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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THIS FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 000-20202
CREDIT ACCEPTANCE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MICHIGAN 38-1999511
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
25505 W. TWELVE MILE ROAD, SUITE 3000 48034-8339
SOUTHFIELD, MICHIGAN (Zip Code)
(Address of Principal Executive Offices)
</TABLE>
Registrant's telephone number, including area code: (248) 353-2700
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of 14,312,629 shares of the Registrant's common stock
held by nonaffiliates on March 24, 1999 was approximately $80,508,538. For
purposes of this computation all officers, directors and 5% beneficial owners of
the Registrant are assumed to be affiliates. Such determination should not be
deemed an admission that such officers, directors and beneficial owners are, in
fact, affiliates of the Registrant.
At March 24, 1999 there were 46,298,904 shares of the Registrant's Common Stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement pertaining to the 1999
Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 1998
INDEX TO FORM 10-K
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C> <C>
PART I
1. Business.................................................... 2
2. Properties.................................................. 10
3. Legal Proceedings........................................... 10
4. Submission of Matters to a Vote of Security Holders......... 11
PART II
5. Market Price and Dividend Information....................... 12
6. Selected Financial Data..................................... 13
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 24
8. Financial Statements and Supplemental Data.................. 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 52
PART III
10. Directors and Executive Officers of the Registrant.......... 52
11. Executive Compensation...................................... 52
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 52
13. Certain Relationships and Related Transactions.............. 52
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 52
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Credit Acceptance Corporation ("CAC" or the "Company"), incorporated in
Michigan in 1972, is a specialized financial services company which provides
funding, receivables management, collection, sales training and related products
and services to automobile dealers located in the United States, the United
Kingdom, Canada and Ireland. CAC assists such dealers with the sale of used
vehicles by providing an indirect financing source for buyers with limited
access to traditional sources of consumer credit ("Non-prime Consumers"). For
the year ended December 31, 1998, CAC had total revenues of $142.3 million and
net earnings of $25.0 million. At December 31, 1998, aggregate gross installment
contracts receivable were $794.8 million and total shareholders' equity was
$276.3 million.
CAC also provides additional products and services to dealers which give
the Non-prime Consumer the opportunity to purchase a number of ancillary
products, including credit life and disability insurance and vehicle service
contracts offered by dealers and point-of-sale dual interest collateral
protection insurance provided by third party insurance carriers. Through
wholly-owned subsidiaries, the Company also reinsures certain of the credit life
and disability insurance and point-of-sale dual interest collateral protection
insurance policies issued in conjunction with installment contracts originated
by dealers. In addition, the Company's credit reporting subsidiary provides
credit information and consumer reports to companies serving the Non-prime
Consumer market. Furthermore, the Company, through a wholly-owned subsidiary,
operates automobile auctions that provide vehicle suppliers with a full range of
services to process and sell vehicles to buyers at the auctions.
The Company is organized into four primary business units: North American
automotive finance, U.K./Ireland automotive finance, credit reporting services,
and auction services. See Note 12 to the consolidated financial statements for
information regarding the Company's reportable segments.
PRODUCTS AND SERVICES
CAC derives its revenues from the following principal sources: (i)
servicing fees (which are accounted for as finance charges) earned as a result
of servicing and collecting installment contracts originated and assigned to the
Company by dealers; (ii) fees charged to dealers at the time they enroll in the
Company's program; (iii) gains from the securitization of dealer advances; (iv)
premiums earned from the Company's reinsurance activities and service contract
programs; and (v) other income which primarily consists of fees earned from
third party service contract products offered by dealers, the processing and
sale of vehicles at auctions, fees from the Company's credit reporting services
and interest income from loans made directly to dealers for floor plan financing
and working capital purposes. The following table sets forth the percent
relationship to total revenue of each of these sources.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
PERCENT OF TOTAL REVENUE 1996 1997 1998
------------------------ ----- ----- -----
<S> <C> <C> <C>
Finance charges.......................................... 75.0% 71.2% 68.8%
Dealer enrollment fees................................... 4.1 4.5 2.5
Gain on sale of advance receivables, net................. -- -- 0.5
----- ----- -----
Total core products and services....................... 79.1 75.7 71.8
----- ----- -----
Premiums earned.......................................... 7.7 6.9 7.7
Other income............................................. 13.2 17.4 20.5
----- ----- -----
Total ancillary products and services.................. 20.9 24.3 28.2
----- ----- -----
Total revenue.......................................... 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
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PRINCIPAL BUSINESS
CAC's principal business involves: (i) the acceptance of installment
contracts originated and assigned by participating dealers; and (ii) the
subsequent management and collection of such contracts. For installment
contracts meeting the Company's criteria, CAC makes a formula-based cash payment
to the dealer (an "Advance"). The Company may Advance up to 90% of the amount
financed, but Advances typically range between 50% and 75% of the amount
financed. To mitigate its risk, at the time of accepting the assignment of an
installment contract, CAC obtains a security interest in the vehicle and
establishes a dealer holdback equal to the gross amount of the contract, less
the Company's servicing fee, which is recorded as an unearned finance charge.
CAC's acceptance of such contracts is generally without recourse to the general
assets of the dealer, and accordingly, the dealer usually has no liability to
the Company if the consumer defaults on the contract.
CAC offers its dealers several Advance alternatives, which are calculated
based upon the dealer's history with the Company, the credit profile of a
particular customer and the year, make, model, and mileage of the used vehicle
to be financed.
Monthly cash receipts related to the aggregate installment contracts
accepted from an individual dealer are remitted to such dealer, but only after:
(i) the Company is reimbursed for certain collection costs relating to
all contracts accepted from such dealer;
(ii) the Company receives a servicing fee (typically 20%) of the
aggregate net monthly receipts (monthly cash receipts less certain
collection costs); and
(iii) the Company has recovered all advances made to such dealer.
OPERATIONS
Dealer Selection and Enrollment Fee. CAC has adopted specific policies
relative to establishing the eligibility of prospective dealers for the
Company's program. A dealer's participation in the Company's program begins with
the execution of a Servicing Agreement, which requires the dealer to disclose
information about his dealership and personal finances. The Company undertakes a
review of the dealer information to determine whether the dealer should be
permitted to participate in the Company's program.
Pursuant to the Servicing Agreement, a dealer represents that it will only
submit contracts to CAC which satisfy criteria established by the Company, meet
certain conditions with respect to the binding nature and the status of the
security interest in the purchased vehicle and comply with applicable state,
federal and foreign laws and regulations. Dealers receive a monthly statement
from the Company, summarizing all transactions on contracts originated by such
dealer. Also, where applicable, the dealer will receive a payment from CAC for
any portion of the payments on contracts to which the dealer is entitled under
the Servicing Agreement.
The Servicing Agreement may be terminated by the Company or by the dealer
(as long as there is no event of default or an event which, with the lapse of
time, giving of notice or both, would become an event of default) upon 30 days
prior written notice. Events of default include, among other things, (i) the
dealer's failure to perform or observe covenants in the Servicing Agreement;
(ii) the dealer's breach of a representation in the Servicing Agreement; (iii) a
misrepresentation by the dealer relating to an installment contract submitted to
the Company or a related vehicle or purchaser; and (iv) the appointment of a
receiver for, or the bankruptcy or insolvency of, the dealer. The Company may
terminate the servicing agreement immediately in the case of an event of default
by the dealer. Upon any termination by the dealer or in the event of a default,
the dealer must immediately pay the Company: (i) any unreimbursed collection
costs; (ii) any unpaid advances and all amounts owed by the dealer to the
Company; and (iii) a termination fee equal to 20% of the then outstanding amount
of the installment contracts originated and accepted by the Company. Upon
receipt in full of such amounts, the Company will reassign the installment
contract receivable and its security interest in the financed vehicle to the
dealer. In the event of a termination by the Company (or any other termination
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if the Company and the dealer agree), the Company may continue to service
installment contracts accepted prior to termination in the normal course of
business without charging a termination fee.
New dealers located in North America are generally charged a $4,500 dealer
enrollment fee, which affords the dealer access to the Company's training
material and programs and helps offset the administrative expenses associated
with new dealer enrollment. No dealer enrollment fee is charged to dealers in
the United Kingdom and Ireland.
Assignment of Contracts. The dealer assigns title to the installment
contract and the security interest in the vehicle to the Company. Thereafter,
the rights and obligations of the Company and the dealer are defined by the
servicing agreement, which provides that the contract assignment to the Company
is for the purposes of administration, servicing and collection of the amounts
due under the assigned contract, as well as for security purposes. At the time a
contract is submitted, CAC evaluates the contract to determine if it meets the
Company's cash Advance criteria. Contracts which do not meet the Company's cash
Advance criteria may still be accepted for servicing without an Advance being
paid.
Contract Portfolio. The portfolio of installment contracts contains loans
of initial duration generally ranging from 24 to 36 months, with an average
initial maturity of approximately 31 months. The Company receives a servicing
fee generally equal to 20% of the gross amount of the contract, with rate of
return varying, based upon the amount of the Advance and the term of the
contract.
The following table sets forth, for each of the periods indicated, the
average size of installment contracts accepted by the Company, the percent
growth in the average size of contracts accepted, the average initial maturity
of the contracts accepted, the average advance per installment contract accepted
and the average advance as a percent of the average installment contract
accepted.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------
AVERAGE CONTRACT DATA 1994 1995 1996 1997 1998
--------------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Average size of installment contracts accepted
during the period................................. $5,922 $6,507 $7,249 $8,340 $8,402
Percentage growth in average size of contract....... 34.1% 9.9% 11.4% 15.1% 0.7%
Average initial maturity (in months)................ 25 25 30 31 31
Average advance per installment contract............ $2,637 $3,220 $3,837 $4,228 $4,260
Average advance as a percent of average installment
contract.......................................... 44.5% 49.5% 52.9% 50.7% 50.7%
</TABLE>
Systems Overview. The Company employs three major computer systems in its
U.S. operations: (i) the Application and Contract System ("ACS") which is used
from the time a dealer faxes an application to the Company until the contract is
received and funded, (ii) the Loan Servicing System ("LSS") which contains all
loan and payment information and is the primary source for management
information reporting, and (iii) the Collection System ("CS") which is used by
the Company's collections personnel to track and service all active customer
accounts.
ACS -- The ACS, designed and built by an independent consulting firm hired
by the Company, was installed in May 1997. This system replaced certain
functionality of the Company's previous systems. The system enables the Company
to efficiently process a large volume of application and contract data. When a
dealer faxes an application to the Company's headquarters in Southfield,
Michigan, Company personnel input the application data into the ACS. The system
automatically pulls all credit bureau and vehicle guidebook data and includes
such data in the application file, which is routed to the analyst team assigned
to the dealer's geographic area. An analyst reviews each application file
on-line to determine if the transaction is properly structured and meets the
Company's guidelines for an advance. The ACS provides the analyst with
information regarding the borrower, including information on the borrower's
residence, employment, wage level and references, information regarding the
vehicle, including the vehicle's age, mileage and guidebook value, and
information regarding the transaction, including sale price, down payment,
interest rate and term. The system computes the Advance amount according to
predefined programs based on dealer and loan variables, provides the analyst
with warning flags on out-of-tolerance application variables and allows the
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analyst to select from a predefined set of stipulations to include on the
Advance approval transmittal, which is automatically faxed to the dealer. After
the sale of the vehicle, the installment contract package is sent to the Company
by the dealer. The contract information is input into the ACS. The system
compares the contract data to the application data and reviews compliance with
analyst stipulations. After any variances have been addressed, the system sends
an Advance payment to the dealer by check or electronic transaction. The system
generally enables the Company to approve application files in under one hour and
fund contracts within 24 hours of receipt of all required documents. The system
enables management personnel to report on service level by analyst and by
region, application and contract volumes by dealer and by program, exceptions
granted and various other reports as needed. The ACS automatically loads all new
contract data into the LSS system.
LSS -- The LSS, designed and built for the Company by the same consulting
firm, was installed and implemented in the third quarter 1997. This system
contains all loan transaction data, including payments and charge-offs for loans
accepted by the Company since July 1990. The system is the Company's primary
information source for management reporting including production of monthly
statements sent to dealers summarizing the status of their accounts and the
Company's static pool system, which provides the Company with a static pool
analysis on a per dealer basis. This system projects future collections for each
dealer based on actual prior loss history. These projections are then used to
analyze dealer profitability and to estimate and record the Company's reserve on
Advances to dealers. The LSS interfaces with both the ACS and CS.
CS -- The CS, which is used by Company collection personnel to service all
active accounts was purchased, modified and installed in 1989. The collection
system provides data on all of the Company's customer accounts including loan
and payment information as well as a log of all account activity including
letters sent and summaries of telephone contact. The system generates payment
books which are sent on all new accounts, generates all collection letters and
notices, allows collectors to record promises to pay and broken promises,
interfaces with a predictive dialing system, assigns accounts to collection
personnel and tracks results on a per collector basis. Repossession and legal
accounts are also processed on this system. The CS interfaces with the phone
system, predictive dialer and the LSS.
The Company has developed a comprehensive project plan for achieving year
2000 readiness. The ACS and LSS were developed by the Company in Oracle 7.3 and
Oracle Form 4.5 which are year 2000 complaint. The CS has been updated to a
version which is year 2000 compliant. See the Company's "Year 2000 Update"
included as part of Item 7. of this report.
Servicing and Collections. CAC's staff of professional and experienced
collection personnel collects amounts due on installment contracts, assisted by
the CS and telephone systems. The customized CS system is integrated with a
predictive dialing telephone system, which allows the Company's collection
personnel to contact a large number of customers on a daily basis. The
integration of the systems allows critical calling information to be seamlessly
uploaded to the CS. This integration helps identify customers who are difficult
to contact by phone and need additional collections efforts. Customer payments
are received through a bank lockbox and at CAC's Southfield, Michigan location.
Payment receipt data is electronically transferred from the bank lockbox on a
daily basis for posting to the customer's account. The payments are processed in
CAC's LSS which provides customer payment information to the CS on a real time
basis.
Customer accounts are monitored and serviced by regional collection teams.
The team members consist of junior, mid-level, and senior collection personnel.
The teams typically take action on accounts within five days of delinquency. If
a customer is delinquent, the Company's policy is to attempt to resolve the
delinquency by persuading the customer to make payment arrangements until the
delinquency is resolved. Since the customer generally has a poor credit history,
the Company's program provides the customer with an opportunity to restore their
credit rating. The Company believes its interests are best served by permitting
the customer to retain the vehicle while making payments, even if the maturity
of the loan needs to be extended beyond the original term. Customers, within the
first three payments of the contract, are monitored and serviced by a
specialized collection team. The first-payment-miss team typically takes action
on accounts at one day past due, attempting to resolve the delinquency as soon
as possible.
The repossession process typically begins when a customer becomes
approximately 60 days past due. However, when a new customer misses one of their
first three payments, or if the customer does not respond to
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the collection effort, the repossession process typically begins when the
customer becomes approximately 30 days past due. At that time, the Company
contracts with a third party to repossess and sell the vehicle at an auction.
The costs related to such activities, to the extent permitted by law, are added
to the amount due from the customer and the dealer Advance amount. If the
proceeds from the sale are not sufficient to cover the total balance due, the
Company may seek to recover its "deficiency balance" from the customer through
legal means, including wage garnishment to the extent permitted by applicable
law. Although the Company continues to pursue collection, the deficiency balance
is charged-off after nine months of not receiving any material payments.
ANCILLARY PRODUCTS
The Company continually explores methods by which its business
relationships with dealers may be enhanced, including several ancillary products
such as insurance and service contracts.
Insurance and Service Contract Programs. CAC has arrangements with
insurance carriers to assist dealers in offering credit life and disability
insurance to Non-prime Consumers. Pursuant to this program, the Company advances
to dealers an amount equal to the credit life and disability insurance premium
on contracts accepted by the Company, which include credit life and disability
insurance written by the Company's designated insurance carriers. The Company is
not involved in the actual sale of insurance; however, as part of the program,
the insurance carriers cede insurance coverages and premiums (less a fee) to a
wholly-owned subsidiary of the Company, which reinsures such coverages. As a
result, the subsidiary bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.
Buyers Vehicle Protection Plan, Inc. ("BVPP"), a subsidiary of CAC,
operates as an administrator of certain vehicle service contract programs
offered by dealers to consumers. Under this program, BVPP charges dealers a
premium for the service contracts and in return agrees to reimburse dealers for
designated amounts that the dealer is required to pay for covered repairs on the
vehicles it sells. CAC advances to dealers an amount equal to the purchase price
of the vehicle service contract on contracts accepted by the Company which
include vehicle service contracts. CAC has, in turn, subcontracted its
obligations to administer these programs to third parties that have experience
with such programs. Nevertheless, the risk of loss (reimbursement obligations in
excess of the purchase price of the vehicle service contract) remains with BVPP.
In addition, BVPP has relationships with third party service contract providers
which pay BVPP a fee on service contracts included on installment contracts
financed through participating dealers. BVPP does not bear any risk of loss for
covered claims on these third party service contracts.
The Company has an arrangement with insurance carriers and a third party
administrator to market and provide claims administration for a dual interest
collateral protection program. This insurance program, which insures the
financed vehicle against physical damage up to the lesser of the cost to repair
the vehicle or the unpaid balance owed on the related installment contract, is
offered to Non-prime Consumers who finance vehicles through participating
dealers. If desired by a Non-prime Consumer, collateral protection insurance
coverage is written under a group master policy issued by the unaffiliated
insurance carriers to the Company. The Company is not involved in the actual
sale of insurance; however, as part of the program, the insurance carriers cede
insurance coverages and premiums (less a fee) to CAC Reinsurance, Ltd., a
subsidiary of the Company, which acts as a reinsurer of such coverages. As a
result, the subsidiary bears the risk of loss attendant to claims under the
coverages ceded to it, and earns revenues resulting from premiums ceded and the
investment of such funds.
The Company continually considers other programs that will increase its
services to dealers. The Company intends that such programs, if undertaken, will
be initially marketed selectively in order to establish strong operating systems
and assess the potential profitability of these services.
OTHER SERVICES
Credit Reporting Services. Montana Investment Group, Inc. a subsidiary of
the Company, supplies risk assessment and fraud alert information and
computerized skiptracing services regarding Non-prime
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Consumers to companies serving the Non-prime Consumer market. Such information
and services are generally not available from traditional consumer information
sources.
Auction Services. In June 1998, the Company acquired substantially all of
the assets and liabilities of an automobile auction in Pennsylvania and
incorporated this business, which currently operates auctions in Pennsylvania
and South Carolina, as a wholly-owned subsidiary of the Company. The subsidiary
provides vehicle suppliers with a full range of services to process and sell
vehicles to buyers at the auctions.
Floor Plan Financing and Secured Working Capital Loans. The Company offers
floor plan financing to certain dealers, pursuant to which the Company makes
loans to dealers to finance vehicle inventories, in each case secured by the
inventory, the related proceeds from the future sale of such inventory and, for
dealers participating in the Company's financing program, future collections on
installment contracts accepted from such dealers. This financing is provided on
a selected basis primarily to dealers participating in the Company's financing
program. On a limited basis, the Company provides floor plan financing to
dealers not participating in the Company's financing program. The interest rate
charged on outstanding floor plan balances generally ranges from 12% to 18% per
annum. On a selected basis, the Company also provides dealers with working
capital loans. These loans are secured by all assets of the dealer, including
any future cash collections owed to the dealer on installment contracts accepted
by the Company.
SALES AND MARKETING
The Company's program is marketed directly to used vehicle dealers and to
new automobile dealers with used vehicle departments. Marketing efforts are
initially concentrated in a particular geographic area through the distribution
of marketing brochures and via advertising in trade journals and other industry
publications directly to automobile dealers. Follow-up is subsequently conducted
through telemarketing, videotapes and monthly newsletters explaining the
Company's program. Free training seminars are available to dealers desiring to
learn more about the Company's program, as well as to participating dealers. The
Company also establishes relationships with dealers through referrals from third
party vendors and participating dealers.
CAC employs experienced sales and marketing professionals (sales
representatives) both at the Company's headquarters and in the field for
purposes of enrolling new dealers and providing services to existing dealers.
The sales force also includes non-employee individuals (sales agents) operating
on a contract basis. Sales personnel are compensated on a commission basis
calculated on the profitability and volume of business submitted by dealers.
CAC provides dealers with training regarding the operation of the Company's
program. Seminars are held on a regular basis at the Company's headquarters and
periodically at locations throughout the country. Pursuant to the Servicing
Agreement, each dealer agrees to attend at least one such seminar each calendar
year.
CREDIT LOSS 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. 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.
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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.
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.
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.
COMPETITION
The Non-prime Consumer finance market is very fragmented and highly
competitive. The Company believes that there are numerous competitors providing,
or are capable of providing, financing programs through dealers to purchasers of
used vehicles. The Company also competes, indirectly, with dealers operating
dealer-financed programs. Because the Company's program is directed to provide
financing to individuals who cannot ordinarily qualify for traditional
financing, the Company does not believe that it directly competes with
commercial banks, thrifts, automobile finance companies and others that apply
more traditional lending criteria to the credit approval process. Historically,
these traditional sources of used vehicle financing (some of which are larger,
have significantly greater financial resources and have relationships with
captive dealer networks) have not served the Company's market segment
consistently. The Company's market is primarily served by smaller finance
organizations which solicit business when and as their capital resources allow.
The Company intends to capitalize on this market segment's lack of a major,
consistent financing source. However, if such a competitor were to enter the
Company's market segment, the Company's financial position and results of
operations could be materially adversely affected. The Company believes that it
can compete on the basis of service provided to its participating dealers and
superior collection performance.
During the past few years, many of CAC's competitors have disclosed that
they have exited the Non-prime Consumer finance market, do not have funding to
acquire additional installment contract receivables from dealers or have
strengthened credit standards which in turn has reduced the volume of new
business. These events suggest that the Non-prime Consumer finance market should
become less competitive; however, dealers appear to continue to have many
alternatives for financing used vehicles.
CUSTOMER AND GEOGRAPHIC CONCENTRATIONS
Installment contracts receivable attributable to contracts accepted from
affiliated dealers owned by the Company's majority shareholder represented
approximately 4%, 4% and 2% of gross installment contracts receivable at the end
of 1996, 1997 and 1998, respectively. Approximately 3%, 1% and 2% of the value
of installment contracts accepted and approximately 3%, 1% and 2% of the number
of installment contracts accepted by the Company during 1996, 1997 and 1998,
respectively, were originated by affiliated dealers. Affiliated dealers are not
obligated to continue doing business with CAC, nor are they precluded from
owning or operating businesses which may compete with the Company. As of
December 31, 1998, approximately 24.9% of the participating dealers in the
United States were located in Michigan, Ohio, and Virginia and these dealers
accounted for approximately 29.7% of the number of contracts accepted from
United States dealers in 1998. As of December 31, 1998, approximately 11.4% of
the Company's total participating dealers were located in the United Kingdom and
during 1998 these dealers accounted for approximately 9.8% of the new contracts
accepted by the Company. No single dealer accounted for more than 10% of the
number of installment contracts accepted by the Company during 1996, 1997 or
1998.
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The following table sets forth, for each of the last three years for the
Company's domestic and foreign operations, the amount of revenues from customers
and long-lived assets (in thousands):
<TABLE>
<CAPTION>
AS OF AND FOR YEARS ENDED
DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Revenues from customers
United States................................. $107,315 $134,950 $120,086
United Kingdom................................ 16,600 28,598 20,828
Other foreign................................. 19 687 1,435
Long-lived assets
United States................................. $ 14,083 $ 18,910 $ 18,781
United Kingdom................................ 854 1,914 1,834
Other foreign................................. 21 15 12
</TABLE>
The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's domestic and foreign operations. Accordingly, the revenue and
identifiable assets shown may not be indicative of the amounts which would have
been reported if the domestic and foreign operations were independent of one
another.
REGULATION
The Company's businesses are subject to various state, federal and foreign
laws and regulations which require licensing and qualification, limit interest
rates, fees and other charges associated with the installment contracts assigned
to the Company, require specified disclosures by automobile dealers to
consumers, govern the sale and terms of the ancillary products and define the
Company's rights to repossess and sell collateral. Failure to comply with, or an
adverse change in, these laws or regulations could have a material adverse
effect on the Company by, among other things, limiting the states or countries
in which the Company may operate, restricting the Company's ability to realize
the value of the collateral securing the contracts, or resulting in potential
liability related to contracts accepted from dealers. In addition, governmental
regulations which would deplete the supply of used vehicles, such as
environmental protection regulations governing emissions or fuel consumption,
could have a material adverse effect on the Company. The Company is not aware of
any such legislation currently pending.
The sale of insurance products by dealers is also subject to state laws and
regulations. As the Company does not deal directly with consumers in the sale of
insurance products, it does not believe that its business is significantly
affected by such laws and regulations. Nevertheless, there can be no assurance
that insurance regulatory authorities in the jurisdictions in which such
products are offered by dealers will not seek to regulate the Company or
restrict the operation of the Company's business in such jurisdictions. Any such
action could materially adversely affect the income received from such products.
CAC's credit life and disability reinsurance subsidiary is licensed, and is
subject to regulation, in the state of Arizona, and CAC's property and casualty
reinsurance subsidiary is licensed in the Turks and Caicos Islands.
The Company's operations in the United Kingdom, Canada and Ireland are also
subject to various laws and regulations. Generally, these requirements tend to
be no more restrictive than those in effect in the United States. In addition,
the Company's credit reporting subsidiary is subject to various state and
federal regulations including the Fair Credit Reporting Act. Furthermore, the
Company's auction services subsidiary is subject to various state and federal
regulations which require disclosure to consumers regarding licensing,
qualification and fees associated with the sale of vehicles.
Management believes that the Company maintains all material licenses and
permits required for its current operations and is in substantial compliance
with all applicable laws and regulations. The Company's Servicing Agreement with
dealers provides that the dealer shall indemnify the Company with respect to any
loss or expense the Company incurs as a result of the dealer's failure to comply
with applicable laws and regulations.
9
<PAGE> 11
EMPLOYEES
As of December 31, 1998, the Company employed 655 persons, 370 of whom were
collection personnel, 83 were contract origination and processing personnel, 67
were marketing professionals, 28 were accounting professionals and the remainder
were management or support personnel. The Company's employees have no union
affiliations and the Company believes its relationship with its employees is
good.
ITEM 2. PROPERTIES
NORTH AMERICAN AUTOMOTIVE FINANCE
The Company's headquarters are located at 25505 West Twelve Mile Road,
Southfield, Michigan 48034. The Company purchased the office building in 1993,
which it financed in part by a loan secured by a mortgage on the building. The
office building includes approximately 118,000 square feet of space on five
floors. The Company occupies approximately 56,000 square feet of the building,
with most of the remainder of the building leased to various tenants. The
Company plans to continue to lease excess space in the building until such time
as the Company's expansion needs require it to occupy additional space.
U.K./IRELAND AUTOMOTIVE FINANCE
The Company leases an office building in Worthing, West Sussex, in the
United Kingdom, which is the headquarters for the Company's United Kingdom
operations. The Company occupies approximately 10,000 square feet of the
building under a lease expiring in September 2007.
OTHER
The Company leases an office building in Norcross, Georgia which houses the
Company's credit reporting services subsidiary. The office building includes
approximately 13,300 square feet of space on one floor. The lease expires in
December 2003.
The Company plans to sell a vacant office building in Norcross, Georgia
which previously housed the Company's credit reporting services subsidiary. The
office building includes approximately 4,100 square feet of space on two floors.
The Company's auction services subsidiary leases a 13,400 square foot
building and 35 acres of land in the Township of East Hanover, Pennsylvania and
leases a 17,000 square foot building and five acres of land in North Charleston,
South Carolina. The lease on the Pennsylvania property expires in June 1999, and
the Company has an option to buy the land and building. The lease on the South
Carolina property expires in March 2000.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business and as a result of the consumer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various consumer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth in lending, credit availability,
credit reporting, consumer protection, warranty, debt collection, insurance and
other consumer-oriented laws and regulations. The Company, as the assignee of
finance contracts originated by dealers, may also be named as a co-defendant in
lawsuits filed by consumers principally against dealers. Many of these cases are
filed as purported class actions and seek damages in large dollar amounts.
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 resulting 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. 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 but denied summary judgment on certain other claims. The Court also
entered a
10
<PAGE> 12
number of permanent injunctions, which among other things, restrain 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 not expected to be scheduled until after the appeal has
been concluded. Should the Company's appeal be unsuccessful, the potential
damages could have a material adverse impact on the Company's financial
position, liquidity and results of operations.
During the first quarter of 1998, several putative class action complaints
were filed 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 alleges 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 that such
results contained material accounting irregularities in that they failed to
reflect adequate reserves for credit losses. The Complaint further alleges that
the Company issued public statements during the alleged class period which
fraudulently created the impression that the Company's accounting practices were
proper. The Company intends to vigorously defend this action and, while
management believes that meritorious defenses exist and has filed a motion to
dismiss the Complaint, the ultimate disposition of this litigation could have a
material adverse impact on the Company's financial position, liquidity and
results of operations.
The frequency of litigation has increased as the Company's business
activities have expanded. The Company believes that the structure of its dealer
program and the ancillary products, including the terms and conditions of its
Servicing Agreement with dealers, may mitigate its risk of loss in any such
litigation. Management believes the Company has taken prudent steps to address
the litigation risks associated with its business activities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
11
<PAGE> 13
PART II
ITEM 5. MARKET PRICE AND DIVIDEND INFORMATION
The Company's Common Stock is traded on The Nasdaq Stock Market(R) under
the symbol CACC. The high and low sale prices for the Common Stock for each
quarter during the two year period ending December 31, 1998 as reported by the
National Association of Securities Dealers, Inc., are set forth in the following
table.
<TABLE>
<CAPTION>
1997 1998
---------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ -----
<S> <C> <C> <C> <C>
March 31....................................... $26.00 $17.00 $ 9.63 $5.25
June 30........................................ 18.50 9.38 12.38 8.38
September 30................................... 16.88 11.25 9.19 5.56
December 31.................................... 13.63 2.50 7.75 4.63
</TABLE>
As of December 31, 1998, the approximate number of beneficial holders and
shareholders of record of the Common Stock was 4,500 based upon securities
position listings furnished to the Company.
Other than the dividend paid in connection with the Company's conversion
from S corporation status to C corporation status during 1992, the Company has
never paid and has no present plans to pay any cash dividends on its Common
Stock. The Company intends to retain its earnings to finance the growth and
development of its business. The Company's credit agreements contain certain
covenants which prohibit the payment of dividends under certain circumstances
and other covenants pertaining to the Company's tangible net worth which may
indirectly limit the payment of dividends on Common Stock.
12
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement and balance sheet data presented below for
and as of each of the five years ended December 31, 1998 are derived from the
Company's audited consolidated financial statements. The selected financial data
presented below as of December 31, 1997 and 1998 and for the years ended
December 31, 1996, 1997 and 1998 should be read in conjunction with the
Company's consolidated audited financial statements and notes thereto and "Item
7 -- Management's Discussion and Analysis of Financial Condition and Results of
Operations," included elsewhere in this Report.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Finance charges.................... $ 44,550 $ 66,276 $ 92,944 $ 117,020 $ 98,007
Premiums earned.................... 3,756 6,504 9,653 11,304 10,904
Dealer enrollment fees............. 1,950 2,810 5,028 7,313 3,614
Gain on sale of Advance
receivables, net................ -- -- -- -- 685
Other income....................... 4,219 9,491 16,309 28,598 29,139
---------- ---------- ---------- ---------- ----------
Total revenue................. 54,475 85,081 123,934 164,235 142,349
---------- ---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses................. 15,045 21,716 30,627 45,911 59,004
Provision for credit losses........ 3,603 7,066 13,071 85,472 16,405
Provision for claims............... 1,582 1,964 3,060 3,911 3,734
Interest........................... 2,651 8,785 13,568 27,597 25,565
---------- ---------- ---------- ---------- ----------
Total costs and expenses...... 22,881 39,531 60,326 162,891 104,708
---------- ---------- ---------- ---------- ----------
Operating income..................... 31,594 45,550 63,608 1,344 37,641
Foreign exchange gain (loss)....... -- (57) 27 (41) (116)
---------- ---------- ---------- ---------- ----------
Income before income taxes........... 31,594 45,493 63,635 1,303 37,525
Provision (credit) for income
taxes........................... 11,024 15,921 22,126 (234) 12,559
---------- ---------- ---------- ---------- ----------
Net income........................... $ 20,570 $ 29,572 $ 41,509 $ 1,537 $ 24,966
========== ========== ========== ========== ==========
Net income per common share(A):
Basic.............................. $ .50 $ .70 $ .91 $ .03 $ .54
========== ========== ========== ========== ==========
Diluted............................ $ .49 $ .68 $ .89 $ .03 $ .53
========== ========== ========== ========== ==========
Weighted average shares
outstanding(A):
Basic.............................. 41,270,984 42,385,262 45,605,159 46,081,804 46,190,208
Diluted............................ 42,316,105 43,527,770 46,623,655 46,754,713 46,960,290
BALANCE SHEET DATA:
Installment contracts receivable,
net................................ $ 402,379 $ 652,452 $1,029,951 $1,036,699 $ 664,693
Floor plan receivables............... 7,115 13,249 15,493 19,800 14,071
Notes receivables.................... 2,459 3,232 2,663 1,231 2,278
All other assets..................... 13,953 17,507 26,311 57,880 70,887
---------- ---------- ---------- ---------- ----------
Total assets.................. $ 425,906 $ 686,440 $1,074,418 $1,115,610 $ 751,929
========== ========== ========== ========== ==========
Dealer holdbacks, net................ $ 251,997 $ 363,519 $ 496,434 $ 439,554 $ 222,275
Total debt........................... 79,652 95,780 288,899 391,666 218,798
Other liabilities.................... 18,517 28,166 42,942 35,399 34,593
---------- ---------- ---------- ---------- ----------
Total liabilities............. 350,166 487,465 828,275 866,619 475,666
Shareholders' equity(B).............. 75,740 198,975 246,143 248,991 276,263
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity.......................... $ 425,906 $ 686,440 $1,074,418 $1,115,610 $ 751,929
========== ========== ========== ========== ==========
</TABLE>
(A) On September 29, 1995 the Company consummated a public offering of 3,900,000
shares of its Common Stock.
(B) No dividends were paid during the periods presented.
13
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is a specialized financial services company providing funding,
receivables management, collection, sales training and related products and
services to automobile dealers located in the United States, the United Kingdom,
Ireland and Canada. The Company assists such dealers by providing them with an
indirect source of financing for buyers of used vehicles with limited access to
traditional sources of consumer credit. In addition, but to a significantly
lesser extent, the Company provides floor plan financing and secured working
capital loans to dealers, secured by the related vehicle inventory and any
future cash collections owed to the dealer on contracts accepted under the
Company's program.
The Company's relationship with a dealer is defined by: (i) the servicing
agreement which sets forth the terms and conditions associated with the
Company's acceptance of a contract from a dealer; and (ii) the contract, which
is a retail installment sales contract between a dealer and a purchaser of a
used vehicle, providing for payment over a specified term. The dealer assigns
title to the contract and the security interest in the vehicle to the Company.
Thereafter, the rights and obligations of the Company and the dealer are defined
by the servicing agreement, which provides that a contract is assigned to the
Company as nominee for the dealer for purposes of administration, servicing and
collection of the amount due under the assigned contract, as well as for
security purposes. The Company takes title to the contract as nominee and
records the gross amount of the contract as a gross installment contract
receivable and the amount of its "servicing fee" (see below) as an unearned
finance charge which, for balance sheet purposes, is netted from the gross
amount of the contract. The Company records the remaining portion of the
contract (the gross amount of the contract less the unearned finance charge) as
a "dealer holdback". For balance sheet purposes, dealer holdbacks are shown net
of any Advances made by the Company to the dealer in connection with accepting
the assignment of a contract.
The Company's program allows dealers to establish the interest rate on
contracts, which typically is the maximum rate allowable by the state or country
in which the dealer is doing business. As the majority of the Company's revenue
is derived from the servicing fee it receives on the gross amount due under the
contract (typically 20% of the principal and interest), the Company's revenues
from servicing fees are not materially impacted by changes in interest rates.
The Company's revenue is principally dependent upon the gross value of contracts
accepted, which is determined by the number of contracts accepted and the amount
of the average contract. The contracts assigned to the Company are: (i) secured
by the related vehicle; and (ii) short-term in duration (generally maturing in
24 to 36 months, with an initial average maturity of approximately 31 months).
The interest rates charged on floor plan financing typically range from 12% to
18% per annum and interest rates charged on secured working capital loans are
typically prime plus 4%.
The Company's subsidiaries provide additional services to dealers. One such
subsidiary is primarily engaged in the business of reinsuring credit life and
disability insurance policies issued to borrowers under contracts originated by
dealers. Credit life and disability insurance premiums are ceded to the
subsidiary on both an earned and written basis and are earned over the life of
the contracts using pro rata and sum-of-digits methods. Another subsidiary
administers short-term limited extended service contracts offered by dealers. In
connection therewith, the subsidiary bears the risk of loss for any repairs
covered under the service contract. Revenue is recognized on a straight-line
basis over the life of the service contracts. In addition, the subsidiary has
relationships with third party service contract providers which pay the
subsidiary a fee on service contracts included on installment contracts financed
through participating dealers. The subsidiary does not bear the risk of loss for
covered claims on these third party service contracts. The income from the
non-refundable fee is recognized upon acceptance of the installment contract. A
third subsidiary is engaged in the business of reinsuring collateral protection
insurance coverage issued to borrowers under contracts originated by dealers.
Premiums are ceded to the subsidiary on both an earned and written basis and are
earned over the life of the contracts using pro rata and sum-of-digits methods.
In addition, the Company's credit reporting subsidiary provides credit
information and consumer reports to companies servicing the Non-Prime consumer
market. Furthermore, the Company's auction service subsidiary provides vehicle
suppliers with a full range of services to process and sell vehicles to buyers
at the auctions.
14
<PAGE> 16
RESULTS OF OPERATIONS
The following table sets forth the percent relationship of certain items to
total revenue for the periods indicated.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
PERCENT OF TOTAL REVENUES 1996 1997 1998
------------------------- ----- ----- -----
<S> <C> <C> <C>
Finance charges.......................................... 75.0% 71.2% 68.9%
Premiums earned.......................................... 7.7 6.9 7.7
Dealer enrollment fees................................... 4.1 4.5 2.5
Gain on sale of Advance receivables, net................. -- -- 0.5
Other income............................................. 13.2 17.4 20.4
----- ----- -----
Total revenue............................................ 100.0 100.0 100.0
----- ----- -----
Operating expenses....................................... 24.6 28.0 41.5
Provision for credit losses.............................. 10.5 52.0 11.5
Provision for claims..................................... 2.5 2.4 2.6
Interest................................................. 10.9 16.8 18.0
----- ----- -----
Total costs and expenses............................... 48.5 99.2 73.6
----- ----- -----
Operating income......................................... 51.5 0.8 26.4
Foreign exchange loss.................................. -- -- (0.1)
----- ----- -----
Income before income taxes............................... 51.5 0.8 26.3
Provision (credit) for income taxes.................... 18.0 (0.1) 8.8
----- ----- -----
Net income............................................... 33.5% 0.9% 17.5%
===== ===== =====
</TABLE>
Year Ended December 31, 1997 Compared To Year Ended December 31, 1998
Total Revenue. Total revenue decreased from $164.2 million in 1997 to
$142.3 million in 1998, a decrease of $21.9 million or 13.3%. This decrease was
primarily due to the decrease in finance charge revenue resulting from a
decrease in the average installment contracts receivable balance. The decrease
in gross installment contracts receivable is primarily the result of collections
on and charge offs of installment contracts exceeding contract originations for
the period. The Company's volume of contract originations decreased in the
fourth quarter of 1997 and in 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
this review 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 10.4% and 11.4% in 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. The percentage of
installment contracts which were in non-accrual status was 37.6% and 32.4% as of
December 31, 1997 and 1998, respectively.
Premiums earned increased, as a percentage of total revenue, from 6.9% in
1997 to 7.7% 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 methods,
premiums earned decreased at a slower rate than the decrease in finance
15
<PAGE> 17
charges. In addition, the increase is due to an increase in the penetration rate
on the Company's service contract and credit life insurance programs.
Earned dealer enrollment fees decreased, as a percentage of total revenue,
from 4.5% to 2.5% for the years ended 1997 and 1998, respectively. The decrease
is 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 value 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 dealers Advances, plus the present value of the estimated
cash flows to be received by the Company. In determining the gain on sale of
receivables, the Company assumed an excess cash flow discount rate of 15%,
cumulative credit losses of 14% and an 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 $13.2 million as of
December 31, 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 exceeds i) the principal and
interest to be paid on the commercial paper and ii) the amount of dealer
holdback due to dealers.
In the securitization, the Company retained servicing responsibilities and
subordinated interests. The Company receives monthly servicing fees of 4% of the
collections on the installment contracts receivable, and rights to future cash
flows arising after the investors in the commercial paper received the return
for which they are contracted. The investors have no recourse to the Company's
other assets for failure of debtors to pay when due. The Company's retained
interests are generally restricted until investors have been fully paid and are
subordinate to investors' interests. Their value is subject to substantial
credit and interest rate risk and the timing of projected collections on the
transferred financial assets.
Other income increased, as a percent of total revenue, from 17.4% in 1997
to 20.4% in 1998. The increase is primarily due to i) revenues from the
Company's auction services 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 increase is offset by 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
decline in contract originations.
Operating Expenses. Operating expenses, as a percent of total revenue,
increased from 28.0% in 1997 to 41.5% in 1998. Operating expenses consist
primarily of salaries and wages, general and administrative, and sales and
marketing expenses.
The increase for the period is due in part to an increase in salaries and
wages. Salaries and wages increased due to i) increases in the Company's average
wage rates necessary to attract and retain quality personnel; ii) the Company's
purchase of the auction services business in June 1998; iii) information
technology personnel added to maintain the Company's new computer systems and
applications and; iv) severance compensation paid to or accrued for an executive
who terminated employment in 1998.
A portion of management personnel compensation paid by the Company is
charged to a company controlled by the Company's Chairman (the "Affiliated
Company"), based upon the percentage of time spent working for the Affiliated
Company. The Company charged the Affiliated Company approximately $208,000 and
$226,000 in 1997 and 1998, respectively. Shared employees devote between 30% and
90% of their time to
16
<PAGE> 18
the Company, depending on their responsibilities. The Company believes that the
amounts charged by the Company are representative of the respective employees'
activities.
In addition, the increase in operating expenses is due to an increase in
general and administrative expenses. These expenses were higher in 1998
primarily due to increases in i) legal fees and settlement provisions resulting
from an increase in the frequency and magnitude of litigation against the
Company (See Item 3. "Legal Proceedings"); 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 auditors. Also, the increase
results from general and administrative expenses at the Company's auction
services subsidiary.
Provision for Credit Losses. The amount provided for credit losses, as a
percent of total revenue, decreased from 52.0% in 1997 to 11.5% in 1998. The
provision for the year ended December 31, 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 37.6% and 32.4% of gross receivables as of
December 31, 1997 and 1998, respectively.
Provision for Claims. The amount provided for insurance and service
contract claims, as a percent of total revenue, was 2.4% and 2.6% in 1997 and
1998, respectively. The increase corresponds with the increase, as a percent of
total revenue, in premiums earned from 6.9% in 1997 to 7.7% 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 16.8% in 1997 to 18.0% in 1998. Total interest expense decreased
from $27.6 million in 1997 to $25.6 million in 1998. The $2.0 million decrease
in interest expense for 1998 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 1998 was partially offset by higher average
interest rates during the year. 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, due to the downgrade of the Company's credit rating with Moody's
Investor Service from Baa3 to Ba2, and with Standard and Poor's from BBB- to BB
effective October 22, 1997, and a further downgrade by Moody's Investor Service
on June 24, 1998 from Ba2 to Ba3. Additionally, the increase in the average
interest rate is due to increases in the interest rate on outstanding borrowings
under the Company's note purchase agreements resulting from amendments due to
the Company's securitization of advance receivables.
Operating Income. As a result of the aforementioned factors, operating
income increased from $1.3 million in 1997 to $37.6 million in 1998, a increase
of $36.3 million.
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<PAGE> 19
Foreign Exchange Loss. The Company incurred a foreign exchange loss of
$41,000 and $116,000 in 1997 and 1998, respectively. The losses were the result
of exchange rate fluctuations between the U.S. dollar and foreign currency on
unhedged intercompany balances between the Company and subsidiaries which
operate outside the United States.
Provision (Credit) for Income Taxes. The provision (credit) for income
taxes increased from ($0.2) million in 1997 to $12.6 million in 1998. The
increase is due to higher pretax profits in 1998. For 1998, the effective tax
rate was 33.5%. The Company provides income taxes on its foreign earnings at the
statutory rate in effect for the applicable country where such earnings arise.
The principal foreign earnings of the Company arise from its operations in the
United Kingdom, where the statutory rate is lower than the U.S. statutory tax
rate.
Year Ended December 31, 1996 Compared To Year Ended December 31, 1997
Total Revenue. Total revenue increased from $123.9 million in 1996 to
$164.2 million in 1997, an increase of $40.3 million or 32.5%. This increase was
primarily due to the increase in finance charge revenue resulting from an
increase in the average installment contracts receivable balance. The increase
in gross installment contracts receivable was primarily the result of contract
originations for the period exceeding the sum of collections on installment
contracts and charge offs of installment contracts for the period.
The average yield on the Company's portfolio, calculated using finance
charge revenue divided by average net installment contracts receivable, was
approximately 10.9% and 11.2% in 1996 and 1997, respectively. The increase in
the average yield principally resulted from the Company changing its accounting
policy relating to the write-off of installment contracts receivable. The
revised policy requires write-off of delinquent installment contracts receivable
at nine months on a recency basis compared to one year under the old policy.
This change was partially offset by an increase in the percent of non-accrual
installment contracts (which were 34.1% and 37.6% of contracts as of December
31, 1996 and 1997, respectively). The increase in the percent of non-accrual
contracts was principally due to a change in the Company's non-accrual policy in
1997 to 90 days measured on a recency basis from 120 days measured on a
contractual basis, as well as a maturing of the installment contract receivable
portfolio due to lower origination growth. The Company implemented the change in
the non-accrual policy in an effort to more quickly identify unprofitable dealer
relationships.
Also contributing to the increase in total revenue was vehicle service
contract fees and other income which increased as a percent of total revenue
from 13.2% in 1996 to 17.4% in 1997. This increase was primarily due to fees
earned from the sale of third party service contract and credit life products
offered by dealers, which increased from $6.5 million in 1996 to $15.8 million
in 1997, and an increase in interest earned on floor plan financing which
resulted from increased floor plan balances in 1997. Earned dealer enrollment
fees increased, as a percent of total revenue, from 4.1% in 1996 to 4.5% in
1997. This increase was due to the continued increase in the number of new
dealers enrolling in the Company's financing program, particularly during 1996,
as these fees are deferred and amortized over the estimated repayment term of
the outstanding dealer Advance. Premiums earned decreased, as a percent of total
revenue, from 7.7% in 1996 to 6.9% in 1997. This decrease was primarily the
result of decreases, as a percent of total revenue, in premiums reinsured under
the Company's service contract and credit life insurance programs.
Operating Expenses. Operating Expenses, as a percentage of total revenue,
increased from 24.6% in 1996 to 28.0% in 1997. Operating expenses consist
primarily of salaries and wages, general and administrative, and sales and
marketing.
