Back to GetFilings.com
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 September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to________
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1999511
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate 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 October 31,
2004 was 36,807,982.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements -
Three and nine months ended September 30, 2004 and September 30, 2003 1
Consolidated Balance Sheets -
As of September 30, 2004 and December 31, 2003 2
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2004 and September 30, 2003 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 29
ITEM 4. CONTROLS AND PROCEDURES 29
PART II. - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND THE USE OF PROCEEDS 30
ITEM 6. EXHIBITS 30
SIGNATURE 31
INDEX OF EXHIBITS 32
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
(Dollars in thousands, except per share data) 2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenue:
Finance charges $ 34,830 $ 25,770 $ 95,790 $ 76,457
Ancillary product income 3,047 4,369 8,373 14,336
Lease revenue 271 1,251 1,323 5,371
Other income 5,051 4,609 14,523 12,866
----------- ----------- ----------- -----------
Total revenue 43,199 35,999 120,009 109,030
----------- ----------- ----------- -----------
COSTS AND EXPENSES:
Salaries and wages 9,807 7,879 27,566 25,083
General and administrative 5,181 4,679 15,601 15,361
Provision for credit losses 2,098 2,303 16,832 9,354
Sales and marketing 3,026 2,023 8,591 6,813
Interest 2,846 2,267 7,820 5,264
Stock-based compensation expense 747 1,027 2,178 2,830
United Kingdom asset impairment - - - 10,493
Other expense 270 1,182 1,050 4,205
----------- ----------- ----------- -----------
Total costs and expenses 23,975 21,360 79,638 79,403
----------- ----------- ----------- -----------
Operating income 19,224 14,639 40,371 29,627
Foreign exchange gain (loss) 674 (1,066) 1,731 (1,037)
----------- ----------- ----------- -----------
Income before provision for income taxes 19,898 13,573 42,102 28,590
Provision for income taxes 7,156 4,755 15,224 10,171
----------- ----------- ----------- -----------
Net income $ 12,742 $ 8,818 $ 26,878 $ 18,419
=========== =========== =========== ===========
Net income per common share:
Basic $ 0.33 $ 0.21 $ 0.69 $ 0.44
=========== =========== =========== ===========
Diluted $ 0.31 $ 0.20 $ 0.65 $ 0.43
=========== =========== =========== ===========
Weighted average shares outstanding:
Basic 38,679,011 42,315,027 39,234,974 42,329,722
Diluted 40,943,604 43,959,924 41,506,320 43,247,518
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
AS OF
--------------------------------------
(Dollars in thousands, except per share data) SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
ASSETS:
Cash and cash equivalents $ 20,254 $ 36,044
Loans receivable 1,017,050 875,417
Allowance for credit losses (37,559) (17,615)
----------- ---------
Loans receivable, net 979,491 857,802
----------- ---------
Notes, lines of credit and floorplan receivables, net (including $1,635 and $1,583
from affiliates as of September 30, 2004 and December 31, 2003, respectively) 4,868 6,562
Investment in operating leases, net 1,379 4,447
Property and equipment, net 19,588 18,503
Income taxes receivable 1,188 5,795
Other assets 17,387 14,627
----------- ---------
Total Assets $ 1,044,155 $ 943,780
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Accounts payable and accrued liabilities $ 41,388 $ 33,117
Dealer holdbacks, net 501,161 423,861
Line of credit 58,700 -
Secured financing 140,000 100,000
Mortgage note and capital lease obligations 10,148 6,467
Deferred income taxes, net 9,765 24,529
----------- ---------
Total Liabilities 761,162 587,974
----------- ---------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued - -
Common stock, $.01 par value, 80,000,000 shares authorized, 36,807,382 and
42,128,087 shares issued and outstanding as of September 30, 2004 and
December 31, 2003, respectively 368 421
Paid-in capital 26,644 125,078
Retained earnings 253,917 227,039
Accumulated other comprehensive income - cumulative translation adjustment 2,064 3,268
----------- ---------
Total Shareholders' Equity 282,993 355,806
----------- ---------
Total Liabilities and Shareholders' Equity $ 1,044,155 $ 943,780
=========== =========
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2004 2003
(Dollars in thousands) --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 26,878 $ 18,419
Adjustments to reconcile cash provided by operating activities:
Provision for credit losses 16,832 9,354
Depreciation 4,392 6,528
Loss on retirement of property and equipment 156 -
Foreign currency (gain) loss on forward contracts (1,734) 1,080
Provision (credit) for deferred income taxes (14,764) 7,576
Stock-based compensation expense 2,178 2,830
United Kingdom asset impairment - 10,493
Change in operating assets and liabilities:
Accounts payable and accrued liabilities 9,747 4,437
Income taxes receivable/payable 4,607 (3,556)
Lease payment receivable 99 1,484
Unearned commissions, insurance premiums and reserves 198 (370)
Other assets (2,760) 556
--------- ---------
Net cash provided by operating activities 45,829 58,831
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments - held to maturity - (9,616)
Principal collected on Loans receivable 326,301 260,566
Advances to dealers (348,060) (279,039)
Payments of dealer holdbacks (24,121) (22,275)
Accelerated payments of dealer holdbacks (14,673) (7,702)
Operating lease liquidations 2,109 4,758
Decrease in notes, lines of credit and floorplan receivables 1,086 3,721
Purchases of property and equipment (3,206) (1,303)
--------- ---------
Net cash used in investing activities (60,564) (50,890)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under lines of credit 58,700 (43,555)
Proceeds from secured financings 140,000 100,000
Repayments of secured financings (100,000) (58,153)
Principal payments under capital lease obligations (847) (680)
Proceeds from mortgage note refinancing 3,540 -
Repayment of mortgage note (579) (577)
Repurchase of common stock (104,299) (4,740)
Proceeds from stock options exercised 3,634 614
--------- ---------
Net cash provided by (used in) financing activities 149 (7,091)
--------- ---------
Effect of exchange rate changes on cash (1,204) 1,134
--------- ---------
Net (decrease) increase in cash and cash equivalents (15,790) 1,984
Cash and cash equivalents, beginning of period 36,044 13,466
--------- ---------
Cash and cash equivalents, end of period $ 20,254 $ 15,450
========= =========
SUPPLEMENTAL DISCLOSURE OF NON- CASH TRANSACTIONS:
Property and equipment acquired through capital lease obligations $ 2,150 $ 27
========= =========
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, 2003 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, 2003 for Credit Acceptance
Corporation (the "Company"). Certain prior period amounts have been reclassified
to conform to the current presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. SIGNIFICANT ACCOUNTING POLICIES
Finance Charges. The Company recognizes finance charge income in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 91, "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases (an Amendment
of FASB Statements No. 13, 60, and 65 and a Rescission of FASB Statement No.
17)" ("SFAS No. 91"). SFAS No. 91 requires the Company to recognize finance
charges under the interest method such that income is recognized on a level
yield basis during the life of the underlying asset. During the first quarter of
2004, the Company revised its methodology for applying SFAS No. 91 such that
finance charge income and the amount of the provision for earned but unpaid
income at the time a retail installment contract (referred to as a "Loan") is
transferred to non-accrual status can be calculated for each individual Loan.
Prior to the first quarter of 2004, the Company calculated finance charge income
and the provision for earned but unpaid revenue using a pooling methodology. The
pooling methodology required the Company to make various assumptions and
estimates which impacted the timing of income recognition and the classification
of finance charge revenue and the provision for earned but unpaid revenue. The
Company believes that this revised methodology improves the precision of the
Company's calculation of finance charge revenue and the provision for earned but
unpaid revenue. This revised methodology resulted in a change in the timing of
revenue recognition as the actual term of the Loans on a Loan by Loan basis was
longer than the average Loan term as calculated under the pooling methodology,
resulting in an approximately $3.5 million reduction in finance charges during
the three months ended March 31, 2004, of which approximately $3.3 million
relates to periods prior to December 31, 2003. In addition, the revised
methodology resulted in a change in the amount of revenue recognized on a Loan
prior to the Loan transferring to non-accrual status, resulting in an increase
in finance charges and a corresponding increase in the provision for earned but
unpaid revenue of approximately $3.5 million for the three months ended March
31, 2004.
Ancillary Product Income. The Company has relationships with third party
vehicle service contract administrators ("TPAs") whereby the TPAs process claims
on vehicle service contracts underwritten by third party insurers. The Company
receives a commission for all such vehicle service contracts sold by its
dealer-partners. The Company refers to dealers participating in the Company's
financing program and sharing the Company's commitment to changing customers'
lives as "dealer-partners". The Company recognizes the commission received from
the TPAs in accordance with SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition" ("SAB 104"). Through December 31, 2003, the Company recognized
ancillary product income for commissions received on the sale of third party
vehicle service contracts upon the sale of the vehicle service contracts since
(i) delivery of the vehicle service contract occurs at this time, (ii) the
Company bears no further obligation under the vehicle service contract and (iii)
the Company's commission is not subject to refund. During the first quarter of
2004, the Company entered into agreements with two new TPAs. The two new
agreements differ from the prior agreement in three material respects: (i) the
new agreements provide a commission to the Company on all vehicle service
contracts sold by its dealer-partners, regardless of whether the vehicle service
contract is financed by the Company, (ii) the new agreements pay a higher
commission on vehicle service contracts financed by the Company, and (iii) the
new agreements allow the Company to participate in underwriting profits
depending on the level of future claims paid. Since the commission paid on
financed vehicle service contracts is higher than the commission paid on
non-financed vehicle service contracts, the Company concluded this
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES - (CONCLUDED)
difference in commission rates was evidence of a multiple element revenue
arrangement as defined under the provisions of SAB 104 and EITF 00-21, "Revenue
Arrangements with Multiple Elements". As a result, the Company considers the
amount received from TPAs for financed vehicle service contracts to be comprised
of two components, a component relating to the fair value of the commission (a
"broker fee") and a larger component relating to providing the financing on the
related Loan (a "financing premium").
The two new agreements also require that net premiums on the vehicle
service contracts be placed in trust accounts by the TPA. Funds in the trust
accounts are utilized by the TPA to pay claims on the vehicle service contracts.
Underwriting profits, if any, on the vehicle service contracts are distributed
to the Company after the term of the vehicle service contracts have expired.
Under FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
("FIN 46"), the Company is considered the primary beneficiary of the trusts. As
a result, the assets and liabilities of the trusts have been consolidated on the
Company's balance sheet. As of September 30, 2004, the trusts had $4.2 million
in cash available to pay claims and a related claims reserve of $4.2 million.
