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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 March 31, 2003
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 (IRS Employer Identification)
of incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 April 1,
2003 was 42,336,615.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements -
Three months ended March 31, 2003 and March 31, 2002 1
Condensed Consolidated Balance Sheets -
As of March 31, 2003 and December 31, 2002 2
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and March 31, 2002 3
Notes to Condensed Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 20
ITEM 4. CONTROLS AND PROCEDURES 20
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
SIGNATURE 22
CERTIFICATIONS 23
INDEX OF EXHIBITS 25
PART I. - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, except per share data) THREE MONTHS ENDED
MARCH 31,
------------------------------
2003 2002
----------- -----------
(Unaudited)
REVENUE:
Finance charges $ 24,256 $ 24,885
Lease revenue 2,336 5,159
Other income 10,337 8,814
----------- -----------
Total revenue 36,929 38,858
COSTS AND EXPENSES:
Operating expenses 16,818 16,007
Provision for credit losses 3,647 3,381
Depreciation of leased assets 1,548 2,941
Interest 1,596 2,305
----------- -----------
Total costs and expenses 23,609 24,634
----------- -----------
Operating income 13,320 14,224
Foreign exchange gain 15 16
----------- -----------
Income before provision for income taxes 13,335 14,240
Provision for income taxes 4,498 7,926
----------- -----------
Net income $ 8,837 $ 6,314
=========== ===========
Net income per common share:
Basic $ 0.21 $ 0.15
=========== ===========
Diluted $ 0.21 $ 0.15
=========== ===========
Weighted average shares outstanding:
Basic 42,328,841 42,437,481
Diluted 42,407,981 43,497,889
See accompanying notes to condensed consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) AS OF
---------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
-------------- -----------------
ASSETS: (Unaudited)
Cash and cash equivalents $ 6,372 $ 13,466
Investments -- held to maturity 99 173
Loans receivable 819,322 778,674
Allowance for credit losses (5,051) (5,497)
--------- ---------
Loans receivable, net 814,271 773,177
--------- ---------
Floor plan receivables, net 3,105 4,450
Notes receivable, net 6,053 7,554
Investment in operating leases, net 13,199 17,879
Property and equipment, net 20,057 19,951
Other assets 5,096 5,675
--------- ---------
Total Assets $ 868,252 $ 842,325
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Lines of credit $ 55,627 $ 43,555
Secured financing 32,904 58,153
Mortgage note 6,005 6,195
Capital lease obligations 1,727 1,938
Accounts payable and accrued liabilities 31,428 28,341
Dealer holdbacks, net 389,387 362,534
Deferred income taxes, net 8,762 11,667
Income taxes payable 10,826 6,094
--------- ---------
Total Liabilities 536,666 518,477
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 423 423
Paid-in capital 107,142 107,164
Retained earnings 223,694 214,857
Accumulated other comprehensive income - cumulative translation adjustment 327 1,404
--------- ---------
Total Shareholders' Equity 331,586 323,848
--------- ---------
Total Liabilities and Shareholders' Equity $ 868,252 $ 842,325
========= =========
See accompanying notes to condensed consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands) FOR THE THREE MONTHS ENDED MARCH 31,
------------------------------------
2003 2002
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 8,837 $ 6,314
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 3,647 3,381
Depreciation 1,094 830
Depreciation of leased assets 1,548 2,941
Provision (credit) for deferred income taxes (2,905) 3,107
Tax benefit from exercise of stock options - 977
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 2,868 (2,114)
Income taxes payable 4,732 2,027
Lease payment receivable 704 394
Unearned insurance premiums, insurance reserves and fees (130) (330)
Deferred dealer enrollment fees, net 219 219
Other assets 579 2,741
--------- ---------
Net cash provided by operating activities 21,193 20,487
--------- ---------
CASH FROM INVESTING ACTIVITIES:
Principal collected on loans receivable 91,921 94,532
Advances to dealers (101,596) (87,179)
Payments of dealer holdbacks (7,354) (7,776)
Operating lease acquisitions - (853)
Deferred costs from lease acquisitions - (200)
Operating lease liquidations 1,774 3,422
Decreases in floor plan receivables 1,345 668
Decrease in notes receivable 1,501 180
Purchases of property and equipment (1,200) (833)
--------- ---------
Net cash (used in) provided by investing activities (13,609) 1,961
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit 12,072 (5,812)
Proceeds from secured financings - 28,552
Repayments of secured financings (25,249) (42,584)
Principal payments under capital lease obligations (211) -
Repayment of senior notes and mortgage note (190) (178)
Repurchase of common stock (58) -
Proceeds from stock options exercised 35 3,023
--------- ---------
Net cash used in financing activities (13,601) (16,999)
--------- ---------
Effect of exchange rate changes on cash (1,077) (1,642)
--------- ---------
Net (decrease) increase in cash and cash equivalents (7,094) 3,807
Cash and cash equivalents, beginning of period 13,466 15,773
--------- ---------
Cash and cash equivalents, end of period $ 6,372 $ 19,580
========= =========
See accompanying notes to condensed consolidated financial statements.
3
CREDIT ACCEPTANCE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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, 2002 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, 2002.
Certain amounts have been reclassified to conform to the 2003 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
Pursuant to Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"), an impairment analysis is performed on the net asset value of the leasing
operation on a quarterly basis. This analysis compares the undiscounted
forecasted future net cash flows relating to Automobile Leasing to the net asset
value of this operation at the balance sheet date. 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 this
operation. Based upon management's analysis, no write down of the net asset
value of the leasing operation was necessary at March 31, 2003 and 2002. In
future periods, if management's analysis indicates that future cash flows from
the leasing operation are less than the leasing operation's net asset value,
SFAS No. 144 requires the use of a present value methodology to estimate the
fair value of the assets. This methodology would require the Company to record
an expense equal to the amount by which the net asset value of the leasing
operation exceeds the future cash flows discounted at the average rate implicit
in the portfolio of automobile leases.
