1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ----------------------- Commission File Number 000-20202 CREDIT ACCEPTANCE CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) <TABLE> <S><C> Michigan 38-1999511 - -------------------------------------------------------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) (IRS Employer Identification) 25505 West Twelve Mile Road, Suite 3000, Southfield, Michigan 48034-8339 - -------------------------------------------------------------------------------------------------------------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code (248) 353-2700 ----------------------------------------------------------- </TABLE> Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date. Outstanding at Class August 12, 1997 Common Stock - $.01 par value 46,112,448
2 <TABLE> <CAPTION> TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. <S> <C> <C> Item 1. Financial Statements Consolidated Balance Sheets - As of December 31, 1996 and June 30, 1997 .................................... 1 Consolidated Income Statements - Three and six month periods ended June 30, 1996 and June 30, 1997 ............ 2 Consolidated Statements of Cash Flows - Six months ended June 30, 1996 and June 30, 1997 ............................. 3 Consolidated Statement of Shareholders' Equity - Six months ended June 30, 1997 ............................................... 4 Notes to Consolidated Financial Statements ................................... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............................. 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk ................... 11 PART II. OTHER INFORMATION Item 2. Changes in Securities ........................................................ 12 Item 4. Submission of Matters to a Vote of Security Holders .......................... 12 Item 6. Exhibits and Reports on Form 8-K ............................................. 12 Signatures ............................................................................... 13 Index of Exhibits ........................................................................ 14 Exhibits.................................................................................. 15 </TABLE>
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CREDIT ACCEPTANCE CORPORATION CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> As of 12/31/96 As of 6/30/97 ---------------- ------------- (Dollars in thousands) (Unaudited) <S> <C> <C> ASSETS Cash and cash equivalents $ 229 $ 135 Investments 6,320 7,538 Installment contracts receivable 1,042,146 1,185,592 Allowance for credit losses (12,195) (14,556) ------------- ------------- Installment contracts receivable, net 1,029,951 1,171,036 Floor plan receivables 15,493 16,320 Notes receivable 2,663 1,818 Property and equipment, net 14,958 18,036 Other assets, net 4,804 5,067 ------------- ------------- TOTAL $1,074,418 $1,219,950 ============= ============= LIABILITIES Senior notes 123,400 195,150 Lines of credit 161,482 155,775 Mortgage loan payable to bank 4,017 3,909 Accounts payable and accrued liabilities 29,121 24,836 Income taxes payable 2,569 5,390 Deferred dealer enrollment fees, net 2,264 1,477 Dealer holdbacks, net 496,434 552,840 Deferred income taxes 8,988 8,409 ------------- ------------- TOTAL LIABILITIES 828,275 947,786 ------------- ------------- SHAREHOLDERS' EQUITY Common stock 458 461 Paid-in capital 125,398 128,262 Retained earnings 116,486 140,574 Cumulative translation adjustment 3,801 2,867 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 246,143 272,164 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,074,418 $1,219,950 ============= ============= </TABLE> 1
4 CREDIT ACCEPTANCE CORPORATION CONSOLIDATED INCOME STATEMENTS (Unaudited) <TABLE> <CAPTION> (Dollars in thousands, except per share data) 3 Months Ended 3 Months Ended 6 Months Ended 6 Months Ended 6/30/96 6/30/97 6/30/96 6/30/97 -------------- ------------- --------------- -------------- <S> <C> <C> <C> <C> REVENUE Finance charges $22,159 $32,602 $42,532 $63,293 Interest and other income 3,556 7,494 6,459 14,399 Dealer enrollment fees 1,261 2,132 2,225 3,922 Premiums earned 2,236 2,625 4,601 5,008 ---------- ---------- ---------- ---------- Total revenue 29,212 44,853 55,817 86,622 COSTS AND EXPENSES Salaries and wages 2,965 4,261 5,705 8,071 General and administrative 3,513 5,315 6,753 9,494 Provision for credit losses 2,721 7,669 5,447 14,722 Sales and marketing 945 2,059 1,847 3,957 Provision for claims 777 878 1,534 1,681 Interest 2,751 6,808 4,824 12,477 ---------- ---------- ---------- ---------- Total costs and expenses 13,672 26,990 26,110 50,402 ---------- ---------- ---------- ---------- OPERATING INCOME 15,540 17,863 29,707 36,220 ---------- ---------- ---------- ---------- Foreign exchange gain(loss) 3 5 1 (15) ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES 15,543 17,868 29,708 36,205 Provision for income taxes 5,406 5,818 10,383 12,117 ---------- ---------- ---------- ---------- NET INCOME $10,137 $12,050 $19,325 $24,088 ========== ========== ========== ========== Net income per common share $ 0.22 $ 0.26 $ 0.42 $ 0.52 ========== ========== ========== ========== Weighted average shares outstanding 46,479,968 46,594,721 46,458,038 46,748,606 ========== ========== ========== ========== </TABLE> 2
