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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, 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 of (IRS Employer Identification)
incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is 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 July 1,
2003 was 42,388,148.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements -
Three and six months ended June 30, 2003 and June 30, 2002 1
Consolidated Balance Sheets -
As of June 30, 2003 and December 31, 2002 2
Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and June 30, 2002 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 13
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 31
ITEM 4. CONTROLS AND PROCEDURES 31
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32
SIGNATURE 33
INDEX OF EXHIBITS 34
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,
------------------------------ ------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
Revenue:
Finance charges $ 26,431 $ 25,522 $ 50,687 $ 50,407
Lease revenue 1,784 4,428 4,120 9,587
Ancillary product income 4,233 3,794 9,966 7,391
Premiums earned 757 1,054 1,512 2,494
Other income 2,767 3,791 6,616 7,568
----------- ----------- ----------- -----------
Total revenue 35,972 38,589 72,901 77,447
----------- ----------- ----------- -----------
Costs and expenses:
General and administrative 5,198 6,383 10,961 12,100
Salaries and wages 8,687 7,448 17,204 14,952
Sales and marketing 2,483 1,809 4,660 3,590
Stock-based compensation expense 1,428 565 1,803 1,047
Provision for insurance and warranty claims 209 570 308 1,133
Provision for credit losses 2,863 3,562 6,772 7,077
Depreciation of leased assets 1,167 2,566 2,715 5,507
United Kingdom asset impairment expense 10,493 - 10,493 -
Interest 1,401 2,457 2,997 4,762
----------- ----------- ----------- -----------
Total costs and expenses 33,929 25,360 57,913 50,168
----------- ----------- ----------- -----------
Operating income 2,043 13,229 14,988 27,279
Foreign exchange gain 14 11 29 27
----------- ----------- ----------- -----------
Income before provision for income taxes 2,057 13,240 15,017 27,306
Provision for income taxes 1,049 4,774 5,416 12,643
----------- ----------- ----------- -----------
Net income $ 1,008 $ 8,466 $ 9,601 $ 14,663
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.02 $ 0.20 $ 0.23 $ 0.35
=========== =========== =========== ===========
Diluted $ 0.02 $ 0.19 $ 0.23 $ 0.34
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 42,321,170 42,535,312 42,317,443 42,486,667
Diluted 42,868,265 43,821,716 42,629,844 43,684,127
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) AS OF
------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
--------------- -------------------
ASSETS: (Unaudited)
Cash and cash equivalents $ 22,068 $ 13,466
Investments-- held to maturity 456 173
Loans receivable 857,502 778,674
Allowance for credit losses (5,100) (5,497)
--------- ---------
Loans receivable, net 852,402 773,177
--------- ---------
Floorplan receivables 2,964 4,450
Lines of credit 2,817 3,655
Notes receivable (including $1,548 and $1,513 from affiliates as of June 30, 2003
and December 31,2002, respectively) 2,074 3,899
Investment in operating leases 9,328 17,879
Property and equipment, net 18,355 19,951
Other assets 7,077 5,166
--------- ---------
Total Assets $ 917,541 $ 841,816
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Lines of credit $ 8,305 $ 43,555
Secured financing 100,000 58,153
Mortgage note 5,813 6,195
Capital lease obligations 1,538 1,938
Accounts payable and accrued liabilities 33,034 28,341
Dealer holdbacks, net 417,043 362,534
Deferred income taxes, net 4,010 10,058
Income taxes payable 11,700 6,094
--------- ---------
Total Liabilities 581,443 516,868
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 422 423
Paid-in capital 124,446 124,263
Retained earnings 208,459 198,858
Accumulated other comprehensive income - cumulative translation adjustment 2,771 1,404
--------- ---------
Total Shareholders' Equity 336,098 324,948
--------- ---------
Total Liabilities and Shareholders' Equity $ 917,541 $ 841,816
========= =========
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands) SIX MONTHS ENDED JUNE 30,
--------------------------------
2003 2002
------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 9,601 $ 14,663
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 6,772 7,077
Depreciation 2,231 2,735
Depreciation of leased assets 2,715 5,507
Loss on retirement of property and equipment - 276
Provision (credit) for deferred income taxes (6,048) 9,109
Tax benefit from exercise of stock options 86 1,555
Stock-based compensation 1,566 (692)
United Kingdom asset impairment 10,493 --
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 4,309 (1,948)
Income taxes payable 5,606 683
Lease payment receivable 1,183 535
Unearned insurance premiums, insurance reserves and fees (223) (492)
Deferred dealer enrollment fees, net 384 43
Other assets (1,911) 3,088
--------- ---------
Net cash provided by operating activities 36,764 42,139
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on loans receivable 174,957 170,648
Advances to dealers (200,121) (155,711)
Payments of dealer holdbacks (15,394) (16,273)
Operating lease acquisitions - (874)
Deferred costs from lease acquisitions - (201)
Operating lease liquidations 3,446 5,792
Decrease (increase) in floor plan receivables 1,209 (394)
Decrease in lines of credit 838 819
Decrease (increase) in notes receivable -- affiliates (35) 28
Decrease in notes receivable -- non-affiliates 1,860 351
Purchases of property and equipment (634) (3,168)
--------- ---------
Net cash (used in) provided by investing activities 33,874 1,017
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit (35,250) 18,057
Proceeds from secured financings 100,000 28,552
Repayments of secured financings (58,153) (85,847)
Principal payments under capital lease obligations (400) 556
Repayment of senior notes and mortgage note (382) (356)
Repurchase of common stock (1,828) (6,325)
Proceeds from stock options exercised 358 3,470
--------- ---------
Net cash (used in) provided by financing activities 4,345 (41,893)
--------- ---------
Effect of exchange rate changes on cash 1,367 3,658
--------- ---------
Net increase in cash and cash equivalents 8,602 4,921
Cash and cash equivalents, beginning of period 13,466 15,773
--------- ---------
Cash and cash equivalents, end of period $ 22,068 $ 20,694
========= =========
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, 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 Annual
Report on Form 10-K for the year ended December 31, 2002 for Credit Acceptance
(the "Company").
Certain amounts have been reclassified to conform to the 2003
presentation, including reclassification due to the Company's change in segment
disclosures. See Note 11. Additionally, the results for prior periods were
restated related to the Company's adoption of the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123") under the retroactive restatement
method selected by the Company as described in SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure." See Note 10.
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 SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", an impairment analysis is performed on the net asset value
of the United Kingdom, Canada, and Automobile Leasing operations on a quarterly
basis. This analysis compares the undiscounted forecasted future net cash flows
(including servicing expenses and any payments due dealers under servicing
agreements) of each operation to the operation's net asset value at the balance
sheet date. The impairment analysis for operations which are being liquidated
reduces the future cash flows by the amount of servicing expenses (under SFAS
No. 144), while the impairment analysis for advances relating to continuing
operations does not (under SFAS No. 144). If this analysis indicates that the
asset is impaired, the Company is required to write down the value of the asset
to the present value of the forecasted net cash flows.
United Kingdom -- Effective June 30, 2003, the Company decided to stop
originating retail installment contracts (referred to as "Contracts" or "Loans")
in the United Kingdom. In analyzing the expected cash flows from this operation,
the Company has assumed lower collection rates than were assumed before the
decision to liquidate. These lower collection rates reflect uncertainties (such
as potentially higher employee turnover or reduced morale) in the servicing
environment that may arise as a result of the decision to liquidate. As a
result, the assets were deemed to be impaired and the Company recorded an
after-tax expense of $6.4 million to reduce the carrying value of the
operation's dealer-partner advances to the present value (using a discount rate
of 13%) of the forecasted cash flows relating to the dealer-partner advances
less estimated future servicing expenses.
Canada -- Effective June 30, 2003, the Company decided to stop
originating Loans in Canada. Since Loans originated in Canada are serviced in
the United States, the Company evaluated cash flows related to the Canadian
operation based on the same collection rate assumptions as were used before the
decision to liquidate. Based upon management's analysis, no write down of the
net asset value of the Canadian operation was necessary at June 30, 2003.
Leasing -- Effective January 1, 2002, the Company decided to stop
originating automobile leases. Based upon management's analysis, no write down
of the net asset value of the leasing operation was necessary at June 30, 2003.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACCOUNTING STANDARDS -- (CONTINUED)
In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal Activities," which
nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in Restructuring)." SFAS No. 146 requires a
liability for a cost associated with an exit or disposal activity to be
recognized and measured initially at its fair value in the period in which the
liability is incurred, rather than at the time of commitment to an exit plan.
The Company adopted this standard for exit or disposal activities initiated
after December 31, 2002. As a result of the Company's decision to exit the
United Kingdom business, the Company recognized: (i) $300,000 after-tax increase
in salaries and wages resulting from employee severance expenses and (ii)
$100,000 after-tax reduction in other income due to a refund of profit sharing
income on ancillary products to an ancillary product provider which was based on
volume targets no longer attainable due to the decision to stop Loan
originations. As of June 30, 2003, the remaining liability for these expenses
was $200,000. The Company may record an additional liability for payment of
future lease obligations under a rental agreement through September 2007 once
the Company stops using the office space in the United Kingdom. The Company
expects to stop using the United Kingdom office space in the fourth quarter of
2005 or first quarter of 2006.
3. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
AS OF
------------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Gross Loans receivable $ 1,015,773 $ 919,022
Unearned finance charges (155,100) (136,954)
Unearned insurance premiums, insurance reserves and fees (3,171) (3,394)
----------- -----------
Loans receivable $ 857,502 $ 778,674
=========== ===========
Non-accrual Loans $ 202,451 $ 220,978
=========== ===========
Non-accrual Loans as a percent of gross Loans receivable 19.9% 24.0%
=========== ===========
A summary of changes in gross Loans receivable is as follows (in
thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
Balance, beginning of period $ 970,703 $ 937,632 $ 919,022 $ 906,808
Gross amount of Loans accepted 206,859 146,869 438,905 338,950
Net cash collections on Loans (112,533) (111,383) (227,563) (226,463)
Charge-offs (55,568) (39,634) (120,222) (81,469)
Currency translation 6,312 10,686 5,631 6,344
----------- ----------- ----------- -----------
Balance, end of period $ 1,015,773 $ 944,170 $ 1,015,773 $ 944,170
=========== =========== =========== ===========
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. LOANS RECEIVABLE -- (CONCLUDED)
A summary of the change in the allowance for credit losses is as
follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Balance, beginning of period $ 5,051 $ 4,909 $ 5,497 $ 4,745
Provision for Loan losses 833 491 1,150 951
Charge-offs (830) (461) (1,585) (733)
Currency translation 46 87 38 63
------- ------- ------- -------
Balance, end of period $ 5,100 $ 5,026 $ 5,100 $ 5,026
======= ======= ======= =======
Loans receivable are collateralized by the related vehicles, with the
Company having the right to repossess the vehicle in the event that the consumer
defaults on the payment terms of the Loan. Repossessed collateral is valued at
the lower of the carrying amount of the receivable or estimated fair value, less
estimated costs of disposition, and is classified in Loans receivable on the
balance sheets. At June 30, 2003 and December 31, 2002, repossessed assets
totaled approximately $6.3 million and $8.6 million, respectively. The Company's
policy for non-accrual Loans is 90 days measured on a recency basis (no payments
received for 90 days). The Company charges-off delinquent Loans at nine months
on a recency basis.