The cash is included in cash and cash equivalents and the claims reserve is
included in accounts payable and accrued liabilities in the consolidated balance
sheets. A third party insures claims in excess of available funds in the trust
accounts.
Beginning January 1, 2004, broker fees generated under the two new
agreements will be recognized over the life of the related vehicle service
contract. Broker fees generated under the old agreement, which does not meet the
requirements for consolidation under FIN 46, will be recognized upon the sale of
the vehicle service contract. Under all three agreements, the financing premium
will be deferred and recognized over the life of the underlying Loan as an
adjustment to the yield consistent with the Company's accounting for finance
charges under the interest method.
Under the new policy, the Company recognized $2.9 million and $7.2 million
in income during the three and nine months ended September 30, 2004,
respectively, and deferred $4.4 million and $12.0 million of financing premiums
and broker fees for the three and nine months ended September 30, 2004,
respectively. The Company estimates the deferred portion will be recognized as
follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2004
------------------ ------------------
Fourth quarter of 2004 $ 622 $ 1,871
2005 2,064 6,058
2006 1,314 3,462
2007 369 633
------- -------
$ 4,369 $12,024
======= =======
Loans Receivable and Allowance for Credit Losses. The Company maintains an
allowance for credit losses that covers: (i) losses inherent in the Company's
Loan portfolio, and (ii) earned but unpaid revenue on Loans in non-accrual
status. Losses inherent in the Company's Loan portfolio result from Loans
receivable determined to be uncollectible or that have expected future
collections less than the full contractual amount, less any losses absorbed by
dealer holdbacks. By definition, these losses equal the amount by which advances
to dealer-partners plus accrued income (the "net investment") exceed the net
present value of estimated future cash flows related to the Loans receivable
less the present value of estimated dealer holdback payments.
To record estimated losses on its Loan portfolio, as required under SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan - an amendment of
FASB Statements No. 5 and 15", as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan- Income Recognition and Disclosures", the
Company compares the present value of estimated future collections for each
dealer-partner's Loan portfolio to the Company's net investment in that
portfolio. During the first quarter of 2004 the Company developed a model for
estimating the amount and timing of future dealer holdback payments and began to
include the present value of expected future dealer holdback payments in its
loss estimate. Considering estimated future dealer holdback payments increases
the Company's loss estimate as cash flows used to evaluate impairment are
reduced. This change resulted in a $9.4 million increase in the allowance for
credit losses and reduced after-tax earnings by approximately $6.1 million for
the three months ended March 31, 2004. Deducting dealer holdback payments from
the cash flows used to evaluate impairment will not increase the cash amount of
losses or future charge-offs against the allowance.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. LOANS RECEIVABLE
Loans receivable consisted of the following (in thousands):
AS OF
---------------------------------------
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Gross Loans receivable $ 1,222,733 $ 1,035,681
Unearned finance charges (202,928) (157,707)
Unearned commissions, insurance premiums and reserves (2,755) (2,557)
----------- -----------
Loans receivable $ 1,017,050 $ 875,417
=========== ===========
Non-accrual Loans $ 216,131 $ 203,598
=========== ===========
Non-accrual Loans as a percent of gross Loans receivable 17.7% 19.7%
=========== ===========
A summary of the changes in gross Loans receivable is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Balance, beginning of period $ 1,169,468 $ 1,011,410 $ 1,035,681 $ 912,963
Gross amount of Loans accepted 240,236 188,815 754,635 614,926
Net cash collections on Loans (143,884) (120,828) (425,012) (360,480)
Charge-offs * (72,467) (67,223) (218,311) (187,445)
Recoveries * 7,599 7,120 24,269 7,120
Other fees 21,895 15,068 52,010 39,951
Net change in repossessed collateral (301) (333) (1,092) 1,363
Currency translation 187 129 553 5,760
----------- ----------- ----------- -----------
Balance, end of period $ 1,222,733 $ 1,034,158 $ 1,222,733 $ 1,034,158
=========== =========== =========== ===========
A summary of the changes in the allowance for credit losses is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
--------- -------- -------- --------
Balance, beginning of period $ 36,567 $ 24,461 $ 17,615 $ 20,991
Provision for credit losses 1,859 1,363 15,966 6,652
Charge-offs * (3,570) (14,201) (4,897) (16,188)
Recoveries * 2,709 3,233 8,840 3,233
Currency translation (6) 27 35 195
-------- -------- -------- --------
Balance, end of period $ 37,559 $ 14,883 $ 37,559 $ 14,883
======== ======== ======== ========
* Charge-offs presented net of recoveries for the periods prior to July 1, 2003
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
4. OTHER ASSETS
Loans receivable are collateralized by the related vehicles. The Company
has the right to repossess the vehicle in the event that the consumer defaults
on the payment terms of the Loan. In accordance with SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets", 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 other assets in
the consolidated balance sheets. As of September 30, 2004 and December 31, 2003,
repossessed assets totaled approximately $7.1 million and $6.0 million,
respectively.
5. DEALER HOLDBACKS
Dealer holdbacks, net consisted of the following (in thousands):
AS OF
---------------------------------------
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Dealer holdbacks $ 974,056 $ 828,720
Less: advances (472,895) (404,859)
--------- ---------
Dealer holdbacks, net $ 501,161 $ 423,861
========= =========
6. 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. The Company accepts Loans from
affiliated dealer-partners and nonaffiliated dealer-partners on the same terms.
A summary of related party Loan activity is as follows (in thousands):
Affiliated % of Affiliated % of
dealer-partner consolidated dealer-partner consolidated
balance as of as of balance as of as of
September 30, 2004 September 30, 2004 December 31, 2003 December 31, 2003
------------------ ------------------ ----------------- -----------------
Gross Loans receivable $ 36,200 3.0% $ 31,500 3.0%
Gross dealer holdbacks $ 28,800 3.0% $ 24,800 3.0%
Advance balance $ 13,700 2.9% $ 12,200 3.0%
For the Three Months ended For the Three Months ended
September 30, 2004 September 30, 2003
-------------------------- --------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
activity consolidated activity consolidated
------------- ------------ -------------- ------------
Loans accepted $ 8,000 3.3% $ 5,400 2.9%
Advances $ 3,900 3.4% $ 2,600 3.0%
For the Nine Months ended For the Nine Months ended
September 30, 2004 September 30, 2003
------------------------- -----------------------------
Affiliated Affiliated
dealer-partner % of dealer-partner % of
activity consolidated activity consolidated
-------------- ------------ -------------- ------------
Loans accepted $ 23,100 3.1% $ 17,200 2.8%
Advances $ 11,100 3.1% $ 8,000 2.8%
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. RELATED PARTY TRANSACTIONS - (CONCLUDED)
Pursuant to an employment agreement with the Company's President dated
April 19, 2001, the Company loaned the President's dealerships $850,000. The
note, including all principal and interest, is due on April 19, 2011, bears
interest at 5.22%, is unsecured, and is personally guaranteed by the Company's
President. The balance of the note including accrued but unpaid interest was
approximately $1,088,000 and $1,054,000 as of September 30, 2004 and December
31, 2003, respectively. In addition, pursuant to the employment agreement, the
Company loaned the President approximately $478,000. The note, including all
principal and interest, is due on April 19, 2011, bears interest at 5.22%
beginning January 1, 2002, and is unsecured. The balance of the note including
accrued interest was approximately $547,000 and $529,000 as of September 30,
2004 and December 31, 2003, respectively.
Total CAPS (the Company's Internet based Credit Approval Processing
System) and dealer enrollment fees earned from affiliated dealer-partners were
$13,000 and $36,000 for the three and nine months ended September 30, 2004,
respectively, and $13,000 and $31,000 for the same periods in 2003.
The Company paid for air transportation services provided by a company
owned by the Company's majority shareholder and Chairman totaling $89,000 and
$171,000 for the three months and nine months ended September 30, 2004,
respectively, and $39,000 and $114,000 for the same periods in 2003.
Prior to the third quarter of 2001, the Company offered a line of credit
arrangement to certain dealerships who were not participating in the Company's
core program. The Company ceased offering this program to new dealerships in the
third quarter of 2001 and has been reducing the amount of capital invested in
this program since that time. Beginning in 2002, entities owned by the Company's
majority shareholder and Chairman began offering secured line of credit loans in
a manner similar to the Company's prior program, at his dealerships and at two
other dealerships, one of whom also does business with the Company. The
Company's majority shareholder and Chairman does not intend to expand his line
of credit lending activities to additional dealerships, except to dealerships
which he owns or controls.
7. FORWARD CONTRACTS
In the third quarter of 2003, the Company entered into a series of forward
contracts with a commercial bank to manage foreign currency exchange risk
associated with the cash flows anticipated from the exit of the United Kingdom
operation. As of September 30, 2004 and December 31, 2003, the Company had
contracts outstanding to deliver 5.3 million British pounds sterling and 16.9
million British pounds sterling, respectively, to the commercial bank which will
be exchanged into United States dollars at weighted average exchange rates of
1.58 and 1.57 United States dollars per British pound sterling, respectively, on
a monthly basis through June 30, 2005. The Company believes that this
transaction minimizes the currency exchange risk associated with an adverse
change in the relationship between the United States dollar and the British
pound sterling as it repatriates cash from the United Kingdom operation. As the
Company has not designated these contracts as hedges as defined under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", as amended
by SFAS No. 138 and SFAS No. 149, changes in the fair value of these forward
contracts will increase or decrease net income. The fair value of the forward
contracts were less than the notional amount of the contracts outstanding as of
September 30, 2004 and December 31, 2003 by $1,082,000 and $2,817,000,
respectively, due to the weakening of the United States dollar versus the
British pound sterling since the date the contracts were entered into. The
Company recognized a foreign currency gain of $675,000 ($439,000 after-tax) and
$1,734,000 ($1,127,000 after-tax) for the three months and nine months ended
September 30, 2004, respectively, related to the change in the fair value of the
forward contracts primarily due to a decrease in the notional amount of the
forward contracts from December 31, 2003 to September 30, 2004. The Company
recognized a foreign currency loss of $1,080,000 ($702,000 after-tax) for the
three months and nine months ended September 30, 2003 related to the change in
the fair value of the forward contracts primarily due to the weakening of the
United States dollar versus the British pound sterling during the third quarter
of 2003.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. INCOME TAXES
A reconciliation of the U.S. federal statutory rate to the Company's
effective tax rate follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
2004 2003 2004 2003
-------- ------- ------ ---------
U.S. federal statutory rate 35.0% 35.0% 35.0% 35.0%
State income taxes 1.0 0.6 1.0 0.7
Foreign income taxes (0.1) (0.3) (0.1) 1.6
U.S. tax impact of foreign earnings - (0.9) 0.1 (2.0)
Other 0.1 0.6 0.2 0.3
---- ---- ---- ----
Effective tax rate 36.0% 35.0% 36.2% 35.6%
==== ==== ==== ====
The differences between the U.S. federal statutory rate and the Company's
consolidated effective tax rate are primarily related to: (i) state income taxes
that are included in the provision for income taxes, (ii) the impact of earnings
generated by the Company's foreign operations, which are taxed at a different
rate, and (iii) the impact of the exchange rate on the repatriation of foreign
earnings. Repatriations of foreign earnings are taxed by the U.S. based on
foreign exchange rates prevailing at the time of repatriation while foreign tax
credits are calculated based on the exchange rates that prevailed when the
income was originally earned.
