<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------ ------
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1999511
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/. No / /.
Indicate the number of shares outstanding of each of the issuer's class
of common stock, as of the latest practicable date.
The number of shares outstanding of Common Stock, par value $.01, on
November 10, 2000 was 42,511,587.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. -- FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets --
As of December 31, 1999 and September 30, 2000............................................ 1
Consolidated Income Statements --
Three and nine months ended September 30, 1999 and September 30, 2000..................... 2
Consolidated Statements of Cash Flows --
Nine months ended September 30, 1999 and September 30, 2000............................... 3
Consolidated Statement of Shareholders' Equity --
Nine months ended September 30, 2000...................................................... 4
Notes to Consolidated Financial Statements...................................................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................................................................... 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS..................................... 14
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................................................... 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 16
SIGNATURES ................................................................................................... 17
INDEX OF EXHIBITS............................................................................................. 18
EXHIBITS...................................................................................................... 19
</TABLE>
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PART I. -- FINANCIAL INFORMATION
ITEM 1. -- FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
----------------------------------------
(Dollars in thousands) December 31, 1999 September 30, 2000
----------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Cash and cash equivalents.......................................... $ 11,122 $ 14,007
Investments........................................................ 11,569 11,492
Installment contracts receivable................................... 570,529 571,463
Allowance for credit losses........................................ (4,742) (4,374)
------------- ------------
Installment contracts receivable, net.......................... 565,787 567,089
------------- ------------
Retained interest in securitization................................ 4,105 4,839
Floor plan receivables............................................. 15,492 10,995
Notes receivable................................................... 3,610 4,644
Property and equipment, net........................................ 18,243 18,053
Investment in operating leases, net................................ 9,115 38,995
Income taxes receivable............................................ 12,686 --
Other assets....................................................... 5,874 4,778
------------- ------------
TOTAL ASSETS............................................................ $ 657,603 $ 674,892
============= ============
LIABILITIES:
Senior notes....................................................... $ 30,579 $ 23,080
Lines of credit.................................................... 36,994 61,803
Mortgage loan payable to bank...................................... 8,215 7,751
Secured financing.................................................. 83,197 74,202
Income taxes payable............................................... -- 511
Accounts payable and accrued liabilities........................... 23,105 27,307
Deferred dealer enrollment fees, net............................... 595 1,297
Dealer holdbacks, net.............................................. 202,143 210,932
Deferred income taxes, net......................................... 9,800 9,821
------------- ------------
TOTAL LIABILITIES....................................................... 394,628 416,704
------------- ------------
SHAREHOLDERS' EQUITY
Common stock....................................................... 461 428
Paid-in capital.................................................... 128,917 112,581
Retained earnings.................................................. 132,303 150,286
Accumulated other comprehensive income (loss) - cumulative
translation adjustment.......................................... 1,294 (5,107)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY.............................................. 262,975 258,188
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.............................. $ 657,603 $ 674,892
============= ============
</TABLE>
1
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CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ----------------------------
(Dollars in thousands, except per share data) 9/30/99 9/30/00 9/30/99 9/30/00
---------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
Finance charges............................. $ 18,753 $ 20,206 $ 57,901 $ 60,505
Lease revenue............................... 377 3,870 456 8,917
Premiums earned............................. 3,034 1,951 7,810 6,986
Other income................................ 5,759 5,147 21,625 15,441
----------- ----------- ----------- -----------
Total revenue........................... 27,923 31,174 87,792 91,849
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses.......................... 12,445 12,471 41,411 38,196
Provision for credit losses................. 49,590 3,074 53,820 8,097
Provision for claims........................ 884 604 2,609 2,096
Depreciation of leased vehicles............. 142 1,679 176 3,525
Valuation adjustment on retained interest
in securitization..................... 13,000 -- 13,517 --
Interest.................................... 3,673 4,119 12,472 12,479
----------- ----------- ----------- -----------
Total costs and expenses................ 79,734 21,947 124,005 64,393
----------- ----------- ----------- -----------
Operating income (loss)................. (51,811) 9,227 (36,213) 27,456
------------ ----------- ----------- -----------
Gain on sale of subsidiary....................... -- -- 14,720 --
Foreign exchange gain (loss)..................... 62 (5) 8 (85)
----------- ------------ ----------- ------------
Income (loss) before provision for income taxes (51,749) 9,222 (21,485) 27,371
Provision (credit) for income taxes.............. (18,108) 3,118 (6,994) 9,388
------------ ------------- ------------ -----------
Net income (loss)................................ $ (33,641) $ 6,104 $ (14,491) $ 17,983
============= =========== ============ ===========
Net income (loss) per common share:
Basic....................................... $ (0.73) $ 0.14 $ (0.31) $ 0.41
============ =========== ============ ===========
