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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, 2002
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 incorporation or organization) (IRS Employer Identification)
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 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 outstanding of Common Stock, par value $.01, on August 1,
2002 was 42,375,861.
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TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements -
Three and six months ended June 30, 2002 and June 30, 2001 1
Consolidated Balance Sheets -
As of June 30, 2002 and December 31, 2001 2
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and June 30, 2001 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 8
RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 23
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26
SIGNATURE 27
INDEX OF EXHIBITS 28
EXHIBITS 29
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, except per share data) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUE:
Finance charges $ 25,522 $ 22,432 $ 50,407 $ 42,960
Lease revenue 4,428 5,573 9,587 10,640
Other income 8,639 9,318 17,453 18,482
----------- ----------- ----------- -----------
Total revenue 38,589 37,323 77,447 72,082
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Operating expenses 17,037 15,652 33,045 30,689
Provision for credit losses 3,170 2,705 6,551 5,720
Depreciation of leased assets 2,566 3,169 5,507 6,098
Interest 2,457 4,016 4,762 7,821
----------- ----------- ----------- -----------
Total costs and expenses 25,230 25,542 49,865 50,328
----------- ----------- ----------- -----------
Operating income 13,359 11,781 27,582 21,754
Foreign exchange gain (loss) (2) (39) 15 (32)
----------- ----------- ----------- -----------
Income before provision for income taxes 13,357 11,742 27,597 21,722
Provision for income taxes 4,807 4,013 12,733 7,404
----------- ----------- ----------- -----------
Net income $ 8,550 $ 7,729 $ 14,864 $ 14,318
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.20 $ 0.18 $ 0.35 $ 0.34
=========== =========== =========== ===========
Diluted $ 0.20 $ 0.18 $ 0.34 $ 0.34
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 42,535,312 42,020,176 42,486,667 42,229,955
Diluted 43,821,716 42,752,287 43,684,127 42,713,296
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) AS OF
-----------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
ASSETS: (UNAUDITED)
Cash and cash equivalents $ 20,694 $ 15,773
Investments -- held to maturity 175 173
Automobile loans receivable 795,656 762,031
Allowance for credit losses (5,026) (4,745)
-------- --------
Automobile loans receivable, net 790,630 757,286
-------- --------
Floor plan receivables 6,414 6,446
Notes receivable 9,869 11,167
Investment in operating leases, net 29,246 42,774
Property and equipment, net 19,802 19,646
Other assets 5,280 8,169
-------- --------
Total Assets $882,110 $861,434
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Lines of credit $ 91,272 $73,215
Secured financing 65,101 122,396
Mortgage note 6,562 6,918
Capital lease obligations 556 -
Accounts payable and accrued liabilities 37,402 39,307
Dealer holdbacks, net 350,689 315,393
Deferred income taxes, net 18,331 10,668
Income taxes payable 5,781 5,098
-------- --------
Total Liabilities 575,694 572,995
-------- --------
SHAREHOLDERS' EQUITY:
Common stock 417 422
Paid-in capital 108,460 109,000
Retained earnings 200,020 185,156
Accumulated other comprehensive loss-cumulative translation adjustment (2,481) (6,139)
-------- --------
Total Shareholders' Equity 306,416 288,439
-------- --------
Total Liabilities and Shareholders' Equity $882,110 $861,434
======== ========
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) SIX MONTHS ENDED JUNE 30,
---------------------------
2002 2001
---------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,864 $ 14,318
Adjustments to reconcile net cash provided by operating activities:
Provision for credit losses 6,551 5,720
Depreciation 2,735 2,106
Depreciation of leased assets 5,507 6,098
Gain on securitization clean-up - (1,082)
Loss on retirement of property and equipment 276 -
Provision (credit) for deferred income taxes 7,663 (110)
Tax benefit from exercise of stock options 1,555 -
Change in operating assets and liabilities:
Accounts payable and accrued liabilities (1,948) 6,734
Income taxes payable 683 2,150
Income taxes receivable - 351
Lease payment receivable 535 (223)
Unearned insurance premiums, insurance reserves and fees (492) 218
Deferred dealer enrollment fees, net 43 782
Other assets 2,889 (1,433)
-------- --------
Net cash provided by operating activities 40,861 35,629
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on automobile loans receivable 170,648 152,730
Advances to dealers (155,711) (189,320)
Payments of dealer holdback (16,276) (14,134)
Operating lease acquisitions (874) (16,848)
Deferred costs from lease acquisitions (201) (2,311)
Operating lease liquidations 5,792 5,855
Decreases in floor plan receivables 32 1,918
Decrease (increase) in notes receivable 1,298 (4,072)
Purchases of property and equipment (3,168) (3,358)
-------- --------
Net cash provided by (used in) investing activities 1,540 (69,540)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under lines of credit, net 18,057 23,893
Proceeds from secured financings 28,552 97,068
Repayments of secured financings (85,847) (75,610)
Net proceeds under capital lease obligation 556 -
Repayment of senior notes and mortgage note (356) (5,621)
Repurchase of common stock (6,325) (3,226)
Proceeds from stock options exercised 4,225 512
-------- --------
Net cash provided by (used in) financing activities (41,138) 37,016
-------- --------
Effect of exchange rate changes on cash 3,658 (4,185)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,921 (1,080)
Cash and cash equivalents, beginning of period 15,773 21,316
-------- --------
Cash and cash equivalents, end of period $ 20,694 $ 20,236
======== ========
See accompanying notes to consolidated financial statements.
3
CREDIT ACCEPTANCE CORPORATION
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, 2001 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
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain amounts have been reclassified to conform to the 2002 presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles 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. ACCOUNTING STANDARDS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144
supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed of", and elements of APB 30, "Reporting the
Results of Operations -- Reporting the Effects on Disposal of a Segment of a
Business and Extraordinary, Unusual or Infrequently Occurring Events and
Transactions". The main objective of this statement is to resolve implementation
issues related to SFAS No. 121 by clarifying certain of its provisions. SFAS No.
144 removes goodwill from the scope of SFAS No. 121 and establishes a
"primary-asset" approach to determine the cash flow estimation period for a
group of assets and liabilities. Other provisions of the statement include more
stringent requirements for classifying assets available for disposal and
expanding the scope of activities that will require discontinued operations
reporting. SFAS No. 144 is effective for fiscal years beginning after December
15, 2001, with early adoption encouraged.
Effective in 2001, the Company adopted SFAS No. 144, which resulted in a
$725,000 pre-tax impairment charge to the operating expense line of the
consolidated income statement. This charge was primarily for leasing software
development costs impaired due to management's decision to discontinue
originating leases in the first quarter of 2002. An impairment analysis is
performed on the investment in operating leases on a quarterly basis. This
analysis compares the undiscounted forecasted future net cash flows relating to
the investment in operating leases to the value of the investment in operating
leases at the balance sheet date. Based upon management's analysis, no write
down in the value of the investment in operating leases was necessary at June
30, 2002. Due to the Company's limited experience in the leasing business, a
substantial amount of uncertainty exists in the forecast of the future net cash
flows that will be generated by the automobile lease portfolio. In future
periods, if management's analysis indicates that future cash flows from the
automobile lease portfolio are materially less than previously forecast, an
expense to reduce the value of the investment in operating leases will be
recorded.
