option shall terminate upon the earlier of:
(A) termination of the Participant's
Servicing Agreement by the Company
or the Participant; or
(B) the close of business on the fifth
anniversary of the date of grant; or
(C) with respect to options granted on
or after September 21, 1998, upon
receipt by the Participant of
written notice from the Company that
an event has occurred which gives
the Company the right to terminate
the Participant's Servicing
Agreement pursuant to the terms
thereof (regardless of whether such
Servicing Agreement is actually
terminated by the Company).
2
<PAGE> 3
(iv) An option may not be sold, assigned,
distributed, conveyed or otherwise transferred by a Participant by any means
(including, without limitation, by gift, dividend or operation of law) and shall
be exercised only by the Participant. Any purported transfer shall be null and
void.
(v) An option shall be a "non-qualified stock option"
and shall not constitute an "incentive stock option" under Section 422 of the
Internal Revenue Code of 1986, as amended.
6. Option Agreement. Each option granted under the Plan shall be
evidenced by an agreement setting forth the number of shares to which the option
relates, the exercise price and expiration date of the option and such other
terms as the Board of Directors may deem appropriate. Such agreement, which may
be a part of the Servicing Agreement or may be a separate writing, shall
reference the fact that the option is subject to the terms of the Plan and shall
be signed by the Participant and the Company.
7. Stock Dividend, Reclassification, Merger, Etc. The total amount of
Common Stock on which options may be granted under the Plan, and the number of
shares subject to and the exercise price of any outstanding option granted to a
Participant, shall be appropriately adjusted for any increase or decrease in the
number of outstanding shares of Common Stock resulting from payment of a stock
dividend on Common Stock, a subdivision or combination of shares of Common
Stock, or a reclassification of Common Stock. Except as provided below, in the
event of a Change of Control, each option shall be cancelled in exchange for
payment in cash of an amount equal to the excess, if any, of the Change of
Control Price over the exercise price thereof. Notwithstanding the immediately
preceding sentence, no cancellation, cash settlement or acceleration of vesting
shall occur with respect to any option if the Board of Directors reasonably
determines in good faith prior to the occurrence of a Change of Control that
such option shall be assumed, or new rights substituted therefor (such assumed
or substituted option hereinafter called an "Alternative Option"), in connection
with and immediately following such Change of Control, provided that any such
Alternative Option must:
(i) be excercisable for common stock which is traded
on an established securities market, or which will be so traded within sixty
(60) days of the Change of Control;
(ii) provide such Participant (or each Participant in
a class of Participants) with rights and entitlements substantially equivalent
to or better than the rights, terms and conditions applicable under such option,
including, but not limited to, an identical or better exercise or vesting
schedule and identical or better timing and methods of payment; and
(iii) have substantially equivalent economic value to
such option (determined at the time of the Change of Control).
A "Change of Control" shall mean (i) consummation of any merger or consolidation
with respect to which the Company or any parent of the Company is a constituent
corporation (other than a transaction for the purpose of changing the Company's
corporate domicile), any liquidation or dissolution of the Company or any sale
of all or substantially all of the Company's assets or (ii) a
3
<PAGE> 4
change in the identity of a majority of the members of the Company's Board of
Directors within any twelve-month period, which change or changes are not
recommended by the incumbent directors immediately prior to any such change or
changes.
"Change of Control Price" means the highest price per share of the Company's
Common Stock offered in conjunction with any transaction resulting in a Change
of Control (as determined in good faith by the Board of Directors if any part of
the offered price is payable other than in cash) or, in the case of a Change of
Control occurring solely by reason of a change in the composition of the Board,
the highest Fair Market Value of the Stock on any of the 30 trading days
immediately preceding the date on which a Change of Control occurs.
8. Securities Laws. Anything to the contrary herein notwithstanding,
the Company's obligation to deliver stock pursuant to the exercise of an option
is subject to such compliance with federal, state and foreign laws, rules and
regulations applying to the authorization or issuance of securities as the
Company deems necessary or advisable. The Company shall not be required to
deliver stock pursuant to the exercise of an option unless and until it receives
satisfactory assurance that the issuance or transfer of such shares will not
violate any of the provisions of the Securities and Exchange Commission or the
rules and regulations promulgated thereunder, or the provisions of any state or
foreign law governing the issuance or transfer of securities, or that there has
been compliance with the provisions of such acts, rules, regulations and state
laws.
9. Termination and Amendment. The Board of Directors may terminate the
Plan, or the granting of options under the Plan, at any time in its sole
discretion. Following termination, no further options may be granted under the
Plan other than Century Options to which Participants become entitled prior to
the close of business on such date. Termination of the Plan shall not affect the
rights of holders of any outstanding options. The Board of Directors may amend
or modify the Plan at any time and from time to time, but no amendment or
modification of the Plan shall in any manner adversely affect any option granted
under the Plan without the consent of the Participant holding the option.
10. Rights Prior to Issuance of Shares. No Participant shall have any
rights as a shareholder with respect to any shares covered by an option until
the issuance of a stock certificate to the Participant for such shares. No
adjustment shall be made for dividends or other rights with respect to such
shares for which the record date is prior to the date such certificate is
issued.
11. Use of Proceeds. The proceeds received from the sale of Common
Stock pursuant to the Plan will be used for general corporate purposes of the
Company.
4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 10,503
<SECURITIES> 9,777
<RECEIVABLES> 733,788
<ALLOWANCES> 7,661
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 29,936
<DEPRECIATION> 9,016
<TOTAL-ASSETS> 809,859
<CURRENT-LIABILITIES> 0
<BONDS> 166,075
0
0
<COMMON> 462
<OTHER-SE> 271,192
<TOTAL-LIABILITY-AND-EQUITY> 809,859
<SALES> 0
<TOTAL-REVENUES> 110,374
<CGS> 0
<TOTAL-COSTS> 43,346
<OTHER-EXPENSES> 2,868
<LOSS-PROVISION> 13,900
<INTEREST-EXPENSE> 20,098
<INCOME-PRETAX> 30,090
<INCOME-TAX> 10,149
<INCOME-CONTINUING> 19,941
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,941
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.42
</TABLE>