5 CREDIT ACCEPTANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> (Dollars in thousands) 6 Months Ended 6 Months Ended 6/30/96 6/30/97 -------------- ---------------- CASH FLOWS FROM OPERATING ACTIVITIES <S> <C> <C> Net Income $ 19,325 $ 24,088 Adjustments to reconcile net income to net cash provided by operating activities - Provision for deferred income taxes 627 (579) Depreciation and amortization 651 1,005 Loss on retirement of property and equipment - 512 Provision for credit losses 5,447 14,722 Change in operating assets and liabilities - Accounts payable and accrued liabilities 2,051 (4,285) Income taxes payable (214) 2,821 Unearned insurance premiums, insurance reserves, and fees 660 836 Deferred dealer enrollment fees, net 743 (787) Other assets 910 (263) --------- --------- Net cash provided by operating activities 30,200 38,070 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Principal collected on installment contracts receivable 133,874 187,986 Purchase of marketable securities (1,276) (1,218) Increase in floor plan receivables (1,747) (827) Decrease in notes receivable 224 845 Purchase of property and equipment (2,231) (4,595) --------- --------- Net cash provided by investing activities 128,844 182,191 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Repayment of mortgage loan payable to bank (101) (108) Advances to dealers and payments of dealer holdback (233,949) (288,223) Net borrowings under line of credit agreement 74,031 (5,707) Proceeds from sale of senior notes - 71,750 Proceeds from stock options exercised 649 2,867 --------- --------- Net cash used in financing activities (159,370) (219,421) --------- --------- Effect of exchange rate changes on cash 326 (934) --------- --------- NET DECREASE IN CASH 0 (94) Cash and cash equivalents - beginning of period 1 229 --------- --------- Cash and cash equivalents - end of period $ 1 $ 135 --------- -------- </TABLE> 3
6 CREDIT ACCEPTANCE CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY for the six months ended June 30, 1997 (Unaudited) <TABLE> <CAPTION> Cumulative Translation Retained (Dollars in thousands) Common Stock Paid-In Capital Adjustment Earnings ------------ --------------- -------------- -------- <S> <C> <C> <C> <C> Balance as of December 31, 1996 $ 458 $125,398 $3,801 $116,486 Net income - - - 24,088 Foreign currency translation adjustment - - (934) - Stock options exercised 3 2,864 - - ------------ --------------- ------------- -------- Balance as of June 30, 1997 $ 461 $128,262 $2,867 $140,574 ============ =============== ============= ======== </TABLE> 4
7 CREDIT ACCEPTANCE CORPORATION Notes to Consolidated Financial Statements (Unaudited) 1. GENERAL The unaudited consolidated operating results have been prepared on the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting of normal recurring items, necessary for a fair presentation of the periods. The results of operations for interim periods are not necessarily indicative of actual results achieved for full fiscal years. As contemplated by the Securities and Exchange Commission under rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and related notes have been condensed and do not contain certain information included in the Company's annual consolidated financial statements and notes thereto. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10K for the year ended December 31, 1996. 2. NET INCOME PER SHARE The net income per share amounts are based on the average number of common shares and common stock equivalents outstanding. All per share amounts have been adjusted to reflect all stock splits declared by the Company. 3. NEW ACCOUNTING STANDARDS Effective January 1, 1997 the Company adopted Statement of Financial Accounting Standard No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The new accounting standard provides accounting and reporting guidance for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is applied prospectively. The adoption of this accounting standard has not affected the Company's financial position or results of operations. Statement of Financial Accounting Standard No. 128 (SFAS 128), "Earnings per Share," which supersedes APB Opinion No. 15, "Earnings per Share," was issued in February 1997. SFAS 128 requires dual presentation of basic and diluted earnings per share (EPS) for complex capital structures on the face of the income statement. Basic EPS is computed by dividing income by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. SFAS 128 is required to be adopted for year-end 1997; earlier application is not permitted. The Company does not expect EPS measured under SFAS 128 to be materially different than EPS measured under APB No. 15. Statement of Financial Accounting Standard No. 129, "Disclosure of Information About Capital Structure," was issued in February 1997. The Company does not expect it to result in any material change in its financial statements. Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive Income," was issued in July 1997. SFAS 130 establishes standards for reporting and displaying comprehensive income. Management does not expect the adoption of this statement to have a significant impact on the financial position and results of the operations of the Company. This statement is effective for financial statements for fiscal years beginning after December 15, 1997. 5
