<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, 1999
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 (zip code)
offices)
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 Common Stock, par value $.01, on November
12, 1999 was 46,071,454.
<PAGE> 2
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Balance Sheets -
As of December 31, 1998 and September 30, 1999............................................ 1
Consolidated Income Statements -
Three and nine month periods ended September 30, 1998 and September 30, 1999.............. 2
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and September 30, 1999............................... 3
Consolidated Statement of Shareholders' Equity -
Nine months ended September 30, 1999...................................................... 4
Notes to Consolidated Financial Statements...................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................................... 7
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..................................... 16
</TABLE>
PART II. - OTHER INFORMATION
<TABLE>
<CAPTION>
<S> <C>
ITEM 1. LEGAL PROCEEDINGS............................................................................... 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 18
SIGNATURES ................................................................................................. 19
INDEX OF EXHIBITS............................................................................................. 20
EXHIBITS...................................................................................................... 21
</TABLE>
<PAGE> 3
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of As of
(Dollars in thousands) 12/31/98 9/30/99
------------- ------------
(Unaudited)
ASSETS:
<S> <C> <C>
Cash and cash equivalents.......................................... $ 13,775 $ 8,092
Investments........................................................ 10,191 11,139
Installment contracts receivable................................... 671,768 575,161
Allowance for credit losses........................................ (7,075) (4,765)
------------- -------------
Installment contracts receivable, net.......................... 664,693 570,396
Retained interest in securitization................................ 14,669 3,570
Floor plan receivables............................................. 14,071 17,491
Notes receivable................................................... 2,278 3,027
Property and equipment, net........................................ 20,627 19,925
Investment in operating leases, net................................ - 3,452
Income taxes receivable............................................ - 14,308
Other assets....................................................... 11,625 10,148
------------- -------------
TOTAL ASSETS............................................................ $ 751,929 $ 661,548
============= =============
LIABILITIES:
Senior notes....................................................... $ 136,165 $ 104,041
Lines of credit.................................................... 79,067 3,403
Mortgage loan payable to bank...................................... 3,566 8,365
Secured financing.................................................. - 42,552
Income taxes payable............................................... 776 -
Accounts payable and accrued liabilities........................... 22,423 26,873
Deferred dealer enrollment fees, net............................... 296 398
Dealer holdbacks, net.............................................. 222,275 205,932
Deferred income taxes, net......................................... 11,098 9,794
------------- -------------
TOTAL LIABILITIES....................................................... 475,666 401,358
------------- -------------
SHAREHOLDERS' EQUITY
Common stock....................................................... 463 460
Paid-in capital.................................................... 129,914 128,960
Retained earnings.................................................. 142,989 128,498
Accumulated other comprehensive income............................. 2,897 2,272
------------- -------------
TOTAL SHAREHOLERS' EQUITY............................................... 276,263 260,190
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $ 751,929 $ 661,548
============= =============
</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) 9/30/98 9/30/99 9/30/98 9/30/99
----------- ------------ ------------ ------------
REVENUE:
<S> <C> <C> <C> <C>
Finance charges............................. $ 21,708 $ 18,783 $ 77,657 $ 57,985
Premiums earned............................. 2,741 3,034 8,294 7,810
Gain on sale of advance receivables......... 685 - 685 -
Other income................................ 8,094 6,106 23,738 21,997
----------- ------------ ------------ ------------
Total revenue........................... $ 33,228 $ 27,923 $ 110,374 $ 87,792
----------- ------------ ------------ ------------
COSTS AND EXPENSES:
Operating expenses.......................... 14,706 12,612 43,346 41,622
Provision for credit losses................. 3,438 49,565 13,900 53,785
Provision for claims........................ 896 884 2,868 2,609
Valuation adjustment on retained interest
in securitization........................ - 13,000 - 13,517
Interest.................................... 5,923 3,673 20,098 12,472
----------- ------------ ------------ ------------
Total costs and expenses................ $ 24,963 $ 79,734 $ 80,212 $ 124,005
----------- ------------ ------------ ------------
Operating income(loss)........................... 8,265 (51,811) 30,162 (36,213)
----------- ------------ ------------ ------------
Gain on sale of subsidiary.................. - - - 14,720
Foreign exchange gain(loss)................. (77) 62 (72) 8
----------- ------------ ------------ ------------
Income(loss) before provision for income taxes... 8,188 (51,749) 30,090 (21,485)
Provision(credit) for income taxes.......... 2,577 (18,108) 10,149 (6,994)
----------- ------------ ------------ ------------
Net income(loss)................................. $ 5,611 $ (33,641) $ 19,941 $ (14,491)
=========== ============ ============ =============
Net income(loss) per common share:
Basic....................................... $ 0.12 $ (0.73) $ 0.43 $ (0.31)
=========== ============ ============ ============
Diluted..................................... $ 0.12 $ (0.73) $ 0.42 $ (0.31)
=========== ============ ============ ============
Weighted average shares outstanding:
Basic....................................... 46,243,115 46,214,489 46,156,448 46,272,303
=========== ============ ============ ============
Diluted..................................... 46,897,388 46,214,489 47,085,750 46,272,303
=========== ============ ============ ============
</TABLE>
2
<PAGE> 5
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Nine Months Ended
-----------------------------------
9/30/98 9/30/99
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income(Loss)....................................................... $ 19,941 $ (14,491)
Adjustments to reconcile net income to net cash
provided by operating activities -
Gain on sale of subsidiary.................................... - (14,720)
Credit for deferred income taxes.............................. (2,515) (1,304)
Depreciation and amortization................................. 2,933 3,370