Diluted..................................... $ (0.73) $ 0.14 $ (0.31) $ 0.40
============ =========== ============ ===========
Weighted average shares outstanding:
Basic....................................... 46,214,489 43,013,682 46,272,303 44,319,948
=========== =========== =========== ===========
Diluted..................................... 46,214,489 43,424,885 46,272,303 44,653,068
=========== =========== =========== ===========
</TABLE>
2
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CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Nine Months Ended
September 30,
-----------------------------------
1999 2000
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)................................................... $ (14,491) $ 17,983
Adjustments to reconcile net income to net cash
provided by operating activities --
Gain on sale of subsidiary................................. (14,720) --
Credit for deferred income taxes........................... (1,304) 21
Depreciation and amortization.............................. 3,159 2,891
Depreciation on operating lease vehicles................... 176 3,525
Amortization on deferred leasing costs..................... 33 990
Loss on retirement of property and equipment............... 42 --
Valuation adjustment on retained interest in securitization 13,517 --
Amortization on retained interest in securitization........ (1,544) (153)
Provision for credit losses................................ 53,820 8,097
Dealer stock option plan expense........................... 98 34
Change in operating assets and liabilities --
Accounts payable and accrued liabilities................. 4,814 4,202
Income taxes payable..................................... (776) 511
Income taxes receivable.................................. (14,308) 12,686
Lease payment receivable................................. 85 (2,183)
Deferred dealer enrollment fees, net..................... 102 702
Unearned insurance premiums, insurance reserves and fees. 200 (1,292)
Other assets............................................. 889 1,095
------------- -------------
Net cash provided by operating activities.............. 29,792 49,109
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on installment contracts receivable............. 242,923 235,934
Advances to dealers and payments of dealer holdbacks................ (219,821) (234,101)
Operating lease acquisitions........................................ (3,663) (31,560)
Operating lease liquidations........................................ -- 2,465
Proceeds from sale of subsidiary.................................... 16,147 --
Net purchases (sales) of investments held to maturity............... (948) 77
(Increase) decrease in floor plan receivables....................... (3,420) 4,497
Increase in notes receivable........................................ (749) (1,034)
Purchases of property and equipment................................. (3,799) (2,701)
Proceeds from sale of property and equipment........................ 349 --
Increase in deferred costs from lease acquisitions.................. (377) (4,848)
------------- -------------
Net cash provided by (used in) investing activities.... 26,642 (31,271)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under mortgage loan payable to bank..... 4,799 (464)
Net repayments (borrowings) under line of credit agreement.......... (75,664) 24,809
Repayments of senior notes.......................................... (32,124) (7,499)
Proceeds from secured financing..................................... 91,568 63,850
Repayment of secured financing...................................... (49,016) (72,845)
Repurchase of common stock.......................................... (1,429) (16,440)
Proceeds from stock options exercised............................... 374 37
------------- -------------
Net cash used in financing activities.................. (61,492) (8,552)
------------- -------------
Effect of exchange rate changes on cash................ (625) (6,401)
------------- -------------
NET (DECREASE) INCREASE IN CASH.......................................... (5,683) 2,885
Cash and cash equivalents -- beginning of period.................... 13,775 11,122
------------- -------------
Cash and cash equivalents -- end of period.......................... $ 8,092 $ 14,007
============= =============
</TABLE>
3
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CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands) Accumulated
Total Other
Shareholders' Comprehensive Common Paid In Retained Comprehensive
Equity Income Stock Capital Earnings Income (Loss)
------------- -------------- ---------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance -- December 31, 1999................. $ 262,975 $ 461 $ 128,917 $ 132,303 $ 1,294
Comprehensive income:
Net income.......................... 17,983 $ 17,983 17,983
----------
Other comprehensive income:
Foreign currency translation
adjustment....................... (6,401) (6,401) (6,401)
Tax on other comprehensive loss.... 2,240
----------
Other comprehensive loss........... (4,161)
----------
Total comprehensive income.............. $ 13,822
==========
Repurchase and retirement of common
stock............................ (16,440) (33) (16,407)
Stock options exercised................. 37 37
Dealer stock option plan expense........ 34 34
----------- --------- ----------- --------- -------------
Balance -- September 30, 2000................ $ 258,188 $ 428 $ 112,581 $ 150,286 $ (5,107)
=========== ========= =========== ========= =============
</TABLE>
4
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CREDIT ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in United
States of America (generally accepted accounting principles) for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. The results of operations for interim periods are not necessarily
indicative of actual results achieved for full fiscal years. The consolidated
balance sheet at December 31, 1999 has been derived from the audited financial
statements at that date but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Certain amounts in the 1999 financial statements have been
reclassified to conform to the 2000 presentation. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. NET INCOME PER SHARE
Basic net income per share amounts are based on the weighted average
number of common shares outstanding. For the three and nine month periods ended
September 30, 2000, diluted net income per share amounts are based on the
weighted average number of common shares and potentially dilutive securities
outstanding. Potentially dilutive securities included in the computation
represent shares issuable upon assumed exercise of stock options which would
have a dilutive effect. As the Company incurred a net loss for the three and
nine month periods ended September 30, 1999, common stock equivalents would be
anti-dilutive to earnings per share and have not been included in the diluted
weighted average shares outstanding.
