UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- -----------
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1999511
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date.
The number of shares of Common Stock, par value $0.01, outstanding on April 30,
2006 was 33,025,164.
TABLE OF CONTENTS
<Table>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements --
Three months ended March 31, 2006 and March 31, 2005 1
Consolidated Balance Sheets --
As of March 31, 2006 and December 31, 2005 2
Consolidated Statements of Cash Flows --
Three months ended March 31, 2006 and March 31, 2005 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 19
ITEM 4. CONTROLS AND PROCEDURES 19
PART II. - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 20
ITEM 6. EXHIBITS 20
SIGNATURE 21
INDEX OF EXHIBITS 22
</Table>
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
<Table>
<Caption>
(Dollars in thousands, except per share data) THREE MONTHS ENDED
MARCH 31,
--------------------------------
2006 2005
-------------- --------------
REVENUE:
Finance charges $ 46,007 $ 42,038
License fees 2,897 1,960
Other income 4,122 3,738
-------------- --------------
Total revenue 53,026 47,736
-------------- --------------
COSTS AND EXPENSES:
Salaries and wages 10,752 9,067
General and administrative 6,765 5,530
Sales and marketing 4,359 3,527
Provision for credit losses 524 854
Interest 3,574 3,743
Stock-based compensation expense (158) 755
Other expense 82 135
-------------- --------------
Total costs and expenses 25,898 23,611
-------------- --------------
Operating income 27,128 24,125
Foreign currency gain 5 645
-------------- --------------
Income from continuing operations before provision for income taxes 27,133 24,770
Provision for income taxes 9,928 9,240
-------------- --------------
Income from continuing operations 17,205 15,530
-------------- --------------
Discontinued operations
(Loss) gain from operations of discontinued United Kingdom operations (13) 255
(Credit) provision for income taxes (5) 71
-------------- --------------
(Loss) gain on discontinued operations (8) 184
-------------- --------------
Net income $ 17,197 $ 15,714
============== ==============
Other comprehensive loss, net of tax (19) (731)
-------------- --------------
Comprehensive income $ 17,178 $ 14,983
============== ==============
Net income per common share:
Basic $ 0.48 $ 0.43
============== ==============
Diluted $ 0.45 $ 0.40
============== ==============
Income from continuing operations per common share:
Basic $ 0.48 $ 0.42
============== ==============
Diluted $ 0.45 $ 0.39
============== ==============
Weighted average shares outstanding:
Basic 36,146,994 36,900,449
Diluted 38,609,257 39,457,287
</Table>
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
(Dollars in thousands, except per share data) AS OF
-----------------------------
MARCH 31, DECEMBER 31,
2006 2005
(UNAUDITED)
------------ ------------
ASSETS:
Cash and cash equivalents $ 1,920 $ 7,090
Restricted cash and cash equivalents 15,663 13,473
Restricted securities available for sale 3,366 3,345
Loans receivable (including $19,939 and $19,722 from affiliates in 2006 and 2005, respectively) 721,381 694,939
Allowance for credit losses (130,614) (131,411)
------------ ------------
Loans receivable, net 590,767 563,528
------------ ------------
Property and equipment, net 17,075 17,992
Income taxes receivable 731 4,022
Other assets 11,338 9,944
------------ ------------
Total Assets $ 640,860 $ 619,394
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 61,868 $ 55,705
Line of credit 101,930 36,300
Secured financing 132,500 101,500
Mortgage note and capital lease obligations 8,737 9,105
Deferred income taxes, net 49,569 43,758
------------ ------------
Total Liabilities 354,604 246,368
------------ ------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000 shares authorized, 33,005,365 and
37,027,286 shares issued and outstanding as of March 31, 2006 and
December 31, 2005, respectively 330 370
Paid-in capital -- 29,746
Unearned stock-based compensation (1,692) (1,566)
Retained earnings 287,674 344,513
Accumulated other comprehensive income, net of tax of $32 and $22 at March 31,
2006 and December 31, 2005, respectively (56) (37)
------------ ------------
Total Shareholders' Equity 286,256 373,026
------------ ------------
Total Liabilities and Shareholders' Equity $ 640,860 $ 619,394
============ ============
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
(Dollars in thousands) THREE MONTHS ENDED
MARCH 31,
-----------------------------
2006 2005
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 17,197 $ 15,714
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 524 703
Depreciation 1,270 1,303
Loss on retirement of property and equipment 38 5
Foreign currency gain on forward contracts -- (656)
Credit for deferred income taxes 5,821 (525)
Stock-based compensation (158) 777
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 6,163 8,744
Income taxes receivable/payable 3,291 9,596
Other assets (1,069) 323
------------ ------------
Net cash provided by operating activities 33,077 35,984
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash and cash equivalents (2,190) (7,212)
Purchases of restricted securities available for sale (198) (994)
Proceeds from sale of restricted securities available for sale 148 77
Principal collected on loans receivable 147,788 119,233
Advances to dealers and accelerated payments of dealer holdback (156,646) (137,991)
Originations and purchases of new consumer loans (3,335) (2,937)
Payments of dealer holdbacks (17,644) (11,864)
Net change in floorplan receivables, notes receivable and lines of credit 1,746 342
Purchases of property and equipment (391) (1,260)
------------ ------------
Net cash used in investing activities (30,722) (42,606)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 103,630 72,300
Repayments under line of credit (38,000) (52,700)
Proceeds from secured financing 75,000 14,500
Repayments of secured financing (44,000) (27,388)
Principal payments under mortgage note and capital lease obligations (368) (271)
Repurchase of common stock (104,862) --
Proceeds from stock options exercised 1,072 49
------------ ------------
Net cash (used in) provided by financing activities (7,528) 6,490
------------ ------------
Effect of exchange rate changes on cash 3 (207)
------------ ------------
Net decrease in cash and cash equivalents (5,170) (339)
Cash and cash equivalents, beginning of period 7,090 614
------------ ------------
Cash and cash equivalents, end of period $ 1,920 $ 275
============ ============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Property and equipment acquired through capital lease obligations $ -- $ 102
Issuance of restricted stock 263 1,964
</Table>
See accompanying notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("generally accepted accounting principles" or "GAAP")
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. The results of operations for interim periods
are not necessarily indicative of actual results achieved for full fiscal years.
