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UNITED STATES
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 THE FISCAL YEAR ENDED DECEMBER 31, 2004 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 (I.R.S. Employer Identification No.)
incorporation or organization)
25505 W. TWELVE MILE ROAD, SUITE 3000 48034-8339
SOUTHFIELD, MICHIGAN (Zip Code)
(Address of Principal Executive Offices)
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 [ ] No [X]
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of 9,896,178 shares of the Registrant's common stock
held by non-affiliates on June 30, 2004 was approximately $149.1 million. For
purposes of this computation all officers, directors and 10% 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 December 31, 2005, there were 37,027,286 shares of the Registrant's common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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1
CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2004
INDEX TO FORM 10-K
ITEM PAGE
- ---- ----
PART I
1. Business 4
2. Properties 13
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 14
6. Selected Financial Data 16
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 17
7A. Quantitative and Qualitative Disclosures About Market Risk 32
8. Financial Statements and Supplementary Data 33
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 75
9A. Controls and Procedures 76
PART III
10. Directors and Executive Officers of the Registrant 79
11. Executive Compensation 81
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 83
13. Certain Relationships and Related Transactions 84
14. Principal Accountant Fees and Services 85
PART IV
15. Exhibits and Financial Statement Schedules 86
2
EXPLANATORY NOTE
This Annual Report on Form 10-K for the year ended December 31, 2004 reflects
the restatement of Credit Acceptance's (the "Company") consolidated financial
statements for the years ended December 31, 2003, December 31, 2002, December
31, 2001 and December 31, 2000, as previously filed. In addition, the Company
has restated the consolidated financial statements for the year ended December
31, 2004 as reported in a March 24, 2005 press release announcing financial
results for the year ended, and the consolidated financial statements for the
quarters ended March 31, 2003, June 30, 2003, September 30, 2003, March 31,
2004, June 30, 2004, and September 30, 2004 as previously filed. Prior year
financial statements have been restated due to the following reasons: On April
1, 2005, the Company's former independent registered public accounting firm,
Deloitte & Touche LLP ("Deloitte"), informed the Company that Deloitte's
National Office was reviewing the Company's accounting for loans. On April 8,
2005, Deloitte informed the Company that it believed the Company should not
account for loans as an originator of loans to consumers but should instead
account for its loans as a lender to its dealer-partners. The Company had
accounted for its loans as a loan originator to consumers since 1992, and
believed such accounting was in accordance with generally accepted accounting
principles in the United States of America ("GAAP"). On April 26, 2005, the
Company submitted a letter to the staff of the Office of the Chief Accountant of
the Securities and Exchange Commission ("the SEC") requesting guidance.
On June 24, 2005, the SEC informed the Company that its method for recording
loans should be changed from that of an originator of consumer loans to that of
a servicer of loans generated by dealer-partners and a lender to those
dealer-partners. As a result of this determination, the Company was required to
restate its previously issued financial statements and reported financial
results.
In addition to the restatement for the new loan accounting methodology, the
Company's consolidated financial statements have been restated to correct income
taxes related primarily to its foreign subsidiaries. On March 10, 2005, the
Company disclosed that it had discovered errors related to accounting for income
taxes related primarily to its foreign operations during the 2004 year-end
closing process. The correction of these errors had no impact on pre-tax income.
Additionally, various adjustments have been made to income taxes in addition to
these corrections as a result of the change in loan accounting previously
discussed.
For additional information regarding the Company's restatement and new
accounting treatment for its loan portfolio, see Note 2 to the consolidated
financial statements, which is incorporated herein by reference.
The following items in the Company's 2004 10-K have been restated for prior
years as a result of the change in accounting methodology for loans and
correction of income taxes:
Part I - Item 1 - Business
Part II - Item 6 - Selected Financial Data
Part II - Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations
Part II - Item 8 - Financial Statements and Supplementary Data
This Annual Report on Form 10-K for the year ended December 31, 2004 should
be read in conjunction with the additional reports filed this same date. These
include the Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2005, the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2005, and the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2005.
PART I
3
ITEM 1. BUSINESS
GENERAL
Since 1972, Credit Acceptance (the "Company" or "Credit Acceptance") has
provided auto loans to consumers, regardless of their credit history. The
Company's product is offered through a nationwide network of automobile dealers
who benefit by selling vehicles to consumers who otherwise could not obtain
financing, by repeat and referral sales generated by these same customers, and
from sales to customers responding to advertisements for the Company's product,
but who actually end up qualifying for traditional financing.
Without the Company's product, consumers are often unable to purchase a
vehicle or they purchase an unreliable one and are not provided the opportunity
to improve their credit standing. As the Company reports to the three national
credit reporting agencies, a significant number of its customers improve their
lives by improving their credit score and move on to more traditional sources of
financing.
Credit Acceptance was founded to service and collect retail installment
contracts (referred to as "Consumer Loans") originated and funded by automobile
dealerships owned by the Company's founder, majority shareholder, and current
Chairman, Donald Foss. During the 1980's, the Company began to market this
service to non-affiliated dealers and, at the same time, began to offer dealers
a non-recourse cash payment (referred to as an "advance") against anticipated
future collections on Consumer Loans serviced for that dealer. Today, the
Company's program is offered to dealers throughout the United States. The
Company refers to dealers who participate in its program and who share its
commitment to changing customers' lives as "dealer-partners".
The Company's Internet address is www.creditacceptance.com. The Company
makes available, free of charge on the web site, copies of reports it files with
or furnishes to the Securities and Exchange Commission as soon as reasonably
practicable after the Company electronically files or furnishes such reports.
Although the Company is the legal owner of the retail installment contracts
upon acceptance, for accounting purposes, the Company is considered a lender to
dealer-partners in the United States and Canada and a lender to consumers in the
United Kingdom. This difference is due to slight differences in the servicing
agreements between the Company and the dealer-partner for each respective
country. For additional information see Note 1 to the consolidated financial
statements, which is incorporated herein by reference.
PRINCIPAL BUSINESS
A customer who does not qualify for conventional automobile financing can
purchase a used vehicle from a Credit Acceptance dealer-partner and finance the
purchase through the Company. As payment for the vehicle, the dealer-partner
receives the following:
(i) a down payment from the customer;
(ii) a cash advance from the Company; and
(iii) after the advance has been recovered by the Company, the cash
from payments made on the Consumer Loan, net of certain
collection costs and the Company's servicing fee ("dealer
holdback").
The Company's servicing fee is equal to a fixed percentage (typically 20%)
of each payment collected. In addition, the Company receives fees for other
products and services. Customers and dealer-partners benefit as follows:
Customers. The Company helps change the lives of customers who do not
qualify for conventional automobile financing by helping them obtain quality
transportation and, equally important, providing an opportunity to establish or
reestablish their credit through the timely repayment of their Consumer Loan.
Dealer-Partners. The Company's program increases dealer-partners' profits
in the following ways:
- Enables dealer-partners to sell cars to customers who may not be able
to obtain financing without the Company's program. In addition,
customers often become repeat customers by financing future vehicle
purchases either through the Company's program or, after they have
successfully established or reestablished their credit, through
conventional financing.
- Allows dealer-partners to share in the profits not only from the sale
of the vehicle, but also from its financing.
- Enables dealer-partners to attract customers by advertising
"guaranteed credit approval", where allowed by law. The customers will
often use other services of the dealer-partners and refer friends and
relatives to them.
- Enables dealer-partners to attract customers who mistakenly assume
they do not qualify for conventional financing.
4
Credit Acceptance derives its revenues from the following principal sources:
(i) Finance charges, which are comprised of: (a) servicing fees earned as
a result of servicing Consumer Loans assigned to the Company by
dealer-partners and (b) fees earned from the Company's third party
ancillary product offerings, which primarily consist of service
contract programs;
(ii) license fees, which represent monthly fees from the Company's patented
Internet-based Credit Approval Processing System ("CAPS");
(iii) lease revenue earned from investments in operating leases; and
(iv) other income, which primarily consists of: premiums earned on credit
life insurance programs; net gains resulting from lease terminations;
and fees charged to dealer-partners at the time they enroll in the
Company's program.
The following table sets forth the percent relationship to total revenue of each
of these sources:
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
PERCENT OF TOTAL REVENUE 2004 2003 2002
- ------------------------ ----- ----- -----
Finance charges 87.6% 84.0% 72.9%
Lease revenue 0.9% 4.2% 10.1%
License fees 3.3% 2.5% 1.8%
Other income 8.2% 9.3% 15.2%
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
===== ===== =====
The Company's business is seasonal with peak Consumer Loan acceptances
occurring during February and March. However, this seasonality does not have a
material impact on the Company's interim results.
The Company is organized into four primary business segments: United
States, United Kingdom, Automobile Leasing and Other. In early 2002, the Company
stopped originating automobile leases and effective June 30, 2003 stopped
accepting Consumer Loans originated in the United Kingdom and Canada. The
Company is in the process of liquidating these portfolios. For information
regarding the Company's reportable segments, see Note 12 to the consolidated
financial statements, which is incorporated herein by reference.
OPERATIONS
United States
Sales and Marketing. The Company's target market is a select group of the
more than 70,000 independent and franchised automobile dealers in the United
States. The marketing of the Company's program is intended to: (i) result in a
network consisting of the highest quality dealer-partners who share the
Company's commitment to changing lives and (ii) increase the value of the
Company's program to the Company's dealer-partners. Dealer-partners pay a
one-time enrollment fee of $9,850 to join the Company's program. In return, the
Company provides the dealer-partner with sales promotion kits, signs, training
and the first month's access to CAPS.
Dealer-partner enrollments in the United States for each of the last five
years are presented in the table below.
NUMBER OF
DEALER-PARTNER
YEAR ENROLLMENTS
- ---- --------------
2000 293
2001 224
2002 143
2003 399
2004 534
5
A new dealer-partner is required to execute a dealer servicing agreement,
which defines the legal relationship between the Company and the dealer-partner.
The servicing agreement assigns the responsibilities for administering,
servicing and collecting the amounts due on Consumer Loans to the Company. The
servicing agreement provides that collections received by Credit Acceptance
during a calendar month on Consumer Loans assigned by a dealer-partner are
applied on a pool-by-pool basis as follows:
- First, to reimburse Credit Acceptance for certain collection costs;
- Second, to pay Credit Acceptance its servicing fee;
- Third, to reduce the aggregate advance balance and to pay any other
amounts due from the dealer-partner to the Company; and
- Fourth, to the dealer-partner as payment for amounts contractually due
under the servicing agreement.
Under the typical servicing agreement, a dealer-partner represents that it
will only submit Consumer Loans to Credit Acceptance 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.
Dealer-partners receive a monthly statement from the Company, summarizing all
activity on Consumer Loans assigned by such dealer-partner.
In the event that the Company discovers a misrepresentation by the
dealer-partner relating to a Consumer Loan submitted to the Company, the Company
can demand that the Consumer Loan be repurchased for the current balance of the
Consumer Loan less the amount of any unearned finance charge plus the applicable
termination fee, which is generally $500. Upon receipt of such amount in full,
the Company will reassign the Consumer Loan receivable and its security interest
in the financed vehicle to the dealer-partner.
The typical servicing agreement may be terminated by the Company or by the
dealer-partner upon written notice. The Company may terminate the servicing
agreement immediately in the case of an event of default by the dealer-partner.
Events of default include, among other things:
(1) the dealer-partner's refusal to allow the Company to audit its records
relating to the Consumer Loans assigned to the Company;
(2) the dealer-partner, without the Company's consent, is dissolved;
merges or consolidates with an entity not affiliated with the
dealer-partner; or sells a material part of its assets outside the
course of its business to an entity not affiliated with the
dealer-partner; or
(3) the appointment of a receiver for, or the bankruptcy or insolvency of,
the dealer-partner.
While a dealer-partner can cease submitting Consumer Loans to the Company
at any time without terminating the servicing agreement, if the dealer-partner
elects to terminate the servicing agreement or in the event of a default, the
dealer-partner must immediately pay the Company:
(i) any unreimbursed collection costs;
(ii) any unpaid advances and all amounts owed by the dealer-partner to the
Company; and
(iii) a termination fee equal to 15% of the then outstanding amount of the
Consumer Loans accepted by the Company.
Upon receipt of such amounts in full, the Company will reassign the
Consumer Loan and its security interest in the financed vehicle to the
dealer-partner. In the event of a termination by the Company (or any other
termination if the Company and the dealer-partner agree), the Company may
continue to service Consumer Loans accepted prior to termination in the normal
course of business without charging a termination fee.
Consumer Loan Assignment. Once a dealer-partner has enrolled in the
Company's program, the dealer-partner may begin submitting Consumer Loans to the
Company for servicing, administration, and collection. A Consumer Loan occurs
when a customer enters into a contract with a dealer-partner that sets forth the
terms of the agreement between the customer and the dealer-partner for the
payment of the purchase price of the automobile. The amount of the Consumer Loan
consists of the total principal and interest that the customer is required to
pay over the term of the Consumer Loan. During 2004 and 2003, virtually all of
the Consumer Loans accepted by the Company in the United States were processed
through CAPS. CAPS was offered to all dealer-partners located in the United
States beginning in January 2001, and allows dealer-partners to input a
consumer's credit application and view the response from the Company via the
Internet. CAPS allows dealer-partners to: (i) receive an approval from the
Company much faster than with traditional methods; and (ii) interact with the
Company's credit scoring system to improve the structure of each transaction
prior to delivery. All responses include the amount of the advance, as well as
any stipulations required for funding. The amount of the advance is determined
using a computer model which considers a number of factors including the timing
and amount of cash flows expected on the related Consumer Loan and the Company's
target return on capital at the time the Consumer Loan is assigned. The
estimated future cash flows are determined based upon a proprietary credit
scoring system, which considers numerous variables,
6
including the customer's credit bureau report, data contained in the customer's
credit application, the structure of the proposed transaction, vehicle
information and other factors, to calculate a composite credit score that
corresponds to an expected collection rate. The Company's credit scoring system
forecasts the collection rate based upon the historical performance of Consumer
Loans in the Company's portfolio that share similar characteristics. The
performance of the credit scoring system is evaluated monthly by comparing
projected to actual Consumer Loan performance. Adjustments are made to the
credit scoring system when necessary.
While a dealer-partner can assign any legally compliant Consumer Loan to
the Company for servicing, administration and collection, the decision whether
to pay an advance to the dealer-partner and the amount of any advance is made
solely by the Company. The Company performs all significant functions relating
to the processing of the Consumer Loan applications and bears certain costs of
Consumer Loan acceptance, including the cost of assessing the adequacy of
Consumer Loan documentation, compliance with underwriting guidelines and the
cost of verifying employment, residence and other information submitted by the
dealer-partner.
CAPS interfaces with the Company's Application and Contract System ("ACS").
Consumer Loan information included in CAPS is automatically entered into ACS
through a download from CAPS. Additional Consumer Loan information is entered
into ACS manually. ACS provides credit scoring capability as well as the ability
to process Consumer Loan packages. ACS compares Consumer Loan data against
information provided during the approval process and allows the funding analyst
to check that all stipulations have been met prior to funding. Consumer Loan
contracts are written on a contract form provided by the Company and the
Consumer Loan transaction typically is not completed until the dealer-partner
has received approval from the Company. The assignment of the Consumer Loan from
the dealer-partner to the Company occurs after both the customer and
dealer-partner sign the contract and the original contract is received and
approved by the Company. Although the dealer-partner is named in the Consumer
Loan contract, the dealer-partner does not have legal ownership of the Consumer
Loan for more than a moment and the Company, not the dealer-partner, is listed
as lien holder on the vehicle title. The customer's payment obligation is
directly to the Company. Payments are generally made by the customer directly to
the Company. The customer's failure to pay amounts due under the Consumer Loan
will result in collection action by the Company.
The Company generally offers the dealer-partner a non-recourse advance
against anticipated future collections on the Consumer Loan. Since typically the
combination of the advance and the customer's down payment provides the
dealer-partner with a cash profit at the time of sale, the dealer-partner's risk
in the Consumer Loan is limited. The Company cannot demand repayment from the
dealer-partner of the advance except in the event the dealer-partner is in
default of the servicing agreement. Advances are made only after the Consumer
Loan is approved, accepted by and assigned to the Company and all other
stipulations required for funding have been satisfied.
Cash advanced to dealer-partners is automatically assigned to the
originating dealer-partner's open pool of advances. The Company records the
amount advanced to the dealer-partner as a Dealer Loan ("Dealer Loan"), which is
classified within Loans receivable in the Company's consolidated balance sheets.
At the dealer-partner's option, a pool containing more than one hundred Consumer
Loans can be closed and subsequent advances assigned to a new pool. All advances
due from a dealer-partner are secured by the future collections on the
dealer-partner's portfolio of Consumer Loans assigned to the Company. Net
collections on all related Consumer Loans within the pool, after payment of the
Company's servicing fee and reimbursement of certain collection costs, are
applied to reduce the aggregate advance balance owing against those Consumer
Loans within the pool. Once the advance balance has been repaid, the
dealer-partner is entitled to receive future net collections from Consumer Loans
within that pool, after payment of the Company's servicing fee and reimbursement
of certain collection costs. If the collections on Consumer Loans from a
dealer-partner's pool are not sufficient to repay the advance balance, the
dealer-partner will not receive dealer holdback. Additionally, for
dealer-partners with more than one pool, the pools are cross-collateralized so
the performance of other pools is considered in determining eligibility for
dealer holdback.
Dealer-partners have an opportunity to receive a portion of the dealer
holdback on an accelerated basis at the time a pool of one hundred or more
Consumer Loans is closed. The eligibility to receive accelerated dealer holdback
and the amount paid to the dealer-partner is calculated using a formula that
considers the collection rate and the advance balance on the closed pool.
The Company's business model allows it to share the risk and reward of
collecting on the Consumer Loans with the dealer-partners. Such sharing is
intended to motivate the dealer-partner to assign better quality Consumer Loans,
follow the Company's underwriting guidelines, and provide appropriate service
and support to the customer after the sale. The Company believes this
arrangement aligns the interests of the Company, the dealer-partner and the
customer. The Company measures various criteria for each dealer-partner against
other dealer-partners in their area as well as the top performing
dealer-partners. Sales representatives are required to present the analysis to
the dealer-partner and to develop an action plan on a quarterly basis with the
dealer-partner to improve the dealer-partner's overall success with the
Company's program.
7
Information on the Company's Consumer Loans accepted in the United States,
the Company's only business segment that continues to accept assignments of new
Consumer Loans, for each of the last five years is presented in the following
table:
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
AVERAGE CONSUMER LOAN DATA 2004 2003 2002 2001 2000
-------------------------- ------- ------- ------- ------- -------
Average size of Consumer Loan accepted $12,634 $12,143 $11,202 $10,397 $7,868
Percentage growth in average size of
Consumer Loan 4.0% 8.4% 7.7% 32.1% (2.2)%
Average initial maturity (in months) 37 37 36 36 32
Average advance per Consumer Loan $ 6,105 $ 5,649 $ 5,115 $ 4,988 $4,010
Average advance as a percent of average
Consumer Loan accepted 48.3% 46.5% 45.7% 48.0% 51.0%
Servicing and Collections. The Company's collectors are organized into
teams. The Company's first payment missed team services Consumer Loans of
customers who have failed to make one of their first three payments on time. A
collection call is generally placed to these customers within one day after the
payment is due. Once a customer has made their first three payments, a regional
collection team services the Consumer Loan. Regional teams service all Consumer
Loans assigned by dealer-partners within their geographic area. The Company has
an incentive system to encourage collectors to collect the full amount due and
eliminate the delinquency on Consumer Loans assigned to their team. Collectors
may recommend repossession of the vehicle based on a variety of factors
including the amount of the delinquency and the estimated value of the vehicle.
These recommendations are typically reviewed by a collection team supervisor.
When a Consumer Loan is approved for repossession, the account is
transferred to the Company's repossession team. Repossession personnel continue
to service the Consumer Loan as it is being assigned to a third party
repossession contractor, who works on a contingency fee basis. Once a vehicle
has been repossessed, the customer can negotiate a redemption with the Company,
whereby the vehicle is returned to the customer in exchange for paying off the
Consumer Loan balance, or where appropriate or if required by law, the vehicle
is returned to the customer and the Consumer Loan reinstated, in exchange for
reducing or eliminating the past due balance. If the redemption process is not
successful, the vehicle is typically sold at a wholesale automobile auction.
Prior to sale, the vehicle is usually inspected by the Company's remarketing
representatives who authorize repair and reconditioning work in order to
maximize the net sale proceeds at auction.
If the vehicle sale proceeds are not sufficient to satisfy the balance
owing on the Consumer Loan, the Consumer Loan is serviced by either: (i) the
Company's senior collection team, in the event that the customer is willing to
make payments on the deficiency balance; or (ii) where permitted by law, the
Company's legal team, if it is believed that legal action is required to reduce
the deficiency balance owing on the Consumer Loan. The Company's legal team
assigns Consumer Loans to third party collection attorneys who file a claim and
upon obtaining a judgment, garnish wages or other assets.
Collectors rely on two systems to service accounts, the Collection System
("CS") and the Loan Servicing System ("LSS"). The LSS and CS are connected
through a batch interface. The present CS has been in service since June 2002.
The CS interfaces with a predictive dialer and records all activity on a
Consumer Loan, including details of past phone conversations with the customer,
collection letters sent, promises to pay, broken promises, repossession orders
and collection attorney activity. The LSS maintains a record of all transactions
relating to Consumer Loans assigned after July 1990 and is the primary source of
management reporting including data utilized to:
(i) evaluate the Company's proprietary credit scoring system;
(ii) forecast future collections;
(iii) establish the amount of revenue recognized by the Company; and
(iv) analyze the profitability of the Company's program.
8
SERVICE CONTRACTS AND INSURANCE PRODUCTS
The Company provides dealer-partners the ability to offer vehicle service
contracts to customers. Under this program, the sales price of the service
contract is added to the amount due under the Consumer Loan. The cost of the
service contract, plus a commission earned by the dealer-partner on the sale of
the service contract is added to the advance balance. A portion of the amount
added to the advance balance is retained by the Company as a fee. Third party
vehicle service contract administrators ("TPAs") bear all of the risk of loss on
claims. During 2004, the Company entered into agreements with two new TPAs where
the Company receives underwriting profits from the TPAs based on the level of
future claims paid. Funds paid by the Company to the TPA to pay future claims
are held in trusts. The assets and liabilities of the trusts have been
consolidated on the Company's balance sheet in accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). As of December 31, 2004, the trusts had
$4.8 million in cash available to pay claims and a related claims reserve of
$4.8 million. For additional information regarding the two new TPAs, see Note 1
to the consolidated financial statements, which is incorporated herein by
reference. The Company previously offered a vehicle service contract program
where the Company bore the risk of loss on claims relating to the service
contracts. The Company discontinued offering this product effective November 1,
2003, as the product was not competitive with the third party vehicle service
contract products offered by the Company. The Company's reserve for these
vehicle service contract claims was $5,000 and $64,000 at December 31, 2004 and
2003, respectively.
The Company maintains relationships with certain insurance carriers which
provide dealer-partners the ability to offer customers credit life and
disability insurance. Should the customer elect to purchase this insurance, the
premium on the insurance policy is added to the amount due under the Consumer
Loan and to the advance balance. The Company is not involved in the actual sale
of the insurance; however, the insurance carrier cedes the premiums, less a fee,
to a wholly-owned subsidiary of the Company, which reinsures the coverage under
the policy. As a result, the Company, through its subsidiary, bears the risk of
loss, and earns revenues from premiums ceded and the investment of such funds.
The Company's reserve for insurance claims was $384,000 and $455,000 at December
31, 2004 and 2003, respectively.
BUSINESSES IN LIQUIDATION
United Kingdom
Effective June 30, 2003, the Company decided to stop originating Consumer
Loans in the United Kingdom. Prior to this decision, the Company originated and
serviced Consumer Loans in the United Kingdom. As of December 31, 2004, the
amount of capital invested in this business was $6.4 million.
The Company sold the remaining Consumer Loan portfolio of its United
Kingdom subsidiary on December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately $3.0 million.
Automobile Leasing
In January 2002, the Company decided to exit the automobile leasing
business. Prior to this decision, the Company assumed ownership of automobile
leases from dealer-partners for an amount based on the value of the vehicle as
determined by an industry guidebook, assumed ownership of the related vehicle
from the dealer-partner and received title to the vehicle. This program differed
from the Company's principal business in that, the Company assumed ownership of
the vehicles and assumed no liability to the dealer-partner for dealer holdback
payments. As of December 31, 2004, the amount of capital invested in this
business was $0.3 million.
Other
Canada. Effective June 30, 2003, the Company decided to cease accepting
Consumer Loans in Canada. Prior to this decision, the Company accepted and
serviced Consumer Loans in Canada on approximately the same basis as in the
United States. As of December 31, 2004, the amount of capital invested in this
business was $1.4 million.
9
Floorplan Financing. Floorplan financing is offered on a limited basis to
certain dealers, most of which participate in the Company's core program. Under
these financing arrangements, loans are provided to finance the dealer's
inventory. Dealers are charged documentation fees in connection with each
vehicle financed, plus interest on the unpaid balance at rates that generally
range from 12% to 18% per annum. Security for these loans generally consists of:
(i) a lien on the financed inventory;
(ii) a security interest in the dealer's assets, including the
dealer-partner's portfolio of Consumer Loans serviced by the Company;
and
(iii) the personal guarantee of the owner.
Since 2001, the Company has significantly reduced its investment in the
floorplan portfolio after concluding this business was not likely to generate an
acceptable return on capital. As of December 31, 2004, the amount of capital
invested in this business was $0.7 million.
Secured Line of Credit Loans. The Company offered line of credit
arrangements to certain dealers who were not participating in the Company's core
program. These lines of credit are secured primarily by loans, originated and
serviced by the dealer, with additional security provided by the personal
guarantee of the dealership's owner. The effective interest rate on these loans
varies based upon the amount loaned to the dealer and the percentage of
collections on the loan portfolio required to be remitted to the Company. During
the third quarter of 2001, the Company discontinued offering this program to new
dealers, and is in the process of reducing the amount of capital invested in
this business. As of December 31, 2004, the amount of capital invested in this
business was $1.6 million.
Beginning in 2002, entities owned by the Company's majority shareholder and
Chairman began offering secured line of credit loans in a manner similar to the
Company's prior program, at his dealerships and at two other dealerships, one of
whom also does business with the Company. The Company's majority shareholder and
Chairman does not intend to expand his line of credit lending activities to
additional dealers, except to dealerships which he owns or controls.
CREDIT LOSS POLICY
For information regarding the Company's accounting policy for the allowance
for credit losses, see Note 1 to the consolidated financial statements, which is
incorporated herein by reference.
COMPETITION
The market for customers who do not qualify for conventional automobile
financing is large and highly competitive. The Company's largest competition
comes from "buy here, pay here" dealerships where the dealer finances the
customer's purchase and services the Consumer Loan themselves. The market is
also currently served by banks, captive finance affiliates of automobile
manufacturers, credit unions and independent finance companies both publicly and
privately owned. Many of these companies are much larger and have greater
resources than the Company. These companies typically target higher credit tier
customers within the Company's market. While the Company is only aware of a few
companies that offer guaranteed credit approval, there is the potential that
significant direct competition could emerge and that the Company may be unable
to compete successfully.
10
CUSTOMER AND GEOGRAPHIC CONCENTRATIONS
No single dealer-partner accounted for more than 10% of total revenues
during any of the last three years. Additionally, no single dealer-partner's
Dealer Loan accounted for more than 10% of total Dealer Loans as of December 31,
2004 or as of December 31, 2003. The following table provides information
regarding the five states that are responsible for the largest dollar amount of
Consumer Loans accepted in the United States during 2004:
CONSUMER LOANS ACCEPTED ACTIVE DEALER-PARTNERS (1)
----------------------- --------------------------
(Dollars in thousands) AMOUNT % OF TOTAL NUMBER % OF TOTAL
-------- ---------- ------ ----------
Michigan $ 77,923 8.1% 114 9.4%
Alabama 62,081 6.5 35 2.9
Mississippi 58,840 6.1 44 3.6
Virginia 57,066 5.9 64 5.3
Maryland 56,119 5.8 60 4.9
All other states 647,588 67.6 898 73.9
-------- ----- ----- -----
Total $959,617 100.0% 1,215 100.0%
======== ===== ===== =====
(1) Active dealer-partners are dealer-partners who submitted at least one
Consumer Loan during the year.
The following table provides information regarding the five states that are
responsible for the largest dollar amount of Consumer Loans accepted in the
United States during 2003:
CONSUMER LOANS ACCEPTED ACTIVE DEALER-PARTNERS (1)
----------------------- --------------------------
(Dollars in thousands) AMOUNT % OF TOTAL NUMBER % OF TOTAL
-------- ---------- ------ ----------
Michigan $ 75,551 10.0% 100 10.9%
Virginia 54,247 7.2 49 5.3
Maryland 50,323 6.6 48 5.2
New York 48,411 6.4 78 8.5
Tennessee 46,900 6.2 34 3.7
All other states 481,463 63.6 607 66.4
-------- ----- --- -----
Total $756,895 100.0% 916 100.0%
======== ===== === =====
(1) Active dealer-partners are dealer-partners who submitted at least one
Consumer Loan during the year.
While not considered to be a concentration, the Company's transactions with
related parties are significant. For information regarding the Company's
transactions with related parties, see Note 9 to the consolidated financial
statements, which is incorporated herein by reference.