Loss on retirement of property and equipment.................. - 42
Gain on sale of advance receivables........................... (1,261) -
Valuation adjustment on retained interest in securitization... - 13,517
Amortization on retained interest in securitization........... (467) (1,544)
Provision for credit losses................................... 13,900 53,778
Dealer stock option plan expense.............................. 103 98
Change in operating assets and liabilities -
Accounts payable and accrued liabilities...................... 4,909 4,814
Income taxes payable.......................................... 250 (776)
Income taxes receivable....................................... - (14,308)
Deferred dealer enrollment costs, net......................... (424) -
Deferred dealer enrollment fees, net.......................... (421) 102
Unearned insurance premiums, insurance reserves and fees...... (179) 200
Other assets.................................................. 15,096 637
------------- -------------
Net cash provided by operating activities................. 51,865 29,415
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on installment contracts receivable................ 288,970 242,923
Net proceeds from sale of advance receivables.......................... 49,275 -
Advances to dealers and payments of dealer holdback.................... (235,981) (219,821)
Operating lease acquisitions........................................... - (3,663)
Proceeds from sale of subsidiary....................................... - 16,147
Net sales(purchases) of investments held to maturity................... 196 (948)
Decrease (increase) in floor plan receivables.......................... 3,954 (3,420)
Increase in notes receivable........................................... (663) (749)
Purchase of property and equipment..................................... (3,014) (3,799)
Proceeds from sale of property and equipment........................... - 349
------------- -------------
Net cash provided by investing activities................. 102,737 27,019
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under mortgage loan payable to bank....... (174) 4,799
Net repayments under line of credit agreement.......................... (134,193) (75,664)
Repayments of senior notes............................................. (12,700) (32,124)
Proceeds from secured financing........................................ - 50,000
Repayments of secured financing........................................ - (7,448)
Repurchase of common stock............................................. - (1,429)
Proceeds from stock options exercised.................................. 482 374
------------- -------------
Net cash used in financing activities..................... (146,585) (61,492)
-------------- --------------
Effect of exchange rate changes on cash................... 2,137 (625)
------------- --------------
NET INCREASE (DECREASE) IN CASH............................................. 10,154 (5,683)
Cash and cash equivalents - beginning of period........................ 349 13,775
------------- -------------
Cash and cash equivalents - end of period.............................. $ 10,503 $ 8,092
============= =============
</TABLE>
3
<PAGE> 6
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Accumulated
Total Other
Shareholders' Comprehensive Common Paid In Retained Comprehensive
Equity Income Stock Capital Earnings Income
----------- ------------- ----------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998........... $ 276,263 $ 463 $ 129,914 $ 142,989 $ 2,897
Comprehensive income:
Net loss......................... (14,491) $ (14,491) (14,491)
------------
Other comprehensive income:
Foreign currency translation
adjustment................... (625) (625) (625)
Tax on other comprehensive
income..................... 219
------------
Other comprehensive income..... (406)
------------
Total comprehensive income.......... $ (14,897)
============
Repurchase and retirement of
common stock..................... (1,429) (3) (1,426)
Stock options exercised............. 374 374
Dealer stock option plan expense.... 98 98
--------- ----------- --------- ---------- -----------
Balance - September 30, 1999.......... $ 260,190 $ 460 $ 128,960 $ 128,498 $ 2,272
========= =========== ========= ========== ===========
</TABLE>
4
<PAGE> 7
CREDIT ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for interim periods are not necessarily
indicative of actual results achieved for full fiscal years. The consolidated
balance sheet at December 31, 1998 has been derived from the audited financial
statements at that date but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Certain amounts in the 1998 financial statements have been
reclassified to conform to the 1999 presentation. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. NET INCOME PER SHARE
Basic net income per share amounts are based on the weighted average
number of common shares outstanding. As the Company incurred a net loss for the
three and nine month periods ended September 30, 1999, common stock equivalents
would be anti-dilutive to earnings per share and have not been included in the
diluted weighted average shares outstanding. For the three and nine month
periods ended September 30, 1998, 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.
5
<PAGE> 8
3. BUSINESS SEGMENT INFORMATION
The Company operates in two reportable business segments: North
American Automotive Finance and U.K./Ireland Automotive Finance. Selected
segment information is set forth below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
9/30/98 9/30/99 9/30/98 9/30/99
------------- ------------- ------------- ------------
Total revenue:
<S> <C> <C> <C> <C>
North American Automotive Finance............... $ 25,554 $ 22,384 $ 88,248 $ 69,216
U.K./Ireland Automotive Finance................. 5,020 4,305 16,791 12,586
All Other....................................... 2,654 1,234 5,335 5,990
------------- ------------- ------------- -------------
$ 33,228 $ 27,923 $ 110,374 $ 87,792
============= ============= ============= =============
Income(loss) before interest and taxes:
North American Automotive Finance............... 11,000 (47,427) 40,120 (12,609)
U.K./Ireland Automotive Finance................. 2,700 (78) 9,311 3,978
All Other....................................... 411 (571) 757 (382)
------------- ------------- ------------- -------------
14,111 (48,076) 50,188 (9,013)
============= ============= ============= =============
Reconciliation of total income(loss) before interest
and taxes to consolidated income before provision
(credit) for income taxes:
Total income(loss) before interest and taxes.... 14,111 (48,076) 50,188 (9,013)
Interest expense................................ (5,923) (3,673) (20,098) (12,472)
------------- ------------- ------------- -------------
Consolidated income(loss) before provision(credit)
for income taxes..................................... $ 8,188 $ (51,749) $ 30,090 $ (21,485)
============= ============= ============= =============
</TABLE>
6
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1999
TOTAL REVENUE. Total revenue decreased from $33.2 million and $110.4 million for
the three and nine months ended September 30, 1998 to $27.9 million and $87.8
million for the same periods in 1999, representing decreases of 16.0% and 20.5%.