3. LOANS RECEIVABLE
Retail installment contracts (referred to as "Contracts" or "Loans")
receivable consisted of the following (in thousands):
AS OF
----------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
---------------- ------------------
(Unaudited)
Gross Loans receivable $ 970,703 $ 919,022
Unearned finance charges (148,117) (136,954)
Unearned insurance premiums, insurance reserves and fees (3,264) (3,394)
---------------- -----------------
Loans receivable $ 819,322 $ 778,674
================ =================
Non-accrual Loans $ 202,864 $ 220,978
================ =================
Non-accrual Loans as a percent of Gross Loans receivable 20.9% 24.0%
================ =================
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS RECEIVABLE -- (CONCLUDED)
A summary of changes in gross Loans receivable is as follows (in
thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
---------------- ----------------
(Unaudited)
Balance, beginning of period $ 919,022 $ 906,808
Gross amount of Loans accepted 232,046 192,081
Net cash collections on Loans (115,030) (115,080)
Charge-offs (64,654) (41,835)
Currency translation (681) (4,342)
---------------- ----------------
Balance, end of period $ 970,703 $ 937,632
================ ================
A summary of the change in the allowance for credit losses is as
follows (in thousands):
THREE MONTHS ENDED MARCH 31,
----------------------------------
2003 2002
---------------- ----------------
(Unaudited)
Balance, beginning of period $ 5,497 $ 4,745
Provision for Loan losses 317 460
Charge-offs (755) (272)
Currency translation (8) (25)
---------------- ----------------
Balance, end of period $ 5,051 $ 4,908
================ ================
4. INVESTMENT IN OPERATING LEASES
The composition of net investment in operating leases consisted of the
following (in thousands):
AS OF
----------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
----------------- -----------------
(Unaudited)
Gross leased assets $ 24,469 $ 29,486
Accumulated depreciation (11,239) (12,304)
Gross deferred costs 3,259 3,956
Accumulated amortization of deferred costs (2,419) (2,706)
Lease payments receivable 1,431 2,112
---------------- ----------------
Investment in operating leases 15,501 20,544
Less: Allowance for lease vehicle losses (2,302) (2,665)
---------------- ----------------
Investment in operating leases, net $ 13,199 $ 17,879
================ ================
5
NOTES TO CONDENSED 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 MARCH 31,
-------------------------------------
2003 2002
----------------- -----------------
(Unaudited)
Balance, beginning of period $ 20,544 $ 45,750
Gross operating leases originated - 1,053
Depreciation of operating leases (1,548) (2,941)
Lease payments due 2,349 4,982
Collections on operating leases (2,587) (4,644)
Charge-offs (466) (732)
Operating lease liquidations (3,026) (5,430)
Currency translation 235 (15)
----------------- -----------------
Balance, end of period $ 15,501 $ 38,023
================= =================
A summary of the change in the allowance for lease vehicle losses (in
thousands):
THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
----------------- -----------------
(Unaudited)
Balance, beginning of period $ 2,665 $ 2,976
Provision for lease vehicle losses 654 1,459
Charge-offs (1,017) (2,024)
----------------- -----------------
Balance, end of period $ 2,302 $ 2,411
================= =================
5. DEALER HOLDBACKS AND RESERVE FOR ADVANCE LOSSES
Dealer holdbacks consisted of the following (in thousands):
AS OF
------------------------------------------
MARCH 31, 2003 DECEMBER 31, 2002
----------------- -----------------
(Unaudited)
Dealer holdbacks $ 776,195 $ 734,625
Less: advances (net of reserve of $17,878 and $15,494
at March 31, 2003 and December 31, 2002, respectively) (386,808) (372,091)
----------------- ----------------
Dealer holdbacks, net $ 389,387 $ 362,534
================= ================
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 MARCH 31,
-----------------------------------------
2003 2002
---------------- -----------------
(Unaudited)
Balance, beginning of period $ 15,494 $ 9,161
Provision for advance losses 2,676 1,462
Charge-offs (266) (565)
Currency translation (26) (49)
---------------- -----------------
Balance, end of period $ 17,878 $ 10,009
================ =================
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 using the
treasury stock method. The share effect is as follows:
THREE MONTHS ENDED MARCH 31,
----------------------------------------
2003 2002
---------------- -----------------
(Unaudited)
Weighted average common shares outstanding 42,328,841 42,437,481
Common stock equivalents 79,140 1,060,408
---------------- -----------------
Weighted average common shares and common stock equivalents 42,407,981 43,497,889
================ =================
During the three months ended March 31, 2003 and 2002, stock options to
purchase approximately 4,056,723 and 312,490 shares, respectively, were excluded
from the diluted net income per share calculation as inclusion of these options
would be anti-dilutive to the net income per share due to the relationship
between the exercise prices and the average market price of common stock during
these periods.
7. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company regularly accepts
assignments of Loans originated by affiliated dealer-partners owned by: (i) the
Company's majority shareholder and Chairman; (ii) the Company's President; and
(iii) a member of the Chairman's family. Loans accepted from these affiliated
dealer-partners were approximately $6.5 million or 2.8% of total loans accepted
and $6.9 million or 3.6% of total loans accepted for the three months ended
March 31, 2003 and 2002, respectively. Loans receivable from affiliated
dealer-partners represented approximately 2.9% and 2.8% of the gross Loans
receivable balance as of March 31, 2003 and December 31, 2002, respectively. The
Company accepts Loans from affiliated dealer-partners and nonaffiliated
dealer-partners on the same terms. Advance balances from affiliated
dealer-partners' were $10.5 million or 2.6% of total advances and $10.4 million
or 2.7% of total advances as of March 31, 2003 and December 31, 2002,
respectively.
The Company records interest income and fees from a note receivable
from the Company's President with a balance of $1.5 million as of March 31, 2003
and December 31, 2002. Total principal and interest on this note receivable is
due on April 19, 2011. Total income earned on the note receivable was $17,000
for the three months ended March 31, 2003 and 2002.
In the normal course of business, the Company records receivables from
dealer-partners for ancillary product charge backs on repossessed leased
vehicles. Charge back receivables from affiliated dealer-partners owned by the
Company's President were $14,000 and $10,000 as of March 31, 2003 and December
31, 2002, respectively.
