e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended December 31, 2007
Commission File Number
000-20202
CREDIT ACCEPTANCE
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
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Michigan
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38-1999511
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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25505 W. Twelve Mile Road, Suite 3000
Southfield, Michigan
(Address of Principal
Executive Offices)
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48034-8339
(Zip Code)
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Registrants telephone number, including area code:
(248) 353-2700
Securities Registered Pursuant to Section 12(b) of the
Act:
Common Stock
Securities Registered Pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
Company o
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of 5,021,041 shares of the
Registrants common stock held by non-affiliates on
June 29, 2007 was approximately $134.7 million. For
purposes of this computation all officers, directors and 10%
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 February 29, 2008, there were 30,378,102 shares of
the Registrants common stock issued and outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
pertaining to the 2008 Annual Meeting of Shareholders (the
Proxy Statement) filed pursuant to
Regulation 14A are incorporated herein by reference into
Part III.
CREDIT
ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2007
INDEX TO
FORM 10-K
2
PART I
General
Since 1972, Credit Acceptance (referred to as the
Company, Credit Acceptance,
we, our or us) has provided
auto loans to consumers, regardless of their credit history. Our
product is offered through a nationwide network of automobile
dealers who benefit from sales of vehicles to consumers who
otherwise could not obtain financing; from repeat and referral
sales generated by these same customers; and from sales to
customers responding to advertisements for our product, but who
actually end up qualifying for traditional financing.
Without our product, consumers are often unable to purchase a
vehicle or they purchase an unreliable one and are not provided
the opportunity to improve their credit standing. As we report
to the three national credit reporting agencies, a significant
number of our consumers improve their lives by improving their
credit score and move on to more traditional sources of
financing.
Credit Acceptance was founded to collect retail installment
contracts (referred to as Consumer Loans) originated
by automobile dealerships owned by our founder, majority
shareholder, and Chairman, Donald Foss. During the 1980s, we
began to market this service to non-affiliated dealers and, at
the same time, began to offer dealers a non-recourse cash
payment (referred to as an advance) against
anticipated future collections on Consumer Loans serviced for
that dealer. We refer to dealers who participate in our program
and who share our commitment to changing consumers lives
as dealer-partners.
A consumer who does not qualify for conventional automobile
financing can purchase a used vehicle from a Credit Acceptance
dealer-partner and finance the purchase through us. We are an
indirect lender from a legal perspective, meaning the Consumer
Loan is originated by the dealer-partner and immediately
assigned to us.
Consumers and dealer-partners benefit from our product as
follows:
Consumers. We help change the lives of
consumers who do not qualify for conventional automobile
financing by helping them obtain quality transportation and,
equally important, providing an opportunity to establish or
reestablish their credit through the timely repayment of their
Consumer Loan.
Dealer-Partners. Our program increases
dealer-partners profits in the following ways:
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Enables dealer-partners to sell cars to consumers who may not be
able to obtain financing without our program. In addition,
consumers often become repeat customers by financing future
vehicle purchases either through our program or, after they have
successfully established or reestablished their credit, through
conventional financing.
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Allows dealer-partners to share in the profits not only from the
sale of the vehicle, but also from its financing.
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Enables dealer-partners to attract consumers by advertising
guaranteed credit approval, where allowed by law.
The consumers will often use other services of the
dealer-partners and refer friends and relatives to them.
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Enables dealer-partners to attract consumers who mistakenly
assume they do not qualify for conventional financing.
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Our Internet address is creditacceptance.com. We make
available, free of charge on the web site, copies of reports we
file with or furnish to the Securities and Exchange Commission
as soon as reasonably practicable after we electronically file
or furnish such reports.
Principal
Business
We have two primary programs: the Portfolio Program and the
Purchase Program. During the year ended December 31, 2007,
83% of loans were assigned to us under the Portfolio Program and
17% were assigned to us under the Purchase Program.
Dealer-Partners have the option to assign Consumer Loans under
either program and sign a separate agreement for each program
type. Under the Portfolio Program, we advance money to
3
dealer-partners
(referred to as a Dealer Loan) in exchange for the
right to service the underlying Consumer Loan. Our servicing fee
is equal to a fixed percentage (typically 20%) of each payment
collected. The Dealer Loan is repaid by collections from the
Consumer Loans. Each dealer-partner has an opportunity to
receive additional money over time based on the performance of
all Consumer Loans that they assign to us under the Portfolio
Program. Under the Purchase Program, we buy the Consumer Loan
from the dealer-partner (referred to as a Purchased
Loan) and keep all amounts collected from the consumer.
Dealer Loans and Purchased Loans are collectively referred to as
Loans.
Portfolio
Program
As payment for the vehicle, the dealer-partner generally
receives the following:
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(i)
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a down payment from the consumer;
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(ii)
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a cash advance from us; and
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(iii)
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after the advance has been recovered by us, the cash from
payments made on the Consumer Loan, net of certain collection
costs and our servicing fee (dealer holdback).
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We record the amount advanced to the dealer-partner as a Dealer
Loan, which is classified within Loans receivable in our
consolidated balance sheets. Cash advanced to dealer-partners is
automatically assigned to the originating dealer-partners
open pool of advances. At the dealer-partners option, a
pool containing at least 100 Consumer Loans can be closed and
subsequent advances assigned to a new pool. All advances due
from a dealer-partner are secured by the future collections on
the dealer-partners portfolio of Consumer Loans assigned
to us. For dealer-partners with more than one pool, the pools
are cross-collateralized so that the performance of other pools
is considered in determining eligibility for dealer holdback. We
perfect our security interest in the Dealer Loans by taking
possession of the Consumer Loans.
The dealer servicing agreement provides that collections
received by us during a calendar month on Consumer Loans
assigned by a dealer-partner are applied on a
pool-by-pool
basis as follows:
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First, to reimburse us for certain collection costs;
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Second, to pay us our servicing fee;
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Third, to reduce the aggregate advance balance and to pay any
other amounts due from the dealer-partner to us; and
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Fourth, to the dealer-partner as payment of dealer holdback.
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Dealer-partners have an opportunity to receive a portion of the
dealer holdback on an accelerated basis at the time a pool of
100 or more Consumer Loans is closed. The eligibility to receive
accelerated dealer holdback and the amount paid to the
dealer-partner is calculated using a formula that considers the
forecasted collections and the advance balance on the closed
pool. If the collections on Consumer Loans from a
dealer-partners pool are not sufficient to repay the
advance balance, the dealer-partner will not receive dealer
holdback or accelerated dealer holdback.
Since typically the combination of the advance and the
consumers down payment provides the dealer-partner with a
cash profit at the time of sale, the dealer-partners risk
in the Consumer Loan is limited. We cannot demand repayment from
the dealer-partner of the advance except in the event the
dealer-partner is in default of the dealer servicing agreement.
Advances are made only after the Consumer Loan is approved,
accepted by and assigned to us and all other stipulations
required for funding have been satisfied.
For accounting purposes, the transactions described under the
Portfolio Program are not considered to be loans to consumers.
Instead, our accounting reflects that of a lender to the
dealer-partner. The classification as a Dealer Loan for
accounting purposes is primarily a result of (i) the
dealer-partners financial interest in the Consumer Loan
and (ii) certain elements of our legal relationship with
the dealer-partner. The cash amount advanced to the
dealer-partner is recorded as an asset on our balance sheet. The
aggregate amount of all advances to an individual
dealer-partner, plus accrued income, less repayments comprises
the amount of the Dealer Loan recorded in Loans receivable.
4
Purchase
Program
We began offering a Purchase Program on a limited basis in March
of 2005. The Purchase Program differs from our traditional
Portfolio Program in that the dealer-partner receives a single
upfront payment from us at the time of origination instead of a
cash advance and dealer holdback. Purchase Program volume
increased in 2007 as the program was offered to additional
dealer-partners.
For accounting purposes, the transactions described under the
Purchase Program are considered to be originated by the
dealer-partner and then purchased by us. The cash amount paid to
the dealer-partner is recorded as an asset on our balance sheet.
The aggregate amount of all amounts paid to purchase Consumer
Loans from dealer-partners, plus accrued income, less
repayments, comprises the amount of Purchased Loans recorded in
Loans receivable.
The following table summarizes key information regarding
Purchased Loans:
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Year Ended
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Year Ended
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December 31,
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December 31,
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2007
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2006
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Purchased Loan unit volume as a percentage of total unit volume
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17.3
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%
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4.0
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%
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Net Purchased Loan receivable balance as a percentage of the
total net receivable balance
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17.2
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%
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4.6
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%
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Revenue
Sources
Credit Acceptance derives its revenues from the following
principal sources:
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(i)
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Finance charges, which are comprised of: (a) servicing fees
earned as a result of servicing Consumer Loans assigned to us by
dealer-partners under the Portfolio Program, (b) finance
charge income from Purchased Loans, (c) fees earned from
our third party ancillary product offerings, and (d) fees
associated with certain Loans;
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(ii)
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License fees, which represent monthly fees charged to
dealer-partners for access to our patented Internet-based Credit
Approval Processing System (CAPS). Effective
January 1, 2007, we implemented a change designed to
positively impact dealer-partner attrition. We continue to
charge a monthly fee of $599, but instead of collecting and
recognizing the revenue from the fee in the current period, we
collect it from future dealer holdback payments. As a result of
this change, we now record license fees as a yield adjustment,
recognizing these fees as finance charge revenue over the term
of the Dealer Loan. We recognize a limited amount of license fee
revenue related to dealer-partners that only participate in our
Purchase Program;
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(iii)
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Other income, which primarily consists of: interest income,
remarketing charges, dealer support products and services,
marketing income, and dealer enrollment fees. For additional
information, see Note 2 to the consolidated financial
statements.
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The following table sets forth the percent relationship to total
revenue from continuing operations of each of these sources:
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For the Years Ended
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December 31,
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Percent of Total Revenue from
Continuing Operations
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2007
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2006
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2005
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Finance charges
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91.9
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%
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86.0
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%
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87.6
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%
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License fees
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0.1
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%
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6.2
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%
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4.9
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%
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Other income
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8.0
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%
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7.8
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%
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7.5
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%
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Total revenue
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100.0
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%
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100.0
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%
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100.0
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%
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Our business is seasonal with peak Consumer Loan acceptances and
collections occurring during the first quarter of the year.
However, this seasonality does not have a material impact on our
interim results.
5
We have two reportable business segments: United States and
Other. The United States segment consists of the United States
automobile financing business. The Other segment primarily
consists of the discontinued United Kingdom automobile financing
business. For information regarding our reportable segments, see
Note 11 to the consolidated financial statements.
Operations
in the United States
Our target market is a select group of approximately 70,000
independent and franchised automobile dealers in the United
States. The marketing of our program is intended to:
(i) result in a network consisting of dealer-partners who
share our commitment to changing lives and (ii) increase
the value of our program to our dealer-partners. Dealer-partners
that enroll in our program have the option to pay a one-time
enrollment fee of $9,850 or to defer the fee. Dealer-partners
choosing to defer payment of the enrollment fee agree to allow
us to keep 50% of their first accelerated dealer holdback
payment. In return for the enrollment fee, we provide the
dealer-partner with training and the first months access
to CAPS. For dealer-partners opting to pay the enrollment fee at
the time of enrollment, in addition to their first months
access to CAPS, we also provide various marketing materials such
as signs and sales promotion kits.
Dealer-partner enrollments for each of the last five years are
presented in the table below:
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Number of
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Dealer-Partner
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Year
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Enrollments
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2003
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399
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2004
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534
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2005
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956
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2006
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1,172
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2007
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1,835
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A new dealer-partner is required to execute a dealer servicing
agreement related to the Portfolio Program and, at their option,
a Purchase Program agreement, which define the legal
relationship between us and the dealer-partner. The agreements
assign the responsibilities for collecting the amounts due on
Consumer Loans to us. Under the typical agreement, a
dealer-partner represents that it will only assign Consumer
Loans to us which satisfy criteria established by us, meet
certain conditions with respect to their binding nature and the
status of the security interest in the purchased vehicle, and
comply with applicable state, federal and foreign laws and
regulations. If we discover a misrepresentation by the
dealer-partner relating to a Consumer Loan assigned to us, we
can demand that the Consumer Loan be repurchased for the current
balance of the Consumer Loan less the amount of any unearned
finance charge plus the applicable termination fee, which is
generally $500. Upon receipt of such amount in full, we will
reassign the Consumer Loan and its security interest in the
financed vehicle to the dealer-partner. The dealer-partner can
also opt to repurchase their Consumer Loan portfolio assigned
under the Portfolio Program, at their discretion.
The typical agreement may be terminated by us or by the
dealer-partner upon written notice. We may terminate the
agreement immediately in the case of an event of default by the
dealer-partner. Events of default include, among other things:
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(i)
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the dealer-partners refusal to allow us to audit its
records relating to the Consumer Loans assigned to us;
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(ii)
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the dealer-partner, without our consent, is dissolved; merges or
consolidates with an entity not affiliated with the
dealer-partner; or sells a material part of its assets outside
the course of its business to an entity not affiliated with the
dealer-partner; or
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(iii)
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the appointment of a receiver for, or the bankruptcy or
insolvency of, the dealer-partner.
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While a dealer-partner can cease assigning Consumer Loans to us
at any time without terminating the agreement, if the
dealer-partner elects to terminate the agreement or in the event
of a default, the dealer-partner must immediately pay us:
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(i)
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any unreimbursed collection costs on Dealer Loans;
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(ii)
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any unpaid advances and all amounts owed by the dealer-partner
to us; and
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(iii)
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a termination fee equal to 15% of the then outstanding amount of
the Consumer Loans accepted or purchased by us.
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Upon receipt of such amounts in full, we reassign the Consumer
Loans and our security interest in the financed vehicles to the
dealer-partner. In the event of a termination, we may continue
to service Consumer Loans assigned by dealer-partners accepted
prior to termination in the normal course of business without
charging a termination fee.
Dealer-partners receive a monthly statement from us, summarizing
all activity on Consumer Loans assigned by such dealer-partner.
Consumer Loan Assignment. Once a
dealer-partner has enrolled in our programs, the dealer-partner
may begin assigning Consumer Loans to us. A Consumer Loan
originates when a consumer enters into a contract with a
dealer-partner that sets forth the terms of the agreement
between the consumer and the dealer-partner for the payment of
the purchase price of the automobile. The amount of the Consumer
Loan consists of the total principal and interest that the
consumer is required to pay over the term of the Consumer Loan.
Virtually all of the Consumer Loans accepted by us in the United
States are processed through CAPS. CAPS allows dealer-partners
to input a consumers credit application and view the
response from us via the Internet. CAPS allows dealer-partners
to: (i) receive a quick approval from us; and
(ii) interact with our proprietary credit scoring system to
improve the structure of each transaction prior to delivery. All
responses include the amount of funding (advance for a Dealer
Loan or purchase price for a Purchased Loan), as well as any
stipulations required for funding. The amount of funding is
determined using a formula which considers a number of factors
including the timing and amount of cash flows expected on the
related Consumer Loan and our target return on capital at the
time the Consumer Loan is assigned. The estimated future cash
flows are determined based upon our proprietary credit scoring
system, which considers numerous variables, including attributes
contained in the consumers credit bureau report, data
contained in the consumers credit application, the
structure of the proposed transaction, vehicle information and
other factors, to calculate a composite credit score that
corresponds to an expected collection rate. Our proprietary
credit scoring system forecasts the collection rate based upon
the historical performance of Consumer Loans in our portfolio
that share similar characteristics. The performance of our
proprietary credit scoring system is evaluated monthly by
comparing projected to actual Consumer Loan performance.
Adjustments are made to our proprietary credit scoring system as
necessary.
While a dealer-partner can assign any legally compliant Consumer
Loan to us, the decision whether to provide funding to the
dealer-partner and the amount of any funding is made solely by
us. We perform all significant functions relating to the
processing of the Consumer Loan applications and bear certain
costs of Consumer Loan acceptances, including the cost of
assessing the adequacy of Consumer Loan documentation,
compliance with underwriting guidelines and the cost of
verifying employment, residence and other information provided
by the dealer-partner.
In the majority of states, Consumer Loan contracts are written
on a contract form provided by us. The Consumer Loan transaction
is not accepted by the Company until we have received and
approved all the related stipulations for funding. The
acceptance of the Consumer Loan from the dealer-partner to us
occurs after both the consumer and dealer-partner sign the
contract and the original contract and supporting documentation
are received and approved by us. Although the dealer-partner is
named in the Consumer Loan contract, the dealer-partner
generally does not have legal ownership of the Consumer Loan for
more than a moment and the Company, not the dealer-partner, is
listed as lien holder on the vehicle title. The consumers
payment obligation is directly to us. Payments are generally
made by the consumer directly to us. The consumers failure
to pay amounts due under the Consumer Loan will result in
collection action by us.
7
Our business model allows us to share the risk and reward of
collecting on the Consumer Loans with the dealer-partners. Such
sharing is intended to motivate the dealer-partner to assign
better quality Consumer Loans, follow our underwriting
guidelines, and provide appropriate service and support to the
consumer after the sale. We believe this arrangement aligns the
interests of the Company, the dealer-partner and the consumer.
We measure various criteria for each dealer-partner against
other dealer-partners in their area as well as the top
performing dealer-partners. Sales representatives regularly
review the performance of each dealer-partner and, together with
the dealer-partner, create an action plan to improve the
dealer-partners overall success with our program.
Information on our Consumer Loans is presented in the following
table:
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For the Years Ended December 31,
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Average Consumer Loan Data
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2007
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2006
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2005
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2004
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2003
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Average size of Consumer Loan accepted
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$
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13,878
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$
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12,722
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$
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12,015
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$
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12,765
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$
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12,206
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Percentage growth in average size of Consumer Loan
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9.1
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%
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5.9
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%
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(5.9
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)%
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4.6
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%
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8.1
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%
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Average initial term (in months)
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41
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37
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35
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37
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37
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Collections. Our collectors are organized into
teams. Our first payment missed team services Consumer Loans of
consumers who have failed to make one of their first three
payments on time. A collection call is generally placed to these
consumers within one day after the payment is due. After a
consumer has made their initial three payments, the Consumer
Loan is serviced by either our delinquency team or our
specialized team. Within our delinquency team Consumer Loans are
segmented by various phone contact profiles (such as a good
residence phone number, but no employment phone number). Our
specialized team has higher skilled collectors with access to
additional tools. This team locates consumers by finding new
contact information to use to collect amounts due or to return
the Consumer Loan to the delinquency team. The specialized team
services Consumer Loans with the following characteristics:
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(i.)
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no valid phone contact information;
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(ii.)
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valid contact information, yet no contact in seven days; or
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(iii.)
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various specialty segments (such as military personnel).
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When a Consumer Loan is approved for repossession, the account
is transferred to our repossession team. Repossession personnel
continue to service the Consumer Loan as it is being assigned to
a third party repossession contractor, who works on a
contingency fee basis. Once a vehicle has been repossessed, the
consumer can negotiate a redemption, whereby the vehicle is
returned to the consumer in exchange for paying off the Consumer
Loan balance, or where appropriate or if required by law, the
vehicle is returned to the consumer and the Consumer Loan
reinstated, in exchange for reducing or eliminating the past due
balance. If the redemption process is not successful, the
vehicle is sold at a wholesale automobile auction. Prior to
sale, the vehicle is usually inspected by our remarketing
representatives who authorize repair and reconditioning work in
order to maximize the net sale proceeds at auction.
If the vehicle sale proceeds are not sufficient to satisfy the
balance owing on the Consumer Loan, the Consumer Loan is
serviced by either: (i) our senior collection team, in the
event that the consumer is willing to make payments on the
deficiency balance; or (ii) where permitted by law, our
legal team, if it is believed that legal action is required to
reduce the deficiency balance owing on the Consumer Loan. Our
legal team generally assigns Consumer Loans to third party
collection attorneys who file a claim and upon obtaining a
judgment, garnish wages or other assets. Additionally, we may
sell or assign Consumer Loans to a third party collection
company.
Collectors rely on two systems; the Collection System
(CS) and the Loan Servicing System
(LSS). The CS and the LSS are connected through a
batch interface. The present CS has been in service since June
2002. The CS interfaces with a predictive dialer and records all
activity on a Consumer Loan, including details of past phone
conversations with the consumer, collection letters sent,
promises to pay, broken promises, repossession orders and
collection attorney activity. The LSS maintains a record of all
transactions relating to Consumer Loans assigned after July 1990
and is a primary source of data utilized to:
|
|
|
|
(i)
|
evaluate our proprietary credit scoring system;
|
8
|
|
|
|
(ii)
|
forecast future collections;
|
|
|
|
|
(iii)
|
establish the amount of revenue recognized by us; and
|
|
|
|
|
(iv)
|
analyze the profitability of our program.
|
During the third quarter of 2005, we began an initiative to
outsource a portion of our collection function to a company in
India. In the second quarter of 2006, we entered into another
outsourcing arrangement with a company in Costa Rica. These
outsourced collectors service accounts using the CS and
typically work accounts that are less than sixty days past due.
Outsourcing reduces the geographic risk of having two collection
centers in the United States and provides additional flexibility
to scale our operation.