These decreases are primarily due to decreases in finance charge revenue
resulting from lower average installment contract receivable balances. The
decline in the average installment contract receivable balance is primarily the
result of collections on and charge offs of installment contracts exceeding
contract originations for the period. The volume of contract originations for
the Company's North American Automotive Finance Operations decreased from $106.2
million and $434.2 million for the three and nine months ended September 30,
1998 to $97.5 million and $317.6 million for the same periods in 1999. The
volume of contract originations for the Company's U.K./Ireland Automotive
Finance Operations increased from $14.9 million and $42.6 million for the three
and nine months ended September 30, 1998 to $40.9 million and $83.8 million for
the same periods in 1999. Based upon reviews of dealer profitability and
improvements in credit quality on installment contracts originated since the
fourth quarter of 1997, in an effort to increase origination volumes, the
Company has introduced new advance programs, both in the United States and
United Kingdom, which have increased the Company's overall advance rates. The
Company's advances to dealers and payment of dealer holdback, as a percent of
gross installment contracts accepted, increased from 51.5% and 49.4% for the
three and nine months ended September 30, 1998 to 56.9% and 54.8% for the same
periods in 1999. There can be no assurance that higher advance rates will lead
to increased origination volumes in future periods or that advance rates will
not need to be reduced in future periods based on continued review of dealer
profitability and credit quality. While management expects the increased advance
rates to have a positive effect on the Company's results, higher advance rates
increase the Company's risk of loss on dealer advances in future periods.
The average annualized yield on the Company's installment contract portfolio,
calculated using finance charge revenue divided by average installment contracts
receivable, was approximately 11.5% and 12.7% for the nine months ended
September 30, 1998 and 1999, respectively. The increase in the average yield is
due to a decrease in the percentage of installment contracts which were in
non-accrual status. The percentage of installment contracts which were in
non-accrual status was 32.1% and 23.6% as of September 30, 1998 and 1999,
respectively.
Premiums earned increased, as a percent of total revenue, from 8.2% and 7.5% for
the three and nine months ended September 30, 1998 to 10.9% and 8.9% for the
same periods in 1999. 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 methods,
premiums earned decreased at a slower rate than the decrease in finance charges.
Other income decreased, as a percent of total revenue, from 24.4% for the three
months ended September 30, 1998 to 21.9% for the same period in 1999 and
increased from 21.5% for the nine months ended September 30, 1998 to 25.1% for
the same period in 1999. The increase for the nine month period is primarily due
to i) revenue from the Company's auction services business which the Company
began operating in June 1998 and ii) servicing fees and interest earned on the
retained interest in securitization resulting from the Company's securitization
of advance receivables in July 1998. For the three month period ended September
30, 1999, the decrease is due to i) a decrease in revenues from the Company's
credit reporting subsidiary which was sold on May 7, 1999, ii) decreases in
earned dealer enrollment fees due to a decline in the number of dealers
enrolling in the Company's financing program and iii) a decrease 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
decrease in installment contract originations.
7
<PAGE> 10
OPERATING EXPENSES. Operating expenses, as a percent of total revenue, increased
from 44.3% and 39.3% for the three and nine months ended September 30, 1998 to
45.2% and 47.4% for the same periods in 1999. Operating expenses consist of
salaries and wages, general and administrative, and sales and marketing
expenses.
The increase, as a percent of revenue, is primarily due to an increase in
salaries and wages. Salaries and wages increased principally due to increases in
the Company's average wage rates necessary to attract and retain quality
personnel. In addition, salaries and wages increased, as a percent of revenue,
due to the Company's employee headcount not being reduced proportionately with
the decrease in revenues, as the Company has retained collection personnel in
order to improve collection levels.
For the nine month period, the increase is also due to an increase, as a percent
of revenue, in general and administrative expenses which, due to the fixed
nature of certain of these expenses, did not decline proportionately with the
decline in revenue.
To a lesser extent, the increase in operating expenses results from the
Company's purchase of the auction services business in June 1998, which requires
proportionately higher operating expenses than the Company's other businesses.
The increases in salaries and wages and general and administrative expenses are
partially offset by a decrease in sales and marketing expenses for the nine
months ended September 30, 1999. This expense decreased primarily due to
reductions in sales commissions as a result of lower contract origination
volumes and reductions in the Company's total sales force. The decrease in sales
and marketing expenses is also the result of a decrease in advertising due to
the termination of the Company's customer lead generating program.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses, as a percent
of total revenue, increased from 10.3% and 12.6% for the three and nine months
ended September 30, 1998 to 177.5% and 61.3% for the same periods in 1999. The
provision for credit losses consists of two components: (i) a provision for
losses on advances to dealers that are not expected to be recovered through
collections on the related installment contract receivable portfolio and (ii) a
provision for earned but unpaid revenue on installment contracts which were
transferred to non-accrual status during the period. The increase is primarily
due to higher provisions needed for losses on advances to dealers with respect
to loan pools originated in 1995, 1996 and 1997. The charge was necessary due to
collections in affected loan pools falling below estimates indicating further
impairment of advance balances associated with these pools. Based on these
trends, the Company recorded a pre-tax charge of $47.3 million for the nine
months ended September 30, 1999.
