e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2010 |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
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MICHIGAN
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38-1999511 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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25505 WEST TWELVE MILE ROAD
SOUTHFIELD, MICHIGAN
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48034-8339 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No 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.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
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 number of shares of Common Stock, par value $0.01, outstanding on July 30, 2010 was 27,125,113.
PART I. FINANCIAL INFORMATION
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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS |
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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(Dollars in thousands, except per share data) |
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2010 |
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2009 |
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2010 |
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2009 |
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Revenue: |
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Finance charges |
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$ |
95,549 |
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$ |
81,124 |
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$ |
185,212 |
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$ |
157,850 |
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Premiums earned |
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8,245 |
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7,201 |
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15,949 |
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13,661 |
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Other income |
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7,985 |
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4,048 |
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13,880 |
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8,750 |
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Total revenue |
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111,779 |
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92,373 |
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215,041 |
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180,261 |
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Costs and expenses: |
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Salaries and wages |
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14,050 |
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16,515 |
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30,160 |
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33,636 |
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General and administrative |
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5,920 |
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6,894 |
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12,462 |
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14,889 |
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Sales and marketing |
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4,834 |
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3,566 |
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9,644 |
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7,487 |
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Provision for credit losses |
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1,790 |
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(3,790 |
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8,216 |
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(3,626 |
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Interest |
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12,267 |
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7,285 |
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23,972 |
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15,208 |
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Provision for claims |
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6,282 |
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4,829 |
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11,494 |
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9,638 |
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Total costs and expenses |
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45,143 |
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35,299 |
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95,948 |
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77,232 |
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Income from continuing operations before provision for
income taxes |
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66,636 |
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57,074 |
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119,093 |
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103,029 |
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Provision for income taxes |
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17,571 |
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20,924 |
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38,013 |
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37,867 |
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Income from continuing operations |
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49,065 |
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36,150 |
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81,080 |
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65,162 |
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Discontinued operations |
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(Loss) gain from discontinued United Kingdom operations |
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(25 |
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49 |
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(30 |
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34 |
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Provision for income taxes |
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14 |
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10 |
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(Loss) gain from discontinued operations |
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(25 |
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35 |
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(30 |
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24 |
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Net income |
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$ |
49,040 |
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$ |
36,185 |
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$ |
81,050 |
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$ |
65,186 |
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Net income per common share: |
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Basic |
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$ |
1.57 |
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$ |
1.18 |
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$ |
2.61 |
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$ |
2.14 |
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Diluted |
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$ |
1.55 |
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$ |
1.15 |
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$ |
2.56 |
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$ |
2.08 |
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Income from continuing operations per common share: |
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Basic |
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$ |
1.57 |
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$ |
1.18 |
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$ |
2.61 |
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$ |
2.14 |
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Diluted |
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$ |
1.55 |
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$ |
1.15 |
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$ |
2.57 |
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$ |
2.08 |
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(Loss) gain from discontinued operations per common share: |
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Basic |
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$ |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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31,172,229 |
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30,600,531 |
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31,107,721 |
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30,510,439 |
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Diluted |
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31,601,027 |
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31,423,187 |
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31,600,586 |
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31,285,734 |
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See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
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As of |
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June 30, 2010 |
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December 31, 2009 |
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(Dollars in thousands, except per share data) |
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(Unaudited) |
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ASSETS: |
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Cash and cash equivalents |
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$ |
1,537 |
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$ |
2,170 |
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Restricted cash and cash equivalents |
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63,859 |
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82,456 |
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Restricted securities available for sale |
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2,893 |
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3,121 |
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Loans receivable (including $11,179 and $12,674 from affiliates as of
June 30, 2010 and December 31, 2009, respectively) |
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1,259,647 |
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1,167,558 |
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Allowance for credit losses |
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(124,871 |
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(117,545 |
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Loans receivable, net |
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1,134,776 |
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1,050,013 |
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Property and equipment, net |
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18,344 |
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18,735 |
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Income taxes receivable |
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6,995 |
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3,956 |
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Other assets |
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26,414 |
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15,785 |
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Total Assets |
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$ |
1,254,818 |
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$ |
1,176,236 |
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LIABILITIES AND SHAREHOLDERS EQUITY: |
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Liabilities: |
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Accounts payable and accrued liabilities |
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$ |
79,042 |
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$ |
77,295 |
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Line of credit |
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4,300 |
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97,300 |
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Secured financing |
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240,500 |
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404,597 |
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Mortgage note and capital lease obligations |
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4,665 |
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5,082 |
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Senior notes |
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244,007 |
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Deferred income taxes, net |
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100,686 |
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93,752 |
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Total Liabilities |
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673,200 |
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678,026 |
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Shareholders Equity: |
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Preferred stock, $.01 par value, 1,000,000 shares authorized, none issued |
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Common stock, $.01 par value, 80,000,000 shares authorized, 31,024,015 and
31,038,217 shares issued and outstanding as of June 30, 2010 and December 31, 2009,
respectively |
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310 |
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311 |
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Paid-in capital |
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25,952 |
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24,370 |
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Retained earnings |
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555,483 |
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474,433 |
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Accumulated other comprehensive loss, net of tax of $75 and $526 at June 30, 2010
and December 31, 2009, respectively |
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(127 |
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(904 |
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Total Shareholders Equity |
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581,618 |
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498,210 |
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Total Liabilities and Shareholders Equity |
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$ |
1,254,818 |
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$ |
1,176,236 |
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See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Six Months Ended June 30, |
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(Dollars in thousands) |
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2010 |
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2009 |
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Cash Flows From Operating Activities: |
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Net income |
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$ |
81,050 |
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$ |
65,186 |
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Adjustments to reconcile cash provided by operating activities: |
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Provision for credit losses |
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8,216 |
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(3,626 |
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Depreciation and amortization |
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2,586 |
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2,723 |
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Loss on retirement of property and equipment |
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98 |
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Provision for deferred income taxes |
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6,482 |
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12,893 |
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Stock-based compensation |
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2,168 |
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3,155 |
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Change in operating assets and liabilities: |
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Increase in accounts payable and accrued liabilities |
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2,966 |
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2,184 |
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Increase in income taxes receivable / decrease in income taxes payable |
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(3,039 |
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(49 |
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Increase in other assets |
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(10,629 |
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(983 |
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Net cash provided by operating activities |
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89,800 |
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81,581 |
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Cash Flows From Investing Activities: |
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Decrease in restricted cash and cash equivalents |
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18,597 |
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4,670 |
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Purchases of restricted securities available for sale |
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(1,018 |
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Maturities of restricted securities available for sale |
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1,256 |
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461 |
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Principal collected on Loans receivable |
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392,156 |
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339,183 |
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Advances to Dealer-Partners and accelerated payments of Dealer Holdback |
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(410,183 |
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(282,746 |
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Purchases of Consumer Loans |
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(52,151 |
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(67,866 |
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Payments of Dealer Holdback |
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(22,882 |
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(23,965 |
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Net decrease (increase) in other loans |
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83 |
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(1 |
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Purchases of property and equipment |
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(1,926 |
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(1,407 |
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Net cash used in investing activities |
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(76,068 |
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(31,671 |
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Cash Flows From Financing Activities: |
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Borrowings under line of credit |
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212,700 |
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411,200 |
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Repayments under line of credit |
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(305,700 |
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(358,600 |
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Proceeds from secured financing |
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70,000 |
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124,400 |
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Repayments of secured financing |
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(234,097 |
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(227,859 |
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Principal payments under mortgage note and capital lease obligations |
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(417 |
) |
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(741 |
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Proceeds from sale of senior notes |
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243,738 |
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Repurchase of common stock |
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(1,896 |
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(540 |
) |
Proceeds from stock options exercised |
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172 |
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352 |
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Tax benefits from stock-based compensation plans |
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1,137 |
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|
336 |
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Net cash used in financing activities |
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(14,363 |
) |
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(51,452 |
) |
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Effect of exchange rate changes on cash |
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(2 |
) |
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(3 |
) |
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Net decrease in cash and cash equivalents |
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(633 |
) |
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(1,545 |
) |
Cash and cash equivalents, beginning of period |
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2,170 |
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|
3,154 |
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Cash and cash equivalents, end of period |
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$ |
1,537 |
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$ |
1,609 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid during the period for interest |
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$ |
25,018 |
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$ |
15,917 |
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Cash paid during the period for income taxes |
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$ |
38,236 |
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$ |
23,870 |
|
See accompanying notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (generally accepted
accounting principles or GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. The results of
operations for interim periods are not necessarily indicative of actual results achieved for full
fiscal years. The consolidated balance sheet at December 31, 2009 has been derived from the audited
financial statements at that date but does not include all the information and footnotes required
by generally accepted accounting principles for complete financial statements. For further
information, refer to the consolidated financial statements and footnotes thereto included in the
Annual Report on Form 10-K for the year ended December 31, 2009 for Credit Acceptance Corporation
(the Company, Credit Acceptance, we, our or us). Certain prior period amounts have been
reclassified to conform to the current presentation.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
We have evaluated events and transactions occurring subsequent to the consolidated balance
sheet date of June 30, 2010 for items that could potentially be recognized or disclosed in these
financial statements. For additional information regarding subsequent events, see Note 13 of these
consolidated financial statements.
2. DESCRIPTION OF BUSINESS
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
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 programs and who share our commitment to changing
consumers lives as Dealer-Partners. Upon enrollment in our financing programs, the
Dealer-Partner enters into a dealer servicing agreement with us 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. A consumer who does
not qualify for conventional automobile financing can purchase a used vehicle from a 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 assigned to us.
We have two programs: the Portfolio Program and the Purchase Program. 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. 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. The
following table shows the percentage of Consumer Loans assigned to us under each of the programs
for each of the last six quarters:
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
Portfolio Program |
|
Purchase Program |
March 31, 2009 |
|
|
82.3 |
% |
|
|
17.7 |
% |
June 30, 2009 |
|
|
86.0 |
% |
|
|
14.0 |
% |
September 30, 2009 |
|
|
89.0 |
% |
|
|
11.0 |
% |
December 31, 2009 |
|
|
90.8 |
% |
|
|
9.2 |
% |
March 31, 2010 |
|
|
90.9 |
% |
|
|
9.1 |
% |
June 30, 2010 |
|
|
90.5 |
% |
|
|
9.5 |
% |
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
2. DESCRIPTION OF BUSINESS (Continued)
Portfolio Program
As payment for the vehicle, the Dealer-Partner generally receives the following:
|
|
|
a down payment from the consumer; |
|
|
|
a non-recourse cash payment (advance) from us; and |
|
|
|
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. We require
Dealer-Partners to group advances into pools of at least 100 Consumer Loans. 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, which list us as lien
holder on the vehicle title.
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, which generally equals 20% of collections; |
|
|
|
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. |
If the collections on Consumer Loans from a Dealer-Partners pool are not sufficient to repay
the advance balance and any other amounts due to us, the Dealer-Partner will not receive Dealer
Holdback.
Dealer-Partners have an opportunity to receive an accelerated Dealer Holdback payment at the
time a pool of 100 or more Consumer Loans is closed. 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.
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 of the advance from the Dealer-Partner except in the
event the Dealer-Partner is in default of the dealer servicing agreement. Advances are made only
after the consumer and Dealer-Partner have signed a Consumer Loan contract, we have received the
original Consumer Loan contract and supporting documentation, and we have approved all of the
related stipulations for funding. The Dealer-Partner can also opt to repurchase Consumer Loans
that have been assigned to us under the Portfolio Program, at their discretion, for a fee.
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 (1) the Dealer-Partners financial interest in the Consumer Loan and (2) certain elements of our
legal relationship with the Dealer-Partner. For each individual Dealer-Partner, the amount of the
Dealer Loan recorded in Loans receivable is comprised of the following:
|
|
|
the aggregate amount of all cash advances to the Dealer-Partner; |
|
|
|
Dealer Holdback payments; |
|
|
|
accelerated Dealer Holdback payments; and |
Less:
|
|
|
collections (net of certain collection costs); and |
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
2. DESCRIPTION OF BUSINESS (Concluded)
Purchase Program
The Purchase Program differs from our Portfolio Program in that the Dealer-Partner receives a
single payment from us at the time of assignment instead of a cash advance and Dealer Holdback.
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 amount of Purchased Loans recorded
in Loans receivable is comprised of the following:
|
|
|
the aggregate amount of all amounts paid to purchase Consumer Loans from
Dealer-Partners; |
Less:
|
|
|
collections (net of certain collection costs); and |
Program Enrollment
Dealer-Partners that enroll in our programs have two enrollment options available to them.
The first enrollment option allows Dealer-Partners to assign Consumer Loans under the Portfolio
Program and requires payment of an upfront, one-time fee of $9,850. The second enrollment option,
which became effective September 1, 2009, allows Dealer-Partners to assign Consumer Loans under the
Portfolio Program and requires payment of an upfront, one-time fee of $1,950 and an agreement to
allow us to keep 50% of their first accelerated Dealer Holdback payment. Prior to September 1,
2009, Dealer-Partners who chose the second enrollment option did not pay an upfront fee but agreed
to allow us to keep 50% of their first accelerated Dealer Holdback payment. For all
Dealer-Partners enrolling in our program after August 31, 2008, access to the Purchase Program is
only granted after the first accelerated Dealer Holdback payment has been made under the Portfolio
Program.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reinsurance
VSC Re Company (VSC Re), our wholly-owned subsidiary, is engaged in the business of
reinsuring coverage under vehicle service contracts sold to consumers by Dealer-Partners on
vehicles financed by us. VSC Re currently reinsures vehicle service contracts that are
underwritten by one of our two third party insurers. Vehicle service contract premiums, which
represent the selling price of the vehicle service contract to the consumer, less commissions and
certain administrative costs, are contributed to trust accounts controlled by VSC Re. These
premiums are used to fund claims covered under the vehicle service contracts. VSC Re is a
bankruptcy remote entity. As such, the exposure to fund claims is limited to the amount of premium
dollars contributed, less amounts earned and withdrawn, plus $0.5 million of equity contributed.
Premiums from the reinsurance of vehicle service contracts are recognized over the life of the
policy in proportion to expected costs of servicing those contracts. Expected costs are determined
based on our historical claims experience. Claims are expensed through a provision for claims in
the period the claim was incurred. Capitalized acquisition costs are comprised of premium taxes
and are amortized as general and administrative expense over the life of the contracts in
proportion to premiums earned. A summary of reinsurance activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
(Dollars in thousands) |
|
2010 |
|
2009 |
|
2010 |
|
2009 |
Net assumed written premiums |
|
$ |
8,366 |
|
|
$ |
7,059 |
|
|
$ |
18,676 |
|
|
$ |
16,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned |
|
|
8,245 |
|
|
|
7,199 |
|
|
|
15,950 |
|
|
|
13,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for claims |
|
|
6,283 |
|
|
|
4,833 |
|
|
|
11,498 |
|
|
|
9,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of capitalized
acquisition costs |
|
|
103 |
|
|
|
135 |
|
|
|
321 |
|
|
|
253 |
|
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
We are considered the primary beneficiary of the trusts and as a result, the trusts have been
consolidated on our balance sheet. The trust assets and related reinsurance liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Balance Sheet location |
|
June 30, 2010 |
|
December 31, 2009 |
Trust assets |
|
Restricted cash and cash equivalents |
|
$ |
38,127 |
|
|
$ |
39,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned premium |
|
Accounts payable and accrued liabilities |
|
|
25,049 |
|
|
|
21,180 |
|
|
|
|
|
|
|
|
|
|
|
|
Claims reserve (1) |
|
Accounts payable and accrued liabilities |
|
|
1,143 |
|
|
|
965 |
|
|
|
|
(1) |
|
The claims reserve is estimated based on historical claims experience. |
Prior to the formation of VSC Re, our agreements with two of our vehicle service contract
third party administrators (TPAs) allowed us to receive profit sharing payments depending upon
the performance of the vehicle service contract programs. The agreements also required that
vehicle service contract premiums be placed in trust accounts. Funds in the trust accounts were
utilized by the TPA to pay claims on the vehicle service contracts. Upon the formation of VSC Re
during the fourth quarter of 2008, the unearned premiums on the majority of the vehicle service
contracts that had been written through these two TPAs were ceded to VSC Re along with any related
trust assets. Vehicle service contracts written prior to 2008 through one of the TPAs remain under
this profit sharing arrangement. Profit sharing payments, if any, on the vehicle service contracts
are distributed to us periodically after the term of the vehicle service contracts have
substantially expired provided certain loss rates are met. We are considered the primary
beneficiary of the trusts and as a result, the assets of the remaining trust and the related
liabilities have been consolidated on our balance sheet. As of both June 30, 2010 and December 31,
2009, the remaining trust had $4.3 million in assets available to pay claims. As of June 30, 2010,
there was a nominal related claims reserve and as of December 31, 2009, there was a related claims
reserve of $3.5 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.