The increase for the period was due in part to an increase in salaries and
wages expense. Salaries and wages increased due to increases in employee
headcount, particularly collection personnel added to service the Company's
larger installment contract portfolio. To a lesser extent, the increase is due
to increases in the Company's average wage rates.
A portion of management personnel compensation paid by the Company is
charged to a company controlled by the Company's Chairman (the "Affiliated
Company"), based upon the percentage of time spent working for the Affiliated
Company. The Company charged the Affiliated Company approximately $311,000
18
<PAGE> 20
and $208,000 in 1996 and 1997, respectively. Shared employees devote between 30%
and 90% of their time to the Company, depending on their responsibilities. The
Company believes that the amounts charged by the Company are representative of
the respective employees' activities.
In addition, the increase in operating expenses was due to an increase in
general and administrative expenses. These expenses were higher in 1997
primarily due to: (i) an increase in depreciation and amortization resulting
from the addition of new computer systems which became operational in 1997 and
(ii) an increase in legal expenses resulting from the increase in the frequency
and severity of litigation in 1997. In addition, this increase was due to the
$500,000 write-off of computer software in 1997 no longer used in the Company's
operations.
To a lesser extent, the increase in the operating expense was due to an
increase in the sales and marketing expenses. The increase corresponds with the
increase in earned dealer enrollment fees, as the sales commissions paid for
dealer enrollments are deferred and amortized to expense over the estimated
repayment term of the outstanding dealer Advance. In addition, the increase was
also the result of increases in advertising and other promotions in 1997.
Provision for Credit Losses. The amount provided for credit losses, as a
percent of total revenue, increased from 10.5% in 1996 to 52.0% in 1997. This
increase was primarily the result of a charge recorded to reflect the
enhancements in the Company's methodology for estimating its reserve for
Advances made possible by a new loan servicing system implemented by the
Company. Utilizing the new information made available upon the successful
implementation of this new system, the Company undertook an extensive review of
its exposure related to dealer Advances using a static pool analysis on a per
dealer basis. In order to reflect the impact of this analysis on the Company's
Advance reserve additional provisions were recorded in 1997.
Provision for Claims. The amount provided for insurance and service
contract claims, as a percent of total revenue, decreased from 2.5% in 1996 to
2.4% in 1997. This decrease corresponds with decreases, as a percent of total
revenue, in premiums earned from 7.7% in 1996 to 6.9% in 1997.
The Company has established claims reserves based on accumulated estimates
of claims reported but unpaid, plus estimates of incurred but unreported claims.
The Company believes the reserves are adequate to cover future claims associated
with the programs.
Interest Expense. Interest expense, as a percent of total revenue,
increased from 10.9% in 1996 to 16.8% in 1997. This increase was a result of an
increase in the amount of average outstanding borrowings. To a lesser extent,
interest expense increased due to a higher average interest rate. The increase
in the average interest rate is primarily the result of the sale of $71.75
million in senior notes, at a fixed rate of interest, in March 1997. The
increase was also attributable to the downgrade of the Company's credit rating
with Moody's Investor Service from Baa3 to Ba2 and with Standard and Poor's from
BBB- to BB effective October 22, 1997. As a result of these downgrades, the
Company's Eurocurrency-based borrowing margins under the $250 million credit
agreement were increased from 82.5 basis points to 120 basis points in
accordance with the terms of the credit agreement.
Operating Income. As a result of the aforementioned factors, operating
income decreased from $63.6 million in 1996 to $1.3 million in 1997, a decrease
of $62.3 million or 97.9%.
Foreign Exchange Gain (Loss). The Company incurred a foreign exchange gain
of $27,000 in 1996 and a foreign exchange loss of $41,000 in 1997. The gain and
loss were the result of exchange rate fluctuations between the U.S. dollar and
foreign currency on unhedged intercompany balances between the Company and
subsidiaries which operate outside the United States.
Provision (Credit) for Income Taxes. The provision (credit) for income
taxes decreased from $22.1 million in 1996 to ($0.2) million in 1997. The
decrease was due to lower pretax profits in 1997.
19
<PAGE> 21
CREDIT LOSS 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 contract portfolio.
For purposes of establishing the reserve, future collections are reduced to
present-value in order to achieve a level yield over the remaining term of the
Advance equal to the expected yield at the origination of the impaired Advance.
During 1997, the Company implemented a new loan servicing system which allows
the Company to better estimate future collections for each dealer pool using
historical loss experience and a dealer by dealer static pool analysis. The
Company took a non-cash charge during 1997 to reflect the impact of this
enhancement in the Company's methodology for estimating the Advance reserve.
Future reserve requirements will depend in part on the magnitude of the variance
between management's prediction of future collections and the actual collections
that are realized. Ultimate losses may vary from current estimates and the
amount of provision, which is a current expense, may be either greater or less
than actual charge offs. The Company charges off dealer Advances against the
reserve at such time and to the extent that the Company's static pool analysis
determines that the Advance is completely or partially impaired.
The Company also maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against expected future losses in the
portfolio of receivables. The risk of loss to the Company related to the
installment contracts receivable balances relates primarily to the earned but
unpaid servicing fee or finance charge recognized on contractually delinquent
accounts.
Servicing fees, which are booked as finance charges, are recognized under
the interest method of accounting until the underlying obligation is 90 days
past due on a recency basis. At such time, the Company suspends the accrual of
revenue and makes a provision for credit losses equal to the earned but unpaid
revenue. In all cases, contracts on which no 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. The Company believes these changes will allow
for earlier identification of underperforming dealer pools.
The following table sets forth information relating to charge offs, the
allowance for credit losses, the reserve on Advances, and dealer holdbacks. 1998
and 1997 charge offs are based on nine month recency method; 1996 charge offs
are based on one year recency method.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Provision for credit losses -- installment
contracts..................................... $ 7,222 $ 11,072 $ 3,432
Provision for credit losses -- Advances......... 5,849 74,400 12,973
Charged against dealer holdbacks................ 103,497 374,646 359,846
Charged against unearned finance charges........ 23,045 82,748 81,632
Charged against allowance for credit losses..... 2,863 10,138 8,392
-------- -------- --------
Total contracts charged off..................... $129,405 $467,532 $449,870
======== ======== ========
Net charge off against the reserve on
Advances...................................... $ 444 $ 71,391 $ 9,744
======== ======== ========
</TABLE>
20
<PAGE> 22
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------
CREDIT RATIOS 1996 1997 1998
- ------------- ---- ---- ----
<S> <C> <C> <C>
Allowance for credit losses as a percent of gross
installment contracts receivable.......................... 1.0% 1.0% 0.9%
Reserve on Advances as a percent of Advances................ 1.7% 2.8% 4.6%
Gross dealer holdbacks as a percent of gross installment
contracts receivable...................................... 79.8% 79.9% 79.8%
</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 $520.6 million in 1997 to $290.6
million 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 1998, the Company paid down
approximately $133.7 million on its credit agreements and repaid $39.0 million
on its outstanding senior notes. The positive cash flow during 1998 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 in 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 in 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.
The Company has a $125 million credit agreement with a commercial bank
syndicate. 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 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 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. 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 December 31,
1998, there was approximately $79.0 million outstanding under this facility.
In July, 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 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
Company receives a monthly servicing fee equal to 4% of the collections of the
contributed installment contracts receivable. Except for the servicing fee, 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.
21
<PAGE> 23
As the Company's $125 million credit facility expires on June 15, 1999, the
Company will be required to renew the facility or refinance any amounts
outstanding under this facility on or before such date. As of March 24, 1999,
there was approximately $48.0 million outstanding under this facility. In
addition, in 1999, the Company will have $42.2 million of principal maturing on
its senior notes and $3.5 million maturing on a mortgage loan. The Company
believes that the $125 million credit facility will be renewed with similar
terms and a similar commitment amount and that the mortgage loan will be
refinanced.
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 various financing alternatives available will provide sufficient
financing for current debt maturities and for future operations. Failure to
complete the refinancing or failure to obtain other financing alternatives may
have a material adverse effect on the Company's operations.
MARKET RISK
The market risk discussion and the estimated amounts generated from the
analysis that follows are forward-looking statements of market risk assuming
certain adverse market conditions occur. Actual results in the future may differ
materially due to changes in the Company's product and debt mix and developments
in the financial markets.
The Company is exposed primarily to market risks associated with movements
in interest rates and foreign currency exchange rates. The Company believes that
it takes the necessary steps to appropriately reduce the potential impact of
interest rate and foreign exchange exposures on the Company's financial position
and operating performance.
Interest Rate Risk. The Company requires substantial amounts of cash to
fund cash Advances to dealers in connection with the acceptance of installment
contracts. The Company relies on various sources of financing to assist in
funding its operations, some of which is at floating rates of interest and
exposes the Company to risks associated with increases in interest rates. The
Company manages such risk by converting portions of its floating rate debt to
long-term fixed rates on a periodic basis, as deemed necessary.
As of December 31, 1998, the Company had $ 79.1 million of floating rate
debt outstanding. For every 1% increase in interest rates, annual after-tax
earnings would decrease by approximately $500,000, assuming the Company
maintains a level amount of floating rate debt and assuming an immediate
increase in rates.
Foreign Currency Risk. The Company is exposed to foreign currency risk from
the possibility of changes in foreign exchange rates that could have a negative
impact on earnings or asset and liability values from operations in foreign
countries. The Company's most significant foreign currency exposure relates to
the United Kingdom. It is the Company's policy to borrow and lend in local
currencies to mitigate such risks. For an immediate, hypothetical 10% decrease
in quoted foreign currency exchange rates, annual after tax earnings would have
declined by approximately $700,000 at December 31, 1998. The potential loss in
net asset values from such a decrease would be approximately $6 million as of
December 31, 1998. Immediate changes in interest rates and foreign currency
exchange rates discussed in the proceeding paragraphs are hypothetical rate
scenarios, used to calibrate risk, and do not currently represent management's
view of future market developments.
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
22
<PAGE> 24
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 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 by the
Company 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 has finished
testing on this system as well as all other mission critical systems to ensure
year 2000 compliance. All non-mission critical systems are anticipated to be
year 2000 compliant by June 30, 1999.
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. While modifications and testing of all mission critical and
non-mission critical systems is substantially complete, these systems will
undergo additional testing in 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 $50,000 in its efforts to become year
2000 compliant, of which approximately $25,000 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
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 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. Contingency planning is an integral part of the
Company's year 2000 readiness project. The Company has and is continuing to
develop contingency plans, which document the processes necessary to maintain
critical business functions should a significant third party system or mission
critical internal system fail. These contingency plans generally include the
repair of existing systems and, in some instances, the use of alternative
systems or procedures.
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
23
<PAGE> 25
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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is incorporated by reference from the
information in Item 7 under the caption "Market Risk" in this Form 10-K.
24
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Credit Acceptance Corporation:
We have audited the accompanying consolidated balance sheet of Credit
Acceptance Corporation and subsidiaries (the "Company") as of December 31, 1998,
and the related consolidated statements of income, shareholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Detroit, Michigan
January 27, 1999
25
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Credit Acceptance Corporation:
We have audited the accompanying consolidated balance sheet of Credit
Acceptance Corporation (a Michigan corporation) and subsidiaries as of December
31, 1997, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Credit
Acceptance Corporation and subsidiaries as of December 31, 1997, and the results
of their operations and their cash flows for each of the two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Detroit, Michigan
February 2, 1998
26
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
1997 1998
---------- --------
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 349 $ 13,775
Investments -- held to maturity........................... 9,973 10,191
Installment contracts receivable.......................... 1,049,818 671,768
Allowance for credit losses............................... (13,119) (7,075)
---------- --------
Installment contracts receivable, net.................. 1,036,699 664,693
---------- --------
Floor plan receivables:
Nonaffiliated companies................................ 8,137 9,455
Affiliated companies................................... 11,663 4,616
---------- --------
19,800 14,071
---------- --------
Notes receivable:
Nonaffiliated companies................................ 700 1,627
Affiliated companies................................... 531 651
---------- --------
1,231 2,278
---------- --------
Retained interest in securitization....................... -- 13,229
Property and equipment, net............................... 20,839 20,627
Other assets.............................................. 26,719 13,065
---------- --------
Total Assets........................................... $1,115,610 $751,929
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Senior notes.............................................. $ 175,150 $136,165
Lines of credit........................................... 212,717 79,067
Mortgage loan payable to bank............................. 3,799 3,566
Income taxes payable...................................... -- 776
Accounts payable and accrued liabilities.................. 20,362 22,423
Deferred dealer enrollment fees, net...................... 421 296
Dealer holdbacks, net..................................... 439,554 222,275
Deferred income taxes, net................................ 14,616 11,098
---------- --------
Total Liabilities...................................... 866,619 475,666
---------- --------
CONTINGENCIES (NOTE 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued................................
Common stock, $.01 par value, 80,000,000 shares
authorized, 46,113,115 and 46,291,487 shares issued and
outstanding in 1997 and 1998, respectively............. 461 463
Paid-in capital........................................... 128,336 129,914
Retained earnings......................................... 118,023 142,989
Accumulated other comprehensive income-cumulative
translation adjustment................................. 2,171 2,897
---------- --------
Total Shareholders' Equity............................. 248,991 276,263
---------- --------
Total Liabilities and Shareholders' Equity............. $1,115,610 $751,929
========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT FOR INCOME PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE:
Finance charges................................... $ 92,944 $ 117,020 $ 98,007
Premiums earned................................... 9,653 11,304 10,904
Dealer enrollment fees............................ 5,028 7,313 3,614
Gain on sale of advance receivables, net.......... -- -- 685
Other income...................................... 16,309 28,598 29,139
----------- ----------- -----------
Total revenue.................................. 123,934 164,235 142,349
----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses................................ 30,627 45,911 59,004
Provision for credit losses....................... 13,071 85,472 16,405
Provision for claims.............................. 3,060 3,911 3,734
Interest.......................................... 13,568 27,597 25,565
----------- ----------- -----------
Total costs and expenses....................... 60,326 162,891 104,708
----------- ----------- -----------
Operating income.................................... 63,608 1,344 37,641
Foreign exchange gain (loss)...................... 27 (41) (116)
----------- ----------- -----------
Income before provision for income taxes............ 63,635 1,303 37,525
Provision (credit) for income taxes............... 22,126 (234) 12,559
----------- ----------- -----------
Net income.......................................... $ 41,509 $ 1,537 $ 24,966
=========== =========== ===========
Net income per common share:
Basic............................................. $ .91 $ .03 $ .54
=========== =========== ===========
Diluted........................................... $ .89 $ .03 $ .53
=========== =========== ===========
Weighted average shares outstanding:
Basic............................................. 45,605,159 46,081,804 46,190,208
Diluted........................................... 46,623,655 46,754,713 46,960,290
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<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, 1995....... $198,975 $455 $123,878 $ 74,977 $ (335)
Comprehensive income:
Net income..................... 41,509 $41,509 41,509
-------
Other comprehensive income:
Foreign currency translation
adjustment................ 4,136 4,136 4,136
Tax on other comprehensive
income.................... (1,448)
-------
Other comprehensive income... 2,688
-------
Total comprehensive income....... 44,197
=======
Stock options exercised.......... 1,528 1 1,527
Issuance of 200,000 common shares
for acquisition of
subsidiary..................... (5) 2 (7)
-------- ---- -------- -------- -------
Balance -- December 31, 1996....... 246,143 458 125,398 116,486 3,801
Comprehensive income:
Net income..................... 1,537 1,537 1,537
-------
Other comprehensive income:
Foreign currency translation
adjustment................ (1,630) (1,630) (1,630)
Tax on other comprehensive
income.................... 570
-------
Other comprehensive income..... (1,060)
-------
Total comprehensive income....... 477
=======
Stock options exercised.......... 2,874 3 2,871
Dealer stock option plan
expense........................ 67 67
-------- ---- -------- -------- -------
Balance -- December 31, 1997....... 248,991 461 128,336 118,023 2,171
Comprehensive income:
Net income..................... 24,966 24,966 24,966
-------
Other comprehensive income:
Foreign currency translation
adjustment................ 726 726 726
Tax on other comprehensive
income.................... (254)
-------
Other comprehensive income... 472
-------
Total comprehensive income....... $25,438
=======
Stock options exercised.......... 1,430 2 1,428
Dealer stock option plan
expense........................ 150 150
-------- ---- -------- -------- -------
Balance-- December 31, 1998........ $276,263 $463 $129,914 $142,989 $ 2,897
======== ==== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements
29
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income............................................... $ 41,509 $ 1,537 $ 24,966
Adjustments to reconcile cash provided by operating
activities --
Provision (credit) for deferred income taxes.......... 964 5,628 (3,518)
Depreciation.......................................... 1,369 2,550 3,793
Gain on sale of advance receivables, gross............ -- -- (1,261)
Amortization of retained interest in securitization... -- -- (951)
Loss on retirement of property and equipment.......... -- 512 --
Provision for credit losses........................... 13,071 85,472 16,405
Dealer stock option plan expense...................... -- 67 150
Change in operating assets and liabilities --
Accounts payable and accrued liabilities.............. 10,842 (8,759) 2,061
Income taxes payable.................................. 2,355 (2,569) 776
Unearned insurance premiums, insurance reserves and
fees................................................ 2,371 1,450 (238)
Deferred dealer enrollment fees, net.................. 615 (1,843) (125)
Other assets.......................................... (165) (21,915) 13,654
--------- --------- ---------
Net cash provided by operating activities........... 72,931 62,130 55,712
--------- --------- ---------
Cash Flows From Investing Activities:
Principal collected on installment contracts
receivable............................................ 280,051 370,059 368,873
Advances to dealers and payments of dealer holdbacks..... (540,077) (520,609) (290,605)
Net proceeds from sale of advance receivables............ -- -- 49,275
Purchase of investments held to maturity................. (3,795) (3,653) (218)
Decrease (increase) in floor plan
receivables -- affiliated companies................... (815) 140 7,047
Increase in floor plan receivables -- non-affiliated
companies............................................. (1,429) (4,447) (1,318)
Increases in notes receivable -- affiliated companies.... (600) (363) (309)
Decreases in notes receivable -- affiliated companies.... 298 1,049 189
Increases in notes receivable -- non-affiliated
companies............................................. (903) (345) (1,254)
Decreases in notes receivable -- non-affiliated
companies............................................. 1,774 1,091 327
Issuance of common shares for acquisition................ (5) -- --
Purchases of property and equipment...................... (5,985) (8,943) (3,581)
--------- --------- ---------
Net cash provided by (used in) investing
activities....................................... (271,486) (166,021) 128,426
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds from sale of senior notes....................... 70,000 71,750 --
Repayment of senior notes................................ (6,600) (20,000) (38,985)
Net borrowings (repayments) under line of credit
agreements............................................ 129,923 51,235 (133,650)
Repayment of other debt.................................. (204) (218) (233)
Proceeds from stock options exercised.................... 1,528 2,874 1,430
--------- --------- ---------
Net cash provided by (used in) financing
activities....................................... 194,647 105,641 (171,438)
--------- --------- ---------
Effect of exchange rate changes on cash............. 4,136 (1,630) 726
--------- --------- ---------
Net increase in cash and cash equivalents........... 228 120 13,426
Cash and cash equivalents beginning of period.............. 1 229 349
--------- --------- ---------
Cash and Cash Equivalents End of Period.................... $ 229 $ 349 $ 13,775
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest................. $ 11,114 $ 27,464 $ 23,142
========= ========= =========
Cash paid during the period for income taxes............. $ 18,280 $ 14,887 $ 17,812
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Principal Business. Credit Acceptance Corporation and its subsidiaries
("CAC" or the "Company") is a specialized financial services company which
provides funding, receivables management, collection, sales training and related
products and services to automobile dealers located in the United States, the
United Kingdom, Canada and Ireland. The Company assists such dealers by
providing an indirect source of financing for buyers with limited access to
traditional sources of consumer credit due to past credit history. Installment
contracts originated and assigned to the Company by automobile dealers are
generally considered to have a high risk of default. To a significantly lesser
extent, CAC provides inventory floor plan financing and working capital loans
for dealers secured by inventory and the related cash collections owed to the
dealer by CAC.
Credit Acceptance Corporation UK, Ltd., CAC of Canada, Ltd., and Credit
Acceptance Corporation of Ireland Ltd. are all wholly-owned subsidiaries of the
Company which operate in their respective countries. These subsidiary companies
offer essentially the same dealer programs as are offered in the United States.
The dealer assigns title to the installment contract and the security
interest in the vehicle to the Company. At the time it accepts the assignment of
a contract, CAC records the gross amount of the contract as a gross installment
contract receivable. The Company records the amount of its servicing fee as an
unearned finance charge with the remaining portion recorded as a dealer
holdback. At the time of acceptance, contracts which meet certain criteria are
eligible for a cash advance, which is computed on a formula basis. Advances are
non-interest bearing and are secured by the cash collections on all of the
installment contracts receivable assigned from an individual dealer. Dealer
advances are netted against dealer holdbacks in the accompanying consolidated
financial statements, as dealer holdbacks are not paid until such time as all
advances related to such dealer have been recovered.
CAC collects the scheduled monthly payments based on contractual
arrangements with the consumer. Monthly cash collections are remitted to the
dealer subject to the Company first: (i) being reimbursed for certain collection
costs associated with all installment contracts originated by such dealer; (ii)
reducing the collections by the Company's servicing fee; and (iii) recovering
the aggregate advances made to such dealer.
Upon enrollment into the Company's financing program, the dealer enters
into a servicing agreement with CAC which defines the rights and obligations of
CAC and the dealer. The servicing agreement may be terminated by the Company or
by the dealer (so long as there is no event of default or an event which with
the lapse of time, giving of notice or both, would become an event of default)
upon 30 days prior written notice. The Company may also terminate the servicing
agreement immediately in the case of an event of default by the dealer. Upon any
termination by the dealer or in the event of a default, the dealer must
immediately pay the Company: (i) any unreimbursed collection costs; (ii) any
unpaid advances and all amounts owed by the dealer to the Company; and (iii) a
termination fee equal to the unearned finance charge of the then outstanding
amount of the installment contracts originated by such dealer and accepted by
the Company.
Ancillary Products and Services. Credit Acceptance Corporation Life
Insurance Company ("CAC Life"), Buyers Vehicle Protection Plan, Inc. ("BVPP")
and Credit Acceptance Reinsurance, LTD. ("CAC Reinsurance"), all wholly-owned
subsidiaries of the Company, provide additional services to participating
dealers.
CAC Life is engaged primarily in the business of reinsuring credit life and
disability insurance policies issued to borrowers under installment contracts
originated by participating dealers. CAC advances to dealers an amount equal to
the credit life and disability insurance premium on contracts accepted by the
Company which include credit life and disability insurance written by the
Company's designated insurance carriers. The policies insure the holder of the
installment contract for the outstanding balance payable in the event of death
or disability of the debtor. Premiums are ceded to CAC Life on both an earned
and written basis and are earned over the life of the contracts using pro rata
and sum-of-digits methods. CAC Life bears the risk of loss attendant to claims
under the coverages ceded to it.
31
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
BVPP administers short-term limited extended service contracts offered by
participating dealers. In connection therewith, BVPP bears the risk of loss for
any repairs covered under the service contract. Income is recognized on a
straight-line basis over the life of the service contracts. In addition, BVPP
has relationships with third party service contract providers which pay BVPP a
fee on service contracts included on installment contracts financed through
participating dealers. BVPP does not bear any risk of loss for covered claims on
these third party service contracts. The income from the non-refundable fee is
recognized upon acceptance of the installment contract. The Company advances to
dealers an amount equal to the purchase price of the vehicle service contract on
contracts accepted by the Company which include vehicle service contracts.
CAC has arrangements with insurance carriers and a third party
administrator to market and provide claims administration for a dual interest
collateral protection program. This insurance program, which insures the
financed vehicle against physical damage up to the lesser of the cost to repair
the vehicle or the unpaid balance owed on the related installment contract, is
made available to borrowers who finance vehicles through participating dealers.
If desired by a borrower, collateral protection insurance coverage is written
under group master policies issued by unaffiliated insurance carriers to the
Company. As part of the program, the insurance carriers cede insurance coverages
and premiums (less a fee) to CAC Reinsurance, which acts as a reinsurer of such
coverages. As a result, CAC Reinsurance bears the risk of loss attendant to
claims under the coverages ceded to it, and earns revenues resulting from
premiums ceded and the investment of such funds.
Other Services. Montana Investment Group, Inc. ("Montana") and Arlington
Investment Company ("Arlington"), wholly-owned subsidiaries of the Company,
provide additional sources of revenue to the Company. Montana supplies risk
assessment and fraud alert information and computerized skiptracing services
regarding borrowers to companies serving the Non-prime Consumer market.
Arlington provides a full range of auction services to vehicle suppliers to
process and sell vehicles to buyers at auctions.
Significant accounting policies are described in the following paragraphs.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated.
REPORTABLE BUSINESS SEGMENTS
The Company is organized into four primary business units: North American
automotive finance, U.K./ Ireland automotive finance, credit reporting services,
and auction services. See Note 12 for information regarding the Company's
reportable segments.
USE OF ESTIMATES
The accounting and reporting policies of the Company require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. The accounts which are subject to such estimation
techniques include the reserve against advances and the allowances for credit
losses. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
operations are measured using the local currency as the functional currency.
Revenues and expenses are translated at average exchange rates during the year
and assets and liabilities are translated at current exchange rates at the
balance sheet date. Translation adjustments are accumulated as a separate
component of shareholders' equity.
32
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
On January 1, 1999, 11 of 15 member countries of the European Monetary
Union established fixed conversion rates between their existing currencies and
adopted the euro as their new common currency. The euro trades on currency
exchanges and the legacy currencies remain legal tender in the participating
countries for a transition period until January 1, 2002. Beginning on January 1,
2002, euro denominated bills and coins will be issued and legacy currencies will
be withdrawn from circulation.
The Company will assess and address the potential impact to CAC that may
result from the euro conversion, as the Company has operations in both the
United Kingdom and Ireland. These issues include, but are not limited to: 1) the
technical challenges to adapt information systems to accommodate euro
transactions; 2) the impact on currency exchange rate risks; 3) the impact on
existing contracts; and 4) tax and accounting implications. The Company expects
that the euro conversion will not have a material adverse impact on its
consolidated financial condition or results of operations.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of readily marketable securities with original
maturities of three months or less.
INVESTMENTS
Investments consist principally of short-term money market funds and U.S.
Treasury Securities which the Company has both the intent and the ability to
hold to maturity.
INSTALLMENT CONTRACTS RECEIVABLE
Installment contracts receivable are collateralized by vehicle titles, and
the Company has the right to repossess the vehicle in the event that the
consumer defaults on the payment terms of the contract. Repossessed collateral
is valued at the lower of the carrying amount of the receivable or estimated
fair value, less estimated costs of disposition, and is classified in
installment contracts receivable on the balance sheets. At December 31, 1998 and
1997, repossessed assets totaled approximately $10.2 million and $13.8 million,
respectively.
The Company changed its policy relating to non-accrual loans in the third
quarter of 1997 to 90 days measured on a recency basis from 120 days measured on
a contractual basis. The Company believes this change allows for earlier
identification of underperforming dealer pools.
During the fourth quarter of 1997, the Company changed its accounting
policies relating to the write-off of installment contracts receivable based on
data available from the Company's new loan servicing system. The revised policy
requires write-off of delinquent installment contracts at nine months on a
recency basis compared to one year under the old policy.
ALLOWANCE FOR CREDIT LOSSES
The Company maintains an allowance for credit losses which, in the opinion
of management, adequately reserves against credit losses on installment
contracts that are considered to be impaired. The risk of loss to the Company
related to the installment contracts receivable balances relates primarily to
the earned but unpaid servicing fee or finance charge recognized on
contractually delinquent accounts. To the extent that the Company does not
collect the gross amount of the contract balance, the remaining gross
installment contract receivable balance is charged off against dealer holdbacks,
unearned finance charges and the allowance for credit losses. Ultimate losses
may vary from current estimates and the amount of the provision, which is
current expense, may be either greater or less than actual charge-offs.
33
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
RESERVE ON ADVANCES
When an installment contract is accepted, the Company generally pays a cash
advance to the dealer. These advance balances represent the Company's primary
risk of loss related to the funding activity with the dealers. The Company
maintains a reserve on advances to dealers which reflects advance balances that
are not expected to be recovered through collections on the related installment
contract receivable portfolio. To serve as a basis for evaluating the reserve
requirement, management reviews delinquencies, charge-off experience factors,
the payment performance of loan pools, changes in collateral value, economic
conditions and trends and other information. For purposes of establishing the
reserve, future collections (including the anticipated proceeds from repossessed
collateral) are reduced to present-value in order to achieve a level yield over
the remaining term of the advance equal to the expected yield at the origination
of the impaired advance.
Future reserve requirements will depend in part on the magnitude of the
variance between management's prediction of future collections and the actual
collections that are realized. Estimating cash collections from the installment
contracts receivable is complicated by the unusual payment patterns of the
borrowers who generally cannot obtain traditional financing. The evaluation of
the reserve against advances considers such factors as current delinquencies,
the characteristics of the accounts, the value of the underlying collateral, the
location of the borrower, general economic conditions and trends among other
information. Although the Company uses many resources to assess the adequacy of
the reserve against advances, actual losses may vary significantly from current
estimates and the amount of provision, which is a current expense, may be either
greater or less than actual charge offs.
FLOOR PLAN RECEIVABLES
CAC finances used vehicle inventories for both affiliated dealers and
nonaffiliated dealers. Amounts loaned are secured by the related inventories and
any future cash collections owed to the dealer on outstanding contracts.
NOTES RECEIVABLE
Notes receivable are primarily working capital loans to dealers and are due
on demand. These notes receivable are secured by all assets of the dealer
including any future cash collections owed to the dealer on outstanding
contracts.
ADVANCE RECEIVABLE SALES
When the Company sells advance receivables in securitizations, it retains
interest-only strips and servicing rights all of which are retained interests in
the securitized assets. Gain or loss on sale of the advance receivables depends
in part on the previous carrying amount of retained interests in advances,
allocated in proportion to their fair value. To obtain fair values, quoted
market prices are used if available. However, quotes are generally not available
for retained interests, so the Company generally estimates fair value based on
the present value of future cash flows expected under management's best
estimates of the key assumptions -- credit losses, timing of projected
collections, and discount rates commensurate with the risks involved.
The Company evaluates the fair value and potential impairment of its
retained interest in securitization on a quarterly basis utilizing the
methodology described above.
PROPERTY AND EQUIPMENT
Additions to property and equipment are recorded at cost. Depreciation is
generally provided on a straight-line basis over the estimated useful lives
(primarily five to forty years) of the assets. The cost of assets sold or
retired and the related accumulated depreciation are removed from the accounts
at the time of
34
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
disposition and any resulting gain or loss is included in operations.
Maintenance, repairs and minor replacements are charged to operations as
incurred; major replacements and betterments are capitalized.
GOODWILL
The Company's goodwill represents the excess of cost over the fair value of
assets acquired and is amortized using the straight-line method over ten years.
Based on management's review of the goodwill, the Company believes that no
material impairment of the asset exists. Goodwill, net of amortization of
$181,000, is recorded in other assets at $2,919,000 at December 31, 1998. Prior
to 1998, no goodwill was recorded in the financial statements.
DEALER HOLDBACKS
As part of the dealer servicing agreement, the Company establishes a dealer
holdback to protect the Company from potential losses associated with
installment contracts. This dealer holdback is not paid until such time as all
advances related to such dealer have been recovered.
INCOME TAXES
Deferred income taxes are provided for all temporary differences between
the book and tax basis of assets and liabilities. Deferred income taxes are
adjusted to reflect new tax rates when they are enacted into law.
REVENUE RECOGNITION
Finance Charges. The Company computes its servicing fee based upon the
gross amount due under the installment contract. Income is recognized under the
interest method of accounting until the underlying obligation is 90 days past
due on a recency basis. At such time, the Company suspends the accrual of
revenue and makes a provision for credit losses equal to the earned but unpaid
revenue.
Premiums Earned. Credit life and disability premiums are ceded to CAC Life
and collision premiums are ceded to CAC Reinsurance on both an earned and
written basis and are earned over the life of the contracts using the pro rata
and sum-of-digits methods. Premiums on BVPP warranties are earned on a
straight-line basis over the life of the service contracts.
Dealer Enrollment Fees. Enrollment fees are paid by each dealer in the
United States and Canada signing a servicing agreement and are nonrefundable.
These fees and the related direct incremental costs of originating these fees
are deferred and amortized on a straight-line basis over the estimated repayment
term of the outstanding dealer advance.
Other Income. Dealers are charged an initial fee to floor plan a vehicle.
Interest is charged based on the number of days a vehicle remains on the floor
plan. Interest rates typically range from 12% to 18% per annum.
Interest on notes receivable is charged based on the outstanding monthly
balance and is typically 4% above prime per annum, generally with a minimum rate
of 12% per annum.
Fees received by the Company for the sale of third party vehicle service
contracts are recognized upon acceptance of the related installment contract
receivable as the Company bears no further obligation.
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. The Company's other comprehensive
income consists of foreign currency transaction adjustments.
35
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED)
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 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect results of consolidated operations or financial position of the
Company, but did affect the disclosure of segment information as illustrated in
Note 12.
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 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.
In the first quarter of 1998, the American Institute of Certified Public
Accountants' Accounting Standards Executive Committee issued Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". SOP 98-1 provides guidance on the capitalization of
software for internal use. CAC adopted SOP 98-1 effective January 1, 1999, as
required. Management is currently assessing the impact of this SOP on the
consolidated financial statements of the Company.
RECLASSIFICATION
Certain amounts for the prior periods have been reclassified to conform to
the current presentation.
(2) FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
their value.
Cash and Cash Equivalents. The carrying amount of cash and cash equivalents
approximate the fair values due to the short maturity of these instruments.
Investments. The fair values of U.S. Treasury securities are based on
quoted market prices. The carrying amount of money market funds approximates the
fair value due to the short maturity.
Installment Contracts Receivable and Net Dealer Holdbacks. As the majority
of the Company's revenue is derived from the servicing fee it receives on the
gross amount due under the installment contract (typically 20% of the principal
and interest), the Company's revenues from servicing fees are not materially
impacted by changes in interest rates. As such, the carrying amounts recorded on
a historical cost basis for installment contracts receivable and net dealer
holdbacks in the financial statements related to the financing and service
program which the Company provides to dealers approximates fair value.
Floor Plan and Notes Receivable. The fair values of floor plan and note
receivables are estimated by discounting the future cash flows using applicable
current interest rates.
36
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) FINANCIAL INSTRUMENTS -- (CONCLUDED)
Retained Interest in Securitization. The fair value of the retained
interest in securitization is estimated by discounting expected future excess
cash flows utilizing current assumptions as described in Note 4.
Debt. The fair value of debt is determined using quoted market prices, if
available, or calculating the estimated value of each debt instrument based on
current rates offered to the Company for debt with similar maturities.
A comparison of the carrying value and fair value of these financial
instruments is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998
----------------------- ---------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents........................ $ 349 $ 349 $ 13,775 $ 13,775
Investments -- held to maturity.................. 9,973 9,991 10,191 10,193
Installment contracts receivable, net............ 1,036,699 1,036,699 664,693 664,693
Floor plan receivable............................ 19,800 19,800 14,071 14,071
Notes receivable................................. 1,231 1,231 2,278 2,278
Retained interest in securitization.............. -- -- 13,229 13,229
Senior notes..................................... 175,150 180,200 136,165 135,529
Lines of credit.................................. 212,717 212,717 79,067 79,067
Mortgage loan payable to bank.................... 3,799 3,799 3,566 3,566
Dealer holdbacks, net............................ 439,554 439,554 222,275 222,275
</TABLE>
CERTAIN DEBT AND MARKETABLE SECURITIES
The Company's portfolio of investment securities includes short-term money
market instruments and U.S. Treasury securities. All investments are categorized
as held-to-maturity and are stated at amortized cost. Pursuant to reinsurance
agreements, the Company is required to hold investment securities in a trust
account. The restricted investment securities totaled approximately $9.4 million
and $8.9 million at December 31, 1997 and 1998, respectively.
A summary of investments held by the Company consist of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1998
------------------------------ --------------------------------
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
COST GAINS VALUE COST GAINS VALUE
------ ---------- ------ ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Money market funds..................... $1,759 $-- $1,759 $ 9,466 $-- $ 9,466
U.S. Treasury securities............... 8,214 18 8,232 725 2 727
------ --- ------ ------- --- -------
Total investments.................... $9,973 $18 $9,991 $10,191 $ 2 $10,193
====== === ====== ======= === =======
</TABLE>
(3) INSTALLMENT CONTRACTS RECEIVABLE
Installment contracts generally have initial terms ranging from 24 to 36
months and are collateralized by the related vehicles. Contractual maturities of
contracts by year have not been presented as this information is not meaningful
due to the uneven payment patterns of non-prime consumers. The initial average
term of an installment contract was approximately 30 months in 1996 and 31
months in 1997 and in 1998. As of December 31, 1997 and 1998, the accrual of
finance charge revenue has been suspended, and fully reserved
37
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) INSTALLMENT CONTRACTS RECEIVABLE -- (CONCLUDED)
for, on approximately $471.8 million and $257.5 million of delinquent
installment contracts, respectively. Installment contracts receivable consisted
of the following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------
1997 1998
---------- ---------
<S> <C> <C>
Gross installment contracts receivable................. $1,254,858 $ 794,831
Unearned finance charges............................... (196,357) (114,617)
Unearned insurance premiums, insurance reserves and
fees................................................. (8,683) (8,446)
---------- ---------
Installment contracts receivable....................... $1,049,818 $ 671,768
========== =========
Non-accrual installment contracts as a percent of total
gross installment contracts.......................... 37.6% 32.4%
========== =========
</TABLE>
A summary of changes in gross installment contracts receivable is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Balance -- beginning of period............. $ 790,607 $1,251,139 $1,254,858
Gross amount of installment contracts
accepted................................. 965,690 983,459 580,578
Gross installment contracts underlying
advance receivables securitized.......... -- -- (98,591)
Cash collections on installment contracts
accepted................................. (388,328) (505,925) (493,900)
Charge offs................................ (129,405) (467,532) (449,870)
Currency translation....................... 12,575 (6,283) 1,756
---------- ---------- ----------
Balance -- end of period................... $1,251,139 $1,254,858 $ 794,831
========== ========== ==========
</TABLE>
A summary of the allowance for credit losses is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997 1998
------- -------- -------
<S> <C> <C> <C>
Balance -- beginning of period.................... $ 7,757 $ 12,195 $13,119
Provision for loan losses......................... 7,222 11,072 3,432
Allowance on installment contracts underlying
advance receivables securitized................. -- -- (1,107)
Charge offs, net.................................. (2,863) (10,138) (8,392)
Currency translation.............................. 79 (10) 23
------- -------- -------
Balance -- end of period.......................... $12,195 $ 13,119 $ 7,075
======= ======== =======
</TABLE>
Recoveries related to charged off contracts are primarily the result of the
recovery of earned but unpaid finance charges and are netted against
charge-offs.
The Company's financing and service program allows dealers to establish the
interest rate on contracts, which typically is the maximum rate allowable by the
state or country in which the dealer is doing business.
(4) ADVANCE RECEIVABLE SALES
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 value of approximately $56 million and
received approximately $49.3 million in financing from an institutional
investor. The debt is
38
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) ADVANCE RECEIVABLE SALES -- (CONCLUDED)
non-recourse to the Company, bears interest at the thirty day commercial paper
rate with a maximum of 7.5% and is anticipated to fully amortize within 30
months. The Company recognized a gain on the transaction of approximately
$685,000 which 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 cash flows to be
received by the Company. In determining the gain on the sale of receivables and
the estimated fair value of the Company's retained interest in securitization,
the Company assumed an excess cash flow discount rate of 15%, cumulative credit
losses of 14% and an interest rate of 7.5% on the underlying debt. The excess
cash flows result from the amount by which projected collections on the
installment contracts exceeds i) the principal and interest to be paid on the
commercial paper and ii) the amount of dealer holdback due to dealers.
In the securitization, the Company retained servicing responsibilities and
subordinated interests. The Company receives monthly servicing fees of 4% of the
collections on the installment contracts receivable, and rights to future cash
flows arising after the investors in the commercial paper received the return
for which they are contracted. The present value of such estimated cash flows
has been recorded by the Company as a retained interest in securitization of
$13.2 million as of December 31, 1998. The investors have no recourse to the
Company's other assets for failure of debtors to pay when due. The Company's
retained interests are generally restricted until investors have been fully paid
and are subordinate to investors' interests. Their value is subject to
substantial credit and interest rate risk and the timing of projected
collections on the transferred financial assets.
The installment contracts supporting the dealer advances that were sold
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.
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Land....................................................... $ 2,577 $ 2,587
Building and improvements.................................. 6,761 6,968
Data processing equipment.................................. 14,814 17,460
Office furniture & equipment............................... 2,061 2,648
Leasehold improvements..................................... 711 781
------- -------
26,924 30,444
Less accumulated depreciation.............................. 6,085 9,817
------- -------
$20,839 $20,627
======= =======
</TABLE>
The depreciation expense on the property and equipment was $1,369,000,
$2,550,000 and $3,793,000 in 1996, 1997 and 1998, respectively.
(6) LEASED PROPERTIES
PROPERTY LEASED TO OTHERS
The Company leases part of its headquarters to outside parties as
non-cancelable operating leases, which is not a significant part of its business
activities. Rental income, which is included in other income, is recognized on a
straight-line basis over the related lease term. Rental income on leased
property was $1,255,000, $991,000 and $997,000 for 1996, 1997 and 1998,
respectively.
39
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) LEASED PROPERTIES -- (CONCLUDED)
PROPERTY LEASED FROM OTHERS
The Company utilizes leases in its day to day operations for administrative
offices, auction facilities and office equipment. Management expects that in the
normal course of business, leases will be renewed or replaced by other leases.
One of the auction facility leases expires in June 1999 and the Company has an
option to purchase the property.
Total rental expense on all operating leases was $175,000, $242,000 and
$388,000 for 1996, 1997 and 1998, respectively. Contingent rentals under the
operating leases were insignificant. Minimum future lease commitments under
operating leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 500,000
2000........................................................ 380,000
2001........................................................ 358,000
2002........................................................ 358,000
2003........................................................ 358,000
2004 and beyond............................................. 744,000
----------
Total minimum lease commitments...................... $2,698,000
==========
</TABLE>
(7) DEBT
SENIOR NOTES
On November 7, 1994, the Company completed the sale of its $60 million
8.87% Senior Notes due November 1, 2001 to various insurance companies. On July
1, 1998, the interest rate on these notes was increased to 9.12%. The Notes are
secured and require semi-annual interest payments and annual payments of
principal.
On August 29, 1996, the Company completed the sale of its $70 million 7.99%
Senior Notes due July 1, 2001 to various insurance companies. On July 1, 1998,
the interest rate on these notes was increased to 8.24%. The Notes are secured
and require semi-annual interest payments and annual payments of principal.
On March 25, 1997, the Company completed the sale of its $71.75 million
7.77% Senior Notes due October 1, 2001 to various insurance companies. On July
1, 1998, the interest rate on these notes was increased to 8.02%. The Notes are
secured and require semi-annual payments of interest and annual payments of
principal commencing on October 1, 1998.
MORTGAGE LOAN PAYABLE
The Company has a loan from its principal commercial bank secured by a
mortgage on the Company's headquarters building. The loan bears interest at 6.5%
and is secured by a first mortgage lien on the building and an assignment of all
leases, rents, revenues and profits under all present and future leases. There
was $3,799,000 and $3,566,000 outstanding on this loan as of December 31, 1997
and 1998, respectively. The loan matures on May 1, 1999.
LINES OF CREDIT
The Company has a $125 million credit agreement with a commercial bank
syndicate with a commitment period through June 15, 1999 subject to annual
extensions for additional one year periods at the request of the Company and
with the consent of each of the banks in the facility. The borrowings are
secured by a lien on most of the Company's assets, including a pledge of the
stock in its United Kingdom subsidiary, with interest payable at the
Eurocurrency rate plus 1.4% or at the prime rate (7.75% as of December 31,
1998). The Eurocurrency borrowings may be fixed for periods of up to six months.
The Company must pay an agent's fee
40
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) DEBT -- (CONCLUDED)
of $48,000 annually and a commitment fee of .60% quarterly on the amount of the
commitment. As of December 31, 1998, there was approximately $79.0 million
outstanding under this facility. The maximum amount outstanding was
approximately $213.4 million and $210.2 million in 1997 and 1998, respectively.
The weighted average balance outstanding was $172.5 million and $143.4 million
in 1997 and 1998, respectively.
The Company also has a $1,000,000 Canadian dollar line of credit with a
commercial bank in Canada, which is used to fund the day to day cash flow
requirements of the Company's Canadian subsidiary. The borrowings are unsecured,
guaranteed by the Company, with interest payable at the Libor rate plus 1.4% or
at the Canadian bank's prime rate (6.75% at December 31, 1998). As of December
31, 1998, there was approximately $125,000 Canadian dollars ($80,000 U.S.
dollars) outstanding under the facility.
The Company also has a $1,200,000 line of credit with a commitment period
through May 16, 1999 with a commercial bank which is used to fund the day to day
operations of its auction services subsidiary. The borrowings are secured by the
assets of the Company's auction services subsidiary and by a $500,000 letter of
credit issued by the Company's principal commercial bank, with interest payable
at the bank's prime rate. As of December 31, 1998, there was approximately
$1,000,000 outstanding under the facility.
The weighted average interest rate on line of credit borrowings outstanding
was 7.34% and 6.89% as of December 31, 1997 and 1998, respectively.
PRINCIPAL DEBT MATURITIES
The principal maturities of the Company's total debt at December 31, 1998
are as follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $124,868
2000........................................................ 45,410
2001........................................................ 48,520
--------
$218,798
========
</TABLE>
DEBT COVENANTS
The Company must comply with various restrictive debt covenants which
require the maintenance of certain financial ratios and other financial
conditions. The most restrictive covenants limit the ratio of the Company's
debt-to-equity, limit the ratio of the Company's fixed charges to net income,
limit the Company's investment in its foreign subsidiaries, limit the ratio of
debt to advances, limit the ratio of debt to gross installment contracts
receivable, limit the ratio of advances to installment contracts receivable, and
require that the Company maintain specified minimum levels of net worth.
(8) DEALER HOLDBACKS AND RESERVE ON ADVANCES
Dealer holdbacks consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-----------------------
1997 1998
---------- ---------
<S> <C> <C>
Dealer holdbacks....................................... $1,002,033 $ 634,102
Less: advances (net of reserve of $16,369 and $19,954
in 1997 and 1998, respectively)...................... (562,479) (411,827)
---------- ---------
Dealer holdbacks, net.................................. $ 439,554 $ 222,275
========== =========
</TABLE>
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
41
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) DEALER HOLDBACKS AND RESERVE ON ADVANCES -- (CONCLUDED)
static pool analysis. The Company took a charge during 1997 to reflect the
impact of this enhancement in the Company's methodology for estimating the
reserve. During the fourth quarter of 1997, the Company reevaluated the timing
of the charge off of advances to dealers and concluded that it was appropriate
to accelerate the recognition of charge offs since the static pool analysis
demonstrated that the advances were uncollectible.