8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Three and Six Months Ended June 30, 1997 Compared to Three and Six Months Ended June 30, 1996 Total Revenue. Total revenue increased from $29.2 million and $55.8 million for the three and six months ended June 30, 1996 to $44.9 million and $86.6 million for the same periods in 1997, representing increases of 53.5% and 55.2%, respectively. These increases are primarily due to an increase in finance charge revenue resulting from an increase in the dollar value of installment contracts receivable. The increase in contracts receivable is primarily the result of an increase in the number of dealers participating in the Company's program and an increase in the average contract size. The Company enrolled 1,045 new dealers into the Company's program during the six months ended June 30, 1997, bringing the total number of dealers as of June 30, 1997 to 6,166 compared to 4,511 as of June 30, 1996. The average yield on the Company's installment contract portfolio was approximately 11.5% and 11.4% for the six months ended June 30, 1996 and 1997, respectively. The decrease in the average yield principally resulted from an increase in the percent of installment contracts which were greater than 120 days contractually past due (which were 32.8% and 35.5% of gross installment contracts as of June 30, 1996 and 1997, respectively). The level of contractual past due contracts, while significant, is mitigated by the fact that when an installment contract is 120 days contractually past due, the Company (i) transfers the contract to a non-accrual status; and (ii) makes a provision to credit losses equal to the earned but unpaid revenue previously recognized on such installment contract. In addition, the decline in the average yield was also the result of an increase in the average outstanding term of the Company's installment contract portfolio. Also contributing to the increase in total revenue was interest and other income which increased as a percent of total revenue from 12.2% and 11.6% for the three and six months ended June 30, 1996 to 16.7% and 16.6% for the same periods in 1997. These increases are primarily due to an increase in revenue from commissions relating to third party credit life and service contract products offered by dealers. Earned dealer enrollment fees increased, as a percent of total revenue, from 4.3% and 4.0% for the three and six months ended June 30, 1996 to 4.8% and 4.5% for the same periods in 1997. The increases are due to the continued increase in the number of dealers participating in the Company's financing program. Premiums earned decreased, as a percent of total revenue from 7.6% and 8.2% for the three and six months ended June 30, 1996 to 5.9% and 5.8% for the same periods in 1997. These decreases are primarily the result of a decrease in premiums written under the Company's collateral protection and credit life insurance programs. Salaries and Wages. Salaries and wages, as a percent of total revenue, decreased from 10.1% and 10.2% for the three and six months ended June 30, 1996 to 9.5% and 9.3% for the same periods in 1997. The Company continues to benefit from increased efficiencies which have allowed it to increase revenue with a less than proportionate increase in personnel costs. General and Administrative. General and administrative expenses, as a percent of total revenue, decreased from 12.0% and 12.1% for the three and six months ended June 30, 1996 to 11.8% and 11.0% for the same periods in 1997. These decreases reflect the Company's ability to benefit from economies-of-scale, increasing revenue with less than proportionate increases in general and administrative costs. Partially offsetting these decreases was the $500,000 write-off during the three months ended June 30, 1997 of computer software no longer used in the Company's operations. Provision for Credit Losses. The amount provided for credit losses, as a percent of total revenue, increased from 9.3% and 9.8% for the three and six months ended June 30, 1996 to 17.1% and 17.0% for the same 6
9 periods in 1997. The increases are primarily the result of amounts provided to increase reserves to cover anticipated losses on dealer advance balances. These reserves are established when the Company estimates that the amounts to be received through the collection of the dealers installment contract receivable pool will be insufficient to recover the dealer advance balance. The company anticipates that as it continues to evaluate its relationship with certain dealers, amounts provided to cover losses on Dealer advance balances for the remainder of 1997, as a percent of total revenue, will continue at higher levels than amounts provided historically. Sales and Marketing. Sales and marketing expenses, as a percent of total revenue, increased from 3.2% and 3.3% during the three and six months ended June 30, 1996 to 4.6% during the same periods in 1997. These increases are