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 June 30, 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 July 31,
2006 was 33,365,312.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements -
Three and six months ended June 30, 2006 and June 30, 2005 1
Consolidated Balance Sheets -
As of June 30, 2006 and December 31, 2005 2
Consolidated Statements of Cash Flows -
Six months ended June 30, 2006 and June 30, 2005 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 25
ITEM 4. CONTROLS AND PROCEDURES 25
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 26
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 27
ITEM 6. EXHIBITS 27
SIGNATURES 28
INDEX OF EXHIBITS 29
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
(Dollars in thousands, except per share data) 2006 2005 2006 2005
----------- ----------- ----------- -----------
REVENUE:
Finance charges $ 47,919 $ 44,295 $ 93,926 $ 86,333
License fees 3,204 2,252 6,101 4,212
Other income 3,958 3,789 8,080 7,527
----------- ----------- ----------- -----------
Total revenue 55,081 50,336 108,107 98,072
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Salaries and wages 9,861 8,939 20,613 18,006
General and administrative 6,297 5,885 13,062 11,415
Sales and marketing 3,406 3,269 7,765 6,796
Provision for credit losses 2,641 1,816 3,165 2,670
Interest 5,660 3,613 9,234 7,356
Stock-based compensation expense 104 510 (54) 1,265
Other expense 55 266 137 401
----------- ----------- ----------- -----------
Total costs and expenses 28,024 24,298 53,922 47,909
----------- ----------- ----------- -----------
Operating income 27,057 26,038 54,185 50,163
Foreign currency gain 6 382 11 1,027
----------- ----------- ----------- -----------
Income from continuing operations before provision for
income taxes 27,063 26,420 54,196 51,190
Provision for income taxes 9,364 9,817 19,292 19,057
----------- ----------- ----------- -----------
Income from continuing operations 17,699 16,603 34,904 32,133
----------- ----------- ----------- -----------
Discontinued operations
(Loss) gain from discontinued United Kingdom operations (132) 630 (145) 885
(Credit) provision for income taxes (39) 180 (44) 251
----------- ----------- ----------- -----------
(Loss) gain on discontinued operations (93) 450 (101) 634
----------- ----------- ----------- -----------
Net income $ 17,606 $ 17,053 $ 34,803 $ 32,767
=========== =========== =========== ===========
Other comprehensive (loss) gain, net of tax (9) 94 (28) (637)
----------- ----------- ----------- -----------
Comprehensive income $ 17,597 $ 17,147 $ 34,775 $ 32,130
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.53 $ 0.46 $ 1.01 $ 0.89
=========== =========== =========== ===========
Diluted $ 0.50 $ 0.44 $ 0.94 $ 0.83
=========== =========== =========== ===========
Income from continuing operations per common share:
Basic $ 0.54 $ 0.45 $ 1.01 $ 0.87
=========== =========== =========== ===========
Diluted $ 0.50 $ 0.43 $ 0.94 $ 0.82
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 32,979,572 37,016,038 34,554,605 36,933,601
Diluted 35,433,944 39,064,886 37,029,956 39,273,824
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF
--------------------------
JUNE 30,
2006 DECEMBER 31,
(Dollars in thousands, except per share data) (UNAUDITED) 2005
----------- ------------
ASSETS:
Cash and cash equivalents $ 436 $ 7,090
Restricted cash and cash equivalents 30,417 13,473
Restricted securities available for sale 3,844 3,345
Loans receivable (including $22,857 and $22,622 from affiliates in 2006 and
2005, respectively) 715,960 694,939
Allowance for credit losses (129,052) (131,411)
--------- ---------
Loans receivable, net 586,908 563,528
--------- ---------
Property and equipment, net 16,408 17,992
Income taxes receivable -- 4,022
Other assets 12,580 9,944
--------- ---------
Total Assets $ 650,593 $ 619,394
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 58,655 $ 55,705
Line of credit 34,400 36,300
Secured financing 202,000 101,500
Mortgage note and capital lease obligations 8,585 9,105
Income taxes payable 1,451 --
Deferred income taxes, net 43,673 43,758
--------- ---------
Total Liabilities 348,764 246,368
--------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued -- --
Common stock, $.01 par value, 80,000,000 shares authorized, 33,365,162 and
37,027,286 shares issued and outstanding as of June 30, 2006 and
December 31, 2005, respectively 334 370
Paid-in capital 1,287 29,746
Unearned stock-based compensation (4,044) (1,566)
Retained earnings 304,317 344,513
Accumulated other comprehensive loss, net of tax of $38 and $22 at June
30, 2006 and December 31, 2005, respectively (65) (37)
--------- ---------
Total Shareholders' Equity 301,829 373,026
--------- ---------
Total Liabilities and Shareholders' Equity $ 650,593 $ 619,394
========= =========
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
(Dollars in thousands) 2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 34,803 $ 32,767
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 3,165 1,896
Depreciation 2,473 2,705
Loss on retirement of property and equipment 38 5
Foreign currency gain on forward contracts -- (1,032)
Credit for deferred income taxes (69) (249)
Stock-based compensation (54) 1,306
Excess tax benefits from stock-based compensation plans (3,529) --
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 2,950 5,265
Income taxes receivable/payable 9,002 1,544
Other assets (2,271) 465
--------- ---------
Net cash provided by operating activities 46,508 44,672
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash and cash equivalents (16,944) (9,170)
Purchases of restricted securities available for sale (794) (1,510)
Proceeds from sale of restricted securities available for sale 251 247
Principal collected on loans receivable 284,244 232,979
Advances to dealers and accelerated payments of dealer holdback (271,273) (246,349)
Originations and purchases of new consumer loans (5,779) (6,676)
Payments of dealer holdbacks (35,635) (24,767)
Net change in floorplan receivables, notes receivable and lines of credit 1,611 544
Purchases of property and equipment (689) (2,120)
--------- ---------
Net cash used in investing activities (45,008) (56,822)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 166,930 135,000
Repayments under line of credit (168,830) (98,000)
Proceeds from secured financing 320,500 48,500
Repayments of secured financing (220,000) (73,410)
Principal payments under mortgage note and capital lease obligations (758) (593)
Repurchase of common stock (114,311) --
Proceeds from stock options exercised 4,864 141
Excess tax benefits from stock-based compensation plans 3,529 --
--------- ---------
Net cash (used in) provided by financing activities (8,076) 11,638
--------- ---------
Effect of exchange rate changes on cash (78) 886
--------- ---------
Net (decrease) increase in cash and cash equivalents (6,654) 374
Cash and cash equivalents, beginning of period 7,090 614
--------- ---------
Cash and cash equivalents, end of period $ 436 $ 988
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Property and equipment acquired through capital lease obligations $ 238 $ 217
Issuance of restricted stock 2,808 1,964
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.