3. BUSINESS SEGMENT INFORMATION
The Company operates in three reportable business segments: CAC North America,
CAC United Kingdom and CAC Automotive Leasing. Selected segment information is
set forth below (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------- -------------------------
9/30/99 9/30/00 9/30/99 9/30/00
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Total revenue:
CAC North America..................................... $ 22,509 $ 21,947 $ 69,469 $ 68,312
CAC United Kingdom.................................... 4,305 5,668 12,586 15,468
CAC Automotive Leasing................................ 169 3,559 233 8,069
Other ............................................. 940 -- 5,504 --
----------- ---------- ----------- -----------
$ 27,923 $ 31,174 $ 87,792 $ 91,849
=========== ========== =========== ===========
Earnings (loss) before interest and taxes:
CAC North America..................................... $ (47,509) $ 10,742 $ (12,835) $ 32,559
CAC United Kingdom.................................... (78) 2,499 3,978 6,209
CAC Automotive Leasing................................ (117) 100 (208) 1,082
Other................................................. (372) -- 52 --
----------- ---------- ----------- -----------
$ (48,076) $ 13,341 $ (9,013) $ 39,850
=========== ========== =========== ===========
Reconciliation of total earnings (loss) before interest
and taxes to consolidated income before provision (credit)
for income taxes:
Total income (loss) before interest and taxes......... $ (48,076) $ 13,341 $ (9,013) $ 39,850
Interest expense...................................... (3,673) (4,119) (12,472) (12,479)
------------ ----------- ------------ ------------
Consolidated income (loss) before provision (credit) for
income taxes.............................................. $ (51,749) $ 9,222 $ (21,485) $ 27,371
============ ========== ============ ===========
</TABLE>
5
<PAGE> 8
Included in the 1999 loss before interest and taxes for CAC North America is the
$14.7 million gain on sale of the Company's credit reporting subsidiary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 2000
TOTAL REVENUE. Total revenue consists of: i) finance charges on installment
contracts; ii) lease revenue on investments in operating leases; iii) premiums
earned on service contracts, credit life and collateral protection insurance
programs; and iv) other income, which consists primarily of fees earned on third
party service contract products, floor plan financing interest income and dealer
enrollment fees. During the nine months ended September 30, 1999, it also
consisted of revenue from the Company's credit reporting and auction services
subsidiaries which were sold on May 7, 1999 and December 15, 1999, respectively.
As a result of the following factors, total revenue increased from $27.9 million
and $87.8 million for the three and nine months ended September 30, 1999 to
$31.2 million and $91.8 for the same periods in 2000, representing increases of
11.6% and 4.6%, respectively.
Finance charges increased from $18.8 million and $57.9 million for the three and
nine months ended September 30, 1999 to $20.2 million and $60.5 million for the
same periods in 2000, representing increases of 7.7% and 4.5%, respectively.
These increases are primarily the result of the increases in the average
annualized yield on the Company's installment contract portfolio. The average
annualized yield on the Company's installment contract portfolio, calculated
using finance charge revenue divided by average installment contracts
receivable, was approximately 12.7% and 14.1% for the nine months ended
September 30, 1999 and 2000, respectively. The increase in the average yield is
primarily due to a decrease in the percentage of installment contracts which
were in non-accrual status. The percentage of installment contracts which were
in non-accrual status was 23.6% and 20.8 % as of September 30, 1999 and 2000,
respectively. The decrease in the non-accrual loans is primarily due to
improvements in credit quality of the Company's portfolio of installment
contracts.
The volume of contract originations for the Company's North American operations
decreased from $97.5 million for the three months ended September 30, 1999 to
$85.2 million for the same period in 2000 and increased from $317.5 million for
the nine months ended September 30, 1999 to $317.6 million for the same period
in 2000. The volume of contract originations for the Company's United Kingdom
operations increased from $40.9 million and $83.8 million for the three and nine
months ended September 30, 1999 to $43.1 million and $110.7 million for the same
periods in 2000.
Lease revenue represents income from the Company's automotive leasing business
unit which began operations in 1999. Income from operating lease assets is
recognized on a straight-line basis over the scheduled lease term. Lease revenue
increased from $377,000 and $456,000 for the three and nine months ended
September 30, 1999 to $3.9 million and $8.9 million for the same periods in
2000. These increases are the result of an increase in the dollar amount of the
Company's lease portfolio due to increases in lease originations for the
periods. Lease originations were $2.2 million and $3.7 million for the three and
nine months ended September 30, 1999 compared to $8.9 million and $31.6 million
for the same periods in 2000. The Company does not expect lease originations to
continue to grow at rates as high as experienced in prior periods.
Premiums earned decreased, from $3.0 million and $7.8 million for the three and
nine months ended September 30, 1999 to $2.0 million and $7.0 for the same
periods in 2000, representing decreases of 35.7% and 10.6%, respectively.
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 program are earned over the life of the contracts using
the pro rata and sum-of-digits methods. The decreases in premiums earned are
primarily due to a decrease in the penetration rate on the Company's service
contract and credit life insurance programs in the CAC North America segment, a
trend which the Company anticipates will reverse in future periods. To a lesser
extent, the decrease in penetration rates is the result of an increase in the
percentage of installment contract originations from the CAC United Kingdom
segment. This segment's service contract and credit life programs are commission
based and the revenue is included in other income.
6
<PAGE> 9
Other income decreased from $5.8 million and $21.6 million for the three and
nine months ended September 30, 1999 to $5.1 million and $15.4 million for the
same periods in 2000, representing decreases of 10.6% and 28.6%, respectively.
The decreases are primarily due to: i) the absence of revenues from the
Company's auction services subsidiary, which was sold on December 15, 1999; ii)
the decrease in servicing fees and interest earned on the retained interest in
the Company's July 1998 securitization of advance receivables; and iii) for the
nine month period, the decrease in other income is also due to the absence of
revenues from the Company's credit reporting subsidiary, which was sold on May
7, 1999.