Service
Contracts and Insurance Products
We provide dealer-partners the ability to offer vehicle service
contracts to consumers. Buyers Vehicle Protection Plan, Inc.
(BVPP), a wholly owned subsidiary of the Company,
has relationships with third party administrators
(TPAs) whereby the TPAs process claims on vehicle
service contracts that are underwritten by third party insurers.
BVPP receives a commission for all vehicle service contracts
sold by our dealer-partners when the vehicle is financed by us,
and does not bear any risk of loss for claims. The commission is
included in the retail price of the vehicle service contract
which is added to the Consumer Loan. We provide dealer-partners
with an additional advance based on the retail price of the
vehicle service contract. We recognize our commission from the
vehicle service contracts as part of finance charges on a
level-yield basis based upon forecasted cash flows. Our
agreements with two of our TPAs allow us to receive profit
sharing payments depending upon the performance of the vehicle
service contract programs. Profit sharing payments are received
once a year, if eligible. Profit sharing payments are currently
not estimable due to a lack of historical information and
therefore revenue related to these payments is recognized in the
period the payments are received.
Agreements with two of the TPAs also require that vehicle
service contract premiums be placed in trust accounts. Funds in
the trust accounts are utilized by the TPA to pay claims on the
vehicle service contracts. Profit sharing payments, if any, on
the vehicle service contracts are distributed to us after the
term of the vehicle service contracts have substantially expired
provided certain loss rates are met. Under Financial Accounting
Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), we are considered the primary
beneficiary of the trusts. As a result, the assets and
liabilities of the trusts have been consolidated on our balance
sheet. As of December 31, 2007, the trusts had
$21.6 million in assets available to pay claims and a
related claims reserve of $20.2 million.
BVPP also has a relationship with a TPA that allows
dealer-partners to offer a Guaranteed Asset Protection
(GAP) product to consumers whereby the TPA processes
claims that are underwritten by a third party insurer. GAP
provides the consumer protection by paying the difference
between the loan balance and the amount covered by the
consumers insurance policy in the event the vehicle is
totaled or stolen. We receive a commission for all GAP contracts
sold by our dealer-partners when the vehicle is financed by us,
and do not bear any risk of loss for claims. The commission is
included in the retail price of the GAP contract which is added
to the Consumer Loan. We provide dealer-partners with an
additional advance based on the retail price of the GAP
contract. We recognize our commission from the GAP contracts as
part of finance charges on a level-yield basis based upon
forecasted cash flows. We are eligible to receive profit sharing
payments depending on the performance of the GAP program. Profit
sharing payments from the third party are received once a year,
if eligible. Profit sharing payments are currently not estimable
due to a lack of historical information and therefore revenue
related to these payments is recognized in the period the
payments are received.
Businesses
in Liquidation
Effective June 30, 2003, we decided to stop originating
Consumer Loans in the United Kingdom. We sold the remaining
Consumer Loan portfolio of our United Kingdom subsidiary on
December 30, 2005. The selling price was approximately
$4.3 million resulting in a pre-tax gain of approximately
$3.0 million.
9
Credit
Loss Policy
For information regarding our accounting policy for the
allowance for credit losses, see Note 2 to the consolidated
financial statements.
Competition
The market for consumers who do not qualify for conventional
automobile financing is large and highly competitive. The market
is currently served by buy here, pay here
dealerships, banks, captive finance affiliates of automobile
manufacturers, credit unions and independent finance companies
both publicly and privately owned. Many of these companies are
much larger and have greater resources than us. These companies
typically target higher credit tier customers within our market.
We compete by offering a profitable and efficient method for
dealer-partners to finance customers who would be more difficult
or less profitable to finance through other methods. In
addition, we compete on the basis of the level of service
provided by our origination and sales personnel.
Customer
and Geographic Concentrations
No single dealer-partner accounted for more than 10% of total
revenues during any of the last three years. Additionally, no
single dealer-partners Loan receivable balance accounted
for more than 10% of total Loans as of December 31, 2007 or
2006. The following table provides information regarding the
five states that are responsible for the largest dollar amount
of Consumer Loans accepted or purchased in the United States
during 2007:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
Active Dealer-Partners(1)
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Number
|
|
|
% of Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
$
|
134,758
|
|
|
|
9.1
|
%
|
|
|
186
|
|
|
|
6.6
|
%
|
Michigan
|
|
|
108,055
|
|
|
|
7.3
|
|
|
|
168
|
|
|
|
5.9
|
|
Alabama
|
|
|
98,595
|
|
|
|
6.7
|
|
|
|
89
|
|
|
|
3.1
|
|
Ohio
|
|
|
86,240
|
|
|
|
5.8
|
|
|
|
157
|
|
|
|
5.6
|
|
Mississippi
|
|
|
75,916
|
|
|
|
5.1
|
|
|
|
71
|
|
|
|
2.5
|
|
All other states
|
|
|
977,123
|
|
|
|
66.0
|
|
|
|
2,155
|
|
|
|
76.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,480,687
|
|
|
|
100.0
|
%
|
|
|
2,826
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Active dealer-partners are dealer-partners who have received
funding for at least one Loan during the year. |
The following table provides information regarding the five
states that are responsible for the largest dollar amount of
Consumer Loans accepted or purchased in the United States during
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loans
|
|
|
Active Dealer-Partners(1)
|
|
|
|
Amount
|
|
|
% of Total
|
|
|
Number
|
|
|
% of Total
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas
|
|
$
|
94,974
|
|
|
|
8.2
|
%
|
|
|
139
|
|
|
|
6.3
|
%
|
Alabama
|
|
|
88,024
|
|
|
|
7.6
|
|
|
|
74
|
|
|
|
3.3
|
|
Michigan
|
|
|
86,607
|
|
|
|
7.5
|
|
|
|
161
|
|
|
|
7.3
|
|
Mississippi
|
|
|
68,823
|
|
|
|
5.9
|
|
|
|
59
|
|
|
|
2.7
|
|
New York
|
|
|
66,895
|
|
|
|
5.8
|
|
|
|
143
|
|
|
|
6.5
|
|
All other states
|
|
|
756,716
|
|
|
|
65.0
|
|
|
|
1,638
|
|
|
|
73.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,162,039
|
|
|
|
100.0
|
%
|
|
|
2,214
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Active dealer-partners are dealer-partners who have received
funding for at least one Loan during the year. |
10
Geographic
Financial Information
For the three years ended December 31, 2007, 2006 and 2005,
revenues from continuing operations were derived primarily from
operations in the United States. Long-lived assets were also
primarily located in the United States.
Regulation
Our businesses are subject to various state, federal and foreign
laws and regulations, which:
(i) require licensing and qualification;
(ii) regulate interest rates, fees and other charges;
(iii) require specified disclosures to consumers;
(iv) govern the sale and terms of ancillary
products; and
(v) define our rights to collect Consumer Loans and
repossess and sell collateral.
Failure to comply with, or an adverse change in, these laws or
regulations could have a material adverse effect on us by, among
other things, limiting the states or countries in which we may
operate, restricting our ability to realize the value of the
collateral securing the Consumer Loans, or resulting in
potential liability related to our collection of Consumer Loans.
In addition, governmental regulations depleting the supply of
used vehicles, such as environmental protection regulations
governing emissions or fuel consumption, could have a material
adverse effect on us. We are not aware of any such legislation
currently pending that could have a material adverse effect on
us.
The sale of insurance products in connection with Consumer Loans
assigned to or purchased by us from dealer-partners is also
subject to state laws and regulations. However, as we do not
deal directly with consumers in the sale of insurance products,
we do not believe that such laws and regulations significantly
affect our business. Nevertheless, there can be no assurance
that insurance regulatory authorities in the jurisdictions in
which such products are offered by dealer-partners will not seek
to regulate us or restrict the operation of our business in such
jurisdictions. Any such action could materially adversely affect
the income received from such products.
We believe that we maintain all material licenses and permits
required for our current operations and are in substantial
compliance with all applicable laws and regulations. Our
agreements with dealer-partners provide that the dealer-partner
shall indemnify us with respect to any loss or expense we incur
as a result of the dealer-partners failure to comply with
applicable laws and regulations.
Team
Members
As of December 31, 2007, we had 971 full and part-time team
members. Our team members have no union affiliations and we
believe our relationship with our team members is good. The
table below presents team members by function:
|
|
|
|
|
|
|
|
|
|
|
Number of Team Members
|
|
|
|
December 31,
|
|
Functions
|
|
2007
|
|
|
2006
|
|
|
Servicing
|
|
|
510
|
|
|
|
423
|
|
Originations
|
|
|
232
|
|
|
|
202
|
|
Support
|
|
|
229
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
971
|
|
|
|
788
|
|
|
|
|
|
|
|
|
|
|
11
Our
inability to accurately forecast and estimate the amount and
timing of future collections could have a material adverse
effect on results of operations.
Since cash flows available to repay the Loans are generated, in
most cases, from the underlying Consumer Loans, the ability to
accurately forecast Consumer Loan performance is critical to our
success. At the time of Consumer Loan acceptance or purchase, we
forecast future expected cash flows from the Consumer Loan.
Based on these forecasts, we make an advance or cash payment to
the related dealer-partner at a level designed to achieve an
acceptable return on capital. If Consumer Loan performance
equals or exceeds original expectations, it is likely the target
return on capital will be achieved. However, actual cash flows
from any individual Consumer Loan are often different than cash
flows estimated at Consumer Loan inception. There can be no
assurance that estimates will be accurate or that Consumer Loan
performance will be as expected. In the event that we
underestimate the default risk or under-price products, the
financial position, liquidity and results of operations could be
adversely affected, possibly to a material degree.
Due to
increased competition from traditional financing sources and
non-traditional lenders, we may not be able to compete
successfully.
The automobile finance market for consumers who do not qualify
for conventional automobile financing is large and highly
competitive. The market is served by a variety of companies
including buy here, pay here dealerships. The market
is also currently served by banks, captive finance affiliates of
automobile manufacturers, credit unions and independent finance
companies both publicly and privately owned. Many of these
companies are much larger and have greater financial resources
than are available to us, and many have long standing
relationships with automobile dealerships. Providers of
automobile financing have traditionally competed based on the
interest rate charged, the quality of credit accepted, the
flexibility of loan terms offered and the quality of service
provided to dealers and consumers. There is potential that
significant direct competition could emerge and that we may be
unable to compete successfully.
We may be
unable to continue to access funding sources and obtain capital
on favorable terms needed to maintain and grow the
business.
We currently use four primary sources of debt financing:
(i) a revolving secured line of credit with a commercial
bank syndicate; (ii) a revolving secured warehouse facility
with institutional investors; (iii) SEC Rule 144A
asset-backed secured borrowings (Term ABS 144A) with
qualified institutional investors; and (iv) a residual
credit facility with an institutional investor. There can be no
assurance that new or additional financing can be obtained, or
that it will be available on acceptable terms. If our various
financing alternatives were to become limited or unavailable, we
may have to limit business activity, and operations could be
materially adversely affected.
We may
not be able to generate sufficient cash flow to service our
outstanding debt and fund operations.
We currently have substantial outstanding indebtedness and our
credit facilities allow us to incur significant amounts of
additional debt. The ability to make payment of principal or
interest on indebtedness will depend in part on our future
operating performance, which to a certain extent is subject to
economic, financial, competitive and other factors beyond our
control. If we are unable to generate sufficient cash flow in
the future to service our debt, we may be required to refinance
all or a portion of our existing debt or obtain additional
financing. There can be no assurance that any such refinancing
will be possible or that any additional financing can be
obtained on sustainable terms.
Dependence
on securitization program and financial guaranty
insurance.
We rely upon our ability to transfer Loans to securitization
trusts and sell securities in the asset-backed securities market
to generate cash proceeds for repayment of credit facilities and
to fund new Loans. The asset-backed securities market has been
currently experiencing unprecedented disruptions. Current
conditions in this market include reduced liquidity, high credit
risk premiums for certain market participants and reduced
investor
12
demand for asset-backed securities, particularly those backed by
sub-prime collateral. These conditions, which may increase our
cost of funding and reduce our access to the asset-backed
securities market, may continue or worsen in the future. We
attempt to mitigate the impact of market disruptions by
obtaining adequate committed credit facilities and accessing
other sources of financing from a variety of reliable sources.
There can be no assurance, however, that we will be successful
in selling securities in the asset-backed securities market,
that our credit facilities and other sources of financing will
be adequate to fund Loans until the disruptions in the
securitization markets subside or that the cost of debt will
allow us to operate at profitable levels. Disruptions in this
market or any adverse change or delay in our ability to access
the market could have a material adverse effect on our financial
position, liquidity and results of operations.
We execute securitization transactions to fund our future
liquidity needs. There can be no assurance that funding will be
available to us through these sources or, if available, that it
will be on terms acceptable to us. If these, and other sources
of funding are not available to us on a regular basis for any
reason, including the occurrence of events of default,
deterioration in loss experience on the Loans, breach of
financial covenants or portfolio and pool performance measures,
disruption of the asset-backed market or otherwise, we could be
required to revise the scale of our business, including the
possible discontinuation of funding Loans, which could have a
material adverse effect on our ability to achieve our business
and financial objectives.
To date, most of our securitizations in the United States have
utilized financial guaranty insurance policies provided by
various monoline insurance providers to achieve AAA/Aaa ratings
on the insured securities issued in the securitization
transactions. These ratings reduce the costs of securitizations
and enhance the marketability of these transactions to investors
in asset-backed securities. The downgrading of monoline
insurance providers credit ratings or the inability to
structure alternative credit enhancements, such as senior
subordinated transactions for our securitization program could
result in higher interest costs for future securitizations
sponsored by us and larger initial credit enhancement
requirements. The absence of a financial guaranty insurance
policy may also impair the marketability of our securitizations.
These events could have a material adverse effect on the cost
and availability of capital which in turn could have a material
adverse effect on our financial position, liquidity and results
of operations.
Requirements
under credit facilities to meet financial and portfolio
performance covenants.
Our credit facilities contain various covenants requiring
certain minimum financial ratios and minimum asset quality.
Failure to meet any of these covenants could result in an event
of default under these agreements.
If we cannot comply with the requirements in our credit
facilities, then the lenders may increase our borrowing costs,
require us to repay immediately all of the outstanding debt,
enforce their interests against collateral pledged under these
agreements or restrict our ability to obtain additional
borrowings under these facilities. If our debt payments were
accelerated, our assets might not be sufficient to fully repay
the debt. These lenders may require us to use all of our
available cash to repay our debt or foreclose upon their
collateral. We may not be able to obtain a waiver of these
provisions or refinance our debt, if needed. In such case, our
financial condition, liquidity and results of operations would
suffer.
Interest
rate fluctuations may adversely affect our borrowing costs,
profitability and liquidity.
Our profitability may be directly affected by the level of and
fluctuations in interest rates, which affects our borrowing
costs. Our profitability and liquidity could be adversely
affected during any period of higher interest rates, possibly to
a material degree. We monitor the interest rate environment and
employ hedging strategies designed to mitigate the impact of
increases in interest rates. We can provide no assurance,
however, that hedging strategies will mitigate the impact of
increases in interest rates.
The
substantial regulation to which we are subject could result in
potential liability.
Our business is subject to various laws and regulations which
require licensing and qualification; limit interest rates, fees
and other charges associated with the Consumer Loans assigned to
us; require specified disclosures by dealer-partners to
consumers; govern the sale and terms of ancillary products; and
define the rights to repossess and sell collateral. Failure to
comply with, or an adverse change in, these laws or regulations
could have a material
13
adverse effect on us by, among other things, limiting the
jurisdictions in which we may operate, restricting the ability
to realize the value of the collateral securing the Consumer
Loans, making it more costly or burdensome to do business, or
resulting in potential liability. 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 us.
The sale of insurance products in connection with Consumer Loans
assigned to us by dealer-partners is also subject to state laws
and regulations. As the holder of the Consumer Loans that
contain these products, some of these state laws and regulations
may apply to our servicing and collection of the Consumer Loans.
Although we do not believe that such laws and regulations
significantly affect our business because we do not deal
directly with consumers in the sale of insurance products, there
can be no assurance that insurance regulatory authorities in the
jurisdictions in which such products are offered by
dealer-partners will not seek to regulate or restrict the
operation of the business in such jurisdictions. Any such action
could materially adversely affect the income received from such
products.
Adverse
changes in economic conditions, or in the automobile or finance
industries or the non-prime consumer market, could adversely
affect our financial position, liquidity and results of
operations and our ability to enter into future financing
transactions.
We are subject to general economic conditions which are beyond
our control. During periods of economic slowdown or recession,
delinquencies, defaults, repossessions and losses may increase.
These periods may also be accompanied by decreased consumer
demand for automobiles and declining values of automobiles
securing outstanding Consumer Loans, which weakens collateral
coverage and increases the amount of a loss in the event of
default. Significant increases in the inventory of used
automobiles during periods of economic recession may also
depress the prices at which repossessed automobiles may be sold
or delay the timing of these sales. Because our business is
focused on consumers who do not qualify for conventional
automobile financing, the actual rates of delinquencies,
defaults, repossessions and losses on these Consumer Loans could
be higher than that of those experienced in the general
automobile finance industry, and could be more dramatically
affected by a general economic downturn. In addition, during an
economic slowdown or recession, our servicing costs may increase
without a corresponding increase in service fee income. Any
sustained period of increased delinquencies, defaults,
repossessions or losses or increased servicing costs could also
materially adversely affect our financial position, liquidity
and results of operations and our ability to enter into future
financing transactions.
Litigation
we are involved in from time to time may adversely affect our
financial condition, results of operations and cash
flows.
As a result of the consumer-oriented nature of the industry in
which we operate and uncertainties with respect to the
application of various laws and regulations in some
circumstances, we are subject to various consumer claims and
litigation seeking damages and statutory penalties, based upon,
among other things, usury, disclosure inaccuracies, wrongful
repossession, violations of bankruptcy stay provisions,
certificate of title disputes, fraud and breach of contract.
Some litigation against us could take the form of class action
complaints by consumers. As the assignee of Consumer Loans
originated by dealer-partners, we may also be named as a
co-defendant in lawsuits filed by consumers principally against
dealer-partners. The damages and penalties claimed by consumers
in these types of matters can be substantial. The relief
requested by the plaintiffs varies but includes requests for
compensatory, statutory and punitive damages. A significant
judgment against us in connection with any litigation could have
a material adverse effect on our financial condition and results
of operations.
We are
dependent on our senior management and the loss of any of these
individuals or an inability to hire additional personnel could
adversely affect our ability to operate profitably.
Our senior management average over 9 years of experience
with the Company. Our success is dependent upon the management
and the leadership skills of these managers. In addition,
competition from other companies to hire our personnel
possessing the necessary skills and experience required could
contribute to an increase in employee turnover. The loss of any
of these individuals or an inability to attract and retain
additional qualified personnel could
14
adversely affect us. There can be no assurance that we will be
able to retain our existing senior management personnel or
attract additional qualified personnel.
Our
inability to properly safeguard confidential consumer
information.
If third parties or our employees are able to penetrate our
network security or otherwise misappropriate our customers
personal information or loan information, or if we give third
parties or our employees improper access to our customers
personal information or loan information, we could be subject to
liability. This liability could include identity theft or other
similar fraud-related claims. This liability could also include
claims for other misuses or losses of personal information,
including for unauthorized marketing purposes. Other liabilities
could include claims alleging misrepresentation of our privacy
and data security practices.
We rely on encryption and authentication technology licensed
from third parties to provide the security and authentication
necessary to effect secure online transmission of confidential
consumer information. Advances in computer capabilities, new
discoveries in the field of cryptography or other events or
developments may result in a compromise or breach of the
algorithms that we use to protect sensitive customer transaction
data. A party who is able to circumvent our security measures
could misappropriate proprietary information or cause
interruptions in our operations. We may be required to expend
capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. Our
security measures are designed to protect against security
breaches, but our failure to prevent such security breaches
could subject us to liability, decrease our profitability, and
damage our reputation.
Our
operations could suffer from telecommunications or technology
downtime or increased costs.
The temporary or permanent loss of our computer and
telecommunications equipment, software systems and Internet
access, through system conversions or operating malfunction,
could disrupt our operations. In the normal course of our
business, we must record and process significant amounts of data
quickly and accurately to access, maintain and expand the
databases we use for our origination and collection activities.
Any failure of our information systems or software and our
backup systems could interrupt our business operations and harm
our business.
Our ability to integrate computer and telecommunications
technologies into our business is essential to our competitive
position and our success. Computer and telecommunications
technologies are evolving rapidly and are characterized by short
product life cycles. We may not be successful in anticipating,
managing or adopting technological changes on a timely basis.
While we believe that our existing information systems are
sufficient to meet our current demands and continued expansion,
our future growth may require additional investment in these
systems. We cannot ensure that adequate capital resources will
be available to us at the appropriate time.
Natural
disasters, acts of war, terrorist attacks and threats or the
escalation of military activity in response to such attacks or
otherwise may negatively affect our business, financial
condition and results of operations.