A summary of the change in the reserve against advances (classified with
dealer holdbacks, net in the accompanying balance sheets) is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------ -------- -------
<S> <C> <C> <C>
Balance -- beginning of period..................... $3,214 $ 8,754 $16,369
Provision for advance losses....................... 5,849 74,400 12,973
Advance reserve fees............................... 4,673 181
Charge offs, net................................... (444) (71,391) (9,744)
Currency translation............................... 135 (67) 175
------ -------- -------
Balance -- end of period........................... $8,754 $ 16,369 $19,954
====== ======== =======
</TABLE>
(9) RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company regularly accepts
assignments of installment contracts originated by affiliated dealers owned by
the Company's majority shareholder. Installment contracts accepted from
affiliated dealers were approximately $25.6 million, $13.4 million and $10.0
million in 1996, 1997 and 1998, respectively. Remaining installment contracts
receivable from affiliated dealers represented approximately 3.9% and 1.6% of
the gross installment contracts receivable balance as of December 31, 1997 and
1998, respectively. The Company accepted installment contracts from affiliated
dealers and nonaffiliated dealers on the same terms. Dealer holdbacks from
contracts accepted from affiliated dealers were approximately $20.5 million,
$10.7 million and $8.0 million in 1996, 1997 and 1998, respectively.
The Company receives interest income and fees from affiliated dealers on
floor plan receivables and notes receivable. Total income earned was $1,409,000,
$1,564,000 and $1,187,000 for the years ended December 31, 1996, 1997 and 1998,
respectively.
The Company shares certain expenses including payroll and related benefits,
occupancy costs and insurance with its affiliated company owned by the Company's
majority shareholder. For the years ended December 31, 1996, 1997 and 1998, the
Company charged its affiliated company approximately $311,000, $247,000 and
$248,000, and was charged $97,000, $45,000 and $80,000 by the affiliated company
for such shared expenses incurred in its operations. This arrangement is covered
under a services agreement. The agreement has an indefinite term, but may be
terminated upon 30 days written notice by either party.
42
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) INCOME TAXES
The income tax provision (credit) consists of the following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Income (loss) before provision (benefit) for income taxes:
Domestic.................................................. $54,329 $(9,285) $26,635
Foreign................................................... 9,306 10,588 10,890
------- ------- -------
$63,635 $ 1,303 $37,525
======= ======= =======
Domestic provision (benefit) for income taxes:
Current................................................... $18,044 $(6,516) $12,507
Deferred.................................................. 1,009 2,799 (3,179)
Foreign provision (benefit) for income taxes:
Current................................................... 3,118 654 3,570
Deferred.................................................. (45) 2,829 (339)
------- ------- -------
Provision (credit) for income taxes......................... $22,126 $ (234) $12,559
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of the
following (in thousands):
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for credit losses............................... $11,165 $12,080
Reserve on advances....................................... 1,731 5,451
Deferred dealer enrollment fees........................... 166 110
Accrued warranty claims................................... 646 713
Other, net................................................ 48 813
------- -------
Total deferred tax assets.............................. 13,756 19,167
------- -------
Deferred tax liabilities:
Unearned finance charges.................................. 27,233 28,204
Gain on sale of advance receivables....................... -- 853
Accumulated depreciation.................................. 642 775
Deferred credit life and warranty costs................... 497 433
------- -------
Total deferred tax liabilities......................... 28,372 30,265
------- -------
Net deferred tax liability............................. $14,616 $11,098
======= =======
</TABLE>
No valuation allowances were considered necessary in the calculation of
deferred tax assets as of December 31, 1997 and 1998.
The Company's effective income tax rate was approximately equal to the
domestic and foreign statutory rates in 1996, 1997 and 1998.
Deferred U.S. federal income taxes and withholding taxes have not been
provided on the undistributed earnings of the Company's foreign subsidiaries as
such amounts are considered to be permanently reinvested. The cumulative
undistributed earnings at December 31, 1998 on which the Company had not
provided additional national income taxes and withholding taxes were
approximately $21.1 million.
43
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CAPITAL TRANSACTIONS
NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the total of the weighted
average number of common shares and 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.
The share effect is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding............... 45,605,159 46,081,804 46,190,208
Common stock equivalents................................. 1,018,496 672,909 770,082
---------- ---------- ----------
Weighted average common shares and common stock
equivalents............................................ 46,623,655 46,754,713 46,960,290
========== ========== ==========
</TABLE>
CAPITAL STOCK TRANSACTIONS
On December 11, 1996, the Company acquired all of the outstanding shares of
Montana Investment Group, Inc. in exchange for a total of 200,000 shares of the
Company's common stock which were issued to two shareholders of Montana. The
acquisition has been accounted for under the pooling of interests method. The
impact of this acquisition was not significant to the Company's financial
statements. The issuance of such shares was exempt from registration under
Section 4(2) of the Securities Act of 1933. On May 19, 1997, CAC's Board of
Directors and shareholders approved an amendment to the Articles of
Incorporation of the Company increasing the number of authorized Common shares
to 80,000,000.
STOCK OPTION PLANS
Pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), the
Company has reserved 5,000,000 shares of its common stock for the future
granting of options to officers and other employees. The exercise price of the
options is equal to the fair market value on the date of the grant. Options
under the 1992 Plan become exercisable over a three to five year period, or
immediately upon a change of control. Nonvested options are forfeited upon
termination of employment and otherwise expire ten years from the date of grant.
Shares available for future grants totaled 1,179,559, 967,066 and 115,559 as of
December 31, 1996, 1997 and 1998, respectively.
Pursuant to the Company's Stock Option Plan for dealers (the "Dealer Plan")
the Company has reserved 1,000,000 shares of its common stock for the future
granting of options to participating dealers. Options are generally granted to
participating dealers based on the Company accepting a minimum of 100 retail
installment contracts from the dealer in a calendar year. Upon the Company's
acceptance of 100 contracts from a dealer, the dealer receives an option to
purchase 1,000 shares of the Company's Common Stock. The dealer receives an
option to purchase an additional 200 shares for each additional 100 contracts
accepted by the Company. The exercise price of the options is equal to the fair
market value on the date of grant. The options become exercisable over a three
year period. Nonvested options are forfeited upon the termination of the
dealer's servicing agreement by the Company or the dealer and otherwise expire
five years from the date of grant. Shares available for future grants totaled
235,600, 185,600 and 478,385 as of December 31, 1996, 1997 and 1998,
respectively. Effective January 1, 1999, the Company suspended the granting of
future options under the Dealer Plan.
44
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CAPITAL TRANSACTIONS -- (CONTINUED)
The Company accounts for the 1992 Plan under APB Opinion No. 25, under
which no compensation cost has been recognized Had compensation cost for the
1992 Plan been recognized, the Company's net income and earnings per share would
have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Net income (loss)
As reported...................................... $41,509 $ 1,537 $24,966
Pro forma........................................ 36,972 (2,519) 22,346
Net income (loss) per common share:
As reported -- basic............................. $ 0.91 $ 0.03 $ 0.54
As reported -- diluted........................... 0.89 0.03 0.53
Pro forma -- basic............................... 0.81 (0.05) 0.48
Pro forma -- diluted............................. 0.79 (0.05) 0.48
</TABLE>
The Company accounts for the compensation costs related to its grants under
the Dealer Plan in accordance with Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The sales and
marketing cost that has been charged against income for the non-employee Dealer
Plan was $67,000 and $150,000 in 1997 and 1998, respectively. No costs were
charged against income for 1996. Because the SFAS 123 method of accounting has
not been applied to options granted prior to January 1, 1995 (December 15, 1995
for the Dealer Plan), the resulting cost is not necessarily indicative of costs
which may be recognized in future years.
The fair value of each option granted included in the above calculations is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1992 PLAN 1996 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.42% 6.50% 5.25%
Expected life................................... 7.0 years 6.0 years 6.0 years
Expected volatility............................. 37.73% 43.97% 56.47%
Dividend yield.................................. 0% 0% 0%
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
DEALER PLAN 1996 1997 1998
----------- --------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate......................... 6.21% 5.89% 4.59%
Expected life................................... 3.5 years 5.0 years 5.0 years
Expected volatility............................. 37.73% 48.40% 56.25%
Dividend yield.................................. 0% 0% 0%
</TABLE>
45
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CAPITAL TRANSACTIONS -- (CONTINUED)
Additional information relating to the Stock Option Plans are as follows:
<TABLE>
<CAPTION>
1992 PLAN DEALER PLAN
------------------------------ ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
OF OPTIONS PER SHARE OF OPTIONS PER SHARE
---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1995......... 1,813,334 $10.63 548,912 $17.75
Options granted........................ 606,275 21.60 205,600 24.37
Options exercised...................... (103,000) 3.44 (34,948) 13.00
Options forfeited...................... (18,334) 20.50 (1,000) 23.88
---------- --------
Outstanding at December 31, 1996......... 2,298,275 13.73 718,564 18.60
Options granted........................ 3,020,129 9.42 173,400 11.49
Options exercised...................... (266,532) 4.11 (3,597) 13.95
Options forfeited...................... (1,807,636) 20.70 (123,400) 21.35
---------- --------
Outstanding at December 31, 1997......... 3,244,236 6.63 764,967 17.76
Options granted........................ 1,420,965 8.71 75,800 7.54
Options exercised...................... (178,372) 2.56 -- --
Options forfeited...................... (569,458) 6.28 (368,585) 18.45
---------- --------
Outstanding at December 31, 1998......... 3,917,371 $ 7.62 472,182 $15.60
========== ========
Exercisable at:
December 31,
1996................................ 795,988 $10.49 260,762 $17.10
1997................................ 894,167 7.95 481,318 17.90
1998................................ 1,251,152 7.91 296,407 17.85
</TABLE>
Options granted and options forfeited under the 1992 Plan for 1997 include
1,713,577 options which were repriced on November 3, 1997. The options which
were repriced were originally granted between September 30, 1995 and September
2, 1997 with original exercise prices between $12.75 and $27.50. These options
were cancelled on November 3, 1997 and reissued at an exercise price of $6.00
per share with a new three year vesting period.
The weighted average fair value of options granted during 1996, 1997 and
1998 was $10.92, $4.68 and $5.09 respectively, for the 1992 Plan and $8.88,
$4.06 and $3.98, respectively, for the Dealer Plan.
46
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) CAPITAL TRANSACTIONS -- (CONCLUDED)
The following tables summarize information about options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------- ---------------------------------
OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE
RANGE OF AS OF REMAINING WEIGHTED-AVERAGE AS OF WEIGHTED-AVERAGE
EXERCISABLE PRICES 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE 12/31/98 EXERCISE PRICE
------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
1992 PLAN
- ---------
$ 2.16 - 5.63........ 390,750 4.0 Years $ 2.41 369,517 $ 2.25
6.00 - 7.75........ 2,219,119 9.0 6.36 508,634 6.02
8.00 - 11.07........ 929,501 9.4 9.37 0 --
$11.50 - 22.25........ 378,001 5.7 16.14 373,001 16.11
--------- --- ------ --------- ------
Totals................ 3,917,371 8.3 $ 7.62 1,251,152 $ 7.91
========= =========
DEALER PLAN
- -----------
$ 6.34 - 9.35........ 118,000 4.5 Years $ 7.50 14,844 $ 7.53
11.18 - 17.63........ 187,514 1.6 14.07 146,778 14.15
$18.25 - 27.63........ 166,668 2.3 23.06 134,785 23.03
--------- --- ------ --------- ------
Totals................ 472,182 2.6 $15.60 296,407 $17.85
========= =========
</TABLE>
(12) BUSINESS SEGMENT INFORMATION
As described in Note 1, the Company adopted SFAS 131 effective January 1,
1998. Prior year segment information has been restated on a basis consistent
with the 1998 presentation. The Company has two reportable business segments:
North American automotive finance and U.K./Ireland automotive finance.
REPORTABLE SEGMENT OVERVIEW
The North American automotive finance operations consist of the Company's
U.S. and Canadian automotive finance and services businesses, including the
Company's reinsurance activities and automotive service contract programs. These
businesses have been aggregated into one reportable segment because they have
similar operating and economic characteristics. The North American automotive
finance segment provided funding, receivables management, collection, sales
training and related products and services to automobile dealers located in the
United States and Canada. The U.K./Ireland automotive finance operations provide
substantially the same products and services as the Company's North American
automotive finance operations to dealers located in the United Kingdom and
Ireland. The Company's credit reporting and auction services businesses do not
constitute reportable operating segments as they do not meet the quantitative
thresholds prescribed by SFAS 131, and have therefore been disclosed in the "all
other" category in the following table.
47
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) BUSINESS SEGMENT INFORMATION -- (CONCLUDED)
MEASUREMENT
The Company allocates resources to and evaluates the performance of its
segments primarily based on finance charges, other revenue, segment earnings
before interest and taxes (EBIT), and segment assets. The table below presents
this information for each reportable segment (in thousands):
<TABLE>
<CAPTION>
NORTH AMERICAN U.K./IRELAND
AUTOMOTIVE AUTOMOTIVE ALL TOTAL
FINANCE FINANCE OTHER COMPANY
-------------- ------------ ------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998
Finance charges.............................. $ 80,330 $ 17,677 $ -- $ 98,007
Other revenue................................ 29,699 3,528 11,115 44,342
EBIT......................................... 47,766 11,501 3,823 63,090
Segment assets............................... 621,418 122,819 7,692 751,929
Year Ended December 31, 1997
Finance charges.............................. $ 92,660 $ 24,360 $ -- $ 117,020
Other revenue................................ 39,627 4,433 3,155 47,215
EBIT......................................... 14,695 13,210 995 28,900
Segment assets............................... 952,259 162,154 1,197 1,115,610
Year Ended December 31, 1996
Finance charges.............................. $ 79,321 $ 13,623 $ -- $ 92,944
Other revenue................................ 27,832 2,979 179 30,990
EBIT......................................... 67,032 10,121 50 77,203
Segment assets............................... 932,383 141,349 686 1,074,418
</TABLE>
INFORMATION ABOUT PRODUCTS AND SERVICES
The Company manages its product and service offerings primarily through
those reportable segments. Therefore, pursuant with the provisions of SFAS 131,
no enterprise-wide disclosures of information about products and services are
necessary.
MAJOR CUSTOMERS
The Company did not have any customer which provided 10% or more of any
segment's revenue during 1996, 1997, or 1998.
(13) LITIGATION AND CONTINGENT LIABILITIES
In the normal course of business and as a result of the consumer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various consumer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth in lending, credit availability,
credit reporting, consumer protection, warranty, debt collection, insurance and
other consumer-oriented laws and regulations. The Company, as the assignee of
finance contracts originated by dealers, may also be named as a co-defendant in
lawsuits filed by consumers principally against dealers. Many of these cases are
filed as purported class actions and seek damages in large dollar amounts.
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 resulting 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. On August 4, 1998, the Court granted partial summary judgment on
liability in favor of the plaintiffs based upon the Court's
48
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) LITIGATION AND CONTINGENT LIABILITIES -- (CONCLUDED)
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, restrain 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 not expected
to be scheduled until after the appeal has been concluded. Should the Company's
appeal be unsuccessful, the potential damages could have a material adverse
impact on the Company's financial position, liquidity and results of operations.
During the first quarter of 1998, several putative class action complaints
were filed 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 alleges 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 that such
results contained material accounting irregularities in that they failed to
reflect adequate reserves for credit losses. The Complaint further alleges that
the Company issued public statements during the alleged class period which
fraudulently created the impression that the Company's accounting practices were
proper. The Company intends to vigorously defend this action and, while
management believes that meritorious defenses exist and has filed a motion to
dismiss the Complaint, the ultimate disposition of this litigation could have a
material adverse impact on the Company's financial position, liquidity and
results of operations.
The Company is currently being examined by the Internal Revenue Service.
While the outcome of the examination is undeterminable at this time, management
does not believe that the ultimate outcome will have a material adverse impact
on the Company's financial position, liquidity or results of operations.
49
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of quarterly financial position and results of
operations for the years ended December 31, 1997 and 1998.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
----------------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE SHEETS
Installment contracts receivable, net......... $1,119,314 $1,171,036 $1,205,331 $1,036,699
Floor plan receivables........................ 15,667 16,320 19,359 19,800
Notes receivables............................. 1,746 1,818 1,589 1,231
All other assets.............................. 28,529 30,776 46,770 57,880
---------- ---------- ---------- ----------
Total assets............................. $1,165,256 $1,219,950 $1,273,049 $1,115,610
========== ========== ========== ==========
Dealer holdbacks, net......................... $ 534,162 $ 552,840 $ 618,443 $ 439,554
Total debt.................................... 326,487 354,834 379,269 391,666
Other liabilities............................. 45,540 40,112 32,624 35,399
---------- ---------- ---------- ----------
Total liabilities........................ 906,189 947,786 1,030,336 866,619
Shareholders' equity.......................... 259,067 272,164 242,713 248,991
---------- ---------- ---------- ----------
Total liabilities and shareholders'
equity................................. $1,165,256 $1,219,950 $1,273,049 $1,115,610
========== ========== ========== ==========
INCOME STATEMENTS
Revenue:
Finance charges............................. $ 30,691 $ 32,602 $ 28,956 $ 24,771
Premiums earned............................. 2,383 2,625 3,111 3,185
Dealer enrollment fees...................... 1,790 2,132 1,750 1,641
Other income................................ 6,905 7,494 7,076 7,123
---------- ---------- ---------- ----------
Total revenue............................ 41,769 44,853 40,893 36,720
---------- ---------- ---------- ----------
Costs and Expenses:
Operating expenses.......................... 9,887 11,635 11,294 13,095
Provision for credit losses................. 7,053 7,669 64,071 6,679
Provision for claims........................ 803 878 1,095 1,135
Interest.................................... 5,669 6,808 7,162 7,958
---------- ---------- ---------- ----------
Total costs and expenses................. 23,412 26,990 83,622 28,867
---------- ---------- ---------- ----------
Operating Income (Loss)....................... 18,357 17,863 (42,729) 7,853
Foreign exchange gain (loss)................ (20) 5 (7) (19)
---------- ---------- ---------- ----------
Income (loss) before income taxes............. 18,337 17,868 (42,736) 7,834
Provision (credit) for income taxes......... 6,299 5,818 (15,028) 2,677
---------- ---------- ---------- ----------
Net Income (Loss)............................. $ 12,038 $ 12,050 $ (27,708) $ 5,157
========== ========== ========== ==========
Net income (loss) per common share
Basic.................................... $ 0.26 $ 0.26 $ (0.60) $ 0.11
========== ========== ========== ==========
Diluted.................................. $ 0.26 $ 0.26 $ (0.60) $ 0.11
========== ========== ========== ==========
Weighted average shares outstanding
Basic.................................... 46,076 46,112 46,113 46,113
Diluted.................................. 46,902 46,595 46,113 46,679
</TABLE>
50
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONCLUDED)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1998
----------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
---------- -------- -------- --------
<S> <C> <C> <C> <C>
BALANCE SHEETS
Installment contracts receivable, net.............. $ 947,506 $865,488 $726,127 $664,693
Floor plan receivables............................. 19,674 18,457 15,846 14,071
Notes receivables.................................. 1,422 1,574 1,894 2,278
All other assets................................... $ 49,437 $ 44,636 $ 65,992 $ 70,887
---------- -------- -------- --------
Total assets.................................. $1,018,039 $930,155 $809,859 $751,929
========== ======== ======== ========
Dealer holdbacks, net.............................. $ 361,260 $306,539 $253,495 $222,275
Total debt......................................... 351,055 314,486 244,599 218,798
Other liabilities.................................. 49,954 44,834 40,111 34,593
---------- -------- -------- --------
Total liabilities............................. 762,269 665,859 538,205 475,666
Shareholders' equity............................... 255,770 264,296 271,654 276,263
---------- -------- -------- --------
Total liabilities and shareholders' equity.... $1,018,039 $930,155 $809,859 $751,929
========== ======== ======== ========
INCOME STATEMENTS
Revenue:
Finance charges.................................. $ 28,055 $ 27,894 $ 21,708 $ 20,350
Premiums earned.................................. 2,923 2,630 2,741 2,610
Dealer enrollment fees........................... 1,450 1,014 693 457
Gain on sale of advance receivables, net......... -- -- 685 --
Other income..................................... 6,882 6,298 7,401 8,558
---------- -------- -------- --------
Total revenue................................. 39,310 37,836 33,228 31,975
---------- -------- -------- --------
Costs and Expenses:
Operating expenses............................... 14,621 14,019 14,706 15,658
Provision for credit losses...................... 5,796 4,666 3,438 2,505
Provision for claims............................. 1,035 937 896 866
Interest......................................... 7,346 6,829 5,923 5,467
---------- -------- -------- --------
Total costs and expenses...................... 28,798 26,451 24,963 24,496
---------- -------- -------- --------
Operating Income................................... 10,512 11,385 8,265 7,479
Foreign exchange gain (loss)..................... 12 (7) (77) (44)
---------- -------- -------- --------
Income before income taxes......................... 10,524 11,378 8,188 7,435
Provision for income taxes....................... 3,637 3,935 2,577 2,410
---------- -------- -------- --------
Net Income......................................... $ 6,887 $ 7,443 $ 5,611 $ 5,025
========== ======== ======== ========
Net income per common share
Basic............................................ $ 0.15 $ 0.16 $ 0.12 $ 0.11
========== ======== ======== ========
Diluted.......................................... $ 0.15 $ 0.16 $ 0.12 $ 0.11
========== ======== ======== ========
Weighted average shares outstanding
Basic............................................ 46,113 46,113 46,243 46,291
Diluted.......................................... 46,950 47,410 46,897 46,584
</TABLE>
51
<PAGE> 53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Matters to Come Before the
Meeting -- Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the caption "Compensation of Executive
Officers" (excluding the Report of the Executive Compensation Committee and the
stock performance graph) in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information is contained under the caption "Common Stock Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement and
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Certain Relationships and
Transactions" in the Company's Proxy Statement and is incorporated herein by
reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a)(1) The following consolidated financial statements of the
Company and Report of Independent Public Accountants are
contained "Item 8 -- Financial Statements and Supplementary
Data."
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
CONSOLIDATED FINANCIAL STATEMENTS:
-- Consolidated Balance Sheets as of December 31, 1997 and
1998
-- Consolidated Income Statements for the years ended
December 31, 1996, 1997 and 1998
-- Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998
-- Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1997 and 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) Financial Statement Schedules have been omitted because they
are not applicable or are not required or the information
required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
</TABLE>
52
<PAGE> 54
<TABLE>
<S> <C>
(3) The Exhibits filed in response to Item 601 of Regulation S-K
are listed in the Exhibit Index. Included in such list as
Item 10(f)(3) (Stock Option Plans) and 10(n)(5) (Management
Incentive Plans) are the Company's management contracts and
compensatory plans and arrangements which are required to be
filed as exhibits to this Form 10-K.
(b) The Company was not required to file a current report on
Form 8-K during the quarter ended December 31, 1998 and none
were filed during that period.
</TABLE>
The following documents are filed as part of this report. Those exhibits
previously filed and incorporated herein by reference are identified below.
Exhibits not required for this report have been omitted.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
3(a)(1) 9 Articles of Incorporation, as amended July 1, 1997
3(b) 3 Bylaws of the Company, as amended
4(a) 2 Note Purchase Agreement dated October 1, 1994 between
various insurance companies and the Company and related form
of note.
4(a)(1) 4 First Amendment dated November 15, 1995 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(2) 6 Second Amendment dated August 29, 1996 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(3) 10 Third Amendment dated December 12, 1997 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(4) 12 Fourth Amendment dated July 1, 1998 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company
4(a)(5) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 9.12% Senior Notes due November 1, 2001 Issued
Under Note Purchase Agreement dated as of October 1, 1994
4(b) 6 Note Purchase Agreement dated August 1, 1996 between various
insurance companies and the Company and the related form of
note.
4(b)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company.
4(b)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company
4(b)(3) 12 Limited Waiver dated July 12, 1998 to First Amended and
Restated 8.24% Senior Notes due July 1, 2001 Issued Under
Note Purchase Agreement dated as of August 1, 1996
4(c) 7 Second Amended and Restated $150,000,000 Line of Credit and
$100,000,000 Revolving Credit Agreement dated December 4,
1996 between the Company, Comerica Bank as agent and LaSalle
National Bank and The Bank of New York as co-agents, and
various commercial banks.
4(c)(1) 9 First Amendment and Consent, dated June 4, 1997, to Second
Amended and Restated Credit Agreement dated as of December
4, 1996 and a memorandum evidencing extension of maturity
dates.
4(c)(2) 10 Second Amendment dated December 12, 1997 to Second Amended
and Restated Credit Agreement dated as of December 4, 1996.
4(c)(3) 11 Third Amendment dated May 11, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(c)(4) 12 Fourth Amendment dated July 30, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(e) 8 Note Purchase Agreement dated March 25, 1997 between various
insurance companies and the Company and related form of
note.
</TABLE>
53
<PAGE> 55
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
4(e)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(3) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 8.02% Senior Notes due October 1, 2001 Issued Under
Note Purchase Agreement dated as of March 25, 1997
4(f) 12 Note Purchase Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp. and NationsBank, N.A.
4(f)(1) 12 Security Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp., the Company and
NationsBank, N.A.
4(f)(2) 12 Servicing Agreement dated July 7, 1998 between CAC Funding
Corp. and the Company
4(f)(3) 12 Contribution Agreement dated July 7, 1998 between the
Company and CAC Funding Corp.
4(g)(1) 14 Security Agreement dated December 15, 1998 between Comerica
Bank, as Collateral Agent, and the Company
4(g)(2) 14 Intercreditor Agreement dated as of December 15, 1998 among
Comerica Bank, as Collateral Agent, and various lenders and
note holders
4(g)(3) 14 Deed of Charge, dated December 17, 1998 between Comerica
Bank, as Collateral Agent, and the Company
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of the
Company or its subsidiaries have not been filed because (i)
in each case the total amount of long-term debt permitted
thereunder does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it will
furnish such instruments, notes and extracts to the
Securities and Exchange Commission upon its request.
10(b)(1) 5 Amended and Restated Services Agreement dated April 17, 1996
between the Company and Larry Lee's Auto Finance Center,
Inc. d/b/a Dealer Enterprise Group.
10(d)(4) 2 Form of Addendum 3 to Servicing Agreement (Multiple Lots).
10(d)(5) 4 Prior form of Servicing Agreement, including form of
Addendum 1 to Servicing Agreement (CAC Life) and form of
Addendum 2 to Servicing Agreement (BVPP, Inc.).
10(d)(6) 14 Current form of Servicing Agreement, including Addendum 1
and Addendum 2.
10(e) 1 Promissory Notes dated various dates, to the Company, from
various affiliated companies.
10(f)(3) 9 Credit Acceptance Corporation 1992 Stock Option Plan, as
amended and restated May 1997.
10(g) 1 Promissory Note dated May 3, 1991 to the Company from
Richard E. Beckman and related assignment.
10(n)(5) 10 Credit Acceptance Corporation Management Incentive
Plan -- Fiscal Year 1998
10(o)(1) 7 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended January 22, 1997
10(o)(2) 13 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended and restated September 21, 1998.
21(1) 14 Schedule of Credit Acceptance Corporation Subsidiaries
23(1) 14 Consent of Deloitte and Touche LLP
23(2) 14 Consent of Arthur Andersen LLP
27 14 Financial Data Schedule
</TABLE>
1 Reference to the Company's Registration Statement on Form S-1, File No.
33-46772.
54
<PAGE> 56
2 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1994, and incorporated herein by reference.
3 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1994, and incorporated herein by reference.
4 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1995, and incorporated herein by reference.
5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1996, and incorporated herein by reference.
6 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1996 and incorporated herein by reference.
7 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1996, and incorporated herein by reference.
8 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1997 and incorporated herein by reference.
9 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference.
10 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1997, and incorporated herein by reference.
11 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1998 and incorporated herein by reference.
12 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1998, and incorporated herein by reference.
13 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1998, and incorporated herein by reference.
14 Filed herewith
55
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 24, 1999.
CREDIT ACCEPTANCE CORPORATION
By: /s/ DONALD A. FOSS
------------------------------------
Donald A. Foss
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on March 24, 1999 on behalf of
the registrant and in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <S>
/s/ DONALD A. FOSS Chairman of the Board, President and
- -------------------------------------------------------- Chief Executive Officer (Principal
Donald A. Foss Executive Officer)
/s/ BRETT A. ROBERTS Executive Vice President and Chief
- -------------------------------------------------------- Financial Officer (Principal Financial
Brett A. Roberts Officer)
/s/ JOHN P. CAVANAUGH Corporate Controller and Assistant
- -------------------------------------------------------- Secretary (Principal Accounting Officer)
John P. Cavanaugh
/s/ HARRY E. CRAIG Director
- --------------------------------------------------------
Harry E. Craig
/s/ THOMAS A. FITZSIMMONS Director
- --------------------------------------------------------
Thomas A. FitzSimmons
/s/ DAVID T. HARRISON Director
- --------------------------------------------------------
David T. Harrison
/s/ SAM M. LAFATA Director
- --------------------------------------------------------
Sam M. LaFata
</TABLE>
56
<PAGE> 58
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
3(a)(1) 9 Articles of Incorporation, as amended July 1, 1997
3(b) 3 Bylaws of the Company, as amended
4(a) 2 Note Purchase Agreement dated October 1, 1994 between
various insurance companies and the Company and related form
of note.
4(a)(1) 4 First Amendment dated November 15, 1995 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(2) 6 Second Amendment dated August 29, 1996 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(3) 10 Third Amendment dated December 12, 1997 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company.
4(a)(4) 12 Fourth Amendment dated July 1, 1998 to Note Purchase
Agreement dated October 1, 1994 between various insurance
companies and the Company
4(a)(5) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 9.12% Senior Notes due November 1, 2001 Issued
Under Note Purchase Agreement dated as of October 1, 1994
4(b) 6 Note Purchase Agreement dated August 1, 1996 between various
insurance companies and the Company and the related form of
note.
4(b)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company.
4(b)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated August 1, 1996 between various insurance
companies and the Company
4(b)(3) 12 Limited Waiver dated July 12, 1998 to First Amended and
Restated 8.24% Senior Notes due July 1, 2001 Issued Under
Note Purchase Agreement dated as of August 1, 1996
4(c) 7 Second Amended and Restated $150,000,000 Line of Credit and
$100,000,000 Revolving Credit Agreement dated December 4,
1996 between the Company, Comerica Bank as agent and LaSalle
National Bank and The Bank of New York as co-agents, and
various commercial banks.
4(c)(1) 9 First Amendment and Consent, dated June 4, 1997, to Second
Amended and Restated Credit Agreement dated as of December
4, 1996 and a memorandum evidencing extension of maturity
dates.
4(c)(2) 10 Second Amendment dated December 12, 1997 to Second Amended
and Restated Credit Agreement dated as of December 4, 1996.
4(c)(3) 11 Third Amendment dated May 11, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(c)(4) 12 Fourth Amendment dated July 30, 1998 to Second Amended and
Restated Credit Agreement dated as of December 4, 1996
4(e) 8 Note Purchase Agreement dated March 25, 1997 between various
insurance companies and the Company and related form of
note.
4(e)(1) 10 First Amendment dated December 12, 1997 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(2) 12 Second Amendment dated July 1, 1998 to Note Purchase
Agreement dated March 25, 1997 between various insurance
companies and the Company
4(e)(3) 12 Limited Waiver dated July 27, 1998 to First Amended and
Restated 8.02% Senior Notes due October 1, 2001 Issued Under
Note Purchase Agreement dated as of March 25, 1997
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C> <C>
4(f) 12 Note Purchase Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp. and NationsBank, N.A.
4(f)(1) 12 Security Agreement dated July 7, 1998 among Kitty Hawk
Funding Corporation, CAC Funding Corp., the Company and
NationsBank, N.A.
4(f)(2) 12 Servicing Agreement dated July 7, 1998 between CAC Funding
Corp. and the Company
4(f)(3) 12 Contribution Agreement dated July 7, 1998 between the
Company and CAC Funding Corp.
4(g)(1) 14 Security Agreement dated December 15, 1998 between Comerica
Bank, as Collateral Agent, and the Company
4(g)(2) 14 Intercreditor Agreement dated as of December 15, 1998 among
Comerica Bank, as Collateral Agent, and various lenders and
note holders
4(g)(3) 14 Deed of Charge, dated December 17, 1998 between Comerica
Bank, as Collateral Agent, and the Company
NOTE: Other instruments, notes or extracts from agreements
defining the rights of holders of long-term debt of the
Company or its subsidiaries have not been filed because (i)
in each case the total amount of long-term debt permitted
thereunder does not exceed 10% of the Company's consolidated
assets, and (ii) the Company hereby agrees that it will
furnish such instruments, notes and extracts to the
Securities and Exchange Commission upon its request.
10(b)(1) 5 Amended and Restated Services Agreement dated April 17, 1996
between the Company and Larry Lee's Auto Finance Center,
Inc. d/b/a Dealer Enterprise Group.
10(d)(4) 2 Form of Addendum 3 to Servicing Agreement (Multiple Lots).
10(d)(5) 4 Prior form of Servicing Agreement, including form of
Addendum 1 to Servicing Agreement (CAC Life) and form of
Addendum 2 to Servicing Agreement (BVPP, Inc.).
10(d)(6) 14 Current form of Servicing Agreement, including Addendum 1
and Addendum 2.
10(e) 1 Promissory Notes dated various dates, to the Company, from
various affiliated companies.
10(f)(3) 9 Credit Acceptance Corporation 1992 Stock Option Plan, as
amended and restated May 1997.
10(g) 1 Promissory Note dated May 3, 1991 to the Company from
Richard E. Beckman and related assignment.
10(n)(5) 10 Credit Acceptance Corporation Management Incentive
Plan -- Fiscal Year 1998
10(o)(1) 7 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended January 22, 1997
10(o)(2) 13 Credit Acceptance Corporation Stock Option Plan for Dealers,
as amended and restated September 21, 1998.
21(1) 14 Schedule of Credit Acceptance Corporation Subsidiaries
23(1) 14 Consent of Deloitte and Touche LLP
23(2) 14 Consent of Arthur Andersen LLP
27 14 Financial Data Schedule
</TABLE>
1 Reference to the Company's Registration Statement on Form S-1, File No.
33-46772.
2 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1994, and incorporated herein by reference.
3 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1994, and incorporated herein by reference.
4 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1995, and incorporated herein by reference.
<PAGE> 60
5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1996, and incorporated herein by reference.
6 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1996 and incorporated herein by reference.
7 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1996, and incorporated herein by reference.
8 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1997 and incorporated herein by reference.
9 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1997, and incorporated herein by reference.
10 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1997, and incorporated herein by reference.
11 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 1998 and incorporated herein by reference.
12 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1998, and incorporated herein by reference.
13 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 1998, and incorporated herein by reference.
14 Filed herewith
<PAGE> 1
EXHIBIT 10.d.6
For Office Use
Dealer Lot No.
[CAC LOGO]
CREDIT ACCEPTANCE CORPORATION
Silver Triangle Building
25505 West Twelve Mile Road, Suite 3000
Southfield, Michigan 48034-8339
(248) 353-2700
(C) 1994, Credit Acceptance Corporation. All rights reserved. 8/98
<PAGE> 2
[CAC LOGO] CREDIT ACCEPTANCE CORPORATION
DEALERSHIP APPLICATION
<TABLE>
<S><C>
Dealership Name:___________________________________________________________________________________________________
(Dealership name must agree with State issued license)
Organization Type (check one): Corporation [ ] Partnership [ ] Sole Proprietorship [ ] LLP [ ] LLC [ ]
Federal I. D. Number:___________________________________________________________________________________________________
Dealer Social Security Number:___________________________________________________________________________________________________
Dealer's License Number:_________________________Installment Seller's License # (if required by State):____________________
Dealership Street Address:___________________________________________________________________________________________________
Mailing Address:___________________________________________________________________________________________________
City:______________________________________County: __________________State:_________Zip:________________
Phone #:____________________________________________________Fax #:_________________________________________
Dealer Surety Bond Company:___________________________________________________________________________________________________
Are You a Member of NIADA? [ ]Yes [ ] No. If Yes, Your Member Number is______________________________________________________
PERSONAL CONTACTS
Owner:___________________________________________________________________________________________________
Owner's Home Address:___________________________________________________________________________________________________
Home Phone Number:___________________________________________________________________________________________________
Spouse of Owner: ___________________________________________________________________________________________________
CAC Contact at Dealership:___________________________________________________________________________________________________
General Manager:___________________________________________________________________________________________________
Used Car Manager:___________________________________________________________________________________________________
Finance & Insurance Manager:___________________________________________________________________________________________________
Office Manager:___________________________________________________________________________________________________
GENERAL INFORMATION
Bank Affiliation:___________________________________________________________________________________________________
Number of Stores:___________________________________________________________________________________________________
SALES VOLUME HISTORY
AVERAGE MONTH
New Retail Unit Volume:______________________________________ Used Retail Unit Volume:__________________________________
Number of Salespeople: New:_____________________________Used:___________________________Total:______________________
Dealer Referrals: 1 2 3
Contact Person _______________________________________ ______________________________________ ____________________________
Dealership _______________________________________ ______________________________________ ____________________________
City, State _______________________________________ ______________________________________ ____________________________
Phone # _______________________________________ ______________________________________ ____________________________
</TABLE>
(R) 1994, Credit Acceptance Corporation. All rights reserved. 1/97
<PAGE> 3
SERVICING AGREEMENT INSTRUCTIONS
To begin your association with Credit Acceptance Corporation, you need to
complete the enclosed Servicing Agreement (as explained below). PLEASE ATTACH
YOUR CHECK FOR THE SIGN UP FEE ($4,500 FOR EACH STORE). THIS SIGN UP FEE IS
NON-REFUNDABLE. Note: you will need to execute one Servicing Agreement and
one Dealer Application (first page) for each store entering the CAC Financing
Program.
YOU MUST ALSO ENCLOSE A COPY OF YOUR DEALER'S LICENSE, DEALER SURETY BOND (IF
REQUIRED IN YOUR STATE) AND INSTALLMENT SELLERS LICENSE WITH THIS SERVICING
AGREEMENT
COMPLETING THE SERVICING AGREEMENT
Page 1: There are four lines that need to be completed.
(1) Date you are completing Servicing Agreement.
(2) Legal name of Dealership.
(3) State of incorporation, or if not incorporated, state in
which you are registered to do business.
(4) Address of Dealership.
Page 5: There are three lines that need to be completed.
(1) Print the name of your Dealership on the line just above
the word "Dealership" (leave the other lines blank).
(2) Sign next to the word "By:"
(3) Print your title next to the word "Title:"
Page 6: (Complete only if incorporated.) There are six blanks to be
completed.
(1) Name of corporate secretary.
(2) Name of Dealership.
(3) State of incorporation.
(4) Date of completion.
(5) Date of completion.
(6) Secretary's signature (with seal if applicable).
Page 6: (Complete only if incorporated.) There are eight blanks to be
completed.
(1) Name of President of Corporation.
(2) Name of Vice President of Corporation.
(3) Name of Secretary of Corporation.
(4) Name of Corporation.
(5) State of Incorporation.
(6) Date of execution.
(7) Date of execution.
(8) Signature of Secretary (with seal if applicable).
SERVICING AGREEMENT
This Servicing Agreement, dated as of ______________________________,
19 ___ is made between Credit Acceptance Corporation, a Michigan
corporation (herein, together with its successors and assigns, called
"Servicer"), with offices at 25505 West Twelve Mile Road, Southfield,
Michigan 48034-8339 and _______________________________________________, a
______________________________ corporation, sole proprietorship,
partnership, LLC, or LLP (circle one) (herein, together with its permitted
successors and assigns, called "Dealer"), with its executive offices
at_______________________________________________________________________.
In consideration of the premises and the mutual agreements contained
herein the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.01 DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
"ADMINISTRATIVE EXPENSES" means all costs, fees, charges, attorney fees and
expenses incurred by Servicer (other than Collection Costs and attorney
fees incurred in connection with the collection of a Receivable) pursuant
to Section 4.03.
"ADVANCE" means an amount advanced to the Dealer pursuant to Section 3.01.
"AGREEMENT" means this Servicing Agreement as executed by the parties and
all amendments and supplements hereto.
"BUSINESS DAY" means any day other than a Saturday, a Sunday, or a holiday.
"COLLECTION COSTS" means all out-of-pocket costs incurred by Servicer in
the administration, servicing and collection of a Receivable, including the
cost of selling and preparing for sale any Financed Vehicle and the costs
of litigation. Collection Costs also include amounts expended by Servicer
to maintain any insurance upon a Financed Vehicle.
"COLLECTIONS" means all collections received by Servicer with respect to a
Receivable, less any payments required by law to be remitted to the
Obligor, less any NSF checks.
"CONFIDENTIAL INFORMATION" means all confidential and/or secret information
concerning Servicer including, but not limited to, customer lists, names of
customers and all information developed by and/or for Servicer and/or its
affiliates, whether now owned or hereafter obtained, concerning plans,
marketing and sales methods, customer relationships, materials, processes,
procedures, devices utilized by Servicer and/or its affiliates, business
forms, costs, prices, suppliers, information concerning past, present or
future contractors, representatives and past, present and/or future
customers of Servicer and/or its affiliates, plans for development of new
or existing products, services and expansion into new areas or markets,
internal operations and any variations, trade secrets, proprietary
information and other confidential information of any type together with
all written, graphic, video and other materials relating to all or any part
of the same.
"DISTRIBUTION DATE" means the 10th day of the month, or if such 10th day is
not a Business Day, the next Business Day.
"EVENT OF DEFAULT" means an event specified in Section 5.04.
"FINANCED VEHICLE" means an automobile or light truck, together with all
accessions thereto, securing an Obligor's indebtedness under a Receivable.
"NET DOWN PAYMENT" means the amount of "cash" or "trade" down payment paid
by the Obligor with respect to the purchase of the Financed Vehicle. Dealer
agrees to disclose on credit applications any and all rebates and source of
down payment, if known by the dealer. Dealer warrants not to purchase any
item, transfer funds, include any post dated checks, rebates or installment
notes to buyer for use as down payment or for any other reason related to
purchase, and that the down payment has been collected in full prior to
assignment to "CAC". Failure to disclose such information makes said
contracts full recourse to dealer and requires immediate payment in full of
said contracts.
"OBLIGOR" on a Receivable means the purchaser or the co-purchaser's of a
Financed Vehicle or any other Person who owes payments under the
Receivable.
"PERSON" means a legal person, including any individual, corporation,
estate, partnership, joint venture, association, joint stock company,
trust, unincorporated organization, or government or any agency or
political subdivision thereof.
1
<PAGE> 4
"QUALIFYING RECEIVABLE" means a retail installment sale contract which
meets the Servicer's credit standards and the following specifications:
(i) it has not been rescinded and it is a valid, binding and
enforceable obligation of the Obligor;
(ii) it is not in default at the date of transfer to Servicer;
(iii) it is owned by the Dealer free and clear of all liens, claims,
options, encumbrances, security interests and other rights (other than
liens in favor of Servicer);
(iv) it is enforceable against the Obligor for the amount shown as
owing in the contract and in the records of the Dealer;
(v) it complied at the time it was originated or made, and is currently
in compliance in all respects, with all requirements of applicable
federal, state and local laws, and regulations thereunder, including,
usury laws, the Federal Truth-in-Lending Act, the Equal Credit
Opportunity Act, the Fair Credit Billing Act, the Fair Credit Reporting
Act, the Fair Debt Collection Practices Act, the Federal Trade
Commission Act, the Magnuson - Moss Warranty Act, Federal Reserve Board
Regulations B, M and Z, state adaptations of the National Consumer Act
and of the Uniform Consumer Credit Code and any other consumer credit
or equal opportunity disclosure;
(vi) it is not subject to any offset, credit, allowance or adjustment
nor has the Obligor disputed his or her liability under the contract;
(vii) the Dealer has assigned to the Servicer a first and prior
perfected security interest in the Financed Vehicle securing the
performance of the Obligor and neither the Receivable nor the security
interest in the Financed Vehicle has been subordinated;
(viii) the Financed Vehicle is adequately insured with a policy or
policies covering damage, destruction and theft of the Financed Vehicle
and such policies name Servicer as a loss payee;
(ix) all representations and warranties contained in the assignment
section of the retail installment sale contract are true and correct as
of the date of transfer to the Servicer;
(x) the Dealer has complied with the procedures for approval of
Receivables and making of advances adopted by the Servicer from time to
time.
(xi) all signatures on it are genuine;
(xii) Dealer received the cash down payment or trade-in described in
the contract;
(xiii) neither Dealer nor, to Dealer's knowledge, any employee or
representative of the Dealer has lent the Obligor any part of the down
payment;
(xiv) the motor vehicle has never been used as a taxi-cab;
(xv) the Dealer delivered the motor vehicle and the motor vehicle
satisfied all warranties, expressed or implied, made to the Obligor;
(xvi) the Obligor owns the motor vehicle free of all liens or
encumbrances except the security interest granted in the contract; and
(xvii) all amounts indicated in the Itemization of the Amount Financed
have been paid.
"RECEIVABLE" means a Qualifying Receivable executed by the Obligor with
respect to a Financed Vehicle, which Receivable shall have been assigned to
Servicer for administration, servicing and collection.
"RECEIVABLE FILES" means all writings (including an executed copy of the
retail installment sale contract) and business records relating to a
Receivable.
ARTICLE II
ADMINISTRATION AND SERVICING OF RECEIVABLES
2.01 ACCEPTANCE OF RECEIVABLES; DUTIES OF SERVICER
(a) The Dealer may submit retail installment sale contracts to the Servicer
for administration, servicing and collection under the terms of this
Agreement. Submission of such a contract to the Servicer constitutes a
representation and warranty by the Dealer that such contracts meets the
criteria set forth in the definition of Qualifying Receivable.
(b) If Servicer issues an approval number with respect to a Qualifying
Receivable, the Dealer shall deliver the Receivable Files to the Servicer
and assign such Receivable and Dealer's security interest in the Financed
Vehicle to the Servicer as nominee for the Dealer, which assignment shall
be for purposes of administration, servicing and collection of the
Receivable, as well as for security purposes as set forth in Section 2.07.
Upon the request of Servicer, the Dealer will furnish the Servicer with any
additional powers of attorney and other documents that the Servicer deems
necessary or appropriate to enable the Servicer to carry out its
administration, servicing and collection duties hereunder.
(c) Servicer's issuance of an approval number shall not be deemed to be
acceptance of a contract for Servicing hereunder. Acceptance of a
Qualifying Receivable shall occur only at such time as Servicer receives
and approves the related Receivable Files.
(d) If the Servicer accepts such Qualifying Receivable it shall be deemed a
Receivable under this Agreement and the Servicer will service and
administer such Receivable on behalf of the Dealer in accordance with the
terms of this Agreement. The Servicer's duties shall consist of collection
and posting of all payments; holding the Receivable Files; collecting
payments due under the Receivables as set forth in Section 2.02 and
reapplying the amounts so collected in the manner set forth in Section
3.03; responding to inquiries of Obligor on the Receivables; investigating
delinquencies; sending monthly payment books and/or receipts to Obligors;
and furnishing monthly statements to the Dealer. The Servicer is hereby
authorized and empowered to endorse the Dealer's name on any payments made
payable to the Dealer and execute and deliver, in the Servicer's own name,
on behalf of the Dealer, any and all instruments of satisfaction or
cancellation, or of partial or full release or discharge, and all other
comparable instruments, with respect to the Receivables or to the Financed
Vehicles.
(e) Notwithstanding any provision to the contrary elsewhere in this
Agreement, the Servicer is acting as an independent contractor, and shall
have no duties or responsibilities, except those expressly set forth
herein, or any fiduciary relationship with the Dealer, and no implied
covenants, functions, responsibilities, duties, obligations or liabilities
shall be read into this Agreement or otherwise exist with respect to the
Servicer.