3. AUTOMOBILE LOANS RECEIVABLE
Automobile loans receivable consisted of the following (in thousands):
AS OF
----------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
-------------- -------------------
(UNAUDITED)
Gross automobile loans receivable $ 944,170 $ 906,808
Unearned finance charges (142,762) (138,533)
Unearned insurance premiums, insurance reserves and fees (5,752) (6,244)
--------- ---------
Automobile loans receivable $ 795,656 $ 762,031
========= =========
Non-accrual automobile loans $ 193,381 $ 181,759
========= =========
Non-accrual automobile loans as a percent of total
gross automobile loans 20.5% 20.0%
========= =========
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. AUTOMOBILE LOANS RECEIVABLE (CONCLUDED)
A summary of changes in gross automobile loans receivable is as follows (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
Balance, beginning of period $ 937,632 $ 741,530 $ 906,808 $ 674,402
Gross amount of automobile loans accepted 146,850 200,519 338,931 411,545
Legal and repossession fees 6,014 5,720 12,344 12,031
Gross automobile loans reacquired from securitization - 2,918 - 2,918
Cash collections on automobile loans accepted (117,293) (104,980) (238,703) (212,100)
Charge-offs (39,719) (36,674) (81,554) (69,483)
Currency translation 10,686 (1,752) 6,344 (12,032)
--------- --------- --------- ---------
Balance, end of period $ 944,170 $ 807,281 $ 944,170 $ 807,281
========= ========= ========= =========
A summary of the allowance for credit losses is as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
------- -------- ------- ------
(UNAUDITED) (UNAUDITED)
Balance, beginning of period $4,909 $3,797 $4,745 $4,640
Provision for loan losses 491 - 951 -
Charge-offs (461) - (733) (799)
Currency translation 87 (13) 63 (57)
------ ------ ------ ------
Balance, end of period $5,026 $3,784 $5,026 $3,784
====== ====== ====== ======
4. INVESTMENT IN OPERATING LEASES
The composition of net investment in operating leases consisted of the
following (in thousands):
AS OF
--------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
Gross leased assets $ 38,774 $ 50,054
Accumulated depreciation (12,461) (11,657)
Gross deferred costs 5,239 6,831
Accumulated amortization of deferred costs (2,817) (2,786)
Lease payments receivable 2,791 3,308
-------- --------
Investment in operating leases 31,526 45,750
Less: Allowance for lease vehicle losses (2,280) (2,976)
-------- --------
Investment in operating leases, net $ 29,246 $ 42,774
======== ========
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVESTMENT IN OPERATING LEASES (CONCLUDED)
A summary of changes in the investment in operating leases is as follows
(in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Balance, beginning of period $38,023 $49,720 $45,750 $44,944
Gross operating leases originated 22 7,230 1,075 19,159
Depreciation of operating leases (2,566) (3,169) (5,507) (6,098)
Lease payments due 4,415 5,359 9,397 10,461
Collections on operating leases (3,998) (4,730) (8,641) (9,245)
Charge-offs (559) (452) (1,291) (993)
Operating lease liquidations (4,087) (4,187) (9,517) (8,386)
Currency translation 276 101 260 30
------- ------- ------- -------
Balance, end of period $31,526 $49,872 $31,526 $49,872
======= ======= ======= =======
A summary of the allowance for lease vehicle losses (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
---------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
Balance, beginning of period $ 2,411 $ 2,115 $ 2,976 $ 2,023
Provision for lease vehicle losses 1,311 1,575 2,770 2,810
Charge-offs (1,442) (1,358) (3,466) (2,501)
------- ------- ------- -------
Balance, end of period $ 2,280 $ 2,332 $ 2,280 $ 2,332
======= ======= ======= =======
5. DEALER HOLDBACKS AND RESERVE FOR ADVANCE LOSSES
Dealer holdbacks consisted of the following (in thousands):
AS OF
---------------------------------------
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
(UNAUDITED)
Dealer holdbacks $ 751,861 $ 721,365
Less: advances (net of reserve of $10,197 and $9,161
at June 30, 2002 and December 31, 2001, respectively) (401,172) (405,972)
--------- ---------
Dealer holdbacks, net $ 350,689 $ 315,393
========= =========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. DEALER HOLDBACKS AND RESERVE FOR ADVANCE LOSSES (CONCLUDED)
A summary of the change in the reserve for advance losses (classified with
net dealer holdbacks in the accompanying balance sheets) is as follows (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------------
2002 2001 2002 2001
------- ------ ------- -------
(UNAUDITED) (UNAUDITED)
Balance, beginning of period $10,009 $7,252 $ 9,161 $ 6,788
Provision for advance losses 1,368 1,130 2,830 2,910
Charge-offs (1,409) (314) (1,974) (1,514)
Currency translation 229 (18) 180 (134)
------- ------ ------- -------
Balance, end of period $10,197 $8,050 $10,197 $ 8,050
======= ====== ======= =======
6. NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the total of the weighted
average number of common shares and 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.
7. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company regularly accepts
assignments of automobile loans originated by affiliated dealer-partners owned
by the Company's: (i) majority shareholder and Chairman; and (ii) President.
Automobile loans accepted from these affiliated dealer-partners were
approximately $3.9 million and $8.7 million or 2.6% of total automobile loan
originations for the three and six months ended June 30, 2002, respectively, and
$4.5 million and $10.2 million or 2.2% and 2.5% of total automobile loan
originations for the same periods in 2001. Automobile loans receivable from
affiliated dealer-partners represented approximately 2.6% and 2.4% of the gross
automobile loans receivable balance as of June 30, 2002 and December 31, 2001,
respectively. The Company accepts automobile loans from affiliated
dealer-partners and nonaffiliated dealer-partners on the same terms. Based upon
management's analysis, the average return on capital on the business originated
by affiliated dealer-partners is currently higher than the average return on
capital for non-affiliated dealer-partners. Affiliated dealer-partners' advances
were $10.0 million or 2.1% of total advances and $9.3 million or 2.0% of total
advances as of June 30, 2002 and December 31, 2001, respectively. The Company
received fees for marketing services provided to affiliated dealer-partners
owned by the Company's majority shareholder and Chairman and the Company's
President totaling $19,000 and $27,000 for the three and six months ended June
30, 2002, respectively.
The Company receives interest income and fees from: (i) a note receivable
of $1.5 million as of June 30, 2002 and December 31, 2001, respectively, from
the Company's President; and (ii) a working capital loan to the Company's
majority shareholder and Chairman with a balance of zero and $66,000 as of June
30, 2002 and December 31, 2001, respectively. Total income earned on the note
receivable and working capital loan was $19,000 and $38,000 for the three and
six months ended June 30, 2002 and $12,000 and $24,000 for the same periods in
2001.
8. INCOME TAXES
The Company's effective tax rate was 36.0% and 46.1% for the three and six
months ended June 30, 2002 compared to 34.2% and 34.1% for the same periods in
2001. These increases are primarily due to the amount recorded in the three and
six months ended June 30, 2002, for additional income taxes that would be due
upon the repatriation of the cumulative undistributed earnings of the Company's
United Kingdom business unit. For the six months ended June 30, 2002, the
increase was partially offset by a change in estimate for state income tax owed
as a result of the re-characterization of income due to an Internal Revenue
Service examination.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
9. BUSINESS SEGMENT INFORMATION
The Company is organized into three primary business segments: the North
America Operation ("North America"), the United Kingdom Operation ("United
Kingdom") and the Automobile Leasing Operation ("Automobile Leasing"). Selected
segment information is set forth below (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
Revenue:
North America $28,683 $25,600 $56,731 $48,877
United Kingdom 5,125 5,854 10,445 11,961
Automobile Leasing 4,781 5,869 10,271 11,244
------- ------- ------- -------
Total revenue $38,589 $37,323 $77,447 $72,082
======= ======= ======= =======
Income before provision for income taxes:
North America $11,977 $10,642 $25,349 $19,269
United Kingdom 1,899 2,123 3,613 4,608
Automobile Leasing (519) (1,023) (1,365) (2,155)
------- ------- ------- -------
Total income before provision for income taxes $13,357 $11,742 $27,597 $21,722
======= ======= ======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company's business model relies on its ability to forecast loan
performance. The Company forecasts drive its ability to price and structure
profitable loan transactions as well as determine its required reserve for
advance losses. If the Company produces disappointing results, it will likely be
because the Company overestimated future loan performance. The following table
presents advance rates and collection rates, expressed as a percent of total
loan value, for the past 10 years:
June 30, 2002
----------------------------------------------------------------
Forecasted % of Forecast
Year Collection % Advance % Spread % Realized
- ---- ------------ --------- -------- ------------
1992 81% 35% 46% 100%
1993 76% 37% 38% 100%
1994 62% 42% 20% 100%
1995 56% 46% 10% 98%
1996 57% 49% 8% 97%
1997 60% 49% 11% 97%
1998 68% 50% 19% 97%
1999 73% 54% 19% 92%
2000 72% 53% 20% 78%
2001 70% 49% 21% 41%
8
The Company first published forecasted collection rates in its 2001 Annual
Report. The following table compares the Company's current forecast with the
forecast published at year end.
December 31, 2001 June 30, 2002
Year Forecasted Collection % Forecasted Collection % Variance
- ---- ----------------------- ----------------------- --------
1992 81% 81% 0%
1993 76% 76% 0%
1994 62% 62% 0%
1995 56% 56% 0%
1996 57% 57% 0%
1997 60% 60% 0%
1998 69% 68% (1%)
1999 73% 73% 0%
2000 73% 72% (1%)
2001 70% 70% 0%
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 2001
The Company's presentation of financial results and subsequent analysis is
based on analyzing the income statement as a percent of capital invested. Since
early 2000, the Company has internally viewed its business results in this
manner and believes it allows for a more transparent and simplified
presentation. The Company's future results will depend on its ability to
increase the return on capital and the amount of capital invested per share,
while maintaining an appropriate balance between equity and debt. The results of
operations are disclosed as "Reported" in the Company's Consolidated Income
Statements and as "Adjusted" with certain adjustments as described in the notes
to the tables. These adjustments have been made in order to present a more
useful analysis of economic profit and are described in footnotes following each
of the tables. The figures in the tables expressed as a percent of average
capital reflect the "Adjusted" amount as a percent of average capital for the
period and are presented on an annualized basis to facilitate period to period
comparisons. Management's discussion of results of operations focuses on the
adjusted results of operations.
9
Consolidated
The following table presents certain income statement data on a
consolidated basis as a percent of average capital invested, for the periods
indicated.
