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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, 2005 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
incorporation or organization) Identification No.)
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 if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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
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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 7,405,675 shares of the Registrant's common stock
held by non-affiliates on June 30, 2005 was approximately $110.3 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 February 28, 2006, there were 37,087,686 shares of the Registrant's common
stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement pertaining to the 2006
Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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1
CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2005
INDEX TO FORM 10-K
ITEM PAGE
- ---- ----
PART I
1. Business 3
1A. Risk Factors 12
1B. Unresolved Staff Comments 14
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 14
PART II
5. Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 15
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 18
7A. Quantitative and Qualitative Disclosures About Market Risk 31
8. Financial Statements and Supplementary Data 32
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure 67
9A. Controls and Procedures 67
PART III
10. Directors and Executive Officers of the Registrant 69
11. Executive Compensation 69
12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 69
13. Certain Relationships and Related Transactions 69
14. Principal Accountant Fees and Services 69
PART IV
15. Exhibits and Financial Statement Schedules 70
2
PART I
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 consumers, and
from sales to consumers 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 consumers 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 consumers' 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 assigned the Consumer Loans, thereby perfecting its
security interest in the Consumer Loans and the collections owed on the Consumer
Loans, and although the Company appears on the related vehicle title as
lienholder, the Company is considered, for accounting purposes, to be a lender
to dealer-partners in the United States and Canada and a lender to consumers in
the United Kingdom. For additional information see Note 1 to the consolidated
financial statements, which is incorporated herein by reference.
PRINCIPAL BUSINESS
A consumer 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 consumer;
(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. Consumers and dealer-partners benefit as follows:
Consumers. The Company helps change the lives of consumers 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 consumers who may not be able
to obtain financing without the Company's program. In addition,
consumers 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 consumers by advertising
"guaranteed credit approval", where allowed by law. The consumers will
often use other services of the dealer-partners and refer friends and
relatives to them.
- Enables dealer-partners to attract consumers who mistakenly assume
they do not qualify for conventional financing.
3
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) other income, which primarily consists of: premiums earned on credit
life insurance programs; net gains resulting from lease terminations;
fees charged to dealer-partners at the time they enroll in the
Company's program; and lease revenue earned from investments in
operating leases.
The following table sets forth the percent relationship to total revenue from
continuing operations of each of these sources:
PERCENT OF TOTAL REVENUE FROM CONTINUING OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
---------------------
2005 2004 2003
----- ----- -----
Finance charges 87.6% 87.5% 83.5%
License fees 4.9% 3.4% 2.7%
Other income 7.5% 9.1% 13.8%
----- ----- -----
Total revenue 100.0% 100.0% 100.0%
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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 three primary business segments: United
States, United Kingdom, and Other. The Other segment consists of the Company's
automobile leasing business, Canadian automobile financing business, and secured
lines of credit and floorplan financing products. 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 sold the remaining Consumer Loan portfolio of its United Kingdom
subsidiary on December 30, 2005. As of December 31, 2005, the Company had 99.4%
of its capital invested in the United States business segment. For information
regarding the Company's reportable segments, see Note 11 to the consolidated
financial statements, which is incorporated herein by reference.
OPERATIONS IN THE 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. During the first quarter of 2005, the
Company implemented a new policy. The new policy allows prospective
dealer-partners to enroll in the Company's program without paying the $9,850
enrollment fee. Prospective dealer-partners choosing this option instead agree
to allow the Company to keep 50% of the first accelerated dealer holdback
payment. This payment, called Portfolio Profit Express, is paid to qualifying
dealer-partners after 100 Consumer Loans have been originated and assigned to
the Company.
4
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
---- --------------
2001 224
2002 143
2003 399
2004 534
2005 956
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 would 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.
5
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 consumer enters into a contract with a dealer-partner that sets forth the
terms of the agreement between the consumer 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 consumer is required to
pay over the term of the Consumer Loan. Virtually all of the Consumer Loans
accepted by the Company in the United States are 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, including the consumer's credit bureau report,
data contained in the consumer'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 consumer 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 generally 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 consumer's payment obligation is
directly to the Company. Payments are generally made by the consumer directly to
the Company. The consumer'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 consumer'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. The
Company perfects its security interest by taking possession of the Consumer
Loans. 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.
6
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 consumer after the sale. The Company believes this
arrangement aligns the interests of the Company, the dealer-partner and the
consumer. 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.
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 2005 2004 2003 2002 2001
-------------------------- ------- ------- ------- ------- -------
Average size of Consumer Loan accepted $11,980 $12,634 $12,143 $11,202 $10,397
Percentage growth in average size of Consumer Loan (5.2)% 4.0% 8.4% 7.7% 32.1%
Average initial maturity (in months) 34 37 37 36 36
Average advance per Consumer Loan $ 6,058 $ 6,105 $ 5,649 $ 5,115 $ 4,988
Servicing and Collections. The Company's collectors are organized into
teams. The Company's first payment missed team services Consumer Loans of
consumers who have failed to make one of their first three payments on time. A
collection call is generally placed to these consumers within one day after the
payment is due. Once a consumer has made their first three payments, the
consumers are segmented by delinquency and phone contact profile. The daily
contact strategy matches delinquency and contact segments with appropriate
collector skill sets with the goal of maximizing cash collections. 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 consumer can negotiate a redemption with the Company,
whereby the vehicle is returned to the consumer in exchange for paying off the
Consumer Loan balance, or where appropriate or if required by law, the vehicle
is returned to the consumer 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 consumer 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 CS and LSS 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 consumer,
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 a 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.
During the third quarter of 2005, the Company began an initiative to
outsource a portion of its collection function overseas to India. Collectors in
India service accounts using the Collection System and typically work on
accounts that are less than sixty days past due. The Company expects the
outsourcing to minimize the geographic risk of having two collection centers in
the United States, and to reduce costs with the same collection performance.
7
SERVICE CONTRACTS AND INSURANCE PRODUCTS
The Company provides dealer-partners the ability to offer vehicle service
contracts to consumers. 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, 2005, the trusts had
$10.6 million in assets available to pay claims and a related claims reserve of
$10.4 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 maintains relationships with certain insurance carriers which
provide dealer-partners the ability to offer consumers credit life and
disability insurance. Should the consumer 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 $0.2 million and $0.4 million at
December 31, 2005 and 2004, respectively.
During the first quarter of 2005, the Company began offering Guaranteed
Asset Protection ("GAP") debt cancellation terms in its contracts. GAP provides
the consumer protection by forgiving the difference between the loan balance and
the consumer's insurance coverage limit in the event the vehicle is totaled or
stolen. The Company receives a fee for every GAP provision sold by its
dealer-partners.
BUSINESSES IN LIQUIDATION
United Kingdom
Effective June 30, 2003, the Company decided to stop originating Consumer
Loans in the United Kingdom. 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.
Other
Effective June 30, 2003, the Company decided to stop 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.
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.
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.
Beginning in 2002, entities owned by the Company's majority shareholder and
Chairman began offering secured lines of credit to third parties in a manner
similar to the Company's prior program. In December of 2004, the Company's
majority shareholder and Chairman sold his ownership interest in these entities.
8
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 consumers 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. In seeking to establish the Company as
one of the principal financing sources of its dealer-partners, the Company
competes predominantly on the basis of a high level of dealer-partner service
and strong dealer-partner relationships, and by offering guaranteed credit
approval for consumers. 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.
9
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 balance accounted for more than 10% of total Dealer Loans as of
December 31, 2005 or as of December 31, 2004. 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 2005:
CONSUMER LOANS ACCEPTED ACTIVE DEALER-PARTNERS (1)
----------------------- --------------------------
(Dollars in thousands) AMOUNT % OF TOTAL NUMBER % OF TOTAL
---------- ---------- ------ ----------
Michigan $ 84,338 8.4% 161 9.1%
Alabama 67,508 6.7 59 3.3
Mississippi 67,252 6.7 56 3.2
New York 59,461 5.9 108 6.1
Texas 58,678 5.9 109 6.2
All other states 663,882 66.4 1,273 72.1
---------- ----- ----- -----
Total $1,001,119 100.0% 1,766 100.0%
========== ===== ===== =====
(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 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.
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 7 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) 2005 2004 2003
-------- -------- --------
Revenues from Continuing Operations
United States $200,640 $171,111 $139,086
Other foreign 628 960 1,956
-------- -------- --------
Total revenues from continuing
operations $201,268 $172,071 $141,042
======== ======== ========
Long-lived assets
United States $ 17,992 $ 19,474 $ 18,045
United Kingdom -- 232 496
-------- -------- --------
Total long-lived assets $ 17,992 $ 19,706 $ 18,541
======== ======== ========
10
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 consumers,
(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, or resulting in potential liability related to the servicing of
Consumer Loans 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 assigned
to the Company by dealer-partners is also subject to state laws and regulations.
However, as the Company does not deal directly with consumers 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 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.
TEAM MEMBERS
As of December 31, 2005, the Company had 777 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 2005 2004
---------- ---- ----
Collection and Servicing 474 482
Loan Origination and Processing 52 43
Sales and Marketing 92 81
Finance and Accounting 37 32
Information Systems 67 57
Management and Support 55 62
--- ---
TOTAL 777 757
=== ===
11
ITEM 1A. RISK FACTORS
THE COMPANY'S INABILITY TO ACCURATELY FORECAST AND ESTIMATE THE AMOUNT AND
TIMING OF FUTURE COLLECTIONS COULD HAVE A MATERIAL ADVERSE EFFECT ON RESULTS OF
OPERATIONS.
The ability to accurately forecast Consumer Loan performance is critical to
the Company's success. At the time of Consumer Loan acceptance, the Company
forecasts future expected cash flows from the Consumer Loan. Based on these
forecasts, the Company makes an advance to the related dealer-partner at a level
designed to achieve an acceptable return on capital. If Consumer Loan
performance equals or exceeds original expectations, it is likely the target
return on capital will be achieved. However, actual cash flows from any
individual Dealer Loan are often different than cash flows estimated at Dealer
Loan inception. If such difference is favorable, the difference is recognized
into income over the remaining 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 there are differences between estimated cash
flows at inception and actual cash flows, an allowance is required for a
significant portion of the Company's Dealer Loan portfolio. There can be no
assurance that estimates will be accurate or that Consumer Loan performance will
be as expected. If the Company produces disappointing operating results, it will
likely be because future Consumer Loan performance was overestimated. In the
event that the Company underestimates the default risk or under-prices products,
the financial position, liquidity and results of operations will be adversely
affected, possibly to a material degree.
DUE TO INCREASED COMPETITION FROM TRADITIONAL FINANCING SOURCES AND
NON-TRADITIONAL LENDERS, THE COMPANY MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
The automobile finance market is highly fragmented and is served by a
variety of companies. The Company's largest competition comes from "buy here,
pay here" dealerships where the dealer finances the consumer'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 financial resources than are
available to the Company, and many have long standing relationships with
automobile dealerships. Providers of automobile financing have traditionally
competed based on the interest rate charged, the quality of credit accepted, the
flexibility of loan terms offered and the quality of service provided to dealers
and consumers. In seeking to establish the Company as one of the principal
financing sources of its dealer-partners, the Company competes predominately on
the basis of a high level of dealer service and strong dealer relationships, and
by offering guaranteed credit approval for consumers. While the Company is only
aware of a few companies that offer guaranteed credit approval, there is
potential that significant direct competition could emerge and that the Company
may be unable to compete successfully.
