1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THIS FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 000-20202 CREDIT ACCEPTANCE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) <TABLE> <S> <C> MICHIGAN 38-1999511 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 25505 W. TWELVE MILE ROAD, SUITE 3000 48034-8339 SOUTHFIELD, MICHIGAN (Zip Code) (Address of Principal Executive Offices) </TABLE> Registrant's telephone number, including area code: (248) 353-2700 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of 11,087,409 shares of the Registrant's common stock held by non-affiliates on March 22, 2000 was approximately $54,051,119. For purposes of this computation all officers, directors and 5% beneficial owners of the Registrant are assumed to be affiliates. Such determination should not be deemed an admission that such officers, directors and beneficial owners are, in fact, affiliates of the Registrant. At March 22, 2000 there were 44,916,654 shares of the Registrant's Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement pertaining to the 2000 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by reference into Part III. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
2 CREDIT ACCEPTANCE CORPORATION YEAR ENDED DECEMBER 31, 1999 INDEX TO FORM 10-K <TABLE> <CAPTION> ITEM PAGE - ---- ---- <C> <S> <C> PART I 1. Business.................................................... 2 2. Properties.................................................. 10 3. Legal Proceedings........................................... 11 4. Submission of Matters to a Vote of Security Holders......... 12 PART II 5. Market Price and Dividend Information....................... 13 6. Selected Financial Data..................................... 14 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 15 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 26 8. Financial Statements and Supplemental Data.................. 28 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 55 PART III 10. Directors and Executive Officers of the Registrant.......... 55 11. Executive Compensation...................................... 55 12. Security Ownership of Certain Beneficial Owners and Management................................................ 55 13. Certain Relationships and Related Transactions.............. 55 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................... 55 </TABLE> 1
3 PART I ITEM 1. BUSINESS GENERAL Credit Acceptance Corporation ("CAC" or the "Company"), incorporated in Michigan in 1972, is a specialized financial services company which provides funding, receivables management, collection, sales training and related products and services to automobile dealers located in the United States, the United Kingdom, Canada and Ireland. CAC assists such dealers with the sale of used vehicles by providing an indirect financing source for buyers with limited access to traditional sources of consumer credit ("Non-prime Consumers"). For the year ended December 31, 1999, CAC had total revenues of $116.1 million and a net loss of ($10.7) million. At December 31, 1999, aggregate gross installment contracts receivable were $679.2 million and total shareholders' equity was $263.0 million. CAC also provides additional products and services to dealers which give the Non-prime Consumer the opportunity to purchase a number of ancillary products, including credit life and disability insurance and vehicle service contracts offered by dealers and point-of-sale dual interest collateral protection insurance provided by third party insurance carriers. Through wholly-owned subsidiaries, the Company also reinsures certain of the credit life and disability insurance and point-of-sale dual interest collateral protection insurance policies issued in conjunction with installment contracts originated by dealers. The Company is organized into two primary business segments: CAC North America and CAC United Kingdom. See Note 13 to the consolidated financial statements for information regarding the Company's reportable segments. PRODUCTS AND SERVICES CAC derives its revenues from the following principal sources: (i) servicing fees (which are accounted for as finance charges) earned as a result of servicing and collecting installment contracts originated and assigned to the Company by dealers; (ii) premiums earned from the Company's reinsurance activities and service contract programs; and (iii) other income which primarily consists of fees earned from third party service contract products offered by dealers, fees charged to dealers at the time they enroll in the Company's program, income from operating lease assets and interest income from loans made directly to dealers for floor plan financing and working capital purposes. The following table sets forth the percent relationship to total revenue of each of these sources. <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ----------------------- PERCENT OF TOTAL REVENUE 1997 1998 1999 ------------------------ ----- ----- ----- <S> <C> <C> <C> Finance charges.......................................... 71.2% 68.8% 65.9% Gain on sale of advance receivables, net................. -- 0.5 -- Premiums earned.......................................... 6.9 7.7 9.0 Other income............................................. 21.9 23.0 25.1 ----- ----- ----- Total revenue.......................................... 100.0% 100.0% 100.0% ===== ===== ===== </TABLE> PRINCIPAL BUSINESS CAC's principal business involves: (i) the acceptance of installment contracts originated and assigned by participating dealers; and (ii) the subsequent management and collection of such contracts. For installment contracts meeting the Company's criteria, CAC makes a formula-based cash payment to the dealer (an "Advance"). In North America, the Company may Advance up to 90% of the amount financed, but Advances typically range between 50% and 75% of the amount financed. In the United Kingdom, the Company may Advance up to 100% of the amount financed, however, Advances typically range between 70% and 90% of the amount financed. To mitigate its risk, at the time of accepting the assignment of an installment contract, CAC obtains a security interest in the vehicle and establishes a dealer holdback equal to the gross amount of the 2
4 contract, less the Company's servicing fee, which is recorded as an unearned finance charge. CAC's acceptance of such contracts is generally without recourse to the general assets of the dealer, and accordingly, the dealer usually has no liability to the Company if the consumer defaults on the contract. CAC offers its dealers in North America several Advance alternatives, which are calculated based upon the dealer's history with the Company, the credit score for a particular customer and the year, make, model, and mileage of the used vehicle to be financed. A similar method is used in the United Kingdom to calculate the Advance, with the exception of credit scoring the customer. Monthly cash receipts related to the aggregate installment contracts accepted from an individual dealer are remitted to such dealer, but only after: (i) the Company is reimbursed for certain collection costs relating to all contracts accepted from such dealer; (ii) the Company receives a servicing fee (typically 20%) of the aggregate net monthly receipts (monthly cash receipts less certain collection costs); and (iii) the Company has recovered all advances made to such dealer. OPERATIONS -- CAC NORTH AMERICA AND CAC UNITED KINGDOM Dealer Selection and Enrollment Fee. CAC has adopted specific policies relative to establishing the eligibility of prospective dealers for the Company's program. A dealer's participation in the Company's program begins with the execution of a Servicing Agreement, which requires the dealer to disclose information about his dealership and personal finances. The Company undertakes a review of the dealer information to determine whether the dealer should be permitted to participate in the Company's program. Pursuant to the Servicing Agreement, a dealer represents that it will only submit contracts to CAC which satisfy criteria established by the Company, meet certain conditions with respect to the binding nature and the status of the security interest in the purchased vehicle and comply with applicable state, federal and foreign laws and regulations. Dealers receive a monthly statement from the Company, summarizing all transactions on contracts originated by such dealer. Also, where applicable, the dealer will receive a payment from CAC for any portion of the payments on contracts to which the dealer is entitled under the Servicing Agreement. The Servicing Agreement may be terminated by the Company or by the dealer (as long as there is no event of default or an event which, with the lapse of time, giving of notice or both, would become an event of default) upon 30 days prior written notice. Events of default include, among other things, (i) the dealer's failure to perform or observe covenants in the Servicing Agreement; (ii) the dealer's breach of a representation in the Servicing Agreement; (iii) a misrepresentation by the dealer relating to an installment contract submitted to the Company or a related vehicle or purchaser; and (iv) the appointment of a receiver for, or the bankruptcy or insolvency of, the dealer. The Company may terminate the servicing agreement immediately in the case of an event of default by the dealer. Upon any termination by the dealer or in the event of a default, the dealer must immediately pay the Company: (i) any unreimbursed collection costs; (ii) any unpaid advances and all amounts owed by the dealer to the Company; and (iii) a termination fee equal to 20% of the then outstanding amount of the installment contracts originated and accepted by the Company. Upon receipt in full of such amounts, the Company will reassign the installment contract receivable and its security interest in the financed vehicle to the dealer. In the event of a termination by the Company (or any other termination if the Company and the dealer agree), the Company may continue to service installment contracts accepted prior to termination in the normal course of business without charging a termination fee. New dealers located in North America are generally charged a $4,500 dealer enrollment fee, which affords the dealer access to the Company's training material and programs and helps offset the administrative expenses associated with new dealer enrollment. In 1999, the Company began generally charging new dealers located in the United Kingdom an enrollment fee of 2,500 pounds. Assignment of Contracts. The dealer assigns title to the installment contract and the security interest in the vehicle to the Company. Thereafter, the rights and obligations of the Company and the dealer are defined 3
5 by the servicing agreement, which provides that the contract assignment to the Company is for the purposes of administration, servicing and collection of the amounts due under the assigned contract, as well as for security purposes. At the time a contract is submitted, CAC evaluates the contract to determine if it meets the Company's cash Advance criteria. Contracts which do not meet the Company's cash Advance criteria may still be accepted for servicing without an Advance being paid. Contract Portfolio. The portfolio of installment contracts contains loans of initial duration generally ranging from 24 to 42 months, with an average initial maturity of approximately 32 months. The Company receives a servicing fee generally equal to 20% of the gross amount of the contract, with rate of return varying, based upon the amount of the Advance and the term of the contract. The following table sets forth, for each of the periods indicated, the average size of installment contracts accepted by the Company, the percent growth in the average size of contracts accepted, the average initial maturity of the contracts accepted, the average advance per installment contract accepted and the average advance as a percent of the average installment contract accepted. <TABLE> <CAPTION> AS OF DECEMBER 31, ---------------------------------------------- AVERAGE CONTRACT DATA 1995 1996 1997 1998 1999 --------------------- ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Average size of installment contracts accepted during the period................................. $6,507 $7,249 $8,340 $8,402 $8,931 Percentage growth in average size of contract....... 9.9% 11.4% 15.1% 0.7% 6.3% Average initial maturity (in months)................ 25 30 31 31 32 Average advance per installment contract............ $3,220 $3,837 $4,228 $4,260 $4,784 Average advance as a percent of average installment contract accepted................................. 49.5% 52.9% 50.7% 50.7% 53.6% </TABLE> Systems Overview. The Company employs three major computer systems in its U.S. operations: (i) the Application and Contract System ("ACS") which is used from the time a dealer faxes an application to the Company until the contract is received and funded, (ii) the Loan Servicing System ("LSS") which contains all loan and payment information and is the primary source for management information reporting, and (iii) the Collection System ("CS") which is used by the Company's collections personnel to track and service all active customer accounts. ACS -- The ACS, designed and built by an independent consulting firm hired by the Company, was installed in May 1997. This system replaced certain functionality of the Company's previous systems. The system enables the Company to efficiently process a large volume of application and contract data. When a dealer faxes an application to the Company's headquarters in Southfield, Michigan, Company personnel input the application data into the ACS. The system automatically pulls all credit bureau and vehicle guidebook data and includes such data in the application file, which is routed to the analyst team assigned to the dealer's geographic area. An analyst reviews each application file on-line to determine if the transaction is properly structured and meets the Company's guidelines for an Advance. The ACS provides the analyst with information regarding the borrower, including information on the borrower's residence, employment, wage level and references, information regarding the vehicle, including the vehicle's age, mileage and guidebook value, and information regarding the transaction, including sale price, down payment, interest rate and term. The system computes the Advance amount according to predefined programs based on dealer and loan variables, provides the analyst with warning flags on out-of-tolerance application variables and allows the analyst to select from a predefined set of stipulations to include on the Advance approval transmittal, which is automatically faxed to the dealer. After the sale of the vehicle, the installment contract package is sent to the Company by the dealer. The contract information is input into the ACS. The system compares the contract data to the application data and reviews compliance with analyst stipulations. After any variances have been addressed, the system sends an Advance payment to the dealer by check or electronic transaction. The system generally enables the Company to approve application files in under one hour and fund contracts within 24 hours of receipt of all required documents. The system enables management personnel to report on service level by analyst and by region, application and contract volumes by dealer and by program, exceptions granted and various other reports as needed. The ACS automatically loads all new contract data into the LSS system. 4
6 LSS -- The LSS, designed and built for the Company by the same consulting firm, was installed and implemented in the third quarter 1997. This system contains all loan transaction data, including payments and charge-offs for loans accepted by the Company since July 1990. The system is the Company's primary information source for management reporting including production of monthly statements sent to dealers summarizing the status of their accounts and the Company's static pool system, which provides the Company with a static pool analysis on a per dealer basis. This system provides the Company with the ability to project future collections for each dealer based on actual prior loss history. These projections are then used to analyze dealer profitability and to estimate and record the Company's reserve on Advances to dealers. The LSS interfaces with both the ACS and CS. CS -- The CS, which is used by Company collection personnel to service all active accounts was purchased, modified and installed in 1989. The collection system provides data on all of the Company's customer accounts including loan and payment information as well as a log of all account activity including letters sent and summaries of telephone contact. The system generates payment books which are sent on all new accounts, generates all collection letters and notices, allows collectors to record promises to pay and broken promises, interfaces with an automated dialing system, assigns accounts to collection personnel and tracks results on a per collector basis. Repossession and legal accounts are also processed on this system. The CS also interfaces with the LSS. The Company employs one major computer system in its UK operation, which was originally developed by a major software vendor. The Company purchased the source code in 1997 and now continues to develop and enhance the system in house. The system encompasses the main features of the ACS, LSS and CS with the exception of (i) the ability to automatically pull all credit bureau and vehicle guidebook data, which have to be referenced separately, and (ii) the automatic interface with the phone system. Servicing and Collections. CAC's staff of professional and experienced collection personnel collects amounts due on installment contracts, assisted by the CS and telephone systems. The customized CS system is integrated with an automated dialing telephone system, which allows the Company's collection personnel to contact a large number of customers on a daily basis. The integration of the systems allows critical calling information to be seamlessly uploaded to the CS. This integration helps identify customers who are difficult to contact by phone and need additional collection efforts. In North America, customer payments are received through a bank lockbox and at CAC's Southfield, Michigan location. Payment receipt data is electronically transferred from the bank lockbox on a daily basis for posting to the customer's account. The payments are processed in CAC's LSS which provides customer payment information to the CS on a real time basis. In the United Kingdom, customers can make payments at banks and post offices. The payment receipt data is received electronically, on a daily basis, and is automatically posted to the customer's account. In addition to payments being received at the Company's UK offices, the Company electronically originates a large percentage of payments directly from a customer's bank account, with the customer's prior consent. All payments processed update the customer's account on a real time basis. Customer accounts are monitored and serviced by regional collection teams. The team members consist of junior, mid-level, and senior collection personnel. The teams typically take action on accounts within five days of delinquency. If a customer is delinquent, the Company's policy is to attempt to resolve the delinquency by persuading the customer to make payment arrangements until the delinquency is resolved. Since the customer generally has a poor credit history, the Company's program provides the customer with an opportunity to restore their credit rating. The Company believes its interests are best served by permitting the customer to retain the vehicle while making payments, even if the maturity of the loan needs to be extended beyond the original term. Customers, within the first three payments of the contract, are monitored and serviced by a specialized collection team. The first-payment-miss team typically takes action on accounts at one day past due, attempting to resolve the delinquency as soon as possible. The repossession process typically begins when a customer becomes approximately 30 days past due. At that time, the Company contracts with a third party to repossess and sell the vehicle at an auction. The costs related to such activities, to the extent permitted by law, are added to the amount due from the customer and the dealer Advance amount. If the proceeds from the sale are not sufficient to cover the total balance due, the 5
7 Company may seek to recover its "deficiency balance" from the customer through legal means, including wage garnishment to the extent permitted by applicable law. Although the Company continues to pursue collection, the deficiency balance is charged-off after nine months of not receiving any material payments. Proprietary Credit Scoring System. In 1999, the Company implemented a proprietary credit scoring system in North America which is based upon the Company's portfolio database and was developed with the assistance of an independent statistical consulting firm. Credit scoring is used to evaluate risk in terms of expected collection rates. Factors considered in the credit scoring model include data contained in the customer's credit application, the customer's credit bureau report and the structure of the proposed transaction. The credit scoring system provides the Company with the ability to vary the structure of the installment contract and the Advance rate on the contract based upon the statistical probability of default. The credit scoring system is not utilized in the United Kingdom. The Company's credit scoring model is evaluated monthly through the comparison of actual versus projected loan collection performance by credit score. The Company continues to enhance and refine its proprietary credit scoring model based on new information and trends in its portfolio of installment contracts receivable. OPERATIONS -- CAC AUTOMOTIVE LEASING During 1999, the Company began to expand its automotive leasing business through two business units, AutoNet Finance.com and CAC Leasing, Inc. Through these business units, the Company purchases 24 to 36 month used vehicle leases originated by dealers participating in the Company's automotive leasing programs. The Company had been evaluating leasing as an alternative for the Non-prime Consumer for several years through a pilot program. The programs are designed to provide dealers with a leasing alternative for Non-prime Consumers with limited access to traditional sources of consumer credit. Because the Company assumes ownership of the vehicles from the dealers, these leases are accounted for as operating leases with the capitalized cost of the vehicles recorded as depreciable assets (net investment in operating leases). This program differs from the Company's principal business in that, as these leases are purchased outright, the dealer does not have any rights to future collections on the lease contracts. The Company anticipates that as it expands its leasing business to new markets and dealers, the leasing business could become a more significant part of the Company's overall operations. ANCILLARY PRODUCTS The Company continually explores methods by which its business relationships with dealers may be enhanced, including several ancillary products such as insurance and service contracts. Insurance and Service Contract Programs. In the U.S., CAC has arrangements with insurance carriers to assist dealers in offering credit life and disability insurance to Non-prime Consumers. Pursuant to this program, the Company advances to dealers an amount equal to the credit life and disability insurance premium on contracts accepted by the Company, which include credit life and disability insurance written by the Company's designated insurance carriers. The Company is not involved in the actual sale of insurance; however, as part of the program, the insurance carriers cede insurance coverages and premiums (less a fee) to wholly-owned subsidiaries of the Company, which reinsure such coverages. As a result, the subsidiaries bear the risk of loss attendant to claims under the coverages ceded to it, and earn revenues resulting from premiums ceded and the investment of such funds. Buyers Vehicle Protection Plan, Inc. ("BVPP"), a wholly-owned subsidiary of CAC, operates as an administrator of certain vehicle service contract programs offered by dealers to consumers in the U.S. Under this program, BVPP charges dealers a premium for the service contracts and in return agrees to reimburse dealers for designated amounts that the dealer is required to pay for covered repairs on the vehicles it sells. CAC advances to dealers an amount equal to the purchase price of the vehicle service contract on contracts 6