(Dollars in thousands, except per THREE MONTHS ENDED THREE MONTHS ENDED
share data) JUNE 30, 2002 JUNE 30, 2001
----------------------------------------- -----------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
-------- ----------- ------------ -------- ----------- ------------
REVENUE:
Finance charges $ 25,522 $ 25,522 20.4% $ 22,432 $ 22,432 18.6%
Lease revenue 4,428 4,428 3.5 5,573 5,573 4.6
Other income(1) 8,639 8,639 6.9 9,318 8,236 6.8
-------- ----------- ------------ -------- ----------- ------------
Total revenue 38,589 38,589 30.8 37,323 36,241 30.0
COSTS AND EXPENSES:
Operating expenses(2), (3) 17,037 16,589 13.2 15,652 15,003 12.5
Provision for credit losses 3,170 3,170 2.5 2,705 2,705 2.2
Depreciation of leased assets 2,566 2,566 2.1 3,169 3,169 2.6
Interest 2,457 2,457 2.0 4,016 4,016 3.3
-------- ----------- ------------ -------- ----------- ------------
Total costs and expenses 25,230 24,782 19.8 25,542 24,893 20.6
-------- ----------- ------------ -------- ----------- ------------
Operating income 13,359 13,807 11.0 11,781 11,348 9.4
Foreign exchange loss (2) (2) - (39) (39) -
-------- ----------- ------------ -------- ----------- ------------
Income before provision for income 13,357 13,805 11.0 11,742 11,309 9.4
taxes
Provision for income taxes(4), (5) 4,807 4,964 4.0 4,013 3,861 3.2
-------- ----------- ------------ -------- ----------- ------------
Net income $ 8,550 $ 8,841 7.0% $ 7,729 $ 7,448 6.2%
======== =========== ============ ======== =========== ============
Return on capital ("ROC")(6) 8.4% 8.4%
Weighted average cost of capital
("WACC")(7) 9.7% 10.0%
----------- -----------
Spread (1.3%) (1.6%)
Average capital (8) $ 499,988 $ 482,577
Economic loss (9) $ (1,657) $ (1,931)
Adjusted weighted average shares 47,207,810 46,865,471
outstanding (10)
Economic loss per share (11) $ (0.04) $ (0.04)
(Dollars in thousands, except per SIX MONTHS ENDED SIX MONTHS ENDED
share data) JUNE 30, 2002 JUNE 30, 2001
----------------------------------------- -----------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
-------- ----------- ------------ -------- ----------- ------------
REVENUE:
Finance charges $ 50,407 $ 50,407 20.0% $ 42,960 $ 42,960 18.5%
Lease revenue 9,587 9,587 3.8 10,640 10,640 4.6
Other income(1) 17,453 17,453 6.9 18,482 17,400 7.5
-------- ----------- ------------ -------- ----------- ------------
Total revenue 77,447 77,447 30.7 72,082 71,000 30.6
COSTS AND EXPENSES:
Operating expenses (2), (3) 33,045 32,619 12.9 30,689 30,040 12.9
Provision for credit losses 6,551 6,551 2.6 5,720 5,720 2.5
Depreciation of leased assets 5,507 5,507 2.2 6,098 6,098 2.6
Interest 4,762 4,762 1.9 7,821 7,821 3.4
-------- ----------- ------------ -------- ----------- ------------
Total costs and expenses 49,865 49,439 19.6 50,328 49,679 21.4
-------- ----------- ------------ -------- ----------- ------------
Operating income 27,582 28,008 11.1 21,754 21,321 9.2
Foreign exchange (gain) loss 15 15 -- (32) (32) --
-------- ----------- ------------ -------- ----------- ------------
Income before provision for income 27,597 28,023 11.1 21,722 21,289 9.2
taxes
Provision for income taxes(3), (4), (5) 12,733 10,067 4.0 7,404 7,252 3.1
-------- ----------- ------------ -------- ----------- ------------
Net income $ 14,864 $ 17,956 7.1% $ 14,318 $ 14,037 6.1%
======== =========== ============ ======== =========== ============
Return on capital ("ROC") (6) 8.4% 8.3%
Weighted average cost of capital 9.4% 10.1%
("WACC") (7) ----------- -----------
Spread (1.1%) (1.9%)
Average capital (8) $ 504,440 $ 464,809
Economic loss (9) $ (2,697) $ (4,328)
Adjusted weighted average shares 47,159,165 47,075,250
outstanding (10)
Economic loss per share (11) $ (0.06) $ (0.09)
(1) For the three and six months ended June 30, 2001, the adjusted column
reflects the reversal of a gain of ($1,082,000) related to an exercised
clean-up call on the July 1998 securitization.
(2) Generally accepted accounting principles ("GAAP") require the Company to
record an expense relating to performance-based stock options. The Company
believes adding back the recorded GAAP expense combined with the adjustment
discussed in footnote (7) accurately reflects the true cost of stock
options. Refer to "Stock Options." For the three and six months ended June
10
30, 2002 the GAAP expense associated with performance-based stock options
granted in 1999 in the amount of ($448,000) and ($755,000) was added back
to the adjusted column.
(3) For the six months ended June 30, 2002, the adjusted column reflects an
adjustment to increase operating expenses by $329,000 and the provision for
income taxes by $634,000 to reverse amounts recorded as a result of a
change in estimate for state income tax owed as a result of the
re-characterization of income as a result of an Internal Revenue Service
examination. For the three and six months ended June 30, 2001, the adjusted
column reflects the reversal of a charge of ($649,000) for executive
severance.
(4) For the six months ended June 30, 2002, an adjustment of $3,713,000 was
recorded to reflect additional taxes that would be due upon repatriation of
currently undistributed earnings in the Company's United Kingdom business
unit. $3,564,000 of this adjustment related to earnings generated from
inception of the business unit through December 31, 2001. The adjusted
column represents the reversal of this amount.
(5) The adjustments described in footnotes (1) - (4) resulted in a net impact
on the provision for income taxes of $157,000 and ($2,666,000) for the
three and six months ended June 30, 2002 and ($152,000) for the three and
six months ended June 30, 2001.
(6) Return on capital is equal to net income plus interest expense after tax
divided by average capital.
(7) Weighted average cost of capital is equal to the sum of: (i) the after-tax
cost of debt multiplied by the ratio of average debt to average capital,
plus (ii) the cost of equity multiplied by the ratio of average equity to
average capital. The cost of equity is assumed to be equal to the 30-year
Treasury bond rate plus 6% plus two times the ratio of the Company's
interest bearing debt to equity. For purposes of computing economic profit,
the Company has added to shareholders' equity as reported under GAAP
$26,875,000 and $25,481,000 in the three and six months ended June 30,
2002, respectively, and $22,838,000 and $21,771,000 in the three and six
months ended June 30, 2001, respectively. Amounts added to shareholders'
equity represent the average amount of capital employed to repurchase
shares consistent with the Company's practices regarding stock options.
(8) Average capital is equal to the average amount of debt and equity during
the period, which includes the additions to shareholders' equity as
reported under GAAP discussed in footnote (7).
(9) Total economic loss equals the Spread (ROC minus WACC) multiplied by
average capital.
(10) Amount includes actual weighted average shares outstanding plus total stock
options outstanding. This differs from shares used for GAAP earnings per
share, which include only a portion of options outstanding.
(11) Economic loss per share equals the economic loss divided by the adjusted
weighted average shares outstanding.
The Company's economic loss, as adjusted, improved to ($1,657,000) and
($2,697,000) for the three and six months ended June 30, 2002 from ($1,931,000)
and ($4,328,000) for the same periods in 2001. These improvements were primarily
due to a reduction in the weighted average cost of capital, and for the six
months ended June 30, 2002 an improvement in the return on capital. The
reduction in the weighted average cost of capital was a result of lower interest
rates during the period. The improvement in the return on capital for the six
months ended June 30, 2002 was primarily due to an increase in capital invested
in North America, which generates a higher return on capital than the Company's
other segments and an increase in the return on capital in North America,
partially offset by a decrease in the return on capital in the United Kingdom.
The results of operations for the Company as a whole are attributable to
changes described in the North America, United Kingdom, and Automobile Leasing
business segments. The following discussion of the results of operations for
interest expense is provided on a consolidated basis, as the explanation is not
meaningful by business segment.
Interest expense. Interest expense, as a percent of average capital,
decreased to 2.0% and 1.9% for the three and six months ended June 30, 2002 from
3.3% and 3.4% for the same periods in 2001. The decrease in interest expense, as
a percent of average capital, was primarily the result of the decrease in the
weighted average interest rate to 5.6% and 5.1% for the three and six months
ended June 30, 2002 from 8.0% and 8.9% for the same periods in 2001, which was
the result of a decrease in the average interest rate on the Company's variable
rate debt, including the lines of credit and secured financing, and the
repayment of the senior note debt.
11
North America
The following table presents certain income statement data for the
Company's North American operations as a percent of average capital invested,
for the periods indicated.