Natural disasters, acts of war, terrorist attacks and the
escalation of military activity in response to such attacks or
otherwise may have negative and significant effects, such as
imposition of increased security measures, changes in applicable
laws, market disruptions and job losses. Such events may have an
adverse effect on the economy in general. Moreover, the
potential for future terrorist attacks and the national and
international responses to such threats could affect the
business in ways that cannot be predicted. The effect of any of
these events or threats could have an adverse effect on our
business, financial condition and results of operations.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
15
United
States and Other
Our headquarters are located at 25505 West Twelve Mile
Road, Southfield, Michigan 48034. We purchased the office
building in 1993 and have a mortgage loan from a commercial bank
that is secured by a first mortgage lien on the property. The
office building includes approximately 117,000 square feet
of useable space on five floors. We occupy approximately
101,000 square feet of the building, with most of the
remainder of the building leased to various tenants.
We lease approximately 20,000 square feet of office space
in Henderson, Nevada. The lease expires in October 2009.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
In the normal course of business and as a result of the
consumer-oriented nature of the industry in which we operate,
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, including claims seeking damages for
physical and mental damages relating to our repossession and
sale of the consumers vehicle and other debt collection
activities. As we accept assignments of Consumer Loans
originated by dealer-partners, we may also be named as a
co-defendant in lawsuits filed by consumers principally against
dealer-partners. Many of these cases are filed as purported
class actions and seek damages in large dollar amounts. An
adverse ultimate disposition in any such action could have a
material adverse impact on our financial position, liquidity and
results of operations.
For a description of material pending litigation to which we are
a party, see Note 12 to the consolidated financial
statements, which is incorporated herein by reference.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
No matters were submitted to a vote of the shareholders during
the fourth quarter of 2007.
16
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Stock
Price
During the year ended December 31, 2007 our common stock
was traded on The Nasdaq Global
Market®
(Nasdaq) under the symbol CACC. From July 19,
2005 until April 25, 2006, our common stock was delisted
from the Nasdaq and was traded on the Pink Sheets Electronic
Quotation Service (Pink Sheets) under the symbol
CACC until it was relisted on the Nasdaq with trading in its
common shares beginning on April 26, 2006. The following
table sets forth the high and low sale prices as reported by the
Nasdaq and Pink Sheets for the common stock for the relevant
periods during 2006 and 2007. Such bid information reflects
inter-dealer prices, without retail
mark-up,
mark-down or commission and may not necessarily represent actual
transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Quarter Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
March 31
|
|
$
|
33.97
|
|
|
$
|
21.74
|
|
|
$
|
25.00
|
|
|
$
|
15.89
|
|
June 30
|
|
|
29.11
|
|
|
|
25.21
|
|
|
|
30.55
|
|
|
|
23.05
|
|
September 30
|
|
|
27.28
|
|
|
|
20.01
|
|
|
|
30.70
|
|
|
|
24.53
|
|
December 31
|
|
|
25.08
|
|
|
|
15.44
|
|
|
|
34.59
|
|
|
|
30.10
|
|
As of February 14, 2008, the number of beneficial holders
and shareholders of record of the common stock was 1,574 based
upon securities position listings furnished to us.
Dividends
We have not paid any cash dividends during the periods
presented. Our credit agreements contain financial covenants
pertaining to our maximum ratio of funded debt to tangible net
worth, which may indirectly limit the payment of dividends on
common stock.
17
Stock
Performance Graph
The following graph compares the percentage change in the
cumulative total shareholder return on our common stock during
the period beginning January 1, 2003 and ending on
December 31, 2007 with the cumulative total return on the
Nasdaq Market Index and a peer group index based upon
approximately 100 companies included in the Dow
Jones US General Financial Index. The comparison
assumes that $100 was invested on January 1, 2003 in our
common stock and in the foregoing indices and assumes the
reinvestment of dividends.
COMPARE
5-YEAR
CUMULATIVE TOTAL RETURN
AMONG CREDIT ACCEPTANCE CORP.,
NASDAQ MARKET INDEX AND DJ US GENERAL FINANCE INDEX
ASSUMES $100
INVESTED ON JANUARY 1, 2003
ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31, 2007
Stock
Repurchases
In 1999, our board of directors approved a stock repurchase
program which authorizes us to purchase common shares in the
open market or in privately negotiated transactions at price
levels we deem attractive. As of December 31, 2007, we have
repurchased approximately 20.4 million shares under the
stock repurchase program at a cost of $399.2 million.
Included in the stock repurchases to date are 12.5 million
shares of common stock purchased through four modified Dutch
auction tender offers at a cost of $304.4 million. As of
December 31, 2007, we have authorization to repurchase up
to $29.1 million of our common stock.
The following table summarizes our stock repurchases for the
three months ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Dollar Value
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
that May Yet Be Used
|
|
|
Total Number
|
|
|
|
|
Part of Publicly
|
|
to Purchase Shares
|
|
|
of Shares
|
|
|
Average Price
|
|
Announced Plans
|
|
Under the Plans
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
or Programs
|
|
or Programs
|
|
October 1 through October 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
$
|
29,113,295
|
November 1 through November 30, 2007
|
|
|
31
|
*
|
|
|
|
|
|
|
|
|
29,113,295
|
December 1 through December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
29,113,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Amount represents shares of common stock released to the
Company by employees as payment of tax withholdings due to the
Company upon the vesting of restricted stock. |
18
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
The selected income statement and balance sheet data presented
below are derived from our audited consolidated financial
statements and should be read in conjunction with our
consolidated financial statements for the years ended
December 31, 2007, 2006, and 2005, and notes thereto and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations, included
elsewhere in this Annual Report. Certain amounts for prior
periods have been reclassified to conform to the current
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
239,927
|
|
|
$
|
219,332
|
|
|
$
|
201,268
|
|
|
$
|
172,071
|
|
|
$
|
141,042
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
55,396
|
|
|
|
41,015
|
|
|
|
39,093
|
|
|
|
35,300
|
|
|
|
31,693
|
|
General and administrative(A)
|
|
|
27,271
|
|
|
|
36,485
|
|
|
|
20,834
|
|
|
|
20,724
|
|
|
|
18,573
|
|
Sales and marketing
|
|
|
17,441
|
|
|
|
16,624
|
|
|
|
14,275
|
|
|
|
11,915
|
|
|
|
8,006
|
|
Provision for credit losses
|
|
|
19,947
|
|
|
|
11,006
|
|
|
|
5,705
|
|
|
|
6,526
|
|
|
|
8,835
|
|
Interest
|
|
|
36,669
|
|
|
|
23,330
|
|
|
|
13,886
|
|
|
|
11,660
|
|
|
|
8,057
|
|
Other expenses
|
|
|
91
|
|
|
|
226
|
|
|
|
931
|
|
|
|
1,270
|
|
|
|
4,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
156,815
|
|
|
|
128,686
|
|
|
|
94,724
|
|
|
|
87,395
|
|
|
|
79,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
83,112
|
|
|
|
90,646
|
|
|
|
106,544
|
|
|
|
84,676
|
|
|
|
61,361
|
|
Foreign currency gain (loss)
|
|
|
69
|
|
|
|
(6
|
)
|
|
|
1,812
|
|
|
|
1,650
|
|
|
|
(2,767
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
83,181
|
|
|
|
90,640
|
|
|
|
108,356
|
|
|
|
86,326
|
|
|
|
58,594
|
|
Provision for income taxes
|
|
|
29,567
|
|
|
|
31,793
|
|
|
|
40,159
|
|
|
|
30,073
|
|
|
|
27,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
53,614
|
|
|
|
58,847
|
|
|
|
68,197
|
|
|
|
56,253
|
|
|
|
31,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from operations of discontinued United Kingdom
segment(B)
|
|
|
(562
|
)
|
|
|
(297
|
)
|
|
|
6,194
|
|
|
|
1,556
|
|
|
|
(7,047
|
)
|
(Benefit) provision for income taxes
|
|
|
(1,864
|
)
|
|
|
(90
|
)
|
|
|
1,790
|
|
|
|
484
|
|
|
|
(491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
|
1,302
|
|
|
|
(207
|
)
|
|
|
4,404
|
|
|
|
1,072
|
|
|
|
(6,556
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,916
|
|
|
$
|
58,640
|
|
|
$
|
72,601
|
|
|
$
|
57,325
|
|
|
$
|
24,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.83
|
|
|
$
|
1.78
|
|
|
$
|
1.96
|
|
|
$
|
1.48
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.76
|
|
|
$
|
1.66
|
|
|
$
|
1.85
|
|
|
$
|
1.40
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.78
|
|
|
$
|
1.78
|
|
|
$
|
1.84
|
|
|
$
|
1.46
|
|
|
$
|
0.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.72
|
|
|
$
|
1.67
|
|
|
$
|
1.74
|
|
|
$
|
1.37
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.12
|
|
|
$
|
0.03
|
|
|
$
|
(0.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
$
|
0.03
|
|
|
$
|
(0.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,053,129
|
|
|
|
33,035,693
|
|
|
|
36,991,136
|
|
|
|
38,617,787
|
|
|
|
42,195,340
|
|
Diluted
|
|
|
31,153,688
|
|
|
|
35,283,478
|
|
|
|
39,207,680
|
|
|
|
41,017,205
|
|
|
|
43,409,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
810,553
|
|
|
$
|
625,780
|
|
|
$
|
563,528
|
|
|
$
|
526,011
|
|
|
$
|
476,128
|
|
All other assets
|
|
|
131,629
|
|
|
|
99,433
|
|
|
|
55,866
|
|
|
|
65,302
|
|
|
|
68,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
942,182
|
|
|
$
|
725,213
|
|
|
$
|
619,394
|
|
|
$
|
591,313
|
|
|
$
|
544,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
532,130
|
|
|
$
|
392,175
|
|
|
$
|
146,905
|
|
|
|
193,547
|
|
|
$
|
106,447
|
|
Dealer reserve payable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,675
|
|
|
|
35,198
|
|
Other liabilities
|
|
|
144,602
|
|
|
|
122,691
|
|
|
|
99,463
|
|
|
|
81,201
|
|
|
|
59,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
676,732
|
|
|
|
514,866
|
|
|
|
246,368
|
|
|
|
290,423
|
|
|
|
201,553
|
|
Shareholders equity(C)
|
|
|
265,450
|
|
|
|
210,347
|
|
|
|
373,026
|
|
|
|
300,890
|
|
|
|
343,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
942,182
|
|
|
$
|
725,213
|
|
|
$
|
619,394
|
|
|
$
|
591,313
|
|
|
$
|
544,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(A) |
|
Includes $11.2 million of additional legal expenses
recorded in 2006 related to an increase in the Companys
estimated loss related to a class action lawsuit in the state of
Missouri. |
|
(B) |
|
Includes gain on sale of United Kingdom loan portfolio of
$3.0 million recognized in 2005 and impairment expenses of
$10.5 million recognized in 2003 following the decision to
liquidate the United Kingdom operation. |
|
(C) |
|
No dividends were paid during the periods presented. |
19
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and
related notes included in Item 8 - Financial Statements and
Supplementary Data in this
Form 10-K.
Critical
Success Factors
Critical success factors for us include access to capital and
the ability to accurately forecast Consumer Loan performance.
Our strategy for accessing the capital required to grow is to:
(i) maintain consistent financial performance,
(ii) maintain modest financial leverage, and
(iii) maintain multiple funding sources. Our funded debt to
equity ratio is 2:1 at December 31, 2007. We currently use
four primary sources of debt financing: (i) a revolving
secured line of credit with a commercial bank syndicate;
(ii) a revolving secured warehouse facility with
institutional investors; (iii) SEC Rule 144A
asset-backed secured borrowings (Term ABS 144A) with
qualified institutional investors; and (iv) a residual
credit facility with an institutional investor.
At the time of Consumer Loan acceptance or purchase, we forecast
future expected cash flows from the Consumer Loan. Based on
these forecasts, an advance or one time payment is made to the
related dealer-partner at a level designed to achieve an
acceptable return on capital. If Consumer Loan performance
equals or exceeds our original expectation, it is likely our
target return on capital will be achieved.
Consumer
Loan Performance
Since the cash flows available to repay the Loans are generated,
in most cases, from the underlying Consumer Loans, the
performance of the Consumer Loans is critical to our financial
results. The following table presents forecasted Consumer Loan
collection rates, advance rates (includes amounts paid to
acquire Purchased Loans), the spread (the forecasted collection
rate less the advance rate), and the percentage of the
forecasted collections that had been realized as of
December 31, 2007. Payments of dealer holdback and
accelerated payments of dealer holdback are not included in the
advance percentage paid to the dealer-partner. All amounts are
presented as a percentage of the initial balance of the Consumer
Loan (principal + interest). The table includes both Dealer
Loans and Purchased Loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
Forecasted
|
|
|
|
|
|
|
|
|
|
|
Year of Origination
|
|
Collection%
|
|
|
Advance%
|
|
|
Spread%
|
|
|
% of Forecast Realized
|
|
|
1998
|
|
|
67.4
|
%
|
|
|
46.1
|
%
|
|
|
21.3
|
%
|
|
|
99.8
|
%
|
1999
|
|
|
72.3
|
%
|
|
|
48.7
|
%
|
|
|
23.6
|
%
|
|
|
99.1
|
%
|
2000
|
|
|
72.8
|
%
|
|
|
47.9
|
%
|
|
|
24.9
|
%
|
|
|
98.4
|
%
|
2001
|
|
|
67.8
|
%
|
|
|
46.0
|
%
|
|
|
21.8
|
%
|
|
|
97.8
|
%
|
2002
|
|
|
71.0
|
%
|
|
|
42.2
|
%
|
|
|
28.8
|
%
|
|
|
97.4
|
%
|
2003
|
|
|
74.6
|
%
|
|
|
43.4
|
%
|
|
|
31.2
|
%
|
|
|
97.1
|
%
|
2004
|
|
|
73.7
|
%
|
|
|
44.0
|
%
|
|
|
29.7
|
%
|
|
|
93.7
|
%
|
2005
|
|
|
74.3
|
%
|
|
|
46.9
|
%
|
|
|
27.4
|
%
|
|
|
85.1
|
%
|
2006
|
|
|
69.9
|
%
|
|
|
46.6
|
%
|
|
|
23.3
|
%
|
|
|
59.9
|
%
|
2007
|
|
|
70.2
|
%
|
|
|
46.5
|
%
|
|
|
23.7
|
%
|
|
|
19.9
|
%
|
The following table presents the same information as the table
above for Purchased Loans and Dealer Loans in 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan
|
|
Forecasted
|
|
|
|
|
|
|
Origination Year
|
|
Collection%
|
|
Advance%
|
|
Spread%
|
|
Purchased Loans
|
|
|
2007
|
|
|
|
71.0
|
%
|
|
|
49.5
|
%
|
|
|
21.5
|
%
|
Dealer Loans
|
|
|
2007
|
|
|
|
70.0
|
%
|
|
|
45.8
|
%
|
|
|
24.2
|
%
|
20
Accurately forecasting future collection rates is critical to
our success. The risk of a forecasting error declines as
Consumer Loans age. For example, the risk of a material
forecasting error for business written in 2003 is very small
since 97.1% of the total amount forecasted has already been
realized. In contrast, our forecast for recent Consumer Loans is
less certain. If we produce disappointing operating results, it
will likely be because we overestimated future Consumer Loan
performance. Although we believe our forecasted collection rates
are as accurate as possible, there can be no assurance that our
estimates will be accurate or that Consumer Loan performance
will be as expected.
The following table compares our forecast of Consumer Loan
collection rates as of December 31, 2007, with the forecast
as of December 31, 2006 for Dealer Loans and Purchased
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2007
|
|
|
December 31, 2006
|
|
|
|
|
Loan Origination Year
|
|
Forecasted Collection%
|
|
|
Forecasted Collection%
|
|
|
Variance
|
|
|
1998
|
|
|
67.4
|
%
|
|
|
67.5
|
%
|
|
|
(0.1
|
)%
|
1999
|
|
|
72.3
|
%
|
|
|
72.4
|
%
|
|
|
(0.1
|
)%
|
2000
|
|
|
72.8
|
%
|
|
|
73.0
|
%
|
|
|
(0.2
|
)%
|
2001
|
|
|
67.8
|
%
|
|
|
67.7
|
%
|
|
|
0.1
|
%
|
2002
|
|
|
71.0
|
%
|
|
|
70.7
|
%
|
|
|
0.3
|
%
|
2003
|
|
|
74.6
|
%
|
|
|
74.2
|
%
|
|
|
0.4
|
%
|
2004
|
|
|
73.7
|
%
|
|
|
73.9
|
%
|
|
|
(0.2
|
)%
|
2005
|
|
|
74.3
|
%
|
|
|
74.2
|
%*
|
|
|
0.1
|
%
|
2006
|
|
|
69.9
|
%
|
|
|
71.1
|
%*
|
|
|
(1.2
|
)%
|
2007
|
|
|
70.2
|
%
|
|
|
70.7
|
%**
|
|
|
(0.5
|
)%
|
|
|
|
* |
|
These forecasted collection percentages differ from those
previously reported in our Annual Report on
Form 10-K
for the year ended December 31, 2006 and our 2006 earnings
release as they have been revised for a seasonality factor. This
seasonality factor was first applied during the first quarter of
2007. |
|
** |
|
Collection percentage represents the initial forecasted
collection percentage for 2007 originations at the time of
pricing. |
We modified our loan pricing model during the third quarter of
2006. These pricing changes were intended to increase Consumer
Loan unit volumes and Consumer Loan average loan sizes in
exchange for a reduction in profitability per Consumer Loan as
measured by the return on capital. Beginning in February 2007,
we made pricing changes designed to increase the spread between
the advance rate and the collection rate.
There were no other material changes in our credit policy or
pricing that impacted the year ended December 31, 2007,
other than routine changes designed to maintain profitability
levels.
21
Results
of Operations
The following is a discussion of the results of operations and
income statement data for the Company on a consolidated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
|
December 31,
|
|
|
% of
|
|
|
|
2007
|
|
|
Revenue
|
|
|
2006
|
|
|
Revenue
|
|
|
2005
|
|
|
Revenue
|
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charges
|
|
$
|
220,473
|
|
|
|
91.9
|
%
|
|
$
|
188,605
|
|
|
|
86.0
|
%
|
|
$
|
176,369
|
|
|
|
87.6
|
%
|
License fees
|
|
|
283
|
|
|
|
0.1
|
|
|
|
13,589
|
|
|
|
6.2
|
|
|
|
9,775
|
|
|
|
4.9
|
|
Other income
|
|
|
19,171
|
|
|
|
8.0
|
|
|
|
17,138
|
|
|
|
7.8
|
|
|
|
15,124
|
|
|
|
7.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
239,927
|
|
|
|
100.0
|
|
|
|
219,332
|
|
|
|
100.0
|
|
|
|
201,268
|
|
|
|
100.0
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
55,396
|
|
|
|
23.1
|
|
|
|
41,015
|
|
|
|
18.7
|
|
|
|
39,093
|
|
|
|
19.4
|
|
General and administrative
|
|
|
27,271
|
|
|
|
11.4
|
|
|
|
36,485
|
|
|
|
16.6
|
|
|
|
20,834
|
|
|
|
10.4
|
|
Sales and marketing
|
|
|
17,441
|
|
|
|
7.3
|
|
|
|
16,624
|
|
|
|
7.6
|
|
|
|
14,275
|
|
|
|
7.1
|
|
Provision for credit losses
|
|
|
19,947
|
|
|
|
8.3
|
|
|
|
11,006
|
|
|
|
5.0
|
|
|
|
5,705
|
|
|
|
2.8
|
|
Interest
|
|
|
36,669
|
|
|
|
15.3
|
|
|
|
23,330
|
|
|
|
10.6
|
|
|
|
13,886
|
|
|
|
6.9
|
|
Other expense
|
|
|
91
|
|
|
|
|
|
|
|
226
|
|
|
|
0.1
|
|
|
|
931
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
156,815
|
|
|
|
65.4
|
|
|
|
128,686
|
|
|
|
58.6
|
|
|
|
94,724
|
|
|
|
47.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
83,112
|
|
|
|
34.6
|
|
|
|
90,646
|
|
|
|
41.4
|
|
|
|
106,544
|
|
|
|
52.9
|
|
Foreign currency gain (loss)
|
|
|
69
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
1,812
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
83,181
|
|
|
|
34.6
|
|
|
|
90,640
|
|
|
|
41.4
|
|
|
|
108,356
|
|
|
|
53.8
|
|
Provision for income taxes
|
|
|
29,567
|
|
|
|
12.3
|
|
|
|
31,793
|
|
|
|
14.5
|
|
|
|
40,159
|
|
|
|
20.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
53,614
|
|
|
|
22.3
|
|
|
|
58,847
|
|
|
|
26.9
|
|
|
|
68,197
|
|
|
|
33.8
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued United Kingdom operations
|
|
|
(562
|
)
|
|
|
(0.2
|
)
|
|
|
(297
|
)
|
|
|
(0.1
|
)
|
|
|
6,194
|
|
|
|
3.1
|
|
(Benefit) provision for income taxes
|
|
|
(1,864
|
)
|
|
|
(0.8
|
)
|
|
|
(90
|
)
|
|
|
|
|
|
|
1,790
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
|
1,302
|
|
|
|
0.6
|
|
|
|
(207
|
)
|
|
|
(0.1
|
)
|
|
|
4,404
|
|
|
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,916
|
|
|
|
22.9
|
%
|
|
$
|
58,640
|
|
|
|
26.8
|
%
|
|
$
|
72,601
|
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.83
|
|
|
|
|
|
|
$
|
1.78
|
|
|
|
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.76
|
|
|
|
|
|
|
$
|
1.66
|
|
|
|
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.78
|
|
|
|
|
|
|
$
|
1.78
|
|
|
|
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.72
|
|
|
|
|
|
|
$
|
1.67
|
|
|
|
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.04
|
|
|
|
|
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,053,129
|
|
|
|
|
|
|
|
33,035,693
|
|
|
|
|
|
|
|
36,991,136
|
|
|
|
|
|
Diluted
|
|
|
31,153,688
|
|
|
|
|
|
|
|
35,283,478
|
|
|
|
|
|
|
|
39,207,680
|
|
|
|
|
|
22
Continuing
Operations
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
For the year ended December 31, 2007, income from
continuing operations decreased to $53.6 million from
$58.8 million in 2006. Income from continuing operations
per diluted share increased to $1.72 from $1.67 in 2006. The
increase in income from continuing operations per diluted share
reflects the impact of share repurchases. The decrease in net
income primarily reflects the following:
|
|
|
|
|
We changed how we account for our license fees due to changing
our methodology of collecting fees from our dealer-partners.