THE COMPANY'S ABILITY TO MAINTAIN AND GROW THE BUSINESS IS DEPENDENT ON THE
ABILITY TO CONTINUE TO ACCESS FUNDING SOURCES AND OBTAIN CAPITAL ON FAVORABLE
TERMS.
The Company depends on borrowings under the revolving credit facility and
warehouse revolving facility and various other financing alternatives available,
in addition to cash flow generated by operations, to fund advances to
dealer-partners and for the payment of dealer holdbacks. The $135.0 million
revolving credit facility matures on June 20, 2008. As of the filing date of
this report, the Company has one warehouse credit facility with various
financial institutions providing for available borrowings of up to a total of
$325.0 million. This facility matures on February 14, 2007. In addition, the
Warehouse Facility must be refinanced within 90 days of February 15, 2006 and
within 360 days of the most recent refinancing occurring after February 15,
2006. There can be no assurance that new or additional financing can be
obtained, or that it will be available on acceptable terms. If its various
financing alternatives were to become limited or unavailable, the Company would
have to limit business activity and operations could be materially adversely
affected.
THE COMPANY MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FLOW TO SERVICE ITS
OUTSTANDING DEBT AND FUND OPERATIONS.
The Company currently has substantial outstanding indebtedness and its
credit facilities allow the Company to incur significant amounts of additional
debt. The ability to make payment of principal or interest on indebtedness will
depend in part on the Company's future operating performance, which to a certain
extent is subject to economic, financial, competitive and other factors beyond
the Company's control. If the Company is unable to generate sufficient cash flow
in the future to service its debt, it may be required to refinance all or a
portion of its existing debt or to obtain additional financing. There can be no
assurance that any such refinancing will be possible or that any additional
financing can be obtained on satisfactory terms.
12
THE SUBSTANTIAL REGULATION TO WHICH THE COMPANY IS SUBJECT LIMITS THE BUSINESS
AND COULD RESULT IN POTENTIAL LIABILITY.
The Company's business is subject to various laws and regulations which
require licensing and qualification; limit interest rates, fees and other
charges associated with the Consumer Loans assigned to the Company; require
specified disclosures by dealer-partners to consumers; govern the sale and terms
of ancillary products; and define the rights to repossess and sell collateral.
Failure to comply with, or an adverse change in, these laws or regulations could
have a material adverse effect on the Company by, among other things, limiting
the jurisdictions in which the Company may operate, restricting the ability to
realize the value of the collateral securing the loans, making it more costly or
burdensome to do business, or resulting in potential liability. In addition,
governmental regulations which would deplete the supply of used vehicles, such
as environmental protection regulations governing emissions or fuel consumption,
could have a material adverse effect on the Company.
The sale of insurance products in connection with Consumer Loans assigned
to the Company by dealer-partners is also subject to state laws and regulations.
As the holder of the Consumer Loans that contain these products, some of these
state laws and regulations may apply to the Company's servicing and collection
of the Consumer Loans. Although the Company does not believe that such laws and
regulations significantly affect its business because it does not deal directly
with consumers in the sale of insurance products, 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 or restrict the operation
of the business in such jurisdictions. Any such action could materially
adversely affect the income received from such products.
ADVERSE CHANGES IN ECONOMIC CONDITIONS COULD ADVERSELY AFFECT THE COMPANY'S
FINANCIAL POSITION, LIQUIDITY AND RESULTS OF OPERATIONS AND ITS ABILITY TO ENTER
INTO FUTURE FINANCING TRANSACTIONS.
The Company is subject to general economic conditions which are beyond its
control. During periods of economic slowdown or recession, delinquencies,
defaults, repossessions and losses generally increase. These periods also may be
accompanied by decreased consumer demand for automobiles and declining values of
automobiles securing outstanding Consumer Loans, which weakens collateral
coverage and increases the amount of a loss in the event of default. Significant
increases in the inventory of used automobiles during periods of economic
recession may also depress the prices at which repossessed automobiles may be
sold or delay the timing of these sales. Because the business is focused on
consumers who do not qualify for conventional automobile financing, the actual
rates of delinquencies, defaults, repossessions and losses on these Consumer
Loans could be higher than that of those experienced in the general automobile
finance industry, and could be more dramatically affected by a general economic
downturn. In addition, during an economic slowdown or recession, the Company's
servicing costs may increase without a corresponding increase in service fee
income. Any sustained period of increased delinquencies, defaults, repossessions
or losses or increased servicing costs could also materially adversely affect
the Company's financial position, liquidity and results of operations and its
ability to enter into future financing transactions.
LITIGATION THE COMPANY IS INVOLVED IN FROM TIME TO TIME MAY ADVERSELY AFFECT ITS
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS.
As a result of the consumer-oriented nature of the industry in which the
Company operates and uncertainties with respect to the application of various
laws and regulations in some circumstances, the Company is subject to various
consumer claims and litigation seeking damages and statutory penalties, based
upon, among other things, usury, disclosure inaccuracies, wrongful repossession,
violations of bankruptcy stay provisions, certificate of title disputes, fraud
and breach of contract. Some litigation against the Company could take the form
of class action complaints by consumers. As the assignee of Consumer Loans
originated by dealer-partners, it may also be named as a co-defendant in
lawsuits filed by consumers principally against dealer-partners. The damages
and penalties claimed by consumers in these types of matters can be substantial.
The relief requested by the plaintiffs varies but includes requests for
compensatory, statutory and punitive damages. A significant judgment against the
Company in connection with any litigation could have a material adverse affect
on the Company's financial condition and results of operations.
13
THE COMPANY IS DEPENDENT ON ITS SENIOR MANAGEMENT AND THE LOSS OF ANY OF THESE
INDIVIDUALS OR AN INABILITY TO HIRE ADDITIONAL PERSONNEL COULD ADVERSELY EFFECT
ITS ABILITY TO OPERATE PROFITABLY.
The Company's senior management average over 8 years of experience with the
Company. The Company's success is dependent upon the management and the
leadership skills of these managers. In addition, competition from other
companies to hire the Company's personnel possessing the necessary skills and
experience required could contribute to an increase in employee turnover. The
loss of any of these individuals or an inability to attract and retain
additional qualified personnel could adversely affect the Company. There can be
no assurance that the Company will be able to retain its existing senior
management personnel or attract additional qualified personnel.
NATURAL DISASTERS, ACTS OF WAR, TERRORIST ATTACKS AND THREATS OR THE ESCALATION
OF MILITARY ACTIVITY IN RESPONSE TO SUCH ATTACKS OR OTHERWISE MAY NEGATIVELY
AFFECT THE BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Natural disasters, acts of war, terrorist attacks and the escalation of
military activity in response to such attacks or otherwise may have negative and
significant effects, such as imposition of increased security measures, changes
in applicable laws, market disruptions and job losses. Such events may have an
adverse effect on the economy in general. Moreover, the potential for future
terrorist attacks and the national and international responses to such threats
could affect the business in ways that cannot be predicted. The effect of any of
these events or threats could have an adverse affect on the Company's business,
financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
United States 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
78,000 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 approximately 10,000 square feet of office space in an
office building in Worthing, West Sussex, in the United Kingdom. As of December
31, 2005, the Company did not occupy any space within the building under a lease
expiring in September 2007, however, the Company did sub-lease approximately
3,700 square feet of the office building during 2005.
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 12 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 2005.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
STOCK PRICE
During 2004 and 2005 (through July 19, 2005), the Company's common stock
was traded on The Nasdaq Stock Market(R) ("the Nasdaq") under the symbol CACC.
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. The following table sets forth the high and low sale prices as
reported by the Nasdaq for the common stock for each quarter during 2004 and
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 2004
--------------- ---------------
QUARTER ENDED HIGH LOW HIGH LOW
- ------------- ------ ------ ------ ------
March 31 $26.46 $19.16 $20.65 $14.97
June 30 20.09 12.90 19.25 12.55
September 30 16.25 12.08 20.00 12.65
December 31 17.90 14.50 26.92 18.52
As of March 1, 2006, the number of beneficial holders and shareholders
of record of the common stock was 1,288 based upon securities position listings
furnished to the Company.
During the first quarter of 2006, the Company applied for the relisting of
its common stock on the NASDAQ National Market. The listing of the common stock
on the Nasdaq National Market requires compliance with, among other things,
various quantitative requirements, such as a minimum level of public market
float, a minimum level of publicly owned shares, a minimum level of round lot
holders and a minimum level of tangible net worth, as well as certain
qualitative requirements. Whether the relevant criteria have been satisfied is
determined at Nasdaq's discretion. The Company anticipates that if its
application is approved, the relisting process should be completed by April 30,
2006.
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.
15
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,
2005:
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 3,459,044 $ 6.98 --
Director Plan 200,000 12.13 --
Incentive Plan -- -- 900,977
--------- -------
Total 3,659,044 $ 7.26 900,977
========= ====== =======
(a) For additional information regarding the Company's stock compensation
plans, see Note 9 to the consolidated financial statements, which is
incorporated herein by reference.
STOCK REPURCHASES
There were no stock repurchases by the Company during the three months
ended December 31, 2005.
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, 2005, the Company has repurchased
approximately 6.4 million shares under this program at a cost of $51.9 million.
On February 10, 2006, the Company announced that it had commenced a modified
dutch auction tender offer to purchase up to 5.0 million of its outstanding
common stock at a price per share of $21.00 to $25.00. The tender offer will
expire on March 13, 2006.
16
ITEM 6. SELECTED FINANCIAL DATA
The selected income statement and balance sheet data presented below are
derived from the Company's audited and unaudited consolidated financial
statements and should be read in conjunction with the Company's consolidated
financial statements for the years ended December 31, 2005, 2004, and 2003, 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.