(Dollars in thousands, except per THREE MONTHS ENDED THREE MONTHS ENDED
share data) JUNE 30, 2002 JUNE 30, 2001
------------------------------------------- -----------------------------------------
REPORTED ADJUSTED %OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
----------- ------------ ------------ ----------- ---------- ------------
REVENUE:
Finance charges $ 20,876 $ 20,876 21.7% $ 17,077 $ 17,077 19.5%
Other income (1) 7,807 7,807 8.1 8,523 7,441 8.5
------------ ------------ ------ ------------ ------------ ------
Total revenue 28,683 28,683 29.8 25,600 24,518 28.0
COSTS AND EXPENSES:
Operating expenses(2) 14,383 13,935 14.5 12,061 12,061 13.7
Provision for credit losses 680 680 0.7 407 407 0.5
Interest 1,638 1,638 1.7 2,451 2,451 2.8
------------ ------------ ------ ------------ ------------ ------
Total costs and expenses 16,701 16,253 16.9 14,919 14,919 17.0
------------ ------------ ------ ------------ ------------ ------
Operating income 11,982 12,430 12.9 10,681 9,599 11.0
Foreign exchange loss (5) (5) -- (39) (39) --
------------ ------------ ------ ------------ ------------ ------
Income before provision for income
taxes 11,977 12,425 12.9 10,642 9,560 11.0
Provision for income taxes(4), (5) 4,493 4,650 4.8 3,748 3,369 3.8
------------ ------------ ------ ------------ ------------ ------
Net income $ 7,484 $ 7,775 8.1% $ 6,894 $ 6,191 7.2%
============ ============ ====== ============ ============ ======
Return on capital ("ROC")* 9.2% 8.9%
Weighted average cost of capital ("WACC")* 9.5% 9.8%
------------ ------------
Spread (0.3%) (0.9%)
Average capital(6) $ 385,382 $ 351,098
Economic loss* $ (146) $ (856)
Adjusted weighted average shares 47,207,810 46,865,471
outstanding*
Economic loss per share* $ -- $ (0.02)
(Dollars in thousands, except per SIX MONTHS ENDED SIX MONTHS ENDED
share data) JUNE 30, 2002 JUNE 30, 2001
----------------------------------------- -----------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
-------- ----------- ------------ -------- ----------- ------------
REVENUE:
Finance charges $ 40,898 $ 40,898 21.3% $ 32,276 $ 32,276 19.3%
Other income(1) 15,833 15,833 8.2 16,601 15,519 9.3
------------ ------------ ------ ------------ ------------ ------
Total revenue 56,731 56,731 29.5 48,877 47,795 28.6
COSTS AND EXPENSES:
Operating expenses(2), (3) 27,194 26,768 13.9 24,101 24,101 14.4
Provision for credit losses 1,196 1,196 0.6 808 808 0.5
Interest 3,004 3,004 1.6 4,667 4,667 2.8
------------ ------------ ------ ------------ ------------ ------
Total costs and expenses 31,394 30,968 16.1 29,576 29,576 17.7
------------ ------------ ------ ------------ ------------ ------
Operating income 25,337 25,763 13.4 19,301 18,219 10.9
Foreign exchange gain(loss) 12 12 -- (32) (32) --
------------ ------------ ------ ------------ ------------ ------
Income before provision for income
taxes 25,349 25,775 13.4 19,269 18,187 10.9
Provision for income taxes(3), (4), (5) 12,251 9,585 5.0 6,788 6,409 3.8
------------ ------------ ------ ------------ ------------ ------
Net income $ 13,098 $ 16,190 8.4% $ 12,481 $ 11,778 7.1%
============ ============ ====== ============ ============ ======
Return on capital ("ROC")* 9.5% 8.9%
Weighted average cost of capital ("WACC")* 9.3% 9.9%
------------ ------------
Spread 0.2% (1.0%)
Average capital(6) $ 383,886 $ 333,954
Economic profit (loss)* $ 573 $ (1,921)
Adjusted weighted average shares
outstanding* 47,159,165 47,075,250
Economic profit (loss) per share* $ 0.01 $ (0.04)
* For further explanation see corresponding footnotes in the Consolidated
section.
(1) For the three and six months ended June 30, 2001, the adjusted column
reflects the reversal of a gain of ($1,082,000) related to an exercised
clean-up call on the July 1998 securitization.
(2) For the three and six months ended June 30, 2002, the GAAP expense
associated with performance-based stock options granted in 1999 in the
amount of ($448,000) and ($755,000) was added back to the adjusted column.
12
(3) For the six months ended June 30, 2002, the adjusted column reflects an
adjustment to increase in operating expenses by $329,000 and the provision
for income taxes by $634,000 to reverse amounts recorded as a result of a
change in estimate for state income tax owed as a result of the
re-characterization of income as a result of an Internal Revenue Service
examination.
(4) For the six months ended June 30, 2002, an adjustment of $3,713,000 was
recorded to reflect additional taxes that would be due upon repatriation of
currently undistributed earnings in the Company's United Kingdom business
unit. $3,564,000 of this adjustment related to earnings generated from
inception of the business unit through December 31, 2001. The adjusted
column represents the reversal of this amount.
(5) The adjustments described in footnotes (1) - (4) resulted in a net impact
on the provision for income taxes of $157,000 and ($2,666,000) for the
three and six months ended June 30, 2002 and ($379,000) for the three and
six months ended June 30, 2001.
(6) Average capital is equal to the average amount of debt and equity during
the period. For purposes of computing economic profit, the Company has
added to shareholders' equity as reported under GAAP $25,994,000 and
$24,674,000 in the three and six months ended June 30, 2002, respectively,
and $22,838,000 and $21,771,000 in the three and six months ended June 30,
2001, respectively. Amounts added to shareholders' equity represent the
average amount of capital employed to repurchase shares consistent with the
Company's practices regarding stock options.
Finance charges. Finance charges, as a percent of average capital,
increased to 21.7% and 21.3% for the three and six months ended June 30, 2002
from 19.5% and 19.3% for the same periods in 2001. The increase was primarily
due to a reduction in the amount advanced to dealer-partners as a percent of the
gross loan amount. This increase is partially offset by an increase in the
percent of non-accrual loans to 19.0% for the six months ended June 30, 2002
from 17.2% for the same period in 2001 due to a reduction in automobile loan
originations in 2002.
Other income. Other income, as a percent of average capital, decreased to
8.1% and 8.2% for the three and six months ended June 30, 2002 from 8.5% and
9.3% for the same periods in 2001. This decrease was due to a reduction in: (i)
premiums earned on the Company's credit life insurance program due to a decrease
in the penetration rates; (ii) premiums earned on the Company's collateral
protection program, which was discontinued in April 2001; and (iii) revenue from
secured lines of credit offered to certain dealer-partners. The Company began to
reduce its investment in this product in the third quarter of 2001. These
decreases were partially offset by an increase in revenue from fees paid by
dealer-partners for the use of the Company's internet based origination system
due to an increase in the number of dealer-partners using the system.
Operating expenses. Operating expenses, as a percent of average capital,
increased to 14.5% for the three months ended June 30, 2002 from 13.7% for the
same period in 2001. This increase was primarily due to: (i) an increase in
salaries and wages due to an increase in headcount; (ii) an increase in legal
expense due to an increase in amounts accrued to cover anticipated future
settlements (see "Part II - Item 1. Legal Proceedings"); and (iii) the write-off
of computer software. The increase was partially offset by prior year expenses
relating to the mailing of privacy rights statements to consumers in May 2001.
Operating expenses, as a percent of average capital, decreased to 13.9% for
the six months ended June 30, 2002 from 14.4% for the same period in 2001. This
decrease was primarily due to: (i) a decrease in taxes due to a
re-characterization of the Company's revenue for state tax reporting purposes
resulting in a decrease in state tax expenses which are classified as operating
expenses; (ii) sales and marketing expense remaining consistent in comparison to
an increase in average capital invested; (iii) a decrease in provision for
losses on secured line of credit loans, due to the Company beginning to reduce
its investment in this product in third quarter of 2001; and (iv) a decrease in
expenses relating to the mailing of privacy rights statements to consumers in
May 2001. This decrease was partially offset by: (i) an increase in salaries and
wages due to higher average wage rates and an increase in headcount; (ii) an
increase in legal expense due to an increase in amounts accrued to cover
anticipated future settlements (see "Part II - Item 1. Legal Proceedings"); and
(iii) the write-off of computer software.
Provision for credit losses. Provision for credit losses, as a percent of
average capital, increased to 0.7% and 0.6% for the three and six months ended
June 30, 2002 from 0.5% for the same periods in 2001. The provision for credit
losses consists of two components: (i) a provision for losses on advances to
dealer-partners that are not expected to be recovered through collections on the
related automobile loan portfolio; and (ii) a provision for earned but unpaid
revenue on automobile loans which were transferred to non-accrual status during
the period. The provision for earned but unpaid revenue on automobile loans
increased, as a percent of average capital, for the three and six months ended
June 30, 2002 compared to the same periods in 2001 primarily due to an increase
in the percent of non-accrual loans. The provision for losses on advances
decreased, as a percent of average capital, for the three and six months ended
June 30, 2002 compared to the same periods in 2001 due to an increase in the
spread between the advance rate and forecasted collection rate.
Provision for income taxes. The provision for income taxes, as a percent of
average capital, increased to 4.8% and 5.0% for the three and six months ended
June 30, 2002 from 3.8% for the same periods in 2001 as a result of an increase
in pre-tax profitability for the three and six months ended June 30, 2002
compared to the same periods in 2001. To a lesser extent, the increase for the
six months ended June 30, 2002 was due to an increase in the effective tax rate
compared to the same period in 2001 as a result of a re-characterization of the
Company's revenue for state tax reporting purposes.
13
Return on capital. The return on capital increased to 9.2% and 9.5% for the
three and six months ended June 30, 2002 from 8.9% for the same periods in 2001.
This increase was primarily due to an increase in finance charge revenue, as a
percent of average capital, partially offset by a reduction in other income and
an increase in operating expenses, as a percent of average capital, as described
above.
Average capital. Average capital increased to $385.4 million and $383.9
million for the three and six months ended June 30, 2002 from $351.1 million and
$334.0 million for the same periods in 2001, representing increases of 9.8% and
14.9%. The increase is a result of increased loan origination volumes in 2001.