GEOGRAPHIC FINANCIAL INFORMATION
The following table sets forth, for each of the last three years for the
Company's domestic and foreign operations, the amount of revenues, and
long-lived assets:
AS OF AND FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
(In thousands) 2004 2003 2002
-------- ---------- ----------
(RESTATED) (RESTATED)
Revenues
United States $170,332 $137,673 $133,602
United Kingdom 4,354 10,789 20,182
Other foreign 2,029 3,765 5,354
-------- -------- --------
Total revenues $176,715 $152,227 $159,138
======== ======== ========
Long-lived assets
United States $ 19,474 $ 18,045 $ 19,169
United Kingdom 232 496 667
-------- -------- --------
Total long-lived assets $ 19,706 $ 18,541 $ 19,836
======== ======== ========
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.
11
REGULATION
The Company's businesses are subject to various state, federal and foreign
laws and regulations, which:
(i) require licensing and qualification,
(ii) regulate interest rates, fees and other charges,
(iii) require specified disclosures to customers,
(iv) govern the sale and terms of the ancillary products; and
(v) define the Company's rights to collect Consumer Loans and
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
Consumer Loans and leases, or resulting in potential liability related to the
servicing of Consumer Loans and leases accepted from dealer-partners. In
addition, governmental regulations depleting 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 that could have a material adverse effect
on the Company.
The sale of insurance products in connection with Consumer Loans and leases
assigned to the Company by dealer-partners is also subject to state laws and
regulations. As the legal owner of the Consumer Loans and leases that contain
these products, some of these state laws and regulations may apply to the
Company's servicing and collection of the Consumer Loans and leases. However, as
the Company does not deal directly with customers in the sale of insurance
products, it does not believe that such laws and regulations significantly
affect its business. Nevertheless, there can be no assurance that insurance
regulatory authorities in the jurisdictions in which such products are offered
by dealer-partners 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. The
Company's credit life and disability reinsurance and property and casualty
insurance subsidiaries are licensed and subject to regulation in the Turks and
Caicos Islands.
The Company's operations in the United Kingdom and Canada 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.
The Company believes that it 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
dealer-partners provides that the dealer-partner shall indemnify the Company
with respect to any loss or expense the Company incurs as a result of the
dealer-partner's failure to comply with applicable laws and regulations.
EMPLOYEES
As of December 31, 2004, the Company had 757 employee team members. The
Company's team members have no union affiliations and the Company believes its
relationship with its team members is good. The table below presents team
members by department:
NUMBER OF TEAM
MEMBERS
--------------
DECEMBER 31,
--------------
DEPARTMENT 2004 2003
---------- ---- ----
Collection and Servicing 482 439
Loan Origination and Processing 43 48
Sales and Marketing 81 66
Finance and Accounting 32 38
Information Systems 57 51
Management and Support 62 52
--- ---
TOTAL 757 694
=== ===
12
ITEM 2. PROPERTIES
United States, Automobile Leasing, and Other
The Company's headquarters are located at 25505 West Twelve Mile Road,
Southfield, Michigan 48034. The Company purchased the office building in 1993
and has a mortgage loan from a commercial bank that is secured by a first
mortgage lien on the property. The office building includes approximately
118,000 square feet of space on five floors. The Company occupies approximately
72,000 square feet of the building, with most of the remainder of the building
leased to various tenants.
The Company leases approximately 20,000 square feet of office space in
Henderson, Nevada. The lease expires in October 2009.
United Kingdom
The Company leases space in an office building in Worthing, West Sussex, in
the United Kingdom. The building includes approximately 10,000 square feet of
space. The Company occupies approximately 6,900 square feet of the building
under a lease expiring in September 2007.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business and as a result of the customer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various customer 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, customer protection, warranty, debt collection, insurance and
other customer-oriented laws and regulations, including claims seeking damages
for physical and mental damages relating to the Company's repossession and sale
of the customer's vehicle and other debt collection activities. As the Company
accepts assignments of Consumer Loans originated by dealer-partners, it may also
be named as a co-defendant in lawsuits filed by customers principally against
dealer-partners. Many of these cases are filed as purported class actions and
seek damages in large dollar amounts. An adverse ultimate disposition in any
such action could have a material adverse impact on the Company's financial
position, liquidity and results of operations.
For a description of material pending litigation to which the Company is a
party, see Note 13 to the consolidated financial statements, which is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of 2004. The Company's annual meeting typically occurs during the second
quarter of each fiscal year and the results of such matters submitted to a vote
of the shareholders at the meeting normally appears in the Quarterly Report on
Form 10-Q for the quarter in which the meeting occurred. There was no annual
meeting held in 2005 due to the ongoing restatement of the Company's
consolidated financial statements.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
STOCK PRICE
During 2003 and 2004, the Company's common stock was traded on The Nasdaq
Stock Market(R) ("the Nasdaq") 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, 2004 as reported by the Nasdaq are set forth in the following
table:
2004 2003
--------------- --------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ -----
March 31 $20.65 $14.97 $ 6.79 $4.75
June 30 19.25 12.55 12.10 4.75
September 30 20.00 12.65 12.59 8.35
December 31 26.92 18.52 15.77 8.99
As of July 19, 2005, the Company's common stock was delisted from the
Nasdaq and is currently traded on the Pink Sheets Electronic Quotation Service
under the symbol CACC.PK.
The following table sets forth the high and low sale prices as reported by
the Nasdaq for the common stock for each quarter during 2005 that the common
stock was traded on the Nasdaq (through July 19, 2005) and the high and low
[bid] prices for the common stock for the remainder of 2005 as reported by the
Pink Sheets Electronic Quotation Service. [Such bid information reflects
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.]
2005
---------------
QUARTER ENDED HIGH LOW
- ------------- ------ ------
March 31 $26.46 $19.16
June 30 20.09 12.90
September 30 16.25 12.08
December 31 17.90 14.50
As of December 31, 2005, the number of beneficial holders and shareholders
of record of the common stock was approximately 1,356 based upon securities
position listings furnished to the Company.
DIVIDENDS
The Company has not paid any cash dividends during the periods presented. The
Company's credit agreements contain financial covenants pertaining to the
Company's ratio of liabilities to tangible net worth and amount of tangible net
worth, which may indirectly limit the payment of dividends on common stock.
14
EQUITY COMPENSATION PLANS
The Company's Incentive Compensation Plan (the "Incentive Plan"), which was
approved by shareholders on May 13, 2004, provides for the granting of
restricted stock, restricted stock units, stock options, and performance awards
to employees, officers, and directors. The Company also has two stock option
plans pursuant to which it has granted stock options with time or
performance-based vesting requirements to employees, officers, and directors.
The Company's 1992 Stock Option Plan (the "1992 Plan") was approved by
shareholders in 1992 prior to the Company's initial public offering and was
terminated as to future grants on May 13, 2004, when shareholders approved the
Incentive Plan. The Company's Director Stock Option Plan (the "Director Plan")
was approved by shareholders in 2002 and was terminated as to future grants on
May 13, 2004, with shareholder approval of the Incentive Plan. The following
table sets forth, with respect to each of the option plans, (i) the number of
shares of common stock to be issued upon the exercise of outstanding options,
(ii) the weighted average exercise price of outstanding options, and (iii) the
number of shares remaining available for future issuance, as of December 31,
2004:
NUMBER OF SHARES
REMAINING
NUMBER OF SHARES AVAILABLE FOR FUTURE
TO BE ISSUED UPON WEIGHTED-AVERAGE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE OF EQUITY
OUTSTANDING OUTSTANDING COMPENSATION PLANS
PLAN CATEGORY OPTIONS OPTIONS (A)
------------- ----------------- ----------------- --------------------
Equity compensation plans approved by shareholders:
1992 Plan 3,506,519 $ 6.98 --
Director Plan 200,000 12.13 --
Incentive Plan -- -- 1,000,000
--------- ---------
Total 3,706,519 $ 7.26 1,000,000
========= =========
For additional information regarding the Company's stock compensation
plans, see Note 11 to the consolidated financial statements, which is
incorporated herein by reference.
STOCK REPURCHASES
The following table summarizes the Company's stock repurchases for the
three months ended December 31, 2004:
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED AS OF SHARES THAT MAY
TOTAL NUMBER PART OF PUBLICLY YET BE PURCHASED
OF SHARES AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS
PERIOD PURCHASED PAID PER SHARE OR PROGRAMS OR PROGRAMS (A)
------ ------------ -------------- ------------------- ------------------
October 2004 -- $ -- -- 756,231
November 2004 93,211 24.37 93,211 663,020
December 2004 27,887 25.16 27,887 635,133
------- -------
121,098 $24.55 121,098
======= =======
(a) On August 5, 1999, the Company announced a stock repurchase program of up
to 1.0 million shares of the Company's common stock. The program authorized
the Company to repurchase common shares in the open market or in privately
negotiated transactions at price levels the Company deems attractive. Since
August 1999, the Company's board of directors has authorized several
increases to the stock repurchase program, the most recent occurring on
March 10, 2004, which increased the total number of shares authorized to be
repurchased to 7.0 million shares. As of December 31, 2004, the Company has
repurchased approximately 6.4 million shares under this program at a cost
of $51.9 million.
15
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement and balance sheet data presented below are derived
from the Company's audited consolidated financial statements for the years ended
December 31, 2004, 2003, and 2002, and should be read in conjunction with the
Company's consolidated financial statements and notes thereto and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", included elsewhere in this Annual Report. Certain amounts for prior
periods have been reclassified to conform to the current presentation. For
information regarding the restatement of the Company's consolidated financial
statements, see Note 2 to the consolidated financial statements, which is
incorporated herein by reference.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------
2001 2000
2003 2002 (RESTATED) (RESTATED)
2004 (RESTATED) (RESTATED) (UNAUDITED) (UNAUDITED)
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Revenue $ 176,715 $ 152,227 $ 159,138 $ 149,230 $ 129,025
Costs and expenses (A) 90,483 97,913 107,779 107,951 94,628
----------- ----------- ----------- ----------- -----------
Operating income 86,232 54,314 51,359 41,279 34,397
Foreign exchange gain (loss) 1,650 (2,767) (3) (42) (11)
----------- ----------- ----------- ----------- -----------
Income before income taxes 87,882 51,547 51,356 41,237 34,386
Provision for income taxes 30,557 26,878 21,582 16,566 11,923
----------- ----------- ----------- ----------- -----------
Net income $ 57,325 $ 24,669 $ 29,774 $ 24,671 $ 22,463
=========== =========== =========== =========== ===========
Net income per common share:
Basic $ 1.48 $ 0.58 $ 0.70 $ 0.59 $ 0.51
=========== =========== =========== =========== ===========
Diluted $ 1.40 $ 0.57 $ 0.69 $ 0.57 $ 0.51
=========== =========== =========== =========== ===========
Weighted average shares outstanding:
Basic 38,617,787 42,195,340 42,438,292 42,140,961 43,879,577
Diluted 41,017,205 43,409,007 43,362,741 43,150,804 44,219,876
BALANCE SHEET DATA:
Loans receivable, net $ 526,011 $ 476,128 $ 456,908 $ 501,535 $ 411,905
All other assets 65,302 68,720 68,251 87,782 92,428
----------- ----------- ----------- ----------- -----------
Total assets $ 591,313 $ 544,848 $ 525,159 $ 589,317 $ 504,333
=========== =========== =========== =========== ===========
Total debt $ 193,547 $ 106,447 $ 109,663 $ 202,290 $ 156,121
Dealer reserve payable, net 15,675 35,198 47,262 61,013 58,565
Other liabilities 81,201 59,908 52,222 45,469 31,686
----------- ----------- ----------- ----------- -----------
Total liabilities 290,423 201,553 209,147 308,772 246,372
Shareholders' equity (B) 300,890 343,295 316,012 280,545 257,961
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 591,313 $ 544,848 $ 525,159 $ 589,317 $ 504,333
=========== =========== =========== =========== ===========
(A) Includes impairment expenses of $10.5 million recognized in 2003 following
the decision to liquidate the United Kingdom operation.
(B) No dividends were paid during the periods presented.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company has changed its method for recording loans in the United States and
Canada, from that of an originator of Consumer Loans to that of a servicer of
loans generated by dealer-partners and a lender to those dealer-partners. As a
result of this determination, the Company was required to restate its previously
reported financial results. For information regarding the restatement of the
Company's consolidated financial statements, see Note 2 to the consolidated
financial statements, which is incorporated herein by reference.
EXECUTIVE SUMMARY
Since 1972, Credit Acceptance has provided auto loans to consumers,
regardless of their credit history. The Company's product is offered through a
nationwide network of automobile dealers who benefit by selling vehicles to
consumers who otherwise could not obtain financing, by repeat and referral sales
generated by these same customers, and from sales to customers responding to
advertisements for the Company's product, but who actually end up qualifying for
traditional financing.
The Company is an indirect lender from a legal perspective, meaning the
Consumer Loan is originated by the dealer-partner and immediately assigned to
the Company. The compensation paid to the dealer-partner in exchange for the
Consumer 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. For accounting purposes, a majority of
the transactions described above are not considered to be Consumer Loan
transactions. Instead the Company's accounting reflects that of a lender to the
dealer-partner. This classification for accounting purposes is primarily a
result of (i) the dealer-partner's financial interest in the Consumer Loan and
(ii) certain elements of the Company's legal relationship with the
dealer-partner. Because the legal agreement between the Company and the
dealer-partner in the United Kingdom is structured differently, the Company's
United Kingdom business is accounted for as a consumer lender. This difference
is due to slight differences in the servicing agreements between the Company and
the dealer-partner for each respective country. In the United States and Canada,
if the Company discovers a misrepresentation by the dealer-partner relating to a
Consumer Loan assigned to the Company, the Company can demand that the Consumer
Loan be repurchased for the current balance of the Consumer Loan less the amount
of any unearned finance charge plus the applicable termination fee, which is
generally $500. Upon receipt of such amount in full, the Company will reassign
the Consumer Loan receivable and its security interest in the financed vehicle
to the dealer-partner. The dealer-partner can also opt to repurchase Consumer
Loans at their own discretion. To date, no dealer-partner has repurchased
receivables under this option. This repurchase stipulation is not part of the
servicing agreement in the United Kingdom. In addition, a small percentage of
transactions in the United States are considered to be Consumer Loans for
accounting purposes. For the majority of the Company's transactions, the cash
amount advanced to the dealer-partner is recorded as an asset on the Company's
balance sheet. The aggregate amount of all advances to an individual
dealer-partner, plus accrued income, less repayments comprises the Dealer Loan
recorded in Loans receivable. For the remaining business, the amount due from
the consumer is recorded as a Consumer Loan in Loans receivable. Additionally, a
liability for estimated dealer holdback payments is recorded. For additional
information regarding the Company's accounting for Loans receivable, see Note 1
to the consolidated financial statements, which is incorporated herein by
reference.
An initial yield is assigned to each dealer advance. The yield is the rate
that, when applied to expected future cash flows, result in a present value
equal to the initial cash amount of the advance. The expected future cash flows
are the expected collections from the Consumer Loan, less the amount of expected
future dealer holdback payments.
The Company believes it has been successful in improving the profitability
of its Dealer Loans in recent years primarily as a result of increasing the
spread between the forecasted collection rate and the advance rate, and
increasing revenue from ancillary products. Dealer Loan originations increased
27.3% in 2004 due to an increase in the number of active dealer-partners and an
increase in the average transaction size. Since the Company believes it is one
of only a few financial services companies serving the Company's target market,
the Company believes that it has an opportunity to grow its business profitably
in the future.
Critical success factors for the Company include access to capital and the
ability to accurately forecast Consumer Loan performance. The Company's strategy
for accessing the capital required to grow its business is to: (i) maintain
consistent financial performance, (ii) maintain modest financial leverage, and
(iii) maintain multiple funding sources. The Company's funded debt to equity
ratio is 0.6 to 1.0 at December 31, 2004. The Company currently funds its
business through a bank line of credit facility, privately placed secured
financings and commercial bank conduit-financed secured financings.
The ability to accurately forecast Consumer Loan performance is critical to
the Company. At the time of Consumer Loan acceptance, the Company forecasts
future expected cash flows from the Consumer Loan. Based on these forecasts, an
advance is made to the related dealer-partner at a level that allows the Company
to achieve an acceptable return on capital. If Consumer Loan performance equals
or exceeds the Company's original expectation, it is likely the Company's target
return on capital will be achieved.
17
CONSUMER LOAN PERFORMANCE IN THE UNITED STATES
The United States is the Company's only business segment that continues to
originate Dealer Loans. The following table presents forecasted Consumer Loan
collection rates, advance rates, the spread (the forecasted collection rate less
the advance rate), and the percentage of the forecasted collections that have
been realized as of September 30, 2005 for the United States business segment.
The data presented in the table has been changed from similar data as previously
disclosed in the Company's filings in order to conform to the Company's new
accounting methodology. The changes are as follows: (1) Collection and advance
rates included in the table are calculated as a percentage of funded loans,
defined as Consumer Loans on which an advance has been paid to the
dealer-partner. Previously, collection and advance rates were calculated as a
percentage of Consumer Loans assigned to the Company. As a result, collection
rates are higher than previously reported. This reflects the change in
presentation rather than a change in loan performance. (2) Advance rates
included in the table below represent the cash amount paid to the dealer-partner
or paid to third parties for ancillary products. Previously, advance rates
presented in the table included non-cash commissions and fees that were retained
by the Company. As a result of this change, the advance rates presented in the
table are lower than previously reported. (3) Forecasted collection rates
included in the table are based on a new forecasting methodology. This change
had only a small impact on collection rates reported in the table.
December 31, 2004
---------------------------------------------------
Year of Forecasted % of Forecast
Origination Collection % Advance % Spread % Realized
- ----------- ------------ --------- -------- -------------
1992 80.2% 37.1% 43.1% 100.0%
1993 75.3% 37.1% 38.2% 100.0%
1994 61.0% 40.5% 20.5% 100.0%
1995 54.9% 44.2% 10.7% 99.7%
1996 55.0% 46.9% 8.1% 99.1%
1997 58.4% 47.9% 10.5% 98.3%
1998 67.7% 46.1% 21.6% 97.7%
1999 72.8% 48.9% 23.9% 96.8%
2000 73.2% 48.0% 25.2% 95.8%
2001 67.2% 45.8% 21.4% 93.3%
2002 70.2% 42.2% 28.0% 83.7%
2003 74.0% 43.4% 30.6% 58.4%
2004 73.4% 44.0% 29.4% 21.2%
Accurately forecasting future collection rates is critical to the Company's
success. The risk of a forecasting error declines as Consumer Loans age. For
example, the risk of a material forecasting error for business written in 1999
is very small since 96.8% of the total amount forecasted has already been
realized. In contrast, the Company's forecast for recent Consumer Loans is less
certain. If the Company produces disappointing operating results, it will likely
be because the Company overestimated future Consumer Loan collections. Although
the Company makes every effort to estimate collection rates as accurately as
possible, there can be no assurance that the Company's estimates will be
accurate or that Consumer Loan performance will be as expected.
A wider spread between the forecasted collection rate and the advance rate
reduces the Company's risk of credit losses. Because collections are applied to
advances on an individual dealer-partner basis, a wide spread does not eliminate
the risk of losses, but it does reduce the risk significantly. The Company made
no material changes in credit policy or pricing during 2004, other than routine
changes designed to maintain current profitability levels.
18
RESULTS OF OPERATIONS
The tables on pages 19 through 25 present income statement data on a
consolidated basis as well as for the Company's four business segments, United
States, United Kingdom, Automobile Leasing, and Other.
CONSOLIDATED
YEAR ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, % OF 2003 % OF 2002 % OF
(Dollars in thousands) 2004 REVENUE (RESTATED) REVENUE (RESTATED) REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $154,859 87.6% $127,853 84.0% $115,957 72.9%
Lease revenue 1,507 0.9 6,432 4.2 16,101 10.1
License fees 5,835 3.3 3,836 2.5 2,906 1.8
Other income 14,514 8.2 14,106 9.3 24,174 15.2
-------- ------ -------- ----- -------- -----
Total revenue 176,715 100.0 152,227 100.0 159,138 100.0
COSTS AND EXPENSES:
Salaries and wages 34,961 19.8 31,970 21.0 28,142 17.7
General and administrative 22,195 12.6 20,705 13.6 24,908 15.7
Sales and marketing 11,915 6.7 8,949 5.9 7,987 5.0
Provision for credit losses 5,757 3.3 9,639 6.3 23,807 15.0
Interest 11,660 6.6 8,057 5.3 9,058 5.7
Stock-based compensation expense 2,725 1.5 3,583 2.4 2,072 1.3
United Kingdom asset impairment expense -- -- 10,493 6.9 -- --
Other expense 1,270 0.7 4,517 3.0 11,805 7.4
-------- ------ -------- ----- -------- -----
Total costs and expenses 90,483 51.2 97,913 64.4 107,779 67.8
-------- ------ -------- ----- -------- -----
Operating income 86,232 48.8 54,314 35.6 51,359 32.2
Foreign exchange gain (loss) 1,650 0.9 (2,767) (1.8) (3) --
-------- ------ -------- ----- -------- -----
Income before provision for income taxes 87,882 49.7 51,547 33.8 51,356 32.2
Provision for income taxes 30,557 17.3 26,878 17.7 21,582 13.6
-------- ------ -------- ----- -------- -----
Net income $ 57,325 32.4 % $ 24,669 16.1% $ 29,774 18.6%
======== ====== ======== ===== ======== =====
Net income per common share:
Basic $ 1.48 $ 0.58 $ 0.70
======== ======== ========
Diluted $ 1.40 $ 0.57 $ 0.69
======== ======== ========
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
For the year ended December 31, 2004, consolidated net income increased to
$57.3 million, or $1.40 per diluted share, compared to $24.7 million, or $0.57
per diluted share, for the same period in 2003. The increase in consolidated net
income was primarily due to: (i) a 21.1% increase in finance charge income due
to an increase in the size of the Dealer Loan portfolio during 2004 and an
increase in the yield due to an increase in forecasted collection rates on these
Dealer Loans, (ii) impairment expenses of $10.5 million recognized in 2003
following the decision to liquidate the United Kingdom operation, (iii) a
decrease in the Company's effective tax rate to 34.8% from 52.1% primarily due
to a change in the Company's international tax structure during 2004 and the
impact of the repatriation of foreign earnings in 2003, and (iv) a foreign
exchange gain of $1.7 million in 2004 compared to a loss of $2.8 million in
2003. The foreign exchange gains and losses were primarily the result of changes
in the fair value of forward contracts entered into during the third quarter of
2003.
The results of operations for the Company as a whole are attributable to
changes described by segment in the discussion of the results of operations in
the United States, United Kingdom, Automobile Leasing, and Other business
segments. The following discussion of interest expense is provided on a
consolidated basis, as the explanation is not meaningful by business segment.
Interest. Consolidated interest expense increased to $11.7 million in 2004
from $8.1 million in 2003. The increase in consolidated interest expense was due
to an increase in average outstanding debt as a result of stock repurchases and
an increase in Dealer Loans outstanding funded using the warehouse financing,
partially offset by a decrease in the weighted average interest rate to 7.0% in
2004 from 7.8% in 2003. The decrease in the weighted average interest rate is
primarily the result of the decreased impact of fixed fees on the Company's
secured financings and line of credit facility due to higher average outstanding
borrowings.
19
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
For the year ended December 31, 2003, consolidated net income decreased to
$24.7 million, or $0.57 per diluted share, compared to $29.8 million, or $0.69
per diluted share, for the same period in 2002. The decrease in consolidated net
income was primarily due to: (i) impairment expenses of $10.5 million recognized
in 2003 following the decision to liquidate the United Kingdom operation, and
(ii) a decrease in other income primarily due to interest income of $4.8 million
received from the Internal Revenue Service in the third quarter of 2002 in
connection with a refund related to a change in tax accounting methods that
affected the characterization and timing of revenue recognition for tax
purposes. Partially offsetting these items were: (i) a decrease in the provision
for credit losses primarily due to a reduction in the provision for credit
losses required to maintain the initial yield established at the inception of
the Dealer Loan, and (ii) an increase in finance charge income primarily due to
an increase in the size of the Dealer Loan portfolio and an increase in the
average yield due to an increase in forecasted collection rates on these Dealer
Loans.
Interest. Consolidated interest expense decreased to $8.1 million in 2003
from $9.1 million in 2002. The decrease in consolidated interest expense was
primarily the result of a decrease in average outstanding debt, partially offset
by an increase in the weighted average interest rate to 7.8% in 2003 from 5.6%
in 2002. This increase was primarily the result of the increased impact of fixed
fees on the Company's secured financings and line of credit facility due to
lower average outstanding borrowings.
UNITED STATES
YEAR ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, % OF 2003 % OF 2002 % OF
(Dollars in thousands) 2004 REVENUE (RESTATED) REVENUE (RESTATED) REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $149,998 89.5% $116,156 89.3% $ 96,472 83.6%
License fees 5,835 3.5 3,836 2.9 2,906 2.5
Other income 11,721 7.0 10,086 7.8 15,996 13.9
-------- ----- -------- ----- -------- -----
Total revenue 167,554 100.0 130,078 100.0 115,374 100.0
COSTS AND EXPENSES:
Salaries and wages 32,111 19.2 27,136 20.9 22,844 19.8
General and administrative 20,304 12.1 17,435 13.4 19,557 17.0
Sales and marketing 11,915 7.1 7,944 6.1 6,886 6.0
Provision for credit losses 5,332 3.2 6,003 4.6 11,443 9.9
Interest 11,009 6.6 6,329 4.9 5,462 4.7
Stock-based compensation expense 2,580 1.5 3,316 2.5 1,685 1.5
Other expense 344 0.2 541 0.4 1,863 1.6
-------- ----- -------- ----- -------- -----
Total costs and expenses 83,595 49.9 68,704 52.8 69,740 60.5
-------- ----- -------- ----- -------- -----
Operating income 83,959 50.1 61,374 47.2 45,634 39.5
Foreign exchange gain (loss) 1,661 1.0 (2,862) (2.2) (5) --
-------- ----- -------- ----- -------- -----
Income before provision for income taxes 85,620 51.1 58,512 45.0 45,629 39.5
Provision for income taxes 29,767 17.8 27,237 20.9 19,805 17.2
-------- ----- -------- ----- -------- -----
Net income $ 55,853 33.3% $ 31,275 24.1% $ 25,824 22.3%
======== ===== ======== ===== ======== =====
20
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Finance Charges. Finance charges increased to $150.0 million in 2004 from
$116.2 million in 2003 primarily due to an increase in the size of the Dealer
Loan portfolio resulting from an increase in the number of active
dealer-partners and an increase in the average transaction size, partially
offset by a decrease in the number of transactions per active dealer-partner.
The number of active dealer-partners is a function of new dealer-partner
enrollments and attrition. Active dealer-partners are dealer-partners who submit
at least one loan during the period. The following table summarizes the changes
in active dealer-partners and corresponding unit volume for the twelve months
ended December 31, 2004 and 2003:
TWELVE MONTHS ENDED DECEMBER 31, 2004 TWELVE MONTHS ENDED DECEMBER 31, 2003
------------------------------------- -------------------------------------
UNIT UNIT
DEALER-PARTRNERS VOLUME AVERAGE DEALER-PARTNERS VOLUME AVERAGE
----------------- ------- ------- ---------------- ------- --------
Production from year ended December 31
of the prior year 916 62,334 68.1 784 49,463 63.1
Attrition (1) (182) (4,459) 24.5 (231) (3,604) 15.6
Volume change from dealer-partners
active in both periods n/a 2,875 n/a n/a 4,487 n/a
----- ------ ---- --- ------ ----
Current period volume from dealer-
partners active both periods 734 60,750 82.8 553 50,346 91.0
New dealer-partners (2) 460 14,482 31.5 333 11,267 33.8
Restarts (3) 21 723 34.4 30 721 24.0
----- ------ ---- --- ------ ----
Current period production 1,215 75,955 62.5 916 62,334 68.1
(1) Dealer-partner attrition is measured according to the following formula:
dealer-partners active during the prior period who become inactive during
the current period.
(2) Excludes new dealer-partners that have enrolled in the Company's program,
but have not submitted at least one Consumer Loan during the period.
(3) Restarts are previously active dealer-partners that were inactive during
the prior period who became active during the current period.
License Fees. License fees increased to $5.8 million in 2004 from $3.8
million in 2003 due to an increase in the number of active dealer-partners.
License fees represent monthly fees charged to dealer-partners for access to
CAPS.
Salaries and Wages. Salaries and wages, as a percentage of revenue,
decreased to 19.2% in 2004 from 20.9% in 2003 primarily due to: (i) a decrease
in servicing salaries, as a percentage of revenue, of 1.4% due to increased
operational efficiencies and (ii) a decrease in corporate support salaries, as a
percentage of revenue, of 0.7% in 2004, which is consistent with the Company's
business plan of growing corporate infrastructure at a rate slower than the
growth rate of the Dealer Loan portfolio.
Sales and Marketing. Sales and marketing expenses, as a percentage of
revenue, increased to 7.1% in 2004 from 6.1% in 2003 primarily due to: (i) an
increase in dealer-partner support products and services, as a percentage of
revenue, of 0.3%, (ii) an increase in expenses related to the Company's national
dealer-partner convention, as a percentage of revenue, of 0.2%, and (iii) an
increase in sales commissions, as a percentage of revenue, of 0.1%. The increase
in expenses related to dealer-partner support products and services was
primarily due to: (i) the introduction of new dealer-partner inventory
acquisition support products and customer lead generation services in 2004 and
(ii) an increase in sales promotion kits and signs primarily due to an increase
in dealer-partner enrollments. The increase in expenses related to
dealer-partner support products and services was offset by an approximately
equal increase in other income resulting from the fees charged to
dealer-partners for these products and services.
Provision for Credit Losses. The provision for credit losses decreased to
$5.3 million in 2004 from $6.0 million in 2003. The provision for credit losses
consists primarily of a provision to reduce the carrying value of Dealer Loans
to maintain the initial yield established at the inception of the Dealer Loan.