8 accepted by the Company which include vehicle service contracts. CAC has, in turn, subcontracted its obligations to administer these programs to third parties that have experience with such programs. Nevertheless, the risk of loss (reimbursement obligations in excess of the purchase price of the vehicle service contract) remains with BVPP. In addition, BVPP has relationships with third party service contract providers which pay BVPP a fee on service contracts included on installment contracts financed through participating dealers. BVPP does not bear any risk of loss for covered claims on these third party service contracts. In the United Kingdom, the Company has relationships with third party credit life and disability and service contract providers, which pay the Company a fee on credit life and disability and service contracts included on installment contracts financed through participating dealers. The Company has an arrangement with insurance carriers and a third party administrator in the U.S. to market and provide claims administration for a dual interest collateral protection program. This insurance program, which insures the financed vehicle against physical damage up to the lesser of the cost to repair the vehicle or the unpaid balance owed on the related installment contract, is offered to Non-prime Consumers who finance vehicles through participating dealers. If desired by a Non-prime Consumer, collateral protection insurance coverage is written under a group master policy issued by the unaffiliated insurance carriers to the Company. The Company is not involved in the actual sale of insurance; however, as part of the program, the insurance carriers cede insurance coverages and premiums (less a fee) to CAC Reinsurance, Ltd., a wholly-owned subsidiary of the Company, which acts as a reinsurer of such coverages. As a result, the subsidiary bears the risk of loss attendant to claims under the coverages ceded to it, and earns revenues resulting from premiums ceded and the investment of such funds. The Company continually considers other programs that will increase its services to dealers. The Company intends that such programs, if undertaken, will be initially marketed selectively in order to establish strong operating systems and assess the potential profitability of these services. OTHER SERVICES Floor Plan Financing and Secured Working Capital Loans. In the U.S., the Company offers floor plan financing to certain dealers, pursuant to which the Company makes loans to dealers to finance vehicle inventories, in each case secured by the inventory, the related proceeds from the future sale of such inventory and, for dealers participating in the Company's financing program, future collections on installment contracts accepted from such dealers. This financing is provided on a selected basis primarily to dealers participating in the Company's financing program. On a limited basis, the Company provides floor plan financing to dealers not participating in the Company's financing program. The interest rate charged on outstanding floor plan balances generally ranges from 12% to 18% per annum. On a selected basis, the Company also provides dealers with working capital loans. These loans are secured by substantially all assets of the dealer, including any future cash collections owed to the dealer on installment contracts accepted by the Company. Credit Reporting Services. In May 1999, the Company sold Montana Investment Group, Inc., a subsidiary of the Company which supplied risk assessment and fraud alert information and computerized skip tracing services regarding Non-prime Consumers to companies serving the Non-prime Consumer market. Auction Services. In December 1999, the Company sold substantially all of the assets and rights to operate its automotive auctions in Pennsylvania and South Carolina. The auctions provided vehicle suppliers with a full range of services to process and sell vehicles to buyers at the auctions. SALES AND MARKETING The Company's program is marketed directly to used vehicle dealers and to new automobile dealers with used vehicle departments. Marketing efforts are initially concentrated in a particular geographic area through the distribution of marketing brochures and via advertising in trade journals and other industry publications directly to automobile dealers. Follow-up is subsequently conducted through telemarketing, videotapes and monthly newsletters explaining the Company's program. Free training seminars are available to dealers 7
9 desiring to learn more about the Company's program, as well as to participating dealers. The Company also establishes relationships with dealers through referrals from third party vendors and participating dealers. CAC employs experienced sales and marketing professionals (sales representatives) both at the Company's headquarters and in the field for purposes of enrolling new dealers and providing services to existing dealers. Sales personnel are compensated on a commission basis calculated on the profitability and volume of business submitted by dealers. CAC provides dealers with training regarding the operation of the Company's program. Seminars are held on a regular basis at the Company's headquarters and periodically at locations throughout the country. Pursuant to the Servicing Agreement, each dealer agrees to attend at least one such seminar each calendar year. CREDIT LOSS POLICY AND EXPERIENCE When an installment contract is assigned to the Company by a participating dealer, the Company generally pays a cash Advance to the dealer. These Advance balances represent the Company's primary risk of loss related to the funding activity with the dealers. The Company maintains a reserve against Advances to dealers that are not expected to be recovered through collections on the related installment contract portfolio. For purposes of establishing the reserve, expected future collections are reduced to their present-value in order to achieve a level yield over the expected term of the Advance. The Company's loan servicing system allows the Company to estimate future collections for each dealer pool using historical loss experience and a dealer by dealer static pool analysis. The Company recorded a non-cash charge during 1999 to reflect the impact of collections on loan pools originated primarily during 1995, 1996 and 1997 falling below previous estimates, indicating further impairment of Advance balances associated with these loan pools. While previous loss curves indicated that loans originated in 1995, 1996 and 1997 would generate lower overall collection rates than those originated in prior years, in the third quarter of 1999 the loss curves indicated collection rates on these pools would be lower than previously estimated. Management's analysis of the static pool model also indicates that the business originated subsequent to 1997 is of higher quality than business originated during the three years ended December 31, 1997. Future reserve requirements will depend in part on the magnitude of the variance between management's current estimate of future collections and the actual collections that are realized. The Company charges off dealer Advances against the reserve at such time when the Company determines that an Advance is permanently impaired. Ultimate losses may vary from current estimates and the amount of the provision, which is the current expense, may be either greater or less than actual charge offs. The Company also maintains an allowance for credit losses which, in the opinion of management, adequately reserves against expected losses in the portfolio of receivables. The risk of loss to the Company related to the installment contracts receivable balances relates primarily to the earned but unpaid revenue on installment contracts which were transferred to non-accrual status during the period. Servicing fees, which are booked as finance charges, are recognized under the interest method of accounting until the underlying obligation is 90 days past due on a recency basis. At such time, the Company suspends the accrual of revenue and makes a provision for credit losses equal to the earned but unpaid revenue. In all cases, contracts on which no material payment has been received for nine months are charged off against dealer holdbacks, unearned finance charges and the allowance for credit losses. During the third quarter of 1997, the Company changed its non-accrual policy from 120 days on a contractual basis to 90 days on a recency basis and, during the fourth quarter of 1997, changed its charge off policy to nine months on a recency basis from one year on a recency basis. The Company believes these changes allow for earlier recognition of under-performing dealer pools. COMPETITION The Non-prime Consumer finance market is very fragmented and highly competitive. The Company believes that there are numerous competitors providing, or are capable of providing, financing programs 8
10 through dealers to purchasers and lessees of used vehicles. The Company also competes, indirectly, with dealers operating dealer-financed programs. Because the Company's program is directed to provide financing to individuals who cannot ordinarily qualify for traditional financing, the Company does not believe that it directly competes with commercial banks, thrifts, automobile finance companies and others that apply more traditional lending criteria to the credit approval process. Historically, these traditional sources of used vehicle financing (some of which are larger, have significantly greater financial resources and have relationships with captive dealer networks) have not served the Company's market segment consistently. The Company's market is primarily served by smaller finance organizations which solicit business when and as their capital resources allow. The Company intends to capitalize on this market segment's lack of a major, consistent financing source. However, if such a competitor were to enter the Company's market segment, the Company's financial position and results of operations could be materially adversely affected. The Company believes that it can compete on the basis of service provided to its participating dealers, innovative products and superior collection performance. CUSTOMER AND GEOGRAPHIC CONCENTRATIONS Installment contracts receivable attributable to contracts accepted from affiliated dealers owned by the Company's majority shareholder represented approximately 4% at the end of 1997 and 2% of gross installment contracts receivable at the end of 1998 and 1999. Approximately 1%, 2 % and 2% of the value and number of installment contracts accepted by the Company during 1997, 1998 and 1999, respectively, were originated by affiliated dealers. Affiliated dealers are not obligated to continue doing business with CAC, nor are they precluded from owning or operating businesses which may compete with the Company. As of December 31, 1999, approximately 27.5% of the participating dealers in North America were located in Michigan, Maryland, and Virginia and these dealers accounted for approximately 31.2% of the number of contracts accepted from North American dealers in 1999. As of December 31, 1999, approximately 13.6% of the Company's total participating dealers were located in the United Kingdom and during 1999 these dealers accounted for approximately 16.4% of the new contracts accepted by the Company. No single dealer accounted for more than 10% of the number of installment contracts accepted by the Company during 1997, 1998 or 1999, however, during 1999, two dealer groups in the United Kingdom accounted for approximately 47.4% of new contracts accepted by that business segment. The following table sets forth, for each of the last three years for the Company's domestic and foreign operations, the amount of revenues from customers and long-lived assets (in thousands): <TABLE> <CAPTION> AS OF AND FOR YEARS ENDED DECEMBER 31, ------------------------------- 1997 1998 1999 -------- -------- ------- <S> <C> <C> <C> Revenues from customers United States.................................. $134,950 $120,086 $97,895 United Kingdom................................. 28,598 20,828 16,660 Other foreign.................................. 687 1,435 1,500 Long-lived assets United States.................................. $ 18,910 $ 18,781 $16,699 United Kingdom................................. 1,914 1,834 1,544 Other foreign.................................. 15 12 -- </TABLE> The Company's operations are structured to achieve consolidated objectives. As a result, significant interdependencies and overlaps exist among the Company's domestic and foreign operations. Accordingly, the revenue and identifiable assets shown may not be indicative of the amounts which would have been reported if the domestic and foreign operations were independent of one another. REGULATION The Company's businesses are subject to various state, federal and foreign laws and regulations which require licensing and qualification, limit interest rates, fees and other charges associated with the installment 9
11 contracts assigned to the Company, require specified disclosures by automobile dealers to consumers, govern the sale and terms of the ancillary products and define the Company's rights to repossess and sell collateral. Failure to comply with, or an adverse change in, these laws or regulations could have a material adverse effect on the Company by, among other things, limiting the states or countries in which the Company may operate, restricting the Company's ability to realize the value of the collateral securing the contracts, or resulting in potential liability related to contracts accepted from dealers. In addition, governmental regulations which would deplete the supply of used vehicles, such as environmental protection regulations governing emissions or fuel consumption, could have a material adverse effect on the Company. The Company is not aware of any such legislation currently pending. The sale of insurance products by dealers is also subject to state laws and regulations. As the Company does not deal directly with consumers in the sale of insurance products, it does not believe that its business is significantly affected by such laws and regulations. Nevertheless, there can be no assurance that insurance regulatory authorities in the jurisdictions in which such products are offered by dealers will not seek to regulate the Company or restrict the operation of the Company's business in such jurisdictions. Any such action could materially adversely affect the income received from such products. CAC's credit life and disability reinsurance and property and casualty insurance subsidiaries are licensed and subject to regulation in the state of Arizona and in the Turks and Caicos Islands. The Company's operations in the United Kingdom, Canada and Ireland are also subject to various laws and regulations. Generally, these requirements tend to be no more restrictive than those in effect in the United States. Management believes that the Company maintains all material licenses and permits required for its current operations and is in substantial compliance with all applicable laws and regulations. The Company's Servicing Agreement with dealers provides that the dealer shall indemnify the Company with respect to any loss or expense the Company incurs as a result of the dealer's failure to comply with applicable laws and regulations. EMPLOYEES As of December 31, 1999, the Company employed 627 persons, 353 of whom were collection personnel, 90 were contract origination and processing personnel, 69 were marketing professionals, 26 were information systems professionals, 22 were accounting professionals and the remainder were management or support personnel. The Company's employees have no union affiliations and the Company believes its relationship with its employees is good. ITEM 2. PROPERTIES CAC NORTH AMERICA The Company's headquarters are located at 25505 West Twelve Mile Road, Southfield, Michigan 48034. The Company purchased the office building in 1993, which it financed in part by a loan secured by a mortgage on the building. The office building includes approximately 118,000 square feet of space on five floors. The Company occupies approximately 60,000 square feet of the building, with most of the remainder of the building leased to various tenants. The Company plans to continue to lease excess space in the building until such time as the Company's expansion needs require it to occupy additional space. The Company leases space in an office building in Henderson, Nevada, which houses CAC's western North America collections and sales operations. The Company occupies approximately 9,300 square feet of the building. The lease expires in February 2004. CAC UNITED KINGDOM The Company leases space in an office building in Worthing, West Sussex, in the United Kingdom, which is the headquarters for the Company's United Kingdom operations. The Company occupies approximately 10,000 square feet of the building under a lease expiring in September 2007. 10
12 ITEM 3. LEGAL PROCEEDINGS In the normal course of business and as a result of the consumer-oriented nature of the industry in which the Company operates, industry participants are frequently subject to various consumer claims and litigation seeking damages and statutory penalties. The claims allege, among other theories of liability, violations of state, federal and foreign truth in lending, credit availability, credit reporting, consumer protection, warranty, debt collection, insurance and other consumer-oriented laws and regulations. The Company, as the assignee of finance contracts originated by dealers, may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. Many of these cases are filed as purported class actions and seek damages in large dollar amounts. During the first quarter of 1998, several putative class action complaints were filed by shareholders against the Company and certain officers and directors of the Company in the United States District Court for the Eastern District of Michigan seeking money damages for alleged violations of the federal securities laws. On August 14, 1998, a Consolidated Class Action Complaint, consolidating the claims asserted in those cases, was filed. The Complaint generally alleged that the Company's financial statements issued during the period August 14, 1995 through October 22, 1997 did not accurately reflect the Company's true financial condition and results of operations because such reported results failed to be in accordance with generally accepted accounting principles and such results contained material accounting irregularities in that they failed to reflect adequate reserves for credit losses. The Complaint further alleged that the Company issued public statements during the alleged class period which fraudulently created the impression that the Company's accounting practices were proper. On April 23, 1999, the Court granted the Company's and the defendant officers' and directors' motion to dismiss the Complaint and entered a final judgment dismissing the action with prejudice. On May 6, 1999, plaintiffs filed a motion for reconsideration of the order dismissing the Complaint or, in the alternative, for leave to file an amended complaint. On July 13, 1999, the Court granted the plaintiffs' motion for reconsideration and granted the plaintiffs leave to file an amended complaint. Plaintiffs filed their First Amended Consolidated Class Action Complaint on August 2, 1999. On September 30, 1999, the Company and the defendant officers and directors filed a motion to dismiss that complaint. On or about November 10, 1999, plaintiffs sought and were granted leave to file a Second Amended Consolidated Class Action Complaint. A hearing on the defendants' motion to dismiss the Second Amended Consolidated Class Action Complaint was held on March 1, 2000 and, on March 24, 2000, the Court granted the Company's and the defendant officers' and directors' motion to dismiss the Second Amended Consolidated Class Action Complaint and entered a final judgment dismissing the action with prejudice. In the event that plaintiffs choose to appeal this judgment, the Company and the defendant officers and directors will continue to vigorously defend this action. While the Company believes it has meritorious legal and factual defenses, an adverse ultimate disposition of this litigation could have a material negative impact on the Company's financial position, liquidity and results of operations. The Company is currently a defendant in a class action proceeding commenced on October 15, 1996 in the United States District Court for the Western District of Missouri seeking money damages for alleged violations of a number of state and federal consumer protection laws (the "Missouri Litigation"). On October 9, 1997, the District Court certified two classes on the claims brought against the Company, one relating to alleged overcharges of official fees, the other relating to alleged overcharges of post-maturity interest. On August 4, 1998, the District Court granted partial summary judgment on liability in favor of the plaintiffs on the interest overcharge claims based upon the District Court's finding of certain violations but denied summary judgment on certain other claims. The District Court also entered a number of permanent injunctions, which among other things, restrained the Company from collecting the amounts found to be uncollectible. The Court also ruled in favor of the Company on certain claims raised by class plaintiffs. Because the entry of an injunction is immediately appealable as of right, the Company appealed the summary judgment order to the United States Court of Appeals for the Eighth Circuit. Oral argument on the appeals was heard on April 19, 1999. On September 1, 1999, the United States Court of Appeals for the Eighth Circuit overturned the August 4, 1998 partial summary judgment order and injunctions against the Company. The Court of Appeals held that the District Court lacked jurisdiction over the interest overcharge claims and directed the District Court to sever those claims and remand them to state court. The class action claims of 11
13 alleged public official fee overcharges have not been finally adjudicated by the District Court and were not part of the appeal. On February 18, 2000, the District Court entered an Order remanding the post-maturity interest class to Missouri state court while retaining jurisdiction on the official fee class. The District Court has set a bench trial date commencing the week of June 19, 2000. The Company will continue its vigorous defense of all remaining claims. However, an adverse ultimate disposition of this litigation could have a material negative impact on the Company's financial position, liquidity and results of operations. The frequency of litigation has increased as the Company's business activities have expanded. The Company believes that the structure of its dealer program and the ancillary products, including the terms and conditions of its Servicing Agreement with dealers, may mitigate its risk of loss in any such litigation. Management believes the Company has taken prudent steps to address the litigation risks associated with its business activities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 12
14 PART II ITEM 5. MARKET PRICE AND DIVIDEND INFORMATION The Company's Common Stock is traded on The Nasdaq Stock Market(R) under the symbol CACC. The high and low sale prices for the Common Stock for each quarter during the two year period ending December 31, 1999 as reported by The Nasdaq Stock Market(R) are set forth in the following table. <TABLE> <CAPTION> 1998 1999 --------------- --------------- QUARTER ENDED HIGH LOW HIGH LOW ------------- ------ ----- ------ ----- <S> <C> <C> <C> <C> March 31........................................ $ 9.63 $5.25 $10.25 $5.44 June 30......................................... 12.38 8.38 8.63 4.88 September 30.................................... 9.19 5.56 6.25 4.88 December 31..................................... 7.75 4.63 6.00 3.00 </TABLE> As of December 31, 1999, the approximate number of beneficial holders and shareholders of record of the Common Stock was 5,000 based upon securities position listings furnished to the Company. The Company has not paid any cash dividends during periods presented and has no present plans to pay any cash dividends on its Common Stock. The Company intends to retain its earnings to finance the growth and development of its business. The Company's credit agreements contain certain covenants which prohibit the payment of dividends under certain circumstances and other covenants pertaining to the Company's tangible net worth which may indirectly limit the payment of dividends on Common Stock. 13