In the normal course of business, the Company analyzes the viability of
new products and services by first offering them to a small group of
dealer-partners, which includes affiliated dealer-partners, prior to offering
them to the entire network of dealer-partners. The Company received fees for
direct mail lead generation services provided to affiliated dealer-partners
owned by the Company's majority shareholder and Chairman totaling zero and
$7,500 for the three months ended March 31, 2003 and 2002, respectively.
8. INCOME TAXES
The Company's effective tax rate was 33.7% for the three months ended
March 31, 2003 compared to 55.7% for the same period in 2002. The decrease was
primarily due to the amount recorded in 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. This decrease was partially offset
by a change in estimate in 2002 for state income tax owed as a result of the
re-characterization of income due to an Internal Revenue Service examination.
7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
9. CAPITAL TRANSACTIONS
At March 31, 2003, the Company has two stock-based compensation plans
for employees and directors. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board Opinion
25, "Accounting for Stock Issued to Employees", and related Interpretations. In
the second quarter of 2003, the Company plans to adopt the recognition and
measurement provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which requires the
Company to expense the fair market value of stock options granted to employees.
Under the retroactive restatement transition method selected by the Company as
described in Statement of Financial Accounting Standards No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"), the
Company will restate all prior periods to reflect stock-based compensation cost
under the fair value based accounting method for all employee awards granted,
modified, or settled in fiscal years beginning after December 15, 1994.
The following table illustrates the approximate effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based employee
compensation using one set of assumptions for all employees.
(Dollars in thousands, except per share data) THREE MONTHS ENDED MARCH 31,
------------------------------------------
2003 2002
---------------- ----------------
(Unaudited)
Net income, as reported $ 8,837 $ 6,314
Less: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects (244) (313)
---------------- ----------------
Net income, pro forma $ 8,593 $ 6,001
================ ================
Earnings per share:
As reported, basic $ 0.21 $ 0.15
As reported, diluted 0.21 0.15
Pro forma, basic 0.20 0.14
Pro forma, diluted 0.20 0.14
10. 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 MARCH 31,
---------------------------------------
2003 2002
---------------- ----------------
(Unaudited)
Revenue:
North America $ 30,299 $ 28,050
United Kingdom 4,001 5,319
Automobile Leasing 2,629 5,489
--------------- ----------------
Total revenue $ 36,929 $ 38,858
=============== ================
Income before provision for income taxes:
North America $ 12,019 $ 13,372
United Kingdom 1,830 1,714
Automobile Leasing (514) (846)
--------------- ----------------
Total income before provision for income taxes $ 13,335 $ 14,240
=============== ================
8
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's forecasts impact Loan pricing and structure as well
as the required reserve for advance losses. The following table presents
forecasted collection rates, advance rates, the spread (the forecasted
collection rate less the advance rate), and the percentage of the forecasted
collections which have been realized through March 31, 2003. The amounts
presented are expressed as a percent of total Loan value by year of Loan
origination.
As of March 31, 2003
-------------------------------------------------------------------------------------
Forecasted % of Forecast
Year Collection % Advance % Spread % Realized
- ---------- ------------------- --------------- ------------- --------------
1992 81% 35% 46% 100%
1993 76% 37% 39% 100%
1994 62% 42% 20% 100%
1995 56% 46% 10% 99%
1996 56% 49% 7% 99%
1997 59% 49% 10% 99%
1998 67% 50% 17% 99%
1999 72% 54% 18% 97%
2000 71% 53% 18% 91%
2001 67% 49% 18% 67%
2002 68% 46% 22% 31%
The risk of a forecasting error declines as Loans age. For example, the
risk of a material forecasting error for business written in 1995 is very small,
with 99% of the total amount forecasted already realized. In contrast, the
Company's forecast for recent Loan originations is much less precise. If the
Company produces disappointing operating results, it will likely be because the
Company overestimated future Loan performance.
The spread between the forecasted collection rate and the advance rate
reduces the Company's risk of advance losses. Because collections are applied to
advances on an individual dealer-partner basis, a wide spread does not eliminate
the risk of advance losses, but it does reduce the risk significantly.
One method for evaluating the reasonableness of the Company's forecast
is to examine the trends in forecasted collection rates over time. The following
table compares the Company's forecast as of March 31, 2003 with the forecast as
of December 31, 2002.
December 31, 2002 March 31, 2003
Year Forecasted Collection % Forecasted Collection % Variance
- --------- ----------------------------- ------------------------------ ----------
1992 81% 81% -
1993 76% 76% -
1994 62% 62% -
1995 56% 56% -
1996 57% 56% (1%)
1997 60% 59% (1%)
1998 68% 67% (1%)
1999 72% 72% -
2000 72% 71% (1%)
2001 68% 67% (1%)
2002 68% 68% -
The Company first began publishing collection forecasts in its 2001
Annual Report. Over the past five quarters, forecasted collection rates have
dropped consistently. This trend is below management's expectations and has
negatively impacted financial results. Most of the decline in forecasted
collection rates in 2002 occurred during the third and fourth quarters of 2002
when a difficult system conversion negatively impacted collection results. While
collection system performance has returned to pre-system conversion levels as
measured by call volumes and charge-off rates, the Company's collection forecast
has continued to decline. During the first quarter of 2003, post repossession
collection results (known as deficiency balance collections) declined from the
prior trend line. While the reasons for this decline are not fully understood,
the Company has incorporated this decline into its collection forecasts.
Accurately predicting future collection rates is critical to the
Company's success. The Company intends to make every possible effort to forecast
results as accurately as possible. Near-term forecasting accuracy will continue
to be a challenge until sufficient data is available to allow the variables
cited above to be more precisely understood.
The Company will continue to publish collection forecasts and allow the
precision of its estimates to be fully visible to shareholders. The impact of
the decline in collection rates on the level of impaired advances has been fully
absorbed as of quarter end. Should collection rates stabilize or increase, it is
likely lower advance provisions will be required in future periods. However,
should forecasted collection rates continue to decline, as they have in the most
recent three quarters, continued high levels of provisions will be required.
9
RESULTS OF OPERATIONS
Three Months Ended March 31, 2003 Compared to Three Months Ended March
31, 2002
The following tables present income statement data on a consolidated
basis as well as for the Company's three business segments, North America,
United Kingdom and Automobile Leasing.