Management's current analysis of collection results leads to a conclusion that
the actual collection results will be below previous forecasts produced by its
static pool model. While previous loss curves indicated that loans originated in
1995, 1996 and 1997 would generate lower overall collection rates than loans
originated in prior years, recent trends in these loss curves indicate that
collection rates on these pools will be lower than previously estimated.
Management's analysis of the static pool data, after considering the effect of
this less favorable trend, continues to indicate that the business originated in
1998 and 1999 is of higher quality than that written in the prior three years.
The decreases are partially offset by the lower provisions needed for earned but
unpaid revenue primarily resulting from the decrease in the percent of
non-accrual installment contracts receivable which were 32.1% and 23.6% of gross
receivables as of September 30, 1998 and 1999, respectively.
PROVISION FOR CLAIMS. The amount provided for insurance and service contract
claims, as a percent of total revenue, increased from 2.7% and 2.6% during the
three and nine months ended September 30, 1998 to 3.2% and 3.0% during the same
periods in 1999. These increases correspond with increases, as a percent of
total revenue, in premiums earned from 8.2% and 7.5% for the three and nine
months ended September 30, 1998 to 10.9% and 8.9% for the same periods in 1999.
The Company has established claims reserves based on accumulated estimates of
claims reported but unpaid plus estimates of incurred but unreported claims.
VALUATION ADJUSTMENT ON RETAINED INTEREST IN SECURITIZATION. The Company
recorded a $13.0 million and $13.5 million valuation adjustment during the three
and nine months ended September 30, 1999,
8
<PAGE> 11
respectively, on the retained interest in securitization related to the
Company's July 1998 securitization. The retained interest in securitization
represents an accounting estimate based on several variables including the
amount and timing of collections on the underlying installment contracts
receivable, the amount and timing of projected dealer holdback payments and
interest costs. The Company regularly reviews the actual performance of these
variables against the assumptions used to record the retained interest. This
evaluation has led to a reassessment of the timing and amount of collections on
the installment contracts underlying the securitized advances and the resulting
$13.0 million write down during the three months ended September 30, 1999. The
Company will continue to assess the performance of the 1998 securitization and
make adjustments when necessary.
INTEREST EXPENSE. Interest expense, as a percent of total revenue, decreased
from 17.8% and 18.2% for the three and nine months ended September 30, 1998 to
13.2% and 14.2% for the same periods in 1999. The decrease in interest expense
is primarily the result of a decrease in the amount of average outstanding
borrowings, which results from i) the positive cash flow generated from
collections on installment contracts receivable exceeding cash advances to
dealers and payments of dealer holdbacks and ii) amounts raised in July 1998
from the securitization of advance receivables. The decrease was partially
offset by higher average interest rates during the nine months ended September
30, 1999. For the three months ended September 30, 1998 and 1999, the weighted
average interest rate decreased from 8.91% to 8.79%, respectively, and for the
nine months ended September 30, 1998 and 1999, the weighted average interest
rate increased from 8.41% to 8.93%, respectively. The decrease for the three
month period is primarily the result of the secured financing transaction
completed in July 1999 at a lower rate of interest than the indebtedness
replaced. The increase in the average interest rates for the nine month period
is the result of i) the impact of fixed borrowing costs, such as facility fees,
up front fees and other costs on average interest rates when average outstanding
borrowings are decreasing ii) a 25 basis point increase in the interest rate on
outstanding borrowings under the Company's senior notes resulting from
amendments to the note purchase agreements due to the Company's securitization
of advance receivables in July 1998 and iii) a decrease in line of credit
balances, which carry lower interest rates, as a percentage of total average
balance sheet debt.
OPERATING INCOME(LOSS). As a result of the aforementioned factors, operating
income(loss) decreased from $8.3 million and $30.1 million for the three and
nine months ended September 30, 1998 to ($51.8) million and ($36.2) million for
the same periods in 1999, representing decreases of 726.9% and 220.1%,
respectively.
GAIN ON SALE OF SUBSIDIARY. The Company recorded a pre-tax gain of $14.7 million
during the nine months ended September 30, 1999 from the sale of the Company's
credit reporting services subsidiary. The net proceeds from the sale were used
to reduce outstanding indebtedness under the Company's $125 million credit
facility.
FOREIGN EXCHANGE GAIN (LOSS). The Company incurred foreign exchange losses of
($77,000) and ($72,000) for the three and nine months ended September 30, 1998
and foreign exchange gains of $62,000 and $8,000 for the same periods in 1999.
The gains and 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
decreased from $2.6 million and $10.1 million during the three and nine months
ended September 30, 1998 to ($18.1) million and ($7.0) million during the same
periods in 1999. The decrease is primarily due to pre-tax losses in 1999. For
the nine months ended September 30, the effective tax rate was 33.7% in 1998 and
32.6% in 1999. The difference in the effective tax rate is primarily due to
approximately $900,000 of state income taxes incurred on the sale of the
Company's credit reporting subsidiary in 1999. The difference is also due to a
lower percentage of the Company's consolidated pretax income(loss) being earned
by the Company's United Kingdom subsidiary in 1999, where the statutory rate is
lower than the U.S. statutory federal tax rate.