Our determination to consolidate the VSC Re trusts and the profit sharing trusts was based on
the following:
|
|
|
First, we determined that the trusts qualified as variable interest entities. The
trusts have insufficient equity at risk as no parties to the trusts were required to
contribute assets that provide them with any ownership interest. |
|
|
|
Next, we determined that we have variable interests in the trusts. We have a residual
interest in the assets of the trusts, which is variable in nature, given that it increases
or decreases based upon the actual loss experience of the related service contracts. In
addition, VSC Re is required to absorb any losses in excess of the trusts assets. |
|
|
|
Next, we evaluated the purpose and design of the trusts. The primary purpose of the
trusts is to provide TPAs with funds to pay claims on vehicle service contracts and to
accumulate and provide us with proceeds from investment income and residual funds. |
|
|
|
Finally, we determined that we are the primary beneficiary of the trusts. We control
the amount of premium written and placed in the trusts through Consumer Loan assignments
under our Programs, which is the activity that most significantly impacts the economic
performance of the trusts. We have the right to receive benefits from the trusts that
could potentially be significant. In addition, VSC Re has the obligation to absorb losses
of the trusts that could potentially be significant. |
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents decreased to $63.9 million at June 30, 2010 from $82.5
million at December 31, 2009. The following table summarizes restricted cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
(Dollars in thousands) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Cash collections related to secured financings |
|
$ |
24,325 |
|
|
$ |
42,115 |
|
Cash held in trusts for future vehicle service contract claims (1) |
|
|
39,534 |
|
|
|
40,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted cash and cash equivalents |
|
$ |
63,859 |
|
|
$ |
82,456 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The unearned premium and claims reserve associated with the trusts are included in
accounts payable and accrued liabilities in the consolidated balance sheets. |
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Restricted Securities Available for Sale
Restricted securities available for sale 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.
Restricted securities available for sale consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
(Dollars in thousands) |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
US Government and agency securities |
|
$ |
577 |
|
|
$ |
9 |
|
|
$ |
(4 |
) |
|
$ |
582 |
|
Corporate bonds |
|
|
2,292 |
|
|
|
23 |
|
|
|
(4 |
) |
|
|
2,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted securities
available for sale |
|
$ |
2,869 |
|
|
$ |
32 |
|
|
$ |
(8 |
) |
|
$ |
2,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Estimated Fair |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value |
|
US Government and agency securities |
|
$ |
726 |
|
|
$ |
18 |
|
|
$ |
(2 |
) |
|
$ |
742 |
|
Corporate bonds |
|
|
2,381 |
|
|
|
7 |
|
|
|
(9 |
) |
|
|
2,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted securities
available for sale |
|
$ |
3,107 |
|
|
$ |
25 |
|
|
$ |
(11 |
) |
|
$ |
3,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
Estimated Fair |
|
|
|
|
|
|
Estimated Fair |
|
(Dollars in thousands) |
|
Cost |
|
|
Value |
|
|
Cost |
|
|
Value |
|
Contractual Maturity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year |
|
$ |
760 |
|
|
$ |
761 |
|
|
$ |
1,486 |
|
|
$ |
1,495 |
|
Over one year to five years |
|
|
2,008 |
|
|
|
2,030 |
|
|
|
1,621 |
|
|
|
1,626 |
|
Over five years to ten years |
|
|
101 |
|
|
|
102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restricted
securities available
for sale |
|
$ |
2,869 |
|
|
$ |
2,893 |
|
|
$ |
3,107 |
|
|
$ |
3,121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Debt Issuance Costs
As of June 30, 2010 and December 31, 2009, deferred debt issuance costs were $15.2 million
(net of accumulated amortization of $1.6 million) and $6.4 million (net of accumulated amortization
of $2.8 million), respectively, and are included in other assets in the consolidated balance
sheets. Expenses associated with the issuance of debt instruments are capitalized and amortized as
interest expense over the term of the debt instrument using the effective interest method for term
secured financings and senior notes and the straight-line method for lines of credit and revolving
secured financings.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Concluded)
New Accounting Pronouncements
Accounting for Transfers of Financial Assets. In June 2009, the FASB issued SFAS No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140 (SFAS 166).
SFAS 166 was incorporated into the Financial Accounting Standards Board Accounting Standards
Codification (FASB ASC) through Accounting Standards Update (ASU) No. 2009-16 and is intended
to improve the information provided in financial statements about the transfer of financial assets
and the effects of the transfer on financial position and performance, and cash flows for transfers
occurring on or after the effective date. The adoption on January 1, 2010 did not have a material
impact on our consolidated financial statements.
Amendments to FASB Interpretation No. 46(R). In June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R) (SFAS 167). SFAS 167 was incorporated into the
FASB ASC through ASU No. 2009-17 and is intended to improve financial reporting related to variable
interest entities. The adoption on January 1, 2010 did not have a material impact on our
consolidated financial statements, but expanded our disclosures.
Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a
Single Asset. In April 2010, the FASB incorporated ASU No. 2010-18 into the FASB ASC. ASU No.
2010-18 is intended to improve comparability by eliminating diversity in practice about the
treatment of modifications of loans accounted for within pools under FASB ASC 310-30.
Additionally, the amendments clarify guidance about maintaining the integrity of a pool as the unit
of accounting for acquired loans with credit deterioration. ASU No. 2010-18 is effective
prospectively for modifications of loans accounted for within pools under FASB ASC 310-30 occurring
in the first interim or annual period ending on or after July 15, 2010. Early application is
permitted. The guidance within ASU No. 2010-18 is consistent with how we have historically
accounted for our Loan portfolio; therefore, adoption of this guidance in the third quarter of 2010
will have no impact on our consolidated financial statements.
4. LOANS RECEIVABLE
Loans receivable consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
(Dollars in thousands) |
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Loans receivable |
|
$ |
980,952 |
|
|
$ |
278,695 |
|
|
$ |
1,259,647 |
|
Allowance for credit losses |
|
|
(112,115 |
) |
|
|
(12,756 |
) |
|
|
(124,871 |
) |
Loans receivable, net |
|
$ |
868,837 |
|
|
$ |
265,939 |
|
|
$ |
1,134,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Loans receivable |
|
$ |
869,603 |
|
|
$ |
297,955 |
|
|
$ |
1,167,558 |
|
Allowance for credit losses |
|
|
(108,792 |
) |
|
|
(8,753 |
) |
|
|
(117,545 |
) |
|
|
|
|
|
|
|
|
|
|
Loans receivable, net |
|
$ |
760,811 |
|
|
$ |
289,202 |
|
|
$ |
1,050,013 |
|
|
|
|
|
|
|
|
|
|
|
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
4. LOANS RECEIVABLE (Continued)
A summary of changes in Loans receivable is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
(Dollars in thousands) |
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
925,094 |
|
|
$ |
286,392 |
|
|
$ |
1,211,486 |
|
New Consumer Loan assignments (1) |
|
|
197,866 |
|
|
|
25,708 |
|
|
|
223,574 |
|
Principal collected on Loans receivable |
|
|
(149,096 |
) |
|
|
(36,923 |
) |
|
|
(186,019 |
) |
Dealer Holdback payments |
|
|
10,712 |
|
|
|
|
|
|
|
10,712 |
|
Transfers |
|
|
(3,522 |
) |
|
|
3,522 |
|
|
|
|
|
Write-offs |
|
|
(672 |
) |
|
|
(24 |
) |
|
|
(696 |
) |
Recoveries |
|
|
582 |
|
|
|
20 |
|
|
|
602 |
|
Net change in other loans |
|
|
(45 |
) |
|
|
|
|
|
|
(45 |
) |
Currency translation |
|
|
33 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
980,952 |
|
|
$ |
278,695 |
|
|
$ |
1,259,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
848,091 |
|
|
$ |
331,393 |
|
|
$ |
1,179,484 |
|
New Consumer Loan assignments (1) |
|
|
129,565 |
|
|
|
26,477 |
|
|
|
156,042 |
|
Principal collected on Loans receivable |
|
|
(126,204 |
) |
|
|
(35,934 |
) |
|
|
(162,138 |
) |
Dealer Holdback payments |
|
|
11,154 |
|
|
|
|
|
|
|
11,154 |
|
Transfers |
|
|
(3,598 |
) |
|
|
3,598 |
|
|
|
|
|
Write-offs |
|
|
(1,247 |
) |
|
|
(14 |
) |
|
|
(1,261 |
) |
Recoveries |
|
|
728 |
|
|
|
15 |
|
|
|
743 |
|
Net change in other loans |
|
|
(12 |
) |
|
|
|
|
|
|
(12 |
) |
Currency translation |
|
|
82 |
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
858,559 |
|
|
$ |
325,535 |
|
|
$ |
1,184,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
869,603 |
|
|
$ |
297,955 |
|
|
$ |
1,167,558 |
|
New Consumer Loan assignments (1) |
|
|
410,183 |
|
|
|
52,151 |
|
|
|
462,334 |
|
Principal collected on Loans receivable |
|
|
(311,087 |
) |
|
|
(81,069 |
) |
|
|
(392,156 |
) |
Dealer Holdback payments |
|
|
22,882 |
|
|
|
|
|
|
|
22,882 |
|
Transfers |
|
|
(9,665 |
) |
|
|
9,665 |
|
|
|
|
|
Write-offs |
|
|
(2,060 |
) |
|
|
(49 |
) |
|
|
(2,109 |
) |
Recoveries |
|
|
1,146 |
|
|
|
42 |
|
|
|
1,188 |
|
Net change in other loans |
|
|
(83 |
) |
|
|
|
|
|
|
(83 |
) |
Currency translation |
|
|
33 |
|
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
980,952 |
|
|
$ |
278,695 |
|
|
$ |
1,259,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
823,567 |
|
|
$ |
325,185 |
|
|
$ |
1,148,752 |
|
New Consumer Loan assignments (1) |
|
|
282,746 |
|
|
|
67,866 |
|
|
|
350,612 |
|
Principal collected on Loans receivable |
|
|
(263,744 |
) |
|
|
(75,439 |
) |
|
|
(339,183 |
) |
Dealer Holdback payments |
|
|
23,965 |
|
|
|
|
|
|
|
23,965 |
|
Transfers |
|
|
(7,928 |
) |
|
|
7,928 |
|
|
|
|
|
Write-offs |
|
|
(1,817 |
) |
|
|
(35 |
) |
|
|
(1,852 |
) |
Recoveries |
|
|
1,710 |
|
|
|
30 |
|
|
|
1,740 |
|
Net change in other loans |
|
|
1 |
|
|
|
|
|
|
|
1 |
|
Currency translation |
|
|
59 |
|
|
|
|
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
858,559 |
|
|
$ |
325,535 |
|
|
$ |
1,184,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Dealer Loans amount represents advances and accelerated Dealer Holdback payments made to
Dealer-Partners for Consumer
Loans assigned under our Portfolio Program. The Purchased Loans amount represents payments
made to Dealer-Partners to
purchase Consumer Loans assigned under our Purchase Program. |
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
4. LOANS RECEIVABLE (Concluded)
A summary of changes in the allowance for credit losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
(Dollars in thousands) |
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
111,372 |
|
|
$ |
11,772 |
|
|
$ |
123,144 |
|
Provision for credit losses |
|
|
802 |
|
|
|
988 |
|
|
|
1,790 |
|
Write-offs |
|
|
(672 |
) |
|
|
(24 |
) |
|
|
(696 |
) |
Recoveries |
|
|
582 |
|
|
|
20 |
|
|
|
602 |
|
Currency translation |
|
|
31 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
112,115 |
|
|
$ |
12,756 |
|
|
$ |
124,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
113,869 |
|
|
$ |
17,515 |
|
|
$ |
131,384 |
|
Provision for credit losses |
|
|
(1,706 |
) |
|
|
(2,084 |
) |
|
|
(3,790 |
) |
Write-offs |
|
|
(1,247 |
) |
|
|
(14 |
) |
|
|
(1,261 |
) |
Recoveries |
|
|
728 |
|
|
|
15 |
|
|
|
743 |
|
Currency translation |
|
|
77 |
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
111,721 |
|
|
$ |
15,432 |
|
|
$ |
127,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
108,792 |
|
|
$ |
8,753 |
|
|
$ |
117,545 |
|
Provision for credit losses |
|
|
4,206 |
|
|
|
4,010 |
|
|
|
8,216 |
|
Write-offs |
|
|
(2,060 |
) |
|
|
(49 |
) |
|
|
(2,109 |
) |
Recoveries |
|
|
1,146 |
|
|
|
42 |
|
|
|
1,188 |
|
Currency translation |
|
|
31 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
112,115 |
|
|
$ |
12,756 |
|
|
$ |
124,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
Dealer Loans |
|
|
Purchased Loans |
|
|
Total |
|
Balance, beginning of period |
|
$ |
113,831 |
|
|
$ |
17,004 |
|
|
$ |
130,835 |
|
Provision for credit losses |
|
|
(2,059 |
) |
|
|
(1,567 |
) |
|
|
(3,626 |
) |
Write-offs |
|
|
(1,817 |
) |
|
|
(35 |
) |
|
|
(1,852 |
) |
Recoveries |
|
|
1,710 |
|
|
|
30 |
|
|
|
1,740 |
|
Currency translation |
|
|
56 |
|
|
|
|
|
|
|
56 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
111,721 |
|
|
$ |
15,432 |
|
|
$ |
127,153 |
|
|
|
|
|
|
|
|
|
|
|
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. DEBT
We currently utilize the following forms of debt financing: (1) a revolving secured line of
credit with a commercial bank syndicate; (2) revolving secured warehouse facilities with
institutional investors; (3) an asset-backed secured financing (Term ABS) with qualified
institutional investors; and (4) Senior Secured Notes due 2017 issued pursuant to Rule 144A and
Regulation S of the Securities Act of 1933, as amended (Senior Notes). General information for
each of our financing transactions in place as of June 30, 2010 is as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-owned |
|
Issue |
|
|
|
|
|
Financing |
|
Interest Rate at |
Financings |
|
Subsidiary |
|
Number |
|
Close Date |
|
Maturity Date |
|
Amount |
|
June 30, 2010 |
Revolving Secured Line of Credit
|
|
n/a
|
|
n/a
|
|
June 9, 2010
|
|
June 22, 2012
|
|
$ |
150,000 |
|
|
At our option, either the Eurodollar rate plus 225 basis points or the prime rate plus 125 basis points |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Secured Warehouse
Facility (1)
|
|
CAC Warehouse Funding Corp. II
|
|
2003-2
|
|
June 16, 2010
|
|
June 15, 2013 (2)
|
|
$ |
325,000 |
|
|
Commercial paper rate plus 350 basis points or LIBOR plus 450 basis points (4) (5) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Secured Warehouse
Facility (1)
|
|
CAC Warehouse Funding III, LLC
|
|
2008-2
|
|
August 31, 2009
|
|
August 31, 2011 (6)
|
|
$ |
75,000 |
|
|
Commercial paper rate plus 375 basis points or LIBOR plus 375 basis points (3) (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term ABS 2009-1 (1)
|
|
Credit Acceptance Funding LLC
2009-1
|
|
2009-1
|
|
December 3, 2009
|
|
May 15, 2011 (2)
|
|
$ |
110,500 |
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
|
|
n/a
|
|
n/a
|
|
February 1, 2010
|
|
February 1, 2017
|
|
$ |
250,000 |
|
|
Fixed rate |
|
|
|
(1) |
|
Financing made available only to a specified subsidiary of the Company. |
|
(2) |
|
Represents the revolving maturity date. Loans will amortize after the maturity date based on
the cash flows of the contributed assets. |
|
(3) |
|
A portion of the outstanding balance is a floating rate obligation that has been converted to a
fixed rate obligation via an interest rate swap. |
|
(4) |
|
The LIBOR rate is used if funding is not available from the commercial paper market. |
|
(5) |
|
Interest rate cap agreements are in place to limit the exposure to increasing interest rates. |
|
(6) |
|
Facility revolves until August 31, 2011 and matures on August 31, 2012. |
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. DEBT (Continued)
Additional information related to the amounts outstanding on each facility is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revolving Secured Line of Credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding balance |
|
$ |
67,300 |
|
|
$ |
128,900 |
|
|
$ |
107,900 |
|
|
$ |
128,900 |
|
Average outstanding balance |
|
|
30,332 |
|
|
|
101,316 |
|
|
|
37,393 |
|
|
|
84,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Secured Warehouse Facility (2003-2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding balance |
|
$ |
66,000 |
|
|
$ |
276,900 |
|
|
$ |
152,600 |
|
|
$ |
276,900 |
|
Average outstanding balance |
|
|
31,736 |
|
|
|
265,482 |
|
|
|
42,603 |
|
|
|
265,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving Secured Warehouse Facility (2008-2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum outstanding balance |
|
$ |
75,000 |
|
|
$ |
50,000 |
|
|
$ |
75,000 |
|
|
$ |
50,000 |
|
Average outstanding balance |
|
|
74,945 |
|
|
|
50,000 |
|
|
|
74,972 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
(Dollars in thousands) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Revolving Secured Line of Credit |
|
|
|
|
|
|
|
|
Balance outstanding |
|
$ |
4,300 |
|
|
$ |
97,300 |
|
Letter(s) of credit |
|
|
500 |
|
|
|
514 |
|
Amount available for borrowing |
|
|
145,200 |
|
|
|
42,186 |
|
Interest rate |
|
|
3.00 |
% |
|
|
4.25 |
% |
|
|
|
|
|
|
|
|
|
Revolving Secured Warehouse Facility (2003-2) |
|
|
|
|
|
|
|
|
Balance outstanding |
|
$ |
60,000 |
|
|
$ |
152,600 |
|
Amount available for borrowing |
|
|
265,000 |
|
|
|
172,400 |
|
Contributed eligible Loans (1) |
|
|
153,081 |
|
|
|
192,921 |
|
Interest rate |
|
|
3.90 |
% |
|
|
5.24 |
% |
|
|
|
|
|
|
|
|
|
Revolving Secured Warehouse Facility (2008-2) |
|
|
|
|
|
|
|
|
Balance outstanding |
|
$ |
70,000 |
|
|
$ |
75,000 |
|
Amount available for borrowing |
|
|
5,000 |
|
|
|
|
|
Contributed eligible Loans |
|
|
91,518 |
|
|
|
94,073 |
|
Interest rate |
|
|
4.46 |
% |
|
|
4.36 |
% |
|
|
|
|
|
|
|
|
|
Term ABS 2008-1 |
|
|
|
|
|
|
|
|
Balance outstanding |
|
$ |
|
|
|
$ |
66,497 |
|
Contributed eligible Loans |
|
|
|
|
|
|
142,267 |
|
Interest rate |
|
|
|
|
|
|
6.37 |
% |
|
|
|
|
|
|
|
|
|
Term ABS 2009-1 |
|
|
|
|
|
|
|
|
Balance outstanding |
|
$ |
110,500 |
|
|
$ |
110,500 |
|
Contributed eligible Loans |
|
|
142,412 |
|
|
|
142,315 |
|
Interest rate |
|
|
4.40 |
% |
|
|
4.40 |
% |
|
|
|
|
|
|
|
|
|
Senior Notes |
|
|
|
|
|
|
|
|
Balance outstanding |
|
$ |
244,007 |
|
|
$ |
|
|
Interest rate |
|
|
9.13 |
% |
|
|
|
|
|
|
|
(1) |
|
At June 30, 2010, the assets shown are the property of the wholly-owned subsidiary but only $96.9 million are pledged as
collateral for the facility. |
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. DEBT (Continued)
Revolving Secured Line of Credit Facility
During the first quarter of 2010, we increased the amount of the revolving secured line of
credit facility from $140.0 million to $150.0 million and, concurrently with the issuance of the
Senior Notes, amended the agreements governing our revolving secured line of credit facility to
facilitate the issuance of the Senior Notes and certain future secured indebtedness.