OPERATING EXPENSES. Operating expenses, as a percent of total revenue, decreased
from 44.6% and 47.2% for the three and nine months ended September 30, 1999 to
40.0% and 41.6% for the same periods in 2000. Operating expenses consist of
salaries and wages, general and administrative, and sales and marketing
expenses.
The decreases, as a percent of revenue, are primarily due to decreases in
general and administrative expenses and salaries and wages. General and
administrative expenses and salaries and wages decreased primarily due to the
sale of the Company's auction service subsidiary in 1999; this subsidiary
required proportionately higher operating expenses than the Company's other
businesses. The decreases are partially offset by operating expenses from the
Company's automotive leasing business unit, which began operations in 1999.
For the nine month period, the decrease is also due to the sale of the Company's
credit reporting service subsidiary in 1999; this subsidiary required
proportionately higher operating expenses than the Company's other businesses.
To a lesser extent, the nine month period decrease in general and administrative
expenses is due to a decrease in legal fees resulting from a reduction in
further adverse developments in litigation against the Company (see Part II Item
1. Legal Proceedings).
The decreases in general and administrative and salaries and wages expenses are
also partially offset by an increase in sales and marketing expenses. These
expenses increased primarily due to increases in the Company's total sales force
and an increase in sales related travel expenses. For the nine month period,
this increase in sales and marketing expenses is partially offset by the sale of
the Company's credit reporting subsidiary in 1999.
PROVISION FOR CREDIT LOSSES. The provision for credit losses consists of three
components: i) a provision for losses on Advances to dealers that are not
expected to be recovered through collections on the related installment contract
receivable portfolio; ii) a provision for earned but unpaid revenue on
installment contracts which were transferred to non-accrual status during the
period; and iii) a provision for expected losses on the investment in operating
leases. The provision for credit losses decreased from $49.6 million and $53.8
million for the three and nine months ended September 30, 1999 to $ 3.1 million
and $ 8.1 million for the same periods in 2000, representing decreases of 93.8%
and 85.0%, respectively. The decreases are primarily due to higher provisions
needed in the third quarter of 1999 for losses on Advances to dealers with
respect to loan pools originated in 1995, 1996 and 1997. As such, the Company
recorded a pre-tax charge of $47.3 million during the third quarter of 1999. The
charge was necessary due to collections in affected loan pools falling below
estimates indicating further impairment of advance balances associated with
these pools. To a much lesser extent, the decreases are due to lower provisions
needed for earned but unpaid revenue primarily resulting from the decrease in
the percent of non-accrual installment contracts receivable.
The decreases are partially offset by an increase in the provision for losses
associated with the Company's investments in operating leases resulting
primarily from the significant increase in operating lease originations. To a
lesser extent, an increase in the provision was required to reflect increased
lease repossession rates and lower than originally estimated residual values.
While actual data on the realization of the Company's residual values will not
be available until June 2002, the Company continuously analyzes its residual
value levels based on the results of the early liquidation of residual values
relating to repossessed vehicles and current residual guidebook values.
The advance provision is based on management's analysis of loan performance
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. The amount provided, as
a percent of new contract originations, was 35.5% and 13.2% for the three and
nine months ended September 30, 1999 and 1.1% and 1.3% for the same periods in
2000. For the Company's North American operations, the amount provided, as a
percent of new contract originations, declined from 47.7% and 15.6% for the
three and nine months ended September 30, 1999 to 0.1% and 0.5% for the same
periods in 2000.
7
<PAGE> 10
For the Company's United Kingdom operations, the amount provided, as a percent
of new contract originations, declined from 6.5% and 4.2% for the three and nine
months ended September 30, 1999 to 3.2% and 3.4% for the same periods in 2000.
These decreases are due to continued improvements in the quality of business
originated, based on management's analysis.
PROVISION FOR CLAIMS. The amount provided for insurance and service contract
claims, as a percent of total revenue, decreased from 3.2% and 3.0% during the
three and nine months ended September 30, 1999 to 1.9% and 2.3% during the same
periods in 2000. These decreases correspond with decreases, as a percent of
total revenue, in premiums earned from 10.9% and 6.3% for the three and nine
months ended September 30, 1999 to 8.9% and 7.6% for the same periods in 2000.
The claims reserves are based on estimates of claims reported but unpaid plus
estimates of incurred but unreported claims. Based on such estimates, the amount
provided on a per contract basis for service contract claims was reduced during
the nine months ended September 30, 2000.
DEPRECIATION OF LEASED VEHICLES. Depreciation of leased vehicles is recorded on
a straight-line basis to the residual value of the vehicle over the scheduled
lease term. The depreciation expense recorded on leased vehicles increased from
$142,000 and $176,000 for the three and nine months ended September 30, 1999 to
$1.7 million and $3.5 million for the same periods in 2000. These increases are
the result of increases in lease originations during the respective periods.
VALUATION ADJUSTMENT ON RETAINED INTEREST IN SECURITIZATION. The Company
recorded a $13.0 million and $13.5 million valuation adjustment during the three
and nine months ended September 30, 1999, respectively, on the retained interest
in securitization related to the Company's July 1998 securitization. The
retained interest in securitization represents an accounting estimate based on
several variables including the amount and timing of collections on the
underlying installment contracts receivable, the amount and timing of projected
dealer holdback payments and interest costs. The Company regularly reviews the
actual performance of these variables against the collections on the installment
contracts underlying the securitized Advances and the resulting $13.0 million
write down in the third quarter of 1999. The Company continues to assess the
performance of the 1998 securitization and makes adjustments when necessary.