9
<PAGE> 12
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) 12/31/98 9/30/99
- ---------------------- ------------- ------------
(Unaudited)
<S> <C> <C>
Gross installment contracts receivable.................................... $ 794,831 $ 682,978
Unearned finance charges.................................................. (114,617) (99,171)
Unearned insurance premiums, insurance reserves, and fees................. (8,446) (8,646)
-------------- -------------
Installment contracts receivable.......................................... $ 671,768 $ 575,161
============== =============
</TABLE>
A summary of changes in gross installment contracts receivable is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
(Dollars in thousands) 9/30/98 9/30/99 9/30/98 9/30/99
- ---------------------- ------------ ------------ ----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance - beginning of period................... $ 1,040,670 $ 695,074 $ 1,254,858 $ 794,831
Gross amount of installment contracts
accepted...................................... 121,487 137,316 477,967 401,292
Gross installment contracts securitized.......... (98,591) - (98,591) -
Cash collections on installment contracts
receivable.................................... (113,293) (99,063) (389,536) (315,047)
Charge offs...................................... (80,959) (55,874) (377,637) (195,155)
Currency translation............................. 2,390 5,525 4,643 (2,943)
------------- ------------ ------------ ------------
Balance - end of period.......................... $ 871,704 $ 682,978 $ 871,704 $ 682,978
============= ============ ============ ============
</TABLE>
DEALER HOLDBACKS
The following table summarizes the composition of dealer holdbacks at
the dates indicated:
<TABLE>
<CAPTION>
As of As of
(Dollars in thousands) 12/31/98 9/30/99
- ---------------------- ------------ --------------
(Unaudited)
<S> <C> <C>
Dealer holdbacks........................................................... $ 634,102 $ 544,355
Less: Advances (net of reserves of $19,954 and $3,832 at
December 31, 1998 and September 30, 1999, respectively).................. (411,827) (338,423)
------------ --------------
Dealer holdbacks, net...................................................... $ 222,275 $ 205,932
============ ==============
</TABLE>
CREDIT POLICY AND EXPERIENCE
When an installment contract is assigned to the Company by a
participating dealer, the Company generally pays a cash advance to the dealer.
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. The Company's loan servicing system allows the Company to
estimate future collections for each dealer pool using historical loss
experience and a dealer by dealer static pool analysis. As discussed previously,
the Company recorded a non-cash charge during the three months
10
<PAGE> 13
ended September 30, 1999 to reflect the impact of collections on loan
pools originated primarily in 1995, 1996 and 1997 falling below previous
estimates, indicating further impairment of advance balances associated with
these pools. While previous loss curves indicated that loans originated in 1995,
1996 and 1997 would generate lower overall collection rates than loans
originated in prior years, recent trends in these loss curves indicate that
collection rates on these pools will be lower than previously estimated.
Management's analysis of the static pool data, after considering the effect of
this less favorable trend, continues to indicate that business originated in
1998 and 1999 is of higher quality than that written in the prior three years.
Future reserve requirements will depend in part on the magnitude of the variance
between management's estimate of future collections and the actual collections
that are realized. The Company charges off dealer advances against the reserve
at such time and to the extent that the 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 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 revenue
on installment contracts which were transferred to non-accrual status during the
period. 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 material payment has been
received for nine months are 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
provision, which is a current expense, may be either greater or less than actual
charge offs.
The following tables set forth information relating to charge offs, the
allowance for credit losses, and the reserve on advances.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
(Dollars in thousands) 9/30/98 9/30/99 9/30/98 9/30/99
- ---------------------- ------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
CHARGE OFFS
<S> <C> <C> <C> <C>
Charged against dealer holdbacks.................. $ 64,759 $ 44,779 $ 302,087 $ 156,312
Charged against unearned finance charges.......... 14,848 10,309 68,329 35,781
Charged against allowance for credit losses....... 1,352 786 7,221 3,062
------------- ------------ ------------ ------------
Total contracts charged off....................... $ 80,959 $ 55,874 $ 377,637 $ 195,155
============= ============ ============ ============
Net charge offs against the reserve on advances... $ 8,240 $ 61,481 $ 8,240 $ 68,989
============= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
(Dollars in thousands) 9/30/98 9/30/99 9/30/98 9/30/99
- ---------------------- ------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
ALLOWANCE FOR CREDIT LOSSES
<S> <C> <C> <C> <C>
Balance - beginning of period.................... $ 9,174 $ 5,114 $ 13,119 $ 7,075
Provision for credit losses...................... 922 398 2,827 780
Allowance on securitized installment contracts... (1,107) - (1,107) -
Charge offs...................................... (1,352) (786) (7,221) (3,062)
Currency translation............................. 24 39 43 (28)
------------- ------------ ------------ ------------
Balance - end of period.......................... $ 7,661 $ 4,765 $ 7,661 $ 4,765
============= ============ ============ ============
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
(Dollars in thousands) 9/30/98 9/30/99 9/30/98 9/30/99
- ---------------------- ------------- ------------ ------------ ------------
(Unaudited) (Unaudited)
RESERVE ON ADVANCES
<S> <C> <C> <C> <C>
Balance - beginning of period.................... $ 25,274 $ 16,090 $ 16,369 $ 19,954
Provision for advance losses..................... 2,516 49,167 11,073 53,005
Advance reserve fees............................. 7 - 174 8
Charge offs...................................... (8,240) (61,481) (8,240) (68,989)
Currency translation............................. 98 56 279 (146)
------------- ------------ ------------ ------------
Balance - end of period.......................... $ 19,655 $ 3,832 $ 19,655 $ 3,832
============= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of
-----------------------
(Dollars in thousands) 9/30/98 9/30/99
- ---------------------- ------- -------
CREDIT RATIOS (Unaudited)
Allowance for credit losses as a percent of gross
<S> <C> <C>
installment contracts receivable.............. 0.9% 0.7%
Reserve on advances as a percent of advances..... 4.3% 1.1%
Gross dealer holdbacks as a percent of gross
installment contracts receivable.............. 79.8% 79.7%
</TABLE>
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 $236.0 million during
the nine months ended September 30, 1998 to $219.8 million during the same
period in 1999. These amounts have historically been funded from cash
collections on installment contracts, cash provided by operating activities and
borrowings under the Company's credit agreements. The Company maintains a
significant dealer holdback on installment contracts accepted which assists the
Company in funding its long-term cash flow requirements. During the first nine
months of 1999, the Company reduced the amount of its total balance sheet
indebtedness by $60.4 million. The positive cash flow during the period is
primarily a result of (i) collections on installment contracts receivable
exceeding cash advances to dealers and payments of dealer holdbacks and (ii)
proceeds from the sale of the Company's credit reporting services subsidiary.