During the second quarter of 2010, we extended the maturity of the revolving secured line of
credit facility from June 23, 2011 to June 22, 2012. Additionally, the interest rate on borrowings
under the facility was changed from the prime rate plus 1.0% or the Eurodollar rate plus 2.75%, at
our option, to the prime rate plus 1.25% or the Eurodollar rate plus 2.25%, at our option. The
floor on the Eurodollar rate was decreased from 1.50% to 0.75%. None of the financial covenants
were modified.
Borrowings under the revolving secured line of credit facility, including any letters of
credit issued under the facility, are subject to a borrowing-base limitation. This limitation
equals 80% of the net book value of Loans, less a hedging reserve (not exceeding $1.0 million), and
the amount of other debt secured by the collateral which secures the line of credit. Borrowings
under the line of credit agreement are secured by a lien on most of our assets. We must pay
quarterly fees on the amount of the facility.
Revolving Secured Warehouse Facilities
We have two revolving secured warehouse facilities that are provided to our wholly-owned
subsidiaries. One is a $325.0 million facility with an institutional investor and the other is a
$75.0 million facility with another institutional investor.
During the second quarter of 2010, we extended the date on which our $325.0 million revolving
secured warehouse facility will cease to revolve from August 23, 2010 to June 15, 2013. The
interest rate on borrowings under the $325.0 million revolving secured warehouse facility was
decreased from a floating rate equal to the commercial paper rate plus 5% to the commercial paper
rate plus 3.5%. In addition, the agreement was modified to provide that in the event that the
facility is not renewed and the borrower is in compliance with the terms and conditions of the
agreement, any amounts outstanding will be repaid over time as the collections on the loans
securing the facility are received.
Under both revolving secured warehouse facilities we can contribute Loans to our wholly-owned
subsidiaries in return for cash and equity in each subsidiary. In turn, each subsidiary pledges
the Loans as collateral to institutional investors to secure financing that will fund the cash
portion of the purchase price of the Loans. The financing provided to each subsidiary under the
applicable facility is limited to the lesser of 80% of the net book value of the contributed Loans
or the facility limit.
The subsidiaries are liable for any amounts due under the applicable facility. Even though we
consolidate our subsidiaries for financial reporting purposes, the financing is non-recourse to us.
As the subsidiaries are organized as separate legal entities from us, their assets (including the
conveyed Loans) will not be available to satisfy our general obligations.
Interest on borrowings under the $325.0 million revolving secured warehouse facility has been
limited through interest rate cap agreements to a maximum rate of 6.75% plus the spread over the
LIBOR rate or the commercial paper rate, as applicable. We have also entered into an interest rate
swap to convert $25.0 million of the $75.0 million revolving secured warehouse facility into fixed
rate debt bearing an interest rate of 5.11%. The subsidiaries pay us a monthly servicing fee equal
to 6% of the collections received with respect to the conveyed Loans. The fee is paid out of the
collections. Except for the servicing fee and holdback payments due to Dealer-Partners, if a
facility is amortizing, 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 have been paid in
full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a
portion of such collections provided that the borrowing base requirements of the facility are
satisfied.
Senior Notes
During the first quarter of 2010, we issued $250.0 million aggregate principal amount of
9.125% First Priority Senior Notes. The Senior Notes were issued pursuant to an indenture, dated
as of February 1, 2010 (the Indenture), among us, Buyers Vehicle Protection Plan, Inc. (BVPP)
and Vehicle Remarketing Services, Inc. (VRS), as guarantors (the Guarantors), and U.S. Bank
National Association, as trustee (the Trustee).
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. DEBT (Continued)
The Senior Notes mature on February 1, 2017 and bear interest at a rate of 9.125% per annum,
computed on the basis of 360-day year composed of twelve 30-day months and payable semi-annually on
February 1 and August 1 of each year, beginning on August 1, 2010. The Senior Notes were issued at
97.495% of the aggregate principal amount for gross proceeds of $243.7 million, representing a
yield to maturity of 9.625%. The discount is being amortized over the life of the Senior Notes
using the effective interest method.
The Senior Notes are guaranteed on a senior secured basis by the Guarantors, which are also
guarantors of obligations under our line of credit facility. Our other existing and future
subsidiaries may become guarantors of the Senior Notes. The Senior Notes and the Guarantors
Senior Note guarantees are secured on a first-priority basis (subject to specified exceptions and
permitted liens), together with all indebtedness outstanding from time to time under the line of
credit facility and, under certain circumstances, certain future indebtedness, by a security
interest in substantially all of our assets and those of the Guarantors, subject to certain
exceptions such as real property, cash (except to the extent it is deposited with the collateral
agent), certain leases, and equity interests of our subsidiaries (other than those of specified
subsidiaries including the Guarantors). Our assets and those of the Guarantors securing the Senior
Notes and the Senior Note guarantees will not include our assets transferred to special purpose
subsidiaries in connection with securitization transactions and will generally be the same as the
collateral securing indebtedness under the line of credit facility and, under certain
circumstances, certain future indebtedness, subject to certain limited exceptions as provided in
the security and intercreditor agreements related to the line of credit facility.
Term ABS Financings
In 2008 and 2009, two of our wholly-owned subsidiaries (the Funding LLCs), each completed a
secured financing transaction. In connection with these transactions, we contributed Loans on an
arms-length basis to each Funding LLC for cash and the sole membership interest in that Funding
LLC. In turn, each Funding LLC contributed the Loans to a respective trust that issued notes to
qualified institutional investors. The Term ABS 2009-1 transaction consists of three classes of
notes. The Class A Notes are rated AAA by S&P and DBRS, Inc. The Class B Notes are rated AA
by S&P. The Class C Note does not bear interest, is not rated and has been retained by us. The
Term ABS 2008-1 ceased to revolve on April 15, 2009 and was paid in full during the second quarter
of 2010.
Each financing has a specified revolving period during which we may be required, and are
likely, to convey additional Loans to each Funding LLC. Each Funding LLC will then convey the
Loans to their respective trust. 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 we are consolidated for
financial reporting purposes with the trusts and the Funding LLCs. Because the Funding LLCs are
organized as legal entities separate from us, their assets (including the conveyed Loans) are not
available to our creditors. We receive a monthly servicing fee on each financing equal to 6% of
the collections received with respect to the conveyed Loans. The fee is paid out of the
collections. Except for the servicing fee and Dealer Holdback payments due to Dealer-Partners, if
a facility is amortizing, 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 have been paid in
full. If a facility is not amortizing, the applicable subsidiary may be entitled to retain a
portion of such collections provided that the borrowing base requirements of the facility are
satisfied. However, in our capacity as servicer of the Loans, we do have a limited right to
exercise a clean-up call option to purchase Loans from the Funding LLCs and/or the trusts 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
Financing:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Book Value of |
|
|
|
|
|
|
|
|
|
|
Dealer Loans |
|
|
|
Expected Annualized |
Term ABS Financing |
|
Issue Number |
|
Close Date |
|
Conveyed at Closing |
|
Revolving Period |
|
Rates (1) |
|
|
|
|
|
|
|
|
18 months |
|
|
Term ABS 2009-1 |
|
2009-1 |
|
December 3, 2009 |
|
$142,301 |
|
(Through May 15, 2011) |
|
5.2% |
|
|
|
(1) |
|
Includes underwriters fees, insurance premiums and other costs. |
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
5. DEBT (Concluded)
Debt Covenants
As of June 30, 2010, we are in compliance with all our debt covenants relating to the line of
credit facility, including those that require the maintenance of certain financial ratios and other
financial conditions. These 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. These
covenants also limit the maximum ratio of our funded debt to tangible net worth. Additionally, we
must maintain consolidated net income of not less than $1 for the two most recently ended fiscal
quarters. Some of these debt covenants may indirectly limit the repurchase of common stock or
payment of dividends on common stock.
In addition to the covenants stated above, our revolving secured warehouse facilities and Term
ABS financings contain covenants that measure the performance of the contributed assets. As of
June 30, 2010, we were in compliance with all such covenants. As of the end of the quarter, we are
also in compliance with our covenants under the Senior Notes Indenture. The Indenture includes
covenants that limit the maximum ratio of our funded debt to tangible net worth and also require a
minimum collateral coverage ratio.
6. DERIVATIVE INSTRUMENTS
Interest Rate Caps. We purchase interest rate cap agreements to manage the interest rate risk
on certain borrowings.
As of June 30, 2010, we had interest rate cap agreements to manage the interest rate risk on
our $325.0 million 2003-2 revolving secured warehouse facility with various maturities between
February 2011 and May 2012. These instruments had a cap rate of 6.75% to cap the commercial paper
rate for the 2003-2 facility.
As of December 31, 2009, we had interest rate cap agreements to manage the interest rate risk
on the 2003-2 facility, as well as on $50.0 million of the $75.0 million 2008-2 revolving secured
warehouse facility with various maturities between May 2010 and August 2011. These instruments had
a cap rate of 6.75% to cap the commercial paper rate for both the 2003-2 and the 2008-2 facilities.
The interest rate caps have not been designated as hedging instruments.
Interest Rate Swaps. As of June 30, 2010 we had an interest rate swap outstanding to convert
$25.0 million of the $75.0 million 2008-2 revolving secured warehouse facility into fixed rate
debt, bearing an interest rate of 5.11%. This interest rate swap has been designated as a cash
flow hedging instrument.
As of December 31, 2009, in addition to the interest rate swap discussed above, the following
were also outstanding:
|
|
|
An interest rate swap to convert the outstanding balance of the 2008-1 floating rate
Term ABS financing, which ceased to revolve on April 15, 2009 and was paid in full
during the second quarter of 2010, into fixed rate debt, bearing an interest rate of
6.37%. This interest rate swap was designated as a cash flow hedging instrument. |
|
|
|
|
An interest rate swap, also related to the outstanding balance of the 2008-1 floating
rate Term ABS financing, that required the counterparties to make a payment depending on
our actual debt balance outstanding on the facility relative to our original forecasted
balance and on the level of interest rates. This interest rate swap was not designated
as a hedging instrument. |
At June 30, 2010, we had minimal exposure to credit loss on the outstanding interest rate
swap. We do not believe that any reasonably likely change in interest rates would have a
materially adverse effect on our financial position, our results of operations or our cash flows.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
6. DERIVATIVE INSTRUMENTS (Concluded)
Information related to the fair values of derivative instruments in our consolidated balance
sheets as of June 30, 2010 and December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
Balance Sheet |
|
June 30, |
|
|
December 31, |
|
(Dollars in thousands) |
|
location |
|
2010 |
|
|
2009 |
|
Derivatives designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
Liability Derivatives |
|
|
|
|
|
|
|
|
|
|
Interest rate swap |
|
Accounts payable and accrued liabilities |
|
$ |
226 |
|
|
$ |
1,445 |
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
|
|
|
|
|
|
|
|
Interest rate caps |
|
Other assets |
|
$ |
20 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Asset Derivatives |
|
|
|
$ |
20 |
|
|
$ |
82 |
|
|
|
|
|
|
|
|
|
|
Total Liability Derivatives |
|
|
|
$ |
226 |
|
|
$ |
1,445 |
|
|
|
|
|
|
|
|
|
|
Information related to the effect of derivative instruments designated as hedging
instruments on our consolidated income statements for the three months ended June 30, 2010 and 2009
is as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain / (Loss) |
|
|
|
|
|
|
Recognized in OCI on Derivative |
|
|
Loss Reclassified from Accumulated |
|
|
|
(Effective Portion) |
|
|
OCI into Income (Effective Portion) |
|
Derivatives in Cash Flow |
|
Three Months Ended June 30, |
|
|
|
|
|
|
Three Months Ended June 30, |
|
Hedging Relationships |
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
Interest rate swap |
|
$ |
562 |
|
|
$ |
(224 |
) |
|
Interest expense |
|
$ |
(168 |
) |
|
$ |
(1,042 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain / (Loss) |
|
|
|
|
|
|
Recognized in OCI on Derivative |
|
|
Loss Reclassified from Accumulated |
|
|
|
(Effective Portion) |
|
|
OCI into Income (Effective Portion) |
|
Derivatives in Cash Flow |
|
Six Months Ended June 30, |
|
|
|
|
|
|
Six Months Ended June 30, |
|
Hedging Relationships |
|
2010 |
|
|
2009 |
|
|
Location |
|
|
2010 |
|
|
2009 |
|
Interest rate swap |
|
$ |
611 |
|
|
$ |
(698 |
) |
|
Interest expense |
|
$ |
(608 |
) |
|
$ |
(2,139 |
) |
As of June 30, 2010, we expect to reclassify losses of $0.2 million from accumulated
other comprehensive income into income during the next twelve months.