INTEREST EXPENSE. Interest expense, as a percent of total revenue, remained the
same at 13.2% for the three months ended September 30, 1999 and 2000 and
decreased from 14.2% for the nine months ended September 30, 1999 to 13.6% for
the same period in 2000. The decrease in interest expense is primarily the
result of a decrease in the amount of average outstanding borrowings, which
resulted from the positive cash flow generated from: i) collections on
installment contracts receivable exceeding cash Advances to dealers and payments
of dealer holdbacks; ii) proceeds from the sale of the Company's credit
reporting services subsidiary; and iii) a reduction in federal tax payments as a
result of the taxable loss in 1999. The decreases were partially offset by
higher average interest rates. The weighted average interest rate increased from
8.79% and 8.93% for the three and nine months ended September 30, 1999 to 9.66%
and 10.20% for the same periods in 2000. The increases in the average interest
rates are the result of: i) the impact of fixed borrowing costs, such as
facility fees, up front fees and other costs on average interest rates when
average outstanding borrowings are decreasing; ii) an increase on December 1,
1999 and January 15, 2000 of 50 and 75 basis points, respectively, in the
interest rate on outstanding borrowings under the Company's senior notes
resulting from amendments to the note purchase agreements due to the $47.3
million pre-tax charge in the third quarter of 1999; and iii) an increase in the
average interest rate on the Company's line of credit due to higher average
Eurocurrency rates during the periods.
OPERATING INCOME (LOSS). As a result of the aforementioned factors, operating
income (loss) increased from ($51.8) million and ($36.2) million for the three
and nine months ended September 30, 1999 to $9.2 million and $27.4 million for
the same periods in 2000, representing increases of 117.8% and 175.8%,
respectively.
GAIN ON SALE OF SUBSIDIARY. The Company recorded a pre-tax gain of $14.7 million
during the nine months ended September 30, 1999 from the sale of the Company's
credit reporting services subsidiary. The net proceeds from the sale were used
to reduce outstanding indebtedness under the Company's credit facility.
FOREIGN EXCHANGE GAIN (LOSS). The Company incurred foreign exchange gains of
$62,000 and $8,000 for the three and nine months ended September 30, 1999 and
foreign exchange losses of ($5,000) and ($85,000) for the same periods in 2000.
The gains and losses result from the effect of exchange rate fluctuations
between the U.S. dollar and foreign currencies on unhedged intercompany balances
between the Company and its foreign subsidiaries.
8
<PAGE> 11
PROVISION (CREDIT) FOR INCOME TAXES. The provision (credit) for income taxes
increased from ($18.1) million and ($7.0) million during the three and nine
months ended September 30, 1999 to $3.1 million and $9.4 million during the same
periods in 2000. The increases are due to a higher level of pre-tax income in
2000, primarily resulting from the $47.3 million pre-tax charge in the third
quarter of 1999. For the nine months ended September 30, the effective tax rate
(credit) was ( 32.6%) in 1999 and 34.3 % in 2000. A reconciliation of U.S.
Federal statutory rate (credit) to the Company's effective tax rate (credit)
were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
09/30/99 9/30/00
-------------- ------------
<S> <C> <C>
U.S. federal statutory rate (credit)...................................... (35.0%) 35.0%
State income taxes..................................................... (2.9) (0.1)
Foreign income taxes................................................... 0.6 (0.6)
Other.................................................................. (0.1) --
---------- ----------
Provision (credit) for income taxes....................................... (32.6%) 34.3%
=========== ==========
</TABLE>
INSTALLMENT CONTRACTS RECEIVABLE
The following table summarizes the composition of installment contracts
receivable at the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
As of
----------------------------------------
December 31, 1999 September 30, 2000
----------------- ------------------
<S> <C> <C>
Gross installment contracts receivable................................ $ 679,247 $ 680,972
Unearned finance charges.............................................. (99,174) (101,257)
Unearned insurance premiums, insurance reserves, and fees............. (9,544) (8,252)
-------------- ----------------
Installment contracts receivable...................................... $ 570,529 $ 571,463
============== ================
</TABLE>
A summary of changes in gross installment contracts receivable
is as follows (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
9/30/99 9/30/00 9/30/99 9/30/00
-------------- ---------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance -- beginning of period.................... $ 694,071 $ 686,551 $ 794,831 $ 679,247
Gross amount of installment contracts accepted.... 138,365 128,313 401,338 428,260
Cash collections on installment contracts
receivable..................................... (99,063) (97,248) (315,047) (302,206)
Charge offs....................................... (55,874) (32,570) (195,155) (109,072)
Currency translation.............................. 5,525 (4,074) (2,943) (15,257)
------------ ------------- ------------- -------------