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
-------------------------------------------------------------------
UNAUDITED
2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Revenue $ 201,268 $ 172,071 $ 141,042 $ 138,070 $ 124,621
Costs and expenses 94,724 87,395 79,681 95,341 93,560
----------- ----------- ----------- ----------- -----------
Operating income 106,544 84,676 61,361 42,729 31,061
Foreign exchange gain (loss) 1,812 1,650 (2,767) (3) (42)
----------- ----------- ----------- ----------- -----------
Income from continuing operations before provision
for income taxes 108,356 86,326 58,594 42,726 31,019
Provision for income taxes 40,159 30,073 27,369 18,747 13,417
----------- ----------- ----------- ----------- -----------
Income from continuing operations 68,197 56,253 31,225 23,979 17,602
----------- ----------- ----------- ----------- -----------
Gain (loss) from operations of discontinued
United Kingdom segment (A) 6,194 1,556 (7,047) 8,630 10,218
Provision (benefit) for income taxes 1,790 484 (491) 2,835 3,149
----------- ----------- ----------- ----------- -----------
Gain (loss) from discontinued operations 4,404 1,072 (6,556) 5,795 7,069
----------- ----------- ----------- ----------- -----------
Net income $ 72,601 $ 57,325 $ 24,669 $ 29,774 $ 24,671
=========== =========== =========== =========== ===========
Net income per common share:
Basic $ 1.96 $ 1.48 $ 0.58 $ 0.70 $ 0.59
=========== =========== =========== =========== ===========
Diluted $ 1.85 $ 1.40 $ 0.57 $ 0.69 $ 0.57
=========== =========== =========== =========== ===========
Income from continuing operations per common share:
Basic $ 1.84 $ 1.46 $ 0.74 $ 0.57 $ 0.42
=========== =========== =========== =========== ===========
Diluted $ 1.74 $ 1.37 $ 0.72 $ 0.55 $ 0.41
=========== =========== =========== =========== ===========
Weighted average shares outstanding:
Basic 36,991,136 38,617,787 42,195,340 42,438,292 42,140,961
Diluted 39,207,680 41,017,205 43,409,007 43,362,741 43,150,804
BALANCE SHEET DATA:
Loans receivable, net $ 563,528 $ 526,011 $ 476,128 $ 456,908 $ 501,535
All other assets 55,866 65,302 68,720 68,251 87,782
----------- ----------- ----------- ----------- -----------
Total assets $ 619,394 $ 591,313 $ 544,848 $ 525,159 $ 589,317
=========== =========== =========== =========== ===========
Total debt $ 146,905 $ 193,547 $ 106,447 $ 109,663 $ 202,290
Dealer reserve payable, net -- 15,675 35,198 47,262 61,013
Other liabilities 99,463 81,201 59,908 52,222 45,469
----------- ----------- ----------- ----------- -----------
Total liabilities 246,368 290,423 201,553 209,147 308,772
Shareholders' equity (B) 373,026 300,890 343,295 316,012 280,545
----------- ----------- ----------- ----------- -----------
Total liabilities and shareholders' equity $ 619,394 $ 591,313 $ 544,848 $ 525,159 $ 589,317
=========== =========== =========== =========== ===========
(A) Includes gain on sale of United Kingdom loan portfolio of $3.0 million
recognized in 2005 and 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.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 consumers, and from sales to consumers 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 right 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 and 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 origination dollar
volume increased 8.0% in 2005 due to an increase in the number of active
dealer-partners and an increase in the number of active dealer-partners
partially offset by a decrease in the number of transactions per active
dealer-partner. 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 0.4 to 1.0 at December 31, 2005. The Company currently funds its
business through a bank line of credit facility 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 designated 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.
18
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 compares the Company's forecast of
Consumer Loan collection rates for loans accepted by year in the United States
as of December 31, 2005 with the forecast as of December 31, 2004. The data
presented in the table is presented in accordance with the Company's current
accounting methodology and is based on the following: (i) 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 and (ii) advance rates represent the cash amount paid to the
dealer-partner or paid to third parties for ancillary products.
Loan
Origination December 31, 2005 December 31, 2004
Year Forecasted Collection % Forecasted Collection % Variance
- ----------- ----------------------- ----------------------- --------
1995 54.9% 54.9% 0.0%
1996 55.0% 55.0% 0.0%
1997 58.3% 58.4% (0.1%)
1998 67.7% 67.7% 0.0%
1999 72.7% 72.8% (0.1%)
2000 73.2% 73.2% 0.0%
2001 67.2% 67.2% 0.0%
2002 70.3% 70.2% 0.1%
2003 74.0% 74.0% 0.0%
2004 72.9% 73.4% (0.5%)
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 December 31, 2005 for the United States business segment.
As of December 31, 2005
---------------------------------------------------
Year of Forecasted % of Forecast
Origination Collection % Advance % Spread % Realized
- ----------- ------------ --------- -------- -------------
1995 54.9% 44.2% 10.7% 100.0%
1996 55.0% 46.9% 8.1% 99.8%
1997 58.3% 47.9% 10.4% 99.2%
1998 67.7% 46.1% 21.6% 98.5%
1999 72.7% 48.9% 23.8% 97.6%
2000 73.2% 48.0% 25.2% 96.7%
2001 67.2% 45.8% 21.4% 96.4%
2002 70.3% 42.2% 28.1% 94.1%
2003 74.0% 43.4% 30.6% 82.8%
2004 72.9% 44.0% 28.9% 59.7%
2005 73.6% 47.1% 26.5% 22.7%
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 97.6% 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. While the spread
has decreased from 2004 to 2005, the Company believes it is still at a
sufficient level to minimize the Company's risk of being able to recover the
cash advance.
During the first quarter of 2005, the Company made the following changes
that impacted pricing: (i) effective February 1, 2005, the monthly rate for CAPS
fees increased from $499 to $599, (ii) effective March 1, 2005, the Company
increased advance rates by approximately 1.5%, and (iii) early in the first
quarter, the Company began offering GAP debt cancellation terms in its
contracts. GAP provides the consumer protection by forgiving the difference
between the loan balance and the consumer's insurance coverage limit in the
event the vehicle is totaled or stolen. The Company receives a fee for every GAP
provision sold by its dealer-partners. The Company believes that the net impact
of these three changes will result in Consumer Loans accepted during 2005
producing approximately the same level of profitability as Consumer Loans
accepted in 2004. There were no other material changes in credit policy or
pricing during 2005, other than routine changes designed to maintain current
profitability levels.
19
RESULTS OF OPERATIONS
The tables in this section present income statement data on a consolidated
basis as well as for the Company's three business segments, United States,
United Kingdom, and Other.
CONSOLIDATED
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, % OF DECEMBER 31, % OF DECEMBER 31, % OF
(Dollars in thousands) 2005 REVENUE 2004 REVENUE 2003 REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $176,369 87.6% $150,651 87.5% $117,758 83.5%
License fees 9,775 4.9 5,835 3.4 3,836 2.7
Other income 15,124 7.5 15,585 9.1 19,448 13.8
-------- ----- -------- ----- -------- -----
Total revenue 201,268 100.0 172,071 100.0 141,042 100.0
COSTS AND EXPENSES:
Salaries and wages 36,853 18.3 32,720 19.0 28,377 20.1
General and administrative 20,834 10.4 20,724 12.0 18,573 13.2
Sales and marketing 14,275 7.1 11,915 6.9 8,006 5.7
Provision for credit losses 5,705 2.8 6,526 3.8 8,835 6.3
Interest 13,886 6.9 11,660 6.8 8,057 5.7
Stock-based compensation expense 2,240 1.1 2,580 1.5 3,316 2.4
Other expense 931 0.5 1,270 0.7 4,517 3.2
-------- ----- -------- ----- -------- -----
Total costs and expenses 94,724 47.1 87,395 50.7 79,681 56.6
-------- ----- -------- ----- -------- -----
Operating income 106,544 52.9 84,676 49.3 61,361 43.4
Foreign exchange gain (loss) 1,812 0.9 1,650 1.0 (2,767) (2.0)
-------- ----- -------- ----- -------- -----
Income from continuing operations before
provision for income taxes 108,356 53.8 86,326 50.3 58,594 41.4
Provision for income taxes 40,159 20.0 30,073 17.5 27,369 19.4
-------- ----- -------- ----- -------- -----
Income from continuing operations 68,197 33.8 56,253 32.8 31,225 22.0
Discontinued operations
Gain (loss) from operations of
discontinued United Kingdom segment
before provision for income taxes (1) 6,194 3.1 1,556 0.9 (7,047) (5.0)
Provision (benefit) for income taxes 1,790 0.9 484 0.3 (491) (0.3)
-------- ----- -------- ----- -------- -----
Gain (loss) from discontinued operations 4,404 2.2 1,072 0.6 (6,556) (4.7)
-------- ----- -------- ----- -------- -----
Net income $ 72,601 36.0% $ 57,325 33.4% $ 24,669 17.3%
======== ===== ======== ===== ======== =====
Net income per common share:
Basic $ 1.96 $ 1.48 $ 0.58
======== ======== ========
Diluted $ 1.85 $ 1.40 $ 0.57
======== ======== ========
Income from continuing operations per
common share:
Basic $ 1.84 $ 1.46 $ 0.74
======== ======== ========
Diluted $ 1.74 $ 1.37 $ 0.72
======== ======== ========
(1) Includes gain on sale of United Kingdom loan portfolio of $3.0 million
recognized during the fourth quarter of 2005 and impairment expenses of
$10.5 million recognized in 2003 following the decision to liquidate the
United Kingdom operation.
CONTINUING OPERATIONS
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
For the year ended December 31, 2005, consolidated net income from
continuing operations increased to $68.2 million, or $1.74 per diluted share,
compared to $56.3 million, or $1.37 per diluted share, for the same period in
2004. The increase in consolidated net income from continuing operations was
primarily due to: (i) a 17.1% increase in finance charge income due to an
increase in the size of the Dealer Loan portfolio during 2005, (ii) a $3.9
million increase in license fees, which represent monthly fees charged to
dealer-partners for access to CAPS, primarily due to an increase in the number
of active dealer-partners, (iii) a decrease in general and administrative
expenses, as a percentage of revenue, of 1.6%, primarily related to the
resolution of a dispute over previously paid audit fees, and (iv) a $0.8 million
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 a Dealer Loan.
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, 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.
20
Interest. Consolidated interest expense from continuing operations increased
to $13.9 million in 2005 from $11.7 million in 2004. The increase in
consolidated interest expense from continuing operations was due to an increase
in average outstanding debt as a result of stock buybacks in the third quarter
of 2004 and an increase in the weighted average interest rate to 7.4% in 2005
from 7.0 % in 2004. The increase in the interest rate is primarily the result of
increased market rates partially offset by the decreased impact of fixed fees on
the Company's secured financing and line of credit facility due to higher
average outstanding borrowings.
YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003
For the year ended December 31, 2004, consolidated net income from
continuing operations increased to $56.3 million, or $1.37 per diluted share,
compared to $31.2 million, or $0.72 per diluted share, for the same period in
2003. The increase in consolidated net income from continuing operations was
primarily due to: (i) a 27.9% 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) a decrease in the Company's effective tax rate to 34.8% from 46.7%
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 (iii) 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, and (iv) a $2.3 million 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 a Dealer Loan.
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, 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.
The following table presents income statement data for the Company's United
States business segment:
UNITED STATES
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, % OF DECEMBER 31, % OF DECEMBER 31, % OF
(Dollars in thousands) 2005 REVENUE 2004 REVENUE 2003 REVENUE
------------ ------- ------------ ------- ------------ -------
Revenue:
Finance charges $176,173 88.1% $149,998 89.5% $116,156 89.3%
License fees 9,775 4.9 5,835 3.5 3,836 2.9
Other income 13,964 7.0 11,721 7.0 10,086 7.8
-------- ----- -------- ----- -------- -----
Total revenue 199,912 100.0 167,554 100.0 130,078 100.0
Costs and expenses:
Salaries and wages 36,612 18.3 32,111 19.2 27,136 20.9
General and administrative 20,548 10.3 20,304 12.1 17,435 13.4
Sales and marketing 14,275 7.1 11,915 7.1 7,944 6.1
Provision for credit losses 5,709 2.9 5,332 3.2 6,003 4.6
Interest 13,304 6.7 11,009 6.6 6,329 4.9
Stock-based compensation expense 2,240 1.1 2,580 1.5 3,316 2.5
Other expense 305 0.2 344 0.2 541 0.4
-------- ----- -------- ----- -------- -----
Total costs and expenses 92,993 46.6 83,595 49.9 68,704 52.8
-------- ----- -------- ----- -------- -----
Operating income 106,919 53.4 83,959 50.1 61,374 47.2
Foreign exchange gain (loss) 1,056 0.5 1,661 1.0 (2,862) (2.2)
-------- ----- -------- ----- -------- -----
Income from continuing operations before
provision for income taxes 107,975 53.9 85,620 51.1 58,512 45.0
Provision for income taxes 40,276 20.1 29,767 17.8 27,237 20.9
-------- ----- -------- ----- -------- -----
Income from continuing operations $ 67,699 33.8% $ 55,853 33.3% $ 31,275 24.1%
======== ===== ======== ===== ======== =====
21
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004
Finance Charges. Finance charges increased to $176.2 million in 2005 from
$150.0 million in 2004 primarily due to an increase in the size of the Dealer
Loan portfolio resulting from an increase in the number of active
dealer-partners, 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, 2005 and 2004:
TWELVE MONTHS ENDED DECEMBER 31, 2005 TWELVE MONTHS ENDED DECEMBER 31, 2004
--------------------------------------- ---------------------------------------
DEALER-PARTNERS UNIT VOLUME AVERAGE DEALER-PARTNERS UNIT VOLUME AVERAGE
--------------- ----------- ------- --------------- ----------- -------
Production from year ended December
31 of the prior year 1,215 75,955 62.5 916 62,334 68.1
Attrition (1) (239) (4,291) 18.0 (182) (4,459) 24.5
Volume change from dealer-partners
active in both periods n/a (5,147) n/a n/a 2,875 n/a
----- ------ ---- ----- ------ ----
Current period volume from dealer-
partners active both periods 976 66,517 68.2 734 60,750 82.8
New dealer-partners (2) 745 16,278 21.8 460 14,482 31.5
Restarts (3) 45 772 17.2 21 723 34.4
----- ------ ---- ----- ------ ----
Current period production 1,766 83,567 47.3 1,215 75,955 62.5
(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.