The consolidated balance sheet at December 31, 2005 has been derived from the
audited financial statements at that date but does not include all the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 2005 for Credit Acceptance
Corporation (the "Company" or "Credit Acceptance"). Certain prior period amounts
have been reclassified to conform to the current presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Principal Business. 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 from sales of
vehicles to consumers who otherwise could not obtain financing; from repeat and
referral sales generated by these same customers; and from sales to customers
responding to advertisements for the Company's product, but who actually end up
qualifying for traditional financing.
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 1980s, 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".
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.
As of March 31, 2006, the Company had 99.8% of its capital invested in the
United States business segment. 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.
The Company's business is seasonal with peak Consumer Loan acceptances
occurring during February and March. Seasonality does not have a material impact
on the Company's interim results.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company is considered a lender to dealer-partners 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 these options.
ACCOUNTING POLICIES
Finance Charges. 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
forecasted cash flows change, the Company adjusts the yield upwards for positive
changes and recognizes impairment for negative changes in the current period.
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. 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 at the time
the commission is received.
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.
Loans Receivable and Allowance for Credit Losses. 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.
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
portfolio insufficient to repay the initial amounts advanced to the
dealer-partners. If a positive revision occurs to the estimated cash flows for a
Dealer Loan that has an allowance for credit losses, the allowance is reversed
up to the lesser of the amount of the positive revision or the amount of the
allowance previously recorded.
SFAS No. 123R. On January 1, 2006, the Company adopted revised Statement of
Financial Accounting Standards ("SFAS") No. 123 ("SFAS No. 123R"), "Share-Based
Payment". The Company had previously adopted the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", under the
retroactive restatement transition method in 2003. Adoption of SFAS No. 123R
primarily resulted in a change in the Company's estimated forfeitures for
unvested stock based compensation awards, which resulted in a cumulative
reversal of stock-based compensation expense of $0.4 million for the quarter
ended March 31, 2006.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
3. LOANS RECEIVABLE
A summary of changes in Loans receivable is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2006
-----------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- ---------
Balance, beginning of period $ 675,692 $ 15,470 $ 3,777 $ 694,939
New Loans 156,646 3,335 -- 159,981
Dealer holdback payments 17,644 -- -- 17,644
Net cash collections on loans (145,501) (2,848) -- (148,349)
Write-offs (1,255) (62) -- (1,317)
Recoveries -- 36 -- 36
Net change in floorplan receivables, notes receivable, and lines of credit -- -- (1,712) (1,712)
Other -- 162 -- 162
Currency translation (3) -- -- (3)
------------ -------------- ----------- ---------
Balance, end of period $ 703,223 $ 16,093 $ 2,065 $ 721,381
============ ============== =========== =========
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- ---------
Balance, beginning of period $ 626,284 $ 36,760 $ 4,350 $ 667,394
New Loans 137,991 2,937 -- 140,928
Dealer holdback payments 11,742 -- -- 11,742
Net cash collections on loans (115,050) (4,781) -- (119,831)
Write-offs (3,003) (3,307) -- (6,310)
Recoveries -- 478 -- 478
Net change in floorplan receivables, notes receivable, and lines of credit -- -- (535) (535)
Other -- 203 -- 203
Currency translation (115) (409) -- (524)
------------ -------------- ----------- ---------
Balance, end of period $ 657,849 $ 31,881 $ 3,815 $ 693,545
============ ============== =========== =========
A summary of changes in the Allowance for credit losses is as follows (in
thousands):
THREE MONTHS ENDED MARCH 31, 2006
-----------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- ---------
Balance, beginning of period $ 130,722 $ 689 $ -- $ 131,411
Provision for credit losses(1) 78 408 -- 486
Write-offs (1,255) (62) -- (1,317)
Recoveries -- 36 -- 36
Currency translation (2) -- -- (2)
------------ -------------- ----------- ---------
Balance, end of period $ 129,543 $ 1,071 $ -- $ 130,614
============ ============== =========== =========
THREE MONTHS ENDED MARCH 31, 2005
-----------------------------------------------------
DEALER LOANS CONSUMER LOANS OTHER LOANS TOTAL
------------ -------------- ----------- ---------
Balance, beginning of period $ 134,599 $ 6,774 $ 10 $ 141,383
Provision for credit losses(2) 674 (176) -- 498
Write-offs (3,003) (334) -- (3,337)
Recoveries -- 631 -- 631
Other changes in floorplan receivables, notes receivable, and lines of credit -- -- (10) (10)
Currency translation (14) (163) -- (177)
------------ -------------- ----------- ---------
Balance, end of period $ 132,256 $ 6,732 $ -- $ 138,988
============ ============== =========== =========
(1) Does not include a provision for credit losses of $38 on license fees
receivable and other items.
