SEC Filing | Credit Acceptance Corporation

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): MAY 14, 2004 CREDIT ACCEPTANCE CORPORATION (Exact Name of Registrant as Specified in its Charter) Commission File Number 000-20202 MICHIGAN 38-1999511 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 25505 W. TWELVE MILE ROAD, SUITE 3000 48034-8339 SOUTHFIELD, MICHIGAN (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (248) 353-2700

ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS. (c) Exhibits. 99.1 Press Release dated May 14, 2004 ITEM 12. RESULTS OF OPERATIONS AND FINANCIAL CONDITION. On May 14, 2004, Credit Acceptance Corporation (the "Company") issued a press release announcing its financial results for the three months ended March 31, 2004. The press release, dated May 14, 2004, is attached as Exhibit 99.1 to this Form 8-K. The financial information included in the press release includes a presentation of net income excluding certain items, in addition to the presentation of the Company's reported net income. The Company believes this information is helpful to investors in measuring the performance of the business, in that excluding the impact of certain items and foreign exchange losses on forward contracts more accurately reflects the financial performance of the business and allows shareholders to better compare results between periods and make more informed assumptions about future results. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. CREDIT ACCEPTANCE CORPORATION (Registrant) By: /s/ Douglas W. Busk Douglas W. Busk Chief Financial Officer and Treasurer May 17, 2004

INDEX OF EXHIBITS EXHIBIT NO. DESCRIPTION ----------- --------------------------------------- 99.1 Press Release dated May 14, 2004.

EXHIBIT 99.1 SILVER TRIANGLE BUILDING 25505 WEST TWELVE MILE ROAD SUITE 3000 SOUTHFIELD, MI 48034-8339 (248) 353-2700 WWW.CREDITACCEPTANCE.COM NEWS RELEASE FOR IMMEDIATE RELEASE DATE: MAY 14, 2004 INVESTOR RELATIONS: DOUGLAS W. BUSK CHIEF FINANCIAL OFFICER (248) 353-2700 EXT. 432 IR@CREDITACCEPTANCE.COM NASDAQ SYMBOL: CACC CREDIT ACCEPTANCE ANNOUNCES: - 1ST QUARTER EARNINGS SOUTHFIELD, MICHIGAN -- MAY 14, 2004 -- CREDIT ACCEPTANCE CORPORATION (NASDAQ: CACC) Credit Acceptance Corporation (the "Company") announced consolidated net income for the three months ended March 31, 2004 of $1,530,000 or $0.04 per diluted share compared to $8,593,000 or $0.20 per diluted share for the same period in 2003. Results for the quarter include: - An increase in loan originations of 40% to $307.7 million - Loan performance consistent with the Company's expectations - New vehicle service contract agreements resulting in higher per unit profitability - A change in estimate for establishing the allowance for loan losses - A change in estimate for recognizing finance charges and the provision for earned but unpaid revenue - A new policy for recording revenue on vehicle service contracts LOAN ORIGINATIONS IN THE UNITED STATES (Dollars in thousands) THREE MONTHS ENDED FOR THE YEARS ENDED MARCH 31, DECEMBER 31, ------------------------------ ---------------------------------------------- 2004 2003 2003 2002 2001 --------------- -------------- ---------------- ------------- ------------- Loan originations $ 307,660 $ 220,282 $ 785,667 $ 571,690 $ 646,572 Number of loans originated 23,841 18,206 62,334 49,650 61,277 Number of active dealer-partners (1) 843 632 916 789 1,120 Loans per active dealer-partner 28.3 28.8 68.1 62.9 54.7 Average loan size $ 12.9 $ 12.1 $ 12.6 $ 11.5 $ 10.6 (1) Active dealer-partners are dealer-partners who submitted at least one loan during the period.