This change reduced license fees by $13.3 million.
|
|
|
|
The impact of pricing changes implemented in the third quarter
of 2006. Pricing changes caused a decrease in the loan yield
(loan revenue divided by average loans outstanding). The overall
impact was partially offset by an increase in average loans
outstanding.
|
|
|
|
Restricted stock and restricted stock units granted in the first
quarter of 2007 caused salaries and wages to increase
$4.1 million.
|
|
|
|
We increased our use of debt to fund share repurchases and new
Loans. The average ratio of debt to equity for the year
increased from 1.1 to 2.0. Increased debt levels caused interest
expense to increase $13.3 million.
|
|
|
|
The provision for credit losses increased $8.9 million
primarily due to increases in the provision for credit losses
required to reduce the carrying value of the Dealer Loans to
maintain the initial yield established at the inception of each
Dealer Loan.
|
Finance Charges. Finance charges increased by
16.9% as Loans receivable increased 23.3%. Finance charges grew
slower than Loans receivable as a result of pricing changes
implemented in the third quarter of 2006. Loans receivable
increased as a result of an increase in the number of new Loans
and an increase in the average Loan amount.
The following table summarizes the changes in active
dealer-partners and corresponding Consumer Loan unit volume:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
% change
|
|
|
Consumer loan unit volume
|
|
|
106,693
|
|
|
|
91,344
|
|
|
|
16.8
|
|
Active dealer-partners (1)
|
|
|
2,827
|
|
|
|
2,214
|
|
|
|
27.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per active dealer-partner
|
|
|
37.7
|
|
|
|
41.3
|
|
|
|
(8.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loan unit volume from dealer-partners active both
periods
|
|
|
86,265
|
|
|
|
81,756
|
|
|
|
5.5
|
|
Dealer-partners active both periods
|
|
|
1,634
|
|
|
|
1,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per dealer-partner active both periods
|
|
|
52.8
|
|
|
|
50.0
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loan unit volume from new dealer-partners
|
|
|
19,914
|
|
|
|
16,779
|
|
|
|
18.7
|
|
New active dealer-partners (2)
|
|
|
1,162
|
|
|
|
857
|
|
|
|
35.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per new active dealer-partner
|
|
|
17.1
|
|
|
|
19.6
|
|
|
|
(12.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attrition (3)
|
|
|
−10.5
|
%
|
|
|
−9.6
|
%
|
|
|
|
|
|
|
|
(1) |
|
Active dealer-partners are dealer-partners who have received
funding for at least one Loan during the period. |
|
(2) |
|
New active dealer-partners are dealer-partners who enrolled in
our program and have received funding for their first Loan from
us during the periods presented. |
|
(3) |
|
Attrition is measured according to the following formula:
decrease in Consumer Loan unit volume from dealer-partners who
have received funding for at least one Loan during the
comparable period of the prior year but who received funding for
no Loans during the current period divided by prior year
comparable period Consumer Loan unit volume. |
23
Dealer-partners that enroll in our program have the option to
pay a one-time enrollment fee of $9,850 or to defer the fee.
Dealer-partners choosing to defer payment of the enrollment fee
agree to allow us to keep 50% of their first accelerated dealer
holdback payment. This payment, called Portfolio Profit Express,
is paid to qualifying dealer-partners after a pool of 100
Consumer Loans has been closed. While we will lose enrollment
fee revenue on those dealer-partners choosing this option and
not reaching 100 Consumer Loans or otherwise failing to qualify
for a Portfolio Profit Express payment, we estimate that we will
realize higher per dealer-partner enrollment fee revenue from
those dealer-partners choosing this option and qualifying for a
Portfolio Profit Express payment. Based on the historical
average of Portfolio Profit Express payments, we expect average
enrollment fee revenue per dealer-partner for those
dealer-partners electing the deferred option and qualifying for
the Portfolio Profit Express payment will be approximately
$12,000. Through December 31, 2007, 88 dealer-partners that
have enrolled under the deferred option have earned Portfolio
Profit Express payments. The amount kept by the Company (50% of
the first Portfolio Profit Express payment) averaged $12,000 per
dealer-partner. Approximately 81% of the dealer-partners that
enrolled during the year ended December 31, 2007 took
advantage of the deferred enrollment option.
License Fees. License fees represent CAPS fees
charged to dealer-partners on a monthly basis. The decrease was
primarily due to a change in our method of collecting the
monthly CAPS fee. Effective January 1, 2007, we implemented
a change designed to positively impact dealer-partner attrition.
We continue to charge a monthly fee of $599, but instead of
collecting and recognizing the revenue from the fee in the
current period, we collect it from future dealer holdback
payments. As a result of this change, we now record license fees
as a yield adjustment, recognizing these fees as finance charge
revenue over the term of the Dealer Loan. We recognized a
limited amount of license fee revenue related to certain
dealer-partners that only participate in our Purchase Program.
The decrease in license fees was partially offset by increases
in finance charges as a result of this change. Because attrition
is impacted by many variables, we cannot quantify the impact of
the license fee change on attrition.
To allow shareholders to more precisely track our financial
performance and make comparisons between periods possible, we
have provided non-GAAP information below reflecting the amount
of revenue that would have been recognized if the license fees
had always been recorded as a yield adjustment. For the year
ended December 31, 2007 and 2006, total revenue would have
changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
% change
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
239,927
|
|
|
$
|
219,332
|
|
|
|
9.4
|
%
|
License fee yield adjustment
|
|
|
7,919
|
|
|
|
(4,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted total revenue
|
|
$
|
247,846
|
|
|
$
|
214,953
|
|
|
|
15.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income. The increase for the year ended
December 31, 2007 was due to:
|
|
|
|
|
Marketing income related to an increase in the average Loans
receivable balance and an increase in the fee structure with one
of our vendors;
|
|
|
|
Profit sharing payments received from ancillary product
providers during the first quarter of 2007; and
|
|
|
|
Interest income on restricted cash.
|
The profit sharing amounts received in the first quarter of 2007
were the first amounts we have received under this arrangement.
Profit sharing payments from third parties are received once a
year, if eligible. The amounts of these payments are currently
not estimable due to a lack of historical information and
therefore the revenue related to these payments is recognized in
the period the payments are received.
Salaries and Wages. The increase for the year
ended December 31, 2007, as a percentage of revenue, was
primarily due to an increase in headcount to support Loan
growth. While the increase in headcount was proportionate to the
increase in Loan volume, pricing changes and the change in the
application and accounting for license fees caused revenue
growth to be less than the growth in Loans receivable. The
increase was also due to an increase in stock compensation
expense primarily related to restricted stock and restricted
stock units granted in the first quarter of 2007.
24
General and Administrative. The decrease, as a
percentage of revenue, for the year ended December 31,
2007, was primarily due to higher than normal legal expenses in
2006 primarily related to an $11.2 million increase in our
estimated loss related to a class action lawsuit in the state of
Missouri.
Provision for Credit Losses. The increase in
the provision for the year ended December 31, 2007 was
primarily due to an increase in the provision for credit losses
required to reduce the carrying value of the Dealer Loans to
maintain the initial yield established at the inception of each
Dealer Loan.
Interest. The increase for the year ended
December 31, 2007 was primarily due to an increase in the
amount of average outstanding debt as a result of borrowings
used to fund stock repurchases during 2006 and new Loans. The
increase in interest expense was partially offset by our cost of
debt which decreased to 7.9% in 2007 from 8.9% in 2006. The
decrease was the result of fixed fees on our secured financings
and line of credit facility having less impact on our cost of
debt, primarily due to higher outstanding borrowings.
Year
ended December 31, 2006 Compared to Year Ended
December 31, 2005
For the year ended December 31, 2006, net income from
continuing operations decreased to $58.8 million, or $1.67
per diluted share, compared to $68.2 million, or $1.74 per
diluted share, for the same period in 2005. The decrease in net
income from continuing operations primarily reflects the
following:
|
|
|
|
|
General and administrative expense increased $15.7 million
primarily due to an $11.2 million increase in our estimated
loss related to a class action lawsuit in the state of Missouri
and lower than normal accounting fees during 2005 as a result of
the resolution of a dispute over fees paid to a former auditor.
|
|
|
|
Interest expense increased $9.4 million primarily due to a
39.0% increase in the amount of average outstanding debt as a
result of borrowings used to fund stock repurchases and new
Dealer Loan originations. Interest expense also increased as a
result of a 220 basis point increase in interest rates
partially offset by the decreased impact of fixed fees on our
secured financings and line of credit facility due to higher
average outstanding borrowings.
|
|
|
|
The provision for credit losses increased $5.3 million
primarily due to an increase in the provision required to
maintain the initial yield established at the inception of the
Dealer Loan.
|
Partially offsetting these decreases to income from continuing
operations:
|
|
|
|
|
Finance charge revenue increased $12.2 million (6.9%)
primarily due to a 9.0% increase in average Loans receivable
partially offset by a 3.6% decrease in the average yield on
Dealer Loans.
|
|
|
|
Provision for income taxes decreased $8.4 million primarily
due to the decrease in income from continuing operations before
provision for income taxes.
|
Finance Charges. The increase for the year
ended December 31, 2006 was primarily due to a 9.0%
increase in average Loans receivable partially offset by a 3.6%
decrease in the average yield. Loans receivable increased as a
result of an increase in the number of active dealer-partners,
partially offset by a decrease in the number of transactions per
active dealer-partner.
25
The following table summarizes the changes in active
dealer-partners and corresponding Consumer Loan unit volume for
the years ended December 31, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
% change
|
|
|
Consumer loan unit volume
|
|
|
91,344
|
|
|
|
81,184
|
|
|
|
12.5
|
|
Active dealer-partners (1)
|
|
|
2,214
|
|
|
|
1,759
|
|
|
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per dealer-partner
|
|
|
41.3
|
|
|
|
46.2
|
|
|
|
(10.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loan unit volume from dealer-partners active both
periods
|
|
|
73,629
|
|
|
|
73,400
|
|
|
|
0.3
|
|
Dealer-partners active both periods
|
|
|
1,319
|
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per dealer-partner active both periods
|
|
|
55.8
|
|
|
|
55.6
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loan unit volume from new dealer-partners
|
|
|
16,779
|
|
|
|
15,411
|
|
|
|
8.9
|
|
New active dealer-partners (2)
|
|
|
857
|
|
|
|
738
|
|
|
|
16.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per new active dealer-partner
|
|
|
19.6
|
|
|
|
20.9
|
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attrition (3)
|
|
|
−9.6
|
%
|
|
|
−5.4
|
%
|
|
|
|
|
|
|
|
(1) |
|
Active dealer-partners are dealer-partners who have received
funding for at least one Loan during the period. |
|
(2) |
|
New active dealer-partners are dealer-partners who enrolled in
our program and have received funding for their first Loan from
us during the periods presented. |
|
(3) |
|
Attrition is measured according to the following formula:
decrease in Consumer Loan unit volume from dealer-partners who
have received funding for at least one Loan during the
comparable period of the prior year but who received funding for
no Loans during the current period divided by prior year
comparable period Consumer Loan unit volume. |
License Fees. License fees increased to
$13.6 million in 2006 from $9.8 million in 2005.
License fees represent CAPS fees charged to dealer-partners on a
monthly basis. CAPS fees are charged to both active and certain
inactive dealer-partners. The increase was primarily due to a
43% increase in the number of dealer-partners being charged for
CAPS during 2006 compared to the same period in the prior year.
Effective January 1, 2007, we implemented a change designed
to positively impact dealer-partner attrition. We continue to
charge a monthly fee of $599, but instead of collecting and
recognizing the revenue from the fee in the current period, we
collect it from future dealer holdback payments. As a result of
this change, we now record license fees as a yield adjustment,
recognizing these fees as finance charge revenue over the term
of the Dealer Loan. We recognized a small amount of license fee
revenue related to certain dealer-partners that only participate
in our Purchase Program.
To allow shareholders to more precisely track our financial
performance and make comparisons between periods possible, we
have provided non-GAAP information below reflecting the amount
of revenue that would have been recognized if the license fees
had always been recorded as a yield adjustment. For the years
ended December 31, 2006 and 2005, total revenue would have
changed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
% change
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
219,332
|
|
|
$
|
201,268
|
|
|
|
9.0
|
%
|
License fee yield adjustment
|
|
|
(4,379
|
)
|
|
|
(3,352
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted total revenue
|
|
$
|
214,953
|
|
|
$
|
197,916
|
|
|
|
8.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and Wages. The decrease for the year
ended December 31, 2006, as a percentage of revenue, was
primarily related to: (i) a decrease in stock-based
compensation expense which was a result of a decline in the
number of unvested stock options outstanding and our adoption of
SFAS No. 123R which resulted in revised turnover
assumptions for the stock options granted during
2002-2004
and (ii) a decrease in support salaries as a
26
percentage of revenue which is consistent with our business plan
of growing corporate infrastructure at a rate slower than the
growth rate of the Dealer Loan portfolio. The decrease in
salaries and wages, as a percentage of revenue, was partially
offset by an increase in payroll taxes primarily due to employee
and director stock option exercises.
General and Administrative. The increase for
the year ended December 31, 2006, as a percentage of
revenue, was primarily due to: (i) an $11.2 million
increase in our estimated loss related to a class action lawsuit
in the state of Missouri, (ii) lower than normal accounting
fees during 2005 as a result of the resolution of a dispute over
fees paid to a former auditor, (iii) an increase in credit
report expenses primarily due to an increase in vendor costs per
unit and increased volume, and (iv) an increase in legal
expenses related to increased litigation during 2006.
Sales and Marketing. The increase for the year
ended December 31, 2006, as a percentage of revenue, was
primarily due to an increase in sales commissions, as a
percentage of revenue, primarily due to loan origination growth
exceeding revenue growth and the impact of a commission plan
change during the fourth quarter of 2006, which resulted in an
increase in the average commission paid per loan origination.
Provision for Credit Losses. The provision for
credit losses consists primarily of a provision to reduce the
carrying value of Dealer Loans to maintain the initial yield
established at the inception of the Dealer Loan. Additionally,
the provision for credit losses includes a provision for losses
on Purchased Loans and a provision for losses on notes
receivable. The increase in the provision for credit losses in
2006 was primarily due to an increase in the provision required
to maintain the initial yield established at the inception of
the Dealer Loan.
Interest. The increase for the year ended
December 31, 2006, as a percentage of revenue, was
primarily due to a 39.0% increase in the amount of average
outstanding debt as a result of borrowings used to fund stock
repurchases and new Dealer Loan originations. Interest expense
also increased as a result of a 220 basis point increase in
interest rates partially offset by the decreased impact of fixed
fees on our secured financings and line of credit facility due
to higher average outstanding borrowings.
Foreign Exchange. The foreign exchange gain of
$1.8 million during 2005 was primarily the result of
changes in the fair value of forward contracts entered into
during the third quarter of 2003. We entered into the forward
contracts to ensure that currency fluctuations would not reduce
the amount of United States dollars received from the
liquidation of the United Kingdom operation. There were no
forward contracts outstanding during 2006. In addition, we
recognized an after-tax foreign currency exchange gain of
$0.8 million during the fourth quarter of 2005 following
the determination that the liquidation of business in Canada was
substantially complete.
Provision for Income Taxes. The decrease for
the year ended December 31, 2006, as a percentage of
revenue, was primarily due to a decrease in income from
continuing operations before provision for income taxes. Our
effective tax rate decreased from 37.1% during 2005 to 35.1%
during 2006 primarily due to an additional state tax liability
recorded in the third quarter of 2005 that was reversed in the
second quarter of 2006 as a result of a favorable settlement.
27
Critical
Accounting Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. On an ongoing basis, we review our accounting
policies, assumptions, estimates and judgments to ensure that
our financial statements are presented fairly and in accordance
with accounting principles generally accepted in the United
States.
Our significant accounting policies are discussed in Note 2
to the consolidated financial statement, which is incorporated
herein by reference. We believe that the following accounting
estimates are the most critical to aid in fully understanding
and evaluating our reported financial results, and involve a
high degree of subjective or complex judgment, and the use of
different estimates or assumptions could produce materially
different financial results.
|
|
|
Finance Charge Revenue
|
|
|
|
|
|
Balance Sheet Caption:
|
|
Loans receivable
|
|
|
|
Income Statement Caption:
|
|
Finance charges
|
|
|
|
Nature of Estimates Required:
|
|
Estimating the amount and timing of future collections and
dealer holdback payments.
|
|
|
|
Assumptions and Approaches Used:
|
|
We recognize finance charge income on Loans in a manner
consistent with the provisions of the American Institute of
Certified Public Accountants Statement of Position
(SOP) 03-3 Accounting for Certain Loans or
Debt Securities Acquired in a Transfer. SOP 03-3 requires
us to recognize finance charges under the interest method such
that revenue is recognized on a level-yield basis based upon
forecasted cash flows.
|
|
|
|
Key Factors:
|
|
Variances in the amount and timing of future collections and
dealer holdback payments from current estimates could materially
impact earnings in future periods.
|
Allowance for Credit Losses
|
|
|
|
|
|
Balance Sheet Caption:
|
|
Allowance for credit losses
|
|
|
|
Income Statement Caption:
|
|
Provision for credit losses
|
|
|
|
Nature of Estimates Required:
|
|
Estimating the amount and timing of future collections and
dealer holdback payments.
|
|
|
|
Assumptions and Approaches Used:
|
|
We follow an approach consistent with the provisions of SOP 03-3
in determining our allowance for credit losses. The allowance
for credit losses is calculated on a dealer-partner by
dealer-partner basis for Dealer Loans and on a pool basis for
Purchased Loans based on month of purchase. Under SOP 03-3, an
allowance for credit losses is maintained at an amount that
reduces the net asset value (Loan balance less the allowance) to
the value of forecasted future cash flows discounted at the
yield established at the inception of the Loan (origination date
for a Dealer Loan or purchase date for a Purchased Loan). The
discounted value of future cash flows is comprised of estimated
future collections on the Loans, less any estimated dealer
holdback payments related to Dealer Loans. We write off Loans
once there are no forecasted future collections on any of the
associated Consumer Loans.
|
|
|
Future collections on Dealer and Purchased Loans are forecasted
based on the historical performance of loans with similar
characteristics. Dealer holdback is forecasted based on the
expected future collections and current advance balance of each
Dealer Loan.
|
28
|
|
|
|
|
Cash flows from any individual Dealer Loan or pool of Purchased
Loans are often different than estimated cash flows at Loan
inception. If such difference is favorable, the difference is
recognized into income over the remaining life of the Dealer
Loan or pool of Purchased Loans through a yield adjustment. If
such difference is unfavorable, a provision for credit losses is
recorded as a current period expense and a corresponding
allowance for credit losses is established. Because differences
between estimated cash flows at inception and actual cash flows
occur often, an allowance is required for a significant portion
of our Loan portfolio. An allowance for credit losses does not
necessarily indicate that a Dealer Loan or pool of Purchased
Loans is unprofitable, and in recent years, very seldom are cash
flows from a Dealer Loan or pool of Purchased Loans insufficient
to repay the initial amounts advanced or paid to the
dealer-partner.
|
|
|
At December 31, 2007, a 1% decline in the forecasted future
collections on Loans would result in approximately a $5.0
million pre-tax charge to the provision for credit losses. For
additional information, see Note 2 to the consolidated financial
statements, which is incorporated herein by reference.
|
|
|
|
Key Factors:
|
|
Variances in the amount and timing of future collections and
dealer holdback payments from current estimates could materially
impact earnings in future periods.
|
|
|
|
Stock-Based Compensation Expense
|
|
|
|
|
|
Balance Sheet Caption:
|
|
Paid-in capital
|
|
|
|
Income Statement Caption:
|
|
Salaries and Wages
|
|
|
|
Nature of Estimates Required:
|
|
Stock-based Compensation Expense is based on the fair values on
the date the equity instrument is granted or awarded. The fair
value is estimated by the Company, and is recognized over the
expected vesting period of the equity instrument. We also
estimate expected forfeiture rate of restricted stock awards.
|
|
|
|
Assumptions and Approaches Used:
|
|
Stock Options. We use the Black-Scholes option
pricing model to estimate the fair value of stock option
grants. This model calculates the fair value using various
assumptions, including the expected life of the option, the
expected volatility of the underlying stock, and the expected
dividend yield on the underlying stock. As of December 31,
2007, all stock options were vested and all related expense had
been recognized.
|
|
|
Restricted Stock Awards. In recognizing
restricted stock compensation expense, we make assumptions
regarding the expected forfeiture rate of the restricted stock
awards. We also make assumptions regarding the expected vesting
dates of performance-based restricted stock awards.
|
|
|
The fair value of restricted stock awards are estimated as if
they were vested and issued on the grant date and are recognized
over the expected vesting period of the restricted stock award.