The Company has a $125 million credit agreement with a commercial bank
syndicate. The facility has a commitment period through June 13, 2000 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 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 advances, debt to 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. Borrowings under the credit
agreement are secured through a lien on most of the Company's assets on an equal
and ratable basis with the Company's senior notes. As of September 30, 1999,
there was approximately $3.4 million outstanding under this facility.
The Company has obtained waivers from its lenders, including the holders of its
senior notes and the banks under its credit agreement, of compliance with the
fixed charge coverage ratio covenant in agreements relating to the Company's
indebtedness. The waivers were necessary as a direct result of the non-cash
charge recorded for credit losses related to dealer advances, as previously
discussed. Such waivers are effective through November 30, 1999. The Company is
in the process of negotiating longer term amendments to the agreements with its
lenders which are expected
12
<PAGE> 15
to be executed prior to the expiration of the waivers. Although the Company
believes the agreements will be modified to the Company's satisfaction, there
can be no assurance to that effect. The failure to modify the fixed charge
coverage ratio in such agreements prior to November 30, 1999 will, in the
absence of further waivers, result in a default under such agreements and will
require the Company to refinance the indebtedness thereunder. The Company
believes that it would be successful in refinancing amounts outstanding under
its senior notes and credit agreement, if necessary. However, such refinancing
could be completed on terms less favorable than those currently in place.
Failure to complete such refinancing or failure to obtain other financing
alternatives would have a material adverse effect on the Company's operations.
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.
In July 1999, the Company completed a secured financing of advance
receivables. Pursuant to this transaction, the Company contributed dealer
advances having a carrying amount of approximately $62.4 million and received
$50.0 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 70 basis points with a maximum rate of
7.5% and is anticipated to fully amortize within thirty months. The financing is
secured by the contributed dealer advances, the rights to collections on the
related installment contracts receivable and certain related assets up to the
sum of the contributed 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 the servicing fee
and payments due to dealers, 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 secured financing were
used to reduce indebtedness under the Company's credit facility.
On August 5, 1999, the Company's Board of Directors authorized a common
stock repurchase program of up to 1,000,000 shares of the Company's common
stock. The shares, which can be repurchased through the open market or in
privately negotiated transactions, represent approximately 2.2% of the
outstanding common shares. However, as a condition of the limited waiver for the
violation of the fixed coverage ratio covenant contained in the senior notes and
the credit agreement, the Company has agreed to suspend its stock repurchase
program until November 30, 1999. As of September 30, 1999, the Company had
repurchased 245,600 shares of its common stock pursuant to this authorization.
The Company repaid $23.9 million of principal on its senior notes in
the fourth quarter of 1999 which the Company funded from cash generated from
operations and amounts available under its $125 million credit agreement,
leaving $80.1 million of principal outstanding on its senior notes as of
November 15, 1999.
Based upon anticipated cash flows, management believes that amounts
available under its credit agreement, cash flow from operations and various
financing alternatives available will provide sufficient financing for current
debt maturities and for future operations. If the various financing alternatives
were to become limited or unavailable to the Company, the Company's operations
could be materially adversely affected.
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
13
<PAGE> 16
believes that its competitors face a similar risk. Although the risk is not
presently quantifiable, the following disclosure is 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 went into production in 1997 and were developed in
Oracle 7.3 and Oracle Forms 4.5 which are year 2000 compliant. The CS is a third
party software package which has been upgraded to be year 2000 compliant.
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 or its third party suppliers have substantially completed
testing all of the Company's mission critical and non-mission critical computer
systems and other non-information technology systems material to the Company's
operations and the Company believes that such systems are year 2000 compliant.
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 1999. The Company initiated communication with its
significant suppliers to determine the extent to which its operations are
vulnerable to those third parties' failure to remediate their own year 2000
issues. Suppliers of hardware, software or products that might contain embedded
processors were asked to provide information regarding the year 2000 compliance
status of their products. The Company will continue to seek information from
non-responsive suppliers. The Company cannot give any assurance that the systems
of other companies on which its systems rely will be year 2000 compliant and
that any failure of such a company to be year 2000 compliant will not have an
adverse effect on the Company's operations.
The Company expects verification activities will continue through the
end of the year. The Company also expects some aspects of the year 2000 plan to
continue beyond January 1, 2000 with respect to resolution of non-critical
issues.
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 $70,000 in its efforts to become year
2000 compliant, of which approximately $44,000 has been spent to date from
available working capital. 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 non-compliant 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 believes that the mission critical systems
within its control are year 2000 compliant, 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
14
<PAGE> 17
disruption in some internal operations.
Contingency Plans. Contingency planning is an integral part of the
Company's year 2000 readiness project. While substantial contingency planning
has occurred, the Company has not yet completed a comprehensive contingency plan
to address situations that may result should a significant third party system or
mission critical internal system fail. Development of contingency plans is in
progress and is expected to be completed by December 31, 1999. The Company
cannot give any assurance that it will be able to develop a contingency plan
that will adequately address all issues that may arise in the year 2000. The
Company's failure to develop and implement, if necessary, an appropriate
contingency plan could have a material adverse impact on its operations.