The Company reported loan originations for the three months ended March 31, 2004 of $307.7 million compared to $220.3 million in the same period in 2003, representing an increase of 40%. The increase in loan originations in the first quarter of 2004 is due to: (i) an increase in the number of active dealer-partners due to increased dealer-partner enrollments, and (ii) an increase in the average loan size. The origination growth rate experienced in the first quarter was higher than the Company's expected long-term growth rate. For the month of April 2004, loan origination growth slowed to 16% when compared to April 2003. The Company made no material changes in credit policy or pricing in the first quarter of 2004, other than routine changes designed to maintain current profitability levels. LOAN PORTFOLIO PERFORMANCE The following table compares the Company's forecast of collection rates for loans originated by year as of March 31, 2004 with the forecast as of December 31, 2003. Loan Origination March 31, 2004 December 31, 2003 Year Forecasted Collection % Forecasted Collection % Variance - --------------- --------------------------- --------------------------- ----------- 1992 81.5% 81.5% 0.0% 1993 75.8% 75.7% 0.1% 1994 61.9% 61.8% 0.1% 1995 56.2% 56.2% 0.0% 1996 56.6% 56.5% 0.1% 1997 59.5% 59.3% 0.2% 1998 67.9% 67.7% 0.2% 1999 72.1% 71.9% 0.2% 2000 71.2% 71.0% 0.2% 2001 67.0% 66.9% 0.1% 2002 68.8% 69.1% -0.3% 2003 72.1% 72.0% 0.1% During the quarter ended March 31, 2004, collection rates were consistent with the Company's expectations. NEW VEHICLE SERVICE CONTRACT AGREEMENTS Net income was impacted by the Company's new policy for recording revenue on third party service contracts. During the quarter, the Company entered into agreements with two new third party vehicle service contract providers. The two new agreements differ from the existing agreement in three material respects: (i) the new agreements provide a commission to the Company on all vehicle service contracts sold by its dealer-partners, regardless of whether the vehicle service contract is financed by the Company, (ii) the new agreements pay a higher commission on vehicle service contracts financed by the Company, and (iii) the new agreements allow the Company to participate in underwriting profits depending on the level of future claims paid. Under the old agreement, the Company received a commission only on vehicle service contracts financed by the Company. Through December 31, 2003, the Company recognized income for commissions received on third party vehicle service contracts at the time the service contract was sold since: (i) delivery of the vehicle service contract occurs at this time, (ii) the Company bears no further obligation under the service contract, and (iii) the Company's commission is not subject to cancellation. These three criteria continue to be true under the two new agreements, however, since the commission paid on financed vehicle service contracts is higher than the commission paid on non-financed vehicle service contracts, the Company concluded the difference in commissions rates was evidence of a multiple element revenue arrangement as defined under the provisions of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition". As a result, the Company considers the amount received for financed vehicle service contracts to be comprised of two components, a component

relating to the fair value of the commission (a "broker fee") and a larger component relating to providing the financing on the related loan (a "financing premium"). Beginning January 1, 2004, broker fees generated under the two new agreements will be recognized over the life of the related vehicle service contract. Broker fees generated under the old agreement will be recognized upon the sale of the service contract. Under all three agreements, the financing premium will be deferred and amortized over the life of the underlying loan as an adjustment to the yield consistent with the Company's accounting for finance charges under the interest method. While the new policy for accounting for vehicle service contracts will result in a change in the timing of GAAP reported revenue, the timing of cash flows related to vehicle service contract revenue has not changed, and the amount of cash flow generated will be greater under the new agreements than under the prior agreement. Under the new policy, the Company recognized $2.1 million in commission income during the current quarter, and deferred $5.8 million. The Company estimates the deferred portion will be recognized into income as follows (in thousands): 2004 $ 2,311 2005 2,254 2006 1,135 2007 94 ---------- $ 5,794 ========== Had the Company historically deferred vehicle service contract revenue using the same policy applied in the current quarter, current period earnings would have been $1,177,000 higher than reported earnings and prior year earnings of the same period would have been $685,000 lower than reported earnings. Had the Company continued to fully recognize vehicle service contract income at the time of sale, current period earnings would have been $3,767,000 higher than reported earnings. CHANGE IN ESTIMATE FOR ESTABLISHING THE ALLOWANCE FOR LOAN LOSSES Net income was also impacted by the Company's change in estimate for establishing its allowance for credit losses. The Company records loan loss reserves in accordance with the provisions of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114"). Under SFAS No. 114, the Company compares the present value of estimated future collections for each dealer-partner's loan portfolio to the Company's net investment in that portfolio. During the quarter, the Company developed a model for estimating the amount and timing of future dealer holdback payments and began to include the present value of expected future dealer holdback payments in its loss estimate. Considering estimated future dealer holdback payments increases the Company's loss estimate as cash flows used to evaluate impairment are reduced. This change resulted in a $9.4 million increase in the allowance for credit losses and reduced after-tax earnings by approximately $6.1 million. Deducting dealer holdback payments from the cash flows used to evaluate impairment will not increase the cash amount of losses or future charge-offs against the allowance. CHANGE IN ESTIMATE FOR RECOGNIZING FINANCE CHARGES Additionally, net income was impacted by a revised methodology for recognizing finance charges and the related provision for earned but unpaid income as a result of an enhancement to the Company's accounting system.(1) This revised methodology resulted in a change in the timing of revenue recognition as the actual term of contracts on a Loan by Loan basis was longer than the average Loan term as calculated under the pooling methodology, resulting in an approximately $3.5 million reduction in finance charges during the three months ended March 31, 2004, of which approximately $3.3 million relates to periods prior to December 31, 2003. In addition, the revised methodology resulted in a change in the amount of revenue recognized on a Loan prior to the Loan transferring to non-accrual status, resulting in an increase in finance charges and a corresponding increase in the provision for earned but unpaid revenue of approximately $3.5 million for the three months