15 ITEM 6. SELECTED FINANCIAL DATA The selected income statement and balance sheet data presented below for and as of each of the five years ended December 31, 1999 are derived from the Company's audited consolidated financial statements. The selected financial data presented below as of December 31, 1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999 should be read in conjunction with the Company's consolidated audited financial statements and notes thereto and "Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Report. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997 1998 1999 ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Revenue: Finance charges.................... $ 66,276 $ 92,944 $ 117,020 $ 98,007 $ 76,497 Premiums earned.................... 6,504 9,653 11,304 10,904 10,389 Gain on sale of Advance receivables, net................ -- -- -- 685 -- Other income....................... 12,301 21,337 35,911 32,753 29,169 ---------- ---------- ---------- ---------- ---------- Total revenue................. 85,081 123,934 164,235 142,349 116,055 ---------- ---------- ---------- ---------- ---------- Costs and Expenses: Operating expenses................. 21,716 30,627 45,911 59,004 56,772 Provision for credit losses........ 7,066 13,071 85,472 16,405 56,073 Provision for claims............... 1,964 3,060 3,911 3,734 3,498 Valuation adjustment on retained interest in securitization...... -- -- -- -- 13,517 Interest........................... 8,785 13,568 27,597 25,565 16,576 ---------- ---------- ---------- ---------- ---------- Total costs and expenses...... 39,531 60,326 162,891 104,708 146,436 ---------- ---------- ---------- ---------- ---------- Other Operating Income Gain on sale of subsidiary...................... -- -- -- -- 14,720 ---------- ---------- ---------- ---------- ---------- Operating income (loss).............. 45,550 63,608 1,344 37,641 (15,661) Foreign exchange gain (loss)....... (57) 27 (41) (116) (66) ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes.... 45,493 63,635 1,303 37,525 (15,727) Provision (credit) for income taxes........................... 15,921 22,126 (234) 12,559 (5,041) ---------- ---------- ---------- ---------- ---------- Net income (loss).................... $ 29,572 $ 41,509 $ 1,537 $ 24,966 $ (10,686) ========== ========== ========== ========== ========== Net income (loss) per common share(A): Basic.............................. $ .70 $ .91 $ .03 $ .54 $ (.23) ========== ========== ========== ========== ========== Diluted............................ $ .68 $ .89 $ .03 $ .53 $ (.23) ========== ========== ========== ========== ========== Weighted average shares outstanding (A): Basic.............................. 42,385,262 45,605,159 46,081,804 46,190,208 46,222,730 Diluted............................ 43,527,770 46,623,655 46,754,713 46,960,290 46,222,730 BALANCE SHEET DATA: Installment contracts receivable, net................................ $ 653,297 $1,030,971 $1,037,760 $ 665,574 $ 568,378 Floor plan receivables............... 13,249 15,493 19,800 14,071 15,492 Notes receivables.................... 3,232 2,663 1,231 2,278 3,610 All other assets..................... 16,662 25,291 56,819 70,006 72,760 ---------- ---------- ---------- ---------- ---------- Total assets.................. $ 686,440 $1,074,418 $1,115,610 $ 751,929 $ 660,240 ========== ========== ========== ========== ========== Dealer holdbacks, net................ $ 363,519 $ 496,434 $ 439,554 $ 222,275 $ 202,143 Total debt........................... 95,780 288,899 391,666 218,798 158,985 Other liabilities.................... 28,166 42,942 35,399 34,593 36,137 ---------- ---------- ---------- ---------- ---------- Total liabilities............. 487,465 828,275 866,619 475,666 397,265 Shareholders' equity(B).............. 198,975 246,143 248,991 276,263 262,975 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity.......................... $ 686,440 $1,074,418 $1,115,610 $ 751,929 $ 660,240 ========== ========== ========== ========== ========== </TABLE> (A) On September 29, 1995 the Company consummated a public offering of 3,900,000 shares of its Common Stock. (B) No dividends were paid during the periods presented. 14
16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL CAC is a specialized financial services company providing funding, receivables management, collection, sales training and related products and services to automobile dealers located in the United States, the United Kingdom, Ireland and Canada. The Company assists such dealers by providing them with an indirect source of financing for buyers of used vehicles with limited access to traditional sources of consumer credit. In addition, but to a significantly lesser extent, the Company provides floor plan financing and secured working capital loans to dealers, secured by the related vehicle inventory and any future cash collections owed to the dealer on contracts accepted under the Company's program. The Company's relationship with a dealer is defined by: (i) the servicing agreement which sets forth the terms and conditions associated with the Company's acceptance of a contract from a dealer; and (ii) the contract, which is a retail installment sales contract between a dealer and a purchaser of a used vehicle, providing for payment over a specified term. With respect to its principal financing program, the dealer assigns title to the contract and the security interest in the vehicle to the Company. Thereafter, the rights and obligations of the Company and the dealer are defined by the servicing agreement, which provides that a contract is assigned to the Company as nominee for the dealer for purposes of administration, servicing and collection of the amount due under the assigned contract, as well as for security purposes. The Company takes title to the contract as nominee and records the gross amount of the contract as a gross installment contract receivable and the amount of its "servicing fee" (see below) as an unearned finance charge which, for balance sheet purposes, is netted from the gross amount of the contract. The Company records the remaining portion of the contract (the gross amount of the contract less the unearned finance charge) as a "dealer holdback". For balance sheet purposes, dealer holdbacks are shown net of any Advances made by the Company to the dealer in connection with accepting the assignment of a contract. The Company's program allows dealers to establish the interest rate on contracts, which typically is the maximum rate allowable by the state or country in which the dealer is doing business. As the majority of the Company's revenue is derived from the servicing fee it receives on the gross amount due under the contract (typically 20% of the principal and interest), the Company's revenues from servicing fees are not materially impacted by changes in interest rates. The Company's revenue is principally dependent upon the gross value of contracts accepted, which is determined by the number of contracts accepted and the amount of the average contract. The contracts assigned to the Company are: (i) secured by the related vehicle; and (ii) short-term in duration (generally maturing in 24 to 42 months, with an initial average maturity of approximately 32 months). The interest rates charged on floor plan financing and on secured working capital loans typically range from 12% to 18% per annum. Through its automotive leasing business, the Company purchases 24 to 36 month used vehicle leases originated by dealers participating in the Company's automotive leasing programs. The programs are designed to provide dealers with a leasing alternative for Non-prime Consumers with limited access to traditional sources of consumer credit. Because the Company assumes ownership of the vehicles from the dealers, these leases are accounted for as operating leases with the capitalized cost of the vehicles recorded as depreciable assets (net investment in operating leases). This program differs from the Company's principal business in that, as these leases are purchased outright, the dealer does not have any rights to future collections on the lease contracts. The Company's subsidiaries provide additional services to dealers. One such subsidiary is primarily engaged in the business of reinsuring credit life and disability insurance policies and collateral protection insurance coverage issued to borrowers under contracts originated by dealers. Premiums are ceded to the subsidiary on both an earned and written basis and are earned over the life of the contracts using pro rata and sum-of-digits methods. Another subsidiary administers short-term limited extended service contracts offered by dealers. In connection therewith, the subsidiary bears the risk of loss for any repairs covered under the service contract. Revenue is recognized on a straight-line basis over the life of the service contracts. In addition, the subsidiary has relationships with third party service contract providers which pay the subsidiary a fee on service contracts included on installment contracts financed through participating dealers. The 15
17 subsidiary does not bear the risk of loss for covered claims on these third party service contracts. The income from the non-refundable fee is recognized upon acceptance of the installment contract. RESULTS OF OPERATIONS The following table sets forth the percent relationship of certain items to total revenue for the periods indicated. <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ----------------------- PERCENT OF TOTAL REVENUES 1997 1998 1999 ------------------------- ----- ----- ----- <S> <C> <C> <C> Finance charges.......................................... 71.2% 68.8% 65.9% Premiums earned.......................................... 6.9 7.7 9.0 Gain on sale of Advance receivables, net................. -- 0.5 -- Other income............................................. 21.9 23.0 25.1 ----- ----- ----- Total revenue............................................ 100.0 100.0 100.0 ----- ----- ----- Operating expenses....................................... 28.0 41.5 48.9 Provision for credit losses.............................. 52.0 11.5 48.3 Provision for claims..................................... 2.4 2.6 3.0 Valuation adjustment on retained interest in securitization......................................... -- -- 11.7 Interest................................................. 16.8 18.0 14.3 ----- ----- ----- Total costs and expenses............................... 99.2 73.6 126.2 ----- ----- ----- Gain on sale of subsidiary............................... -- -- 12.7 ----- ----- ----- Operating income (loss).................................. 0.8 26.4 (13.5) Foreign exchange loss.................................. -- (0.1) (0.1) ----- ----- ----- Income (loss) before income taxes........................ 0.8 26.3 (13.6) Provision (credit) for income taxes.................... (0.1) 8.8 (4.4) ----- ----- ----- Net income (loss)........................................ 0.9% 17.5% (9.2)% ===== ===== ===== </TABLE> Year Ended December 31, 1998 Compared To Year Ended December 31, 1999 Total Revenue. Total revenue decreased from $142.3 million in 1998 to $116.1 million in 1999, a decrease of $26.2 million or 18.4%. This decrease was primarily due to the decrease in finance charge revenue resulting from a decrease in the average installment contracts receivable balance. The decrease in gross installment contracts receivable is primarily the result of collections on and charge offs of installment contracts exceeding contract originations for the period. The volume of contract originations for CAC's North America operations decreased from $521.5 million for the year ended December 31, 1998 to $408.5 million for 1999. The volume of contract originations for CAC's United Kingdom operations increased from $59.1 million in 1998 to $124.6 million in 1999. Based upon reviews of dealer profitability and improvements in credit quality on installment contracts originated since the fourth quarter of 1997, in an effort to increase origination volumes, the Company has introduced new advance programs, both in the United States and United Kingdom, which have increased the Company's overall advance rates. The Company's Advances to dealers and payment of dealer holdback, as a percent of gross installment contracts accepted, increased from 50.1% for the year ended December 31, 1998 to 55.5% for 1999. There can be no assurance that higher Advance rates will lead to increased origination volumes in future periods or that Advance rates will not need to be reduced in future periods based on continued review of dealer profitability and credit quality. While management expects the increased Advance rates to have a positive effect on the Company's results, higher Advance rates increase the Company's risk of loss on dealer Advances in future periods. The average yield on the Company's installment contract portfolio, calculated using finance charge revenue divided by average installment contracts receivable, was approximately 11.4% and 12.3% in 1998 and 1999, respectively. The increase in the average yield is due to a decrease in the percentage of installment 16
18 contracts which were in non-accrual status. The percentage of installment contracts which were in non-accrual status was 32.4% and 23.0% as of December 31, 1998 and 1999, respectively. Premiums earned increased, as a percentage of total revenue, from 7.7% in 1998 to 9.0% in 1999. Premiums on the Company's service contract program are earned on a straight-line basis over the life of the service contracts. Premiums reinsured under the Company's credit life and collateral protection insurance programs are earned over the life of the contracts using the pro rata and sum-of-digits methods. As a result of these revenue recognition methods, premiums earned decreased at a slower rate than the decrease in finance charge revenue. In July 1998, the Company recognized a net gain on sale of advance receivables of approximately $685,000. The gain resulted from the securitization of dealer Advances having a carrying value of approximately $56 million. See "Liquidity and Capital Resources". The gain represents the difference between the sale proceeds to the Company from the sale of dealer Advance receivables to an institutional investor, net of transaction costs, and the Company's carrying amount of the Advances, plus the present value of the estimated cash flows to be received by the Company. In determining the gain on sale of receivables, the Company assumed an excess cash flow discount rate of 15%, cumulative credit losses of 14% and an interest rate on the underlying debt of 7.5%. The present value of such estimated excess cash flows has been recorded by the Company as a retained interest in securitization of $4.1 million as of December 31, 1999. The Company recorded a valuation adjustment to the retained interest in securitization in the third quarter of 1999 (see "Results of Operations -- Valuation Adjustment on Retained Interest in Securitization"). The installment contracts supporting the dealer Advances include contracts with origination dates ranging from July 1990 to June 1998, with a weighted average age of 15 months as of the date of the transaction. The amount of such contracts included on the Company's balance sheet as of June 30, 1998 was $98.6 million, of which $43.8 million was in non-accrual status. In addition, the Advances are supported by installment contracts which had been previously written off for financial statement purposes. The excess cash flows result from the amount by which projected collections on the installment contracts exceeds (i) the principal and interest to be paid to the institutional investor and (ii) the amount of dealer holdback due to dealers. In the securitization, the Company retained servicing responsibilities and subordinated interests. The Company receives monthly servicing fees of 4% of the collections on the installment contracts receivable, and rights to future cash flows arising after the institutional investor has received the return for which they are contracted. The investor has no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are generally restricted until investors have been fully paid and are subordinate to investors' interests. The value of the retained interest is subject to substantial credit risk and moderate interest rate risk, as well as the timing of projected collections on the transferred financial assets. Other income increased, as a percent of total revenue, from 23.0% in 1998 to 25.1% in 1999. The increase is primarily due to (i) revenue from the Company's auction services business which the Company began operating in June 1998 until it was sold in December 1999, (ii) servicing fees from the securitization of advance receivables completed in July 1998 and (iii) operating lease revenue from the CAC Automotive Leasing business unit which began operating in 1999. The increase is partially offset by (i) a decrease in revenues from the Company's credit reporting subsidiary which was sold on May 7, 1999, (ii) decreases in earned dealer enrollment fees due to a decline in the number of dealers enrolling in the Company's financing program and (iii) a decrease in fees earned on third party service contract products offered by dealers on installment contracts, as the volume of this business has declined proportionately with the decrease in installment contract originations. Operating Expenses. Operating expenses, as a percent of total revenue, increased from 41.5% in 1998 to 48.9% in 1999. Operating expenses consist primarily of salaries and wages, general and administrative, and sales and marketing expenses. The increase, as a percent of revenue, is primarily due to an increase in salaries and wages. Salaries and wages increased, as a percent of revenue, due to the Company's employee headcount not being reduced proportionately with the decrease in revenues. The Company has retained collection personnel in an effort to improve collection levels. 17
19 A portion of management personnel compensation paid by the Company is charged to a company controlled by the Company's Chairman (the "Affiliated Company"), based upon the percentage of time spent working for the Affiliated Company. The Company charged the Affiliated Company approximately $226,000 and $203,000 in 1998 and 1999, respectively. Shared employees devote between 30% and 90% of their time to the Company, depending on their responsibilities. The Company believes that the amounts charged by the Company are representative of the respective employees' activities. The increase is also due to an increase, as a percent of revenue, in general and administrative expenses which, due to the fixed nature of certain of these expenses, did not decline proportionately with the decline in revenue. This increase is partially offset by a decrease in legal fees and settlement provisions resulting from a decline in material new litigation against the Company. To a lesser extent, the increase in operating expenses, as a percent of revenue, resulted from the Company's auction services business, which requires proportionately higher operating expenses than the Company's other businesses. The Company operated the auction service business from June of 1998 when it was the purchased until it was sold in December 1999. The increases, as a percent of revenue, in salaries and wages and general and administrative expenses are partially offset by a decrease in sales and marketing expenses. This expense decreased primarily due to reductions in sales commissions as a result of lower contract origination volumes and lower average sales force headcounts. The decrease in sales and marketing expenses is also the result of a decrease in advertising due to the termination of the Company's customer lead generating program. Provision for Credit Losses. The amount provided for credit losses, as a percent of total revenue, increased from 11.5% in 1998 to 48.3% in 1999. The provision for credit losses consists of two components: (i) a provision for losses on Advances to dealers that are not expected to be recovered through collections on the related installment contract receivable portfolio and (ii) a provision for earned but unpaid revenue on installment contracts which were transferred to non-accrual status during the period. The increase is primarily due to higher provisions needed for losses on Advances to dealers with respect to loan pools originated in 1995, 1996 and 1997. As such, the Company recorded a pre-tax charge of $47.3 million during the third quarter of 1999. The charge was necessary due to collections in affected loan pools falling below estimates indicating further impairment of advance balances associated with these pools. Management's analysis of collection results leads to a conclusion that the actual collection results will be below previous forecasts produced by its static pool model. While previous loss curves indicated that loans originated in 1995, 1996 and 1997 would generate lower overall collection rates than loans originated in prior years, trends in these loss curves indicate that collection rates on these pools will be lower than previously estimated. Management's analysis of the static pool data, after considering the effect of this less favorable trend, continues to indicate that the business originated since 1998 is of higher quality than that written in the prior three years. The decreases are partially offset by the lower provisions needed for earned but unpaid revenue primarily resulting from the decrease in the percent of non-accrual installment contracts receivable which were 32.4% and 23.0% of gross receivables as of December 31, 1998 and 1999, respectively. Provision for Claims. The amount provided for insurance and service contract claims, as a percent of total revenue, increased from 2.6% in 1998 to 3.0% in 1999. The increase corresponds with the increase, as a percent of total revenue, in premiums earned from 7.7% in 1998 to 9.0% in 1999. The Company has established claims reserves on accumulated estimates of claims reported but unpaid plus estimates of incurred but unreported claims. The Company believes the reserves are adequate to cover future claims associated with the programs. Valuation Adjustment on Retained Interest in Securitization. The Company recorded a $13.5 million valuation adjustment in 1999 on the retained interest in securitization related to the Company's July 1998 securitization. The retained interest in securitization represents an accounting estimate based on several variables including the amount and timing of collections on the underlying installment contracts receivable, the amount and timing of projected dealer holdback payments and interest costs. The Company regularly 18
20 reviews the actual performance of these variables against the assumptions used to record the retained interest. This evaluation led to a reassessment of the timing and amount of collections on the installment contracts underlying the securitized advances and the resulting $13.5 million write down in the third quarter of 1999. The Company continues to assess the performance of the 1998 securitization and makes adjustments when necessary. Interest Expense. Interest expense, as a percent of total revenue, decreased from 18.0% in 1998 to 14.3% in 1999. Total interest expense decreased from $25.6 million in 1998 to $16.6 million in 1999. The $9.0 million decrease in interest expense for 1999 is primarily the result of a decrease in the amount of average outstanding borrowings which results from (i) the positive cash flow generated from collections on installment contracts receivable exceeding cash advances to dealers and payments of dealer holdbacks and (ii) amounts raised in July 1998 from the securitization of advance receivables. The decrease was partially offset by higher average interest rates in 1999. The weighted average interest rate was 9.27% in 1998 and 9.36% in 1999. The increase in the average interest rates for 1999 is the result of (i) the impact of fixed borrowing costs, such as facility fees, up front fees and other costs on average interest rates when average outstanding borrowings are decreasing, (ii) an increase in the interest rate on outstanding borrowings under the Company's senior notes resulting from amendments to the note purchase agreements entered into in contemplation of the Company's securitization of advance receivables in 1998 and the $47.3 million pre-tax charge on Advances to dealers in the third quarter of 1999, (iii) a decrease in line of credit balances, which carry lower interest rates, as a percentage of total average balance sheet debt and (iv) the acceleration of amortization of certain deferred debt issuance cost in connection with the repurchase of senior notes. These interest rate increases are partially offset by the secured financings completed in 1999, which are at lower rates of interest than the debt they replaced. Gain on Sale of Subsidiary. The Company recorded a pre-tax gain of $14.7 million in 1999 from the sale of the Company's credit reporting services subsidiary. The net proceeds from the sale were used to reduce outstanding indebtedness under the Company's $125 million credit facility. Operating Income (Loss). As a result of the aforementioned factors, operating income (loss) decreased from $37.6 million in 1998 to ($15.7) million in 1999, a decrease of $53.3 million. Foreign Exchange Loss. The Company incurred a foreign exchange loss of $116,000 and $66,000 in 1998 and 1999, respectively. The losses were the result of exchange rate fluctuations between the U.S. dollar and foreign currency on unhedged intercompany balances between the Company and subsidiaries which operate outside the United States. Provision (Credit) for Income Taxes. The provision (credit) for income taxes decreased from $12.6 million in 1998 to ($5.0) million in 1999. The decrease is primarily due to a pretax loss in 1999. In 1998 and 1999, the effective tax rate was 33.5% and 32.1%, respectively. The 1999 income tax benefit is partially offset by state income taxes incurred on the sale of the Company's credit reporting subsidiary in 1999. Year Ended December 31, 1997 Compared To Year Ended December 31, 1998 Total Revenue. Total revenue decreased from $164.2 million in 1997 to $142.3 million in 1998, a decrease of $21.9 million or 13.3%. This decrease was primarily due to the decrease in finance charge revenue resulting from a decrease in the average installment contracts receivable balance. The decrease in gross installment contracts receivable is primarily the result of collections on and charge offs of installment contracts exceeding contract originations for the period. The Company's volume of contract originations decreased in the fourth quarter of 1997 and in 1998 as the Company has implemented more conservative Advance programs and has limited business with marginally profitable and unprofitable dealers. These changes were made primarily as a result of the Company's enhanced analysis made possible by the Company's loan servicing system which became operational in the third quarter of 1997. Based on this review of dealer profitability, the Company has discontinued relationships with certain dealers and continues to monitor its relationships with dealers and make adjustments to these relationships as required. It is expected that the volume of contract originations will continue at lower levels than those experienced prior to the implementation of these changes. 19