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.
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.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
For accounting purposes, a majority of the transactions described above are
not considered to be loans to consumers. 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.
As of June 30, 2006, the Company had approximately 100% 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 loan originations occurring
during February and March. Seasonality does not have a material impact on the
Company's interim financial results.
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." Consistent with SOP 03-3, the Company
recognizes 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 collection
and 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, a provision for
credit losses is recorded as a current period expense and a corresponding
allowance for credit losses is established. 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.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
Stock-based Compensation. 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.
Accounting for Uncertainty in Income Taxes. On July 13, 2006, the FASB
issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes" and prescribes a recognition threshold and measurement attribute for
financial statement disclosure of tax positions taken or expected to be taken on
a tax return. Additionally, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The Company has not yet determined the impact, if any, of
adopting the provisions of FIN 48 on the Company's financial position, results
of operations or cash flows.
6
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 JUNE 30, 2006
------------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
--------- -------- ------- ---------
Balance, beginning of period $ 703,223 $16,093 $ 2,065 $ 721,381
New Loans 114,627 2,443 -- 117,070
Dealer holdback payments 17,991 -- -- 17,991
Net cash collections on loans (134,223) (2,575) -- (136,798)
Write-offs (3,969) (163) -- (4,132)
Recoveries -- 10 -- 10
Net change in floorplan receivables,
notes receivable, and lines of credit -- -- 186 186
Other -- 171 -- 171
Currency translation 81 -- -- 81
--------- ------- ------- ---------
Balance, end of period $ 697,730 $15,979 $ 2,251 $ 715,960
========= ======= ======= =========
THREE MONTHS ENDED JUNE 30, 2005
------------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
--------- -------- ------- ---------
Balance, beginning of period $ 657,849 $31,881 $ 3,815 $ 693,545
New Loans 108,358 3,739 -- 112,097
Dealer holdback payments 12,771 -- -- 12,771
Net cash collections on loans (110,311) (4,437) -- (114,748)
Write-offs (3,311) (3,727) -- (7,038)
Recoveries -- 694 -- 694
Net change in floorplan receivables,
notes receivable, and lines of credit -- -- (49) (49)
Other -- 167 -- 167
Currency translation (77) (921) -- (998)
--------- ------- ------- ---------
Balance, end of period $ 665,279 $27,396 $ 3,766 $ 696,441
========= ======= ======= =========
SIX MONTHS ENDED JUNE 30, 2006
------------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
--------- -------- ------- ---------
Balance, beginning of period $ 675,692 $15,470 $ 3,777 $ 694,939
New Loans 271,273 5,779 -- 277,052
Dealer holdback payments 35,635 -- -- 35,635
Net cash collections on loans (279,724) (5,424) -- (285,148)
Write-offs (5,224) (225) -- (5,449)
Recoveries -- 46 -- 46
Net change in floorplan receivables,
notes receivable, and lines of credit -- -- (1,526) (1,526)
Other -- 333 -- 333
Currency translation 78 -- -- 78
--------- ------- ------- ---------
Balance, end of period $ 697,730 $15,979 $ 2,251 $ 715,960
========= ======= ======= =========
SIX MONTHS ENDED JUNE 30, 2005
------------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
--------- -------- ------- ---------
Balance, beginning of period $ 626,284 $36,760 $ 4,350 $ 667,394
New Loans 246,349 6,676 -- 253,025
Dealer holdback payments 24,513 -- -- 24,513
Net cash collections on loans (225,361) (9,218) -- (234,579)
Write-offs (6,314) (7,034) -- (13,348)
Recoveries -- 1,172 -- 1,172
Net change in floorplan receivables,
notes receivable, and lines of credit -- -- (584) (584)
Other -- 370 -- 370
Currency translation (192) (1,330) -- (1,522)
--------- ------- ------- ---------
Balance, end of period $ 665,279 $27,396 $ 3,766 $ 696,441
========= ======= ======= =========
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
3. LOANS RECEIVABLE - (CONCLUDED)
A summary of changes in the Allowance for credit losses is as follows (in
thousands):
THREE MONTHS ENDED JUNE 30, 2006
--------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
-------- -------- ----- --------
Balance, beginning of period $129,543 $1,071 $-- $130,614
Provision for credit losses (1) 2,475 23 -- 2,498
Write-offs (3,969) (163) -- (4,132)
Recoveries -- 10 -- 10
Currency translation 62 -- -- 62
-------- ------ --- --------
Balance, end of period $128,111 $ 941 $-- $129,052
======== ====== === ========
THREE MONTHS ENDED JUNE 30, 2005
--------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
-------- -------- ----- --------
Balance, beginning of period $132,256 $6,732 $-- $138,988
Provision for credit losses (2) 1,813 (647) -- 1,166
Write-offs (3,312) (875) -- (4,187)
Recoveries -- 785 -- 785
Other changes in floorplan receivables,
notes receivable, and lines of
credit -- -- -- --
Currency translation (13) (302) -- (315)
-------- ------ --- --------
Balance, end of period $130,744 $5,693 $-- $136,437
======== ====== === ========
SIX MONTHS ENDED JUNE 30, 2006
--------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