(2) Does not include a provision for credit losses of $205 on license fees
receivable and other items.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
4. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company has Dealer Loans with
affiliated dealer-partners owned or controlled 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):
<Table>
<Caption>
As of March 31, 2006 As of December 31, 2005
----------------------------------- -----------------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
balance consolidated balance consolidated
---------------- ---------------- ---------------- ----------------
Affiliated Dealer Loan balance $ 18,200 2.6% $ 18,000 2.7%
For the Three Months ended For the Three Months ended
March 31, 2006 March 31, 2005
----------------------------------- -----------------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
activity consolidated activity consolidated
---------------- ---------------- ---------------- ----------------
Advances $ 4,700 3.0% $ 5,900 4.3%
Affiliated dealer-partner revenue $ 1,200 2.8% $ 1,000 2.4%
</Table>
Pursuant to an employment agreement with the Company's President dated April
19, 2001, the Company loaned the President's dealerships $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
$1.2 million and $1.1 million as of March 31, 2006 and December 31, 2005,
respectively. 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 March 31, 2006 and
December 31, 2005.
Total CAPS and dealer enrollment fees earned from affiliated dealer-partners
were $15,000 and $24,000 for the three months ended March 31, 2006 and 2005,
respectively.
The Company paid for air transportation services provided by a company owned
by the Company's majority shareholder and Chairman totaling $10,000 for the
three months ended March 31, 2006. No such services were provided for the three
months ended March 31, 2005.
Beginning in 2000, 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 but he continues to have indirect control over these entities and has
the right or obligation to reacquire the entities under certain circumstances
until December 31, 2014 or the repayment of the related purchase money note.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
5. INCOME TAXES
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate, excluding the results of the discontinued United Kingdom
operations, is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
------------------------
2006 2005
---------- ----------
U.S. federal statutory rate 35.0% 35.0%
State income taxes 1.4 2.0
U.S. tax impact of foreign earnings -- 0.1
Other 0.2 0.2
---------- ----------
Effective tax rate 36.6% 37.3%
========== ==========
</Table>
The differences between the U.S. federal statutory rate and the Company's
consolidated effective tax rate are primarily related to state income taxes that
are included in the provision for income taxes.
6. DUTCH TENDER OFFER
On February 10, 2006, the Company announced that it had commenced a modified
Dutch auction tender offer to purchase up to 5.0 million shares of its
outstanding common stock at a price per share of $21.00 to $25.00. Upon the
expiration of the tender offer on March 13, 2006, the Company had repurchased
4.1 million tendered shares of its common stock at $25.00 per share, at a total
cost of approximately $103.2 million.
7. BUSINESS SEGMENT INFORMATION
During the first quarter of 2006, the Company combined the United Kingdom
business segment into its Other business segment as the Company sold the
remaining Consumer Loan portfolio of its United Kingdom subsidiary on December
30, 2005 and the United Kingdom segment no longer meets the quantitative
thresholds of a reportable segment. As a result, the Company now has two
reportable business segments: United States 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 Other segment consists of the Company's United Kingdom
automobile financing business, 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.
Selected segment information is set forth below (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------------
2006 2005
------------ ------------
Revenue:
United States $ 53,042 $ 47,250
Other
(16) 486
------------ ------------
Total revenue $ 53,026 $ 47,736
============ ============
Income (loss) from continuing operations before provision (credit) for income taxes:
United States $ 27,212 $ 24,830
Other (79) (60)
------------ ------------
Total income from continuing operations before provision for income taxes $ 27,133 $ 24,770
============ ============
</Table>
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(UNAUDITED)
8. 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 weighted average
number of common shares and common stock equivalents outstanding. Common stock
equivalents included in the computation represent shares issuable upon assumed
exercise of stock options that would have a dilutive effect using the treasury
stock method. The share effect is as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------ ------------
Weighted average common shares outstanding 36,146,994 36,900,449
Common stock equivalents 2,462,263 2,556,838
------------ ------------
Weighted average common shares and common stock equivalents 38,609,257 39,457,287
============ ============
</Table>
There were no stock options that would be anti-dilutive for the three months
ended March 31, 2006 and 2005.