ended March 31, 2004. The Company does not believe the revised methodology will materially impact reported earnings in future periods. (1) The Company recognizes finance charge income in accordance with the provisions of Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases (an Amendment of FASB Statements No. 13, 60, and 65 and a Rescission of FASB Statement No. 17)" ("SFAS No. 91"). SFAS No. 91 requires the Company to recognize income under the interest method such that income is recognized on a level yield basis during the life of the underlying asset. Earned but unpaid servicing fees are fully reserved at the time the loan is transferred to non-accrual status in accordance with the Company's policy. During the first quarter of 2004, the Company revised its methodology for applying SFAS No. 91 such that finance charge income and the amount of the provision for earned but unpaid income at the time a loan is transferred to non-accrual status can be calculated for each individual loan. Prior to the first quarter of 2004, the Company calculated finance charge income and the provision for earned but unpaid revenue using a pooling methodology. The pooling methodology required the Company to make various assumptions and estimates which impacted the timing of income recognition and the classification of finance charge revenue and the provision for earned but unpaid revenue. Because the revised methodology reduces the Company's need to make estimates, the Company believes that these enhancements improve the precision of the Company's calculation of finance charge revenue and the provision for earned but unpaid revenue. SEGMENT INFORMATION (Dollars in thousands, except per share data) THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 2004 2003 % Change ---------------- ---------------- ------------ NET INCOME (LOSS) ----------------- United States $ 1,103 $ 7,480 (85.3)% United Kingdom 226 1,306 (82.7) Automobile Leasing 304 (317) 195.9 Other (103) 124 (183.1) --------------- --------------- Consolidated $ 1,530 $ 8,593 (82.2)% =============== =============== NET INCOME (LOSS) PER SHARE --------------------------- United States $ 0.03 $ 0.18 (83.3)% United Kingdom -- 0.03 (100.0) Automobile Leasing 0.01 (0.01) 200.0 Other -- -- -- --------------- --------------- Consolidated $ 0.04 $ 0.20 (80.0)% =============== =============== Diluted shares outstanding 42,159,338 42,407,981 RECONCILIATION OF REPORTED NET INCOME TO ADJUSTED NET INCOME The following table reconciles reported net income to adjusted net income (reported net income excluding certain items) for the three months ended March 31, 2004 and 2003: THREE MONTHS ENDED MARCH 31, ---------------------------------- (Dollars in thousands, except per share data) 2004 2003 -------------- ---------------- Reported net income $ 1,530 $ 8,593 Inclusion of dealer holdback in estimate of losses on the loan portfolio (1) 6,110 -- Revised methodology for recognizing finance charges (1) 2,282 -- Foreign exchange gain due to forward contracts (2) (98) -- Interest income from Internal Revenue Service (3) -- (400) --------------- --------------- Net income excluding certain items $ 9,824 $ 8,193 Change in vehicle service contract revenue if new policy had been retroactively applied (4) 1,177 (685) --------------- --------------- Adjusted net income 11,001 7,508 Diluted weighted average shares outstanding 42,159,338 42,407,981 Adjusted net income per share $ 0.26 $ 0.18 =============== =============== The Company's reported net income includes certain items which the Company believes should be considered in measuring the performance of the business when comparing current period results with the same period in the prior year. Management believes this information is important to shareholders because it allows shareholders to better compare results between periods and make more informed assumptions about future results. The reason each item should be considered is as follows:

(1) These items represent changes in estimates or changes in methodology that impact the current period more significantly than the prior period. (2) This item represents a current period gain which is offset by a reduction in shareholders' equity due to the decline in value of foreign currency denominated assets. (3) The Company expects cash inflows of this type to be infrequent. (4) This adjustment allows the reader to compare the current quarter to the prior year same period assuming a consistent treatment of vehicle service contract revenue. While the treatment of vehicle service contract revenue changed as a result of facts arising in the current period, the timing of cash flows generated from vehicle service contract revenue has not materially changed under the new agreements. The Company uses adjusted net income for performance purposes in determining bonus compensation paid under the Company's incentive compensation plans. Refer to the Company's Form 10-Q, which will be filed today with the Securities and Exchange Commission, and will appear on the Company's website at www.creditacceptance.com for a complete discussion of the results of operations and financial data for the three months ended March 31, 2004. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION Certain statements in this release that are not historical facts, such as those using terms like "believes," "expects," "anticipates," "estimates" and those regarding the Company's future plans and objectives, are "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements represent the Company's outlook only as of the date of this release. While the Company believes that its forward-looking statements are reasonable, actual results could differ materially since the statements are based on current expectations, which are subject to risks and uncertainties. Factors that might cause such a difference include the following: o the Company's potential inability to accurately forecast and estimate future collections and historical collection rates, o increased competition from traditional financing sources and from non-traditional lenders, o unavailability of funding at competitive rates of interest, o the Company's potential inability to continue to obtain third party financing on favorable terms, o the Company's potential inability to generate sufficient cash flow to service its debt and fund its future operations, o adverse changes in applicable laws and regulations, o adverse changes in economic conditions, o adverse changes in the automobile or finance industries or in the non-prime consumer finance market, o the Company's potential inability to maintain or increase the volume of automobile loans, o an increase in the amount or severity of litigation against the Company, o the loss of key management personnel, o the effect of terrorist attacks and potential attacks, and o various other factors discussed in the Company's reports filed with the Securities and Exchange Commission. Other factors not currently anticipated by management may also materially and adversely affect the Company's results of operations. The Company does not undertake, and expressly disclaims any obligation, to update or alter its forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law.