4. FLOORPLAN RECEIVABLES AND LINES OF CREDIT
A summary of the change in the allowance for floorplan receivables and
lines of credit losses is as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- -------------------------
2003 2002 2003 2002
------- ------- ------- -------
Balance, beginning of period $ 1,323 $ 1,945 $ 1,041 $ 1,827
Provision for credit losses 14 392 277 526
Charge-offs (990) -- (961) --
Currency translation 10 22 -- 6
------- ------- ------- -------
Balance, end of period $ 357 $ 2,359 $ 357 $ 2,359
======= ======= ======= =======
5. INVESTMENT IN OPERATING LEASES
The composition of investment in operating leases consisted of the
following (in thousands):
AS OF
---------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Gross leased assets $ 17,767 $ 26,821
Accumulated depreciation (9,978) (12,304)
Gross deferred costs 2,635 3,956
Accumulated amortization of deferred costs (2,075) (2,706)
Lease payments receivable 979 2,112
-------- --------
Investment in operating leases $ 9,328 $ 17,879
======== ========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. 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,
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Balance, beginning of period $ 13,312 $ 35,743 $ 18,355 $ 43,470
Gross operating leases originated - 22 - 1,075
Depreciation of operating leases (1,167) (2,566) (2,715) (5,507)
Lease payments due 1,840 4,415 4,189 9,397
Collections on operating leases (2,002) (3,998) (4,589) (8,641)
Charge-offs (318) (559) (783) (1,291)
Operating lease liquidations (2,589) (4,087) (5,616) (9,517)
Currency translation 252 276 487 260
-------- -------- -------- --------
Balance, end of period $ 9,328 $ 29,246 $ 9,328 $ 29,246
======== ======== ======== ========
6. DEALER HOLDBACKS AND RESERVE FOR ADVANCE LOSSES
Dealer holdbacks consisted of the following (in thousands):
AS OF
----------------------------------
JUNE 30, 2003 DECEMBER 31, 2002
------------- -----------------
Dealer holdbacks $ 810,741 $ 734,625
Less: advances (net of reserve of $19,361 and $15,494
at June 30, 2003 and December 31, 2002, respectively) (393,698) (372,091)
--------- ---------
Dealer holdbacks, net $ 417,043 $ 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2003 2002 2003 2002
-------- -------- -------- --------
Balance, beginning of period $ 17,878 $ 10,009 $ 15,494 $ 9,161
Provision for advance losses 1,463 1,368 4,139 2,830
Charge-offs (136) (1,409) (402) (1,974)
Currency translation 156 229 130 180
-------- -------- -------- --------
Balance, end of period $ 19,361 $ 10,197 $ 19,361 $ 10,197
======== ======== ======== ========
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Weighted average common shares outstanding 42,321,170 42,535,312 42,317,443 42,486,667
Common stock equivalents 547,095 1,286,404 312,401 1,197,460
------------- ------------- ------------- -------------
Weighted average common shares and common stock equivalents 42,868,265 43,821,716 42,629,844 43,684,127
============= ============= ============= =============
The diluted net income per share calculation excludes stock options to
purchase approximately 1,041,309 shares and 1,657,430 shares in the three and
six months ended June 30, 2003, respectively, and 232,030 shares and 280,193
shares in the same periods in 2002 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.
8. 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 $5.4 million and $11.8 million or 2.6% and
2.7%, respectively, of total Loans accepted for the three and six months ended
June 30, 2003, respectively, and $4.3 million and $9.7 million or 2.9%,
respectively, of total Loans accepted for the same periods in 2002. Loans
receivable from affiliated dealer-partners represented approximately 2.9% and
2.8% of the gross Loans receivable balance as of June 30, 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 $10.7 million or 2.7% of total advances and
$10.4 million or 2.8% of total advances as of June 30, 2003 and December 31,
2002, respectively.
The Company records interest income from unsecured notes receivable
from the Company's President with a total balance of $1.5 million as of June 30,
2003 and December 31, 2002. The note bears interest at a rate of 5.22% with
interest and principal due on April 19, 2011. Total income earned on the note
receivable was $17,000 and $35,000 for the three and six months ended June 30,
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 $10,000 as of June 30, 2003 and December 31, 2002.
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 $19,000 and
$27,000 for the three and six months ended June 30, 2002, respectively. The
Company did not provide these services to affiliated dealer-partners in 2003.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES
The Company's effective tax rate was 51.0% and 36.1% for the three and
six months ended June 30, 2003 compared to 36.0% and 46.3% for the same periods
in 2002. Detail by business unit follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Income (loss) before provision (credit) for income taxes:
United States $ 13,147 $ 11,704 $ 24,658 $ 24,362
United Kingdom (10,963) 1,792 (9,212) 3,415
Automobile Leasing (252) (519) (766) (1,365)
Other 125 263 337 894
---------------- ---------------- ---------------- ----------------
Total income before provision for income taxes $ 2,057 $ 13,240 $ 15,017 $ 27,306
================ ================ ================ ================
Provision (credit) for income taxes:
United States $ 4,444 $ 4,384 $ 8,477 $ 11,880
United Kingdom (3,369) 496 (2,924) 932
Automobile Leasing (99) (214) (298) (509)
Other 73 108 161 340
---------------- ---------------- ---------------- ----------------
Total provision for income taxes $ 1,049 $ 4,774 $ 5,416 $ 12,643
================ ================ ================ ================
Effective tax rate:
United States 33.8% 37.5% 34.4% 48.8%
United Kingdom 30.7% 27.7% 31.7% 27.3%
Automobile Leasing 39.3% 41.2% 38.9% 37.3%
Other 58.4% 41.1% 47.8% 38.0%
---------------- ---------------- ---------------- ----------------
Total effective tax rate 51.0% 36.0% 36.1% 46.3%
================ ================ ================ ================
The changes in the effective tax rate are attributable to changes in the
provision (credit) for income taxes in the United States, United Kingdom,
Automobile Leasing, and Other segments, which are discussed for each segment in
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
-9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
10. CAPITAL TRANSACTIONS
At June 30, 2003, the Company has two stock-based compensation plans
for employees and directors. Prior to June 30, 2003, the Company accounted for
those plans under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and
related Interpretations. In the second quarter of 2003, the Company adopted the
fair value recognition and measurement provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure" for stock-based employee
compensation. Under the retroactive restatement transition method selected by
the Company described in SFAS No. 148, the Company restated all prior periods to
reflect the stock-based compensation expense that would have been recognized had
the recognition provisions of SFAS No. 123 been applied to all awards granted to
employees or directors after January 1, 1995. The following table summarizes the
reported and restated results:
(Dollars in thousands) 2002 2001 2000 1999
---------------------- --------------------- --------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
REVENUE:
Finance charges $ 97,744 $ 97,744 $ 90,169 $ 90,169 $ 80,580 $ 80,580 $ 76,896 $ 76,896
Lease revenue 16,101 16,101 21,853 21,853 13,019 13,019 1,034 1,034
Ancillary product income 15,620 15,620 11,920 11,920 6,987 6,987 5,720 5,720
Premiums earned 4,512 4,512 6,572 6,572 9,467 9,467 10,389 10,389
Other income 20,357 20,357 16,815 16,815 13,558 13,558 21,789 21,789
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenue 154,334 154,334 147,329 147,329 123,611 123,611 115,828 115,828
COSTS AND EXPENSES:
General and administrative 25,274 25,274 21,365 21,365 22,119 22,119 26,205 26,205
Salaries and wages 29,042 29,042 27,170 27,170 21,232 21,232 23,315 23,315
Sales and marketing 7,623 7,623 7,685 7,685 5,790 5,790 5,355 5,355
Stock-based compensation expense 14 2,072 379 1,755 - 1,955 242 3,252
Provision for insurance and warranty claims 1,861 1,861 1,544 1,544 2,984 2,984 3,498 3,498
Provision for credit losses 23,212 23,212 13,594 13,594 12,051 12,051 56,932 56,932
Depreciation of leased assets 9,669 9,669 12,485 12,485 7,004 7,004 569 569
Valuation adjustment on retained interest
in securitization - - - - - - 13,517 13,517
Interest 9,058 9,058 14,688 14,688 16,431 16,431 16,576 16,576
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses 105,753 107,811 98,910 100,286 87,611 89,566 146,209 149,219
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Other operating income:
Gain on sale of subsidiary - - - - - - 14,720 14,720
----------------------- --------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) 48,581 46,523 48,419 47,043 36,000 34,045 (15,661) (18,671)
Foreign exchange loss - - (42) (42) (11) (11) (66) (66)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before provision (credit)
for income taxes 48,581 46,523 48,377 47,001 35,989 34,034 (15,727) (18,737)
Provision (credit) for income taxes 18,880 18,154 19,174 18,586 12,339 11,655 (5,041) (6,091)
----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) $ 29,701 $ 28,369 $ 29,203 $ 28,415 $ 23,650 $ 22,379 $(10,686) $ (12,646)
=========== ========== ========== ========== ========== ========== ========== ==========
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CAPITAL TRANSACTIONS -- (CONCLUDED)
In connection with the adoption of the fair value method of accounting
for stock-based compensation, the Company recorded stock-based compensation
expense of $1,429,000 and $1,803,000 for the three and six months ended June 30,
2003. For the same periods in 2002, the amount of stock-based compensation
expense increased to $565,000 and $1,047,000 from $448,000 and $756,000
previously reported. While the number of stock options outstanding declined
during the periods, stock-based compensation expense increased as a result of a
change in assumptions that reduced the period over which certain performance
based stock options are expected to vest.