Consolidated
------------
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
MARCH 31, 2003 REVENUE MARCH 31, 2002 REVENUE
------------------- ----------- --------------------- -----------
REVENUE:
Finance charges $ 24,256 65.7 % $ 24,885 64.0 %
Lease revenue 2,336 6.3 5,159 13.3
Other income 10,337 28.0 8,814 22.7
----------------- ----------- ---------------- -----------
Total revenue 36,929 100.0 38,858 100.0
COSTS AND EXPENSES:
Operating expenses 16,818 45.5 16,007 41.2
Provision for credit losses 3,647 9.9 3,381 8.7
Depreciation of leased assets 1,548 4.2 2,941 7.6
Interest 1,596 4.3 2,305 5.9
----------------- ----------- ---------------- -----------
Total costs and expenses 23,609 63.9 24,634 63.4
----------------- ----------- ---------------- -----------
Operating income 13,320 36.1 14,224 36.6
Foreign exchange gain 15 - 16 -
----------------- ----------- ---------------- -----------
Income before provision for
income taxes 13,335 36.1 14,240 36.6
Provision for income taxes 4,498 12.2 7,926 20.4
----------------- ----------- ---------------- -----------
Net income $ 8,837 23.9 % $ 6,314 16.2 %
================= =========== ================ ===========
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. Interest expense decreased to $1.6 million for the three
months ended March 31, 2003 from $2.3 million for the same period in 2002. The
decrease in interest expense was primarily the result of the impact of a
decrease in average outstanding debt. This decrease was partially offset by the
increase in the weighted average interest rate to 6.4% for the three months
ended March 31, 2003 from 4.7% for the same period in 2002, which was the result
of an increased impact of borrowing fees and costs on average interest rates due
to lower average outstanding borrowings.
10
North America
-------------
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
MARCH 31, 2003 REVENUE MARCH 31, 2002 REVENUE
-------------------- ----------- --------------------- ------------
REVENUE:
Finance charges $ 21,154 69.8 % $ 20,020 71.4 %
Other income 9,145 30.2 8,030 28.6
--------------- ----------- ---------------- ------------
Total revenue 30,299 100.0 28,050 100.0
COSTS AND EXPENSES:
Operating expenses 14,510 47.9 12,812 45.7
Provision for credit losses 2,575 8.5 516 1.8
Interest 1,184 3.9 1,367 4.9
--------------- ----------- ---------------- ------------
Total costs and expenses 18,269 60.3 14,695 52.4
--------------- ----------- ---------------- ------------
Operating income 12,030 39.7 13,355 47.6
Foreign exchange gain (loss) (11) - 17 -
--------------- ----------- ---------------- ------------
Income before provision for
income taxes 12,019 39.7 13,372 47.6
Provision for income taxes 4,227 14.0 7,758 27.7
--------------- ----------- ---------------- ------------
Net income $ 7,792 25.7 % $ 5,614 19.9 %
=============== =========== ================ ============
Finance Charges. Finance charges increased to $21.2 million for the
three months ended March 31, 2003 from $20.0 million for the same period in 2002
primarily due to an increase in the average size of the Loan portfolio. This
increase was partially offset by a reduction in the average annualized yield on
the Company's Loan portfolio to 12.0% for the three months ended March 31, 2003
from 13.0% for the same period in 2002. This decrease was primarily due to an
increase in the average initial contract term of the Company's Loan portfolio as
of March 31, 2003 compared to the same period in 2002. The following is a
summary of Loan origination volumes and dealer-partner information for the past
three years and the first quarters of 2003 and 2002:
1ST QTR 1ST QTR
(Dollars in thousands) 2000 2001 2002 2002 2003
-------- -------- -------- -------- --------
Loan originations $384,743 $659,485 $582,060 $174,543 $222,620
Number of Loans originated 47,620 62,675 50,839 16,102 18,445
Dealer-partners:
Number of active dealer-partners (1) 1,202 1,170 833 681 659
Loans originated per active dealer-partner 39.6 53.6 61.0 23.6 28.0
Average Loan size $ 8.1 $ 10.5 $ 11.4 $ 10.8 $ 12.1
(1) Active dealer-partners are dealer-partners who submitted at least
one loan during the period.
Other Income. Other income increased to $9.1 million for the three
months ended March 31, 2003 from $8.0 million for the same period in 2002
primarily due to: (i) an increase in income of $1.1 million on service contract
products offered by dealer-partners, primarily due to the increase in Loan
originations in the three months ended March 31, 2003 and (ii) interest income
of $600,000 from the Internal Revenue Service in connection with a change in tax
accounting methods that affected the characterization and timing of revenue
recognition for tax purposes. These increases were partially offset by a
decrease in income of $300,000 from secured lines of credit offered to certain
dealer-partners, as the Company continues to reduce its investment in this
product.
Operating Expenses. Operating expenses consist of salaries and wages,
general and administrative expenses, sales and marketing expenses, and a
provision for insurance and service contract claims. Operating expenses
increased to $14.5 million for the three months ended March 31, 2003 from $12.8
million for the same period in 2002 primarily due to: (i) an increase in
salaries and wages of $1.0 million resulting primarily from additions to the
Company's corporate infrastructure in 2002; (ii) an increase of $300,000 in
sales and marketing expenses due to increased sales commissions as a result of
increased unit volumes; and (iii) the 2002 reversal of $300,000 in state tax
related expense originally recorded in 2001. These increases were partially
offset by a decrease in the provision for insurance and service contract claims
of $500,000 due primarily to a reduction in the number of policies written in
2002 and the first quarter of 2003.
Provision for Credit Losses. The provision for credit losses increased
to $2.6 million for the three months ended March 31, 2003 from $500,000 for the
same period in 2002. 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 Loan portfolio and (ii) a
provision for earned but unpaid revenue on Loans which were transferred to
non-accrual status during the period. The increase in the provision for credit
losses was due to a $2.1 million increase in the provision for advance losses as
a result of a reduction in the Company's forecast of future collections on its
portfolio of Loans. (See "General" for further information regarding collection
forecasts.)