-------- -------- ----- --------
Balance, beginning of period $130,722 $ 689 $-- $131,411
Provision for credit losses (3) 2,553 431 -- 2,984
Write-offs (5,224) (225) -- (5,449)
Recoveries -- 46 -- 46
Currency translation 60 -- -- 60
-------- ----- --- --------
Balance, end of period $128,111 $ 941 $-- $129,052
======== ===== === ========
SIX MONTHS ENDED JUNE 30, 2005
--------------------------------------
DEALER CONSUMER OTHER
LOANS LOANS LOANS TOTAL
-------- -------- ----- --------
Balance, beginning of period $134,599 $ 6,774 $ 10 $141,383
Provision for credit losses (4) 2,487 (823) -- 1,664
Write-offs (6,315) (1,209) -- (7,524)
Recoveries -- 1,416 -- 1,416
Other changes in floorplan receivables,
notes receivable, and lines of
credit -- -- (10) (10)
Currency translation (27) (465) -- (492)
-------- ------- ---- --------
Balance, end of period $130,744 $ 5,693 $ -- $136,437
======== ======= ==== ========
(1) Does not include a provision for credit losses of $143 on license fees
receivable and other items.
(2) Does not include a provision for credit losses of $27 on license fees
receivable and other items. Includes a negative provision for credit losses
related to discontinued operations of $623.
(3) Does not include a provision for credit losses of $181 on license fees
receivable and other items.
(4) Does not include a provision for credit losses of $232 on license fees
receivable and other items. Includes a negative provision for credit losses
related to discontinued operations of $774.
8
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):
As of June 30, 2006 As of December 31, 2005
----------------------------- -----------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
balance consolidated balance consolidated
-------------- ------------ -------------- ------------
Affiliated Dealer Loan balance $21,100 3.0% $20,900 3.1%
For the Three Months ended For the Three Months ended
June 30, 2006 June 30, 2005
----------------------------- -----------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
activity consolidated activity consolidated
-------------- ------------ -------------- ------------
Advances $ 3,800 3.3% $ 4,600 4.3%
Affiliated dealer-partner revenue $ 1,400 3.2% $ 1,500 3.4%
For the Six Months ended For the Six Months ended
June 30, 2006 June 30, 2005
----------------------------- -----------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
activity consolidated activity consolidated
-------------- ------------ -------------- ------------
Advances $ 9,900 3.7% $11,800 4.8%
Affiliated dealer-partner revenue $ 2,900 3.2% $ 2,800 3.3%
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 June 30, 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% and is
unsecured. The balance of the note including accrued but unpaid interest was
approximately $0.6 million as of June 30, 2006 and December 31, 2005,
respectively.
Total CAPS and dealer enrollment fees earned from affiliated
dealer-partners were $22,000 and $45,000 for the three and six months ended June
30, 2006, respectively, and $22,000 and $51,000 for the same periods in 2005.
The Company paid for air transportation services provided by a company
owned by the Company's majority shareholder and Chairman totaling $14,000 and
$24,000 for the three and six months ended June 30, 2006, respectively, and
$35,000 for the same periods in 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.
9
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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2006 2005 2006 2005
---- ---- ---- ----
U.S. federal statutory rate 35.0% 35.0% 35.0% 35.0%
State income taxes (0.7) 2.4 0.3 2.2
U.S. tax impact of foreign earnings (0.1) 0.1 (0.1) --
Other 0.4 (0.3) 0.4 --
---- ---- ---- ----
Effective tax rate 34.6% 37.2% 35.6% 37.2%
==== ==== ==== ====
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. A decrease in the effective tax
rate to 34.6% and 35.6% for the three and six months ended June 30, 2006,
respectively, from 37.2% for the same periods in 2005 is primarily due to a
reduction of state tax liability as a result of a settlement.
6. CAPITAL TRANSACTIONS
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.
During the six months ended June 30, 2006, the Company granted 115,757
shares of restricted stock to employees and officers under the Incentive Plan,
of which 103,867 shares vest in full or in part based on the Company's
satisfaction of certain performance-related criteria and 11,890 shares vest over
a five year period. The Company recorded $2.8 million of unearned stock-based
compensation for the six months ended June 30, 2006 representing the grant date
fair value of the restricted stock granted during the period. Unearned
stock-based compensation is recognized as stock-based compensation expense over
the expected vesting period of the restricted stock.
The Company recognized stock-based compensation expense of $0.2 million and
$0.3 million for the three and six months ended June 30, 2006, respectively, and
$0.1 million for the three and six months ended June 30, 2005 for outstanding
restricted stock.
At June 30, 2006 and December 31, 2005, the Company had 214,636 and 98,879
shares of restricted stock outstanding, respectively. Shares available for
future grants under the Incentive Plan totaled 785,364 at June 30, 2006.
7. 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.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. 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 met 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 discontinued
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 the
Other segment.