Information related to the effect of derivative instruments not designated as hedging
instruments on our consolidated income statements for the three months ended June 30, 2010 and 2009
is as follows:
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not |
|
|
|
|
|
Amount of (Loss) / Gain Recognized in Income on Derivative |
|
Designated as Hedging |
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
Instruments |
|
Location |
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest rate caps |
|
Interest expense |
|
$ |
(81 |
) |
|
$ |
1 |
|
|
$ |
(157 |
) |
|
$ |
|
|
Interest rate swap |
|
Interest expense |
|
|
|
|
|
|
24 |
|
|
|
(590 |
) |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
(81 |
) |
|
$ |
25 |
|
|
$ |
(747 |
) |
|
$ |
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
7. 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 us 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 prices for similar instruments in active markets, which are influenced by a number
of factors, including interest rates, amount of debt outstanding, and number of months until
maturity.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, |
|
|
As of December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
Carrying |
|
|
Estimated |
|
|
Carrying |
|
|
Estimated |
|
(Dollars in thousands) |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
1,537 |
|
|
$ |
1,537 |
|
|
$ |
2,170 |
|
|
$ |
2,170 |
|
Restricted cash and cash equivalents |
|
|
63,859 |
|
|
|
63,859 |
|
|
|
82,456 |
|
|
|
82,456 |
|
Restricted securities available for sale |
|
|
2,893 |
|
|
|
2,893 |
|
|
|
3,121 |
|
|
|
3,121 |
|
Net investment in Loans receivable |
|
|
1,134,776 |
|
|
|
1,144,030 |
|
|
|
1,050,013 |
|
|
|
1,056,059 |
|
Derivative instruments |
|
|
20 |
|
|
|
20 |
|
|
|
82 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit |
|
$ |
4,300 |
|
|
$ |
4,300 |
|
|
$ |
97,300 |
|
|
$ |
97,300 |
|
Secured financing |
|
|
240,500 |
|
|
|
243,015 |
|
|
|
404,597 |
|
|
|
404,725 |
|
Mortgage note |
|
|
4,635 |
|
|
|
4,646 |
|
|
|
4,744 |
|
|
|
4,757 |
|
Senior notes |
|
|
244,007 |
|
|
|
251,250 |
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
|
226 |
|
|
|
226 |
|
|
|
1,445 |
|
|
|
1,445 |
|
Fair value is an exit price, representing the amount that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants. As such,
fair value is a market-based measurement that should be determined based on assumptions that market
participants would use in pricing an asset or liability. We group assets and liabilities at fair
value in three levels, based on the markets in which the assets and liabilities are traded and the
reliability of the assumptions used to determine fair value. These levels are:
Level 1 |
|
Valuation is based upon quoted prices for identical instruments traded in active markets. |
|
Level 2 |
|
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions
are observable in the market. |
|
Level 3 |
|
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the
market. These unobservable assumptions reflect estimates or assumptions that market participants would use in pricing
the asset or liability. |
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (Concluded)
The following table provides the fair value measurements of applicable assets and liabilities,
measured at fair value on a recurring basis, as of June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010 |
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
Total |
|
(Dollars in thousands) |
|
|
Level 1 |
|
Level 2 |
|
|
Fair Value |
|
|
Level 1 |
|
|
Level 2 |
|
|
Fair Value |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted securities
available for sale |
|
$ |
2,893 |
|
|
$ |
|
|
|
$ |
2,893 |
|
|
$ |
3,121 |
|
|
$ |
|
|
|
$ |
3,121 |
|
Derivative instruments |
|
|
|
|
|
|
20 |
|
|
|
20 |
|
|
|
|
|
|
|
82 |
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments |
|
$ |
|
|
|
$ |
226 |
|
|
$ |
226 |
|
|
$ |
|
|
|
$ |
1,445 |
|
|
$ |
1,445 |
|
8. RELATED PARTY TRANSACTIONS
In the normal course of our business, affiliated Dealer-Partners assign Consumer Loans to us
under the Portfolio and Purchase Programs. Dealer Loans and Purchased Loans with affiliated
Dealer-Partners are on the same terms as those with non-affiliated Dealer-Partners. Affiliated
Dealer-Partners are comprised of Dealer-Partners owned or controlled by: (1) our majority
shareholder and Chairman; and (2) a member of the Chairmans immediate family.
Affiliated Dealer Loan balances were $11.2 million and $12.7 million as of June 30, 2010 and
December 31, 2009, respectively. Affiliated Dealer Loan balances were 1.1% and 1.5% of total
consolidated Dealer Loan balances as of June 30, 2010 and December 31, 2009, respectively. A
summary of related party Loan activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Affiliated |
|
|
|
|
|
|
Affiliated |
|
|
|
|
|
|
Dealer-Partner |
|
|
% of |
|
|
Dealer-Partner |
|
|
% of |
|
(Dollars in thousands) |
|
activity |
|
|
consolidated |
|
|
activity |
|
|
consolidated |
|
New Dealer and Purchased
Loans |
|
$ |
1,039 |
|
|
|
0.5 |
% |
|
$ |
1,591 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Loan revenue |
|
$ |
801 |
|
|
|
1.1 |
% |
|
$ |
958 |
|
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Holdback payments |
|
$ |
469 |
|
|
|
4.4 |
% |
|
$ |
494 |
|
|
|
4.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
|
|
Affiliated |
|
|
|
|
|
|
Affiliated |
|
|
|
|
|
|
Dealer-Partner |
|
|
% of |
|
|
Dealer-Partner |
|
|
% of |
|
|
|
activity |
|
|
consolidated |
|
|
activity |
|
|
consolidated |
|
New Dealer and
Purchased Loans |
|
$ |
2,638 |
|
|
|
0.6 |
% |
|
$ |
3,621 |
|
|
|
1.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Loan revenue |
|
$ |
1,648 |
|
|
|
1.2 |
% |
|
$ |
1,906 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Holdback payments |
|
$ |
1,059 |
|
|
|
4.6 |
% |
|
$ |
1,065 |
|
|
|
4.4 |
% |
Our majority shareholder and Chairman has indirect control over entities that, in the
past, offered secured lines of credit to automobile dealers, and has the right or obligation to
reacquire these entities under certain circumstances until December 31, 2014 or the repayment of
the related purchase money note.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
9. INCOME TAXES
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
U.S. federal statutory rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
35.0 |
% |
State income taxes |
|
|
1.5 |
|
|
|
1.2 |
|
|
|
1.6 |
|
|
|
1.3 |
|
Interest and penalties |
|
|
0.3 |
|
|
|
0.6 |
|
|
|
0.3 |
|
|
|
0.5 |
|
Reversal of reserves as a
result of settlement with
IRS |
|
|
(10.4 |
) |
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
26.4 |
% |
|
|
36.7 |
% |
|
|
31.9 |
% |
|
|
36.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The differences between the U.S. federal statutory rate and our effective tax rate are
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. The decreases for the three and
six months ended June 30, 2010, as compared to the same periods in 2009, are primarily due to a
reversal of the previously accrued tax reserves and related interest as a result of a settlement of
the Internal Revenue Service (IRS) audit detailed below.
The federal income tax returns for 2004, 2005, and 2006 have been under examination by the IRS
since February 2007, and in March 2010, the IRS began examining the federal returns for 2007 and
2008. On June 7, 2010, we reached a settlement with the IRS which closed our 2004 through 2008 tax
years. As a result of the settlement, we agreed to pay a total of $6.8 million in federal and
state taxes and interest related to these years. We also concluded that all 2004 through 2008
uncertain federal jurisdiction tax positions taken in previous periods are effectively settled.
The following table is a summary of changes of the reserve for unrecognized gross tax benefits
(in thousands):
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2010 |
|
Gross tax contingencies balance at January 1, 2010 |
|
$ |
11,830 |
|
Additions based on tax positions related to current year |
|
|
909 |
|
Additions for tax positions of prior years |
|
|
111 |
|
Settlements |
|
|
(4,702 |
) |
Reductions as a result of a lapse of the statute of limitations |
|
|
(289 |
) |
|
|
|
|
Gross tax contingencies balance at June 30, 2010 |
|
$ |
7,859 |
|
|
|
|
|
The settlements amount include $6.2 million of additional taxes for the 2004 through 2008
period that was paid to the IRS because of the settlement discussed above. These additional taxes
resulted from an acceleration of taxes already provided for in prior periods and the payment did
not have an impact on our net income during the reporting periods. The reversal of reserves for
other uncertain tax positions and related interest as a result of the settlement with the IRS had a
favorable impact of $6.9 million and $5.9 million (after-tax) on our net income for the three and
six month periods ended June 30, 2010, respectively.
The total amount of unrecognized tax benefit that, if recognized, would favorably affect the
effective income tax rate in future periods, was approximately $7.9 million as of June 30, 2010.
It is reasonably possible that the total amount of
unrecognized tax benefit will decrease within the next twelve months as a result of the lapse
of statutes of limitations. Accrued interest and penalties related to uncertain tax positions were
$1.5 million and $3.9 million as of June 30, 2010 and December 31, 2009, respectively.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
10. CAPITAL TRANSACTIONS
Net Income Per Share
Basic net income per share has been computed by dividing net income by the basic number of
common shares outstanding. Diluted net income per share has been computed by dividing net income
by the diluted number of common and common equivalent shares outstanding using the treasury stock
method. The share effect is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Weighted average common and common equivalent shares
outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic number of common shares outstanding |
|
|
31,172,229 |
|
|
|
30,600,531 |
|
|
|
31,107,721 |
|
|
|
30,510,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options |
|
|
364,952 |
|
|
|
610,172 |
|
|
|
366,357 |
|
|
|
582,248 |
|
Dilutive effect of restricted stock and restricted stock units |
|
|
63,846 |
|
|
|
212,484 |
|
|
|
126,508 |
|
|
|
193,047 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive number of common and common equivalent shares
outstanding |
|
|
31,601,027 |
|
|
|
31,423,187 |
|
|
|
31,600,586 |
|
|
|
31,285,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no stock options, restricted stock or restricted stock units that would be
anti-dilutive for the three and six months ended June 30, 2010 and 2009.
Stock Compensation Plans
Pursuant to our Amended and Restated Incentive Compensation Plan (the Incentive Plan), the
number of shares reserved for granting of restricted stock, restricted stock units, stock options,
and performance awards to team members, officers, directors, and contractors at any time prior to
April 6, 2019 is 1.5 million shares. The shares available for future grants under the Incentive
Plan totaled 313,193 as of June 30, 2010.
A summary of the restricted stock activity under the Incentive Plan for the six months ended
June 30, 2010 and 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
Six Months Ended June 30, |
|
Restricted Stock |
|
2010 |
|
|
2009 |
|
Outstanding Beginning Balance |
|
|
242,277 |
|
|
|
245,329 |
|
Granted |
|
|
19,183 |
|
|
|
121,736 |
|
Vested |
|
|
(142,682 |
) |
|
|
(105,682 |
) |
Forfeited |
|
|
(2,593 |
) |
|
|
(10,233 |
) |
|
|
|
|
|
|
|
Outstanding Ending Balance |
|
|
116,185 |
|
|
|
251,150 |
|
|
|
|
|
|
|
|
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)
10. CAPITAL TRANSACTIONS (Concluded)
A summary of the restricted stock unit activity under the Incentive Plan for the six months
ended June 30, 2010 and 2009 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested |
|
|
Vested |
|
|
Total |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Number of |
|
|
Grant-Date |
|
|
Number of |
|
|
Grant-Date |
|
|
Number of |
|
|
|
Restricted Stock |
|
|
Fair Value |
|
|
Restricted Stock |
|
|
Fair Value |
|
|
Restricted Stock |
|
Restricted Stock Units |
|
Units |
|
|
Per Share |
|
|
Units |
|
|
Per Share |
|
|
Units |
|
Outstanding at December 31, 2009 |
|
|
648,250 |
|
|
$ |
19.35 |
|
|
|
120,000 |
|
|
$ |
26.30 |
|
|
|
768,250 |
|
Granted |
|
|
32,500 |
|
|
|
39.89 |
|
|
|
|
|
|
|
|
|
|
|
32,500 |
(1) |
Vested |
|
|
(149,650 |
) |
|
|
20.24 |
|
|
|
149,650 |
|
|
|
20.24 |
|
|
|
|
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010 |
|
|
531,100 |
|
|
$ |
20.36 |
|
|
|
269,650 |
|
|
$ |
22.94 |
|
|
|
800,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested |
|
|
Vested |
|
|
Total |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Number of |
|
|
Grant-Date |
|
|
Number of |
|
|
Grant-Date |
|
|
Number of |
|
|
|
Restricted Stock |
|
|
Fair Value |
|
|
Restricted Stock |
|
|
Fair Value |
|
|
Restricted Stock |
|
Restricted Stock Units |
|
Units |
|
|
Per Share |
|
|
Units |
|
|
Per Share |
|
|
Units |
|
Outstanding at December 31, 2008 |
|
|
640,000 |
|
|
$ |
18.99 |
|
|
|
60,000 |
|
|
$ |
26.30 |
|
|
|
700,000 |
|
Granted |
|
|
62,500 |
|
|
|
21.38 |
|
|
|
|
|
|
|
|
|
|
|
62,500 |
(3) |
Vested |
|
|
(60,000 |
) |
|
|
26.30 |
|
|
|
60,000 |
|
|
|
26.30 |
|
|
|
|
(4) |
Forfeited |
|
|
(20,000 |
) |
|
|
13.51 |
|
|
|
|
|
|
|
|
|
|
|
(20,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2009 |
|
|
622,500 |
|
|
$ |
18.71 |
|
|
|
120,000 |
|
|
$ |
26.30 |
|
|
|
742,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The distribution date of any vested restricted stock units is February 22, 2017. |
|
(2) |
|
The distribution date of vested restricted stock units is February 22, 2014 for 60,000
restricted stock units and February 22, 2016 for 89,650 restricted
stock units. |
|
(3) |
|
The distribution date of any vested restricted stock units is February 22, 2016. |
|
(4) |
|
The distribution date of vested restricted stock units is February 22, 2014. |
Stock compensation expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Restricted stock |
|
$ |
126 |
|
|
$ |
555 |
|
|
$ |
460 |
|
|
$ |
1,065 |
|
Restricted stock units |
|
|
859 |
|
|
|
1,116 |
|
|
|
1,708 |
|
|
|
2,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
985 |
|
|
$ |
1,671 |
|
|
$ |
2,168 |
|
|
$ |
3,155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
(UNAUDITED)
11. BUSINESS SEGMENT INFORMATION
We have two reportable business segments: United States and Other. The United States segment
is our dominant segment and primarily consists of the United States automobile financing business.
The Other segment consists of businesses in liquidation.