Finally, the Company is also vulnerable to external forces that might generally
affect industry and commerce, such as utility or transportation company year
2000 compliance failures and related service interruptions.
The disclosure in this section contains information regarding Year 2000
readiness which constitutes "Year 2000 Readiness Disclosure" as defined in the
Year 2000 Readiness Disclosure Act. 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 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 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, 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.
15
<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 for a complete discussion of the Company's market risk. There
have been no material changes to the market risk information included in the
Company's 1998 Annual Report on Form 10-K.
16
<PAGE> 19
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's 1998 Annual Report on Form 10-K and the
Company's Quarterly Report on Form 10-Q for the quarterly periods ended March
31, 1999 and June 30, 1999, during the first quarter of 1998, several putative
class action complaints were filed by shareholders against the Company and
certain officers and directors of the Company in the United States District
Court for the Eastern District of Michigan seeking money damages for alleged
violations of the federal securities laws. On August 14, 1998, a Consolidated
Class Action Complaint, consolidating the claims asserted in those cases, was
filed. The Complaint generally alleged that the Company's financial statements
issued during the period August 14, 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 such results contained material
accounting irregularities in that they failed to reflect adequate reserves for
credit losses. The Complaint further alleged that the Company issued public
statements during the alleged class period which fraudulently created the
impression that the Company's accounting practices were proper. On April 23,
1999, the Court granted the Company's and the defendant officers' and directors'
motion to dismiss the Complaint and entered a final judgment dismissing the
action with prejudice. On May 6, 1999, plaintiffs filed a motion for
reconsideration of the order dismissing the Complaint or, in the alternative,
for leave to file an amended complaint. On July 13, 1999, the Court granted the
plaintiffs' motion for reconsideration and granted the plaintiffs leave to file
an amended complaint. Plaintiffs filed their First Amended Consolidated Class
Action Complaint on August 2, 1999. On September 30, 1999, the Company and the
defendant officers and directors filed a motion to dismiss that complaint. On or
about November 10, 1999, plaintiffs filed a motion seeking leave to file their
Second Amended Consolidated Class Action Complaint. The Company and the
defendant officers and directors have indicated they do not oppose plaintiffs'
motion and, if the motion is granted, will stand on their pending motion to
dismiss. A hearing on the motion to dismiss is presently scheduled for February
9, 2000. The Company and the defendant officers and directors intend to continue
to vigorously defend this action. While the Company believes it has meritorious
legal and factual defenses, an adverse ultimate disposition of this litigation
could have a material negative impact on the Company's financial position,
liquidity and results of operations.
As previously disclosed in the Company's 1998 Annual Report on Form 10-K and the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1999, the Company is currently a defendant in a class action proceeding
commenced on October 15, 1996 in the United States District Court for the
Western District of Missouri seeking money damages for alleged violations of a
number of state and federal consumer protection laws (the "Missouri
Litigation"). On October 9, 1997, the Court certified two classes on the claims
brought against the Company, one relating to alleged overcharges of official
fees, the other relating to alleged overcharges of post-maturity interest. On
August 4, 1998, the Court granted partial summary judgment on liability in favor
of the plaintiffs on the interest overcharge claims based upon the Court's
finding of certain violations but denied summary judgment on certain other
claims. The Court also entered a number of permanent injunctions, which among
other things, restrained 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 appealed the summary judgment order to the
United States Court of Appeals for the Eighth Circuit. Oral argument on the
appeals was heard on April 19, 1999. On September 1, 1999, the United States
Court of Appeals for the Eighth Circuit overturned the August 4, 1998 partial
summary judgment order and injunctions against the Company. The Court of Appeals
held that the District Court lacked jurisdiction over the interest overcharge
claims and directed the District Court to sever those claims and remand them to
state court. The class action claims of alleged public official fee overcharges
have not been finally adjudicated by the District Court and were not part of the
appeal. The District Court as yet has not determined whether it will resolve
only the federal official fee claim and remand the state law claims to state
court or whether it will resolve all official fee claims. The Company will
continue its vigorous defense of all remaining claims. However, an adverse
ultimate disposition of this litigation could have a material negative impact on
the Company's financial position, liquidity and results of operations.
17
<PAGE> 20
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, 1999 and
none were filed during that period.
18
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT ACCEPTANCE CORPORATION
(Registrant)
/S/ BRETT A. ROBERTS
-----------------------------
BRETT A. ROBERTS
Executive Vice President and
Chief Financial Officer
November 12, 1999
(Principal Financial Officer
and Duly Authorized Officer)
/S/ JOHN P. CAVANAUGH
-----------------------------
JOHN P. CAVANAUGH
Corporate Controller and
Assistant Secretary
November 12, 1999
(Principal Accounting Officer)
19
<PAGE> 22
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
<S> <C>
4 (f) (7) Amendment No. 2 dated September 29, 1999 to Security Agreement dated July 7, 1998 among
Kitty Hawk Funding Corporation, CAC Funding Corp., the Company and NationsBank, N.A.