21 The average yield on the Company's installment contract portfolio, calculated using finance charge revenue divided by average installment contracts receivable, was approximately 10.4% and 11.4% in 1997 and 1998, respectively. The increase in the average yield is due to a decrease in the percentage of installment contracts which were in non-accrual status as well as improvements in collection levels on non-accrual installment contracts. The percentage of installment contracts which were in non-accrual status was 37.6% and 32.4% as of December 31, 1997 and 1998, respectively. Premiums earned increased, as a percentage of total revenue, from 6.9% in 1997 to 7.7% in 1998. Premiums on the Company's service contract program are earned on a straight-line basis over the life of the service contracts. Premiums reinsured under the Company's credit life and collateral protection insurance programs are earned over the life of the contracts using the pro rata and sum-of-digits methods. As a result of these revenue recognition methods, premiums earned decreased at a slower rate than the decrease in finance charges. In addition, the increase is due to an increase in the penetration rate on the Company's service contract and credit life insurance programs. In July 1998, the Company recognized a net gain on sale of advance receivables of approximately $685,000. The gain resulted from the securitization of dealer Advances having a carrying value of approximately $56 million. See "Liquidity and Capital Resources". The gain represents the difference between the sale proceeds to the Company, net of transaction costs, and the Company's carrying amount of the dealers Advances, plus the present value of the estimated cash flows to be received by the Company. In determining the gain on sale of receivables, the Company assumed an excess cash flow discount rate of 15%, cumulative credit losses of 14% and an interest rate on the underlying debt of 7.5%. The present value of such estimated excess cash flows has been recorded by the Company as a retained interest in securitization of $14.7 million as of December 31, 1998. The installment contracts supporting the dealer Advances include contracts with origination dates ranging from July 1990 to June 1998, with a weighted average age of 15 months. The amount of such contracts included on the Company's balance sheet as of June 30, 1998 was $98.6 million, of which $43.8 million was in non-accrual status. In addition, the Advances are supported by installment contracts which had been previously written off for financial statement purposes. The excess cash flows result from the amount by which projected collections on the installment contracts exceeds i) the principal and interest to be paid and ii) the amount of dealer holdback due to dealers. In the securitization, the Company retained servicing responsibilities and subordinated interests. The Company receives monthly servicing fees of 4% of the collections on the installment contracts receivable, and rights to future cash flows arising after the investors in the commercial paper received the return for which they are contracted. The investors have no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are generally restricted until investors have been fully paid and are subordinate to investors' interests. Their value is subject to substantial credit and interest rate risk and the timing of projected collections on the transferred financial assets. Other income increased, as a percent of total revenue, from 21.9% in 1997 to 23.0% in 1998. The increase is primarily due to i) revenues from the Company's auction services business which the Company began operating in June 1998; ii) an increase in revenues from the Company's credit reporting subsidiary and iii) servicing fees and interest earned on the retained interest in securitization resulting from the Company's securitization of advance receivables in July 1998. The increase is offset by decreases in fees earned on third party service contract products offered by dealers on installment contracts, as the volume of this business has declined proportionately with the decline in contract originations; and by a decrease due to a decline in the number of new dealers enrolling in the Company's financing program. The Company has become more selective with respect to the enrollment of new dealers in an effort to improve the performance of its portfolio of installment contracts receivable. Operating Expenses. Operating expenses, as a percent of total revenue, increased from 28.0% in 1997 to 41.5% in 1998. Operating expenses consist primarily of salaries and wages, general and administrative, and sales and marketing expenses. The increase for the period is due in part to an increase in salaries and wages. Salaries and wages increased due to i) increases in the Company's average wage rates necessary to attract and retain quality 20
22 personnel; ii) the Company's purchase of the auction services business in June 1998; iii) information technology personnel added to maintain the Company's new computer systems and applications and; iv) severance compensation paid to or accrued for an executive who terminated employment in 1998. A portion of management personnel compensation paid by the Company is charged to a company controlled by the Company's Chairman (the "Affiliated Company"), based upon the percentage of time spent working for the Affiliated Company. The Company charged the Affiliated Company approximately $208,000 and $226,000 in 1997 and 1998, respectively. Shared employees devote between 30% and 90% of their time to the Company, depending on their responsibilities. The Company believes that the amounts charged by the Company are representative of the respective employees' activities. In addition, the increase in operating expenses is due to an increase in general and administrative expenses. These expenses were higher in 1998 primarily due to increases in i) legal fees and settlement provisions resulting from an increase in the frequency and magnitude of litigation against the Company (See Item 3. "Legal Proceedings"); ii) depreciation and amortization primarily resulting from the addition of new computer systems in 1997 and; iii) audit fees charged by the Company's independent auditors. Also, the increase results from general and administrative expenses at the Company's auction services subsidiary. Provision for Credit Losses. The amount provided for credit losses, as a percent of total revenue, decreased from 52.0% in 1997 to 11.5% in 1998. The provision for the year ended December 31, 1997 included a charge recorded to reflect the enhancements in the Company's methodology for estimating its reserve for Advances made possible by a new loan servicing system implemented by the Company. Utilizing the new information made available upon the successful implementation of this new system, the Company undertook an extensive review of its exposure related to dealer Advances using a static pool analysis on a per dealer basis. In order to reflect the impact of this analysis on the Company's Advance reserve, additional provisions were recorded in 1997. The provision for credit losses consists of two components: i) a provision for loan losses for the earned but unpaid servicing fees or finance charges recognized on contractually delinquent installment contracts and ii) a provision for losses on Advances to dealers that are not expected to be recovered through collections on the related installment contract receivable portfolio. The decreases were primarily due to lower provisions needed for Advance losses, based on the Company's static pool analysis. Advance balances are continually reviewed by management utilizing the Company's loan servicing system which allows management to estimate future collections for each dealer pool using historical loss experience and a dealer by dealer static pool analysis. In addition, the decreases were also due to lower provisions needed for loan losses primarily resulting from a decrease in the percent of non-accrual installment contracts receivable, which were 37.6% and 32.4% of gross receivables as of December 31, 1997 and 1998, respectively. Provision for Claims. The amount provided for insurance and service contract claims, as a percent of total revenue, was 2.4% and 2.6% in 1997 and 1998, respectively. The increase corresponds with the increase, as a percent of total revenue, in premiums earned from 6.9% in 1997 to 7.7% in 1998. The Company has established claims reserves on accumulated estimates of claims reported but unpaid plus estimates of incurred but unreported claims. The Company believes the reserves are adequate to cover future claims associated with the programs. Interest Expense. Interest expense, as a percent of total revenue, increased from 16.8% in 1997 to 18.0% in 1998. Total interest expense decreased from $27.6 million in 1997 to $25.6 million in 1998. The $2.0 million decrease in interest expense for 1998 is primarily the result of a decrease in the amount of average outstanding borrowings, which resulted from i) the positive cash flow generated primarily from collections on installment contracts receivable exceeding cash Advances to dealers and payments of dealer holdbacks and ii) $49.3 million raised in July 1998 from the securitization of advance receivables. The decrease for 1998 was partially offset by higher average interest rates during the year. The increase in the average interest rate is primarily the result of increases in the Company's Eurocurrency-based borrowing and facility fee margins under its credit agreement with a commercial bank syndicate, due to the downgrade of the Company's credit rating with Moody's Investor Service from Baa3 to Ba2, and with Standard and Poor's from BBB- to BB 21
23 effective October 22, 1997, and a further downgrade by Moody's Investor Service on June 24, 1998 from Ba2 to Ba3. Additionally, the increase in the average interest rate is due to increases in the interest rate on outstanding borrowings under the Company's note purchase agreements resulting from amendments due to the Company's securitization of advance receivables. Operating Income. As a result of the aforementioned factors, operating income increased from $1.3 million in 1997 to $37.6 million in 1998, a increase of $36.3 million. Foreign Exchange Loss. The Company incurred a foreign exchange loss of $41,000 and $116,000 in 1997 and 1998, respectively. The losses were the result of exchange rate fluctuations between the U.S. dollar and foreign currency on unhedged intercompany balances between the Company and subsidiaries which operate outside the United States. Provision (Credit) for Income Taxes. The provision (credit) for income taxes increased from ($0.2) million in 1997 to $12.6 million in 1998. The increase is due to higher pretax profits in 1998. For 1998, the effective tax rate was 33.5%. The Company provides income taxes on its foreign earnings at the statutory rate in effect for the applicable country where such earnings arise. The principal foreign earnings of the Company arise from its operations in the United Kingdom, where the statutory rate is lower than the U.S. statutory tax rate. CREDIT LOSS POLICY AND EXPERIENCE When an installment contract is assigned to the Company by a participating dealer, the Company generally pays a cash Advance to the dealer. These Advance balances represent the Company's primary risk of loss related to the funding activity with the dealers. The Company maintains a reserve against Advances to dealers that are not expected to be recovered through collections on the related installment contract portfolio. For purposes of establishing the reserve, expected future collections are reduced to their present-value in order to achieve a level yield over the expected term of the Advance. The Company's loan servicing system allows the Company to estimate future collections for each dealer pool using historical loss experience and a dealer by dealer static pool analysis. The Company recorded a non-cash charge during 1999 to reflect the impact of collections on loan pools originated primarily during 1995, 1996 and 1997 falling below previous estimates, indicating further impairment of Advance balances associated with these loan pools. While previous loss curves indicated that loans originated in 1995, 1996 and 1997 would generate lower overall collection rates than those originated in prior years, in the third quarter of 1999 the loss curves indicated collection rates on these pools would be lower than previously estimated. Management's analysis of the static pool model also indicates that the business originated subsequent to 1997 is of higher quality than business originated during the three years ended December 31, 1997. Future reserve requirements will depend in part on the magnitude of the variance between management's current estimate of future collections and the actual collections that are realized. The Company charges off dealer Advances against the reserve at such time when the Company determines that an Advance is permanently impaired. Ultimate losses may vary from current estimates and the amount of the provision, which is the current expense, may be either greater or less than actual charge offs. The Company also maintains an allowance for credit losses which, in the opinion of management, adequately reserves against expected losses in the portfolio of receivables. The risk of loss to the Company related to the installment contracts receivable balances relates primarily to the earned but unpaid revenue on installment contracts which were transferred to non-accrual status during the period. Servicing fees, which are booked as finance charges, are recognized under the interest method of accounting until the underlying obligation is 90 days past due on a recency basis. At such time, the Company suspends the accrual of revenue and makes a provision for credit losses equal to the earned but unpaid revenue. In all cases, contracts on which no material payment has been received for nine months are charged off against dealer holdbacks, unearned finance charges and the allowance for credit losses. During the third quarter of 1997, the Company changed its non-accrual policy from 120 days on a contractual basis to 90 days on a recency basis and, during the fourth quarter of 1997, changed its charge off 22
24 policy to nine months on a recency basis from one year on a recency basis. The Company believes these changes allow for earlier recognition of under-performing dealer pools. The following table sets forth information relating to charge offs, the allowance for credit losses, the reserve on Advances, and dealer holdbacks. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1997 1998 1999 -------- -------- -------- <S> <C> <C> <C> Provision for credit losses -- installment contracts..................................... $ 11,072 $ 3,432 $ 1,205 -------- -------- -------- Provision for credit losses -- Advances......... $ 74,400 $ 12,973 $ 54,868 ======== ======== ======== CHARGE OFFS - ------------------------------------------------ Charged against dealer holdbacks................ $374,646 $359,846 $187,584 Charged against unearned finance charges........ 82,748 81,632 43,094 Charged against allowance for credit losses..... 10,138 8,392 3,489 -------- -------- -------- Total contracts charged off..................... $467,532 $449,870 $234,167 ======== ======== ======== Net charge off against the reserve on Advances...................................... $ 71,391 $ 9,744 $ 70,353 ======== ======== ======== </TABLE> <TABLE> <CAPTION> AS OF DECEMBER 31, ----------------------- CREDIT RATIOS 1997 1998 1999 ------------- ----- ----- ----- <S> <C> <C> <C> Allowance for credit losses as a percent of gross installment contracts receivable..................... 1.0% 0.9% 0.7% Reserve on Advances as a percent of Advances........... 2.8% 4.6% 1.3% Gross dealer holdbacks as a percent of gross installment contracts receivable..................... 79.9% 79.8% 79.6% </TABLE> LIQUIDITY AND CAPITAL RESOURCES The Company's principal need for capital is to fund cash Advances made to dealers in connection with the acceptance of installment contracts and for the payment of dealer holdbacks to dealers who have repaid their Advance balances. These cash outflows to dealers increased from $290.6 million in 1998 to $295.6 million in 1999. These amounts have historically been funded primarily from cash collections on installment contracts, cash provided by operating activities and draws under the Company's line of credit agreements. During 1999, the Company paid down approximately $42.1 million on its line of credit and repaid $105.6 million on its outstanding senior notes, primarily funded by (i) $100 million raised through secured financings of Advance receivables during the third and fourth quarters of 1999, (ii) principal collections on installment contracts receivable exceeding cash advances to dealers and (iii) proceeds from the sale of the Company's credit reporting services subsidiary. During the fourth quarter of 1997 and in 1998, the Company implemented more conservative Advance programs and reduced business with marginally profitable and unprofitable dealers in order to improve the performance of its portfolio of installment contracts. These changes have resulted in reduced levels of originations and cash Advances to dealers in 1998 and in 1999. The Company has a $125 million credit agreement with a commercial bank syndicate. The facility has a commitment period through June 13, 2000 and is subject to annual extensions for additional one year periods at the request of the Company with the consent of each of the banks in the facility. The agreement provides that interest is payable at the Eurocurrency rate plus 140 basis points, or at the prime rate. The Eurocurrency borrowings may be fixed for periods up to six months. The credit agreement has certain restrictive covenants, including limits on the ratio of the Company's debt-to-equity, debt to Advances, debt to gross installment contracts receivable, Advances to installment contracts receivable, fixed charges to net income, limits on the Company's investment in its foreign subsidiaries and requirements that the Company maintain a specified minimum level of net worth. Borrowings under the credit agreement are secured through a lien on most of the 23
25 Company's assets on an equal and ratable basis with the Company's senior notes. As of December 31, 1999, there was approximately $34.2 million outstanding under this facility. The Company has a $2.0 million British pound sterling line of credit agreement with a commercial bank in the United Kingdom. The borrowings are secured by a letter of credit issued by the Company's principal commercial bank, with interest payable at the greater of the United Kingdom bank's base rate (5.5% as of December 31, 1999) plus 65 basis points or at the Libor rate plus 56.25 basis points. As of December 31, 1999, there was approximately 1.5 million British pounds ($2.4 million U.S. dollars) outstanding under this agreement. In July 1999 and December 1999, the Company completed two separate $50 million secured financings of Advance receivables. Pursuant to these transactions, in July 1999 and December 1999, the Company contributed dealer advances having a carrying amount of approximately $62.4 million and $65.0 million respectively and received approximately $97.7 million in financing from an institutional investor. The financing, which is nonrecourse to the Company, bears interest at a floating rate equal to the applicable commercial paper rate plus 70 basis points with a maximum rate of 7.5%. The commercial paper may be issued for terms of between 1 and 270 days. The July 1999 transaction is expected to amortize within 28 months while the December 1999 transaction is expected to amortize within 12 months. The financing is secured by the contributed dealer Advances and the rights to collections on the related installment contracts receivable. The proceeds of the July 1999 secured financing were used to reduce indebtedness under the Company's credit facility while the proceeds of the December 1999 secured financing were used to repurchase, at par, approximately $49.5 million in principal of its senior notes. On August 5, 1999, the Company's Board of Directors authorized a common stock repurchase program of up to 1,000,000 shares of the Company's common stock. On February 7, 2000, the Company's Board of Directors authorized an increase in the Company's stock repurchase program from 1,000,000 to 2,000,000 shares. The 2,000,000 shares, which can be repurchased through the open market or in privately negotiated transactions, represent approximately 4% of the outstanding common shares. As of March 22, 2000, the Company had repurchased approximately 1.4 million shares under this program. When borrowing to fund the operations of its foreign subsidiaries, the Company's policy is to borrow funds denominated in the currency of the country in which the subsidiary operates, thus mitigating the Company's exposure to foreign exchange fluctuations. The Company maintains a significant dealer holdback on installment contracts accepted which assists the Company in funding its long-term cash flow requirements. As the Company's $125 million credit facility expires on June 13, 2000, the Company will be required to renew the facility or refinance any amounts outstanding under this facility on or before such date. As of March 22, 2000, there was approximately $57.5 million outstanding under this facility. In addition, in 2000, the Company will have $14.6 million of principal maturing on its senior notes and $600,000 maturing on a mortgage loan. The Company believes that the $125 million credit facility will be renewed with similar terms and a similar commitment amount, and that the other repayments can be made from cash resources available to the Company at the time such repayments are due. The Company's short and long-term cash flow requirements are materially dependent on future levels of originations. During the third and fourth quarters of 1999, the Company experienced an increase in originations over 1998. The Company expects this trend to continue in future periods and, to the extent this trend does continue, the Company will experience an increase in its need for capital. Based upon anticipated cash flows, management believes that amounts available under its credit agreement, cash flow from operations and various financing alternatives available will provide sufficient financing for current debt maturities and for future operations. Failure to complete the refinancing or failure to obtain other financing alternatives may have a material adverse effect on the Company's operations. 24
26 MARKET RISK The market risk discussion and the estimated amounts generated from the analysis that follows are forward-looking statements of market risk assuming certain adverse market conditions occur. Actual results in the future may differ materially due to changes in the Company's product and debt mix and developments in the financial markets. The Company is exposed primarily to market risks associated with movements in interest rates and foreign currency exchange rates. The Company believes that it takes the necessary steps to appropriately reduce the potential impact of interest rate and foreign exchange exposures on the Company's financial position and operating performance. The Company's policies and procedures prohibit the use of financial instruments for trading purposes. Sensitivity analysis is used to manage and monitor interest rate and foreign exchange risk. A discussion of the Company's accounting policies for derivative instruments is included in the Summary of Significant Accounting Policies in the notes to the consolidated financial statements. Interest Rate Risk. The Company requires substantial amounts of cash to fund cash Advances to dealers in connection with the acceptance of installment contracts. The Company relies on various sources of financing to assist in funding its operations, some of which is at floating rates of interest and exposes the Company to risks associated with increases in interest rates. The Company manages such risk primarily by entering into interest rate cap agreements on certain portions of its floating rate debt. As of December 31, 1999, the Company had $37.0 million of floating rate debt outstanding on its bank credit facilities, with no interest rate cap protection, and $83.2 million in floating rate commercial paper outstanding under its secured financings, with interest rate caps at 7.5%. Based on the difference between the Company's commercial paper rates at 12/31/99 and the 7.5% interest rate cap, the Company's maximum interest rate risk on the secured financing is a 1.8% increase in commercial paper rates, which would reduce annual after-tax earnings by approximately $700,000. For every 1% increase in rates on the Company's bank credit facilities, annual after-tax earnings would decrease by approximately an additional $250,000. This analysis assumes the Company maintains a level amount of floating rate debt and assumes an immediate increase in rates. Foreign Currency Risk. The Company is exposed to foreign currency risk from the possibility of changes in foreign exchange rates that could have a negative impact on earnings or asset and liability values from operations in foreign countries. The Company's most significant foreign currency exposure relates to the United Kingdom. It is the Company's policy to borrow and lend in local currencies to mitigate such risks. For an immediate, hypothetical 10% decrease in quoted foreign currency exchange rates, annual after tax earnings would have declined by approximately $350,000 at December 31, 1999. The potential loss in net asset values from such a decrease would be approximately $7.0 million as of December 31, 1999. Immediate changes in interest rates and foreign currency exchange rates discussed in the proceeding paragraphs are hypothetical rate scenarios, used to calibrate risk, and do not currently represent management's view of future market developments. YEAR 2000 UPDATE The Year 2000 issue results from the inability of some computer programs to recognize the Year 2000 properly, potentially leading to errors or system failure. CAC adopted a Year 2000 compliance program in an attempt to minimize or prevent the number and seriousness of any disruptions that could have occurred as a result of the Year 2000 issue. CAC's compliance program included an assessment of its hardware and software computer systems and other non-information technology systems, as well as an assessment of the Year 2000 issues relating to third parties with which CAC had a material relationship or whose systems were material to the operations of CAC. 25