For additional information, see Notes 2 and 10 to the
consolidated financial statements, which are incorporated herein
by reference.
|
|
|
|
Key Factors:
|
|
Changes in the expected vesting dates of performance-based
restricted stock awards and expected forfeiture rates would
impact the amount and timing of stock-based compensation expense
recognized in future periods.
|
29
|
|
|
Litigation and Contingent Liabilities
|
|
|
|
|
|
Balance Sheet Caption:
|
|
Accounts payable and accrued liabilities
|
|
|
|
Income Statement Caption:
|
|
General and administrative expense
|
|
|
|
Nature of Estimates Required:
|
|
Estimating the likelihood of adverse legal judgments and any
resulting damages owed.
|
|
|
|
Assumptions and Approaches Used:
|
|
The Company, with assistance from our legal counsel, determines
if the likelihood of an adverse judgment for various claims and
litigation is remote, reasonably possible, or probable. To the
extent we believe an adverse judgment is probable and the amount
of the judgment is estimable, we recognize a liability. For
information regarding the potential various consumer claims
against us, see Note 12 to the consolidated financial
statements, which is incorporated herein by reference.
|
|
|
|
Key Factors:
|
|
Negative variances in the ultimate disposition of claims and
litigation outstanding from current estimates could result in
additional expense in future periods.
|
|
|
|
Taxes
|
|
|
|
|
|
Balance Sheet Captions:
|
|
Deferred income taxes, net
Income taxes receivable
Accounts payable and accrued liabilities
|
|
|
|
Income Statement Caption:
|
|
Provision for income taxes
|
|
|
|
Nature of Estimates Required:
|
|
Estimating the recoverability of deferred tax assets.
Estimating the impact of an uncertain income tax position on the
income tax return that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority.
|
|
|
|
Assumptions and Approaches Used:
|
|
The Company, based on historical and projected future financial
results by tax jurisdiction, determines if it is more likely
than not a deferred tax asset will be realized. To the extent
we believe the recovery of all or a portion of a deferred tax
asset is not likely, a valuation allowance is established. For
additional information, see Note 9 to the consolidated financial
statements, which is incorporated herein by reference.
|
|
|
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109 (FIN
48) which clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements
in accordance with FASB Statement No. 109, Accounting for
Income Taxes and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. Under
FIN 48, the impact of an uncertain income tax position on the
income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will
not be recognized if it has less than a 50% likelihood of being
sustained. For additional information, see Note 9 to the
consolidated financial statements, which is incorporated herein
by reference.
|
|
|
|
Key Factors:
|
|
Changes in tax laws and variances in projected future results
from current estimates that impact judgments made on valuation
allowances could impact our provision for income taxes in future
periods.
|
30
Liquidity
and Capital Resources
We need capital to fund new Loans and pay dealer holdback. Our
primary sources of capital are cash flows from operating
activities, collections of Consumer Loans and borrowings through
four primary sources of financing: (i) a revolving secured
line of credit with a commercial bank syndicate; (ii) a
revolving secured warehouse facility with institutional
investors; (iii) SEC Rule 144A asset-backed secured
borrowings (Term ABS 144A) with qualified
institutional investors; and (iv) a residual credit
facility with an institutional investor. There are various
restrictive debt covenants for each source of financing and we
are in compliance with those covenants as of December 31,
2007. For information regarding these financings and the
covenants included in the related documents, see Note 7 and
Note 13 to the consolidated financial statements, which are
incorporated herein by reference.
Cash and cash equivalents decreased to $0.7 million as of
December 31, 2007 from $8.5 million at
December 31, 2006. Our total balance sheet indebtedness
increased to $532.1 million at December 31, 2007 from
$392.2 million at December 31, 2006. This increase was
primarily a result of borrowings used to fund new Loans in 2007.
Restricted cash and cash equivalents increased to
$74.1 million as of December 31, 2007 from
$45.6 million at December 31, 2006. The balance
consists of: i) $42.5 million of cash collections
related to secured financings, ii) $18.3 million of
cash held in trusts for future vehicle service contract claims,
and iii) $13.3 million held in escrow related to the
settlement of the class action lawsuit in the state of Missouri.
The claims reserve associated with the trusts and the
$13.3 million related to the settlement are included in
accounts payable and accrued liabilities in the consolidated
balance sheets. For additional information related to the
settlement of the class action lawsuit in the state of Missouri,
see Note 12 to the consolidated financial statements.
Restricted securities available for sale decreased to
$3.3 million as of December 31, 2007 from
$3.6 million at December 31, 2006. Restricted
securities consist of amounts held in accordance with vehicle
service contract trust agreements.
A summary of the total future contractual obligations requiring
repayments as of December 31, 2007 is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
< 1 Year
|
|
|
1-3 Years
|
|
|
Other
|
|
|
Long-term debt, including current maturities and capital leases
(1)
|
|
$
|
532,130
|
|
|
$
|
369,439
|
|
|
$
|
162,691
|
|
|
$
|
|
|
Operating lease obligations
|
|
|
1,127
|
|
|
|
661
|
|
|
|
466
|
|
|
|
|
|
Purchase obligations (2)
|
|
|
1,738
|
|
|
|
1,738
|
|
|
|
|
|
|
|
|
|
Other long-term obligations (3)
|
|
|
9,451
|
|
|
|
|
|
|
|
|
|
|
|
9,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
544,446
|
|
|
$
|
371,838
|
|
|
$
|
163,157
|
|
|
$
|
9,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt obligations included in the above table consist
solely of principal repayments. We are also obligated to make
interest payments at the applicable interest rates, as discussed
in Note 7 to the consolidated financial statements. Based
on the actual amounts outstanding under our revolving line of
credit and warehouse facilities at December 31, 2007, the
forecasted amounts outstanding on all other debt and the actual
interest rates in effect as of December 31, 2007, interest
is expected to be approximately $20.3 million during 2008
and $5.1 million during 2009. |
|
(2) |
|
Purchase obligations consist solely of contractual obligations
related to the information system needs of the Company. |
|
(3) |
|
Other long-term obligations included in the above table consist
solely of reserves for uncertain tax positions recognized under
FIN 48. Additionally, we have contractual obligations to
pay dealer holdback to our dealer-partners; however, as payments
of dealer holdback are contingent upon the receipt of customer
payments and the repayment of advances, these obligations are
excluded from the table above. |
31
Based upon anticipated cash flows, management believes that cash
flows from operations and its various financing alternatives
will provide sufficient financing for debt maturities and for
future operations. Our ability to borrow funds may be impacted
by many economic and financial market conditions. If the various
financing alternatives were to become limited or unavailable to
us, our operations could be materially and adversely affected.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a material current or future
effect on our financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital
resources.
Market
Risk
We are exposed primarily to market risks associated with
movements in interest rates. Our policies and procedures
prohibit the use of financial instruments for trading purposes.
A discussion of our accounting policies for derivative
instruments is included in Note 2 to the consolidated
financial statements.
Interest Rate Risk. We rely on various sources
of financing, some of which are at floating rates of interest
and expose us to risks associated with increases in interest
rates. We manage such risk primarily by entering into interest
rate cap and interest rate swap agreements.
As of December 31, 2007, we had $36.3 million of
floating rate debt outstanding on our revolving secured line of
credit, with no interest rate protection. For every 1.0%
increase in rates on our revolving secured line of credit,
annual after-tax earnings would decrease by approximately
$0.2 million, assuming we maintain a level amount of
floating rate debt.
As of December 31, 2007, we had $198.1 million in
floating rate debt outstanding under our revolving secured
warehouse facility, with an interest rate cap of 6.75% on the
underlying commercial paper rate. Based on the difference
between the rates on our revolving secured warehouse facility at
December 31, 2007 and the interest rate cap, our maximum
interest rate risk on the secured warehouse financing is 1.64%.
This maximum interest rate risk would reduce annual after-tax
earnings by approximately $2.1 million, assuming we
maintain a level amount of floating rate debt.
As of December 31, 2007 we had $240.0 million in fixed
rate debt, and $50.0 million in floating rate debt
outstanding under Term ABS 144A asset-backed secured borrowings.
We entered into an interest rate swap to convert the
$50.0 million in floating rate debt into fixed rate debt
bearing a rate of 6.28%. As we have not designated the interest
rate swap as a hedge as defined under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, changes in the fair value of this swap will
increase or decrease interest expense. The fair value of the
interest rate swap is based on quoted market values, which are
influenced by a number of factors, including interest rates,
amount of debt outstanding, and number of months until maturity.
Since we intend to hold the interest rate swap until maturity,
any increases or decreases in interest expense resulting from
changes in fair value will reverse by maturity date.
New
Accounting Pronouncements
Accounting for Uncertainty in Income Taxes. In
July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48). We adopted the provisions of
FIN 48 on January 1, 2007. For additional information
related to FIN 48 see the Income Tax portion of
Note 2 to the consolidated financial statements, which is
incorporated herein by reference.
Fair Value Option for Financial Assets and
Liabilities. In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to
choose to measure financial assets and liabilities (except for
those that are specifically exempted from SFAS 159) at
fair value. The election to measure a financial asset or
liability at fair value can be made on an
instrument-by-instrument
basis and is irrevocable. The difference between carrying value
and fair value at the election date is recorded as a transition
adjustment to opening retained earnings. Subsequent changes in
fair value are recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. At this time, we do not intend to adopt SFAS 159.
32
Forward-Looking
Statements
We make forward-looking statements in this report and may make
such statements in future filings with the Securities and
Exchange Commission (SEC). We may also make
forward-looking statements in our press releases or other public
or shareholder communications. Our forward-looking statements
are subject to risks and uncertainties and include information
about our expectations and possible or assumed future results of
operations. When we use any of the words may,
will, should, believes,
expects, anticipates,
assumes, forecasts,
estimates, intends, plans or
similar expressions, we are making forward-looking statements.
We claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform
Act of 1995 for all of our forward-looking statements. These
forward-looking statements represent our outlook only as of the
date of this report. Actual results could differ materially
since the statements are based on our current expectations,
which are subject to risks and uncertainties. Factors that might
cause such a difference include, but are not limited to, the
factors set forth under Item 1A. Risk Factors
elsewhere in this report and the risks and uncertainties
discussed in our other reports filed or furnished from time to
time with the SEC.
|
|
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.
33
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
34
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and
Shareholders of Credit Acceptance Corporation
We have audited the accompanying consolidated balance sheets of
Credit Acceptance Corporation (a Michigan Corporation) and
subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of income and comprehensive
income, shareholders equity, and cash flows for each of
the three years in the period ended December 31, 2007.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Credit Acceptance Corporation and subsidiaries as of
December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2007 in conformity with
accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Credit Acceptance Corporation and subsidiaries internal
control over financial reporting as of December 31, 2007,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report
dated March 14, 2008 expressed an unqualified opinion on
the effectiveness of the Companys internal control over
financial reporting.
/s/GRANT THORNTON LLP
Southfield, Michigan
March 14, 2008
35
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS:
|
Cash and cash equivalents
|
|
$
|
712
|
|
|
$
|
8,528
|
|
Restricted cash and cash equivalents
|
|
|
74,102
|
|
|
|
45,609
|
|
Restricted securities available for sale
|
|
|
3,290
|
|
|
|
3,564
|
|
Loans receivable (including $16,125 and $23,038 from affiliates
as of December 31, 2007 and 2006, respectively)
|
|
|
944,698
|
|
|
|
754,571
|
|
Allowance for credit losses
|
|
|
(134,145
|
)
|
|
|
(128,791
|
)
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
|
810,553
|
|
|
|
625,780
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
20,124
|
|
|
|
16,203
|
|
Income taxes receivable
|
|
|
20,712
|
|
|
|
11,734
|
|
Other assets
|
|
|
12,689
|
|
|
|
13,795
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
942,182
|
|
|
$
|
725,213
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY:
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
79,834
|
|
|
$
|
78,294
|
|
Line of credit
|
|
|
36,300
|
|
|
|
38,400
|
|
Secured financing
|
|
|
488,065
|
|
|
|
345,144
|
|
Mortgage note and capital lease obligations
|
|
|
7,765
|
|
|
|
8,631
|
|
Deferred income taxes, net
|
|
|
64,768
|
|
|
|
44,397
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
676,732
|
|
|
|
514,866
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies See Note 12
|
|
|
|
|
|
|
|
|
Shareholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 80,000,000 shares
authorized, 30,240,859 and 30,179,959 shares issued and
outstanding at December 31, 2007 and 2006, respectively
|
|
|
302
|
|
|
|
302
|
|
Paid-in capital
|
|
|
4,134
|
|
|
|
828
|
|
Retained earnings
|
|
|
261,001
|
|
|
|
209,253
|
|
Accumulated other comprehensive income (loss), net of tax of
$(7) and $19 at December 31, 2007 and 2006, respectively
|
|
|
13
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
265,450
|
|
|
|
210,347
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
942,182
|
|
|
$
|
725,213
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
36
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands, Except Per Share Data)
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance charges
|
|
$
|
220,473
|
|
|
$
|
188,605
|
|
|
$
|
176,369
|
|
License fees
|
|
|
283
|
|
|
|
13,589
|
|
|
|
9,775
|
|
Other income
|
|
|
19,171
|
|
|
|
17,138
|
|
|
|
15,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
239,927
|
|
|
|
219,332
|
|
|
|
201,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages
|
|
|
55,396
|
|
|
|
41,015
|
|
|
|
39,093
|
|
General and administrative
|
|
|
27,271
|
|
|
|
36,485
|
|
|
|
20,834
|
|
Sales and marketing
|
|
|
17,441
|
|
|
|
16,624
|
|
|
|
14,275
|
|
Provision for credit losses
|
|
|
19,947
|
|
|
|
11,006
|
|
|
|
5,705
|
|
Interest
|
|
|
36,669
|
|
|
|
23,330
|
|
|
|
13,886
|
|
Other expense
|
|
|
91
|
|
|
|
226
|
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
156,815
|
|
|
|
128,686
|
|
|
|
94,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
83,112
|
|
|
|
90,646
|
|
|
|
106,544
|
|
Foreign currency gain (loss)
|
|
|
69
|
|
|
|
(6
|
)
|
|
|
1,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes
|
|
|
83,181
|
|
|
|
90,640
|
|
|
|
108,356
|
|
Provision for income taxes
|
|
|
29,567
|
|
|
|
31,793
|
|
|
|
40,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
53,614
|
|
|
|
58,847
|
|
|
|
68,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued United Kingdom operations
|
|
|
(562
|
)
|
|
|
(297
|
)
|
|
|
6,194
|
|
(Benefit) provision for income taxes
|
|
|
(1,864
|
)
|
|
|
(90
|
)
|
|
|
1,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations
|
|
|
1,302
|
|
|
|
(207
|
)
|
|
|
4,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,916
|
|
|
$
|
58,640
|
|
|
$
|
72,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.83
|
|
|
$
|
1.78
|
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.76
|
|
|
$
|
1.66
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.78
|
|
|
$
|
1.78
|
|
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.72
|
|
|
$
|
1.67
|
|
|
$
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,053,129
|
|
|
|
33,035,693
|
|
|
|
36,991,136
|
|
Diluted
|
|
|
31,153,688
|
|
|
|
35,283,478
|
|
|
|
39,207,680
|
|
See accompanying notes to consolidated financial statements.
37
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
|
|
|
|
|
|
Other
|
|
|
|
Shareholders
|
|
|
Comprehensive
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
Equity
|
|
|
Income
|
|
|
Number
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Balance, January 1, 2005
|
|
$
|
300,890
|
|
|
|
|
|
|
|
36,897
|
|
|
$
|
369
|
|
|
$
|
25,640
|
|
|
$
|
|
|
|
$
|
271,912
|
|
|
$
|
2,969
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
72,601
|
|
|
$
|
72,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,601
|
|
|
|
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on securities available for sale, net of tax of
$20
|
|
|
(33
|
)
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
Foreign currency translation adjustment, net of tax of $0
|
|
|
(2,973
|
)
|
|
|
(2,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
$
|
69,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
2,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,936
|
|
|
|
395
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
99
|
|
|
|
1
|
|
|
|
1,960
|
|
|
|
(1,961
|
)
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
210
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
373,026
|
|
|
|
|
|
|
|
37,027
|
|
|
|
370
|
|
|
|
29,746
|
|
|
|
(1,566
|
)
|
|
|
344,513
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative affect due to adoption of SFAS 123R modified
prospective application
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,566
|
)
|
|
|
1,566
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
58,640
|
|
|
$
|
58,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,640
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale, net of tax of
$3
|
|
|
1
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
$
|
58,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(247,168
|
)
|
|
|
|
|
|
|
(8,796
|
)
|
|
|
(87
|
)
|
|
|
(53,181
|
)
|
|
|
|
|
|
|
(193,900
|
)
|
|
|
|
|
Stock options exercised
|
|
|
12,091
|
|
|
|
|
|
|
|
1,902
|
|
|
|
19
|
|
|
|
12,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit for exercised stock options
|
|
|
13,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
210,347
|
|
|
|
|
|
|
|
30,180
|
|
|
|
302
|
|
|
|
828
|
|
|
|
|
|
|
|
209,253
|
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative affect due to adoption of FIN 48
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(87
|
)
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
54,916
|
|
|
$
|
54,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,916
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on securities available for sale, net of tax of
$(26)
|
|
|
49
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
$
|
54,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
4,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock
|
|
|
(9,530
|
)
|
|
|
|
|
|
|
(371
|
)
|
|
|
|
|
|
|
(6,449
|
)
|
|
|
|
|
|
|
(3,081
|
)
|
|
|
|
|
Stock options exercised
|
|
|
2,584
|
|
|
|
|
|
|
|
375
|
|
|
|
|
|
|
|
2,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit for exercised stock options
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
265,450
|
|
|
|
|
|
|
|
30,241
|
|
|
$
|
302
|
|
|
$
|
4,134
|
|
|
$
|
|
|
|
$
|
261,001
|
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
38
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Thousands)
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
54,916
|
|
|
$
|
58,640
|
|
|
$
|
72,601
|
|
Adjustments to reconcile cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
|
|
|
19,947
|
|
|
|
11,006
|
|
|
|
3,979
|
|
Depreciation
|
|
|
4,105
|
|
|
|
4,624
|
|
|
|
5,209
|
|
Loss (gain) on retirement of property and equipment
|
|
|
196
|
|
|
|
(271
|
)
|
|
|
76
|
|
Foreign currency gain on forward contracts
|
|
|
|
|
|
|
|
|
|
|
(1,033
|
)
|
Provision for deferred income taxes
|
|
|
20,346
|
|
|
|
636
|
|
|
|
11,961
|
|
Stock-based compensation
|
|
|
4,659
|
|
|
|
87
|
|
|
|
2,331
|
|
Gain on sale of United Kingdom loan portfolio
|
|
|
|
|
|
|
|
|
|
|
(3,033
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in accounts payable and accrued liabilities
|
|
|
1,453
|
|
|
|
22,589
|
|
|
|
7,354
|
|
(Increase) decrease in income taxes receivable
|
|
|
(8,978
|
)
|
|
|
(7,712
|
)
|
|
|
5,422
|
|
Decrease (increase) in other assets
|
|
|
1,248
|
|
|
|
(3,425
|
)
|
|
|
(490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
97,892
|
|
|
|
86,174
|
|
|
|
104,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in restricted cash
|
|
|
(28,493
|
)
|
|
|
(32,136
|
)
|
|
|
10,454
|
|
Purchases of restricted securities available for sale
|
|
|
(550
|
)
|
|
|
(795
|
)
|
|
|
(3,239
|
)
|
Proceeds from sale of restricted securities available for sale
|
|
|
|
|
|
|
302
|
|
|
|
742
|
|
Maturities of restricted securities available for sale
|
|
|
898
|
|
|
|
278
|
|
|
|
27
|
|
Principal collected on Loans receivable
|
|
|
576,543
|
|
|
|
551,792
|
|
|
|
468,273
|
|
Advances to dealers and accelerated payments of dealer holdback
|
|
|
(571,197
|
)
|
|
|
(532,869
|
)
|
|
|
(461,877
|
)
|
Purchases of Consumer Loans
|
|
|
(139,340
|
)
|
|
|
(25,562
|
)
|
|
|
(13,354
|
)
|
Payments of dealer holdback
|
|
|
(70,950
|
)
|
|
|
(70,110
|
)
|
|
|
(52,887
|
)
|
Proceeds from the sale of United Kingdom loan portfolio
|
|
|
|
|
|
|
|
|
|
|
4,297
|
|
Purchases of property and equipment
|
|
|
(7,659
|
)
|
|
|
(1,536
|
)
|
|
|
(2,863
|
)
|
Net change in other receivables
|
|
|
349
|
|
|
|
3,050
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(240,399
|
)
|
|
|
(107,586
|
)
|
|
|
(49,827
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
|
633,500
|
|
|
|
414,630
|
|
|
|
250,700
|
|
Repayments under line of credit
|
|
|
(635,600
|
)
|
|
|
(412,530
|
)
|
|
|
(222,100
|
)
|
Proceeds from secured financings
|
|
|
619,500
|
|
|
|
678,500
|
|
|
|
120,500
|
|
Repayments of secured financings
|
|
|
(476,579
|
)
|
|
|
(434,856
|
)
|
|
|
(195,000
|
)
|
Principal payments under mortgage and capital lease obligations
|
|
|
(1,429
|
)
|
|
|
(1,502
|
)
|
|
|
(1,296
|
)
|
Repurchase of common stock
|
|
|
(9,530
|
)
|
|
|
(247,168
|
)
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
2,584
|
|
|
|
12,091
|
|
|
|
210
|
|
Tax benefits from stock based compensation plans
|
|
|
2,512
|
|
|
|
13,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
134,958
|
|
|
|
22,835
|
|
|
|
(46,986
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(267
|
)
|
|
|
15
|
|
|
|
(1,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(7,816
|
)
|
|
|
1,438
|
|
|
|
6,476
|
|
Cash and cash equivalents, beginning of period
|
|
|
8,528
|
|
|
|
7,090
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
712
|
|
|
$
|
8,528
|
|
|
$
|
7,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
36,131
|
|
|
$
|
23,056
|
|
|
$
|
13,244
|
|
Cash paid during the period for income taxes
|
|
$
|
14,506
|
|
|
$
|
25,427
|
|
|
$
|
23,454
|
|
Supplemental Disclosure of Non-Cash Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment acquired through capital lease obligations
|
|
$
|
563
|
|
|
$
|
1,785
|
|
|
$
|
531
|
|
Issuance of restricted stock, net of forfeitures
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,961
|
|
See accompanying notes to consolidated financial statements.