9. OTHER ASSETS
As of March 31, 2006 and December 31, 2005, deferred debt issuance costs
were $3.2 million ($2.6 million net of amortization expense) and $5.4 million
($1.6 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 term secured financings
and on a straight-line basis for lines of credit and revolving secured
financings.
9
ITEM 2. 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 customers, and from sales to customers responding to
advertisements for the Company's product, but who actually end up qualifying for
traditional financing.
The Company is an indirect lender from a legal perspective, meaning the
Consumer Loan is originated by the dealer-partner and immediately assigned to
the Company. The compensation paid to the dealer-partner in exchange for the
Consumer Loan is paid in two parts. A portion of the compensation is paid at the
time of origination, and a portion is paid based on the performance of the loan.
The amount paid at the time of origination is called an advance; the portion
paid over time is called dealer holdback. For accounting purposes, a majority of
the transactions described above are not considered to be Consumer Loan
transactions. Instead the Company's accounting reflects that of a lender to the
dealer-partner. This classification for accounting purposes is primarily a
result of (i) the dealer-partner's financial interest in the Consumer Loan and
(ii) certain elements of the Company's legal relationship with the
dealer-partner. A small percentage of transactions in the United States are
considered to be Consumer Loans for accounting purposes. 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 amount recorded in Loans
receivable. For additional information regarding the Company's accounting for
Loans receivable, see Note 2 to the consolidated financial statements, which is
incorporated herein by reference.
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. For the three months ended March 31,
2006, Dealer Loan originations grew 13.5% compared to the same period in 2005
due to an increase in the number of active dealer-partners and an increase in
the number of Consumer Loans accepted. 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 0.8 to 1.0 at March 31, 2006. The Company currently funds its business
through a bank line of credit facility, privately placed secured financings and
commercial bank conduit-financed secured financings.
10
CONSUMER LOAN PERFORMANCE
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 March 31, 2006 for the United States business segment.
<Table>
<Caption>
As of March 31, 2006
--------------------------------------------------------------
Year of Forecasted % of Forecast
Origination Collection % Advance % Spread % Realized
----------- ------------ --------- -------- --------
1996 55.0% 46.9% 8.1% 99.9%
1997 58.3% 47.9% 10.4% 99.3%
1998 67.6% 46.1% 21.5% 98.6%
1999 72.6% 48.9% 23.7% 97.8%
2000 73.2% 48.0% 25.2% 96.9%
2001 67.4% 45.8% 21.6% 96.6%
2002 70.4% 42.2% 28.2% 95.7%
2003 74.4% 43.4% 31.0% 87.2%
2004 73.6% 44.0% 29.6% 67.6%
2005 75.4% 47.1% 28.3% 34.0%
</Table>
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 97.8% of the total amount forecasted has already been
realized. In contrast, the Company's forecast for recent Consumer Loans is less
certain. If the Company produces disappointing operating results, it will likely
be because the Company overestimated future Consumer Loan performance. 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 2003 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.
There were no material changes in credit policy or pricing in the first
quarter of 2006, other than routine changes designed to maintain current
profitability levels.
11
RESULTS OF OPERATIONS
Three Months Ended March 31, 2006 Compared to Three Months Ended March 31, 2005
The following is a discussion of the results of operations and income
statement data for the Company on a consolidated basis.
<Table>
<Caption>
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, % OF MARCH 31, % OF
2006 REVENUE 2005 REVENUE
------------ ------------ ------------ ------------
REVENUE:
Finance charges $ 46,007 86.7% $ 42,038 88.1%
License fees 2,897 5.5 1,960 4.1
Other income 4,122 7.8 3,738 7.8
------------ ------------ ------------ ------------
Total revenue 53,026 100.0 47,736 100.0
COSTS AND EXPENSES:
Salaries and wages 10,752 20.2 9,067 19.0
General and administrative 6,765 12.8 5,530 11.6
Sales and marketing 4,359 8.2 3,527 7.4
Provision for credit losses 524 1.0 854 1.8
Interest 3,574 6.7 3,743 7.8
Stock-based compensation expense (158) (0.3) 755 1.6
Other expense 82 0.2 135 0.3
------------ ------------ ------------ ------------
Total costs and expenses 25,898 48.8 23,611 49.5
------------ ------------ ------------ ------------
Operating income 27,128 51.2 24,125 50.5
Foreign exchange gain 5 -- 645 1.4
------------ ------------ ------------ ------------
Income from continuing operations before provision for 27,133 51.2 24,770 51.9
income taxes
Provision for income taxes 9,928 18.7 9,240 19.4
------------ ------------ ------------ ------------
Income from continuing operations 17,205 32.5 15,530 32.5
------------ ------------ ------------ ------------
Discontinued operations
(Loss) gain from operations of
discontinued United Kingdom operations (13) -- 255 0.5
(Credit) provision for income taxes (5) -- 71 0.1
------------ ------------ ------------ ------------
(Loss) gain from discontinued operations (8) -- 184 0.4
------------ ------------ ------------ ------------
Net income $ 17,197 32.5% $ 15,714 32.9%
============ ============ ============ ============
</Table>
For the three months ended March 31, 2006, net income increased to $17.2
million, or $0.45 per diluted share, compared to $15.7 million, or $0.40 per
diluted share, for the same period in 2005. The increase in net income primarily
reflects the following:
- Finance charge revenue increased $4.0 million (9.4%) primarily due to a
6.8% increase in the average size of the loan portfolio.