As of June 30, 2003, the cumulative decrease in retained earnings as a
result of this restatement was $17.2 million. The decrease in retained earnings
was offset by a $19.3 million increase in paid-in capital and a $2.1 million
decrease in deferred income taxes, net. The impact on paid-in capital and
retained earnings for the interim periods of 2002 and 2003 was as follows:
2002 2003
----------------------------------------------------------------------------------------- ---------------------
1ST Q 2ND Q 3RD Q 4TH Q 1ST Q
--------------------- -------------------- --------------------- ---------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- ---------- ---------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Paid-in capital $ 113,000 $ 129,102 $ 108,460 $ 124,000 $ 107,571 $ 124,263 $ 107,164 $ 124,263 $ 107,142 $ 124,534
Retained earnings $ 191,471 $ 176,692 $ 200,018 $ 185,156 $ 209,449 $ 193,769 $ 214,856 $ 198,858 $ 223,692 $ 207,451
The impact of this restatement on net income was a decrease of $244,000,
$84,000, and $201,000 for the three months ended March 31, 2003 and the three
and six months ended June 30, 2002, respectively, as follows.
(Dollars in thousands) THREE MONTHS ENDED THREE MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 2003 JUNE 30, 2002 JUNE 30, 2002
------------------------------ ------------------------------ ---------------------------
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------------- --------------- --------------- -------------- ------------ --------------
REVENUE:
Finance charges $ 24,256 $ 24,256 $ 25,522 $ 25,522 $ 50,407 $ 50,407
Lease revenue 2,336 2,336 4,428 4,428 9,587 9,587
Ancillary product income 5,733 5,733 3,794 3,794 7,391 7,391
Premiums earned 755 755 1,054 1,054 2,494 2,494
Other income 3,849 3,849 3,791 3,791 7,568 7,568
-------------- --------------- --------------- -------------- ------------ --------------
Total revenue 36,929 36,929 38,589 38,589 77,447 77,447
COSTS AND EXPENSES:
General and administrative 5,763 5,763 6,383 6,383 12,100 12,100
Salaries and wages 8,517 8,517 7,448 7,448 14,952 14,952
Sales and marketing 2,177 2,177 1,809 1,809 3,590 3,590
Stock-based compensation expense - 375 448 565 756 1,047
Provision for insurance and warranty claims 99 99 570 570 1,133 1,133
Provision for credit losses 3,909 3,909 3,562 3,562 7,077 7,077
Depreciation of leased assets 1,548 1,548 2,566 2,566 5,507 5,507
Interest 1,596 1,596 2,457 2,457 4,762 4,762
-------------- --------------- --------------- -------------- ------------ --------------
Total costs and expenses 23,609 23,984 25,243 25,360 49,877 50,168
-------------- --------------- --------------- -------------- ------------ --------------
Operating income 13,320 12,945 13,346 13,229 27,570 27,279
Foreign exchange gain 15 15 11 11 27 27
-------------- --------------- --------------- -------------- ------------ --------------
Income before provision for income taxes 13,335 12,960 13,357 13,240 27,597 27,306
Provision for income taxes 4,498 4,367 4,807 4,774 12,733 12,643
-------------- --------------- --------------- -------------- ------------ --------------
Net income $ 8,837 $ 8,593 $ 8,550 $ 8,466 $ 14,864 $ 14,663
============== =============== =============== ============== ============ ==============
Stock options outstanding for 1999-2002 and the interim periods of 2002 and 2003
were as follows:
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------------- -------------------------------------------------------
2003 2002 2002 2001 2000 1999
------------- ---------- ------------- ----------- ---------- ---------
Total options outstanding 4,415,491 4,710,598 4,601,754 4,893,411 4,652,611 5,256,463
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
11. BUSINESS SEGMENT INFORMATION
In the second quarter of 2003, the Company re-evaluated its business
segments as a result of the decision to stop Loan originations in the United
Kingdom and Canada. As a result, the Company has four reportable business
segments: United States, United Kingdom, Automobile Leasing, and Other. Selected
segment information is set forth below (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
2003 2002 2003 2002
---------------- --------------- ---------------- ----------------
Revenue:
United States $ 30,544 $ 27,371 $ 59,893 $ 54,023
United Kingdom 2,862 5,125 6,863 10,445
Automobile Leasing 2,077 4,781 4,706 10,271
Other 489 1,312 1,439 2,708
---------------- --------------- ---------------- ----------------
Total revenue $ 35,972 $ 38,589 $ 72,901 $ 77,447
================ =============== ================ ================
Income (loss) before provision (credit) for income taxes:
United States $ 13,147 $ 11,704 $ 24,658 $ 24,362
United Kingdom (10,963) 1,792 (9,212) 3,415
Automobile Leasing (252) (519) (766) (1,365)
Other 125 263 337 894
---------------- --------------- ---------------- ----------------
Total income before provision for income taxes $ 2,057 $ 13,240 $ 15,017 $ 27,306
================ =============== ================ ================
12. SUBSEQUENT EVENT
On July 9, 2003, the Company entered into a series of forward contracts
with a commercial bank to hedge foreign currency risk associated with the cash
flows anticipated from the exit of the United Kingdom operation. In connection
with this transaction, the Company will deliver 29.0 million pounds sterling to
the commercial bank which will be exchanged into United States dollars at an
agreed upon rate on a monthly basis beginning July 31, 2003 through June 30,
2005. The Company believes that this transaction will minimize the currency
exchange risk associated with an adverse change in the relationship between the
United States dollar and the pound sterling as it repatriates cash from the
United Kingdom operation. However, as the Company has not adopted hedge
accounting under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities -- an amendment of FASB
Statement No. 133", future changes in the fair value of these forward contracts
are expected to increase or decrease net income.
12
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 June 30, 2003. The amounts
presented are expressed as a percent of total Loan value by year of Loan
origination.
As of June 30, 2003
------------------------------------------------------------------
Year Forecasted % of Forecast
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% 98%
2000 71% 53% 18% 93%
2001 68% 49% 19% 73%
2002 70% 46% 24% 40%
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. The
Company made no material changes in credit policy or pricing in the second
quarter, other than routine changes designed to maintain current profitability
levels.
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 June 30, 2003 with the forecast as of
March 31, 2003.
March 31, 2003 June 30, 2003
Year Forecasted Collection % Forecasted Collection % Variance
- --------- -------------------------- ------------------------- ----------
1992 81% 81% -
1993 76% 76% -
1994 62% 62% -
1995 56% 56% -
1996 56% 56% -
1997 59% 59% -
1998 67% 67% -
1999 72% 72% -
2000 71% 71% -
2001 67% 68% 1%
2002 68% 70% 2%
The Company first began publishing collection forecasts in its 2001 Annual
Report. Forecasted collection rates declined in 2002 when a difficult collection
system conversion negatively impacted collection results and in the first
quarter of 2003 due to post repossession collection results (known as deficiency
balance collections) declining from the prior trend line. Forecasted collection
rates stabilized in the second quarter of 2003.
Accurately predicting future collection rates is critical to the Company's
success. The Company's historical results indicate the risk of an unintended
adverse change in the profitability of Loan originations is increased during
periods of high growth. The
13
growth rate experienced in the second quarter of 2003 is higher than the
Company's expected long-term growth rate. However, the Company believes that the
investments in infrastructure in 2002, combined with decreases in Loan
origination volumes in 2002, have adequately prepared the Company for this
growth. The Company intends to make every possible effort to forecast results as
accurately as possible. The Company will continue to publish collection
forecasts and allow the precision of its estimates to be fully visible to
shareholders.
RESULTS OF OPERATIONS
Three and Six Months Ended June 30, 2003 Compared to Three and Six Months
Ended June 30, 2002
The following tables present income statement data on a consolidated basis
as well as for the Company's four business segments, United States, United
Kingdom, Automobile Leasing and Other.
Consolidated
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
-------------------- ----------- --------------------- -----------
REVENUE:
Finance charges $ 26,431 73.5 % $ 25,522 66.1 %
Lease revenue 1,784 4.9 4,428 11.5
Ancillary product income 4,233 11.8 3,794 9.8
Premiums earned 757 2.1 1,054 2.8
Other income 2,767 7.7 3,791 9.8
--------------- ----------- ---------------- -----------
Total revenue 35,972 100.0 38,589 100.0
COSTS AND EXPENSES:
General and administrative 5,198 14.4 6,383 16.5
Salaries and wages 8,687 24.1 7,448 19.3
Sales and marketing 2,483 6.9 1,809 4.7
Stock-based compensation expense 1,428 4.0 565 1.5
Provision for insurance and warranty claims 209 0.6 570 1.5
Provision for credit losses 2,863 8.0 3,562 9.2
Depreciation of leased assets 1,167 3.2 2,566 6.6
United Kingdom asset impairment expense 10,493 29.2 - -
Interest 1,401 3.9 2,457 6.4
--------------- ----------- ---------------- -----------
Total costs and expenses 33,929 94.3 25,360 65.7
--------------- ----------- ---------------- -----------
Operating income 2,043 5.7 13,229 34.3
Foreign exchange gain 14 - 11 -
--------------- ----------- ---------------- -----------
Income before provision for income taxes 2,057 5.7 13,240 34.3
Provision for income taxes 1,049 2.9 4,774 12.4
--------------- ----------- ---------------- -----------
Net income $ 1,008 2.8 % $ 8,466 21.9 %
=============== =========== ================ ===========
14
(Dollars in thousands) SIX MONTHS SIX MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
-------------------- ----------- --------------------- -----------
REVENUE:
Finance charges $ 50,687 69.4 % $ 50,407 65.1 %
Lease revenue 4,120 5.7 9,587 12.4
Ancillary product income 9,966 13.7 7,391 9.5
Premiums earned 1,512 2.1 2,494 3.2
Other income 6,616 9.1 7,568 9.8
--------------- ----------- ---------------- -----------
Total revenue 72,901 100.0 77,447 100.0
COSTS AND EXPENSES:
General and administrative 10,961 15.0 12,100 15.6
Salaries and wages 17,204 23.6 14,952 19.3
Sales and marketing 4,660 6.4 3,590 4.6
Stock-based compensation expense 1,803 2.5 1,047 1.4
Provision for insurance and warranty claims 308 0.4 1,133 1.5
Provision for credit losses 6,772 9.3 7,077 9.1
Depreciation of leased assets 2,715 3.7 5,507 7.1
United Kingdom asset impairment expense 10,493 14.4 - -
Interest 2,997 4.1 4,762 6.1
--------------- ----------- ---------------- -----------
Total costs and expenses 57,913 79.4 50,168 64.7
--------------- ----------- ---------------- -----------
Operating income 14,988 20.6 27,279 35.3
Foreign exchange gain 29 - 27 -
--------------- ----------- ---------------- -----------
Income before provision for income taxes 15,017 20.6 27,306 35.3
Provision for income taxes 5,416 7.4 12,643 16.3
--------------- ----------- ---------------- -----------
Net income $ 9,601 13.2 % $ 14,663 19.0 %
=============== =========== ================ ===========
For the three months ended June 30, 2003, net income declined to $1.0
million compared to $8.5 million for the same period in 2002. The reduction in
net income for the period was primarily due to the $7.6 million loss incurred in
the United Kingdom business segment in 2003 compared to net income of $1.3
million in 2002. The loss was primarily the result of $11.1 million in asset
impairment and other expenses recorded in connection with the Company's decision
to stop Loan originations in the United Kingdom. The impact of the loss in the
United Kingdom was partially offset by an increase in net income in the United
States to $8.7 million in 2003 from $7.3 million for the same period in 2002.