Selected segment information is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
111,778 |
|
|
$ |
92,375 |
|
|
$ |
215,039 |
|
|
$ |
180,261 |
|
Other |
|
|
1 |
|
|
|
(2 |
) |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
111,779 |
|
|
$ |
92,373 |
|
|
$ |
215,041 |
|
|
$ |
180,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before provision for income
taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
66,668 |
|
|
$ |
56,994 |
|
|
$ |
119,138 |
|
|
$ |
102,964 |
|
Other |
|
|
(32 |
) |
|
|
80 |
|
|
|
(45 |
) |
|
|
65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing operations before provision for income taxes |
|
$ |
66,636 |
|
|
$ |
57,074 |
|
|
$ |
119,093 |
|
|
$ |
103,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
(Dollars in thousands) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Segment Assets |
|
|
|
|
|
|
|
|
United States |
|
$ |
1,254,755 |
|
|
$ |
1,175,550 |
|
Other |
|
|
63 |
|
|
|
686 |
|
|
|
|
|
|
|
|
Total Assets |
|
$ |
1,254,818 |
|
|
$ |
1,176,236 |
|
|
|
|
|
|
|
|
12. COMPREHENSIVE INCOME
Our comprehensive income information is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
49,040 |
|
|
$ |
36,185 |
|
|
$ |
81,050 |
|
|
$ |
65,186 |
|
Unrealized gain on securities available for sale, net of tax |
|
|
12 |
|
|
|
15 |
|
|
|
7 |
|
|
|
14 |
|
Unrealized gain on interest rate swap, net of tax |
|
|
462 |
|
|
|
521 |
|
|
|
771 |
|
|
|
907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
49,514 |
|
|
$ |
36,721 |
|
|
$ |
81,828 |
|
|
$ |
66,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13. SUBSEQUENT EVENTS
Revolving Secured Line of Credit Facility
During the third quarter of 2010, we increased the amount of the revolving secured line of
credit facility from $150.0 million to $170.0 million.
Tender Offer
During the second quarter of 2010, we commenced a tender offer to purchase up to 4.0 million
shares of our outstanding common stock at a price of $50.00 per share. Upon expiration of the
tender offer during the third quarter of 2010, we repurchased 4.0 million common shares at a cost
of $200.0 million, which included approximately 2.9 million shares beneficially owned by Donald A.
Foss, our Chairman of the Board, and approximately 0.8 million shares beneficially owned by the
trustee of certain grantor retained annuity trusts created by Mr. Foss. We financed the purchase
of our securities in the tender offer by borrowing under our $170.0 million revolving secured line
of credit facility and $325.0 million revolving secured warehouse facility.
23
|
|
|
ITEM 2. |
|
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, of our 2009 Annual Report on Form 10-K, as well as Item 1- Consolidated Financial Statements,
of this Form 10-Q, which are incorporated herein by reference.
Overview
We provide 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.
Critical Success Factors
Critical success factors include our ability to access capital on acceptable terms, accurately
forecast Consumer Loan performance, and maintain or grow Consumer Loan volume at the level and on
the terms that we anticipate, with an objective to maximize economic profit. Economic profit is a
financial metric we use to evaluate our financial results and determine incentive compensation.
Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is
a function of the return on capital in excess of the cost of capital and the amount of capital
invested in the business.
Access to Capital
Our strategy for accessing capital on acceptable terms needed to maintain and grow the
business is to: (1) maintain consistent financial performance; (2) maintain modest financial
leverage; and (3) maintain multiple funding sources. Our funded debt to equity ratio is 0.8:1 at
June 30, 2010. As of June 30, 2010, our pro forma funded debt to equity ratio was 1.8:1 after
completion of our tender offer on July 19, 2010. We currently utilize the following forms of debt
financing: (1) a revolving secured line of credit with a commercial bank syndicate; (2) revolving
secured warehouse facilities with institutional investors; (3) a Term ABS financing with qualified
institutional investors; and (4) Senior Notes.
Consumer Loan Performance
At the time the Consumer Loan is submitted to us for assignment, 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 price 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.
We use a statistical model to estimate the expected collection rate for each Consumer Loan at
the time of assignment. We continue to evaluate the expected collection rate of each Consumer Loan
subsequent to assignment. Our evaluation becomes more accurate as the Consumer Loans age, as we
use actual performance data in our forecast. By comparing our current expected collection rate for
each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the
accuracy of our initial forecast. The following table compares our forecast of Consumer Loan
collection rates as of June 30, 2010, with the forecasts as of March 31, 2010, as of December 31,
2009, and at the time of assignment, segmented by year of assignment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Forecasted Collection Percentage as of |
|
Variance in Forecasted Collection Percentage from |
|
|
June 30, |
|
March 31, |
|
December 31, |
|
Initial |
|
March 31, |
|
December 31, |
|
Initial |
Consumer Loan Assignment Year |
|
2010 |
|
2010 |
|
2009 |
|
Forecast |
|
2010 |
|
2009 |
|
Forecast |
2001 |
|
|
67.5 |
% |
|
|
67.5 |
% |
|
|
67.5 |
% |
|
|
70.4 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
-2.9 |
% |
2002 |
|
|
70.5 |
% |
|
|
70.5 |
% |
|
|
70.4 |
% |
|
|
67.9 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
2.6 |
% |
2003 |
|
|
73.7 |
% |
|
|
73.7 |
% |
|
|
73.7 |
% |
|
|
72.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
1.7 |
% |
2004 |
|
|
73.1 |
% |
|
|
73.1 |
% |
|
|
73.1 |
% |
|
|
73.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
2005 |
|
|
73.8 |
% |
|
|
73.8 |
% |
|
|
73.7 |
% |
|
|
74.0 |
% |
|
|
0.0 |
% |
|
|
0.1 |
% |
|
|
-0.2 |
% |
2006 |
|
|
70.2 |
% |
|
|
70.3 |
% |
|
|
70.3 |
% |
|
|
71.4 |
% |
|
|
-0.1 |
% |
|
|
-0.1 |
% |
|
|
-1.2 |
% |
2007 |
|
|
68.0 |
% |
|
|
68.1 |
% |
|
|
68.3 |
% |
|
|
70.7 |
% |
|
|
-0.1 |
% |
|
|
-0.3 |
% |
|
|
-2.7 |
% |
2008 |
|
|
69.8 |
% |
|
|
69.8 |
% |
|
|
70.0 |
% |
|
|
69.7 |
% |
|
|
0.0 |
% |
|
|
-0.2 |
% |
|
|
0.1 |
% |
2009 |
|
|
77.2 |
% |
|
|
76.4 |
% |
|
|
75.6 |
% |
|
|
71.9 |
% |
|
|
0.8 |
% |
|
|
1.6 |
% |
|
|
5.3 |
% |
2010 (1) |
|
|
75.3 |
% |
|
|
73.4 |
% |
|
|
|
|
|
|
73.6 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
1.7 |
% |
24
|
|
|
(1) |
|
The forecasted collection rate for 2010 Consumer Loans as of June 30, 2010 includes both
Consumer Loans that were in our portfolio as of March 31, 2010 and Consumer Loans assigned
during the most recent quarter. The following table provides forecasted collection rates
for each of these segments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forecasted Collection Percentage as of |
|
|
|
|
June 30, |
|
March 31, |
|
|
2010 Consumer Loan Assignment Period |
|
2010 |
|
2010 |
|
Variance |
January 1, 2010 through March 31, 2010 |
|
76.9% |
|
|
73.4 |
% |
|
|
3.5 |
% |
April 1, 2010 through June 30, 2010 |
|
73.6% |
|
|
|
|
|
|
|
|
Consumer Loans assigned in 2002 through 2004 and 2008 through 2010 have performed better
than our initial expectations while Consumer Loans assigned in 2001 and 2005 through 2007 have
performed worse. During the second quarter of 2010, forecasted collection rates increased for
Consumer Loans assigned during 2009 and 2010 and were consistent with expectations at the start of
the period for other assignment years. During the first six months of 2010, forecasted collection
rates increased for Consumer Loans assigned in 2009 and 2010, and decreased modestly for 2007 and
2008 Consumer Loan assignments.
As a result of current economic conditions and uncertainty about future conditions, our
forecasts of future collection rates are subject to a greater than normal degree of risk. Our
pricing strategy considers this in that we have established advance rates that are intended to
allow us to achieve acceptable levels of profitability, even if collection rates are less than we
currently forecast.
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
June 30, 2010. Payments of Dealer Holdback and accelerated Dealer Holdback are not included in the
advance percentage paid to the Dealer-Partner. All amounts, unless otherwise noted, are presented
as a percentage of the initial balance of the Consumer Loan (principal + interest). The table
includes both Dealer Loans and Purchased Loans.
|
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|
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|
|
|
|
|
|
|
|
As of June 30, 2010 |
Consumer Loan |
|
Forecasted |
|
|
|
|
|
|
|
|
|
% of Forecast |
Assignment Year |
|
Collection % |
|
Advance % |
|
Spread % |
|
Realized (1) |
2001 |
|
|
67.5 |
% |
|
|
46.0 |
% |
|
|
21.5 |
% |
|
|
99.3 |
% |
2002 |
|
|
70.5 |
% |
|
|
42.2 |
% |
|
|
28.3 |
% |
|
|
99.2 |
% |
2003 |
|
|
73.7 |
% |
|
|
43.4 |
% |
|
|
30.3 |
% |
|
|
99.0 |
% |
2004 |
|
|
73.1 |
% |
|
|
44.0 |
% |
|
|
29.1 |
% |
|
|
98.6 |
% |
2005 |
|
|
73.8 |
% |
|
|
46.9 |
% |
|
|
26.9 |
% |
|
|
98.2 |
% |
2006 |
|
|
70.2 |
% |
|
|
46.6 |
% |
|
|
23.6 |
% |
|
|
95.9 |
% |
2007 |
|
|
68.0 |
% |
|
|
46.5 |
% |
|
|
21.5 |
% |
|
|
86.0 |
% |
2008 |
|
|
69.8 |
% |
|
|
44.6 |
% |
|
|
25.2 |
% |
|
|
67.4 |
% |
2009 |
|
|
77.2 |
% |
|
|
43.9 |
% |
|
|
33.3 |
% |
|
|
41.0 |
% |
2010 |
|
|
75.3 |
% |
|
|
44.9 |
% |
|
|
30.4 |
% |
|
|
9.3 |
% |
|
|
|
(1) |
|
Presented as a percentage of total forecasted collections. |
The risk of a material change in our forecasted collection rate declines as the Consumer
Loans age. For 2006 and prior Consumer Loan assignments, the risk of a material forecast variance
is modest, as we have currently realized in excess of 95% of the expected collections. Conversely,
the forecasted collection rates for more recent Consumer Loan assignments are less certain as a
significant portion of our forecast has not been realized.
The spread between the forecasted collection rate and the advance rate declined during the
2003 through 2007 period as we increased advance rates during this period in response to a more
difficult competitive environment. During 2008 and 2009, the spread increased as the competitive
environment improved, and we reduced advance rates. In addition, during 2009, the spread was
positively impacted by better than expected Consumer Loan performance. The decline in the spread
for 2010 Consumer Loan assignments reflects advance rate increases implemented during the last four
months of 2009 and the first quarter of 2010 to increase unit volume as a result of an increase in
the amount of capital available to us.
The following table presents forecasted Consumer Loan collection rates, advance rates
(includes amounts paid to acquire Purchased Loans), and the spread (the forecasted collection rate
less the advance rate) as of June 30, 2010 for Purchased Loans and Dealer Loans separately.
Payments of Dealer Holdback and accelerated Dealer Holdback are not included in the
25
advance percentage paid to the Dealer-Partner. All amounts are presented as a percentage of the initial
balance of the Consumer Loan (principal + interest).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loan |
|
Forecasted |
|
|
|
|
|
|
Assignment Year |
|
Collection % |
|
Advance % |
|
Spread % |
Purchased Loans |
|
2007 |
|
|
68.1 |
% |
|
|
48.6 |
% |
|
|
19.5 |
% |
|
|
2008 |
|
|
68.9 |
% |
|
|
46.3 |
% |
|
|
22.6 |
% |
|
|
2009 |
|
|
77.3 |
% |
|
|
44.9 |
% |
|
|
32.4 |
% |
|
|
2010 |
|
|
75.2 |
% |
|
|
47.1 |
% |
|
|
28.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dealer Loans |
|
2007 |
|
|
67.9 |
% |
|
|
45.9 |
% |
|
|
22.0 |
% |
|
|
2008 |
|
|
70.4 |
% |
|
|
43.6 |
% |
|
|
26.8 |
% |
|
|
2009 |
|
|
77.2 |
% |
|
|
43.6 |
% |
|
|
33.6 |
% |
|
|
2010 |
|
|
75.3 |
% |
|
|
44.6 |
% |
|
|
30.7 |
% |
Although the advance rate on Purchased Loans is higher as compared to the advance rate on
Dealer Loans, Purchased Loans do not require us to pay Dealer Holdback.
Consumer Loan Volume
Our ability to maintain and grow Consumer Loan volume is impacted by our pricing strategy, the
number of Dealer-Partners actively participating in our programs, and the competitive environment.
The following table summarizes changes in Consumer Loan assignment volume in each of the last six
quarters as compared to the same period in the previous year:
|
|
|
|
|
|
|
|
|
|
|
Year over Year Percent Change |
Three Months Ended |
|
Unit Volume |
|
Dollar Volume (1) |
March 31, 2009 |
|
|
-13.0 |
% |
|
|
-28.9 |
% |
June 30, 2009 |
|
|
-16.2 |
% |
|
|
-33.5 |
% |
September 30, 2009 |
|
|
-5.7 |
% |
|
|
-13.0 |
% |
December 31, 2009 |
|
|
7.6 |
% |
|
|
5.9 |
% |
March 31, 2010 |
|
|
11.2 |
% |
|
|
21.6 |
% |
June 30, 2010 |
|
|
22.7 |
% |
|
|
42.2 |
% |
|
|
|
(1) |
|
Represents payments made to Dealer-Partners for advances on Dealer Loans and the
acquisition of Purchased Loans. Payments of Dealer Holdback and accelerated Dealer
Holdback are not included. |
Dollar and unit volume increased during the first two quarters of 2010 as compared to the
same periods in 2009 due to pricing changes implemented during the last four months of 2009 and the
first quarter of 2010 that reduced per unit profitability in exchange for increased unit volume.
With the amount of capital available to us, we are in position to grow year over year unit
volumes. We will continue to monitor unit volumes and will make additional pricing changes with an
objective to maximize economic profit given the capital we have available. Future growth rates
will partially depend on how unit volumes respond to pricing changes, which will be influenced to a
large degree by how quickly competition returns to our market.
26
The following table summarizes the changes in Consumer Loan unit volume and active
Dealer-Partners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
% change |
|
Consumer Loan unit volume |
|
|
71,439 |
|
|
|
61,510 |
|
|
|
16.1 |
% |
Active Dealer-Partners (1) |
|
|
2,657 |
|
|
|
2,678 |
|
|
|
-0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
Average volume per active Dealer-Partner |
|
|
26.9 |
|
|
|
23.0 |
|
|
|
17.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loan unit volume from Dealer-Partners active
both periods |
|
|
56,319 |
|
|
|
50,826 |
|
|
|
10.8 |
% |
Dealer-Partners active both periods |
|
|
1,803 |
|
|
|
1,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average volume per Dealer-Partners active both periods |
|
|
31.2 |
|
|
|
28.2 |
|
|
|
10.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Loan unit volume from new Dealer-Partners |
|
|
5,151 |
|
|
|
6,466 |
|
|
|
-20.3 |
% |
New active Dealer-Partners (2) |
|
|
435 |
|
|
|
614 |
|
|
|
-29.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Average volume per new active Dealer-Partners |
|
|
11.8 |
|
|
|
10.5 |
|
|
|
12.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Attrition (3) |
|
|
-17.4 |
% |
|
|
-22.9 |
% |
|
|
|
|
|
|
|
(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 period. |
|
(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 did not receive funding for any Loans during the
current period divided by prior year comparable period Consumer Loan unit volume. |
Consumer Loans are assigned to us through either our Portfolio Program or our Purchase
Program. The following table summarizes the portion of our Consumer Loan volume that was assigned
to us through our Purchase Program:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
|
|
2010 |
|
2009 |
|
2010 |
|
2009 |
New Purchased Loan unit volume as a percentage of total unit volume |
|
9.5% |
|
14.0% |
|
9.3% |
|
16.1% |
New Purchased Loan dollar volume as a percentage of total
dollar volume |
|
11.5% |
|
17.0% |
|
11.3% |
|
19.4% |
For the three and six months ended June 30, 2010, new Purchased Loan unit and dollar
volume as a percentage of total unit and dollar volume, respectively, decreased as compared to 2009
primarily due to the continued impact of program enrollment eligibility changes we made in 2008,
which restricts new Dealer-Partners access to the Purchase Program.