39
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
DESCRIPTION
OF BUSINESS
|
Principal Business. Since 1972, Credit
Acceptance (referred to as the Company, Credit
Acceptance, we, our or
us) has provided auto loans to consumers, regardless
of their credit history. Our product is offered through a
nationwide network of automobile dealers who benefit from sales
of vehicles to consumers who otherwise could not obtain
financing; from repeat and referral sales generated by these
same customers; and from sales to customers responding to
advertisements for our product, but who actually end up
qualifying for traditional financing.
We refer to dealers who participate in our program and who share
our commitment to changing consumers lives as
dealer-partners. Upon enrollment in our financing
program, the dealer-partner enters into a dealer servicing
agreement with Credit Acceptance that defines the legal
relationship between Credit Acceptance and the dealer-partner.
The dealer servicing agreement assigns the responsibilities for
administering, servicing, and collecting the amounts due on
retail installment contracts (referred to as Consumer
Loans) from the dealer-partners to us.
We are an indirect lender from a legal perspective, meaning the
Consumer Loan is originated by the dealer-partner and
immediately assigned to us. If we discover a misrepresentation
by the dealer-partner relating to a Consumer Loan assigned to
us, we can demand that the Consumer Loan be repurchased for the
current balance of the Consumer Loan less the amount of any
unearned finance charge plus the applicable termination fee,
which is generally $500. Upon receipt of such amount in full, we
will reassign the Consumer Loan and our security interest in the
financed vehicle to the dealer-partner.
We have two primary programs: the Portfolio Program and the
Purchase Program. During the year ended December 31, 2007,
83% of loans were assigned to us under the Portfolio Program and
17% were assigned to us under the Purchase Program.
Dealer-Partners have the option to assign Consumer Loans under
either program and sign a separate agreement for each program
type. Under the Portfolio Program, we advance money to
dealer-partners (referred to as a Dealer Loan) in
exchange for the right to service the underlying Consumer Loan.
Our servicing fee is equal to a fixed percentage (typically 20%)
of each payment collected. The Dealer Loan is repaid by
collections from the Consumer Loans. Each dealer-partner has an
opportunity to receive additional money over time based on the
performance of all Consumer Loans that they assign to us under
the Portfolio Program. Under the Purchase Program, we buy the
Consumer Loan from the dealer-partner (referred to as a
Purchased Loan) and keep all amounts collected from
the consumer. Dealer Loans and Purchased Loans are collectively
referred to as Loans.
Portfolio Program
As payment for the vehicle, the dealer-partner generally
receives the following:
|
|
|
|
(i)
|
a down payment from the consumer;
|
|
|
|
|
(ii)
|
a cash advance from us; and
|
|
|
(iii)
|
after the advance has been recovered by us, the cash from
payments made on the Consumer Loan, net of certain collection
costs and our servicing fee (dealer holdback).
|
We record the amount advanced to the dealer-partner as a Dealer
Loan, which is classified within Loans receivable in our
consolidated balance sheets. Cash advanced to dealer-partners is
automatically assigned to the originating dealer-partners
open pool of advances. At the dealer-partners option, a
pool containing at least 100 Consumer Loans can be closed and
subsequent advances assigned to a new pool. All advances due
from a dealer-partner are secured by the future collections on
the dealer-partners portfolio of Consumer Loans assigned
to us. For dealer-partners with more than one pool, the pools
are cross-collateralized so the performance of other pools is
considered in determining eligibility for dealer holdback. We
perfect our security interest in the Dealer Loans by taking
possession of the Consumer Loans.
40
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
DESCRIPTION
OF BUSINESS (Concluded)
|
The dealer servicing agreement provides that collections
received by us during a calendar month on Consumer Loans
assigned by a dealer-partner are applied on a
pool-by-pool
basis as follows:
|
|
|
|
|
First, to reimburse us for certain collection costs;
|
|
|
|
Second, to pay us our servicing fee;
|
|
|
|
Third, to reduce the aggregate advance balance and to pay any
other amounts due from the dealer-partner to us; and
|
|
|
|
Fourth, to the dealer-partner as payment of dealer holdback.
|
Dealer-partners have an opportunity to receive a portion of the
dealer holdback on an accelerated basis at the time a pool of
100 or more Consumer Loans is closed. The eligibility to receive
accelerated dealer holdback and the amount paid to the
dealer-partner is calculated using a formula that considers the
forecasted collections and the advance balance on the closed
pool. If the collections on Consumer Loans from a
dealer-partners pool are not sufficient to repay the
advance balance, the dealer-partner will not receive dealer
holdback or accelerated dealer holdback.
Since typically the combination of the advance and the
consumers down payment provides the dealer-partner with a
cash profit at the time of sale, the dealer-partners risk
in the Consumer Loan is limited. We cannot demand repayment from
the dealer-partner of the advance except in the event the
dealer-partner is in default of the dealer servicing agreement.
Advances are made only after the Consumer Loan is approved,
accepted by and assigned to us and all other stipulations
required for funding have been satisfied. The dealer-partner can
also opt to repurchase Consumer Loans assigned under the
Portfolio Program at their own discretion.
For accounting purposes, the transactions described under the
Portfolio Program are not considered to be loans to consumers.
Instead, our accounting reflects that of a lender to the
dealer-partner. The classification as a Dealer Loan for
accounting purposes is primarily a result of (i) the
dealer-partners financial interest in the Consumer Loan
and (ii) certain elements of our legal relationship with
the dealer-partner. The cash amount advanced to the
dealer-partner is recorded as an asset on our balance sheet. The
aggregate amount of all advances to an individual
dealer-partner, plus accrued income, less repayments comprises
the amount of the Dealer Loan recorded in Loans receivable.
Purchase Program
We began offering a Purchase Program on a limited basis in March
of 2005. The Purchase Program differs from our traditional
Portfolio Program in that the dealer-partner receives a single
upfront payment from us at the time of origination instead of a
cash advance and dealer holdback. Purchase Program volume
increased in 2007 as the program was offered to additional
dealer-partners.
For accounting purposes, the transactions described under the
Purchase Program are considered to be originated by the
dealer-partner and then purchased by us. The cash amount paid to
the dealer-partner is recorded as an asset on our balance sheet.
The aggregate amount of all amounts paid to purchase Consumer
Loans from dealer-partners, plus accrued income, less
repayments, comprises the amount of Purchased Loans recorded in
Loans receivable.
Businesses in Liquidation. We sold our United
Kingdom Consumer Loan portfolio on December 30, 2005. The
selling price was approximately $4.3 million resulting in a
pre-tax gain of approximately $3.0 million.
41
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of Consolidation
The consolidated financial statements include the accounts of
the Company and our wholly owned subsidiaries. All significant
intercompany transactions have been eliminated. Our primary
subsidiaries are: Buyers Vehicle Protection Plan, Inc.,
Vehicle Remarketing Services, Inc., CAC Warehouse Funding Corp.
II, Credit Acceptance Funding LLC
2006-2,
Credit Acceptance Funding LLC
2007-1, and
Credit Acceptance Funding LLC
2007-2.
Reportable
Business Segments
We are organized into two primary business segments: United
States and Other. For more information regarding our reportable
segments, see Note 11 to the consolidated financial
statements.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (GAAP) requires us 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 significant estimation include the
allowance for credit losses, finance charge revenue, stock-based
compensation expense, contingencies, and taxes. Actual results
could materially differ from those estimates.
Cash and
Cash Equivalents
Cash equivalents consist of readily marketable securities with
original maturities at the date of acquisition of three months
or less.
Restricted
Cash and Cash Equivalents
The carrying amount of restricted cash and cash equivalents
approximate their fair value due to the short maturity of these
instruments. Restricted cash and cash equivalents increased to
$74.1 million as of December 31, 2007 from
$45.6 million at December 31, 2006. The balance
consists of: i) $42.5 million of cash collections
related to secured financings, ii) $18.3 million of
cash held in trusts for future vehicle service contract claims,
and iii) $13.3 million held in escrow related to the
settlement of the class action lawsuit in the state of Missouri.
The claims reserve associated with the trusts and the
$13.3 million related to the settlement are included in
accounts payable and accrued liabilities in the consolidated
balance sheets. For additional information related to the
settlement of the class action lawsuit in the state of Missouri,
see Note 12 to the consolidated financial statements.
Restricted
Securities Available for Sale
Restricted securities consist of amounts held in accordance with
vehicle service contract trust agreements. We determine the
appropriate classification of our investments in debt securities
at the time of purchase and reevaluate such determinations at
each balance sheet date. Debt securities for which we do not
have the intent or ability to hold to maturity are classified as
available for sale, and stated at fair value with unrealized
gains and losses, net of income taxes included in the
determination of comprehensive income and reported as a
component of shareholders equity.
42
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
Restricted securities available for sale consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government and agency securities
|
|
$
|
1,584
|
|
|
$
|
40
|
|
|
$
|
|
|
|
$
|
1,624
|
|
Corporate bonds
|
|
|
1,686
|
|
|
|
10
|
|
|
|
(30
|
)
|
|
|
1,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted securities available for sale
|
|
$
|
3,270
|
|
|
$
|
50
|
|
|
$
|
(30
|
)
|
|
$
|
3,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Government and agency securities
|
|
$
|
1,578
|
|
|
$
|
5
|
|
|
$
|
(13
|
)
|
|
$
|
1,570
|
|
Corporate bonds
|
|
|
2,041
|
|
|
|
2
|
|
|
|
(49
|
)
|
|
|
1,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted securities available for sale
|
|
$
|
3,619
|
|
|
$
|
7
|
|
|
$
|
(62
|
)
|
|
$
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost and estimated fair values of debt securities by
contractual maturity were as follows (securities with multiple
maturity dates are classified in the period of final maturity).
Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Estimated
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year
|
|
$
|
1,096
|
|
|
$
|
1,100
|
|
|
$
|
898
|
|
|
$
|
893
|
|
Over one year to five years
|
|
|
2,174
|
|
|
|
2,190
|
|
|
|
2,721
|
|
|
|
2,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted securities available for sale
|
|
$
|
3,270
|
|
|
$
|
3,290
|
|
|
$
|
3,619
|
|
|
$
|
3,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
Charges
Finance Charges Loans. We
recognize finance charge income on Loans in a manner consistent
with the provisions of the American Institute of Certified
Public Accountants Statement of Position (SOP)
03-3
Accounting for Certain Loans or Debt Securities Acquired
in a Transfer.
SOP 03-3
requires us to recognize finance charges under the interest
method such that revenue is recognized on a level-yield basis
based upon forecasted cash flows.
For Dealer Loans only, certain direct origination costs such as
salaries and credit reports are deferred and the net costs are
recognized as an adjustment to finance charges over the life of
the related Dealer Loan on a level-yield basis. This treatment
is in accordance with Statement of Financial Accounting
Standards (SFAS) No. 91, Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases.
43
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
Finance Charges Other. Buyers
Vehicle Protection Plan, Inc. (BVPP), a wholly owned
subsidiary of the Company, has relationships with third party
administrators (TPAs) whereby the TPAs process
claims on vehicle service contracts that are underwritten by
third party insurers. BVPP receives a commission for all vehicle
service contracts sold by our dealer-partners when the vehicle
is financed by us, and does not bear any risk of loss for
claims. The commission is included in the retail price of the
vehicle service contract which is added to the Consumer Loan. We
provide dealer-partners with an additional advance based on the
retail price of the vehicle service contract. We recognize our
commission from the vehicle service contracts as part of finance
charges on a level-yield basis based upon forecasted cash flows.
Our agreements with two of our TPAs allow us to receive profit
sharing payments depending upon the performance of the vehicle
service contract programs. Profit sharing payments are received
once a year, if eligible. Profit sharing payments are currently
not estimable due to a lack of historical information and
therefore revenue related to these payments is recognized in the
period the payments are received.
Agreements with two of the TPAs also require that vehicle
service contract premiums be placed in trust accounts. Funds in
the trust accounts are utilized by the TPA to pay claims on the
vehicle service contracts. Profit sharing payments, if any, on
the vehicle service contracts are distributed to us after the
term of the vehicle service contracts have substantially expired
provided certain loss rates are met. Under Financial Accounting
Standards Board (FASB) Interpretation No. 46,
Consolidation of Variable Interest Entities
(FIN 46), we are considered the primary
beneficiary of the trusts. As a result, the assets and
liabilities of the trusts have been consolidated on our balance
sheet. As of December 31, 2007, the trusts had
$21.6 million in assets available to pay claims and a
related claims reserve of $20.2 million. The trust assets
are included in restricted cash and cash equivalents, and
restricted securities available for sale. The claims reserve is
included in accounts payable and accrued liabilities in the
consolidated balance sheets. A third party insures claims in
excess of funds in the trust accounts.
BVPP also has a relationship with a TPA that allows
dealer-partners to offer a Guaranteed Asset Protection
(GAP) product to consumers whereby the TPA processes
claims that are underwritten by a third party insurer. GAP
provides the consumer protection by paying the difference
between the loan balance and the amount covered by the
consumers insurance policy in the event the vehicle is
totaled or stolen. We receive a commission for all GAP contracts
sold by our dealer-partners when the vehicle is financed by us,
and do not bear any risk of loss for claims. The commission is
included in the retail price of the GAP contract which is added
to the Consumer Loan. We provide dealer-partners with an
additional advance based on the retail price of the GAP
contract. We recognize our commission from the GAP contracts as
part of finance charges on a level-yield basis based upon
forecasted cash flows. We are eligible to receive profit sharing
payments depending on the performance of the GAP program. Profit
sharing payments from the third party are received once a year,
if eligible. Profit sharing payments are currently not estimable
due to a lack of historical information and therefore revenue
related to these payments is recognized in the period the
payments are received.
License
Fees
License fees represent monthly fees charged to dealer-partners
for access to our patented Internet-based Credit Approval
Processing System (CAPS). Historically we have
charged dealer-partners a per month license fee for access to
CAPS. This fee had historically been recorded as revenue in the
month the fee is charged. Based on feedback received from field
sales personnel and dealer-partners, we concluded that the way
this fee was structured was a significant factor driving higher
than desired dealer-partner attrition. Effective January 1,
2007, we implemented a change designed to positively impact
dealer-partner attrition. We continue to charge a monthly fee of
$599, but instead of collecting and recognizing the revenue from
the fee in the current period, we collect it from future dealer
holdback payments. As a result of this change, we now record
license fees as a yield adjustment, recognizing these fees as
finance charge revenue over the term of the Dealer Loan. We
recognized a limited amount of license fee revenue related to
certain dealer-partners that only participate in our Purchase
Program.
44
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
Other
Income
Other income consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Interest Income
|
|
$
|
3,020
|
|
|
$
|
1,799
|
|
|
$
|
763
|
|
Remarketing Charges
|
|
|
2,954
|
|
|
|
3,029
|
|
|
|
2,296
|
|
Dealer Support Products and Services
|
|
|
2,779
|
|
|
|
3,598
|
|
|
|
2,950
|
|
Marketing Income
|
|
|
2,691
|
|
|
|
1,515
|
|
|
|
1,137
|
|
Dealer Enrollment Fees
|
|
|
1,859
|
|
|
|
1,725
|
|
|
|
1,897
|
|
Profit Sharing Income
|
|
|
1,201
|
|
|
|
51
|
|
|
|
170
|
|
Non-Sufficient Funds Fees
|
|
|
1,160
|
|
|
|
1,029
|
|
|
|
977
|
|
Seminars and Conventions
|
|
|
1,034
|
|
|
|
1,244
|
|
|
|
890
|
|
Rental Income
|
|
|
404
|
|
|
|
458
|
|
|
|
670
|
|
Premiums Earned
|
|
|
362
|
|
|
|
1,043
|
|
|
|
2,004
|
|
Other
|
|
|
1,707
|
|
|
|
1,647
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,171
|
|
|
$
|
17,138
|
|
|
$
|
15,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income includes income on restricted cash relating to
collections on securitized Loans and income related to amounts
in the vehicle service contract trust accounts.
Vehicle Remarketing Services, Inc. (VRS), a
wholly-owned subsidiary, is responsible for remarketing vehicles
for Credit Acceptance. VRS coordinates vehicle repossessions
with a nationwide network of repossession agents, the redemption
of the vehicle by the consumer or the sale of the vehicle
through a nationwide network of vehicle auctions. VRS retains a
remarketing fee from the sale of each vehicle and recognizes
income at the time of the sale. VRS does not retain a fee if a
repossessed vehicle is redeemed by the consumer prior to the
sale. In addition, any skip tracing fees incurred by VRS are
passed on to us and are included in remarketing charges.
Dealer Support Products and Services primarily relates to
products and services provided to dealer-partners to assist with
their vehicle inventory.
Marketing income primarily consists of payments received on a
monthly basis from vendors that charge a fee to consumers to
process or expedite their payments. The amount of income we earn
is based on the amount of payments processed by the vendors and
is paid to us according to a tiered structure.
Dealer-partners that enroll in our program have the option to
pay a one-time enrollment fee of $9,850 or to defer the fee.
Dealer-partners choosing to defer payment of the enrollment fee
agree to allow us to keep 50% of their first accelerated dealer
holdback payment. In return for the enrollment fee, we provide
the dealer-partner with training and the first months
access to CAPS.
Loans
Receivable and Allowance for Credit Losses
Dealer Loans. At the time of acceptance,
Consumer Loans that meet certain criteria are eligible for an
advance, which is computed on a formula basis. The Dealer Loan
is increased as revenue is recognized and decreased as
collections are received. We follow an approach consistent with
the provisions of
SOP 03-3
in determining our allowance for credit losses. Consistent with
SOP 03-3,
an allowance for credit losses is maintained at an amount that
reduces the net asset value (Dealer Loan balance less the
allowance) to the value of forecasted future cash flows
discounted at the yield established at the inception of the
Dealer Loan. This allowance is calculated on a dealer-partner by
dealer-partner basis. The discounted value of future cash flows
is comprised of
45
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
estimated future collections on the Consumer Loans, less any
estimated dealer holdback payments. We write off Dealer Loans
once there are no forecasted future collections on any of the
associated Consumer Loans.
Future collections on Dealer Loans are forecasted based on the
historical performance of loans with similar characteristics.
Dealer holdback is forecasted based on the expected future
collections and current advance balance of each Dealer Loan.
Cash flows from any individual Dealer Loan are often different
than estimated cash flows at Dealer Loan inception. If such
difference is favorable, the difference is recognized into
income over the remaining life of the Dealer Loan through a
yield adjustment. If such difference is unfavorable, a provision
for credit losses is recorded as a current period expense and a
corresponding allowance for credit losses is established.
Because differences between estimated cash flows at inception
and actual cash flows occur often, an allowance is required for
a significant portion of our Dealer Loan portfolio. An allowance
for credit losses does not necessarily indicate that a Dealer
Loan is unprofitable, and in recent years, very seldom are cash
flows from a Dealer Loan insufficient to repay the initial
amounts advanced to the dealer-partner.