9. BUSINESS SEGMENT INFORMATION
The Company has four reportable business segments: United States, United
Kingdom, Automobile Leasing, and Other. The United States segment primarily
consists of the Company's United States automobile financing business. The
United Kingdom segment primarily consists of the Company's United Kingdom
automobile financing business. The Automobile Leasing segment consists of the
Company's automobile leasing business. The Other segment consists of the
Company's Canadian automobile financing business and secured lines of credit and
floorplan financing products. The Company is currently liquidating its
operations in all segments other than the United States.
Selected segment information is set forth below (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
September 30, September 30,
-------------------- ---------------------
2004 2003 2004 2003
-------- -------- --------- --------
Revenue:
United States $ 41,060 $ 30,835 $ 112,399 $ 90,858
United Kingdom 1,206 2,431 3,795 9,294
Automobile Leasing 743 1,886 3,054 6,592
Other 190 847 761 2,286
-------- -------- --------- --------
Total revenue $ 43,199 $ 35,999 $ 120,009 $109,030
======== ======== ========= ========
Income (loss) before provision (credit) for income taxes:
United States $ 19,661 $ 12,706 $ 40,814 $ 37,364
United Kingdom 222 1,097 806 (8,115)
Automobile Leasing 325 (126) 1,156 (892)
Other (310) (104) (674) 233
-------- -------- --------- --------
Total income before provision for income taxes $ 19,898 $ 13,573 $ 42,102 $ 28,590
======== ======== ========= ========
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
10. NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the total weighted average
number of common shares and common stock equivalents outstanding. Common stock
equivalents included in the computation represent shares issuable upon assumed
exercise of stock options that would have a dilutive effect using the treasury
stock method. The share effect is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Weighted average common shares outstanding 38,679,011 42,315,027 39,234,974 42,329,722
Common stock equivalents 2,264,593 1,644,897 2,271,346 917,796
---------- ---------- ---------- ----------
Weighted average common shares and common stock equivalents 40,943,604 43,959,924 41,506,320 43,247,518
========== ========== ========== ==========
The diluted net income per share calculation excludes stock options to
purchase approximately 110,000 shares and 82,737 shares for the three months and
nine months ended September 30, 2004, respectively, and 266,531 shares and
992,490 shares for the same periods in 2003 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
Since 1972, Credit Acceptance has provided auto loans to consumers,
regardless of their credit history. The Company's product is offered through a
nationwide network of automobile dealers who benefit by selling vehicles to
consumers who otherwise could not obtain financing. The Company delivers credit
approvals instantly through the Internet. The Company's revenues are generated
primarily through the servicing fees it receives for the collection and
administration of Loans assigned by dealer-partners to the Company, and to a
lesser extent, through the fees it receives through the sale of third-party
ancillary products.
The Company's strategy is to increase the amount of economic profit per
share by increasing its return on capital and profitably growing its business.
(See "Economic Profit" for the Company's definition of economic profit.) The
Company believes it has been successful in improving the profitability of Loan
originations in recent years as a result of increasing the spread between the
forecasted collection rate and the advance rate, and increasing revenue from
ancillary products. For the nine months ended September 30, 2004, consolidated
Loan originations grew 23% while Loan originations in the United States grew 29%
compared to the same period in 2003 due to an increase in the number of active
dealer-partners and an increase in the average Loan size. Since the Company
believes it is the only financial services company offering "guaranteed credit
approval" for automobile dealers on a national scale, and the Company presently
serves only a small portion of its target market, the Company believes that it
has a good opportunity to grow its business profitably in the future.
Critical success factors for the Company include access to capital and
ability to accurately forecast Loan performance. The Company's strategy for
accessing the capital required to grow its business is to: (i) maintain
consistent financial performance, (ii) maintain modest financial leverage, and
(iii) maintain multiple funding sources. The Company's funded debt to equity
ratio is 0.7/1.0 at September 30, 2004. The Company currently funds its business
through a bank line of credit facility, privately placed secured financings and
commercial bank conduit-financed secured financings. The ability to accurately
forecast Loan performance is critical to building a profitable company. At the
time of Loan origination, the Company forecasts future expected cash flows from
the Loan. Based on these forecasts, an advance is made to the related
dealer-partner at a level that allows the Company to achieve an acceptable
return on capital. If Loan performance equals or exceeds the Company's original
expectation, it is likely the Company's target return on capital will be
achieved.
FORECASTING LOAN PERFORMANCE IN THE UNITED STATES
The United States is the Company's only business segment that continues to
originate new Loans. 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 in the United States
that have been realized as of September 30, 2004. The amounts presented are
expressed as a percent of the original Loan amount by year of Loan origination.
As of September 30, 2004
-----------------------------------------------------------------
Forecasted % of Forecast
Year Collection % Advance % Spread % Realized
- ---- ------------ --------- -------- -------------
1992 81.7% 35.3% 46.4% 100.0%
1993 75.9% 37.3% 38.6% 100.0%
1994 62.0% 41.8% 20.2% 100.0%
1995 55.3% 45.3% 10.0% 99.5%
1996 55.4% 48.4% 7.0% 98.8%
1997 58.5% 48.3% 10.2% 98.2%
1998 67.6% 49.4% 18.2% 98.2%
1999 71.9% 52.3% 19.6% 97.9%
2000 72.1% 50.9% 21.2% 97.2%
2001 67.1% 48.0% 19.1% 92.1%
2002 69.1% 45.7% 23.4% 79.6%
2003 72.3% 47.0% 25.3% 49.5%
11
Accurately predicting future collection rates is critical to the Company's
success. The risk of a forecasting error declines as Loans age. For example, the
risk of a material forecasting error for business written in 1999 is very small
since 97.9% of the total amount forecasted has already been realized. In
contrast, the Company's forecast for recent Loan originations is less certain.
If the Company produces disappointing operating results, it will likely be
because the Company overestimated future Loan performance. Although the Company
makes every effort to estimate collection rates as accurately as possible, there
can be no assurance that the Company's estimates will be accurate or that Loan
performance will be as predicted.
A wider spread between the forecasted collection rate and the advance rate
reduces the Company's risk of credit losses. Because collections are applied to
advances on an individual dealer-partner basis, a wide spread does not eliminate
the risk of losses, but it does reduce the risk significantly. The Company made
no material changes in credit policy or pricing in the third quarter of 2004,
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 of collection rates in the United States
for Loans originated by year as of September 30, 2004 with the forecast as of
December 31, 2003.
September 30, 2004 December 31, 2003
Year Forecasted Collection % Forecasted Collection % Variance
- ---- ----------------------- ----------------------- --------
1992 81.7% 81.5% 0.2%
1993 75.9% 75.7% 0.2%
1994 62.0% 61.8% 0.2%
1995 55.3% 55.2% 0.1%
1996 55.4% 55.3% 0.1%
1997 58.5% 58.1% 0.4%
1998 67.6% 67.2% 0.4%
1999 71.9% 71.5% 0.4%
2000 72.1% 71.7% 0.4%
2001 67.1% 67.0% 0.1%
2002 69.1% 69.4% -0.3%
2003 72.3% 72.8% -0.5%
12
RESULTS OF OPERATIONS
Three and Nine Months ended September 30, 2004 Compared to Three and Nine
Months Ended September 30, 2003
The following is a discussion of the results of operations and income
statement data for the Company on a consolidated basis and for each of the
Company's four business segments: United States, United Kingdom, Automobile
Leasing and Other.
Consolidated
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
- ---------------------- ------------ ------- ------------- -------
REVENUE:
Finance charges $ 34,830 80.6% $ 25,770 71.6%
Ancillary product income 3,047 7.1 4,369 12.1
Lease revenue 271 0.6 1,251 3.5
Other income 5,051 11.7 4,609 12.8
-------- ----- -------- -----
Total revenue 43,199 100.0 35,999 100.0
COSTS AND EXPENSES:
Salaries and wages 9,807 22.7 7,879 21.8
General and administrative 5,181 12.0 4,679 13.0
Provision for credit losses 2,098 4.9 2,303 6.4
Sales and marketing 3,026 7.0 2,023 5.6
Interest 2,846 6.6 2,267 6.3
Stock-based compensation expense 747 1.7 1,027 2.9
Other expense 270 0.6 1,182 3.3
-------- ----- -------- -----
Total costs and expenses 23,975 55.5 21,360 59.3
-------- ----- -------- -----
Operating income 19,224 44.5 14,639 40.7
Foreign exchange gain (loss) 674 1.6 (1,066) (3.0)
-------- ----- -------- -----
Income before provision for income taxes 19,898 46.1 13,573 37.7
Provision for income taxes 7,156 16.6 4,755 13.2
-------- ----- -------- -----
Net income $ 12,742 29.5% $ 8,818 24.5%
======== ===== ======= =====
13
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
- ---------------------- ---- ------- ---- -------
REVENUE:
Finance charges $ 95,790 79.8% $ 76,457 70.2%
Ancillary product income 8,373 7.0 14,336 13.1
Lease revenue 1,323 1.1 5,371 4.9
Other income 14,523 12.1 12,866 11.8
-------- ----- -------- -----
Total revenue 120,009 100.0 109,030 100.0
COSTS AND EXPENSES:
Salaries and wages 27,566 23.0 25,083 23.0
General and administrative 15,601 13.0 15,361 14.1
Provision for credit losses 16,832 14.0 9,354 8.6
Sales and marketing 8,591 7.2 6,813 6.2
Interest 7,820 6.5 5,264 4.8
Stock-based compensation expense 2,178 1.8 2,830 2.6
United Kingdom asset impairment - - 10,493 9.6
Other expense 1,050 0.9 4,205 3.9
-------- ----- -------- -----
Total costs and expenses 79,638 66.4 79,403 72.8
-------- ----- -------- -----
Operating income 40,371 33.6 29,627 27.2
Foreign exchange gain (loss) 1,731 1.4 (1,037) (1.0)
-------- ----- -------- -----
Income before provision for income taxes 42,102 35.0 28,590 26.2
Provision for income taxes 15,224 12.7 10,171 9.3
-------- ----- -------- -----
Net income $ 26,878 22.3% $ 18,419 16.9%
======== ===== ======== =====
For the three months ended September 30, 2004, consolidated net income
increased to $12.7 million or $0.31 per diluted share compared to $8.8 million
or $0.20 per diluted share for the same period in 2003. The increase in
consolidated net income was primarily due to: (i) an increase in finance charge
income due to increases in the average annualized yield on the Loan portfolio
and the average size of the Loan portfolio during 2004 and (ii) an increase in
foreign exchange gain due to an increase in the fair value of forward contracts
during 2004. Partially offsetting these items was a decrease in ancillary
product income due to the Company's new policy, implemented prospectively in the
first quarter of 2004, for recognizing income on third-party vehicle service
contracts sold, as discussed in Note 2 to the consolidated financial statements.