As of June 30, 2010 and December 31, 2009, the net Purchased Loans receivable balance was
23.4% and 27.5%, respectively, of the total net Loans receivable balance.
27
Results of Operations
Three and Six Months Ended June 30, 2010 Compared to Three and Six Months Ended June 30,
2009
The following is a discussion of our results of operations and income statement data on a
consolidated basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share data) |
|
Three Months Ended June 30, |
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
% Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Finance charges |
|
$ |
95,549 |
|
|
$ |
81,124 |
|
|
|
17.8 |
% |
Premiums earned |
|
|
8,245 |
|
|
|
7,201 |
|
|
|
14.5 |
% |
Other income |
|
|
7,985 |
|
|
|
4,048 |
|
|
|
97.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
111,779 |
|
|
|
92,373 |
|
|
|
21.0 |
% |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages |
|
|
14,050 |
|
|
|
16,515 |
|
|
|
-14.9 |
% |
General and administrative |
|
|
5,920 |
|
|
|
6,894 |
|
|
|
-14.1 |
% |
Sales and marketing |
|
|
4,834 |
|
|
|
3,566 |
|
|
|
35.6 |
% |
Provision for credit losses |
|
|
1,790 |
|
|
|
(3,790 |
) |
|
|
-147.2 |
% |
Interest |
|
|
12,267 |
|
|
|
7,285 |
|
|
|
68.4 |
% |
Provision for claims |
|
|
6,282 |
|
|
|
4,829 |
|
|
|
30.1 |
% |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
45,143 |
|
|
|
35,299 |
|
|
|
27.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes |
|
|
66,636 |
|
|
|
57,074 |
|
|
|
16.8 |
% |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
17,571 |
|
|
|
20,924 |
|
|
|
-16.0 |
% |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
49,065 |
|
|
|
36,150 |
|
|
|
35.7 |
% |
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued United Kingdom operations |
|
|
(25 |
) |
|
|
49 |
|
|
|
-151.0 |
% |
Provision for income taxes |
|
|
|
|
|
|
14 |
|
|
|
-100.0 |
% |
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued operations |
|
|
(25 |
) |
|
|
35 |
|
|
|
-171.4 |
% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,040 |
|
|
$ |
36,185 |
|
|
|
35.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.57 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.55 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.57 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
1.55 |
|
|
$ |
1.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued operations per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
31,172,229 |
|
|
|
30,600,531 |
|
|
|
|
|
Diluted |
|
|
31,601,027 |
|
|
|
31,423,187 |
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
|
(Dollars in thousands, except per share data) |
|
2010 |
|
|
2009 |
|
|
% Change |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Finance charges |
|
$ |
185,212 |
|
|
$ |
157,850 |
|
|
|
17.3 |
% |
Premiums earned |
|
|
15,949 |
|
|
|
13,661 |
|
|
|
16.7 |
% |
Other income |
|
|
13,880 |
|
|
|
8,750 |
|
|
|
58.6 |
% |
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
215,041 |
|
|
|
180,261 |
|
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and wages |
|
|
30,160 |
|
|
|
33,636 |
|
|
|
-10.3 |
% |
General and administrative |
|
|
12,462 |
|
|
|
14,889 |
|
|
|
-16.3 |
% |
Sales and marketing |
|
|
9,644 |
|
|
|
7,487 |
|
|
|
28.8 |
% |
Provision for credit losses |
|
|
8,216 |
|
|
|
(3,626 |
) |
|
|
-326.6 |
% |
Interest |
|
|
23,972 |
|
|
|
15,208 |
|
|
|
57.6 |
% |
Provision for claims |
|
|
11,494 |
|
|
|
9,638 |
|
|
|
19.3 |
% |
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
95,948 |
|
|
|
77,232 |
|
|
|
24.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income taxes |
|
|
119,093 |
|
|
|
103,029 |
|
|
|
15.6 |
% |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
38,013 |
|
|
|
37,867 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
81,080 |
|
|
|
65,162 |
|
|
|
24.4 |
% |
|
|
|
|
|
|
|
|
|
|
Discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued United Kingdom operations |
|
|
(30 |
) |
|
|
34 |
|
|
|
-188.2 |
% |
Provision for income taxes |
|
|
|
|
|
|
10 |
|
|
|
-100.0 |
% |
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued operations |
|
|
(30 |
) |
|
|
24 |
|
|
|
-225.0 |
% |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
81,050 |
|
|
$ |
65,186 |
|
|
|
24.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.61 |
|
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.56 |
|
|
$ |
2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
2.61 |
|
|
$ |
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
2.57 |
|
|
$ |
2.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain from discontinued operations per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
31,107,721 |
|
|
|
30,510,439 |
|
|
|
|
|
Diluted |
|
|
31,600,586 |
|
|
|
31,285,734 |
|
|
|
|
|
29
Continuing Operations
Three and Six Months Ended June 30, 2010 Compared to Three and Six Months Ended June 30, 2009
The following table highlights changes in income from continuing operations for the three and
six months ended June 30, 2010, as compared to 2009:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
Three Months Ended |
|
|
Six Months Ended |
|
Income from continuing operations, June 30, 2009 |
|
$ |
36,150 |
|
|
$ |
65,162 |
|
|
|
|
|
|
|
|
|
|
Increase in finance charges |
|
|
14,425 |
|
|
|
27,362 |
|
|
|
|
|
|
|
|
|
|
Increase in premiums earned |
|
|
1,044 |
|
|
|
2,288 |
|
|
|
|
|
|
|
|
|
|
Increase in other income |
|
|
3,937 |
|
|
|
5,130 |
|
|
|
|
|
|
|
|
|
|
Decrease in operating expenses (1) |
|
|
2,171 |
|
|
|
3,746 |
|
|
|
|
|
|
|
|
|
|
Increase in provision for credit losses |
|
|
(5,580 |
) |
|
|
(11,842 |
) |
|
|
|
|
|
|
|
|
|
Increase in interest |
|
|
(4,982 |
) |
|
|
(8,764 |
) |
|
|
|
|
|
|
|
|
|
Increase in provision for claims |
|
|
(1,453 |
) |
|
|
(1,856 |
) |
|
|
|
|
|
|
|
|
|
Decrease (increase) in provision for income taxes |
|
|
3,353 |
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, June 30, 2010 |
|
$ |
49,065 |
|
|
$ |
81,080 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating expenses consist of salaries and wages, general and administrative, and sales
and marketing expenses. |
Finance Charges. For the three months ended June 30, 2010, finance charges increased
$14.4 million, or 17.8%, as compared to the same period in 2009. For the six months ended June 30,
2010, finance charges increased $27.4 million, or 17.3%, as compared to the same period in 2009.
The increases were the result of an increase in the average yield on our Loan portfolio and an
increase in the average Loan receivable balance, as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
(Dollars in thousands) |
|
June 30, 2010 |
|
|
|
|
Change due to an increase in
the average yield on our Loan portfolio |
|
$ |
9,999 |
|
|
$ |
20,514 |
|
Change due to an increase in
the average Loan receivable balance |
|
|
4,426 |
|
|
|
6,848 |
|
|
|
|
|
|
|
|
Increase in finance charges |
|
$ |
14,425 |
|
|
$ |
27,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Average yield on our Loan portfolio |
|
|
34.3 |
% |
|
|
30.7 |
% |
|
|
34.2 |
% |
|
|
30.4 |
% |
The increases in the average yield on our Loan portfolio were primarily due to an
increase in forecasted collection rates throughout 2009 as well as higher yields on Consumer Loans
assigned during the last three quarters of 2009 and the first two quarters of 2010. The increases
in the average Loan receivable balance were primarily due to growth in new Loan volume during the
last quarter of 2009 and first two quarters of 2010.
Premiums Earned. For the three months ended June 30, 2010, premiums earned increased $1.0
million, or 14.5%, as compared to the same period in 2009. For the six months ended June 30, 2010,
premiums earned increased $2.3 million, or 16.7%, as compared to the same period in 2009. The increases were due to a revision in our
revenue recognition timing, partially offset by a decline in the size of our reinsurance portfolio.
During the third quarter of 2009, we revised our revenue recognition timing in order to better
match the timing with our expected costs of servicing vehicle contracts. The decline in the size
of our reinsurance portfolio is primarily due to the termination of our arrangement with one of our
third party insurers during the fourth quarter of 2009. Prior to the fourth quarter of 2009, VSC
Re reinsured vehicle service contracts that were underwritten by two of our three third party
insurers. VSC Re currently reinsures vehicle service contracts that are underwritten by one of our
two third party insurers.
30
Other Income. For the three months ended June 30, 2010, other income increased $3.9
million, or 97.3%, as compared to the same period in 2009. For the six months ended June 30, 2010,
other income increased $5.1 million, or 58.6%, as compared to the same period in 2009. For the
three and six month periods, the increase was primarily a result of $3.4 million of income
recognized during the second quarter of 2010 related to an arrangement with one
of our third party vehicle service contract providers. This arrangement was discontinued in 2008 and no additional income is expected beyond the amount
recognized to date. While we continue to generate income from vehicle service contracts, such
amounts are captured through VSC Re and recorded over the life of the contracts.
Salaries and wages. For the three months ended June 30, 2010, salaries and wages decreased
$2.5 million, or 14.9%, as compared to the same period in 2009. For the six months ended June 30,
2010, salaries and wages decreased $3.5 million, or 10.3%, as compared to the same period in 2009.
The decreases were primarily the result of:
|
|
|
Reduced expenses related to stock compensation due to the timing of expense related
to long-term incentive compensation; |
|
|
|
|
Reduced expenses related to information technology primarily due to an approximate
25% reduction in information technology headcount. Secondarily, a higher percentage of
the work being performed has been capitalized as software developed for internal use;
and |
|
|
|
|
Reduced expenses related to collections due to fewer delinquent accounts which reduce
the amount of collection effort. |
In addition, for the three month period, the decrease was also partially the result of an
increased percentage of Loan origination costs being deferred due to a decrease in the Purchased
Loan unit volume as a percentage of total unit volume.
General and Administrative. For the three months ended June 30, 2010, general and
administrative expense decreased $1.0 million, or 14.1%, as compared to the same period in 2009.
For the six months ended June 30, 2010, general and administrative expense decreased $2.4 million,
or 16.3%, as compared to the same period in 2009. The decreases primarily resulted from (1)
decreased legal costs and (2) decreased consulting fees primarily related to the IRS audit which is
now complete.
Sales and Marketing. For the three months ended June 30, 2010, sales and marketing expense
increased $1.3 million, or 35.6%, as compared to the same period in 2009. For the six months ended
June 30, 2010, sales and marketing expense increased $2.2 million, or 28.8%, as compared to the
same period in 2009. The increases were due primarily to increased sales commissions due to an
increase in commission per Loan assignment and an increase in the number of Loan assignments.
Provision for Credit Losses. For the three months ended June 30, 2010, the provision for
credit losses increased $5.6 million, or 147.2%, as compared to the same period in 2009. For the
six months ended June 30, 2010, the provision for credit losses increased $11.8 million, or 326.6%,
as compared to the same period in 2009. Under GAAP, when forecasted future cash flows decline
relative to the cash flows expected at the time of assignment, a provision for credit losses is
recorded immediately as a current period expense and a corresponding allowance for credit losses is
established. For purposes of calculating the required allowance, Dealer Loans are grouped by
Dealer-Partner and Purchased Loans are grouped by month of purchase. As a result, regardless of
the overall performance of the portfolio of Consumer Loans, a provision can be required if any
individual Loan pool performs worse than expected. Conversely, a previously recorded provision can
be reversed if any previously impaired individual Loan pool experiences an improvement in
performance.
During the three and six months ended June 30, 2010, overall Consumer Loan performance
exceeded our expectations at the start of the periods. However, impaired Loan pools within our
portfolio experienced net declines in forecasted cash flows, resulting in provision for credit
losses of $1.8 million and $8.2 million for the three and six months ended June 30, 2010,
respectively. During the three and six months ended June 30, 2009, overall Consumer Loan
performance also exceeded our expectations at the start of the periods. Consistent with the
overall performance of the portfolio, impaired Loan pools experienced net improvements in
forecasted cash flows, resulting in a reversal of provision for credit losses of $3.8 million and
$3.6 million for the three months and six months ended June 30, 2009, respectively.
31
Interest. For the three months ended June 30, 2010, interest expense increased $5.0 million,
or 68.4%, as compared to the same period in 2009. For the six months ended June 30, 2010, interest
expense increased $8.8 million, or 57.6%, as compared to the same period in 2009. The following
table shows interest expense, the average outstanding debt balance, and the pre-tax average cost of
debt for the three and six months ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Interest expense |
|
$ |
12,267 |
|
|
$ |
7,285 |
|
|
$ |
23,972 |
|
|
$ |
15,208 |
|
Average outstanding debt
balance |
|
$ |
509,867 |
|
|
$ |
604,863 |
|
|
$ |
500,968 |
|
|
$ |
614,571 |
|
Pre-tax average cost of debt |
|
|
9.6 |
% |
|
|
4.8 |
% |
|
|
9.6 |
% |
|
|
4.9 |
% |
For the three and six months ended June 30, 2010, the increases in interest expense were
primarily due to increases in our pre-tax average cost of debt due to the issuance of the Senior
Notes during the first quarter of 2010 and an increase in available and unused credit capacity.
Provision for claims. For the three months ended June 30, 2010, provision for claims
increased $1.5 million, or 30.1%, as compared to the same period in 2009. For the six months ended
June 30, 2010, provision for claims increased $1.9 million, or 19.3%, as compared to the same
period in 2009. The increases were due to an increase in claims paid per reinsured vehicle service
contract, partially offset by a decline in the size of our reinsurance portfolio.
Provision for income taxes. For the three months ended June 30, 2010, the effective tax rate
decreased to 26.4%, from 36.7% in the same period in 2009. For the six months ended June 30, 2010,
the effective tax rate decreased to 31.9%, from 36.8% in the same period in 2009. The decreases
for the three and six month periods, as compared to the same periods in prior year, were primarily
due to the reversal of reserves for uncertain tax positions and associated interest as a result of
the completion of the IRS audit during the second quarter of 2010.
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 under: (1) a
revolving secured line of credit with a commercial bank syndicate; (2) revolving secured warehouse
facilities with institutional investors; (3) Term ABS financings with qualified institutional
investors; and (4) Senior Notes. There are various restrictive debt covenants for each financing
arrangement and we are in compliance with those covenants as of June 30, 2010. For information
regarding these financings and the covenants included in the related documents, see Note 5 to the
consolidated financial statements contained in Item 1 of this Form 10-Q, which is incorporated
herein by reference.
Cash and cash equivalents decreased to $1.5 million as of June 30, 2010 from $2.2 million at
December 31, 2009. Our total balance sheet indebtedness decreased to $493.5 million at June 30,
2010 from $507.0 million at December 31, 2009 as the net cash provided by our operating activities
and principal collections from our Loan portfolio exceeded the cash used to fund new Loans.
During the first quarter of 2010, we issued $250.0 million aggregate principal amount of
9.125% First Priority Senior Notes. Concurrently with the issuance of the Senior Notes, we amended
the agreements governing our line of credit facility with a commercial bank syndicate to facilitate
the issuance of the Senior Notes and future secured indebtedness. The net proceeds from the
offering of the Senior Notes were used to repay all outstanding borrowings under our line of credit
facility and to repay all outstanding borrowings under our $325.0 million revolving secured
warehouse facility, subject to our ability to reborrow in each case.