The increase in new dealer-partner enrollments in 2005 was impacted by a
new policy implemented in the first quarter of 2005. The new policy allows
prospective dealer-partners to enroll in the Company's program without paying
the $9,850 enrollment fee. Prospective dealer-partners choosing this option
instead agree to allow the Company to keep 50% of the first accelerated dealer
holdback payment. This payment, called Portfolio Profit Express, is paid to
qualifying dealer-partners after 100 Consumer Loans have been originated and
assigned to the Company. Based on the historical average of Portfolio Profit
Express payments, the Company expects average enrollment fee revenue per
dealer-partner for those dealer-partners electing the new option and reaching
100 Consumer Loans will be approximately $15,000 to $20,000. Approximately 57%
of the dealer-partners that enrolled during 2005 took advantage of this new
enrollment option.
License Fees. License fees increased to $9.8 million in 2005 from $5.8
million in 2004 due to an increase in the number of active dealer-partners.
License fees represent monthly fees charged to dealer-partners for access to
CAPS. The average number of dealer-partners billed for CAPS fees in 2005 was
1,360 compared to 938 in 2004. Effective February 1, 2005, the monthly rate for
CAPS fees increased from $499 to $599.
Salaries and Wages. Salaries and wages, as a percentage of revenue,
decreased to 18.3% in 2005 from 19.2% in 2004 primarily due to a decrease in
servicing salaries, as a percentage of revenue, of 0.5% due to increased
operational efficiencies.
General and Administrative. General and administrative expenses, as a
percentage of revenue, decreased to 10.3% in 2005 from 12.1% in 2004. The
decrease was primarily due to the resolution of a dispute over previously paid
audit fees.
Sales and Marketing. Sales and marketing expenses, as a percentage of
revenue, remained consistent at 7.1% in 2005 and in 2004 primarily due to an
increase in dealer-partner support products and services, as a percentage of
revenue, of 0.4%, offset by a decrease in sales commissions, as a percentage of
revenue, of 0.4%. The increase in expenses related to dealer-partner support
products and services was primarily due to an increase in sales promotion kits
and signs primarily due to an increase in dealer-partner enrollments. The
decrease in sales commissions, as a percentage of revenue, is primarily due to
Dealer Loan origination volume growing at a slower rate than finance charge
revenue.
Provision for Credit Losses. The provision for credit losses increased to
$5.7 million in 2005 from $5.3 million in 2004. 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 increase in the provision for credit losses in 2005 was
primarily due to a one-time pre-tax charge of $2.9 million in the third quarter
of 2005 related to a reduction in forecasted collection rates resulting from
Hurricanes Katrina and Rita partially offset by a decrease in the provision for
credit losses required to maintain the initial yield established at the
inception of the Dealer Loan.
22
Stock-based Compensation Expense. Stock-based compensation expense
decreased to $2.2 million in 2005 from $2.6 million in 2004 primarily due to a
decline in the number of unvested stock options outstanding.
Provision for Income Taxes. The effective tax rate increased to 36.6% in
2005 from 34.8% in 2004 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.
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
--------------------------------------- ---------------------------------------
DEALER-PARTNERS UNIT VOLUME AVERAGE DEALER-PARTNERS UNIT 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 consumer 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.
23
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.
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.
UNITED KINGDOM
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
(Dollars in thousands) 2005 2004 2003
------------ ------------ ------------
Discontinued operations
Gain (loss) from operations of discontinued
United Kingdom segment before provision for
income taxes(1) $6,194 $1,556 $(7,047)
Provision for income taxes 1,790 484 (491)
------ ------ -------
Gain (loss) on discontinued operations $4,044 $1,072 $(6,556)
====== ====== =======
(1) Includes gain on sale of United Kingdom loan portfolio of $3.0 million
recognized during the fourth quarter of 2005 and impairment expenses of
$10.5 million recognized in 2003 following the decision to liquidate the
United Kingdom operation.
Effective June 30, 2003, the Company decided to stop originating Consumer
Loans in the United Kingdom.
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.
24
OTHER
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, % OF DECEMBER 31, % OF DECEMBER 31, % OF
(Dollars in thousands) 2005 REVENUE 2004 REVENUE 2003 REVENUE
------------ ------- ------------ ------- ------------ -------
REVENUE:
Finance charges $ 196 14.5% $ 653 14.5% $ 1,602 14.6%
Other income 1,160 85.5 3,864 85.5 9,362 85.4
------ ----- ------ ----- ------- -----
Total revenue 1,356 100.0 4,517 100.0 10,964 100.0
COSTS AND EXPENSES:
Salaries and wages 241 17.8 609 13.5 1,241 11.2
General and administrative 286 21.1 420 9.3 1,138 10.4
Sales and marketing -- -- -- -- 62 0.6
(Credit) provision for credit losses (4) (0.3) 1,194 26.4 2,832 25.8
Interest 582 42.9 651 14.4 1,728 15.8
Other expense 626 46.2 926 20.5 3,976 36.3
------ ----- ------ ----- ------- -----
Total costs and expenses 1,731 127.7 3,800 84.1 10,977 100.1
------ ----- ------ ----- ------- -----
Operating (loss) income (375) (27.7) 717 15.9 (13) (0.1)
Foreign exchange gain (loss) 3 0.3 (11) (0.3) 95 0.8
------ ----- ------ ----- ------- -----
(Loss) income from continuing operations before
(credit) provision for income taxes (372) (27.4) 706 15.6 82 0.7
(Credit) provision for income taxes (117) (8.6) 306 6.7 132 1.2
------ ----- ------ ----- ------- -----
(Loss) income from continuing operations $ (255) (18.8)% $ 400 8.9% $ (50) (0.5)%
====== ===== ====== ===== ======= =====
The Other segment consists of the Company's automobile leasing business,
Canadian automobile financing business (accounted for as Dealer Loans) and
secured lines of credit and floorplan financing products. In January 2002, the
Company decided to stop originating automobile leases and effective June 30,
2003, the Company decided to stop originating Dealer Loans in Canada. As a
result, the size of the lease portfolio and Dealer Loan portfolio in Canada have
declined significantly. The Company has also significantly reduced its floorplan
and secured line of credit portfolios since 2001. The declines in the revenues
and expenses are primarily a result of these decisions.
25
CRITICAL ACCOUNTING POLICIES
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 Estimating revenue recognition using the
Required: interest rate method of accounting.
Assumptions and Approaches The Company recognizes finance charge income
Used: under an approach similar to the provisions of
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 Estimating the amount and timing of future
Required: collections and dealer holdback payments.
Assumptions and Approaches The Company maintains an allowance for credit
Used: 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, 2005, 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 Compensation expense for stock options is based
Required: on the fair value of the options on the date of
grant, which is estimated by the Company, and
is recognized over the expected vesting period
of the options.
26
Assumptions and Approaches The Company uses the Black-Scholes option
Used: 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 9 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 Estimating impairment for businesses in
Required: liquidation on a quarterly basis.
Assumptions and Approaches The Company estimates impairment for each
Used: 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 Estimating the likelihood of adverse legal
Required: judgments and any resulting damages owed.
Assumptions and Approaches The Company, with assistance from its legal
Used: 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 consumer claims
against the Company, see Note 12 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 Estimating the recoverability of deferred tax
Required: assets.
Assumptions and Approaches The Company, based on historical and projected
Used: 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 8 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 2005, the Company experienced an increase in Dealer Loan
originations from 2004 primarily due to an increase in the number of active
dealer-partners due to increased dealer-partner enrollments.
The Company currently finances its operations through: (i) a bank line of
credit facility; (ii) secured financings; (iii) a mortgage loan; and (iv)
capital lease obligations. For information regarding these financings and the
covenants included in the related documents, see Note 6 to the consolidated
financial statements, which is incorporated herein by reference. As of December
31, 2005, 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 became permanent upon the filing of such reports in January 2006.
The Company's total balance sheet indebtedness decreased to $146.9 million
at December 31, 2005 from $193.5 million at December 31, 2004. In addition to
the balance sheet indebtedness as of December 31, 2005, 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, 2005 is as follows (in thousands):
PAYMENTS DUE BY PERIOD
---------------------------------------------------------
LESS THAN 1-3 3-5 YEARS MORE THAN 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
- ----------------------- -------- --------- -------- --------- -----------
Long-term debt obligations (1) $145,339 $ 715 $144,624 $-- $--
Capital lease obligations 1,566 780 786 -- --
Operating lease obligations 2,051 684 1,367 -- --
Purchase obligations -- -- -- -- --
Other long-term obligations -- -- -- -- --
-------- ------ -------- --- ---
Total contractual obligations $148,956 $2,179 $146,777 $-- $--
======== ====== ======== === ===
(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 6 in the
consolidated financial statements, which is incorporated herein by
reference.
28
Repurchase and Retirement of Common Stock. For information regarding the
Company's stock repurchase program, see Note 9 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, 2005, the Company had $36.3 million of floating rate
debt outstanding on its bank credit facilities, with no interest rate cap
protection, and $101.5 million in floating rate debt outstanding under its
secured financing, with an interest rate cap of 6.75%. Based on the difference
between the Company's rates on its secured financing at December 31, 2005 and
the interest rate cap, the Company's maximum interest rate risk on the September
2003 secured financing is 2.4%. This maximum interest rate risk would reduce
annual after-tax earnings by approximately $1.6 million in 2005. For every 1%
increase in rates on the Company's bank credit facilities, annual after-tax
earnings would decrease by approximately $0.2 million in 2005. 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.
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. The Company believed that this transaction minimized the currency
exchange risk associated with an adverse change in the relationship between the
United States dollar and the British pound sterling as it repatriated cash from
the United Kingdom operation. As the Company had 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 increased or decreased 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. There were no contracts outstanding as of December
31, 2005.
At December 31, 2005, an immediate 10% weakening of the United States
dollar would not have a material impact on shareholders' equity or net income.
29
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). This statement supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123(R) established
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123(R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123(R) is effective for the
Company's fiscal year beginning January 1, 2006. 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
("SEC"). 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 factors set forth
under "Item 1A. Risk Factors" elsewhere in this report and the risks and
uncertainties discussed in the Company's other reports filed or furnished from
time to time with the SEC.