Additionally, the provision for credit losses includes a provision for losses on
notes receivable and a provision for earned but unpaid revenue related to
license fees. The decrease in the provision for credit losses in 2004 was
primarily due to a reduction in the provision for credit losses required to
maintain the initial yield established at the inception of the Dealer Loan.
Stock-based Compensation Expense. Stock-based compensation expense
decreased to $2.6 million in 2004 from $3.3 million in 2003 primarily due to:
(i) additional expense recognized during 2003 as a result of a reduction in the
period over which certain performance-based stock options were expected to vest
and (ii) a decline in the number of unvested stock options outstanding.
Foreign Exchange Gain (Loss). The Company recognized a foreign exchange
gain of $1.7 million in 2004 compared to a loss of $2.9 million in 2003. The
foreign exchange gains and losses were primarily the result of changes in the
fair value of forward contracts entered into during the third quarter of 2003,
as discussed in Note 1 to the consolidated financial statements, incorporated
herein by reference.
21
Provision for Income Taxes. The effective tax rate decreased to 34.8% in
2004 from 46.5% in 2003 primarily due to a change made to the Company's tax
structure in 2004 to treat the Company's foreign subsidiaries as branches
subject to United States tax jurisdiction and the impact of the repatriation of
foreign earnings in 2003.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Finance Charges. Finance charges increased to $116.2 million in 2003 from
$96.5 million in 2002 primarily due to an increase in the size of the Dealer
Loan portfolio. The increase in Dealer Loans originations in the United States
in 2003 is due to an increase in the number of active dealer-partners due to an
increase in dealer-partner enrollments and reduced levels of dealer-partner
attrition.
Other Income. Other income decreased to $10.1 million in 2003 from $16.0
million in 2002 primarily due to: (i) interest income of $4.8 million received
from the Internal Revenue Service in the third quarter of 2002 in connection
with a change in tax accounting methods that affected the characterization and
timing of revenue recognition for tax purposes and (ii) a decrease in premiums
earned in 2003 of $1.5 million primarily due to a decrease in the penetration
rate on the Company's in-house service contract product. The decrease in the
penetration rate was a result of this product not being competitive with the
third party service contract products offered by the Company.
Salaries and Wages. Salaries and wages, as a percentage of revenue,
increased to 20.9% in 2003 from 19.8% in 2002 primarily due to: (i) an increase
in employee bonus expense, as a percentage of revenue, of 0.7% due to improved
financial and operational performance and (ii) an increase in benefits, as a
percentage of revenue, of 0.3%.
General and Administrative. General and administrative expenses, as a
percentage of revenue, decreased to 13.4% in 2003 from 17.0% in 2002 primarily
due to: (i) a decrease, as a percentage of revenue, of 1.1% due to losses on the
disposal of computer hardware in 2002, (ii) a decrease in occupancy and
equipment expense, as a percentage of revenue, of 0.8% due to a reduction in
depreciation expense and (iii) a decrease in legal expenses, as a percentage of
revenue, of 0.7% resulting from a reduction in the frequency and severity of
legal proceedings in which the Company is engaged.
Provision for Credit Losses. The provision for credit losses decreased to
$6.0 million in 2003 from $11.4 million in 2002. The provision for credit losses
consists primarily of a provision to reduce the carrying value of Dealer Loans
to maintain the initial yield established at the inception of the Dealer Loan.
Additionally, the provision for credit losses includes a provision for losses on
notes receivable. The decrease in the provision for credit losses in 2003
compared to 2002 was primarily due to a decrease in the provision required to
maintain the initial yield established at the inception of the Dealer Loan.
Stock-based Compensation Expense. Stock-based compensation expense
increased to $3.3 million in 2003 from $1.7 million in 2002. While the number of
stock options outstanding declined in 2003, stock-based compensation expense
increased as a result of a change in assumptions that reduced the period over
which certain performance based stock options are expected to vest.
Foreign exchange loss. The foreign exchange loss increased to $2.9 million
in 2003 from zero in 2002 primarily due to the changes in the fair value of
forward contracts entered into during the third quarter of 2003, as discussed in
Note 1 to the consolidated financial statements, incorporated herein by
reference.
Provision for Income Taxes. The effective tax rate increased to 46.5% in
2003 from 43.4% in 2002 due primarily to the impact of taxes on undistributed
and distributed foreign earnings. During 2002, the Company determined that the
undistributed earnings of its United Kingdom and Ireland subsidiaries should no
longer be considered to be permanently reinvested, and during 2003, the Company
determined that the undistributed earnings of its Canadian subsidiary should no
longer be considered to be permanently reinvested. As a result of these
determinations, the Company recorded the amount of U.S. federal income taxes and
withholding taxes related to the repatriation of these foreign earnings.
22
UNITED KINGDOM
YEAR ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, % OF 2003 % OF 2002 % OF
(Dollars in thousands) 2004 REVENUE (RESTATED) REVENUE (RESTATED) REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $4,208 90.6% $10,095 90.3% $17,671 83.9%
Other income 436 9.4 1,090 9.7 3,397 16.1
------ ----- ------- ----- ------- -----
Total revenue 4,644 100.0 11,185 100.0 21,068 100.0
COSTS AND EXPENSES:
Salaries and wages 2,241 48.3 3,593 32.1 3,620 17.2
General and administrative 1,471 31.7 2,132 19.1 2,499 11.9
Sales and marketing -- -- 943 8.4 849 4.0
(Benefit) provision for credit losses (769) (16.6) 804 7.2 4,489 21.3
Interest -- -- -- -- 594 2.8
Stock-based compensation expense 145 3.1 267 2.4 387 1.8
United Kingdom asset impairment expense -- -- 10,493 93.8 -- --
------ ----- ------- ----- ------- -----
Total costs and expenses 3,088 66.5 18,232 163.0 12,438 59.0
------ ----- ------- ----- ------- -----
Income (loss) before provision (credit)
for income taxes 1,556 33.5 (7,047) (63.0) 8,630 41.0
Provision (credit) for income taxes 484 10.4 (491) (4.4) 2,835 13.5
------ ----- ------- ----- ------- -----
Net income (loss) $1,072 23.1% $(6,556) (58.6)% $ 5,795 27.5%
====== ===== ======= ===== ======= =====
Effective June 30, 2003, the Company decided to stop originating Consumer
Loans in the United Kingdom. As a result, the size of the Consumer Loan
portfolio in the United Kingdom has declined significantly. The declines in the
revenues and expenses were primarily a result of this decision, except as
discussed below.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Provision for Credit Losses. The negative provision for credit losses of
$0.8 million in 2004 is the result of the recognition of recoveries on
previously charged-off Consumer Loans.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Salaries and Wages. Salaries and wages remained relatively consistent at
$3.6 million in 2003 and 2002. The impact of a reduction in staffing levels
resulting from the decision to stop Consumer Loan originations in the United
Kingdom was partially offset by increases of: (i) $250,000 in expenses related
to employee severance costs and (ii) $200,000 in employee bonus expense.
Sales and Marketing. Sales and marketing expenses increased to $900,000 in
2003 from $800,000 in 2002 primarily due to employee severance costs of $250,000
associated with the Company's decision to stop Consumer Loan originations in the
United Kingdom. This increase was partially offset by the elimination of sales
and marketing activities after the decision to stop Consumer Loan originations.
United Kingdom Asset Impairment Expense. As a result of the decision to
stop originating Consumer Loans in the United Kingdom, the Company recorded an
expense in the second quarter of 2003 consisting of: (i) $9.8 million to reduce
the carrying value of the operation's net asset value of the Consumer Loan
portfolio to the present value (using a discount rate of 13%) of the forecasted
cash flows relating to the Consumer Loan portfolio less estimated future
servicing expenses and (ii) a write-off of $700,000 of fixed assets that would
no longer be used in the operation. In determining the impairment of the
Consumer Loan portfolio, the Company analyzed the expected cash flows from this
operation assuming lower collection rates than were assumed before the decision
to liquidate. These lower collection rates reflect uncertainties (such as
potentially higher employee turnover or reduced morale) in the servicing
environment that may arise as a result of the decision to liquidate. For further
discussion on the impairment analysis performed in accordance with SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets", see Note 1 to the
consolidated financial statements, which is incorporated herein by reference.
23
The Company sold the remaining Consumer Loan portfolio of its United
Kingdom subsidiary on December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately $3.0 million.
AUTOMOBILE LEASING
YEAR ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, % OF 2003 % OF 2002 % OF
(Dollars in thousands) 2004 REVENUE (RESTATED) REVENUE (RESTATED) REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $ 4 0.1% $ 9 0.2% $ 6 --%
Lease revenue 1,507 41.6 6,432 78.8 16,101 92.3
Other income 2,109 58.3 1,717 21.0 1,335 7.7
------ ----- ------ ----- ------- -----
Total revenue 3,620 100.0 8,158 100.0 17,442 100.0
COSTS AND EXPENSES:
Salaries and wages 502 13.8 1,000 12.3 1,409 8.2
General and administrative 198 5.5 781 9.6 2,048 11.7
Sales and marketing -- -- -- -- 23 0.1
Provision for credit losses -- -- 1,688 20.7 5,135 29.4
Interest 517 14.3 1,136 13.9 1,991 11.4
Other expense 926 25.6 3,976 48.7 9,942 57.0
------ ----- ------ ----- ------- -----
Total costs and expenses 2,143 59.2 8,581 105.2 20,548 117.8
------ ----- ------ ----- ------- -----
Operating income (loss) 1,477 40.8 (423) (5.2) (3,106) (17.8)
Foreign exchange (loss) gain (11) (0.3) 95 1.2 2 --
------ ----- ------ ----- ------- -----
Income (loss) before provision (credit)
for income taxes 1,466 40.5 (328) (4.0) (3,104) (17.8)
Provision (credit) for income taxes 416 11.5 (115) (1.4) (1,102) (6.3)
------ ----- ------ ----- ------- -----
Net income (loss) $1,050 29.0% $ (213) (2.6)% $(2,002) (11.5)%
====== ===== ====== ===== ======= =====
In January 2002, the Company decided to stop originating automobile leases.
As a result, the average size of the lease portfolio has declined significantly.
The declines in the revenues and expenses were primarily a result of this
decision, except as discussed below.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
Other Income. Other income, as a percent of revenue, increased to 58.3% in
2004 from 21.0% in 2003 due to an increase in gains on lease terminations, as a
percentage of revenue, during 2004 resulting from an increase in the proportion
of lease terminations to total leases outstanding during 2004.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Other Income. Other income, as a percent of revenue, increased to 21.0% in
2003 from 7.7% in 2002 due to an increase in gains on lease terminations, as a
percentage of revenue, during 2003 resulting from an increase in the proportion
of lease terminations to total leases outstanding during 2003.
24
OTHER
YEAR ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, % OF 2003 % OF 2002 % OF
(Dollars in thousands) 2004 REVENUE (RESTATED) REVENUE (RESTATED) REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $ 649 72.4% $1,593 56.8% $1,808 34.4%
Other income 248 27.6 1,213 43.2 3,446 65.6
------ ----- ------ ----- ------ -----
Total revenue 897 100.0 2,806 100.0 5,254 100.0
COSTS AND EXPENSES:
Salaries and wages 107 11.9 241 8.6 269 5.1
General and administrative 222 24.7 357 12.7 804 15.3
Sales and marketing -- -- 62 2.2 229 4.4
Provision for credit losses 1,194 133.1 1,144 40.8 2,740 52.2
Interest 134 14.9 592 21.1 1,011 19.2
------ ----- ------ ----- ------ -----
Total costs and expenses 1,657 184.6 2,396 85.4 5,053 96.2
------ ----- ------ ----- ------ -----
(Loss) income before provision for
income taxes (760) (84.6) 410 14.6 201 3.8
(Credit) provision for income taxes (110) (12.1) 247 8.8 44 0.8
------ ----- ------ ----- ------ -----
Net income (loss) $ (650) (72.5)% $ 163 5.8% $ 157 3.0%
====== ===== ====== ===== ====== =====
The Other segment consists of the Company's Canadian indirect auto loan
business (accounted for as Dealer Loans), floorplan financing, and secured line
of credit financing businesses. Effective June 30, 2003, the Company decided to
stop originating Dealer Loans in Canada. As a result, the average size of the
Dealer Loan portfolio in Canada has declined significantly. The Company
significantly reduced its floorplan and secured line of credit portfolios since
2001. The declines in the revenues and expenses were primarily a result of these
decisions.
25
CRITICAL ACCOUNTING POLICIES AND LOSS EXPERIENCE
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments 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. On an ongoing basis, the Company evaluates its estimates,
including those related to the allowance for credit losses, finance charge
revenue, stock-based compensation expense, impairment of various assets,
contingencies, and taxes. The Company believes the following critical accounting
policies involve a high degree of judgment and complexity, and the use of
different estimates or assumptions could produce materially different financial
results.
Finance Charge Revenue
Balance Sheet Caption: Loans receivable
Income Statement Caption: Finance charges
Nature of Estimates Required: Estimating revenue recognition using the
interest rate method of accounting.
Assumptions and Approaches Used: The Company recognizes finance charge
income in accordance with the provisions
of an approach similar to SOP 03-3
"Accounting for Certain Loans or Debt
Securities Acquired in a Transfer." SOP
03-3 requires the Company to recognize
finance charges under the interest method
such that revenue is recognized on a level
yield basis based upon forecasted cash
flows. As the forecasted cash flows change
over time, the Company prospectively
adjusts the rate upwards for positive
changes but recognizes impairment for
negative changes in the current period.
Key Factors: Variances in the amount and timing of
future collections and dealer holdback
payments from current estimates could
materially impact earnings in future
periods.
Allowance for Credit Losses
Balance Sheet Caption: Allowance for credit losses
Income Statement Caption: Provision for credit losses
Nature of Estimates Required: Estimating the amount and timing of future
collections and dealer holdback payments.
Assumptions and Approaches Used: The Company maintains an allowance for
credit losses for any Dealer Loan balance
that, based on current expectations, is
not expected to achieve the weighted
average initial yield established at the
inception of the Dealer Loan. The Company
compares the present value (discounted at
the weighted average initial yield) of
estimated future collections less the
present value of the estimated related
dealer holdback payments for each Dealer
Loan to the recorded net investment in
that Dealer Loan. If the present value of
such cash flows is less than the carrying
amount of the Dealer Loan, an allowance
for credit losses is established to reduce
the carrying amount to the calculated
present value. The estimates of future
collections and the related dealer
holdback payments use various assumptions
based on a dealer-partner's actual loss
data and the Company's historical loss and
collection experience. At December 31,
2004, a 1% decline in the forecasted
future collections would result in
approximately a $1.8 million pre-tax
charge to the provision for credit losses.
For additional information, see Note 1 to
the consolidated financial statements,
which is incorporated herein by reference.
Key Factors: Variances in the amount and timing of
future collections and dealer holdback
payments from current estimates could
materially impact earnings in future
periods.
Stock-Based Compensation Expense
Balance Sheet Caption: Paid-in capital
Income Statement Caption: Stock-based compensation expense
Nature of Estimates Required: Compensation expense for stock options is
based on the fair value of the options on
the date of grant, which is estimated by
the Company, and is recognized over the
vesting period of the options.
26
Assumptions and Approaches Used: The Company uses the Black-Scholes option
pricing model to estimate the fair value
of stock option grants. This model
calculates the fair value using various
assumptions, including the expected life
of the option, the expected volatility of
the underlying stock, and the expected
dividend yield on the underlying stock. In
recognizing stock-based compensation
expense, the Company makes assumptions
regarding the expected forfeiture rate of
stock options and the expected vesting
date of performance-based options. For
additional information, see Notes 1 and 11
to the consolidated financial statements,
which are incorporated herein by
reference.
Key Factors: Changes in the expected vesting dates of
performance-based stock options would
impact the amount and timing of
stock-based compensation expense
recognized in future periods.
Impairment of Assets
Balance Sheet Caption: Various assets
Income Statement Caption: Impairment expense
Nature of Estimates Required: Estimating impairment for businesses in
liquidation on a quarterly basis.
Assumptions and Approaches Used: The Company estimates impairment for each
business in liquidation by comparing its
future forecasted net cash flows to its
net asset value. In estimating the future
net cash flows of the business, the
Company makes assumptions regarding the
amount and timing of cash flows. For
additional information, see Note 1 to the
consolidated financial statements, which
is incorporated herein by reference.
Key Factors: Negative variances in future forecasted
net cash flows from current estimates may
result in the recognition of impairment
expenses in future periods.
Litigation and Contingent
Liabilities
Balance Sheet Caption: Accrued liabilities
Income Statement Caption: General and administrative expense
Nature of Estimates Required: Estimating the likelihood of adverse legal
judgments and any resulting damages owed.
Assumptions and Approaches Used: The Company, with assistance from its
legal counsel, determines if the
likelihood of an adverse judgment for
various claims and litigation is remote,
reasonably possible, or probable. To the
extent the Company believes an adverse
judgment is probable and the amount of the
judgment is estimable, the Company
recognizes a liability. For information
regarding the potential various customer
claims against the Company, see Note 13 to
the consolidated financial statements,
which is incorporated herein by reference.
Key Factors: Negative variances in the ultimate
disposition of claims and litigation
outstanding from current estimates could
result in additional expense in future
periods.
Taxes
Balance Sheet Caption: Deferred income taxes, net
Income Statement Caption: Provision for income taxes
Nature of Estimates Required: Estimating the recoverability of deferred
tax assets.
Assumptions and Approaches Used: The Company, based on historical and
projected future financial results by tax
jurisdiction, determines if it is more
likely than not a deferred tax asset will
be realized. To the extent the Company
believes the recovery of all or a portion
of a deferred tax asset is not likely, a
valuation allowance is established. For
additional information, see Note 10 to the
consolidated financial statements, which
is incorporated herein by reference.
Key Factors: Changes in tax laws and variances in
projected future results from current
estimates that impact judgments made on
valuation allowances could impact the
Company's provision for income taxes in
future periods.
27
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flows from operating
activities, collections of Consumer Loans receivable and borrowings under the
Company's lines of credit and secured financings. The Company's principal need
for capital is to fund Dealer Loan originations and for the payment of dealer
holdbacks.
The Company's cash flow requirements are dependent on levels of Dealer Loan
originations. In 2004, the Company experienced an increase in Dealer Loan
originations from 2003 primarily due to: (i) an increase in the number of active
dealer-partners due to increased dealer-partner enrollments and reduced levels
of dealer-partner attrition and (ii) an increase in the average transaction
size.
The Company currently finances its operations through: (i) a bank line of
credit facility; (ii) term secured financings; (iii) revolving secured
financings; (iv) a mortgage loan; and (v) capital lease obligations. For
information regarding these financings and the covenants included in the related
documents, see Note 8 to the consolidated financial statements, which is
incorporated herein by reference. The Company was not in compliance with certain
covenants under its debt agreements due to its inability to timely file its
Annual Report on Form 10-K for the year ended December 31, 2004 and its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005, June 30,
2005, and September 30, 2005 due to the ongoing restatement of the Company's
consolidated financial statements. The Company has received waivers of this
requirement on its debt facilities and these waivers become permanent upon the
filing of such reports.
The Company's total balance sheet indebtedness increased to $193.5 million
at December 31, 2004 from $106.5 million at December 31, 2003. In addition to
the balance sheet indebtedness as of December 31, 2004, the Company also has
contractual obligations resulting in future minimum payments under operating
leases.
A summary of the total future contractual obligations requiring repayments
as of December 31, 2004 is as follows (in thousands):
PAYMENTS DUE BY PERIOD
---------------------------------------------------
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- -------- --------- ------- ------ ---------
Long-term debt obligations (1) $191,916 $176,677 $ 9,965 $5,274 $--
Capital lease obligations 1,631 491 1,140 -- --
Operating lease obligations 2,723 672 1,736 315 --
Purchase obligations -- -- -- -- --
Other long-term obligations (2) (3) -- -- -- -- --
-------- -------- ------- ------ ---
Total contractual obligations $196,270 $177,840 $12,841 $5,589 $--
======== ======== ======= ====== ===
(1) Long-term debt obligations included in the above table consists solely of
principal repayments. The Company is also obligated to make interest
payments at the applicable interest rates, as discussed in Note 8 in the
consolidated financial statements, which is herein incorporated by
reference.
(2) The Company has dealer holdback liabilities on its balance sheet; however,
as payments of dealer holdbacks are contingent upon the receipt of customer
payments on Consumer Loans receivable and the repayment of advances, these
obligations are excluded from the above table.
(3) The Company has entered into a series of forward contracts to deliver
British pound sterling in exchange for United States dollars. As the
forward contracts are derivatives that are recorded on the balance sheet at
their fair value and as this fair value does not represent the amounts that
will ultimately be received or paid under these contracts, these
obligations are excluded from the above table.
28
LIQUIDATION OF NON-CORE BUSINESSES
As a result of the decision in the second quarter of 2003 to stop Consumer
Loan originations in the United Kingdom and Dealer Loan originations in Canada,
and the decision to stop lease originations in January 2002, the Company expects
to receive approximately $15.0 million from the liquidation of its United
Kingdom, Canadian, and Automobile Leasing business segments. The expected
liquidation proceeds have been determined based on the Company's forecast of
cash inflows and outflows during the estimated remaining years of operation for
each business. Detail of expected future cash flows from the liquidation of
these business segments is shown in the following table:
(In thousands) AS OF DECEMBER 31, 2004
-----------------------
United Kingdom $12,200
Canada 2,000
Automobile Leasing 800
-------
$15,000
=======
The Company intends to utilize proceeds from businesses being liquidated
to: (i) fund Dealer Loan originations in the United States and (ii) fund common
stock repurchases. During 2004, the Company received $27.9 million in
liquidation proceeds.
The Company sold the remaining Consumer Loan portfolio of its United
Kingdom subsidiary on December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately $3.0 million.
Repurchase and Retirement of Common Stock - For information regarding the
Company's stock repurchase program, see Note 11 to the consolidated financial
statements, which is incorporated herein by reference.
Based upon anticipated cash flows, management believes that cash flows from
operations and its various financing alternatives will provide sufficient
financing for debt maturities and for future operations. The Company's ability
to borrow funds may be impacted by many economic and financial market
conditions. If the various financing alternatives were to become limited or
unavailable to the Company, the Company's operations could be materially and
adversely affected.
MARKET RISK
The Company is exposed primarily to market risks associated with movements
in interest rates and foreign currency exchange rates. The Company's policies
and procedures prohibit the use of financial instruments for trading purposes. A
discussion of the Company's accounting policies for derivative instruments is
included in the Summary of Significant Accounting Policies in Note 1 to the
consolidated financial statements, which is incorporated herein by reference.
Interest Rate Risk. The Company relies on various sources of financing,
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
primarily by entering into interest rate cap agreements.
As of December 31, 2004, the Company had $7.7 million of floating rate debt
outstanding on its bank credit facilities, with no interest rate cap protection,
and $76.0 million in floating rate debt outstanding under its secured financing,
with an interest rate cap of 6.25%. Based on the difference between the
Company's rates on its secured financing at December 31, 2004 and the interest
rate cap, the Company's maximum interest rate risk on the September 2003 secured
financing is 3.3%. This maximum interest rate risk would reduce annual after-tax
earnings by approximately $1.6 million in 2004. For every 1% increase in rates
on the Company's bank credit facilities, annual after-tax earnings would
decrease by approximately $50,000 in 2004. This analysis assumes the Company
maintains a level amount of floating rate debt.
Foreign Currency Risk. The Company is exposed to 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.
In the third quarter of 2003, the Company entered into a series of forward
contracts with a commercial bank to manage foreign currency exchange risk
associated with the cash flows anticipated from the exit of the United Kingdom
operation. As of December 31, 2004, the Company had contracts outstanding to
deliver 3.3 million British pounds sterling to the commercial bank which will be
exchanged into United States dollars at a weighted average exchange rate of 1.57
United States dollars per British pound
29
sterling on a monthly basis through June 30, 2005. The Company believes that
this transaction will minimize the currency exchange risk associated with an
adverse change in the relationship between the United States dollar and the
British pound sterling as it repatriates cash from the United Kingdom operation.
As the Company has not designated these contracts as hedges as defined under
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 138 and SFAS No. 149, changes in the fair value of these
forward contracts will increase or decrease net income. As of December 31, 2004,
the fair value of the forward contracts was $1.2 million less than the notional
amount of the contracts due to the weakening of the United States dollar versus
the British pound sterling since the date the contracts were entered into.
At December 31, 2004, an immediate 10% weakening of the United States
dollar would have decreased shareholders' equity by approximately $0.2 million
and decreased net income by approximately $0.4 million.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchange of
Nonmonetary Assets" ("SFAS 153"). This Statement amends Accounting Principles
Board ("APB") Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB
No. 29") which established the requirement that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in APB No. 29, however, included certain exceptions to that principle. SFAS 153
amends APB No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. SFAS 153 is
effective for nonmonetary exchanges occurring in fiscal periods beginning after
June 15, 2005. SFAS 153 is not expected to have material impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)"). This statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and amends SFAS No.
95, "Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar
to the approach described in SFAS 123. However, SFAS 123(R) requires all
shares-based payments to employees, including grants of employee stock options,
to be recognized in the consolidated statement of income based on their fair
values. Pro forma disclosure, as was allowed under APB No. 25, will no longer be
an alternative. As the Company began recognizing stock based compensation
expense under the fair value recognition and measurement provisions of SFAS No.
123 during 2003, the adoption of SFAS No. 123R will not have a material impact
on the Company.
30
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements in this report and may make
such statements in future filings with the Securities and Exchange Commission.
It may also make forward-looking statements in its press releases or other
public or shareholder communications. The Company's forward-looking statements
are subject to risks and uncertainties and include information about its
expectations and possible or assumed future results of operations. When the
Company uses any of the words "may," "will," "should," "believes," "expects,"
"anticipates," "assumes," "forecasts," "estimates," "intends," "plans" or
similar expressions, it is making forward-looking statements.
The Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
all of its forward-looking statements. These forward-looking statements
represent the Company's outlook only as of the date of this report. While the
Company believes that its forward-looking statements are reasonable, actual
results could differ materially since the statements are based on our current
expectations, which are subject to risks and uncertainties. Factors that might
cause such a difference include, but are not limited to, the following:
- the Company's potential inability to accurately forecast and estimate
the amount and timing of future collections,
- increased competition from traditional financing sources and from
non-traditional lenders,
- the unavailability of funding at competitive rates of interest,
- the Company's potential inability to continue to obtain third party
financing on favorable terms,
- the Company's potential inability to generate sufficient cash flow to
service its debt and fund its future operations,
- 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 potential inability to maintain or increase the volume
of automobile Consumer Loans,
- an increase in the amount or severity of litigation against the
Company,
- the loss of key management personnel or inability to hire qualified
personnel,
- the effect of natural disasters, terrorist attacks and other potential
disasters and attacks; and
- other risks set forth in this report and the other reports filed or
furnished from time to time with the SEC.
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.
31
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.
32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm 34
Consolidated Balance Sheets as of December 31, 2004 and 2003 35
Consolidated Income Statements for the years ended December 31, 2004,
2003, and 2002 36
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2004, 2003, and 2002 37
Consolidated Statements of Cash Flows for the years ended December 31,
2004, 2003, and 2002 38
Notes to the Consolidated Financial Statements 39
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Credit Acceptance Corporation
We have audited the accompanying consolidated balance sheets of Credit
Acceptance Corporation and Subsidiaries as of December 31, 2004 and 2003, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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 financial statements referred to above present fairly, in
all material respects, the financial position of Credit Acceptance Corporation
as of December 31, 2004 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Credit
Acceptance Corporation's internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Since we were unable to apply other procedures to satisfy
ourselves as to the effectiveness of the Company's internal control over
financial reporting at December 31, 2004, the scope of our work was not
sufficient to enable us to express, and we did not express, an opinion either on
management's assessment or on the effectiveness of the Company's internal
control over financial reporting in our report dated January 27, 2006.
As discussed in Note 2 to the consolidated financial statements, the Company has
restated its consolidated financial statements as of December 31, 2003, and for
the two years ended December 31, 2003.