The increase in net income in the United States was due to an increase in
total revenue to $30.5 million for the three months ended June 30, 2003 compared
to $27.4 million for the same period in 2002 as a result of increases in: (i)
finance charges to $23.2 million in 2003 from $20.4 million in 2002 as a result
of an increase in the average size of the Loan portfolio due to an increase in
Loan originations in 2003, and (ii) ancillary product income to $4.2 million in
2003 from $3.3 million in 2002 due to an increase in commissions on third-party
service contracts offered by dealer-partners. Partially offsetting the increase
in revenue were increases in the following expenses: (i) salaries and wages to
$7.2 million in 2003 from $6.0 million in 2002 due to an increase in corporate
infrastructure in the second half of 2002, (ii) stock-based compensation expense
to $1.4 million in 2003 from $500,000 in 2002 as a result of a change in
assumptions that reduced the period over which certain performance based stock
options are expected to vest, and (iii) provision for credit losses to $1.5
million in 2003 from $700,000 in 2002 due to increases in the provision for
advance losses and the provision for earned but unpaid revenue.
For the six months ended June 30, 2003, net income declined to $9.6 million
from $14.7 million for the same period in 2002. The decrease in net income for
the period was primarily due to the $6.3 million loss incurred in the United
Kingdom business segment in 2003 compared to net income of $2.5 million in 2002.
The loss was primarily the result of $11.1 million in asset impairment and other
expenses recorded in connection with the Company's decision to stop Loan
originations in the United Kingdom. The impact of the loss in the United Kingdom
was partially offset by an increase in net income in the United States to $16.2
million in 2003 from $12.5 million in 2002.
The increase in net income in the United States in 2003 was primarily due
to two tax related adjustments that increased the provision for income taxes and
decreased net income in 2002 by $2.6 million. Other factors which impacted net
income were an increase in total revenue to $59.9 million in 2003 from $54.0
million in 2002 as a result of increases in: (i) finance charges to $44.0
million in 2003 from $40.0 million in 2002 as a result of an increase in the
average size of the Loan portfolio due to an increase in Loan originations in
2003, and (ii) ancillary product income to $9.0 million in 2003 from $6.5
million in 2002 due to an increase in commissions on third-party service
contracts offered by dealer-partners. Partially offsetting the increase in
revenue were increases in the following expenses: (i) salaries and wages to
$14.5 million in 2003 from $11.9 million in 2002 due to an increase in corporate
infrastructure in the second half of 2002, (ii) stock-based compensation expense
to $1.6 million in 2003 from $800,000 in 2002 as a result of a change in
assumptions that reduced the period over which certain performance based stock
15
options are expected to vest, and (iii) provision for credit losses to $4.1
million in 2003 from $1.2 million in 2002 due to increases in the provision for
advance losses in the first quarter of 2003 due to a decline in recovery rates
versus the prior trend line.
The results of operations for the Company as a whole are attributable
to changes described by segment in the discussion of the results of operations
in the United States, United Kingdom, Automobile Leasing, and Other 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 $1.4 million and $3.0 million
for the three and six months ended June 30, 2003 from $2.5 million and $4.8
million for the same periods in 2002. The decrease in interest expense was
primarily the result of the impact of a decrease in average outstanding debt.
For the three months ended June 30, 2003, the decrease was also impacted by the
decrease in the weighted average interest rate to 4.9% from 5.6% for the same
period in 2002, 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. For the six months ended June 30, 2003, the decrease in interest
expense was partially offset by the increase in the weighted average interest
rate to 5.6% from 5.1% 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.
United States
The United States segment primarily consists of the Company's United
States retail automobile loan operations.
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 23,195 75.9% $ 20,425 74.6%
Ancillary product income 4,189 13.7 3,332 12.2
Premiums earned 757 2.5 1,054 3.8
Other income 2,403 7.9 2,560 9.4
-------- ----- -------- -----
Total revenue 30,544 100.0 27,371 100.0
COSTS AND EXPENSES:
General and administrative 4,352 14.2 5,043 18.4
Salaries and wages 7,199 23.6 5,982 21.9
Sales and marketing 1,818 6.0 1,577 5.8
Stock-based compensation expense 1,353 4.4 458 1.7
Provision for insurance and warranty claims 209 0.7 570 2.1
Provision for credit losses 1,490 4.9 680 2.5
Interest 958 3.1 1,352 4.9
-------- ----- -------- -----
Total costs and expenses 17,379 56.9 15,662 57.3
-------- ----- -------- -----
Operating income 13,165 43.1 11,709 42.7
Foreign exchange loss (18) (0.1) (5) -
-------- ----- -------- -----
Income before provision for income taxes 13,147 43.0 11,704 42.7
Provision for income taxes 4,444 14.5 4,384 16.0
-------- ----- -------- -----
Net income $ 8,703 28.5% $ 7,320 26.7%
======== ===== ======== =====
16
(Dollars in thousands) SIX MONTHS SIX MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
--------------- ----------- ---------------- -----------
REVENUE:
Finance charges $ 43,954 73.4% $ 40,007 74.1%
Ancillary product income 9,038 15.1 6,505 12.0
Premiums earned 1,512 2.5 2,494 4.6
Other income 5,389 9.0 5,017 9.3
-------- ----- -------- -----
Total revenue 59,893 100.0 54,023 100.0
COSTS AND EXPENSES:
General and administrative 9,128 15.2 9,007 16.7
Salaries and wages 14,489 24.2 11,944 22.1
Sales and marketing 3,656 6.1 3,089 5.7
Stock-based compensation expense 1,649 2.8 848 1.6
Provision for insurance and warranty claims 308 0.5 1,133 2.1
Provision for credit losses 4,072 6.8 1,193 2.2
Interest 1,904 3.2 2,459 4.6
-------- ----- -------- -----
Total costs and expenses 35,206 58.8 29,673 55.0
-------- ----- -------- -----
Operating income 24,687 41.2 24,350 45.0
Foreign exchange gain (loss) (29) - 12 -
-------- ----- -------- -----
Income before provision for income taxes 24,658 41.2 24,362 45.0
Provision for income taxes 8,477 14.2 11,880 22.0
-------- ----- -------- -----
Net income $ 16,181 27.0% $ 12,482 23.0%
======== ===== ======== =====
Finance Charges. Finance charges increased to $23.2 million and $44.0
million for the three and six months ended June 30, 2003 from $20.4 million and
$40.0 million for the same periods in 2002 primarily due to an increase in the
average size of the Loan portfolio resulting from an increase in Loan
originations in 2003. This increase was partially offset by a reduction in the
average annualized yield on the Company's Loan portfolio to 12.9% and 12.6% for
the three and six months ended June 30, 2003 from 13.0% for the same periods in
2002. This decrease was primarily due to an increase in the average initial
contract term of the Company's Loan portfolio as of June 30, 2003 compared to
the same period in 2002. Selected Loan origination data follows:
(Dollars in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
-------------------------------------- ------------------------ --------------------------
2000 2001 2002 2003 2002 2003 2002
------------ ------------ ------------ ------------ ----------- ------------ -------------
Loan originations $371,045 $646,572 $571,690 $190,870 $134,829 $411,152 $306,883
Number of Loans originated 45,898 61,277 49,650 14,736 11,678 32,942 27,481
Number of active dealer-partners (1) 1,130 1,120 789 677 571 721 687
Loans per active dealer-partner 40.6 54.7 62.9 21.8 20.5 45.7 40.0
Average Loan size $ 8.1 $ 10.6 $ 11.5 $ 13.0 $ 11.5 $ 12.5 $ 11.2
(1) Active dealer-partners are dealer-partners who submitted at least
one Loan during the period.
Ancillary Product Income. Ancillary product income increased to $4.2
million and $9.0 million for the three and six months ended June 30, 2003 from
$3.3 million and $6.5 million for the same periods in 2002 due to an increase in
commissions on third party service contract products offered by dealer-partners,
primarily due to the increase in Loan originations compared to the same periods
in 2002.
Premiums Earned. Premiums earned decreased to $800,000 and $1.5 million
for the three and six months ended June 30, 2003 from $1.1 million and $2.5
million for the same periods in 2002 primarily due to a decrease in penetration
rates on the Company's in-house service contract and credit life and accident
and health products in 2002 and 2003.
Other Income. Other income decreased to $2.4 million for the three
months ended June 30, 2003 from $2.6 million for the same period in 2002
primarily due to a decrease of $150,000 in income from direct mail lead
generation services as a result of the Company discontinuing its in-house direct
mail lead generation program and referring dealer-partners to a third party
provider of such services.
Other income increased to $5.4 million for the six months ended June
30, 2003 from $5.0 million for the same period in 2002. The increase was due to
interest income of $600,000 received from the Internal Revenue Service in
connection with a change in tax accounting methods that affect the
characterization and timing of revenue recognition for tax purposes, offset by a
decrease of $100,000 in income from direct mail lead generation services as a
result of the Company discontinuing its in-house direct mail
17
lead generation program and referring dealer-partners to a third party provider
of such services.
General and Administrative. General and administrative expenses
decreased to $4.4 million for the three months ended June 30, 2003 from $5.0
million for the same period in 2002 due to: (i) a decrease of $300,000 in
depreciation expense due primarily to one of the Company's primary computer
systems becoming fully depreciated in June 2002 and (ii) a decrease of $200,000
in losses on the retirement of assets resulting from the write-off of computer
software in 2002.
General and administrative expenses remained relatively consistent at
$9.1 million for the six months ended June 30, 2003 compared to $9.0 million for
the same period in 2002. A decrease of $400,000 in depreciation expense due
primarily to one of the Company's primary computer systems becoming fully
depreciated in June 2002 and a decrease of $200,000 in losses on the retirement
of assets resulting from the write-off of computer software in 2002 were
partially offset by the 2002 reversal of $300,000 in state tax related expense
originally recorded in 2001.
Salaries and Wages. Salaries and wages expenses increased to $7.2
million and $14.5 million for the three and six months ended June 30, 2003 from
$6.0 million and $11.9 million for the same periods in 2002 resulting primarily
from additions to the Company's corporate infrastructure in the second half of
2002.
Sales and Marketing. Sales and marketing expenses increased to $1.8
million and $3.7 million for the three and six months ended June 30, 2003 from
$1.6 million and $3.1 million for the same periods in 2002 due primarily to
increased sales commissions as a result of increased unit volumes.