While loan origination volumes declined 17.5% and 8.8% during the three and six
months ended June 30, 2002 compared to the same periods in 2001, loan
origination volumes increased significantly in 2001. The following is a summary
of loan origination volumes and dealer partner information over the past three
years and the interim periods of 2002 and 2001:
THREE MONTHS ENDED SIX MONTHS ENDED
(Dollars in thousands) JUNE 30, JUNE 30,
-------- -------- -------- -------------------- --------------------
1999 2000 2001 2002 2001 2002 2001
-------- -------- -------- -------- -------- -------- --------
Originations $386,713 $384,743 $659,485 $137,485 $166,570 $312,028 $342,239
Number of loans originated 47,759 47,620 62,675 11,990 15,656 28,092 34,839
Dealer-partners:
Number of active dealer-partners(1) 1,236 1,202 1,170 602 905 726 1,046
Loans per active dealer-partner 38.6 39.6 53.6 19.9 17.3 38.7 33.3
Average loan size $ 8.1 $ 8.1 $ 10.5 $ 11.5 $ 10.6 $ 11.1 $ 9.8
(1) Active dealer-partners are dealer-partners who submitted at least one
loan during the period.
The reduction in loan origination volume for the three and six months ended
June 30, 2002 is a result of an increased focus on improving the return on
capital. The Company's financial goal is to maximize the amount of economic
profit generated per share. The Company believes that in the short-term, this
objective can best be achieved by first improving the return per dollar of
capital invested. Once return on capital goals have been met, the Company will
then focus on increasing the amount of capital invested by increasing the number
of dealer-partners and the number of loans originated per dealer-partner. The
Company's efforts to improve the return on capital have focused on increasing
the spread between the advance rate (the amount advanced to dealer-partners as a
percent of the total loan amount) and the forecasted collection rate (the amount
the Company expects to collect on the loan).
14
United Kingdom
The following table presents certain income statement data for the
Company's United Kingdom operations as a percent of average capital invested,
for the periods indicated.
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
----------------------------------------- -------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
----------- ----------- ------------ -------- ----------- ------------
REVENUE:
Finance charges $ 4,646 $ 4,646 21.5% $5,355 $ 5,355 22.7%
Other income 479 479 2.2 499 499 2.1
----------- ----------- ---- ------ ----------- ----
Total revenue 5,125 5,125 23.7 5,854 5,854 24.8
COSTS AND EXPENSES:
Operating expenses(1) 1,834 1,834 8.5 2,446 1,797 7.6
Provision for credit losses 1,160 1,160 5.4 724 724 3.1
Interest 235 235 1.1 561 561 2.4
----------- ----------- ---- ------ ----------- ----
Total costs and expenses 3,229 3,229 15.0 3,731 3,082 13.1
----------- ----------- ---- ------ ----------- ----
Operating income 1,896 1,896 8.7 2,123 2,772 11.7
Foreign exchange gain 3 3 -- -- -- --
----------- ----------- ---- ------ ----------- ----
Income before provision for income taxes 1,899 1,899 8.7 2,123 2,772 11.7
Provision for income taxes(2) 528 528 2.5 638 865 3.7
----------- ----------- ---- ------ ----------- ----
Net income $ 1,371 $ 1,371 6.2% $1,485 $ 1,907 8.0%
=========== =========== ==== ====== =========== ====
Return on capital ("ROC")* 7.1% 9.7%
Weighted average cost of capital ("WACC")* 11.2% 10.2%
----------- -----------
Spread (4.1%) (0.5%)
Average capital(3) $ 86,338 $ 94,558
Economic loss* $ (882) $ (114)
Adjusted weighted average shares outstanding* 47,207,810 46,865,471
Economic loss per share* $ (0.02) $ --
(Dollars in thousands, except per share data) SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
---------------------------------------- ------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
-------- ----------- ------------ -------- ----------- ------------
REVENUE:
Finance charges $ 9,509 $ 9,509 21.4% $10,684 $ 10,684 22.7%
Other income 936 936 2.1 1,277 1,277 2.7
------- ----------- ---- ------- ----------- ----
Total revenue 10,445 10,445 23.5 11,961 11,961 25.4
COSTS AND EXPENSES:
Operating expenses(1) 3,771 3,771 8.5 4,123 3,474 7.4
Provision for credit losses 2,506 2,506 5.6 2,103 2,103 4.5
Interest 558 558 1.3 1,127 1,127 2.4
------- ----------- ---- ------- ----------- ----
Total costs and expenses 6,835 6,835 15.4 7,353 6,704 14.3
------- ----------- ---- ------- ----------- ----
Operating income 3,610 3,610 8.1 4,608 5,257 11.1
Foreign exchange gain 3 3 -- -- -- --
------- ----------- ---- ------- ----------- ----
Income before provision for income taxes 3,613 3,613 8.1 4,608 5,257 11.1
Provision for income taxes(2) 991 991 2.2 1,381 1,608 3.4
------- ----------- ---- ------- ----------- ----
Net income $ 2,622 $ 2,622 5.9% $ 3,227 $ 3,649 7.7%
======= =========== ==== ======= =========== ====
Return on capital ("ROC")* 6.7% 9.4%
Weighted average cost of capital ("WACC")* 10.5% 10.3%
----------- -----------
Spread (3.8%) (0.9%)
Average capital(3) $ 88,832 $ 94,172
Economic loss* $ (1,653) $ (405)
Adjusted weighted average shares outstanding* 47,159,165 47,075,250
Economic loss per share* $ (0.04) $ (0.01)
* For further explanation see corresponding footnotes in the Consolidated
section.
(1) For the three and six months ended June 30, 2001, the adjusted column
reflects the reversal of a charge of ($649,000) for executive
severance.
(2) The adjustment described in footnote (1) resulted in a net impact on
the provision for income taxes of $227,000 for the three and six
months ended June 30, 2001, respectively.
(3) Average capital is equal to the average amount of debt and equity
during the period. For purposes of computing economic profit, the
Company has added to shareholders' equity as reported under GAAP
$881,000 and $807,000 in the three and six months ended
15
June 30, 2002, respectively. Amounts added to shareholders' equity
represent the average amount of capital employed to repurchase shares
consistent with the Company's practices regarding stock options.
Finance charges. Finance charges, as a percent of average capital,
decreased to 21.5% and 21.4% for the three and six months ended June 30, 2002
from 22.7% for the same periods in 2001. This decrease was primarily due to an
increase in the percent of non-accrual loans to 27.1% for the three and six
months ended June 30, 2002 from 19.6% for the same periods in 2001 due to a
reduction in automobile loan originations in 2002.
Other income. Other income, as a percent of average capital, increased
to 2.2% for the three months ended June 30, 2002 from 2.1% for the same period
in 2001. Other income, as a percent of average capital, decreased to 2.1% for
the six months ended June 30, 2002 from 2.7% for the same period in 2001. The
increase and decrease, as a percent of average capital, for the three and six
months ended June 30, 2002 and 2001, respectively, were due primarily to
fluctuations in income under an ancillary products profit sharing agreement
with an insurance provider.
Operating Expenses. Operating expenses, as a percent of average
capital, increased to 8.5% for the three and six months ended June 30, 2002 from
7.6% and 7.4% for the same periods in 2001. The increase was primarily due to:
(i) an increase in costs related to new employee benefits offered; and (ii) an
increase in salaries and wages, as a percent of average capital, due to capital
in the United Kingdom declining at a faster rate than salaries and wages. The
increases for the three and six months ended June 30, 2002 and 2001 were
partially offset by a decrease in sales and marketing expenses due to a decrease
in the size of the operation's sales force.
Provision for credit losses. Provision for credit losses, as a percent
of average capital, increased to 5.4% and 5.6% for the three and six months
ended June 30, 2002 from 3.1% and 4.5% for the same periods in 2001. The
provision for credit losses consists of two components: (i) a provision for
losses on advances to dealer-partners that are not expected to be recovered
through collections on the related automobile loan portfolio; and (ii) a
provision for earned but unpaid revenue on automobile loans which were
transferred to non-accrual status during the period. The increase in the
provision was primarily due to an increase in the provision for losses on
advances to dealer-partners. The increase in advance provisions was due to the
deterioration in credit quality of loans originated in 2001. As a result of this
deterioration, the Company stopped originating automobile loans in Ireland and
decreased the amount advanced to dealer-partners in the United Kingdom.
Provision for income taxes. The provision for income taxes, as a
percent of average capital, decreased to 2.5% and 2.2% for the three and six
months ended June 30, 2002 from 3.7% and 3.4% for the same periods in 2001 as a
result of: (i) a decrease in pre-tax profitability for the three and six months
ended June 30, 2002 compared to the same periods in 2001; and (ii) a decrease in
the effective tax rate for the three and six months ended June 30, 2002 compared
to the same periods in 2001 due to a restructuring of legal entities within this
business segment.
Return on capital. The return on capital decreased to 7.1% and 6.7%
for the three and six months ended June 30, 2002 from 9.7% and 9.4% for the same
periods in 2001. These decreases were primarily due to: (i) an increase in the
provision for credit losses; (ii) a reduction in finance charge revenue; and
(iii) an increase in operating expenses, as a percent of average capital, as
described above.