/s/ GRANT THORNTON LLP
Southfield, Michigan
January 27, 2006
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
2003
2004 (RESTATED)
--------- ----------
ASSETS:
Cash and cash equivalents $ 614 $ 1,136
Restricted cash 23,927 37,275
Restricted securities available for sale 928 --
Loans receivable (including $18,353 and $16,783
from affiliates in 2004 and 2003, respectively) 667,394 619,437
Allowance for credit losses (141,383) (143,309)
--------- ---------
Loans receivable, net 526,011 476,128
--------- ---------
Property and equipment, net 19,706 18,541
Income taxes receivable 9,444 --
Other assets 10,683 11,768
--------- ---------
Total Assets $ 591,313 $ 544,848
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 49,384 $ 38,862
Dealer reserve payable, net 15,675 35,198
Line of credit 7,700 --
Secured financing 176,000 100,000
Mortgage note and capital lease obligations 9,847 6,447
Income taxes payable -- 2,086
Deferred income taxes, net 31,817 18,960
--------- ---------
Total Liabilities 290,423 201,553
--------- ---------
CONTINGENCIES (NOTE 12)
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000
shares authorized, 36,897,242 and
42,128,087 shares issued and outstanding at
year-end 2004 and 2003, respectively 369 421
Paid-in capital 25,640 125,077
Retained earnings 271,912 214,587
Accumulated other comprehensive income, net
of tax of $2 and $1,760 at year-end 2004
and 2003, respectively 2,969 3,210
--------- ---------
Total Shareholders' Equity 300,890 343,295
--------- ---------
Total Liabilities and Shareholders' Equity $ 591,313 $ 544,848
========= =========
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
2003 2002
2004 (RESTATED) (RESTATED)
----------- ----------- -----------
REVENUE:
Finance charges $ 154,859 $ 127,853 $ 115,957
Lease revenue 1,507 6,432 16,101
License fees 5,835 3,836 2,906
Other income 14,514 14,106 24,174
----------- ----------- -----------
Total revenue 176,715 152,227 159,138
----------- ----------- -----------
COSTS AND EXPENSES:
Salaries and wages 34,961 31,970 28,142
General and administrative 22,195 20,705 24,908
Sales and marketing 11,915 8,949 7,987
Provision for credit losses 5,757 9,639 23,807
Interest 11,660 8,057 9,058
Stock-based compensation 2,725 3,583 2,072
United Kingdom asset impairment expense -- 10,493 --
Other expense 1,270 4,517 11,805
----------- ----------- -----------
Total costs and expenses 90,483 97,913 107,779
----------- ----------- -----------
Operating income 86,232 54,314 51,359
Foreign exchange gain (loss) 1,650 (2,767) (3)
----------- ----------- -----------
Income before provision for income taxes 87,882 51,547 51,356
Provision for income taxes 30,557 26,878 21,582
----------- ----------- -----------
Net income $ 57,325 $ 24,669 $ 29,774
=========== =========== ===========
Net income per common share:
Basic $ 1.48 $ 0.58 $ 0.70
=========== =========== ===========
Diluted $ 1.40 $ 0.57 $ 0.69
=========== =========== ===========
Weighted average shares outstanding:
Basic 38,617,787 42,195,340 42,438,292
Diluted 41,017,205 43,409,007 43,362,741
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
TOTAL COMMON STOCK OTHER
SHAREHOLDERS' COMPREHENSIVE --------------- PAID-IN RETAINED COMPREHENSIVE
EQUITY INCOME (LOSS) NUMBER AMOUNT CAPITAL EARNINGS INCOME (LOSS)
------------- ------------- ------ ------ --------- -------- -------------
Balance, January 1, 2002, as previously $ 290,887 42,163 $422 $ 126,111 $170,493 $(6,139)
reported
Effect of restatement (10,342) -- -- -- (10,349) 7
--------- ------ ---- --------- -------- -------
Balance, January 1, 2002, as restated 280,545 42,163 422 126,111 160,144 (6,132)
Comprehensive income:
Net income 29,774 $29,774 29,774
Other comprehensive income:
Foreign currency translation
adjustment, net of tax of $431 7,110 7,110 7,110
Tax on permanently reinvested
other comprehensive loss (2,209)
-------
Other comprehensive income 4,901
-------
Total comprehensive income $34,675
=======
Recognition of deferred taxes on
foreign currency translation
adjustment related to the United
Kingdom and Ireland operations (77) (77)
Stock-based compensation 2,072 2,072
Repurchase and retirement of
common stock (7,018) (586) (6) (7,012)
Stock options exercised 3,606 749 7 3,599
--------- ------ ---- --------- -------- -------
Balance, December 31, 2002 316,012 42,326 423 124,770 189,918 901
Comprehensive income:
Net income 24,669 $24,669 24,669
Other comprehensive income:
Foreign currency translation
adjustment, net of
tax of $1,252 2,309 2,309 2,309
Tax on permanently reinvested
other comprehensive loss (69)
-------
Other comprehensive income 2,240
-------
Total comprehensive income $26,909
=======
Stock-based compensation 3,583 3,583
Repurchase and retirement of
common stock (5,316) (464) (5) (5,311)
Stock options exercised 2,038 266 3 2,035
--------- ------ ---- --------- -------- -------
Balance, December 31, 2003 343,295 42,128 421 125,077 214,587 3,210
Comprehensive income:
Net income 57,325 $57,325 57,325
Other comprehensive loss:
Unrealized loss on securities
available for sale, net of
tax of $2 (4) (4) (4)
Foreign currency translation
adjustment, net of
tax of ($1,760) (237) (237) (237)
-------
Total comprehensive income $57,084
=======
Stock-based compensation 2,725 2,725
Repurchase and retirement of
common stock (107,236) (5,752) (57) (107,179)
Stock options exercised 5,022 521 5 5,017
--------- ------ ---- --------- -------- -------
Balance, December 31, 2004 $ 300,890 36,897 $369 $ 25,640 $271,912 $ 2,969
========= ====== ==== ========= ======== =======
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------
2004 2003 2002
(RESTATED) (RESTATED)
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 57,325 $ 24,669 $ 29,774
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 5,757 9,639 23,807
Depreciation 5,781 8,502 14,643
Loss on retirement of property and equipment 230 73 1,500
Foreign currency (gain) loss on forward contracts (1,661) 2,817 --
Provision (credit) for deferred income taxes 12,857 (2,555) 23,257
Stock-based compensation 2,725 3,583 2,072
United Kingdom asset impairment -- 10,493 --
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 11,715 5,338 (8,674)
Income taxes receivable/payable (11,530) 11,845 (17,630)
Other assets 621 8,555 13,101
------------ ------------ ------------
Net cash provided by operating activities 83,820 82,959 81,850
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash 13,348 (27,203) 5,109
Increase in restricted securities available for sale (928) -- --
Principal collected on loans receivable 397,091 362,575 377,892
Advances to dealers and accelerated payments (427,866) (334,720) (249,434)
Originations and purchases of new consumer loans (7,938) (42,621) (71,391)
Payments of dealer holdbacks (34,421) (28,127) (32,698)
Purchases of property and equipment (3,567) (3,273) (4,444)
------------ ------------ ------------
Net cash (used in) provided by investing activities (64,281) (73,369) 25,034
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 314,000 68,400 129,963
Repayments under line of credit (306,300) (111,955) (159,623)
Proceeds from secured financings 288,000 100,000 75,045
Repayments of secured financings (212,000) (58,153) (139,288)
Principal payments under mortgage and capital lease obligations (2,821) (1,540) (851)
Proceeds from mortgage note refinancing 3,540 -- --
Repurchase of common stock (107,236) (5,316) (7,018)
Proceeds from stock options exercised 5,022 2,038 3,606
------------ ------------ ------------
Net cash used in financing activities (17,795) (6,526) (98,166)
------------ ------------ ------------
Effect of exchange rate changes on cash (2,266) (7,055) (4,488)
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (522) (3,991) 4,230
Cash and cash equivalents, beginning of period 1,136 5,127 898
------------ ------------ ------------
Cash and cash equivalents, end of period $ 614 $ 1,136 $ 5,128
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 10,920 $ 7,969 $ 7,729
============ ============ ============
Cash paid during the period for income taxes $ 26,855 $ 16,081 $ 16,509
============ ============ ============
Supplemental Disclosure of Non-Cash Transactions:
Property and equipment acquired through capital lease obligations $ 2,038 $ 32 $ 2,168
============ ============ ============
</Table>
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Principal Business. Since 1972, Credit Acceptance (the "Company" or "Credit
Acceptance") has provided auto loans to consumers, regardless of their credit
history. The Company's product is offered through a nationwide network of
automobile dealers who benefit from sales of vehicles to consumers who otherwise
could not obtain financing; from repeat and referral sales generated by these
same customers; and from sales to customers responding to advertisements for the
Company's product, but who actually end up qualifying for traditional financing.
The Company refers to dealers who participate in its program as
"dealer-partners". Upon enrollment in the Company's financing program, the
dealer-partner enters into a servicing agreement with Credit Acceptance that
defines the legal relationship between Credit Acceptance and the dealer-partner.
The servicing agreement assigns the responsibilities for administering,
servicing, and collecting the amounts due on retail installment contracts
(referred to as "Consumer Loans") from the dealer-partners to the Company.
The Company is considered a lender to dealer-partners in the United States
and Canada and a lender to consumers in the United Kingdom. This difference is
due to slight differences in the servicing agreements between the Company and
the dealer-partner for each respective country. In the United States and Canada,
if the Company discovers a misrepresentation by the dealer-partner relating to a
Consumer Loan assigned to the Company, the Company can demand that the Consumer
Loan be repurchased for the current balance of the Consumer Loan less the amount
of any unearned finance charge plus the applicable termination fee, which is
generally $500. Upon receipt of such amount in full, the Company will reassign
the Consumer Loan receivable and its security interest in the financed vehicle
to the dealer-partner. The dealer-partner can also opt to repurchase Consumer
Loans at their own discretion. To date, no dealer-partner has repurchased
receivables under this option. This repurchase stipulation is not part of the
servicing agreement in the United Kingdom.
Loans receivable in the United States and Canada. The Company is not
considered the originator of Consumer Loans in the United States and Canada for
accounting purposes. Instead the Company is a lender to dealer-partners. At the
time of acceptance, Consumer Loans that meet certain criteria are eligible for a
non-recourse cash payment to the dealer-partner (referred to as an "advance"),
which is computed on a formula basis. Upon acceptance of an assigned Consumer
Loan, the Company records the cash amount advanced to the dealer-partner as a
Dealer Loan ("Dealer Loan") classified in Loans receivable in the consolidated
financial statements.
Cash advanced to dealer-partners is automatically assigned to the
originating dealer-partner's open pool of business. At the dealer-partner's
option, a pool containing more than one hundred Consumer Loans can be closed and
subsequent advances assigned to a new pool. All advances due from a
dealer-partner are secured by the future collections on the dealer-partner's
portfolio of Consumer Loans that have been assigned to the Company. Net
collections on all related Consumer Loans within the pool, after payment of the
Company's servicing fee and reimbursement of certain collection costs, are
applied to reduce the aggregate advance balance owing against those Consumer
Loans. Once the advance balance has been repaid, the dealer-partner is entitled
to receive future collections from Consumer Loans within that pool, after
payment of the Company's servicing fee and reimbursement of certain collection
costs. If the collections on Consumer Loans from a dealer-partner's pool are not
sufficient to repay the advance balance, the dealer-partner will not receive the
portion of compensation that is paid based on the performance of the Consumer
Loan ("dealer holdback"). Additionally, for dealer-partners with more than one
pool, the pools are cross-collateralized so the performance of other pools is
considered in determining eligibility for holdback payments.
Loans receivable in the United Kingdom. Upon origination of a Consumer
Loan, the Company records the total payments due under the Consumer Loan as a
Loan receivable and the amount of its servicing fee as an unearned finance
charge, which, for balance sheet purposes, is netted from the gross amount of
the Consumer Loan and represents the interest element on the Consumer Loan from
the Company's perspective. The Company records the remaining portion of the
Consumer Loan (the gross amount of the Consumer Loan less the unearned finance
charge) in Dealer reserve payable in the consolidated financial statements. At
the time of acceptance, Consumer Loans that meet certain criteria are eligible
for a cash advance to the dealer-partner, which is computed on a formula basis.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Cash advanced to dealer-partners is automatically assigned to the
originating dealer-partner's open pool of advances. At the dealer-partner's
option, a pool containing more than one hundred Consumer Loans can be closed and
subsequent advances assigned to a new pool. All advances due from a
dealer-partner are secured by the future collections on the dealer-partner's
portfolio of Consumer Loans that have been assigned to the Company. Collections
on all related Consumer Loans within the pool, after payment of the Company's
servicing fee and reimbursement of certain collection costs, are applied to
reduce the aggregate advance balance related to that pool. Once the advance
balance has been repaid, the dealer-partner is entitled to receive future
collections from Consumer Loans within that pool, after payment of the Company's
servicing fee and reimbursement of certain collection costs. If the collections
on Consumer Loans from a dealer-partner's pool are not sufficient to repay the
advance balance, the dealer-partner will not receive the dealer holdback.
Dealer-partner advances are netted against dealer holdbacks in the accompanying
consolidated financial statements.
Businesses in Liquidation. Pursuant to Statement of Financial Accounting
Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", an impairment analysis is performed on the net asset value
of the United Kingdom, Canadian, and Automobile Leasing operations on a
quarterly basis. This analysis compares the undiscounted forecasted future net
cash flows (including future servicing expenses and any payments due to
dealer-partners under servicing agreements) of each operation to the operation's
net asset value at the balance sheet date. If this analysis indicates impairment
(i.e. the net asset value exceeds the undiscounted forecasted future net cash
flows), the Company is required to write down the value of the asset to the
present value of the forecasted net cash flows.
Effective June 30, 2003, the Company decided to stop originating Consumer
Loans in the United Kingdom. In analyzing the expected cash flows from this
operation, the Company assumed lower collection rates than assumed before the
decision to liquidate. These lower collection rates reflect uncertainties (such
as potentially higher employee turnover or reduced morale) in the servicing
environment that may arise as a result of the decision to liquidate. As a result
of this analysis, in the second quarter of 2003, the net asset value of the
operation's Consumer Loan portfolio was deemed to be impaired and the Company
recorded an after-tax expense of $6.4 million to reduce the carrying value of
its Consumer Loan portfolio to the present value (using a discount rate of 13%)
of the forecasted cash flows relating to the Consumer Loan portfolio less
estimated future servicing expenses. Based upon management's analysis as of
December 31, 2004, no additional reduction of the carrying value of the United
Kingdom Consumer Loan portfolio is required.
The Company sold the remaining Consumer Loan portfolio of its United
Kingdom subsidiary on December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately $3.0 million.
Effective June 30, 2003, the Company decided to stop originating Dealer
Loans in Canada. Since Dealer Loans originated in Canada are serviced in the
United States, the Company evaluated cash flows related to the Canadian
operation based on the same collection rate assumptions as were used before the
decision to liquidate. Based upon management's analysis as of December 31, 2004,
no reduction of the carrying value of the Canadian Dealer Loan portfolio is
required.
In January 2002, the Company decided to stop originating automobile leases.
Based upon management's analysis as of December 31, 2004, no reduction of the
carrying value of the Automobile Leasing's net assets is required.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
supercedes Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in Restructuring)." SFAS No. 146 requires a
liability for a cost associated with an exit or disposal activity to be
recognized and measured initially at its fair value in the period in which the
liability is incurred, rather than at the time of commitment to an exit plan.
The Company adopted this standard for exit or disposal activities initiated
after December 31, 2002. As a result of the Company's decision to exit the
United Kingdom business in the second quarter of 2003, the Company recognized:
(i) $300,000 after-tax increase in salaries and wages resulting from employee
severance expenses and (ii) $100,000 after-tax reduction in other income due to
a refund of profit sharing income on ancillary products to an ancillary product
provider which was based on volume targets no longer attainable due to the
decision to stop Consumer Loan originations.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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. The Company's primary subsidiaries are: Buyer's Vehicle
Protection Plan, Inc., CAC Leasing, Inc., Credit Acceptance Corporation UK
Limited, CAC of Canada Company, and Credit Acceptance Corporation Ireland
Limited.
REPORTABLE BUSINESS SEGMENTS
The Company is organized into four primary business segments: United
States, United Kingdom, Automobile Leasing, and Other. See Note 12 - Business
Segment Information for information regarding the Company's reportable segments.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP"), requires
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
significant estimation include the allowance for credit losses, finance charge
revenue, stock-based compensation expense, impairment of various assets,
contingencies, and taxes. Actual results could materially differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of readily marketable securities with original
maturities at the date of acquisition of three months or less.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consist of amounts held in accordance
with secured financing arrangements and reinsurance agreements.
RESTRICTED SECURITIES
Restricted securities consist of amounts held in accordance with secured
financing arrangements and reinsurance agreements. The Company determines the
appropriate classification of its investments in debt and equity securities at
the time of purchase and reevaluates such determinations at each balance sheet
date. Debt securities for which the Company does not have the intent or ability
to hold to maturity are classified as available for sale, and stated at fair
value with unrealized gains and losses, net of income taxes included in the
determination of comprehensive income and reported as a component of
shareholders' equity.
Restricted available-for-sale securities consist of the following:
AS OF DECEMBER 31, 2004
------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ---------- ---------- ---------
US Government and agency securities $150 $-- $(2) $148
Corporate bonds 784 1 (5) 780
---- --- --- ----
Total restricted securities available for sale $934 $ 1 $(7) $928
==== === === ====
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
The cost and estimated fair values of debt securities by contractual
maturity were as follows (securities with multiple maturity dates are classified
in the period of final maturity). Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AS OF
DECEMBER 31, 2004
---------------------
ESTIMATED FAIR
COST VALUE
---- --------------
Contractual Maturity
Within one year $ -- $ --
Over one year to five years 857 852
Over five years to ten years 77 76
Over ten years -- --
---- ----
Total restricted securities available for sale $934 $928
==== ====
FINANCE CHARGES - UNITED STATES AND CANADA
The Company recognizes finance charge income in accordance with the
provisions of the American Institute of Certified Public Accountant's Statement
of Position ("SOP") 03-3 "Accounting for Certain Loans or Debt Securities
Acquired in a Transfer." SOP 03-3 requires the Company to recognize finance
charges under the interest method such that revenue is recognized on a level
yield basis based upon forecasted cash flows. As the forecasted cash flows
change, the Company would prospectively adjust the rate upwards for positive
changes but would recognize impairment for negative changes in the current
period.
Buyers Vehicle Protection Plan, Inc. ("BVPP"), a wholly owned subsidiary of
the Company, has relationships with third party vehicle service contract
administrators ("TPAs") whereby the TPAs process claims on vehicle service
contracts underwritten by third party insurers. BVPP receives a commission for
all such vehicle service contracts sold by its dealer-partners where the vehicle
service contract is financed by the Company, and does not bear any risk of loss
for claims covered on these third party service contracts. The commission is
included in the purchase price of the vehicle service contract included in the
Consumer Loan. The Company advances to dealer-partners an amount equal to the
purchase price of the vehicle service contract on Consumer Loans accepted by the
Company that include vehicle service contracts. In addition, BVPP had its own
short-term limited extended service contract product offered by participating
dealer-partners. In connection therewith, BVPP bears the risk of loss for any
repairs covered under the service contract. The Company recognizes income and
related expense for this service contract program on an accelerated basis over
the life of the service contract. The Company stopped offering this product
effective November 1, 2003.
The Company recognizes the commission received from the TPAs for contracts
financed by the Company as part of finance charges on a level yield basis based
upon forecasted cash flows. Commissions on contracts not financed by the Company
are recognized as finance charge income at the time the commissions are
received.
During the first quarter of 2004, the Company entered into agreements with
two new TPAs. The two new agreements differ from the prior agreement in three
material respects: (i) the new agreements provide a commission to the Company on
all vehicle service contracts sold by its dealer-partners, regardless of whether
the vehicle service contract is financed by the Company, (ii) the Company
experiences a higher commission on vehicle service contracts financed by the
Company, and (iii) the new agreements allow the Company to participate in
underwriting profits depending on the level of future claims paid. The two new
agreements also require that net premiums on the vehicle service contracts be
placed in trust accounts by the TPA. Funds in the trust accounts are utilized by
the TPA to pay claims on the vehicle service contracts. Underwriting profits, if
any, on the vehicle service contracts are distributed to the Company after the
term of the vehicle service contracts have expired. Under FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), the Company is
considered the primary beneficiary of the trusts. As a result, the assets and
liabilities of the trusts have been consolidated on the Company's balance sheet.
As of December 31, 2004, the trusts had $4.8 million in cash and cash
equivalents available to pay claims and a related claims reserve of $4.8
million. Cash and cash equivalents are included in restricted cash and cash
equivalents and the claims reserve is included in accounts payable and accrued
liabilities in the consolidated balance sheets. A third party insures claims in
excess of funds in the trust accounts.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
LOANS RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES - UNITED STATES AND CANADA
The Company records the amount advanced to the dealer-partner as a Dealer
Loan. The Dealer Loan is increased as revenue is recognized and decreased as
collections are received. The Company follows SOP 03-3 in determining its
allowance for credit losses. Consistent with SOP 03-3, an allowance for credit
losses is maintained at an amount that reduces the net asset value (Dealer Loan
balance less the allowance) to the discounted value of forecasted future cash
flows at the yield established at the inception of the Dealer Loan. This
allowance is calculated on a dealer-partner by dealer-partner basis. The
discounted value of future cash flows is comprised of estimated future
collections on the Consumer Loans, less any estimated dealer holdback payments.
In estimating future collections and dealer holdback payments for each
dealer-partner, the Company considers: (i) a dealer-partner's actual loss data
on a static pool basis and (ii) the Company's historical loss and collection
experience. The Company's collection forecast for each dealer-partner is updated
monthly, and considers the most recent static pool data available for each
dealer-partner and the Company's entire portfolio of Consumer Loans.
Cash flows from any individual Dealer Loan are often different than
estimated cash flows at Dealer Loan inception. If such difference is favorable,
the difference is recognized into income over the life of the Dealer Loan
through a yield adjustment. If such difference is unfavorable, an allowance for
credit losses is established and a corresponding provision for credit losses is
recorded as a current period expense. Because differences between estimated cash
flows at inception and actual cash flows occur often, an allowance is required
for a significant portion of the Company's Dealer Loan portfolio. An allowance
for credit losses does not necessarily indicate that a Dealer Loan is
unprofitable, and very seldom are cash flows from a Dealer Loan portfolio
insufficient to repay the initial amounts advanced to the dealer.
FINANCE CHARGES - UNITED KINGDOM
The Company recognizes finance charge income in the United Kingdom in
accordance with the provisions of SFAS No. 91, "Accounting for Nonrefundable
Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases (an Amendment of FASB Statements No. 13, 60, and 65 and a
Rescission of FASB Statement No. 17)" ("SFAS No. 91"). SFAS No. 91 requires the
Company to recognize finance charges under the interest method such that income
is recognized on a level yield basis during the life of the underlying asset.
LOANS RECEIVABLE, ALLOWANCE FOR CREDIT LOSSES, AND DEALER RESERVE PAYABLE -
UNITED KINGDOM
The Company maintains an allowance for credit losses to cover losses
inherent in the Company's Consumer Loan portfolio. Such losses consist of
Consumer Loans receivable determined to be uncollectible or that have expected
future collections less than the full contractual amount, less any losses
absorbed by dealer holdbacks. Dealer holdbacks in the United Kingdom are
classified in Dealer reserve payable, in the Company's consolidated financial
statements. By definition, these losses equal the amount by which advances to
dealer-partners plus accrued income (the "net investment") exceed the net
present value of estimated future cash flows related to the Consumer Loans
receivable less the present value of estimated dealer holdback payments.
To record losses, as required under SFAS No. 114, "Accounting by Creditors
for Impairment of a Loan - an amendment of FASB Statements No. 5 and 15", as
amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan-
Income Recognition and Disclosures", the Company utilizes a present value
methodology and compares the present value of estimated future collections less
the present value of the estimated related dealer holdback payments for each
dealer-partner's Consumer Loan portfolio to the Company's net investment in that
portfolio. The Company maintains historical loss experience for each
dealer-partner on a static pool basis and uses this information to forecast the
timing and amount of the future collections and dealer holdback payments on each
dealer-partner's Consumer Loan portfolio. In estimating future collections and
dealer holdback payments for each dealer-partner, the Company considers: (i) a
dealer-partner's actual loss data on a static pool basis and (ii) the Company's
historical loss and collection experience. The Company's collection forecast for
each dealer-partner is updated monthly, and considers the most recent static
pool data available for each dealer-partner and the Company's entire portfolio
of Consumer Loans. Forecasted collections and dealer holdback payments are
discounted to present value using a rate equal to the rate of return expected at
the origination of the Consumer Loan. To the extent that the present value of
future collections less the present value of the related dealer holdback
payments is less than the Company's net investment in the portfolio, the Company
records an allowance equal to the difference between the net investment and the
present value of future collections less the present value of the related dealer
holdback payments. Proceeds from one dealer-partner's portfolio cannot be used
to offset losses relating to another dealer-partner.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
A significant percentage of charged-off Consumer Loans are absorbed by
dealer holdbacks and, as a result, do not result in losses to the Company. The
Company's primary protection against losses relates to appropriately managing
the spread between the collection rate and the amount advanced to
dealer-partners at Consumer Loan inception.
The Company's allowance for credit losses also covers earned but unpaid
servicing fees on Consumer Loans receivable in non-accrual status (no payments
received for 90 days). Servicing fees, which are recorded as finance charges,
are recognized under the interest method of accounting until the earlier of the
underlying obligation becoming 90 days past due on a recency basis or the
repossession and sale of the vehicle securing the Consumer Loan. At such time,
the Company suspends the recognition of revenue and records a provision for
credit losses equal to the earned but unpaid revenue. Once a Consumer Loan is
classified in non-accrual status, it remains in non-accrual status for the
remaining life of the Consumer Loan. Revenue on non-accrual Consumer Loans is
recognized on a cash basis.
Effective July 1, 2003, the Company retroactively eliminated the reserve
for advance losses balance, which was previously classified within dealer
holdbacks, net and transferred the balance into the allowance for credit losses
which is classified within Loans receivable, net. In addition, the Company
prospectively eliminated its charge-off policy related to dealer advances and
modified its Loans receivable charge-off policy to require charge-off of Loans
receivable after 270 days of no payment against dealer holdbacks, net and, if
such holdback is insufficient, against the allowance for credit losses. In
effect, the Company combined its advance and Loans receivable charge-off
policies into a single policy whereby the Consumer Loan and related advance are
charged-off at the same time. For the first six months of 2003, advances were
charged-off when the Company's analysis forecasted no future collections on
Consumer Loans relating to the dealer-partner advance pool. Prior to January 1,
2003, advances were charged-off or partially charged-off when the Company's
analysis determined that the expected discounted cash flows associated with the
related Consumer Loans were insufficient to recover the outstanding advance
balance in the pool.
The Company records the gross amount of the Consumer Loan less the unearned
finance charges as dealer holdbacks. Consumer Loans originated by and advances
to each dealer-partner are automatically assigned to that dealer-partner's open
pool of Consumer Loans. Periodically, pools are closed and subsequent Consumer
Loans and advances are assigned to a new pool. Collections on the Consumer Loans
within each pool, after payment of the Company's servicing fee and reimbursement
of certain collection costs, are applied to reduce the aggregate advance balance
relating to those Consumer Loans. Once the advance balance has been repaid, the
dealer-partner is entitled to receive collections from the Consumer Loans within
that pool.
All advances from a dealer-partner are secured by all of the future
collections on Consumer Loans originated by that dealer-partner. For balance
sheet purposes, dealer holdbacks are shown in Dealer reserve payable, net of the
current advance balance.
PROPERTY AND EQUIPMENT
Additions to property and equipment are recorded at cost. Depreciation is
provided on a straight-line basis over the estimated useful lives of the assets.
Estimated useful lives are generally as follows: buildings - 40 years, building
improvements - 10 years, data processing equipment - 3 years, software - 5
years, office furniture and equipment - 7 years, and leasehold improvements -
the lesser of the lease term or 10 years. The cost of assets sold or retired and
the related accumulated depreciation are removed from the accounts at the time
of 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 improvements are capitalized. Software
developed for internal use is capitalized and generally amortized on a
straight-line basis. The Company evaluates long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
OTHER ASSETS
Leased assets are depreciated to their residual values on a straight-line
basis over the scheduled lease term. The Company established its residual values
based upon an industry guidebook and data from repossessed vehicles sold at
auction. Realization of the residual values is dependent on the Company's future
ability to market the vehicles under then prevailing market conditions.
As of December 31, 2004 and 2003, deferred debt issuance costs were $3.5
million and $3.0 million, respectively. Expenses associated with the issuance of
debt instruments are capitalized and amortized over the term of the debt
instrument on a level-yield basis for term secured financings and on a
straight-line basis for lines of credit and revolving secured financings.
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INCOME TAXES
Provisions for federal, state and foreign income taxes are calculated on
reported pre-tax earnings based on current tax law and also include, in the
current period, the cumulative effect of any changes in tax rates from those
used previously in determining deferred tax assets and liabilities. Such
provisions differ from the amounts currently receivable or payable because
certain items of income and expense are recognized in different time periods for
financial reporting purposes than for income tax purposes. Significant judgment
is required in determining income tax provisions and evaluating tax positions.
The Company establishes reserves for income tax when, despite the belief that
our tax positions are fully supportable, there remain certain positions that are
probable to be challenged and possibly disallowed by various authorities. The
consolidated tax provision and related accruals include the impact of such
reasonably estimable losses and related interest as deemed appropriate. To the
extent that the probable tax outcome of these matters changes, such changes in
estimate will impact the income tax provision in the period in which such
determination is made.
DERIVATIVE INSTRUMENTS
Interest Rate Caps. The Company purchases interest rate cap agreements to
manage its interest rate risk on its secured financings. As the Company has not
designated these agreements as hedges as defined under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 138
and SFAS No. 149, changes in the fair value of these agreements will increase or
decrease net income.
As of December 31, 2004, the following interest rate cap agreements were
outstanding (in thousands):
NOTIONAL COMMERCIAL PAPER FAIR
AMOUNT CAP RATE TERM VALUE
- -------- ---------------- ---- -----
$100,000 6.25% September 2004 through January 2007 $30
100,000 6.25% September 2004 through February 2007 13
- -------- ---
$200,000 $43
======== ===
As of December 31, 2003, the following interest rate cap agreements were
outstanding (in thousands):
NOTIONAL COMMERCIAL PAPER FAIR
AMOUNT CAP RATE TERM VALUE
- -------- ---------------- ---- -----
$ 6,663 7.50% July 2002 through January 2004 $--
8,218 6.50% July 2002 through January 2004 --
31,250 6.25% October 2002 through October 2004 --
100,000 6.25% November 2003 through March 2006 17
- -------- ---
$146,131 $17
======== ===
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Foreign Currency Forward Contracts. In the third quarter of 2003, the
Company entered into a series of forward contracts with a commercial bank to
manage foreign currency exchange risk associated with the cash flows anticipated
from the exit of the United Kingdom operation. As of December 31, 2004 and 2003,
the Company had contracts outstanding to deliver 3.3 million British pounds
sterling and 16.9 million British pounds sterling, respectively, to the
commercial bank which will be exchanged into United States dollars at weighted
average exchange rates of 1.57 and 1.58 United States dollars per British pound
sterling, respectively, on a monthly basis through June 30, 2005. The Company
believes that this transaction will minimize the currency exchange risk
associated with an adverse change in the relationship between the United States
dollar and the British pound sterling as it repatriates cash from the United
Kingdom operation. As the Company has not designated these contracts as hedges
as defined under SFAS No. 133, changes in the fair value of these forward
contracts will increase or decrease net income. The fair value of the forward
contracts was less than the notional amount of the contracts outstanding as of
December 31, 2004 and 2003 by $1,156,000 and $2,817,000, respectively, due to
the weakening of the United States dollar versus the British pound sterling
since the date the contracts were entered into. The Company recognized a foreign
currency gain of $1,661,000 for 2004 related to the change in the fair value of
the forward contracts primarily due to a decrease in the notional amount of the
forward contracts from December 31, 2003 to December 31, 2004, partially offset
by the weakening of the United States dollar versus the British pound sterling
during 2004. The Company recognized a foreign currency loss of $2,817,000 for
2003 related to the change in the fair value of the forward contracts due to the
weakening of the United States dollar versus the British pound sterling since
the date the contracts were entered into.