For the nine months ended September 30, 2004, consolidated net income
increased to $26.9 million or $0.65 per diluted share compared to $18.4 million
or $0.43 per diluted share for the same period in 2003. The increase in
consolidated net income was primarily due to: (i) an increase in finance charge
income due to increases in the average size of the Loan portfolio and the
average annualized yield on the Loan portfolio during 2004 and (ii) the United
Kingdom impairment expenses recognized during the second quarter of 2003.
Partially offsetting these items were: (i) a decrease in ancillary product
income due to the Company's new policy, implemented prospectively in the first
quarter of 2004, for recognizing income on third-party vehicle service contracts
sold, as discussed in Note 2 to the consolidated financial statements, and (ii)
an increase in the provision for credit losses primarily due to the Company's
change in estimate during the first quarter of 2004 for recording losses on its
Loan portfolio and the Company's revised methodology during the first quarter of
2004 for calculating finance charge income and the related provision for earned
but unpaid servicing fees, as discussed in Note 2 to the consolidated financial
statements.
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 interest expense is provided on a
consolidated basis, as the explanation is not meaningful by business segment.
Interest. Consolidated interest expense increased to $2.8 and $7.8 million
for the three and nine months ended September 30, 2004 from $2.3 million and
$5.3 million for the same periods in 2003. The increase in consolidated interest
expense was due to an increase in average outstanding debt as a result of stock
repurchases and an increase in Loan originations, partially offset by a decrease
in the weighted average interest rate to 6.3% and 6.7% for the three and nine
months ended September 30, 2004 from 8.3 % and 6.8 % for the same periods in
2003. The decrease in the weighted average interest rate is primarily the result
of the decreased impact of fixed fees on the Company's secured financings and
line of credit facility due to higher average outstanding borrowings.
14
United States
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 33,918 82.7% $ 23,135 75.1%
Ancillary product income 2,607 6.3 4,363 14.1
Other income 4,535 11.0 3,337 10.8
-------- ----- -------- -----
Total revenue 41,060 100.0 30,835 100.0
COSTS AND EXPENSES:
Salaries and wages 8,851 21.7 6,741 21.8
General and administrative 4,874 11.9 3,940 12.8
Provision for credit losses 1,784 4.3 1,189 3.9
Sales and marketing 3,026 7.4 2,021 6.6
Interest 2,722 6.6 1,865 6.0
Stock-based compensation expense 713 1.7 962 3.1
Other expense 102 0.2 329 1.1
-------- ----- -------- -----
Total costs and expenses 22,072 53.8 17,047 55.3
-------- ----- -------- -----
Operating income 18,988 46.2 13,788 44.7
Foreign exchange gain (loss) 673 1.6 (1,082) (3.5)
-------- ----- -------- -----
Income before provision for income taxes 19,661 47.8 12,706 41.2
Provision for income taxes 7,087 17.3 4,564 14.8
-------- ----- -------- -----
Net income $ 12,574 30.5% $ 8,142 26.4%
======== ===== ======= =====
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 91,899 81.7% $ 67,089 73.9%
Ancillary product income 7,933 7.1 13,401 14.7
Other income 12,567 11.2 10,368 11.4
-------- ----- -------- -----
Total revenue 112,399 100.0 90,858 100.0
COSTS AND EXPENSES:
Salaries and wages 24,972 22.2 21,230 23.4
General and administrative 14,079 12.5 12,808 14.1
Provision for credit losses 16,126 14.3 5,521 6.1
Sales and marketing 8,591 7.6 5,808 6.4
Interest 7,314 6.5 3,769 4.1
Stock-based compensation expense 2,057 1.8 2,611 2.9
Other expense 191 0.2 636 0.7
-------- ----- -------- -----
Total costs and expenses 73,330 65.1 52,383 57.7
-------- ----- -------- -----
Operating income 39,069 34.9 38,475 42.3
Foreign exchange gain (loss) 1,745 1.6 (1,111) (1.2)
-------- ----- -------- -----
Income before provision for income taxes 40,814 36.5 37,364 41.1
Provision for income taxes 14,797 13.2 13,039 14.4
-------- ----- -------- -----
Net income $ 26,017 23.3% $ 24,325 26.7%
======== ===== ======== =====
Finance Charges. Finance charges increased to $33.9 million and $91.9
million for the three and nine months ended September 30, 2004 from $23.1
million and $67.1 million for the same periods in 2003 primarily due to
increases in: (i) the average size of the Loan portfolio resulting from an
increase in Loan originations in 2003 and 2004 and (ii) the average annualized
yield on the Loan portfolio to 14.7% and 13.6% for the three and nine months
ended September 30, 2004 from 12.4% and 12.8% for the same periods in 2003. The
increase in Loan originations in the United States in 2004 was due to an
increase in the number of active dealer-partners due to an increase in
dealer-partner enrollments and an increase in the average Loan size, partially
offset by a decrease in the number of Loans originated per active
dealer-partner. The increase in the average yield was primarily due to (i) the
Company's new policy, implemented prospectively in the first quarter of 2004,
for recognizing income on third-party vehicle service contracts sold that
resulted in the recognition of the related financing premiums as finance charge
income, as discussed in Note 2 to the consolidated financial statements and (ii)
15
the Company's revised methodology for calculating finance charge income, as
discussed in Note 2 to the consolidated financial statements. The increases in
finance charge income resulting from the Company's revised methodology for
calculating finance charge income and the Company's new policy for recognizing
income on third-party vehicle service contracts sold had no impact on net income
as these increases were offset by approximately equal changes in the provision
for credit losses and ancillary product income. Selected Loan origination data
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Loan originations $ 240,236 $ 188,053 $ 754,635 $ 586,412
Number of Loans originated 18,375 15,545 59,484 48,487
Number of active dealer-partners (1) 957 724 1,074 824
Loans per active dealer-partner 19.2 21.5 55.4 58.8
Average Loan size $ 13.1 $ 12.1 $ 12.7 $ 12.1
(1) Active dealer-partners are dealer-partners who submitted at least one
Loan during the period.
The number of active dealer-partners is a function of new dealer-partner
enrollments and attrition. New dealer-partner enrollments are a function of the
number of sales personnel ("Market Area Managers" or "MAM's") and their
productivity. The Company expects to add approximately one MAM per month over
the next eighteen months. The following table summarizes the changes in active
dealer-partners and MAM productivity for the three and nine months ended
September 30, 2004 and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2004 (1) 2003 (1) 2004 (1) 2003 (1)
------- -------- ------- -------
Balance, beginning of period 899 677 916 789
New dealer-partner enrollments (2) 105 88 321 244
Attrition (3) (47) (41) (163) (209)
--- ---- ------ ----
Balance, end of period 957 724 1,074 824
=== ==== ====== ====
Average number of MAM's 52 36 47 34
New dealer-partner enrollments per MAM 2.0 2.4 6.8 7.2
(1) Active dealer-partners are dealer-partners who submitted at least
one Loan during the period.
(2) Excludes new dealer-partners that have enrolled in the Company's
program, but have not submitted at least one Loan during the period.
(3) Dealer-partner attrition is measured according to the following
formula: dealer-partners active during the prior period who become
inactive in the current period less dealer-partners who were
inactive during the prior period who become active in the current
period.
Ancillary Product Income. Ancillary product income decreased to $2.6
million and $7.9 million for the three and nine months ended September 30, 2004
from $4.4 million and $13.4 million for the same periods in 2003 primarily due
to the Company's new policy, implemented prospectively in the first quarter of
2004, for recognizing income on third-party vehicle service contracts sold, as
discussed in Note 2 to the consolidated financial statements, that resulted in:
(i) the deferral of approximately $4.4 million and $12.0 million in financing
premiums for the three and nine months ended September 30, 2004 and (ii) the
recognition of $1.7 million and $3.4 million of deferred financing premiums as
finance charge income for the three and nine months ended September 30, 2004.
These decreases were partially offset by an increase in revenue per vehicle
service contract and an increase in the number of third party vehicle service
contract products sold resulting from an increase in Loan originations during
2004 compared to 2003. The decrease in ancillary product income resulting from
the recognition of deferred financing premiums had no impact on net income as
this decrease was offset by an approximately equal increase in finance charge
income.
Salaries and Wages. Salaries and wages, as a percentage of revenue,
decreased to 22.2% for the nine months ended September 30, 2004 from 23.4% for
the same period in 2003 primarily due to: (i) a decrease in servicing salaries,
as a percentage of revenue, of 1.1% for the nine months ended September 30, 2004
compared to the same period in 2003 and (ii) a decrease in corporate support
salaries, as a percentage of revenue, of 0.9% for the nine months ended
September 30, 2004 compared to the same period in 2003, which is consistent with
the Company's business plan of growing corporate infrastructure at a rate slower
than the growth rate of the Loan portfolio. Partially offsetting these items
were: (i) an increase in employee benefits, as a percentage of revenue, of 0.3%
for the nine months ended September 30, 2004 compared to the same period in 2003
due to an increase in medical costs during 2004 and (ii) an increase in employee
bonus expense, as a percentage of revenue, of 0.3% for the nine months ended
September 30, 2004 compared to the same period in 2003 due to improved financial
and operational performance during 2004. Salaries and wages, as a percentage of
revenue, for the three months ended September 30, 2004 varied by less than 1% of
revenue from the same period in 2003.