Stock-based Compensation Expense. Stock-based compensation expense
increased to $1.4 million and $1.6 million for the three and six months ended
June 30, 2003 from $500,000 and $800,000 for the same periods in 2002. While the
number of stock options outstanding declined during the periods, stock-based
compensation expense increased as a result of a change in assumptions that
reduced the period over which certain performance based stock options are
expected to vest. Refer to Notes to Consolidated Financial Statements -- Note 10
for further discussion on the adoption of SFAS No. 123, "Accounting for
Stock-Based Compensation".
Provision for Insurance and Service Contract Claims. The provision for
insurance and service contract claims, as a percent of premiums earned,
decreased to 27.6% and 20.4% for the three and six months ended June 30, 2003
from 54.1% and 45.4% for the same periods in 2002. The decreases are due to: (i)
the reserve for incurred but not reported claims on the Company's in-house
service contract product not being reduced proportionally with the reduction in
unearned premiums in 2002, thereby increasing claims expense as a percentage of
premiums earned and (ii) an increase in the percent of total claims paid
relating to the Company's credit life and accident and health products, which
have a lower ratio of claims paid to premiums earned than the Company's service
contract product.
Provision for Credit Losses. The provision for credit losses increased
to $1.5 million and $4.1 million for the three and six months ended June 30,
2003 from $700,000 and $1.2 million for the same periods 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 for the three months
ended June 30, 2003 was due to: (i) an increase in the provision for losses on
advances to $800,000 from $300,000 in 2002 and (ii) an increase in the provision
for earned but unpaid revenue on Loans to $700,000 from $400,000 in 2002 which
was due to the increase in the size of the Loan portfolio.
The Company's current period provision for advance losses is comprised
of: (i) estimated losses incurred during the current period on advances
originated in the current period, (ii) estimated losses incurred during the
current period on advances originated in prior periods due to changes in
forecasted collection rates and (iii) revisions of prior period loss estimates
for reasons not attributable to current period events. The Company estimates
losses created on advances originated during the period, for which there is very
little Loan performance data, using loss estimates on business originated in
prior periods, adjusted for other variables, such as the spread between the
advance rate and the forecasted collection rate, the volume of advances
originated, and improvements in risk management and pricing compared to prior
periods. The increase in the provision for losses on advances for the three
months ended June 30, 2003 was due primarily to an increase in the estimate of
losses on advances originated in this period. This was caused by the reduction
in forecasted collection rates reported in the third and fourth quarters of 2002
and first quarter of 2003 which increased the estimate of losses on prior period
advances. In addition, the increased provision for losses reflected higher
levels of originations during the quarter ended June 30, 2003.
For the six months ended June 30, 2003, the increase in the provision
for credit losses was due primarily to a $2.5 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 in the first quarter of 2003.
18
Provision for Income Taxes. The effective tax rate decreased to 33.8%
and 34.4% for the three and six months ended June 30, 2003 from 37.5% and 48.8%
for the same periods in 2002. The reduction in the effective tax rate for the
three months ended June 30, 2003 was due to a change in estimate of taxes due on
repatriation of United Kingdom earnings. This change in estimate was due to an
increase in the United Kingdom pound sterling exchange rate versus the United
States dollar which enabled the Company to utilize foreign tax credits that it
had previously assumed would not be utilizable.
The reduction in the effective tax rate for the six months ended June
30, 2003, was primarily due to a decrease of 16.3% resulting from an expense
recorded in 2002 for estimated taxes due upon repatriation of prior years'
earnings in the United Kingdom. The reduction in the effective tax rate for the
six months ended June 30, 2003 was partially offset by an increase of 2.7%
resulting from the reversal of expense in 2002 due to a change in estimate of
state income tax owed.
United Kingdom
The United Kingdom segment consists of the Company's United Kingdom
retail automobile loan operations. This segment is being liquidated as
the Company decided to stop originating Loans in the United Kingdom
effective June 30, 2003.
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 2,812 98.3 % $ 4,646 90.7 %
Ancillary product income 44 1.5 462 9.0
Other income 6 0.2 17 0.3
-------- -------- -------- --------
Total revenue 2,862 100.0 5,125 100.0
COSTS AND EXPENSES:
General and administrative 632 22.1 621 12.1
Salaries and wages 1,176 41.1 1,055 20.6
Sales and marketing 638 22.3 158 3.1
Stock-based compensation expense 75 2.6 107 2.1
Provision for credit losses 811 28.4 1,160 22.6
United Kingdom asset impairment expense 10,493 366.6 - -
Interest - - 235 4.6
-------- -------- -------- --------
Total costs and expenses 13,825 483.1 3,336 65.1
-------- -------- -------- --------
Operating income (loss) (10,963) (383.1) 1,789 34.9
Foreign exchange gain - - 3 -
-------- -------- -------- --------
Income (loss) before provision for income taxes (10,963) (383.1) 1,792 34.9
Provision (credit) for income taxes (3,369) (117.7) 496 9.7
-------- -------- -------- --------
Net income (loss) $ (7,594) (265.4) % $ 1,296 25.2 %
======== ======== ======== ========
19
(Dollars in thousands) SIX MONTHS SIX MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 5,914 86.2% $ 9,509 91.0%
Ancillary product income 928 13.5 886 8.5
Other income 21 0.3 50 0.5
-------- ----- -------- -----
Total revenue 6,863 100.0 10,445 100.0
COSTS AND EXPENSES:
General and administrative 1,192 17.4 1,353 12.9
Salaries and wages 2,047 29.8 2,086 20.0
Sales and marketing 944 13.8 331 3.2
Stock-based compensation expense 154 2.2 199 1.9
Provision for credit losses 1,245 18.1 2,506 24.0
United Kingdom asset impairment expense 10,493 152.9 - -
Interest - - 558 5.3
-------- ----- -------- -----
Total costs and expenses 16,075 234.2 7,033 67.3
-------- ----- -------- -----
Operating income (loss) (9,212) (134.2) 3,412 32.7
Foreign exchange gain - - 3 -
-------- ----- -------- -----
Income (loss) before provision for income taxes (9,212) (134.2) 3,415 32.7
Provision (credit) for income taxes (2,924) (42.6) 932 8.9
-------- ----- -------- -----
Net income (loss) $ (6,288) (91.6)% $ 2,483 23.8%
======== ===== ======== =====
Finance Charges. Finance charges decreased to $2.8 million and $5.9
million for the three and six months ended June 30, 2003 from $4.6 million and
$9.5 million for the same periods in 2002 primarily as the result of a decrease
in the average size of the Loan portfolio due to a decrease in Loan originations
in 2002 and the first quarter of 2003. 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 11.4% and 12.1% for the three and six months ended
June 30, 2003 from 12.9% and 12.8% for the same periods in 2002. The decreases
in the average annual yield were primarily due to increases in the: (i) average
initial term of the Company's Loan portfolio as of June 30, 2003 compared to the
same period in 2002 and (ii) non-accrual percentage to 28.8% as of June 30, 2003
from 27.1% as of the same period in 2002. Selected Loan origination data
follows:
(Dollars in thousands) THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, JUNE 30,
------------------------------ ------------------- -------------------
2000 2001 2002 2003 2002 2003 2002
-------- -------- -------- -------- -------- -------- --------
Loan originations $142,228 $122,817 $ 43,325 $ 13,358 $ 9,365 $ 22,784 $ 26,903
Number of Loans originated 10,664 9,121 3,062 758 651 1,363 1,955
Number of active dealer-partners(1) 205 215 147 65 45 86 151
Loans per active dealer-partner 52.0 42.4 20.8 11.7 14.5 15.8 12.9
Average Loan size $ 13.3 $ 13.5 $ 14.1 $ 17.6 $ 14.4 $ 16.7 $ 13.8
(1) Active dealer-partners are dealer-partners who submitted at least
one Loan during the period.
Ancillary product income. Ancillary product income decreased to $50,000
for the three months ended June 30, 2003 from $500,000 for the same period in
2002 primarily due to: (i) a refund of $150,000 of profit sharing income on
ancillary products to an ancillary product provider which was based on volume
targets no longer attainable due to the decision to stop Loan originations and
(ii) a change in the Company's revenue recognition policy for ancillary products
in the third quarter of 2002. Prior to the change in revenue recognition policy,
the Company recognized ancillary product revenue over the life of the Loan or
ancillary product, depending upon the product. The Company's current policy is
to recognize this revenue at the time the ancillary product is sold. The change
in the Company's revenue recognition policy, combined with a decline in Loan
originations in 2002 and the first quarter of 2003, resulted in a decrease in
ancillary product commissions.
Ancillary product income remained consistent at $900,000 for the six
months ended June 30, 2003 and 2002 due to the receipt of $500,000 in revenue
under an ancillary products profit sharing agreement with an insurance provider,
offset by a decrease of $500,000 resulting from the change in the revenue
recognition policy and decline in Loan originations in 2002 and the first
quarter of 2003.
Other Income. Other income remained relatively consistent for the three
and six months ended June 30, 2003 and 2002.
20
General and Administrative. General and administrative expenses
remained consistent at $600,000 for the three months ended June 30, 2003 and
2002. General and administrative expenses remained relatively consistent at $1.2
million for the six months ended June 30, 2003 compared to $1.4 million for the
same period in 2002.
Salaries and Wages. Salaries and wages expenses remained relatively
consistent at $1.2 million and $2.0 million for the three and six months ended
June 30, 2003 compared to $1.1 million and $2.1 million for the same periods in
2002. Employee severance costs of $250,000 associated with the Company's
decision to stop Loan originations in the United Kingdom were offset by a
decrease in salaries and wages of $100,000 and $400,000 for the three and six
months ended June 30, 2003, respectively, as a result of a reduction in staffing
levels.
Sales and Marketing. Sales and marketing expenses increased to $600,000
and $900,000 for the three and six months ended June 30, 2003 from $200,000 and
$300,000 for the same periods in 2002 primarily due to: (i) employee severance
costs of $250,000 associated with the Company's decision to stop Loan
originations in the United Kingdom and (ii) increased salaries and wages of
$200,000 and $400,000, respectively, as a result of an increase in sales and
marketing personnel in an effort to increase Loan originations.
Stock-based Compensation Expense. Stock-based compensation expense
remained consistent at $100,000 and $200,000 for the three and six months ended
June 30, 2003 and 2002. Refer to Notes to Consolidated Financial Statements --
Note 10 for further discussion on the adoption of SFAS No. 123, "Accounting for
Stock-Based Compensation".
Provision for Credit Losses. The provision for credit losses decreased
to $800,000 and $1.2 million for the three and six months ended June 30, 2003
from $1.2 million and $2.5 million for the same periods 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 decreases in the provision for credit losses were primarily due to
decreases in the provision for losses on advances to dealer-partners to $700,000
and $1.1 million in the three and six months ended June 30, 2003, respectively,
from $1.1 million and $2.2 million for the same periods in 2002, respectively,
due to an increase in the spread between the advance rate and the forecasted
collection rate.