STOCK COMPENSATION PLANS
At December 31, 2004, the Company has three stock-based compensation plans
for employees and directors, which are described more fully in Note 11 - Capital
Transactions. Prior to April 1, 2003, the Company accounted for those plans
under the recognition and measurement principles of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
Interpretations. In the second quarter of 2003, the Company adopted the fair
value recognition and measurement provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" for stock-based employee
compensation. Under the retroactive restatement transition method selected by
the Company described in SFAS No. 148, the Company restated all prior periods to
reflect the stock-based compensation expense that would have been recognized had
the recognition provisions of SFAS No. 123 been applied to all options granted
to employees or directors after January 1, 1995.
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 reflected in accumulated other
comprehensive income, as a separate component of shareholders' equity. Realized
foreign currency transaction gains and losses are included in the statement of
income.
Deferred income taxes are recognized for foreign currency translation
adjustments when the Company's investments in its foreign subsidiaries are
considered temporary and the differences will reverse in the foreseeable future.
Prior to 2002, the Company considered all of its investments in its foreign
subsidiaries to be permanent. During the first quarter of 2002, the Company
determined that its investments in its United Kingdom subsidiary was no longer
considered permanent, and during the second quarter of 2003, the Company
determined that its investment in its Canadian subsidiary was no longer
considered permanent. Upon these determinations, the Company recognized deferred
income taxes related to the foreign currency translation adjustments of these
subsidiaries.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
LEASE REVENUE
Income from operating lease vehicles is recognized on a straight-line basis
over the scheduled lease term. Revenue recognition is suspended at the point the
customer becomes 90 days past due on a recency basis.
LICENSE FEES
The Company recognizes a monthly dealer-partner access fee for the
Company's patented Internet-based proprietary Credit Approval Processing System
("CAPS") in the month the access is provided.
OTHER INCOME
Other income consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
------- ---------- ----------
(RESTATED) (RESTATED)
Premiums earned $ 2,457 $ 2,986 $ 4,512
Dealer enrollment fees 1,449 781 847
Net gains on lease terminations 1,497 1,073 973
Rental revenue 788 900 1,044
Interest and fees on floorplan receivables, lines
of credit, and notes receivable 792 1,416 3,675
Interest income - tax refund (1) -- -- 4,800
Other 7,531 6,950 8,323
------- ------- -------
$14,514 $14,106 $24,174
======= ======= =======
(1) Interest income from the Internal Revenue Service was received in 2002 in
connection with a refund related to a change in tax accounting methods that
affected the characterization and timing of revenue recognition for tax
purposes.
Premiums earned include credit life and disability premiums and premiums
from the Company's non-TPA service contract program. CAC Reinsurance, Ltd.
("Credit Acceptance Reinsurance"), a wholly owned subsidiary of the Company, is
engaged primarily in the business of reinsuring credit life and disability
insurance policies issued to borrowers under Consumer Loans assigned by
participating dealer-partners. The Company advances to dealer-partners an amount
equal to the credit life and disability insurance premium. The policies insure
the customer for the outstanding balance payable in the event of death or
disability of the customer. Premiums are ceded to Credit Acceptance Reinsurance
on both an earned and written basis and are earned over the life of the Consumer
Loans using pro rata and sum-of-digits methods. Credit Acceptance Reinsurance
bears the risk of loss related to claims under the coverage ceded to it. The
Company recognizes income and related expense for the service non-TPA contract
program on an accelerated basis over the life of the service contract.
Enrollment fees of $9,850 are generally paid by each dealer-partner signing
a servicing agreement. In return for the enrollment fee, the Company provides
the dealer-partner with sales promotion kits, signs, training and the first
month's access to CAPS. Beginning in the fourth quarter of 2002, the enrollment
fee in the United States is 100% refundable for 180 days. The fees and the
related direct incremental costs of enrolling these dealer-partners are deferred
and amortized on a straight-line basis over the estimated life of the
dealer-partner relationship. The Company estimates the amount of fees that will
not be refunded and begins amortizing this portion of the deferred fees and
costs immediately. After the 180-day refund period expires, the Company begins
amortizing any remaining fees that have not been refunded along with the related
costs.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
The Company recognizes gains on lease terminations when the proceeds from
the sale of previously leased vehicles at auctions exceed the carrying values of
the vehicles.
The Company leases part of its headquarters to outside parties under
non-cancelable operating leases. This activity is not a significant part of its
business activities.
Dealer-partners are charged an initial fee to floorplan a vehicle, and
interest is recognized monthly based on the number of days a vehicle remains on
the floorplan, with interest rates generally ranging from 12% to 18% per annum.
Income from secured lines of credit is recognized under the interest method of
accounting. Interest on notes receivable is recognized as income based on the
outstanding monthly balance and is generally 5% to 18% per annum. When a
floorplan receivable, line of credit, or note receivable is determined to be
impaired, the recognition of income is suspended and the Company records a
provision for losses equal to the difference between the carrying value and the
present value of the expected cash flows.
Other income consists primarily of remarketing and repossession fees, NSF
fees, Credit Acceptance University training fees and income earned from sales of
the Company's marketing materials.
EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) plan that covers substantially all of its
employees. Employees may elect to contribute to the plan from 1% to 20% of their
salary subject to statutory limitations. The Company makes matching
contributions equal to 50% of the employee contributions, up to a maximum of
$1,250 per employee. Prior to 2004, the Company made matching contributions
equal to 25% of the employee contributions, up to a maximum of $625 per
employee. The Company recognized compensation expense of $302,000, $131,000, and
$123,000 in 2004, 2003, and 2002, respectively, for its matching contributions
to the plan.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 153, "Exchange of
Nonmonetary Assets" ("SFAS 153"). This Statement amends Accounting Principles
Board ("APB") Opinion No. 29, "Accounting for Nonmonetary Transactions" ("APB
No. 29") which established the requirement that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. The guidance
in APB No. 29, however, included certain exceptions to that principle. SFAS 153
amends APB No. 29 to eliminate the exception for nonmonetary exchanges of
similar productive assets and replaces it with a general exception for exchanges
of nonmonetary assets that do not have commercial substance. SFAS 153 is
effective for nonmonetary exchanges occurring in fiscal periods beginning after
June 15, 2005. SFAS 153 is not expected to have material impact on the Company's
consolidated financial statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123(R)"). This statement supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"), and amends SFAS No.
95, "Statement of Cash Flows." Generally, the approach in SFAS 123(R) is similar
to the approach described in SFAS 123. However, SFAS 123(R) requires all
shares-based payments to employees, including grants of employee stock options,
to be recognized in the consolidated statement of income based on their fair
values. Pro forma disclosure, as was allowed under APB No. 25, will no longer be
an alternative. As the Company began recognizing stock based compensation
expense under the fair value recognition and measurement provisions of SFAS No.
123 during 2003, the adoption of SFAS No. 123R will not have a material impact
on the Company.
RECLASSIFICATION
Certain amounts for prior periods have been reclassified to conform to the
current presentation.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) RESTATEMENT OF PRIOR PERIODS
On April 1, 2005, the Company's former independent registered public
accounting firm, Deloitte & Touche LLP ("Deloitte"), informed the Company that
Deloitte's National Office was reviewing the Company's accounting for loans. On
April 8, 2005, Deloitte informed the Company that it believed the Company should
not account for loans as an originator of loans to consumers but should instead
account for its loans as a lender to its dealer-partners. The Company had
accounted for its loans as a loan originator to consumers since 1992, and
believed such accounting was in accordance with generally accepted accounting
principles in the United States ("GAAP"). On April 26, 2005, the Company
submitted a letter to the staff of the Office of the Chief Accountant of the
Securities and Exchange Commission ("the SEC") requesting guidance.
On June 24, 2005, the SEC informed the Company that its method for
recording loans should be changed from that of an originator of Consumer Loans
to that of a servicer of loans generated by dealer-partners and a lender to
those dealer-partners. As a result of this determination, the Company was
required to restate its previously issued financial statements and reported
financial results.
In addition to the restatement for the new loan accounting methodology, the
Company's consolidated financial statements have been restated to correct income
taxes related primarily to its foreign subsidiaries. On March 10, 2005, the
Company disclosed that it had discovered errors related to accounting for income
taxes related primarily to its foreign operations during the 2004 year-end
closing process. The restatement of these errors decreased net income for the
year ended December 31, 2003 by $2.3 million and increased net income for the
three months ended June 30, 2004 by $2.7 million. The correction of these errors
had no impact on pre-tax income. Additionally, various adjustments have been
made to income taxes in addition to these corrections as a result of the change
in loan accounting previously discussed.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) RESTATEMENT OF PRIOR PERIODS - (CONTINUED)
The restatement impacted the consolidated financial statements as follows:
<Table>
<Caption>
DECEMBER 31,
2003 DECEMBER 31,
(AS ORIGINALLY 2003
REPORTED) ADJUSTMENTS (RESTATED)
--------------- --------------- ---------------
REVENUE:
Finance charges $ 103,125 $ 24,728 $ 127,853
Lease revenue 6,432 -- 6,432
License fees 3,836 -- 3,836
Other income 32,395 (18,289) 14,106
--------------- --------------- ---------------
Total revenue 145,788 6,439 152,227
COSTS AND EXPENSES:
Salaries and wages 33,655 (1,685) 31,970
General and administrative 20,034 671 20,705
Sales and marketing 8,494 455 8,949
Provision for credit losses 10,459 (820) 9,639
Interest 8,057 -- 8,057
Stock-based compensation 3,583 -- 3,583
United Kingdom asset impairment expense 10,493 -- 10,493
Other expense 4,756 (239) 4,517
--------------- --------------- ---------------
Total costs and expenses 99,531 (1,618) 97,913
Operating income 46,257 8,057 54,314
Foreign exchange loss (2,767) -- (2,767)
--------------- --------------- ---------------
Income before provision for income taxes 43,490 8,057 51,547
Provision for income taxes 15,309 11,569 26,878
--------------- --------------- ---------------
Net income $ 28,181 $ (3,512) $ 24,669
=============== =============== ===============
Net income per common share:
Basic $ 0.67 $ (0.09) $ 0.58
=============== =============== ===============
Diluted $ 0.65 $ (0.08) $ 0.57
=============== =============== ===============
Weighted average shares outstanding:
Basic 42,195,340 42,195,340 42,195,340
Diluted 43,409,007 43,409,007 43,409,007
</Table>
<Table>
<Caption>
DECEMBER 31,
2002 DECEMBER 31,
(AS ORIGINALLY 2002
REPORTED) ADJUSTMENTS (RESTATED)
--------------- --------------- ---------------
REVENUE:
Finance charges $ 97,744 $ 18,213 $ 115,957
Lease revenue 16,101 -- 16,101
License fees 2,906 -- 2,906
Other income 37,583 (13,409) 24,174
--------------- --------------- ---------------
Total revenue 154,334 4,804 159,138
COSTS AND EXPENSES:
Salaries and wages 29,042 (900) 28,142
General and administrative 24,551 357 24,908
Sales and marketing 7,623 364 7,987
Provision for credit losses 23,935 (128) 23,807
Interest 9,058 -- 9,058
Stock-based compensation 2,072 -- 2,072
Other expense 11,530 275 11,805
--------------- --------------- ---------------
Total costs and expenses 107,811 (32) 107,779
Operating income 46,523 4,836 51,359
Foreign exchange gain (loss) -- (3) (3)
--------------- --------------- ---------------
Income before provision for income taxes 46,523 4,833 51,356
Provision for income taxes 18,158 3,424 21,582
--------------- --------------- ---------------
Net income $ 28,365 $ 1,409 $ 29,774
=============== =============== ===============
Net income per common share:
Basic $ 0.67 $ 0.03 $ 0.70
=============== =============== ===============
Diluted $ 0.65 $ 0.04 $ 0.69
=============== =============== ===============
Weighted average shares outstanding:
Basic 42,438,292 42,438,292 42,438,292
Diluted 43,362,741 43,362,741 43,362,741
</Table>
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) RESTATEMENT OF PRIOR PERIODS - (CONCLUDED)
DECEMBER 31,
2003 DECEMBER 31,
(AS ORIGINALLY 2003
REPORTED) ADJUSTMENTS (RESTATED)
-------------- ----------- ------------
Loans receivable $872,970 $(253,533) $ 619,437
Allowance for credit losses (17,615) (125,694) (143,309)
-------- --------- ---------
Loans receivable, net 855,355 (379,227) 476,128
Income taxes receivable 5,795 (5,795) --
All other assets 82,630 (13,910) 68,720
-------- --------- ---------
Total assets 943,780 (398,932) 544,848
======== ========= =========
Dealer reserve payable, net 423,861 (388,663) 35,198
Income taxes payable -- 2,086 2,086
Deferred income taxes, net 22,770 (3,810) 18,960
Other liabilites 139,584 5,725 145,309
-------- --------- ---------
Total liabilities 586,215 (384,662) 201,553
Shareholders' equity 357,565 (14,270) 343,295
-------- --------- ---------
Total liabilities and shareholders' equity $943,780 $(398,932) $ 544,848
======== ========= =========
See Note 14 for additional information on the restatement impact on
quarterly data.
(3) 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 and Restricted Cash and Cash Equivalents. The
carrying amount of cash and cash equivalents and restricted cash and cash
equivalents approximate their fair value due to the short maturity of these
instruments.
Net Investment in Loans. Loans receivable, net less dealer holdbacks, net
represent the Company's net investment in Dealer Loans and Consumer Loans. The
fair value is determined by calculating the present value of future loan payment
inflows and dealer holdback outflows estimated by the Company utilizing a
discount rate comparable with the rate used to calculate the Company's allowance
for credit losses.
Floorplan, Lines of Credit, and Notes Receivable. The carrying values of
floorplan, lines of credit, and notes receivable approximate their fair values
as the interest rates on these instruments approximate the interest rates the
Company would charge on similar instruments as of December 31, 2004 and 2003.
Debt. The fair value of debt is determined using quoted market prices, if
available, or calculated using the estimated value of each debt instrument based
on current rates offered to the Company for debt with similar maturities.
Derivative Instruments. The fair value of interest rate caps and foreign
currency forward contracts are based on quoted market values.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) FAIR VALUE OF FINANCIAL INSTRUMENTS - (CONCLUDED)
A comparison of the carrying value and estimated fair value of these financial
instruments is as follows (in thousands):
AS OF DECEMBER 31,
---------------------------------------------
2003
2004 (RESTATED)
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
ASSETS
Cash and cash equivalents and restricted cash $ 25,469 $ 25,469 $ 38,411 $ 38,411
Net investment in Loans receivable 510,336 519,532 440,930 447,690
Notes, lines of credit and floorplan receivables, net 4,339 4,339 6,562 6,562
Derivative instruments 43 43 17 17
LIABILITIES
Lines of credit 7,700 7,700 -- --
Secured financing 176,000 175,543 100,000 100,158
Mortgage note 8,216 7,876 5,418 5,470
Derivative instruments 1,156 1,156 2,817 2,817
(4) LOANS RECEIVABLE
Loans receivable consists of the following (in thousands):
AS OF DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Dealer Loans receivable $626,284 $537,671 $462,509
Consumer Loans receivable 43,008 88,446 145,682
Other Loans receivable 4,350 6,668 12,326
Unearned finance charges (4,275) (10,791) (19,722)
Unearned insurance premiums, insurance reserves and fees (1,973) (2,557) (3,394)
-------- -------- --------
Loans receivable $667,394 $619,437 $597,401
======== ======== ========
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LOANS RECEIVABLE
Loans receivable consists of the following (in thousands):
AS OF DECEMBER 31,
------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Dealer Loans receivable $ 626,284 $ 537,671 $ 462,508
Consumer Loans receivable 43,008 88,446 145,682
Other Loans receivable 4,350 6,668 12,326
Unearned finance charges (4,275) (10,791) (19,722)
Unearned insurance premiums, insurance reserves and fees (1,973) (2,557) (3,393)
------------ ------------ ------------
Loans receivable $ 667,394 $ 619,437 $ 597,401
============ ============ ============
A summary of changes in Loans receivable is as follows (in thousands):
Years Ended December 31,
YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ------------ ------------
Balance, beginning of period $ 537,671 $ 75,098 $ 6,668 $ 619,437
New loans 427,866 7,938 -- 435,804
Dealer holdback payments 33,326 -- -- 33,326
Net cash collections on loans (365,119) (27,615) -- (392,734)
Write-offs (7,104) (23,783) -- (30,887)
Recoveries -- 2,157 -- 2,157
Net change in floorplan receivables, notes receivable
and lines of credit -- -- (2,318) (2,318)
Other -- 584 -- 584
Currency translation (356) 2,381 -- 2,025
------------ ------------ ------------ ------------
Balance, end of period $ 626,284 $ 36,760 $ 4,350 $ 667,394
============ ============ ============ ============
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ------------ ------------
Balance, beginning of period $ 462,508 $ 122,567 $ 12,326 $ 597,401
New loans 334,720 27,519 -- 362,239
Dealer holdback payments 27,403 -- -- 27,403
Net cash collections on loans (285,522) (46,221) -- (331,743)
Write-offs (2,468) (39,106) -- (41,574)
Recoveries -- 1,168 -- 1,168
Net change in floorplan receivables, notes receivable
and lines of credit -- -- (5,658) (5,658)
Other -- 837 -- 837
Currency translation 1,030 8,334 -- 9,364
------------ ------------ ------------ ------------
Balance, end of period $ 537,671 $ 75,098 $ 6,668 $ 619,437
============ ============ ============ ============
</Table>
<Table>
<Caption>
YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ------------ ------------
Balance, beginning of period $ 446,580 $ 168,657 $ 19,045 $ 634,282
New loans 249,434 44,692 -- 294,126
Dealer holdback payments 31,937 -- -- 31,937
Net cash collections on loans (263,362) (68,949) -- (332,311)
Write-offs (2,149) (36,197) -- (38,346)
Recoveries -- 61 -- 61
Net change in floorplan receivables, notes receivable
and lines of credit -- -- (6,719) (6,719)
Other -- 2,850 -- 2,850
Currency translation 68 11,453 -- 11,521
------------ ------------ ------------ ------------
Balance, end of period $ 462,508 $ 122,567 $ 12,326 $ 597,401
============ ============ ============ ============
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LOANS RECEIVABLE - (CONCLUDED)
A summary of changes in the Allowance for credit losses is as follows (in
thousands):
FOR THE YEAR ENDED DECEMBER 31, 2004
------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- --------
Balance, beginning of period $136,514 $ 6,689 $ 106 $143,309
Provision for credit losses (1) 5,094 (978) 1,174 5,290
Write-offs (7,104) (1,305) -- (8,409)
Recoveries -- 2,023 -- 2,023
Other change in floorplan receivables, notes receivable,
and lines of credit -- -- (1,270) (1,270)
Currency translation 95 345 -- 440
-------- ------- ------- --------
Balance, end of period $134,599 $ 6,774 $ 10 $141,383
======== ======= ======= ========
FOR THE YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- --------
Balance, beginning of period $132,658 $ 6,550 $ 1,285 $140,493
Provision for credit losses (2) 6,109 744 1,100 7,953
Write-offs (2,468) (2,179) -- (4,647)
Recoveries -- 1,123 -- 1,123
Other change in floorplan receivables, notes receivable,
and lines of credit -- -- (2,279) (2,279)
Currency translation 215 451 -- 666
-------- ------- ------- --------
Balance, end of period $136,514 $ 6,689 $ 106 $143,309
======== ======= ======= ========
FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- --------
Balance, beginning of period $124,368 $ 5,916 $ 2,463 $132,747
Provision for credit losses (3) 10,433 4,999 3,241 18,673
Write-offs (2,149) (4,922) -- (7,071)
Recoveries -- 61 -- 61
Other change in floorplan receivables, notes receivable,
and lines of credit -- -- (4,419) (4,419)
Currency translation 6 496 -- 502
-------- ------- ------- --------
Balance, end of period $132,658 $ 6,550 $ 1,285 $140,493
======== ======= ======= ========
(1) Does not include a provision of $467 for earned but unpaid revenue related
to license fees.
(2) Does not include a provision of $1,686 primarily related to the Company's
lease portfolio.
(3) Does not include a provision of $5,134 primarily related to the Company's
lease portfolio.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(5) LEASED PROPERTIES
The Company leases offices and office equipment. Management expects that in
the normal course of business, leases will be renewed or replaced by other
leases. Total rental expense on all operating leases was $484,000, $391,000, and
$373,000 for 2004, 2003, and 2002, respectively. Contingent rentals under the
operating leases were insignificant. Minimum future lease commitments under
operating leases as of December 31, 2004 are as follows (in thousands):
MINIMUM FUTURE
LEASE COMMITMENTS
- -----------------
2005 $ 672
2006 684
2007 628
2008 424
2009 315
------
$2,723
======
(6) INVESTMENTS IN OPERATING LEASES
The net investment in operating leases consists of the following (in
thousands):
AS OF DECEMBER 31,
--------------------
2004 2003
------- ----------
(RESTATED)
Gross leased assets $ 2,037 $10,273
Accumulated depreciation (1,535) (6,703)
Gross deferred costs 226 1,513
Accumulated amortization of deferred costs (212) (1,307)
Lease payments receivable 558 631
------- -------
Investment in operating leases, net $ 1,074 $ 4,407
======= =======
A summary of changes in the investment in operating leases is as follows
(in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
------- ---------- ----------
(RESTATED) (RESTATED)
Balance, beginning of period $ 4,407 $17,669 $ 42,774
Gross operating leases originated -- -- 1,075
Depreciation of operating leases (928) (3,974) (9,941)
Lease payments receivable 1,723 6,513 16,062
Collections on operating leases (1,769) (7,132) (15,031)
Provision for lease losses -- (1,703) (5,252)
Operating lease liquidations (2,393) (7,387) (12,037)
Currency translation 34 421 19
------- ------- --------
Balance, end of period $ 1,074 $ 4,407 $ 17,669
======= ======= ========
Future minimum rentals on leased vehicles at December 31, 2004 are $274,000
in 2005.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
AS OF DECEMBER 31,
---------------------
2004 2003
-------- ----------
(RESTATED)
Land $ 2,586 $ 2,587
Building and improvements 9,639 8,848
Data processing equipment and software 30,921 27,737
Office furniture and equipment 2,047 2,025
Leasehold improvements 369 995
-------- --------
45,562 42,192
Less:
Accumulated depreciation on property and
equipment (24,969) (22,768)
Accumulated depreciation on leased assets (887) (883)
-------- --------
Total accumulated depreciation (25,856) (23,651)
-------- --------
$ 19,706 $ 18,541
======== ========
Property and equipment included capital leased assets of $2,447,000 and
$1,934,000 as of December 31, 2004 and 2003, respectively. Depreciation expense
on property and equipment was $4,853,000, $4,528,000 and $4,702,000 in 2004,
2003 and 2002, respectively.
(8) DEBT
LINES OF CREDIT
At December 31, 2004, the Company had a $135.0 million credit agreement
with a commercial bank syndicate. The facility has a commitment period through
June 9, 2006. At December 31, 2004, the agreement provided that, at the
Company's option, interest is payable at either the eurodollar rate plus 130
basis points (3.68% at December 31, 2004), or at the prime rate (5.25% at
December 31, 2004). The eurodollar borrowings may be fixed for periods of up to
six months. Borrowings under the credit agreement are subject to a borrowing
base limitation equal to 65% of the net book value of Dealer Loans plus 65% of
the net book value of Consumer Loans purchased by the Company (not to exceed a
maximum of 25% of the aggregate borrowing base limitation), less a hedging
reserve (not exceeding $1.0 million), the amount of letters of credit issued
under the line of credit, and the amount of other debt secured by the collateral
which secures the line of credit. Currently, the borrowing base limitation does
not inhibit the Company's borrowing ability under the line of credit. The credit
agreement uses terminology corresponding to the Company's historical method of
accounting. As a result, the net book value of Dealer Loans would require
adjustment to reflect the equivalent terms used in the credit agreement. As of
December 31, 2004, there was $121.9 million available under the line of credit.
The credit agreement has certain restrictive covenants, including a minimum
required ratio of the Company's assets to debt, its liabilities to tangible net
worth, and its earnings before interest, taxes and non-cash expenses to fixed
charges. Additionally, the agreement requires that the Company maintain a
specified minimum level of net worth. Borrowings under the credit agreement are
secured by a lien on most of the Company's assets. The Company must pay annual
and quarterly fees on the amount of the commitment. As of December 31, 2004,
there was $7.7 million outstanding under this facility. There were no amounts
outstanding under this facility as of December 31, 2003. The maximum amount
outstanding was approximately $118.1 and $82.9 million in 2004 and 2003,
respectively. The weighted average balance outstanding was $49.6 and $59.0
million in 2004 and 2003, respectively. The weighted average interest rate on
line of credit borrowings outstanding on December 31, 2004 was 3.7%.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT - (CONTINUED)
SECURED FINANCING
The secured financing agreements described below that were in place at
December 31, 2004 used terminology corresponding to the Company's historical
method of accounting as described in Note 2. The agreements, as drafted, include
references to advance rates based on asset values determined under the
historical accounting methodology. As a result, calculations using advance rates
and assets valued pursuant to the current accounting methodology will not
reflect actual limitations imposed by the agreements. The Company is currently
negotiating modifications to the secured financing agreements that remain in
effect as of the date of this report to adjust the advance rates and/or
determination of asset values and to otherwise conform the terminology used in
these agreements to the Company's current method of accounting as necessary to
keep the parties' rights constant.
In the second quarter of 2003, the Company's wholly-owned subsidiary,
Credit Acceptance Funding LLC 2003-1 ("Funding 2003-1"), completed a secured
financing transaction, in which Funding 2003-1 received $100.0 million in
financing. In connection with this transaction, the Company conveyed, for cash
and the sole membership interest in Funding 2003-1, Dealer Loans having a net
book value of approximately $134.0 million to Funding 2003-1, which, in turn,
conveyed the Dealer Loans to a trust, which issued $100.0 million in notes to
qualified institutional investors. Radian Asset Assurance issued a financial
insurance policy in connection with the transaction. The policy guaranteed the
timely payment of interest and ultimate repayment of principal on the final
scheduled distribution date. The notes were rated "AA" by Standard & Poor's
Rating Services and bore interest at a fixed rate of 2.77%. The proceeds of the
conveyance to Funding 2003-1 were used by the Company to reduce outstanding
borrowings under the Company's line of credit. At December 31, 2003, there was
$100.0 million outstanding under this secured financing transaction. In the
third quarter of 2004, the Company, as servicer for Funding 2003-1, exercised
its "clean-up call" option to reacquire the remaining Dealer Loans from the
trust and directed the trust to redeem the notes in full. The remaining assets
of the trust, including remaining collections, were paid over to Funding 2003-1
as the sole beneficiary of the trust and then distributed to the Company as the
sole member of Funding 2003-1. As a result, this secured financing transaction
was terminated after a total term of 15 months.
In the third quarter of 2003, the Company's wholly-owned subsidiary, CAC
Warehouse Funding Corp. II ("Warehouse Funding" or "2003-2"), completed a
revolving secured financing transaction with an institutional investor. In the
third quarter of 2004, Warehouse Funding increased the facility limit and
renewed the commitment. Under the renewed facility, Warehouse Funding may
receive up to $200.0 million in financing when the Company conveys Dealer Loans
to Warehouse Funding for cash and equity in Warehouse Funding. Warehouse Funding
will in turn pledge the Dealer Loans as collateral to the institutional investor
to secure loans that will fund the cash portion of the purchase price of the
Dealer Loans. As required under the agreement, all amounts outstanding under the
facility were refinanced and the facility paid to zero in August 2004. This
revolving facility, which was to mature on August 9, 2005, but has been extended
to February 15, 2006, allows conveyances of Dealer Loans by the Company and
related borrowing by Warehouse Funding in which Warehouse Funding will receive
70% (increased to 75% in January 2005) of the net book value of the contributed
Dealer Loans up to the $200.0 million facility limit. In addition to the
maturity of the facility, there is a requirement that any amounts outstanding
under the facility be refinanced, and the facility paid to zero, by February 15,
2006. If this does not occur or the requirement is not waived, or if the
facility is not extended, the transaction will cease to revolve, will amortize
as collections are received and, at the option of the institutional investor,
may be subject to acceleration and foreclosure. Although Warehouse Funding will
be liable for any secured financing under the facility, the financing will be
non-recourse to the Company, even though Warehouse Funding and the Company are
consolidated for financial reporting purposes. As Warehouse Funding is organized
as a separate special purpose legal entity from the Company, assets of Warehouse
Funding (including the conveyed Dealer Loans) will not be available to satisfy
the general obligations of the Company. All the assets of Warehouse Funding have
been encumbered to secure Warehouse Funding's obligations to its creditors.