16
General and Administrative. General and administrative expenses, as a
percentage of revenue, decreased to 12.5% for the nine months ended September
30, 2004 from 14.1% for the same period in 2003 primarily due to: (i) a decrease
in occupancy and equipment expenses, as a percentage of revenue, of 0.6% for the
nine months ended September 30, 2004 compared to the same period in 2003 due to
a reduction in depreciation expense, as a percentage of revenue, during 2004 and
(ii) a decrease in legal expenses, as a percentage of revenue, of 0.4% for the
nine months ended September 30, 2004 compared to the same period in 2003 due to
a reduction in litigation during 2004. General and administrative expenses, as a
percentage of revenue, for the three months ended September 30, 2004 varied by
less than 1% of revenue from the same period in 2003.
Sales and Marketing. Sales and marketing expenses, as a percentage of
revenue, increased to 7.6% for the nine months ended September 30, 2004 from
6.4% for the same period in 2003 primarily due to: (i) an increase in
dealer-partner support products and services, as a percentage of revenue, of
0.4% for the nine months ended September 30, 2004 compared to the same period in
2003 due to the introduction of new dealer-partner inventory acquisition support
products and customer lead generation services during 2004 and (ii) an increase
in sales commissions, as a percentage of revenue, of 0.3% for the nine months
ended September 30, 2004 compared to the same period in 2003 primarily due to an
increase in the percentage of newer MAM's, which are more expensive on a per
contract basis than seasoned MAM's, to total MAM's during 2004. The increase in
expenses related to dealer-partner support products and services are offset by
an approximately equal increase in other income resulting from the fees charged
to dealer-partners for these products and services. Sales and marketing
expenses, as a percentage of revenue, for the three months ended September 30,
2004 varied by less than 1% of revenue for the same period in 2003.
Provision for Credit Losses. The provision for credit losses increased to
$1.8 million and $16.1 million for the three and nine months ended September 30,
2004 from $1.2 million and $5.5 million for the same periods in 2003. The
provision for credit losses consists of four components: (i) a provision for
earned but unpaid revenue on Loans which were transferred to non-accrual status
during the period, (ii) a provision to reflect losses inherent in the Company's
Loan portfolio, (iii) a provision for losses on notes receivable, and (iv) a
provision for earned but unpaid revenue related to dealer-partner access fees
for the Company's Credit Approval Processing System ("CAPS").
The increase in the provision for credit losses for the three months ended
September 30, 2004 compared to the same period in 2003 was primarily due to: (i)
an increase of $2.4 million in the provision for earned but unpaid revenue on
Loans primarily due to the Company's change in estimate for calculating finance
charge income and the related provision for earned but unpaid servicing fees, as
discussed in Note 2 to the consolidated financial statements, (ii) an increase
of $300,000 in the provision for earned but unpaid CAPS fees due to a revised
estimate of the collectibility of these fees, and (iii) an increase of $200,000
in the provision for losses on notes receivable due to a negative provision of
$200,000 recognized in the third quarter of 2003. Partially offsetting these
items was a $2.3 million decrease in the provision for losses inherent in the
Loan portfolio due to recoveries on previously charged-off Loans exceeding
credit losses during 2004. The increase in the provision for credit losses
resulting from the Company's revised methodology for calculating the provision
for earned but unpaid servicing fees had no impact on net income as this
increase was offset by an approximately equal increase in finance charges
resulting from the Company's revised methodology for calculating finance charge
income.
The increase in the provision for credit losses for the nine months ended
September 30, 2004 compared to the same period in 2003 was primarily due to: (i)
a $6.0 million increase in the provision for earned but unpaid revenue on Loans
primarily due to the Company's change in estimate for calculating finance charge
income and the related provision for earned but unpaid servicing fees, as
discussed in Note 2 to the consolidated financial statements and (ii) a $4.4
million increase in the provision for losses inherent in the Loan portfolio. The
increase in the provision for losses inherent in the Loan portfolio was the
result of a $9.4 million increase in the provision during the first quarter of
2004 resulting from the Company's revised methodology for recording losses on
its Loan portfolio which now considers estimated future dealer holdback payments
in its analysis of Loan impairment, as discussed in Note 2 to the consolidated
financial statements, partially offset by decreases in the provision during the
second and third quarters of 2004 due to recoveries on previously charged-off
Loans exceeding credit losses during the periods.
Stock-based Compensation Expense. Stock-based compensation expense
decreased to $700,000 and $2.1 million for the three and nine months ended
September 30, 2004 from $1.0 million and $2.6 million for the same periods in
2003. The decrease in expense was primarily the result of: (i) additional
expense recognized during the second quarter of 2003 as a result of a reduction
in the period over which certain performance-based stock options were expected
to vest and (ii) a decline in the number of stock options outstanding from the
prior year periods.
17
Foreign Exchange Gain (Loss). The foreign exchange gain increased to
$700,000 and $1.7 million for the three and nine months ended September 30, 2004
from losses of $1.1 million for the same periods in 2003. The foreign exchange
gains and losses for the three and nine months ended September 30, 2004 and 2003
were primarily the result of changes in the fair value of forward contracts
entered into during the third quarter of 2003, as discussed in Note 7 to the
consolidated financial statements.
Provision for Income Taxes. The effective tax rate increased to 36.0% and
36.3% for the three and nine months ended September 30, 2004 from 35.9% and
34.9% for the same periods in 2003. The increase in the effective tax rate for
the three and nine months ended September 30, 2004 was primarily due to the
effects of foreign exchange rates on the taxes associated with the repatriation
of foreign earnings.
United Kingdom
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
-------------- ------- -------------- ------
REVENUE:
Finance charges $ 767 63.6% $ 2,288 94.2%
Ancillary product income 440 36.5 6 0.2
Other income (1) (0.1) 137 5.6
----- ----- ------- -----
Total revenue 1,206 100.0 2,431 100.0
COSTS AND EXPENSES:
Salaries and wages 826 68.5 841 34.6
General and administrative 216 17.9 502 20.6
Provision for credit losses (92) (7.6) (74) (3.0)
Stock-based compensation expense 34 2.8 65 2.7
----- ----- ------- -----
Total costs and expenses 984 81.6 1,334 54.9
----- ----- ------- -----
Income before provision for income taxes 222 18.4 1,097 45.1
Provision for income taxes 66 5.5 236 9.7
----- ----- ------- -----
Net income $ 156 12.9% $ 861 35.4%
===== ===== ======= =====
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 3,356 88.4% $ 8,202 88.2%
Ancillary product income 440 11.6 935 10.1
Other income (1) - 157 1.7
------- ----- -------- ------
Total revenue 3,795 100.0 9,294 100.0
COSTS AND EXPENSES:
Salaries and wages 2,059 54.3 2,888 31.0
General and administrative 1,153 30.4 1,694 18.2
Provision for credit losses (344) (9.1) 1,171 12.6
Sales and marketing - - 944 10.2
Stock-based compensation expense 121 3.2 219 2.4
United Kingdom asset impairment - - 10,493 112.9
------- ----- -------- ------
Total costs and expenses 2,989 78.8 17,409 187.3
------- ----- -------- ------
Income (loss) before provision (credit) for income taxes 806 21.2 (8,115) (87.3)
Provision (credit) for income taxes 238 6.3 (2,688) (28.9)
------- ----- -------- ------
Net income (loss) $ 568 14.9% $ (5,427) (58.4)%
======= ===== ======== ======
Effective June 30, 2003, the Company decided to stop originating Loans in
the United Kingdom. As a result, the average size of the Loan portfolio in the
United Kingdom has declined significantly. The declines in the revenues and
expenses were primarily a result of this decision, except as discussed below.
Ancillary Product Income. During the third quarter of 2004, the Company
received $440,000 in profit sharing income from a third party ancillary product
provider related to the performance of ancillary products originated prior to
June 30, 2003 that matured during 2003.
18
United Kingdom Asset Impairment. As a result of the decision to stop
originating Loans in the United Kingdom, the Company recorded an expense in the
second quarter of 2003 consisting of: (i) $9.8 million to reduce the carrying
value of the operation's net asset value of the Loan portfolio to the present
value (using a discount rate of 13%) of the forecasted cash flows relating to
the Loan portfolio less estimated future servicing expenses and (ii) a write-off
of $700,000 of fixed assets that would no longer be used in the operation. In
determining the impairment of the Loan portfolio, 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. The Company does not expect to record additional impairment
expense unless the actual results are less than the forecast used by management
in the impairment analysis, resulting in a decrease in the present value of
forecasted cash flows relative to the United Kingdom's net asset value.
Automobile Leasing
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- -------
REVENUE:
Lease revenue $ 271 36.5% $ 1,251 66.3%
Other income 472 63.5 635 33.7
----- ----- ------- -----
Total revenue 743 100.0 1,886 100.0
COSTS AND EXPENSES:
Salaries and wages 107 14.4 250 13.2
General and administrative 46 6.2 162 8.6
Provision for credit losses - - 497 26.4
Interest 98 13.2 266 14.1
Other expense 168 22.6 853 45.2
----- ----- ------- -----
Total costs and expenses 419 56.4 2,028 107.5
----- ----- ------- -----
Operating income (loss) 324 43.6 (142) (7.5)
Foreign exchange gain 1 0.1 16 0.8
----- ----- ------- -----
Income (loss) before provision (credit) for income taxes 325 43.7 (126) (6.7)
Provision (credit) for income taxes 119 16.0 (57) (3.0)
----- ----- ------- -----
Net income (loss) $ 206 27.7% $ (69) (3.7)%
===== ===== ======= =====
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- ------
REVENUE:
Lease revenue $ 1,323 43.3% $ 5,371 81.5%
Other income 1,731 56.7 1,221 18.5
------- ----- ------- -----
Total revenue 3,054 100.0 6,592 100.0
COSTS AND EXPENSES:
Salaries and wages 439 14.4 770 11.8
General and administrative 183 6.0 599 9.1
Provision for credit losses - - 1,690 25.6
Interest 403 13.2 931 14.1
Other expense 859 28.1 3,568 54.1
------- ----- ------- -----
Total costs and expenses 1,884 61.7 7,558 114.7
------- ----- ------- -----
Operating income (loss) 1,170 38.3 (966) (14.7)
Foreign exchange gain (loss) (14) (0.5) 74 1.1
------- ----- ------- -----
Income (loss) before provision (credit) for income taxes 1,156 37.8 (892) (13.6)
Provision (credit) for income taxes 414 13.6 (353) (5.4)
------- ----- ------- -----
Net income (loss) $ 742 24.2% $ (539) (8.2)%
======= ===== ======= =====
19
In January 2002, the Company decided to stop originating automobile
leases. As a result, the average size of the lease portfolio has declined
significantly. The declines in the revenues and expenses were primarily a result
of this decision, except as discussed below.