primarily the result of increased sales commissions as a result of the increased enrollment of new dealers into the Company's program, as well as increases in other costs directly associated with the enrollment of new dealers. Provision for Claims. The amount provided for insurance and service contract claims, as a percent of total revenue, decreased from 2.7% during the three and six months ended June 30, 1996 to 2.0% during the same periods in 1997. This decrease corresponds with a decrease, as a percent of total revenue, in premiums earned from 7.7% and 8.2% for the three and six months ended June 30, 1996 to 5.9% and 5.8% for the same periods in 1997. Interest Expense. Interest expense, as a percent of total revenue, increased from 9.4% and 8.6% for the three and six months ended June 30, 1996 to 15.1% and 14.4% for the same periods in 1997. These increases, are the result of an increase in the amount of average outstanding borrowings. To a lesser extent, interest expense increased due to a higher average interest rate as a result of the sale of $71.75 million in senior notes in March, 1997. The Company expects to continue to borrow in future periods to assist in funding the continued growth of the Company. Operating Income. As a result of the aforementioned factors, operating income increased from $15.5 million and $29.7 million for the three and six months ended June 30, 1996 to $17.9 million and $36.2 million for the same periods in 1997, representing increases of 14.9% and 21.9%, respectively. Foreign Exchange Gain (Loss). The Company incurred a foreign exchange gain of $3,000 and $1,000 for the three and six months ended June 30, 1996 and a foreign exchange gain of $5,000 and a foreign exchange loss of $15,000 for the three and six months ended June 30, 1997. The gain and loss result from the effect of exchange rate fluctuations between the U.S. dollar and foreign currencies on unhedged intercompany balances between the Company and its subsidiaries which operate outside the United States. Provision for Income Taxes. The provision for income taxes increased from $5.4 million and $10.4 million during the three and six months ended June 30, 1996 to $5.8 million and $12.1 million during the same periods in 1997. The increase is due to a higher level of pretax income in 1997. For the six months ended June 30, the effective tax rate was 33.5% in 1997 and 35.0% in 1996. The decrease in the effective tax rate is due primarily to the utilization of a $331,000 net operating loss carryforward. 7
10 INSTALLMENT CONTRACTS RECEIVABLE The following table summarizes the composition of installment contracts receivable at the dates indicated: <TABLE> <CAPTION> AS OF AS OF (Dollars in thousands) 12/31/96 06/30/97 -------- ---------- (Unaudited) <S> <C> <C> Gross installment contracts receivable $1,251,139 $1,420,620 Unearned finance charges (201,760) (226,959) Unearned insurance premiums, insurance reserves, and fees (7,233) (8,069) ---------- ---------- Installment contracts receivable $1,042,146 $1,185,592 ========== ========== Non-accrual installment contracts as a percent of total gross installment contracts 34.1% 35.5% ===== ===== </TABLE> A summary of changes in gross installment contracts receivable is as follows: <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- (Dollars in thousands) 1996 1997 1996 1997 ---- ---- ---- ---- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Balance, beginning of period $885,121 $1,360,899 $ 790,607 1,251,139 Gross amount of installment contracts accepted 220,288 242,660 424,214 533,641 Cash collections on installment contracts receivable (92,514) (130,833) (179,792) (258,806) Charge offs (31,750) (55,317) (53,884) (101,594) Currency Translation (a) 3,211 (a) (3,760) -------- ---------- --------- ---------- Balance, end of period $981,145 $1,420,620 $ 981,145 $1,420,620 ======== ========== ========= ========== </TABLE> (a) immaterial DEALER HOLDBACKS The following table summarizes the composition of dealer holdbacks at the dates indicated: <TABLE> <CAPTION> AS OF AS OF (Dollars in thousands) 12/31/96 06/30/97 -------- ---------- (Unaudited) <S> <C> <C> Dealer holdbacks $ 998,593 $1,134,941 Less: Advances (net of reserves of $8,754 and $19,816 at December 31, 1996 and June 30, 1997, respectively) (502,159) (582,101) --------- ---------- Dealer holdbacks, net $ 496,434 $ 552,840 ========= ========== </TABLE> 8
11 CREDIT POLICY AND EXPERIENCE The Company maintains an allowance for credit losses which, in the opinion of management, adequately reserves against expected future losses in the portfolio of receivables. The risk of loss to the Company related to the installment contracts receivable balance 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, the remaining gross installment receivable contracts balance is charged off against dealer holdbacks, unearned finance charges and the allowance for credit losses. The Company also maintains a reserve against advances to dealers that are not expected to be recovered through collections on the related installment contract receivable portfolio. Advance balances are continually reviewed by management, and those which are deemed to be unrecoverable are charged against the reserve. Credit loss experience, changes in the character and size of the receivables portfolio and the advance balance, and management's judgment are primary factors used in assessing the overall adequacy of the allowance and advance reserve and the resulting provisions for credit losses. Ultimate losses may vary from current estimates and the amount of the provision, which is a current expense, may be either greater or less than actual charge offs. Servicing fees, which are booked as finance charges, are recognized under the interest method of accounting until the underlying obligation is 120 days contractually past due. 