Selected segment information is set forth below (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
2006 2005 2006 2005
------- ------- -------- -------
Revenue:
United States $54,867 $49,969 $107,909 $97,219
Other 214 367 198 853
------- ------- -------- -------
Total revenue $55,081 $50,336 $108,107 $98,072
======= ======= ======== =======
Income from continuing operations before
provision for income taxes:
United States $26,851 $26,327 $ 54,063 $51,157
Other 212 93 133 33
------- ------- -------- -------
Total income from continuing operations
before provision for income taxes $27,063 $26,420 $ 54,196 $51,190
======= ======= ======== =======
JUNE 30, 2006 DECEMBER 31, 2005
------------- -----------------
Segment Assets
United States $649,253 $614,149
Other 1,340 5,245
-------- --------
Total Assets $650,593 $619,394
======== ========
9. 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:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2006 2005 2006 2005
---------- ---------- ---------- ----------
Weighted average common shares outstanding 32,979,572 37,016,038 34,554,605 36,933,601
Common stock equivalents 2,454,372 2,048,848 2,475,351 2,340,223
---------- ---------- ---------- ----------
Weighted average common shares and common
stock equivalents 35,433,944 39,064,886 37,029,956 39,273,824
========== ========== ========== ==========
The diluted net income per share calculation excludes stock options to
purchase 110,000 shares for the three months ended June 30, 2005 as inclusion of
these options would be anti-dilutive to the net income per share due to the
relationship between the exercise prices and the average market price of common
stock during this period. There were no stock options that would be
anti-dilutive for the three months ended June 30, 2006 or the six months ended
June 30, 2006 and 2005.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
(UNAUDITED)
10. OTHER ASSETS
As of June 30, 2006 and December 31, 2005, deferred debt issuance costs
were $3.8 million (net of amortization expense of $1.5 million) and $1.6 million
(net of amortization expense of $3.8 million), respectively. Expenses associated
with the issuance of debt instruments are capitalized and amortized over the
term of the debt instrument on a level-yield basis for term secured financings
and on a straight-line basis for lines of credit and revolving secured
financings.
11. SUBSEQUENT EVENT
On August 1, 2006, the Company's Board of Directors authorized the
repurchase of up to $25.0 million of the Company's common stock in addition to
the Board's prior authorizations. The additional shares may be repurchased
through the open market or in privately negotiated transactions from time to
time under terms defined by the Board. Unless terminated earlier by
resolution of the Board, the share repurchase program will expire when the
Company has repurchased all shares authorized for repurchase thereunder.
Through August 1, 2006, the Company has repurchased approximately 6.8 million
shares under this program at a cost of $62.8 million.
12
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 loans to consumers.
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 June 30,
2006, Dealer Loan originations grew 5.8% compared to the same period in 2005 due
to an increase in the number of active dealer-partners which resulted in 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 June 30, 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.
13
CONSUMER LOAN PERFORMANCE
Although the majority of loan originations are recorded in the Company's
financial statements as Dealer Loans, each transaction starts with a loan from
the dealer-partner to the individual purchasing the vehicle. Since the cash
flows available to repay the Dealer Loans are generated, in most cases, from the
underlying Consumer Loan, the performance of the Consumer Loans are critical to
the Company's financial results. 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 June 30, 2006 for the United States
business segment. Payments of dealer holdback and accelerated payments of dealer
holdback are not included in the analysis of the initial advance paid to the
dealer-partner. All amounts are presented as a percentage of the initial balance
of the Consumer Loan (principal + interest).
As of June 30, 2006
---------------------------------------------------
Year of Forecasted % of Forecast
Origination Collection % Advance % Spread % Realized
- ----------- ------------ --------- -------- -------------
1996 55.0% 46.9% 8.1% 100.0%
1997 58.4% 47.8% 10.6% 99.5%
1998 67.6% 46.0% 21.6% 98.8%
1999 72.5% 48.7% 23.8% 98.0%
2000 73.1% 47.9% 25.2% 97.1%
2001 67.6% 45.9% 21.7% 96.8%
2002 70.5% 42.2% 28.3% 96.5%
2003 74.4% 43.4% 31.0% 90.8%
2004 73.7% 44.0% 29.7% 74.0%
2005 74.8% 46.9% 27.9% 44.8%
2006 73.8% 46.7% 27.1% 11.3%
The following table compares the Company's forecast of Consumer Loan
collection rates as of June 30, 2006 with the forecast as of December 31, 2005:
June 30, 2006 December 31, 2005
Loan Origination Year Forecasted Collection % Forecasted Collection % Variance
- --------------------- ----------------------- ----------------------- --------
1996 55.0% 55.0% 0.0%
1997 58.4% 58.3% 0.1%
1998 67.6% 67.7% (0.1)%
1999 72.5% 72.7% (0.2)%
2000 73.1% 73.2% (0.1)%
2001 67.6% 67.2% 0.4%
2002 70.5% 70.3% 0.2%
2003 74.4% 74.0% 0.4%
2004 73.7% 72.9% 0.8%
2005 74.8% 73.6% 1.2%
Accurately forecasting future collection rates is critical to the Company's
success. The risk of a forecasting error declines as Consumer Loans age. For
example, the risk of a material forecasting error for business written in 1999
is very small since 98.0% 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 second
quarter of 2006, other than routine changes designed to maintain current
profitability levels.
14
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2006 Compared to Three and Six Months
Ended June 30, 2005
The following is a discussion of the results of operations and income
statement data for the Company on a consolidated basis.