Other Income. Other income, as a percentage of revenue, increased to 63.5%
and 56.7% for the three and nine months ended September 30, 2004 from 33.7% and
18.5% for the same periods in 2003 primarily due to an increase in gains on
lease terminations, as a percentage of revenue, during 2004 resulting from an
increase in the proportion of lease terminations to total leases outstanding
during 2004.
Other
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 145 76.3% $ 347 41.0%
Other income 45 23.7 500 59.0
------ ------ ------ -----
Total revenue 190 100.0 847 100.0
COSTS AND EXPENSES:
Salaries and wages 23 12.1 47 5.5
General and administrative 45 23.7 75 8.9
Provision for credit losses 406 213.7 691 81.6
Sales and marketing - - 2 0.2
Interest 26 13.7 136 16.1
------ ------ ------ -----
Total costs and expenses 500 263.2 951 112.3
------ ------ ------ -----
Income (loss) before provision (credit) for income taxes (310) (163.2) (104) (12.3)
Provision (credit) for income taxes (116) (61.1) 12 1.4
------ ------ ------ -----
Net income (loss) $ (194) (102.1)% $ (116) (13.7)%
====== ====== ====== =====
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF SEPTEMBER 30, % OF
(Dollars in thousands) 2004 REVENUE 2003 REVENUE
------------- ------- ------------- -------
REVENUE:
Finance charges $ 535 70.3% $ 1,166 51.0%
Other income 226 29.7 1,120 49.0
------ ----- ------- -----
Total revenue 761 100.0 2,286 100.0
COSTS AND EXPENSES:
Salaries and wages 96 12.6 195 8.5
General and administrative 186 24.4 260 11.4
Provision for credit losses 1,050 138.1 972 42.5
Sales and marketing - - 62 2.7
Interest 103 13.5 564 24.7
------ ----- ------- -----
Total costs and expenses 1,435 188.6 2,053 89.8
------ ----- ------- -----
Income (loss) before provision (credit) for income taxes (674) (88.6) 233 10.2
Provision (credit) for income taxes (225) (29.6) 173 7.6
------ ----- ------- -----
Net income (loss) $ (449) (59.0)% $ 60 2.6%
====== ===== ======= =====
The Other segment consists of the Company's Canadian automobile Loan
business, floorplan, and secured line of credit financing businesses. Effective
June 30, 2003, the Company decided to stop originating Loans in Canada. As a
result, the average size of the Loan portfolio in Canada has declined
significantly. The Company has also decided to significantly reduce its
floorplan and secured line of credit portfolios since 2001. The declines in the
revenues and expenses were primarily a result of these decisions.
20
AVERAGE CAPITAL ANALYSIS
The following presentation of financial results and subsequent analysis is
based on analyzing the consolidated 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 on
a consolidated basis.
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF AVERAGE SEPTEMBER 30, % OF AVERAGE
(Dollars in thousands) 2004 CAPITAL (1) 2003 CAPITAL (1)
------------- ------------ ------------- ------------
REVENUE:
Finance charges $ 34,830 28.1% $ 25,770 23.0%
Ancillary product income 3,047 2.5 4,369 3.9
Lease revenue 271 0.2 1,251 1.1
Other income 5,051 4.1 4,609 4.1
--------- ---- --------- -----
Total revenue 43,199 34.9 35,999 32.1
COSTS AND EXPENSES:
Salaries and wages 9,807 8.0 7,879 6.9
General and administrative 5,181 4.2 4,679 4.2
Provision for credit losses 2,098 1.7 2,303 2.1
Sales and marketing 3,026 2.4 2,023 1.8
Interest 2,846 2.3 2,267 2.0
Stock-based compensation expense 747 0.6 1,027 0.9
Other expense 270 0.2 1,182 1.1
--------- ---- --------- -----
Total costs and expenses 23,975 19.4 21,360 19.0
--------- ---- --------- -----
Operating income 19,224 15.5 14,639 13.1
Foreign exchange gain (loss) 674 0.5 (1,066) (1.0)
--------- ---- --------- -----
Income before provision for income taxes 19,898 16.0 13,573 12.1
Provision for income taxes 7,156 5.8 4,755 4.2
--------- ---- --------- -----
Net income $ 12,742 10.2% $ 8,818 7.9%
========= ==== ========= =====
Average capital (1) $ 494,694 $ 448,140
21
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, % OF AVERAGE SEPTEMBER 30, % OF AVERAGE
(Dollars in thousands) 2004 CAPITAL (1) 2003 CAPITAL (1)
------------- ------------ ------------- ------------
REVENUE:
Finance charges $ 95,790 26.8% $ 76,457 23.3%
Ancillary product income 8,373 2.3 14,336 4.4
Lease revenue 1,323 0.4 5,371 1.6
Other income 14,523 4.1 12,866 3.9
--------- ---- --------- ----
Total revenue 120,009 33.6 109,030 33.2
COSTS AND EXPENSES:
Salaries and wages 27,566 7.7 25,083 7.6
General and administrative 15,601 4.4 15,361 4.7
Provision for credit losses 16,832 4.7 9,354 2.8
Sales and marketing 8,591 2.4 6,813 2.1
United Kingdom asset impairment - - 10,493 3.2
Interest 7,820 2.2 5,264 1.6
Stock-based compensation expense 2,178 0.6 2,830 0.9
Other expense 1,050 0.3 4,205 1.3
--------- ---- --------- ----
Total costs and expenses 79,638 22.3 79,403 24.2
--------- ---- --------- ----
Operating income 40,371 11.3 29,627 9.0
Foreign exchange gain (loss) 1,731 0.5 (1,037) (0.3)
--------- ---- --------- ----
Income before provision for income taxes 42,102 11.8 28,590 8.7
Provision for income taxes 15,224 4.3 10,171 3.1
--------- ---- --------- ----
Net income $ 26,878 7.5% $ 18,419 5.6%
========= ==== ========= ====
Average capital (1) $ 475,617 $ 437,939
(1) Average capital is equal to the average amount of debt and equity
during the period, each calculated in accordance with generally
accepted accounting principles. The calculation of average capital
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------------
(Dollars in thousands) 2004 2003 2004 2003
--------- --------- --------- ---------
Average debt $ 180,208 $ 109,205 $ 156,861 $ 102,919
Average shareholders' equity 314,486 338,935 318,756 335,020
--------- --------- --------- ---------
Average capital $ 494,694 $ 448,140 $ 475,617 $ 437,939
========= ========= ========= =========
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:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
(Dollars in thousands) 2004 2003 2004 2003
--------- --------- --------- ---------
Net income $ 12,742 $ 8,818 $ 26,878 $ 18,419
Interest expense after-tax 1,850 1,474 5,083 3,422
--------- --------- --------- ---------
Net operating profit after-tax 14,592 10,292 31,961 21,841
========= ========= ========= =========
Average capital $ 494,694 $ 448,140 $ 475,617 $ 437,939
========= ========= ========= =========
Return on capital 11.8% 9.2% 9.0% 6.6%
22
The increase in the Company's return on capital for the three months ended
September 30, 2004 compared to the same period in 2003 was primarily the result
of: (i) an increase in the return on capital in the United States to 12.0% in
2004 from 9.5% in 2003 and (ii) an increase in the percentage of average total
capital invested in the United States, the Company's business segment with the
highest return on capital, to 96.4% in 2004 from 87.5% in 2003. The increase in
the return on capital in the United States is primarily due to an increase in
the average annualized yield on the Loan portfolio and an increase in foreign
exchange gain as a percentage of average capital, partially offset by a decrease
in ancillary product income as a percentage of capital, as discussed further in
connection with the United States results of operations.
The increase in the Company's return on capital for the nine months ended
September 30, 2004 compared to the same period in 2003 was primarily the result
of: (i) an increase in the return on capital in the United Kingdom to 4.1% in
2004 from (13.6%) in 2003 primarily due to the asset impairment expense
recognized during 2003, as discussed further in connection with the United
Kingdom results of operations and (ii) an increase in the percentage of average
total capital invested in the United States, the Company's business segment with
the highest return on capital, to 94.5% in 2004 from 83.1% in 2003. Partially
offsetting these items that positively impacted the Company's 2004 return on
capital was a decrease in the return on capital in the United States to 9.1% in
2004 from 9.8% in 2003 primarily due to an increase in the provision for credit
losses as a percentage of average capital and a decrease in ancillary product
income as a percentage of average capital, partially offset by an increase in
the average annualized yield on the Loan portfolio, as discussed in connection
with the United States results of operations.
ECONOMIC PROFIT
The Company defines economic profit as net operating profit after-tax less
an imputed cost of equity. Economic profit measures how efficiently the Company
utilizes its total capital, both debt and equity. To consider the cost of both
debt and equity, the Company's calculation of economic profit deducts from net
income as determined under GAAP a cost of equity equal to 10% of average equity,
which approximates the S&P 500's rate of return since 1965. Management uses
economic profit to assess the Company's performance as well as to make capital
allocation decisions. Management believes this information is important to
shareholders because it allows shareholders to compare the returns earned by the
Company investing capital in its core business with the return they could expect
if the Company returned capital to shareholders and they invested in other
securities.
The following table presents the calculation of the Company's economic
profit (loss) for the periods indicated (dollars in thousands, except per share
data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
ECONOMIC PROFIT
Net income (1) $ 12,742 $ 8,818 $ 26,878 $ 18,419
Imputed cost of equity at 10% (2) (7,862) (8,473) (23,907) (25,127)
------------ ------------ ------------ ------------
Total economic profit (loss) $ 4,880 $ 345 $ 2,971 $ (6,708)
============ ============ ============ ============
Diluted weighted average shares outstanding 40,943,604 43,959,924 41,506,320 43,247,518
Economic profit (loss) per diluted share (3) $ 0.12 $ 0.01 $ 0.07 $ (0.16)
(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 average
shareholders' equity, which was $314,486,000 and $318,756,000 for the
three months and nine months ended September 30, 2004, respectively, and
$338,935,000 and $335,020,000 for the same periods in 2003.