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.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm 33
Consolidated Balance Sheets as of December 31, 2005 and 2004 34
Consolidated Statements of Income for the years ended December 31, 2005,
2004, and 2003 35
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2005, 2004, and 2003 36
Consolidated Statements of Cash Flows for the years ended December 31,
2005, 2004, and 2003 37
Notes to the Consolidated Financial Statements 38
32
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 (the "Company") as of December 31, 2005
and 2004, and the related consolidated statements of income, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 2005. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Credit Acceptance
Corporation and Subsidiaries as of December 31, 2005 and 2004, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2005 in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 10, 2006 expressed an unqualified opinion on management's assessment
of the effectiveness of the Company's internal control over financial reporting
and an unqualified opinion on the effectiveness of the Company's internal
control over financial reporting.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 10, 2006
33
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
DECEMBER 31,
----------------------
2005 2004
--------- ---------
ASSETS:
Cash and cash equivalents $ 7,090 $ 614
Restricted cash and cash equivalents 13,473 23,927
Restricted securities available for sale 3,345 928
Loans receivable (including $14,622 and
$18,353 from affiliates in 2005 and 2004,
respectively) 694,939 667,394
Allowance for credit losses (131,411) (141,383)
--------- ---------
Loans receivable, net 563,528 526,011
--------- ---------
Property and equipment, net 17,992 19,706
Income taxes receivable 4,022 9,444
Other assets 9,944 10,683
--------- ---------
Total Assets $ 619,394 $ 591,313
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 55,705 $ 49,384
Dealer reserve payable, net -- 15,675
Line of credit 36,300 7,700
Secured financing 101,500 176,000
Mortgage note and capital lease obligations 9,105 9,847
Deferred income taxes, net 43,758 31,817
--------- ---------
Total Liabilities 246,368 290,423
--------- ---------
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, 37,027,286 and
36,897,242 shares issued and outstanding
at December 31, 2005 and 2004, respectively 370 369
Paid-in capital 29,746 25,640
Unearned stock-based compensation (1,566) --
Retained earnings 344,513 271,912
Accumulated other comprehensive (loss)
income, net of tax of $20 and $2 at
December 31, 2005 and 2004, respectively (37) 2,969
--------- ---------
Total Shareholders' Equity 373,026 300,890
--------- ---------
Total Liabilities and Shareholders' Equity $ 619,394 $ 591,313
========= =========
See accompanying notes to consolidated financial statements.
34
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------
2005 2004 2003
----------- ----------- -----------
REVENUE:
Finance charges $ 176,369 $ 150,651 $ 117,758
License fees 9,775 5,835 3,836
Other income 15,124 15,585 19,448
----------- ----------- -----------
Total revenue 201,268 172,071 141,042
----------- ----------- -----------
COSTS AND EXPENSES:
Salaries and wages 36,853 32,720 28,377
General and administrative 20,834 20,724 18,573
Sales and marketing 14,275 11,915 8,006
Provision for credit losses 5,705 6,526 8,835
Interest 13,886 11,660 8,057
Stock-based compensation 2,240 2,580 3,316
Other expense 931 1,270 4,517
----------- ----------- -----------
Total costs and expenses 94,724 87,395 79,681
----------- ----------- -----------
Operating income 106,544 84,676 61,361
Foreign exchange gain (loss) 1,812 1,650 (2,767)
----------- ----------- -----------
Income from continuing operations before
provision for income taxes 108,356 86,326 58,594
Provision for income taxes 40,159 30,073 27,369
----------- ----------- -----------
Income from continuing operations 68,197 56,253 31,225
----------- ----------- -----------
Discontinued operations
Gain (loss) from operations of discontinued
United Kingdom segment before provision
for income taxes 6,194 1,556 (7,047)
Provision (benefit) for income taxes 1,790 484 (491)
----------- ----------- -----------
Gain (loss) on discontinued operations 4,404 1,072 (6,556)
----------- ----------- -----------
Net income $ 72,601 $ 57,325 $ 24,669
=========== =========== ===========
Net income per common share:
Basic $ 1.96 $ 1.48 $ 0.58
=========== =========== ===========
Diluted $ 1.85 $ 1.40 $ 0.57
=========== =========== ===========
Income from continuing operations per common
share:
Basic $ 1.84 $ 1.46 $ 0.74
=========== =========== ===========
Diluted $ 1.74 $ 1.37 $ 0.72
=========== =========== ===========
Weighted average shares outstanding:
Basic 36,991,136 38,617,787 42,195,340
Diluted 39,207,680 41,017,205 43,409,007
See accompanying notes to consolidated financial statements.
35
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
TOTAL COMMON STOCK UNEARNED OTHER
SHAREHOLDERS' COMPREHENSIVE -------------- PAID-IN STOCK RETAINED COMPREHENSIVE
EQUITY INCOME (LOSS) NUMBER AMOUNT CAPITAL COMPENSATION EARNINGS INCOME (LOSS)
------------- ------------- ------ ------ --------- ------------ -------- -------------
Balance, January 1, 2003 $ 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
--------- ------ ---- --------- ------- -------- -------
Comprehensive income:
Net income 72,601 $72,601 72,601
Other comprehensive loss:
Unrealized loss on securities
available for sale, net of
tax of $20 (33) (33) (33)
Foreign currency translation
adjustment, net of tax of
$0 (2,973) (2,973) (2,973)
-------
Total comprehensive income $69,595
=======
Stock-based compensation 2,331 1,936 395
Issuance of restricted stock, net
of forfeitures -- 99 1 1,960 (1,961)
Stock options exercised 210 31 210
--------- ------ ---- --------- ------- -------- -------
Balance, December 31, 2005 $ 373,026 37,027 $370 $ 29,746 $(1,566) $344,513 $ (37)
========= ====== ==== ========= ======= ======== =======
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
2005 2004 2003
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 72,601 $ 57,325 $ 24,669
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 3,979 5,757 9,639
Depreciation 5,209 5,781 8,502
Loss on retirement of property and equipment 76 230 73
Foreign currency (gain) loss on forward contracts (1,033) (1,661) 2,817
Provision (credit) for deferred income taxes 11,961 12,859 (2,555)
Stock-based compensation 2,331 2,725 3,583
Gain on sale of United Kingdom loan portfolio (3,033) -- --
United Kingdom asset impairment -- -- 10,493
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 7,354 11,715 5,338
Income taxes receivable/payable 5,422 (11,530) 11,845
Other assets 110 621 8,555
--------- --------- ---------
Net cash provided by operating activities 104,977 83,822 82,959
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in restricted cash 10,454 13,348 (27,203)
Purchases of restricted securities available for sale (3,239) (934) --
Sales of restricted securities available for sale 742 -- --
Maturities of restricted securities available for sale 27 -- --
Principal collected on loans receivable 468,273 397,091 362,575
Advances to dealers and accelerated payments of dealer holdback (461,877) (427,866) (334,720)
Originations and purchases of new Consumer Loans (13,354) (7,938) (42,621)
Payments of dealer holdbacks (52,887) (34,421) (28,127)
Proceeds from the sale of United Kingdom loan portfolio 4,297 -- --
Purchases of property and equipment (2,863) (3,567) (3,273)
--------- --------- ---------
Net cash used in investing activities (50,427) (64,287) (73,369)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 250,700 314,000 68,400
Repayments under line of credit (222,100) (306,300) (111,955)
Proceeds from secured financings 120,500 288,000 100,000
Repayments of secured financings (195,000) (212,000) (58,153)
Principal payments under mortgage and capital lease obligations (1,296) (2,821) (1,540)
Proceeds from mortgage note refinancing -- 3,540 --
Repurchase of common stock -- (107,236) (5,316)
Proceeds from stock options exercised 210 5,022 2,038
--------- --------- ---------
Net cash used in financing activities (46,986) (17,795) (6,526)
--------- --------- ---------
Effect of exchange rate changes on cash (1,088) (2,262) (7,055)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 6,476 (522) (3,991)
Cash and cash equivalents, beginning of period 614 1,136 5,127
--------- --------- ---------
Cash and cash equivalents, end of period $ 7,090 $ 614 $ 1,136
========= ========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $ 13,244 $ 10,920 $ 7,969
========= ========= =========
Cash paid during the period for income taxes $ 23,454 $ 26,855 $ 16,081
========= ========= =========
Supplemental Disclosure of Non-Cash Transactions:
Property and equipment acquired through capital lease obligations $ 531 $ 2,038 $ 32
========= ========= =========
See accompanying notes to consolidated financial statements.
37
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 consumers; and from sales to consumers 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 and who share
its commitment to changing consumers' lives 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
Loans ("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.
38
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.
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, 2005,
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.
As of December 31, 2005, there was no capital invested in this business.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities," which
supersedes 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) $0.3 million after-tax increase in salaries and wages resulting from
employee severance expenses and (ii) $0.1 million 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.
39
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., and CAC of Canada Company.
REPORTABLE BUSINESS SEGMENTS
The Company is organized into three primary business segments: United
States, United Kingdom, and Other. See Note 11 - 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 AVAILABLE FOR SALE
Restricted securities consist of the 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, 2005
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
(Dollars in thousands) COST GAINS LOSSES VALUE
------ ---------- ---------- --------------
US Government and agency securities $1,336 $-- $(14) $1,322
Corporate bonds 2,068 -- (45) 2,023
------ --- ---- ------
Total restricted securities available for sale $3,404 $-- $(59) $3,345
====== === ==== ======
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
AS OF DECEMBER 31, 2004
-------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
(Dollars in thousands) 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
==== === === ====
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,
---------------------------------------
2005 2004
------------------- -----------------
ESTIMATED ESTIMATED
(Dollars in thousands) COST FAIR VALUE COST FAIR VALUE
------ ---------- ---- ----------
Contractual Maturity
Within one year $ -- $ -- $ -- $ --
Over one year to five years 3,028 2,971 857 852
Over five years to ten years 376 374 77 76
Over ten years -- -- -- --
------ ------ ---- ----
Total restricted securities available for sale $3,404 $3,345 $934 $928
====== ====== ==== ====
FINANCE CHARGES - UNITED STATES AND CANADA
The Company recognizes finance charge income in a manner consistent 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 yield 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 based on 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.
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
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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, 2005, the trusts
had $10.6 million in assets available to pay claims and a related claims reserve
of $10.4 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.
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 2005, the Company began offering Guaranteed
Asset Protection ("GAP") debt cancellation terms in its contracts. GAP provides
the consumer protection by forgiving the difference between the loan balance and
the consumer's insurance coverage limit in the event the vehicle is totaled or
stolen. The Company receives a fee for every GAP provision sold by its
dealer-partners. The Company recognizes the commission received for GAP products
as part of finance charges on a level yield basis based upon forecasted cash
flows.
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 an approach similar to the
provisions of 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 in recent years, very seldom are cash flows from a Dealer Loan
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.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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, net 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.
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 reserve payable. 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.
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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, 2005 and 2004, deferred debt issuance costs were $5.4
million ($1.6 million net of amortization expense) and $7.7 million ($3.5
million net of amortization expense), 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 the term secured financings and on a
straight-line basis for lines of credit and revolving secured financings.