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, installment contracts on which no material payment has been received for one year are charged off against the related dealer holdback and the allowance for credit losses. As future payments on any remaining aggregate contracts from a given dealer are available to recover all advances from such dealer, the risk of loss to the Company is mitigated. The following tables set forth information relating to charge offs, the allowance for credit losses, the reserve on advances, and dealer holdbacks (Dollars in thousands). <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ----------------- 1996 1997 1996 1997 ---- ---- ---- ---- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Provision for credit losses-installment contracts $ 1,295 $ 2,062 $ 2,814 $ 4,615 Provision for credit losses-advances 1,426 5,607 2,633 10,107 Charged against dealer holdbacks 25,379 44,237 43,092 81,223 Charged against unearned finance charges 5,663 9,876 9,578 18,133 Charged against allowance for credit losses 708 1,204 1,214 2,238 ------- ------- ------- -------- Total contracts charged off $31,750 $55,317 $53,884 $101,594 ======= ======= ======= ======== Net charge offs against the reserve on advances $ 23 $ 994 $ 67 $ 1,321 </TABLE> 9
12 <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ----------------- -------------------- 1996 1997 1996 1997 ----------------- -------------------- (Unaudited) (Unaudited) ALLOWANCE FOR CREDIT LOSSES <S> <C> <C> <C> <C> Balance, beginning of period .............. $ 8,770 $13,665 $ 7,757 $12,194 Provision for losses ...................... 1,295 2,062 2,814 4,615 Charge offs (708) (1,204) (1,214) (2,238) Currency Translation ...................... (a) 33 (a) (15) ------- ------- ------- ------- Balance, end of period .................... $ 9,355 $14,556 $ 9,357 $14,556 ======= ======= ======= ======= </TABLE> (a) immaterial <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------ ----------------- 1996 1997 1996 1997 ------------------ ----------------- (Unaudited) (Unaudited) RESERVE ON ADVANCES <S> <C> <C> <C> <C> Balance, beginning of period .............. $4,377 $14,168 $ 3,214 $ 8,754 Provision for advance losses .............. 1,426 5,607 2,633 10,107 Advance reserve fees ...................... - 944 - 2,274 Charge offs (23) (994) (67) (1,321) Currency Translation ...................... (a) 91 (a) 2 ------ ------- ------- ------- Balance, end of period .................... $5,780 $19,816 $ 5,780 $19,816 ====== ======= ======= ======= </TABLE> (a) Immaterial <TABLE> <CAPTION> AS OF AS OF JUNE 30, 1996 JUNE 30, 1997 ------------- ------------- <S> <C> <C> (Unaudited) Allowance for credit losses as a percent of gross installment contracts receivable 1.0% 1.0% Reserve on advances as a percent of advances 1.6% 3.3% Dealer holdbacks as a percent of gross installment contracts receivable 79.7% 79.9% </TABLE> The Company's relatively low level of amounts charged against the allowance for credit losses is due to, among other factors: (i) the requirement that each installment contract accepted must meet established, formula-based criteria prior to the Company making an advance on such contract; (ii) experienced personnel, using computer-assisted accounts receivable management and collection systems; (iii) the security interest the Company receives in the vehicle at the time it accepts an installment contract; and (iv) the high level of dealer holdbacks, relative to the amount of installment contracts. 10
13 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 $233.9 million during the six months ended June 30, 1996 to $288.7 million during the same period in 1997. These amounts were funded from cash collections on installment contracts, income from operations, advances under the Company's credit agreement and proceeds from the sale of $71.75 million in senior notes in March 1997. During the first six months of 1997, the Company borrowed approximately $66.0 million under various agreements to assist in funding the Company's operations. The increased need for capital is primarily a result of the continued growth in new installment contracts accepted. To a lesser extent, the increased need for capital is also due to an increase in the amount advanced per contract, continued increases in dealers' utilization of service contract products offered by the Company, and amounts needed to fund the continued growth of the Company's operations in the United Kingdom and to a lesser extent, Canada and Ireland. The Company has a $250 million credit agreement with a commercial