United Kingdom Asset Impairment Expense. Effective June 30, 2003, the
Company elected to stop originating Loans in the United Kingdom. As a result of
this decision, the Company recorded an expense consisting of: (i) $9.8 million
to reduce the carrying value of the operation's dealer-partner advances to the
present value (using a discount rate of 13%) of the forecasted cash flows
relating to the dealer-partner advances less estimated future servicing expenses
and (ii) a write-off of $700,000 of fixed assets which will no longer be used in
the operation. In determining the impairment of dealer-partner advances, the
Company analyzed the expected cash flows from this operation assuming lower
collection rates than were assumed before the decision to liquidate. These lower
collection rates reflect uncertainties (such as potentially higher employee
turnover or reduced morale) in the servicing environment that may arise as a
result of the decision to liquidate. Refer to Notes to Consolidated Financial
Statements -- Note 2 for further discussion on the impairment analysis in
accordance with SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets".
Provision (Credit) for Income Taxes. The effective tax rate increased
to 30.7% and 31.7% for the three and six months ended June 30, 2003 from 27.7%
and 27.3% for the same periods in 2002. The changes in the effective rate for
the three and six months ended June 30, 2003 were attributable to a
restructuring of the legal entities within this business segment. This
restructuring provides the United Kingdom business segment with a fixed dollar
amount of tax benefit. The impact of this fixed benefit on the effective tax
rates varies based upon (i) whether the business segment reports income or loss,
and (ii) the amount of the income or loss. For the three and six months ended
June 30, 2002, the restructuring tax benefit reduced the effective tax rate on
the business segments earnings. For the three and six months ended June 30,
2003, since the business segment reported a pre-tax loss, the restructuring tax
benefit increased the amount of the credit for income taxes, thereby increasing
the effective tax rate. This increase in the effective tax rate was partially
offset by a reduction in the impact of the restructuring benefit on the
effective tax rate due to the magnitude of the loss in 2003.
21
Automobile Leasing
The Automobile Leasing segment consists of the Company's automobile
leasing operations. This segment is being liquidated as the Company
decided to stop originating leases in early 2002.
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Lease revenue $ 1,784 85.9% $ 4,428 92.6%
Other income 293 14.1 353 7.4
------- ------ ------- -----
Total revenue 2,077 100.0 4,781 100.0
COSTS AND EXPENSES:
General and administrative 139 6.7 485 10.1
Salaries and wages 247 11.9 348 7.3
Provision for credit losses 555 26.7 1,330 27.8
Depreciation of leased assets 1,167 56.2 2,566 53.7
Interest 253 12.2 584 12.2
------- ------ ------- -----
Total costs and expenses 2,361 113.7 5,313 111.1
------- ------ ------- -----
Operating loss (284) (13.7) (532) (11.1)
Foreign exchange gain 32 1.5 13 0.3
------- ------ ------- -----
Loss before credit for income taxes (252) (12.2) (519) (10.8)
Credit for income taxes (99) (4.8) (214) (4.5)
------- ------ ------- -----
Net loss $ (153) (7.4)% $ (305) (6.3)%
======= ====== ======= =====
(Dollars in thousands) SIX MONTHS SIX MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Lease revenue $ 4,120 87.5 % $ 9,587 93.3 %
Other income 586 12.5 684 6.7
-------- ----- -------- -----
Total revenue 4,706 100.0 10,271 100.0
COSTS AND EXPENSES:
General and administrative 437 9.3 1,279 12.5
Salaries and wages 520 11.0 792 7.7
Sales and marketing - - 21 0.2
Provision for credit losses 1,193 25.4 2,849 27.7
Depreciation of leased assets 2,715 57.7 5,507 53.6
Interest 665 14.1 1,200 11.7
-------- ----- -------- -----
Total costs and expenses 5,530 117.5 11,648 113.4
-------- ----- -------- -----
Operating loss (824) (17.5) (1,377) (13.4)
Foreign exchange gain 58 1.2 12 -
-------- ----- -------- -----
Loss before credit for income taxes (766) (16.3) (1,365) (13.4)
Credit for income taxes (298) (6.3) (509) (5.0)
-------- ----- -------- -----
Net loss $ (468) (10.0)% $ (856) (8.4) %
======== ===== ======== =====
Lease Revenue. Lease revenue decreased to $1.8 million and $4.1 million
for the three and six months ended June 30, 2003 from $4.4 million and $9.6
million for the same periods in 2002 primarily due to the decrease in the dollar
value of the Company's lease portfolio. The decrease was the result of the
Company's decision to stop originating automobile leases in the first quarter of
2002.
Other Income. Other income, as a percent of revenue, increased to 14.1%
and 12.5% for the three and six months ended June 30, 2003 from 7.4% and 6.7%
for the same periods in 2002 due to revenue from gains recognized on leases
terminated before their maturity date remaining consistent as lease revenue
declined.
General and Administrative. General and administrative expenses
decreased to $100,000 and $400,000 for the three and six months ended June 30,
2003 from $500,000 and $1.3 million for the same periods in 2002 primarily due
to a decreases of: (i) $200,000 and $400,000, respectively, in the provision for
uncollectible receivables from dealer-partners for ancillary product charge
backs on repossessed leased vehicles and (ii) $100,000 in third party lease
servicing costs due to a reduction in the number of leases being serviced. For
the six months ended June 30, 2003, the decrease was also due to an expense of
$100,000 recorded in 2002 for the impairment of certain assets.
22
Salaries and Wages. Salaries and wages expenses, as a percent of
revenue, increased to 11.9% and 11.0% for the three and six months ended June
30, 2003 from 7.3% and 7.7% for the same periods in 2002 primarily due to
servicing salaries and wages expenses declining at a slower rate than the
decline in revenue producing leases.
Sales and Marketing. There were no sales and marketing expenses for the
three and six months ended June 30, 2003 due to discontinuing automobile lease
originations in January 2002.
Provision for Credit Losses. The provision for credit losses, as a
percent of revenue, decreased to 26.7% and 25.4% for the three and six months
ended June 30, 2003 from 27.8% and 27.7% for the same periods 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 initial direct 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 56.2% and 57.7% for
the three and six months ended June 30, 2003 from 53.7% and 53.6% for the same
periods 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 effective tax rate decreased to 39.3% for
the three months ended June 30, 2003 from 41.2% for the same period in 2002. The
effective tax rate increased to 38.9% for the six months ended June 30, 2003
from 37.3% for the same period in 2002. The changes in the effective tax rates
did not have material impact on financial results.
Other
The Other segment consists of the Company's Canadian retail automobile
loan operations and secured lines of credit and floorplan financing products
offered to certain dealer-partners. In June 2003, the Company decided to stop
originating Loans in Canada. The Company is also reducing its investment in
secured lines of credit and floorplan financing offered to certain
dealer-partners.
(Dollars in thousands) THREE MONTHS THREE MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 424 86.7% $ 451 34.4%
Other income 65 13.3 861 65.6
------ ----- ------ -----
Total revenue 489 100.0 1,312 100.0
COSTS AND EXPENSES:
General and administrative 75 15.3 234 17.8
Salaries and wages 65 13.3 63 4.8
Sales and marketing 27 5.5 74 5.6
Provision for credit losses 7 1.4 392 29.9
Interest 190 38.9 286 21.8
------ ----- ------ -----
Total costs and expenses 364 74.4 1,049 79.9
------ ----- ------ -----
Income before provision for income taxes 125 25.6 263 20.1
Provision for income taxes 73 14.9 108 8.2
------ ----- ------ -----
Net income $ 52 10.7% $ 155 11.9%
====== ===== ====== =====
23
(Dollars in thousands) SIX MONTHS SIX MONTHS
ENDED % OF ENDED % OF
JUNE 30, 2003 REVENUE JUNE 30, 2002 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 819 56.9% $ 891 32.9%
Other income 620 43.1 1,817 67.1
------ ----- ------ -----
Total revenue 1,439 100.0 2,708 100.0
COSTS AND EXPENSES:
General and administrative 204 14.2 461 17.0
Salaries and wages 148 10.3 130 4.8
Sales and marketing 60 4.2 149 5.5
Provision for credit losses 262 18.2 529 19.5
Interest 428 29.7 545 20.1
------ ----- ------ -----
Total costs and expenses 1,102 76.6 1,814 66.9
------ ----- ------ -----
Income before provision for income taxes 337 23.4 894 33.1
Provision for income taxes 161 11.2 340 12.6
------ ----- ------ -----
Net income $ 176 12.2% $ 554 20.5%
====== ===== ====== =====
Finance charges. Finance charges decreased to $400,000 and $800,000 for
the three and six months ended June 30, 2003 from $500,000 and $900,000 for the
same periods in 2002. Finance charges decreased for the three and six months
ended June 30, 2003 primarily due to a reduction in the average annualized yield
on the Company's Loan portfolio to 12.5% and 12.2% for the three and six months
ended June 30, 2003 from 13.0% and 12.8% for the same periods in 2002. This
decrease was primarily due to an increase in the percent of non-accrual Loans to
20.0% as of June 30, 2003 from 17.4% as of the same period in 2002.
Other Income. Other income decreased to $100,000 and $600,000 for the
three and six months ended June 30, 2003 from $900,000 and $1.8 million for the
same periods in 2002. The decreases for the three and six months ended June 30,
2003 are primarily due to the decreases in revenue from secured lines of credit
and floorplan financing offered to certain dealer-partners of $800,000 and $1.2
million, respectively, as the Company continues to reduce its investment in
these products.
General and Administrative. General and administrative expenses
decreased to $100,000 and $200,000 for the three and six months ended June 30,
2003 from $200,000 and $500,000 for the same periods in 2002 as a result of a
general reduction in the amount of resources dedicated to the Canadian
operations.
Salaries and Wages. Salaries and wages expenses, as a percent of
revenue, increased to 13.3% and 10.3% for the three and six months ended June
30, 2003 from 4.8% for the same periods in 2002 primarily due to salaries and
wages relating to the Company's floorplan and line of credit loan products
remaining relatively constant as the income from these products declined as a
result of the Company's decision to decrease its investment in these products.
Sales and Marketing. Sales and marketing expenses decreased to $50,000
for the three and six months ended June 30, 2003 from $100,000 for the same
periods in 2002 due primarily to decreased sales commissions in the Canadian
automobile loan operations as a result of decreased unit volumes.
Provision for Credit Losses. The provision for credit losses decreased
by $400,000 and $300,000, respectively, for the three and six months ended June
30, 2003 compared to the same periods in 2002 primarily due to the decreases in
the provision for floorplan loan losses as the Company continues to reduce its
investment in this product.