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, 2005, the following interest rate cap agreements were
outstanding (in thousands):
NOTIONAL COMMERCIAL PAPER FAIR
AMOUNT CAP RATE TERM VALUE
- -------- ---------------- ------------------------------- -----
$100,000 6.75% September 2005 through May 2008 $13
100,000 6.75% September 2005 through May 2008 10
- -------- ---
$200,000 $23
======== ===
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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
======== ===
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. The Company did not have any
outstanding contracts as of December 31, 2005. As of December 31, 2004, the
Company had contracts outstanding to deliver 3.3 million British pounds sterling
to the commercial bank which was exchanged into United States dollars at
weighted average exchange rates of 1.57 United States dollars per British pound
sterling on a monthly basis through June 30, 2005. As the Company had not
designated these contracts as hedges as defined under SFAS No. 133, changes in
the fair value of these forward contracts increased 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 by $1.2 million 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 $1.0 million for 2005 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, 2004 to June 30, 2005. The Company
recognized a foreign currency gain of $1.7 million for 2004 primarily due to a
decrease in the notional amount of the forward contracts, partially offset by
the weakening of the United States dollar versus the British pound during 2004.
STOCK COMPENSATION PLANS
At December 31, 2005, the Company has three stock-based compensation plans
for employees and directors, which are described more fully in Note 9 - 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 investment 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.
During the fourth quarter of 2005, the Company determined that the
liquidation of business in the United Kingdom and Canada were substantially
complete. The Company recognized a $2.0 million non-taxable foreign currency
exchange gain following this determination.
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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,
---------------------------
2005 2004 2003
------- ------- -------
Premiums earned $ 2,004 $ 2,457 $ 2,986
Dealer enrollment fees 1,878 1,453 786
Remarketing charges 1,822 1,655 1,492
Marketing materials 1,103 642 181
Rental revenue 670 788 900
Net gains on lease terminations 376 1,497 1,073
Lease revenue 219 1,507 6,432
Interest and fees on floorplan receivables, lines
of credit, and notes receivable 144 792 1,416
Other 6,908 4,794 4,182
------- ------- -------
$15,124 $15,585 $19,448
======= ======= =======
Premiums earned include credit life and disability premiums and premiums
from the Company's TPA payment protection 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
based on the credit life and disability insurance premium. The policies insure
the consumer for the outstanding balance payable in the event of death or
disability of the consumer. 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 TPA payment protection
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 was 100% refundable for 180 days. This program was
discontinued in July 2005. 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. During the first quarter of
2005, the Company implemented a new policy. The new policy allows prospective
dealer-partners to enroll in the Company's program without paying the $9,850
enrollment fee. Prospective dealer-partners choosing this option instead agree
to allow the Company to keep 50% of the first accelerated dealer holdback
payment. This payment, called Portfolio Profit Express, is paid to qualifying
dealer-partners after 100 Consumer Loans have been originated and assigned to
the Company.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
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.
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.
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
consumer becomes 90 days past due on a recency basis.
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 repossession fees, NSF fees, and
dealer-partner training fees.
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 $0.3 million in 2005
and 2004 and $0.1 million in 2003 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. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123(R)"). This statement supersedes Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and its related implementation guidance. SFAS 123(R) established
standards for the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. It also addresses transactions in
which an entity incurs liabilities in exchange for goods or services that are
based on the fair value of the entity's equity instruments or that may be
settled by the issuance of those equity instruments. SFAS 123(R) focuses
primarily on accounting for transactions in which an entity obtains employee
services in share-based payment transactions. SFAS 123(R) is effective for the
Company's fiscal year beginning January 1, 2006. 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.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(2) 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.
Restricted Securities Available for Sale. Restricted securities consist of
the amounts held in accordance with secured financing arrangements and
reinsurance agreements. 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.
Net Investment in Loans Receivable . 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.
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.
A comparison of the carrying value and estimated fair value of these
financial instruments is as follows (in thousands):
AS OF DECEMBER 31,
---------------------------------------------
2005 2004
--------------------- ---------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
-------- ---------- -------- ----------
ASSETS
Cash and cash equivalents and restricted cash $ 20,563 $ 20,563 $ 24,541 $ 24,541
Restricted securities available for sale 3,345 3,345 928 928
Net investment in Loans receivable 563,528 573,591 510,336 519,532
Derivative instruments 23 23 43 43
LIABILITIES
Line of credit 36,300 36,300 7,700 7,700
Secured financing 101,500 101,500 176,000 175,543
Mortgage note 7,539 7,653 8,216 7,876
Derivative instruments -- -- 1,156 1,156
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) LOANS RECEIVABLE
Loans receivable consists of the following (in thousands):
AS OF DECEMBER 31,
------------------------------
2005 2004 2003
-------- -------- --------
Dealer Loans receivable $675,692 $626,284 $537,671
Consumer Loans receivable 16,489 43,008 88,446
Other Loans receivable 3,777 4,350 6,668
Unearned finance charges -- (4,275) (10,791)
Unearned insurance premiums,
insurance reserves and fees (1,019) (1,973) (2,557)
-------- -------- --------
Loans receivable $694,939 $667,394 $619,437
======== ======== ========
A summary of changes in Loans receivable is as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31, 2005
-------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- ---------
Balance, beginning of period $ 626,284 $ 36,760 $4,350 $ 667,394
New loans 461,877 13,354 -- 475,231
Dealer holdback payments 52,512 -- -- 52,512
Net cash collections on loans (454,636) (16,871) -- (471,507)
Write-offs (10,215) (10,760) -- (20,975)
Recoveries -- 2,367 -- 2,367
Sale of United Kingdom loan portfolio -- (8,579) -- (8,579)
Net change in floorplan receivables,
notes receivable and lines of credit -- -- (573) (573)
Other -- 954 -- 954
Currency translation (130) (1,755) -- (1,885)
--------- -------- ------ ---------
Balance, end of period $ 675,692 $ 15,470 $3,777 $ 694,939
========= ======== ====== =========
FOR THE 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
========= ======== ======= =========
FOR THE 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
========= ========= ======== =========
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(3) LOANS RECEIVABLE - (CONCLUDED)
A summary of changes in the Allowance for credit losses is as follows (in
thousands):
FOR THE YEAR ENDED DECEMBER 31, 2005
------------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- --------
Balance, beginning of period $134,599 $ 6,774 $ 10 $141,383
Provision for credit losses (1) 6,290 (2,344) (37) 3,909
Write-offs (10,215) (1,985) -- (12,200)
Recoveries -- 2,312 -- 2,312
Sale of United Kingdom loan portfolio -- (3,439) -- (3,439)
Other change in floorplan receivables,
notes receivable, and lines of credit -- -- 27 27
Currency translation 48 (629) -- (581)
-------- ------- ---- --------
Balance, end of period $130,722 $ 689 $ -- $131,411
======== ======= ==== ========
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 (2) 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 (3) 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
======== ======= ======= ========
(1) Does not include a provision of $70 primarily related to earned but unpaid
revenue related to license fees. Includes a negative provision for credit
losses related to discontinued operations of $1,726.
(2) Does not include a provision of $467 for earned but unpaid revenue related
to license fees. Includes a negative provision for credit losses related to
discontinued operations of $769.
(3) Does not include a provision of $1,686 primarily related to the Company's
lease portfolio. Includes a provision for credit losses related to
discontinued operations of $804.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(4) LEASED PROPERTIES
The Company leases office space 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 $1.0 million,
$0.5 million, and $0.4 million for 2005, 2004, and 2003, respectively.
Contingent rentals under the operating leases were insignificant. Minimum future
lease commitments under operating leases as of December 31, 2005 are as follows
(in thousands):
MINIMUM FUTURE
LEASE COMMITMENTS
2006 $ 684
2007 628
2008 424
2009 315
------
$2,051
======
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
AS OF DECEMBER 31,
-------------------
2005 2004
-------- --------
Land $ 2,586 $ 2,586
Building and improvements 9,798 9,639
Data processing equipment and software 30,148 30,921
Office furniture and equipment 1,727 2,047
Leasehold improvements 381 369
-------- --------
44,640 45,562
Less:
Accumulated depreciation on property and equipment (25,168) (24,969)
Accumulated depreciation on leased assets (1,480) (887)
-------- --------
Total accumulated depreciation (26,648) (25,856)
-------- --------
$ 17,992 $ 19,706
======== ========
Property and equipment included capital leased assets of $2.7 million and
$2.5 million as of December 31, 2005 and 2004, respectively. Depreciation
expense on property and equipment was $5.2 million, $4.9 million, and $4.5
million in 2005, 2004, and 2003, respectively.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) DEBT
LINES OF CREDIT
At December 31, 2005, the Company had a $135.0 million credit agreement
with a commercial bank syndicate. The facility has a commitment period through
June 20, 2008. At December 31, 2005, the agreement provided that, at the
Company's option, interest is payable at either the Eurodollar rate plus 130
basis points (5.68% at December 31, 2005), or at the prime rate (7.25% at
December 31, 2005). 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% (increased to 75% in February 2006) of the net book
value of Dealer Loans plus 65% (increased to 75% in February 2006) 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. As of December 31,
2005, there was $93.3 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 debt 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, 2005 and
December 31, 2004, there was $36.3 million and $7.7 million outstanding under
this facility. The maximum amount outstanding was approximately $60.1 million
and $118.1 million in 2005 and 2004, respectively. The weighted average balance
outstanding was $38.4 million and $49.6 million in 2005 and 2004, respectively.
The weighted average interest rate on line of credit borrowings outstanding on
December 31, 2005 was 5.75%.
SECURED FINANCING
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 (increased to $325.0 million in February 2006) 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 matures on February 14, 2007 , allows conveyances of Dealer
Loans by the Company and related borrowing by Warehouse Funding in which
Warehouse Funding will receive 75% of the net book value of the contributed
Dealer Loans up to the $200.0 million (increased to $325.0 million in February
2006) facility limit. In addition to the maturity of the facility, there is a
requirement that certain amounts outstanding under the facility be refinanced
within 90 days of February 15, 2006 and within 360 days of the most recent
refinancing occurring after February 15, 2006. If the refinancing 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 investors, 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 (4.97% at December 31, 2005), which
has been limited to a maximum rate of 6.75% through interest rate cap agreements
executed in the third quarter of 2005. The interest rate at December 31, 2005
was 4.97%. 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, 2005 and December 31, 2004, there was $101.5 million and $76.0
million outstanding under this facility.
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. The Sale and Servicing Agreement dated August 25, 2004,
as amended,
52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) DEBT - (CONTINUED)
used 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 under the Company's new method of accounting.
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
with a net book value of approximately $20.0 million 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. 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 underwriter's
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, ten of which have been repaid in full. Information about
the outstanding secured financing transactions is as follows (dollars in
thousands):
ISSUE SECURED FINANCING BALANCE SECURED DEALER LOAN BALANCE
NUMBER CLOSE DATE LIMIT AT DECEMBER 31, 2005 AT DECEMBER 31, 2005
- ------ --------------- -------- ------------------------- ---------------------------
2003-2 September 2003* $325,000 101,500 177,104
* In February 2006, the 2003-2 Loan and Security Agreement was amended to
increase the facility limit to $325 million and extend the commitment
period to February 14, 2007.
MORTGAGE NOTE 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 $7.5 million and $8.2 million outstanding on this loan
as of December 31, 2005 and December 31, 2004, 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.