Cash advanced to dealer-partners is automatically assigned to
the originating dealer-partners open pool of business. At
the dealer-partners option, a pool containing at least 100
Consumer Loans can be closed and subsequent advances assigned to
a new pool. All advances due from a dealer-partner are secured
by the future collections on the dealer-partners portfolio
of Consumer Loans that have been assigned to us. Net collections
on all related Consumer Loans within the pool, after payment of
our servicing fee and reimbursement of certain collection costs,
are applied to reduce the aggregate advance balance owing
against those Consumer Loans. Once the advance balance has been
repaid, the dealer-partner is entitled to receive future
collections from Consumer Loans within that pool, after payment
of our servicing fee and reimbursement of certain collection
costs. If the collections on Consumer Loans from a
dealer-partners pool are not sufficient to repay the
advance balance, the dealer-partner will not receive the dealer
holdback. Additionally, for dealer-partners with more than one
pool, the pools are cross-collateralized so the performance of
other pools is considered in determining eligibility for dealer
holdback payments.
Purchased Loans. The Purchased Loan amount
reflected on our balance sheet is increased as revenue is
recognized and decreased as collections are received. We
aggregate Purchased Loans into pools based on the month of
purchase for revenue recognition and impairment purposes. We
follow
SOP 03-3
in determining our allowance for credit losses. Under
SOP 03-3,
an allowance for credit losses is maintained at an amount that
reduces the net asset value (Purchased Loan pool balance less
the allowance) to the value of forecasted future cash flows
discounted at the yield established at the date of purchase. The
discounted value of future cash flows is comprised of estimated
future collections on the pool of Purchased Loans. We write off
pools of Purchased Loans once there are no forecasted future
collections on any of the Purchased Loans included in the pool.
Future collections on Purchased Loans are forecasted based on
the historical performance of loans with similar
characteristics. Cash flows from any individual pool of
Purchased Loans are often different than estimated cash flows at
the date of purchase. If such difference is favorable, the
difference is recognized into income over the remaining life of
the pool of Purchased Loans through a yield adjustment. If such
difference is unfavorable, a provision for credit losses is
recorded as a current period expense and a corresponding
allowance for credit losses is established.
Property
and Equipment
Purchases of property and equipment are recorded at cost.
Depreciation is provided on a straight-line basis over the
estimated useful life of the asset. Estimated useful lives are
generally as follows: buildings 40 years,
building improvements 10 years, data processing
equipment 3 years, software
5 years, office furniture and equipment
7 years, and leasehold improvements the lesser
of the lease term or 10 years. The cost of assets sold or
retired and the related accumulated depreciation are removed
from the balance sheet 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 improvements are capitalized.
Software developed
46
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
for internal use is capitalized and generally amortized on a
straight-line basis. We evaluate long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Deferred
Debt Issuance Costs
As of December 31, 2007 and 2006, deferred debt issuance
costs were $3.3 million (net of accumulated amortization of
$2.0 million) and $3.0 million (net of accumulated
amortization of $4.1 million), respectively. Expenses
associated with the issuance of debt instruments are capitalized
and amortized as interest expense over the term of the debt
instrument on a level-yield basis for term secured financings
and on a straight-line basis for lines of credit and revolving
secured financings.
Income
Taxes
Provisions for federal, state and foreign income taxes are
calculated on reported pre-tax earnings based on current tax law
and also include, in the current period, the cumulative effect
of any changes in tax rates from those used previously in
determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently receivable or payable because
certain items of income and expense are recognized in different
time periods for financial reporting purposes than for income
tax purposes.
Deferred income tax balances reflect the effects of temporary
differences between the carrying amounts of assets and
liabilities and their tax bases and are stated at enacted tax
rates expected to be in effect when taxes are actually paid or
recovered.
Effective January 1, 2007, we adopted the provisions of
FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes An Interpretation of
FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and
measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the
tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount which is
more than 50% likely of being realized upon ultimate settlement.
We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic
adjustments and which may not accurately anticipate actual
outcomes. The cumulative effect of implementation of FIN 48
was approximately a $0.1 million increase in the liability
for unrecognized tax benefits, which was accounted for as a
decrease in the January 1, 2007 balance of retained
earnings.
Effective January 1, 2007, we began to recognize interest
and penalties related to income tax matters in provision for
income taxes.
Derivative
Instruments
Interest Rate Caps. We purchase interest rate
cap agreements to manage the interest rate risk on our secured
financings. As we have not designated these agreements as hedges
as defined under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, as amended
by SFAS No. 138 and SFAS No. 149, changes in
the fair value of these agreements will increase or decrease net
income.
As of December 31, 2007, four interest rate cap agreements
were outstanding with a cap rate of 6.75% and totaled (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
Commercial Paper
|
|
|
|
Fair
|
Amount
|
|
Cap Rate
|
|
Term
|
|
Value
|
|
$
|
525,000
|
|
|
|
6.75
|
%
|
|
Various maturities between September 2005 and June 2010
|
|
$
|
6
|
|
47
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
|
As of December 31, 2006, three interest rate cap agreements
were outstanding with a cap rate of 6.75% and totaled (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Notional
|
|
Commercial Paper
|
|
|
|
Fair
|
Amount
|
|
Cap Rate
|
|
Term
|
|
Value
|
|
$
|
325,000
|
|
|
|
6.75
|
%
|
|
Various maturities between September 2005 and May 2008
|
|
$
|
Interest Rate Swap. As of December 31,
2007 we had $240.0 million in fixed rate debt, and
$50.0 million in floating rate debt outstanding under Term
ABS 144A asset-backed secured borrowings. We entered into an
interest rate swap to convert the $50.0 million in floating
rate debt into fixed rate debt bearing a rate of 6.28%. As we
have not designated the interest rate swap as a hedge as defined
under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, changes in the fair
value of this swap will increase or decrease interest expense.
The fair value of the interest rate swap is based on quoted
market values, which are influenced by a number of factors,
including interest rates, amount of debt outstanding, and number
of months until maturity. Since we intend to hold the interest
rate swap until maturity, any increases or decreases in interest
expense resulting from changes in fair value will reverse by
maturity date. The agreement matures in April 2013. As of
December 31, 2007, the interest rate swap had a fair value
of ($0.5) million.
We recognize our derivative financial instruments as either
assets or liabilities on our consolidated balance sheets.
Stock
Compensation Plans
At December 31, 2007, we have three stock-based
compensation plans for employees and directors, which are
described more fully in Note 10 to the consolidated
financial statements. On January 1, 2006, we adopted
revised SFAS No. 123R, Share-Based Payment
under the modified prospective application method. We had
previously adopted the fair value recognition provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation, under the retroactive restatement transition
method in 2003. Adoption of SFAS No. 123R primarily
resulted in a change in our estimated forfeitures for unvested
stock-based compensation awards, which resulted in a cumulative
reversal of stock-based compensation expense of
$0.4 million for the quarter ended March 31, 2006.
Employee
Benefit Plan
We sponsor a 401(k) plan that covers substantially all of our
employees. Employees may elect to contribute to the plan from 1%
to 20% of their salary subject to statutory limitations. During
2007, we made matching contributions equal to 50% of the
employee contributions, up to a maximum of $1,250 per employee.
We recognized compensation expense of $0.5 million in 2007,
$0.4 million in 2006 and $0.3 million in 2005 for our
matching contributions to the plan.
Advertising
Costs
Advertising costs are expensed as incurred. Advertising expenses
were $0.4 million, $0.6 million, and $0.5 million
for the years ended December 31, 2007, 2006, and 2005,
respectively.
New
Accounting Pronouncements
Accounting for Uncertainty in Income Taxes. In
July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
(FIN 48). We adopted the provisions of
FIN 48 on January 1, 2007. Refer to the Income
Taxes portion of this note to the consolidated financial
statements for additional information.
Fair Value Option for Financial Assets and
Liabilities. In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to
choose to measure financial assets and liabilities (except for
those that are specifically exempted from SFAS 159) at
48
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING
POLICIES (Concluded)
|
fair value. The election to measure a financial asset or
liability at fair value can be made on an
instrument-by-instrument
basis and is irrevocable. The difference between carrying value
and fair value at the election date is recorded as a transition
adjustment to opening retained earnings. Subsequent changes in
fair value are recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15,
2007. At this time, we do not intend to adopt SFAS 159.
Reclassification
Certain amounts for prior periods have been reclassified to
conform to the current presentation.
|
|
3.
|
FAIR
VALUE OF FINANCIAL INSTRUMENTS
|
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it
is practicable to estimate their value.
Cash and Cash Equivalents and Restricted Cash and Cash
Equivalents. The carrying amount of cash and cash
equivalents and restricted cash and cash equivalents approximate
their fair value due to the short maturity of these instruments.
Restricted Securities Available for
Sale. Restricted securities consist of amounts
held in trusts by TPAs to pay claims on vehicle service
contracts. Securities for which we do not have the intent or
ability to hold to maturity are classified as available for sale
and stated at fair value. The fair value of restricted
securities are based on quoted market values.
Net Investment in Loans Receivable. Loans
receivable, net represents our net investment in Consumer Loans.
The fair value is determined by calculating the present value of
future loan payment inflows and dealer holdback outflows
estimated by the Company utilizing a discount rate comparable
with the rate used to calculate our allowance for credit losses.
Derivative Instruments. The fair value of
interest rate caps and interest rate swaps are based on quoted
market values.
Liabilities. The fair value of debt is
determined using quoted market prices, if available, or
calculated using the estimated value of each debt instrument
based on current rates offered to us for debt with similar
maturities.
A comparison of the carrying value and estimated fair value of
these financial instruments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash
|
|
$
|
74,814
|
|
|
$
|
74,814
|
|
|
$
|
54,137
|
|
|
$
|
54,137
|
|
Restricted securities available for sale
|
|
|
3,290
|
|
|
|
3,290
|
|
|
|
3,564
|
|
|
|
3,564
|
|
Net investment in Loans receivable
|
|
|
810,553
|
|
|
|
826,828
|
|
|
|
625,780
|
|
|
|
636,412
|
|
Derivative instruments
|
|
|
6
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
36,300
|
|
|
$
|
36,300
|
|
|
$
|
38,400
|
|
|
$
|
38,400
|
|
Secured financing
|
|
|
438,065
|
|
|
|
434,655
|
|
|
|
345,144
|
|
|
|
345,213
|
|
Mortgage note
|
|
|
6,070
|
|
|
|
5,867
|
|
|
|
6,824
|
|
|
|
6,642
|
|
Derivative instruments
|
|
|
478
|
|
|
|
478
|
|
|
|
|
|
|
|
|
|
49
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Loans receivable consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Dealer Loans receivable
|
|
$
|
803,539
|
|
|
$
|
724,093
|
|
Purchased Loans receivable
|
|
|
140,453
|
|
|
|
29,926
|
|
Other loans receivable
|
|
|
706
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
944,698
|
|
|
$
|
754,571
|
|
|
|
|
|
|
|
|
|
|
A summary of changes in Loans receivable is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
Dealer Loans
|
|
|
Purchased Loans
|
|
|
Other Loans
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
724,093
|
|
|
$
|
29,926
|
|
|
$
|
552
|
|
|
$
|
754,571
|
|
New loans (1)
|
|
|
571,197
|
|
|
|
139,340
|
|
|
|
|
|
|
|
710,537
|
|
Transfers (2)
|
|
|
(4,748
|
)
|
|
|
4,748
|
|
|
|
|
|
|
|
|
|
Dealer holdback payments
|
|
|
70,950
|
|
|
|
|
|
|
|
|
|
|
|
70,950
|
|
Net cash collections on loans
|
|
|
(543,846
|
)
|
|
|
(33,398
|
)
|
|
|
|
|
|
|
(577,244
|
)
|
Write-offs
|
|
|
(14,376
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
(14,568
|
)
|
Recoveries
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
29
|
|
Net change in other loans
|
|
|
|
|
|
|
|
|
|
|
154
|
|
|
|
154
|
|
Currency translation
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
803,539
|
|
|
$
|
140,453
|
|
|
$
|
706
|
|
|
$
|
944,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Dealer Loans
|
|
|
Purchased Loans
|
|
|
Other Loans
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
675,692
|
|
|
$
|
16,486
|
|
|
$
|
2,761
|
|
|
$
|
694,939
|
|
New loans (1)
|
|
|
532,869
|
|
|
|
25,562
|
|
|
|
|
|
|
|
558,431
|
|
Dealer holdback payments
|
|
|
70,110
|
|
|
|
|
|
|
|
|
|
|
|
70,110
|
|
Net cash collections on loans
|
|
|
(540,614
|
)
|
|
|
(11,940
|
)
|
|
|
|
|
|
|
(552,554
|
)
|
Write-offs
|
|
|
(13,950
|
)
|
|
|
(228
|
)
|
|
|
|
|
|
|
(14,178
|
)
|
Recoveries
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
46
|
|
Net change in other loans
|
|
|
|
|
|
|
|
|
|
|
(2,209
|
)
|
|
|
(2,209
|
)
|
Currency translation
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
724,093
|
|
|
$
|
29,926
|
|
|
$
|
552
|
|
|
$
|
754,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
New Dealer Loans includes advances to dealer-partners and
accelerated payments of dealer holdback. |
|
(2) |
|
Transfers relate to Dealer Loans that are now considered to be
Purchased Loans when we exercise our right to the dealer
holdback of certain dealer-partners Consumer Loans once
they are inactive and have originated less than 100 Consumer
Loans. |
50
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
LOANS
RECEIVABLE (Concluded)
|
A summary of changes in the Allowance for credit losses is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
Dealer Loans
|
|
|
Purchased Loans
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
127,881
|
|
|
$
|
910
|
|
|
$
|
128,791
|
|
Provision for credit losses (1)
|
|
|
19,468
|
|
|
|
197
|
|
|
|
19,665
|
|
Write-offs
|
|
|
(14,376
|
)
|
|
|
(192
|
)
|
|
|
(14,568
|
)
|
Recoveries
|
|
|
|
|
|
|
29
|
|
|
|
29
|
|
Currency translation
|
|
|
228
|
|
|
|
|
|
|
|
228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
133,201
|
|
|
$
|
944
|
|
|
$
|
134,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006
|
|
|
|
Dealer Loans
|
|
|
Purchased Loans
|
|
|
Total
|
|
|
Balance, beginning of period
|
|
$
|
130,722
|
|
|
$
|
689
|
|
|
$
|
131,411
|
|
Provision for credit losses(2)
|
|
|
11,094
|
|
|
|
403
|
|
|
|
11,497
|
|
Write-offs
|
|
|
(13,950
|
)
|
|
|
(228
|
)
|
|
|
(14,178
|
)
|
Recoveries
|
|
|
|
|
|
|
46
|
|
|
|
46
|
|
Currency translation
|
|
|
15
|
|
|
|
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
127,881
|
|
|
$
|
910
|
|
|
$
|
128,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Does not include a provision for credit losses of $282 related
to other items. |
|
(2) |
|
Does not include a negative provision for credit losses of $491
related to other items |
We lease office space and office equipment. We expect that in
the normal course of business, leases will be renewed or
replaced by other leases. Total rental expense from continuing
operations on all operating leases was $0.8 million,
$0.5 million and $0.3 million for 2007, 2006, and
2005, respectively. Contingent rentals under the operating
leases were insignificant. Our total minimum future lease
commitments under operating leases as of December 31, 2007
are as follows (in thousands):
|
|
|
|
|
Minimum Future Lease Commitments
|
|
|
|
|
2008
|
|
$
|
661
|
|
2009
|
|
|
455
|
|
2010
|
|
|
11
|
|
2011
|
|
|
|
|
2012
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,127
|
|
|
|
|
|
|
51
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
PROPERTY
AND EQUIPMENT
|
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land and land improvements
|
|
$
|
2,582
|
|
|
$
|
2,582
|
|
Building and improvements
|
|
|
11,175
|
|
|
|
9,761
|
|
Data processing equipment and software
|
|
|
35,073
|
|
|
|
30,943
|
|
Office furniture and equipment
|
|
|
2,525
|
|
|
|
1,782
|
|
Leasehold improvements
|
|
|
344
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
51,699
|
|
|
|
45,466
|
|
Less:
|
|
|
|
|
|
|
|
|
Accumulated depreciation on property and equipment
|
|
|
(30,302
|
)
|
|
|
(28,102
|
)
|
Accumulated depreciation on capital leased assets
|
|
|
(1,273
|
)
|
|
|
(1,161
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated depreciation
|
|
|
(31,575
|
)
|
|
|
(29,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,124
|
|
|
$
|
16,203
|
|
|
|
|
|
|
|
|
|
|
Property and equipment included capital leased assets of
$2.4 million and $2.9 million as of December 31,
2007 and 2006, respectively. Depreciation expense on property
and equipment, including capital leased assets, was
$4.1 million, $4.6 million and $5.2 million in
2007, 2006, and 2005, respectively.
52
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
We currently use four primary sources of debt financing:
(i) a revolving secured line of credit with a commercial
bank syndicate; (ii) a revolving secured warehouse facility
with institutional investors; (iii) SEC Rule 144A
asset-backed secured financings (Term ABS 144A) with
qualified institutional investors; and (iv) a residual
credit facility with an institutional investor. General
information for each of the Companys financing
transactions in place as of December 31, 2007 is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly owned
|
|
Issue
|
|
|
|
|
|
Financing
|
|
|
Interest Rate at
|
Financings
|
|
Subsidiary *
|
|
Number
|
|
Close Date
|
|
Maturity Date
|
|
Amount
|
|
|
December 31, 2007
|
|
Revolving Line of Credit
|
|
n/a
|
|
n/a
|
|
June 14, 2007
|
|
June 20, 2009
|
|
$
|
75,000
|
|
|
Either Eurocurrency rate plus 125 basis points (5.85%) or
the prime rate minus 165 basis points (5.60)%
|
Revolving Secured Warehouse Facility*
|
|
CAC Warehouse Funding Corp. II
|
|
2003-2
|
|
February 14, 2007
|
|
February 13, 2008
|
|
$
|
425,000
|
|
|
Commercial paper rate plus 65 basis points (5.76)%
|
Term ABS 144A
2006-2*
|
|
Credit Acceptance Funding LLC 2006-2
|
|
2006-2
|
|
November 21, 2006
|
|
n/a(1)
|
|
$
|
100,000
|
|
|
Fixed rate (5.38)%
|
Term ABS 144A
2007-1*
|
|
Credit Acceptance Funding LLC 2007-1
|
|
2007-1
|
|
April 12, 2007
|
|
n/a(2)
|
|
$
|
100,000
|
|
|
Fixed rate (5.32)%
|
Term ABS 144A
2007-2*
|
|
Credit Acceptance Funding LLC 2007-2
|
|
2007-2
|
|
October 29, 2007
|
|
n/a(3)
|
|
$
|
100,000
|
|
|
Fixed rate (6.22)%
|
Residual Credit Facility*
|
|
Credit Acceptance Residual Funding LLC
|
|
2006-3
|
|
September 11, 2007
|
|
September 9, 2008
|
|
$
|
50,000
|
|
|
LIBOR (4.60%) or the commercial paper rate plus 145 basis
points (6.56%)
|
|
|
|
* |
|
Financing made available only to a specified subsidiary of
the Company. |
|
(1) |
|
The total expected term of this facility is
22 months. |
|
(2) |
|
The total expected term of this facility is
24 months. |
|
(3) |
|
The total expected term of this facility is
26 months. |
Additional information related to the amounts outstanding on
each facility is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
|
Maximum Outstanding Balance
|
|
$
|
73,400
|
|
|
$
|
103,900
|
|
Weighted Average Outstanding Balance
|
|
$
|
43,837
|
|
|
$
|
58,749
|
|
Revolving Secured Warehouse Facility
|
|
|
|
|
|
|
|
|
Maximum Outstanding Balance
|
|
$
|
293,500
|
|
|
$
|
218,500
|
|
Weighted Average Outstanding Balance
|
|
$
|
221,155
|
|
|
$
|
138,780
|
|
53
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Revolving Line of Credit
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
36,300
|
|
|
$
|
38,400
|
|
Letter(s) of credit
|
|
|
173
|
|
|
|
860
|
|
Amount Available for borrowing
|
|
|
38,527
|
|
|
|
95,740
|
|
Interest Rate
|
|
|
5.60
|
%
|
|
|
7.06
|
%
|
Revolving Secured Warehouse Facility
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
198,100
|
|
|
$
|
171,000
|
|
Amount Available for borrowing
|
|
|
226,900
|
|
|
|
154,000
|
|
Contributed Dealer Loans
|
|
|
225,674
|
|
|
|
249,247
|
|
Interest Rate
|
|
|
5.76
|
%
|
|
|
6.00
|
%
|
Term ABS 144A
2006-1
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
|
|
|
$
|
74,144
|
|
Contributed Dealer Loans
|
|
|
|
|
|
|
115,664
|
|
Interest Rate
|
|
|
|
|
|
|
5.36
|
%
|
Term ABS 144A
2006-2
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
89,965
|
|
|
$
|
100,000
|
|
Contributed Dealer Loans
|
|
|
129,950
|
|
|
|
125,178
|
|
Interest Rate
|
|
|
5.38
|
%
|
|
|
5.38
|
%
|
Term ABS 144A
2007-1
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
100,000
|
|
|
$
|
|
|
Contributed Dealer Loans
|
|
|
130,841
|
|
|
|
|
|
Interest Rate
|
|
|
5.32
|
%
|
|
|
|
|
Term ABS 144A
2007-2
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
100,000
|
|
|
$
|
|
|
Contributed Dealer Loans
|
|
|
132,695
|
|
|
|
|
|
Interest Rate
|
|
|
6.22
|
%
|
|
|
|
|
Residual Credit Facility
|
|
|
|
|
|
|
|
|
Balance Outstanding
|
|
$
|
|
|
|
$
|
|
|
Contributed Dealer Loans
|
|
|
|
|
|
|
|
|
Interest Rate
|
|
|
4.60
|
%
|
|
|
5.32
|
%
|
Line of
Credit Facility
During the second quarter of 2007, we extended the maturity of
our line of credit facility from June 20, 2008 to
June 20, 2009. We also reduced the amount of the facility
from $135.0 million to $75.0 million because the
funding available under this facility and our warehouse facility
exceeded our current revolving credit borrowing needs. In
addition, the interest rate on borrowings under the facility was
reduced from the prime rate or 1.30% over the Eurocurrency rate,
at our option to the prime rate minus 1.65% or 1.25% over the
Eurocurrency rate, at our option. For additional information
regarding the current amount and maturity of the facility, see
Note 13 to the consolidated financial statements.