27 Neither the Company or any material third parties incurred any significant problems relating to the Year 2000 issue and the Company does not expect to incur significant expenses to remediate immaterial Year 2000 operating issues. FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis contains a number of forward looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, both as amended with respect to expectations for future periods which are subject to various risks and uncertainties. The risks and uncertainties are detailed from time to time in reports filed by the Company with the Securities and Exchange Commission, including forms 8-K, 10-Q, and 10-K, and include, among others, competition from traditional financing sources and from non-traditional lenders, availability of funding at competitive rates of interest, 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 ability to maintain or increase the volume of installment contracts accepted , the Company's inability to accurately forecast and estimate future collections and historical collection rates and the Company's ability to complete various financing alternatives. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information called for by Item 7A is incorporated by reference from the information in Item 7 under the caption "Market Risk" in this Form 10-K. 26
28 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Credit Acceptance Corporation: We have audited the accompanying consolidated balance sheets of Credit Acceptance Corporation and subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Detroit, Michigan January 26, 2000 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Shareholders Credit Acceptance Corporation: We have audited the accompanying consolidated statements of income, shareholders' equity and cash flows of Credit Acceptance Corporation and subsidiaries for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Credit Acceptance Corporation and subsidiaries for the year ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Detroit, Michigan February 2, 1998 27
29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) DECEMBER 31, ---------------------- 1998 1999 --------- --------- <S> <C> <C> ASSETS: Cash and cash equivalents................................... $ 13,775 $ 11,122 Investments -- held to maturity............................. 10,191 11,569 Installment contracts receivable............................ 672,649 573,120 Allowance for credit losses................................. (7,075) (4,742) -------- -------- Installment contracts receivable, net..................... 665,574 568,378 -------- -------- Floor plan receivables: Non-affiliates............................................ 9,455 12,874 Affiliates................................................ 4,616 2,618 -------- -------- 14,071 15,492 -------- -------- Notes receivable: Non-affiliates............................................ 1,627 2,547 Affiliates................................................ 651 1,063 -------- -------- 2,278 3,610 -------- -------- Retained interest in securitization......................... 14,669 4,105 Property and equipment, net................................. 20,627 18,243 Investment in operating leases, net......................... -- 7,898 Income taxes receivable..................................... -- 12,686 Other assets................................................ 10,744 7,137 -------- -------- Total Assets........................................... $751,929 $660,240 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY: LIABILITIES: Senior notes.............................................. $136,165 $ 30,579 Lines of credit........................................... 79,067 36,994 Mortgage loan payable to bank............................. 3,566 8,215 Secured financing......................................... -- 83,197 Income taxes payable...................................... 776 -- Accounts payable and accrued liabilities.................. 22,423 25,813 Deferred dealer enrollment fees, net...................... 296 524 Dealer holdbacks, net..................................... 222,275 202,143 Deferred income taxes, net................................ 11,098 9,800 -------- -------- Total Liabilities...................................... 475,666 397,265 -------- -------- CONTINGENCIES (NOTE 14) SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued................................ Common stock, $.01 par value, 80,000,000 shares authorized, 46,291,487 and 46,071,454 shares issued and outstanding in 1998 and 1999, respectively............. 463 461 Paid-in capital........................................... 129,914 128,917 Retained earnings......................................... 142,989 132,303 Accumulated other comprehensive income-cumulative translation adjustment................................. 2,897 1,294 -------- -------- Total Shareholders' Equity............................. 276,263 262,975 -------- -------- Total Liabilities and Shareholders' Equity............. $751,929 $660,240 ======== ======== </TABLE> See accompanying notes to consolidated financial statements. 28
30 CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) FOR THE YEARS ENDED DECEMBER 31, --------------------------------------------- 1997 1998 1999 ----------- ----------- ----------- <S> <C> <C> <C> REVENUE: Finance charges................................... $ 117,020 $ 98,007 $ 76,497 Premiums earned................................... 11,304 10,904 10,389 Gain on sale of advance receivables, net.......... -- 685 -- Other income...................................... 35,911 32,753 29,169 ----------- ----------- ----------- Total revenue.................................. 164,235 142,349 116,055 ----------- ----------- ----------- COSTS AND EXPENSES: Operating expenses................................ 45,911 59,004 56,772 Provision for credit losses....................... 85,472 16,405 56,073 Provision for claims.............................. 3,911 3,734 3,498 Valuation adjustment on retained interest in securitization................................. -- -- 13,517 Interest.......................................... 27,597 25,565 16,576 ----------- ----------- ----------- Total costs and expenses....................... 162,891 104,708 146,436 ----------- ----------- ----------- Other Operating Income: Gain on sale of subsidiary........................ -- -- 14,720 ----------- ----------- ----------- Operating income (loss)............................. 1,344 37,641 (15,661) Foreign exchange loss............................. (41) (116) (66) ----------- ----------- ----------- Income (loss) before provision for income taxes..... 1,303 37,525 (15,727) Provision (credit) for income taxes............... (234) 12,559 (5,041) ----------- ----------- ----------- Net income (loss)................................... $ 1,537 $ 24,966 $ (10,686) ----------- ----------- ----------- Net income (loss) per common share: Basic............................................. $ .03 $ .54 $ (.23) =========== =========== =========== Diluted........................................... $ .03 $ .53 $ (.23) =========== =========== =========== Weighted average shares outstanding: Basic............................................. 46,081,804 46,190,208 46,222,730 Diluted........................................... 46,754,713 46,960,290 46,222,730 </TABLE> See accompanying notes to consolidated financial statements. 29
31 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) ACCUMULATED TOTAL COMPREHENSIVE OTHER SHAREHOLDERS' INCOME COMMON PAID-IN RETAINED COMPREHENSIVE EQUITY (LOSS) STOCK CAPITAL EARNINGS INCOME ------------- ------------- ------ ------- -------- ------------- <S> <C> <C> <C> <C> <C> <C> Balance -- December 31, 1996............ $246,143 $458 $125,398 $116,486 $ 3,801 Comprehensive income: Net income.......................... 1,537 $ 1,537 1,537 -------- Other comprehensive income: Foreign currency translation adjustment..................... (1,630) (1,630) (1,630) Tax on other comprehensive loss... 570 -------- Other comprehensive loss.......... (1,060) -------- Total comprehensive income............ 477 ======== Stock options exercised............... 2,874 3 2,871 Dealer stock option plan.............. 67 67 -------- ---- -------- -------- ------- Balance -- December 31, 1997............ 248,991 461 128,336 118,023 2,171 Comprehensive income: Net income.......................... 24,966 $ 24,966 24,966 -------- Other comprehensive income: Foreign currency translation adjustment..................... 726 726 726 Tax on other comprehensive income......................... (254) -------- Other comprehensive income.......... 472 -------- Total comprehensive income............ 25,438 ======== Stock options exercised............... 1,430 2 1,428 Dealer stock option plan.............. 150 150 -------- ---- -------- -------- ------- Balance -- December 31, 1998............ 276,263 463 129,914 142,989 2,897 Comprehensive income: Net income (loss)................... (10,686) (10,686) (10,686) -------- Other comprehensive income: Foreign currency translation adjustment..................... (1,603) (1,603) (1,603) Tax on other comprehensive loss... 561 -------- Other comprehensive loss.......... (1,042) -------- Total comprehensive loss.............. $(11,728) ======== Repurchase and retirement of common stock............................... (1,510) (3) (1,507) Stock options exercised............... 380 1 379 Dealer stock option plan.............. 131 131 -------- ---- -------- -------- ------- Balance -- December 31, 1999............ $262,975 $461 $128,917 $132,303 $ 1,294 ======== ==== ======== ======== ======= </TABLE> See accompanying notes to consolidated financial statements. 30
32 CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1997 1998 1999 --------- --------- --------- <S> <C> <C> <C> Cash Flows From Operating Activities: Net Income (loss)......................................... $ 1,537 $ 24,966 $ (10,686) Adjustments to reconcile cash provided by operating activities -- Gain on sale of subsidiary.............................. -- -- (14,720) Provision (credit) for deferred income taxes............ 5,628 (3,518) (1,298) Depreciation............................................ 2,550 3,793 4,697 Gain on sale of advance receivables, gross.............. -- (1,261) -- Valuation adjustments on retained interest in securitization........................................ -- -- 13,517 Amortization of retained interest in securitization..... -- (951) (1,586) (Gain) loss on retirement of property and equipment..... 512 -- (543) Provision for credit losses............................. 85,472 16,405 56,073 Provision for residual losses........................... -- -- 91 Dealer stock option plan expense........................ 67 150 131 Change in operating assets and liabilities -- Accounts payable and accrued liabilities................ (8,759) 2,061 3,754 Income taxes payable.................................... (2,569) 776 (776) Income taxes receivable................................. -- -- (12,686) Unearned insurance premiums, insurance reserves and fees.................................................. 1,450 (238) (658) Deferred dealer enrollment fees, net.................... (1,843) (125) 228 Other assets............................................ (21,915) 13,654 145 --------- --------- --------- Net cash provided by operating activities............. 62,130 55,712 35,683 --------- --------- --------- Cash Flows From Investing Activities: Principal collected on installment contracts receivable... 370,059 368,873 315,869 Advances to dealers and payments of dealer holdbacks...... (520,609) (290,605) (295,587) Net proceeds from sale of advance receivables............. -- 49,275 -- Proceeds from sale of subsidiary.......................... -- -- 16,147 Purchase of investments held to maturity.................. (3,653) (218) (1,378) Decrease in floor plan receivables -- affiliates.......... 140 7,047 1,998 Increase in floor plan receivables -- non-affiliates...... (4,447) (1,318) (3,419) Increases in notes receivable -- affiliates............... (363) (309) (1,301) Decreases in notes receivable -- affiliates............... 1,049 189 889 Increases in notes receivable -- non-affiliates........... (345) (1,254) (2,156) Decreases in notes receivable -- non-affiliates........... 1,091 327 1,236 Operating lease acquisitions.............................. -- -- (8,538) Operating lease liquidations.............................. -- -- 79 Purchases of property and equipment....................... (8,943) (3,581) (4,821) Proceeds from sale of property and equipment.............. -- -- 5,192 --------- --------- --------- Net cash provided by (used in) investing activities... (166,021) 128,426 24,210 --------- --------- --------- Cash Flows From Financing Activities: Proceeds from sale of senior notes........................ 71,750 -- -- Repayment of senior notes................................. (20,000) (38,985) (105,586) Net borrowings (repayments) under line of credit agreements.............................................. 51,235 (133,650) (42,073) Proceeds from secured financings.......................... -- -- 97,720 Repayments of secured financings.......................... -- -- (14,523) Proceeds from mortgage loan refinancing................... -- -- 5,046 Repayment of mortgage loan................................ (218) (233) (397) Repurchase of common stock................................ -- -- (1,510) Proceeds from stock options exercised..................... 2,874 1,430 380 --------- --------- --------- Net cash provided by (used in) financing activities... 105,641 (171,438) (60,943) --------- --------- --------- Effect of exchange rate changes on cash............... (1,630) 726 (1,603) --------- --------- --------- Net increase (decrease) in cash and cash equivalents........................................ 120 13,426 (2,653) Cash and cash equivalents beginning of period............... 229 349 13,775 --------- --------- --------- Cash and Cash Equivalents End of Period..................... $ 349 $ 13,775 $ 11,122 ========= ========= ========= Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest.................. $ 27,464 $ 23,142 $ 18,593 ========= ========= ========= Cash paid during the period for income taxes.............. $ 14,887 $ 17,812 $ 8,451 ========= ========= ========= </TABLE> See accompanying notes to consolidated financial statements. 31
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Principal Business. Credit Acceptance Corporation and its subsidiaries ("CAC" or the "Company") is a specialized financial services company which provides funding, receivables management, collection, sales training and related products and services to automobile dealers located in the United States, the United Kingdom, Canada and Ireland. The Company assists such dealers by providing an indirect source of financing for buyers with limited access to traditional sources of consumer credit due to past credit history. Installment contracts originated and assigned to the Company by automobile dealers are generally considered to have a high risk of default. To a significantly lesser extent, CAC provides inventory floor plan financing and working capital loans for dealers secured by inventory and the related cash collections owed to the dealer by CAC. Credit Acceptance Corporation UK, Ltd., CAC of Canada, Ltd., and Credit Acceptance Corporation of Ireland Ltd. are all wholly-owned subsidiaries of the Company which operate in their respective countries. These subsidiary companies offer essentially the same dealer programs as are offered in the United States. The dealer assigns title to the installment contract and the security interest in the vehicle to the Company. At the time it accepts the assignment of a contract, CAC records the gross amount of the contract as a gross installment contract receivable. The Company records the amount of its servicing fee as an unearned finance charge with the remaining portion recorded as a dealer holdback. At the time of acceptance, contracts which meet certain criteria are eligible for a cash advance, which is computed on a formula basis. Advances are non-interest bearing and are secured by the cash collections on all of the installment contracts receivable assigned from an individual dealer. Dealer advances are netted against dealer holdbacks in the accompanying consolidated financial statements, as dealer holdbacks are not paid until such time as all advances related to such dealer have been recovered. CAC collects the scheduled monthly payments based on contractual arrangements with the consumer. Monthly cash collections are remitted to the dealer subject to the Company first: (i) being reimbursed for certain collection costs associated with all installment contracts originated by such dealer; (ii) reducing the collections by the Company's servicing fee; and (iii) recovering the aggregate advances made to such dealer. Upon enrollment into the Company's financing program, the dealer enters into a servicing agreement with CAC which defines the rights and obligations of CAC and the dealer. The servicing agreement may be terminated by the Company or by the dealer (so long as there is no event of default or an event which with the lapse of time, giving of notice or both, would become an event of default) upon 30 days prior written notice. The Company may also terminate the servicing agreement immediately in the case of an event of default by the dealer. Upon any termination by the dealer or in the event of a default, the dealer must immediately pay the Company: (i) any unreimbursed collection costs; (ii) any unpaid advances and all amounts owed by the dealer to the Company; and (iii) a termination fee equal to the unearned finance charge of the then outstanding amount of the installment contracts originated by such dealer and accepted by the Company. Ancillary Products and Services. Buyers Vehicle Protection Plan, Inc. ("BVPP") and Credit Acceptance Reinsurance, LTD. ("CAC Reinsurance"), both wholly-owned subsidiaries of the Company, provide additional services to participating dealers. CAC Reinsurance is engaged primarily in the business of reinsuring credit life and disability insurance policies issued to borrowers under installment contracts originated by participating dealers. CAC advances to dealers an amount equal to the credit life and disability insurance premium on contracts accepted by the Company which include credit life and disability insurance written by the Company's designated insurance carriers. The policies insure the holder of the installment contract for the outstanding balance payable in the event of death or disability of the debtor. Premiums are ceded to CAC Reinsurance on both an earned and written basis and are earned over the life of the contracts using pro rata and sum-of-digits methods. CAC Reinsurance bears the risk of loss attendant to claims under the coverages ceded to it. 32
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) To a lesser extent, CAC Reinsurance has arrangements with insurance carriers and a third party administrator to market and provide claims administration for a dual interest collateral protection program. This insurance program, which insures the financed vehicle against physical damage up to the lesser of the cost to repair the vehicle or the unpaid balance owed on the related installment contract, is made available to borrowers who finance vehicles through participating dealers. If desired by a borrower, collateral protection insurance coverage is written under group master policies issued by unaffiliated insurance carriers to the Company. As part of the program, the insurance carriers cede insurance coverages and premiums (less a fee) to CAC Reinsurance, which acts as a reinsurer of such coverages. As a result, CAC Reinsurance bears the risk of loss attendant to claims under the coverages ceded to it, and earns revenues resulting from premiums ceded and the investment of such funds. BVPP administers short-term limited extended service contracts offered by participating dealers. In connection therewith, BVPP bears the risk of loss for any repairs covered under the service contract. Income is recognized on a straight-line basis over the life of the service contracts. In addition, BVPP has relationships with third party service contract providers which pay BVPP a fee on service contracts included on installment contracts financed through participating dealers. BVPP does not bear any risk of loss for covered claims on these third party service contracts. The income from the non-refundable fee is recognized upon acceptance of the installment contract. The Company advances to dealers an amount equal to the purchase price of the vehicle service contract on contracts accepted by the Company which include vehicle service contracts. Automotive Leasing. Through its automotive leasing business, the Company purchases used vehicle leases originated by dealers participating in the Company's automotive leasing programs. The programs are designed to provide participating dealers with a leasing alternative for non-prime consumers with limited access to traditional sources of consumer credit. As the Company assumes ownership of the vehicles from the dealers, these leases are accounted for as operating leases with the capitalized cost of the vehicles recorded as depreciable assets (net investment in operating leases). This program differs from the Company's principal business in that, as these leases are purchased outright, the dealer does not have any rights to future collections on the lease contracts. Significant accounting policies are described in the following paragraphs. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany transactions have been eliminated. REPORTABLE BUSINESS SEGMENTS The Company is organized into two primary business segments: CAC North America and CAC United Kingdom. See Note 13 for information regarding the Company's reportable segments. USE OF ESTIMATES The accounting and reporting policies of the Company require management to make estimates and assumptions 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. The accounts which are subject to such estimation techniques include the reserve against advances, the allowance for credit losses, the retained interest in securitization and the residual reserve on leased vehicles. Actual results could differ from those estimates. 33
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) DERIVATIVE INSTRUMENTS The Company utilizes interest rate cap and floor agreements to manage its interest rate risk on its secured financings. The Company does not hold or issue derivative financial instruments for trading purposes. Premiums paid for interest rate caps are amortized to interest expense over the terms of the cap agreements. The derivative agreements generally match the notional amounts of the hedged debt to assure the effectiveness of the derivatives in reducing interest rate risk. As of December 31, 1999, the following interest rate cap agreements were outstanding: <TABLE> <CAPTION> COMMERCIAL PAPER NOTIONAL AMOUNT CAP RATE TERM - --------------- ---------------- ------------------------------- <C> <S> <C> <C> $ 8,697,152 .................. 7.5% July 1998 through October 2001 9,723,198 .................. 7.5% July 1999 through August 2003 46,728,110 .................. 7.5% December 1999 through June 2003 </TABLE> As of December 31, 1999, the following interest rate floor agreements were outstanding: <TABLE> <CAPTION> COMMERCIAL PAPER NOTIONAL AMOUNT FLOOR RATE TERM - --------------- ---------------- ----------------------------- <C> <S> <C> <C> $9,723,198 ...................... 4.79% July 1999 through August 2003 </TABLE> The Company is exposed to credit risk in the event of nonperformance by the counterparty to its interest rate cap agreements. The Company anticipates that its counterparty will fully perform their obligations under the agreements. The Company manages credit risk by utilizing a financial sound counterparty. FOREIGN CURRENCY TRANSLATION The financial position and results of operations of the Company's foreign operations are measured using the local currency as the functional currency. Revenues and expenses are translated at average exchange rates during the year and assets and liabilities are translated at current exchange rates at the balance sheet date. Translation adjustments are reflected in accumulated other comprehensive income, as a separate component of shareholders' equity. On January 1, 1999, 11 of 15 member countries of the European Monetary Union established fixed conversion rates between their existing currencies and adopted the euro as their new common currency. The euro trades on currency exchanges and the legacy currencies remain legal tender in the participating countries for a transition period until January 1, 2002. Beginning on January 1, 2002, euro denominated bills and coins will be issued and legacy currencies will be withdrawn from circulation. The Company will assess and address the potential impact to CAC that may result from the euro conversion, as the Company has operations in both the United Kingdom and Ireland. These issues include, but are not limited to: 1) the technical challenges to adapt information systems to accommodate euro transactions; 2) the impact on currency exchange rate risks; 3) the impact on existing contracts; and 4) tax and accounting implications. The Company expects that the euro conversion will not have a material adverse impact on its consolidated financial condition or results of operations. CASH AND CASH EQUIVALENTS Cash equivalents consist of readily marketable securities with original maturities at the date of acquisition of three months or less. 34