(3) Economic profit (loss) per share equals the economic profit (loss) divided
by the diluted weighted average number of shares outstanding.
23
CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared in accordance
with GAAP. The preparation of these financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, the Company evaluates its
estimates, including those related to the recognition of finance charge revenue
and the allowance for credit losses. Item 7 of the Company's Annual Report on
Form 10-K discusses several critical accounting policies, which the Company
believes involve a high degree of judgment and complexity. See Note 2 to the
consolidated financial statements included in this Quarterly Report on Form
10-Q, which is incorporated herein by reference, for material changes to the
estimates and judgments associated with the finance charge revenue, allowance
for credit losses, and ancillary product income accounting policies during the
three months ended March 31, 2004. There have been no other material changes to
the estimates and assumptions associated with these accounting policies during
the three and nine months ended September 30, 2004.
LOSS EXPERIENCE
The following sets forth the components of the provision for credit
losses, charge-offs related to the Company's Loan portfolio, and the allowance
for credit losses as a percentage of gross Loans receivable:
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in thousands) SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Provision for credit losses:
Loans receivable (1) $ 1,859 $ 1,363 $ 15,966 $ 6,652
Leased vehicles - 497 - 1,690
Other 239 443 866 1,012
---------- ---------- ---------- ----------
Total provision for credit losses $ 2,098 $ 2,303 $ 16,832 $ 9,354
========== ========== ========== ==========
Net charge-offs related to the Company's
Loan portfolio absorbed through:
Dealer holdbacks $ 51,206 $ 39,308 $ 158,388 $ 133,896
Unearned finance charges 12,801 9,827 39,597 33,474
Allowance for credit losses (2) 861 10,968 (3,943) 12,955
---------- ---------- ---------- ----------
Total net charge-offs $ 64,868 $ 60,103 $ 194,042 $ 180,325
========== ========== ========== ==========
(1) The increase in provision for credit losses for the nine months
ended September 30, 2004 was primarily due to: (i) the Company's
change in estimate for recording losses on its Loan portfolio which
now considers estimated future dealer holdback payments in its
analysis of Loan impairment, and (ii) credit losses associated with
the Company's revised methodology for calculating finance charge
income and the related provision for earned but unpaid servicing
fees, both as discussed in Note 2 to the consolidated financial
statements.
(2) The net recoveries for the nine months ended September 30, 2004 was
primarily the result of changes to the Company's write-off policy,
which were implemented in the third quarter of 2003.
The allowance for credit losses as a percentage of gross Loans receivable
was 3.1% and 1.7% at September 30, 2004 and December 31, 2003, respectively. The
increase is due to the Company's change in estimate for calculating losses on
its Loan portfolio and the Company's revised methodology for calculating finance
charge income and the related provision for earned but unpaid servicing fees, as
discussed in Note 2 to the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital are cash flows from operating
activities, collections on Loans receivable and borrowings under the Company's
line of credit and secured financings. The Company's principal need for capital
is 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.
The Company's cash and cash equivalents decreased to $20.3 million as of
September 30, 2004 from $36.0 million at December 31, 2003 and the Company's
total balance sheet indebtedness increased to $208.8 million at September 30,
2004 from $106.5 million at December 31, 2003. These changes were primarily a
result of $104.3 million in stock repurchases during the first and third
quarters of 2004 and an increase in advances to dealers resulting from an
increase in Loan originations during the period.
24
Stock Repurchases. In the fourth quarter of 2003, the Board of Directors
authorized the repurchase of up to 2.6 million common shares through a modified
Dutch auction tender offer. Upon expiration of the tender offer in January 2004,
the Company repurchased 2.2 million shares at a cost of $37.4 million.
Similarly, in the third quarter of 2004, the Board of Directors authorized the
repurchase of up to 3.0 million common shares through a second modified Dutch
auction tender offer. Upon expiration of the tender offer in September 2004, the
Company repurchased 2.7 million shares at a cost of $53.6 million.
The following table summarizes the Company's stock repurchases for the
three months ended September 30, 2004:
TOTAL NUMBER OF MAXIMUM NUMBER
SHARES PURCHASED AS OF SHARES THAT MAY
TOTAL NUMBER PART OF PUBLICLY YET BE PURCHASED
OF SHARES AVERAGE PRICE ANNOUNCED PLANS UNDER THE PLANS
PERIOD PURCHASED PAID PER SHARE OR PROGRAMS OR PROGRAMS (a)(b)
- -------------- ------------ -------------- ------------------- ------------------
July 2004 - $ - - 756,231
August 2004 - - - 3,756,231
September 2004 2,673,073 20.00 2,673,073 756,231
--------- ----------- ---------
2,673,073 $ 20.00 2,673,073
========= =========== =========
(a) On August 5, 1999 the Company announced a stock repurchase program of up
to 1,000,000 shares of the Company's common stock. The program authorized
the Company to purchase common shares in the open market or in privately
negotiated transactions at price levels the Company deems attractive.
Since August 1999, the board of directors has authorized several increases
to the stock repurchase program, the most recent occurring on March 10,
2004, which increased the total number of shares authorized to be
repurchased to 7,000,000 shares.
(b) On August 11, 2004, the Company announced a modified Dutch auction tender
offer to purchase up to 3,000,000 shares of its common stock at a purchase
price of not less than $14.00 per share and not greater than $20.00 per
share. Upon the expiration of the tender offer on September 9, 2004, the
Company repurchased all of the 2,673,073 tendered shares of its common
stock at a price of $20.00 per share.
Line of Credit Facility. At September 30, 2004, the Company had a $135.0
million credit agreement with a commercial bank syndicate. The facility has a
commitment period through June 9, 2006. The agreement provides that, at the
Company's option, interest is payable at either the eurodollar rate plus 130
basis points (3.13% at September 30, 2004), or at the prime rate (4.75% at
September 30, 2004). 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 (as reflected in the
consolidated financial statements and related notes) plus 65% of Loans purchased
by the Company (not to exceed $13.0 million), 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 September 30, 2004, there
was $58.7 million outstanding under this facility. There were no amounts
outstanding under this facility as of December 31, 2003. The weighted average
interest rate on line of credit borrowings outstanding as of September 30, 2004
was 3.1%.
Secured Financing. In the second quarter of 2003, the Company's
wholly-owned subsidiary, Credit Acceptance Funding LLC 2003-1 ("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 $100.0 million in notes to qualified institutional investors. Radian
Asset Assurance issued a financial insurance policy in connection with the
transaction. The policy guaranteed the timely payment of interest and ultimate
25
repayment of principal on the final scheduled distribution date. The notes were
rated "AA" by Standard & Poor's Rating Services and bore interest at a fixed
rate of 2.77%. The proceeds of the conveyance to Funding 2003-1 were used by the
Company to reduce outstanding borrowings under the Company's line of credit. At
December 31, 2003, there was $100.0 million outstanding under this secured
financing transaction. In the third quarter of 2004, the Company exercised its
option to reacquire the dealer-partner advances from the trust and directed the
trust to redeem the notes in full. The remaining assets of the trust, including
remaining collections, were paid over to Funding 2003-1 as the sole beneficiary
of the trust and then distributed to the Company as the sole member of Funding
2003-1. This secured financing transaction was terminated during the third
quarter of 2004, after a total term of 15 months.
In the third quarter of 2003, the Company's wholly-owned subsidiary, CAC
Warehouse Funding Corp. II ("Warehouse Funding" or "2003-2"), completed a
revolving secured financing transaction with an institutional investor. In the
third quarter of 2004, Warehouse Funding increased the facility limit and
renewed the commitment. Under the renewed facility, Warehouse Funding may
receive up to $200.0 million in financing when the Company conveys
dealer-partner advances to Warehouse Funding for equity in Warehouse Funding.
Warehouse Funding will in turn pledge the dealer-partner advances as collateral
to the institutional investor to secure loans that will fund the cash portion of
the purchase price of the dealer-partner advances. At June 30, 2004, there was
$100.0 million outstanding under this facility. As required under the agreement,
all amounts outstanding under the facility were refinanced and the facility paid
to zero in August 2004. Subsequent to the renewal of the facility during the
third quarter of 2004, $59.2 million in dealer-partner advances were
contributed, resulting in $40 million in financing proceeds. This revolving
facility allows conveyances of dealer-partner advances by the Company and
related borrowing by Warehouse Funding in which Warehouse Funding will receive
70% of the net book value of the contributed dealer-partner advances up to the
$200.0 million facility limit. Provided that the commitment is renewed, there is
a requirement that any amounts outstanding under the facility be refinanced, and
the facility paid to zero, by August 20, 2005. If this does not occur, the
transaction will cease to revolve, will amortize as collections are received
and, at the option of the institutional investor, may be subject to acceleration
and foreclosure. Upon completion of the refinancing and pay down, the full
facility will again be available to Warehouse Funding. Although Warehouse
Funding will be liable for any secured financing under the facility, the loans
will be non-recourse to the Company, even though Warehouse Funding and the
Company are consolidated for financial reporting purposes. Such loans will bear
interest at a floating rate equal to the commercial paper rate plus 65 basis
points, which has been limited to a maximum rate of 6.25% through interest rate
cap agreements executed in the third quarter of 2004. As Warehouse Funding is
organized as a separate special purpose legal entity from the Company, assets of
Warehouse Funding (including the conveyed dealer-partner advances) will not be
available to satisfy the general obligations of the Company. All the assets of
Warehouse Funding have been encumbered to secure Warehouse Funding's obligations
to its creditors. The Company will receive a monthly servicing fee paid out of
collections equal to 6% of the collections received with respect to the conveyed
dealer-partner advances and related Loans. Except for the servicing fee and
payments due to dealer-partners, the Company will not receive, or have any
rights in, any portion of such collections until Warehouse Funding's underlying
indebtedness is paid in full either through collections or through a prepayment
of the indebtedness. There were no amounts outstanding under this facility as of
December 31, 2003. As of September 30, 2004, there was $40.0 million outstanding
under this facility.
