FOR IMMEDIATE RELEASE:
CREDIT ACCEPTANCE RELEASES ADDITIONAL INFORMATION TO SHAREHOLDERS RELATED TO
APRIL 11, 2005 PRESS RELEASE.
Southfield, Mich., April 12, 2005
(Primezone)-Brett Roberts, CEO of Credit Acceptance Corporation, addressed the
following letter to shareholders of Credit Acceptance Corporation (Nasdaq NM:
CACCE-News):
April 12, 2005
Dear Shareholders:
As we have disclosed in a separate press release, we are still working with our
auditors to finalize our 2004 Form 10-K. The primary purpose of this
communication is to provide shareholders with a plain English explanation of our
accounting. This explanation is also intended to help shareholders put our April
11, 2005 press release in context.
Our business is relatively simple to understand; we make auto loans. We are an
indirect lender, meaning our loans are originated by automobile dealers and
immediately assigned to us.
The compensation paid to the automobile dealer in exchange for the auto loan is
paid in two parts. A portion of the compensation is paid at the time of
origination, and a portion is paid based on the performance of the loan. The
amount paid at the time of origination is called an advance; the portion paid
over time is called dealer holdback.
From an economic perspective, the revenue generated from a loan equals the cash
collections from the loan, less the amount paid to the dealer (advance + dealer
holdback). In other words, the revenue equals the cash inflows from the loan,
less the cash outflows required to acquire the loan. This amount, plus a modest
amount of revenue from other sources, less our operating expenses, interest and
taxes is the sum that will ultimately be paid to shareholders or reinvested in
new assets.
The GAAP treatment that we have followed since 1992 is complex, being governed
by three revenue recognition policies and a credit loss policy with multiple
elements. One policy that significantly affects our earnings results requires us
to record an allowance for credit losses for any dealer-partner loan pool
carried on our GAAP financial statements at more than the present value of
future cash flows, but does not allow us to increase the value of pools carried
at less than the present value of future cash flows. Our historical GAAP
earnings have been also impacted by the following:
o The timing of recoveries, defined as reversals of previously recorded
losses due to cash collections received on charged-off loans.
o Revenue recognition policies related to finance charges, vehicle
service contracts, and insurance products.
o Changes in accounting policies as well as changes in estimates related
to loan collections or dealer holdback payments.
As a result of this complexity, we do not use GAAP accounting to run our
business. Instead, we have developed an alternative. This alternative was
reported to shareholders in our March 24, 2005 press release as "adjusted net
income".
To arrive at adjusted net income, we treat the revenue stream described above in
the most logical manner we can think of. We record the revenue stream, so that
the amount of revenue recorded in each period is consistent, as a percentage of
our investment in the loan, with our original expectation for each loan. Any
variance from our original expectation is recorded as a current period gain or
loss.
There is no need for a separate calculation of losses, as all loan cash flows
are already accounted for in our definition of revenue (collections less
advances less dealer holdback payments). The adjustment to our GAAP statements
required to arrive at adjusted net income is similar to a mark-to-market
adjustment. However, instead of marking to market, we are marking to the
estimated present value of future cash flows.
Mechanically, we compute the adjustment to our GAAP statements so that the
amount reflected in our balance sheet equals the discounted future cash flows
from loans receivable at the start and end of each period. This adjustment
effectively eliminates the combined impact of our GAAP loan accounting policies
and results in consistent and comparable treatment of our loan revenue over
time.
By this measure, 2004 was a very good year. We grew the business and increased
the profitability per loan. We cannot guarantee our future results will be as
good as 2004, but we can guarantee our results will be reported using this
method so that shareholders can clearly measure our performance.
With all this said, what should shareholders conclude from yesterday's press
release?
Our auditors, Deloitte and Touche, have informed us they believe our accounting
policies should change. I admit to being frustrated by the timing of their
decision, however shareholders can be assured that we are working hard to
resolve these issues.
The primary issue, and the reason we find ourselves in this position, is one I
have witnessed for fourteen years; our business does not fit neatly into the
GAAP framework. Furthermore, our current GAAP accounting, as we have presented
above, differs from our view of the economics of our business. These two
factors, in my opinion, have caused our auditors to change their position.
Regardless of the outcome of the review process with our auditors and the
Securities and Exchange Commission, we believe the Adjusted Economic Profit for
2003 and 2004 that we reported in our March 24 release is a fair representation
of our true economic performance over the past two years.
At the current time, it is not clear if our GAAP accounting will be changed, or
what it would look like if it were. I believe, over time, our GAAP accounting
will eventually be changed to mirror the accounting we use to run our business.
Although the focus today is on a literal interpretation of GAAP, I believe
shareholders will eventually demand a more common sense approach. Until then, we
will continue to do our best to accurately report both numbers.
Sincerely,
Brett A. Roberts, CEO
Credit Acceptance Corporation
This letter is not intended to be a solicitation of proxies. Shareholders of
Credit Acceptance Corporation are advised to read the proxy statement, when it
becomes available, because it will contain important information. The proxy
statement and any other relevant documents will be available, after they are
filed with the Securities and Exchange Commission, free of charge at the SEC's
website (www.sec.gov) or from the Company's investor relations website
(www.creditacceptance.com).
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
Certain statements in this release that are not historical facts, such as those
using terms like "believes," "expects," "anticipates," "assumptions,"
"forecasts," "estimates" and those regarding the Company's future results, plans
and objectives, are "forward-looking statements" within the meaning of the
federal securities laws. These forward-looking statements represent the
Company's outlook only as of the date of this release. While the Company
believes that its forward-looking statements are reasonable, actual results
could differ materially since the statements are based on current expectations,
which are subject to risks and uncertainties. Factors that might cause such a
difference include the following:
o the Company's potential inability to accurately forecast and estimate
the amount and timing of future collections,
o increased competition from traditional financing sources and from
non-traditional lenders,
o the unavailability of funding at competitive rates of interest,
o the Company's potential inability to continue to obtain third party
financing on favorable terms,
o the Company's potential inability to generate sufficient cash flow to
service its debt and fund its future operations,
o adverse changes in applicable laws and regulations,
o adverse changes in economic conditions,
o adverse changes in the automobile or finance industries or in the
non-prime consumer finance market,
o the Company's potential inability to maintain or increase the volume
of automobile loans,
o an increase in the amount or severity of litigation against the
Company,
o the loss of key management personnel or the inability to hire
qualified personnel,
o the effect of terrorist attacks and potential attacks, and
o various other factors discussed in the Company's reports filed with
the Securities and Exchange Commission.
Other factors not currently anticipated by management may also materially and
adversely affect the Company's results of operations. The Company does not
undertake, and expressly disclaims any obligation, to update or alter its
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.
Contact:
Credit Acceptance Corporation
Investor Relations:
Douglas W. Busk, Treasurer
(248) 353-2700 Ext. 4432
IR@creditacceptance.com