Provision for Income Taxes. The effective tax rate increased to 58.4%
and 47.8% for the three and six months ended June 30, 2003 from 41.1% and 38.0%
for the same periods in 2002. The increases in the effective rate for the three
and six months ended June 30, 2003 compared to the same periods in 2002 were due
to losses reported in the floorplan and line of credit businesses in 2003. These
businesses are based in the United States, and have a lower effective tax rate
than the Canadian automobile loan business. As a result, the tax benefit from
losses incurred in these businesses does not fully offset taxes relating to
profits earned in the Canadian automobile loan operation, thereby increasing the
effective tax rate for the business segment.
24
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
JUNE 30, 2003 CAPITAL (1) JUNE 30, 2002 CAPITAL (1)
--------------- --------------- ---------------- ---------------
REVENUE:
Finance charges $ 26,431 24.1 % $ 25,522 21.5 %
Lease revenue 1,784 1.6 4,428 3.7
Ancillary product income 4,233 3.9 3,794 3.2
Premiums earned 757 0.7 1,054 0.9
Other income 2,767 2.5 3,791 3.2
--------------- --------------- ---------------- ---------------
Total revenue 35,972 32.8 38,589 32.5
COSTS AND EXPENSES:
General and administrative 5,198 4.7 6,383 5.4
Salaries and wages 8,687 7.9 7,448 6.3
Sales and marketing 2,483 2.2 1,809 1.5
Stock-based compensation expense 1,428 1.3 565 0.5
Provision for insurance and warranty claims 209 0.2 570 0.5
Provision for credit losses 2,863 2.6 3,562 3.0
Depreciation of leased assets 1,167 1.1 2,566 2.1
United Kingdom asset impairment expense 10,493 9.6 - -
Interest 1,401 1.3 2,457 2.1
--------------- --------------- ---------------- ---------------
Total costs and expenses 33,929 30.9 25,360 21.4
--------------- --------------- ---------------- ---------------
Operating income 2,043 1.9 13,229 11.1
Foreign exchange gain 14 - 11 -
--------------- --------------- ---------------- ---------------
Income before provision for income taxes 2,057 1.9 13,240 11.1
Provision for income taxes 1,049 1.0 4,774 4.0
--------------- --------------- ---------------- ---------------
Net income $ 1,008 0.9 % $ 8,466 7.1 %
=============== =============== ================ ===============
Average capital (1) $ 438,684 $ 474,285
25
(Dollars in thousands) SIX MONTHS SIX MONTHS
ENDED % OF AVERAGE ENDED % OF AVERAGE
JUNE 30, 2003 CAPITAL (1) JUNE 30, 2002 CAPITAL (1)
--------------- --------------- --------------- ---------------
REVENUE:
Finance charges $ 50,687 23.4 % $ 50,407 21.0 %
Lease revenue 4,120 1.9 9,587 4.0
Ancillary product income 9,966 4.6 7,391 3.1
Premiums earned 1,512 0.7 2,494 1.0
Other income 6,616 3.0 7,568 3.1
--------------- --------------- --------------- ---------------
Total revenue 72,901 33.6 77,447 32.2
COSTS AND EXPENSES:
General and administrative 10,961 5.1 12,100 5.0
Salaries and wages 17,204 7.9 14,952 6.2
Sales and marketing 4,660 2.1 3,590 1.5
Stock-based compensation expense 1,803 0.8 1,047 0.4
Provision for insurance and warranty claims 308 0.1 1,133 0.5
Provision for credit losses 6,772 3.1 7,077 3.0
Depreciation of leased assets 2,715 1.3 5,507 2.3
United Kingdom asset impairment expense 10,493 4.9 - -
Interest 2,997 1.4 4,762 2.0
--------------- --------------- --------------- ---------------
Total costs and expenses 57,913 26.7 50,168 20.9
--------------- --------------- --------------- ---------------
Operating income 14,988 6.9 27,279 11.3
Foreign exchange gain 29 - 27 -
--------------- --------------- --------------- ---------------
Income before provision for income taxes 15,017 6.9 27,306 11.3
Provision for income taxes 5,416 2.5 12,643 5.2
--------------- --------------- --------------- ---------------
Net income $ 9,601 4.4 % $ 14,663 6.1 %
=============== =============== =============== ===============
Average capital (1) $ 434,022 $ 480,620
(1) Average capital is equal to the average amount of debt and equity
during the period in accordance with generally accepted accounting
principles in the United States of America ("GAAP"). The calculation of
average capital follows:
(Dollars in thousands) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -----------------------------
2003 2002 2003 2002
---------------- ---------------- ------------- -------------
Average debt $ 101,821 $ 172,077 $101,147 $182,381
Average shareholders' equity 336,863 302,208 332,875 298,239
---------------- ---------------- ------------- -------------
Average capital $ 438,684 $ 474,285 $434,022 $480,620
================ ================ ============= =============
RETURN ON CAPITAL ANALYSIS
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- ----------------------------
2003 2002 2003 2002
---------------- ---------------- ------------ ------------
Net income $ 1,008 $ 8,466 $ 9,601 $ 14,663
Interest expense $ 1,401 $ 2,457 $ 2,997 $ 4,762
Tax rate 65.0% 65.5% 65.0% 65.6%
---------------- ---------------- ------------ ------------
Interest expense after-tax $ 911 $ 1,609 $ 1,948 $ 3,124
---------------- ---------------- ------------ ------------
Net operating profit after-tax $ 1,919 $ 10,075 $ 11,549 $ 17,787
================ ================ ============ ============
Average capital $ 438,684 $ 474,285 $434,022 $480,620
================ ================ ============ ============
Return on capital 1.7% 8.5% 5.3% 7.4%
The Company's return on capital decreased to 1.7% and 5.3% for the
three and six months ended June 30, 2003 from 8.5% and 7.4% for the same periods
in 2002. The decreases in return on capital were primarily due to a reduction in
the return on capital in the United Kingdom business segment as a result of the
$7,238,000 after-tax adjustment for asset impairment and accrued expenses
related to the Company's decision to stop originating Loans in the United
Kingdom. This adjustment decreased the Company's reported return on capital by
6.6% and 3.4% for the three and six months ended June 30, 2003, respectively.
Refer to Notes to Consolidated Financial Statements -- Note 2 for further
discussion on the impairment analysis in accordance with SFAS No. 144,
"Accounting for Impairment or Disposal of Long-Lived Assets".
26
For the three months ended June 30, 2003, the reduction in the return
on capital was also due to decreases in the return on capital in the Automobile
Leasing and Other business segments. Partially offsetting the decreases in the
return on capital in the United Kingdom, Automobile Leasing and Other segments
was an increase in the return on capital in the United States to 10.2% in 2003
from 9.4% in 2002 and an increase in the percent of total capital invested in
the United States to 83.6% in 2003 from 73.6% in 2002. The increase in the
return on capital in the United States was due to increases in: (i) finance
charges as a percent of average capital due to a reduction in the amount
advanced to dealer-partners as a percent of the gross Loan amount, and (ii)
ancillary product income, which is recognized upon the sale of the ancillary
product. Ancillary product income, as a percent of average capital, increased as
a result of Loan originations increasing at a faster rate than average capital
in the United States. Partially offsetting these increases in revenue were
increases in the following expenses as a percent of average capital: (i)
salaries and wages due to the increase in corporate infrastructure in the second
half of 2002, (ii) stock-based compensation expense as a result of a change in
assumptions that reduced the period over which certain performance based stock
options are expected to vest, and (iii) provision for credit losses due to
increases in the provision for advance losses and the provision for earned but
unpaid revenue.
For the six months ended June 30, 2003, the reduction in the return on
capital was also due to decreases in the return on capital in the Automobile
Leasing and Other business segments. Partially offsetting the decreases in the
return on capital in the United Kingdom, Automobile Leasing and Other segments
was an increase in the return on capital in the United States to 9.8% in 2003
from 8.1% in 2002 and an increase in the percent of total capital invested in
the United States to 82.1% in 2003 from 72.6% in 2002. The increase in the
return on capital in the United States was due to increases in: (i) finance
charges as a percent of average capital due to a reduction in the amount
advanced to dealer-partners as a percent of the gross Loan amount, and (ii)
ancillary product income, which is recognized upon the sale of the ancillary
product. Ancillary product income, as a percent of average capital, increased as
a result of Loan originations increasing at a faster rate than average capital
in the United States. Partially offsetting these increases in revenue were
increases in the following expenses as a percent of average capital: (i)
salaries and wages due to the increase in corporate infrastructure in the second
half of 2002, (ii) stock-based compensation expense as a result of a change in
assumptions that reduced the period over which certain performance based stock
options are expected to vest, (iii) provision for credit losses due to increases
in the provision for advance losses in the first quarter of 2003 due to a
decline in recovery rates versus the prior trend line, and (iv) provision for
income taxes for two tax related adjustments in 2002.
ECONOMIC PROFIT
Economic profit or loss represents net operating profit after-tax less
an imputed cost of equity. By considering an imputed cost of equity, the
Company's economic profit or loss calculation differs from net income or loss
under GAAP, which does not assign a cost of equity. Management assumes a cost of
equity equal to 10% of average shareholders' equity in its economic profit or
loss calculations, which approximates the long-term rate of return on publicly
traded equity investments. 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 generated an economic loss of ($7,414,000), or ($0.18) per adjusted
share, for the three months ended June 30, 2003 compared to an economic profit
of $911,000, or $0.02 per adjusted share, for the same period in 2003. The
economic loss increased to ($7,043,000), or ($0.17) per adjusted share, for the
six months ended June 30, 2003 from ($249,000), or ($0.01) per adjusted share,
for the same period in 2002.
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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------- ----------------------------------
2003 2002 2003 2002
---------------- --------------- --------------- ----------------
Economic profit (loss)
Net income (1) $ 1,008 $ 8,466 $ 9,601 $ 14,663
Imputed cost of equity at 10% (2) (8,422) (7,555) (16,644) (14,912)
---------------- --------------- --------------- ----------------
Total economic profit (loss) $ (7,414) $ 911 $ (7,043) $ (249)
Weighted average shares outstanding 42,321,170 42,535,312 42,317,443 42,486,667
Economic profit (loss) per share (3) $ (0.18) $ 0.02 $ (0.17) $ (0.01)
(1) Consolidated net income from the Consolidated Statement of Income. See
"Item 1. Consolidated Financial Statements."
(2) Cost of equity is equal to 10% (on an annual basis) of total average
shareholders' equity, which was $336,863,000 and $332,875,000 for the
three and six months ended June 30, 2003, respectively, and
$302,208,000 and $298,239,000 for the three and six months ended June
30, 2002, respectively, calculated as described in the Average Capital
Analysis.