In the third quarter of 2004, the Company's wholly-owned subsidiary,
Credit Acceptance Funding LLC 2004-1 ("Funding 2004-1"), completed a secured
financing transaction, in which Funding 2004-1 received $100.0 million in
financing. In connection with this transaction, the Company conveyed, for cash
and the sole membership interest in Funding 2004-1, dealer-partner advances
having a carrying amount of approximately $134.0 million to Funding 2004-1,
which, in turn, conveyed the advances to a trust, which issued $100.0 million in
notes to qualified institutional investors. Radian Asset Assurance issued the
primary financial insurance policy in connection with the transaction, and XL
Capital Assurance issued a backup financial insurance policy. The policies
guarantee the timely payment of interest and ultimate repayment of principal on
the final scheduled distribution date. The notes are rated "Aaa" by Moody's
Investor Services and "AAA" by Standard & Poor's Rating Services. The proceeds
of the conveyance to Funding 2004-1 were used by the Company to reduce
outstanding borrowings under the Company's secured warehouse credit facility.
Until February 15, 2005, the Company will be required to convey additional
dealer-partner advances to Funding 2004-1 which will then be conveyed by Funding
2004-1 to the trust, to be used by the trust in order to maintain a minimum
collateral amount in support of the outstanding debt. After February 15, 2005,
the debt outstanding under this facility will begin to amortize. The total
expected term of the facility is 15 months. The secured financing creates loans
for which the trust is liable and which are secured by all the assets of the
trust and of Funding 2004-1. Such loans are non-recourse to the Company, even
though the trust, Funding 2004-1 and the Company are consolidated for financial
reporting purposes. The notes bear interest at a fixed rate of 2.53%. The
expected annualized cost of the secured financing, including underwriters fees,
the insurance premiums and other costs is approximately 6.6%. As Funding 2004-1
is organized as a separate legal entity from the Company, assets of Funding
2004-1 (including the conveyed dealer-partner advances) will not be available to
satisfy the general obligations of the Company. All the assets of Funding 2004-1
have been encumbered to secure Funding 2004-1's obligations to its creditors.
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 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 collections or through a prepayment of the indebtedness.
26
Thereafter, remaining collections would be paid over to Funding 2004-1 as the
sole beneficiary of the trust where they would be available to be distributed to
the Company as the sole member of Funding 2004-1. Alternatively, the Company may
repurchase, or may choose to cause Funding 2004-1 to repurchase the remaining
dealer-partner advances from the trust and direct the trust to redeem the
indebtedness in whole, whereby the assets of the trust (including the right to
remaining collections) would be paid over to Funding 2004-1, and distributed to
the Company, resulting in the Company becoming the owner of such remaining
collections. As of September 30, 2004 there was $100.0 million outstanding under
this secured financing transaction.
The Company has completed a total of eleven secured financing
transactions, nine of which have been repaid in full. Information about the
currently outstanding secured financing transactions is as follows (dollars in
thousands):
Balance as
Secured Financing Secured Dealer Percent of
Issue Balance at Advance Balance at Original
Number Close Date Limit September 30, 2004 September 30, 2004 Balance
- ------ --------------- --------- ------------------ ------------------ ----------
2004-1 August 2004 $ 100,000 $ 100,000 $ 134,081 100%
2003-2 September 2003* $ 200,000 40,000 59,243 n/a
*In August 2004, the 2003-2 Loan and Security Agreement was amended to increase
the facility limit to $200 million and extend the commitment period to August 9,
2005.
Mortgage Loan. The Company has a mortgage loan from a commercial bank that
is secured by a first mortgage lien on the Company's headquarters building and
an assignment of all leases, rents, revenues and profits under all present and
future leases of the building. There was $8.4 million and $5.4 million
outstanding on this loan as of September 30, 2004 and December 31, 2003,
respectively. The loan bears interest at a fixed rate of 5.35%, and requires
monthly payments of $92,156 and a balloon payment at June 9, 2009 for the
balance of the loan.
Capital Lease Obligations. As of September 30, 2004, the Company has
various capital lease obligations outstanding for computer equipment, with
monthly payments totaling $65,000. These capital lease obligations bear interest
at rates ranging from 4.45% to 9.31% and have maturity dates between October
2004 and March 2008.
Debt Covenants. As of September 30, 2004, the Company is in compliance
with various restrictive debt covenants that require the maintenance of certain
financial ratios and other financial conditions. The most restrictive covenants
require a minimum ratio of the Company's assets to debt, its liabilities to
tangible net worth, and its earnings before interest, taxes and non-cash
expenses to fixed charges. The Company must also maintain a specified minimum
level of net worth.
In addition to the balance sheet indebtedness as of September 30, 2004,
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 3-5 YEARS > 5 YEARS TOTAL
---------- ---------- ---------- --------- ----------
Long-term debt obligations $ 140,667 $ 60,933 $ 5,479 $ - $ 207,079
Capital lease obligations 100 1,572 98 - 1,770
Operating lease obligations 512 1,424 254 - 2,190
Purchase obligations - - - - -
Other long-term obligations(1)(2) - - - - -
---------- ---------- ---------- ------- ----------
Total contractual obligations $ 141,279 $ 63,929 $ 5,831 $ - $ 211,039
========== ========== ========== ======= ==========
(1) The Company has dealer holdback liabilities on its balance sheet; however,
as payments of dealer holdbacks are contingent upon the receipt of
customer payments on Loans receivable and the repayment of dealer
advances, these obligations are excluded from the above table.
(2) The Company has entered into a series of forward contracts to deliver
British pound sterling in exchange for United States dollars. As the
forward contracts are derivatives that are recorded on the balance sheet
at their fair value and as this fair value does not represent the amounts
that will ultimately be received or paid under these contracts, these
obligations are excluded from the above table.
Liquidation of Non-Core Businesses. As of September 30, 2004, the Company
expects to receive approximately $12.8 million from the liquidation of its
United Kingdom, Canadian, and Automobile Leasing businesses. The expected
liquidation proceeds have been determined based on the Company's forecast of
cash inflows and outflows during the estimated remaining years of operation for
each business. Detail of expected future net liquidation proceeds follows:
27
(Dollars in thousands) AS OF
SEPTEMBER 30, 2004
------------------
United Kingdom $ 10,500
Canada 1,700
Automobile Leasing 600
---------
$ 12,800
=========
The Company intends to utilize proceeds from businesses being liquidated
to: (i) fund dealer-partner advances on Loans originated in the United States
and (ii) fund share repurchases. During the third quarter of 2004, the Company
received $6.0 million in liquidation proceeds.
Based upon anticipated cash flows, management believes that cash flows
from operations and its various financing alternatives 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,"
"assumptions," "forecasts," "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 include, but are not limited to, the following:
- the Company's potential inability to accurately forecast and
estimate the amount and timing of future collections,
- 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,
- an increase in the amount or severity of litigation against the
Company,
- the loss of key management personnel or inability to hire qualified
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
statements whether as a result of new information, future events or otherwise,
except as required by applicable law.
28
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, 2003 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 2003 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 Accounting
Officer (acting as its principal 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 Accounting Officer
(acting as its principal 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 were no changes in the Company's internal controls over
financial reporting during the quarter ended September 30, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
29
PART II. - OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The information required in Part II, Item 2 is incorporated by reference
from the information in Part I, Item 2 under the caption "Liquidity and Capital
Resources - Stock Repurchases" in this Form 10-Q.
ITEM 6. EXHIBITS
See Index of Exhibits following the signature page.
30
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CREDIT ACCEPTANCE CORPORATION
(Registrant)
By: /s/ Kenneth S. Booth
------------------------------------
Kenneth S. Booth
Chief Accounting Officer
November 1, 2004
(Acting as Principal Financial
Officer, Principal Accounting
Officer and Duly Authorized
Officer)
31
INDEX OF EXHIBITS
EXHIBIT
NO. NOTE DESCRIPTION
- ------- ---- -----------------------------------------------------------------
4(f)57 1 Indenture dated August 25, 2004 between Credit Acceptance Auto
Dealer Loan Trust 2004-1 and JPMorgan Chase Bank
4(f)58 1 Sales and Servicing Agreement dated August 25, 2004 among the
Company, Credit Acceptance Auto Dealer Loan Trust 2004-1, Credit
Acceptance Funding LLC 2004-1, JPMorgan Chase Bank, and Systems &
Services Technologies, Inc.
4(f)59 1 Backup Servicing Agreement dated August 25, 2004 among the
Company, Credit Acceptance Funding 2004-1, Credit Acceptance Auto
Dealer Loan Trust 2004-1, Systems & Services Technologies, Inc.,
Radian Asset Assurance Inc., XL Capital Assurance Inc., and
JPMorgan Chase Bank
4(f)60 1 Amended and Restated Trust Agreement dated August 25, 2004
between Credit Acceptance Funding LLC 2004-1 and Wachovia Bank of
Delaware, National Association
4(f)61 1 Contribution Agreement dated August 25, 2004 between the Company
and Credit Acceptance Funding LLC 2004-1
4(f)62 1 Intercreditor Agreement dated August 25, 2004 among the Company,
CAC Warehouse Funding Corporation II, Credit Acceptance Funding
LLC 2003-1, Credit Acceptance Auto Dealer Loan Trust 2003-1,
Credit Acceptance Funding LLC 2004-1, Credit Acceptance Auto
Dealer Loan Trust 2004-1, Wachovia Capital Markets, LLC, as
agent, JPMorgan Chase Bank, as agent, and Comerica Bank, as agent
4(f)63 2 Amendment No. 1, dated August 10, 2004, to Loan and Security
Agreement dated September 30, 2003 among the Company, CAC
Warehouse Funding Corporation II, Wachovia Bank, National
Association, Variable Funding Capital Corporation, Wachovia
Capital Markets, LLC, and Systems & Services Technologies, Inc.
31(a) 2 Certification of Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act.
31(b) 2 Certification of Chief Accounting Officer (acting as principal
financial officer) pursuant to Rule 13a-14(a) of the Securities
Exchange Act.
32(a) 2 Certification of Chief Executive Officer, pursuant to 18 U.S.C.
Section 1350 and Rule 13a-14(b) of the Securities Exchange Act.
32(b) 2 Certification of Chief Accounting Officer (acting as principal
financial officer), pursuant to 18 U.S.C. Section 1350 and Rule
13a-14(b) of the Securities Exchange Act.
1 Previously filed as an exhibit to the Company's Form 8-K dated August 25,
2004, and incorporated herein by reference.
2 Filed herewith.