Borrowings under the facility will bear interest at a floating rate equal to the
commercial paper rate plus 65 basis points, which has been limited to a maximum
rate of 6.25% (increased to 6.75% in September 2005) through interest rate cap
agreements. The interest rate at December 31, 2004 was 2.97%. The Company will
receive a monthly servicing fee paid out of collections equal to 6% of the
collections received with respect to the conveyed Dealer Loans. Except for the
servicing fee and payments due to dealer-partners, the Company does not have any
rights in, any portion of such collections. As of December 31, 2004, there was
$76.0 million outstanding under this facility. There were no amounts outstanding
under this facility as of December 31, 2003.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT - (CONTINUED)
In the third quarter of 2004, the Company's wholly-owned subsidiary, Credit
Acceptance Funding LLC 2004-1 ("Funding 2004-1"), completed a secured financing
transaction, in which Funding 2004-1 received $100.0 million in financing. In
connection with this transaction, the Company conveyed, for cash and the sole
membership interest in Funding 2004-1, Dealer Loans having a net book value of
approximately $134.0 million to Funding 2004-1, which, in turn, conveyed the
Dealer Loans to a trust, which issued $100.0 million in notes to qualified
institutional investors. Radian Asset Assurance issued the primary financial
insurance policy in connection with the transaction, and XL Capital Assurance
issued a backup financial insurance policy. The policies guaranteed the timely
payment of interest and ultimate repayment of principal on the final scheduled
distribution date. The notes were rated "Aaa" by Moody's Investor Services and
"AAA" by Standard & Poor's Rating Services. The proceeds of the initial
conveyance to Funding 2004-1 were used by the Company to purchase Dealer Loans
from Warehouse Funding. Until February 15, 2005, the Company conveyed additional
Dealer Loans to Funding 2004-1 which were then conveyed by Funding 2004-1 to the
trust, and used by the trust as collateral in support of the outstanding debt.
As of December 31, 2004, additional Dealer Loans having a net book value of
approximately $8.4 million had been conveyed by the Company after the completion
of the initial funding. After February 15, 2005, the debt outstanding under this
facility began to amortize. The secured financing created loans for which the
trust was liable and which were secured by all the assets of the trust and of
Funding 2004-1. Such loans were non-recourse to the Company, even though the
trust, Funding 2004-1 and the Company were consolidated for financial reporting
purposes. As Funding 2004-1 was organized as a separate legal entity from the
Company, assets of Funding 2004-1 (including the conveyed Dealer Loans) were not
available to satisfy the general obligations of the Company. All the assets of
Funding 2004-1 were encumbered to secure Funding 2004-1's obligations to its
creditors. The notes bore interest at a fixed rate of 2.53%. The annualized cost
of the secured financing, including underwriters fees, the insurance premiums
and other costs was 6.6%. The Company received a monthly servicing fee paid out
of collections equal to 6% of the collections received with respect to the
conveyed Dealer Loans. Except for the servicing fee and payments due to
dealer-partners, the Company did not receive, or have any rights in, any portion
of such collections, except for a limited right in its capacity as Servicer to
exercise a "clean-up call" option to purchase Dealer Loans from Funding 2004-1
under certain specified circumstances. As of December 31, 2004 there was $100.0
million outstanding under this secured financing transaction. In the fourth
quarter of 2005, the Company exercised its "clean-up call" option to reacquire
the remaining Dealer Loans from the trust and directed the trust to redeem the
notes in full. The remaining assets of the trust, including remaining
collections, were paid over to Funding 2004-1 as the sole beneficiary of the
trust and then distributed to the Company as the sole member of Funding 2004-1.
As a result, this secured financing transaction was terminated after a total
term of 15 months.
The Company and its subsidiaries have completed a total of eleven secured
financing transactions, nine of which have been repaid in full as of December
31, 2004. Information about the outstanding secured financing transactions is as
follows (dollars in thousands):
Balance as
Secured Financing Secured Dealer Loan Percent of
Issue Balance at Balance at Original
Number Close Date Limit December 31, 2004 December 31, 2004 Balance
- ------ -------------- -------- ----------------- ------------------- ----------
2004-1 August 2004 $100,000 $100,000 $134,534 100%
2003-2 September 2003 * $200,000 76,000 116,731 n/a
* In August 2004, the 2003-2 Loan and Security Agreement was amended to
increase the facility limit to $200 million and extend the commitment
period to August 9, 2005. The commitment period has subsequently been
extended to February 15, 2006.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) DEBT - (CONCLUDED)
MORTGAGE LOAN PAYABLE
The Company has a mortgage loan from a commercial bank that is secured by a
first mortgage lien on the Company's headquarters building and an assignment of
all leases, rents, revenues and profits under all present and future leases of
the building. There was $8.2 million and $5.4 million outstanding on this loan
as of December 31, 2004 and December 31, 2003, respectively. During the second
quarter of 2004, the loan, which now matures on June 9, 2009, was refinanced and
increased by $3.5 million under similar terms and conditions. The loan bears
interest at a fixed rate of 5.35%, and requires monthly payments of $92,156 and
a balloon payment at maturity for the balance of the loan.
CAPITAL LEASE OBLIGATIONS
As of December 31, 2004, the Company has various capital lease obligations
outstanding for computer equipment, with monthly payments totaling $67,000. The
total amount of capital lease obligations outstanding as of December 31, 2004
and 2003 was $1.6 million and $1.0 million, respectively. These capital lease
obligations bear interest at rates ranging from 7.28% to 9.31% and have maturity
dates between October 2005 and March 2008.
LETTERS OF CREDIT
Letters of credit are issued by a commercial bank and reduce amounts
available under the Company's line of credit. As of December 31, 2004, the
Company has four letters of credit relating to reinsurance agreements totaling
$5.4 million. Such letters of credit expired on May 26, 2005, at which time they
were extended for the period of one year until May 26, 2006.
PRINCIPAL DEBT MATURITIES
The scheduled principal maturities of the Company's debt at December 31,
2004 are as follows (in thousands):
2005 $177,168
2006 9,008
2007 1,204
2008 893
2009 5,274
--------
$193,547
========
Included in scheduled principal maturities are anticipated maturities of
secured financing debt. The maturities of this debt are dependent on the timing
of cash collections on the Dealer Loans, the amounts due to dealer-partners for
payments of dealer holdbacks and changes in interest rates on the secured
financing. Such amounts included in the table above are $176.0 million for 2005.
DEBT COVENANTS
The Company's debt facilities require compliance with various restrictive
debt covenants that require the maintenance of certain financial ratios and
other financial conditions. The most restrictive covenants require a minimum
ratio of the Company's assets to debt, its liabilities to tangible net worth,
and its earnings before interest, taxes and non-cash expenses to fixed charges.
The Company must also maintain a specified minimum level of net worth, which may
indirectly limit the payment of dividends on common stock. Although the Company
was not in compliance with its covenants due to its inability to timely file its
Annual Report on Form 10-K for the year ended December 31, 2004 and its
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005, June 30,
2005, and September 30, 2005, the Company had received waivers of this
requirement on its debt facilities and these waivers became permanent upon the
filing of such reports.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company has Dealer Loans with
affiliated dealer-partners owned by: (i) the Company's majority shareholder and
Chairman; (ii) the Company's President; and (iii) a member of the Chairman's
immediate family. The Company's Dealer Loans from affiliated dealer-partners and
nonaffiliated dealer-partners are on the same terms. A summary of related party
Dealer Loan activity is as follows (in thousands):
As of December 31, 2004 As of December 31, 2003
----------------------------- -----------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
balance consolidated balance consolidated
-------------- ------------ -------------- ------------
Dealer loan balance $16,700 2.7% $15,200 2.8%
For the Year ended For the Year ended For the Year ended
December 31, 2004 December 31, 2003 December 31, 2002
----------------------------- ----------------------------- -----------------------------
Affiliated Affiliated Affiliated
dealer-partner % of dealer-partner % of dealer-partner % of
activity consolidated activity consolidated activity consolidated
-------------- ------------ -------------- ------------ -------------- ------------
Advances $14,300 3.3% $10,600 3.2% $8,200 3.3%
Affiliated Dealer revenue $ 4,200 2.9% $ 3,600 3.2% $3,200 3.5%
Pursuant to an employment agreement with the Company's President dated
April 19, 2001, the Company loaned the President's dealerships $850,000. The
note, including all principal and interest, is due on April 19, 2011, bears
interest at 5.22%, is unsecured, and is personally guaranteed by the Company's
President. The balance of the note including accrued but unpaid interest was
approximately $1,099,000 and $1,054,000 as of December 31, 2004 and December 31,
2003, respectively. In addition, pursuant to the employment agreement, the
Company loaned the President approximately $478,000. The note, including all
principal and interest, is due on April 19, 2011, bears interest at 5.22%
beginning January 1, 2002, and is unsecured. The balance of the note including
accrued interest was approximately $554,000 and $529,000 as of December 31, 2004
and December 31, 2003, respectively.
Total CAPS and dealer enrollment fees earned from affiliated
dealer-partners were $95,000, $66,000, and $34,000 for the years ended December
31, 2004, 2003, and 2002, respectively.
The Company paid for air transportation services provided by a company
owned by the Company's majority shareholder and Chairman totaling $227,000,
$159,000 and $77,000 for the years ended December 31, 2004, 2003, and 2002,
respectively.
Prior to the third quarter of 2001, the Company offered a line of credit
arrangement to certain dealerships who were not participating in the Company's
core program. The Company ceased offering this program to new dealerships in the
third quarter of 2001 and has been reducing the amount of capital invested in
this program since that time. Beginning in 2002, entities owned by the Company's
majority shareholder and Chairman began offering secured line of credit loans in
a manner similar to the Company's prior program, at his dealerships and at two
other dealerships, one of whom also does business with the Company.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(10) INCOME TAXES
The income tax provision consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
---------------------------------
2004 2003 2002
-------- ---------- ---------
(RESTATED) (RESTATED)
Income (loss) before provision
(credit) for income taxes:
Domestic $85,428 $57,480 $42,561
Foreign 2,454 (5,933) 8,795
------- ------- -------
$87,882 $51,547 $51,356
======= ======= =======
Current provision (credit)
for income taxes:
Federal $12,013 $27,956 $(1,081)
State 787 1,511 (3,120)
Foreign 3,138 1,217 3,034
------- ------- -------
15,938 30,684 (1,167)
------- ------- -------
Deferred provision (credit)
for income taxes:
Federal 15,993 (2,385) 21,537
State 911 (218) 1,331
Foreign (2,285) (1,203) (119)
------- ------- -------
14,619 (3,806) 22,749
------- ------- -------
Provision for income taxes $30,557 $26,878 $21,582
======= ======= =======
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):
AS OF DECEMBER 31,
--------------------
2004 2003
------- ----------
(RESTATED)
Deferred tax assets:
Allowance for credit losses $51,818 $51,719
United Kingdom asset impairment 3,858 2,095
Accrued liabilities 1,366 1,010
Deferred Dealer Enrollment Fees 788 459
Net Operating Losses 433 555
Stock-based compensation 1,575 2,649
Unrealized loss on currency 420 1,022
Other, net 368 879
------- -------
Total deferred tax assets 60,626 60,388
------- -------
Deferred tax liabilities:
Valuation of receivables 85,577 69,519
Unearned finance charges 2,767 2,997
Depreciable assets 2,455 3,130
Deferred Origination Costs 441 219
Foreign currency translation adjustment -- 1,760
Other, net 1,203 1,723
------- -------
Total deferred tax liabilities 92,443 79,348
------- -------
Net deferred tax liability $31,817 $18,960
======= =======
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(10) INCOME TAXES - (CONCLUDED)
A reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2004 2003 2002
---- ---------- ----------
(RESTATED) (RESTATED)
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes 1.3 1.6 (2.3)
Foreign income taxes -- 4.1 (0.3)
Undistributed/distributed foreign earnings (2.2) 12.5 8.3
Other 0.7 (1.1) 1.3
---- ---- ----
Provision for income taxes 34.8% 52.1% 42.0%
==== ==== ====
The effective tax rate decreased in 2004 from 2003 due to a change made to
the Company's tax structure in 2004 to treat the Company's foreign subsidiaries
as branches subject to United States tax jurisdiction and due to the provision
of U.S. taxes related to the repatriated foreign earnings in 2003. The effective
tax rate for 2002 and 2003 differed from the federal statutory tax rate of 35 %
primarily due to the provision of U.S. taxes related to the repatriation of
foreign earnings.
During 2002, the Company determined that the undistributed earnings of its
United Kingdom and Ireland subsidiaries should no longer be considered to be
permanently reinvested, and during 2003, the Company determined that the
undistributed earnings of its Canadian subsidiary should no longer be considered
to be permanently reinvested. As a result of these determinations, the Company
recorded the amount of U.S. federal income taxes and withholding taxes related
to the repatriation of these earnings. During 2002, 2003 and 2004, the Company
remitted substantially all of its accumulated earnings as profits to the U.S.
and accrued or paid U.S. income taxes accordingly.
(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 dilutive common shares outstanding. Dilutive
common shares included in the computation represent shares issuable upon assumed
exercise of stock options that would have a dilutive effect using the treasury
stock method. The share effect is as follows:
YEARS ENDED DECEMBER 31,
------------------------------------
2004 2003 2002
---------- ---------- ----------
Weighted average common shares outstanding 38,617,787 42,195,340 42,438,292
Dilutive effect of stock options 2,399,418 1,213,667 924,449
---------- ---------- ----------
Weighted average common shares and dilutive common shares 41,017,205 43,409,007 43,362,741
========== ========== ==========
The computations of diluted net income per share for 2003 and 2002 exclude
the effects of the potential exercise of stock options to purchase 423,000 and
378,000 shares, respectively, because the effects of including them would have
been anti-dilutive. There were no anti-dilutive potential shares for 2004.
62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) CAPITAL TRANSACTIONS - (CONTINUED)
STOCK REPURCHASE PROGRAM
On August 5, 1999, the Company announced a stock repurchase program of up
to 1.0 million shares of the Company's common stock. The program authorized the
Company to purchase common shares in the open market or in privately negotiated
transactions at price levels the Company deems attractive. Since August 1999,
the Company's board of directors has authorized several increases to the stock
repurchase program, the most recent occurring on March 10, 2004, which increased
the total number of shares authorized to be repurchased to 7.0 million shares.
As of December 31, 2004, the Company has repurchased approximately 6.4 million
shares under this program at a cost of $51.9 million.
In addition to the above stock repurchase program, the Company repurchased
4.9 million shares of its common stock at a cost of $91.0 million through two
modified Dutch auction tender offers completed during 2004. On November 26,
2003, the Company announced a modified Dutch auction tender offer to purchase up
to 2.6 million shares of its common stock at a purchase price of not less than
$12.50 per share and not greater than $17.00 per share. Upon the expiration of
the tender offer on January 6, 2004, the Company repurchased all of the 2.2
million tendered shares of its common stock at $17.00 per share. On August 11,
2004, the Company announced a modified Dutch auction tender offer to purchase up
to 3.0 million shares of its common stock at a purchase price of not less than
$14.00 per share and not greater than $20.00 per share. Upon the expiration of
the tender offer on September 9, 2004, the Company repurchased all of the 2.7
million tendered shares of its common stock at a price of $20.00 per share.
STOCK OPTION PLANS
Pursuant to the Company's Incentive Compensation Plan (the "Incentive
Plan"), which was approved by shareholders on May 13, 2004, the Company has
reserved 1.0 million shares of its common stock for the future granting of
restricted stock, restricted stock units, stock options, and performance awards
to employees, officers, and directors at any time prior to April 1, 2014. All of
the terms relating to vesting or other restrictions of restricted stock awards
or restricted stock unit grants will be determined by the Company's compensation
committee. Options granted under the Incentive Plan may be either incentive
stock options or nonqualified stock options. The terms of options granted under
the Incentive Plan will be set forth in agreements between the Company and the
recipients and will be determined by the Company's compensation committee. The
exercise price will not be less than the fair market value of the shares on the
date of grant and, for incentive stock options, the exercise price must be at
least 110% of fair market value if the recipient is the holder of more than 10%
of the Company's common stock. All of the terms relating to the satisfaction of
performance goals, the length of any performance period, the amount of any
performance award granted, the amount of any payment or transfer to be made
pursuant to any performance award, and any other terms and conditions of any
performance award will be determined by the Company's compensation committee and
included in an agreement between the recipient and the Company. As of December
31, 2004, the Company has made no grants under the Incentive Plan.
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) CAPITAL TRANSACTIONS - (CONTINUED)
Pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), the
Company had reserved 8.0 million shares of its common stock for the future
granting of options to officers and other employees. The exercise price of the
options is no less than the fair market value on the date of the grant. Options
under the 1992 Plan generally become exercisable over a three to five year
period, or the Company's attainment of certain performance related criteria, or
immediately upon a change of Company control. The Company issued 15,000,
138,500, and 629,969 options in 2004, 2003, and 2002, respectively, that will
vest only if certain performance targets are met. In addition, the Company
issued 234,810 options in 2002 that will vest over a three to five year period.
Nonvested options are forfeited upon termination of employment and otherwise
expire ten years from the date of grant. Shares available for future grants
totaled 1,647,225 and 1,607,615 as of December 31, 2003 and 2002, respectively.
The 1992 Plan was terminated as to future grants on May 13, 2004, with
shareholder approval of the Incentive Plan.
Pursuant to the Company's Director Stock Option Plan (the "Director Plan"),
the Company had reserved 200,000 shares of its common stock for future granting
of options to members of its Board of Directors. The exercise price of the
options is equal to the fair market value on the date of grant. In 2004, the
Company granted 100,000 options that will vest only if the Company meets certain
performance targets. Nonvested options are forfeited if the participant should
cease to be a director and otherwise expire ten years from the date of grant.
Shares available for future grants totaled 100,000 as of December 31, 2003 and
2002. The Director Plan was terminated as to future grants on May 13, 2004, with
shareholder approval of the Incentive Plan.
Pursuant to the Company's Stock Option Plan for Dealers (the "Dealer
Plan"), the Company had reserved 1.0 million shares of its common stock for the
future granting of options to participating dealer-partners. Effective January
1, 1999, the Company suspended the granting of future options under the Dealer
Plan. During 2003, the Dealer Plan was cancelled and all previously outstanding
options under the Dealer Plan were either exercised or forfeited.
The Company accounts for the compensation costs related to its grants under
the stock option plans in accordance with SFAS No. 123. The Company recognized
stock-based compensation expense of $2,725,000, $3,583,000 and $2,072,000 for
2004, 2003 and 2002, respectively, for the 1992 Plan and Director Plan.
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) CAPITAL TRANSACTIONS - (CONTINUED)
The fair value of each option granted used in determining the above
stock-based compensation expense is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted-average assumptions used in the
option-pricing model as well as the resulting weighted-average fair value of
options granted are as follows:
YEARS ENDED DECEMBER 31,
-------------------------------------
2004 2003 2002
---------- ----------- ----------
1992 PLAN
Risk-free interest rate 3.00% 3.50% 4.00%
Expected life 5.0 years 4.0 years 4.0 years
Expected volatility 53.35% 63.03% 63.03%
Dividend yield -- -- --
Fair value of options granted $ 8.07 $ 5.05 $ 5.58
DIRECTOR PLAN
Risk-free interest rate 2.71% -- --
Expected life 5.0 years -- --
Expected volatility 52.49% -- --
Dividend yield -- -- --
Fair value of options granted $ 8.29 -- --
Additional information relating to the stock option plans is as follows:
1992 PLAN DIRECTOR PLAN DEALER PLAN
----------------------------- ----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
OF OPTIONS PER SHARE OF OPTIONS PER SHARE OF OPTIONS PER SHARE
---------- ---------------- ---------- ---------------- ---------- ----------------
Outstanding at January 1, 2002 4,569,261 $ 6.53 100,000 $ 7.00 184,400 $10.02
Options granted 864,779 9.83 -- -- -- --
Options exercised (742,420) 4.77 -- -- (6,100) 8.45
Options forfeited (317,366) 8.37 -- -- (109,200) 11.69
--------- ------- -------
Outstanding at December 31, 2002 4,374,254 7.35 100,000 7.00 69,100 7.51
Options granted 138,500 10.10 -- -- -- --
Options exercised (262,744) 7.69 -- -- (2,900) 7.13
Options forfeited (178,110) 9.71 -- -- (66,200) 7.53
--------- ------- -------
Outstanding at December 31, 2003 4,071,900 7.32 100,000 7.00 -- --
Options granted 15,000 16.45 100,000 17.25 -- --
Options exercised (521,034) 9.64 -- -- --
Options forfeited (59,347) 8.88 -- -- -- --
--------- ------- -------
Outstanding at December 31, 2004 3,506,519 $ 6.98 200,000 $12.13 -- $ --
========= ======= =======
Exercisable at December 31:
2002 1,640,094 $ 7.66 -- $ -- 69,100 $ 7.51
2003 1,660,184 7.60 -- -- -- --
2004 2,131,528 6.79 50,000 7.00 -- --
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) CAPITAL TRANSACTIONS - (CONCLUDED)
The following tables summarize information about options outstanding at
December 31, 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -----------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AS REMAINING EXERCISE EXERCISABLE AS EXERCISE PRICE PER
EXERCISABLE PRICES OF 12/31/2004 CONTRACTUAL LIFE PRICE PER SHARE OF 12/31/2004 SHARE
- ------------------ -------------- ---------------- ---------------- -------------- ------------------
1992 PLAN
$ 3.63 - $ 5.99 385,759 4.9 Years $ 4.03 223,509 $ 4.25
6.00 - 8.99 2,292,511 4.8 6.45 1,570,762 6.50
9.00 - 11.99 776,749 7.2 9.58 313,107 9.55
12.00 - 14.99 36,500 5.8 12.68 18,150 12.67
15.00 - 17.05 15,000 9.1 16.45 6,000 16.45
--------- ---------
Totals 3,506,519 5.4 $ 6.98 2,131,528 $ 6.79
========= =========
DIRECTOR PLAN
$ 7.00 100,000 6.5 Years $ 7.00 50,000 $ 7.00
17.25 100,000 9.2 17.25 -- --
--------- ---------
Totals 200,000 7.8 $12.13 50,000 $ 7.00
========= =========
(12) BUSINESS SEGMENT INFORMATION
The Company classifies its operations into four reportable business
segments: United States, United Kingdom, Automobile Leasing, and Other.
REPORTABLE SEGMENT OVERVIEW
In the second quarter of 2003, the Company re-evaluated its business
segments as a result of the decision to stop originating Consumer Loans in the
United Kingdom and Dealer Loans in Canada. Business decisions, including
resources to be allocated, are based on the financial performance of the
operations that will continue to accept new business, separate from those that
do not. The chief operating decision maker reviews financial information
combined into six components: United States, United Kingdom, Automobile Leasing,
Canada, Floorplan and Lines of Credit. Each component is an operating segment,
however, Canada, Floorplan and Lines of Credit are combined in an "all other"
category as none meet the quantitative thresholds of a reportable segment. As a
result, the Company has four reportable business segments: United States, United
Kingdom, Automobile Leasing, and Other. Prior year's disclosures have been
reclassified to conform to the current year presentation. The United States
segment primarily consists of the Company's United States automobile financing
business. The United Kingdom segment primarily consists of the Company's United
Kingdom Consumer Loan operation. The Automobile Leasing segment consists of the
Company's automobile leasing operation. The Other segment consists of the
Company's Canadian Dealer Loan operation and secured lines of credit and
floorplan financing programs. The Company is currently liquidating its
operations in all segments other than the United States.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENST - (CONTINUED)
(12) BUSINESS SEGMENT INFORMATION - (CONTINUED)
MEASUREMENT
The table below presents information for each reportable segment (in
thousands):
UNITED UNITED AUTOMOBILE TOTAL
STATES KINGDOM LEASING OTHER COMPANY
-------- -------- ---------- -------- --------
YEAR ENDED DECEMBER 31, 2004
Finance charges $149,998 $ 4,208 $ 4 $ 649 $154,859
Lease revenue -- -- 1,507 -- 1,507
License fees 5,835 -- -- -- 5,835
Other income 11,721 436 2,109 248 14,514
Provision for credit losses 5,332 (769) -- 1,194 5,757
Interest expense 11,009 -- 517 134 11,660
Depreciation expense 4,515 270 949 47 5,781
Provision (credit) for income taxes 29,767 484 416 (110) 30,557
Net income (loss) 55,853 1,072 1,050 (650) 57,325
Segment assets 563,497 22,960 719 4,137 591,313
YEAR ENDED DECEMBER 31, 2003 - (RESTATED)
Finance charges $116,156 $ 10,095 $ 9 $ 1,593 $127,853
Lease revenue -- -- 6,432 -- 6,432
License fees 3,836 -- -- -- 3,836
Other income 10,086 1,090 1,717 1,213 14,106
Provision for credit losses 6,003 804 1,688 1,144 9,639
United Kingdom asset impairment expense -- 10,493 -- -- 10,493
Interest expense 6,329 -- 1,136 592 8,057
Depreciation expense 4,060 313 4,033 96 8,502
Provision (credit) for income taxes 27,237 (491) (115) 247 26,878
Net income (loss) 31,275 (6,556) (213) 163 24,669
Segment assets 464,021 67,302 4,547 8,978 544,848
YEAR ENDED DECEMBER 31, 2002 - (RESTATED)
Finance charges $ 96,472 $ 17,671 $ 6 $ 1,808 $115,957
Lease revenue -- -- 16,101 -- 16,101
License fees 2,906 -- -- -- 2,906
Other income 15,996 3,397 1,335 3,446 24,174
Provision for credit losses 11,443 4,489 5,135 2,740 23,807
Interest expense 5,462 594 1,991 1,011 9,058
Depreciation expense 4,241 310 10,043 49 14,643
Provision (credit) for income taxes 19,805 2,835 (1,102) 44 21,582
Net income (loss) 25,824 5,795 (2,002) 157 29,774
Segment assets 369,659 122,983 18,394 14,123 525,159
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENST - (CONTINUED)
(12) BUSINESS SEGMENT INFORMATION - (CONCLUDED)
The Company operates primarily in the United States and the United Kingdom
(excluding Ireland). The table below presents the key financial information by
geographic location (in thousands):
UNITED UNITED ALL TOTAL
STATES KINGDOM OTHER COMPANY
-------- ------- ------ --------
Year Ended December 31, 2004
Finance charges $150,002 $ 3,918 $ 939 $154,859
Lease revenue 728 -- 779 1,507
License fees 5,835 -- -- 5,835
Other income 13,767 436 311 14,514
Net income 55,724 770 831 57,325
Property and equipment, net 19,474 232 -- 19,706
YEAR ENDED DECEMBER 31, 2003 - (RESTATED)
Finance charges $116,165 $ 9,699 $1,989 $127,853
Lease revenue 5,019 -- 1,413 6,432
License fees 3,836 -- -- 3,836
Other income 12,653 1,090 363 14,106
Net income (loss) 30,611 (6,631) 689 24,669
Property and equipment, net 18,045 496 -- 18,541
YEAR ENDED DECEMBER 31, 2002 - (RESTATED)
Finance charges $ 96,478 $16,785 $2,694 $115,957
Lease revenue 13,885 -- 2,216 16,101
License fees 2,906 -- -- 2,906
Other income 20,333 3,397 444 24,174
Net income (loss) 23,896 6,483 (605) 29,774
Property and equipment, net 19,169 667 -- 19,836
INFORMATION ABOUT PRODUCTS AND SERVICES
The Company manages its product and service offerings primarily through
those reportable segments. Therefore, in accordance with the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
no enterprise-wide disclosures of information about products and services are
necessary.
MAJOR CUSTOMERS
The Company did not have any dealer-partners that provided 10% or more of
the Company's revenue during 2004, 2003, or 2002. Additionally, no single
dealer-partner's Dealer Loan accounted for more than 10% of total Dealer Loans
as of December 31, 2004 or as of December 31, 2003.
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) LITIGATION AND CONTINGENT LIABILITIES
In the normal course of business and as a result of the customer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various customer 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, customer protection, warranty, debt collection, insurance and
other customer-oriented laws and regulations, including claims seeking damages
for physical and mental damages relating to the Company's repossession and sale
of the customer's vehicle and other debt collection activities. The Company, as
the assignee of Consumer Loans originated by dealer-partners, may also be named
as a co-defendant in lawsuits filed by customers principally against
dealer-partners. Many of these cases are filed as purported class actions and
seek damages in large dollar amounts. An adverse ultimate disposition in any
such action could have a material adverse impact on the Company's financial
position, liquidity and results of operations.
The Company is currently a defendant in a class action proceeding commenced
on October 15, 1996 in the Circuit Court of Jackson County, Missouri and removed
to the United States District Court for the Western District of Missouri. The
complaint seeks unspecified money damages for alleged violations of a number of
state and federal consumer protection laws. On October 9, 1997, the District
Court certified two classes on the claims brought against the Company, one
relating to alleged overcharges of official fees, the other relating to alleged
overcharges of post-maturity interest. On August 4, 1998, the District Court
granted partial summary judgment on liability in favor of the plaintiffs on the
interest overcharge claims based upon the District Court's finding of certain
violations but denied summary judgment on certain other claims. The District
Court also entered a number of permanent injunctions, which among other things,
restrained the Company from collecting on certain class accounts. 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, the Company
appealed the summary judgment order to the United States Court of Appeals for
the Eighth Circuit. Oral argument on the appeals was heard on April 19, 1999. On
September 1, 1999, the United States Court of Appeals for the Eighth Circuit
overturned the August 4, 1998 partial summary judgment order and injunctions
against the Company. The Court of Appeals held that the District Court lacked
jurisdiction over the interest overcharge claims and directed the District Court
to sever those claims and remand them to state court. On February 18, 2000, the
District Court entered an order remanding the post-maturity interest class to
the Circuit Court of Jackson County, Missouri while retaining jurisdiction on
the official fee class. The Company then filed a motion requesting that the
District Court reconsider that portion of its order of August 4, 1998, in which
the District Court had denied the Company's motion for summary judgment on the
federal Truth-In-Lending Act ("TILA") claim. On May 26, 2000, the District Court
entered summary judgment in favor of the Company on the TILA claim and directed
the Clerk of the Court to remand the remaining state law official fee claims to
the appropriate state court. On September 18, 2001, the Circuit Court of Jackson
County, Missouri mailed an order assigning this matter to a judge. On October
28, 2002, the plaintiffs filed a fourth amended complaint. The Company filed a
motion to dismiss the plaintiff's fourth amended complaint on November 4, 2002.