The Senior Notes were issued pursuant to an Indenture, dated as of February 1, 2010, among us,
BVPP and VRS, as Guarantors, and U.S. Bank National Association, as Trustee.
The Senior Notes mature on February 1, 2017 and bear interest at a rate of 9.125% per annum,
computed on the basis of 360-day year composed of twelve 30-day months and payable semi-annually on
February 1 and August 1 of each year, beginning on August 1, 2010. The Senior Notes were issued at
97.495% of the aggregate principal amount for net proceeds of $243.7 million, representing a yield
to maturity of 9.625%.
During the second quarter of 2010, we extended the maturity of the revolving secured line of
credit facility with a commercial bank syndicate from June 23, 2011 to June 22, 2012. The interest
rate on borrowings under the facility was changed from the prime rate plus 1.0% or the Eurodollar
rate plus 2.75%, at the Companys option, to the prime rate plus 1.25% or the Eurodollar rate plus
2.25%, at the Companys option. The floor on the Eurodollar rate decreased from 1.50% to
32
0.75%. None of the financial covenants were modified. Additionally, during the third quarter of 2010, we
increased the amount of the facility from $150.0 million to $170.0 million.
Also during the second quarter of 2010, we extended the date on which our $325.0 million
revolving secured warehouse facility will cease to revolve from August 23, 2010 to June 15, 2013.
The interest rate on borrowings under the $325.0 million revolving secured warehouse facility was
decreased from a floating rate equal to the commercial paper rate plus 5% to the commercial paper
rate plus 3.5%. In addition, the agreement was modified to provide that in the event that the
facility is not renewed and the borrower is in compliance with the terms and conditions of the
agreement, any amounts outstanding will be repaid over time as the collections on the loans
securing the facility are received.
During the second quarter of 2010, we commenced a tender offer to purchase up to 4.0 million
shares of our outstanding common stock at a price of $50.00 per share. Upon expiration of the
tender offer during the third quarter of 2010, we repurchased 4.0 million common shares at a cost
of $200.0 million, which included approximately 2.9 million shares beneficially owned by Donald A.
Foss, our Chairman of the Board, and approximately 0.8 million shares beneficially owned by the
trustee of certain grantor retained annuity trusts created by Mr. Foss. We financed the purchase
of our securities in the tender offer by borrowing under our $170.0 million revolving secured line
of credit facility and $325.0 million revolving secured warehouse facility.
Contractual Obligations
A summary of the total future contractual obligations requiring repayments as of June 30, 2010
is as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
More than |
|
|
|
|
(Dollars in thousands) |
|
Total |
|
|
1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
5 Years |
|
|
Other |
|
Long-term debt, including current
maturities and capital leases (1) |
|
$ |
499,465 |
|
|
$ |
8,099 |
|
|
$ |
177,726 |
|
|
$ |
63,640 |
|
|
$ |
250,000 |
|
|
$ |
|
|
Operating lease obligations |
|
|
2,479 |
|
|
|
688 |
|
|
|
1,649 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
Purchase obligations (2) |
|
|
2,255 |
|
|
|
1,553 |
|
|
|
702 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other future obligations (3) |
|
|
7,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations (4) |
|
$ |
512,058 |
|
|
$ |
10,340 |
|
|
$ |
180,077 |
|
|
$ |
63,782 |
|
|
$ |
250,000 |
|
|
$ |
7,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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(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 5 to the consolidated financial statements contained in Item 1
of this Form 10-Q, which is incorporated herein by reference. Based on the actual amounts
outstanding under our revolving line of credit, our warehouse facilities, and our Senior
Notes at June 30, 2010, the forecasted amounts outstanding on all other debt and the actual
interest rates in effect as of June 30, 2010, interest is expected to be approximately
$16.6 million during 2010; $32.6 million during 2011; and $132.9 million during 2012 and
thereafter. |
|
(2) |
|
Purchase obligations consist solely of contractual obligations related to the
information system needs. |
|
(3) |
|
Other future obligations included in the above table consist solely of reserves for
uncertain tax positions. Payments are contingent upon examination and would occur in the
periods in which the uncertain tax positions are settled. |
|
(4) |
|
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. Additionally,
we completed a $200.0 million tender offer on July 19, 2010 which is not reflected in this
table as it was not an obligation as of June 30, 2010. |
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 economic and financial
market conditions. If the various financing alternatives were to become limited or unavailable to
us, our operations and liquidity could be materially and adversely affected.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation
of these financial statements requires management 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
GAAP. Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009 discusses
several critical accounting estimates, which we believe involve a high degree of judgment and
complexity. There have been no material changes to the estimates and assumptions associated with
these accounting estimates from those discussed in our Annual Report on Form 10-K for the year
ended December 31, 2009.
33
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.
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. 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, believe, expect, anticipate, assume, forecast, estimate, intend, plan,
target 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. While we
believe that our forward-looking statements are reasonable, actual results could differ materially
since the statements are based on our current expectations, which are subject to risks and
uncertainties. Factors that might cause such a difference include, but are not limited to, the
factors set forth in Item 1A of our Form 10-K for the year ended December 31, 2009, other risk
factors discussed herein or listed from time to time in our reports filed with the Securities and
Exchange Commission and the following:
|
|
|
Our inability to accurately forecast and estimate the amount and timing of future
collections could have a material adverse effect on results of operations. |
|
|
|
|
We may be unable to execute our business strategy due to current economic conditions. |
|
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|
We may be unable to continue to access or renew funding sources and obtain capital
needed to maintain and grow our business. |
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|
The terms of our debt limit how we conduct our business. |
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|
The conditions of the U.S. and international capital markets may adversely affect
lenders with which we have relationships, causing us to incur additional costs and reducing
our sources of liquidity, which may adversely affect our financial position, liquidity and
results of operations. |
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|
Our substantial debt could negatively impact our business, prevent us from satisfying
our debt obligations and adversely affect our financial condition. |
|
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|
Due to competition from traditional financing sources and non-traditional lenders, we
may not be able to compete successfully. |
|
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|
We may not be able to generate sufficient cash flows to service our outstanding debt and
fund operations and may be forced to take other actions to satisfy our obligations under
such debt. |
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|
|
|
Interest rate fluctuations may adversely affect our borrowing costs, profitability and
liquidity. |
|
|
|
|
Reduction in our credit rating could increase the cost of our funding from, and restrict
our access to, the capital markets and adversely affect our liquidity, financial condition
and results of operations. |
|
|
|
|
We may incur substantially more debt and other liabilities. This could exacerbate
further the risks associated with our current debt levels. |
|
|
|
|
The regulation to which we are or may become subject could result in a material adverse
effect on our business. |
|
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|
|
Adverse changes in economic conditions, the automobile or finance industries, or the
non-prime consumer market could adversely affect our financial position, liquidity and
results of operations, the ability of key vendors that we depend on to supply us with
services, and our ability to enter into future financing transactions. |
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|
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|
Litigation we are involved in from time to time may adversely affect our financial
condition, results of operations and cash flows. |
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|
Our operations are dependent on technology. |
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|
We are dependent on our senior management and the loss of any of these individuals or an
inability to hire additional team members could adversely affect our ability to operate
profitably. |
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|
Our reputation is a key asset to our business, and our business may be affected by how
we are perceived in the marketplace. |
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|
|
The concentration of our Dealer-Partners in several states could adversely affect us. |
34
|
|
|
Failure to properly safeguard confidential consumer information could subject us to
liability, decrease our profitability and damage our reputation. |
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|
Our founder controls a majority of our common stock, has the ability to control matters
requiring shareholder approval and has interests which may conflict with the interests of
our other security holders. |
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|
Reliance on our outsourced business functions could adversely affect our business. |
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|
Natural disasters, acts of war, terrorist attacks and threats or the escalation of
military activity in response to these attacks or otherwise may negatively affect our
business, financial condition and results of operations. |
Other factors not currently anticipated by management may also materially and adversely affect
our results of operations. We do not undertake, and expressly disclaim any obligation, to update
or alter our statements whether as a result of new information, future events or otherwise, except
as required by applicable law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Refer to our Annual Report on Form 10-K for the year ended December 31, 2009 for a complete
discussion of our market risk. There have been no material changes to the market risk information
included in our 2009 Annual Report on Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of disclosure controls and procedures.
(a) Disclosure Controls and Procedures. Our management, with the participation of our Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period
covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, our disclosure controls and procedures
are effective in recording, processing, summarizing and reporting, on a timely basis, information
required to be disclosed by us in the reports that we file or submit under the Exchange Act and are
effective in ensuring that information required to be disclosed by us in the reports that we file
or submit under the Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
(b) Internal Control Over Financial Reporting. There have not been any changes in our internal
control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act) during the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
See Index of Exhibits following the signature page, which is incorporated herein by reference.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
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|
|
|
CREDIT ACCEPTANCE CORPORATION
(Registrant)
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|
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By: |
/s/ Kenneth S. Booth
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|
|
|
Kenneth S. Booth |
|
|
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Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
|
|
|
August 3, 2010 |
|
36
INDEX OF EXHIBITS
|
|
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|
|
Exhibit |
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|
|
|
|
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No. |
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|
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|
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Description |
4(f)(134)
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1 |
|
|
Tenth Amendment, dated as of June 9, 2010, to Fourth
Amended and Restated Credit Agreement, dated February
7, 2006, between the Company, the Banks which are
parties thereto from time to time, and Comerica Bank as
Administrative Agent for the Banks. |
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|
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|
4(f)(135)
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|
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2 |
|
|
Fourth Amended and Restated Loan and Security
Agreement, dated as of June 16, 2010 among the Company,
CAC Warehouse Funding Corporation II, Variable Funding
Capital Company LLC, Wells Fargo Securities, LLC, and
Wells Fargo Bank, National Association. |
|
|
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4(f)(136)
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|
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3 |
|
|
Second Amended and Restated Contribution Agreement,
dated as of June 16, 2010, between the Company and CAC
Warehouse Funding Corporation II. |
|
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31(a)
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|
|
3 |
|
|
Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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31(b)
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|
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3 |
|
|
Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
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32(a)
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|
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3 |
|
|
Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
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32(b)
|
|
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3 |
|
|
Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. |
1 |
|
Previously filed as an exhibit to the Companys Current Report on Form 8-K, dated
June 9, 2010, and incorporated herein by reference, |
|
2 |
|
Previously filed as an exhibit to the Companys Current Report on Form 8-K, dated
June 18, 2010, and incorporated herein by reference, |
|
3 |
|
Filed herewith. |
37
exv4wfw136
Exhibit 4(f)(136)
Execution Copy
SECOND AMENDED AND RESTATED
CONTRIBUTION AGREEMENT
This SECOND AMENDED AND RESTATED CONTRIBUTION AGREEMENT, dated as of June 16, 2010 (the
Agreement), is made between CREDIT ACCEPTANCE CORPORATION, a Michigan corporation
(CAC) and CAC WAREHOUSE FUNDING CORPORATION II, a Nevada corporation (Funding).
CAC and Funding entered into a First Amended and Restated Contribution Agreement dated as of
August 31, 2007, and desire to amend such First Amended and Restated Contribution Agreement in its
entirety as provided herein.
Funding desires to acquire from time to time certain Loans and related rights and collateral,
including certain of CACs rights in any related Dealer Agreements and Purchase Agreements, all of
the related Contracts, and the Collections (other than Dealer Collections) derived therefrom during
the full term of this Agreement, and CAC desires to transfer, convey and assign from time to time
such Loans and related property to Funding upon the terms and conditions hereinafter set forth.
CAC has also agreed to service the Loans and related property to be transferred, conveyed and
assigned to Funding.
In consideration of the premises and the mutual agreements set forth herein, it is hereby
agreed by and between CAC and Funding as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. All capitalized terms used herein shall have the meanings
specified herein or, if not so specified, the meaning specified in, or incorporated by reference
into the Loan and Security Agreement and shall include in the singular number the plural and in the
plural number the singular:
Conveyed Property means the Initial Contributed Property and the Subsequent Conveyed
Property.
Initial Contributed Property means (i) Loans listed on Exhibit A hereto delivered to
the Servicer, the Collateral Agent and the Backup Servicer on the Initial Funding Date and (ii) all
Related Security with respect thereto.
Initial Funding Date means September 30, 2003.
Loan and Security Agreement shall mean the Fourth Amended and Restated Loan and
Security Agreement dated as of June 16, 2010 among Funding, CAC, the Investors named therein, the
CP Conduits named therein, Wells Fargo Securities, LLC, as the Deal Agent, Wells Fargo Bank,
National Association as the Liquidity Agent, the other Liquidity Agents named therein, and Wells
Fargo Bank, National Association as the Backup Servicer and the Collateral Agent, as such agreement
may be amended, modified or supplemented from time to time.
Related Security With respect to any Loan all of CACs interest in:
(i) the Dealer Agreements (other than Excluded Dealer Agreement Rights, but including CACs
rights to service the Loans and the related Contracts and receive the related collection fee and
receive reimbursement of certain recovery expenses, in accordance with the terms of the Dealer
Agreements) and Contracts securing payment of such Loan;
(ii) all security interests or liens purporting to secure payment of such Loan, whether
pursuant to such Loan, the related Dealer Agreement or otherwise, together with all financing
statements signed by the related Obligor describing any collateral securing such Loan and all other
property obtained upon foreclosure of any security interest securing payment of such Loan or any
related Contract;
(iii) all guarantees, insurance (including insurance insuring the priority of perfection of
any lien) or other agreements or arrangements of any kind from time to time supporting or securing
payment of each Contract whether pursuant to such Contract or otherwise; including any of the
foregoing relating to any Contract securing payment of such Loan;
(iv) all of CACs interests in all Records, documents and writing evidencing or related to
such Loan;
(v) all Collections (other than Dealer Collections), the Collection Account, the Reserve
Account, and all amounts on deposit therein and investments thereof; and
(vi) the Proceeds of each of the foregoing.
For the avoidance of doubt, the term Related Security with respect to any Dealer Loan includes
all rights arising after the end of the Revolving Period under such Dealer Loan which rights are
attributable to advances made under such Dealer Loan as the result of Contracts being added after
the last date of the last full Collection Period during the Revolving Period to the identifiable
group of Dealer Loan Contracts to which such Loan relates.
Subsequent Conveyed Property means, with respect to the date of any Incremental
Funding, (i) the Loans added to Exhibit A hereto as of the date of such Incremental Funding and
(ii) all Related Security with respect thereto.
Section 1.2 Other Terms. All accounting terms not specifically defined herein shall
be construed in accordance with GAAP. All terms used in Article 9 of the UCC, and not specifically
defined herein, are used herein as defined in such Article 9.
Section 1.3 Computation of Time Periods. Unless otherwise stated in this Agreement,
in the computation of a period of time from a specified date to a later specified date, the word
from means from and including and the words to and until each means to but excluding.
2
ARTICLE II
CONTRIBUTION AND SERVICING OF LOANS
Section 2.1 Contribution and Sale of Loans.
(a) In consideration of the payments described in Section 3.1, effective as of the Initial
Funding Date, CAC did convey, assign, sell and transfer without recourse, except as set forth
herein, to Funding all of its right, title and interest in and to the Initial Contributed Property.
(b) CAC hereby further agrees that on the date of each Incremental Funding during the
Revolving Period, in consideration of the payment described in Section 3.1 with respect to the date
of such Incremental Funding, CAC shall and CAC does hereby agree to, convey, assign, sell and
transfer without recourse, except as set forth in this Agreement, to Funding all of its right,
title and interest in and to the Subsequent Conveyed Property with respect to the date of such
Incremental Funding.
(c) CAC hereby further agrees that the above-described conveyances shall, without the need for
any further action on the part of CAC or Funding, include all rights arising after the end of the
Revolving Period under any Dealer Loan included in the Initial Contributed Property or Subsequent
Conveyed Property which rights are attributable to advances made under such Loans as the result of
Dealer Loan Contracts being added after the last day of the last full Collection Period during the
Revolving Period to the identifiable group of Dealer Loan Contracts to which such Dealer Loan
relates.