27 Financial Data Schedule
</TABLE>
20
<PAGE> 1
EXHIBIT 4(f)(7)
AMENDMENT NO. 2 TO
SECURITY AGREEMENT
AMENDMENT NO. 2 TO SECURITY AGREEMENT (this "Amendment"),
dated as of September 29, 1999, among KITTY HAWK FUNDING CORPORATION, a Delaware
corporation, as a secured party (together with its successors and assigns, the
"Company"), CAC FUNDING CORP., a Nevada corporation, as debtor (together with
its successors and assigns, the "Debtor"), CREDIT ACCEPTANCE CORPORATION, a
Michigan corporation, individually and as servicer (together with its successors
and assigns, the "Servicer"), and BANK OF AMERICA, N.A., a national banking
association ("Bank of America"), individually and as collateral agent (together
with its successors and assigns in such capacity, the "Collateral Agent"),
amending that certain Security Agreement (as amended to the date hereof, the
"Security Agreement"), dated as of July 7, 1998, between the Company, the
Debtor, the Servicer and Bank of America (known under the Security Agreement as
"NationsBank, N.A."), individually and as Collateral Agent.
WHEREAS, on the terms and conditions set forth herein, the
parties to the Security Agreement wish to amend the Security Agreement as
provided herein.
NOW, THEREFORE, the parties hereby agree as follows:
SECTION 1. Defined Terms. As used in this Amendment
capitalized terms have the same meanings assigned thereto in the Security
Agreement.
SECTION 2. Amendment of Certain Terms.
(1) Section 1.1 of the Security Agreement is hereby amended by
deleting the definition of "Optional Clean-Up Event" and replacing it with the
following:
""Optional Clean-Up Event" shall mean either an Initial
Funding Optional Clean-Up Event or a Subsequent Funding Optional Clean-Up Event,
as applicable."
(2) Section 1.1 of the Security Agreement is hereby amended by
inserting the following definition after the definition of "Initial Funding":
""Initial Funding Optional Clean-Up Event" shall mean, with
respect to the Initial Funding, any day on which the Net Investment
relating to the Initial Funding is equal to or less than 5% of the
amount of the highest Net Investment relating to the Initial Funding on
any preceding day."
(3) Section 1.1 of the Security Agreement is hereby amended by
inserting the following definition after the definition of "Subsequent Funding
Date":
""Subsequent Funding Optional Clean-Up Event" shall mean, with
respect to any Subsequent Funding, any day on which the Net Investment
relating to such Subsequent Funding is equal to or less than 15% of the
amount of the highest Net Investment relating to such Subsequent
Funding on any preceding day."
(4) Section 5.4 of the Security Agreement is hereby amended by:
(I) deleting all references to "Servicer" and replacing each
such reference with "Debtor";
(ii) inserting the following before the semi-colon in the
eleventh line thereof:
"in the case of a Mandatory Clean-Up Event or, in the case of
an Optional Clean-Up Event, to pay all amounts outstanding that relate
to the Funding to which such Optional Clean-Up Event applies under the
Note Purchase Agreement, the Note and any other Transaction Document";
and
1
<PAGE> 2
(iii) deleting all words after the word "withdraw" in the sixteenth
line thereof and replacing them with the following:
"on the next Remittance Date (I) in the case of a Mandatory
Clean-Up Event, all funds on deposit in the Collection Account and the
Reserve Account, and (ii) in the case of an Optional Clean-Up Event,
the funds in the Collection Account and, if necessary, the Reserve
Account, that relate to the Funding to which such Optional Clean-Up
Event applies, and in each case pay such amounts to the Company, the
Bank Investors and any Noteholder, as applicable."
SECTION 3. Representations and Warranties.
(a) The Debtor hereby makes to the Collateral Agent, the Company
and the Bank Investors, on and as of the date hereof, all of the representations
and warranties set forth in Sections 3.1 and 3.2 of the Security Agreement,
except that to the extent that any of such representations and warranties
expressly relate to an earlier date, such representations and warranties shall
be true and correct as of such earlier date.
SECTION 4. Effectiveness. This Amendment shall become
effective on the date hereof.
SECTION 5. Costs and Expenses. The Debtor shall pay all of the
Company's, the Bank Investors' and the Collateral Agent's cost and expenses
(including out of pocket expenses and reasonable attorneys fees and
disbursements) incurred by them in connection with the preparation, execution
and delivery of this Amendment.
SECTION 6. Governing Law. THIS AMENDMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7. Severability; Counterparts. This Amendment may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
instrument. Any provisions of this Amendment which are prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
SECTION 8. Captions. The captions in this Amendment are for
convenience of reference only and shall not define or limit any of the terms or
provisions hereof.
SECTION 9. Ratification. Except as expressly affected by the
provisions hereof, the Security Agreement as amended shall remain in full force
and effect in accordance with its terms and ratified and confirmed by the
parties hereto. On and after the date hereof, each reference in the Security
Agreement to "this Agreement", "hereunder", "herein" or words of like import
shall mean and be a reference to the Security Agreement as amended by this
Amendment.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment No. 2 to the Security Agreement as of the date first written above.
CAC FUNDING CORP., as Debtor
By: /S/DOUGLAS W. BUSK
--------------------------------
Name: Douglas W. Busk
Title: Vice President-Finance
and Treasurer
CREDIT ACCEPTANCE CORPORATION,
Individually and as Servicer
By: /S/DOUGLAS W. BUSK
--------------------------------
Name: Douglas W. Busk
Title: Vice President-Finance
and Treasurer
KITTY HAWK FUNDING CORPORATION,
as Company
By: /S/RICHARD L. TAIANO
--------------------------------
Name: Richard L. Taiano
Title: Vice President
BANK OF AMERICA, N.A., Individually
and as Collateral Agent
By: /S/ELLIOTT T. LEMON
--------------------------------
Name: Elliott T. Lemon
Title: Vice President
3
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<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
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0
0
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<INCOME-PRETAX> (21,485)
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