On November 18, 2002, the Company filed a memorandum urging the decertification
of the classes. On February 21, 2003, the plaintiffs filed a brief opposing the
Company's November 4, 2002 motion to dismiss the case. On May 19, 2004, the
court released an order, dated January 9, 2004, that denied the Company's motion
to dismiss. On November 16, 2005 the Court issued an order that, among other
things, adopted the District Court's order certifying classes. The Company will
continue its vigorous defense of all remaining claims. However, an adverse
ultimate disposition of this litigation could have a material negative impact on
the Company's financial position, liquidity and results of operations.
The Company sold the remaining Consumer Loan portfolio of its United
Kingdom subsidiary on December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately $3.0 million.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly financial position and results
of operations as of and for the years ended December 31, 2004 and 2003, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. Certain amounts for prior periods have been
reclassified to conform to the current presentation.
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2004
-----------------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
----------- ----------- ----------- -----------
(RESTATED) (RESTATED) (RESTATED)
BALANCE SHEETS
Loans receivable, net $ 509,696 $ 515,000 $ 527,235 $ 526,011
All other assets 51,199 62,862 54,299 65,302
----------- ----------- ----------- -----------
Total assets $ 560,895 $ 577,862 $ 581,534 $ 591,313
=========== =========== =========== ===========
Total debt $ 156,458 $ 171,282 $ 208,848 $ 193,547
Dealer reserve payable, net 29,606 24,232 19,919 15,675
Other liabilities 69,265 59,498 64,669 81,201
----------- ----------- ----------- -----------
Total liabilities 255,329 255,012 293,436 290,423
Shareholders' equity 305,566 322,850 288,098 300,890
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 560,895 $ 577,862 $ 581,534 $ 591,313
=========== =========== =========== ===========
INCOME STATEMENTS
Revenue $ 40,680 $ 43,647 $ 45,474 $ 46,914
Costs and expenses 22,146 21,904 22,982 23,451
----------- ----------- ----------- -----------
Operating income 18,534 21,743 22,492 23,463
Foreign exchange gain (loss) 151 906 674 (81)
----------- ----------- ----------- -----------
Income before income taxes 18,685 22,649 23,166 23,382
Provision for income taxes 6,733 5,476 8,898 9,450
----------- ----------- ----------- -----------
Net income $ 11,952 $ 17,173 $ 14,268 $ 13,932
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.29 $ 0.44 $ 0.37 $ 0.38
=========== =========== =========== ===========
Diluted $ 0.29 $ 0.41 $ 0.35 $ 0.35
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 39,791,700 39,240,321 38,679,011 36,819,410
Diluted 42,159,338 41,413,308 40,943,604 39,473,105
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003
-----------------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
----------- ----------- ----------- -----------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
BALANCE SHEETS
Loans receivable, net $ 461,378 $ 477,372 $ 479,453 $ 476,128
All other assets 52,370 61,927 59,626 68,720
----------- ----------- ----------- -----------
Total assets $ 513,748 $ 539,299 $ 539,079 $ 544,848
=========== =========== =========== ===========
Total debt $ 96,263 $ 115,656 $ 106,876 $ 106,447
Dealer reserve payable, net 38,546 45,190 39,736 35,198
Other liabilities 55,040 54,156 61,965 59,908
----------- ----------- ----------- -----------
Total liabilities 189,849 215,002 208,577 201,553
Shareholders' equity 323,899 324,297 330,502 343,295
----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 513,748 $ 539,299 $ 539,079 $ 544,848
=========== =========== =========== ===========
INCOME STATEMENTS
Revenue $ 37,247 $ 37,112 $ 38,326 $ 39,542
Costs and expenses 22,419 34,760 21,073 19,661
----------- ----------- ----------- -----------
Operating income 14,828 2,352 17,253 19,881
Foreign exchange gain (loss) 15 14 (1,066) (1,730)
----------- ----------- ----------- -----------
Income before income taxes 14,843 2,366 16,187 18,151
Provision for income taxes 6,621 2,845 9,245 8,167
----------- ----------- ----------- -----------
Net income (loss) $ 8,222 $ (479) $ 6,942 $ 9,984
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.19 $ (0.01) $ 0.16 $ 0.24
=========== =========== =========== ===========
Diluted $ 0.19 $ (0.01) $ 0.16 $ 0.23
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 42,328,841 42,321,170 42,315,027 42,040,063
Diluted 42,407,981 42,868,265 43,959,924 43,958,520
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)
The restatement impacted the quarterly financial data as follows:
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<Table>
<Caption>
3/31/2004 3/31/2003
(AS ORIGINALLY 3/31/2004 (AS ORIGINALLY 3/31/2003
REPORTED) ADJUSTMENTS (RESTATED) REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------ -------------- ------------ ------------
REVENUE:
Finance charges $ 29,754 $ 5,522 $ 35,276 $ 24,256 $ 5,254 $ 29,510
Lease revenue 647 -- 647 2,336 -- 2,336
License fees 1,266 -- 1,266 832 -- 832
Other income 6,128 (2,637) 3,491 9,505 (4,936) 4,569
------------ ------------ ------------ ------------ ------------ ------------
Total revenue 37,795 2,885 40,680 36,929 318 37,247
COSTS AND EXPENSES:
Salaries and wages 8,796 9 8,805 8,517 (304) 8,213
General and administrative 5,507 (33) 5,474 5,484 162 5,646
Sales and marketing 2,543 246 2,789 2,177 56 2,233
Provision for credit losses 15,068 (13,802) 1,266 4,188 (1,239) 2,949
Interest 2,600 226 2,826 1,596 32 1,628
Stock-based compensation 567 -- 567 375 -- 375
Other expense 457 (38) 419 1,647 (272) 1,375
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses 35,538 (13,392) 22,146 23,984 (1,565) 22,419
Operating income 2,257 16,277 18,534 12,945 1,883 14,828
Foreign exchange gain 151 -- 151 15 -- 15
------------ ------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 2,408 16,277 18,685 12,960 1,883 14,843
Provision for income taxes 878 5,855 6,733 4,367 2,254 6,621
------------ ------------ ------------ ------------ ------------ ------------
Net income $ 1,530 $ 10,422 $ 11,952 $ 8,593 $ (371) $ 8,222
============ ============ ============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.04 $ 0.25 $ 0.29 $ 0.20 $ (0.01) $ 0.19
============ ============ ============ ============ ============ ============
Diluted $ 0.04 $ 0.25 $ 0.29 $ 0.20 $ (0.01) $ 0.19
============ ============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic 39,791,700 39,791,700 39,791,700 42,328,841 42,328,841 42,328,841
Diluted 42,159,338 42,159,338 42,159,338 42,407,981 42,407,981 42,407,981
</Table>
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)
<Table>
<Caption>
6/30/2004 6/30/2003
(AS ORIGINALLY 6/30/2004 (AS ORIGINALLY 6/30/2003
REPORTED) ADJUSTMENTS (RESTATED) REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------ -------------- ------------ ------------
REVENUE:
Finance charges $ 33,731 $ 4,827 $ 38,558 $ 26,431 $ 5,316 $ 31,747
Lease revenue 405 -- 405 1,784 -- 1,784
License fees 1,362 -- 1,362 938 -- 938
Other income 5,791 (2,469) 3,322 6,893 (4,250) 2,643
------------ ------------ ------------ ------------ ------------ ------------
Total revenue 41,289 2,358 43,647 36,046 1,066 37,112
COSTS AND EXPENSES:
Salaries and wages 8,963 (488) 8,475 8,687 (227) 8,460
General and administrative 5,214 (227) 4,987 5,272 12 5,284
Sales and marketing 2,474 301 2,775 2,483 76 2,559
Provision for credit losses 2,187 (193) 1,994 2,863 864 3,727
Interest 2,373 112 2,485 1,401 32 1,433
Stock-based compensation 864 -- 864 1,428 -- 1,428
United Kingdom asset impairment expense -- -- -- 10,493 -- 10,493
Other expense 324 -- 324 1,376 -- 1,376
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses 22,399 (495) 21,904 34,003 757 34,760
Operating income 18,890 2,853 21,743 2,043 309 2,352
Foreign exchange gain loss 906 -- 906 14 -- 14
------------ ------------ ------------ ------------ ------------ ------------
Income before provision for income
taxes 19,796 2,853 22,649 2,057 309 2,366
Provision for income taxes 7,190 (1,714) 5,476 1,049 1,796 2,845
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 12,606 $ 4,567 $ 17,173 $ 1,008 $ (1,487) $ (479)
============ ============ ============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.32 $ 0.12 $ 0.44 $ 0.02 $ (0.03) $ (0.01)
============ ============ ============ ============ ============ ============
Diluted $ 0.30 $ 0.11 $ 0.41 $ 0.02 $ (0.03) $ (0.01)
============ ============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic 39,240,321 39,240,321 39,240,321 42,321,170 42,321,170 42,321,170
Diluted 41,413,308 41,413,308 41,413,308 42,868,265 42,868,265 42,868,265
</Table>
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONTINUED)
<Table>
<Caption>
9/30/2004 9/30/2003
(AS ORIGINALLY (AS ORIGINALLY 9/30/2003
REPORTED) ADJUSTMENTS (RESTATED) REPORTED) ADJUSTMENTS (RESTATED)
-------------- ------------ ------------ -------------- ------------ ------------
REVENUE:
Finance charges $ 34,830 $ 4,888 $ 39,718 $ 25,770 $ 6,733 $ 32,503
Lease revenue 271 -- 271 1,251 -- 1,251
License fees 1,519 -- 1,519 975 -- 975
Other income 6,579 (2,613) 3,966 8,003 (4,406) 3,597
------------ ------------ ------------ ------------ ------------ ------------
Total revenue 43,199 2,275 45,474 35,999 2,327 38,326
COSTS AND EXPENSES:
Salaries and wages 9,807 (564) 9,243 7,879 (305) 7,574
General and administrative 5,181 87 5,268 4,679 100 4,779
Sales and marketing 3,026 16 3,042 2,023 -- 2,023
Provision for credit losses 2,098 (632) 1,466 2,303 (115) 2,188
Interest 2,846 100 2,946 2,267 33 2,300
Stock-based compensation 747 -- 747 1,027 -- 1,027
Other expense 270 -- 270 1,182 -- 1,182
------------ ------------ ------------ ------------ ------------ ------------
Total costs and expenses 23,975 (993) 22,982 21,360 (287) 21,073
Operating income 19,224 3,268 22,492 14,639 2,614 17,253
Foreign exchange gain (loss) 674 -- 674 (1,066) -- (1,066)
------------ ------------ ------------ ------------ ------------ ------------
Income before provision for income taxes 19,898 3,268 23,166 13,573 2,614 16,187
Provision for income taxes 7,156 1,742 8,898 4,755 4,490 9,245
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss) $ 12,742 $ 1,526 $ 14,268 $ 8,818 $ (1,876) $ 6,942
============ ============ ============ ============ ============ ============
Net income (loss) per common share:
Basic $ 0.33 $ 0.04 $ 0.37 $ 0.21 $ (0.05) $ 0.16
============ ============ ============ ============ ============ ============
Diluted $ 0.31 $ 0.04 $ 0.35 $ 0.20 $ (0.04) $ 0.16
============ ============ ============ ============ ============ ============
Weighted average shares outstanding:
Basic 38,679,011 38,679,011 38,679,011 42,315,027 42,315,027 42,315,027
Diluted 40,943,604 40,943,604 40,943,604 43,959,924 43,959,924 43,959,924
</Table>
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(14) QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONCLUDED)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
MARCH 31, MARCH 31,
2004 MARCH 31, 2003 MARCH 31,
(AS ORIGINALLY 2004 (AS ORIGINALLY 2003
REPORTED) ADJUSTMENTS (RESTATED) REPORTED) ADJUSTMENTS (RESTATED)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable $ 956,867 $ (304,159) $ 652,708 $ 811,961 $ (208,814) $ 603,147
Allowance for credit losses (34,521) (108,491) (143,012) (22,929) (118,840) (141,769)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net 922,346 (412,650) 509,696 789,032 (327,654) 461,378
Income taxes receivable 251 (251) -- -- 3,238 3,238
All other assets 60,240 (9,041) 51,199 61,342 (12,210) 49,132
----------- ----------- ----------- ----------- ----------- -----------
Total assets 982,837 (421,942) 560,895 850,374 (336,626) 513,748
Dealer reserve payable, net 466,779 (437,173) 29,606 371,509 (332,963) 38,546
Income taxes payable -- 7,326 7,326 10,826 (10,826) --
Deferred income taxes, net 14,972 2,186 17,158 8,762 8,690 17,452
Other liabilites 191,742 9,497 201,239 127,691 6,160 133,851
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 673,493 (418,164) 255,329 518,788 (328,939) 189,849
Shareholders' equity 309,344 (3,778) 305,566 331,586 (7,687) 323,899
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 982,837 $ (421,942) $ 560,895 $ 850,374 $ (336,626) $ 513,748
=========== =========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
JUNE 30, JUNE 30, JUNE 30,
2004 JUNE 30, 2003
(AS ORIGINALLY 2004 (AS ORIGINALLY 2003
REPORTED) ADJUSTMENTS (RESTATED) REPORTED) ADJUSTMENTS (RESTATED)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable $ 976,315 $ (317,918) $ 658,397 $ 851,201 $ (230,840) $ 620,361
Allowance for credit losses (36,567) (106,830) (143,397) (24,461) (118,528) (142,989)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net 939,748 (424,748) 515,000 826,740 (349,368) 477,372
Income taxes receivable 7,458 (5,633) 1,825 -- 3,188 3,188
All other assets 70,148 (9,111) 61,037 71,440 (12,701) 58,739
----------- ----------- ----------- ----------- ----------- -----------
Total assets 1,017,354 (439,492) 577,862 898,180 (358,881) 539,299
Dealer reserve payable, net 475,415 (451,183) 24,232 397,682 (352,492) 45,190
Income taxes payable -- -- -- 11,700 (11,700) --
Deferred income taxes, net 13,820 620 14,440 4,010 12,827 16,837
Other liabilites 207,763 8,577 216,340 148,690 4,285 152,975
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 696,998 (441,986) 255,012 562,082 (347,080) 215,002
Shareholders' equity 320,356 2,494 322,850 336,098 (11,801) 324,297
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,017,354 $ (439,492) $ 577,862 $ 898,180 $ (358,881) $ 539,299
=========== =========== =========== =========== =========== ===========
</Table>
<Table>
<Caption>
SEPTEMBER 30, SEPTEMBER 30,
2004 SEPTEMBER 30, 2003 SEPTEMBER 30,
(AS ORIGINALLY 2004 (AS ORIGINALLY 2003
REPORTED) ADJUSTMENTS (RESTATED) REPORTED) ADJUSTMENTS (RESTATED)
-------------- ----------- ------------- -------------- ----------- -----------
Loans receivable $ 1,017,050 $ (347,121) $ 669,929 $ 869,927 $ (246,532) $ 623,395
Allowance for credit losses (37,559) (105,135) (142,694) (14,883) (129,059) (143,942)
----------- ----------- ----------- ----------- ----------- -----------
Loans receivable, net 979,491 (452,256) 527,235 855,044 (375,591) 479,453
Income taxes receivable 1,188 (1,188) -- -- 55 55
All other assets 63,476 (9,177) 54,299 70,335 (10,764) 59,571
----------- ----------- ----------- ----------- ----------- -----------
Total assets 1,044,155 (462,621) 581,534 925,379 (386,300) 539,079
Dealer reserve payable, net 501,161 (481,242) 19,919 420,759 (381,023) 39,736
Income taxes payable -- 1,477 1,477 2,538 (2,538) --
Deferred income taxes, net 9,765 4,122 13,887 17,048 4,057 21,105
Other liabilites 250,236 7,917 258,153 140,734 7,002 147,736
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities 761,162 (467,726) 293,436 581,079 (372,502) 208,577
Shareholders' equity 282,993 5,105 288,098 344,300 (13,798) 330,502
----------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 1,044,155 $ (462,621) $ 581,534 $ 925,379 $ (386,300) $ 539,079
=========== =========== =========== =========== =========== ===========
</Table>
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(15) SUBSEQUENT EVENT
The Company sold the remaining Consumer Loan portfolio of its United
Kingdom subsidiary on December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately $3.0 million.
74
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As disclosed in the Company's report on Form 8-K dated June 24, 2005, as
filed with the SEC on June 30, 2005, and amended on Form 8-K/A filed with the
SEC on July 14, 2005, the management of the Company dismissed Deloitte and
Touche LLP ("Deloitte") as its independent registered public accounting firm as
of June 24, 2005. The Company's decision to change auditing firms was made at
the direction of and was approved by the Audit Committee of the Board of
Directors.
During the two most recent fiscal years and the subsequent interim period
through the date of Deloitte's dismissal, there were no disagreements with
Deloitte on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreement(s), if
not resolved to the satisfaction of Deloitte, would have caused Deloitte to make
reference to the subject matter of the disagreement(s) in connection with its
reports on the Company's financial statements for such years, except as
described in the following two paragraphs:
On April 8, 2005, Deloitte informed the Company that it believed the
Company should not account for loans as an originator of loans to consumers
("Consumer Loans") but should instead account for its loans as a lender to its
dealer-partners ("Dealer Loans"). The Company has historically accounted for
Consumer Loans as a loan originator, and believed such accounting was in
accordance with GAAP. The Company did not believe that there was only a single
proper interpretation of GAAP for the Company's core business model given its
unique characteristics, and accordingly, believed that both the Company's
current methodology and Deloitte's proposed methodology were acceptable under
GAAP. Deloitte notified the Company that their proposed methodology, whereby the
Company originates Dealer Loans, is the only methodology consistent with GAAP.
On April 26, 2005, the Company submitted a letter to the staff of the
Office of the Chief Accountant of the Securities and Exchange Commission (the
"SEC") requesting guidance from the SEC related to the proper accounting
methodology for the Company's loan portfolio. On June 24, 2005, the Company
received a response from the SEC to its request. The SEC informed the Company
that it saw no reason to take positions different from those of Deloitte as the
Company's auditors with respect to the proper method for recording automobile
loans. In view of Deloitte's and the SEC's positions, the Company has agreed to
change its method for recording such loans and, as a result, was required to
restate its previously reported financial results. The Audit Committee discussed
the subject matter of the disagreement with Deloitte, and the Company has
authorized Deloitte to respond fully to the inquiries of the Company's successor
auditors concerning this disagreement.
During the two most recent fiscal years and the subsequent interim period
through the date of Deloitte's dismissal, there have been no "reportable
events," as defined in Item 304(a)(1)(v) of Regulation S-K, except as noted in
the following paragraph:
During the course of the Company's 2004 year-end closing process, the
Company identified errors in its accounting for income taxes in prior periods
related primarily to its foreign subsidiaries. As a result of these errors, the
Company concluded that a deficiency in internal controls related to income taxes
existed at December 31, 2004, and that such deficiency constituted a material
weakness, as defined by the Public Company Accounting Oversight Board's Auditing
Standard No. 2. As a result of the material weakness related to income taxes,
management was unable to conclude that the Company's internal controls over
financial reporting were effective as of December 31, 2004. As a result of these
errors, Deloitte advised the Company and the Audit Committee that it believed
that the Company's financial statements for the year ended December 31, 2003
should be restated. Deloitte also communicated to the Audit Committee of the
Board of Directors that it believed these errors were a result of a material
weakness in internal control over accounting for income taxes. The Company
concurred with Deloitte's conclusions.
75
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
that it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized, and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures,
management recognized that a control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, with a company have been
detected.
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
of the design and operation of the Company's disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were not
effective as of December 31, 2004 because of the material weakness in its
internal control over financial reporting related to accounting for income taxes
described below.
Management's Report on Internal Control over Financial Reporting.
The Company's management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rules 13a-15(f)
and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Internal control over financial reporting includes those
policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions
of the assets of the Company;
- provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Company are being made only
in accordance with authorizations of management and directors of
the Company; and
- provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. In addition, projections of
any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions and that the
degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of its internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO).
Management's assessment identified a material weakness in the Company's
internal control over financial reporting related to accounting for income
taxes. Specifically, the Company's controls over the calculation and review of
income taxes did not operate effectively. This deficiency resulted in errors in
the accounting for the provision for income taxes, deferred income taxes, and
current income taxes payable primarily related to the Company's foreign
operations. Although the Company detected the errors affecting the income tax
accounts, remediated the deficiencies related to controls over the calculation
and review of income taxes, and adjusted the consolidated financial statements
as of December 31, 2004 to correct the identified errors, our management
believes that, as of December 31, 2004, we did not maintain effective internal
control over financial reporting based on the COSO criteria.
76
ITEM 9A. CONTROLS AND PROCEDURES - (CONCLUDED)
Attestation Report of the Registered Public Accounting Firm.
Management's assessment of the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004 has been audited by
Grant Thornton LLP, the Company's independent registered public accounting firm,
as stated in their report on page 78.
Changes in Internal Controls. In preparation for the Company's management
to provide its first report on internal control over financial reporting as
required by Section 404 of the Sarbanes-Oxley Act, the Company made changes in
internal controls over financial reporting during the quarter ended December 31,
2004. The Company also implemented changes in internal controls to remediate the
material weakness described above for the quarter ended March 31, 2005 by
strengthening the resources used in preparation of accounting for income taxes
and implementing additional monitoring and oversight controls including engaging
external tax advisors to assist in the review of our income tax calculations to
ensure compliance with generally accepted accounting principles.
77
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Credit Acceptance Corporation
We were engaged to audit management's assessment, included in the accompanying
"Management's Report on Internal Control Over Financial Reporting", that Credit
Acceptance Corporation did not maintain effective internal control over
financial reporting as of December 31, 2004, because the Company did not
maintain effective internal controls related to accounting for income taxes
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Credit Acceptance Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting.
We were engaged in August 2005 to audit Management's Assessment of Internal
Control Over Financial Reporting as of December 31, 2004. As a result of being
appointed subsequent to the date of management's assessment and report, it was
necessary to perform our testing procedures in the period subsequent to December
31, 2004. Due to the timing of our testing we were unable to perform certain
procedures necessary to evaluate management's assessment process and verify the
design and operating effectiveness of certain controls.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. A material weakness is a
control deficiency, or a combination of control deficiencies, that results in
more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. A material
weakness has been identified and included in management's assessment related to
accounting for income taxes. This material weakness was considered in
determining the nature, timing and extent of audit tests applied in our audit of
the 2004 financial statements and this report does not affect our report dated
January 27, 2006 on those financial statements.
Since we were unable to perform certain procedures necessary to evaluate
management's assessment process and verify the design and operating
effectiveness of certain controls, the scope of our work was not sufficient to
enable us to express, and we do not express, an opinion either on management's
assessment or on the effectiveness of the Company's internal control over
financial reporting.
We do not express an opinion or any other form of assurance on management's
statements regarding remediations made in respect to the material weakness in
accounting for income taxes.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Credit Acceptance Corporation and Subsidiaries as of December 31, 2004 and 2003,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004 and
our report dated January 27, 2006 expressed an unqualified opinion on those
financial statements.
/s/ GRANT THORNTON LLP
Southfield, Michigan
January 27, 2006
78
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following sets forth information with respect to the director nominees
and our executive officers as of the date of this report:
Donald A. Foss; age 61; Chairman of the Board. Mr. Foss is the founder and
principal shareholder of the Company, in addition to owning and operating
companies engaged in the sale of used vehicles. He was formally named Chairman
of the Board and Chief Executive Officer of the Company in March 1992 and
vacated the Chief Executive Officer position effective January 1, 2002.
Glenda J. Chamberlain; age 52; Executive Vice President and Chief Financial
Officer, Whole Foods Market, Inc. Ms. Chamberlain is the Executive Vice
President and Chief Financial Officer of Whole Foods Market, Inc., the largest
natural and organic foods supermarket retailer in the United States. Ms.
Chamberlain joined Whole Foods Market in 1988 as Chief Financial Officer, prior
to which she held positions in public accounting, retail and business
consulting. Ms. Chamberlain became a director of the Company in March 2004.
Harry E. Craig; age 78; Independent Personnel Consultant. Mr. Craig has been a
self-employed consultant providing management training services since 1986. Mr.
Craig served in various managerial and other capacities with Ford Motor Company
for 30 years, most recently as Director, Personnel and Organization Office of
Ford Aerospace & Communications Corporation. Mr. Craig became a director of the
Company in June 1992.
Daniel P. Leff; age 46; Managing Member, The Placid Group, LLC. Mr. Leff is
currently the Managing Member of The Placid Group, LLC which was established in
January 2004 to provide advisory services to public and private companies. Prior
to that, Mr. Leff was Chief Operating Officer of Invensys Energy Management.
Prior to joining Invensys in May 2002, Mr. Leff was Chairman and Chief Executive
Officer of Enron Energy Services, a role he was appointed to by creditor
appointed management following the Chapter 11 bankruptcy filed by Enron in
December 2001. From 1997 to 2001, Mr. Leff served in other management capacities
at Enron Energy Services. Prior to 1997, Mr. Leff was President and Chief
Executive Officer of FMES, Incorporated, a company he founded in 1993 and sold
to Enron Energy Services in 1997. Mr. Leff became a director of the Company in
June 2001.
Brett A. Roberts; age 39; Chief Executive Officer. Mr. Roberts joined the
Company in 1991 as Corporate Controller and was named Assistant Treasurer in
March 1992 and Vice President-Finance in April 1993. He was named Chief
Financial Officer and Treasurer in August 1995. He was named Executive Vice
President and Chief Financial Officer in January 1997, Co-President in January
2000, Executive Vice President of Finance and Operations in October 2000, Chief
Operating Officer in January 2001, and to his present position in January 2002.
Mr. Roberts became a director of the Company in March 2002.
Thomas N. Tryforos; age 46; Private Investor. Mr. Tryforos is presently a
private investor. Between May 1991 and September 2004, Mr. Tryforos was a
General Partner at Prescott Investors, Inc., a private investment firm based in
Connecticut. Mr. Tryforos became a director of the Company in July 1999.
OTHER EXECUTIVE OFFICERS
Keith P. McCluskey; age 46; President. Mr. McCluskey joined the Company in May
1999 as President of the Company's auto leasing subsidiary. He was named Chief
Marketing Officer in February 2001 while remaining President of the Company's
auto leasing subsidiary and to his present position in January 2002. Since June
1983, Mr. McCluskey has owned and operated companies engaged in the sale and
lease of new and used vehicles.
Michael W. Knoblauch; age 42; Chief Operating Officer. Mr. Knoblauch joined the
Company in 1992. He served as the Company's collection manager from May 1994 to
August 1995. He was named Vice President - Collections in August 1995, Chief
Operating Officer in July 1999, Co-President in January 2000, President in
October 2000, and to his present position in January 2002.
79
Steven M. Jones; age 42; Chief Analytics Officer. Mr. Jones joined the Company
in October 1997 as Manager of the Debt Recovery Department for Credit Acceptance
Corporation UK Limited, in which position he served until November 1999 when he
was named Deputy Managing Director, Credit Acceptance Corporation UK Limited. In
December 2001, he was named Managing Director Credit Acceptance Corporation UK
Limited in which he was responsible for the operations of the Company's United
Kingdom business segment. Mr. Jones was named Chief Administrative Officer in
November 2003 and to his present position in December 2004.
David S. Simmet; age 41; Chief Information Officer. Mr. Simmet joined the
Company in August 1992 as Manager of Information Systems. He was named Director
of Information Systems in April 1995. He was named Vice President - Information
Systems in October 1997 and to his present position in February 2001.
Kenneth S. Booth; age 38; Chief Financial Officer. Mr. Booth joined the Company
in January 2004 as Director of Internal Audit. He was named Chief Accounting
Officer in May 2004 and to his present position in December 2004. From August
1991 until joining the Company, Mr. Booth worked in public accounting, most
recently as a senior manager at PricewaterhouseCoopers LLP.
Steven M. Dion; Age 37; Chief Human Resources Officer. Mr. Dion joined the
Company in November 2001 as Vice President, Human Resources and was promoted to
his present position in December 2004. Prior to joining the Company, Mr. Dion
worked for Plastipak Packaging as the Director of Human Resources.
Charles A. Pearce; age 41; Chief Legal Officer. Mr. Pearce joined the Company in
January 1996 as General Counsel. He was named Vice President -- General Counsel
in January 1997; Vice President--General Counsel and Corporate Secretary in June
1999 and to his present position in December 2004.
Douglas W. Busk: age 45; Treasurer. Mr. Busk joined the Company in November 1996
and was named Vice President and Treasurer in January 1997. He was named Chief
Financial Officer in January 2000. Mr. Busk served as Chief Financial Officer
and Treasurer until August 2001, when he was named President of the Company's
Capital Services unit. He resumed his duties as Chief Financial Officer and
Treasurer in December 2001 and was named to his present position in May 2004.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors, and persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater than 10% shareholders are required by
SEC regulation to furnish the Company with copies of all Section 16(a) forms
they file. Based solely on its review of the copies of such forms received since
January 1, 2004, and written representations from certain reporting persons, the
Company believes that all filing requirements applicable to its officers,
directors, and greater than 10% beneficial owners were complied with except that
one officer, Dave Simmet, Chief Information Officer, was one day late in filing
a Form 4 for one transaction.