Balance -- end of period.......................... $ 683,024 $ 680,972 $ 683,024 $ 680,972
============ ============ ============ ============
</TABLE>
9
<PAGE> 12
INVESTMENT IN OPERATING LEASES
The following table summarizes the composition of investment in operating
leases, net (dollars in thousands):
<TABLE>
<CAPTION>
As of
----------------------------------------
December 31, 1999 September 30, 2000
----------------- ------------------
<S> <C> <C>
(Unaudited)
Gross leased vehicles................................................ $ 8,442 $ 36,952
Accumulated depreciation............................................. (453) (3,613)
Gross deferred costs................................................. 1,061 5,489
Accumulated amortization of deferred costs........................... (108) (1,002)
Lease payments receivable............................................ 264 2,446
------------- -------------
Investment in operating leases....................................... 9,206 40,272
Less: Allowance for lease vehicle losses............................ (91) (1,277)
------------- -------------
Investment in operating leases, net.................................. $ 9,115 $ 38,995
============= =============
</TABLE>
A summary of changes in gross leased vehicles is as follows (dollars in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------- ------------------------------
9/30/99 9/30/00 9/30/99 9/30/00
-------------- -------------- ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Balance -- beginning of period................... $ 1,430 $ 30,178 $ -- $ 8,443
Gross operating leases originated................ 2,244 8,853 3,674 31,560
Operating lease liquidations..................... -- (2,079) -- (3,051)
------------ ------------ ------------ ------------
Balance -- end of period......................... $ 3,674 $ 36,952 $ 3,674 $ 36,952
============ ============ ============ ============
</TABLE>
DEALER HOLDBACKS
The following table summarizes the composition of dealer holdbacks at
the dates indicated (dollars in thousands):
<TABLE>
<CAPTION>
As of
-----------------------------------------
December 31, 1999 September 30, 2000
------------------- ------------------
(Unaudited)
<S> <C> <C>
Dealer holdbacks.................................................. $ 540,799 $ 541,663
Less: Advances (net of reserves of $4,329 and $6,605 at
December 31, 1999 and September 30, 2000 respectively).... (338,656) (330,731)
------------- -------------
Dealer holdbacks, net............................................. $ 202,143 $ 210,932
============ =============
</TABLE>
CREDIT POLICY AND EXPERIENCE
When an installment contract is assigned to the Company by a
participating dealer, the Company generally pays a cash advance to the dealer.
The Company maintains a reserve against Advances to dealers that are not
expected to be recovered through collections on the related installment contract
portfolio. For purposes of establishing the reserve, future collections are
reduced to present-value in order to achieve a level yield over the remaining
term of the advance equal to the expected yield at the origination of the
impaired advance. The Company's loan servicing system allows the Company to
estimate future collections for each dealer pool using historical loss
experience and a dealer by dealer static pool analysis. Future reserve
requirements will depend in part on the magnitude of the variance between
management's estimate of future collections and the actual collections that are
realized. The Company charges off dealer Advances against the reserve at such
time and to the extent that the Company's static pool analysis determines that
the advance is completely or partially impaired.
The Company maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against losses in the portfolio of
receivables. The risk of loss to the Company related to the installment
contracts receivable balances relates primarily to the earned but unpaid revenue
on installment contracts which were
10
<PAGE> 13
transferred to non-accrual status during the period. Servicing fees, which are
booked as finance charges, are recognized under the interest method of
accounting until the underlying obligation is 90 days past due on a recency
basis. At such time, the Company suspends the accrual of revenue and makes a
provision for credit losses equal to the earned but unpaid revenue. In all
cases, contracts on which no material payment has been received for nine months
are charged off against dealer holdbacks, unearned finance charges and the
allowance for credit losses.
The Company also maintains an allowance for lease vehicle losses which
consists of a reserve for residual losses on leased vehicles and a reserve for
earned but unpaid revenue on operating leases. The residual values represent
estimates of the values of the assets at the end of the lease contracts and are
initially recorded based on estimates. Realization of the residual values is
dependent on the Company's future ability to market the vehicles under then
prevailing market conditions. The unpaid revenue is fully reserved at 90 days
past due on a recency basis. Management reviews these reserves periodically to
determine that the allowance for lease vehicle losses is appropriate.
Ultimate losses may vary from current estimates and the amount of provision,
which is a current period expense, may be either greater or less than actual
charge offs.