bank syndicate. The agreement consists of a $150 million line of credit facility with a commitment period through May 15, 1998 and a $100 million revolving credit facility with a commitment period through May 15, 2000. Both facilities are subject to annual extension for additional one year periods at the request of the Company with the consent of each of the banks in the facility. The borrowings are unsecured with interest payable at the Eurocurrency rate plus a minimum of 61.25 basis points and a maximum of 120 basis points (currently 82.5 basis points) dependent on the Company's debt rating, or at the prime rate. The Eurocurrency borrowings may be fixed for periods up to one year. The credit agreement has certain restrictive covenants, including limits on the ratio of the Company's debt-to-equity, limits on the Company's investment in its subsidiaries in the United Kingdom, and requirements that the Company maintain a specified minimum level of net worth. As of June 30, 1997, there was approximately $155.8 million outstanding under these facilities. 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 subsidiary which operates 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 United Kingdom bank's base rate (currently 6.5%) plus 65 basis points or at the LIBOR rate plus 56.25 basis points. The rates may be fixed for periods up to six months. As of June 30, 1997, there were no outstandings under this facility. The Company maintains a significant dealer holdback on installment contracts accepted which assists the Company in funding its long-term cash flow requirements. In future periods, the Company's short and long-term cash flow requirements will continue to be funded primarily through earnings from operations, cash flow from the collection of installment contracts, the Company's credit facilities and sales of debt securities pursuant to a shelf registration statement filed with the Securities and Exchange Commission. The Company will continue to utilize various sources of financing available from time to time to fund the continuing growth of the Company, both in the United States and abroad. The Company believes that such amounts will be sufficient to meet its short-term and long-term cash flow requirements. 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 uncertainties, including competition from traditional financing sources and from non-traditional lenders, 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 and the Company's ability to continue to increase the volume of installment contracts accepted. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 11
14 PART II. Item 2. Changes in Securities. On July 1, 1997, the Company's Articles of Incorporation were amended to increase the number of authorized shares of common stock from 60,000,000 to 80,000,000. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on May 19, 1997 at which the shareholders considered the following: 1. The election of six directors. Each of the nominees for director at the meeting was an incumbent and all nominees were elected. The following table sets forth the number of shares for and withheld with respect to each nominee. Nominee Votes For Votes Withheld --------------------- ---------- -------------- Donald A. Foss 42,325,671 33,178 Richard E. Beckman 42,325,671 33,178 Harry E. Craig 42,325,571 33,278 Thomas A. FitzSimmons 42,325,671 33,178 David T. Harrison 42,325,671 33,178 Sam M. LaFata 42,325,671 33,178 2. To approve a proposal to amend the Articles of Incorporation of the Company to increase the number of authorized Common Shares to 80,000,000. Votes For Votes Against Abstain Broker Non-Vote --------- -------------- ----------- ---------------- 41,599,409 741,828 17,612 0 3. To approve a proposal to amend the 1992 Stock Option Plan to increase the number of shares subject to the plan to 5,000,000. Votes For Votes Against Abstain Broker Non-Vote ---------- ------------- ------- --------------- 39,779,449 2,505,398 54,815 19,187 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits See Index of Exhibits following the signature page. (b) Reports on Form 8-K The Company was not required to file a current report on Form 8-K during the quarter ended June 30, 1997 and none were filed during that period. 12
15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CREDIT ACCEPTANCE CORPORATION (Registrant) Date: /S/Brett A. Roberts ----------------------------- Brett A. Roberts Executive Vice President and Chief Financial Officer Signing on behalf of the registrant and as principal financial officer. Date: /S/John P. Cavanaugh ------------------------------ John P. Cavanaugh Corporate Controller and Assistant Secretary Principal accounting officer. 13
16 INDEX OF EXHIBITS Exhibit Number Description - -------------- ----------- 3(a) (1) Articles of Incorporation, as amended July 1, 1997 4(c) (1) First Amendment and Consent, dated June 4, 1997, to Second Amended and Restated Credit Agreement dated as of December 4, 1996 and a memorandum evidencing extension of maturity dates. 10(f) (3) Credit Acceptance Corporation 1992 Stock Option Plan, as amended and restated May 1997 11 Statement of Computation of Net Income Per Common Share 27 Financial Data Schedule