11
Provision for Income Taxes. The provision for income taxes decreased to
$4.2 million for the three months ended March 31, 2003 from $7.8 million for the
same period in 2002 due to a decrease in the effective tax rate to 35.2% for the
three months ended March 31, 2003 from 58.0% for the same period in 2002. The
reduction in the effective tax rate was due primarily to an expense of $3.6
million recorded in 2002 for estimated taxes due upon repatriation of prior
years' earnings in the United Kingdom. This decrease was partially offset by the
reversal of $634,000 in expense in 2002 due to a change in estimate of state
income tax owed.
United Kingdom
--------------
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
MARCH 31, 2003 REVENUE MARCH 31, 2002 REVENUE
---------------- ---------- ---------------- -----------
REVENUE:
Finance charges $ 3,102 77.5 % $ 4,865 91.5 %
Other income 899 22.5 454 8.5
---------------- ---------- ---------------- -----------
Total revenue 4,001 100.0 5,319 100.0
COSTS AND EXPENSES:
Operating expenses 1,737 43.4 1,937 36.4
Provision for credit losses 434 10.8 1,346 25.3
Interest - - 322 6.1
---------------- ---------- ---------------- -----------
Total costs and expenses 2,171 54.2 3,605 67.8
---------------- ---------- ---------------- -----------
Income before provision for
income taxes 1,830 45.8 1,714 32.2
Provision for income taxes 470 11.7 463 8.7
---------------- ---------- ---------------- -----------
Net income $ 1,360 34.1 % $ 1,251 23.5 %
================ ========== ================ ===========
Finance Charges. Finance charges decreased to $3.1 million for the
three months ended March 31, 2003 from $4.9 million for the same period in 2002
primarily as the result of a decrease in the average size of the Loan portfolio
due to a decrease in Loan originations. Loan originations decreased as the
result of the United Kingdom decreasing the amount advanced to dealer-partners
in an effort to improve the Company's return on capital. To a lesser extent, the
decrease in finance charges was due to a reduction in the average annualized
yield on the Company's Loan portfolio to 11.3% for the three months ended March
31, 2003 from 12.7% for the same period in 2002. This decrease was primarily due
to an increase in the average initial contract term of the Company's Loan
portfolio as of March 31, 2003 compared to the same period in 2002. Loan
origination volume declined 46.3% compared to the same period in 2002 and
increased 28.3% compared to the fourth quarter of 2002. The following is a
summary of Loan origination volumes and dealer-partner information for the past
three years and the first quarters of 2003 and 2002:
1ST QTR 1ST QTR
(Dollars in thousands) 2000 2001 2002 2002 2003
---------- --------- ----------- ---------- ----------
Loan originations $ 142,228 $ 122,817 $ 43,325 $ 17,538 $ 9,426
Number of Loans originated 10,664 9,121 3,062 1,304 605
Dealer-partners:
Number of active dealer-partners (1) 205 215 147 106 72
Loans originated per active dealer-partner 52.0 42.4 20.8 12.3 8.4
Average Loan size $ 13.3 $ 13.5 $ 14.1 $ 13.4 $ 15.6
(1) Active dealer-partners are dealer-partners who submitted at least
one loan during the period.
Other Income. Other income increased to $900,000 for the three months
ended March 31, 2003 from $500,000 for the same period in 2002 primarily due to
an increase of $700,000 in revenue under an ancillary products profit sharing
agreement with an insurance provider. This increase was partially offset by a
decrease of $300,000 in ancillary product revenue resulting from: (i) a change
in the Company's revenue recognition policy for ancillary products in the third
quarter of 2002 and (ii) a decline in
12
ancillary product unit volume due to the decline in Loan originations. The
Company recognizes income on ancillary products at the time the product is sold.
Operating Expenses. Operating expenses decreased to $1.7 million for
the three months ended March 31, 2003 from $1.9 million for the same period in
2002 primarily due to a decrease in salaries and wages of $200,000 as a result
of a reduction in staffing levels.
Provision for Credit Losses. The provision for credit losses decreased
to $400,000 for the three months ended March 31, 2003 from $1.3 million for the
same period in 2002. 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 Loan portfolio; and (ii) a
provision for earned but unpaid revenue on Loans which were transferred to
non-accrual status during the period. This decrease in the provision for credit
losses for the three months ended March 31, 2003 compared to the same period in
2002 was primarily due to a decrease of $800,000 in the provision for losses on
advances to dealer-partners due to a reduction in Loan originations during the
last four quarters and an increase in the spread between the advance rate and
the forecasted collection rate.
Provision for Income Taxes. The provision for income taxes remained
consistent at $500,000 for the three months ended March 31, 2003 and 2002 with
the impact of an increase in pre-tax profitability offset by a reduction in the
effective tax rate to 25.7% for the three months ended March 31, 2003 from 27.0%
for the same period in 2002 as a result of a restructuring of legal entities
within this business segment.
Automobile Leasing
------------------
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
MARCH 31, 2003 REVENUE MARCH 31, 2002 REVENUE
-------------------- ----------- -------------------- -----------
REVENUE:
Lease revenue $ 2,336 88.9 % $ 5,159 94.0 %
Other income 293 11.1 330 6.0
--------------- ----------- --------------- -----------
Total revenue 2,629 100.0 5,489 100.0
COSTS AND EXPENSES:
Operating expenses 571 21.7 1,258 22.9
Provision for credit losses 638 24.3 1,519 27.7
Depreciation of leased assets 1,548 58.9 2,941 53.6
Interest 412 15.7 616 11.2
--------------- ----------- --------------- -----------
Total costs and expenses 3,169 120.6 6,334 115.4
--------------- ----------- --------------- -----------
Operating loss (540) (20.6) (845) (15.4)
Foreign exchange gain (loss) 26 1.0 (1) -
--------------- ----------- --------------- -----------
Loss before credit for
income taxes (514) (19.6) (846) (15.4)
Credit for income taxes (199) (7.6) (295) (5.4)
--------------- ----------- --------------- -----------
Net loss $ (315) (12.0) % $ (551) (10.0) %
=============== =========== =============== ===========
Lease Revenue. Lease revenue decreased to $2.3 million for the three
months ended March 31, 2003 from $5.2 million for the same period in 2002
primarily due to the decrease in the dollar value of the Company's lease
portfolio. This decrease was the result of the Company's decision to stop
originating automobile leases in the first quarter of 2002.