2.02 COLLECTION OF RECEIVABLE PAYMENTS
The Servicer shall use reasonable efforts to collect all payments called
for under the terms and provisions of the Receivables as and when the same
shall become due. If any payments of a Receivable are made to the Dealer
after such Receivable is accepted by the Servicer under this Agreement, the
Dealer will immediately forward such payment to the Servicer in the form
received. The Servicer may, in its discretion, waive any late payment
charge or any other fee that may be collected in the ordinary course of
servicing a Receivable.
2.03 REALIZATION UPON REPOSSESSION
On behalf of the Dealer, at the discretion of the Servicer, the Servicer
shall use reasonable efforts to repossess or otherwise convert the
ownership of the Financed Vehicle securing any Receivable, and sell or
otherwise liquidate the Financed Vehicle. In exercising reasonable efforts
to sell or otherwise liquidate the Financed Vehicle, the Servicer shall
follow such practices and procedures as it deems necessary or advisable in
its servicing of automotive receivables, which may include selling the
Financed Vehicle at public or private sale.
2.04 PHYSICAL DAMAGE INSURANCE
If required by the Servicer, the Dealer shall require that each Obligor
shall have obtained and shall maintain adequate insurance covering damage,
destruction and theft of the Financed Vehicle, at least in the minimum
amounts required by law. If the Servicer has required such insurance and
has determined that an Obligor has allowed any such insurance covering the
related Financed Vehicle to lapse, the Servicer may place such insurance
and pay the related premium for the account of the Obligor and the Dealer.
2.05 SECURITY INTERESTS IN FINANCED VEHICLES
The Dealer will take such steps as are necessary to perfect the security
interest in the Financed Vehicle in the name of the Servicer, including
placing the Servicer's name as lienholder on all titles to Financed
Vehicles.
2.06 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING RECEIVABLES THE
Dealer shall provide to the Servicer all Receivable Files in its
possession; provided, however, that this Section 2.06 shall not require the
Dealer to violate any applicable law prohibiting disclosure of information
regarding an Obligor.
2.07 SECURITY INTEREST
The Dealer hereby grants the Servicer a security interest in all
Receivables now or hereafter transferred to the Servicer pursuant to this
Agreement and in the Dealer's interest in the Financed Vehicles connected
therewith, together with all proceeds, as security for the payment of all
indebtedness of the Dealer to the Servicer, including Advances, Collection
Costs, Administrative Expenses and any other amount due to the Servicer
hereunder. This grant of a security interest will survive the termination
of this Agreement until the Dealer has paid all its obligations to the
Servicer, including those due under this Agreement, including Advances and
Collection Costs, in full.
In addition to the security interest granted above, Dealer, upon demand by
the Servicer, will grant to Servicer a security interest in all Collateral
possessed by the Dealer, the term "Collateral" being defined to mean all
inventory and goods now or hereafter acquired or owned, including, but not
limited to, goods, tangible property, business records, stock and trade,
supplies, merchandise used in or sold in the ordinary course of business,
all machinery, equipment, furniture, ledgers, books, chattels, and all
other tangible personal property of every nature and description now
existing or hereafter acquired, together with all substitutions,
replacements and additions thereto, all contracts, patents, licensing
agreements, supplier lists, business records, and customer lists together
with all proceeds and product of all the foregoing. Dealer agrees to
execute UCC Financing Statements and to take such other actions requested
by Servicer in order to perfect such security interest of Servicer.
2
<PAGE> 5
ARTICLE III
ADVANCES, DISTRIBUTIONS AND SERVICING FEE
3.01 ADVANCES
Upon the acceptance by the Servicer of a Qualifying Receivable under
Section 2.01, the Servicer may, in its discretion, make an Advance. The
amount of the Advance will be determined by the applicable advance program
currently in use by the Servicer in the Dealer's state of operation. Such
Advances shall be repaid to the Servicer as provided in Section 3.03, and
shall be repaid immediately upon the termination of this Agreement or upon
the occurrence of an Event of Default. Servicer may modify from time to
time its advance methodology upon written notice to the Dealer.
3.02 SERVICING FEE
As compensation for the services provided by the Servicer to the Dealer,
the Servicer will retain 20% of all Collections net of Collection Costs.
3.03 APPLICATION OF FUNDS
Collections received by the Servicer during a calendar month shall be
applied as follows:
FIRST, to reimburse Servicer for all Collection Costs;
SECOND, to pay to Servicer its servicing fee set forth in Section 3.02
above;
THIRD, to any outstanding Advances or any other indebtedness or
amounts owing from the Dealer to the Servicer, including, without
limitation, the Administrative Expenses and any indemnification
obligations of Dealer to Servicer pursuant to Section 4.02 of this
Agreement; and
FOURTH, to the Dealer.
All amounts due to the Dealer under this Section 3.03 with respect to
Collections made during the calendar month shall be paid to the Dealer no
later than the Distribution Date occurring in the following calendar month.
3.04 STATEMENT TO DEALER
The Servicer shall provide to the Dealer a statement containing the
following information: (i) The amounts set forth in Section 3.03; (ii) The
amount of any distribution to the Dealer.
ARTICLE IV
THE DEALER
4.01 REPRESENTATIONS OF THE DEALER
The Dealer makes the following representations on which the Servicer is
relying in accepting the Receivables, and each request by the Dealer to the
Servicer to administer, service and collect a Receivable under Section 2.01
will act as a reaffirmation of each of the following representations as of
the date of such request:
(i) ORGANIZATION AND GOOD STANDING. The Dealer is duly organized and is
validly existing as a corporation in good standing under the laws of
state of its incorporation, with full power and authority to own its
properties and to conduct its business, and had at all relevant times,
and shall have power, authority, and legal right to acquire and own the
Receivables.
(ii) DUE QUALIFICATION. The Dealer is duly qualified to do business and
has obtained all necessary licenses and approvals in all jurisdictions
in which the ownership or lease of property or the conduct of its
business requires such qualification.
(iii) POWER AND AUTHORITY. The Dealer has the power and authority to
execute and deliver this Agreement and to carry out its terms and the
execution, delivery, and performance of this Agreement has been duly
authorized by the Dealer by all necessary corporate action.
(iv) BINDING OBLIGATIONS. This Agreement constitutes a legal, valid,
and binding obligation of the Dealer enforceable in accordance with its
terms, except as enforceability may be limited by bankruptcy,
insolvency, reorganization, or other similar laws affecting the
enforcement of creditors' rights in general.
(v) NO VIOLATION. The consummation of the transactions contemplated by
this Agreement and the fulfillment of the terms hereof shall not
conflict with, result in any breach of any of the terms and provisions
of, nor constitute (with or without notice of lapse of time) a default
under any indenture, agreement, or other instrument to which the Dealer
is a party or by which it shall be bound; nor result in the creation or
imposition of any lien upon any of its properties pursuant to the terms
of any such indenture, agreement, or other instrument (other than this
Agreement); nor violate any law or any order, rule, or regulation
applicable to the Dealer of any court or of any federal or state
regulatory body, administrative agency, or other governmental
instrumentality having jurisdiction over the Dealer or its properties.
(vi) NO PROCEEDINGS. There are no proceedings or investigations
pending, or threatened, before any court, regulatory body,
administrative agency, or other governmental instrumentality having
jurisdiction over the Dealer or its properties: (a) asserting the
invalidity of this Agreement, (b) seeking to prevent any of the
transactions contemplated by this Agreement, or (c) seeking any
determination or ruling that might materially and adversely affect the
financial condition of the Dealer or the performance by the Dealer of
its obligations under, or the validity or enforceability of this
Agreement. Neither the Dealer nor any of its officers or employees is
operating under or subject to, or in default with respect to any
adjudicatory order, writ, injunction or decree of any court or federal,
state, municipal or governmental department, commission, board, agency
or instrumentality, domestic or foreign, related to the conduct of the
Dealer's business; and neither the Dealer nor any of its directors,
officers or employees is subject to any cease and desist order,
supervisory agreement or arrangement or disqualification consensual or
otherwise, with any regulatory authority, which is material to the
Receivables or the transactions contemplated hereby.
(vii) BROKERS AND FINDERS. Neither Dealer nor any person acting on its
behalf has employed any broker, agent or finder or incurred any
liability for any brokerage fees, agents' commissions or finders' fees
in connection with the transactions contemplated herein.
(viii) COMPLIANCE WITH LAWS. Dealer has complied with all federal,
state, local and foreign laws, ordinances, regulations and orders
applicable to it or the Receivables or the Financed Vehicles. All
licenses, permits, orders or approvals of any governmental or
regulatory body which are required in connection with Dealer's business
("Permits"), are in full force and effect, no violations are or have
been recorded in respect to any such Permits and no proceedings are
pending or, to Dealer's knowledge, threatened to terminate, revoke or
limit any of such Permits.
(ix) CHARACTERISTICS OF RECEIVABLES. Each Receivable was originated by
Dealer for the sale of a Financed Vehicle in the ordinary course of
Dealer's business, was fully and properly executed by the parties
thereto, and contains customary and enforceable provisions for an
installment sale of a motor vehicle in the state in which the Obligor
is located.
(x) SOURCE OF DOWN PAYMENT. Dealer agrees to disclose on credit
applications any and all rebates and source of down payment, if known
by the dealer. Dealer warrants not to purchase any item, transfer
funds, include any post dated checks, rebates or installment notes to
buyer for use as down payment or for any other reason related to
purchase, and that the down payment has been collected in full prior to
assignment to "CAC". Failure to disclose such information makes said
contracts full recourse to dealer and requires immediate payment in
full of said contracts.
(xi) LAWFUL ASSIGNMENT. No Receivable has been originated in, or is
subject to the laws of, any jurisdiction under which the assignment of
such obligation as contemplated under this Agreement would be unlawful,
void or voidable.
(xii) ONE ORIGINAL. There is only one original executed copy of each
Receivable.
(xiii) DISCLOSURE OF MATERIAL FACTS. The representations and warranties
contained in this Agreement or in any other agreement, schedule,
exhibit or other document delivered pursuant hereto do not contain any
untrue statement of a material fact or omit to state any material fact
necessary to make the statements contained herein or therein not
misleading.
(xiv) NON-RELIANCE. The Dealer has independently and without reliance
upon the Servicer, and based on such documents and information as it
has deemed appropriate, made its own appraisal of and investigation
into the financial condition and creditworthiness of each Obligor and
made its own decision to enter into a retail installment sale contract
with such Obligor.
4.02 INDEMNITIES
The Dealer will defend, indemnify, and hold harmless the Servicer from and
against any and all costs, expenses, losses, damages, claims and
liabilities arising out of or resulting from:
(i) the use, ownership, or operation by the Servicer or any affiliate
thereof of a Financed Vehicle or Servicer's performance of this
Agreement, including the administration, servicing and collection of
any Receivable; and
(ii) any claims by the Obligor with respect to the Receivable, the
Financed Vehicle or the purchase thereof, except to the extent of the
Servicer's gross negligence or willful misconduct in the performance of
duties hereunder;
(iii) any breach of any of the representations, warranties or
agreements made by Dealer in this Agreement; and
(iv) any taxes that may at any time be asserted against the Servicer
with respect to the transactions contemplated herein (other than taxes
measured by the net income of Servicer), including, without limitation
any sales, gross receipts, general corporation, tangible or intangible
personal property, privilege, or license taxes and costs and expenses
in defending against same.
Indemnification under this Section shall include reasonable attorneys' fees
and all expenses of litigation.
4.03 ADMINISTRATIVE EXPENSES
The Dealer agrees to reimburse Servicer, on demand, for all Administrative
Expenses incurred by Servicer in connection with (i) protecting Servicer's
interest in Qualifying
3
<PAGE> 6
Receivables and the Financed Vehicles; and (ii) enforcement of the
provisions of this Agreement, including, without limitation, (a) to
commence, defend or intervene in any litigation or to file a petition,
complaint, motion, answer or other pleadings; and (b) to take any other
action in or with respect to any suit or proceeding, including, without
limitation, any bankruptcy proceeding.
4.04 CONFIDENTIALITY
Except as required for Dealer to conduct its regular daily business with
Servicer, Dealer shall not at anytime, either during or for a period of two
years after termination of Dealer's relationship with Servicer, or in any
way, disclose, disseminate, transfer and/or use, or permit anyone else to
disclose, disseminate, transfer and/or use, any Confidential Information of
Servicer, and Dealer shall retain all such information in trust in a
fiduciary capacity for the sole use and benefit of Servicer and/or its
affiliates. Dealer acknowledges that the Confidential Information of
Servicer is valuable, special and unique to Servicer's business and on
which such business depends, and is proprietary to Servicer and its
affiliates, and that Servicer has protected and wishes to continue to
protect the confidential Information by keeping it secret and confidential
for the sole use and benefit of Servicer and its affiliates. Dealer will
take all steps necessary and all steps reasonably requested by Servicer, to
insure that all such Confidential Information is kept secret and
confidential for the sole use and benefit of Servicer and its affiliates.
In so doing, Dealer shall require and represents that each of its
employees, agents and representatives complies with each and every
provision of this Agreement. Upon termination of this Agreement without the
necessity of any request from Servicer, or at any other time Servicer may
in writing so request, Dealer shall promptly deliver to Servicer all
materials concerning any Confidential Information, copies thereof and any
other materials of Servicer and/or its affiliates which are in Dealer's
possession or under Dealer's control, and Dealer shall not make or retain
any copy, draft or extract thereof which has been made at any time. Dealer
acknowledges that the foregoing provisions are necessary to protect the
special knowledge of Servicer's and its affiliates' trade secrets (which
are the result of a considerable amount of time, money and effort of
Servicer and its affiliates over a period of 20 years to increase and
maintain its sales, including product sales) which Dealer has acquired and
will acquire in carrying out Dealer's job responsibilities as well as
Servicer's goodwill and customer relationships to which Dealer has gained
access through Dealer's dealer relationship. Nothing contained herein shall
be construed or considered to vest in the Dealer any right, title or
interest of any kind in or to the information disclosed or made available
to it by the Servicer pursuant to this Agreement or otherwise. Accordingly,
Dealer acknowledges and agrees that all memoranda, notes, records,
agreements, documents and other materials, as well as copies and drafts
thereof, made and/or compiled by Dealer and/or made available to Dealer
during the course of his/her dealer relationship, which relate to the
Confidential Information (as stated above), is and shall remain the
property of Servicer. The obligations of Dealer under this Section 4.03
shall survive the termination (for any reason) or breach of this Agreement.
Dealer acknowledges and agrees that the covenants and undertakings in this
Section 4.04 relate to matters which are of a special, unique and
extraordinary character and that a violation of any of them will cause
irreparable injury to Servicer, the amount of which will be extremely
difficult, if not impossible to estimate or determine and which cannot be
completely and adequately compensated by monetary damages alone. Therefore,
Dealer agrees that Servicer shall be entitled, as a matter of course, and
as a matter of law, without the need to prove irreparable injury, to an
injunction, restraining order or other equitable relief from any court of
competent jurisdiction, restraining any violation or threatened violation
of any of such terms by Dealer and such other persons as the court shall
order. Dealer agrees to pay all costs and legal fees incurred by Servicer
in pursuing its remedies in any legal or equitable action. Dealer further
acknowledges that the restraints imposed upon it pursuant to the foregoing
are no greater than are reasonably necessary to preserve and protect
Servicer's legitimate business interests and that such restraints will not
impose an undue hardship upon Dealer.
ARTICLE V
TERMINATION AND ASSIGNMENT
5.01 MERGER OR CONSOLIDATION OF SERVICER
Any corporation (i) into which the Servicer may be merged or consolidated,
(ii) which may result from any merger, conversion, or consolidation to
which the Servicer shall be a party or (iii) which may succeed to the
business of the Servicer, shall be the successor to this Agreement without
any further act on the part of any of the parties to this Agreement.
5.02 RESIGNATION AS SERVICER
Regardless of whether there is an Event of Default or an event with the
lapse of time, giving of notice or both would become an Event of Default,
the Servicer may terminate this Agreement, at any time, upon 30 days
written notice to the Dealer.
5.03 TERMINATION BY THE DEALER
So long as there is no Event of Default or an event which with the lapse of
time, giving of notice or both would become an Event of Default, the Dealer
may terminate this Agreement with respect to all Receivables upon 30 days
prior written notice to the Servicer.
5.04 EVENTS OF DEFAULT
This Agreement shall terminate immediately, without further notice to
Dealer, and Servicer shall be entitled to immediate repayment of all
outstanding Advances and the other amounts specified in Section 5.05 upon
the occurrence of any one of the following events ("Events of Default"):
(i) failure on the part of the Dealer duly to observe or to perform any
covenant or agreement set forth in this Agreement, which failure shall
continue unremedied for a period of ten Business Days after the date on
which written notice of such failure, requiring the same to be
remedied, shall have been given to the Dealer by the Servicer; or
(ii) the breach by the Dealer of any representation or warranty set
forth in this Agreement, including any with respect to Qualifying
Receivables; or
(iii) the Dealer misrepresents in any respect any facts or
circumstances relating to an installment contract submitted to Servicer
or any Obligor or motor vehicle covered by such contract; or
(iv) the entry of a decree or order by a court or agency or supervisory
authority for the appointment of a conservator, receiver or liquidator
for the Dealer in any bankruptcy, readjustment of debt, marshaling of
assets and liabilities, or similar proceedings, or for the winding up
or liquidation of its affairs, and the continuance of any such decree
or order unstated and in effect for a period of 60 consecutive days; or
(v) the consent by the Dealer to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities, or similar proceedings of or
relating to the Dealer; or the Dealer, shall admit in writing its
inability to pay its debts generally as they become due, file a
petition to take advantage of any applicable bankruptcy statute, make
an assignment for the benefit of its creditors or voluntarily suspend
payment of its obligations.
(vi) the Dealer fails to place with the Servicer fifteen (15)
Qualifying Receivables per calendar quarter (which calendar quarter
shall begin with the signing date of this Agreement) for two
consecutive calendar quarters; or
(vii) any guaranty executed in connection with this Agreement is
revoked, terminated or becomes unenforceable in whole or in part, or
any guarantor fails to promptly perform under such a guaranty; or
(viii) any judgment is entered against the Dealer or any guarantor, or
any attachment, levy or garnishment is issued against any property of
the Dealer or any guarantor; or (ix) the Dealer or any guarantor,
without the Servicer's written consent, (a) is dissolved; (b) merges or
consolidates with any third party; (c) leases, sells or otherwise
conveys a material part of its assets or business outside the ordinary
course of business; (d) ceases to operate its business; or (e) agrees
to do any of the foregoing; or
(x) there is a substantial change in the existing or prospective
financial condition of the Dealer or any guarantor which the Servicer
in good faith determines to be materially adverse; or
(xi) the Servicer in good faith deems itself insecure.
5.05 EFFECT OF TERMINATION
Upon any termination of this Agreement pursuant to Section 5.03 or Section
5.04, the Dealer shall immediately pay to the Servicer the following
amounts:
(i) Any unreimbursed Collection Costs and Administrative Expenses;
(ii) Any unpaid Advances and all other amounts owed by the Dealer to
the Servicer; and
(iii) A termination fee equal to 20% of the then outstanding amount of
the Receivables.
Upon receipt in full of the amounts set forth in (i) through (iii) above,
Servicer shall deliver all Receivable Files to the Dealer and shall take
such action as may be requested by Dealer to terminate or assign to the
Dealer the Servicer's security interest in the Receivables and Financed
Vehicles. If the Dealer fails to promptly pay such amounts, the Servicer
may exercise any rights it has, including those under the Uniform
Commercial Code, and may, at its discretion, continue to collect the
Receivables and retain Collections in satisfaction of such amounts due from
the Dealer.
5.06 COLLECTION FOLLOWING TERMINATION
If this Agreement is terminated pursuant to Section 5.02, Servicer shall
continue to service and administer Receivables accepted for service and
administration hereunder prior to the date of termination unless (a) Dealer
pays to Servicer the amounts set forth in Section 5.05, at which time
Section 5.05 shall govern, or (b) an Event of Default occurs after the date
of termination, at which time the provisions of Section 5.05 shall apply.
4
<PAGE> 7
ARTICLE VI
MISCELLANEOUS PROVISIONS
6.01 GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the State
of Michigan and the obligations, rights, and remedies of the parties under
this Agreement shall be determined in accordance with such laws.
6.02 NOTICES
All demands, notices, and communications under this Agreement shall be in
writing, personally delivered or mailed by first-class mail, and shall be
deemed to have been duly given upon receipt at the address specified on the
first page of this Agreement, or at such other address as shall be
designated in writing by a party.
6.03 SEVERABILITY OF PROVISIONS; UNENFORCEABILITY
If any one or more of the provisions of this Agreement shall be for any
reason whatsoever held invalid, then such provisions shall be deemed
severable from the remaining provisions of this Agreement or the rights of
the Dealer or the Servicer. If for any reason a court determines that any
part of any of the provisions of this Agreement is unreasonable in scope or
otherwise unenforceable, such provision(s) will be deemed modified and
fully enforceable, as so modified, to the extent determined by the court to
be reasonable under the circumstances.
6.04 ARBITRATION AND COSTS
Any disputes and differences arising between the parties in connection with
or relating to this Agreement or the parties relationship with respect
hereto shall be settled and finally determined by arbitration in accordance
with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitration shall take place in Southfield, Michigan and
shall be conducted by three arbitrators, one of whom shall be selected by
the Dealer, one selected by the Servicer and the third by the two
arbitrators so selected. Each party shall notify the other party of the
arbitrators selected by it within 30 days of a written request from one
party to the other for arbitration. In the event either party shall fail to
select an arbitrator or fail to notify the other party of the arbitrator
which it has selected within such time period, the arbitrator so selected
by the other party shall select a second arbitrator. The decision and award
of the arbitrators shall be in writing, and shall be final and binding upon
the parties hereto. Judgement upon the award may be entered in any court
having jurisdiction thereof or any application may be made to such court
for judicial acceptance of or award in order of enforcement, as the case
may be. In the event that the Servicer shall prevail under any dispute or
claim with respect to this Agreement, the Dealer shall pay any costs and
expenses incurred by the Servicer with respect to such dispute, including
court costs and attorneys' fees. Notwithstanding the foregoing, Servicer
shall be entitled to seek legal and equitable relief under this Agreement,
pursuant to Section 4.04 or otherwise, in any court of record in the State
of Michigan, County of Oakland, or in the United States District Court of
the Eastern District of Michigan, and Dealer consents to the jurisdiction
thereof.
To the extent Servicer and Dealer waive the right to arbitration
pursuant to this Section 6.04, the parties stipulate and agree that
jurisdiction shall exist exclusively in any court of competent jurisdiction
in the State of Michigan, County of Oakland or in the United States
District Court of the Eastern District of Michigan.
6.05 RIGHTS CUMULATIVE
All rights and remedies from time to time conferred upon or reserved to the
Servicer are cumulative, and none is intended to be exclusive of another.
No delay or omission is insisting upon the strict observance or performance
of any provision of this Agreement, or in exercising any right or remedy,
shall be construed as a waiver or relinquishment of such provision, nor
shall it impair such right or remedy.
6.06 USAGE OF TERMS
With respect to all terms in this Agreement, the singular includes the
plural and the plural the singular; words importing any gender include the
other genders; references to agreements and other contractual instruments
include all subsequent amendments thereto or changes therein entered into
in accordance with their respective terms and not prohibited by this
Agreement; references to Persons include their permitted successors and
assigns; and the term "including" means "including without limitation".
6.07 ASSIGNMENT
This Agreement shall inure to the benefit of the Servicer and the Dealer
and each of their permitted successors and assigns. Notwithstanding
anything in this Agreement to the contrary, the Dealer may not assign its
rights under this Agreement to any Person without the prior written consent
of the Servicer.
6.08 SETOFF
The Servicer may, at any time and from time to time, at its option, setoff
and apply against any amounts due to the Servicer either hereunder or
otherwise any Dealer funds held by Servicer.
6.09 DELEGATION OF DUTIES; LIABILITY
The Servicer may execute any of its duties under this Agreement by or
through agents, nominees or attorneys-in-fact and shall be entitled to
advice of counsel concerning all matters pertaining to such duties. The
Servicer shall not be responsible for the negligence or misconduct of any
agents, nominees or attorneys-in-fact selected by it with reasonable care.
Neither the Servicer nor any of its officers, directors, employees,
nominees, attorneys-in-fact or affiliates shall be liable for any action
lawfully taken or omitted to be taken by it or any such person under or in
connection with this Agreement (except for its or such person's own gross
negligence or willful misconduct).
6.10 SECURITY
To the extent the Servicer has a good faith belief that it is insecure, the
Servicer shall have the right to escrow any and all funds which would
otherwise be payable to the Dealer until such time as Servicer is confident
that the risk is no longer present. Servicer shall have the right pursuant
to Section 6.08, to set off its losses out of this escrow account.
6.11 WAIVER OF JURY TRIAL
The Dealer, after consulting or having had the opportunity to consult with
counsel, knowingly, voluntarily and intentionally waives any right it may
have to a trial by jury in any litigation based upon or arising out of this
Agreement or any course of conduct, dealing, statements (whether oral or
written), or actions of Dealer or Servicer. Dealer shall not seek to
consolidate, by counterclaim or otherwise any such action in which a jury
trial cannot be or has not been waived.
6.12 NO WAIVER
No delay on the part of the Servicer in the exercise of any right or remedy
shall operate as a waiver. No single or partial exercise by the Servicer
shall preclude any other future exercise of it or the exercise of any other
right or remedy. No waiver or indulgence by Servicer shall be effective
unless in writing and signed by the Servicer, nor shall a waiver on one
occasion be construed as a bar to or waiver of that right on any future
occasion.
6.13 COMPLETE AGREEMENT
This Agreement contains the complete agreement of the parties hereto, and
supersedes any and all prior agreements (whether written or oral), with
respect to the subject matter hereof. This Agreement may not be altered or
amended without the written consent of both parties.
THIS AGREEMENT IS ACCEPTED AND AGREED TO BY EACH OF THE UNDERSIGNED,
AFTER EACH OF THE UNDERSIGNED HAS CONSULTED WITH LEGAL COUNSEL, AND EACH
OF THE UNDERSIGNED HAS CAREFULLY READ AND UNDERSTANDS ALL OF THE TERMS AND
PROVISIONS OF THIS AGREEMENT.
IN WITNESS WHEREOF, the parties have caused the Servicing Agreement to
be duly executed by their respective officers as of the day and year
written on Page 1. This Agreement shall be deemed effective upon receipt
by Servicer of a duly executed Agreement along with the applicable sign up
fee.
________________________________________________________________________________
DEALERSHIP
By: ____________________________________________________________________________
Title:__________________________________________________________________________
(Must be Officer of Dealership)
CREDIT ACCEPTANCE CORPORATION
By: ____________________________________________________________________________
Title: _________________________________________________________________________
5
<PAGE> 8
COMPLETE BOTH RESOLUTIONS ONLY IF THE DEALERSHIP IS A CORPORATION
RESOLUTION OF BOARD OF DIRECTORS OF
___________________________________
(Name of Dealership)
RESOLVED, That the president of this Corporation be and hereby is authorized and
empowered to enter into a contract for services with the Credit Acceptance
Corporation, in the name and in behalf of this Corporation, upon such terms and
conditions as may be agreed upon between him and said Credit Acceptance
Corporation.
I, ____________________________________________, do hereby certify that I am the
duly elected and qualified Secretary and the keeper of the records and corporate
seal of _______________________________________________________________________,
a corporation organized and existing under the laws of the State of ___________
____________________, and that the above is true and correct copy of a
resolution duly adopted at a meeting of the Board of Directors thereof, convened
and held in accordance with law and the bylaws of said Corporation on
___________________________, 19____, and that such resolution is now in full
force and effect.
IN WITNESS WHEREOF, I affixed my name as Secretary and have caused the corporate
seal of said Corporation to be hereunto affixed, this __________ day of
______________________, 19____.
__________________________________________
Secretary
RESOLUTION OF BOARD OF DIRECTORS OF
___________________________________
(Name of Dealership)
RESOLVED, That the proposed contracts between this Corporation and Credit
Acceptance Corporation submitted to this meeting, be and it hereby is accepted,
that__________________________________________________________________,
President, and ________________________________, Vice President, be and they
hereby are authorized to execute in the name and in behalf of this Corporation,
a contract substantially in the form submitted to this meeting.
I, __________________________________________, do hereby certify that I am the
duly elected and qualified Secretary and the keeper of the records and corporate
seal of _____________________________________________________________________,
a corporation organized and existing under the laws of the State of ________
_________________________, and that the above is a true and correct copy of a
resolution duly adopted at a meeting of the Board of Directors thereof, convened
and held in accordance with the law and bylaws of said Corporation on
_____________ day of _________________________, 19____.
__________________________________________
Secretary
6
<PAGE> 9
[CAC LOGO] CREDIT ACCEPTANCE CORPORATION
ADDENDUM NO. 1
(CAC/VOYAGER INSURANCE PROGRAM)
TO
SERVICING AGREEMENT
dated as of________________________________________,19_________
between
CREDIT ACCEPTANCE CORPORATION ("The Servicer")
and
______________________________________________ ("Dealer")
By executing this addendum, Dealer agrees to participate in the credit
life and disability insurance program offered by Servicer in connection
with Voyager Insurance Companies ("Voyager"), as described herein (the
"CAC/Voyager Insurance Program"). When executed by Servicer and the Dealer,
this addendum shall become a part of the Servicing Agreement. All
capitalized terms herein shall have the meanings assigned to them in the
Servicing Agreement.
1. Pursuant to the CAC/Voyager Insurance Program, Voyager will issue to
Dealer a group policy of insurance for coverage of Dealer's customers.
The terms of the relationship between Dealer and Voyager shall be
governed exclusively by agreements to be executed by Dealer and Voyager.
This Addendum does not, and shall not be deemed to, alter or affect in
any way the relationship between Voyager and Dealer.
2. If the premium for coverage under the Dealer's group insurance policy is
financed by Dealer and becomes a part of a Receivable assigned to
Servicer under the Servicing Agreement, Servicer will add to the Advance
otherwise payable to Dealer upon acceptance by Servicer of a Qualifying
Receivable, an amount equal to ___% of the premium (the "Premium
Advance"). The Premium Advance will be paid by Servicer on behalf of
Dealer to Voyager, and will be considered a part of the Advance related
to the accepted Qualifying Receivable for all purposes under the
Servicing Agreement. Premiums refunded as a result of the surrender or
cancellation of coverages written by Dealer will, upon notification by
Voyager or Dealer as the case may be, be credited to Dealer's customer's
account as a "credit adjustment," thereby reducing the principal amount
of the installment contract by the aggregate amount of refunds received
by the Servicer from Voyager or the Dealer, as the case may be.
3. To participate in the CAC/Voyager Insurance Program, Dealer must include
a copy of the certificate of insurance under the Dealer's group
insurance policy as a part of the Receivables Files submitted to
Servicer by Dealer in connection with the acceptance by Servicer of
installment contract under the Servicing Agreement. Dealer-financed
insurance premiums that are not presented under the CAC/Voyager
Insurance program will not be eligible for the Premium Advance.
Submission of the certificate of insurance by Dealer to the Servicer is
for Servicer's information only and shall not affect insurance coverage,
Dealer's relationship with its customer with respect to insurance or
Dealer's relationship with Voyager, and the Servicer shall have no
liability to Dealer or to Dealer's Customer as a result thereof or of
issuing the Premium Advance.
4. Participation in the CAC/Voyager Insurance Program by Dealer is
conditioned upon the following:
(a) Dealer must enter into all agreements and relationships with
Voyager as may be required by Voyager from time-to-time.
(b) Dealer must have all license and authorizations required under
all federal, state and local laws, ordinances, regulations and
orders applicable to participation in the CAC/Voyager Insurance
Program; and
(c) Dealer must provide the Servicer with written evidence of
satisfaction of the foregoing conditions prior to eligibility to
participate in the CAC/Voyager Insurance Program and, for purposes
of continued eligibility, upon Servicer's request from time-to-time
during the term of the Servicing Agreement.
5. In addition to Dealer's representations and obligations set forth in the
Servicing Agreement, Dealer agrees with the Servicer, as follows:
(a) to familiarize itself with all state and federal laws and
regulations applicable to its participation in the CAC/Voyager
Insurance Program and to conduct itself in compliance therewith;
(b) to adhere to all rules, requirements, underwriting standards,
manuals, and procedures of the CAC/Voyager Insurance Program;
(c) to not engage in unlawful rebating, discrimination,
misrepresentation, twisting or any unfair trade practice prohibited
by applicable law;
(d) to not induce the lapse, cancellation, or termination of any
certificate issued under the Dealer's group policy prior to its
scheduled expiration;
(e) to notify the Servicer of the receipt of legal notices or
service of process affecting Servicer or the CAC/Voyager Insurance
Program and to immediately forward same to Servicer;
(f) to not negotiate or endorse any check or other negotiable
instrument made payable to the Servicer and to forward same
immediately to the Servicer;
(g) to not publish, circulate, or display any advertisements,
circulars, or other promotional materials relating to the
CAC/Voyager Insurance Program, or to print, replicate, display, or
utilize in any fashion the name, trademark, service mark, logo, or
other identifying emblem or insignia of Servicer, Voyager or any of
their respective affiliates unless the content or use thereof has
received the prior written approval of Servicer or Voyager, as the
case may be;
(h) to be solely responsible for the payment of compensation to all
employees, agents and sub-agents utilized by Dealer and to indemnify
and defend Servicer from and against any claim for compensation by
said employees, agents, and sub-agents; and
(i) to perform all agreements and obligations of Dealer to Voyager.
(R) 1994, Credit Acceptance Corporation. All rights reserved. 11/97
7
<PAGE> 10
6. Servicer may discontinue the CAC/Voyager Insurance Program or terminate
Dealer's participation therein at any time, in its absolute and sole
discretion, and without advance notice to Dealer. Dealer may terminate
its participation in the CAC/Voyager Insurance Program upon 30 days
written notice to Servicer, provided that such termination will not
terminate Dealer's obligations and liabilities to Servicer hereunder for
any matters occurring prior to the date of such termination or for any
inaccuracy or breach by Dealer in any of the representations or
agreements of Dealer contained herein.
7. Servicer may terminate its relationship with Voyager and enter into a
new credit life and disability insurance program with another qualified
life insurance company upon thirty (30) days written notice to the
Dealer. Should Servicer make such a substitution, this Addendum shall
remain in full force and effect without any further act by Servicer or
Dealer.
8. Nothing in this Addendum shall be deemed to effect Servicer's or
Dealer's rights or obligations under the Servicing Agreement, except as
expressly set forth herein.
_______________________________________________________________________________
Dealership Name
Address:_______________________________________________________________________
(Street, City, State and Zip Code)
By:____________________________________________________________________________
Title:_________________________________________________________________________
(Must be Officer of Dealership)
CREDIT ACCEPTANCE CORPORATION
By:____________________________________________________________________________
Title:_________________________________________________________________________
Date:__________________________________________________________________________
2
<PAGE> 11
[CAC LOGO] CREDIT ACCEPTANCE CORPORATION
ADDENDUM NO. 2
(BUYERS VEHICLE PROTECTION PLAN)
TO
SERVICING AGREEMENT
dated as of________________________________________,19_________
between
CREDIT ACCEPTANCE CORPORATION ("The Servicer")
and
__________________________________________________ ("Dealer")
By executing this addendum, Dealer agrees to participate in the vehicle
service contract financing program offered by Servicer in connection with
its wholly-owned subsidiary, Buyers Vehicle Protection Plan, Inc.
("Buyers"), as described herein (the "Service Contract Program"). When
executed by Servicer and the Dealer, this addendum shall become a part of
the Servicing Agreement. All capitalized terms herein shall have the
meanings assigned to them in the Servicing Agreement.
1. If the purchase price for a vehicle service contract issued by Dealer
under Dealer's vehicle service contract program administered by Buyers
is financed by Dealer and becomes a part of a Receivable assigned to
Servicer under the Servicing Agreement, Servicer will add to the advance
otherwise payable to dealer upon acceptance by Servicer of a Qualifying
Receivable, an amount equal to the selling price of such vehicle service
contract (the "Service Contract Advance") up to a maximum of the
suggested retail price. Dealer authorizes the Servicer to disburse an
amount equal to the net Dealer cost of the subject vehicle service
contract including any vehicle surcharge to Buyers with the remainder
(representing the difference between the net Dealer cost of the subject
vehicle service contract including any vehicle surcharge and the
purchase price up to the stated maximum therefor charged by Dealer to
its customer) to the Dealer. The Service Contract Advance will be
considered part of the Advance related to the accepted Qualifying
Receivable for all purposes under the Servicing Agreement. Any refunds
payable to Dealer's customer as a result of cancellation of a vehicle
service contract will be credited to Dealer's customer's account as a
"credit adjustment," thereby reducing the principal amount of the
installment contract by the aggregate amount of refunds due Dealer
customer.
2. To participate in the Service Contract Program, Dealer must include a
copy of the fully executed limited Used Vehicle Service Contract
supplied to Dealer by Buyers as a part of the Receivables files
submitted to Servicer by Dealer in connection with the acceptance by
Servicer of installment Contracts under the Servicing Agreement. Dealer
financed vehicle service contracts that are not presented under the
Service Contract Program will not be eligible for the Service Contract
Advance. Submission of a copy of the Limited Used Vehicle Service
Contract to Servicer is for Servicer's information only and shall not
effect coverage under any such contract, Dealer's relationship with its
customer under such contract or Dealer's relationship with Buyers, and
Servicer shall owe no liability to Dealer or Dealer's Customer as a
result thereof or of disbursing the Service Contract Advance.
3. Participation in the Service Contract Program is conditional upon the
following:
(a) Dealer must have in full force and effect a Dealer Agreement
with Buyers;
(b) Dealer must have all licenses and authorizations, if any,
required under all federal, state and local laws, ordinances,
regulations and orders applicable to participation in the Service
Contract Program, and the sale by Dealer of vehicle service
contracts; and
(c) Dealer must provide Servicer with written evidence of
satisfaction of the foregoing conditions prior to eligibility to
participate in the Service Contract Program and, for purposes of
continued eligibility, upon Servicer's request from time-to-time
during the term of this Servicing Agreement.
4. In addition to Dealer's representations and obligations set forth in the
Servicing Agreement, Dealer makes the following representations to the
Servicer:
(a) to familiarize itself with all state and federal laws and
regulations applicable to its participation in the Service Contract
Program and shall conduct itself in compliance therewith;
(b) to adhere to all rules, requirements, underwriting standards,
manuals, and procedures of the Service Contract Program;
(c) to not engage in unlawful rebating, discrimination,
misrepresentation, twisting or any unfair trade practice prohibited
by applicable law;
(d) to not induce the cancellation, or termination of any vehicle
service contract sold by Dealer prior to its scheduled expiration;
(e) to notify Servicer of the receipt of legal notices of service of
process affecting Servicer or the Service Contract Program and to
immediately forward same to Servicer;
(f) to not negotiate or endorse any check or other negotiable
instrument made payable to the Servicer and to forward same
immediately to Servicer;
(g) to not publish, circulate, or display any advertisements,
circulars, or other promotional materials relating to the Service
Contract Program, or to print, replicate, display, or utilize in any
fashion the name, trademark, service mark, logo, or other
identifying emblem or insignia of Servicer, Buyers or any of their
respective affiliates unless the content or use thereof has received
the prior written approval of Servicer or Buyers, as the case may
be;
(h) to be solely responsible for the payment of compensation to all
employees, agents and sub-agents utilized by Dealer and to indemnity
and defend the other party from and against any claim for
compensation by said employees, agents, and sub-agents; and
5. Servicer may discontinue the Service Contract Program or terminate
Dealer's participation therein at any time, in its absolute and sole
discretion, and without advance notice to Dealer. Dealer may terminate
its participation in the Service Contract Program upon 30 days written
notice to Servicer, provided that such termination will not terminate
Dealer's obligations and liabilities to Servicer hereunder to any
matters occurring prior to the date of such termination or for any
inaccuracy or breach by Dealer in any of the representations or
agreements of Dealer contained herein.
6. Nothing in this Addendum shall be deemed to effect Servicer or Dealer's
rights or obligations under the Servicing Agreement, except as expressly
set forth herein.
(R) 1994, Credit Acceptance Corporation. All rights reserved. 11/97
<PAGE> 12
_______________________________________________________________________________
Dealership Name
Address:_______________________________________________________________________
(Street, City, State and Zip Code)
By:____________________________________________________________________________
Title:_________________________________________________________________________
(Must be Officer of Dealership)
CREDIT ACCEPTANCE CORPORATION
By:____________________________________________________________________________
Title:_________________________________________________________________________
Date:__________________________________________________________________________
2
<PAGE> 13
[CAC LOGO] CREDIT ACCEPTANCE CORPORATION
DEALER AGREEMENT
FOR BUYER'S VEHICLE PROTECTION PLAN, INC.
Dealer Name:___________________________________________________________________
Address:_______________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Phone: (__________)____________________________________________________
Is repair facility available? [ ]Yes [ ]No
If answer is "yes," complete the following:
Retail Labor Rate:_________________day of______________________, 19______,
between BUYERS VEHICLE PROTECTION PLAN, INC. (the "Dealer").
I. RECITALS:
A. The Dealer has a vehicle service contract program that it offers to
purchasers of used motor vehicles.
B. The Administrator is in the business of designing and administering
vehicle service contract programs and the Dealer desires to retain the
Administrator to design and administer the Dealer's vehicle service
contract program on the terms set forth herein.
C. NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein, the parties agree as follows:
II. DEFINITIONS:
A. The term "Program" refers to the Dealer's vehicle service contract
program designed and administered by the Administrator pursuant to the
terms of this Agreement.
B. The term "Contract" refers to a vehicle service contract sold and issued
by Dealer pursuant to the Program.
C. The term "Contract Holder" refers to the purchaser and owner of a
contract.
D. The term "Covered Repairs" refers to repairs, replacement, labor,
materials and any other services which Dealer is obligated to provide to
Contract Holder, or to reimburse Contract Holder therefore, under the
contract.
E. The term "Repair Facility" means a person, partnership, association or
corporation in the business of repairing vehicles which has agreed with the
Administrator to honor claims for Covered Repairs under the Contract
administered by the Administrator.
III. ADMINISTRATOR OBLIGATIONS:
A. The Administrator shall act as Dealer's administrator and is authorized,
when requested by Dealer, to perform any and all of the following services
to the extent necessary to meet Dealer's needs and contractual obligations:
1. Educate, train and advise Dealer or Dealer's representatives in the
administration and marketing of the Program;
2. Provide administrative forms, promotional displays, manuals and
unexecuted Contract forms to enable Dealer to sell and issue Contracts
and to administer the Program, to the extent the responsibility for
administration has not been delegated to the Administrator;
3. Select and make agreements with the Repair Facilities, in which the
Repair Facilities agree to honor claims for Covered Repairs under the
Program, and
4. Verify that Contracts are valid and enforceable prior to Dealer or
Repair Facility performing Covered Repairs.
The Dealer agrees that when repairs are provided by a Repair Facility
that the Administrator shall have no liability to Dealer for any loss
or damage caused by defective materials installed by, or the
workmanship or negligence of, the Repair Facility.
B. The Administrator shall review, adjust, and settle claims for Covered
Repairs by Contract Holders which are presented to the Dealer and which are
verified and approved by the Administrator under the Program and shall
advise Dealer as to the proper disposition of such claims. Dealer shall
then be reimbursed for Covered Repairs to the extent provided under the
Contract.
C. None of the obligations of the Administrator set forth herein shall be
construed as the Administrator's assumption of Dealers risk or liability.
D. The Administrator may subcontract any or all of its obligations
hereunder from time-to-time and to subcontract of its choice without
permission of or notification to Dealer. As of the date of this Agreement,
the Administrator has subcontracted all of its obligations hereunder to
_______________________________________________________________________.
IV. DEALER OBLIGATIONS:
A. Dealer shall solicit and issue Contracts to Contract Holders to be
administered by the Administrator. Such sales are incidental to and as a
natural extension of Dealer's business of selling vehicles. Dealer
acknowledges that the Program has been developed by the Administrator and
that Dealer has been licensed to use the Program's trade names, promotional
material, Contract forms and proprietary procedures associated therewith
only during the term of this Agreement. At the termination of this
Agreement, Dealer shall return all such material and contract forms to the
Administrator and shall not use the Program's trade names, forms, or
proprietary procedures thereafter.
B. Dealer shall, promptly as possible following the sale by Dealer of each
Contract, but no later than thirty (30) days after such sale, remit to
Administrator completed copies of Contracts together with the net Dealer
cost for such Contracts as set forth in the most recent net rate schedule
provided to Dealer by the Administrator. The Administrator shall have no
obligation to Dealer or Contract Holder in respect to any Contract until
Dealer shall have remitted to the Administrator the full amount of the net
Dealer cost as provided in this paragraph.
C. Dealer agrees to follow the procedures and to use only the forms
provided and approved by the Administrator, for Contracts to be
administered under this Agreement. Dealer further agrees to return any void
or spoiled contracts to the Administrator.
D. Dealer agrees, for claims submitted by Contract Holders to contact the
Administrator to receive authorization prior to proceeding. Any repairs
made without such authority, as evidenced by an authorization number from
the Administrator, shall be uncovered and Dealer shall not be reimbursed
for such repairs by the Administrator.
Dealer further agrees to unconditionally warranty all covered repairs for a
period of not less than ninety (90) days or four thousand (4,000) miles.
Dealer shall be reimbursed for Covered Repairs based on retail labor rate
and last rate manual shown above and the Dealer's retail cost of
replacement parts
(R) 1994, Credit Acceptance Corporation. All rights reserved. 11/97
<PAGE> 14
that are like kind and quality. Retail cost shall be determined at the
lower of actual cost multiplied by 1.4 or list price. Covered Repairs
occurring within the first twenty (20) days of the Contract's effective
date shall be the sole responsibility of the Dealer.
All claims not submitted to the Administrator within ninety days from the
date of repair shall not be paid by the Administrator and the Administrator
shall have no obligations or liability with respect to such claims.
Dealer agrees to provide refunds to Contract Holders as provided in the
Contract. The Administrator shall be responsible for refunds to the Dealer
to extent of the net rate remitted to the Administrator and the
cancellation provisions allowed in the Contract. Further, the Administrator
shall be entitled to the entire cancellation or transfer fee, if any,
provided in the Contract.
V. INDEMNIFICATION:
Dealer shall hold harmless, indemnity and defend the Administrator, and its
employees and representatives against all claims, demands and actions for
loss, liability, damages, costs and expenses (including attorneys fees)
caused by the act or omission to act of Dealer and its employees, which
arise from any Contract which is not reported to the Administrator or which
is the result of the act or omission to act of Dealer or Dealer's employees
or representatives.
VL. DURATION OF AGREEMENT:
This Agreement shall be effective on the date first written above and shall
continue to force until terminated by either party giving to the other not
less than thirty (30) days prior written notice of such termination.
Termination of this Agreement shall not affect the responsibilities of
either party on Contracts issued prior to the effective date of
termination.
This Agreement may be immediately terminated by the Administrator if no
Contracts are submitted hereunder for sixty (60) days or if a petition in
bankruptcy is filed by or against Dealer.
The Agreement supersedes all prior agreements either oral or written,
between Dealer and the Administrator, and may not be amended except in
writing signed by both parties.