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, % OF JUNE 30, % OF
(Dollars in thousands) 2006 REVENUE 2005 REVENUE
------------ ------- ------------ -------
REVENUE:
Finance charges $47,919 87.0% $44,295 88.0%
License fees 3,204 5.8 2,252 4.5
Other income 3,958 7.2 3,789 7.5
------- ----- ------- -----
Total revenue 55,081 100.0 50,336 100.0
COSTS AND EXPENSES:
Salaries and wages 9,861 17.9 8,939 17.8
General and administrative 6,297 11.4 5,885 11.7
Sales and marketing 3,406 6.2 3,269 6.5
Provision for credit losses 2,641 4.8 1,816 3.6
Interest 5,660 10.3 3,613 7.2
Stock-based compensation expense 104 0.2 510 1.0
Other expense 55 0.1 266 0.5
------- ----- ------- -----
Total costs and expenses 28,024 50.9 24,298 48.3
------- ----- ------- -----
Operating income 27,057 49.1 26,038 51.7
Foreign exchange gain 6 -- 382 0.8
------- ----- ------- -----
Income from continuing operations before
provision for income taxes 27,063 49.1 26,420 52.5
Provision for income taxes 9,364 17.0 9,817 19.5
------- ----- ------- -----
Income from continuing operations 17,699 32.1 16,603 33.0
------- ----- ------- -----
Discontinued operations
(Loss) gain from operations of
discontinued United Kingdom
operations (132) (0.2) 630 1.3
(Credit) provision for income taxes (39) (0.1) 180 0.4
------- ----- ------- -----
(Loss) gain from discontinued operations (93) (0.1) 450 0.9
------- ----- ------- -----
Net income $17,606 32.0% $17,053 33.9%
======= ===== ======= =====
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, % OF JUNE 30, % OF
(Dollars in thousands) 2006 REVENUE 2005 REVENUE
---------- ------- ---------- -------
REVENUE:
Finance charges $ 93,926 86.9% $86,333 88.0%
License fees 6,101 5.6 4,212 4.3
Other income 8,080 7.5 7,527 7.7
-------- ----- ------- -----
Total revenue 108,107 100.0 98,072 100.0
COSTS AND EXPENSES:
Salaries and wages 20,613 19.1 18,006 18.4
General and administrative 13,062 12.1 11,415 11.6
Sales and marketing 7,765 7.2 6,796 6.9
Provision for credit losses 3,165 2.9 2,670 2.7
Interest 9,234 8.5 7,356 7.5
Stock-based compensation expense (54) -- 1,265 1.3
Other expense 137 0.1 401 0.4
-------- ----- ------- -----
Total costs and expenses 53,922 49.9 47,909 48.8
-------- ----- ------- -----
Operating income 54,185 50.1 50,163 51.2
Foreign exchange gain 11 -- 1,027 1.0
-------- ----- ------- -----
Income from continuing operations before
provision for income taxes 54,196 50.1 51,190 52.2
Provision for income taxes 19,292 17.8 19,057 19.4
-------- ----- ------- -----
Income from continuing operations 34,904 32.3 32,133 32.8
-------- ----- ------- -----
Discontinued operations
(Loss) gain from operations of
discontinued United Kingdom
operations (145) (0.1) 885 0.9
(Credit) provision for income taxes (44) -- 251 0.3
-------- ----- ------- -----
(Loss) gain from discontinued operations (101) (0.1) 634 0.6
-------- ----- ------- -----
Net income $ 34,803 32.2% $32,767 33.4%
======== ===== ======= =====
15
For the three months ended June 30, 2006, net income increased to $17.6
million, or $0.50 per diluted share, compared to $17.1 million, or $0.44 per
diluted share, for the same period in 2005. The increase in net income primarily
reflects the following:
- Finance charge revenue increased $3.6 million (8.2%) primarily due to
a 5.7% increase in the average size of the loan portfolio.
- License fees increased $1.0 million primarily due to an increase in
the number of dealer-partners.
- A decrease in the effective tax rate from 37.2% to 34.6% primarily due
to a reduction of state tax liability as a result of a settlement.
Partially offsetting these improvements:
- Interest expense increased $2.0 million primarily due to an increase
in interest rates and a 25.7% increase in the amount of average
outstanding debt as a result of borrowings used to fund stock
repurchases in the first and second quarters of 2006.
For the six months ended June 30, 2006, net income increased to $34.8
million, or $0.94 per diluted share, compared to $32.8 million, or $0.83 per
diluted share, for the same period in 2005. The increase in net income primarily
reflects the following:
- Finance charge revenue increased $7.6 million (8.8%) primarily due to
a 5.9% increase in the average size of the loan portfolio.
- License fees increased $1.9 million primarily due to an increase in
the number of dealer-partners.
- Stock-based compensation expense decreased $1.3 million primarily due
to a decline in the number of unvested stock options and the Company's
adoption of SFAS No. 123R.
Partially offsetting these improvements:
- Foreign exchange gain decreased $1.0 million. The foreign exchange
gains for the six months ended June 30, 2005 were primarily the result
of changes in the fair value of forward contracts entered into during
the third quarter of 2003. There were no forward contracts outstanding
during 2006.
Finance Charges. Finance charges increased to $47.9 million and $93.9
million for the three and six months ended June 30, 2006 from $44.3 million and
$86.3 million for the same periods in 2005 primarily due to increases in the
size of the Dealer Loan portfolio.
16
The following table summarizes the changes in active dealer-partners and
corresponding Consumer Loan unit volume for the three months ended June 30, 2006
and 2005:
THREE MONTHS ENDED JUNE 30,
---------------------------
%
2006 2005 CHANGE
------ ------ ------
Consumer Loan unit volume 20,176 19,018 6.1
Active dealer-partners (1) 1,510 1,224 23.4
------ ------
Average volume per dealer-partner 13.4 15.5 (13.5)
Consumer Loan unit volume from dealer-partners
active both periods 13,160 15,227 (13.6)
Dealer-partners active both periods 814 814 --
------ ------
Average volume per dealer-partner active both periods 16.2 18.7 (13.4)
Consumer Loan unit volume from new dealer-partners 1,085 1,558 (30.4)
New active dealer-partners (2) 188 222 (15.3)
------ ------
Average volume per new active dealer-partner 5.8 7.0 (17.1)
Attrition (3) -19.9% -13.9%
(1) Active dealer-partners are dealer-partners who submit at least one Consumer
Loan during the period.