- License fees increased $0.9 million primarily due to an increase in the
number of active dealer-partners and an increase in the monthly rate for
CAPS fees from $499 to $599.
- Stock-based compensation expense decreased $0.9 million due to a decline
in the number of unvested stock options outstanding and the Company's
adoption of SFAS No. 123R.
Finance Charges. Finance charges increased to $46.0 million for the three
months ended March 31, 2006 from $42.0 million for the same period in 2005
primarily due to an increase in the size of the Dealer Loan portfolio and an
increase in the yield due to an increase in forecasted collection rates on these
Dealer Loans.
12
The following table summarizes the changes in active dealer-partners and
corresponding consumer loan unit volume for the three months ended March 31,
2006 and 2005:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2006 2005 % CHANGE
---------- ---------- ----------
Consumer loan unit volume 28,994 25,847 12.2%
Active dealer-partners(1) 1,491 1,112 34.1%
---------- ----------
Average volume per dealer-partner 19.4 23.2 -16.3%
Consumer loan unit volume from dealer-partners active both periods 18,685 21,503 -13.1%
Dealer-partners active both periods 760 760 --
---------- ----------
Average volume per dealer-partners active both periods 24.6 28.3 -13.1%
Consumer loan unit volume from new dealer-partners 2,099 1,409 49.0%
New active dealer-partners(2) 220 141 56.0%
---------- ----------
Average volume per new active dealer-partner 9.5 10.0 -4.5%
Attrition(3) -16.8% -8.8%
</Table>
(1) Active dealer-partners are dealer-partners who submit at least
one loan during the period.
(2) New dealer-partners are dealer-partners that have enrolled in
the Company's program and have submitted their first loan to
the Company during the period.
(3) Attrition is measured according to the following formula:
decrease in consumer loan unit volume from dealer-partners who
submitted at least one consumer loan during the comparable
period of the prior year but who submitted no consumer loans
during the current period divided by prior year comparable
period consumer loan unit volume.
In March 2005, the Company implemented a change in policy that 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. While the Company will lose enrollment fee revenue on
those dealer-partners choosing this option and not reaching 100 Consumer Loans
or otherwise qualifying for a Portfolio Profit Express payment, the Company
estimates that it will realize higher per dealer-partner enrollment fee revenue
from those dealer-partners choosing this option and qualifying for a Portfolio
Profit Express payment. 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 - $20,000.
License Fees. License fees increased to $2.9 million for the three months
ended March 31, 2006 from $2.0 million for the same period in 2005. License fees
represent CAPS fees charged to dealer-partners on a monthly basis. The increase
was primarily due to an increase in the number of active dealer-partners. The
average number of dealer-partners billed for CAPS fees in the first quarter of
2006 was 1,768 compared to 1,117 for the same quarter in the prior year. In
February 2005, the rate for CAPS fees increased from $499 per dealer-partner per
month to $599 per month.
Salaries and Wages. Salaries and wages, as a percentage of revenue,
increased to 20.2% for the three months ended March 31, 2006 from 19.0% for the
same period in 2005 primarily due to increased costs of information systems
personnel.
General and Administrative. General and administrative expenses, as a
percentage of revenue, increased to 12.8% for the three months ended March 31,
2006 from 11.6% for the same period in 2005 primarily due to additional
professional fees associated with the restatement and an increase in corporate
legal expenses.
Sales and Marketing. Sales and marketing expenses, as a percentage of
revenue, increased to 8.2% for the three months ended March 31, 2006 from 7.4%
for the same period in 2005 primarily due to an increase in dealer support
products and sales promotions.
Interest. Interest expense decreased to $3.6 million for the three months
ended March 31, 2006 from $3.7 million for the same period in 2005. The decrease
in interest expense was due to a decrease in average outstanding debt partially
offset by an increase in interest rates.
Stock-based Compensation Expense. Stock-based compensation expense decreased
to ($0.2) million for the three months ended March 31, 2006 from $0.8 million
for the same period in 2005. The decrease is due to a decline in the number of
unvested stock options outstanding and the Company's adoption of SFAS No. 123R.
13
Foreign Currency Gain. The foreign exchange gain decreased to $5,000 for the
three months ended March 31, 2006 from $0.7 million for the same period in 2005.
The foreign exchange gains for the three months ended March 31, 2005 were
primarily the result of changes in the fair value of forward contracts entered
into during the third quarter of 2003. No forward contracts were outstanding
during 2006.