VLL. MISCELLANEOUS:
Dealer shall have no authority to make, alter, modify, waive, or discharge
any terms or conditions of the Program or any Contract, or any performance
thereunder, or to waive any forfeiture, or to incur any liability on behalf
of the Administrator.
All notices pertaining to this Agreement must be in writing and transmitted
through the United States Postal Service, postage prepaid to the address
set forth by the respective party. Until Dealer notifies the Administrator
of a different address, notices to Dealer shall be effective if sent to the
address set forth above. Notices to the Administrator shall be effective if
sent to Buyers Vehicle Protection Plan, Inc., 25505 W. Twelve Mile Road,
Suite 3000, Southfield, Michigan 48034-8339, until the Administrator
notifies Dealer of a different address.
Dealer shall immediately notify the Administrator by telecopy, confirmed by
mail of any lawsuit, regulatory inquiry, or complaint about the Program or
a Contract.
The Administrator may examine, during the term of this Agreement and for
one (1) year after the expiration of any Contract issued pursuant hereto,
at all reasonable times at the office of the Dealer, the books, records,
cost of parts, labor involved, and any and all such other information of
the Dealer pertaining to the rendering of Covered Repairs and the Program
hereunder. The Administrator agrees not to use any information so acquired
for any purpose other than as contemplated herein.
_______________________________________________________________________________
Dealer Name
_______________________________________________________________________________
Federal Tax I.D. Number
By:____________________________________________________________________________
Dealer Representative
Dated:_________________________________________________________________________
BUYERS VEHICLE PROTECTION PLAN, INC.
By:____________________________________________________________________________
Dated:_________________________________________________________________________
2
<PAGE> 1
EXHIBIT 4(g)(1)
REVISED EXECUTION COPY
12/15/98
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (the "Agreement") dated as of December 15,
1998, is entered into by and between Credit Acceptance Corporation, a Michigan
corporation (the "Debtor") and Comerica Bank, a Michigan banking corporation
("Comerica"), as agent for the benefit of the "Lenders", the "Noteholders" and
the "Future Debt Holders" (each as referred to below) (in such capacity, the
"Collateral Agent"). The addresses for Debtor and Collateral Agent are set forth
on the signature pages.
RECITALS:
A. The Debtor, Comerica and the other financial institutions signatory
thereto, each as "Banks" thereunder (and, in the case of Comerica, in its
separate additional capacity as "Issuing Bank" thereunder) (together with any
Successor Lenders (as hereinafter defined) party thereto from time to time,
collectively the "Lenders"), entered into that certain Second Amended and
Restated Credit Agreement dated as of December 4, 1996, as amended by First
Amendment and Consent dated as of June 4, 1997, Second Amendment dated as of
December 12, 1997, Third Amendment dated as of May 11, 1998 and Fourth Amendment
dated as of July 30, 1998 by and among the Debtor, the financial institutions
from time to time parties thereto and Comerica, as Agent (said credit agreement,
as further amended, restated or otherwise modified from time to time, the
"Credit Agreement").
B. The Debtor entered into the separate note purchase agreements with
the 1994 Noteholders (as hereinafter defined) dated as of October 1, 1994
(collectively, as amended by First Amendment to Note Purchase Agreement dated as
of November 15, 1995, Second Amendment to Note Purchase Agreement dated as of
August 29, 1996, Third Amendment to Note Purchase Agreement dated as of December
12, 1997 and Fourth Amendment to Note Purchase Agreement dated as of July 1,
1998, and as further amended, restated or otherwise modified from time to time,
the "1994 Note Agreements"), pursuant to which the First Amended and Restated
9.12% Senior Notes due November 1, 2001 (collectively, as amended, restated or
otherwise modified from time to time, the "1994 Senior Notes") are outstanding.
C. The Debtor entered into the separate note purchase agreements with
the 1996 Noteholders (as hereinafter defined) dated as of August 1, 1996
(collectively, as amended by First Amendment to Note Purchase Agreement dated as
of December 12, 1997 and Second Amendment to Note Purchase Agreement dated as of
July 1, 1998 and as further amended, restated or otherwise modified from time to
time, the "1996 Note Agreements"), pursuant to which the First Amended and
Restated 8.24% Senior Notes due July 1, 2001 (collectively, as amended, restated
or otherwise modified from time to time, the "1996 Senior Notes") are
outstanding.
<PAGE> 2
D. The Debtor entered into the separate note purchase agreements with
the 1997 Noteholders (as hereinafter defined) dated as of March 25, 1997
(collectively, as amended by the First Amendment to Note Purchase Agreement
dated as of December 12, 1997 and the Second Amendment to Note Purchase
Agreement dated as of July 1, 1998, as further amended, restated or otherwise
modified from time to time, the "1997 Note Agreements") pursuant to which the
First Amended and Restated 8.02% Senior Notes due October 1, 2001 (collectively,
as amended, restated or otherwise modified from time to time, the "1997 Senior
Notes") are outstanding.
E. Pursuant to Section 7.23 of the Credit Agreement, the Lenders have
required that the Debtor grant (or cause to be granted) certain liens and
security interests to Comerica Bank, as agent for the benefit of the Lenders,
Noteholders, and the Future Debt Holders, all to secure the obligations of the
Debtor under the Credit Documents, the obligations of the Debtor under the
Noteholder Documents and the obligations of the Debtor under the Future Debt
Documents.
F. The Lenders and the Noteholders have consented to the transactions
contemplated hereby, and by the Security Documents, and the Lenders and the
Noteholders have agreed that the Debtor's obligations under the Credit
Agreement, the Note Agreements and the Future Debt Documents (as defined below)
shall be equally and ratably secured pursuant to this Agreement and the other
Security Documents.
G. The Debtor has directly and indirectly benefitted and will directly
and indirectly benefit from the transactions evidenced by and contemplated in
the Credit Agreement, the Note Agreements and the Future Debt Documents (defined
below) and has consented to the execution and delivery of that certain
Intercreditor Agreement among Comerica, as Collateral Agent, the Lenders
(including Comerica), the Noteholders and the Future Debt Holders, dated as of
the date of this Agreement (as amended, restated or otherwise modified from time
to time according to the terms thereof, the "Intercreditor Agreement").
H. The Lenders, the Noteholders and the Collateral Agent have entered
into the Intercreditor Agreement to define the rights, duties, authority and
responsibilities of the Collateral Agent, acting on behalf of such parties
regarding the Collateral (as defined below), and the relationship among the
parties regarding their equal and ratable interests in the Collateral.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the adequacy, receipt and sufficiency of which are
hereby acknowledged, the parties hereto hereby agree as follows:
2
<PAGE> 3
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINITIONS. As used in this Agreement, capitalized terms
not otherwise defined herein or expressly referenced as being defined in the
Credit Agreement have the meanings provided for such terms in the Intercreditor
Agreement. References to "Sections," "subsections," "Exhibits" and "Schedules"
shall be to Sections, subsections, Exhibits and Schedules, respectively, of this
Agreement unless otherwise specifically provided. All references to statutes and
regulations shall include any amendments of the same and any successor statutes
and regulations. References to particular sections of the UCC should be read to
refer also to parallel sections of the Uniform Commercial Code as enacted in
each state or other jurisdiction where any portion of the Collateral is or may
be located.
The following terms have the meanings indicated below, all such
definitions to be equally applicable to the singular and plural forms of the
terms defined:
"Account" means any "account," as such term is defined in Article or
Chapter 9 of the UCC, now owned or hereafter acquired by the Debtor, and, in any
event, shall include, without limitation, each of the following, whether now
owned or hereafter acquired by the Debtor: (a) all rights of the Debtor to
payment for goods sold or leased or services rendered, whether or not earned by
performance, (b) all accounts receivable of the Debtor, (c) all rights of the
Debtor to receive any payment of money or other form of consideration, (d) all
security pledged, assigned or granted to or held by the Debtor to secure any of
the foregoing, (e) all guaranties of, or indemnifications with respect to, any
of the foregoing, and (f) all rights of the Debtor as an unpaid seller of goods
or services, including, but not limited to, all rights of stoppage in transit,
replevin, reclamation and resale.
"Advances to Dealers" shall mean any and all advances by the Debtor to
Dealers under the Dealer Agreements, as outstanding from time to time.
"Benefited Obligations" has the meaning specified in the Intercreditor
Agreement.
"Chattel Paper" means any "chattel paper," as such term is defined in
Article or Chapter 9 of the UCC, now owned or hereafter acquired by the Debtor.
"Collateral" has the meaning specified in Section 2.1 of this
Agreement.
"Computer Records" has the meaning specified in Section 2.1(g) of this
Agreement.
"Dealer(s)" shall mean a Person engaged in the business of the retail
sale of used motor vehicles, including both businesses exclusively selling used
motor vehicles and businesses principally selling new motor vehicles, but having
a used vehicle department, including any such Person which constitutes an
Affiliate of Debtor.
"Dealer Agreement(s)" shall mean the servicing agreements between the
Debtor and a participating Dealer which sets forth the terms and conditions
under which the Debtor accepts, as
3
<PAGE> 4
nominee for such Dealer, the assignment of Installment Contracts for purposes of
administration, servicing and collection and under which the Debtor may make
advances to such Dealers, as such agreements may be in effect from time to time.
"Document" means any "document," as such term is defined in Article or
Chapter 9 of the UCC, now owned or hereafter acquired by the Debtor, including,
without limitation, all documents of title and all receipts covering, evidencing
or representing goods now owned or hereafter acquired by the Debtor.
"Election" is defined in Section 6.4 of this Agreement.
"Equipment" means any "equipment," as such term is defined in Article
or Chapter 9 of the UCC, now owned or hereafter acquired by the Debtor and, in
any event, shall include, without limitation, all machinery, equipment,
furniture, trade fixtures, tractors, trailers, rolling stock, vessels, aircraft
and vehicles now owned or hereafter acquired by the Debtor and any and all
additions, substitutions and replacements of any of the foregoing, wherever
located, together with all attachments, components, parts, equipment and
accessories installed thereon or affixed thereto.
"Event of Default" has the meaning specified in the Intercreditor
Agreement.
"Financing Agreements" has the meaning specified in the Intercreditor
Agreement.
"Future Debt Holders" has the meaning specified in the Intercreditor
Agreement.
"General Intangibles" means any "general intangibles," as such term is
defined in Article or Chapter 9 of the UCC, now owned or hereafter acquired by
the Debtor and, in any event, shall include, without limitation, each of the
following, whether now owned or hereafter acquired by the Debtor: (a) all of the
Debtor's service marks, trade names, trade secrets, registrations, goodwill,
franchises, licenses, permits, proprietary information, customer lists, designs
and inventions; (b) all of the Debtor's books, records, data, plans, manuals,
computer software, computer tapes, computer disks, computer programs, source
codes, object codes and all rights of the Debtor to retrieve data and other
information from third parties; (c) all of the Debtor's contract rights,
partnership interests, membership interests, joint venture interests,
securities, deposit accounts, investment accounts and certificates of deposit;
(d) all rights of the Debtor to payment under letters of credit and similar
agreements; (e) all tax refunds and tax refund claims of the Debtor; (f) all
CHOSES in action and causes of action of the Debtor (whether arising in
contract, tort or otherwise and whether or not currently in litigation) and all
judgments in favor of the Debtor; (g) all rights and claims of the Debtor under
warranties and indemnities; and (h) all rights of the Debtor under any
insurance, surety or similar contract or arrangement.
"Installment Contract(s)" shall mean retail installment contracts for
the sale of used motor vehicles assigned by Dealers to Debtor, as nominee for
the Dealer, for administration, servicing, and collection pursuant to an
applicable Dealer Agreement; provided, however, that to the extent the Debtor
transfers or encumbers its interest in any Installment Contracts (or any
4
<PAGE> 5
Advances to Dealers related thereto) pursuant to a Permitted Securitization,
such Installment Contracts shall, from and after the date of such transfer or
encumbrance, cease to be considered Installment Contracts under this Agreement
unless and until such installment contracts are reassigned to the Debtor or such
encumbrances are discharged.
"Instrument" means any "instrument," as such term is defined in Article
or Chapter 9 of the UCC, now owned or hereafter acquired by the Debtor, and, in
any event, shall include all promissory notes, drafts, bills of exchange and
trade acceptances of the Debtor, whether now owned or hereafter acquired.
"Inventory" means any "inventory," as such term is defined in Article
or Chapter 9 of the UCC, now owned or hereafter acquired by the Debtor, and, in
any event, shall include, without limitation, each of the following, whether now
owned or hereafter acquired by the Debtor: (a) all goods and other personal
property of the Debtor that are held for sale or lease or to be furnished under
any contract of service; (b) all raw materials, work-in-process, finished goods,
supplies and materials of the Debtor; (c) all wrapping, packaging, advertising
and shipping materials of the Debtor; (d) all goods that have been returned to,
repossessed by or stopped in transit by the Debtor; and (e) all Documents
evidencing any of the foregoing.
"Lenders" has the meaning specified in the Intercreditor Agreement.
"Noteholders" has the meaning specified in the Intercreditor Agreement.
"Permitted Liens" has the meaning specified in Section 3.1 of this
Agreement.
"Permitted Securitization" shall mean a "Permitted Securitization"
under each of the applicable Financing Agreements.
"Pledged Shares" means the shares of capital stock or other equity,
partnership or membership interests described on Schedule D attached hereto and
incorporated herein by reference.
"Proceeds" means any "proceeds," as such term is defined in Article or
Chapter 9 of the UCC and, in any event, shall include, but not be limited to,
(a) any and all proceeds of any insurance, indemnity, warranty or guaranty
payable to the Debtor from time to time with respect to any of the Collateral,
(b) any and all payments (in any form whatsoever) made or due and payable to the
Debtor from time to time in connection with any requisition, confiscation,
condemnation, seizure or forfeiture of all or any part of the Collateral by any
governmental authority (or any Person acting, or purporting to act, for or on
behalf of any governmental authority), and (c) any and all other amounts from
time to time paid or payable under or in connection with any of the Collateral.
"Records" is defined in Section 4.9 of this Agreement.
"Security Documents" has the meaning specified in the Intercreditor
Agreement.
5
<PAGE> 6
"Software" has the meaning specified in Section 2.1(g) of this
Agreement.
"UCC" means the Uniform Commercial Code as in effect in the State of
Michigan; provided, that if, by applicable law, the perfection or effect of
perfection or non-perfection of the security interest created hereunder in any
Collateral is governed by the Uniform Commercial Code as in effect on or after
the date hereof in any other jurisdiction, "UCC" means the Uniform Commercial
Code as in effect in such other jurisdiction for purposes of the provisions
hereof relating to such perfection or the effect of perfection or
non-perfection.
ARTICLE II
SECURITY INTEREST
SECTION 2.1. SECURITY INTEREST. As collateral security for the prompt
payment and performance in full when due of the Benefited Obligations (whether
at stated maturity, by acceleration or otherwise), the Debtor hereby pledges and
assigns (as collateral) to the Collateral Agent, and grants the Collateral Agent
a continuing lien on and security interest in, all of the Debtor's right, title
and interest in and to the following, whether now owned or hereafter arising or
acquired and wherever located (collectively, the "Collateral"):
(a) all Accounts;
(b) all Chattel Paper;
(c) all General Intangibles;
(d) all Equipment;
(e) all Inventory;
(f) all Advances to Dealers, Dealer Agreements (and any amounts
advanced to or liens granted by Dealers thereunder), and the
Installment Contracts securing the repayment of such Advances
to Dealers (and other indebtedness of Dealers to Debtor) and
related financial property (the security interest granted
hereby in such Dealer Agreements, Advances to Dealers and
Installment Contracts, and the Accounts, Chattel Paper,
General Intangibles and proceeds therefrom relating to such
Dealer Agreements, Advances to Dealers and Installment
Contracts being subject to the rights of Dealers under Dealer
Agreements);
(g) all computer records ("Computer Records") and software
("Software"), whether relating to the foregoing Collateral or
otherwise, but in the case of such Software, subject to the
rights of any non-affiliated licensee of software;
(h) all shares of stock, and other equity, partnership or
membership interests constituting securities, of the
Significant Domestic Subsidiaries of Debtor from time to time
owned or acquired by the Debtor in any manner (including,
without
6
<PAGE> 7
limitation, the Pledged Shares), and the certificates and
all dividends, cash, instruments, rights and other property
from time to time received, receivable or otherwise
distributed or distributable in respect of or in exchange
for any or all of such shares; and
(i) the Proceeds, in cash or otherwise, of any of the property
described in the foregoing clauses (a) through (h) and all
liens, security, rights. remedies and claims of the Debtor
with respect thereto;
provided, however, that "Collateral" shall not include rights under or with
respect to any General Intangible, license, permit or authorization to the
extent any such General Intangible, license, permit or authorization, by its
terms or by law, prohibits the assignment of, or the granting of a security
interest in, the rights of a Grantor thereunder or which would be invalid or
enforceable upon any such assignment or grant; and provided further that
"Collateral" shall not include any Advances to Dealers, Installment Contracts,
rights or interests under Dealer Agreements and related financial property
transferred by the Debtor prior to the date hereof pursuant to a Permitted
Securitization, except to the extent any such property is re-transferred to the
Debtor according to the terms of such Permitted Securitization.
SECTION 2.2. DEBTOR REMAINS LIABLE. Notwithstanding anything to the
contrary contained herein, (a) the Debtor shall remain liable under the
contracts, agreements, documents and instruments included in the Collateral
(including without limitation Dealer Agreements, Advances to Dealers and
Installment Contracts) to the extent set forth therein to perform all of its
duties and obligations thereunder to the same extent as if this Agreement had
not been executed and pay when due any taxes, including without limitation, any
sales taxes payable in connection with the Dealer Agreements, Advances to
Dealers or Installment Contracts and their creation and satisfaction, (b) the
exercise by the Collateral Agent or any of the Benefited Parties of any of their
respective rights or remedies hereunder shall not release the Debtor from any of
its duties or obligations under the contracts, agreements, documents and
instruments included in the Collateral, and (c) subject to the rights of Dealers
under Dealer Agreements to the extent of collections on Installment Contracts
for the account of such Dealers received by the Collateral Agent or any
Benefited Party, neither the Collateral Agent nor any of the Benefited Parties
shall have any indebtedness, liability or obligation (by assumption or
otherwise) under any of the contracts, agreements, documents and instruments
included in the Collateral (including without limitation any Dealer Agreement or
Installment Contract) by reason of this Agreement, and none of such parties
shall be obligated to perform any of the obligations or duties of the Debtor
thereunder (including without limitation any obligation to make future advances
to or on behalf of any Dealer or other obligor) or to take any action to collect
or enforce any claim for payment assigned hereunder.
SECTION 2.3. DELIVERY OF COLLATERAL. All certificates or instruments
representing or evidencing the Pledged Shares, promptly upon the Debtor gaining
any rights therein, shall be delivered to and held by or on behalf of the
Collateral Agent pursuant hereto in suitable form for transfer by delivery, or
accompanied by duly executed stock powers or instruments of transfer or
assignments in blank, all in form and substance reasonably satisfactory to the
Collateral Agent.
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<PAGE> 8
SECTION 2.4. MARKING COMPUTER FILES. In connection with the security
interest and lien established hereby, the Debtor hereby agrees, at its sole
expense, to indicate clearly and unambiguously in its computer files with
respect to the Dealer Agreements, Advances to Dealers and Installment Contracts
encumbered hereby, that Debtor's rights to payment under such Dealer Agreements,
Advances to Dealers and Installment Contracts have been pledged to the
Collateral Agent pursuant to this Agreement for the benefit of the Benefited
Parties.
SECTION 2.5. AFFIXING LEGENDS. The Debtor shall, within thirty (30)
days from the date hereof with respect to each Dealer Agreement which
constitutes Collateral on the date hereof and, with respect to each Dealer
Agreement which subsequently becomes Collateral hereunder, within five (5) days
of the Debtor's entering into any such agreement, clearly mark each such Dealer
Agreement encumbered hereby with the following legend: "THIS AGREEMENT HAS BEEN
PLEDGED TO COMERICA BANK, AS COLLATERAL AGENT FOR THE BENEFIT OF CERTAIN
BENEFITED PARTIES". Such legend shall be in bold, in type face at least as large
as 12 point and shall be entirely in capital letters.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce the Collateral Agent to enter into this Agreement and the
Intercreditor Agreement, and to induce the Lenders and the Noteholders to enter
into the Financing Agreements, the Debtor represents and warrants to the
Collateral Agent and to each Lender and each Noteholder that as of the date
hereof:
SECTION 3.1. TITLE. The Debtor is, and with respect to Collateral
acquired after the date hereof the Debtor will be, the legal and beneficial
owner of the Collateral free and clear of any Lien or other encumbrance, except
for (a) Liens which constitute both (x) Liens which are permitted under Section
8.6 of the Credit Agreement and (y) Liens described in any of clauses (i)
through (vii) of Section 6.6(a) of the Note Agreements (hereinafter, "Permitted
Liens"), provided that, other than the Lien established hereby, no Lien on the
Collateral described in clause (h) of Section 2.1 shall constitute a Permitted
Lien, (b) with respect to Dealer Agreements and Advances to Dealers, and the
Installment Contracts, Accounts, Chattel Paper and General Intangibles (and
proceeds therefrom) relating to such Dealer Agreements and Advances to Dealers,
the rights of Dealers under such Dealer Agreements and (c) with respect to
Installment Contracts, Dealers' interests in financed vehicles and the proceeds
of such Installment Contracts and interests, the security interest and lien
granted by Dealers to Debtor to secure repayment of Advances to Dealers (and all
other indebtedness of Dealers to Debtor) pursuant to the applicable Dealer
Agreement.
SECTION 3.2. FINANCING STATEMENTS. No financing statement, security
agreement or other Lien instrument covering all or any part of the Collateral is
on file in any public office with respect to any outstanding obligation of
Debtor except (i) as may have been filed in favor of the Collateral Agent
pursuant to this Agreement, (ii) financing statements filed to perfect Permitted
Liens, and (iii) Liens described in Section 3.1(c) hereof. As of the date
hereof, and to the best of
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Debtor's knowledge, except as otherwise disclosed on Schedule E hereto, the
Debtor does not do business and has not done business within the past five (5)
years under a trade name or any name other than its legal name set forth at the
beginning of this Agreement.
SECTION 3.3. PRINCIPAL PLACE OF BUSINESS. The principal place of
business and chief executive office of the Debtor, and the office where the
Debtor keeps its books and records, is located at the address of the Debtor
shown on the signature page hereto.
SECTION 3.4. LOCATION OF COLLATERAL. All Inventory (except Inventory
in transit) and Equipment (other than vehicles) of the Debtor in the possession
of the Debtor are located at the places specified on Schedule A hereto. If any
such location is leased by the Debtor as of the date hereof, the name and
address of the landlord leasing such location is identified on Schedule A
hereto. None of the Inventory or Equipment of the Debtor (other than trailers,
rolling stock, vessels, aircraft and vehicles) is evidenced by a Document
(including, without limitation, a negotiable document of title). All
certificates of the Debtor representing shares of stock of any Significant
Domestic Subsidiary (including, without limitation, the Pledged Shares) will be
delivered to the Collateral Agent, accompanied by duly executed stock powers or
instruments of transfer or assignments in blank with respect thereto.
SECTION 3.5. PERFECTION. Upon the filing of Uniform Commercial Code
financing statements in the jurisdictions listed on Schedule B attached hereto,
and upon the Collateral Agent's obtaining possession of the certificates
evidencing the Pledged Shares accompanied by duly executed stock powers or
instruments of transfer or assignments in blank, the security interest in favor
of the Collateral Agent created herein will constitute a valid and perfected
Lien upon and security interest in the Collateral which may be created and
perfected under the UCC by filing financing statements or obtaining possession
thereof, subject to no equal or prior Liens except for those (if any) which
constitute Permitted Liens.
SECTION 3.6. PRIMARY COMPUTER SYSTEMS AND SOFTWARE; COMPUTER RECORDS
AND INTELLECTUAL PROPERTY. The only material service and computer systems and
related Software utilized by Debtor to service its Dealer Agreements, Advances
to Dealers and Installment Contracts (whether or not encumbered hereby) are (a)
the Application and Contract System which is used from the time a dealer faxes
an application to the Debtor until the relevant Installment Contract is received
and funded, (b) the Loan Servicing System which contains all payment information
and is the primary source for management information reporting, and (c) the
Collection System which is used by the Debtor's collections personnel to track
and service all active customer accounts. Such computer systems and software are
defined (and described in greater detail) on Schedule C, attached hereto.
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SECTION 3.7. PLEDGED SHARES.
(a) The Pledged Shares that are shares of a corporation have been duly
authorized and validly issued and are fully paid and nonassessable, and the
Pledged Shares that are membership interests or partnership units (if any) have
been validly granted, under the laws of the jurisdiction of organization of the
issuers thereof, and, to the extent applicable, are fully paid and
nonassessable.
(b) The Debtor is the legal and beneficial owner of the Pledged Shares,
free and clear of any Lien (other than the Liens created by this Agreement and
the Permitted Liens), and the Debtor has not sold, granted any option with
respect to, assigned, transferred or otherwise disposed of any of its rights or
interest in or to the Pledged Shares. None of the Pledged Shares are subject to
any contractual or other restrictions upon the pledge or other transfer of such
Pledged Shares, other than those imposed by securities laws generally.
(c) On the date hereof, the Pledged Shares constitute the percentage of
the issued and outstanding shares of stock, partnership units or membership
interests of the Issuers thereof indicated on Schedule D and such schedule
contains a description of all shares of capital stock, membership interests and
other equity interests of or in its Significant Domestic Subsidiaries owned by
the Debtor (as such Schedule D may from time to time be supplemented, amended or
modified in accordance with the terms of this Agreement).
ARTICLE IV
COVENANTS
The Debtor covenants and agrees with the Collateral Agent that until
the Benefited Obligations are paid and performed in full and all commitments to
lend or provide other credit accommodations under the Credit Agreement have been
terminated:
SECTION 4.1. ENCUMBRANCES. The Debtor shall not create, permit or
suffer to exist, and shall defend the Collateral against, any Lien or other
encumbrance (other than the Liens created by this Agreement and the Permitted
Liens) or any restriction upon the pledge or other transfer thereof (other than
as provided in the Financing Agreements), and shall, subject to the Permitted
Liens, defend the Debtor's title to and other rights in the Collateral and the
Collateral Agent's pledge and collateral assignment of and security interest in
the Collateral against the claims and demands of all Persons. Except to the
extent permitted by the Financing Agreements or in connection with any release
of Collateral under Section 7.13 hereof (but only to the extent of any
Collateral so released), the Debtor shall do nothing to impair the rights of the
Collateral Agent in the Collateral.
SECTION 4.2. COLLECTION OF ACCOUNTS AND CONTRACTS; NO COMMINGLING. The
Debtor shall, in accordance with its usual business practices, endeavor to
collect or cause to be collected from each account debtor under its Accounts, as
and when due, any and all amounts owing under such Accounts and from any Dealer
or from any obligor under an Installment Contract, as
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the case may be, any amounts owing under a Dealer Agreement or Installment
Contract, as applicable. Debtor shall take the steps required under the
documents relating to Permitted Securitizations to segregate any Collateral
transferred, encumbered or otherwise affected by a Permitted Securitization from
the Collateral encumbered under this Agreement and all proceeds or other sums
received in respect thereof (provided that Dealer Agreements which cover
Advances to Dealers which have been transferred pursuant to a Permitted
Securitization, but which also cover Advances to Dealers encumbered hereby, may
contain the legend affixed in connection with the applicable Permitted
Securitization, so long as such Dealer Agreements also contain the legend
required under Section 2.5 hereof).
SECTION 4.3. DISPOSITION OF COLLATERAL. To the extent prohibited by
the terms of the Financing Agreements, the Debtor shall not enter into or
consummate any transfer or other disposition of assets without the prior written
consent of the applicable Benefited Parties, according to the terms of the
applicable Financing Agreements.
SECTION 4.4. FURTHER ASSURANCES. At any time and from time to time,
upon the request of the Collateral Agent, and at the sole expense of the Debtor,
the Debtor shall promptly execute and deliver all such further agreements,
documents and instruments and take such further action as the Collateral Agent
may reasonably deem necessary or appropriate to preserve and perfect its
security interest in and pledge and collateral assignment of the Collateral and
carry out the provisions and purposes of this Agreement or to enable the
Collateral Agent to exercise and enforce its rights and remedies hereunder with
respect to any of the Collateral; provided, however, that nothing contained in
this Section 4.4 shall require Debtor to affix legends to the Dealer Agreements
or Installment Contracts (or folders containing the same) prior to the times set
forth in Sections 2.5 and 6.4, respectively. Except as otherwise expressly
permitted by the terms of the Financing Agreements relating to disposition of
assets, including without limitation any Permitted Securitization and except for
Permitted Liens, the Debtor agrees to maintain and preserve the Collateral
Agent's security interest in and pledge and collateral assignment of the
Collateral hereunder. Without limiting the generality of the foregoing, the
Debtor shall (a) execute and deliver to the Collateral Agent such financing
statements as the Collateral Agent may from time to time require; and (b)
execute and deliver to the Collateral Agent such other agreements, documents and
instruments, including without limitation stock powers, as the Collateral Agent
may require to perfect and maintain the validity, effectiveness and priority of
the Liens intended to be created by the Security Documents. The Debtor
authorizes the Collateral Agent to file one or more financing or continuation
statements, and amendments thereto, relating to all or any part of the
Collateral without the signature of the Debtor unless otherwise prohibited by
law.
SECTION 4.5. INSURANCE. The Debtor shall maintain insurance of the
types and in amounts, and under the terms and conditions, specified in the
Financing Agreements. Recoveries under any such policy of insurance shall be
paid as provided in the Financing Agreements and Intercreditor Agreement.
SECTION 4.6. BAILEES. If any of the Collateral is at any time in the
possession or control of any warehouseman, bailee or any of the Debtor's agents
or processors, the Debtor shall, at the request of the Collateral Agent, notify
such warehouseman, bailee, agent or processor of the
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security interest created hereunder and shall instruct such Person to hold such
Collateral for the Collateral Agent's account subject to the Collateral Agent's
instructions.
SECTION 4.7. FURNISHING OF INFORMATION AND INSPECTION RIGHTS. (a)
Within 30 days following the execution and delivery of this Agreement, the
Debtor agrees to deliver to the Collateral Agent one or more computer files or
microfiche lists containing true and complete (and updated to the most recent
month end) lists of all Dealer Agreements and Advances to Dealers, and all
Installment Contracts securing all such Advances to Dealers, identified by
account number, dealer number, and pool number and outstanding balance as of the
date of such file or list. Such file or list shall be delivered to the
Collateral Agent as confidential and proprietary.
(b) Thereafter:
(i) so long as no Event of Default has occurred and is
continuing, upon the written request of the Collateral Agent (as
directed by the Majority Benefited Parties), the Debtor shall be
obligated, but not more frequently than monthly; and
(ii) upon the occurrence and during the continuance of an
Event of Default, the Debtor shall be obligated, on a monthly
basis whether or not Collateral Agent shall so request, and more
frequently upon the written request of the Collateral Agent (as
directed by the Majority Benefited Parties);
to furnish to the Collateral Agent, a computer file, microfiche list or other
list identifying each of the Dealer Agreements, Advances to Dealers and
Installment Contracts encumbered hereby by pool number, account number and
dealer number and by the outstanding balance thereof and identifying the obligor
on the relevant Installment Contract, and the Debtor shall also furnish to the
Collateral Agent from time to time such other information with respect to Dealer
Agreements, the Advances to Dealers and Installment Contracts encumbered hereby
as the Collateral Agent may reasonably request. Without impairing the rights of
any Benefited Party to obtain information from the Debtor under any of the other
Financing Agreements, as applicable, the Collateral Agent shall furnish copies
of the foregoing to any Lender, Noteholder or Future Debt Holder upon its
request following the occurrence and during the continuance of any Default or
Event of Default, and Debtor hereby authorizes and approves such release. The
Debtor will, at any time and from time to time during regular business hours,
upon 5 days prior notice (except if any Event of Default has occurred and is
continuing, when no prior notice shall be required), permit the Collateral
Agent, or its agents or representatives, to examine and make copies of and
abstracts from all Records, to visit the offices and properties of the Debtor
for the purpose of examining such Records, and to discuss matters relating to
the Advances to Dealers or Installment Contracts or the Debtor's performance
hereunder and under the other Financing Documents with any of the officers,
directors, employees or independent public accountants of the Debtor having
knowledge of such matters; provided, however, that the Collateral Agent
acknowledges that, in exercising the rights and privileges conferred in this
Section 4.7, it or its agents and representatives may, from time to time, obtain
knowledge of information, practices,
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books, correspondence and records of a confidential nature and in which the
Debtor has a proprietary interest. The Collateral Agent agrees that all such
information, practices, books, correspondence and records are to be regarded as
confidential information and agrees that it shall retain in strict confidence
and shall use its reasonable efforts to ensure that its agents and
representatives retain in strict confidence, and will not disclose without the
prior written consent of the Debtor, any such information, practices, books,
correspondence and records furnished to them except that the Collateral Agent
may disclose such information (i) to its officers, directors, employees, agents,
counsel, accountants, auditors, affiliates, advisors or representatives
(provided that such Persons are informed of the confidential nature of such
information), (ii) to the extent such information has become available to the
public other than as a result of a disclosure by or through the Collateral Agent
or its officers, directors, employees, agents, counsel, accountants, auditors,
affiliates, advisors or representatives, (iii) to the extent such information
was available to the Collateral Agent on a nonconfidential basis prior to its
disclosure to the Collateral Agent hereunder, (iv) to the extent the Collateral
Agent is (A) required in connection with any legal or regulatory proceeding or
(B) requested by any bank or other regulatory authority to disclose such
information, (v) to any prospective assignee of any note or other instrument
evidencing a Benefited Obligation; provided, that the Collateral Agent shall
notify such assignee of the confidentiality provisions of this Section 4.7 and
such assignee shall agree to be bound thereby, or (vi) to any Benefited Party,
subject to the confidentiality provisions contained in this Agreement and any
other Financing Agreement to which it is a party, upon the request of such party
following the occurrence and during the continuance of such Default or Event of
Default (but with no obligation on the part of any such Benefited Party
hereunder to return such information to Collateral Agent or the Company if any
such Default or Event of Default is subsequently cured or waived).
Notwithstanding anything to the contrary in this Agreement, the Collateral Agent
may reply to a request from any Person for a list of Advances to Dealers, Dealer
Agreements, Installment Contracts or other information related to any Collateral
referred to in any financing statement filed to perfect the security interest
and liens established hereby, to the extent necessary to maintain the perfection
or priority of such security interests or liens, or otherwise required under
applicable law. The Collateral Agent agrees (at Debtor's sole cost and expense)
to take such measures as shall be reasonably requested by the Debtor to protect
and maintain the security and confidentiality of such information. The
Collateral Agent shall exercise good faith and make diligent efforts to provide
the Debtor with written notice at least five (5) Business Days prior to any
disclosure pursuant to this subsection 4.7(b).
(c) Furthermore, the Debtor shall permit the Collateral Agent
and its representatives to examine, inspect and audit the Collateral and to
examine, inspect and audit the Debtor's books and Records as otherwise provided
under the Financing Agreements.
SECTION 4.8. CORPORATE CHANGES. The Debtor shall not change its name,
identity or corporate structure in any manner that might make any financing
statement filed in connection with this Agreement seriously misleading within
the meaning of Section 9-402(8) of the UCC unless the Debtor shall have given
the Collateral Agent thirty (30) days prior written notice thereof and shall
have taken all action deemed necessary or desirable by the Collateral Agent to
protect its Liens and the perfection and priority thereof. The Debtor shall not
change its
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principal place of business, chief executive office or the place where it keeps
its books and records unless it shall have given the Collateral Agent thirty
(30) days prior written notice thereof and shall have taken all action deemed
necessary or desirable by the Collateral Agent to cause its security interest in
the Collateral to be perfected with the priority required by this Agreement.
SECTION 4.9. BOOKS AND RECORDS; INFORMATION. The Debtor shall keep
accurate and complete books and records (the "Records") of the Collateral and
the Debtor's business and financial condition in accordance with the Financing
Agreements. Subject to Section 4.7, the Debtor shall from time to time at the
request of the Collateral Agent deliver to the Collateral Agent such information
regarding the Collateral and the Debtor as the Collateral Agent may reasonably
request, including, without limitation, lists and descriptions of the Collateral
and evidence of the identity and existence of the Collateral. Debtor shall mark
its books and records to reflect the security interest of the Collateral Agent
under this Agreement; provided, however, that with respect to its computer
files, Debtor's compliance with Section 2.4 hereof shall be deemed to satisfy
its obligations under this sentence.
SECTION 4.10. ADMINISTRATIVE AND OPERATING PROCEDURES. The Debtor will
maintain and implement administrative and operating procedures (including
without limitation an ability to recreate records relating to the Dealer
Agreements, Advances to Dealers and Installment Contracts encumbered hereby in
the event of the destruction of the originals thereof), and keep and maintain,
or obtain, as and when required, all documents, books, records and other
information reasonably necessary or advisable for the collection of all amounts
due under the Dealer Agreements, Advances to Dealers and Installment Contracts
encumbered hereby (including without limitation records adequate to permit
adjustments to amounts due under each of such Dealer Agreements, Advances to
Dealers and Installment Contracts). The Debtor will give the Collateral Agent
notice of any material change in the administrative and operating procedures of
the Debtor referred to in the previous sentence. Notwithstanding the foregoing,
Debtor shall not be required to make or retain duplicate copies of Installment
Contracts.
SECTION 4.11. EQUIPMENT AND INVENTORY.
(a) The Debtor shall keep the Equipment (other than vehicles) and
Inventory (other than Inventory in transit) which is in Debtor's possession at
any of the locations specified on Schedule A hereto or, upon thirty (30) days
prior written notice to the Collateral Agent, at such other places within the
United States of America or Canada where all action required to perfect the
Collateral Agent's security interest in the Equipment and Inventory with the
priority required by this Agreement shall have been taken.
(b) The Debtor shall maintain the Equipment and Inventory in accordance
with the terms of the Financing Agreements.
SECTION 4.12. NOTIFICATION. The Debtor shall promptly notify the
Collateral Agent in writing of any Lien, encumbrance or claim (other than a
Permitted Lien) that has attached to or been made or asserted against any of the
Collateral upon becoming aware of the existence of such Lien, encumbrance or
claim.
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SECTION 4.13. COLLECTION OF ACCOUNTS. So long as no Event of Default
has occurred and is continuing and except as otherwise provided in this Section
4.13 and in Section 5.1, the Debtor shall have the right to collect and receive
payments on the Accounts, Dealer Agreements, Advances to Dealers and Installment
Contracts, and to use and expend the same in its operations, in each case in
compliance with the terms of each of the Financing Agreements. In connection
with such collections, the Debtor may take (and, at the Collateral Agent's
direction following the occurrence and during the continuance of an Event of
Default, shall take) such actions as the Debtor or the Collateral Agent may deem
necessary or advisable to enforce collection of the Accounts.
SECTION 4.14. VOTING RIGHTS; DISTRIBUTIONS, ETC.
(a) So long as no Event of Default shall have occurred and be
continuing (both before and after giving effect to any of the actions or other
matters described in clauses (i) or (ii) of this subparagraph):
(i) The Debtor shall be entitled to exercise any and all voting
and other consensual rights (including, without limitation, the right
to give consents, waivers and ratifications) pertaining to any of the
Pledged Shares or any part thereof; provided, however, that no vote
shall be cast or consent, waiver or ratification given or action taken
without the prior written consent of the Collateral Agent which would
violate any provision of this Agreement or any other Financing
Agreement; and
(ii) Except as otherwise provided by any of the other Financing
Agreements, the Debtor shall be entitled to receive and retain any and
all dividends, distributions and interest paid in respect to any of the
Pledged Shares.
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(b) Upon the occurrence and during the continuance of an Event of
Default:
(i) The Collateral Agent may, without notice to the Debtor,
transfer or register in the name of the Collateral Agent or any of its
nominees, for the equal and ratable benefit of the Lenders, the
Noteholders and the Future Debt Holders, any or all of the Pledged
Shares and the Proceeds thereof (in cash or otherwise) held by the
Collateral Agent hereunder, and the Collateral Agent or its nominee may
thereafter, after delivery of notice to the Debtor, exercise all voting
and corporate rights at any meeting of any corporation issuing any of
the Pledged Shares and any and all rights of conversion, exchange,
subscription or any other rights, privileges or options pertaining to
any of the Pledged Shares as if the Collateral Agent were the absolute
owner thereof, including, without limitation, the right to exchange, at
its discretion, any and all of the Pledged Shares upon the merger,
consolidation, reorganization, recapitalization or other readjustment
of any corporation issuing any of such Pledged Shares or upon the
exercise by any such issuer or the Collateral Agent of any right,
privilege or option pertaining to any of the Pledged Shares, and in
connection therewith, to deposit and deliver any and all of the Pledged
Shares with any committee, depositary, transfer agent, registrar or
other designated agency upon such terms and conditions as the
Collateral Agent may determine, all without liability except to account
for property actually received by it, but the Collateral Agent shall
have no duty to exercise any of the aforesaid rights, privileges or
options, and the Collateral Agent shall not be responsible for any
failure to do so or delay in so doing.
(ii) All rights of the Debtor to exercise the voting and other
consensual rights which it would otherwise be entitled to exercise
pursuant to Subsection 4.14(a)(i) and to receive the dividends,
interest and other distributions which it would otherwise be authorized
to receive and retain pursuant to Subsection 4.14(a)(ii) shall be
suspended until such Event of Default shall no longer exist, and all
such rights shall, until such Event of Default shall no longer exist,
thereupon become vested in the Collateral Agent which shall thereupon
have the sole right to exercise such voting and other consensual rights
and to receive, hold and dispose of as Pledged Shares such dividends,
interest and other distributions.
(iii) All dividends, interest and other distributions which are
received by the Debtor contrary to the provisions of this Subsection
4.14(b) shall be received in trust for the benefit of the Collateral
Agent, shall be segregated from other funds of the Debtor and shall be
forthwith paid over to the Collateral Agent as Collateral in the same
form as so received (with any necessary endorsement).
(iv) The Debtor shall execute and deliver (or cause to be
executed and delivered) to the Collateral Agent all such proxies and
other instruments as the Collateral Agent may reasonably request for
the purpose of enabling the Collateral Agent to exercise the voting and
other rights which it is entitled to exercise pursuant to this
Subsection 4.14(b) and to receive the dividends, interest and other
distributions which it is entitled to receive and retain pursuant to
this Subsection 4.14(b). The foregoing shall
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not in any way limit the Collateral Agent's power and authority granted
pursuant to Section 5.1.
SECTION 4.15. TRANSFERS AND OTHER LIENS; ADDITIONAL INVESTMENTS. The
Debtor agrees that, (a) except with the written consent of the Collateral Agent,
it will not permit any Significant Domestic Subsidiary to issue to Debtor or any
of Debtor's other Subsidiaries any shares of stock, membership interests,
partnership units, notes or other securities or instruments (including without
limitation the Pledged Shares) in addition to or in substitution for any of the
Collateral, unless, concurrently with each issuance thereof, any and all such
shares of stock, membership interests, partnership units, notes or instruments
are encumbered in favor of the Collateral Agent under this Agreement or
otherwise (it being understood and agreed that all such shares of stock,
membership interests, partnership units, notes or instruments issued to Debtor
shall, without further action by Debtor or Collateral Agent, be automatically
encumbered by this Agreement as Pledged Shares) and (b) it will promptly upon
the written request of Collateral Agent following the issuance thereof (and in
any event within three Business Days following such request) deliver to the
Collateral Agent (i) an amendment, duly executed by the Debtor, in substantially
the form of Exhibit A hereto (an "Amendment"), in respect of such shares of
stock, membership interests, partnership units, notes or instruments issued to
Debtor or (ii) a new stock pledge, duly executed by the applicable Subsidiary,
in substantially the form of this Agreement (a "New Pledge"), in respect of such
shares of stock, membership interests, partnership units, notes or instruments
issued to any Subsidiary granting to Collateral Agent, for the benefit of the
Benefited Parties, a first priority security interest, pledge and lien thereon,
together in each case with all certificates, notes or other instruments
representing or evidencing the same. The Debtor hereby (x) authorizes the
Collateral Agent to attach each Amendment to this Agreement, (y) agrees that all
such shares of stock, membership interests, partnership units, notes or
instruments listed in any Amendment delivered to the Collateral Agent shall for
all purposes hereunder constitute Pledged Shares, and (z) is deemed to have
made, upon the delivery of each such Amendment, the representations and
warranties contained in Sections 3.1, 3.2, 3.4, 3.5 and 3.7 of this Agreement
with respect to the Collateral covered thereby.
SECTION 4.16. POSSESSION; REASONABLE CARE. Regardless of whether an
Event of Default has occurred or is continuing, the Collateral Agent shall have
the right to hold in its possession all Pledged Shares pledged, assigned or
transferred hereunder and from time to time constituting a portion of the
Collateral. The Collateral Agent may appoint one or more agents (which in no
case shall be the Debtor or an affiliate of the Debtor) to hold physical
custody, for the account of the Collateral Agent, of any or all of the
Collateral. The Collateral Agent shall be deemed to have exercised reasonable
care in the custody and preservation of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which the
Collateral Agent accords its own property, it being understood that the
Collateral Agent shall not have any responsibility for (a) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Collateral, whether or not the Collateral Agent
has or is deemed to have knowledge of such matters, or (b) taking any necessary
steps to preserve rights against any parties with respect to any Collateral,
except, subject to the terms hereof, upon the written instructions of the
Majority Benefited Parties. Following the occurrence and continuance (beyond any
applicable grace or cure period) of an Event of Default, the
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Collateral Agent shall be entitled to take possession of the Collateral in
accordance with the UCC.
SECTION 4.17. FUTURE SIGNIFICANT DOMESTIC SUBSIDIARIES. With respect to
each Person which becomes a Significant Domestic Subsidiary subsequent to the
date hereof, on the date such Person is created, acquired or otherwise becomes a
Significant Domestic Subsidiary (whichever first occurs), Debtor will cause such
Subsidiary to execute and deliver to the Collateral Agent a security agreement,
substantially in the form of this Agreement, granting to the Collateral Agent,
for the benefit of the Benefited Parties, a first priority security interest,
mortgage and lien encumbering all right, title and interest of such Person in
property, rights and interests of the type included in the definition of the
Collateral.