Average capital. Average capital decreased to $86.3 million and $88.8
million for the three and six months ended June 30, 2002 from $94.6 million and
$94.2 million for the same periods in 2001, representing decreases of 8.8% and
5.7%, respectively. The decrease in average capital is a result of decreased
loan origination volumes. The following is a summary of loan origination volumes
and dealer partner information over the past three years and for the interim
periods of 2002 and 2001:
(Dollars in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- -------- -------- ------------------- ------------------
1999 2000 2001 2002 2001 2002 2001
-------- -------- -------- ------ ------- ------- -------
Originations $121,999 $142,228 $122,817 $9,365 $33,949 $26,903 $69,306
Number of loans originated 9,432 10,664 9,121 651 2,559 1,955 5,263
Dealer-partners:
Number of active dealer-partners(1) 196 205 215 45 148 151 296
Loans per active dealer-partner 48.1 52.0 42.4 14.5 17.3 12.9 17.8
Average loan size $ 12.9 $ 13.3 $ 13.5 $ 14.4 $ 13.3 $ 13.8 $ 13.2
(1) Active dealer-partners are dealer-partners who submitted at least one
loan during the period.
16
The reduction in loan origination volume for the three and six months
ended June 30, 2002 is a result of the Company's increased focus on improving
return on capital. To improve the United Kingdom's return on capital the Company
has increased the spread between the advance rate and the forecasted collection
rate. In order for these changes to result in improved returns on capital,
increased unit volume will be required in order to absorb fixed operating
expenses.
Automobile Leasing
The following table presents certain income statement data for the
Company's Automobile Leasing operations as a percent of average capital
invested, for the periods indicated.
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- --------------------------------
REPORTED % OF CAPITAL REPORTED % OF CAPITAL
----------- ------------ ----------- ------------
REVENUE:
Lease revenue $ 4,428 62.6% $ 5,573 60.4%
Other income 353 5.0 296 3.2
----------- ---- ----------- -----
Total revenue 4,781 67.6 5,869 63.6
COSTS AND EXPENSES:
Operating expenses 820 11.6 1,145 12.4
Provision for credit losses 1,330 18.8 1,574 17.1
Depreciation of leased assets 2,566 36.3 3,169 34.3
Interest 584 8.3 1,004 10.9
----------- ---- ----------- -----
Total costs and expenses 5,300 75.0 6,892 74.7
----------- ---- ----------- -----
Operating loss (519) (7.3) (1,023) (11.1)
Credit for income taxes (214) (3.0) (373) (4.0)
----------- ---- ----------- -----
Net loss $ (305) (4.3)% $ (650) (7.1)%
=========== ==== =========== =====
Return on capital ("ROC")* 1.1% 0.0%
Weighted average cost of capital ("WACC")* 10.0% 10.4%
----------- -----------
Spread (8.9%) (10.4%)
Average capital* $ 28,278 $ 36,921
Economic loss* $ (629) $ (961)
Adjusted weighted average shares outstanding* 47,207,810 46,865,471
Economic loss per share* $ (0.01) $ (0.02)
(Dollars in thousands, except per share data) SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2001
--------------------------------- --------------------------------
REPORTED % OF CAPITAL REPORTED % OF CAPITAL
----------- ------------ ----------- ------------
REVENUE:
Lease revenue $ 9,587 60.4% $ 10,640 58.0%
Other income 684 4.3 604 3.2
----------- ---- ----------- -----
Total revenue 10,271 64.7 11,244 61.2
COSTS AND EXPENSES:
Operating expenses 2,080 13.1 2,465 13.4
Provision for credit losses 2,849 18.0 2,809 15.3
Depreciation of leased assets 5,507 34.7 6,098 33.3
Interest 1,200 7.5 2,027 11.0
----------- ---- ----------- -----
Total costs and expenses 11,636 73.3 13,399 73.0
----------- ---- ----------- -----
Operating loss (1,365) (8.6) (2,155) (11.8)
Credit for income taxes (509) (3.2) (765) (4.2)
----------- ---- ----------- -----
Net loss $ (856) (5.4)% $ (1,390) (7.6)%
=========== ==== =========== =====
Return on capital ("ROC")* (0.5%) (0.4%)
Weighted average cost of capital ("WACC")* 9.7% 10.5%
----------- -----------
Spread (10.2%) (10.9%)
Average capital* $ 31,722 $ 36,683
Economic loss* $ (1,617) $ (2,002)
Adjusted weighted average shares outstanding* 47,159,165 47,075,250
Economic loss per share* $ (0.03) $ (0.04)
* For further explanation see corresponding footnotes in the Consolidated
section.
17
Lease revenue. Lease revenue, as a percent of average capital,
increased to 62.6% and 60.4% for the three and six months ended June 30, 2002
from 60.4% and 58.0% for the same periods in 2001. The increases were primarily
due to an increase in the age of the lease portfolio due to the Company's
decision to stop originating automobile leases in January 2002. The liquidation
of the leasing portfolio has reduced the average capital employed in the leasing
operation for the three and six months ended June 30, 2002. Accounting for
operating leases requires straight-line revenue recognition. Straight-line
revenue recognition when combined with a declining capital base results in an
increase in lease revenue as a percentage of average capital.
Other income. Other income, as a percent of average capital, increased
to 5.0% and 4.3% for the three and six months ended June 30, 2002 from 3.2% for
the same periods in 2001. These increases were primarily the result of an
increase in gains recognized on leases terminated before their maturity date.
Operating expenses. Operating expenses, as a percent of average
capital, decreased to 11.6% and 13.1% for the three and six months ended June
30, 2002 from 12.4% and 13.4% for the same periods in 2001. These decreases were
primarily a result of a decrease in sales and marketing expenses due to
discontinuing automobile lease originations in January 2002. For the six months
ended June 30, 2002, the decrease was partially offset by an increase in the
provision for uncollectible receivables from dealer-partners for ancillary
product charge backs on repossessed leased vehicles.
Provision for credit losses. Provision for credit losses, as a percent
of average capital, increased to 18.8% and 18.0% for the three and six months
ended June 30, 2002 from 17.1% and 15.3% for the same periods in 2001. These
increases in the provision were primarily due to increased frequency of lease
repossessions and an increase in the estimated average loss per repossessed
vehicle.
Depreciation of leased assets. Depreciation of leased assets,
including the amortization of indirect lease costs, is recorded on a
straight-line basis to the residual value of leased vehicles over their
scheduled lease terms. Depreciation expense, as a percent of average capital,
increased to 36.3% and 34.7% for the three and six months ended June 30, 2002
from 34.3% and 33.3% for the same periods in 2001. These increases were
primarily to an increase in the age of the lease portfolio and the resulting
impact of recording depreciation on a straight-line basis over the lease term
when combined with a decline in capital.
Credit for income taxes. The credit for income taxes, as a percent of
average capital, decreased to (3.0%) and (3.2%) for the three and six months
ended June 30, 2002 from (4.0%) and (4.2%) for the same periods in 2001 as a
result of a reduction in the pre-tax loss for the three and six months ended
June 30, 2002 compared to the same periods in 2001.
Return on capital. The return on capital increased to 1.1% for the
three months ended June 30, 2002 from (0.0%) for the same period in 2001. This
increase was primarily due to an increase in revenue, as a percent of average
capital, partially offset by increases in the provision for credit losses and
depreciation of leased assets, as a percent of average capital, as described
above. The return on capital decreased to (0.5%) for the six months ended June
30, 2002 from (0.4%) for the same period in 2001. This decrease was primarily
due to increases in the provision for credit losses and depreciation of leased
assets, as a percent of average capital, partially offset by an increase in
revenue, as a percent of average capital, as described above.
Average capital. Average capital decreased to $28.3 million and $31.7
million for the three and six months ended June 30, 2002 from $36.9 million and
$36.7 million for the same periods in 2001. This decrease is the result of the
Company's decision to stop originating automobile leases in January 2002.
STOCK OPTIONS
In 1999, the Company began granting performance-based stock options to
employees. Performance-based options are options that vest solely based on the
achievement of performance targets, in the Company's case targets based on
either earnings per share or economic profit. GAAP requires companies to expense
performance-based options when it is likely that performance targets will be met
and a measurement date can be established. The amount of the reported expense is
the price of the Company's stock at the end of each reporting period less the
exercise price of the options. The Company's non-performance options are not
required to be expensed under GAAP.
Regardless of the accounting, options represent a significant cost to
shareholders. The true cost is the business value transferred to the employee in
stock, less the exercise proceeds, a number that is difficult to calculate since
it depends on when options are exercised and the future performance of the
business. GAAP provides several alternatives for accounting for this cost. In
the Company's opinion, none of these alternatives provide a method that
accurately captures the true cost of options in all circumstances.
Because the Company believes that accurately understanding and
managing the cost of options is essential, over the last three years, the
Company has developed the following practices regarding stock options:
18
- When options are issued, the Company's general practice is to
repurchase the same number of shares. Future options will have a
strike price no less than the average price of the repurchased shares.
For shareholders, the only impact of options therefore is the capital
used to repurchase shares is no longer available to invest in income
producing assets. This cost, the opportunity cost of the capital used
to repurchase shares until the capital is returned upon option
exercise, already reduces the Company's reported earnings.
- Option grants are predominantly performance-based, with appropriately
aggressive vesting targets. The Company believes that these options
properly align the interests of management and shareholders by
rewarding management only for exceptional business performance.