Borrowings under the credit facility are subject to a
borrowing-base limitation. This limitation equals 80% of the net
book value of Dealer Loans plus 80% of the net book value of
Purchased Loans, less a hedging reserve (not exceeding
$1.0 million), the amount of letters of credit issued under
the line of credit, and the amount of other debt
54
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
secured by the collateral which secures the line of credit.
Borrowings under the credit agreement are secured by a lien on
most of our assets. We must pay annual and quarterly fees on the
amount of the facility.
Revolving
Secured Warehouse Facility
This facility is used to provide financing to our subsidiary CAC
Warehouse Funding Corp. II (Warehouse Funding).
During the first quarter of 2007, we extended the maturity of
this facility from February 14, 2007 to February 13,
2008. During the fourth quarter of 2007 we increased the amount
of the facility from $325.0 million to $425.0 million.
For additional information regarding the current amount and
maturity of the facility, see Note 13 to the consolidated
financial statements.
During the third quarter of 2007, we executed an amendment to
the facility. Under the revised facility, we can now contribute
Purchased Loans in addition to Dealer Loans, to Warehouse
Funding. Under the facility, we convey Dealer and Purchased
Loans to this subsidiary in return for cash and equity in the
subsidiary. In turn, Warehouse Funding pledges the Dealer and
Purchased Loans as collateral to institutional investors to
secure loans that will fund the cash portion of the purchase
price of the Dealer and Purchased Loans. The financing provided
to Warehouse Funding under the facility is limited to the lesser
of 80% of the net book value of the contributed Dealer and
Purchased Loans or the facility limit.
The agreement requires that certain amounts outstanding under
the facility be refinanced within 360 days of the most
recent renewal. The most recent renewal occurred on
February 14, 2007, and the most recent refinancing occurred
on October 29, 2007. If such financing had not occurred,
the transaction would cease to revolve, would amortize as
collections were received and, at the option of the
institutional investors, may be subject to acceleration and
foreclosure.
Warehouse Funding is liable for any amounts due under the
facility. Even though Warehouse Funding and the Company are
consolidated for financial reporting purposes, the financing is
non-recourse to us. As Warehouse Funding is organized as a
separate legal entity from the Company, assets of Warehouse
Funding (including the conveyed Dealer and Purchased Loans) will
not be available to satisfy the general obligations of the
Company. All of Warehouse Fundings assets have been
encumbered to secure its obligations to its creditors.
Interest on borrowings under the facility has been limited to a
maximum rate of 6.75% through interest-rate-cap agreements
executed in the first and fourth quarters of 2007. Warehouse
Funding pays us a monthly servicing fee equal to 6% of the
collections received with respect to the conveyed Dealer and
Purchased Loans. The fee is paid out of the collections. Except
for the servicing fee and holdback payments due to
dealer-partners, we do not have any rights in any portion of
such collections until all outstanding principal, accrued and
unpaid interest, fees and other related costs are paid in full.
Term ABS
144A Financings
In 2006 and 2007, four of our wholly owned subsidiaries, Credit
Acceptance Funding LLC
2006-1,
Credit Acceptance Funding LLC
2006-2,
Credit Acceptance Funding LLC
2007-1 and
Credit Acceptance Funding LLC
2007-2 (the
Funding LLCs), each completed a secured financing
transaction in which they received $100.0 million. In
connection with these transactions, we conveyed Dealer Loans to
each Funding LLC for cash and the sole membership interest in
that Funding LLC. In turn, each Funding LLC conveyed the Dealer
Loans to a respective trust that issued $100.0 million in
notes to qualified institutional investors. In each transaction,
the notes were rated Aaa by Moodys Investor
Service and AAA by Standard & Poors
Rating Services. Financial insurance policies were issued in
connection with the transactions. The policies guarantee the
timely payment of interest and ultimate repayment of principal
on the final scheduled distribution date.
Each financing has a specified revolving period during which we
may be required, and are likely, to convey additional Dealer
Loans to each Funding LLC. Each Funding LLC will then convey
them to their respective trust, to maintain the financing at the
$100.0 million level. (The proceeds of the initial Dealer
Loan conveyances to the
55
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Funding LLCs were used to purchase Dealer Loans, on an
arms-length basis, from Warehouse Funding.) At the end of
the revolving period, the debt outstanding under each financing
will begin to amortize.
The financings create loans for which the trusts are liable and
which are secured by all the assets of each trust. Such loans
are non-recourse to us, even though the trusts, the Funding LLCs
and the Company are consolidated for financial reporting
purposes. Because the Funding LLCs are organized as separate
legal entities from the Company, their assets (including the
conveyed Dealer Loans) are not available to satisfy our general
obligations. We receive a monthly servicing fee on each
financing equal to 6% of the collections received with respect
to the conveyed Dealer Loans. The fee is paid out of the
collections. Aside from the servicing fee and payments due to
dealer-partners, we do not receive, or have any rights in the
collections. However, in our capacity as Servicer of the Dealer
Loans, we do have a limited right to exercise a
clean-up
call option to purchase Dealer Loans from the Funding LLCs
under certain specified circumstances. Alternatively, when a
trusts underlying indebtedness is paid in full, either
through collections or through a prepayment of the indebtedness,
the trust is to pay any remaining collections over to its
Funding LLC as the sole beneficiary of the trust. The
collections will then be available to be distributed to us as
the sole member of the respective Funding LLC.
The table below sets forth certain additional details regarding
the outstanding Term ABS 144A Financings (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value of
|
|
|
|
|
Expected
|
|
Term ABS 144A
|
|
Issue
|
|
|
|
Dealer Loans
|
|
|
|
|
Annualized
|
|
Financing
|
|
Number
|
|
Close Date
|
|
Conveyed at Closing
|
|
|
Revolving Period
|
|
Rates *
|
|
|
Term ABS 144A
2006-2
|
|
2006-2
|
|
November 21, 2006
|
|
$
|
125,600
|
|
|
12 months (Through November 15, 2007)
|
|
|
7.4
|
%
|
Term ABS 144A
2007-1
|
|
2007-1
|
|
April 12, 2007
|
|
$
|
125,700
|
|
|
12 months (Through April 15, 2008)
|
|
|
7.2
|
%
|
Term ABS 144A
2007-2
|
|
2007-2
|
|
October 29, 2007
|
|
$
|
125,000
|
|
|
12 months (Through October 15, 2008)
|
|
|
8.0
|
%
|
|
|
|
* |
|
Includes underwriters fees, insurance premiums and
other costs. |
Residual
Credit Facility
Another wholly owned subsidiary, Credit Acceptance Residual
Funding LLC (Residual Funding), has a
$50.0 million secured credit facility with an institutional
investor. This facility allows Residual Funding to finance its
purchase of trust certificates from special-purpose entities
(the Term SPEs) that have purchased Dealer Loans
under our term securitization transactions. Historically, the
Term SPEs residual interests in Dealer Loans, represented
by their trust certificates, have proven to have value that
increases as their term securitization obligations amortize.
During the third quarter of 2007, we executed an amendment to
the residual funding credit facility extending the maturity date
from September 19, 2007 to September 9, 2008.
Additionally, we increased the maximum facility advance rate
from 65% to 70% enabling the Term SPEs to realize and distribute
to us up to 70% of that increase in value prior to the time the
related term securitization senior notes are paid in full.
Residual Fundings interests in Dealer Loans, represented
by its purchased trust certificates, are subordinated to the
interests of term securitization senior noteholders. However,
the entire arrangement is non-recourse to us. Residual Funding
is organized as a separate legal entity from the Company.
Therefore its assets, including purchased trust certificates,
are not available to satisfy our general obligations, even
though Residual Funding and the Company are consolidated for
financial reporting purposes.
Mortgage
Loan
We have a mortgage loan from a commercial bank that is secured
by a first mortgage lien on our headquarters building and an
assignment of all leases, rents, revenues and profits under all
present and future leases of the building. There was
$6.1 million and $6.8 million outstanding on this loan
as of December 31, 2007 and 2006,
56
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively. The loan matures on June 9, 2009, bears
interest at a fixed rate of 5.35%, and requires monthly payments
of $92,156 and a balloon payment at maturity for the balance of
the loan.
Capital
Lease Obligations
As of December 31, 2007, we had various capital lease
obligations outstanding for computer equipment, with monthly
payments totaling $73,000. The total amount of capital lease
obligations outstanding as of December 31, 2007 and 2006
were $1.7 million and $1.8 million, respectively.
These capital lease obligations bear interest at rates ranging
from 6.99% to 8.71% and have maturity dates between February
2008 and November 2010.
Letters
of Credit
Letters of credit are issued by a commercial bank syndicate and
reduce amounts available under our revolving line of credit. As
of December 31, 2007 and December 31, 2006, we had
letters of credit outstanding of $0.2 million and
$0.9 million, respectively. The letters of credit relate to
reinsurance agreements. The letters of credit expire on
May 26, 2008, at which time they will be automatically
extended for a period of one year unless we are notified
otherwise by the commercial bank syndicate.
Principal
Debt Maturities
The scheduled principal maturities of our debt at
December 31, 2007 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of Credit
|
|
|
|
|
|
Mortgage
|
|
|
Capital Lease
|
|
|
|
|
Year
|
|
Facility
|
|
|
Secured Financing
|
|
|
Loan
|
|
|
Obligations
|
|
|
Total
|
|
|
2008 (1)
|
|
$
|
|
|
|
$
|
367,942
|
|
|
$
|
796
|
|
|
$
|
701
|
|
|
$
|
369,439
|
|
2009 (2)(3)
|
|
|
36,300
|
|
|
|
120,123
|
|
|
|
5,273
|
|
|
|
641
|
|
|
|
162,337
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354
|
|
|
|
354
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,300
|
|
|
$
|
488,065
|
|
|
$
|
6,069
|
|
|
$
|
1,696
|
|
|
$
|
532,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The total expected term of Term ABS 144A
2006-2 is
22 months. |
|
(2) |
|
The total expected term of Term ABS 144A
2007-1 is
24 months. |
|
(3) |
|
The total expected term of Term ABS 144A
2007-2 is
26 months. |
Debt
Covenants
As of December 31, 2007, we are in compliance with various
restrictive debt covenants that require the maintenance of
certain financial ratios and other financial conditions. The
most restrictive covenants require a minimum ratio of our assets
to debt and a minimum ratio of our earnings before interest,
taxes and non-cash expenses to fixed charges. The covenants also
limit the maximum ratio of our funded debt to tangible net
worth. Additionally, we must maintain, as of the end of the
year, consolidated net income of not less than $1.00 for the two
consecutive quarters then ending. Some of the debt covenants may
indirectly limit the payment of dividends on common stock. For
additional information regarding our debt covenants, see
Note 13 to the consolidated financial statements.
57
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
RELATED
PARTY TRANSACTIONS
|
In the normal course of our business, we have Dealer Loans with
affiliated dealer-partners owned or controlled by: (i) our
majority shareholder and Chairman; (ii) a member of the
Chairmans immediate family; and (iii) our former
President, Keith McCluskey. Mr. McCluskey resigned from his
position with the Company effective September 1, 2006.
Transactions with Mr. McCluskey are reported below through
December 31, 2006. Our Dealer Loans to affiliated
dealer-partners and non-affiliated dealer-partners are on the
same terms.
Affiliated Dealer Loan balances were $16.1 million, and
$22.4 million as of December 31, 2007 and 2006,
respectively. Affiliated Dealer Loans balances were 2.0% and
3.1% of total consolidated Dealer Loan balances as of
December 31, 2007 and 2006, respectively. A summary of
related party Dealer Loan activity is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Affiliated
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
Affiliated
|
|
|
|
|
|
|
Dealer-Partner
|
|
|
% of
|
|
|
Dealer-Partner
|
|
|
% of
|
|
|
Dealer-Partner
|
|
|
% of
|
|
|
|
Activity
|
|
|
Consolidated
|
|
|
Activity
|
|
|
Consolidated
|
|
|
Activity
|
|
|
Consolidated
|
|
|
New Loans
|
|
$
|
10,111
|
|
|
|
1.8
|
%
|
|
$
|
17,851
|
|
|
|
3.3
|
%
|
|
$
|
19,534
|
|
|
|
4.2
|
%
|
Affiliated dealer-partner revenue
|
|
$
|
4,529
|
|
|
|
2.4
|
%
|
|
$
|
6,347
|
|
|
|
3.6
|
%
|
|
$
|
6,206
|
|
|
|
3.7
|
%
|
Dealer holdback payments
|
|
$
|
1,801
|
|
|
|
2.5
|
%
|
|
$
|
2,355
|
|
|
|
3.4
|
%
|
|
$
|
2,184
|
|
|
|
4.2
|
%
|
Beginning in 2002, entities owned by our majority shareholder
and Chairman began offering secured lines of credit to third
parties in a manner similar to a program previously offered by
us. In December of 2004, our majority shareholder and Chairman
sold his ownership interest in these entities; however, he
continues to have indirect control over these entities and has
the right or obligation to reacquire the entities under certain
circumstances until December 31, 2014 or the repayment of
the related purchase money note.
Pursuant to an employment agreement with the Companys
former President, Mr. McCluskey, dated April 19, 2001,
we loaned Mr. McCluskeys dealerships
$0.9 million. Obligations under this note, including all
principal and interest, were paid in full on August 16,
2006. In addition, pursuant to the employment agreement, we
loaned Mr. McCluskey approximately $0.5 million. The
note, including all principal and interest, is due on
April 19, 2011, bears interest at 5.22% and is unsecured.
The balance of the note including accrued but unpaid interest
was approximately $0.5 million and $0.6 million as of
December 31, 2007 and 2006, respectively.
58
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The income tax provision, excluding the results of the
discontinued United Kingdom operations, consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income from continuing operations before provision for income
taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
82,966
|
|
|
$
|
90,506
|
|
|
$
|
107,420
|
|
Foreign
|
|
|
215
|
|
|
|
134
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
83,181
|
|
|
$
|
90,640
|
|
|
$
|
108,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current provision (credit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
8,446
|
|
|
$
|
30,902
|
|
|
$
|
26,465
|
|
State
|
|
|
93
|
|
|
|
687
|
|
|
|
1,979
|
|
Foreign
|
|
|
(41
|
)
|
|
|
(435
|
)
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,498
|
|
|
|
31,154
|
|
|
|
28,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred provision (credit) for income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
19,201
|
|
|
|
166
|
|
|
|
10,182
|
|
State
|
|
|
1,159
|
|
|
|
232
|
|
|
|
1,455
|
|
Foreign
|
|
|
11
|
|
|
|
241
|
|
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,371
|
|
|
|
639
|
|
|
|
11,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and penalties expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
749
|
|
|
|
|
|
|
|
|
|
Penalties
|
|
|
(51
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
29,567
|
|
|
$
|
31,793
|
|
|
$
|
40,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective January 1, 2007, we began to recognize interest
and penalties related to income tax matters in provision for
income taxes expense.
59
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
INCOME
TAXES (Continued)
|
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):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
$
|
49,148
|
|
|
$
|
46,833
|
|
Accrued liabilities
|
|
|
17
|
|
|
|
5,346
|
|
Deferred dealer enrollment fees
|
|
|
321
|
|
|
|
453
|
|
Stock-based compensation
|
|
|
2,058
|
|
|
|
367
|
|
Other, net
|
|
|
1,003
|
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
52,547
|
|
|
|
53,329
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Valuation of receivables
|
|
|
113,407
|
|
|
|
93,863
|
|
Depreciable assets
|
|
|
873
|
|
|
|
820
|
|
Deferred origination costs
|
|
|
1,756
|
|
|
|
1,700
|
|
Foreign income tax
|
|
|
|
|
|
|
549
|
|
Other, net
|
|
|
1,279
|
|
|
|
794
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
117,315
|
|
|
|
97,726
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
64,768
|
|
|
$
|
44,397
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the U.S. Federal statutory rate to the
Companys effective tax rate, excluding the results of the
discontinued United Kingdom operations, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes
|
|
|
1.0
|
|
|
|
0.7
|
|
|
|
2.1
|
|
Foreign income taxes
|
|
|
(0.1
|
)
|
|
|
(0.3
|
)
|
|
|
(0.2
|
)
|
Undistributed/distributed foreign earnings
|
|
|
0.7
|
|
|
|
0.1
|
|
|
|
0.9
|
|
Interest and penalties
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(1.8
|
)
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
35.6
|
%
|
|
|
35.1
|
%
|
|
|
37.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effective tax rates for 2007, 2006, and 2005 differed from
the federal statutory tax rate of 35% primarily due to state
income taxes and reserves for uncertain tax positions and
related interest and penalties that are included in the
provision for income taxes.
We adopted FIN 48 on January 1, 2007. As a result of
the implementation, we recognized a $0.1 million increase
to reserves for uncertain tax positions. This increase was
accounted for as an adjustment to the beginning balance of
retained earnings on the balance sheet. As of December 31,
2007, changes to our tax contingencies that
60
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
INCOME
TAXES (Concluded)
|
are reasonably possible in the next twelve months are not
material. The following table is a summary of changes of the
reserve for unrecognized gross tax benefits:
|
|
|
|
|
|
|
2007
|
|
|
Gross tax contingencies balance at January 1, 2007
|
|
$
|
9,974
|
|
Additions based on tax position related to current year
|
|
|
2,162
|
|
Additions for tax position of prior years
|
|
|
59
|
|
Reductions for tax positions of prior years
|
|
|
(2,518
|
)
|
Reductions as a result of a lapse of the statute of limitations
|
|
|
(226
|
)
|
|
|
|
|
|
Gross tax contingencies balance at December 31, 2007
|
|
$
|
9,451
|
|
|
|
|
|
|
As of January 1, 2007, upon the FIN 48 implementation,
we had approximately $3.0 million of accrued interest and
penalties related to uncertain tax positions.
We are subject to U.S. federal income tax as well as income
tax in multiple state jurisdictions. We have substantially
concluded all U.S. federal income tax matters for years
through 2003. Substantially all material state and local tax
matters have been concluded for years through 2003 and foreign
tax matters have been concluded through 2003. The federal income
tax returns for 2004, 2005 and 2006 are currently under
examination.
During 2007, 2006 and 2005, we remitted substantially all of our
accumulated earnings from foreign subsidiaries as profits to the
U.S. and accrued or paid U.S. income taxes accordingly.
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 dilutive common stock equivalents
outstanding. Dilutive common stock equivalents included in the
computation represent shares issuable upon assumed exercise of
stock options and outstanding time based restricted stock that
would have a dilutive effect using the treasury stock method.
The share effect is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted average common shares outstanding
|
|
|
30,053,129
|
|
|
|
33,035,693
|
|
|
|
36,991,136
|
|
Dilutive effect of common stock equivalents
|
|
|
1,100,559
|
|
|
|
2,247,785
|
|
|
|
2,216,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and dilutive common shares
|
|
|
31,153,688
|
|
|
|
35,283,478
|
|
|
|
39,207,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no stock options that would be anti-dilutive for the
years presented.
Stock
Repurchase Program
In 1999, our board of directors approved a stock repurchase
program which authorizes us to purchase common shares in the
open market or in privately negotiated transactions at price
levels we deem attractive. As of December 31, 2007, we have
repurchased approximately 20.4 million shares under the
stock repurchase program at a cost of $399.2 million.
Included in the stock repurchases to date are 12.5 million
shares of common stock purchased through four modified Dutch
auction tender offers at a cost of $304.4 million. As of
December 31, 2007, we have authorization to repurchase up
to $29.1 million of our common stock.
61
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
CAPITAL
TRANSACTIONS (Continued)
|