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) INVESTMENTS Investments consist principally of short-term money market funds and U.S. Treasury securities which the Company has both the intent and the ability to hold to maturity. Accordingly, such investments are carried at amortized cost, with no recognition of temporary changes in fair value. INSTALLMENT CONTRACTS RECEIVABLE Installment contracts receivable are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event that the consumer defaults on the payment terms of the contract. 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 installment contracts receivable on the balance sheets. At December 31, 1998 and 1999, repossessed assets totaled approximately $10.2 million and $5.5 million, respectively. The Company's policy for non-accrual loans is 90 days measured on a recency (no material payments received) basis. The Company writes-off delinquent installment contracts at nine months on a recency basis. ALLOWANCE FOR CREDIT LOSSES The Company maintains an allowance for credit losses which, in the opinion of management, adequately reserves against credit losses on installment contracts that are considered to be impaired. The risk of loss to the Company related to the installment contracts receivable balances relates primarily to the earned but unpaid servicing fee or finance charge recognized on contractually delinquent accounts. To the extent that the Company does not collect the gross amount of the contract balance, the remaining gross installment contract receivable balance is charged off against dealer holdbacks, unearned finance charges and the allowance for credit losses. Ultimate losses may vary from current estimates and the amount of the provision, which is current expense, may be either greater or less than actual charge-offs. RESERVE ON ADVANCES When an installment contract is accepted, the Company generally pays a cash advance to the dealer. These advance balances represent the Company's primary risk of loss related to the funding activity with the dealers. The Company maintains a reserve on advances to dealers which reflects advance balances that are not expected to be recovered through collections on the related installment contract receivable portfolio. To serve as a basis for evaluating the reserve requirement, management reviews delinquencies, charge-off experience factors, the payment performance of loan pools, changes in collateral value, economic conditions and trends and other information. For purposes of establishing the reserve, future collections (including the anticipated proceeds from repossessed collateral) are reduced to present value in order to achieve a level yield over the expected term of the advance. Future reserve requirements will depend in part on the magnitude of the variance between management's prediction of future collections and the actual collections that are realized. Estimating cash collections from the installment contracts receivable is complicated by the unusual payment patterns of the borrowers who generally cannot obtain traditional financing. The evaluation of the reserve against advances considers such factors as current delinquencies, the characteristics of the accounts, the value of the underlying collateral, the location of the borrower, general economic conditions and trends among other information. Although the Company uses many resources to assess the adequacy of the reserve against advances, actual losses may vary significantly from current estimates and the amount of provision, which is a current expense, may be either greater or less than actual charge offs. 35
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) FLOOR PLAN RECEIVABLES CAC finances used vehicle inventories for both affiliated dealers and nonaffiliated dealers. Amounts loaned are secured by the related inventories and any future cash collections owed to the dealer on outstanding contracts. NOTES RECEIVABLE Notes receivable are primarily working capital loans to dealers and are due on demand. These notes receivable are secured by substantially all assets of the dealer including any future cash collections owed to the dealer on outstanding contracts. ADVANCE RECEIVABLE SALES When the Company sells advance receivables in securitizations or secured financings, it retains interest-only strips and servicing rights, all of which are retained interests in the securitized assets. Gain or loss on sale of the advance receivables depends in part on the previous carrying amount of advances, allocated between the portion sold and the portion retained in proportion to their relative fair value. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests, so the Company generally estimates fair value based on the present value of future cash flows expected under management's best estimates of the key assumptions -- credit losses, timing of projected collections, and discount rates commensurate with the risks involved. The Company evaluates the fair value and potential impairment of its retained interest in securitization on a quarterly basis. PROPERTY AND EQUIPMENT Additions to property and equipment are recorded at cost. Depreciation is generally provided on a straight-line basis over the estimated useful lives (primarily five to forty years) of the assets. The cost of assets sold or retired and the related accumulated depreciation are removed from the accounts at the time of disposition and any resulting gain or loss is included in operations. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. GOODWILL At December 31, 1998, the Company had goodwill representing the excess of cost over the fair value of assets acquired and was amortized using the straight-line method over ten years. At December 31, 1998, goodwill, net of amortization of $181,000, is recorded in other assets at $2,919,000. In 1999, the assets pertaining to this goodwill were sold. INVESTMENTS IN OPERATING LEASES, NET Leased vehicles are generally depreciated down to their residual values on a straight-line basis over the term of the lease. The residual values represent the estimate of the values of the vehicles at the end of the lease contracts and are initially recorded based on appraisals and estimates. Realization of the residual values is dependent on the Company's future ability to market the vehicles under then prevailing market conditions. Management reviews residual values periodically to determine that recorded amounts are recoverable. DEALER HOLDBACKS As part of the dealer servicing agreement, the Company establishes a dealer holdback to protect the Company from potential losses associated with installment contracts. This dealer holdback is not paid until such time as all advances related to such dealer have been recovered. 36
38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED) INCOME TAXES Deferred income taxes are provided for all temporary differences between the book and tax basis of assets and liabilities. Deferred income taxes are adjusted to reflect new tax rates when they are enacted into law. REVENUE RECOGNITION Finance Charges. The Company computes its servicing fee based upon the gross amount due under the installment contract. Income is recognized under the interest method of accounting until the underlying obligation is 90 days past due on a recency basis. At such time, the Company suspends the accrual of revenue and makes a provision for credit losses equal to the earned but unpaid revenue. Premiums Earned. Credit life and disability premiums and collision premiums are ceded to the Company on both an earned and written basis and are earned over the life of the contracts using the pro rata and sum-of-digits methods. Premiums on BVPP warranties are earned on a straight-line basis over the life of the service contracts. Other Income. Dealers are charged an initial fee to floor plan a vehicle. Interest is charged based on the number of days a vehicle remains on the floor plan. Interest rates typically range from 12% to 18% per annum. Income from operating lease assets is recognized on a straight-line basis over the scheduled lease term. Enrollment fees are generally paid by each dealer signing a servicing agreement and are nonrefundable. These fees and the related direct incremental costs of originating these fees are deferred and amortized on a straight-line basis over the estimated repayment term of the outstanding dealer advance. Interest on notes receivable is recognized in income based on the outstanding monthly balance and is generally 12% to 18% per annum. Fees received by the Company for the sale of third party vehicle service contracts are recognized upon acceptance of the related installment contract receivable as the Company bears no further obligation. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No. 133). SFAS No. 137 delayed the implementation of SFAS No. 133 which is now effective for fiscal years beginning after June 15, 2000. This statement standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, by recognition of those items as assets and liabilities in the statement of financial position and measurement of fair value. The impact of SFAS No. 133 on the Company's financial position and results of operations has not yet been determined. RECLASSIFICATION Certain amounts for the prior periods have been reclassified to conform to the current presentation. (2) FINANCIAL INSTRUMENTS FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments. Cash and Cash Equivalents. The carrying amount of cash and cash equivalents approximate the fair values due to the short maturity of these instruments. Pursuant to the secured financings of advance 37
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) FINANCIAL INSTRUMENTS -- (CONTINUED) receivables, the Company is required to hold cash and cash equivalents in a trust account. The restricted cash and cash equivalents totaled $10.4 million at December 31, 1999. Investments. The fair value of U.S. Treasury securities are based on quoted market prices. The carrying amount of money market funds approximates the fair value due to the short maturity. Installment Contracts Receivable and Net Dealer Holdbacks. As the majority of the Company's revenue is derived from the servicing fee it receives on the gross amount due under the installment contract (typically 20% of the principal and interest), the Company's revenues from servicing fees are not materially impacted by changes in interest rates. As such, the carrying amounts recorded on a historical cost basis for installment contracts receivable and net dealer holdbacks in the financial statements related to the financing and service program which the Company provides to dealers approximates fair value. Floor Plan and Notes Receivable. The fair values of floor plan and note receivables are estimated by discounting the future cash flows using applicable current interest rates. Retained Interest in Securitization. The fair value of the retained interest in securitization is estimated by discounting expected future excess cash flows utilizing current assumptions as described in Note 4. Debt. The fair value of debt is determined using quoted market prices, if available, or calculating the estimated value of each debt instrument based on current rates offered to the Company for debt with similar maturities. The fair value of interest rate caps represents the amount that the Company would receive to terminate the agreement, taking into account current interest rates, which was immaterial as of December 31, 1999 and 1998. A comparison of the carrying value and fair value of these financial instruments is as follows (in thousands): <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------------- 1998 1999 ----------------------- ----------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------------ -------- ------------ <S> <C> <C> <C> <C> Cash and cash equivalents...................... $ 13,775 $ 13,775 $ 11,122 $ 11,122 Investments -- held to maturity................ 10,191 10,193 11,569 11,572 Installment contracts receivable, net.......... 665,574 665,574 568,378 568,378 Floor plan receivable.......................... 14,071 14,071 15,492 15,492 Notes receivable............................... 2,278 2,278 3,610 3,610 Retained interest in securitization............ 14,669 14,669 4,105 4,105 Senior notes................................... 136,165 135,529 30,579 30,491 Lines of credit................................ 79,067 79,067 36,994 36,994 Mortgage loan payable to bank.................. 3,566 3,566 8,215 8,215 Secured financing.............................. -- -- 83,197 83,197 Dealer holdbacks, net.......................... 222,275 222,275 202,143 202,143 </TABLE> The Company's portfolio of investment securities includes short-term money market instruments and U.S. Treasury securities. All investments are categorized as held-to-maturity and are stated at amortized cost. Pursuant to reinsurance agreements, the Company is required to hold investment securities in a trust account. The restricted investment securities totaled approximately $8.9 million and $7.6 million at December 31, 1998 and 1999, respectively. 38
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (2) FINANCIAL INSTRUMENTS -- (CONTINUED) CERTAIN DEBT AND MARKETABLE SECURITIES A summary of investments held by the Company consist of the following (in thousands): <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------------------------------------- 1998 1999 -------------------------------- -------------------------------- GROSS GROSS UNREALIZED FAIR UNREALIZED FAIR COST GAINS VALUE COST GAINS VALUE ------- ---------- ------- ------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> Money market funds................... $ 9,466 $-- $ 9,466 $ 2,640 $-- $ 2,640 U.S. Treasury securities............. 725 2 727 8,929 3 8,932 ------- --- ------- ------- --- ------- Total investments.................. $10,191 $ 2 $10,193 $11,569 $ 3 $11,572 ======= === ======= ======= === ======= </TABLE> Installment contracts generally have initial terms ranging from 24 to 42 months and are collateralized by the related vehicles. Contractual maturities of contracts by year have not been presented as this information is not meaningful due to the uneven payment patterns of non-prime consumers. The initial average term of an installment contract was approximately 31 months in 1997 and 1998 and 32 months in 1999. As of December 31, 1998 and 1999, the accrual of finance charge revenue has been suspended, and fully reserved for, on approximately $257.5 million and $156.5 million of delinquent installment contracts, respectively. Installment contracts receivable consisted of the following (in thousands): <TABLE> <CAPTION> AS OF DECEMBER 31, -------------------- 1998 1999 --------- -------- <S> <C> <C> Gross installment contracts receivable.................. $ 794,831 $679,201 Unearned finance charges................................ (114,617) (99,174) Unearned insurance premiums, insurance reserves and fees.................................................. (7,565) (6,907) --------- -------- Installment contracts receivable........................ $ 672,649 $573,120 ========= ======== Non-accrual installment contracts as a percent of total gross installment contracts........................... 32.4% 23.0% ========= ======== </TABLE> (3) INSTALLMENT CONTRACTS RECEIVABLE A summary of changes in gross installment contracts receivable is as follows (in thousands): <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------- 1997 1998 1999 ---------- ---------- --------- <S> <C> <C> <C> Balance -- beginning of period.............. $1,251,139 $1,254,858 $ 794,831 Gross amount of installment contracts accepted.................................. 983,459 580,578 533,065 Gross installment contracts underlying advance receivables securitized........... -- (98,591) -- Cash collections on installment contracts accepted.................................. (505,925) (493,900) (409,742) Charge offs................................. (467,532) (449,870) (234,167) Currency translation........................ (6,283) 1,756 (4,786) ---------- ---------- --------- Balance -- end of period.................... $1,254,858 $ 794,831 $ 679,201 ========== ========== ========= </TABLE> 39
41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) INSTALLMENT CONTRACTS RECEIVABLE -- (CONCLUDED) A summary of the allowance for credit losses is as follows (in thousands): <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 -------- ------- ------- <S> <C> <C> <C> Balance -- beginning of period.................... $ 12,195 $13,119 $ 7,075 Provision for loan losses......................... 11,072 3,432 1,205 Allowance on installment contracts underlying advance receivables securitized................. -- (1,107) -- Charge offs, net.................................. (10,138) (8,392) (3,489) Currency translation.............................. (10) 23 (49) -------- ------- ------- Balance -- end of period.......................... $ 13,119 $ 7,075 $ 4,742 ======== ======= ======= </TABLE> Recoveries related to charged off contracts are primarily the result of the recovery of earned but unpaid finance charges and are netted against charge-offs. The Company's financing and service program allows dealers to establish the interest rate on contracts, which typically is the maximum rate allowable by the state or country in which the dealer is doing business. (4) ADVANCE RECEIVABLE SALES On July 8, 1998, the Company completed a $50 million securitization of advance receivables. Pursuant to this transaction, the Company contributed dealer advances having a carrying value of approximately $56 million and received approximately $49.3 million in financing from an institutional investor. The debt is non-recourse to the Company and bears interest at the applicable commercial paper rate plus 1% with a maximum of 7.5%. The commercial paper may be issued for terms of between 1 and 270 days. As of December 31, 1999, the debt is anticipated to fully amortize within 21 months. The Company recognized a gain on the transaction of approximately $685,000 which represents the difference between the sale proceeds to the Company, net of transaction costs, and the Company's carrying amount of the dealer advances, plus the present value of the estimated cash flows to be received by the Company. In determining the gain on the sale of receivables and the estimated fair value of the Company's retained interest in securitization, the Company assumed an excess cash flow discount rate of 15%, cumulative credit losses of 14% on the related installment contracts receivable (which is less than the Company would have incurred had these assets been securitized when originated) and an interest rate of 7.5% on the underlying debt. The excess cash flows result from the amount by which projected collections on the installment contracts exceeds i) the principal and interest to be paid to the institutional investor and ii) the amount of dealer holdback due to dealers. In the securitization, the Company retained servicing responsibilities and subordinated interests. The Company receives monthly servicing fees of 4% of the collections on the installment contracts receivable, and rights to future cash flows arising after the investor has received the return for which they are contracted. The present value of such estimated cash flows has been recorded by the Company as a retained interest in securitization of $14.7 and $4.1 million as of December 31, 1998 and 1999, respectively. The investors have no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are generally restricted until investors have been fully paid and are subordinate to investors' interests. The Company recorded a $13.5 million valuation adjustment in 1999 on the retained interest in securitization. The retained interest in securitization represents an accounting estimate based on several variables including the amount and timing of collections on the underlying installment contracts receivable, the amount and timing of projected dealer holdback payments and interest costs. The Company regularly reviews the actual performance of these variables against the assumptions used to record the retained interest. This evaluation has led to a reassessment of the timing and amount of collections on the installment contracts underlying the securitized advances and the resulting $13.5 million write down in 1999. For purposes of 40
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (4) ADVANCE RECEIVABLE SALES -- (CONCLUDED) valuing the retained interest as of December 31, 1999, the Company assumed an excess cash flow discount rate of 15% and an interest rate of 7.5% on the underlying debt. The installment contracts supporting the dealer advances that were sold included contracts with origination dates ranging from July 1990 to June 1998, with a weighted average age of 15 months as of the date of the transaction. The amount of such contracts included on the Company's balance sheet as of June 30, 1998 was $98.6 million, of which $43.8 million was in non-accrual status. (5) PROPERTY AND EQUIPMENT Property and equipment consists of the following at December 31 (in thousands): <TABLE> <CAPTION> 1998 1999 ------- ------- <S> <C> <C> Land....................................................... $ 2,587 $ 2,587 Building and improvements.................................. 6,968 6,804 Data processing equipment.................................. 17,460 17,828 Office furniture & equipment............................... 2,648 2,292 Leasehold improvements..................................... 781 706 ------- ------- 30,444 30,217 Less accumulated depreciation.............................. 9,817 11,974 ------- ------- $20,627 $18,243 ======= ======= </TABLE> Depreciation expense on property and equipment was $2,550,000, $3,793,000 and $4,227,000 in 1997, 1998 and 1999, respectively. (6) LEASED PROPERTIES PROPERTY LEASED TO OTHERS The Company leases part of its headquarters to outside parties as non-cancelable operating leases, which is not a significant part of its business activities. Rental income, which is included in other income, is recognized on a straight-line basis over the related lease term. Rental income on leased property was $991,000, $997,000 and $1,105,000 for 1997, 1998 and 1999, respectively. PROPERTY LEASED FROM OTHERS The Company utilizes leases in its day to day operations for administrative offices and office equipment. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. Total rental expense on all operating leases was $242,000, $388,000 and $499,000 for 1997, 1998 and 1999, respectively. Contingent rentals under the operating leases were insignificant. Minimum future lease commitments under operating leases are as follows: <TABLE> <S> <C> 2000........................................................ $ 359,000 2001........................................................ 359,000 2002........................................................ 359,000 2003........................................................ 359,000 2004........................................................ 225,000 2005 and beyond............................................. 545,000 ---------- Total minimum lease commitments........................... $2,206,000 ========== </TABLE> 41
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) INVESTMENTS IN OPERATING LEASES The following schedule provides an analysis of the Company's investment in property of operating leases (in thousands): <TABLE> <CAPTION> DECEMBER 31, 1999 ----------------- <S> <C> Vehicles, at cost........................................... $8,351 Less: accumulated depreciation............................ 453 ------ Investment in operating leases, net......................... $7,898 ====== </TABLE> A summary of changes in gross leased vehicles is as follows (in thousands): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1999 ----------------- <S> <C> Balance-beginning of period................................. $ -- Gross operating leases originated........................... 8,659 Provision for residual losses............................... (91) Operating lease liquidations................................ (217) ------ Balance-end of period....................................... $8,351 ====== </TABLE> Future minimum rentals on vehicles leased at December 31, 1999 are as follows: 2000 -- $4.0 million; 2001 -- $4.0 million; and 2002 -- $2.5 million. (8) DEBT SENIOR NOTES As of December 31, 1999, the Company had $15,127,000, $10,186,000 and $5,266,000 in outstanding borrowings under the three Senior Notes issued to various insurance companies in 1994, 1996 and 1997, respectively. The Notes are secured and require semi-annual interest payments and annual payments of principal. The final payments are due November 1, 2001, July 1, 2001 and October 1, 2001 for the 1994, 1996 and 1997 Senior Notes, respectively. The interest rates at December 31, 1999 were 9.87%, 8.99% and 8.77% and increased on January 15, 2000 to 10.37%, 9.49% and 9.27% for the 1994, 1996 and 1997 Senior Notes, respectively. MORTGAGE LOAN PAYABLE The Company has a mortgage loan from a commercial bank which 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. During 1999, the Company refinanced this loan, borrowing an additional $5.0 million of principal. There was $3,566,000 and $8,215,000 outstanding on this loan as of December 31, 1998 and 1999, respectively. The refinanced loan matures on May 1, 2004, requires monthly payments of principal and interest and bears interest at a fixed rate of 7.07%. SECURED FINANCING On July 21, 1999 and December 15, 1999, the Company completed two separate $50 million secured financings of advance receivables, receiving approximately $97.7 million in financing from an institutional investor. The secured financings are secured by dealer advances having a carrying value as of the date of the transactions of approximately $62.4 million and $65.0 million for the July 1999 and December 1999 secured financings, respectively. The secured financings are non-recourse to the Company and bear interest at the applicable commercial paper rate plus 70 basis points with a maximum of 7.5%. The interest rates at December 31, 1999 on the July 1999 and December 1999 secured financings were 5.66% and 6.63%, 42