- The calculation of economic profit (loss) includes three adjustments
to the Company's results reported under GAAP to reflect the cost of
options. First, to avoid double counting, the GAAP expense recorded
for performance options is added back. Second, all options outstanding
are included in the Company's fully diluted share base. Finally,
economic profit (loss) includes a charge for the capital used to
repurchase shares covering options grants. The Company's method of
measuring options in the calculation of economic profit (loss) is
conservative in two respects. First, the tax benefits of options have
not been included in the Company's calculation. Because option expense
is deducted for tax purposes upon exercise, more capital will be
returned to the Company upon exercise than is invested in repurchased
shares. Second, options may be cancelled due to turnover or the
failure to meet performance targets. Cancellations will be factored in
as they occur. One additional risk is assumed. Should options be
issued and shares repurchased above intrinsic value, and the options
subsequently expire unexercised, a loss equal to the amount paid above
intrinsic value would be incurred.
The Company views options as a significant but necessary cost. In the
Company's opinion, this cost is now accurately measured and charged to economic
profit per share, the number on which the Company's management incentive
compensation system is based. The Company believes the ability to measure the
cost of options, combined with an incentive compensation system that includes
this cost, enhances the probability that the Company's option program will
produce favorable results for shareholders.
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates its
estimates, including those related to the reserve for advance losses, the
allowance for credit losses, and the allowance for lease vehicle 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 that information
during the six months ended June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flows from operating
activities, principal collected on automobile loans receivable, borrowings under
the Company's credit agreements and secured financings. The Company's principal
need for capital has been to fund cash advances made to dealer-partners in
connection with the acceptance of automobile loans, to pay dealer holdbacks to
dealer-partners who have repaid their advance balances and to fund the
origination of used vehicle leases.
When borrowing to fund the operations of its foreign subsidiaries, the
Company's policy is to borrow funds denominated in the currency of the country
in which the subsidiary operates, thus mitigating the Company's exposure to
foreign exchange fluctuations.
The Company's cash flow requirements are dependent on future levels of
automobile loan originations. In the three and six months ended June 30, 2002,
the Company experienced a decrease in originations over the same periods in
2001. This decrease is the result of the Company's increased focus on improving
the return on capital. Once return on capital goals have been met, the Company
will focus on increasing the amount of capital invested through increasing the
number of dealer-partners and the number of loans originated per dealer-partner.
The Company currently finances its operations through: (i) a bank line
of credit facility; (ii) secured financings; and (iii) a mortgage note.
19
Line of Credit Facility - At June 30, 2002, the Company had a $135.0
million credit agreement with a commercial bank syndicate. The facility, which
was renewed on June 10, 2002, has a commitment period through June 9, 2003, with
a one-year term out option at the request of the Company provided that no event
of default then exists. The agreement provides that, at the Company's
discretion, interest is payable at either the eurodollar rate plus 140 basis
points, or at the prime rate (4.75% as of June 30, 2002). The eurodollar
borrowings may be fixed for periods of up to six months. Borrowings under the
credit agreement are subject to a borrowing base limitation equal to 65% of
advances to dealer-partners and leased vehicles (as reflected in the
consolidated financial statements and related notes), less a hedging reserve
(not exceeding $1,000,000), the amount of letters of credit issued under the
line of credit, and the amount of other debt secured by the collateral which
secures the line of credit. Currently, the borrowing base limitation does not
inhibit the Company's borrowing ability under the line of credit. The credit
agreement has certain restrictive covenants, including a minimum required ratio
of the Company's assets to debt, its liabilities to tangible net worth, and its
earnings before interest, taxes and non-cash expenses to fixed charges.
Additionally, the agreement requires that the Company maintain a specified
minimum level of net worth. Borrowings under the credit agreement are secured by
a lien on most of the Company's assets. The Company must pay an annual agent's
fee and a quarterly commitment fee of 0.60% on the amount of the commitment. As
of June 30, 2002, there was approximately $91.3 million outstanding under this
facility. Since this credit facility expires on June 9, 2003, the Company will
be required to renew the facility or refinance any amounts outstanding under
this facility on or before such date. The Company believes that the $135.0
million credit facility will be renewed with similar terms and a similar
commitment amount. The Company also maintains a small line of credit agreement
in Canada to fund daily cash requirements within this operation.
Secured Financing - The Company's wholly-owned subsidiary, CAC Funding
Corp. ("Funding"), has completed seven secured financing transactions with an
institutional investor through June 30, 2002, two of which remain outstanding.
The remaining secured financings include the July 23, 2001 and November 5, 2001
transactions, in which Funding received $61.0 million and $62.0 million in
financing, respectively. In connection with these transactions, the Company
contributed dealer-partner advances having a carrying amount of approximately
$83.0 million and $96.0 million for the July 2001 and November 2001 secured
financings, respectively, to Funding, which, in turn, pledged them as collateral
to an institutional investor to secure loans that funded the purchase price of
the dealer-partner advances. The proceeds of the secured financings were used by
the Company to reduce outstanding borrowings under the Company's credit
facility. The secured financings create loans for which Funding is liable and
are non-recourse to the Company, even though Funding and the Company are
consolidated for financial reporting purposes. Such loans bear interest at a
floating rate equal to the commercial paper rate plus 50 basis points with a
maximum of 7.5% and 6.5% for the July 23, 2001 and November 5, 2001 secured
financings, respectively. As Funding is organized as a separate legal entity
from the Company, assets of Funding (including the contributed dealer-partner
advances) will not be available to satisfy the general obligations of the
Company. Substantially all the assets of Funding have been encumbered to secure
Funding's obligations to its creditors. In the six months following the July
2001 and the four months following the November 2001 financings, the Company and
Funding received additional proceeds by having the Company contribute additional
dealer-partner advances to Funding, which could then be used by Funding as
collateral to support additional borrowings. To the extent permitted by its
creditors, Funding would be able to use the proceeds of borrowings to pay the
purchase price of dealer-partner advances or to make advances or distributions
to the Company. Such financings are secured by Funding's dealer-partner
advances, Funding's rights to collections on the related automobile loans
receivable and certain related assets up to the sum of Funding's dealer-partner
advances and the Company's servicing fee. The Company receives a monthly
servicing fee paid by the institutional investor equal to 6% of the collections
on Funding's automobile loans receivable for the July 2001 and November 2001
secured financings. Except for the servicing fee and payments due to
dealer-partners, the Company does not receive, or have any rights in, any
portion of collections on the automobile loans receivable until Funding's
underlying indebtedness is paid in full either through collections on the
related automobile loans or through a prepayment of the indebtedness.
In the first quarter 2002, the Company was informed that the institutional
investor, which provided the Company's secured financings, would no longer
provide the Company with future secured financings. The Company is considering
several alternatives for replacing the financing provided by this institutional
investor. However, approval for replacement financing has not been obtained by
the Company. Failure to replace this financing could materially adversely impact
future operations.
20
A summary of the secured financing transactions is as follows (dollars
in thousands):
Balance as
Secured Financing Secured Dealer Percent of
Issue Original Balance at Advance Balance at Original
Number Close Date Balance June 30, 2002 June 30, 2002 Balance
------ ------------- -------- ----------------- ------------------ -----------
1998-A July 1998 $ 50,000 Paid in full Paid in full 0.0%
1999-A July 1999 50,000 Paid in full Paid in full 0.0
1999-B December 1999 50,000 Paid in full Paid in full 0.0
2000-A August 2000 65,000 Paid in full Paid in full 0.0
2001-A March 2001 97,100 Paid in full Paid in full 0.0
2001-B July 2001 60,845 $27,128* $ 71,073 44.6
2001-C November 2001 61,795 37,973** 76,636 61.4
-------- ------------ ------------
$434,740 $65,101 $147,709
======== ============ ============
* Bears an interest rate of 2.5% and is anticipated to fully
amortize within 7 months as of June 30, 2002
** Bears an interest rate of 2.5% and is anticipated to fully
amortize within 9 months as of June 30, 2002
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. The loan matures on May 1, 2004 and requires
monthly payments of $99,582, bearing interest at a fixed rate of 7.07%. The
Company believes that the mortgage loan repayments can be made from cash
resources available to the Company at the time such repayments are due.
A summary of the total future contractual obligations requiring
repayments is as follows (in thousands):
PERIOD OF REPAYMENT
CONTRACTUAL OBLIGATIONS < 1 YEAR 1-3 YEARS > 3 YEARS TOTAL
-------- --------- --------- --------
Secured financings $ 65,101 $ - $ - $ 65,101
Line of Credit 91,272 - - 91,272
Mortgage Note 749 5,813 - 6,562
Capital lease obligations 229 327 - 556
Non-cancelable operating lease obligations 626 876 475 1,977
-------- ------ ---- --------
Total contractual cash obligations $157,977 $7,016 $475 $165,468
======== ====== ==== ========
Repurchase and Retirement of Common Stock - In 1999, the Company began
acquiring shares of its common stock in connection with a stock repurchase
program announced in August 1999. That program authorized the Company to
purchase up to 1,000,000 common shares on the open market or pursuant to
negotiated transactions at price levels the Company deems attractive. On each of
February 7, 2000, June 7, 2000, July 13, 2000, November 10, 2000, and May 20,
2002 the Company's Board of Directors authorized increases in the Company's
stock repurchase program of an additional 1,000,000 shares. As of June 30, 2002,
the Company has repurchased approximately 4.9 million shares of the 6.0 million
shares authorized to be repurchased under this program at a cost of $29,948,000.
The six million shares, which can be repurchased through the open market or in
privately negotiated transactions, represent approximately 13.0% of the shares
outstanding at the beginning of the program.