(2) New dealer-partners are dealer-partners that have enrolled in the Company's
program and have submitted their first Consumer 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. Approximately 72% of
the dealer-partners that enrolled during the second quarter of 2006 took
advantage of this new enrollment option.
License Fees. License fees increased to $3.2 million and $6.1 million for
the three and six months ended June 30, 2006 from $2.3 million and $4.2 million
for the same periods in 2005. License fees represent CAPS fees charged to
dealer-partners on a monthly basis. The increases were primarily due to an
increase in the number of dealer-partners. The average number of dealer-partners
billed for CAPS fees for the six months ended June 30, 2006 was 1,806 compared
to 1,179 for the same period 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,
remained comparable at 17.9% and 17.8% for the three months ended June 30, 2006
and 2005, respectively. Salaries and wages, as a percentage of revenue,
increased to 19.1% for the six months ended June 30, 2006 compared to 18.4% for
the same period in 2005. The increase, as a percentage of revenue, for the six
months was primarily due to increased costs of information systems personnel.
General and Administrative. General and administrative expenses, as a
percentage of revenue, remained consistent at 11.4% for the three months ended
June 30, 2006 compared to 11.7% for the same period in 2005 while these
expenses, as a percentage of revenue, increased to 12.1% for the six months
ended June 30, 2006, compared to 11.6% for the same period in 2005. The
increase, as a percentage of revenue, for the six months was primarily due to
additional professional fees associated with the Company's restatement of its
financial statements and an increase in corporate legal expenses.
17
Provision for Credit Losses. The provision for credit losses increased to
$2.6 million and $3.2 million for the three and six months ended June 30, 2006
compared to $1.8 million and $2.7 million for the same periods in 2005. 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 increases in the provision for
the three and six months ended June 30, 2006 were primarily due to an increase
in the provision for credit losses required to maintain the initial yield
established at the inception of the Dealer Loan.
Interest. Interest expense increased to $5.7 million and $9.2 million for
the three and six months ended June 30, 2006 from $3.6 million and $7.4 million
for the same periods in 2005. The increase in interest expense during the three
months ended June 30, 2006 was primarily due to an increase in interest rates
and an increase in the average amount of outstanding debt as a result of
borrowings used to fund stock repurchases in the first and second quarters of
2006. The increase in interest expense during the six months ended June 30, 2006
was primarily due to an increase in interest rates.
Stock-based Compensation Expense. Stock-based compensation expense
decreased to $0.1 million and $(0.1) million for the three and six months ended
June 30, 2006 from $0.5 million and $1.3 million for the same periods in 2005.
The decrease for the three months ended June 30, 2006 was primarily due to a
decline in the number of unvested stock options outstanding and an adjustment
recognized in the second quarter of 2006 as a result of an increase in the
period over which certain performance based stock options and restricted stock
are expected to vest. The decrease for the six months ended June 30, 2006 was
primarily due to: (i) a decline in the number of unvested stock options
outstanding, (ii) the Company's adoption of SFAS No. 123R, and (iii) an
adjustment recognized in the second quarter of 2006 as a result of an increase
in the period over which certain performance based stock options and restricted
stock are expected to vest.
Foreign Currency Gain. Foreign currency gain decreased to $6,000 and
$11,000 for the three and six months ended June 30, 2006 from $0.4 million and
$1.0 million for the same periods in 2005. The foreign currency gains for the
three and six months ended June 30, 2005 were primarily the result of changes in
the fair value of forward contracts entered into during the third quarter of
2003. There were no forward contracts outstanding during 2006.
Provision for Income Taxes. The effective tax rate decreased to 34.6% from
37.2% for the three months ended June 30, 2006 and 2005, respectively, primarily
due to a reduction of state tax liability as a result of a settlement. The
effective tax rate remained consistent at 35.6% and 37.2% for the six months
ended June 30, 2006 and 2005, respectively.
RETURN ON CAPITAL
The return on capital analysis provides an additional perspective on the
financial performance of the Company. The Company believes this information
provides a useful measurement of how effectively the Company is utilizing its
capital. Return on capital is equal to net operating profit after-tax (net
income plus interest expense after-tax) divided by average capital as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
(Dollars in thousands) 2006 2005 2006 2005
-------- -------- -------- --------
Net income $ 17,606 $ 17,053 $ 34,803 $ 32,767
Interest expense after-tax (1) 3,566 2,276 5,817 4,634
-------- -------- -------- --------
Net operating profit after-tax $ 21,172 $ 19,329 $ 40,620 $ 37,401
======== ======== ======== ========
Average debt $256,162 $203,800 $205,900 $199,434
Average shareholders' equity 294,023 325,359 331,107 316,292
-------- -------- -------- --------
Average capital $550,185 $529,159 $537,007 $515,726
======== ======== ======== ========
Return on capital 15.4% 14.6% 15.1% 14.5%
(1) Interest expense after-tax calculated using a 37% tax rate which
approximates the Company's long term effective tax rate.
18
ECONOMIC PROFIT
The Company defines economic profit as net income less an imputed cost of
equity. Economic profit measures how efficiently the Company utilizes its
capital. To consider the cost of both debt and equity, the Company's calculation
of economic profit deducts from net income a cost of equity equal to 10% of
average equity, which approximates the S&P 500's rate of return since 1965.
Management uses economic profit to assess the Company's performance as well as
to make capital allocation decisions. Management believes this information is
important to shareholders because it allows shareholders to compare the returns
earned by the Company with the return they could expect if the Company returned
capital to shareholders and they invested in other securities.