53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(6) DEBT - (CONCLUDED)
CAPITAL LEASE OBLIGATIONS
As of December 31, 2005, the Company has various capital lease obligations
outstanding for computer equipment, with monthly payments totaling $74,000. The
total amount of capital lease obligations outstanding as of December 31, 2005
and 2004 was $1.6 million. These capital lease obligations bear interest at
rates ranging from 7.87% to 9.31% and have maturity dates between March 2006 and
July 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, 2005, the
Company has four letters (decreased to two in February 2006) of credit relating
to reinsurance agreements totaling $5.4 million (decreased to $2.6 million in
February 2006). Such letters of credit expire on May 26, 2006, at which time
they will be automatically extended for the period of one year unless the
Company is notified otherwise by the commercial bank syndicate.
PRINCIPAL DEBT MATURITIES
The scheduled principal maturities of the Company's debt at December 31,
2005 are as follows (in thousands):
2006 1,495
2007 102,884
2008 37,253
2009 5,273
--------
$146,905
========
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 $101.5 million for 2007.
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 in January 2006.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(7) 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, 2005 As of December 31, 2004
----------------------------- -----------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
balance consolidated balance consolidated
-------------- ------------ -------------- ------------
Dealer loan balance $12,900 1.9% $16,700 2.7%
For the Year ended For the Year ended For the Year ended
December 31, 2005 December 31, 2004 December 31, 2003
----------------------------- ----------------------------- -----------------------------
Affiliated Affiliated Affiliated
dealer-partner % of dealer-partner % of dealer-partner % of
activity consolidated activity consolidated activity consolidated
-------------- ------------ -------------- ------------ -------------- ------------
Advances $9,600 2.1% $14,300 3.3% $10,600 3.2%
Affiliated Dealer revenue $3,500 2.1% $ 4,200 2.9% $ 3,600 3.2%
Pursuant to an employment agreement with the Company's President dated
April 19, 2001, the Company loaned the President's dealerships approximately
$0.9 million. 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 $1.1 million as of December 31, 2005 and 2004. In
addition, pursuant to the employment agreement, the Company loaned the President
approximately $0.5 million. 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
$0.6 million as of December 31, 2005 and 2004.
Total CAPS and dealer enrollment fees earned from affiliated
dealer-partners were approximately $0.1 million for the years ended December 31,
2005, 2004, and 2003.
The Company paid for air transportation services provided by a company
owned by the Company's majority shareholder and Chairman totaling $0.1 million
for the year ended December 31, 2005 and $0.2 million for the years ended
December 31, 2004 and 2003.
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 lines of credit to
third parties in a manner similar to the Company's prior program. In December of
2004, the Company's majority shareholder and Chairman sold his ownership
interest in these entities.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) INCOME TAXES
The income tax provision, excluding the results of the discontinued United
Kingdom segment, consists of the following (in thousands):
YEARS ENDED DECEMBER 31,
----------------------------
2005 2004 2003
-------- ------- -------
Income from continuing operations before
provision for income taxes:
Domestic $107,420 $85,428 $57,477
Foreign 936 898 1,117
-------- ------- -------
$108,356 $86,326 $58,594
======== ======= =======
Current provision for income taxes:
Federal $ 26,465 $12,013 $27,956
State 1,979 787 1,511
Foreign 120 734 486
-------- ------- -------
28,564 13,534 29,953
-------- ------- -------
Deferred provision (credit) for income taxes:
Federal 10,182 15,993 (2,385)
State 1,455 911 (218)
Foreign (42) (365) 19
-------- ------- -------
11,595 16,539 (2,584)
-------- ------- -------
Provision for income taxes $ 40,159 $30,073 $27,369
======== ======= =======
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,
------------------
2005 2004
------- -------
Deferred tax assets:
Allowance for credit losses $48,046 $51,818
United Kingdom asset impairment -- 3,858
Accrued liabilities 1,298 1,366
Deferred dealer enrollment fees 713 788
Net operating losses 189 433
Stock-based compensation 2,275 1,575
Unrealized loss on currency -- 420
Other, net 448 368
------- -------
Total deferred tax assets 52,969 60,626
------- -------
Deferred tax liabilities:
Valuation of receivables 92,486 85,577
Unearned finance charges -- 2,767
Depreciable assets 2,343 2,455
Deferred origination costs 848 441
Other, net 1,050 1,203
------- -------
Total deferred tax liabilities 96,727 92,443
------- -------
Net deferred tax liability $43,758 $31,817
======= =======
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(8) INCOME TAXES - (CONCLUDED)
A reconciliation of the U.S. Federal statutory rate to the Company's
effective tax rate, excluding the results of the discontinued United Kingdom
segment, is as follows:
YEARS ENDED DECEMBER 31,
------------------------
2005 2004 2003
---- ---- ----
U.S. federal statutory rate 35.0% 35.0% 35.0%
State income taxes 2.1 1.3 1.4
Foreign income taxes (0.2) -- 0.2
Undistributed/distributed foreign earnings 0.9 (2.2) 11.1
Other (0.7) 0.7 (1.0)
---- ---- ----
Provision for income taxes 37.1% 34.8% 46.7%
==== ==== ====
The change in effective tax rates for 2005, 2004, and 2003 differed from
the federal statutory tax rate of 35% primarily due to the provision for U.S.
taxes related to remittance 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 2005, 2004 and 2003, the Company
remitted substantially all of its accumulated earnings as profits to the U.S.
and accrued or paid U.S. income taxes accordingly.
(9) 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,
------------------------------------
2005 2004 2003
---------- ---------- ----------
Weighted average common shares outstanding 36,991,136 38,617,787 42,195,340
Dilutive effect of stock options 2,216,544 2,399,418 1,213,667
---------- ---------- ----------
Weighted average common shares and
dilutive common shares 39,207,680 41,017,205 43,409,007
========== ========== ==========
The computation of diluted net income per share for 2003 excludes the
effect of the potential exercise of stock options to purchase 423,000 shares,
because the effects of including them would have been anti-dilutive. There were
no anti-dilutive potential shares for 2005 or 2004.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) 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, 2005, 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.
On February 10, 2006, the Company announced that it had commenced a
modified Dutch auction tender offer to purchase up to 5.0 million of its
outstanding common stock at a price per share of $21.00 to $25.00. The tender
offer will expire on March 13, 2006.
STOCK COMPENSATION 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, 2005, the Company granted 99,023 shares of restricted stock to employees and
officers under the Incentive Plan. The shares vest dependent upon attaining
certain performance targets within seven years. In conjunction with this grant,
during the first quarter of 2005 the Company recorded approximately $2.0 million
of unearned stock-based compensation, representing the fair value of the
restricted stock on the date of grant. Unearned stock-based compensation will be
recognized as stock-based compensation expense over the expected vesting period
of the restricted stock. The related stock-based compensation expense totaled
$0.4 million for the year ended December 31, 2005. Shares available for future
grants under the Incentive Plan totaled 900,977 at December 31, 2005.
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 and
138,500 options in 2004 and 2003, respectively, that will vest only if certain
performance targets are met. No options were issued during 2005. 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 as of December 31, 2003. The 1992 Plan was terminated as to future
grants on May 13, 2004, with shareholder approval of the Incentive Plan.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) CAPITAL TRANSACTIONS - (CONTINUED)
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.
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 $1.9 million, $2.7 million and $3.6 million
for 2005, 2004 and 2003, respectively, for the 1992 Plan and Director Plan.
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,
----------------------------
2005 2004 2003
---- --------- ---------
1992 Plan
Risk-free interest rate -- 3.00% 3.50%
Expected life -- 5.0 years 4.0 years
Expected volatility -- 53.35% 63.03%
Dividend yield -- -- --
Fair value of options granted -- $ 8.07 $ 5.05
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 --
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(9) CAPITAL TRANSACTIONS - (CONCLUDED)
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, 2003 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 -- --
--------- ------- -------
Options granted -- -- -- -- -- --
Options exercised (31,165) 6.77 -- -- -- --
Options forfeited (17,660) 9.17 -- -- -- --
--------- ------- -------
Outstanding at December 31, 2005 3,457,694 $ 6.97 200,000 $12.13 -- $ --
========= ======= =======
Exercisable at December 31:
2003 1,660,184 $ 7.60 -- $ -- -- $ --
2004 2,131,528 6.79 50,000 7.00 -- --
2005 3,383,573 6.95 140,000 9.93 -- --
The following tables summarize information about options outstanding at
December 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ -----------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AS REMAINING EXERCISE PRICE PER EXERCISABLE AS EXERCISE PRICE PER
EXERCISABLE PRICE OF 12/31/2005 CONTRACTUAL LIFE SHARE OF 12/31/2005 SHARE
- ----------------- -------------- ---------------- ------------------ -------------- ------------------
1992 PLAN
$ 3.63 - $ 5.99 366,309 3.9 Years $ 4.03 366,309 $ 4.03
6.00 - 8.99 2,281,536 3.7 6.45 2,229,043 6.42
9.00 - 11.99 771,049 6.2 9.58 749,421 9.57
12.00 - 14.99 23,800 5.9 12.53 23,800 12.53
15.00 - 17.05 15,000 8.1 16.45 15,000 16.45
--------- ---------
Totals 3,457,694 4.3 $ 6.97 3,383,573 $ 6.95
========= =========
DIRECTOR PLAN
$ 7.00 100,000 5.5 Years $ 7.00 100,000 $ 7.00
17.25 100,000 8.2 17.25 40,000 17.25
--------- ---------
Totals 200,000 6.8 $12.13 140,000 $ 9.93
========= =========
60
NOTES TO CONSOLIDATED STATEMENTS - (CONTINUED)
(10) DISCONTINUED OPERATIONS
On December 30, 2005, the Company sold the remaining Consumer Loan
portfolio of its United Kingdom subsidiary. The selling price was $4.3 million
resulting in a pre-tax gain of approximately $3.0 million. In accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the financial results of these subsidiary companies were reported separately as
discontinued operations in the Company's Consolidated Statements of Income for
all periods presented, since the operations and cash flows of these companies
were eliminated from the ongoing operations of the Company. The Company expects
to complete the liquidation of its remaining assets and liabilities by the end
of 2007.
As a result of the decision to stop originating Consumer Loans in the
United Kingdom, the Company had recorded an asset impairment expense of $10.5
million in the second quarter of 2003. These impairment charges were included in
"Income from discontinued operations" in the Company's Consolidated Statements
of Income.
(11) BUSINESS SEGMENT INFORMATION
The Company classifies its operations into three reportable business
segments: United States, United Kingdom, 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, Automobile Leasing, 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 three reportable business
segments: United States, United Kingdom, 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 Other segment consists of
the Company's automobile leasing business, Canadian automobile financing
business and secured lines of credit and floorplan financing products. The
Company is currently liquidating its operations in all segments other than the
United States.