ARTICLE V
RIGHTS OF THE COLLATERAL AGENT
SECTION 5.1. POWER OF ATTORNEY. The Debtor hereby irrevocably
constitutes and appoints the Collateral Agent and any officer or agent thereof,
with full power of substitution, as its true and lawful attorney-in-fact with
full irrevocable power and authority in the name of the Debtor or in its own
name, to take, after the occurrence and during the continuance of an Event of
Default, any and all actions, and to execute any and all documents and
instruments which the Collateral Agent at any time and from time to time deems
necessary or desirable, to accomplish the purposes of this Agreement and,
without limiting the generality of the foregoing, the Debtor hereby gives the
Collateral Agent the power and right on behalf of the Debtor and in its own name
to do any of the following after the occurrence and during the continuance of an
Event of Default, without notice to or the consent of the Debtor:
(i) to demand, sue for, collect or receive, in the name of the
Debtor or in its own name, any money or property at any time payable or
receivable on account of or in exchange for any of the Collateral and,
in connection therewith, endorse checks, notes, drafts, acceptances,
money orders, documents of title or any other instruments for the
payment of money under the Collateral or any policy of insurance;
(ii) to pay or discharge taxes, Liens or other encumbrances
levied or placed on or threatened against the Collateral;
(iii) (A) to direct account debtors, Dealers, any obligors under
Installment Contracts, as applicable, and any other parties liable for
any payment under any of the Collateral to make payment of any and all
monies due and to become due thereunder directly to the Collateral
Agent or as the Collateral Agent shall direct; (B) to receive payment
of and receipt for any and all monies, claims and other amounts due and
to become due at any time in respect of or arising out of any
Collateral; (C) to sign and endorse any invoices, freight or express
bills, bills of lading, storage or warehouse receipts, drafts against
debtors, assignments, proxies, stock powers, verifications and notices
in connection with accounts and other documents relating to the
Collateral; (D) to
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commence and prosecute any suit, action or proceeding at law or in
equity in any court of competent jurisdiction to collect the Collateral
or any part thereof and to enforce any other right in respect of any
Collateral; (E) to defend any suit, action or proceeding brought
against the Debtor with respect to any Collateral; (F) to settle,
compromise or adjust any suit, action or proceeding described above
and, in connection therewith, to give such discharges or releases as
the Collateral Agent may deem appropriate; (G) to exchange any of the
Collateral for other property upon any merger, consolidation,
reorganization, recapitalization or other readjustment of the issuer
thereof and, in connection therewith, deposit any of the Collateral
with any committee, depositary, transfer agent, registrar or other
designated agency upon such terms as the Collateral Agent may
determine; (H) to add or release any guarantor, indorser, surety or
other party to any of the Collateral; (I) to renew, extend or otherwise
change the terms and conditions of any of the Collateral; (J) to make,
settle, compromise or adjust any claim under or pertaining to any of
the Collateral (including claims under any policy of insurance); and
(K) to sell, transfer, pledge, convey, make any agreement with respect
to, or otherwise deal with, any of the Collateral as fully and
completely as though the Collateral Agent were the absolute owner
thereof for all purposes, and to do, at the Collateral Agent's option
and the Debtor's expense, at any time, or from time to time, all acts
and things which the Collateral Agent deems necessary to protect,
preserve, maintain, or realize upon the Collateral and the Collateral
Agent's security interest therein.
This power of attorney is a power coupled with an interest and shall be
irrevocable. The Collateral Agent shall be under no duty to exercise or withhold
the exercise of any of the rights, powers, privileges and options expressly or
implicitly granted to the Collateral Agent in this Agreement, and shall not be
liable for any failure to do so or any delay in doing so. This power of attorney
is conferred on the Collateral Agent solely to protect, preserve, maintain and
realize upon its security interest in the Collateral. The Collateral Agent shall
not be responsible for any decline in the value of the Collateral and shall not
be required to take any steps to preserve rights against prior parties or to
protect, preserve or maintain any Lien given to secure the Collateral.
SECTION 5.2. SETOFF. In addition to and not in limitation of any
rights of any Benefited Party under applicable law, the Collateral Agent and
each Benefited Party shall, upon acceleration of any Benefited Obligation owing
to such party under the Credit Agreement, the Note Agreements or the Future Debt
Documents, as the case may be, or when and to the extent any such Benefited
Obligation shall otherwise be due and payable, and without notice or demand of
any kind, have the right to appropriate and apply to the payment of the
Benefited Obligations owing to it (whether or not then due) any and all
balances, credits, deposits, accounts or moneys of Debtor then or thereafter on
deposit with such Benefited Party; provided, however, that any such amount so
applied by any Benefited Party on any of the Benefited Obligations owing to it
shall be subject to the provisions of Sections 5 and 10 of the Intercreditor
Agreement.
SECTION 5.3. ASSIGNMENT BY THE COLLATERAL AGENT. The Collateral Agent
may at any time assign or otherwise transfer all or any portion of its rights
and obligations as Collateral Agent under this Agreement and the other Security
Documents (including, without limitation, the Benefited Obligations) to any
other Person, to the extent permitted by, and upon the conditions
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contained in, the Intercreditor Agreement and the other Financing Agreements, as
applicable, and such Person shall thereupon become vested with all the benefits
and obligations thereof granted to the Collateral Agent herein or otherwise.
SECTION 5.4. PERFORMANCE BY THE COLLATERAL AGENT. If the Debtor shall
fail to perform any covenant or agreement contained in this Agreement, the
Collateral Agent may perform or attempt to perform such covenant or agreement on
behalf of the Debtor, in which case Collateral Agent shall exercise good faith
and make diligent efforts to give Debtor prompt prior written notice of such
performance or attempted performance. In such event, the Debtor shall, at the
request of the Collateral Agent, promptly pay any reasonable amount expended by
the Collateral Agent in connection with such performance or attempted
performance to the Collateral Agent, together with interest thereon at the
interest rate set forth in the Credit Agreement, from and including the date of
such expenditure to but excluding the date such expenditure is paid in full.
Notwithstanding the foregoing, it is expressly agreed that the Collateral Agent
shall not have any liability or responsibility for the performance of any
obligation of the Debtor under this Agreement.
SECTION 5.5. RESTRICTIONS UNDER DEALER AGREEMENTS. In exercising the
rights and remedies set forth in this Agreement, the Collateral Agent shall take
no action with regard to any Dealer which is expressly prohibited by the related
Dealer Agreement.
SECTION 5.6. CERTAIN COSTS AND EXPENSES. The Debtor shall pay or
reimburse the Collateral Agent within five (5) Business Days after demand for
all reasonable costs and expenses (including reasonable attorney's and paralegal
fees and expenses supported by an itemized billing) incurred by it in connection
with the enforcement, attempted enforcement, or preservation of any rights or
remedies under this Agreement or any other Security Document during the
existence of an Event of Default or after acceleration of any of the Benefited
Obligations (including in connection with any "workout" or restructuring
regarding the Benefited Obligations, and including in any insolvency proceeding
or appellate proceeding); provided, however, that the Debtor shall only be
required to pay or reimburse the Collateral Agent in connection with the
enforcement, attempted enforcement, or preservation of any rights or remedies
under this Agreement or any other Security Document for the fees and expenses of
one law firm in each jurisdiction governing the establishment, perfection or
priority of any security interest or lien established hereby, or governing any
dispute, claim or other matter arising hereunder, at any given time, engaged on
behalf of the Collateral Agent. The agreements in this Section 5.6 shall survive
the payment in full of the Benefited Obligations. Notwithstanding the foregoing,
the reimbursement of any fees and expenses incurred by the Benefited Parties
shall be governed by the terms and conditions of the applicable Financing
Agreements.
SECTION 5.7. INDEMNIFICATION. The Debtor shall indemnify, defend and
hold the Collateral Agent and each Benefited Party and each of their respective
officers, directors, employees, counsel, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses and disbursements (including reasonable attorneys' and
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paralegals' fees and expenses supported by an itemized billing) of any kind or
nature whatsoever which may at any time (including at any time following
repayment of the Benefited Obligations and the termination, resignation or
replacement of the Collateral Agent or replacement of any Benefited Party) be
imposed on, incurred by or asserted against any such Indemnified Person in any
way relating to or arising out of this Agreement or any other Security Document
or any document contemplated by or referred to herein or therein, or the
transactions contemplated hereby, or any action taken or omitted by any such
Indemnified Person under or in connection with any of the foregoing, including
with respect to any investigation, litigation or proceeding (including any
"Bankruptcy Proceeding" (as defined in the Intercreditor Agreement) or appellate
proceeding) related to or arising out of this Agreement or the Benefited
Obligations or the use of the proceeds thereof, whether or not any Indemnified
Person is a party thereto (all the foregoing, collectively, the "Indemnified
Liabilities); provided, that the Debtor shall have no obligation under this
Section 5.7 to any Indemnified Person (a) with respect to Indemnified
Liabilities to the extent resulting from the gross negligence or willful
misconduct of such Indemnified Person or (b) if, in the case of an action solely
among the Collateral Agent and/or the Benefited Parties (or any of them),
neither the Debtor nor any of its Affiliates or employees or agents is (or has
been) finally determined, in a court of competent jurisdiction, to have engaged
in any wrongful conduct or in any breach of this Agreement or any of the
Financing Agreements or (c) if, in the case of an action solely as between or
among the Collateral Agent and/or the Benefited Parties (or any of them) on the
one hand and the Debtor on the other hand, (i) Debtor has obtained a final,
non-appealable judgment from a court of competent jurisdiction that neither it
nor any of its Affiliates, employees or agents has engaged in any wrongful
conduct or in any breach of this Agreement or any of the other Financing
Agreements or (ii) the Debtor by non-appealable judgment is the prevailing
party. The agreements in this Section 5.7 shall survive payment of all other
Benefited Obligations.
ARTICLE VI
DEFAULT
SECTION 6.1. RIGHTS AND REMEDIES. If an Event of Default shall have
occurred and be continuing, the Collateral Agent shall have the following rights
and remedies subject to the direction and/or consent of the Majority Benefited
Parties as required under the Intercreditor Agreement:
(i) In addition to all other rights and remedies granted to the
Collateral Agent in this Agreement, the Intercreditor Agreement or in
any other Financing Agreement or by applicable law, the Collateral
Agent shall have all of the rights and remedies of a secured party
under the UCC (whether or not the UCC applies to the affected
Collateral) and the Collateral Agent may also, without notice except as
specified below or in the Intercreditor Agreement, sell the Collateral
or any part thereof in one or more parcels at public or private sale,
at any exchange, broker's board or at any of the Collateral Agent's
offices or elsewhere, for cash, on credit or for future delivery, and
upon such other terms as the Collateral Agent may, in its reasonable
discretion, deem commercially reasonable or otherwise as may be
permitted by law. Without limiting the generality of the foregoing, the
Collateral Agent may (A) without demand or notice to the Debtor (except
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as required under the Financing Agreements or applicable law), collect,
receive or take possession of the Collateral or any part thereof, and
for that purpose the Collateral Agent (and/or its agents, servicers or
other independent contractors) may enter upon any premises on which the
Collateral is located and remove the Collateral therefrom or render it
inoperable, and/or (B) sell, lease or otherwise dispose of the
Collateral, or any part thereof, in one or more parcels at public or
private sale or sales, at the Collateral Agent's offices or elsewhere,
for cash, on credit or for future delivery, and upon such other terms
as the Collateral Agent may, in its reasonable discretion, deem
commercially reasonable or otherwise as may be permitted by law. The
Collateral Agent and, subject to the terms of the Intercreditor
Agreement, each of the Benefited Parties shall have the right at any
public sale or sales, and, to the extent permitted by applicable law,
at any private sale or sales, to bid (which bid may be, in whole or in
part, in the form of cancellation of indebtedness) and become a
purchaser of the Collateral or any part thereof free of any right of
redemption on the part of the Debtor, which right of redemption is
hereby expressly waived and released by the Debtor to the extent
permitted by applicable law. Upon the request of the Collateral Agent,
the Debtor shall assemble the Collateral and make it available to the
Collateral Agent at any place designated by the Collateral Agent that
is reasonably convenient to the Debtor and the Collateral Agent. The
Debtor agrees that the Collateral Agent shall not be obligated to give
more than ten (10) days prior written notice of the time and place of
any public sale or of the time after which any private sale may take
place and that such notice shall constitute reasonable notice of such
matters. The Collateral Agent shall not be obligated to make any sale
of Collateral if, in the exercise of its reasonable discretion, it
shall determine not to do so, regardless of the fact that notice of
sale of Collateral may have been given. The Collateral Agent may,
without notice or publication (except as required by applicable law),
adjourn any public or private sale or cause the same to be adjourned
from time to time by announcement at the time and place fixed for sale,
and such sale may, without further notice, be made at the time and
place to which the same was so adjourned. The Debtor shall be liable
for all reasonable expenses of retaking, holding, preparing for sale or
the like, and all reasonable attorneys' fees, legal expenses and other
costs and expenses incurred by the Collateral Agent in connection with
the collection of the Benefited Obligations and the enforcement of the
Collateral Agent's rights under this Agreement and the Intercreditor
Agreement. The Debtor shall, to the extent permitted by applicable law,
remain liable for any deficiency if the Proceeds of any such sale or
other disposition of the Collateral (conducted in conformity with this
clause (i) and applicable law) applied to the Benefited Obligations are
insufficient to pay the Benefited obligations in full. The Collateral
Agent shall apply the proceeds from the sale of the Collateral
hereunder against the Benefited Obligations in such order and manner as
is provided in the Intercreditor Agreement.
(ii) The Collateral Agent may cause any or all of the Collateral
held by it to be transferred into the name of the Collateral Agent or
the name or names of the Collateral Agent's nominee or nominees.
(iii) The Collateral Agent may exercise any and all rights and
remedies of the Debtor under or in respect of the Collateral,
including, without limitation, any and all
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rights of the Debtor to demand or otherwise require payment of any
amount under, or performance of any provision of any of the Collateral
and any and all voting rights and corporate powers in respect of the
Collateral.
(iv) On any sale of the Collateral, the Collateral Agent is
hereby authorized to comply with any limitation or restriction with
which compliance is necessary (based on a reasoned opinion of the
Collateral Agent's counsel) in order to avoid any violation of
applicable law or in order to obtain any required approval of the
purchaser or purchasers by any applicable Governmental Authority.
(v) For purposes of enabling the Collateral Agent to exercise
its rights and remedies under this Section 6.1 and enabling the
Collateral Agent and its successors and assigns to enjoy the full
benefits of the Collateral, the Debtor hereby grants to the Collateral
Agent an irrevocable, nonexclusive license (exercisable without payment
of royalty or other compensation to the Debtor) to use, assign, license
or sublicense any of the Computer Records or Software (including in
such license reasonable access to all media in which any of the
licensed items may be recorded or stored and all computer programs used
for the completion or printout thereof), exercisable upon the
occurrence and during the continuance of an Event of Default (and
thereafter if Collateral Agent succeeds to any of the Collateral
pursuant to an enforcement proceeding or voluntary arrangement with
Debtor), except as may be prohibited by any licensing agreement
relating to such Computer Records or Software. This license shall also
inure to the benefit of all successors, assigns, transferees of and
purchasers from the Collateral Agent.
SECTION 6.2. PRIVATE SALES.
(a) In view of the fact that applicable securities laws may impose
certain restrictions on the method by which a sale of the Pledged Shares may be
effected after an Event of Default, Debtor agrees that upon the occurrence and
during the continuance of an Event of Default, Collateral Agent may from time to
time attempt to sell all or any part of the Pledged Shares by a private sale in
the nature of a private placement, restricting the bidders and prospective
purchasers to those who will represent and agree that they are "accredited
investors" within the meaning of Regulation D promulgated pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), and are purchasing
for investment only and not for distribution. In so doing, Collateral Agent may
solicit offers for the Pledged Shares, or any part thereof, from a limited
number of investors who might be interested in purchasing the Pledged Shares.
Without limiting the methods or manner of disposition which could be determined
to be commercially reasonable, if Collateral Agent hires a firm of regional or
national reputation that is engaged in the business of rendering investment
banking and brokerage services to solicit such offers and facilitate the sale of
the Pledged Shares, then Collateral Agent's acceptance of the highest offer
(including its own offer, or the offer of any of the Benefited Parties at any
such sale) obtained through such efforts of such firm shall be deemed to be a
commercially reasonable method of disposition of such Pledged Shares. The
Collateral Agent shall not be under any obligation to delay a sale of any of the
Pledged Shares for the period of time necessary to permit the issuer of such
securities to register such securities under the laws of any jurisdiction
outside the United States, under the
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Securities Act or under any applicable state securities laws, even if such
issuer would agree to do so.
(b) The Debtor further agrees to do or cause to be done, to the extent
that the Debtor may do so under applicable law, all such other reasonable acts
and things as may be necessary to make such sales or resales of any portion or
all of the Collateral valid and binding and in compliance with any and all
applicable laws, regulations, orders, writs, injunctions, decrees or awards of
any and all courts, arbitrators or governmental instrumentalities, domestic or
foreign, having jurisdiction over any such sale or sales, all at the Debtor's
expense.
6.3 ESTABLISHMENT OF SPECIAL ACCOUNT; AND LOCK BOX. Upon the occurrence
and during the continuance of any Event of Default, there shall be established
by the Debtor with Collateral Agent, for the benefit of the Benefited Parties in
the name of the Collateral Agent, a segregated non-interest bearing cash
collateral account ("Special Account") bearing a designation clearly indicating
that the funds deposited therein are held for the benefit of the Collateral
Agent and the Benefited Parties; provided, however, that the Special Account may
be an interest-bearing account with a commercial bank (including Comerica or any
other Benefited Party which is a commercial bank) if determined by the
Collateral Agent, in its reasonable discretion, to be practicable, invested by
Collateral Agent in its sole discretion, but without any liability for losses or
the failure to achieve any particular rate of return. Subject to the terms
hereof and to the rights of Dealers under applicable Dealer Agreement and to the
rights of the applicable creditor in respect of Permitted Securitizations, the
Collateral Agent shall possess all right, title and interest in and to all funds
deposited from time to time in such account. Furthermore, upon the occurrence
and during the continuance of any Event of Default, the Debtor agrees, upon the
written election of Collateral Agent, to establish and maintain at Debtor's sole
expense a United States Post Office lock box (the "Lock Box"), to which
Collateral Agent shall have exclusive access and control. Debtor expressly
authorizes Collateral Agent, from time to time, to remove the contents from the
Lock Box, for disposition in accordance with this Agreement. Upon the occurrence
and during the continuance of an Event of Default, Debtor shall, upon Collateral
Agent's request, notify all account debtors, all Dealers under Dealer Agreements
encumbered hereby, and all obligors under Installment Contracts encumbered
hereby that all payments made to Debtor (a) other than by electronic funds
transfer, shall be remitted, for the credit of Debtor, to the Lock Box, and
Debtor shall include a like statement on all invoices, and (b) by electronic
funds transfer, shall be remitted to the Special Account, and Debtor shall
include a like statement on all invoices. Debtor shall execute all documents and
authorizations as reasonably required by the Collateral Agent to establish and
maintain the Lock Box and the Special Account. It is acknowledged by the parties
hereto that any lockbox presently maintained or subsequently established by
Debtor with Collateral Agent may be used, subject to the terms hereof, to
satisfy the requirements set forth in the first sentence of this Section 6.3.
6.4 LEGENDING INSTALLMENT CONTRACTS ON DEFAULT. Upon the occurrence and
during the continuance of any Event of Default, the Majority Benefited Parties
may elect (the "Election"), by directing the Collateral Agent to notify the
Debtor of such election, to affix to each Installment Contract securing or
otherwise related to a Dealer Agreement encumbered
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hereby (or, at Debtor's option, to the file folders containing such Installment
Contracts) the following legend: "THIS AGREEMENT HAS BEEN PLEDGED TO COMERICA
BANK, AS COLLATERAL AGENT FOR THE BENEFIT OF CERTAIN BENEFITED PARTIES". The
Election, once made by the Majority Benefited Parties, as aforesaid, shall
remain in effect, and Debtor shall remain obligated to comply with such
Election, notwithstanding any subsequent waiver or cure of the applicable Event
of Default giving rise to such election, unless the Election is withdrawn by the
Majority Benefited Parties.
6.5. DEFAULT UNDER FINANCING AGREEMENTS. It shall constitute an Event
of Default under each of the Financing Agreements if (a) any representation or
warranty made or deemed made by the Debtor herein or in any instrument submitted
pursuant hereto proves untrue in any material adverse respect when made or
deemed made, or (b) the Debtor shall breach any covenant or other provision
hereof, and such breach shall continue for a period of three (3) consecutive
days, in the case of any failure to pay any money due hereunder, and thirty (30)
consecutive days, in the case of any other breach hereunder or (c) this
Agreement shall at any time for any reason (other than in accordance with its
terms or the terms of each of the Financing Agreements or with the consent of
the requisite Benefited Parties) cease to be valid and binding and enforceable
against the Debtor, or (d) the validity, binding effect or enforceability hereof
shall be contested by any Person, or (e) the Debtor shall deny, prior to payment
of the Benefited Obligations in full or the termination of this Agreement
according to its terms, that it has any further liability hereunder, or (f) this
Agreement (other than in accordance with its terms or the terms of each of the
Financing Agreements) shall be terminated, invalidated, revoked or set aside or
in any way cease to give or provide to the Collateral Agent and the Benefited
Parties the benefits purported to be created hereby.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1. NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of
the Collateral Agent to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power or privilege under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right, power or privilege under this Agreement preclude any other or further
exercise thereof or the exercise of any other right, power, or privilege. The
rights and remedies provided for in this Agreement are cumulative and not
exclusive of any rights and remedies provided by law.
SECTION 7.2. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the Debtor and the Collateral Agent and their
respective heirs, successors and assigns, except that the Debtor may not assign
any of its rights or obligations under this Agreement without the prior written
consent of the Collateral Agent.
SECTION 7.3. AMENDMENT; ENTIRE AGREEMENT. THIS AGREEMENT (AND THE
FINANCING AGREEMENTS REFERRED TO HEREIN) EMBODIES THE FINAL, ENTIRE AGREEMENT
AMONG THE PARTIES HERETO AND SUPERSEDES ANY AND ALL PRIOR COMMITMENTS,
AGREEMENTS, REPRESENTATIONS AND
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UNDERSTANDINGS, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT MATTER HEREOF
AND MAY NOT BE CONTRADICTED OR VARIED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OR DISCUSSIONS OF THE PARTIES HERETO. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES HERETO. The provisions of this
Agreement may be amended or waived only by an instrument in writing signed by
the parties hereto.
SECTION 7.4. NOTICES. All notices, requests, consents, approvals,
waivers and other communications hereunder shall be in writing (including, by
facsimile transmission) and mailed, faxed or delivered to the address or
facsimile number specified for notices on signature pages hereto; or, as
directed to the Debtor or the Collateral Agent, to such other address or number
as shall be designated by such party in a written notice to the other. All such
notices, requests and communications shall, when sent by overnight delivery, or
faxed, be effective when delivered for overnight (next business day) delivery,
or transmitted in legible form by facsimile machine, respectively, or if mailed,
upon the third "Business Day" (as defined in the Credit Agreement) after the
date deposited into the U.S. mail, or if otherwise delivered, upon delivery;
except that notices to the Collateral Agent shall not be effective until
actually received by the Collateral Agent.
SECTION 7.5. GOVERNING LAW; SUBMISSION TO JURISDICTION; SERVICE OF
PROCESS. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE INTERNAL LAWS OF THE STATE OF MICHIGAN.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR ANY OTHER SECURITY DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF
MICHIGAN OR OF THE UNITED STATES FOR THE EASTERN DISTRICT OF MICHIGAN, AND BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE DEBTOR AND THE COLLATERAL
AGENT CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE DEBTOR AND THE COLLATERAL AGENT
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT
OF THIS AGREEMENT OR ANY SECURITY DOCUMENT.
SECTION 7.6. HEADINGS. The headings, captions, and arrangements used
in this Agreement are for convenience only and shall not affect the
interpretation of this Agreement.
SECTION 7.7. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties made in this Agreement or in any certificate
delivered pursuant hereto shall survive the execution and delivery of this
Agreement, and no investigation by the Collateral Agent shall affect the
representations and warranties or the right of the Collateral Agent, the
Lenders, the Noteholders or the Future Debt Holders to rely upon them.
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SECTION 7.8. COUNTERPARTS. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
SECTION 7.9. WAIVER OF BOND. In the event the Collateral Agent seeks
to take possession of any or all of the Collateral by judicial process, the
Debtor hereby irrevocably waives any bonds and any surety or security relating
thereto that may be required by applicable law as an incident to such
possession, and waives any demand for possession prior to the commencement of
any such suit or action.
SECTION 7.10. SEVERABILITY. Any provision of this Agreement which is
determined by a court of competent jurisdiction to be 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 of this Agreement, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 7.11. CONSTRUCTION. The Debtor and the Collateral Agent
acknowledge that each of them has had the benefit of legal counsel of its own
choice and has been afforded an opportunity to review this Agreement with its
legal counsel and that this Agreement shall be construed as if jointly drafted
by the Debtor and the Collateral Agent.
SECTION 7.12. TERMINATION. If all of the Benefited Obligations (other
than contingent liabilities pursuant to any indemnity, including without
limitation Sections 5.6 and 5.7 hereof, for claims which have not been asserted,
or which have not yet accrued) shall have been paid and performed in full and
all commitments to extend credit or other credit accommodations under the Credit
Agreement have been terminated, the Collateral Agent shall, upon the written
request of the Debtor, execute and deliver to the Debtor a proper instrument or
instruments acknowledging the release and termination of the security interests
created by this Agreement, and shall duly assign and deliver to the Debtor
(without recourse and without any representation or warranty) such of the
Collateral as may be in the possession of the Collateral Agent and has not
previously been sold or otherwise applied pursuant to this Agreement.
SECTION 7.13 RELEASE OF COLLATERAL. The Collateral Agent shall, upon
the written request of Debtor, execute and deliver to the Debtor a proper
instrument or instruments acknowledging the release of the security interest and
liens established hereby (a) on any Collateral (other than the Pledged Shares)
(i) which is permitted to be sold or disposed of by Debtor or any other grantor
in connection with a Permitted Securitization, or (ii) the sale or other
disposition of which is not otherwise prohibited under the terms of any of the
other Financing Agreements (or in the event any Financing Agreement prohibits
such sale or disposition, the applicable Benefited Parties under such Financing
Agreement shall have consented to such sale or disposition in accordance with
the terms thereof) and, at the time of such proposed release, both before and
after giving effect thereto, no Default or Event of Default has occurred and is
continuing, or (b) if such release has been approved by the requisite Benefited
Parties in
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accordance with Section 3(g) of the Intercreditor Agreement.
SECTION 7.14. WAIVER OF JURY TRIAL. THE DEBTOR AND THE COLLATERAL AGENT
EACH WAIVES ITS RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER SECURITY
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY EITHER SUCH PARTY AGAINST
THE OTHER, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE.
THE DEBTOR AND THE COLLATERAL AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF
ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE
FOREGOING, EACH SUCH PARTY FURTHER AGREES THAT ITS RIGHT TO A TRIAL BY JURY IS
WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER
PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR
ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER SECURITY DOCUMENTS OR ANY
PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT
AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT.
SECTION 7.15. CONSISTENT APPLICATION. The rights and duties created by
this Agreement shall, in all cases, be interpreted consistently with, and shall
be in addition to (and not in lieu of), the rights and duties created by the
Financing Agreements. In the event that any provision of this Agreement shall be
inconsistent with any provision of any other Financing Agreements, such
provision of this Agreement shall govern.
* * * *
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first written above.
DEBTOR:
CREDIT ACCEPTANCE CORPORATION
By: /s/ Brett A. Roberts
----------------------------------------
Name: Brett A. Roberts
--------------------------------------
Title: Executive Vice President and CFO
-------------------------------------
Address for Notices:
Credit Acceptance Corporation
25505 W. 12 Mile Road, Suite 3000
Southfield, Michigan 48034
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<PAGE> 29
Fax No.: 248-827-8542
Telephone No.: 248-353-2700
Attention: Doug Busk
COLLATERAL AGENT:
COMERICA BANK as Collateral Agent
By: /s/ Michael P. Stapleton
----------------------------------------
Name: Michael P. Stapleton
--------------------------------------
Title: Vice President
--------------------------------------
Address for Notices:
Metropolitan Loans B
One Detroit Center, 6th Floor
500 Woodward Avenue
Detroit, Michigan 48226
Fax No.: 313/222-3503
Telephone No.:313/222-2863
Attention: Michael P. Stapleton
29
<PAGE> 1
EXHIBIT 4(g)(2)
REVISED EXECUTION COPY
12/15/98
================================================================================
INTERCREDITOR AGREEMENT
Dated as of December 15, 1998
AMONG
COMERICA BANK,
as Collateral Agent,
THE LENDERS,
AND
THE NOTEHOLDERS,
Re: 9.12% Senior Notes due November 1, 2001 of Credit Acceptance
Corporation
8.24% Senior Notes due July 1, 2001 of Credit Acceptance Corporation,
8.02% Senior Notes due October 1, 2001 of Credit Acceptance
Corporation,
Second Amended and Restated Credit Acceptance Corporation Credit
Agreement, and
Future Debt of Credit Acceptance Corporation
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS ........................................................................... 1
SECTION 1. DEFINED TERMS................................................... 3
SECTION 2. APPOINTMENT OF COLLATERAL AGENT................................. 10
SECTION 3. DECISIONS RELATING TO ADMINISTRATION AND EXERCISE
OF REMEDIES VESTED IN THE MAJORITY BENEFITED PARTIES............ 11
SECTION 4. APPLICATION OF PROCEEDS......................................... 13
SECTION 5. SHARING OF SET-OFF.............................................. 14
SECTION 6. INFORMATION..................................................... 15
SECTION 7. ADDITIONAL PARTIES.............................................. 16
SECTION 8. DISCLAIMERS, INDEMNITY, ETC..................................... 17
SECTION 9. INVALIDATED PAYMENTS............................................ 21
SECTION 10. SPECIAL PAYMENTS AND SPECIAL ACCOUNT............................ 22
SECTION 11. MISCELLANEOUS................................................... 23
</TABLE>
<PAGE> 3
INTERCREDITOR AGREEMENT
This INTERCREDITOR AGREEMENT (as amended, restated or otherwise
modified from time to time in accordance with the terms hereof, this
"Agreement") is dated as of December 15, 1998 and entered into among COMERICA
BANK ("Comerica"), as the Collateral Agent (as hereinafter defined) and as a
Lender (as hereinafter defined), the NOTEHOLDERS (as hereinafter defined) and
the other LENDERS from time to time signatory to this Agreement. This Agreement
is acknowledged and consented to by Credit Acceptance Corporation, a Michigan
corporation (the "Company"), as the issuer of the Senior Notes (as hereinafter
defined) and the Credit Notes (as hereinafter defined) and as the grantor of
collateral pursuant to the Security Documents (as hereinafter defined), by its
execution of the acknowledgment hereto. Other Persons may become parties hereto
by executing an acknowledgment hereto in accordance with Section 7 hereof.
RECITALS
A. The Company, Comerica and the other financial institutions signatory
thereto, each as "Banks" thereunder (and, in the case of Comerica, in its
separate additional capacity as "Issuing Bank" thereunder) (together with any
Successor Lenders (as hereinafter defined) party thereto from time to time,
collectively the "Lenders"), entered into that certain Second Amended and
Restated Credit Agreement dated as of December 4, 1996, as amended by First
Amendment and Consent dated as of June 4, 1997, Second Amendment dated as of
December 12, 1997, Third Amendment dated as of May 11, 1998 and Fourth Amendment
dated as of July 30, 1998 by and among the Company, the financial institutions
from time to time parties thereto and Comerica, as Agent (said credit agreement,
as further amended, restated or otherwise modified from time to time, the
"Credit Agreement").
B. The Company entered into the separate note purchase agreements with
the 1994 Noteholders (as hereinafter defined) dated as of October 1, 1994
(collectively, as amended by First Amendment to Note Purchase Agreement dated as
of November 15, 1995, Second Amendment to Note Purchase Agreement dated as of
August 29, 1996, Third Amendment to Note Purchase Agreement dated as of December
12, 1997 and Fourth Amendment to Note Purchase Agreement dated as of July 1,
1998, and as further amended, restated or otherwise modified from time to time,
the "1994 Note Agreements"), pursuant to which the First Amended and Restated
9.12% Senior Notes due November 1, 2001 (collectively, as amended, restated or
otherwise modified from time to time, the "1994 Senior Notes") are outstanding.
C. The Company entered into the separate note purchase agreements with
the 1996 Noteholders (as hereinafter defined) dated as of August 1, 1996
(collectively, as amended by First Amendment to Note Purchase Agreement dated as
of December 12, 1997 and Second Amendment to Note Purchase Agreement dated as of
July 1, 1998 and as further amended, restated or otherwise modified from time to
time, the "1996 Note Agreements"), pursuant to which the First Amended and
<PAGE> 4
Restated 8.24% Senior Notes due July 1, 2001 (collectively, as amended, restated
or otherwise modified from time to time, the "1996 Senior Notes") are
outstanding.
D. The Company entered into the separate note purchase agreements with
the 1997 Noteholders (as hereinafter defined) dated as of March 25, 1997
(collectively, as amended by the First Amendment to Note Purchase Agreement
dated as of December 12, 1997 and the Second Amendment to Note Purchase
Agreement dated as of July 1, 1998, as further amended, restated or otherwise
modified from time to time, the "1997 Note Agreements") pursuant to which the
First Amended and Restated 8.02% Senior Notes due October 1, 2001 (collectively,
as amended, restated or otherwise modified from time to time, the "1997 Senior
Notes") are outstanding.
E. The Lenders and the Noteholders (as hereinafter defined) have
consented to the transactions contemplated hereby and by the Security Documents
(as hereinafter defined);
F. Pursuant to Section 7.23 of the Credit Agreement, the Lenders have
required that (i) the Company execute and deliver that certain Security
Agreement dated as of December 15, 1998, in the form attached hereto as Exhibit
A-1, in favor of the Collateral Agent (as hereinafter defined) for the benefit
of the Noteholders, the Lenders and the Future Debt Holders (as hereinafter
defined) (such agreement, as it may be amended, restated or otherwise modified
from time to time, the "Security Agreement") and that certain Share Charge dated
December 17, 1998, in the form attached hereto as Exhibit A-2, in favor of the
Collateral Agent (as hereinafter defined) for the benefit of the Noteholders,
the Lenders and the Future Debt Holders and encumbering sixty-five percent (65%)
of the share capital of Credit Acceptance Corporation UK Limited, a corporation
organized under the laws of England ("CAC UK") (such agreement as amended,
restated or otherwise modified from time to time, herein the "Share Charge") and
such other security agreements, stock pledges, collateral assignments,
hypothecations and other documents and instruments which are required to
encumber the Collateral (as hereinafter defined) or to protect or perfect the
security interests, liens or other encumbrances established thereby (including,
without limitation, financing statements, stock powers, acknowledgments,
registrations and the like) and (ii) upon the Company's acquisition or creation
thereof, each Significant Domestic Subsidiary (as defined in the Credit
Agreement) will grant a security interest and lien to the Collateral Agent (as
hereinafter defined) for the benefit of the Noteholders, the Lenders and the
Future Debt Holders in the Collateral owned by such Significant Domestic
Subsidiary substantially on the terms set forth in the Security Agreement and
the Company will pledge, or cause to be pledged, to the Collateral Agent (as
hereinafter defined) for the benefit of the Noteholders, the Lenders and the
Future Debt Holders, all of the outstanding capital stock of such Significant
Domestic Subsidiary which is owned by the Company or its Subsidiaries, all to
secure the obligations of the Company under the Credit Documents, the
obligations of the Company under the Noteholder Documents and the obligations of
the Company under the Future Debt Documents.
G. The Lenders and the Noteholders (individually a "Party" and
collectively the "Parties") have agreed that the Credit Obligations (as
hereinafter defined), the Senior Note Obligations (as hereinafter defined) and
the Future Debt Obligations shall be secured equally and ratably pursuant to the
Security Agreement and the other Security Documents; the Parties desire that
2
<PAGE> 5
Comerica Bank shall be the agent (the "Collateral Agent") to act on behalf of
all Parties regarding the Collateral, all as more fully provided herein; and the
Parties have entered into this Agreement to, among other things, further define
the rights, duties, authority and responsibilities of the Collateral Agent and
the relationship between the Parties regarding their equal and ratable interests
in the Collateral.
H. It is contemplated that financial institutions other than any
Affiliate of the Company (the "Future Debt Holders") may enter into or become
parties (by assignment or otherwise) to one or more agreements with the Company
making extensions of credit to the Company, other than under the terms of the
Credit Agreement or the Note Agreements.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the sufficiency and receipt of which are hereby
acknowledged, the Parties hereto hereby agree as follows:
SECTION 1. DEFINED TERMS.
As used in this Agreement, and unless the context requires a different
meaning, capitalized terms not otherwise defined herein have the respective
meanings provided for such terms in the Credit Agreement, and the following
terms have the meanings indicated below, all such definitions to be equally
applicable to the singular and plural forms of the terms defined:
"Affiliate" means, at any time, and with respect to any Person, (a) any
other Person that at such time directly or indirectly through one or more
intermediaries Controls, or is Controlled by, or is under common Control with,
such first Person, (b) any Person beneficially owning or holding, directly or
indirectly, 10% or more of any class of voting or equity interests of the Person
or any corporation of which the Person beneficially owns or holds, in the
aggregate, directly or indirectly, 10% or more of any class of voting or equity
interests and (c) any officer or director of such first Person or any Person
fulfilling an equivalent function of an officer or director. As used in this
definition, "Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management and policies of a Person,
whether through the ownership of voting securities, by contract or otherwise.
Unless the context otherwise clearly requires, any reference to an "Affiliate"
is a reference to an Affiliate of the Company.
"Agent-Related Persons" means the directors, officers, employees and
agents of the Collateral Agent.
"Agreement" has the meaning ascribed to that term in the introductory
paragraph hereto.
"Bankruptcy Proceeding" means, with respect to any Person, a general
assignment by such Person for the benefit of its creditors, or the institution
by or against such Person of any proceeding seeking relief as debtor, or
seeking, to adjudicate such Person as bankrupt or insolvent, or seeking
reorganization, dissolution, liquidation, administration, arrangement,
adjustment or composition of such Person or its debts, under any law relating to
bankruptcy, insolvency, reorganization or relief
3
<PAGE> 6
of debtors, or seeking, appointment of a receiver, administrative receiver,
administrator, supervisor, liquidator, trustee, custodian or other similar
official for such Person or for any substantial part of its property.
"Benefited Obligations" means (a) all Credit Obligations, (b) all
Senior Note Obligations, (c) the Letter of Credit Usage, (d) all Hedging
Exposure and other obligations of the Company under or arising in connection
with any Hedging Agreement, (e) and all Future Debt Obligations and (f) all
other amounts payable by the Company or any other Obligor under this Agreement
and the Security Documents (including, without limitation, the reasonable fees
and expenses of the Collateral Agent); provided, however, that the term
"Benefited Obligations" shall exclude any obligation (i) of the Company or any
other Obligor to any Benefited Party to the extent such obligation is secured by
property of the Company or any other Obligor other than the Collateral or (ii)
pursuant to any document or instrument which is not a Credit Document, a
Noteholder Document or a Future Debt Document.
"Benefited Parties" means the Lenders, the Noteholders and the Future
Debt Holders, and shall not include, under any circumstances, the Company or any
of its Affiliates.
"Code" means the Uniform Commercial Code as the same may from time to
time be in effect in the State of Michigan.
"Collateral" means all property and interests in property of the
Company or any other Grantor in which a Lien has been, or will at any time
hereafter be, created under the Security Agreement or any other Security
Document.
"Collateral Agent" means Comerica in its separate capacity as agent for
the Benefited Parties hereunder and any successor agent appointed pursuant to
Section 8 hereof.
"Comerica" means Comerica Bank, a Michigan banking corporation.
"Company" has the meaning ascribed to that term in the introductory
paragraph hereto.
"Credit Agreement" has the meaning ascribed to that term in the
recitals hereto.
"Credit Documents" means the Credit Agreement, the Credit Notes, the
Security Documents, the Letters of Credit and any Hedging Agreement.
"Credit Notes" means the promissory notes, if any, issued by the
Company under the Credit Agreement.
"Credit Obligations" means all outstanding and unpaid obligations of
every nature of the Company or any other Obligor from time to time to the
Lenders or any of them under or in connection with the Credit Agreement, the
Credit Notes and any other Credit Documents, including, without limitation, any
breakage charges or prepayment premium and all fees, collection costs and
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<PAGE> 7
other expenses accruing thereunder (but excluding Letter of Credit Usage and all
Hedging Exposure and other obligations of the Company under or arising in
connection with any Hedging Agreement).
"Default" means a "Default" as defined in any Financing Agreement.
"Directing Party" means, with respect to any particular instruction
given to the Collateral Agent, each Benefited Party that has given such
instruction to the Collateral Agent.
"Enforcement" means the commencement of enforcement, collection
(including judicial or non-judicial foreclosure) or similar proceedings with
respect to the Collateral (it being understood that the term "Enforcement" shall
not include (i) an acceleration or other enforcement of any of the Benefited
Obligations independent of the Collateral, (ii) the suspension or termination of
any commitment to extend credit or other credit accommodations, (iii) subject to
Section 5, the exercise of any set-off right or (iv) filing a proof of claim
with respect to the Benefited Obligations or casting a vote, or abstaining from
voting, for or against confirmation of a plan of reorganization in a case of
bankruptcy, insolvency or similar law, filing a petition to initiate a
bankruptcy proceeding against the Company or any other Obligor or providing
financing to a trustee of, or a debtor-in-possession with respect to, the
Company or any Subsidiary under 11 U.S.C. ss.364).
"Event of Default" means an "Event of Default" as defined in any
Financing Agreement.
"Financing Agreements" means the Credit Documents, the Noteholder
Documents, any Hedging Agreement, the Future Debt Documents, this Agreement, the
Security Documents, each other security document securing the Benefited
Obligations, and any other instruments, documents or agreements entered into in
connection with any Benefited Obligation or Financing Agreement.
"Future Debt" means Debt, if any, incurred by the Company pursuant to
clause (ii) of the definition of "Future Debt" under the Credit Agreement
without giving effect to any amendments thereto after the date hereof (and in
compliance therewith) and in compliance with the terms and conditions of the
Note Agreements.
"Future Debt Documents" means the promissory note(s), agreement(s) and
other documents, instruments and certificates, if any, executed and delivered,
subject to the terms of this Agreement, to evidence or secure or otherwise
relating to Future Debt, as amended, restated or otherwise modified from time to
time, and the Security Documents, and any replacement, refinancing or
restructuring of any such promissory note, agreement or other document,
instrument or certificate, provided that any successor Future Debt Holder, or
any agent acting on behalf of all such successor Future Debt Holders, has
executed an acknowledgement to this Agreement substantially in the form of
Exhibit B-1.
"Future Debt Holders" means each Person which is, at the date of
determination, the holder of Future Debt, if any.
5
<PAGE> 8
"Future Debt Obligations" means all outstanding and unpaid obligations
of every nature of the Company from time to time to the Future Debt Holders or
any of them under or in connection with the Future Debt Documents, including,
without limitation, any prepayment premium, make-whole amount, yield maintenance
payment and all fees, collection costs and other expenses accruing thereunder.
"Grantors" means the Company, each Subsidiary and any other Person
which grants any Collateral to the Collateral Agent under the Security Documents
or under any other security document securing the Benefited Obligations or any
part thereof.
"Hedging Agreement" means any interest rate swap, cap, floor, collar,
forward rate agreement, or other rate protection transaction, any foreign
exchange transaction or commodity swap arrangement or any combination of such
transactions or agreements or any option with respect to any such transactions
or agreements now existing or hereafter entered into between the Company and any
Lender or any Affiliate of any Lender which is a party hereto.
"Hedging Exposure" means, on any date of determination for any Hedging
Transaction, the amount, as calculated in good faith and in a commercially
reasonable manner by the Lender that is the Company's counterparty for such
Hedging Transaction, which such Lender would pay to a third party (such amount
being expressed as a positive amount) or receive from a third party (such amount
being expressed as a negative amount) in an arm's-length transaction as
consideration for the third party's entering into a new transaction with such
Lender in which: (a) such Lender holds the same position in the Hedging
Transaction as it currently holds; (b) the third party holds the same position
as the Company currently holds; and (c) the new transaction has economic and
other terms and conditions identical in all respects to such Hedging Transaction
except that (i) the date of calculation shall be deemed to be the date of
commencement of the new transaction and (ii) all period end dates shall
correspond to all period end dates, if any, for such Hedging Transaction;
provided, however, that if the Majority Benefited Parties shall direct the
Collateral Agent to commence Enforcement, each Hedging Transaction will be
terminated within ten days of the date such direction is given to the Collateral
Agent and the Hedging Exposure for each Hedging Transaction shall be (i) if a
net amount is paid out by such Lender in connection with the termination of such
Hedging Transaction, a positive amount equal to such net amount or (ii) if a net
amount is received by such Lender in connection with the termination of such
Hedging Transaction, a negative amount equal to such net amount.
"Hedging Transaction" means each interest rate swap transaction, basis
swap transaction, forward rate transaction, commodity swap transaction, equity
transaction, equity index transaction, foreign exchange transaction, cap
transaction, floor transaction, collar transaction, currency swap transaction or
any other similar transaction (including any option with respect to any of these
transactions and any combination of any of the foregoing) entered into by the
Company from time to time pursuant to a Hedging Agreement; provided that such
transaction is entered into for purposes of protection from price, interest
rate, currency or commodity price fluctuations posed by debt, contract or
purchase order obligations and not for speculative purposes.
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<PAGE> 9
"Lenders" has the meaning ascribed to that term in the recitals hereto.
"Letters of Credit" shall mean outstanding standby letters of credit
and documentary letters of credit issued pursuant to the Credit Agreement, and
any related letter of credit or reimbursement agreement; provided, that the term
"Letters Of Credit" shall exclude any Letter of Credit issued to secure
obligations which are secured by property of the Company other than the
Collateral.
"Letter of Credit Usage" shall mean, as at any date of determination,
the sum of (i) the Maximum Available Amount plus (ii) the aggregate amount of
all drawings under the Letters of Credit honored by the Lenders and not
theretofore reimbursed by the Company through advances under the Credit
Agreement or otherwise.
"Lien" shall mean any pledge, assignment, hypothecation, mortgage,
security interest, deposit arrangement, option, trust receipt, conditional sale
or title retaining contract, sale and leaseback transaction, or any other type
of lien, charge or encumbrance, whether based on common law, statute or
contract; provided that the term "Lien" shall not include any negative pledge
clauses in agreements relating to the borrowing of money or the obligation of
the Company or any of its Subsidiaries (a) to remit monies held by it in
connection with dealer holdbacks, claims or refunds under insurance policies or
claims or refunds under service contracts or (b) to make deposits in trust or
otherwise as required under re-insurance agreements and pursuant to state
regulatory requirements, unless the Company or any of its Subsidiaries, as the
case may be, has encumbered its interest in such monies or deposits or in other
property of the Company or any such Subsidiary to secure such obligations.
"Majority Benefited Parties" means (a) the Required Lenders, (b) the
Required Noteholders and (c) the Required Future Debt Holders (if any), in each
case voting as a separate class, provided that if at any time (I) the aggregate
principal amount of all outstanding indebtedness under the Credit Agreement
(including in the determination thereof all Hedging Exposure and Letter of
Credit Usage) plus, at all times when a commitment to extend financing exists
under the Credit Agreement and the Lenders do not have the right at such time
immediately to terminate such commitment, the amount of all unused commitments
under the Credit Agreement or (II) the aggregate principal amount of all
outstanding indebtedness under the Note Agreements or (III) the aggregate
principal amount of all outstanding Future Debt represents, in any such case,
less than 10% of the sum of the amounts referred to in clauses (I), (II), and
(III) above, then any such group referred to in clause (a), (b) or (c) which
represents less than 10% of the sum of such amounts shall not vote as a separate
class and "Majority Benefited Parties" shall mean (A) each group referred to in
clause (a), (b) or (c) above which does vote as a separate class, and (B) the
Benefited Parties, considered as a single class, holding more than 50% of the
sum of the amounts referred to in clauses (I), (II) and (III), above.
"Make-Whole Amount" is defined in Section 9.1 of the Note Agreements.
"Maximum Available Amount" shall mean, as of any date of determination,
the amount that may be drawn under the Letters of Credit issued pursuant to the
Credit Agreement (whether or not
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<PAGE> 10
the beneficiary thereof shall have presented, or shall be entitled at such time
to present, the drafts or other documents required to draw under the Letters of
Credit).