Based upon anticipated cash flows, management believes that cash flows
from operations, various financing alternatives available to the Company, and
amounts available under its credit agreement will provide sufficient financing
for debt maturities and for future operations. The Company's ability to borrow
funds may be impacted by many economic and financial market conditions. If the
various financing alternatives were to become limited or unavailable to the
Company, the Company's operations could be materially and adversely affected.
21
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis contains a number of
forward-looking statements within the meaning of the Securities Act of 1933 and
the Securities Exchange Act of 1934, both as amended, with respect to
expectations for future periods. 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 the Company's current expectations,
which are subject to risks and uncertainties. These risks and uncertainties are
detailed from time to time in reports filed by the Company with the Securities
and Exchange Commission, including forms 8-K, 10-Q and 10-K, and include, among
others, increased competition from traditional financing sources and from
non-traditional lenders, the unavailability of funding at competitive rates of
interest or the Company's potential inability to continue to obtain third party
financing on favorable terms, the Company's potential inability to generate
sufficient cash flow to service its debt and fund its future operations, adverse
changes in applicable laws and regulations, adverse changes in economic
conditions, adverse changes in the automobile or finance industries or in the
non-prime consumer finance market, the Company's potential inability to maintain
or increase the volume of automobile loans, the Company's potential inability to
accurately forecast and estimate future collections and collection rates and the
associated default risk, the Company's potential inability to accurately
estimate the residual values of leased vehicles, an increase in the amount or
severity of litigation against the Company, the loss of key management
personnel, and the effect of terrorist attacks and potential attacks.
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 disclaim any obligation, to update or alter
its forward-looking statements whether as a result of new information, future
events or otherwise, except as required by applicable law.
22
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, 2001 for a complete discussion of the Company's market risk.
Subsequent to June 30, 2002, the Company sold two of its interest rate
cap agreements. The Company recognized a gain on the sale of the interest rate
caps. In addition, the Company restructured two interest rate caps by
accelerating the maturity of the caps related to the July 2001 and November 2001
secured financings to July 2002 and December 2003 from November 2006 and
December 2006, respectively. The restructuring resulted in a gain. The maximum
rate under the caps remained unchanged at 7.5% and 6.5% for the July 2001 and
November 2001 secured financings, respectively. The sale and restructuring of
the interest rate caps did not have a material effect on the Company's financial
condition or results of operations. Based on the difference between the
Company's rates on its secured financings at June 30, 2002 and the interest rate
caps, the Company's maximum interest rate risk on the July 2001 and November
2001 secured financings is 5.0% and 4.0%, respectively.
23
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business and as a result of the
consumer-oriented nature of the industry in which the Company operates, industry
participants are frequently subject to various consumer 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, consumer protection, warranty, debt collection,
insurance and other consumer-oriented laws and regulations. The Company, as the
assignee of automobile loans originated by dealer-partners, may also be named as
a co-defendant in lawsuits filed by consumers principally against
dealer-partners. Many of these cases are filed as purported class actions and
seek damages in large dollar amounts.
The Company believes that the structure of its dealer-partner programs
and ancillary products, including the terms and conditions of its servicing
agreement, may mitigate its risk of loss in any such litigation and that it has
taken prudent steps to address the litigation risks associated with its business
activities. However, there can be no assurance that future litigation will not
have a material adverse impact on the Company's financial condition or results
of operations.
The Company is currently a defendant in a class action proceeding
commenced on October 15, 1996 in the United States District Court for the
Western District of Missouri seeking money damages for alleged violations of a
number of state and federal consumer protection laws (the "Missouri
Litigation"). On October 9, 1997, the District Court certified two classes on
the claims brought against the Company, one relating to alleged overcharges of
official fees, the other relating to alleged overcharges of post-maturity
interest. On August 4, 1998, the District Court granted partial summary judgment
on liability in favor of the plaintiffs on the interest overcharge claims based
upon the District Court's finding of certain violations but denied summary
judgment on certain other claims. The District Court also entered a number of
permanent injunctions, which among other things, restrained the Company from
collecting on certain class accounts. The Court also ruled in favor of the
Company on certain claims raised by class plaintiffs. Because the entry of an
injunction is immediately appealable as of right, 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 Missouri
state court 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 to dismiss the federal official fee overcharge claims. On May
26, 2000, the District Court entered an order dismissing the federal official
fee claims against the Company and directed the Clerk of the Court to remand the
remaining state law official fee claims to the appropriate state court. On
September 18, 2001, the Circuit Court of Jackson County, Missouri mailed an
order assigning this matter to a judge. A status conference with the new state
court judge was held on July 18, 2002 at which the Court set a timetable for the
parties to file additional pleadings on the case. The Company will continue its
vigorous defense of all remaining claims. However, an adverse ultimate
disposition of this litigation could have a material negative impact on the
Company's financial position, liquidity and results of operations.
The Company is currently a defendant in a private attorney general
action in the Superior court of the State of California, County if Alameda,
brought on behalf of the general public, pursuant to California's Unfair
Competition Law, Business and Professions Code Section 17200, et seq. On January
24, 2001, plaintiffs filed this action alleging that he Company's notices of
repossession served within four years proceeding the filing of the complaint did
not comply with the statutory requirements of California's Rees-Levering
Automobile Finance Act, Civil Code Section 2981, et seq. Plaintiff, who is not a
debtor on any automobile loan assigned to the Company, contends that the alleged
violations of the Rees-Levering Act and the Company's efforts to collect the
balance due after sale of the repossessed vehicles constitute unfair and
fraudulent business practices for which the plaintiff seeks relief under
Business and Professions Code Section 17203. The plaintiff seeks restitution on
behalf of debtors on automobile loans assigned to the Company for the amounts
that the Company has collected on deficiency balances remaining after the
disposition of repossessed vehicles, interest and profit thereon, correction of
account balances and credit reporting, interest and attorney's fees. The Company
has answered the complaint generally denying all of its allegations and
asserting a number of affirmative defenses. On May 20, 2002, the court found
that the Company's notices did not comply with the Rees-Levering Act, awarded
restitution of all post sale collections made on accounts that were sent notices
between January 23, 1997 and July 5, 1999 in an amount to be determined in
further proceedings, and enjoined collection of any deficiency on such accounts.
A final order has not been entered as yet and the Company is considering future
action, including the possibility of an appeal or settlement. The Company will
continue its vigorous defense of all claims. The Company does not expect this
matter to have a material adverse impact on the Company's' financial condition
or results of operations.
24
The Company has reached an agreement with the Internal Revenue Service
as the result of an examination of its tax years ended December 31, 1993, 1994
and 1995. This agreement requires changes in some tax accounting methods with
respect to the timing of income recognition. The Company has filed amended
returns for the tax years ended December 31, 1996, 1997, 1998 and 1999 utilizing
or employing the new methods. Pursuant to the agreement and the filed amended
returns, the Company has recorded an additional current tax liability and a
reduction to its deferred tax liability of $3.5 million. The agreement also
requires the Company to recognize interest income and interest expense for the
years in question. No interest amounts have been recorded, as the amounts and
timing of such items cannot be determined at this time. The Company believes
that the amount of interest owed to the Company will exceed the amount of
interest owed by the Company and that payment of these amounts will occur prior
to December 31, 2002. These amounts will be recognized as current period income
and expense, which in the aggregate may have a material positive impact on the
Company's results of operations.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 9, 2002 at
which the shareholders considered the following:
1. The election of six directors. The following table sets forth the
number of votes for and withheld with respect to each nominee.
Nominee Votes For Votes Withheld
------- --------- --------------
Brett A. Roberts 37,715,495 117,922
Donald A. Foss 37,715,495 117,922
Harry E. Craig 37,801,385 32,032
Sam M. LaFata 37,801,385 32,032
Daniel P. Leff 37,713,917 119,500
Thomas N. Tryforos 37,802,185 31,232
2. To approve a proposal to adopt the Director Stock Option Plan.
Votes For Votes Against Abstain
--------- ------------- -------
36,032,996 1,786,640 13,781
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits following the signature page.
(b) Reports on Form 8-K
The Company was not required to file a current report on Form 8-K
during the quarter ended June 30, 2002 and none were filed during
that period.
26
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/ Douglas W. Busk
-------------------------------------
Douglas W. Busk
Chief Financial Officer and Treasurer
August 14, 2002
(Principal Financial, Accounting
Officer and Duly Authorized Officer)
27
INDEX OF EXHIBITS
Exhibit
No. Description
- -------- ---------------------------------------------------------------------
4(f)(39) Amendment No. 2 dated June 11, 2002 to Amended and Restated Credit
Agreement dated June 11, 2001 among the Company, Comerica Bank,
LaSalle Bank National, Harris Trust and Savings Bank, Fifth Third
Bank, Bank of America, N.A., and National City Bank
4(f)(40) Second Amendment dated as of June 10, 2002 to the Intercreditor
Agreement dated as of December 15, 1998 among Comerica Bank, as
Collateral Agent, and various lenders and note holders
4(f)(41) Second Amendment, dated June 10, 2002 to Second Amended and Restated
Security Agreement, dated June 11, 2001 between Comerica Bank, as
Collateral Agent and the Company
99(a) Certification of Chief Executive Officer, Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99(b) Certification of Chief Financial Officer, Pursuant to 18 U.S.C.
Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.