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------- -------------------------
(Dollars in thousands, except per share data) 2006 2005 2006 2005
----------- ----------- ----------- -----------
Net income $ 17,606 $ 17,053 $ 34,803 $ 32,767
Imputed cost of equity at 10% (1) (7,351) (8,134) (16,556) (15,815)
----------- ----------- ----------- -----------
Total economic profit $ 10,255 $ 8,919 $ 18,247 $ 16,952
=========== =========== =========== ===========
Diluted weighted average shares outstanding 35,433,944 39,064,886 37,029,956 39,273,824
Economic profit per diluted share (2) $ 0.29 $ 0.23 $ 0.49 $ 0.43
(1) Cost of equity is equal to 10% (on an annual basis) of average
shareholders' equity, as disclosed in the Return on Capital calculation.
(2) Economic profit per diluted share equals the economic profit divided by the
diluted weighted average number of shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flows from operating
activities, collections of Consumer Loans and borrowings under the Company's
line 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 $0.4 million as of
June 30, 2006 from $7.1 million at December 31, 2005. The Company's total
balance sheet indebtedness increased to $245.0 million at June 30, 2006 from
$146.9 million at December 31, 2005. This increase was primarily a result of
borrowings used to fund stock repurchases in the first and second quarters 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.
19
Restricted securities available for sale consisted of the following:
AS OF JUNE 30, 2006
--------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
------ ---------- ---------- ---------
US Government and agency securities $1,628 $-- $ (32) $1,596
Corporate bonds 2,319 -- (71) 2,248
------ --- ----- ------
Total restricted securities
available for sale $3,947 $-- $(103) $3,844
====== === ===== ======
AS OF DECEMBER 31, 2005
--------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED 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
====== === ===== ======
The cost and estimated fair values of securities available for sale 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.
AS OF JUNE 30, 2006 AS OF DECEMBER 31, 2005
------------------- -----------------------
ESTIMATED ESTIMATED
(in thousands) COST FAIR VALUE COST FAIR VALUE
------ ---------- ------ ----------
Contractual Maturity
Within one year $ 482 $ 472 $ -- $ --
Over one year to five years 3,465 3,372 3,028 2,971
Over five years to ten years -- -- 376 374
Over ten years -- -- -- --
------ ------ ------ ------
Total restricted securities
available for sale $3,947 $3,844 $3,404 $3,345
====== ====== ====== ======
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.
On August 1, 2006, the Company's Board of Directors authorized the
repurchase of up to $25.0 million of the Company's common stock in addition to
the Board's prior authorizations.
For additional information regarding the Company's stock repurchase
program, see "Part II, Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds", which is incorporated herein by reference.
Line of Credit Facility. At June 30, 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 June 30, 2006, the agreement provided that, at
the Company's option, interest is payable at either the Eurodollar rate plus 130
basis points (6.62% at June 30, 2006), or at the prime rate (8.25% at June 30,
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. As of June 30, 2006,
there was $99.1 million available under the line of credit.
20
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 June 30, 2006 and December 31, 2005, there was $34.4
million and $36.3 million outstanding under this facility. The maximum amount
outstanding was approximately $103.9 million and $54.9 million during the three
months ended June 30, 2006 and 2005, respectively. The weighted average balance
outstanding was $66.9 million and $40.8 million during the three months ended
June 30, 2006 and 2005, respectively. The weighted average interest rate on line
of credit borrowings outstanding on June 30, 2006 was 6.60%.
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
investors 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 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. If the second
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
(5.86% at June 30, 2006), which has been limited to a maximum rate of 6.75%
through interest rate cap agreements executed in the third quarter of 2005 and
first quarter of 2006. 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
June 30, 2006 and December 31, 2005, there was $102.0 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. As of June 30, 2006, additional Dealer Loans having a net book value of
approximately $29.7 million had been conveyed by the Company after the
completion of the initial funding. 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
21
sole beneficiary of the trust where they would be available to be distributed to
the Company as the sole member of Funding 2006-1. As of June 30, 2006 there was
$100.0 million outstanding under this secured financing transaction.
The Company and its subsidiaries have completed a total of twelve secured
financing transactions, ten of which have been repaid in full as of June 30,
2006. Information about the outstanding secured financing transactions as of
June 30, 2006 are set forth in the following table (in thousands):
Secured Financing Secured Dealer
Issue Balance at Loan Balance at
Number Close Date Limit June 30, 2006 June 30, 2006
- ------ ---------------- -------- ----------------- ---------------
2003-2 September 2003* $325,000 $102,000 $182,709
2006-1 April 2006 $100,000 $100,000 $133,555
* 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 $7.2 million and $7.5 million
outstanding on this loan as of June 30, 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 June 30, 2006, the Company has various
capital lease obligations outstanding for computer equipment, with monthly
payments totaling $79,000. The total amount of capital lease obligations
outstanding as of June 30, 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 January 2007 and
April 2009.
Debt Covenants. As of June 30, 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 and its earnings before
interest, taxes and non-cash expenses to fixed charges. The covenants also limit
the maximum ratio of the Company's debt to tangible net worth and the Company
must also maintain a specified minimum level of net worth, which may indirectly
limit the payment of dividends on common stock.
Contractual Obligations. In addition to the balance sheet indebtedness as
of June 30, 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):
PAYMENTS DUE BY PERIOD
------------------------------------------------
LESS GREATER
THAN 1-3 3-5 THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- -------- -------- -------- ----- -------
Long-term debt obligations $243,586 $102,734 $140,852 $-- $--
Capital lease obligations 1,399 812 587 -- --
Operating lease obligations 1,710 715 995 -- --
Purchase obligations -- -- -- -- --
Other long-term obligations -- -- -- -- --
-------- -------- -------- --- ---
Total contractual obligations $246,695 $104,261 $142,434 $-- $--
======== ======== ======== === ===
22
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 ongoing 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.