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 and cash equivalents decreased to $1.9 million as of
March 31, 2006 from $7.1 million at December 31, 2005. The Company's total
balance sheet indebtedness increased to $243.2 million at March 31, 2006 from
$146.9 million at December 31, 2005. This increase was primarily a result of
borrowings used to fund the modified Dutch auction tender offer, which took
place during the first quarter of 2006.
Restricted Securities. 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 consisted of the following as of
the dates shown:
<Table>
<Caption>
(in thousands) AS OF MARCH 31, 2006
------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
------------ ------------ ------------ -------------
US Government and agency securities $ 1,485 $ -- $ (27) $ 1,458
Corporate bonds 1,969 -- (61) 1,908
------------ ------------ ------------ -------------
Total restricted securities available for sale $ 3,454 $ -- $ (88) $ 3,366
============ ============ ============ =============
</Table>
<Table>
<Caption>
AS OF DECEMBER 31, 2005
--------------------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED ESTIMATED FAIR
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
============ ============ ============ =============
14
The cost and estimated fair values of debt securities by contractual
maturity as of the dates shown are set forth in the table below (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.
<Table>
<Caption>
(in thousands) AS OF MARCH 31, 2006 AS OF DECEMBER 31, 2005
--------------------------- ----------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------------ ------------ ------------ -------------
Contractual Maturity
Within one year $ 331 $ 325 $ -- $ --
Over one year to five years 3,123 3,041 3,028 2,971
Over five years to ten years -- -- 376 374
Over ten years -- -- -- --
------------ ------------ ------------ -------------
Total restricted securities available for sale $ 3,454 $ 3,366 $ 3,404 $ 3,345
============ ============ ============ =============
</Table>
Stock Repurchases. In the first quarter of 2006, the Board of Directors
authorized the repurchase of up to 5.0 million common shares through a modified
Dutch auction tender offer. Upon expiration of the tender offer in March 2006,
the Company repurchased 4.1 million shares at a cost of $103.2 million. See Part
II. Item 2 "Unregistered Sales of Equity Securities and Use of Proceeds" in this
report.
Line of Credit Facility. At March 31, 2006, 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 March 31, 2006, the agreement provided that, at
the Company's option, interest is payable at either the Eurodollar rate plus 130
basis points (6.11% at March 31, 2006), or at the prime rate (7.75% at March 31,
2006). 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 75% of the net book value of Dealer Loans plus 75% of the net book
value of Consumer Loans purchased by the Company (not to exceed a maximum of 25%
of the aggregate borrowing base limitation), less a hedging reserve (not
exceeding $1.0 million), the amount of letters of credit issued under the line
of credit, and the amount of other debt secured by the collateral which secures
the line of credit. Currently, the borrowing base limitation does not inhibit
the Company's borrowing ability under the line of credit.
The credit agreement 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 March 31, 2006 and
December 31, 2005, there was $101.9 million and $36.3 million outstanding under
this facility. The maximum amount outstanding was approximately $101.9 million
and $30.3 million during the three months ended March 31, 2006 and 2005,
respectively. The weighted average balance outstanding was $58.6 million and
$19.6 million during the three months ended March 31, 2006 and 2005,
respectively. The weighted average interest rate on line of credit borrowings
outstanding on March 31, 2006 was 6.11%.
Secured Financing. The Company's wholly-owned subsidiary, CAC Warehouse
Funding Corp. II ("Warehouse Funding" or "2003-2"), has a revolving secured
financing facility with institutional investors. In the first quarter of 2006,
Warehouse Funding increased the facility limit and renewed the commitment. Under
the renewed facility, which matures on February 14, 2007, Warehouse Funding may
receive up to $325.0 million in financing when the Company conveys Dealer Loans
to Warehouse Funding for cash and equity in Warehouse Funding. Warehouse Funding
will in turn pledge the Dealer Loans as collateral to the institutional investor
to secure loans that will fund the cash portion of the purchase price of the
Dealer Loans. Warehouse Funding receives 75% of the net book value of the
contributed Dealer Loans up to the $325.0 million 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. On April 18, 2006, $100.0 million of the amounts outstanding under the
facility were refinanced to comply with this requirement. If the second required
refinancing does not occur within 360 days of April 18, 2006 or the requirement
is not waived, or if the facility is not extended, the transaction will cease to
revolve, will amortize as collections are received and, at the option of the
institutional investor, may be subject to acceleration and foreclosure. Although
Warehouse Funding will be liable for any secured financing under the facility,
the financing is 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
(5.35% at March 31, 2006), which has been limited to a
15
maximum rate of 6.75% through interest rate cap agreements executed in the third
quarter of 2005. The Company receives 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
March 31, 2006 and December 31, 2005, there was $132.5 million and $101.5
million, respectively, outstanding under this facility.