The following tables set forth information relating to charge offs, the
allowance for credit losses, the reserve on Advances, and the allowance for
lease vehicle losses (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
9/30/99 9/30/00 9/30/99 9/30/00
------------ ------------ ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
CHARGE OFFS
Charged against dealer holdbacks.................. $ 44,779 $ 25,983 $ 156,312 $ 87,150
Charged against unearned finance charges.......... 10,309 5,959 35,781 20,374
Charged against allowance for credit losses....... 786 373 3,062 1,293
------------ ------------ ------------ ------------
Total contracts charged off....................... $ 55,874 $ 32,315 $ 195,155 $ 108,817
============ ============ ============ ============
Net charge offs against the reserve on Advances... $ 61,481 $ 2,463 $ 68,989 $ 3,041
============ ============ ============ ============
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
9/30/99 9/30/00 9/30/99 9/30/00
------------ ------------ ------------ -------------
(Unaudited) (Unaudited)
ALLOWANCE FOR CREDIT LOSSES
Balance -- beginning of period................... $ 5,114 $ 4,184 $ 7,075 $ 4,742
Provision for loan losses........................ 398 581 780 996
Charge offs...................................... (786) (373) (3,062) (1,293)
Currency translation............................. 39 (18) (28) (71)
------------ ------------ ----------- ------------
Balance -- end of period......................... $ 4,765 $ 4,374 $ 4,765 $ 4,374
============ ============ =========== ============
Three Months Ended Nine Months Ended
----------------------------- ----------------------------
9/30/99 9/30/00 9/30/99 9/30/00
------------- ------------- ------------ -------------
(Unaudited) (Unaudited)
RESERVE ON ADVANCES
Balance -- beginning of period................... $ 16,090 $ 7,695 $ 19,954 $ 4,329
Provision for advance losses..................... 49,167 1,452 53,005 5,370
Advance reserve fees............................. - - 8 -
Charge offs...................................... (61,481) (2,463) (68,989) (3,041)
Currency translation............................. 56 (79) (146) (53)
------------ ------------- ------------- -------------
Balance -- end of period......................... $ 3,832 $ 6,605 $ 3,832 $ 6,605
============ ============= ============ =============
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------
09/30/99 09/30/00 09/30/99 09/30/00
--------------- -------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
ALLOWANCE FOR LEASE
VEHICLE LOSSES
Balance -- beginning of period................... $ 10 $ 619 $ - $ 91
Provision for lease vehicle losses............... 25 1,041 35 1,731
Charge offs...................................... - (383) - (545)
------------ ------------ ------------ -----------
Balance, end of period........................... $ 35 $ 1,277 $ 35 $ 1,277
============ ============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
As of
----------------------------------------
December 31, 1999 September 30, 2000
----------------- ------------------
CREDIT RATIOS (Unaudited)
<S> <C> <C>
Allowance for credit losses as a percent of gross installment contracts
receivable............................................................ 0.7% 0.6%
Reserve on Advances as a percent of Advances............................. 1.3% 2.0%
Allowance for lease vehicle losses as a percent of investment in
operating leases......................................................... 1.0% 3.2%
Gross dealer holdbacks as a percent of gross installment contracts
receivable............................................................ 79.6% 79.5%
</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, for the
payment of dealer holdbacks to dealers who have repaid their advance balances
and to fund the origination of used vehicle leases. These cash outflows to
dealers increased from $219.8 million during the nine months ended September 30,
1999 to $234.1 million during the same period in 2000. These amounts have
historically been funded from cash collections on installment contracts, cash
provided by operating activities and borrowings under the Company's credit
agreements. The Company maintains a significant dealer holdback on installment
contracts accepted which assists the Company in funding its long-term cash flow
requirements. During the first nine months of 2000, the Company's total balance
sheet indebtedness increased from $159.0 million as of December 31, 1999 to
$166.8 million as of September 30, 2000.
The Company has a $115 million credit agreement with a commercial bank
syndicate. The facility has a commitment period through June 12, 2001 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, at the Company's discretion, the interest rate is payable at
either the Eurocurrency rate plus 140 basis points, or at the prime rate. The
Eurocurrency borrowings may be fixed for periods up to six months. The credit
agreement has certain restrictive covenants, including limits on the ratio of
the Company's debt to equity, debt to Advances, debt to installment contracts
receivable, Advances to installment contracts receivable, fixed charges to net
income, limits on the Company's investment in its foreign subsidiaries and
requirements that the Company maintain a specified minimum level of net worth.
Borrowings under the credit agreement are secured through a lien on most of the
Company's assets on an equal and ratable basis with the Company's senior notes.
As of September 30, 2000, there was approximately $59.8 million outstanding
under this facility.
On August 5, 1999, the Company's Board of Directors authorized a common
stock repurchase program of up to 1,000,000 shares of the Company's common
stock. On each of February 7, 2000, June 7, 2000, July 13, 2000 and November 10,
2000, the Company's Board of Directors authorized increases in the Company's
stock repurchase program of an additional 1,000,000 shares. As of September 30,
2000, the Company has repurchased approximately 3.5 million shares of the 5
million shares authorized to be repurchased under this program at a cost of
$18.0 million.
On August 8, 2000, the Company completed a secured financing of advance
receivables. Pursuant to this transaction, the Company contributed dealer
Advances having a carrying amount of approximately $82.4 million and received
approximately $63.9 million in financing, which is net of both the underwriter's
fees and the required escrow account, from an institutional investor. The money
received was used to reduce outstanding borrowings under the line of credit. The
financing, which is nonrecourse to the Company, bears interest at a floating
rate equal to the commercial paper rate
12
<PAGE> 15
plus 57.5 basis points with a maximum rate of 8.5% and is anticipated to fully
amortize within twenty months. The financing is secured by the contributed
dealer Advances, the rights to collections on the related installment contracts
receivable and certain related assets up to the sum of the contributed dealer
Advances and the Company's servicing fee. The Company will receive a monthly
servicing fee equal to 6% of the collections of the contributed installment
contracts receivable. Except for the servicing fee and payments due to dealers,
the Company will not receive any portion of collections on the installment
contracts receivable until the underlying indebtedness has been repaid in full.
The Company has $9.7 million of principal maturing on its senior notes in the
fourth quarter of 2000 which the Company expects to repay from cash generated
from operations and amounts available under its $115 million credit agreement.
The Company's short and long-term cash flow requirements are materially
dependent on future levels of originations. For the nine months ended September
30, 2000, the Company experienced an increase in originations over the same
period in 1999. The Company expects this trend to continue in future periods
and, to the extent this trend does continue, the Company will experience an
increase in its need for capital.