(3) Economic profit (loss) per share equals the economic profit (loss)
divided by the weighted average shares outstanding.
27
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in
accordance with GAAP. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, the Company
evaluates its estimates, including those related to the 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 and six months ended June 30, 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.
The Company's cash flow requirements are dependent on future levels of
Loan originations. In the three and six months ended June 30, 2003, the Company
experienced increases in Loan originations compared to the same periods in 2002
primarily due to increases in the number of active dealer-partners and Loans per
active dealer-partner. 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) a bank line
of credit facility; (ii) secured financings; (iii) a mortgage loan; and (iv)
capital lease obligations.
Line of Credit Facility -- At June 30, 2003, the Company had a $135.0
million credit agreement with a commercial bank syndicate. The facility has a
commitment period through June 9, 2005. 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 (4.0% as of June 30, 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
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
earnings before interest, taxes and non-cash expenses to fixed charges.
Additionally, the agreement requires that the Company maintain a specified
minimum level of net worth. Borrowings under the credit agreement are secured by
a lien on most of the Company's assets. The Company must pay annual and
quarterly fees on the amount of the commitment. As of June 30, 2003, there was
approximately $8.3 million outstanding under this facility.
Secured Financing -- On June 27, 2003, the Company's wholly-owned
subsidiary, Credit Acceptance Funding 2003-1 LLC ("Funding 2003-1"), completed a
secured financing transaction, in which Funding 2003-1 received $100.0 million
in financing. In connection with this transaction, the Company conveyed, for
cash and the sole membership interest in Funding 2003-1, dealer-partner advances
having a carrying amount of approximately $134.0 million to Funding 2003-1,
which, in turn, conveyed the advances to a trust, which issued $100 million in
notes to qualified institutional investors. A financial insurance policy was
issued in connection with the transaction by Radian Asset Assurance. The policy
guarantees the timely payment of interest and ultimate repayment of principal on
the final scheduled distribution date. The notes are rated "AA" by Standard &
Poor's Rating Services. The proceeds of the secured financing were used by the
Company to reduce outstanding borrowings under the Company's credit facility.
Until December 15, 2003, the Company and Funding 2003-1 may receive additional
proceeds from the transaction by having the Company convey additional
dealer-partner advances to Funding 2003-1 which could then be conveyed by
Funding 2003-1 to the trust and used by the trust as collateral to support
additional borrowings. The secured financing creates loans for which the trust
is liable and which are secured by security interests in all assets of the trust
and of Funding 2003-1. Such loans are non-recourse to the Company, even though
the trust, Funding 2003-1 and the Company are consolidated for financial
reporting purposes. The notes bear interest at a fixed rate of 2.77%. The
expected annualized cost of the secured financing, including underwriters fees,
the insurance premium and other costs is approximately 6.8%. As Funding 2003-1
is organized as a separate legal entity from the Company, assets of Funding
2003-1 (including the conveyed dealer-partner advances) will not be available to
satisfy the general obligations of the Company until the secured financing is
repaid. The Company receives a monthly servicing fee paid out of collections
equal to 6% of the collections received with respect to the conveyed
dealer-partner
28
advances and related Loans. Except for the servicing fee and payments due to
dealer-partners, the Company does not receive, or have any rights in, any
portion of such collections until the trust's underlying indebtedness is paid in
full, either through such collections or through a prepayment of the
indebtedness. Thereafter, remaining collections would be paid over to Funding
2003-1 as the sole beneficiary of the trust where they would be available to be
distributed to the Company as the sole member of Funding 2003-1, or the Company
may choose to cause Funding 2003-1 to repurchase the remaining dealer-partner
advances from the trust and then dissolve, whereby the Company would become the
owner of such remaining collections.
The secured financing transaction that had been outstanding as of March
31, 2003 between the Company's wholly-owned subsidiary, CAC Warehouse Funding
Corp. ("Warehouse Funding"), and an institutional investor, in which Warehouse
Funding had received $75.0 million in financing, was repaid in the second
quarter of 2003. The Company has completed a total of nine secured financing
transactions, eight of which have been repaid in full. Information about the
currently outstanding secured financing transaction is as follows (dollars in
thousands):
Secured Financing Secured Dealer Balance as
Issue Original Balance at Advance Balance Percent of
Number Close Date Balance June 30, 2003 at June 30, 2003 Original Balance
- ------ ---------- -------- ------------------ ---------------- ----------------
2003-1 June 2003 $100,000 $100,000 * $134,892 100%
* Bears a fixed interest rate of 2.77% and is anticipated to fully amortize
within 16 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, bearing
interest at a fixed rate of 7.07%, and requires monthly payments of $99,582 and
a balloon payment at maturity for the balance of the loan. The Company believes
that the monthly payments under the mortgage loan can be made from cash
resources available to the Company and that the balloon payment will be
refinanced at the time it is due.
Capital Lease Obligations -- As of June 30, 2003, the Company has
twelve capital lease obligations outstanding related to various computer
equipment, with monthly payments totaling $82,598. These capital lease
obligations bear interest at rates ranging from 4.45% to 9.22% and have maturity
dates between June 2004 and March 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 increased to $115.7
million at June 30, 2003 from $109.8 million at December 31, 2002. In addition
to the balance sheet indebtedness as of June 30, 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):
PERIOD OF REPAYMENT
---------------------------------------------
CONTRACTUAL OBLIGATIONS < 1 YEAR 1-3 YEARS > 3 YEARS TOTAL
------------- --------------- ------------- --------------
Secured financing $ 75,000 $ 25,000 $ - $ 100,000
Lines of credit 4,275 4,030 - 8,305
Mortgage loan 5,813 - - 5,813
Capital lease obligations 909 629 - 1,538
Non-cancelable operating lease obligations 336 446 278 1,060
------------- --------------- ------------- --------------
Total contractual cash obligations $ 86,333 $ 30,105 $ 278 $ 116,716
============= =============== ============= ==============
United Kingdom Repatriation -- As a result of the Company's decision to
stop Loan originations in the United Kingdom, the capital invested in the United
Kingdom operation will be reinvested in the United States operation. Based on
management's analysis of estimated future cash flows, the Company expects that
approximately $50.9 million will be recovered and reinvested in the United
States. It is expected that approximately 70% of this amount will be recovered
within one year, 90% within two years, and the remainder within three years. In
order to manage the foreign currency risk associated with the expected cash
flows, the Company entered into forward contracts to deliver 29.0 million pounds
sterling to the commercial bank which will be exchanged into United States
dollars at an agreed upon rate with a commercial bank beginning July 31, 2003
through June 30, 2005.
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
29
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 June 30, 2003, the Company has repurchased approximately 5.2
million shares of the 6.0 million shares authorized to be repurchased under this
program at a cost of $32.5 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.
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, 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 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.
30
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.
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Rule 13a-15 of the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures 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.
31
PART II. - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 6, 2003, the Board of Directors approved amendments to
the Company's Bylaws modifying the provisions relating to
indemnification included in Article XI. The Amended and
Restated Bylaws are attached to this Form 10-Q as an exhibit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 15, 2003 at
which the shareholders considered 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 40,412,425 921,067
Donald A. Foss 41,272,421 61,071
Harry E. Craig 41,272,421 61,071
Sam M. LaFata 41,272,421 61,071
Daniel P. Leff 40,415,425 918,067
Thomas N. Tryforos 41,272,421 61,071
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 filed a current report on Form 8-K pursuant to
Items 7, 9 and 12, dated April 24, 2003, reporting that
the Company issued a press release announcing its
financial results for the three months ended March 31,
2003, a copy of which was filed as Exhibit 99.1.
The Company filed a current report on Form 8-K pursuant to
Items 5 and 7, dated June 2, 2003, reporting that the
Company issued a press release on June 2, 2003 announcing
the decision to stop Loan originations in Canada and the
United Kingdom effective June 30, 2003 and that the
Company issued a press release dated June 3, 2003
announcing that it was preparing to engage in a $100
million asset-backed bond transaction in June 2003, copies
of which were filed as Exhibit 99.1 and 99.2,
respectively.
The Company filed a current report on Form 8-K pursuant to
Items 5 and 7, dated June 9, 2003, reporting that the
Company issued a press release announcing the renewal of
its $135 million credit agreement with a group of
commercial banks for two years, a copy of which was filed
as Exhibit 99.1.
The Company filed a current report on Form 8-K pursuant to
Items 5 and 7, dated June 27, 2003, reporting that the
Company issued a press release announcing the completion
of a $100 million asset-backed non-recourse secured
financing, a copy of which was filed as Exhibit 99.1.
32
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 5, 2003
(Principal Financial Officer, Accounting
Officer and Duly Authorized Officer)
33
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ---------- ----------------------------------------------------------------
3(b) Bylaws of the Company, as amended June 6, 2003
4(c)12 Second Amended and Restated Credit Agreement, dated as
of June 9, 2003, among the Company, certain of the
Company's subsidiaries, Comerica Bank, as Administrative
Agent and Collateral Agent, and the banks signatory
thereto.
4(f)(47) Contribution Agreement dated June 27, 2003 between the Company
and Credit Acceptance Funding LLC 2003-1
4(f)(48) Back-Up Servicing Agreement dated June 27, 2003 among the
Company, Credit Acceptance Funding 2003-1, Credit Acceptance
Auto Dealer Loan Trust 2003-1, Systems & Services Technologies,
Inc., Radian Asset Assurance Inc.
4(f)(49) Intercreditor Agreement, dated June 27, 2003, among the
Company, CAC Warehouse Funding Corp., Credit Acceptance
Funding LLC 2003-1, Credit Acceptance Auto Dealer Loan
Trust 2003-1, Wachovia Securities, Inc., as agent,
JPMorgan Chase Bank, as trustee, and Comerica Bank, as
agent.
4(f)(50) Sale and Servicing Agreement dated June 27, 2003 among
the Company, Credit Acceptance Auto Dealer Loan Trust
2003-1, Credit Acceptance Funding LLC 2003-1, JPMorgan
Chase Bank, and Systems & Services Technologies, Inc.
4(f)(51) Indenture, dated June 27, 2003, between Credit Acceptance Auto
Dealer Loan Trust 2003-1 and JPMorgan Chase Bank
4(f)(52) Amended and Restated Trust Agreement dated June 27, 2003 between
Credit Acceptance Funding LLC 2003-1 and Wachovia Bank of
Delaware, National Association
10(d)(9) Form of Servicing Agreement as of April 2003
31(a) Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
31(b) Certification of Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
32 Certification of Chief Executive Officer and Chief
Financial Officer, pursuant to 18 U.S.C. Section 1350
and Rule 13a-14(b) of the Securities Exchange Act.
34