AUDIT COMMITTEE
The Board of Directors has established an Audit Committee in accordance
with Section 3(a)(58)(A) of the Securities and Exchange Act of 1934. The Audit
Committee currently consists of Harry E. Craig, Glenda J. Chamberlain, Daniel P.
Leff, and Thomas N. Tryforos. The Board has determined that each of the members
of the Audit Committee is "independent," as independence is defined in the
Nasdaq rules for audit committee members. The Board has also determined that Mr.
Tryforos and Ms. Chamberlain are "audit committee financial experts" as defined
by applicable Securities and Exchange Commission rules and that each of the
Audit Committee members satisfies all other qualifications for Audit Committee
members set forth in the Nasdaq rules.
CODE OF ETHICS
The Company has adopted codes of ethics that apply to the Company's directors,
executive officers and other employees. The codes of ethics are available on the
Company's website at www.creditacceptance.com. Shareholders may also obtain a
written copy of the codes of ethics, without charge, by sending a written
request to the Investor Relations Department, Credit Acceptance Corporation,
P.O. Box 513, Southfield, Michigan 48037. We will disclose any amendments to, or
waivers from, the provisions of the codes of ethics applicable to our directors
or executive officers on our website.
80
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain summary information for the years
indicated concerning the compensation awarded to, earned by, or paid to the
Chief Executive Officer, and the other four most highly compensated executive
officers of the Company (based on combined salary and bonus for 2004)
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM
----------------------------------------------- COMPENSATION
OTHER ANNUAL AWARDS ALL OTHER
NAME AND COMPENSATION RESTRICTED STOCK COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($)(A) ($)(B) AWARDS ($)(B) ($)(C)
------------------ ---- ---------- ------------ ------------ ---------------- ------------
Donald A. Foss ................. 2004 $475,000 $ -- $ -- $ -- $ 1,250
Chairman of the Board 2003 475,000 -- -- -- 625
2002 475,000 -- -- -- 625
Brett A. Roberts ............... 2004 $400,000 $566,850 $1,017,954 $ -- $ 1,250
Chief Executive Officer 2003 386,000 240,000 -- -- 625
2002 308,000 -- -- 452,469 625
Keith P. McCluskey ............. 2004 $300,000 $453,480 $ 650,260 $ -- $ 1,250
President 2003 254,000 152,000 -- -- --
2002 253,000 -- -- -- --
Michael W. Knoblauch ........... 2004 $258,000 $283,425 $ -- $ -- $ 1,250
Chief Operating Officer 2003 259,000 155,000 -- -- 625
2002 258,000 -- -- 100,000 625
Steven M. Jones ................ 2004 $225,000 $226,740 $ 127,532 $ -- $22,702
Chief Analytics Officer 2003 243,000 135,000 -- 120,000 80,461
2002 183,000 16,000 -- -- 18,343
Annual bonus amounts are earned and accrued during the fiscal years indicated
and paid in subsequent years.
(a) The amounts disclosed in this column for Mr. Roberts, Mr. McCluskey and Mr.
Jones were determined in accordance with the formula determined by the
Compensation Committee in accordance with the Company's Incentive
Compensation Plan, which was approved by shareholders on May 13, 2004 and
previously filed as Exhibit 10(q) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2004. The formula, including the
restricted stock multiplier, was previously disclosed in the Company's Form
8-K on April 4, 2005 with Exhibit (q)(3). The amount disclosed for each
individual was calculated using the average of the high and low market
prices of the Company's common stock on March 30, 2005, which was $19.825
per share. The amount for Mr. Roberts reflects 51,347 shares. The amount
for Mr. McCluskey reflects 32,800 shares. The amount for Mr. Jones reflects
6,448 shares. If any dividends or distributions are paid to Mr. Roberts,
Mr. McCluskey or Mr. Jones, during the Restricted Period, the dividend or
other distribution shall be subject to the same restrictions on
transferability as the shares of Common Stock with respect to which they
were paid. The restricted stock awards were granted pursuant to a
restricted stock grant agreement, the form of which was filed by the
Company as Exhibit 10(q)(2) to the Current Report on Form 8-K dated
February 24, 2005. The restricted stock awarded vests in full or in part
based on the Company's satisfaction of certain performace-related
critieria, which are described more fully in the form of restricted stock
grant agreement.
(b) The amounts disclosed in this column for Mr. Foss, Mr. Roberts, Mr.
Knoblauch and Mr. McCluskey consist of the Company's matching contribution
for the 401(k) Profit Sharing Plan. The 2004 amount disclosed in this
column for Mr. Jones consists of reimbursed relocation expenses. The 2003
amount in this column for Mr. Jones consists of the Company's retirement
contribution of $34,286, reimbursed relocation expenses of $34,461, and
reimbursed housing expenses of $11,714. The 2002 amount disclosed in this
column for Mr. Jones consist of the Company's retirement contributions.
81
COMPENSATION OF DIRECTORS
For 2004, all outside Board members received $1,500 for each Board meeting
attended plus $500 for each committee meeting attended and were reimbursed for
travel related expenses. Non-employee directors are also eligible to participate
in the Company's Director Stock Option Plan, which permits the board to grant
stock options to these directors at their discretion. In March 2004, upon her
appointment as director, Ms. Chamberlain was granted stock options for 100,000
shares of Common Stock with an exercise price of $17.25 per option, the fair
market value of the Company's Common Stock on the date of grant. Ms.
Chamberlain's stock options expire in 2014, and vest in four portions based on
the Company's achievement of four tiered economic profit targets or immediately
upon a change in control of the Company. There were no other grants under the
Director Stock Option Plan during 2004. Non-employee directors were also
eligible to participate in the Company's Incentive Compensation Plan approved by
the shareholders at the 2004 Annual Meeting of Shareholders. This Incentive
Compensation Plan replaced the Company's Director Stock Option Plan. There were
no equity awards made to the non-employee directors under the Incentive
Compensation Plan in 2004.
OPTIONS
The following table provides information with respect to the options exercised
during 2004 and the unexercised options held as of December 31, 2004 by the
Named Executive Officers. There were no option grants in 2004.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
NUMBERS OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
SHARES AT FISCAL YEAR-END AT FISCAL YEAR-END($) (A)
ACQUIRED ON --------------------------- ---------------------------
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ------------- ----------- ------------- ----------- -------------
Donald A. Foss -- $ -- -- -- $ -- $ --
Brett A. Roberts 144,999 1,534,536 480,988 321,482 8,632,814 5,474,792
Steven M. Jones 12,000 200,564 48,000 90,000 723,840 1,402,290
Michael W. Knoblauch 30,000 43,257 340,000 110,000 6,445,400 2,020,200
Keith P. McCluskey -- -- 400,000 600,000 7,726,000 11,589,000
(a) Value is equal to the difference between the option exercise price and the
average of the high and low price of $25.41 per share on the Nasdaq on
December 31, 2004, multiplied by the number of options held.
EMPLOYMENT AGREEMENT
Effective April 19, 2001, the Company entered into an employment agreement
with Mr. McCluskey as Chief Marketing Officer, which replaced the prior
agreement dated May 29, 1999. Under the terms of this agreement, Mr. McCluskey
is to be paid an annual base salary of $250,000 and is entitled to participate
in the bonus program and the other fringe benefit programs for salaried
employees. In addition, Mr. McCluskey was granted 1,000,000 options with an
exercise price of $6.09 under the Company's 1992 Stock Option Plan, with vesting
of such options subject to the Company achieving certain performance criteria,
and was provided a $478,000 loan. Refer to "Certain Relationships and
Transactions - Indebtedness" for further information on the terms of this
agreement. The term of this employment agreement will continue indefinitely,
with a right of termination by either the Company or Mr. McCluskey under any
circumstances upon 30 days written notice. Upon such termination the Company is
obligated to pay Mr. McCluskey all salary and other compensation accrued through
and including the date of such termination, and any options which have not yet
vested and become exercisable shall be cancelled. In the event of a "change of
control" of the Company (as defined in the 1992 Stock Option Plan), each option
shall be cancelled in exchange for payment in cash of an amount equal to the
excess of the change of control price (as defined in Mr. McCluskey's option
agreement) over the exercise price thereof, unless such option is honored or
assumed, or new rights substituted therefore immediately following the change of
control.
82
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP
The following table sets forth information as of November 30, 2005
concerning beneficial ownership by all directors and nominees, by each of the
executive officers named in the Summary Compensation Table, by all directors and
executive officers as a group, and by all other beneficial owners of more than
5% of the outstanding shares of Common Stock. The number of shares beneficially
owned is determined under rules of the Securities and Exchange Commission, and
the information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as to
which the individual has sole or shared voting power or investment power and
also any shares which the individual has the right to acquire on November 30,
2005 or within 60 days thereafter through the exercise of any stock option or
other right. Unless otherwise indicated, each holder has sole investment and
voting power with respect to the shares set forth in the following table.
NUMBER
OF SHARES PERCENT OF
BENEFICIALLY OUTSTANDING
OWNED SHARES
------------ -----------
Donald A. Foss ................................................ 24,036,898 (a) 64.9%
Brett A. Roberts .............................................. 921,817 (b) 2.4%
Steven M. Jones ............................................... 134,448 (c) *
Michael W. Knoblauch .......................................... 452,600 (d) 1.2%
Keith P. McCluskey ............................................ 1,157,800 (e) 3.0%
Harry E. Craig ................................................ 10,000 (f) *
Glenda J. Chamberlain ......................................... 74,000 (g) *
Daniel P. Leff ................................................ 100,000 (h) *
Thomas N. Tryforos ............................................ 434,842 1.2%
All Directors and Executive Officers as a Group (14 persons) .. 27,530,844 (i) 68.9%
Thomas W. Smith ............................................... 4,759,478 (j) 12.9%
Scott J. Vassalluzo ........................................... 4,136,555 (j) 11.2%
* Less than 1%.
(a) Shares are held by Donald A. Foss and Donald A. Foss Revocable Living Trust
dated January 26, 1984 as to which Mr. Foss is the trustee. Karol A. Foss
as trustee of the Karol A. Foss Revocable Trust Under Agreement dated
January 16, 1981, as amended and restated on January 26, 1984, June 28,
1990, December 10, 1997 and April 1, 2005, and Allan Apple as trustee of
the Karol A. Foss 2005 Grantor Retained Annuity Trust under Agreement dated
November 11, 2005, are the record owners of 11,968,587 of these shares of
which Mr. Foss has sole voting power and dispositive power of such shares
pursuant to an agreement dated December 6, 2001. In addition, Mr. Foss has
shared voting and dispositive power with respect to 83,166 shares which are
owned by a limited liability company in which he has a 20% interest. Mr.
Foss' business address is 25505 West Twelve Mile Road, Suite 3000,
Southfield, Michigan 48034-8339.
(b) Includes 802,470 shares which Mr. Roberts has the right to acquire upon
exercise of employee stock options and 51,347 restricted shares as to which
Mr. Roberts has voting power but which are subject to forfeiture and
restrictions on transfer until the related vesting conditions have been
satisfied.
(c) Includes 128,000 shares which Mr. Jones has the right to acquire upon
exercise of employee stock options and 6,448 restricted shares as to which
Mr. Jones has voting power but which are subject to forfeiture and
restrictions on transfer until the related vesting conditions have been
satisfied.
(d) Includes 450,000 shares which Mr. Knoblauch has the right to acquire upon
exercise of employee stock options.
(e) Includes 1,000,000 shares which Mr. McCluskey has the right to acquire upon
exercise of employee stock options and 32,800 restricted shares as to which
Mr. McCluskey has voting power but which are subject to forfeiture and
restrictions on transfer until the related vesting conditions have been
satisfied. In addition, Mr. McCluskey has shared voting and dispositive
power with respect to 83,166 shares which are owned by a limited liability
company in which he has an 80% interest.
(f) Shares are held by the Craig Living Trust as to which Mr. Craig is the
trustee.
(g) Includes 70,000 shares which Mrs. Chamberlain has the right to acquire upon
exercise of director stock options.
(h) Includes 100,000 shares which Mr. Leff has the right to acquire upon
exercise of director stock options.
(i) Includes a total of 2,836,470 shares which such persons have the right to
acquire upon exercise of employee and director stock options and 93,025
restricted shares as to which such persons have voting power but which are
subject to forfeiture and restrictions on transfer until the related
vesting conditions have been satisfied.
(j) The number of shares is based on information obtained from Prescott
Associates as of November 30, 2005. Mr. Smith has shared voting and
dispositive power over 3,941,658 shares, sole voting power over 517,970
shares, and sole dispositive power over 817,820 shares. Mr. Vassalluzzo has
shared voting and dispositive power over 3,941,658 shares, sole voting
power over 44,000 shares, and sole dispositive power over 194,897 shares.
Mr. Smith's, and Mr. Vassalluzzo's business address is 323 Railroad Avenue,
Greenwich, Connecticut 06830.
The information contained in the "Equity Compensation Plans" subheading under
Item 5 of this Report is incorporated herein by reference.
83
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In the normal course of business, the Company has maintained and continues
to maintain business relationships and engaged in certain transactions with
companies owned by Donald Foss, the Company's majority shareholder and Chairman,
and a member of Mr. Foss' immediate family (collectively, the "Foss Companies"),
and with certain automotive dealerships owned by Keith McCluskey, the Company's
President (the "McCluskey Dealerships").
CONTRACT ASSIGNMENTS AND FEES
In the normal course of its business, the Company has Dealer Loans with the
Foss Companies, which totaled approximately $13.1 million at December 31, 2004.
The total amount of cash advanced for the year ended December 31, 2004 was $11.3
million. The Company's Dealer Loans from the Foss Companies and nonaffiliated
dealer-partners are on the same terms.
In the normal course of its business, the Company has Dealer Loans with the
McCluskey Dealerships, which totaled approximately $3.6 million at December 31,
2004. The total amount of cash advanced for the year ended December 31, 2004 was
$3.0 million. The Company's Dealer Loans from the McCluskey Dealerships and
nonaffiliated dealer-partners are on the same terms.
Total CAPS (the Company's Internet based Credit Approval Processing System)
and dealer enrollment fees earned from the Foss Companies and the McCluskey
Dealerships during 2004 were $54,000 and $12,000, respectively.
INDEBTEDNESS
Pursuant to an employment agreement with Mr. McCluskey dated April 19,
2001, the Company loaned the McCluskey Dealerships $850,000. The note, including
all principal and interest, is due on April 19, 2011, bears interest at 5.22%,
is unsecured, and is personally guaranteed by Mr. McCluskey. As of September 30,
2005, the balance of the note including accrued but unpaid interest was
approximately $1,132,000, which was the highest amount outstanding since the
beginning of 2004. In addition, in 2001 pursuant to the employment agreement,
the Company loaned Mr. McCluskey approximately $478,000. The note, including all
principal and interest, is due on April 19, 2011, bears interest at 5.22%,
beginning January 1, 2002, and is unsecured. As of September 30, 2005 the
balance of the note including accrued interest was approximately $573,000.
OTHER
The Company paid for air transportation services provided by a company
owned by Mr. Foss totaling $227,000 for the year ended December 31, 2004.
Prior to the third quarter of 2001, the Company offered a line of credit
arrangement to certain dealerships who were not participating in the Company's
core program. The Company ceased offering this program to new dealerships in the
third quarter of 2001 and has been reducing the amount of capital invested in
this program since that time. Beginning in 2002, some of the Foss Companies
began offering secured line of credit loans in a manner similar to the Company's
prior program, at his dealerships and at two other dealerships, one of whom also
does business with the Company. Mr. Foss does not intend to expand his line of
credit lending activities to additional dealerships, except to dealerships which
he owns or controls.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
FEES PAID TO INDEPENDENT ACCOUNTANTS
The following table provides a summary of the aggregate fees billed by
Grant Thornton LLP for 2004 (in thousands):
2004
------
Audit fees (1) ................... $1,657
Audit-related fees ............... --
------
Audit and audit-related fees .. 1,657
------
Tax fees ......................... --
All other fees ................... --
------
Total fees .................... $1,657
======
(1) Audit fees were for the audit of the Company's consolidated balance sheets
as of December 31, 2004 and 2003, and the related consolidated statements
of income, shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 2004 and for the audit of the
effectiveness of the Company's internal control over financial reporting as
of December 31, 2004.
The Audit Committee has considered whether the provision of these services
is compatible with maintaining the independence of Grant Thornton LLP, and
satisfied itself as to the maintenance of the auditors' independence.
POLICY FOR PRE-APPROVAL OF AUDIT AND NON-AUDIT SERVICES
The Audit Committee's policy is to pre-approve all audit services and all
non-audit services that our independent accountants are permitted to perform for
us under applicable federal securities regulations. The Audit Committee's policy
utilizes an annual review and general pre-approval of certain categories of
specified services that may be provided by the independent accountants, up to
predetermined fee levels. Any proposed services not qualifying as a pre-approved
specified service, and pre-approved services exceeding the predetermined fee
levels, require further specific pre-approval by the Audit Committee. The Audit
Committee has delegated to the Chairman of the Audit Committee the authority to
pre-approve audit and non-audit services proposed to be performed by the
independent accountants. Effective July 20, 2005, the Audit Committee of the
Board of Directors appointed Grant Thornton LLP as its new independent
registered public accounting firm. Since that date, all services provided by
Grant Thornton LLP were pre-approved by the Audit Committee. The policy has not
been waived in any instance.
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) The following consolidated financial statements of the Company and
Report of Independent Public Accountants are contained in "Item 8 --
Financial Statements and Supplementary Data."
Report of Independent Public Accountants
Consolidated Financial Statements:
-- Consolidated Balance Sheets as of December 31, 2004 and 2003
-- Consolidated Income Statements for the years ended December 31,
2004, 2003 and 2002
-- Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2004, 2003 and 2002
-- Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002
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.
(3) The Exhibits filed in response to Item 601 of Regulation S-K are
listed in the Exhibit Index, which is incorporated herein by
reference.
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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.
CREDIT ACCEPTANCE CORPORATION
By: /s/ BRETT A. ROBERTS
--------------------
Brett A. Roberts
Chief Executive Officer
Date: January 27, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on January 27, 2006 on
behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ BRETT A. ROBERTS Chief Executive Officer (Principal
- ------------------------------------- Executive Officer)
Brett A. Roberts
/s/ KENNETH S. BOOTH Chief Financial Officer
- ------------------------------------- (Principal Financial Officer, Principal
Kenneth S. Booth Accounting Officer and Duly
Authorized Officer)
/s/ HARRY E. CRAIG Director
- -------------------------------------
Harry E. Craig
/s/ GLENDA J. CHAMBERLAIN Director
- -------------------------------------
Glenda J. Chamberlain
/s/ DONALD A. FOSS Director and Chairman of the Board
- -------------------------------------
Donald A. Foss
/s/ DANIEL P. LEFF Director
- -------------------------------------
Daniel P. Leff
/s/ THOMAS N. TRYFOROS Director
- -------------------------------------
Thomas N. Tryforos
87
EXHIBIT INDEX
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. The Company's
commission file number is 000-20202.
EXHIBIT
NO. DESCRIPTION
- ------- ---------------------------------------------------------------
3(a)(1) 1 Articles of Incorporation, as amended July 1, 1997
3(b) 20 Amended and Restated Bylaws of the Company, as amended,
February 24, 2005
4(c)(12) 10 Second Amended and Restated Credit Agreement, dated as of June
9, 2003, among the Company, certain of the Company's
subsidiaries, Comerica Bank, as Administrative Agent and
Collateral Agent, and the banks signatory thereto.
4(c)(13) 12 Third Amended and Restated Credit Agreement, dated as of June
9, 2004, among the Company, certain of the Company's
subsidiaries, Comerica Bank, as Administrative Agent and
Collateral Agent, and the banks signatory thereto.
4(c)(14) 15 First Amendment, dated as of December 10, 2004, to Third
Amended and Restated Credit Agreement, dated as of June 9,
2004, among the Company, Comerica Bank, as Administrative Agent
and Collateral Agent, and the banks signatory thereto.
4(f)(40) 8 Second Amendment dated as of June 10, 2002 to the Intercreditor
Agreement dated as of December 15, 1998 among Comerica Bank, as
Collateral Agent, and various lenders and note holders
4(f)(41) 8 Second Amendment dated June 10, 2002 to Second Amended and
Restated Security Agreement, dated June 11, 2001 between
Comerica Bank, as Collateral Agent and the Company
4(f)(42) 9 Third Amendment dated August 30, 2002 to Second Amended and
Restated Security Agreement dated June 11, 2001 between
Comerica Bank, as Collateral Agent and the Company
4(f)(47) 10 Contribution Agreement dated June 27, 2003 between the Company
and Credit Acceptance Funding LLC 2003-1
4(f)(48) 10 Back-Up Servicing Agreement dated June 27, 2003 among the
Company, Credit Acceptance Funding 2003-1, Credit Acceptance
Auto Dealer Loan Trust 2003-1, Systems & Services Technologies,
Inc., and Radian Asset Assurance Inc.
4(f)(49) 10 Intercreditor Agreement, dated June 27, 2003, among the
Company, CAC Warehouse Funding Corp., Credit Acceptance Funding
LLC 2003-1, Credit Acceptance Auto Dealer Loan Trust 2003-1,
Wachovia Securities, Inc., as agent, JPMorgan Chase Bank, as
trustee, and Comerica Bank, as agent.
4(f)(50) 10 Sale and Servicing Agreement dated June 27, 2003 among the
Company, Credit Acceptance Auto Dealer Loan Trust 2003-1,
Credit Acceptance Funding LLC 2003-1, JPMorgan Chase Bank, and
Systems & Services Technologies, Inc.
4(f)(51) 10 Indenture, dated June 27, 2003, between Credit Acceptance Auto
Dealer Loan Trust 2003-1 and JPMorgan Chase Bank
4(f)(52) 10 Amended and Restated Trust Agreement dated June 27, 2003
between Credit Acceptance Funding LLC 2003-1 and Wachovia Bank
of Delaware, National Association
4(f)(53) 11 Contribution Agreement dated September 30, 2003 between the
Company and CAC Warehouse Funding Corporation II.
4(f)(54) 11 Loan and Security Agreement dated September 30, 2003 among the
Company, CAC Warehouse Funding Corporation II, Wachovia Bank,
National Association, Variable Funding Capital Corporation,
Wachovia Capital Markets, LLC, and Systems & Services
Technologies, Inc.
4(f)(55) 11 Back-Up Servicing Agreement dated September 30, 2003 among the
Company, Systems & Services Technologies, Inc., Wachovia
Capital Markets, LLC, and CAC Warehouse Funding Corporation II.
88
4(f)(56) 11 Intercreditor Agreement, dated September 30, 2003, among the
Company, CAC Warehouse Funding Corporation II, Credit
Acceptance Funding LLC 2003-1, Credit Acceptance Auto Dealer
Loan Trust 2003-1, Wachovia Capital Markets, LLC, JPMorgan
Chase Bank, and Comerica Bank.
4(f)(57) 13 Indenture dated August 25, 2004 between Credit Acceptance Auto
Dealer Loan Trust 2004-1 and JPMorgan Chase Bank.
4(f)(58) 13 Sale and Servicing Agreement dated August 25, 2004 among the
Company, Credit Acceptance Auto Dealer Loan Trust 2004-1,
Credit Acceptance Funding LLC 2004-1, JPMorgan Chase Bank and
Systems & Services Technologies, Inc.
4(f)(59) 13 Backup Servicing Agreement dated August 25, 2004 among the
Company, Credit Acceptance Funding 2004-1, Credit Acceptance
Auto Dealer Loan Trust 2004-1, Systems & Services Technologies,
Inc., Radian Asset Assurance Inc., XL Capital Assurance Inc.,
and JPMorgan Chase Bank.
4(f)(60) 13 Amended and Restated Trust Agreement dated August 25, 2004
between Credit Acceptance Funding LLC 2004-1 and Wachovia Bank
of Delaware, National Association
4(f)(61) 13 Contribution Agreement dated August 25, 2004 between the
Company and Credit Acceptance Funding LLC 2004-1.
4(f)(62) 13 Intercreditor Agreement dated August 25, 2004 among the
Company, CAC Warehouse Funding Corporation II, Credit
Acceptance Funding LLC 2003-1, Credit Acceptance Auto Dealer
Loan Trust 2003-1, Credit Acceptance Funding LLC 2004-1, Credit
Acceptance Auto Dealer Loan Trust 2004-1, Wachovia Capital
Markets, LLC, as agent, JPMorgan Chase Bank, as agent, and
Comerica Bank, as agent.
4(f)(63) 14 Amendment No. 1, dated August 10, 2004, to Loan and Security
Agreement dated September 30, 2003 among the Company, CAC
Warehouse Funding Corporation II, Wachovia Bank, National
Association, Variable Funding Capital Corporation, Wachovia
Capital Markets, LLC, and Systems & Servicing Technologies,
Inc.
4(f)(64) 16 Amendment No. 1, dated January 19, 2005, to Sale and Servicing
Agreement dated as of August 25, 2004 among the Company, Credit
Acceptance Auto Dealer Loan Trust 2004-1, Credit Acceptance
Funding LLC 2004-1, JPMorgan Chase Bank and Systems & Services
Technologies, Inc.
4(f)(65) 17 Amendment No. 2, dated January 21, 2005, to the Loan and
Security Agreement, dated September 30, 2003, among the
Company, CAC Warehouse Funding Corporation II, Wachovia Bank,
National Association, Variable Funding Capital Corporation, and
Wachovia Capital Markets, LLC.
4(g)(2) 2 Intercreditor Agreement dated as of December 15, 1998 among
Comerica Bank, as Collateral Agent, and various lenders and
note holders
4(g)(4) 5 Second Amended and Restated Security Agreement, dated June 11,
2001 between Comerica Bank, as Collateral Agent and the Company
4(g)(5) 4 First Amendment dated as of March 30, 2001 to the Intercreditor
Agreement dated as of December 14, 1998 among Comerica Bank, as
Collateral Agent, and various lenders and note holders
4(g)(6) 6 First Amendment, dated September 7, 2001 to Second Amended and
Restated Security Agreement, dated June 11, 2001 between
Comerica Bank, as Collateral Agent and the Company
4(g)(7) 12 Release and Fourth Amendment to Second Amended and Restated
Security Agreement, dated June 9, 2004, between Comerica Bank,
as Collateral Agent and the Company.
4(g)(8) 12 Fifth Amendment to Second Amended and Restated Security
Agreement, dated June 30, 2004, between Comerica Bank, as
Collateral Agent and the Company.
4(i) 6 Security Agreement, dated September 7, 2001, between CAC of
Canada Limited and Comerica Bank
4(j) 6 Debenture, dated September 7, 2001, made by way of deed by CAC
Ireland Limited, in favor of Comerica Bank, as agent and
security trustee
89
4(k) 6 Debenture, dated September 7, 2001, made by way of deed by CAC
UK Limited, in favor of Comerica Bank, as agent and security
trustee
4(l) 6 Debenture, dated September 7, 2001, made by way of deed by CAC
UK Funding Ltd., in favor of Comerica Bank, as agent and
security trustee
4(m) 6 Assignation in Security, dated September 10, 2001, among Credit
Acceptance Corporation, CAC Nevada, Inc., CAC Scotland and
Comerica Bank, as collateral agent and trustee
4(n) 6 Deed of Charge, dated September 7, 2001 between Credit
Acceptance Corp., and Comerica Bank, as Collateral Agent, with
respect to the share capital of CAC Ireland Limited
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 there under 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(d)(9) 10 Form of Servicing Agreement as of April 2003
10(f)(4)* 3 Credit Acceptance Corporation 1992 Stock Option Plan, as
amended and restated May 1999
10(g)(2)* 4 Employment agreement for Keith P. McCluskey, Chief Marketing
Officer, dated April 19, 2001
10(p) 7 Credit Acceptance Corporation Director Stock Option Plan
10(q)* 12 Credit Acceptance Corporation Incentive Compensation Plan,
effective April 1, 2004
10(q)(2)* 18 Form of Restricted Stock Grant Agreement
* Note: Incentive Compensation Bonus Formula for 2005 will need
to be filed with your 1Q2005 10-Q
16 19 Letter from Deloitte & Touche LLP dated July 12, 2005
21(1)(a) 20 Schedule of Credit Acceptance Corporation Subsidiaries
23(a) 20 Consent of Grant Thornton LLP
31(a) 20 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
31(b) 20 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
32(a) 20 Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32(b) 20 Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
* Management compensatory contracts and arrangements.
1 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.
2 Previously filed as an exhibit to the Company's Form 10-K Annual Report for
the year ended December 31, 1998, and incorporated herein by reference.
3 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 1999, and incorporated herein by reference.
4 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended March 31, 2001, and incorporated herein by reference.
5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 2001, and incorporated herein by reference.
90
6 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2001, 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, 2001, and incorporated herein by reference.
8 Previously filed as an exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 2002, and incorporated herein by reference.
9 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2002, and incorporated herein by reference.
10 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 2003, and incorporated herein by reference.
11 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2003, 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, 2004, and incorporated herein by reference.
13 Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated August 25, 2004, and incorporated herein by reference.
14 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2004, and incorporated herein by reference.
15 Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated December 13, 2004, and incorporated herein by reference.
16 Previously filed as an exhibit to the Company Current Report on Form 8-K
dated January 19, 2005, and incorporated herein by reference.
17 Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 9, 2005, and incorporated herein by reference.
18 Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 24, 2005, and incorporated herein by reference.
19 Previously filed as an exhibit to the Company's Current Report on Form
8-K/A dated June 24, 2005, and incorporated herein by reference.
20 Filed herewith.
91