"1994 Note Agreements," "1996 Note Agreements," and "1997 Note
Agreements" and 1994 Senior Notes, 1996 Senior Notes and 1997 Senior Notes have
the respective meanings ascribed to such terms in the recitals hereto.
"1994 Noteholders" means the Persons named in the 1994 Note Agreements
and each other Person which is, at the date of determination, a holder of a 1994
Senior Note.
"1996 Noteholders" means the Persons named in the 1996 Note Agreements
and each other Person which is, at the date of determination, a holder of a 1996
Senior Note.
"1997 Noteholders" means the Persons named in the 1997 Note Agreements
and each other Person which is, at the date of determination, a holder of a 1997
Senior Note.
"Non-Directing Party" means, with respect to any particular instruction
given to the Collateral Agent, each Benefited Party that has not given or agreed
with such instruction given to the Collateral Agent.
"Note Agreements" means the 1994 Note Agreements, the 1996 Note
Agreements and the 1997 Note Agreements.
"Noteholder Documents" means (i) the Note Agreements; (ii) the Senior
Notes; and (iii) the Security Documents.
"Noteholders" means the 1994 Noteholders, the 1996 Noteholders and the
1997 Noteholders.
"Notice of Special Default" has the meaning ascribed to such term in
Section 10(a) hereof.
"Obligor" means each Grantor and each other Person which guarantees the
payment or collection of the obligations of the Company or any of its
Significant Domestic Subsidiaries under the Financing Agreements.
"Party" has the meaning ascribed to that term in the recitals hereto,
and shall include any Future Debt Holder which becomes a party to this Agreement
by executing an acknowledgment in the form attached hereto as Exhibit B-1.
"Permitted Borrower" has the meaning ascribed to that term in the
Credit Agreement.
"Permitted Securitization" means any "Permitted Securitization" under
the Credit Agreement, the Note Agreements and the Future Debt Documents.
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<PAGE> 11
"Person" means any individual, corporation, limited liability company,
partnership, trust or other entity.
"Proceeds" has the meaning assigned to it under the Code and, in any
event, includes, but is not limited to, (a) any and all proceeds of any
collection, sale or other disposition of the Collateral, (b) any and all amounts
from time to time paid or payable under or in connection with any of the
Collateral, and (c) amounts collected by the Collateral Agent or any Benefited
Party by way of set-off, deduction or counterclaim.
"Required Future Debt Holders" means at any time Future Debt Holders
holding 66-2/3% of the aggregate principal amount of the indebtedness (exclusive
of indebtedness held by the Company or any of its Affiliates) then outstanding
under the Future Debt Documents.
"Required Lenders" means at any time Lenders holding 66-2/3% of the
aggregate principal amount of the indebtedness (exclusive of indebtedness held
by the Company or any of its Affiliates) then outstanding under the Credit
Agreement (provided that, for purposes of determining Required Lenders,
indebtedness outstanding under the Swing Line Notes (as defined in the Credit
Agreement) shall be allocated among the Lenders based on their respective
Percentages (as defined in the Credit Agreement) of the Revolving Credit (as
defined in the Credit Agreement), or if no indebtedness is outstanding
thereunder, Lenders holding 66-2/3% of the Percentages.
"Required Noteholders" means at any time Noteholders holding 66-2/3% of
the aggregate principal amount of the indebtedness (exclusive of indebtedness
held by the Company or any of its Affiliates) then outstanding under the Note
Agreements.
"Security Agreement" has the meaning ascribed to that term in the
recitals hereto, and shall include any other agreements or instruments relating
to security given with respect to any Benefited Obligation which are executed
and delivered after the date hereof.
"Security Documents" shall mean this Agreement, the Security Agreement,
the Share Charge, each security agreement executed and delivered by the Company
or any other Grantor pursuant to Section 7.23 of the Credit Agreement, and shall
include any other agreements or instruments which provide security with respect
to any Benefited Obligation which are executed and delivered after the date
hereof.
"Senior Debt" means debt for borrowed money, other than the
indebtedness outstanding under the Note Agreements, the Credit Agreement or the
Future Debt Documents, which is not subordinated in right of payment to any
other obligation of the Company.
"Senior Note Obligations" means all outstanding and unpaid obligations
of every nature of the Company from time to time to the Noteholders under or in
connection with the Noteholder Documents, including, without limitation, any
Make-Whole Amount and all fees, collection costs and other expenses otherwise
accruing thereunder.
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"Senior Notes" means the 1994 Senior Notes, the 1996 Senior Notes and
the 1997 Senior Notes.
"Share Charge" has the meaning ascribed to that term in the recitals
hereto.
"Significant Domestic Subsidiary" has the meaning ascribed to that term
in the Credit Agreement, without giving effect to any amendment thereto after
the date hereof.
"Special Account" shall mean that certain interest bearing account
maintained by or on behalf of the Collateral Agent for the purpose of receiving
and holding Special Payments.
"Special Event of Default" shall mean (i) the commencement of a
Bankruptcy Proceeding with respect to the Company or any other Obligor, (ii) any
failure to pay, on the final maturity thereof, the entire principal indebtedness
outstanding under any Financing Agreement (including without limitation any
reimbursement obligation), or (iii) the acceleration of the indebtedness
outstanding under any Financing Agreement.
"Special Payment" means any payments or Proceeds from the Company, any
other Obligor or any other source on behalf of the Company or any other Obligor
with respect to the Benefited Obligations (including from the exercise of any
setoff or the purchase of indebtedness or through the collection upon any
guaranty of any Benefited Obligation) which are:
(i) received by a Benefited Party within 90 days prior to (A)
the commencement of a Bankruptcy Proceeding, with respect to any of the Company
or any other Obligor, or (B) the acceleration of the indebtedness outstanding
under any Financing Agreement, and which payment reduces the amount of the
Benefited Obligations owed to such Benefited Party below the amount owed to such
Benefited Party as of the 90th day prior to such occurrence, or
(ii) received by a Benefited Party after the occurrence of a
Special Event of Default except as provided in Section 10(b), and which payment
reduces the amount of the Benefited Obligations owed to such Benefited Party
below the amount owed to such Benefited Party as of the 90th day prior to such
occurrence;
provided however that to the extent any such payments or Proceeds are received
by a Lender without actual knowledge that a Special Event of Default has
occurred and is continuing, such payments or Proceeds shall not constitute
Special Payments, but only to the extent of the amount of any advances or
readvances by such Lender to the Company or a Permitted Borrower subsequent to
the receipt of any such payment or Proceeds.
"Subsidiary(ies)" has the meaning ascribed to that term in the Credit
Agreement.
SECTION 2. APPOINTMENT OF COLLATERAL AGENT.
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Subject to removal as provided in Section 8(h) hereof, each of the
Lenders and each of the Noteholders, for themselves and their respective
Affiliates, hereby irrevocably and, by delivery of an acknowledgment in the form
of Exhibit B-1 attached hereto, each Future Debt Holder appoints, designates and
authorizes the Collateral Agent as its agent to take such action on behalf of
such Persons under the provisions of this Agreement and the Security Documents
and to exercise such powers and perform such duties as are expressly delegated
to it by the terms of this Agreement or any Security Document, together with
such powers as are reasonably incidental thereto. Notwithstanding any provision
to the contrary contained elsewhere in this Agreement or any Security Document,
and notwithstanding the use of the term "Collateral Agent", the Collateral Agent
shall not have any duties or responsibilities except those expressly set forth
herein, nor shall the Collateral Agent have or be deemed to have any fiduciary
relationship with any Lender, any Noteholder or any Future Debt Holder, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any Security Document or
otherwise exist against the Collateral Agent.
SECTION 3. DECISIONS RELATING TO ADMINISTRATION AND EXERCISE OF REMEDIES
VESTED IN THE MAJORITY BENEFITED PARTIES.
(a) The Collateral Agent agrees that it will not commence Enforcement
without the direction of the Majority Benefited Parties. The Collateral Agent
agrees to administer the Security Documents and the Collateral and to make such
demands and give such notices under the Security Documents as the Majority
Benefited Parties may request, and to take such action to enforce the Security
Documents and to realize upon, collect and dispose of the Collateral or any
portion thereof as may be directed by the Majority Benefited Parties upon
receipt of written notice from the Directing Party; provided that any such
written notice shall identify the Majority Benefited Parties on whose behalf the
request or direction is being made and shall state the action to be taken by the
Collateral Agent. The Benefited Parties agree that the Collateral Agent shall
not be required to take any action that is in the opinion of counsel contrary to
law or to the terms of this Agreement or any Security Document, or that would in
the opinion of counsel subject it or any of its officers, employees, agents or
directors to liability, and the Collateral Agent shall not be required to take
any action under this Agreement or any Security Document unless and until the
Collateral Agent shall be indemnified to its reasonable satisfaction by one or
more of the Benefited Parties against any and all loss, cost, expense or
liability in connection therewith.
(b) Subject to the terms hereof, each Party agrees that the Collateral
Agent shall act hereunder as the Majority Benefited Parties may request
(regardless of whether any individual Party or Benefited Party agrees, disagrees
or abstains with respect to such request), that the Collateral Agent shall have
no liability for acting in accordance with such request and that no Directing
Party or Non-Directing Party shall have any liability to any Non-Directing Party
or Directing Party, respectively, for any such request. The Collateral Agent
shall give prompt notice to each of the Parties of action taken pursuant to the
instructions of the Majority Benefited Parties to enforce any Security Document;
provided, however, that the failure to give any such notice shall not impair the
right of the Collateral Agent to take any such action or the validity or
enforceability under this Agreement of the action so taken.
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(c) Each Party agrees that the only right of a Non-Directing Party
under any Security Document is for Benefited Obligations held by such
Non-Directing Party to be secured by the Collateral for the period and to the
extent provided therein and in this Agreement and to receive a share of the
proceeds of the Collateral, if any, to the extent and at the time provided in
such Security Document and in this Agreement.
(d) The Collateral Agent may at any time request directions from the
Majority Benefited Parties as to any course of action or other matter relating
hereto or relating to any Security Document. Except as otherwise provided in
this Agreement or the Security Documents, directions given by the Majority
Benefited Parties to the Collateral Agent hereunder shall be binding on all
Benefited Parties, including all Non-Directing Parties, for all purposes.
(e) Nothing contained in this Agreement shall affect the rights of any
Party to give the Company or any other Grantor notice of any default, accelerate
or make demand for or enforce payment of their respective Benefited Obligations
under the Financing Agreements or collect payment thereof other than through a
realization on or in respect of the Collateral or any part or portion thereof,
nor shall anything contained in this Agreement be deemed or construed (except as
expressly set forth herein) to affect the rights of any Party to administer,
modify, waive or amend any term or provision of any Financing Agreement to which
it and the Company or any Subsidiary are parties, other than this Agreement, the
Security Documents or any other security document securing the Benefited
Obligations. If a Party (upon authorization of the Majority Benefited Parties)
instructs the Collateral Agent to take any action, commence any proceedings or
otherwise proceed against the Collateral or enforce any Security Document, and
such action or proceedings are or may be defective without the joinder of other
Parties as parties, then all such other Parties shall join in such actions or
proceedings.
Each Party agrees not to take any action to enforce any term or
provision of any Security Document or to enforce any of its rights in respect of
the Collateral except through the Collateral Agent in accordance with this
Agreement. Additionally, notwithstanding anything to the contrary contained in
any Security Document, each Party agrees that any action required or permitted
under any Security Document with respect to (i) the exercise of any remedy
thereunder, (ii) the declaration of any default thereunder, (iii) the waiver of
any default thereunder and (iv) any other request for any waiver, consent,
amendment or modification with respect thereto shall only be performed at the
direction of the Majority Benefited Parties (regardless of whether any
individual Party or Benefited Party agrees, disagrees or abstains with respect
to such direction and regardless of whether any such right is expressly granted
to fewer than all of the Benefited Parties). The Collateral Agent, promptly upon
receipt thereof, shall provide each Party with copies of all notices and other
written information received by the Collateral Agent pursuant to any Security
Document.
(f) Any Benefited Party which has actual knowledge of the occurrence of
an Event of Default, or facts which indicate that an Event of Default has
occurred, shall (unless it reasonably believes that the Collateral Agent has
already received notice of such Event of Default or such facts) deliver to the
Collateral Agent a written statement describing such Event of Default or facts.
Failure to do so, however, does not constitute a waiver of such Event of Default
by the Benefited Parties.
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The Collateral Agent, promptly upon receipt thereof, shall provide each Party
with a copy of any such notice of an Event of Default.
(g) The Collateral Agent shall not release any Lien or Collateral
except with the prior written approval of the Required Lenders, the Required
Noteholders and the Required Future Debt Holders (or such greater percentage of
any such class of creditors as is required under the applicable Financing
Agreements) as the case may be; provided however that the Collateral Agent may,
upon the written request of the Company and without notice to or the approval of
any Lender, Noteholder or Future Debt Holder, release any Lien or Collateral
under any Security Document which is permitted to be sold or disposed of by the
Company or any other Grantor in connection with a Permitted Securitization
pursuant to the Credit Agreement, the Note Agreements and the Future Debt
Documents or otherwise in accordance with the terms of each of the Financing
Agreements (or which the Security Agreement otherwise requires to be released)
and execute and deliver such releases as may be necessary to terminate of record
the Collateral Agent's security interest in such Collateral.
SECTION 4. APPLICATION OF PROCEEDS.
(a) Any and all Proceeds received by the Collateral Agent in
connection with an Enforcement and any Special Payments required to be paid to
all Benefited Parties in accordance with the provisions of Sections 5 and 10
hereof or otherwise, shall be applied promptly by the Collateral Agent, as
follows:
FIRST: To the payment of the reasonable costs and expenses of
such Enforcement or other realization, including, without duplication,
fees and expenses of counsel to the Collateral Agent, and all
reasonable expenses, liabilities and advances made or incurred by the
Collateral Agent in connection therewith;
SECOND: To the ratable payment of the Benefited Obligations to
Benefited Parties (including the Make-Whole Amount and Letter of Credit
Usage and Hedging Exposure), calculated in accordance with the
provisions of Section 4(b) hereof; provided, however, that any portion
of such Proceeds allocated to any Lender with respect to obligations
under an undrawn Letter of Credit shall be held in a separate account
established under Section 4(c) for disposition in accordance with the
provisions thereof; and
THIRD: After payment in full of all Benefited Obligations, to the
payment to or upon the order of Grantors, or to whomsoever may be
lawfully entitled to receive the same or as a court of competent
jurisdiction may direct, of any surplus then remaining from such
Proceeds and Special Payments.
Until such Proceeds and Special Payments are so applied, the Collateral Agent
shall hold such Proceeds and Special Payments in its custody in an interest
bearing account and otherwise in accordance with its regular procedures for
handling deposited funds.
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(b) Any and all Proceeds and Special Payments received by the
Collateral Agent in connection with an Enforcement and any Special Payments (net
of any amounts applied in accordance with Section 4(a) FIRST) shall be applied
in accordance with the priority set forth in Section 4(a) SECOND so that each
Benefited Party shall be allocated its proportionate amount of all such Proceeds
and Special Payments, as the case may be. Payment shall be based upon the
proportion which the amount of such Benefited Obligations of such Benefited
Party bears to the total amount of all Benefited Obligations of all such
Benefited Parties, including, without limitation, Hedging Exposure to any
Lender. For purposes of determining the proportionate amounts of all Benefited
Obligations sharing in any such distribution under Section 4(a) SECOND: (i) the
amount of the outstanding Credit Obligations shall be deemed to be the sum of
the principal amount of the Credit Notes plus the Hedging Exposure and subject
to Section 4(c), all Letter of Credit Usage, and all accrued interest and fees
(including any breakage fees or charges) with respect thereto, (ii) the amount
of the outstanding Senior Note Obligations shall be deemed to be the principal
amount of the Senior Notes plus all accrued interest and fees with respect
thereto, including, without limitation, the Make-Whole Amount, if any, in
respect thereof, (iii) the amount of the outstanding Future Debt Obligations
shall be deemed to be the principal amount of the Future Debt, plus all accrued
interest and fees with respect thereto, including without limitation any
prepayment premium, yield maintenance payment or make whole amount with respect
thereto and (iv) the amount of the Hedging Exposure shall be the amount
determined in accordance with the definition of "Hedging Exposure".
(c) Notwithstanding anything herein to the contrary, any Proceeds
allocated pursuant to Section 4(b) to obligations under any undrawn Letter of
Credit ("Undrawn L/C Proceeds") shall be held by the Collateral Agent for the
benefit of all Benefited Parties but shall be allocated to the Lender which
issued such undrawn Letter of Credit and shall be allocated by the Collateral
Agent to a separate interest bearing account for each such Letter of Credit. If
any such Letter of Credit is thereafter drawn upon, the Collateral Agent shall
pay Undrawn L/C Proceeds allocable to the amount drawn with respect to such
Letter of Credit (adjusted for any investment losses or gains) to the Lender for
which the related account was established. If any Letter of Credit for which
Undrawn L/C Proceeds have been allocated as set forth in this Section 4(c)
expires or is terminated without having been drawn upon in full, the Collateral
Agent shall, promptly upon its receipt of written notice thereof, reapply the
remaining Undrawn L/C Proceeds (adjusted for any investment losses or gains) as
if such Undrawn L/C Proceeds had been received by the Collateral Agent for
application under Section 4(a).
(d) Payments by the Collateral Agent in respect of (i) the Credit
Obligations shall be made to the Lenders in accordance with the Credit
Agreement; (ii) the Senior Note Obligations shall be made as directed in writing
by the Noteholder to whom such Senior Note Obligations are owed; (iii) the
Future Debt Obligations shall be made as directed in writing by the Future Debt
Holder to whom such Future Debt Obligations are owed; and (iv) Hedging Exposure
shall be made as directed by the Lender to whom or to whose Affiliate such
Hedging Exposure is owed.
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SECTION 5. SHARING OF SET-OFF.
Each Benefited Party agrees with each other Benefited Party that, in
the event it shall receive and retain any payment, whether by set-off or
application of deposit balances or other similar means ("Set-Off") after the
occurrence and during the continuance of an Event of Default, on or in respect
of any deposit account in which the Company or any other Obligor has any
interest (and whether or not any such balances were held prior to the occurrence
of such Event of Default), it shall share all such Set-Offs with each of such
other Benefited Parties pro-rata in accordance with the outstanding Benefited
Obligations owed to each Benefited Party by complying with the terms and
conditions of this Agreement, including without limitation Section 4 and this
Section 5. The amount of any Set-Off shall be held by the party exercising such
Set-Off for the benefit of the Benefited Parties until the earlier of the 10th
day following such Set-Off and the date of the next subsequent Enforcement
hereunder (provided, however, that nothing herein shall be construed to provide
that Set-Offs may be exercised only on the date of any Enforcement hereunder),
at which time such Set-Off shall be deemed to be a Special Payment and the
amount thereof shall be immediately paid over by the party exercising such
Set-Off to the Collateral Agent to be deposited into the Special Account for
distribution to the Benefited Parties pursuant to Section 10.
SECTION 6. INFORMATION.
If the Collateral Agent proceeds to enforce any Security Document or to
collect, sell, otherwise dispose of or take any other action with respect to any
of such agreements or the Collateral or any portion thereof or proposes to take
any other action pursuant to or contemplated by this Agreement, the Parties
hereto agree as follows:
(a) Each Lender shall (i) promptly from time to time, upon the
written request of the Collateral Agent, notify the Collateral Agent of
the outstanding Credit Obligations owed to such Lender or its
Affiliates as at such date as the Collateral Agent may specify; and
(ii) promptly from time to time thereafter notify the Collateral Agent
of any payment received by such Lender or its Affiliates to be applied
to satisfy Credit Obligations owing to such Lender or its Affiliates.
Each Lender shall certify as to such amounts and the Collateral Agent
shall be entitled to rely conclusively upon such certification.
(b) Each Noteholder shall (i) promptly from time to time, upon the
written request of the Collateral Agent, notify the Collateral Agent of
the outstanding Senior Note Obligations owed to such Noteholder as at
such date as the Collateral Agent may specify; (ii) promptly from time
to time, upon the written request of the Collateral Agent, notify the
Collateral Agent of the amount that would be payable as a "Make-Whole
Amount" under Section 8.2 of the Note Agreements or any successor
provision thereto if such "Make-Whole Amount" were payable as of such
date as the Collateral Agent may specify and (iii) promptly from time
to time thereafter, notify the Collateral Agent of any payment received
thereafter by such Noteholder to be applied to the principal of or
interest or "Make-Whole Amount" on the Senior Note Obligations owing to
such Noteholder. Each Noteholder shall certify as
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to such amounts and the Collateral Agent shall be entitled to rely
conclusively upon such certification.
(c) Each Lender party to, or having an Affiliate a party to, a
Hedging Transaction shall (i) promptly from time to time, upon the
written request of the Collateral Agent, notify the Collateral Agent of
the Hedging Exposure under such Hedging Transaction at the date
specified by the Collateral Agent in such written request and (ii)
promptly from time to time thereafter notify the Collateral Agent of
any payment received by such Lender to be applied to amounts due upon
early termination of such Hedging Transaction. Such Lender shall
certify as to such amounts and the Collateral Agent shall be entitled
to rely conclusively upon such certification.
(d) Each Lender party to any Letter of Credit shall (i) promptly
from time to time, upon the written request of the Collateral Agent,
notify the Collateral Agent of the Letter of Credit Usage applicable to
such Letter of Credit and (ii) promptly from time to time thereafter
notify the Collateral Agent of any draws under any Letter of Credit
giving rise to reimbursement obligations of the Company with respect
thereto or any payment received by such Lender to be applied to amounts
due with respect to the Company's reimbursement obligations resulting
from draws under such Letter of Credit. Such Lender shall certify as to
such amounts and the Collateral Agent shall be entitled to rely
conclusively upon such certification.
(e) Each Future Debt Holder party to any Future Debt Documents
shall (i) promptly from time to time, upon the written request of the
Collateral Agent, notify the Collateral Agent of the outstanding Future
Debt Obligations owed to such Future Debt Holder as at such date as the
Collateral Agent may specify; (ii) promptly from time to time, upon the
written request of the Collateral Agent, notify the Collateral Agent of
the amount that would be payable as a prepayment premium, yield
maintenance payment or make-whole amount under the applicable terms of
the Future Debt Documents and (iii) promptly from time to time
thereafter, notify the Collateral Agent of any payment received
thereafter by such Future Debt Holder to be applied to the principal of
or interest or other amounts on the Future Debt Obligations owing to
such Future Debt Holder. Each Future Debt Holder shall certify as to
such amounts and the Collateral Agent shall be entitled to rely
conclusively upon such certification.
(f) In connection with any request for information under Section
6, and in connection with any application of Proceeds or Special
Payments under Sections 4, 5 and 10 hereof, the Collateral Agent will
promptly provide to each of the Benefited Parties a written report
setting forth the amounts and types of obligations owed to each
Benefited Party (which may be based upon the information supplied by
such parties hereunder), the aggregate amount of Proceeds and Special
Payments from time to time received by the Collateral Agent from the
Benefited Parties hereunder, the application and/or distribution of the
amounts so received (including a schedule listing the amounts received
by each Benefited
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Party hereunder), together with its supporting calculations, in
reasonable detail, and such other information as the Benefited Parties
shall reasonably request.
SECTION 7. ADDITIONAL PARTIES.
(a) So long as it is permitted to do so by the terms of the Credit
Agreement, the Note Agreements and the Future Debt Documents, the Company may
enter into one or more Future Debt Documents and, pursuant thereto, incur
additional indebtedness secured by the Collateral under the terms of the
Security Documents; provided that, at the time the Company enters into any such
Future Debt Documents, each such Future Debt Holder party to such Future Debt
Documents, shall sign an acknowledgment in the form of Exhibit B-1 attached to
this Agreement, by which such Future Debt Holder agrees to be bound by the terms
of this Agreement, and shall deliver a signed acknowledgment hereof (also
executed by the Company and the Collateral Agent) to the Collateral Agent; and
provided further that on the date of execution and delivery of such Future Debt
Documents and after giving effect to any indebtedness incurred by the Company
thereunder and to the application of the proceeds thereof, no Default or Event
of Default shall have occurred and be continuing under the Note Agreements, the
Credit Agreement, such Future Debt Documents or any Future Debt Documents
executed prior thereto.
(b) Upon the acquisition or creation of any Subsidiary that constitutes
a Significant Domestic Subsidiary, (i) the Company shall execute, and cause such
Subsidiary to execute, and deliver to the Collateral Agent and each Benefited
Party the Security Documents to the extent required by Section 7.23 of the
Credit Agreement and/or the applicable provisions of the Note Agreements or any
Future Debt Documents and (ii) the Company shall cause such newly acquired or
created Subsidiary (and any other Subsidiary required to deliver a stock pledge
under Section 4.15 of the Security Agreement or a deed of charge under any
comparable provision contained in the Share Charge) to execute and deliver to
the Collateral Agent an acknowledgment substantially in the form of Exhibit B-2
attached to this Agreement, by which such Subsidiary agrees to be bound by the
terms of this Agreement. Each such acknowledgment shall also be signed by the
Company and the Collateral Agent.
(c) Notwithstanding anything in any of the Financing Agreements to the
contrary, each Benefited Party agrees that it will not sell, assign, grant a
participation or otherwise transfer any interest in any of the Benefited
Obligations or interests therein to any Person other than another Benefited
Party or the Company or any of the Company's Affiliates (provided that any note
or other Benefited Obligation assigned to the Company or any of its Affiliates
shall, concurrently with such assignment, be cancelled), unless such other
Person shall become a Benefited Party under this Agreement by signing an
acknowledgment to this Agreement substantially in the form of Exhibit B-3.
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SECTION 8. DISCLAIMERS, INDEMNITY, ETC
(a) The Collateral Agent may execute any of its duties under this
Agreement or any Security Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel (including in-house
counsel) concerning all matters pertaining to such duties. The Collateral Agent
shall not be responsible for the negligence or misconduct of any agent or
attorney-in-fact that it selects with reasonable care.
(b) Neither the Collateral Agent nor any Agent-Related Persons shall
(i) be liable for any action taken or omitted to be taken by any of them under
or in connection with this Agreement or any Security Document or the
transactions contemplated hereby (except for its own or their gross negligence
or willful misconduct), or (ii) be responsible in any manner to any of the
Lenders or Noteholders or Future Debt Holders for any recital, statement,
representation or warranty made by the Company, any other Grantor or any officer
thereof, contained in this Agreement or any Security Document or in any
certificate, report, statement or other document referred to or provided for in,
or received by the Collateral Agent under or in connection with, this Agreement
or any Security Document or the validity, effectiveness, genuineness,
enforceability, sufficiency or collectibility of this Agreement or any Security
Document, any Benefited Obligations, or any Lien securing or intended to secure
the Benefited Obligations, or the attachment, perfection or priority of any
Liens securing or intended to secure the Benefited Obligations, or for any
failure of the Company to perform its obligations hereunder or thereunder.
Neither the Collateral Agent nor any Agent-Related Person shall be under any
obligation to any Lender, any Noteholder or any Future Debt Holder to ascertain
or to inquire as to the observance or performance of any of the agreements
contained in, or conditions of, this Agreement or any Security Document, or to
inspect the properties, books or records of the Company.
(c) The Collateral Agent shall be entitled to rely, and shall be fully
protected in relying, upon any writing, resolution, notice, consent,
certificate, affidavit, letter, telegram, facsimile, telex, statement or other
document believed by it to be genuine and correct and to have been signed, sent
or made by the proper Person or Persons, and upon advice and statements of legal
counsel, independent accountants and other experts selected by the Collateral
Agent. The Collateral Agent shall be fully justified in failing or refusing to
take any action under this Agreement or any Security Document unless it shall
first receive written notice in the form specified in Section 3 from a Directing
Party on behalf of the Majority Benefited Parties which notice is reasonably
acceptable to the Collateral Agent and, if it so requests, it shall first be
indemnified by the Benefited Parties ratably in accordance with the amount of
the Benefited Obligations held by such Benefited Parties against any and all
liability and expense which may be incurred by it by reason of taking or
continuing to take any such action to the extent not otherwise reimbursed
hereunder. Any such indemnity given by a Benefited Party which is a bank, trust
company, savings and loan association, pension fund, investment company,
insurance company, fraternal benefit society, broker or dealer or other similar
financial institution or entity, regardless of legal form, may be unsecured at
the option of such Benefited Party. The Collateral Agent shall in all cases be
fully protected in acting, or in refraining from acting, under this Agreement or
the Security Documents in accordance with
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a request or consent of the Majority Benefited Parties and such request and any
action taken or failure to act pursuant thereto shall be binding upon all of the
Benefited Parties.
(d) The Collateral Agent shall not be deemed to have knowledge or
notice of the occurrence of any Event of Default or Special Event of Default
unless the Collateral Agent shall have received written notice from a Lender, a
Noteholder, a Future Debt Holder or any of the Company or any Grantor referring
to this Agreement, describing such Event of Default or Special Event of Default
and stating that such notice is a "notice of default". Upon the Collateral
Agent's receipt of such notice of default it shall promptly provide written
notice of such Event of Default or Special Event of Default to all Benefited
Parties. The Collateral Agent shall take such action under the Security
Documents with respect to such Event of Default or Special Event of Default as
may be requested by the Majority Benefited Parties in accordance with Section 3.
Each Lender, each Noteholder and each Future Debt Holder acknowledges that the
Collateral Agent is an agent of the Benefited Parties and before advancing any
funds in connection with the performance of its duties as Collateral Agent, the
Collateral Agent may request either advances from, or assurances of payment when
requested by the Collateral Agent from, each of the Benefited Parties of its pro
rata share of such funds; provided, that upon the return to the Collateral Agent
of any such funds which the Collateral Agent advanced in the performance of its
duties, the Collateral Agent shall promptly distribute such funds to the
Benefited Parties who paid the same to the Collateral Agent.
(e) Each Lender, each Noteholder and each Future Debt Holder
acknowledges that the Agent-Related Persons have not made any representation or
warranty to it, and that no act by the Collateral Agent hereinafter taken,
including any review of the affairs of the Company and its Subsidiaries, shall
be deemed to constitute any representation or warranty by the Agent-Related
Persons to any Lender, Noteholder or Future Debt Holder. Each Lender, each
Noteholder and each Future Debt Holder acknowledges that it has, independently
and without reliance upon the Collateral Agent and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, prospects, operations, property, financial and
other condition and creditworthiness of the Company and its Subsidiaries, and
made its own decision to enter into this Agreement and to extend credit to the
Company under the Financing Agreements to which it is a party. Each Lender,
Noteholder and each Future Debt Holder also represents that it will,
independently and without reliance upon the Agent-Related Persons and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or
not taking action under this Agreement or any Security Document, and to make
such investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of the Company or any Subsidiary. Except for notices, reports
and other documents expressly herein required to be furnished to the Lenders,
the Noteholders and the Future Debt Holders by the Collateral Agent, the
Collateral Agent shall not have any duty or responsibility to provide any
Lender, Noteholder or Future Debt Holder with any credit or other information
concerning the business, prospects, operations, property, financial and other
condition or creditworthiness of the Company or any Subsidiary which may come
into the possession of any of the Agent-Related Persons.
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(f) The Benefited Parties agree that they will indemnify the Collateral
Agent in its capacity as the Collateral Agent, ratably in accordance with the
amount of the Benefited Obligations held by such Benefited Parties to the extent
neither reimbursed by Grantors under the Security Documents nor reimbursed out
of any Special Payments or Proceeds pursuant to clause FIRST of Section 4(a)
hereof, for any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever that may be imposed on, incurred by or asserted against the
Collateral Agent in any way relating to or arising out of this Agreement or any
Security Document or the enforcement of any of the terms of any thereof,
including fees and expenses of counsel; provided, however, that no such
Benefited Party shall be liable for any such payment to the extent the
obligation to make such payment arises from the Collateral Agent's gross
negligence or willful misconduct. The obligations of the Benefited Parties under
this Section 8(f) shall survive the payment in full of the Benefited Obligations
and the termination of this Agreement; provided, further, that no such Benefited
Party shall be liable for any such payment to the extent that the action or
inaction giving rise to the obligation to make such payment arose after the
Benefited Obligations of such Benefited Party had been paid in full.
(g) Comerica (or any successor Collateral Agent) and its Affiliates may
make loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Company and its
Subsidiaries and Affiliates as though Comerica (or such successor Collateral
Agent) were not the Collateral Agent hereunder and without notice to or consent
of the Lenders, the Noteholders or the Future Debt Holders. The Lenders, the
Noteholders and the Future Debt Holders acknowledge that, pursuant to such
activities, the Collateral Agent or its subsidiaries may receive information
regarding the Company or its Subsidiaries (including information that may be
subject to confidentiality obligations in favor of the Company or such
Subsidiary) and acknowledge that the Collateral Agent shall be under no
obligation to provide such information to them. With respect to its loans to the
Company, the Collateral Agent shall have the same rights and powers under this
Agreement as any other Lender and may exercise the same as though it were not
the Collateral Agent, and the terms "Lender" and "Lenders" include the
Collateral Agent in its individual capacity.
(h) (i) The Collateral Agent may resign at any time by giving at least
30 days' notice thereof to the Parties, such resignation to take effect upon the
acceptance by a successor Collateral Agent of any appointment as the Collateral
Agent hereunder.
(ii) The Collateral Agent may be removed as the Collateral Agent
at any time either (1) by (x) Benefited Parties holding (or representing) at
least 66-2/3% of the outstanding principal amount under the Credit Notes, or if
no indebtedness is then outstanding thereunder, holding 66-2/3% of the
Percentages under (and as defined in) the Credit Agreement (but excluding the
outstanding principal indebtedness, or if applicable, the Percentage, held by
the Collateral Agent in the determination thereof, if the Collateral Agent is
then a Lender) (it being understood that, if the Required Lenders agree on any
instruction to be given to the Collateral Agent, the Required Lenders shall be
entitled to vote on behalf of all Lenders for purposes of this clause) or (y)
Benefited Parties holding (or representing) more than 51% of the outstanding
principal amount under the Senior Notes
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(it being understood that, if the Required Noteholders agree on any instruction
to be given to the Collateral Agent, the Required Noteholders shall be entitled
to vote on behalf of all Noteholders for purposes of this clause) or (z)
Benefitted Parties holding (or representing) more than 51% of the outstanding
principal amount under the Future Debt Documents (it being understood that, if
the Required Future Debt Holders agree on any instruction to be given to the
Collateral Agent, the Required Future Debt Holders shall be entitled to vote on
behalf of all Future Debt Holders for purposes of this clause) either (I) upon
the gross negligence or willful misconduct of the Collateral Agent or upon the
failure of the Collateral Agent to comply with the terms and conditions of this
Agreement or (II) if the Collateral Agent is no longer a Lender hereunder, or
(2) by the Majority Benefited Parties, with or without cause. In the event of
any such resignation or removal of the Collateral Agent, the Majority Benefited
Parties shall thereupon have the right to appoint a successor Collateral Agent.
If no successor Collateral Agent shall have been so appointed by the Majority
Benefited Parties and shall have accepted such appointment within 30 days after
the notice of the intent of the Collateral Agent to resign or the removal of the
Collateral Agent, then the retiring Collateral Agent may, on behalf of the other
Parties, appoint a successor Collateral Agent. Any successor Collateral Agent
appointed pursuant to this Section 8(h)(ii) shall be a commercial bank or other
financial institution organized under the laws of the United States of America
or any state thereof having (1) a combined capital and surplus of at least
$250,000,000 and (2) a rating upon its long-term senior unsecured indebtedness
of "A-2" or better by Moody's Investors Service, Inc. or "A" or better by
Standard & Poor's Services, a division of The McGraw Hill Companies, Inc.
Notwithstanding the foregoing, in the event (y) the Collateral Agent shall have
received a court order requiring that it resign as Collateral Agent or (z) the
Collateral Agent shall have received a written opinion of independent outside
counsel of nationally recognized standing reasonably acceptable to the
Collateral Agent and Benefited Parties holding (or representing) more than 51%
of the outstanding principal amount of the Senior Notes and the Future Debt that
the performance by the Collateral Agent of its duties as Collateral Agent
constitutes a conflict of interest which has adversely affected, or could
reasonably be expected to affect adversely, the objective performance by
Collateral Agent of its duties hereunder, then in either such event, the
Collateral Agent shall give written notice of such event to the Parties and the
Collateral Agent shall resign on the earlier of the 90th day following such
notice or the date on which a successor Collateral Agent has accepted
appointment hereunder. With regard to any such conflict of interest or perceived
conflict of interest, the Parties agree to act in a commercially reasonable
manner in addressing any such conflict of interest.
(iii) Upon the acceptance by a successor Collateral Agent of any
appointment as the Collateral Agent hereunder, such successor Collateral Agent
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring or removed Collateral Agent. The retiring
or removed Collateral Agent shall be discharged from its duties and obligations
hereunder upon the appointment of the successor Collateral Agent. After any
retiring or removed Collateral Agent's resignation or removal hereunder as the
Collateral Agent, the provisions of this Section 8 shall continue in effect for
its benefit in respect of any actions taken or omitted to be taken by it while
it was acting as the Collateral Agent.
21
<PAGE> 24
SECTION 9. INVALIDATED PAYMENTS.
If any amount distributed by the Collateral Agent to a Benefited Party
in accordance with the provisions of this Agreement is subsequently required to
be returned or repaid by the Collateral Agent or such Benefited Party to any of
the Company or any other Obligor or any Affiliate thereof or their respective
representatives or successors in interest, whether by court order, settlement or
otherwise (a "Disgorgement Event"), the Collateral Agent shall promptly request
funds from one or more of the Benefited Parties in appropriate amounts in order
to adjust the amounts distributed to each Benefited Party so that after giving
effect to any such adjustment all Benefited Parties will have received such
proportion of the proceeds as would have been received had the original payment
which gave rise to such Disgorgement Event not occurred. If a Disgorgement Event
occurs which results in the Collateral Agent or any Benefited Party being
required to return or repay any amount distributed by the Collateral Agent to
any Benefited Party under this Agreement, the Benefited Party to which such
amount was distributed shall, promptly upon its receipt of a notice thereof from
the Collateral Agent, pay the Collateral Agent such amount; provided that, if
any Benefited Party shall fail to promptly pay such amount to the Collateral
Agent, the Collateral Agent may deduct such amount from any amounts payable
thereafter to such Benefited Party under this Agreement.
SECTION 10. SPECIAL PAYMENTS AND SPECIAL ACCOUNT.
(a) The Collateral Agent shall give each Benefited Party a written
notice (a "Notice of Special Default") promptly after being notified in writing
by a Benefited Party that a Special Event of Default has occurred. Promptly
following the receipt of such Notice of Special Default, all Special Payments
(whether received by a Benefited Party prior to or after its receipt of such
Notice of Special Default) other than those payments received pursuant to
Section 10(b) shall be deposited into the Special Account by the Benefited Party
having received such Special Payment. Each Benefited Party agrees that, solely
for purposes of this Agreement (and as among the parties hereto other than the
Company or any other Grantor), no Event of Default shall be deemed to have
occurred as a result of payments so made on a timely basis to the Collateral
Agent.
(b) If (i) such Special Event of Default is waived by the Required
Lenders, the Required Noteholders or the Required Future Debt Holders, or any or
all of them, to the extent such Special Event of Default constitutes an Event of
Default under the Financing Agreements applicable to such class of Benefited
Parties, as the case may be, and if no other Special Event of Default has
occurred and is continuing, (ii) such Special Event of Default is cured by the
Company or by any amendment of the Credit Agreement, the Note Agreements or the
Future Debt Documents, as the case may be, and if no other Event of Default has
occurred and is continuing or (iii) none of the Benefited Obligations have been
accelerated and the Majority Benefited Parties have not instructed the
Collateral Agent to seek the appointment of a receiver, commence litigation
against the Company or any Obligor, liquidate the Collateral, commence a
Bankruptcy Proceeding against the Company or any Obligor, seize Collateral, or
exercise other remedies of similar character, in any such case under clauses (i)
through (iii) hereof prior to the 90th day following the occurrence of such
Special Event of Default, then the Collateral Agent thereupon shall return all
amounts, together with their pro rata share of interest earned thereon, held in
the Special Account representing payment of any
22
<PAGE> 25
Benefited Obligations to the Benefited Party initially entitled thereto, and no
payments thereafter received by a Benefited Party shall constitute a Special
Payment by reason of such cured or waived Special Event of Default. No payment
returned to a Benefited Party for which such Benefited Party has been obligated
to make a deposit into the Special Account shall thereafter ever be
characterized as a Special Payment.
(c) Each Benefited Party agrees that upon receiving a Notice of Special
Default it shall (i) promptly notify the Collateral Agent of its prior and
subsequent receipt of any Special Payments, (ii) hold such amounts for the
Benefited Parties and act as agent of the Benefited Parties during the time any
such amounts are held by it, and (iii) deliver to the Collateral Agent such
amounts for deposit into the Special Account.
(d) If (i) a Special Event of Default has occurred and has not been
waived or cured within 90 days after the occurrence thereof, (ii) any of the
Benefited Obligations have been accelerated or (iii) the Majority Benefited
Parties have instructed the Collateral Agent to seek the appointment of a
receiver, commence litigation against the Company, any Grantor or other Obligor,
liquidate the Collateral, commence a Bankruptcy Proceeding against the Company,
or any Grantor or other Obligor, seize Collateral, or exercise other remedies of
similar character, then all funds, together with interest earned thereon, held
in the Special Account and all Special Payments shall be applied in accordance
with the provisions of Section 4(a) above. Any Lender, any Noteholder or any
Future Debt Holder which is aware of the same, shall promptly give the
Collateral Agent written notice of any Special Event of Default which has
occurred and which has not been cured or waived; provided that failure to give
any such notice shall not modify, amend or otherwise prejudice or affect the
rights of any Lender, Noteholder or Future Debt Holder hereunder.
SECTION 11. MISCELLANEOUS.
(a) All notices and other communications provided for herein shall be
in writing and may be sent by overnight air courier, facsimile communication or
United States mail and shall be deemed to have been given when delivered by
overnight air courier, upon receipt of facsimile communication if concurrently
with transmission of such telecopy or telex, a copy thereof shall be sent by
overnight courier to the address specified for such notice or communication, or
four business days after deposit in the United States mail, registered or
certified, with postage prepaid and properly addressed. For the purposes hereof,
the addresses of the parties hereto (until notice of a change thereof is
delivered as provided in this Section 11(a)) shall be as set forth on Annex 1
hereto.
(b) This Agreement may be amended, modified or waived only by an
instrument or instruments in writing signed by all of the holders of Benefited
Obligations, the Collateral Agent and the Company; provided that, after the
occurrence and during the continuance of any Default or Event of Default or
after the commencement of an Enforcement, this Agreement may be amended or
modified without the written consent of the Company so long as such amendment or
modification does not modify the obligations of the Company or any Obligor under
any Financing Agreement.
23
<PAGE> 26
(c) This Agreement shall be binding upon and inure to the benefit of
the Collateral Agent, each Party and their respective successors and assigns. In
the event that the holder of any indebtedness outstanding under the Credit
Agreement, any Note Agreement or any Future Debt Document shall assign or
transfer such indebtedness or any portion thereof (other than by participation),
the Company shall promptly so advise the Collateral Agent in writing. Each
assignee or transferee of any such indebtedness (and any participant) shall take
such indebtedness subject to the provisions of this Agreement and to any request
made, waiver or consent given or other action taken or authorized hereunder, by
or binding upon (even if not authorized by) each previous holder of such
indebtedness, prior to the receipt by the Collateral Agent of written notice of
such transfer; and, except as expressly otherwise provided in such notice, the
Collateral Agent shall be entitled to assume conclusively that the transferee
named in such notice shall thereafter be vested with all rights and powers as a
Party under this Agreement. The Collateral Agent shall not be obligated to give
any Party notice of any such transfer; provided that, upon the written request
of any Benefited Party, the Collateral Agent shall promptly provide such
Benefited Party with a then current list of all Benefited Parties.
(d) This Agreement shall continue to be effective among the Parties
even though a case or proceeding under any bankruptcy or insolvency law or any
proceeding in the nature of a receivership, whether or not under any insolvency
law, shall be instituted with respect to any of the Company or any other
Grantor, or any portion of the property or assets of any of the Company or any
other Grantor, and all actions taken by the Parties with regard to such
proceeding shall be by the Majority Benefited Parties; provided, however, that
nothing herein shall be interpreted to preclude any Party from filing a proof of
claim with respect to its Benefited Obligations, from casting its vote, or
abstaining from voting, for or against confirmation of a plan of reorganization
in a case of bankruptcy, insolvency or similar law, from filing a petition to
initiate a bankruptcy proceeding against any Grantor or from providing financing
to a trustee of any Grantor under 11 U.S.C. ss.364 (so long as such financing is
not secured by a senior or equal and ratable Lien on any of the Collateral in
existence as of the date of the commencement of such proceeding), in each case
in its sole discretion.
(e) Each Party hereto agrees to do such further acts and things and to
execute and deliver such additional agreements, powers and instruments as any
other Party hereto may reasonably request to carry into effect the terms,
provisions and purposes of this Agreement or to better assure and confirm unto
such other Party hereto its respective rights, powers and remedies hereunder.
(f) This Agreement may be executed in any number of counterparts, all
of which taken together shall constitute one and the same instrument, and any of
the Parties hereto may execute this Agreement by signing any such counterpart. A
telecopy of the signature of any Party on any counterpart shall be effective as
the signature of the Party executing such counterpart for purposes of
effectiveness of this Agreement.
(g) This Agreement shall become effective immediately upon execution by
the Parties and shall continue in full force and effect until one year following
the date upon which all Benefited
24
<PAGE> 27
Obligations are irrevocably paid in full and all commitments under the Credit
Agreement have expired or been terminated.
(h) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE
WITH, THE INTERNAL LAWS OF THE STATE OF MICHIGAN.
(i) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE COLLATERAL
AGENT, THE LENDERS, THE NOTEHOLDERS, THE FUTURE DEBT HOLDERS AND THE COMPANY,
HEREBY IRREVOCABLY AGREE TO WAIVE THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY
AND ALL ACTIONS OR PROCEEDINGS BETWEEN ANY OF THE PARTIES HERETO ARISING OUT OF,
CONNECTED WITH, OR RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN ANY OF
THEM IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT WILL BE RESOLVED IN A BENCH TRIAL
WITHOUT A JURY. THESE WAIVERS HAVE BEEN VOLUNTARILY GIVEN, WITH FULL KNOWLEDGE
OF THE CONSEQUENCES THEREOF.
(j) Headings of sections of this Agreement have been included herein
for convenience only and should not be considered in interpreting this
Agreement.
(k) Nothing in this Agreement or any Security Document, expressed or
implied, is intended or shall be construed to confer upon or give to any Person
other than the Benefited Parties, any right, remedy or claim under or by reason
of any such agreement or any covenant, condition or stipulation herein or
therein contained, or, except as expressly set forth herein, to alter the rights
or obligations under the Financing Agreements between any Benefited Party, on
one hand, and the Company or any other Obligor, on the other hand.
Notwithstanding the foregoing, however, each of the Benefited Parties, for
purposes of the Financing Agreements to which it is a party, consents to the
execution, delivery and performance by the Company of the Security Documents and
this Agreement.
(l) In case any provision in or obligation under this Agreement shall
be invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
(m) The rights and duties created by this Agreement shall, in all
cases, be interpreted consistently with, and shall be in addition to (and not in
lieu of), the rights and duties created by the Financing Agreements. In the
event that any provision of this Agreement shall be inconsistent with any
provision of any other Financing Agreement, such provision of this Agreement
shall govern.