Other Income. Other income increased, as a percent of revenue, to 11.1%
for the three months ended March 31, 2003 from 6.0% for the same period in 2002
due to an increase in gains recognized on leases terminated before their
maturity date.
Operating Expenses. Operating expenses decreased to $600,000 for the
three months ended March 31, 2003 from $1.3 million for the same period in 2002
primarily due to a decrease of $300,000 in the provision for uncollectible
receivables from dealer-partners for ancillary product charge backs on
repossessed leased vehicles.
Provision for Credit Losses. The provision for credit losses, as a
percent of revenue, decreased to 24.3% for the three months ended March 31, 2003
from 27.7% for the same period in 2002 primarily due to the decline in the
frequency of lease repossessions.
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 revenue, increased to 58.9% for the
13
three months ended March 31, 2003 from 53.6% for the same period in 2002
primarily due to a reduction in the average residual value, as a percent of
original lease value, in the lease portfolio.
Credit for income taxes. The credit for income taxes decreased to
$200,000 for the three months ended March 31, 2003 from $300,000 for the same
period in 2002 as a result of the decrease in pre-tax loss. This decrease was
partially offset by an increase in the effective tax rate to 38.7% for the three
months ended March 31, 2003 from 34.9% for the same period in 2002.
AVERAGE CAPITAL ANALYSIS
The following presentation of financial results and subsequent analysis
is based on analyzing the income statement as a percent of capital invested.
This information provides an additional perspective on the financial performance
of the Company in addition to the presentation of the Company's results as a
percent of revenue. The Company believes this information provides a useful
measurement of how effectively the Company is utilizing its capital.
Consolidated
------------
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF AVERAGE ENDED % OF AVERAGE
MARCH 31, 2003 CAPITAL (1) MARCH 31, 2002 CAPITAL (1)
-------------------- ---------------- -------------------- ----------------
REVENUE:
Finance charges $ 24,256 21.1 % $ 24,885 19.2 %
Lease revenue 2,336 2.0 5,159 4.0
Other income 10,337 9.0 8,814 6.8
--------------- ---------------- --------------- ----------------
Total revenue 36,929 32.1 38,858 30.0
COSTS AND EXPENSES:
Operating expenses 16,818 14.6 16,007 12.3
Provision for credit losses 3,647 3.2 3,381 2.6
Depreciation of leased assets 1,548 1.3 2,941 2.3
Interest 1,596 1.4 2,305 1.8
--------------- ---------------- --------------- ----------------
Total costs and expenses 23,609 20.5 24,634 19.0
--------------- ---------------- --------------- ----------------
Operating income 13,320 11.6 14,224 11.0
Foreign exchange gain 15 - 16 -
--------------- ---------------- --------------- ----------------
Income before provision for
income taxes 13,335 11.6 14,240 11.0
Provision for income taxes 4,498 3.9 7,926 6.1
--------------- ---------------- --------------- ----------------
Net income $ 8,837 7.7 % $ 6,314 4.9 %
=============== ================ =============== ================
Average capital (1) $ 460,209 $ 519,653
Return on capital (2)
North America 8.9% 6.6%
United Kingdom 8.5% 6.4%
Automobile leasing (1.6%) (1.7%)
Consolidated 8.6% 6.0%
(1) Average capital is equal to the average amount of debt and equity during
the period, calculated using an average of the monthly outstanding
balances prepared in accordance with generally accepted accounting
principles in the United States of America ("GAAP"). For purposes of
computing average capital, the Company has added to shareholders' equity
as reported under GAAP amounts representing the average options
outstanding for the period multiplied by the weighted average exercise
price. See "Stock Options." The calculation of average capital follows:
(Dollars in thousands) THREE MONTHS ENDED MARCH 31,
---------------------------------------
2003 2002
----------------- ----------------
Average debt $ 99,251 $ 192,716
Average stockholders' equity 327,740 292,244
Average stock option investment 33,218 34,693
----------------- ----------------
Total average stockholders' equity 360,958 326,937
----------------- ----------------
Average capital $ 460,209 $ 519,653
================= ================
14
(2) Return on capital is equal to net operating profit after-tax (net income
plus interest expense after-tax) divided by average capital as follows:
(Dollars in thousands) THREE MONTHS ENDED MARCH 31,
-------------------------------------
2003 2002
--------------- ----------------
Net income $ 8,837 $ 6,314
Interest expense $ 1,596 $ 2,305
Tax effect (1 - tax rate) 65.0% 65.7%
--------------- ----------------
Interest expense after-tax $ 1,038 $ 1,514
--------------- ----------------
Net operating profit after-tax $ 9,875 $ 7,828
=============== ================
Average capital $ 460,209 $ 519,653
Return on capital 8.6% 6.0%
RETURN ON CAPITAL ANALYSIS
The following presents the Company's return on capital excluding
non-recurring adjustments:
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
------------------ -------------------
Return on capital
North America 8.5% (1) 9.3% (2)
United Kingdom 8.5% 6.4%
Automobile leasing (1.6%) (1.7%)
Consolidated 8.2% (1) 8.0% (2)
Excludes the following:
(1) A $400,000 after-tax non-recurring adjustment relating to interest
income from the Internal Revenue Service.
(2) Two non-recurring tax related adjustments that reduced net income by
$2,601,000.
Excluding the impact of non-recurring adjustments, the Company's return
on capital increased to 8.2% for the three months ended March 31, 2003 from 8.0%
for the same period in 2002. The increase in the return on capital was primarily
a result of (i) an increase in the return on capital in the United Kingdom, and
(ii) a reduction in the percentage of total capital allocated to Automobile
Leasing, the business unit with the lowest return on capital. These factors were
partially offset by a reduction in the return on capital in North America, the
Company's largest business unit.