44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) DEBT -- (CONTINUED) respectively. The commercial paper may be issued for terms of between 1 and 270 days. As of December 31, 1999, the July 1999 secured financing had an outstanding balance of approximately $33.2 million and was anticipated to fully amortize within 28 months while the December 1999 secured financing has an outstanding balance of $50.0 million and is anticipated to fully amortize within 12 months. LINES OF CREDIT The Company has a $125 million credit agreement with a commercial bank syndicate with a commitment period through June 13, 2000 subject to annual extensions for additional one year periods at the request of the Company and with the consent of each of the banks in the facility. The borrowings are secured by a lien on most of the Company's assets, including a pledge of the stock in its United Kingdom subsidiary, with interest payable at the Eurocurrency rate plus 1.4% or at the prime rate (8.5% as of December 31, 1999). The Eurocurrency borrowings may be fixed for periods of up to six months. The Company must pay an agent's fee of $42,000 annually and a commitment fee of .60% quarterly on the amount of the commitment. In addition, when outstandings under the commitment earn 50% of the amount of the commitment, the Company must pay, quarterly, a fee equal to .25% on the amount outstanding under the commitment. As of December 31, 1999, there was approximately $34.2 million outstanding under this facility. The maximum amount outstanding was approximately $210.2 million and $81.4 million in 1998 and 1999, respectively. The weighted average balance outstanding was $143.4 million and $49.5 million in 1998 and 1999, respectively. The Company also has a 2.0 million British pound sterling line of credit agreement with a commercial bank in the United Kingdom, which is used to fund the day to day cash flow requirements of the Company's United Kingdom subsidiary. The borrowings are secured by a letter of credit issued by the Company's principal commercial bank, with interest payable at the greater of the United Kingdom bank's base rate (5.5% as of December 31, 1999) plus 65 basis points or at the Libor rate plus 56.25 basis points. The rates may be fixed for periods of up to six months. As of December 31, 1999, there was approximately 1.5 million British pounds ($2.4 million U.S. dollars), outstanding under this facility which matures on May 29, 2000. The maximum amount outstanding was 1.6 million British pounds ($2.6 million U.S. dollars) and 2.3 million British pounds ($3.7 million U.S. dollars) in 1998 and 1999, respectively. The weighted average balance outstanding was 900,000 British pounds ($1.5 million U.S. dollars) and 1.4 million British pounds ($2.3 million U.S. dollars) in 1998 and 1999, respectively. The Company also has a $1,000,000 Canadian dollar line of credit with a commercial bank in Canada, which is used to fund the day to day cash flow requirements of the Company's Canadian subsidiary. The borrowings are unsecured, guaranteed by the Company, with interest payable at the Libor rate plus 1.4% or at the Canadian bank's prime rate (6.5% at December 31, 1999). As of December 31, 1999, there was approximately $526,000 Canadian dollars ($363,000 U.S. dollars) outstanding under the facility. The weighted average interest rate on line of credit borrowings outstanding was 6.9% and 7.5% as of December 31, 1998 and 1999, respectively. 43
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) DEBT -- (CONCLUDED) PRINCIPAL DEBT MATURITIES The scheduled principal maturities of the Company's long-term debt at December 31, 1999 are as follows (in thousands): <TABLE> <S> <C> 2000........................................................ $ 87,276 2001........................................................ 25,274 2002........................................................ 3,249 2003........................................................ 776 2004........................................................ 5,416 -------- $121,991 ======== </TABLE> Included in scheduled principal maturities are anticipated maturities of secured financing debt. The maturities of this debt are dependant on the timing of cash collections on the contributed installment contracts receivable and changes in interest rates on the commercial paper. Such amounts included in the table above are $72.0 million, $8.7 million and $2.5 million for 2000, 2001 and 2002, respectively. DEBT COVENANTS The Company must comply with various restrictive debt covenants which require the maintenance of certain financial ratios and other financial conditions. The most restrictive covenants limit the ratio of the Company's debt-to-equity, limit the ratio of the Company's fixed charges to net income, limit the Company's investment in its foreign subsidiaries, limit the ratio of debt to advances, limit the ratio of debt to gross installment contracts receivable, limit the ratio of advances to installment contracts receivable, and require that the Company maintain specified minimum levels of net worth. (9) DEALER HOLDBACKS AND RESERVE ON ADVANCES Dealer holdbacks consisted of the following (in thousands): <TABLE> <CAPTION> AS OF DECEMBER 31, ---------------------- 1998 1999 --------- --------- <S> <C> <C> Dealer holdbacks....................................... $ 634,102 $ 540,799 Less: advances (net of reserve of 19,954 and $4,329 in 1998 and 1999, respectively)......................... (411,827) (338,656) --------- --------- Dealer holdbacks, net.................................. $ 222,275 $ 202,143 ========= ========= </TABLE> A summary of the change in the reserve against advances (classified with dealer holdbacks, net in the accompanying balance sheets) is as follows (in thousands): <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------- 1997 1998 1999 -------- ------- -------- <S> <C> <C> <C> Balance -- beginning of period................... $ 8,754 $16,369 $ 19,954 Provision for advance losses..................... 74,400 12,973 54,868 Advance reserve fees............................. 4,673 181 8 Charge offs, net................................. (71,391) (9,744) (70,353) Currency translation............................. (67) 175 (148) -------- ------- -------- Balance -- end of period......................... $ 16,369 $19,954 $ 4,329 ======== ======= ======== </TABLE> 44
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (9) DEALER HOLDBACKS AND RESERVE ON ADVANCES -- (CONCLUDED) During 1997, the Company implemented a new loan servicing system which allowed the Company to better estimate future collections for each dealer pool using historical loss experience and a dealer by dealer static pool analysis. The Company took a charge during 1997 to reflect the impact of this enhancement in the Company's methodology for estimating the reserve. During the third quarter of 1999, the Company recorded a non-cash charge of $47.3 million to reflect the impact of collections on loan pools originated primarily in 1995, 1996 and 1997 falling below previous estimates, indicating further impairment of advance balances associated with these pools. While previous loss curves indicated that loans originated in 1995, 1996 and 1997 would generate lower overall collection rates than loans originated in prior years, in the third quarter of 1999 the loss curves indicated that collection rates on these pools will be lower than previously estimated. Future reserve requirements will depend in part on the magnitude of the variance between management's estimate of future collections and the actual collections that are realized. The Company charges off dealer advances against the reserve at such time and to the extent that the Company's static pool analysis determines that the advance is completely or partially impaired. (10) RELATED PARTY TRANSACTIONS In the normal course of its business, the Company regularly accepts assignments of installment contracts originated by affiliated dealers owned by the Company's majority shareholder and from a Company executive. Installment contracts accepted from affiliated dealers were approximately $13.4 million, $10.0 million and $9.3 million in 1997, 1998 and 1999, respectively. Remaining installment contracts receivable from affiliated dealers represented approximately 1.6% and 2.1% of the gross installment contracts receivable balance as of December 31, 1998 and 1999, respectively. The Company accepted installment contracts from affiliated dealers and nonaffiliated dealers on the same terms. Dealer holdbacks from contracts accepted from affiliated dealers were approximately $10.7 million, $8.0 million and $7.4 million in 1997, 1998 and 1999, respectively. The Company receives interest income and fees from affiliated dealers on floor plan receivables and notes receivable. Total income earned was $1,564,000, $1,187,000 and $679,000 for the years ended December 31, 1997, 1998 and 1999, respectively. The Company regularly purchases operating lease contracts originated by affiliated dealers owned by the Company's majority shareholder and originated by affiliated dealers owned by a Company executive. Lease contracts accepted from affiliated dealers were $5.8 million in 1999. Approximately 60.4% of the value of leasing contracts purchased and approximately 63.6% of the number of leasing contracts purchased by the Company during 1999 were originated by affiliated dealers. The Company shares certain expenses including payroll and related benefits, occupancy costs and insurance with its affiliated company owned by the Company's majority shareholder. For the years ended December 31, 1997, 1998 and 1999, the Company charged its affiliated company and majority shareholder approximately $247,000, $248,000 and $367,000 for such shared expenses incurred in its operations. This arrangement is covered under a services agreement. The agreement has an indefinite term, but may be terminated upon 30 days written notice by either party. 45
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (11) INCOME TAXES The income tax provision (credit) consists of the following (in thousands): <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 ------- ------- -------- <S> <C> <C> <C> Income (loss) before provision (benefit) for income taxes: Domestic.................................................. $(9,285) $26,635 $(21,090) Foreign................................................... 10,588 10,890 5,363 ------- ------- -------- $ 1,303 $37,525 $(15,727) ======= ======= ======== Domestic provision (benefit) for income taxes: Current................................................... $(6,516) $12,507 $ (5,470) Deferred.................................................. 2,799 (3,179) (1,285) Foreign provision (benefit) for income taxes: Current................................................... 654 3,570 1,727 Deferred.................................................. 2,829 (339) (13) ------- ------- -------- Provision (credit) for income taxes......................... $ (234) $12,559 $ (5,041) ======= ======= ======== </TABLE> The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities consist of the following (in thousands): <TABLE> <CAPTION> AS OF DECEMBER 31, ------------------ 1998 1999 ------- ------- <S> <C> <C> Deferred tax assets: Allowance for credit losses............................... $12,080 $12,431 Reserve on advances....................................... 5,451 1,177 Sale of advance receivables............................... -- 3,140 Deferred dealer enrollment fees........................... 110 189 Accrued warranty claims................................... 713 631 Other, net................................................ 813 1,430 ------- ------- Total deferred tax assets.............................. 19,167 18,998 ------- ------- Deferred tax liabilities: Unearned finance charges.................................. 28,204 27,203 Sale of advance receivables............................... 853 -- Accumulated depreciation.................................. 775 1,135 Deferred credit life and warranty costs................... 433 460 ------- ------- Total deferred tax liabilities......................... 30,265 28,798 ------- ------- Net deferred tax liability............................. $11,098 $ 9,800 ======= ======= </TABLE> No valuation allowances were considered necessary in the calculation of deferred tax assets as of December 31, 1998 and 1999. The Company's effective income tax rate was approximately equal to the domestic and foreign statutory rates in 1997 and 1998. In 1999, the effective income tax rate differs from the domestic and foreign statutory rates due primarily to state income taxes. Deferred U.S. federal income taxes and withholding taxes have not been provided on the undistributed earnings of the Company's foreign subsidiaries as such amounts are considered to be permanently reinvested. The cumulative undistributed earnings at December 31, 1999 on which the Company had not provided additional national income taxes and withholding taxes were approximately $24.7 million. 46
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) CAPITAL TRANSACTIONS NET INCOME PER SHARE Basic net income per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted net income per share has been computed by dividing net income by the total of the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive securities included in the computation represent shares issuable upon assumed exercise of stock options which would have a dilutive effect. As the Company incurred a net loss for the year ended December 31, 1999, potentially dilutive securities of 263,516 would be anti-dilutive to diluted net income per share and have not been included in the weighted average shares calculation. The share effect is as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ---------- ---------- ---------- <S> <C> <C> <C> Weighted average common shares outstanding............... 46,081,804 46,190,208 46,222,730 Dilutive securities -- stock options..................... 672,909 770,082 -- ---------- ---------- ---------- Weighted average common shares and common stock equivalents............................................ 46,754,713 46,960,290 46,222,730 ========== ========== ========== </TABLE> STOCK REPURCHASE PROGRAM In 1999, the Company began acquiring shares of its common stock in connection with a stock repurchase program announced in August 1999. That program authorized the Company to purchase up to 1,000,000 common shares on the open market or pursuant to negotiated transactions at price levels the Company deems attractive. The Company purchased 263,300 shares of common stock in 1999 at an aggregate cost of $1,510,000. The total shares authorized for repurchase represents 2.2% of the 46,071,454 shares outstanding as of December 31, 1999. STOCK OPTION PLANS Pursuant to the Company's 1992 Stock Option Plan (the "1992 Plan"), the Company has reserved 8,000,000 shares of its common stock for the future granting of options to officers and other employees. The exercise price of the options is equal to the fair market value on the date of the grant. Options under the 1992 Plan generally become exercisable over a three to five year period, or immediately upon a change of control. In 1999, the Company issued 1,369,500 options that will vest only if certain performance targets are met. As it was not foreseeable that the performance targets would be met, no compensation expense was recorded for these performance-based options in 1999. Nonvested options are forfeited upon termination of employment and otherwise expire ten years from the date of grant. Shares available for future grants totaled 967,066, 115,559 and 1,911,519 as of December 31, 1997, 1998 and 1999, respectively. Pursuant to the Company's Stock Option Plan for dealers (the "Dealer Plan") the Company has reserved 1,000,000 shares of its common stock for the future granting of options to participating dealers. The exercise price of the options is equal to the fair market value on the date of grant. The options become exercisable over a three year period. Nonvested options are forfeited upon the termination of the dealer's servicing agreement by the Company or the dealer and otherwise expire five years from the date of grant. Shares available for future grants totaled 185,600, 478,385 and 605,899 as of December 31, 1997, 1998 and 1999, respectively. Effective January 1, 1999, the Company suspended the granting of future options under the Dealer Plan. 47
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) CAPITAL TRANSACTIONS -- (CONTINUED) The Company accounts for the 1992 Plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the 1992 Plan been recognized, the Company's net income (loss) and net income (loss) per share would have been negatively impacted as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------ 1997 1998 1999 ------- ------- -------- <S> <C> <C> <C> Net income (loss) As reported..................................... $ 1,537 $24,966 $(10,686) Pro forma....................................... (2,519) 22,346 (12,800) Net income (loss) per common share: As reported -- basic............................ $ 0.03 $ 0.54 $ (0.23) As reported -- diluted.......................... 0.03 0.53 (0.23) Pro forma -- basic.............................. (0.05) 0.48 (0.28) Pro forma -- diluted............................ (0.05) 0.48 (0.28) </TABLE> The Company accounts for the compensation costs related to its grants under the Dealer Plan in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The sales and marketing cost that has been charged against income for the non-employee Dealer Plan was $67,000, $150,000 and $131,000 in 1997, 1998 and 1999, respectively. Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995 (December 15, 1995 for the Dealer Plan), the resulting cost is not necessarily indicative of costs which may be recognized in future years. The fair value of each option granted included in the above calculations is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: <TABLE> <CAPTION> FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1992 PLAN 1997 1998 1999 --------- --------- --------- --------- <S> <C> <C> <C> Risk-free interest rate......................... 6.50% 5.25% 5.75% Expected life................................... 6.0 years 6.0 years 6.0 years Expected volatility............................. 43.97% 56.47% 56.47% Dividend yield.................................. 0% 0% 0% </TABLE> <TABLE> <CAPTION> YEARS ENDED DECEMBER 31 ------------------------ DEALER PLAN 1997 1998 ----------- --------- --------- <S> <C> <C> Risk-free interest rate................................. 5.89% 4.59% Expected life........................................... 5.0 years 5.0 years Expected volatility..................................... 48.40% 56.25% Dividend yield.......................................... 0% 0% </TABLE> 48
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) CAPITAL TRANSACTIONS -- (CONTINUED) Additional information relating to the Stock Option Plans are as follows: <TABLE> <CAPTION> 1992 PLAN DEALER PLAN ------------------------------ ------------------------------ WEIGHTED AVERAGE WEIGHTED AVERAGE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE OF OPTIONS PER SHARE OF OPTIONS PER SHARE ---------- ---------------- ---------- ---------------- <S> <C> <C> <C> <C> Outstanding at December 31, 1996......... 2,298,275 $13.73 718,564 $18.60 Options granted........................ 3,020,129 9.42 173,400 11.49 Options exercised...................... (266,532) 4.11 (3,597) 13.95 Options forfeited...................... (1,807,636) 20.70 (123,400) 21.35 ---------- -------- Outstanding at December 31, 1997......... 3,244,236 6.63 764,967 17.76 Options granted........................ 1,420,965 8.71 75,800 7.54 Options exercised...................... (178,372) 2.56 -- -- Options forfeited...................... (569,458) 6.28 (368,585) 18.45 ---------- -------- Outstanding at December 31, 1998......... 3,917,371 7.62 472,182 15.60 Options granted........................ 1,761,200 5.48 -- -- Options exercised...................... (25,567) 4.10 -- -- Options forfeited...................... (557,160) 9.08 (127,514) 14.15 ---------- -------- Outstanding at December 31, 1999......... 5,095,844 $ 6.74 344,668 $16.14 ========== ======== Exercisable at: December 31, 1997...................... 894,167 $ 7.95 481,318 $17.90 1998................................ 1,251,152 7.91 296,407 17.85 1999................................ 1,766,521 7.18 258,719 18.41 </TABLE> Options granted and options forfeited under the 1992 Plan for 1997 include 1,713,577 options which were repriced on November 3, 1997. The options which were repriced were originally granted between September 30, 1995 and September 2, 1997 with original exercise prices between $12.75 and $27.50. These options were cancelled on November 3, 1997 and reissued at an exercise price of $6.00 per share with a new three year vesting period. The weighted average fair value of options granted during 1997, 1998 and 1999 was $4.68, $5.09 and $3.13 respectively, for the 1992 Plan. The weighted average fair value of options granted during 1997 and 1998 was $4.06 and $3.98, respectively, for the Dealer Plan. 49
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (12) CAPITAL TRANSACTIONS -- (CONCLUDED) The following tables summarize information about options outstanding at December 31, 1999: <TABLE> <CAPTION> OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------- --------------------------------- OUTSTANDING WEIGHTED-AVERAGE EXERCISABLE RANGE OF AS OF REMAINING WEIGHTED-AVERAGE AS OF WEIGHTED-AVERAGE EXERCISABLE PRICES 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE 12/31/99 EXERCISE PRICE ------------------ ----------- ---------------- ---------------- ----------- ---------------- <S> <C> <C> <C> <C> <C> 1992 PLAN $ 2.16 - 5.63........ 799,500 6.7 Years $ 3.05 360,500 $ 2.28 6.00 - 7.75........ 3,187,142 8.6 6.24 937,091 6.12 8.00 - 11.07........ 846,201 8.4 9.35 205,929 9.74 $11.50 - 22.25........ 263,001 4.7 15.68 263,001 15.68 --------- --------- ------ --------- ------ Totals................ 5,095,844 8.1 $ 6.74 1,766,521 $ 7.18 ========= ========= DEALER PLAN $ 6.34 - 9.35........ 117,000 3.5 Years $ 7.51 53,875 $ 7.51 11.18 - 17.63........ 61,000 2.6 13.78 40,647 13.78 $18.25 - 27.63........ 166,668 1.3 23.06 164,197 23.13 --------- --------- ------ --------- ------ Totals................ 344,668 2.3 $16.14 258,719 $18.41 ========= ========= </TABLE> (13) BUSINESS SEGMENT INFORMATION Prior year segment information has been restated on a basis consistent with the 1999 presentation. The Company has two reportable business segments: CAC North America and CAC United Kingdom. REPORTABLE SEGMENT OVERVIEW CAC North America operations consist of the Company's U.S. and Canadian automotive finance and services businesses, including the Company's reinsurance activities and automotive service contract programs. These businesses have been aggregated into one reportable segment because they have similar operating and economic characteristics. The CAC North America segment provides funding, receivables management, collection, sales training and related products and services to automobile dealers located in the United States and Canada. The CAC United Kingdom operations provide substantially the same products and services as the CAC North America operations to dealers located in the United Kingdom and Ireland. The CAC Automotive Leasing operations and credit reporting and auction services businesses, which were sold in 1999, do not constitute reportable operating segments as they do not meet the quantitative thresholds prescribed by SFAS 131, and have therefore been disclosed in the "all other" category in the following table. The CAC Automotive Leasing segment provides a sub-prime leasing program to automobile dealers located in the United States. 50