The Company is currently under examination by the Internal Revenue
Service for its tax years ended December 31, 1993, 1994 and 1995. The IRS has
identified and taken under advisement the tax treatment of certain items.
Although the Company is unable to quantify its potential liability from the
audit, the resolution of these items in a manner unfavorable to the Company may
have a material adverse effect on the Company's financial position, liquidity
and results of operations.
In connection with the audit, the IRS has issued a Technical Advice
Memorandum which would directly impact the timing of tax recognition of income
accrual with respect to certain items. The views expressed in the Memorandum are
contrary to the Company's tax accounting method for such items. The total amount
of exposure from this tax issue cannot be reasonably estimated due to the lack
of available information required for such estimation and due to the
uncertainties of computation, the methodology for which must be agreed upon by
the IRS. In the worst case, the application of the ruling to the Company's
financing activities could result in the recognition of taxable income with
respect to certain items exceeding the current net income reported for book
purposes. The Company has the right to appeal the ruling once issued, or may
challenge the positions of the IRS in court.
Based upon anticipated cash flows, management believes that amounts
available under its credit agreement, cash flow from operations and various
financing alternatives available will provide sufficient financing for current
debt maturities and for future operations. If the various financing alternatives
were to become limited or unavailable to the Company, the Company's operations
could be materially adversely affected.
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, 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 or leases accepted, the
Company's inability to accurately forecast and estimate future collections and
historical collection rates, the Company's inability to accurately estimate the
residual values of the lease vehicles and the Company's ability to complete
various financing alternatives.
13
<PAGE> 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 1999 for a complete discussion of the Company's market risk. There
have been no material changes to the market risk information included in the
Company's 1999 Annual Report on Form 10-K.
14
<PAGE> 17
PART II. -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As previously disclosed in the Company's 1999 Annual Report on Form
10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000
and June 30, 2000 during the first quarter of 1998, several putative class
action complaints were filed by shareholders against the Company and certain
officers and directors of the Company in the United States District Court for
the Eastern District of Michigan seeking money damages for alleged violations of
the federal securities laws. On August 14, 1998, a Consolidated Class Action
Complaint, consolidating the claims asserted in those cases, was filed. The
Complaint generally alleged that the Company's financial statements issued
during the period August 14, 1995 through October 22, 1997 did not accurately
reflect the Company's true financial condition and results of operations because
such reported results failed to be in accordance with generally accepted
accounting principles and such results contained material accounting
irregularities in that they failed to reflect adequate reserves for credit
losses. The Complaint further alleged that the Company issued public statements
during the alleged class period which fraudulently created the impression that
the Company's accounting practices were proper. On April 23, 1999, the Court
granted the Company's and the defendant officers' and directors' motion to
dismiss the Complaint and entered a final judgment dismissing the action with
prejudice. On May 6, 1999, plaintiffs filed a motion for reconsideration of the
order dismissing the Complaint or, in the alternative, for leave to file an
amended complaint. On July 13, 1999, the Court granted the plaintiffs' motion
for reconsideration and granted the plaintiffs leave to file an amended
complaint. Plaintiffs filed their First Amended Consolidated Class Action
Complaint on August 2, 1999. On September 30, 1999, the Company and the
defendant officers and directors filed a motion to dismiss that complaint. On or
about November 10, 1999, plaintiffs sought and were granted leave to file a
Second Amended Consolidated Class Action Complaint. A hearing on the defendants'
motion to dismiss the Second Amended Consolidated Class Action Complaint was
held on March 1, 2000 and on March 24, 2000 the Court granted the Company's and
the defendant officers' and directors' motion to dismiss the Second Amended
Consolidated Class Action Complaint and entered a final judgment dismissing the
action with prejudice. On April 7, 2000, plaintiffs filed a notice of appeal
from the District Court's judgment. On October 26, 2000, the parties reached an
agreement in principle to settle the action. The proposed settlement is subject
to entry into a formal Stipulation of Settlement, submission of the Stipulation
to the District Court following remand of the action from the Court of Appeals
for purposes of settlement only, and approval of the proposed settlement by the
District Court following notice to class members and a hearing. This proposed
settlement is not expected to have a material impact on the Company's financial
results.
15
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits following the signature page.
(b) Reports on Form 8-K
The Company was not required to file a current report on
Form 8-K during the quarter ended September 30, 2000 and
none were filed during that period.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT ACCEPTANCE CORPORATION
(Registrant)
/S/DOUGLAS W. BUSK
-----------------------------------
DOUGLAS W. BUSK
Treasurer and Chief Financial Officer
November 14, 2000
(Principal Financial Officer and Duly Authorized Officer)
/S/LINDA M. CARDINALE
-----------------------------------
LINDA M. CARDINALE
Vice President -- Accounting
November 14, 2000
(Principal Accounting Officer)
17
<PAGE> 20
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
4 (f) (11) Amendment No. 3 dated August 8, 2000 to Note Purchase
Agreement dated July 7, 1998 among Kitty Hawk Funding
Corporation, CAC Funding Corp. and NationsBank, N.A.
4 (f) (12) Amendment No. 3 dated August 8, 2000 to Contribution
Agreement dated July 7, 1998 between the Company and CAC
Funding Corp.
27 Financial Data Schedule
------------