In North America the return on capital, after non-recurring
adjustments, declined to 8.5% for the three months ended March 31, 2003 compared
to 9.3% for the same period in 2002 primarily due to an increase in the
provision for advance losses as a result of a decline in forecasted collection
rates and an increase in operating expenses due to an increase in corporate
infrastructure during the last three quarters of 2002. This was partially offset
by an increase in revenue as a percent of total capital for the three months
ended March 31, 2003 compared to the same period in 2002. The increase was due
to (i) an increase in ancillary product revenue due to an increase in Loan
originations during the quarter, and (ii) an increase in finance charges, as a
percent of total capital, due to a reduction in the amount advanced to
dealer-partners as a percent of the gross Loan amount.
The return on capital in the United Kingdom increased to 8.5% for the
three months ended March 31, 2003 from 6.4% for the same period in 2002
primarily due to (i) income under a profit sharing arrangement with an ancillary
product provider, and (ii) a reduction in the provision for advance losses. This
was partially offset by a reduction in finance charges, as a percent of average
capital, due to an increase in the average initial contract term in the
Company's Loan portfolio.
ECONOMIC PROFIT
Economic profit or loss represents net operating profit after-tax less
an imputed cost of equity. Management has assumed a cost of equity equal to 10%
of average shareholders' equity in its economic profit or loss calculations.
Economic profit or loss is a measurement of how efficiently the Company utilizes
its capital. The Company has used economic profit internally since January 1,
2000 to evaluate its performance. The Company's goal is to maximize the amount
of economic profit per share generated. The Company's economic loss decreased to
($187,000), or ($0.00) per adjusted share, for the three months ended March 31,
2003 compared to ($1,860,000), or ($0.04) per adjusted share, for the same
period in 2002.
15
The following presents the calculation of the Company's economic loss
for the periods indicated (dollars in thousands, except per share data):
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
------------- ---------------
ECONOMIC LOSS
Net income (1) $ 8,837 $ 6,314
Imputed cost of equity at 10% (2) (9,024) (8,174)
------------- ---------------
Total economic loss $ (187) $ (1,860)
Adjusted weighted average shares outstanding (3) 46,832,114 47,336,090
Economic loss per share (4) $ (0.00) $ (0.04)
(1) Consolidated net income from the Consolidated Statement of Income.
See "Item 1. Condensed Consolidated Financial Statements."
(2) Cost of equity is equal to 10% (on an annual basis) of total average
shareholders' equity, which was $360,958,000 and $326,937,000 for the
three months ended March 31, 2003 and 2002, respectively, calculated as
described in the Average Capital Analysis.
(3) Includes actual weighted average shares outstanding plus total stock
options outstanding. The calculation of adjusted weighted average
shares outstanding follows:
THREE MONTHS ENDED MARCH 31,
-----------------------------------
2003 2002
---------------- ----------------
Weighted average shares outstanding 42,328,841 42,437,481
Stock options outstanding 4,503,273 4,898,609
---------------- ----------------
Adjusted weighted average shares outstanding 46,832,114 47,336,090
================ ================
(4) Economic loss per share equals the economic loss divided by the
adjusted weighted average shares outstanding.
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. Beginning in the second quarter of 2003, the
Company plans to adopt the recognition and measurement provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which requires the Company to expense the fair
market value of stock options granted to employees.
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 accounting alternatives. In the Company's
opinion, SFAS No. 123 represents the best alternative under GAAP for recording
the cost associated with stock options. However, the Company believes that 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, the Company has developed the following
practices regarding stock options:
- Beginning in 2002, options are issued only after shares have first
been repurchased in the open market. In all cases, the option is
priced at or above the higher of the fair market value on the date
of grant and the average price of the repurchased shares. For
shareholders, the impact of options therefore is that 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, 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 Company's reported 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.
16
First, the tax benefits of future option exercises 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 practice of repurchasing shares to cover option grants has
evolved over time. To date the Company has repurchased shares
covering all options granted since 1995. Because the Company's
option program pre-dates the current practice of repurchasing
shares, as of March 31, 2003 options to purchase approximately 1.6
million shares granted prior to 1995 have not been covered by
repurchases. Depending upon capital availability and other
investment opportunities, the Company may repurchase shares covering
some or all of these uncovered options. For purposes of computing
economic profit, the Company includes a capital charge as if these
options had been repurchased at the option exercise price at the
date of grant.
The Company views options as a significant but necessary cost. In the
Company's opinion, this cost is accurately measured and charged to economic
profit per share, the performance measure on which the Company's management is
evaluated. The Company believes the ability to measure the cost of options
enhances the probability that the Company's option program will produce
favorable results for shareholders.
CRITICAL ACCOUNTING POLICIES
The Company's condensed consolidated financial statements are prepared
in accordance with GAAP. The preparation of these financial statements requires
the Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates its estimates, including those related to the 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 three months ended March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flows from operating
activities, collections on 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 Loans and for the payment of dealer holdbacks to
dealer-partners who have repaid their advance balances.
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
Loan originations. In the three months ended March 31, 2003, the Company
experienced an increase in Loan originations compared to the same period in 2002
primarily due to an increase in the number of Loans per active dealer-partner,
partially offset by a reduction in the number of active dealer-partners. The
Company expects Loan originations to increase in future periods and, to the
extent this trend does continue, the Company will experience an increase in its
need for capital.
The Company currently finances its operation through: (i) bank line of
credit facilities; (ii) secured financings; (iii) a mortgage Loan; (iv) and
capital lease obligations.
Line of Credit Facilities -- At March 31, 2003, the Company had a
$135.0 million credit agreement with a commercial bank syndicate. The facility
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 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 (4.25% as
of March 31, 2003). 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 condensed consolidated financial statements and related
notes), less a hedging reserve (not exceeding $1.0 million), the amount of
letters of credit issued under the line of credit, and the amount of other debt
secured by the collateral which secures the line of credit. Currently, the
borrowing base limitation does not inhibit the Company's borrowing ability under
the line of credit. The credit agreement has certain restrictive covenants,
including a minimum required ratio of the Company's assets to debt, its
liabilities to tangible net worth, and its
17
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 March 31, 2003, there was approximately $55.6 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 its Canadian operation.