52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) BUSINESS SEGMENT INFORMATION -- (CONCLUDED) MEASUREMENT The Company allocates resources to and evaluates the performance of its segments primarily based on finance charges, other revenue, segment earnings before interest and taxes (EBIT), and segment assets. The table below presents this information for each reportable segment (in thousands): <TABLE> <CAPTION> CAC CAC ALL TOTAL NORTH AMERICA UNITED KINGDOM OTHER COMPANY -------------- -------------- ------ ---------- <S> <C> <C> <C> <C> Year Ended December 31, 1999 Finance charges............................ $ 62,568 $ 13,929 $ -- $ 76,497 Other revenue.............................. 28,973 3,007 7,578 39,558 EBIT....................................... (3,922) 5,200 (429) 849 Segment assets............................. 519,278 132,450 8,512 660,240 Year Ended December 31, 1998 Finance charges............................ $ 80,330 $ 17,677 $ -- $ 98,007 Other revenue.............................. 33,092 3,528 7,722 44,342 EBIT....................................... 50,236 11,501 1,353 63,090 Segment assets............................. 621,418 122,819 7,692 751,929 Year Ended December 31, 1997 Finance charges............................ $ 92,660 $ 24,360 $ -- $ 117,020 Other revenue.............................. 40,036 4,433 2,746 47,215 EBIT....................................... 14,937 13,210 753 28,900 Segment assets............................. 952,259 162,154 1,197 1,115,610 </TABLE> INFORMATION ABOUT PRODUCTS AND SERVICES The Company manages its product and service offerings primarily through those reportable segments. Therefore, pursuant with the provisions of SFAS 131, no enterprise-wide disclosures of information about products and services are necessary. MAJOR CUSTOMERS The Company did not have any customer which provided 10% or more of the Company's revenue during 1997, 1998 or 1999, however, during 1999, two dealer groups in the United Kingdom accounted for approximately 47.4% of new contracts accepted by the CAC United Kingdom segment. (14) LITIGATION AND CONTINGENT LIABILITIES In the normal course of business and as a result of the consumer-oriented nature of the industry in which the Company operates, industry participants are frequently subject to various consumer claims and litigation seeking damages and statutory penalties. The claims allege, among other theories of liability, violations of state, federal and foreign truth in lending, credit availability, credit reporting, consumer protection, warranty, debt collection, insurance and other consumer-oriented laws and regulations. The Company, as the assignee of finance contracts originated by dealers, may also be named as a co-defendant in lawsuits filed by consumers principally against dealers. Many of these cases are filed as purported class actions and seek damages in large dollar amounts. During the first quarter of 1998, several putative class action complaints were filed by shareholders against the Company and certain officers and directors of the Company in the United States District Court for the Eastern District of Michigan seeking money damages for alleged violations of the federal securities laws. On August 14, 1998, a Consolidated Class Action Complaint, consolidating the claims asserted in those cases, was filed. The Complaint generally alleged that the Company's financial statements issued during the period 51
53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (14) LITIGATION AND CONTINGENT LIABILITIES -- (CONCLUDED) August 14, 1995 through October 22, 1997 did not accurately reflect the Company's true financial condition and results of operations because such reported results failed to be in accordance with generally accepted accounting principles and such results contained material accounting irregularities in that they failed to reflect adequate reserves for credit losses. The Complaint further alleged that the Company issued public statements during the alleged class period which fraudulently created the impression that the Company's accounting practices were proper. On April 23, 1999, the Court granted the Company's and the defendant officers' and directors' motion to dismiss the Complaint and entered a final judgment dismissing the action with prejudice. On May 6, 1999, plaintiffs filed a motion for reconsideration of the order dismissing the Complaint or, in the alternative, for leave to file an amended complaint. On July 13, 1999, the Court granted the plaintiffs' motion for reconsideration and granted the plaintiffs leave to file an amended complaint. Plaintiffs filed their First Amended Consolidated Class Action Complaint on August 2, 1999. On September 30, 1999, the Company and the defendant officers and directors filed a motion to dismiss that complaint. On or about November 10, 1999, plaintiffs sought and were granted leave to file a Second Amended Consolidated Class Action Complaint. The Company and the defendant officers and directors intend to continue to vigorously defend this action. While the Company believes it has meritorious legal and factual defenses, an adverse ultimate disposition of this litigation could have a material negative impact on the Company's financial position, liquidity and results of operations. The Company is currently a defendant in a class action proceeding commenced on October 15, 1996 in the United States District Court for the Western District of Missouri seeking money damages for alleged violations of a number of state and federal consumer protection laws (the "Missouri Litigation"). On October 9, 1997, the District Court certified two classes on the claims brought against the Company, one relating to alleged overcharges of official fees, the other relating to alleged overcharges of post-maturity interest. On August 4, 1998, the District Court granted partial summary judgment on liability in favor of the plaintiffs on the interest overcharge claims based upon the District Court's finding of certain violations but denied summary judgment on certain other claims. The District Court also entered a number of permanent injunctions, which among other things, restrained the Company from collecting the amounts found to be uncollectible. The District Court also ruled in favor of the Company on certain claims raised by class plaintiffs. Because the entry of an injunction is immediately appealable as of right, the Company appealed the summary judgment order to the United States Court of Appeals for the Eighth Circuit. Oral argument on the appeals was heard on April 19, 1999. On September 1, 1999, the United States Court of Appeals for the Eighth Circuit overturned the August 4, 1998 partial summary judgment order and injunctions against the Company. The Court of Appeals held that the District Court lacked jurisdiction over the interest overcharge claims and directed the District Court to sever those claims and remand them to state court. The class action claims of alleged public official fee overcharges have not been finally adjudicated by the District Court and were not part of the appeal. On February 18, 2000, the District Court entered an Order remanding the post-maturity interest class to Missouri state court while retaining jurisdiction on the official fee class. The District Court has set a bench trial date commencing the week of June 19, 2000. The Company will continue its vigorous defense of all remaining claims. However, an adverse ultimate disposition of this litigation could have a material negative impact on the Company's financial position, liquidity and results of operations. The Company is currently being examined for tax years 1993 to 1996 by the Internal Revenue Service. The outcome of the examination is undeterminable at this time. 52
54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of quarterly financial position and results of operations for the years ended December 31, 1998 and 1999. Certain amounts have been reclassified to conform to the 1999 presentation. <TABLE> <CAPTION> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 ---------------------------------------------- 1ST Q 2ND Q 3RD Q 4TH Q ---------- -------- -------- -------- <S> <C> <C> <C> <C> BALANCE SHEETS Installment contracts receivable, net.............. $ 948,539 $866,489 $727,069 $665,574 Floor plan receivables............................. 19,674 18,457 15,846 14,071 Notes receivables.................................. 1,422 1,574 1,894 2,278 All other assets................................... 48,404 43,635 65,050 70,006 ---------- -------- -------- -------- Total assets.................................. $1,018,039 $930,155 $809,859 $751,929 ========== ======== ======== ======== Dealer holdbacks, net.............................. $ 361,260 $306,539 $253,495 $222,275 Total debt......................................... 351,055 314,486 244,599 218,798 Other liabilities.................................. 49,954 44,834 40,111 34,593 ---------- -------- -------- -------- Total liabilities............................. 762,269 665,859 538,205 475,666 Shareholders' equity............................... 255,770 264,296 271,654 276,263 ---------- -------- -------- -------- Total liabilities and shareholders' equity.... $1,018,039 $930,155 $809,859 $751,929 ========== ======== ======== ======== INCOME STATEMENTS Revenue: Finance charges.................................. $ 28,055 $ 27,894 $ 21,708 $ 20,350 Premiums earned.................................. 2,923 2,630 2,741 2,610 Gain on sale of advance receivables, net......... -- -- 685 -- Other income..................................... 8,332 7,312 8,094 9,015 ---------- -------- -------- -------- Total revenue................................. 39,310 37,836 33,228 31,975 ---------- -------- -------- -------- Costs and Expenses: Operating expenses............................... 14,621 14,019 14,706 15,658 Provision for credit losses...................... 5,796 4,666 3,438 2,505 Provision for claims............................. 1,035 937 896 866 Interest......................................... 7,346 6,829 5,923 5,467 ---------- -------- -------- -------- Total costs and expenses...................... 28,798 26,451 24,963 24,496 ---------- -------- -------- -------- Operating Income................................... 10,512 11,385 8,265 7,479 Foreign exchange gain (loss)..................... 12 (7) (77) (44) ---------- -------- -------- -------- Income before income taxes......................... 10,524 11,378 8,188 7,435 Provision for income taxes....................... 3,637 3,935 2,577 2,410 ---------- -------- -------- -------- Net Income......................................... $ 6,887 $ 7,443 $ 5,611 $ 5,025 ========== ======== ======== ======== Net income per common share Basic......................................... $ 0.15 $ 0.16 $ 0.12 $ 0.11 ========== ======== ======== ======== Diluted....................................... $ 0.15 $ 0.16 $ 0.12 $ 0.11 ========== ======== ======== ======== Weighted average shares outstanding Basic......................................... 46,113 46,113 46,243 46,291 Diluted....................................... 46,950 47,410 46,897 46,584 </TABLE> 53
55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (15) QUARTERLY FINANCIAL DATA (UNAUDITED) -- (CONCLUDED) <TABLE> <CAPTION> (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1999 -------------------------------------------- 1ST Q 2ND Q 3RD Q 4TH Q -------- -------- -------- -------- <S> <C> <C> <C> <C> BALANCE SHEETS Installment contracts receivable, net............... $607,620 $582,006 $571,442 $568,378 Floor plan receivables.............................. 15,928 18,666 17,491 15,492 Notes receivables................................... 2,239 2,637 3,027 3,610 All other assets.................................... 75,861 71,954 69,588 72,760 -------- -------- -------- -------- Total assets................................... $701,648 $675,263 $661,548 $660,240 ======== ======== ======== ======== Dealer holdbacks, net............................... $194,254 $171,765 $205,932 $202,143 Total debt.......................................... 186,638 168,527 158,361 158,985 Other liabilities................................... 41,066 42,818 37,065 36,137 -------- -------- -------- -------- Total liabilities.............................. 421,958 383,110 401,358 397,265 Shareholders' equity................................ 279,690 292,153 260,190 262,975 -------- -------- -------- -------- Total liabilities and shareholders' equity..... $701,648 $675,263 $661,548 $660,240 ======== ======== ======== ======== INCOME STATEMENTS Revenue: Finance charges................................... $ 19,405 $ 19,797 $ 18,783 $ 18,512 Premiums earned................................... 2,445 2,331 3,034 2,579 Other income...................................... 8,511 7,380 6,106 7,172 -------- -------- -------- -------- Total revenue.................................. 30,361 29,508 27,923 28,263 -------- -------- -------- -------- Costs and Expenses: Operating expenses................................ 14,549 14,461 12,612 15,150 Provision for credit losses....................... 2,136 2,084 49,565 2,288 Provision for claims.............................. 831 894 884 889 Valuation adjustment on retained interest in securitization.............................. -- 517 13,000 -- Interest.......................................... 4,527 4,272 3,673 4,104 -------- -------- -------- -------- Total costs and expenses....................... 22,043 22,228 79,734 22,431 -------- -------- -------- -------- Other Operating Income Gain on sale of subsidiary........................ -- 14,720 -- -- -------- -------- -------- -------- Operating income (loss)............................. 8,318 22,000 (51,811) 5,832 Foreign exchange gain (loss)...................... (45) (9) 62 (74) -------- -------- -------- -------- Income (loss) before income taxes................... 8,273 21,991 (51,749) 5,758 Provision (credit) for income taxes............... 2,894 8,220 (18,108) 1,953 -------- -------- -------- -------- Net (loss) income................................... $ 5,379 $ 13,771 $(33,641) $ 3,805 ======== ======== ======== ======== Net (loss) income per common share Basic............................................. $ 0.12 $ 0.30 $ (0.73) $ 0.08 ======== ======== ======== ======== Diluted........................................... $ 0.12 $ 0.30 $ (0.73) $ 0.08 ======== ======== ======== ======== Weighted average shares outstanding Basic............................................. 46,299 46,304 46,214 46,074 Diluted........................................... 46,706 46,545 46,214 46,253 </TABLE> 54
56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information is contained under the captions "Matters to Come Before the Meeting -- Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information is contained under the caption "Compensation of Executive Officers" (excluding the Report of the Executive Compensation Committee and the stock performance graph) in the Company's Proxy Statement and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information is contained under the caption "Common Stock Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information is contained under the caption "Certain Relationships and Transactions" in the Company's Proxy Statement and is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K <TABLE> <S> <C> (a)(1) The following consolidated financial statements of the Company and Report of Independent Public Accountants are contained "Item 8 -- Financial Statements and Supplementary Data." REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSOLIDATED FINANCIAL STATEMENTS: -- Consolidated Balance Sheets as of December 31, 1998 and 1999 -- Consolidated Income Statements for the years ended December 31, 1997, 1998 and 1999 -- Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999 -- Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1998 and 1999 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) Financial Statement Schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. (3) The Exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index, which is incorporated herein by reference. (b) The Company was not required to file a current report on Form 8-K during the quarter ended December 31, 1999 and none were filed during that period. </TABLE> 55
57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 2000. CREDIT ACCEPTANCE CORPORATION By: /s/ DONALD A. FOSS ------------------------------------ Donald A. Foss Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on March 29, 2000 on behalf of the registrant and in the capacities indicated. <TABLE> <CAPTION> SIGNATURE TITLE --------- ----- <C> <C> <S> /s/ DONALD A. FOSS Chairman of the Board and Chief Executive - -------------------------------------------------------- Officer (Principal Executive Officer) Donald A. Foss /s/ DOUGLAS W. BUSK Chief Financial Officer - -------------------------------------------------------- (Principal Financial Officer) Douglas W. Busk /s/ JOHN P. CAVANAUGH Corporate Controller and Assistant - -------------------------------------------------------- Secretary (Principal Accounting Officer) John P. Cavanaugh /s/ HARRY E. CRAIG Director - -------------------------------------------------------- Harry E. Craig /s/ THOMAS A. FITZSIMMONS Director - -------------------------------------------------------- Thomas A. FitzSimmons /s/ DAVID T. HARRISON Director - -------------------------------------------------------- David T. Harrison /s/ SAM M. LAFATA Director - -------------------------------------------------------- Sam M. LaFata /s/ THOMAS N. TRYFOROS Director - -------------------------------------------------------- Thomas N. Tryforos </TABLE> 56
58 EXHIBIT INDEX The following documents are filed as part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted. The Company's commission file number is 000-20202. <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> <C> 3(a)(1) 7 Articles of Incorporation, as amended July 1, 1997 3(b) 2 Bylaws of the Company, as amended 4(a) 1 Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company and related form of note. 4(a)(1) 1 First Amendment dated November 15, 1995 to Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company. 4(a)(2) 5 Second Amendment dated August 29, 1996 to Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company. 4(a)(3) 8 Third Amendment dated December 12, 1997 to Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company. 4(a)(4) 9 Fourth Amendment dated July 1, 1998 to Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company 4(a)(5) 9 Limited Waiver dated July 27, 1998 to First Amended and Restated 9.12% Senior Notes due November 1, 2001 Issued Under Note Purchase Agreement dated as of October 1, 1994 4(a)(6) 12 Fifth Amendment dated April 13, 1999 to Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company 4(a)(7) 14 Sixth Amendment dated December 1, 1999 to Note Purchase Agreement dated October 1, 1994 between various insurance companies and the Company 4(b) 5 Note Purchase Agreement dated August 1, 1996 between various insurance companies and the Company and the related form of note. 4(b)(1) 8 First Amendment dated December 12, 1997 to Note Purchase Agreement dated August 1, 1996 between various insurance companies and the Company. 4(b)(2) 9 Second Amendment dated July 1, 1998 to Note Purchase Agreement dated August 1, 1996 between various insurance companies and the Company 4(b)(3) 9 Limited Waiver dated July 12, 1998 to First Amended and Restated 8.24% Senior Notes due July 1, 2001 Issued Under Note Purchase Agreement dated as of August 1, 1996 4(b)(4) 12 Third Amendment dated April 13, 1999 to Note Purchase Agreement dated August 1, 1996 between various insurance companies and the Company 4(b)(5) 14 Fourth Amendment dated December 1, 1999 to Note Purchase Agreement dated August 1, 1996 between various insurance companies and the Company 4(c)(5) 12 Third Amended and Restated Credit Agreement dated as of June 15, 1999 between the Company, Comerica Bank as Administrative Agent and Collateral Agent, NationsBank, N.A., as Syndications Agent and Banc of America Securities, LLC as Sole Lead Arranger and Sole Bank Manager 4(c)(6) 14 First Amendment dated December 10, 1999 to the Third Amended and Restated Credit Agreement dated as of June 15, 1999 between the Company, Comerica Bank as Administrative Agent and Collateral Agent, NationsBank, N.A., as Syndications Agent and Banc of America Securities, LLC as Sole Lead Arranger and Sole Bank Manager 4(e) 6 Note Purchase Agreement dated March 25, 1997 between various insurance companies and the Company and related form of note. </TABLE>
59 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> <C> 4(e)(1) 8 First Amendment dated December 12, 1997 to Note Purchase Agreement dated March 25, 1997 between various insurance companies and the Company 4(e)(2) 9 Second Amendment dated July 1, 1998 to Note Purchase Agreement dated March 25, 1997 between various insurance companies and the Company 4(e)(3) 9 Limited Waiver dated July 27, 1998 to First Amended and Restated 8.02% Senior Notes due October 1, 2001 Issued Under Note Purchase Agreement dated as of March 25, 1997 4(e)(4) 12 Third Amendment dated April 13, 1999 to Note Purchase Agreement dated March 25, 1997 between various insurance companies and the Company 4(e)(5) 14 Fourth Amendment dated December 1, 1999 to Note Purchase Agreement dated March 25, 1997 between various insurance companies and the Company 4(f) 9 Note Purchase Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp. and NationsBank, N.A. 4(f)(1) 9 Security Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp., the Company and NationsBank, N.A. 4(f)(2) 9 Servicing Agreement dated July 7, 1998 between CAC Funding Corp. and the Company 4(f)(3) 9 Contribution Agreement dated July 7, 1998 between the Company and CAC Funding Corp. 4(f)(4) 12 Amendment No. 1 dated June 30, 1999 to Note Purchase Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp., and NationsBank, N.A. 4(f)(5) 12 Amendment No. 1 dated June 30, 1999 to Security Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp., the Company and NationsBank, N.A. 4(f)(6) 12 Amendment No. 1 dated June 30, 1999 to Contribution Agreement dated July 7, 1998 between the Company and CAC Funding Corp. 4(f)(7) 13 Amendment No. 2 dated September 29, 1999 to Security Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp., the Company and NationsBank, N.A. 4(f)(8) 14 Amendment No. 2 dated December 15, 1999 to Note Purchase Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp., and NationsBank, N.A. 4(f)(9) 14 Amendment No. 3 dated December 15, 1999 to Security Agreement dated July 7, 1998 among Kitty Hawk Funding Corporation, CAC Funding Corp., the Company and NationsBank, N.A. 4(f)(10) 14 Amendment No. 2 dated December 15, 1999 to Contribution Agreement dated July 7, 1998 between the Company and CAC Funding Corp. 4(g)(1) 11 Security Agreement dated December 15, 1998 between Comerica Bank, as Collateral Agent, and the Company 4(g)(2) 11 Intercreditor Agreement dated as of December 15, 1998 among Comerica Bank, as Collateral Agent, and various lenders and note holders 4(g)(3) 11 Deed of Charge, dated December 17, 1998 between Comerica Bank, as Collateral Agent, and the Company NOTE: Other instruments, notes or extracts from agreements defining the rights of holders of long-term debt of the Company or its subsidiaries have not been filed because (i) in each case the total amount of long-term debt permitted thereunder does not exceed 10% of the Company's consolidated assets, and (ii) the Company hereby agrees that it will furnish such instruments, notes and extracts to the Securities and Exchange Commission upon its request. 10(b)(1) 4 Amended and Restated Services Agreement dated April 17, 1996 between the Company and Larry Lee's Auto Finance Center, Inc. d/b/a Dealer Enterprise Group </TABLE>
60 <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION ------- ----------- <S> <C> <C> 10(d)(4) 1 Form of Addendum 3 to Servicing Agreement (Multiple Lots) 10(d)(6) 11 Prior form of Servicing Agreement, including Addendum 1 and Addendum 2 10(d)(7) 14 Current form of Servicing Agreement, Including Addendum 1 and Addendum 2 10(f)(3)* 7 Credit Acceptance Corporation 1992 Stock Option Plan, as amended and restated May 1997 10(f)(4)* 12 Credit Acceptance Corporation 1992 Stock Option Plan, as amended and restated May, 1999 10(o)(2) 10 Credit Acceptance Corporation Stock Option Plan for Dealers, as amended and restated September 21, 1998 21(1) 14 Schedule of Credit Acceptance Corporation Subsidiaries 23(1) 14 Consent of Deloitte and Touche LLP 23(2) 14 Consent of Arthur Andersen LLP 27 14 Financial Data Schedule </TABLE> * Management compensatory contracts and arrangements. 1 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended September 30, 1994, and incorporated herein by reference. 2 Previously filed as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1994, and incorporated herein by reference. 3 Previously filed as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1995, and incorporated herein by reference. 4 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended March 31, 1996, and incorporated herein by reference. 5 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by reference. 6 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended March 31, 1997 and incorporated herein by reference. 7 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended June 30, 1997, and incorporated herein by reference. 8 Previously filed as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1997, and incorporated herein by reference. 9 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended June 30, 1998, and incorporated herein by reference. 10 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended September 30, 1998, and incorporated herein by reference. 11 Previously filed as an exhibit to the Company's Form 10-K Annual Report for the year ended December 31, 1998, and incorporated herein by reference. 12 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by reference. 13 Previously filed as an exhibit to the Company's Form 10-Q for the quarterly period ended September 30, 1999, and incorporated herein by reference. 14 Filed herewith