As noted above, on April 18, 2006, the Company's wholly-owned subsidiary,
Credit Acceptance Funding LLC 2006-1 ("Funding 2006-1"), completed a secured
financing transaction in which Funding 2006-1 received $100.0 million in
financing. In connection with this transaction, the Company conveyed, for cash
and the sole membership interest in Funding 2006-1, Dealer Loans having a net
book value of approximately $133.5 million to Funding 2006-1, which, in turn,
conveyed the Dealer Loans to a trust that issued $100.0 million in notes to
qualified institutional investors. Radian Asset Assurance Inc. issued the
primary financial insurance policy in connection with the transaction, and XL
Capital Assurance, Inc. issued a backup financial insurance policy. The policies
guarantee 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 2006-1 were used by the Company to purchase
Dealer Loans, on an arm's-length basis, from Warehouse Funding. Through October
15, 2006, the Company may be required, and is likely, to convey additional
Dealer Loans to Funding 2006-1, which will be conveyed by Funding 2006-1 to the
trust. After October 15, 2006, the debt outstanding under this facility will
begin to amortize. The total expected term of the facility is 17 months. The
secured financing creates loans for which the trust is liable and which are
secured by all the assets of the trust. Such loans are non-recourse to the
Company, even though the trust, Funding 2006-1 and the Company are consolidated
for financial reporting purposes. As Funding 2006-1 is organized as a separate
legal entity from the Company, assets of Funding 2006-1 (including the conveyed
Dealer Loans) are not available to satisfy the general obligations of the
Company. The notes bear interest at a fixed rate of 5.36%. The expected
annualized cost of the secured financing, including underwriter's fees, the
insurance premiums and other costs is approximately 7.6%. The Company receives 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 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 2006-1 under certain specified circumstances. In exercising
its "clean up call," the Servicer may repurchase the remaining Dealer Loans from
the trust and direct the trust to redeem the indebtedness in whole, whereby the
assets of the trust (including the right to remaining collections) would be paid
over to Funding 2006-1, and distributed to the Company, resulting in the Company
becoming the owner of such remaining collections. Alternatively, when the
trust's underlying indebtedness is paid in full, either through collections or
through a prepayment of the indebtedness, remaining collections would be paid
over to Funding 2006-1 as the sole beneficiary of the trust where they would be
available to be distributed to the Company as the sole member of Funding 2006-1.
The Company and its subsidiaries have completed a total of twelve secured
financing transactions, ten of which have been repaid in full as of March 31,
2006 and one that was entered into subsequent to March 31, 2006. Information
about the outstanding secured financing transaction as of March 31, 2006 is
set forth in the following table (dollars in thousands):
<Table>
<Caption>
Secured Financing Secured Dealer
Issue Balance at Loan Balance at
Number Close Date Limit March 31, 2006 March 31, 2006
- ------------ --------------- --------- ----------------- ----------------------
2003-2 September 2003* $ 325,000 $ 132,500 $ 191,840
* In February 2006, the 2003-2 Loan and Security Agreement was amended to
increase the facility limit to $325.0 million and extend the commitment period
to February 14, 2007.
Mortgage Loan. 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 $7.4 million and $7.5 million
outstanding on this loan as of March 31, 2006 and December 31, 2005,
respectively. The loan matures on June 9, 2009, bears interest at a fixed rate
of 5.35%, and requires monthly payments of $92,156 and a balloon payment at
maturity for the balance of the loan.
Capital Lease Obligations. As of March 31, 2006, the Company has various
capital lease obligations outstanding for computer equipment, with monthly
payments totaling $73,000. The total amount of capital lease obligations
outstanding as of March 31, 2006 and December 31, 2005 were $1.4 million and
$1.6 million, respectively. These capital lease obligations bear interest at
rates ranging from 7.87% to 9.31% and have maturity dates between October 2006
and July 2008.
16
Debt Covenants. As of March 31, 2006, the Company is in 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 debt 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.
In addition to the balance sheet indebtedness as of March 31, 2006, the
Company also has contractual obligations resulting in future minimum payments
under operating leases. A summary of the total future contractual obligations
requiring repayments is as follows (in thousands):
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
------------ ---------------------------------------------------------
CONTRACTUAL OBLIGATIONS TOTAL < 1 YEAR 1-3 YEARS 3-5 YEARS > 5 YEARS
------------ ------------ ------------ ------------ ------------
Long-term debt obligations $ 241,792 $ 133,224 $ 108,568 $ -- $ --
Capital lease obligations 1,375 779 596 -- --
Operating lease obligations 1,893 699 1,194 -- --
Purchase obligations -- -- -- -- --
Other long-term obligations -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total contractual obligations $ 245,060 $ 134,702 $ 110,358 $ -- $ --
============ ============ ============ ============ ============
</Table>
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance
with GAAP. 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 on going basis, the Company evaluates its
estimates, including those related to the recognition of finance charge revenue
and the allowance for credit losses. Item 7 of the Company's Annual Report on
Form 10-K discusses several critical accounting policies, which the Company
believes involve a high degree of judgment and complexity. There have been no
material changes to the estimates and assumptions associated with these
accounting policies, other than related to stock-based compensation expense as
discussed in Note 2 to the consolidated financial statements, incorporated
herein by reference, from those discussed in the Company's annual report on Form
10-K for the year ended December 31, 2005.
17
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements in this report and may make
such statements in future filings with the Securities and Exchange Commission.