DESCRIPTION OF CREDIT ACCEPTANCE CORPORATION Since 1972, Credit Acceptance has provided auto loans to consumers, regardless of their credit history. Our product is offered through a nationwide network of automobile dealers who benefit by selling vehicles to consumers who otherwise could not obtain financing, by 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 customers improve their lives by improving their credit score and move on to more traditional sources of financing. Credit Acceptance is publicly traded on the NASDAQ National Market under the symbol CACC. For more information, visit www.creditacceptance.com.

CREDIT ACCEPTANCE CORPORATION CONSOLIDATED INCOME STATEMENTS (Dollars in thousands, except per share data) THREE MONTHS ENDED MARCH 31, ------------------------------------- 2004 2003 --------------- --------------- REVENUE: Finance charges $ 29,754 $ 24,256 Ancillary product income 2,867 5,733 Lease revenue 647 2,336 Premiums earned 544 755 Other income 3,983 3,849 --------------- --------------- Total revenue 37,795 36,929 --------------- --------------- COSTS AND EXPENSES: Salaries and wages 8,796 8,517 General and administrative 5,507 5,484 Provision for credit losses 15,068 4,188 Sales and marketing 2,543 2,177 Interest 2,600 1,596 Stock-based compensation expense 567 375 Other expense 457 1,647 --------------- --------------- Total costs and expenses 35,538 23,984 --------------- --------------- Operating income 2,257 12,945 Foreign exchange gain 151 15 --------------- --------------- Income before provision for income taxes 2,408 12,960 Provision for income taxes 878 4,367 --------------- --------------- Net income $ 1,530 $ 8,593 =============== =============== Net income per common share: Basic $ 0.04 $ 0.20 =============== =============== Diluted $ 0.04 $ 0.20 =============== =============== Weighted average shares outstanding: Basic 39,791,700 42,328,841 Diluted 42,159,338 42,407,981

CREDIT ACCEPTANCE CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands) AS OF ------------------------------------- MARCH 31, 2004 DECEMBER 31, 2003 ------------------ ----------------- ASSETS: Cash and cash equivalents $ 17,595 $ 36,044 Loans receivable 956,867 875,417 Allowance for credit losses (34,521) (17,615) --------------- --------------- Loans receivable, net 922,346 857,802 --------------- --------------- Notes receivable, net (including $1,600 and $1,583 from affiliates as of March 31, 2004 and December 31, 2003, respectively) 3,776 2,090 Lines of credit and floorplan receivables, net 3,458 4,472 Investment in operating leases, net 2,840 4,447 Property and equipment, net 18,598 18,503 Income taxes receivable 251 5,795 Other assets 13,973 14,627 --------------- --------------- Total Assets $ 982,837 $ 943,780 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY: LIABILITIES: Lines of credit $ 66,200 $ -- Secured financing 83,434 100,000 Mortgage note 5,216 5,418 Capital lease obligations 1,608 1,049 Accounts payable and accrued liabilities 35,284 33,117 Dealer holdbacks, net 466,779 423,861 Deferred income taxes, net 14,972 22,770 --------------- --------------- Total Liabilities 673,493 586,215 --------------- --------------- SHAREHOLDERS' EQUITY: Preferred Stock, $ .01 par value, 1,000,000 shares authorized, none issued -- -- Common stock, $ .01 par value, 80,000,000 shares authorized, 39,239,103 and 42,128,087 shares issued and outstanding as of March 31, 2004 and December 31, 2003, respectively 392 421 Paid-in capital 75,538 125,078 Retained earnings 228,569 227,039 Accumulated other comprehensive income - cumulative translation adjustment 4,845 5,027 --------------- --------------- Total Shareholders' Equity 309,344 357,565 --------------- --------------- Total Liabilities and Shareholders' Equity $ 982,837 $ 943,780 =============== ===============