61
NOTES TO CONSOLIDATED STATEMENTS - (CONTINUED)
(11) BUSINESS SEGMENT INFORMATION - (CONTINUED)
MEASUREMENT
The table below presents information for each reportable segment (in
thousands):
UNITED UNITED TOTAL
STATES KINGDOM OTHER COMPANY
-------- ------- ------- --------
YEAR ENDED DECEMBER 31, 2005
Finance charges $176,173 $ -- $ 196 $176,369
License fees 9,775 -- -- 9,775
Other income 13,964 -- 1,160 15,124
Provision for credit losses 5,709 -- (4) 5,705
Interest expense 13,304 -- 582 13,886
Depreciation expense 4,832 -- 179 5,011
Provision (credit) for income taxes 40,276 -- (117) 40,159
Income from continuing operations 67,699 -- 498 68,197
Gain on discontinued operations, net of tax -- 4,404 -- 4,404
Segment assets 614,149 2,715 2,530 619,394
YEAR ENDED DECEMBER 31, 2004
Finance charges $149,998 $ -- $ 653 $150,651
License fees 5,835 -- -- 5,835
Other income 11,721 -- 3,864 15,585
Provision for credit losses 5,332 -- 1,194 6,526
Interest expense 11,009 -- 651 11,660
Depreciation expense 4,515 -- 996 5,511
Provision (credit) for income taxes 29,767 -- 306 30,073
Income from continuing operations 55,853 -- 400 56,253
Gain on discontinued operations, net of tax -- 1,072 -- 1,072
Segment assets 563,497 22,960 4,856 591,313
YEAR ENDED DECEMBER 31, 2003
Finance charges $116,156 $ -- $ 1,602 $117,758
License fees 3,836 -- -- 3,836
Other income 10,086 -- 9,362 19,448
Provision for credit losses 6,003 -- 2,832 8,835
Interest expense 6,329 -- 1,728 8,057
Depreciation expense 4,060 -- 4,129 8,189
Provision (credit) for income taxes 27,237 -- 132 27,369
Income from continuing operations 31,275 -- (50) 31,225
Loss on discontinued operations, net of tax -- (6,556) -- (6,556)
Segment assets 464,021 67,302 13,525 544,848
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(11) 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, 2005
Finance charges $176,172 $ -- $ 197 $176,369
License fees 9,775 -- -- 9,775
Other income 14,694 -- 430 15,124
Income from continuing operations 67,339 -- 858 68,197
Gain on discontinued operations -- 4,044 360 4,404
Property and equipment, net 17,992 -- -- 17,992
YEAR ENDED DECEMBER 31, 2004
Finance charges $150,002 $ -- $ 649 $150,651
License fees 5,835 -- -- 5,835
Other income 15,274 -- 311 15,585
Income from continuing operations 55,724 -- 529 56,253
Gain on discontinued operations -- 770 302 1,072
Property and equipment, net 19,474 232 -- 19,706
YEAR ENDED DECEMBER 31, 2003
Finance charges $116,165 $ -- $1,593 $117,758
License fees 3,836 -- -- 3,836
Other income 19,085 -- 363 19,448
Income from continuing operations 30,611 -- 614 31,225
(Loss) gain on discontinued operations -- (6,631) 75 (6,556)
Property and equipment, net 18,045 496 -- 18,541
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 2005, 2004, or 2003. Additionally, no single
dealer-partner's Dealer Loan accounted for more than 10% of total Dealer Loans
as of December 31, 2005 or as of December 31, 2004.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(12) 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.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(13) 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, 2005 and 2004, 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)
2005
-----------------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
----------- ----------- ----------- -----------
BALANCE SHEETS
Loans receivable, net $ 554,557 $ 560,004 $ 566,394 $ 563,528
All other assets 63,199 73,380 72,960 55,866
----------- ----------- ----------- -----------
Total assets $ 617,756 $ 633,384 $ 639,354 $ 619,394
=========== =========== =========== ===========
Total debt $ 200,113 $ 205,284 $ 194,069 $ 146,905
Dealer reserve payable, net 12,003 8,243 6,007 --
Other liabilities 88,941 85,389 90,128 99,463
----------- ----------- ----------- -----------
Total liabilities 301,057 298,916 290,204 246,368
Shareholders' equity 316,699 334,468 349,150 373,026
----------- ----------- ----------- -----------
Total liabilities and
shareholders' equity $ 617,756 $ 633,384 $ 639,354 $ 619,394
=========== =========== =========== ===========
INCOME STATEMENTS
Revenue $ 47,736 $ 50,336 $ 51,623 $ 51,573
Costs and expenses 23,611 24,298 28,435 18,380
----------- ----------- ----------- -----------
Operating income 24,125 26,038 23,188 33,193
Foreign exchange gain (loss) 645 382 (8) 793
----------- ----------- ----------- -----------
Income from continuing operations
before income taxes 24,770 26,420 23,180 33,986
Provision for income taxes 9,240 9,817 9,231 11,871
----------- ----------- ----------- -----------
Income from continuing operations 15,530 16,603 13,949 22,115
Gain on discontinued operations, net
of tax (1) 184 450 645 3,125
----------- ----------- ----------- -----------
Net income $ 15,714 $ 17,053 $ 14,594 $ 25,240
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.43 $ 0.46 $ 0.39 $ 0.68
=========== =========== =========== ===========
Diluted $ 0.40 $ 0.44 $ 0.38 $ 0.65
=========== =========== =========== ===========
Income from continuing operations
per common share:
Basic $ 0.42 $ 0.45 $ 0.38 $ 0.60
=========== =========== =========== ===========
Diluted $ 0.39 $ 0.43 $ 0.36 $ 0.57
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 36,900,449 37,016,038 37,020,020 37,025,517
Diluted 39,457,287 39,064,886 38,912,822 39,088,720
(1) Includes gain on sale of United Kingdom loan portfolio of $3.0 million
recognized during the fourth quarter of 2005
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(13) QUARTERLY FINANCIAL DATA (UNAUDITED) - (CONCLUDED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2004
-----------------------------------------------------
1ST Q 2ND Q 3RD Q 4TH Q
----------- ----------- ----------- -----------
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 $ 39,232 $ 42,507 $ 44,268 $ 46,064
Costs and expenses 21,020 21,023 21,998 23,354
----------- ----------- ----------- -----------
Operating income 18,212 21,484 22,270 22,710
Foreign exchange gain (loss) 151 906 674 (81)
----------- ----------- ----------- -----------
Income from continuing operations before income taxes 18,363 22,390 22,944 22,629
Provision for income taxes 6,643 5,401 8,827 9,202
----------- ----------- ----------- -----------
Income from continuing operations 11,720 16,989 14,117 13,427
Gain on discontinued operations, net of tax 232 184 151 505
----------- ----------- ----------- -----------
Net income $ 11,952 $ 17,173 $ 14,268 $ 13,932
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.30 $ 0.44 $ 0.37 $ 0.38
=========== =========== =========== ===========
Diluted $ 0.28 $ 0.41 $ 0.35 $ 0.35
=========== =========== =========== ===========
Income from continuing operations per common share:
Basic $ 0.29 $ 0.43 $ 0.36 $ 0.36
=========== =========== =========== ===========
Diluted $ 0.28 $ 0.41 $ 0.34 $ 0.34
=========== =========== =========== ===========
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
66
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 effective
as of December 31, 2005.
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, 2005 and concluded that they were
effective. 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).
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, 2005 has been audited by
Grant Thornton LLP, the Company's independent registered public accounting firm,
as stated in their report on page 68.
Changes in Internal Controls. The Company implemented changes in internal
controls over financial reporting during the quarter ended March 31, 2005 to
remediate the material weakness related to accounting for income taxes that
existed at December 31, 2004 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.
67
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Credit Acceptance Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Credit
Acceptance Corporation and its subsidiaries (the Company) maintained effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Company'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. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
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.
In our opinion, management's assessment that Credit Acceptance Corporation
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the COSO. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control--Integrated Framework issued by the
COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of Credit
Acceptance Corporation as of December 31, 2005 and 2004, and the related
statements of income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 2005 and our report dated March 10, 2006
expressed an unqualified opinion on those financial statements.
/S/ GRANT THORNTON LLP
Southfield, MI
March 10, 2006
68
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information is contained under the captions "Matters to Come Before the
Meeting - Election of Directors" (excluding the Report of the Audit Committee)
and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the Company's
Proxy Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information is contained under the caption "Compensation of Executive
Officers" (excluding the Report of the Executive Compensation Committee and the
stock performance graph) in the Company's Proxy Statement and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information is contained under the caption "Common Stock Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement and
is incorporated herein by reference. In addition, the information contained in
the "Equity Compensation Plans" subheading under Item 5 of this Report is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information is contained under the caption "Certain Relationships and
Transactions" in the Company's Proxy Statement and is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information is contained under the caption "Independent Accountants" in the
Company's Proxy Statement and is incorporated herein by reference.
69
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, 2005 and 2004
-- Consolidated Income Statements for the years ended December
31, 2005, 2004 and 2003
-- Consolidated Statements of Shareholders' Equity for the
years ended December 31, 2005, 2004 and 2003
-- Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004, 2003
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.
70
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: March 10, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on March 10, 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
71
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)(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(c)(15) 22 Extension, Waiver and Amendment, dated April 30, 2005, under
Third Amended and Restated Credit Agreement, dated as of June
9, 2004, as amended by First Amendment dated as of December 10,
2004, by and among the Company, certain of the Company's
subsidiaries, Comerica Bank, as Administrative Agent and
Collateral Agent, and the banks signatory thereto.
4(c)(16) 22 Extension, Waiver and Amendment, dated May 31, 2005, under
Third Amended and Restated Credit Agreement, dated as of June
9, 2004, as amended by First Amendment dated as of December 10,
2004, by and among the Company, certain of the Company's
subsidiaries, Comerica Bank, as Administrative Agent and
Collateral Agent, and the banks signatory thereto.
4(c)(17) 23 Extension, Waiver and Amendment, dated July 29, 2005, under
Third Amended and Restated Credit Agreement, dated as of June
9, 2004, as amended by First Amendment dated as of December 10,
2004, by and among the Company, certain of the Company's
subsidiaries, Comerica Bank, as Administrative Agent and
Collateral Agent, and the banks signatory thereto.
4(c)(18) 24 The Fourth Amended and Restated Credit Agreement, dated
February 7, 2006, between the Company, the Lenders which are
parties thereto from time to time, Comerica Bank as
Administrative Agent for the Banks, and Banc of America
Securities LLC as Sole Lead Arranger and Sole Book Manager.
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
72
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.
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(f)(66) 23 Amendment No. 3, dated July 31, 2005 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 and Wachovia
Capital Markets, LLC.
4(f)(67) 26 Amendment No. 4, dated November 14, 2005, 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 and Wachovia
Capital Markets, LLC
4(f)(68) 24 Amendment No. 5, dated February 10, 2006, to Loan and Security
Agreement dated as of 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., as amended, and agreements related thereto.
4(f)(69) 24 Third Amended and Restated Security Agreement, dated February
7, 2006, between the Company, certain subsidiaries of the
Company and Comerica Bank, as agent for the Banks.
73
4(f)(70) 25 First Amended and Restated Loan and Security Agreement, dated
February 15, 2006, between the Company, CAC Warehouse Funding
Corporation II, Wachovia Bank, National Association, JPMorgan
Chase Bank, N.A., Variable Funding Capital Corporation,
Wachovia Capital Markets, LLC, and Systems & Services
Technologies, Inc.
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.
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
10(q)(3)* 19 Incentive Compensation Bonus Formula for 2005
16 21 Letter from Deloitte & Touche LLP dated July 12, 2005
21(1)(a) 26 Schedule of Credit Acceptance Corporation Subsidiaries
23(a) 26 Consent of Grant Thornton LLP
31(a) 26 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
31(b) 26 Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
32(a) 26 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) 26 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.
74
(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.
(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
dated March 29, 2005, and incorporated herein by reference.
(20) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 2004 and incorporated herein by reference.
(21) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated June 24, 2005, as amended, and incorporated herein by reference.
(22) Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended June 30, 2005, and incorporated herein by reference.
75
(23) Previously filed as an exhibit to the Company's Form 10-Q for the quarterly
period ended September 30, 2005, and incorporated herein by reference.
(24) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 10, 2006, and incorporated herein by reference.
(25) Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 15, 2006, and incorporated herein by reference.
(26) Filed herewith.
76