It may also make forward-looking statements in its press releases or other
public or shareholder communications. The Company's forward-looking statements
are subject to risks and uncertainties and include information about its
expectations and possible or assumed future results of operations. When the
Company uses any of the words "may," "will," "should," "believes," "expects,"
"anticipates," "assumes," "forecasts," "estimates," "intends," "plans" or
similar expressions, it is making forward-looking statements.
The Company claims the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995 for
all of its forward-looking statements. These forward-looking statements
represent the Company's outlook only as of the date of this report. While the
Company believes that its forward-looking statements are reasonable, actual
results could differ materially since the statements are based on our current
expectations, which are subject to risks and uncertainties. Factors that might
cause such a difference include, but are not limited to, the factors set forth
in Item 1A of the Company's Form 10-K for the year ended December 31, 2005,
other risk factors discussed herein or listed from time to time in the Company's
reports filed with the Securities and Exchange Commission and the following:
- 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.
- Due to increased competition from traditional financing
sources and non-traditional lenders, the Company may not be
able 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 may not be able to generate sufficient cash flow
to service its outstanding debt and fund operations.
- The substantial regulation to which the Company is subject
limits the business, and such regulation or changes in such
regulation could result in potential liability.
- Adverse changes in economic conditions, or in the automobile
or finance industries or the non-prime consumer finance
market, could 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.
- 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 affect its ability to operate
profitably.
- 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.
Other factors not currently anticipated by management may also materially
and adversely affect the Company's results of operations. The Company does not
undertake, and expressly disclaims any obligation, to update or alter its
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
Refer to the Company's Annual Report on Form 10-K for the year ended
December 31, 2005 for a complete discussion of the Company's market risk. There
have been no material changes to the market risk information included in the
Company's 2005 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
The Company maintains disclosure controls and procedures that are designed
to ensure material 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
financial 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 effectiveness 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, at the reasonable assurance level, as of the end of
the period covered by this report to cause the material information required to
be disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934 to be recorded, processed, summarized and
reported within the time periods specified in the Commission's rules and forms.
Changes in Internal Controls Over Financial Reporting. There have been no
changes in the Company's internal controls over financial reporting during the
quarter ended March 31, 2006 that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
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PART II. - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table summarizes the Company's stock repurchases for the three
months ended March 31, 2006:
<Table>
<Caption>
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED AS OF SHARES THAT MAY
TOTAL NUMBER PART OF PUBLICLY YET BE PURCHASED
OF SHARES AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS
PERIOD PURCHASED PAID PER SHARE OR PROGRAMS OR PROGRAMS(a)(b)
- ----------------- -------------- --------------- ------------------- -------------------
January 2006 -- $ -- -- 635,133
February 2006 -- -- -- 5,635,133
March 2006 4,192,635 24.98 4,192,635 572,233
------------- ------------- -------------
4,192,635 $ 24.98 4,192,635
============= ============= =============
</Table>
(a) On August 5, 1999 the Company announced a stock repurchase program of up
to 1.0 million shares of the Company's common stock. The program
authorized the Company to purchase common shares in the open market or
in privately negotiated transactions at price levels the Company deems
attractive. Since August 1999, the board of directors has authorized
several increases to the stock repurchase program, the most recent
occurring on February 10, 2006, which increased the total number of
shares authorized to be repurchased to 12.0 million shares.
(b) On February 10, 2006, the Company announced a modified Dutch auction
tender offer to purchase up to 5.0 million shares of its common stock at
a purchase price of not less than $21.00 per share and not greater than
$25.00 per share. Upon the expiration of the tender offer on March 13,
2006, the Company repurchased all of the 4,129,735 tendered shares of
its common stock at a price of $25.00 per share.
ITEM 6. EXHIBITS
See Index of Exhibits following the signature page, which is incorporated
herein by reference.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT ACCEPTANCE CORPORATION
(Registrant)
By: /s/ Kenneth S. Booth
-----------------------------------------------
Kenneth S. Booth
Chief Financial Officer
May 3, 2006
(Principal Financial Officer, Principal
Accounting Officer and Duly Authorized Officer)
21
INDEX OF EXHIBITS
<Table>
<Caption>
EXHIBIT
NO. NOTE DESCRIPTION
-------------- -------- ------------------------------------------------------------------------------------------------
4(f)(66) 1 Amendment No. 5, dated February 10, 2006, to Warehouse Facility 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)(67) 1 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)(68) 1 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 (previously
filed with original Form 8-K).
4(f)(69) 2 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., as amended, and agreements related thereto.
31(a) 3 Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
31(b) 3 Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934.
32(a) 3 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 and Rule
13a-14(b) of the Securities Exchange Act of 1934.
32(b) 3 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 and Rule
13a-14(b) of the Securities Exchange Act of 1934.
</Table>
1 Previously filed as an exhibit to the Company's Current Report on Form 8-K,
as amended, dated February 7, 2006, and incorporated herein by reference.
2 Previously filed as an exhibit to the Company's Current Report on Form 8-K
dated February 15, 2006, and incorporated herein by reference.
3 Filed herewith.
22