23
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 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.
24
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 June 30, 2006 that have materially affected, or are reasonably
likely to materially affect, the Company's internal controls over financial
reporting.
25
PART II. - OTHER INFORMATION
ITEM 1. 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. 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 and a subclass relating to allegedly
inadequate repossession notices. 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 July 18, 2002, the Circuit Court of Jackson County, Missouri granted
plaintiffs leave to file a fourth amended petition which was filed on October
28, 2002. Instead of a subclass of Class 2, that petition alleges a new,
expanded Class 3 relating to allegedly inadequate repossession notices. 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 Circuit Court released an order, dated January 9, 2004, that
denied the Company's motion to dismiss. On November 16, 2005 the Circuit Court
issued an order that, among other things, adopted the District Court's order
certifying classes. By adopting the District Court's order, the Circuit Court's
order certified only the two original classes and did not certify the new,
expanded Class 3. On January 13, 2006, plaintiffs filed a motion entitled
Plaintiffs' Motion To Adjust Class 2 Definition To Correspond With Allegations
Of Their Fourth Amended Complaint which requested that the "repossession
subclass" be deleted from Class 2 and a new Class 3 be adopted. The Company
filed a response arguing that the new, expanded Class 3 is inappropriate for a
number of reasons including the expiration of the statute of limitations. On May
23, 2006, the Circuit Court issued several orders, including an order granting
plaintiffs' motion and adding the new Class 3. On June 2, 2006 the Company filed
for leave to appeal the Circuit Court's decision to allow the expanded
repossession class as well as its November 16, 2005 certification order.
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.
26
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 June 30, 2006:
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)
- ------ ------------ -------------- ------------------- --------------------
April 2006 -- $ -- -- 572,233
May 2006 197,043 $26.77 197,043 375,190
June 2006 151,176 $27.42 151,176 224,014
------- ------ -------
348,219 $27.05 348,219
======= ====== =======
(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
7.0 million shares. As of June 30, 2006, the Company has repurchased
approximately 6.8 million shares under this program at a cost of $62.8
million.
(b) On August 1, 2006, the Company's Board of Directors authorized the
repurchase of up to $25.0 million of the Company's common stock in addition
to the Board's prior authorizations. The additional shares may be
repurchased through the open market or in privately negotiated transactions
from time to time under terms defined by the Board. Unless terminated
earlier by resolution of the Board, the share repurchase program
will expire when the Company has repurchased all shares authorized for
repurchase thereunder. Through August 1, 2006, the Company has repurchased
approximately 6.8 million shares under this program at a cost of $62.8
million.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 11, 2006 at
which the shareholders considered the election of six directors. Each of the six
nominees was reelected. The following table summarizes the votes for the
election:
Nominee Votes For Votes Withheld
- ------- ---------- --------------
Donald A. Foss 25,055,033 1,159
Glenda J. Chamberlain 25,054,949 1,243
Harry E. Craig 25,053,228 2,964
Daniel P. Leff 25,055,224 968
Brett A. Roberts 25,054,750 1,442
Thomas N. Tryforos 25,055,324 868
On June 28, 2006, Daniel P. Leff resigned from the Credit Acceptance
Corporation Board of Directors, effective immediately, to pursue other
interests.
ITEM 6. EXHIBITS
See Index of Exhibits following the signature page, which is incorporated
herein by reference.
27
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
August 2, 2006
(Principal Financial Officer, Principal
Accounting Officer and Duly Authorized
Officer)
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INDEX OF EXHIBITS
EXHIBIT
NO. NOTE DESCRIPTION
- -------- ---- --------------------------------------------------------------
4(f)(71) (1) Indenture dated April 18, 2006 between Credit Acceptance Auto
Dealer Loan Trust 2006-1 and JPMorgan Chase Bank, N.A.
4(f)(72) (1) Sale and Servicing Agreement dated April 18, 2006 among the
Company, Credit Acceptance Auto Dealer Loan Trust 2006-1,
Credit Acceptance Funding LLC 2006-1, JPMorgan Chase Bank,
N.A., and Systems & Services Technologies, Inc.
4(f)(73) (1) Backup Servicing Agreement dated April 18, 2006 among the
Company, Credit Acceptance Funding LLC 2006-1, Credit
Acceptance Auto Dealer Loan Trust 2006-1, Systems & Services
Technologies, Inc., Radian Asset Assurance Inc., XL Capital
Assurance Inc. and JPMorgan Bank, N.A.
4(f)(74) (1) Amended and Restated Trust Agreement dated April 18, 2006
between Credit Acceptance Funding LLC 2006-1 and U.S. Bank
Trust National Association
4(f)(75) (1) Contribution Agreement dated April 18, 2006 between the
Company and Credit Acceptance Funding LLC 2006-1
4(f)(76) (1) Intercreditor Agreement dated April 18, 2006 among the
Company, CAC Warehouse Funding Corporation II, Credit
Acceptance Auto Dealer Loan Trust 2006-1, Credit Acceptance
Funding LLC 2006-1, Wachovia Capital Markets, LLC, as agent,
J.P.Morgan Chase Bank, N.A., as agent, and Comerica Bank, as
agent
31(a) (2) Certification of Chief Executive Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
31(b) (2) Certification of Chief Financial Officer, pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
32(a) (2) 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) (2) 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.
(1) Previously filed as an exhibit to the Company's Current Report on Form 8-K,
as amended, dated April 18, 2006, and incorporated herein by reference.
(2) Filed herewith.
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