(n) Each Benefited Party hereby agrees to provide written notice to the
Collateral Agent of the bank account with a United States bank to which payments
of all amounts due to such Benefited Party hereunder shall be made and the
Collateral Agent hereby agrees to make such payments in immediately available
funds to such bank account, marked for attention as indicated, or in such other
manner or to such other account in any United States bank as such
25
<PAGE> 28
Benefited Party may from time to time direct the Collateral Agent in writing.
(o) The Noteholders hereby consent and agree (and by its execution of
the Acknowledgment and Agreement set forth below, the Company consents and
agrees) to the provisions of Section 6.5 of the Security Agreement and to the
amendment of their respective Note Agreements effected thereby.
(p) Notwithstanding Section 8.4 of the Credit Agreement and Section
6.1(d) of the Note Agreements, the Significant Domestic Subsidiaries may execute
and deliver guaranties of the Benefited Obligations outstanding to the Lenders
and the Noteholders, provided that concurrently with the giving of any such
guaranty, each Lender and each Noteholder shall have the benefit of equal and
ratable guaranties given by such Significant Domestic Subsidiaries on
substantially similar terms. For avoidance of doubt with respect to Section
6.1(d) of the Note Agreements the debt of a Significant Domestic Subsidiary that
is attributable to any guaranty by such Significant Domestic Subsidiary which
complies with this Section 11(p) shall be excluded from the definition of "Total
Restricted Subsidiary Debt" (as defined in the Note Agreements); and with
respect to Section 8.4 of the Credit Agreement, any guaranty which complies with
this Section 11(p) shall be deemed to be permitted under Section 8.4 of the
Credit Agreement. The Noteholders and the Lenders, respectively, hereby consent
and agree (and by its execution of the Acknowledgment and Agreement set forth
below, the Company consents and agrees) to the provisions of this Section 11(p)
and to the amendment of their respective Note Agreements and the Credit
Agreement, as applicable, effected thereby.
In WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed as of the date and year first written above.
COMERICA BANK, as Collateral Agent
By: /S/ Michael P. Stapleton
----------------------------------
Its: Vice President
LENDERS:
COMERICA BANK, as a Lender
By: /S/ Michael P. Stapletoton
----------------------------------
Its: Vice President
<PAGE> 29
NATIONSBANK, N.A.
By: /S/ Elizabeth Kurilecz
----------------------------------
Its: Senior Vice President
---------------------------------
<PAGE> 30
THE BANK OF NOVA SCOTIA
By: /S/ F.C.H. Ashby
----------------------------------
Its: Senior Manager Loan Operations
---------------------------------
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 31
HARRIS TRUST AND SAVINGS BANK
By: /S/ Michael Cameli
----------------------------------
Its: Vice President
---------------------------------
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 32
LASALLE NATIONAL BANK
By: /S/ Lisa Mun
----------------------------------
Its: Assistant Vice President
--------------------------------
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 33
GREEN TREE FINANCIAL SERVICING
CORPORATION
By: /S/ C. A. Gouskos
----------------------------------
Its: Sr. Vice President
--------------------------------
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 34
NATIONAL CITY BANK OF MINNEAPOLIS
By: /S/ Steven R. Berglund
----------------------------------
Its: Assistant Vice President
---------------------------------
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 35
ALLSTATE LIFE INSURANCE CO.
By: /S/ Patricia W. Wilson
---------------------------------
Name: Patricia W. Wilson
Title: Authorized Signatory
By: /S/ Ronald A. Mendel
---------------------------------
Name: Ronald A. Mendel
Title: Authorized Signatory
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 36
THE OHIO CASUALTY INSURANCE COMPANY
By: /S/ Barry S. Porter
----------------------------------
Name: Barry S. Porter
Title: CFO/Treasurer
THE OHIO LIFE INSURANCE COMPANY
By: /S/ Barry S. Porter
----------------------------------
Name: Barry S. Porter
Title: CFO/Treasurer
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 37
WILLIAM BLAIR & COMPANY, LLC
By William Blair & Company, LLC,
Attorney-in-Fact
By: /S/ James D. McKinney
----------------------------------
Name: James D. McKinney
Title: Principal and Manager
(Fixed Income)
[SIGNATURE PAGE TO INTERCREDITOR AGREEMENT]
<PAGE> 38
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY
BY CIGNA INVESTMENTS, INC.
By: /S/ James R. Kuzemchak
----------------------------------
Name: James R. Kuzemchak
Title: Managing Director
CONNECTICUT GENERAL LIFE INSURANCE
COMPANY,
ON BEHALF OF ONE OR MORE SEPARATE
ACCOUNTS BY CIGNA INVESTMENTS, INC.
By: /S/ James R. Kuzemchak
----------------------------------
Name: James R. Kuzemchak
Title: Managing Director
2
<PAGE> 39
WESTERN FARM BUREAU LIFE INSURANCE
COMPANY
By: /S/ Robert J. Rummelhart
----------------------------------
Name: Robert J. Rummelhart
Title: Fixed Income-Vice
President
FARM BUREAU LIFE INSURANCE COMPANY
By: /S/ Robert J. Rummelhart
----------------------------------
Name: Robert J. Rummelhart
Title: Fixed Income-Vice
President
3
<PAGE> 40
WASHINGTON NATIONAL INSURANCE COMPANY
By: /S/ Robert L. Cook
----------------------------------
Name: Robert L. Cook
Title: Second Vice President
4
<PAGE> 41
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR CENTRAL STATES HEALTH &
LIFE COMPANY OF OMAHA
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR THE CHARLES SCHWAB TRUST
COMPANY FBO GUARANTY INCOME LIFE
INSURANCE COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR AMERICAN COMMUNITY
MUTUAL INSURANCE
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR CENTRALRE CORP. &
PHOENIX
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
5
<PAGE> 42
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR LONE STAR LIFE INSURANCE
COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR OZARK NATIONAL LIFE
INSURANCE COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR CSA FRATERNAL LIFE
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR KANAWHA INSURANCE
COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
6
<PAGE> 43
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR OLD GUARD MUTUAL
INSURANCE COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
7
<PAGE> 44
COMBINED INSURANCE COMPANY OF AMERICA
BY: AON ADVISORS, INC.
By: /S/ Keith Lemmer
---------------------------------
Name: Keith Lemmer
Title: Senior Portfolio
Manager
8
<PAGE> 45
MASSACHUSETTS MUTUAL LIFE INSURANCE
COMPANY
By: /S/ Richard E. Spencer II
---------------------------------
Name: Richard E. Spencer II
Title: Managing Director
CM LIFE INSURANCE COMPANY
By: /S/ Richard E. Spencer II
---------------------------------
Name: Richard E. Spencer II
Title: Managing Director
9
<PAGE> 46
NATIONWIDE LIFE INSURANCE COMPANY
By: /S/ Mark W. Poeppelman
---------------------------------
Name: Mark W. Poeppelman
Title: Authorized Signature
10
<PAGE> 47
PAN AMERICAN LIFE INSURANCE COMPANY
By: /S/ F. Anderson Stone
---------------------------------
Name: F. Anderson Stone
Title: Vice President
Corporate Securities
11
<PAGE> 48
PHOENIX HOME LIFE MUTUAL INSURANCE
COMPANY
BY: PHOENIX INVESTMENT COUNSEL, INC.
By: /S/ Rosemary T. Strekel
---------------------------------
Name: Rosemary T. Strekel
Title: Senior Managing
Director
12
<PAGE> 49
SECURITY BENEFIT LIFE INSURANCE
COMPANY
By: /S/ Steven M. Bowser
---------------------------------
Name: Steven M. Bowser
Title: Second Vice President
13
<PAGE> 50
THE GUARDIAN LIFE INSURANCE COMPANY
OF AMERICA
By: /S/ Thomas M. Donohue
---------------------------------
Name: Thomas M. Donohue
Title: Vice President
14
<PAGE> 51
AMERICAN BANKERS INSURANCE COMPANY
OF FLORIDA
By: /S/ Gus Rodriguez
---------------------------------
Name: Gus Rodriguez
Title: Director of Investments
VOYAGER PROPERTY & CASUALTY INSURANCE
CO.
By: /S/ Gus Rodriguez
---------------------------------
Name: Gus Rodriguez
Title: Director of Investments
15
<PAGE> 52
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR AMERICAN PIONEER LIFE
INSURANCE COMPANY OF NEW YORK
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR AMERICAN PROGRESSIVE
LIFE AND HEALTH INSURANCE COMPANY OF
NEW YORK
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR FEDERATED RURAL ELECTRIC
INSURANCE CORP.
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR TOWER LIFE INSURANCE
COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
16
<PAGE> 53
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR PHYSICIANS LIFE
INSURANCE COMPANY VISTA 500
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR WORLD INSURANCE COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
ASSET ALLOCATION & MANAGEMENT COMPANY
AS AGENT FOR UNITED TEACHERS
ASSOCIATES INSURANCE COMPANY
By: /S/ Kathy Lange
---------------------------------
Name: Kathy Lange
Title:
17
<PAGE> 54
FARM BUREAU LIFE INSURANCE COMPANY
By: /S/ Robert J. Rummelhart
---------------------------------
Name: Robert J. Rummelhart
Title: Fixed Income - Vice
President
FARM BUREAU MUTUAL INSURANCE COMPANY
By: /S/ Robert J. Rummelhart
---------------------------------
Name: Robert J. Rummelhart
Title: Fixed Income - Vice
President
18
<PAGE> 55
GENERAL AMERICAN LIFE INSURANCE
COMPANY
By: Conning Asset Management Company
By: /S/ Laura R. Caro
---------------------------------
Name: Laura R. Caro
Title: Senior Vice President
19
<PAGE> 56
ACKNOWLEDGMENT AND AGREEMENT
CREDIT ACCEPTANCE CORPORATION, a Michigan corporation (the "Company"),
as the issuer of the Senior Notes and the Credit Notes and as the grantor of
collateral pursuant to the Security Documents, hereby acknowledges and agrees to
the foregoing terms and provisions contained in this Intercreditor Agreement. By
executing this Intercreditor Agreement, the Company agrees to be bound by the
provisions thereof as they relate to the relative rights of the Benefited
Parties as among such Benefited Parties; provided, however, that, except as
specifically provided herein, nothing in this Intercreditor Agreement shall
amend, modify, change or supersede the respective terms of the Financing
Agreements as between the Benefited Parties or any of them and any of the
Company or any Subsidiary. In the event of any conflict or inconsistency between
the terms of this Intercreditor Agreement and the other Financing Agreements,
the other Financing Agreements shall govern as between the Benefited Parties
thereto and the Company or any Subsidiary. The Company further agrees that,
subject to Sections 3(g), 7, 10(a) and 11, the terms of this Intercreditor
Agreement shall not give any of the Company or any Subsidiary any substantive
rights, or (except as expressly provided in this Intercreditor Agreement) impose
any duties or responsibilities, vis a vis any Benefited Party or the Collateral
Agent and that, subject to the aforesaid Sections, none of them shall use the
violation of this Intercreditor Agreement by any of the Parties hereto as a
defense to the enforcement by any Benefited Party under any Financing Agreement,
nor assert such violation as a counterclaim or basis for set-off or recoupment
against any of them. The Company further acknowledges and agrees that the scope
of the agency granted by this Intercreditor Agreement to the Collateral Agent
hereunder is strictly limited by this Intercreditor Agreement.
By its execution hereof, the Company further specifically acknowledges
the provisions of Sections 5 and 10 of this Intercreditor Agreement and agrees
that, in the event any Benefited Party receives any amounts with respect to its
Benefited Obligations and is required to share any such amounts with any other
Benefited Party pursuant to the terms of this Intercreditor Agreement, the
original claim of such Benefited Party against the Company or any Subsidiary
that was discharged by the original receipt of such amounts shall automatically
be reinstated to the extent of any amounts that are so required to be shared
with any other Benefited Party.
CREDIT ACCEPTANCE CORPORATION
By: /S/ Brett A. Roberts
--------------------------------
Title: Executive Vice President
& CFO
Date: December 15, 1998
20
<PAGE> 1
EXHIBIT 4 (g)(3)
EXECUTION COPY
DEED OF CHARGE,
dated 17 December, 1998,
between
CREDIT ACCEPTANCE CORPORATION,
as the Chargor,
and
COMERICA BANK,
as the Collateral Agent
MAYER, BROWN & PLATT
Bucklersbury House
3 Queen Victoria Street
London EC4N 8EL
<PAGE> 2
THIS DEED OF CHARGE is made on 17 December, 1998
BETWEEN:
(1) CREDIT ACCEPTANCE CORPORATION, a Michigan corporation (the "Chargor");
and
(2) COMERICA BANK, a bank organised and existing under the laws of
Michigan, as agent for the benefit of the Lenders, the Noteholders and
the Future Debt Holders (in such capacity, the "Collateral Agent").
WHEREAS:
(A) The Chargor, Comerica Bank and the other financial institutions
signatory thereto, each as "Banks" thereunder (and, in the case of
Comerica Bank, in its separate additional capacity as "Issuing Bank"
thereunder) (together with any Successor Lenders party thereto from
time to time, collectively the "Lenders"), entered into that certain
Second Amended and Restated Credit Agreement dated as of December 4,
1996, as amended by First Amendment and Consent dated as of June 4,
1997, Second Amendment dated as of December 12, 1997, Third Amendment
dated as of May 11, 1998 and Fourth Amendment dated as of July 30, 1998
by and among the Chargor, the financial institutions from time to time
parties thereto and Comerica Bank, as Agent (said credit agreement, as
further amended, restated or otherwise modified from time to time, the
"Existing Credit Agreement" and together with any Successor Credit
Agreement, the "Credit Agreement").
(B) The Chargor entered into the separate note purchase agreements with the
1994 Noteholders dated as of October 1, 1994 (collectively, as amended
by First Amendment to Note Purchase Agreement dated as of November 15,
1995, Second Amendment to Note Purchase Agreement dated as of August
29, 1996, Third Amendment to Note Purchase Agreement dated as of
December 12, 1997 and Fourth Amendment to Note Purchase Agreement dated
as of July 1, 1998, and as further amended, restated or otherwise
modified from time to time, the "1994 Note Agreements"), pursuant to
which the First Amended and Restated 9.12% Senior Notes due November 1,
2001 (collectively, as amended, restated or otherwise modified from
time to time, the "1994 Senior Notes") are outstanding.
(C) The Chargor entered into the separate note purchase agreements with the
1996 Noteholders dated as of August 1, 1996 (collectively, as amended
by First Amendment to Note Purchase Agreement dated as of December 12,
1997 and Second Amendment to Note Purchase Agreement dated as of July
1, 1998 and as further amended, restated or otherwise modified from
time to time, the "1996 Note Agreements"), pursuant to which the First
Amended and Restated 8.24% Senior Notes due July 1, 2001 (collectively,
as amended, restated or otherwise modified from time to time, the "1996
Senior Notes") are outstanding.
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(D) The Chargor entered into the separate note purchase agreements with the
1997 Noteholders dated as of March 25, 1997 (collectively, as amended
by the First Amendment to Note Purchase Agreement dated as of December
12, 1997 and the Second Amendment to Note Purchase Agreement dated as
of July 1, 1998, and as further amended, restated or otherwise modified
from time to time, the "1997 Note Agreements") pursuant to which the
First Amended and Restated 8.02% Senior Notes due October 1, 2001
(collectively, as amended, restated or otherwise modified from time to
time, the "1997 Senior Notes") are outstanding.
(E) Pursuant to Section 7.23 of the Existing Credit Agreement, the Lenders
have required that the Chargor grant (or cause to be granted) certain
liens and security interests to the Collateral Agent, as contractual
representative for the benefit of the Lenders, the Noteholders, and the
Future Debt Holders, all to secure the obligations of the Chargor under
the Credit Documents, the obligations of the Chargor under the
Noteholder Documents and the obligations of the Chargor under the
Future Debt Documents.
(F) The Lenders and the Noteholders have consented to the transactions
contemplated hereby and by the Security Documents, and the Lenders and
the Noteholders have agreed that the Chargor's obligations under the
Credit Agreement, the Note Agreements and the Future Debt Documents
shall be equally and ratably secured pursuant to this Deed and the
other Security Documents.
(G) The Chargor has directly and indirectly benefited and will directly and
indirectly benefit from the transactions evidenced by and contemplated
in the Credit Agreement, the Note Agreements and the Future Debt
Documents and has consented to the execution and delivery of that
certain Intercreditor Agreement among the Collateral Agent, the Lenders
(including Comerica Bank), the Noteholders and the Future Debt Holders,
dated as of 15 December 1998 (as amended from time to time according to
the terms thereof, the "Intercreditor Agreement").
(H) The Lenders, the Noteholders and the Collateral Agent have entered into
the Intercreditor Agreement to define the rights, duties, authority and
responsibilities of the Collateral Agent, acting on behalf of such
parties regarding the Charged Property (as defined below), and the
relationship among the parties regarding their equal and ratable
interests in the Charged Property.
NOW THIS DEED WITNESSETH AND IT IS HEREBY AGREED as follows:
1. DEFINED TERMS; INTERPRETATION
(a) In this Deed, unless the context otherwise requires, the
following expressions shall have the following meanings:
"Charged Property" means all the assets, property and rights charged to
the Collateral Agent by the Chargor pursuant to Section 3 of this Deed;
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"Chargor" is defined in the preamble;
"Collateral Agent" is defined in the preamble;
"Deed" means this Deed of Charge, as amended, modified or supplemented
from time to time;
"Initial Shares" is defined in Section 3.1(a);
"Issuer" means Credit Acceptance Corporation UK Limited, a company
organised and existing under the laws of England;
"Lien" means any mortgage, charge, pledge, hypothecation, assignment by
way of security, deposit agreement, encumbrance, lien (statutory or otherwise),
title retention, finance lease, factoring or discounting of debts or other
security interest on or over present or future assets of the Person concerned
securing any obligation of any Person or any other type of preferential or trust
arrangement having a similar effect, including any such security interest which
arises or is imposed by operation of law;
"Non-Charged Shares" means all those shares of the Issuer owned or at
any time and from time to time acquired by the Chargor which are not Shares
charged pursuant hereto;
"Percentage Limitation" means the lesser of (i) all of the shares of
the Issuer owned or at any time and from time to time acquired by the Chargor or
any of its Subsidiaries and (ii) sixty-five percent (65%) of the aggregate share
capital of the Issuer at any time or from time to time issued and outstanding
(determined in accordance with Section 956 of the Internal Revenue Code of the
United States of America, as amended from time to time);
"Receiver" means any one or more administrative receivers, receivers
and managers, administrators, liquidators or other insolvency officers appointed
in any jurisdiction or (if the Collateral Agent so specifies in the relevant
appointment) any such officers appointed by the Collateral Agent pursuant to
this Deed in respect of the Chargor or over all or any of the Charged Property;
"Rights" is defined in Section 14(b);
"Shares" is defined in Section 3(b);
"Transfer Form" means a stock transfer form or other appropriate
instrument of transfer executed by the Chargor as transferor and left undated
and with details of the transferee left blank but with details of the transferor
and the number and class of shares or securities completed.
(b) In this Deed:
(i) the parties hereto intend that this document shall
take effect as a deed;
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(ii) references to the "Chargor", the "Collateral
Agent", the "Issuer" and any other person referred to in this
Deed shall be construed so as to include their respective
successors and permitted transferees and assigns in accordance
with their respective interests;
(iii) capitalised terms used but not defined in this
Deed (including the preamble hereto) have the same meanings as
in the Intercreditor Agreement; and
(iv) this Deed is a Financing Agreement and shall be
interpreted and construed in accordance with the terms and
provisions of the Intercreditor Agreement.
2. COVENANT TO PAY
The Chargor covenants with the Collateral Agent that it will pay the
Benefited Obligations as and when the same fall due for payment.
3. CHARGING SECTION
As a continuing security for the payment and discharge of all Benefited
Obligations, the Chargor hereby charges and assigns, with full title guarantee,
in favour of the Collateral Agent (to the intent that the security hereby
created shall be a continuing security in favour of the Collateral Agent in its
capacity as such) the following property and rights, both present and future,
from time to time owned by the Chargor or in which the Chargor is from time to
time interested:
(a) by way of first fixed charge, all the shares described in
Schedule I hereto (the "Initial Shares"), all of the certificates
and/or instruments representing such shares and all cash,
distributions, dividends, rights, allotments, accretions, benefits and
other property at any time and from time to time received, receivable
or otherwise distributed in respect of or in exchange for any or all of
such shares (whether by way of conversion, redemption, bonus,
preference, option or otherwise);
(b) by way of first fixed charge, all additional shares of the
Issuer at any time and from time to time acquired by the Chargor
(collectively with the Initial Shares, the "Shares") in any manner
(provided that the aggregate percentage of the share capital of the
Issuer encumbered by any and all charges granted in favour of the
Collateral Agent by the Chargor or any of its Subsidiaries pursuant
hereto shall not at any time exceed the Percentage Limitation), all of
the certificates and/or instruments representing such additional
shares, and all cash, distributions, dividends, rights, allotments,
accretions, benefits and other property at any time and from time to
time received, receivable or otherwise distributed in respect of or in
exchange for any or all of such shares (whether by way of conversion,
redemption, bonus, preference, option or otherwise);
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<PAGE> 6
(c) by way of first fixed charge, all other property hereafter
delivered to the Collateral Agent in substitution for or in addition to
any of the foregoing, all certificates and instruments representing or
evidencing such property, and all cash, distributions, dividends,
rights, allotments, accretions, benefits and other property at any time
and from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all thereof (whether by way of
conversion, redemption, bonus, preference, option or otherwise); and
(d) by way of first fixed charge, all products and proceeds of
all of the foregoing.
The Collateral Agent shall hold the benefit of the covenants, charges
and other undertakings given by the Chargor pursuant to this Deed upon trust for
the Lenders, the Noteholders and the Future Debt Holders and the Collateral
Agent, provided that the sole obligations of the Collateral Agent and of any
Agent-Related Persons to the Lenders, the Noteholders and the Future Debt
Holders shall be those set out in the Intercreditor Agreement (including,
without limitation, Section 8 thereof) and neither the Collateral Agent nor any
Agent-Related Persons shall be deemed to be a fiduciary hereunder.
4. DELIVERY
The Chargor agrees to deliver to the Collateral Agent, forthwith upon
execution of this Deed (in connection with the Initial Shares) and from time to
time (in connection with any other Shares), all share certificates and documents
of title relating to the Shares together with Transfer Form(s) relating to all
such Shares and covenants with the Collateral Agent to deliver to it all other
share certificates, documents of title and Transfer Forms relating to the
Charged Property which may at any time come into the possession or control of
the Chargor; and prior to the delivery thereof to the Collateral Agent, the
Chargor will hold all such certificates, documents of title and Transfer Forms
on trust for the Collateral Agent.
5. REPRESENTATIONS AND WARRANTIES
The Chargor represents and warrants to the Collateral Agent on the date
of this Deed and shall be deemed to have represented and warranted on each date
when any Benefited Obligations is outstanding, in each case in the terms set out
below:
(a) the Chargor is (or at the time of any future delivery,
charge, assignment or transfer will be) the owner of the Charged
Property with full title guarantee thereto, free and clear of all
Liens, other than the security created hereunder;
(b) the charges and assignments constituted by this Deed
create a valid first ranking charge over and, as the case may be,
assignment of the Charged Property in favour of the Collateral Agent;
(c) all the Shares are (and all Shares which in the future
become subject to charge hereunder will be) duly authorised, validly
issued, fully paid, non-assessable and
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<PAGE> 7
not subject to any Lien or restriction on transfer imposed under the
constitutional documents of the Issuer or otherwise;
(d) the information contained in Schedule I hereto in
connection with the Initial Shares is true and accurate in all
respects; and
(e) the Chargor is not unable to pay its debts as they fall
due and is not otherwise insolvent.
6. NEGATIVE PLEDGE AND DISPOSAL RESTRICTIONS
During the continuance of the security constituted by this Deed, and
without prejudice to the provisions of the Intercreditor Agreement and the other
Financing Agreements, the Chargor will not (without the prior consent in writing
of the Collateral Agent):
(a) create or agree or attempt to create or permit to subsist
(in favour of any person other than the Collateral Agent) any Lien over
the whole or any part of the Charged Property or of the Non-Charged
Shares or agree (whether on a contingent basis or otherwise) to do so;
or
(b) (whether by a single transaction or a number of related or
unrelated transactions and whether at the same time or over a period of
time) sell, transfer, lease out, lend or otherwise dispose of or cease
to exercise direct control over all or any part of the Charged Property
or of the Non-Charged Shares or any interest therein or the right to
receive or to be paid the proceeds arising on the disposal of the same,
or agree or attempt to do so; or
(c) dispose of the equity of redemption in respect of all or
any part of the Charged Property or of the Non-Charged Shares; or
(d) except with the written consent of the Collateral Agent,
permit the Issuer to issue to any of the Chargor's other Subsidiaries
any shares in addition to or in substitution for the Shares or the
Non-Charged Shares unless, concurrently with each issuance thereof, any
and all such shares are charged in favour of the Collateral Agent
pursuant to a deed of charge substantially in the form of this Deed;
provided that the aggregate percentage of the share capital of the
Issuer required to be encumbered by any and all charges granted in
favour of the Collateral Agent by the Chargor or any of its
Subsidiaries pursuant hereto shall not exceed the Percentage
Limitation.
7. OTHER UNDERTAKINGS
(a) The Chargor will furnish the Collateral Agent with such
information concerning the Charged Property and the Non-Charged Shares
as the Collateral Agent may from time to time reasonably request, and
will permit the Collateral Agent from time to time during business
hours and on reasonable notice (or at any time without notice during
the existence of an Event of Default), to inspect, audit and make
copies of and
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<PAGE> 8
extracts from all records and all other papers in the possession of the
Chargor which pertain to the Charged Property and/or the Non-Charged
Shares.
(b) The Chargor will not do or cause or permit to be done
anything (including, without limitation, by way of any exercise of its
rights under Section 8) which may in any way depreciate, jeopardise or
otherwise prejudice the value to the Collateral Agent of the Charged
Property or the security constituted by this Deed; provided that, so
long as no Event of Default (both before and after giving effect
thereto) has occurred and is continuing, the Chargor may receive,
retain and dispose of any and all lawful dividends and cash
distributions payable in respect of the Charged Property; and further
provided that this undertaking will only relate to matters affecting
the Charged Property and no breach of this undertaking shall arise as a
result of any general deterioration in the financial condition of the
Issuer arising as a consequence of any action or omission of the
Chargor or the Issuer in relation to the business or assets of the
Issuer.
(c) The Chargor hereby declares and agrees that:
(i) this Deed shall be held by the Collateral Agent
as a continuing security and shall not be satisfied by any
intermediate payment or satisfaction of any part of the
Benefited Obligations and shall remain in full force and
effect until all Benefited Obligations have been
unconditionally and irrevocably paid and discharged in full to
the satisfaction of the Collateral Agent;
(ii) the Collateral Agent shall not be bound to
enforce any guarantee or security or proceed to take any other
steps against any other Person before enforcing this Deed; and
(iii) this Deed shall be in addition to, and not in
substitution for, any other rights which the Collateral Agent
or any Lender, Noteholder or Future Debt Holder may now or
hereafter have under or by virtue of any guarantee or security
or agreement or any Lien or by operation of law or under any
collateral or other security now or hereafter held by the
Collateral Agent or any Lender, Noteholder or Future Debt
Holder or to which the Collateral Agent or any Lender,
Noteholder or Future Debt Holder may be entitled.
(d) Any settlement or discharge under this Deed between the
Collateral Agent and the Chargor shall be conditional upon no security
or payment to the Collateral Agent or any Lender, Noteholder or Future
Debt Holder by the Chargor or any other Person being avoided or
set-aside or ordered to be refunded or reduced by virtue of any
provision or enactment relating to bankruptcy, insolvency,
administration or liquidation for the time being in force, and if such
condition is not satisfied (but without limiting the other rights of
the Collateral Agent or any Lender, Noteholder or Future Debt Holder
hereunder or under applicable law) such settlement or discharge shall
be of no effect and the security created by this Deed shall remain
and/or shall be reinstated in full force and effect as if such
settlement or discharge had not occurred and the Collateral Agent
shall, on behalf of the Lenders, the Noteholders and the Future Debt
Holders, be entitled to recover from
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<PAGE> 9
the Chargor on demand the value of the security or payment so avoided,
set-aside, refunded or reduced.
8. VOTING RIGHTS AND DIVIDENDS
(a) So long as no Event of Default (both before and after
giving effect thereto) has occurred and is continuing, the Chargor
shall, subject to clause (b) of Section 7, be entitled to exercise any
and all voting or consensual rights and powers attaching to the Charged
Property.
(b) So long as no Event of Default (both before and after
giving effect thereto) has occurred and is continuing, the Chargor
shall, subject to clause (b) of Section 7, be entitled to receive and
retain any and all lawful dividends and cash distributions payable in
respect of the Charged Property.
(c) Upon the occurrence of an Event of Default, and for so
long as the same shall be continuing, all rights, powers and
entitlements which the Chargor is entitled to exercise pursuant to
clause (a) or (b) will immediately be suspended until such Event of
Default shall no longer exist, and all such rights, powers and
entitlements will thereupon become vested in the Collateral Agent so
that the Collateral Agent has the sole and exclusive authority to
exercise such rights and powers and to receive such dividends and
distributions. All money and other property paid over to or received by
the Collateral Agent pursuant to this Section 8 will be retained by it
as additional Charged Property and applied in accordance with the
provisions of this Deed and the Intercreditor Agreement.
9. COMPLETION OF TRANSFER FORMS
(a) At any time on or following the occurrence of an Event of
Default so long as such Event of Default is continuing, the Collateral
Agent may complete the Transfer Forms delivered to it hereunder in
favour of itself as transferee or in favour of such other nominee as it
may select.
(b) At any time when any Charged Property is registered in or
transferred into the name of the Collateral Agent or its nominee,
neither the Collateral Agent nor such nominee will be under any duty to
ensure that any dividends or distributions relating to the Charged
Property are duly paid or received or to exercise, defend or take any
action with respect to any voting, consensual or other rights or powers
attaching to the Charged Property including rights which are by way of
bonus, preference, option, warrant or otherwise.
10. FURTHER ASSURANCES; POWER OF ATTORNEY
(a) The Chargor hereby undertakes with the Collateral Agent to
take such further acts, enter into such other instruments or documents
and otherwise perform such action as may be necessary or as the
Collateral Agent may otherwise reasonably request
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to more fully give effect to the security granted hereunder and any
other provision of this Deed.
(b) The Chargor hereby irrevocably and by way of security
appoints the Collateral Agent and each Receiver appointed hereunder and
each of their delegates severally as its attorney (with full power of
substitution and delegation) in its name and on its behalf and as its
act and deed to execute, seal and deliver and otherwise perfect and
complete and do any deed, agreement, instrument, Transfer Form or other
act or thing which the Chargor ought to execute and do under the terms
of this Deed or which may otherwise be required or deemed proper by the
Collateral Agent for the purposes of this Deed and the Chargor hereby
covenants to ratify and confirm all acts and things done by such
attorney. The power of attorney hereby granted is as regards the
Collateral Agent and its delegates (and as the Chargor hereby
acknowledges) granted irrevocably and for value as part of the security
constituted by this Deed to secure proprietary interests in and the
performance of obligations owed to the respective donees within the
meaning of the Power of Attorney Act 1971, and shall be exercisable
upon the occurrence and during the continuance of any Event of Default.
11. ENFORCEMENT
(a) The restrictions on the consolidation of mortgages imposed
by Section 93 of the Law of Property Act 1925 will not apply to this
Deed or any security granted pursuant to this Deed.
(b) Section 103 of the Law of Property Act 1925 will not apply
to this Deed, which shall immediately become enforceable and the power
of sale and other powers conferred by Section 101 of such Act (as
varied or extended by this Deed) will be immediately exercisable at any
time after an Event of Default has occurred.
(c) The powers conferred on mortgagees or receivers by the Law
of Property Act 1925 and under the Insolvency Act 1986 (as the case may
be) will apply to this Deed except insofar as they are expressly or
impliedly excluded and if there is any ambiguity or conflict between
the powers contained in such Acts and those contained in this Deed,
those contained in this Deed will prevail.
(d) At any time after the security constituted by this Deed
has become enforceable or if so requested by the Chargor, the
Collateral Agent may by writing under hand signed by any officer or
manager of the Collateral Agent appoint any person (or persons) to be a
Receiver of all or any part of the Charged Property.
(e) Any powers conferred upon mortgagees or chargees by the
Law of Property Act 1925 as hereby varied or extended and all or any
rights conferred by this Deed on a Receiver (whether expressly or
impliedly) may be exercised by the Collateral Agent without further
notice to the Chargor at any time after the security constituted by
this Deed has become enforceable and the Collateral Agent may exercise
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such rights and powers irrespective of whether it has taken possession
of or has appointed a Receiver in respect of the Charged Property.
(f) For the purpose of or pending the discharge of any of the
Benefited Obligations, the Collateral Agent may, subject to the terms
and conditions of the Intercreditor Agreement, convert any moneys
received, recovered or realised in any currency under this Deed
(including the proceeds of any previous conversion under this
paragraph) from their existing currency of denomination into any other
currency at such rate or rates of exchange and at such time as the
Collateral Agent thinks fit and shall effect such conversion in such a
manner as to minimise the number of currencies to be converted to the
extent reasonably practicable.
12. RECEIVER
(a) Any Receiver appointed hereunder will be the agent of the
Chargor and the Chargor will be solely responsible for his acts and
defaults and for his remuneration and will be liable on any contracts
entered into by him.
(b) Any Receiver appointed under this Deed will have power, in
addition to the powers conferred by the Law of Property Act 1925 and
Schedule 1 of the Insolvency Act 1986 (which are incorporated into this
Deed), and notwithstanding the liquidation of the Chargor, to take
possession, collect and get in all or any part of the Charged Property
and for that purpose to take any proceedings in the name of the Chargor
or otherwise, generally to manage the Charged Property, to make any
arrangement or enter into or cancel any contracts relating to the
Charged Property, to insure or increase insurance in respect of the
Charged Property, to exercise all voting or other rights attaching to
the Charged Property in such manner as he may think fit, to redeem any
prior liens, to appoint and discharge employees and professionals
appointed in relation to the protection of the Charged Property on such
terms as he may think fit, to prosecute, enforce and discontinue all
proceedings in the name of the Chargor in relation to the Charged
Property, and to do all such other acts and things (including, without
limitation, execution of all documents) as may be considered by the
Receiver to be conducive to any of the matters or powers set out above
and to use the name of the Chargor for such purposes.
(c) The Collateral Agent may by written notice from time to
time remove any Receiver and appoint a new Receiver in his place and
may from time to time fix the remuneration of any such Receiver.
(d) Sections 109(6) and (8) of the Law of Property Act 1925
will not apply to a Receiver appointed under this Deed.
(e) Any money recovered by the Collateral Agent or any
Receiver pursuant to this Deed may be kept by them in a separate
suspense account for so long and in such manner as they may think fit
prior to application in accordance with the terms of this Deed.
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(f) All monies received by the Collateral Agent or any
Receiver appointed hereunder shall be applied by it or him in the
following order:
(i) in payment of the costs, charges and expenses
incurred, and payments made, by the Collateral Agent and/or
any Receiver in connection with this Deed (including the
payment of any preferential debts);
(ii) in payment of remuneration to the Receiver at
such rates as may be agreed between him and the Collateral
Agent at or any time after his appointment;
(iii) in or towards satisfaction of the Benefited
Obligations (in such order (subject to the terms of the
Intercreditor Agreement) as the Collateral Agent shall
require); and
(iv) the surplus (if any) shall be paid to the
Chargor or other person entitled to it.
13. PROTECTION OF THIRD PARTIES
No purchaser from, or other person dealing with, the Collateral Agent
and/or any Receiver will be obliged or concerned to enquire whether the right of
the Collateral Agent or any Receiver to exercise any of the powers conferred by
this Deed has arisen or become exercisable or whether any of the Benefited
Obligations remains outstanding and the receipt of the Collateral Agent or any
Receiver shall be an absolute and complete discharge to any such purchaser and
will relieve such purchaser of any obligation to see to the application of any
monies paid to or by the direction of the Collateral Agent or any Receiver.
14. THE COLLATERAL AGENT'S REMEDIES
(a) The rights, powers and remedies provided in this Deed are
cumulative and are not, nor are they to be construed as, exclusive of
any rights, powers or remedies provided by law or otherwise.
(b) No failure on the part of the Collateral Agent or any
Agent-Related Persons to exercise, or delay on its part in exercising,
any of its rights, powers and remedies provided by this Deed or by law
(collectively the "Rights") shall operate as a waiver thereof, nor
shall any single or partial exercise of any of the Rights preclude any
further or other exercise of that one of the Rights concerned or the
exercise of any other of the Rights.
(c) The Chargor hereby agrees to indemnify the Collateral
Agent and any Agent-Related Persons against all losses, actions,
claims, costs, charges, expenses and liabilities incurred by the
Collateral Agent and any Agent-Related Persons (including any
substitute delegate attorney) in relation to this Deed or the Benefited
Obligations (including, without limitation, the costs, charges and
expenses incurred in the carrying
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into effect of this Deed or in the exercise of any of the rights,
remedies and powers conferred on the Collateral Agent hereby or in the
perfection or enforcement of the security constituted hereby or
pursuant hereto) or occasioned by any breach by the Chargor of any of
its covenants or obligations to the Collateral Agent and any Agent-
Related Persons under this Deed. The Chargor shall so indemnify the
Collateral Agent on demand.
15. THE COLLATERAL AGENT'S DISCRETION
(a) Subject to the terms and conditions of the Intercreditor
Agreement, any liberty or power which may be exercised or any
determination which may be made hereunder by the Collateral Agent may
be exercised or made in the reasonable discretion of the Collateral
Agent.
(b) A certificate by an officer of the Collateral Agent (i) as
to the amount for the time being due to the Collateral Agent or any
Lender, Noteholder or Future Debt Holder under any Financing Agreement
and (ii) as to any sums payable to the Collateral Agent or any Lender,
Noteholder or Future Debt Holder hereunder, shall (save in the case of
manifest error) be conclusive and binding upon the Chargor for all
purposes.
16. AMENDMENTS
No amendment or waiver of any provision of this Deed and no consent to
any departure by the Chargor therefrom shall in any event be effective unless
the same shall be in writing and signed or approved in writing by the Collateral
Agent in accordance with the provisions of the Intercreditor Agreement and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given. In the event of any conflict between this
Deed and the Intercreditor Agreement or any of the other Financing Agreements,
the provisions of the Intercreditor Agreement or the relevant Financing
Agreement shall prevail.
17. NOTICES
All notices and other communications provided to any party hereto in
connection with this Deed shall be in writing and the provisions of Section
11(a) of the Intercreditor Agreement are hereby incorporated into this Deed with
all necessary consequential changes.
18. RIGHTS AND REMEDIES CUMULATIVE; WAIVERS
(a) The rights and remedies of the Collateral Agent provided
in this Deed are cumulative and not exclusive of any rights or remedies
provided by law.
(b) A waiver given or consent granted by the Collateral Agent
under this Deed will be effective only if given in writing and then
only in the instance and for the purpose for which it is given.
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19. INVALIDITY OF ANY PROVISION
If any provision of this Deed is or becomes invalid, illegal or
unenforceable in any respect under any law, the validity, legality and
enforceability of the remaining provisions will not be affected or impaired in
any way.
20. ASSIGNMENT
The Collateral Agent may at any time assign or otherwise transfer all
or any part of its rights under this Deed in accordance with and subject to the
terms of the Intercreditor Agreement. The Chargor may not at any time assign or
otherwise transfer any of its rights or obligations under this Deed.
21. NOTICE OF SUBSEQUENT CHARGE
If the Collateral Agent receives notice of any subsequent Lien
affecting any part of the Charged Property, it may open a new account for the
Chargor in its books and if it does not do so then it will, as from the time of
receipt of such notice, automatically be treated as if all payments made to it
by the Chargor have been credited to a new account of the Chargor and not as
having been applied in reduction of the Benefited Obligations.
22. PERPETUITY PERIOD
For purposes of the Perpetuity and Accumulations Act 1964 the duration
period of any trust established pursuant to this Deed shall be eighty (80) years
from the date of this Deed.
23. NO WAIVER
The obligations of the Chargor contained in this Deed will not be
affected by any act, omission or circumstance which (save for this provision)
may operate so as to release or otherwise exonerate the Chargor from its
obligations hereunder or otherwise affect any such obligation, including:
(a) any time, indulgence or waiver granted to or composition
made with any obligor in respect of the Benefited Obligations or any
other person;
(b) the taking, variation, compromise, renewal or release of
or failure to enforce any rights, remedies or securities against or
granted by any obligor in respect of the Benefited Obligations or any
other person;
(c) any legal limitation, disability, incapacity or other
circumstance relating to any obligor in respect of the Benefited
Obligations or any other person or any variation of the terms of this
Deed or any other document (including the other Financing Agreements);
or
13
<PAGE> 15
(d) any other act, omission or circumstance which might
otherwise adversely affect any of the obligations of the Chargor
hereunder.
No failure or delay by the Collateral Agent or any Agent-Related
Persons in exercising any right, power or privilege under this Deed shall
operate as a waiver thereof nor shall any single or partial exercise of any
right, power or privilege preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
24. COUNTERPARTS
This Deed may be executed in any number of counterparts and all of such
counterparts taken together shall constitute one and the same instrument.
25. GOVERNING LAW AND SUBMISSION TO JURISDICTION
(a) LAW: This Deed and all matters and disputes relating
hereto shall be governed and construed in accordance with English law.
(b) JURISDICTION: The Chargor irrevocably agrees for the
benefit of the Collateral Agent that the courts of England shall have
exclusive jurisdiction to hear and determine any suit, action or
proceeding, and to settle any disputes, which may arise out of or in
connection with this Deed and, for such purposes, irrevocably submits
to the exclusive jurisdiction of such courts. The submission to the
courts of England referred to in the preceding sentence of this clause
(b) shall not limit the right of the Chargor to take proceedings in
connection with any agreement relating to the Benefited Obligations to
which it is a party and which is not governed by English law in any
other court of competent jurisdiction.
(c) FORUM: The Chargor irrevocably waives any objection which
it might now or hereafter have to the courts referred to in clause (b)
being nominated as the forum to hear and determine any suit, action or
proceeding, and to settle any disputes, which may arise out of or in
connection with this Deed and agrees not to claim that any such court
is not a convenient or appropriate forum.
(d) NON-EXCLUSIVE: The submission to the jurisdiction of the
courts referred to in clause (b) shall not (and shall not be construed
so as to) limit the right of the Collateral Agent to take proceedings
against the Chargor in any other court of competent jurisdiction nor
shall the taking of proceedings in any one or more jurisdictions
preclude the taking of proceedings in any other jurisdiction, whether
concurrently or not.
(e) PROCESS AGENT: The Chargor agrees that the process by
which any suit, action or proceeding is begun may be served on it by
being delivered in connection with any suit, action or proceeding in
England, to it at c/o Credit Acceptance Corporation UK Limited, Burfree
House, Teville Road, Worthing, West Sussex BN11 1UG, England, or, if
different, the principal place of business of Credit Acceptance
Corporation UK Limited in England for the time being.
14
<PAGE> 16
(f) WAIVER OF IMMUNITY: To the extent that the Chargor may be
entitled in any jurisdiction to claim for itself or its assets,
immunity from suit, execution, attachment or other legal process
whatsoever, it hereby irrevocably agrees not to claim and hereby
irrevocably waives such immunity to the fullest extent permitted by the
laws of such jurisdiction.
15
<PAGE> 17
IN WITNESS whereof the parties hereto have caused this Deed to be duly
executed, sealed where appropriate, and delivered as at the day and year first
before written.
THE CHARGOR )
)
SIGNED AND SEALED )
as a DEED ) /S/ Brett A. Roberts
for and on behalf of )
CREDIT ACCEPTANCE )
CORPORATION )
THE COLLATERAL AGENT )
)
SIGNED as a DEED )
for and on behalf of )
COMERICA BANK, as Collateral ) /S/ Michael P. Stapleton
Agent for and on behalf of )
the Lenders, the Noteholders and )
the Future Debt Holders )
ACKNOWLEDGED this 17th day of December 1998
for and on behalf of )
CREDIT ACCEPTANCE ) /S/ Brett A. Roberts
CORPORATION UK LIMITED )
16
<PAGE> 18
SCHEDULE I
<TABLE>
<CAPTION>
Charged Shares as % Total Shares
Share No. of of Total Shares of Issues
Issuer Certificate No. Charged Shares Issued and Outstanding Outstanding
- ------ --------------- -------------- ---------------------- -----------
<S> <C> <C> <C> <C>
Credit Acceptance 4 130 Shares 65% 200 Shares
Corporation UK Limited
</TABLE>
17
<PAGE> 1
EXHIBIT 21(1)
The following is a list of subsidiaries as of the date of this filing of Credit
Acceptance Corporation, other than subsidiaries which, considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary,
as defined by the Securities and Exchange Commission Regulation S-X.
Buyers Vehicle Protection Plan, Inc.
Credit Acceptance Corporation Life Insurance Company
Credit Acceptance Corporation UK Limited
CAC of Canada Limited
Credit Acceptance Corporation Ireland Limited
CAC Leasing, Inc.
CAC Reinsurance, Ltd.
Montana Investment Group, Inc.
Vehicle Remarketing Services, Inc.
CAC Funding Corp.
Arlington Investment Company
<PAGE> 1
EXHIBIT 23(1)
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement of
Credit Acceptance Corporation on Forms S-3 (File Nos. 33-75246 (as amended) and
333-18301) and Forms S-8 (File Nos. 33-64876 and 33-80339) of our report dated
January 27, 1999, appearing in the Annual Report on Form 10-K of Credit
Acceptance Corporation for the year ended December 31, 1998.
DELOITTE & TOUCHE
Detroit, Michigan
March 30, 1999
<PAGE> 1
EXHIBIT 23(2)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated February 2, 1998 included in this Annual Report on Form 10-K of
Credit Acceptance Corporation for the year ended December 31, 1998, into Credit
Acceptance Corporation's previously filed Registration Statement on Forms S-3
(File Nos. 33-75246 (as amended) and 333-18301) and Forms S-8 (File Nos.
33-64876 and 33-80339). It should be noted that we have not audited any
financial statements of Credit Acceptance Corporation subsequent to December 31,
1997 or performed any audit procedures subsequent to the date of our report.
ARTHUR ANDERSEN LLP
Detroit, Michigan
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 13,775
<SECURITIES> 10,191
<RECEIVABLES> 671,768
<ALLOWANCES> 7,075
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 30,444
<DEPRECIATION> 9,817
<TOTAL-ASSETS> 751,929
<CURRENT-LIABILITIES> 0
<BONDS> 139,731
0
0
<COMMON> 463
<OTHER-SE> 275,800
<TOTAL-LIABILITY-AND-EQUITY> 751,929
<SALES> 0
<TOTAL-REVENUES> 142,349
<CGS> 0
<TOTAL-COSTS> 59,004
<OTHER-EXPENSES> 3,734
<LOSS-PROVISION> 16,405
<INTEREST-EXPENSE> 25,565
<INCOME-PRETAX> 37,525
<INCOME-TAX> 12,599
<INCOME-CONTINUING> 24,966
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,966
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