Secured Financing -- During 2002, the Company's wholly-owned
subsidiary, CAC Warehouse Funding Corp. ("Warehouse Funding"), completed a
secured financing transaction with another institutional investor, in which
Warehouse Funding received $75.0 million in financing. In connection with this
transaction, the Company contributed dealer-partner advances having a carrying
amount of approximately $109.0 million to Warehouse 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 financing was used by the Company to reduce outstanding borrowings under
the Company's credit facility. The secured financing creates loans for which
Warehouse Funding is liable and are non-recourse to the Company, even though
Warehouse 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 75 basis points with a maximum rate of 6.25%. As Warehouse
Funding is organized as a separate legal entity from the Company, assets of
Warehouse Funding (including the contributed dealer-partner advances) will not
be available to satisfy the general obligations of the Company. Substantially
all the assets of Warehouse Funding have been encumbered to secure Warehouse
Funding's obligations to its creditors. This financing is secured primarily by
Warehouse 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 Loans receivable for the secured
financing. 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 Loans receivable until Warehouse Funding's underlying indebtedness is paid
in full either through collections on the related Loans or through a prepayment
of the indebtedness.
The Company has completed a total of eight secured financing
transactions, seven of which have been repaid in full. Information about the
currently outstanding secured financing transaction 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 March 31, 2003 March 31, 2003 Balance
- -------------- ----------------- ------------- -------------------- ---------------------- ----------------
2002-A October 2002 $75,000 $32,904 * $89,209 43.9%
* Bears an interest rate equal to the commercial paper rate plus 75 basis
points (2.2% as of March 31, 2003) and is anticipated to fully amortize
within 4 months.
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.
Capital Lease Obligations -- As of March 31, 2003, the Company has nine
capital lease obligations outstanding related to various computer equipment,
with monthly payments totaling $81,728. These capital lease obligations bear
interest at rates ranging from 4.45% to 9.22% and have maturity dates between
June 2004 and January 2006. The Company believes that capital lease obligation
payments can be made from cash resources available to the Company at the time
such payments are due.
The Company's total balance sheet indebtedness decreased to $96.3
million at March 31, 2003 from $109.8 million at December 31, 2002. In addition
to the balance sheet indebtedness as of March 31, 2003, the Company also has
contractual obligations resulting in future minimum payments under operating
leases. A summary of the total future contractual obligations requiring
repayments is as follows (in thousands):
18
PERIOD OF REPAYMENT
--------------------------------------------------
CONTRACTUAL OBLIGATIONS < 1 YEAR 1-3 YEARS > 3 YEARS TOTAL
------------- --------------- ------------- --------------
Secured financing $ 32,904 $ - $ - $ 32,904
Lines of credit 55,627 - - 55,627
Mortgage loan 790 5,215 - 6,005
Capital lease obligations 884 619 224 1,727
Non-cancelable operating lease obligations 369 427 320 1,116
------------- --------------- ------------- --------------
Total contractual cash obligations $ 90,574 $ 6,261 $ 544 $ 97,379
============= =============== ============= ==============
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 1.0 million 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 1.0 million shares. As of March 31,
2003, the Company has repurchased approximately 5.0 million shares of the 6.0
million shares authorized to be repurchased under this program at a cost of
$30.7 million. The 6.0 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. See "--Stock Options"
for a description of the relationship between stock repurchases by the Company
and the granting of stock options.
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.
FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements in this report and may
make such statements in future filings with the Securities and Exchange
Commission. It may also make forward-looking statements in its press releases or
other public or shareholder communications. The Company's forward-looking
statements are subject to risks and uncertainties and include information about
its expectations and possible or assumed future results of operations. When the
Company uses any of the words "believes," "expects," "anticipates," "estimates"
or similar expressions, it is making forward-looking statements.
The Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995 for all of its forward-looking statements. These forward-looking
statements represent the Company's outlook only as of the date of this report.
While the Company believes that its forward-looking statements are reasonable,
actual results could differ materially since the statements are based on our
current expectations, which are subject to risks and uncertainties. Factors that
might cause such a difference, without limitation, include the following:
- increased competition from traditional financing sources and from
non-traditional lenders,
- the unavailability of funding at competitive rates of interest,
- the Company's potential inability to continue to obtain third party
financing on favorable terms,
- the Company's potential inability to generate sufficient cash flow
to service its debt and fund its future operations,
- adverse changes in applicable laws and regulations,
- adverse changes in economic conditions,
- adverse changes in the automobile or finance industries or in the
non-prime consumer finance market,
- the Company's potential inability to maintain or increase the volume
of Loans,
- the Company's potential inability to accurately forecast and
estimate future collections and historical collection rates,
- the Company's potential inability to accurately estimate the
residual values of the lease vehicles,
- an increase in the amount or severity of litigation against the
Company,
- the loss of key management personnel,
- the effect of terrorist attacks and potential attacks, and
- the effect of war in Iraq.
Other factors not currently anticipated by management may also
materially and adversely affect the Company's results of operations. The Company
does not undertake, and expressly disclaims any obligation, to update or alter
its forward-looking statements whether as a result of new information, future
events or otherwise, except as required by applicable law.
19
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, 2002 for a complete discussion of the Company's market risk. There
have been no material changes to the market risk information included in the
Company's 2002 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 of the
Securities Exchange Act of 1934. Based upon that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective to cause the material
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 to be recorded, processed,
summarized and reported within the time periods specified in the Commission's
rules and forms. There have been no significant changes in the Company's
internal controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
20
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On March 11, 2003, the Board of Directors approved amendments to
the Company's Bylaws modifying the notice provisions in Section
5.01 and 6.01 and the description of the duties of the various
officers in Article VIII. The Amended and Restated Bylaws are
attached to this Form 10-Q as an exhibit.
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 three months ended March 31, 2003 and none were filed
during that period.
21
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
April 24, 2003
(Principal Financial, Accounting Officer and
Duly Authorized Officer)
22
CERTIFICATIONS
I, Brett A. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Credit
Acceptance Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
April 24, 2003
/s/ Brett A. Roberts
- --------------------
Chief Executive Officer
23
I, Douglas W. Busk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Credit
Acceptance Corporation (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
April 24, 2003
/s/ Douglas W. Busk
- -------------------
Chief Financial Officer
24
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------
3(b) Bylaws of the Company, as amended
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.
25