(d) Each such contribution, sale, assignment, transfer and conveyance does not constitute an
assumption by Funding of any obligations of CAC or any other Person to Obligors or to any other
Person in connection with the Loans or under any Contract, Dealer Agreement, Purchase Agreement or
other agreement and instrument relating to the Loans.
(e) In connection with any such foregoing conveyance, CAC agrees to record and file on or
prior to the Initial Funding Date, at its own expense, a financing statement or statements with
respect to the Conveyed Property conveyed by CAC hereunder meeting the requirements of applicable
state law in such manner and in such jurisdictions as are necessary to perfect the interests of
Funding created hereby, and to deliver either the originals of such financing statements or a
file-stamped copy of such financing statements or other evidence of such filings to Funding on or
before the Initial Funding Date.
(f) CAC agrees that from time to time, at its expense, it will promptly execute and deliver
all instruments and documents and take all actions as may be necessary or as Funding may reasonably
request in order to perfect or protect the interest of Funding in the Loans and other Conveyed
Property purchased hereunder or to enable Funding to exercise or enforce any of its rights
hereunder. CAC shall, upon request of Funding, obtain such additional search reports as Funding
shall request. To the fullest extent permitted by applicable law, Funding shall be authorized and
permitted to file continuation statements and amendments to financing statements
3
and assignments thereof to preserve and protect its right, title and interest in, to and under
the Conveyed Property.
(g) It is the express intent of CAC and Funding that the conveyance of the Loans and other
Conveyed Property by CAC to Funding pursuant to this Agreement be construed as a absolute sale and
contribution of such Loans and other Conveyed Property by CAC to Funding and that CAC relinquishes
all title and control over the Loans upon the transfer of each such Loan under this Agreement
(except to the extent CAC acts as the Servicer of the Loans). Further, it is not the intention of
CAC and Funding that such conveyance be deemed a grant of a security interest in the Loans and
other Conveyed Property by CAC to Funding in the nature of a consensual lien securing an
obligation. However, in the event that, notwithstanding the express intent of the parties, the
Loans and other Conveyed Property are construed to constitute property of CAC, then (i) this
Agreement also shall be deemed to be, and hereby is, a security agreement within the meaning of the
UCC as enacted in the State of New York; and (ii) the conveyance by CAC provided for in this
Agreement shall be deemed to be, and CAC hereby grants to Funding, a security interest in, to and
under all of CACs right, title and interest in, to and under the Conveyed Property, to secure the
rights of Funding set forth in this Agreement or as may be determined in connection therewith by
applicable law. CAC and Funding shall, to the extent consistent with this Agreement, take such
actions as may be necessary to ensure that, if this Agreement were deemed to create a security
interest in the Loans and other Conveyed Property, such security interest would be a perfected
security interest in favor of Funding under applicable law and will be maintained as such
throughout the term of this Agreement.
(h) In connection with such conveyance, CAC agrees to deliver to Funding on the Initial
Funding Date, one or more computer files or microfiche lists containing true and complete lists of
all applicable Dealer Agreements and Loans conveyed to Funding on the Initial Funding Date, and all
Contracts securing all such Loans, identified by, as applicable, account number, dealer number and
pool number. Such file or list shall be marked as Exhibit A to this Agreement, shall be delivered
to Funding as confidential and proprietary, and is hereby incorporated into and made a part of this
Agreement. Such list and such Exhibit A shall be supplemented and updated by lists delivered by
CAC to Funding on the date of each Incremental Funding in the Revolving Period describing all
Conveyed Property conveyed on the date of each such Incremental Funding so that, on each such date,
Funding will have an aggregate list constituting Exhibit A that describes all Loans conveyed by CAC
to Funding hereunder on or prior to said date of Incremental Funding, any related Dealer
Agreements, Purchase Agreements and all Contracts relating to such Loans.
(i) CAC will reflect the transactions described in paragraph (a) of this Section 2.1 on its
internal non-consolidated financial statements and on its non-consolidated state tax returns as a
sale or other absolute transfer of the Loans from CAC to Funding, even though CAC will reflect this
transaction on its consolidated financial statements as an on-balance sheet item in accordance
with generally accepted accounting principles. CAC will present the data in its consolidated
financial statements with an accompanying footnote describing Fundings separate existence and
stating that such item is a financing secured by the Loans and is non-recourse to CAC.
4
Section 2.2 Servicing of Loans. The servicing, administering and collection of the
Loans shall be conducted by the Servicer, which hereby agrees to perform, take or cause to be taken
all such action as may be necessary or advisable to collect each Loan from time to time, all in
accordance with applicable laws, rules and regulations and with the care and diligence which the
Servicer employs in servicing similar loans for its own account, in accordance with the Credit
Guidelines and the Collection Guidelines. Funding hereby appoints the Servicer as its agent to
enforce Fundings and any Assignees rights and interests in, to and under the Loans, the Related
Security, the Collections, and the other Conveyed Property. The Servicer shall hold in trust for
Funding and any Assignees, in accordance with its interests, all Records which evidence or relate
to the Loans, Related Security, Collections and other Conveyed Property.
ARTICLE III
CONSIDERATION AND PAYMENT; LOANS
Section 3.1 Consideration. The consideration for the Loans and other Conveyed
Property conveyed on the Initial Funding Date to Funding by CAC under this Agreement shall be an
amount equal to (i) the net cash proceeds of each advance to Funding under the Loan and Security
Agreement used by Funding to purchase the Loans and other Conveyed Property conveyed on the Initial
Funding Date, plus (ii) the value attributable to CACs common stock in Funding (which
constitutes and will constitute all of the equity interests issued by Funding) as a result of the
coveyance of such Loans and other Conveyed Property. Thereafter, on the date of each Incremental
Funding in the Revolving Period, the consideration for the Loans and other Conveyed Property
conveyed on the date of such Incremental Funding will equal the Outstanding Balance of the Loans
conveyed less the Loan Loss Reserve in each case as in effect as of the date of such Incremental
Funding. Such consideration shall be payable (i) in cash in the amount of the net cash proceeds of
each Incremental Funding under the Loan and Security Agreement used by Funding to purchase the
Loans and other Conveyed Property conveyed on the date of such Incremental Funding, plus
(ii) an increase in the value attributable to CACs common stock in Funding (which constitutes and
will constitute all of the equity interests issued by Funding) as a result of the coveyance of such
Loans and other Conveyed Property.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties. CAC represents and warrants to Funding as
of the Closing Date, the Initial Funding Date and the date of each Incremental Funding during the
Revolving Period, that:
(a) Organization and Good Standing. CAC is duly organized and is validly existing as
a corporation in good standing under the laws of the State of Michigan, with power and authority to
own its properties and to conduct its business as such properties are currently owned and such
business is presently conducted, and has and had at all relevant times, full power, authority, and
legal right to acquire, own, sell, and service the Loans and the related Contracts, and to perform
its obligations under the Transaction Documents.
5
(b) Due Qualification. CAC is duly qualified to do business as a foreign corporation
in good standing, and has obtained all necessary licenses and approvals in all jurisdictions in
which the ownership or lease of property or the conduct of its business, including the servicing of
the Loans and the related Contracts as required by this Agreement, requires such qualifications
except where such failure will not have a Material Adverse Effect.
(c) Power and Authority. CAC has the power and authority to execute and deliver this
Agreement and the other Transaction Documents to which it is a party and to carry out their
respective terms; and the execution, delivery, and performance of this Agreement and the other
Transaction Documents to which it is a party have been duly authorized by CAC by all necessary
corporate action.
(d) Valid Sale; Binding Obligations. This Agreement evidences a valid sale, transfer,
and assignment of the Conveyed Property enforceable against creditors of and purchasers from CAC;
and this Agreement and the other Transaction Documents to which CAC is a party constitute legal,
valid and binding obligations of CAC enforceable in accordance with their terms, subject to the
effects of bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement
of creditors or secured creditors rights generally and to general principles of equity.
(e) No Violation. The consummation of the transactions contemplated by this Agreement
and the other Transaction Documents to which it is a party and the fulfillment of the terms hereof
and thereof do not conflict with, result in any breach of any of the terms and provisions of, or
constitute (with or without notice or lapse of time) a default under, the Articles of Incorporation
or by-laws of CAC, or any indenture, agreement, or other instrument to which CAC is a party or by
which it is or may be bound; nor result in the creation or imposition of any Lien upon any of its
properties pursuant to the terms of any such indenture, agreement (other than this Agreement), or
other instrument; or violate any law or, to the best of CACs knowledge, any order, rule, or
regulation applicable to CAC of any court or of any federal or state regulatory body,
administrative agency, or other governmental instrumentality having jurisdiction over CAC or its
properties.
(f) No Proceedings. There are no proceedings or investigations pending, or to CACs
best knowledge threatened, before any court, regulatory body, administrative agency, or other
governmental instrumentality having jurisdiction over CAC or its properties: A) asserting the
invalidity of this Agreement or any other Transaction Document to which it is a party; B) seeking
to prevent the consummation of any of the transactions contemplated by this Agreement or any other
Transaction Document to which it is a party; or C) seeking any determination or ruling that might
materially and adversely affect the performance by CAC of its obligations under, or the validity or
enforceability of, this Agreement, or any other Transaction Document to which it is a party.
(g) Solvency; Fraudulent Conveyance. CAC is solvent, is able to pay its debts as they
become due and will not be rendered insolvent by the transactions contemplated by the Transaction
Documents and, after giving effect thereto, will not be left with an unreasonably
6
small amount of capital with which to engage in its business. CAC does not intend to incur,
nor does it believe that it has incurred, debts beyond its ability to pay such debts as they
mature. CAC does not contemplate the commencement of insolvency, bankruptcy, liquidation or
consolidation proceedings or the appointment of a receiver, liquidator, conservator, trustee or
similar official or any of its assets. The amount of consideration being received by CAC upon the
sale or other absolute transfer of the Conveyed Property to Funding constitutes reasonably
equivalent value and fair consideration for the Conveyed Property. CAC is not transfering the
Conveyed Property to Funding with any intent to hinder, delay or defraud any of its creditors.
(h) Security Interest. As of the Initial Funding Date, CAC has granted a security
interest (as defined in the UCC as enacted in the State of Michigan) to Funding in the Conveyed
Property, which is enforceable in accordance with Applicable Law upon the Initial Funding Date.
Upon the filing of UCC-1 financing statements naming Funding as secured party and CAC as debtor,
Funding shall have a first priority perfected security interest in the Conveyed Property. All
filings (including, without limitation, UCC filings) as are necessary in any jurisdiction to
perfect the interest of Funding in the Conveyed Property have been made.
(i) Contribution Agreement. This Contribution Agreement is the only agreement
pursuant to which Funding purchases Loans from CAC.
(j) Perfection. As of the Initial Funding Date, CAC will be the owner of all of the
Loans and the other Conveyed Property, free and clear of all Liens. On or prior to the date of
each contribution of Loans and the other Conveyed Property to Funding pursuant to this Agreement,
all financing statements and other documents required to be recorded or filed in order to perfect
and protect the ownership interest of Funding in and to the Loans and the other Conveyed Property
against all creditors of and purchasers from CAC will have been duly filed in each filing office
necessary for such purpose and all filing fees and taxes, if any, payable in connection with such
filings shall have been paid in full.
(k) Accuracy of Information. All information with respect to the Loans and other
Conveyed Property provided to Funding hereunder by CAC was true and correct in all material
respects as of the date such information was provided to Funding and did not omit to state any
material facts necessary to make the statements contained therein not misleading.
(l) Taxes. CAC has filed on or before their respective due dates, all tax returns
which are required to be filed in any jurisdiction or has obtained extensions for filing such tax
returns and has paid all taxes, assessments, fees and other governmental charges against CAC or any
of its properties, income or franchises, to the extent that such taxes have become due, other than
any taxes or assessments, the validity of which are being contested in good faith by appropriate
proceedings and with respect to which adequate provision has been made on the books of the Seller
as may be required by GAAP. To the best knowledge of CAC, all such tax returns were true and
correct in all material respects and CAC knows of any proposed material additional tax assessment
against it nor any basis therefor. Any taxes, assessments, fees and other governmental charges
payable by CAC in connection with the execution and delivery of the Transaction Documents have been
paid or shall have been paid at or prior to Closing Date.
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(m) Place of Business. The principal place of business and chief executive office of
CAC is in Southfield, Michigan, and the office where CAC keeps all of its Records is at the address
listed in Section 8.3, or such other locations notified to Funding and the Deal Agent in accordance
with this Agreement in jurisdictions where all action required by the terms of this Agreement has
been taken and completed; provided that the Servicer may temporarily (or permanently, in the case
of a Contract that is repurchased, liquidated or paid in full) move or transfer to an agent of the
Servicer individual Contract Files or Records, or any portion thereof without notice as necessary
to allow the Servicer to conduct collection and other servicing activities in accordance with its
customary practices and procedures.
(n) Good Title. Upon the contribution of the Loans and related property to Funding
pursuant to this Agreement, Funding shall acquire all of CACs ownership and other interest in each
Loan, and in the Related Security, Collections and proceeds with respect thereto, in each case free
and clear of any Lien.
(o) Tradenames, Etc. As of the date hereof CAC has not, within the last five (5)
years, operated under any tradenames other than its corporate name, nor has it changed its name,
merged with or into or consolidated with any other corporation or been the subject of any
proceeding under Title 11, United States Code (Bankruptcy).
(p) Nature of Loans, Contracts. Each Dealer Loan and Purchased Loan represented by
CAC to be an Eligible Dealer Loan or Eligible Purchased Loan, as applicable, or included in the
calculation of the Aggregate Outstanding Eligible Loan Balance, at the time of such representation,
or at the time of such calculation, as applicable, in fact satisfies the definition of Eligible
Dealer Loan or Eligible Purchased Loan, as applicable, set forth in the Loan and Security
Agreement. Each Dealer Loan Contract classified as an Eligible Dealer Loan Contract (or included
in any aggregation of balances of Eligible Dealer Loan Contracts) by CAC satisfies at the time of
such classification the definition of Eligible Dealer Loan Contract set forth in the Loan and
Security Agreement.
(q) Amount of Loans. The Funding Notice shall provide (A) the aggregate Outstanding
Balance of the Contracts; (B) the Aggregate Outstanding Eligible Loan Balance; and (C) the
Aggregate Outstanding Eligible Loan Net Balance; each as of the Cut-off Date and as reported in the
Loan Servicing System.
(r) Collections and Servicing. Since June 30, 2007, there has been no material
adverse change in the ability of the Servicer to service and collect the Loans.
(s) Not an Investment Company. CAC is not, and is not controlled by, an investment
company within the meaning of the Investment Company Act of 1940, as amended, or each is exempt
from all provisions of such Act.
(t) ERISA. CAC is in compliance in all material respects with the Employee Retirement
Income Security Act of 1974, as amended.
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(u) Bulk Sales. No transaction contemplated by this Agreement requires compliance
with any bulk sales act or similar law.
(v) Preference; Voidability. The transfer of the Loans, Collections, Related Security
and other Conveyed Property by CAC to Funding, has not been made for or on account of an antecedent
debt owed by Funding to CAC, or by CAC to Funding, and such transfer is not voidable under any
Section of the Bankruptcy Reform Act of 1978 (11 U.S.C. § § 101 et seq.), as amended.
(w) No Consents. With respect to each Loan and the other Conveyed Property, all
consents, licenses, approvals or authorizations of or registrations or declarations with any
Governmental Authority required to be obtained, effected or given by CAC, in connection with the
pledge of such Conveyed Property to Funding have been duly obtained, effected or given and are in
full force and effect.
(x) Exhibit A. Upon delivery, Exhibit A to this Agreement and each supplement or
addendum thereto will be an accurate and complete listing of all Loans and the related Contracts
and any related Dealer Agreements in all material respects on the date each such Loan was sold to
Funding hereunder, and the information contained therein is and will be true and correct in all
material respects as of such date.
(y) Adverse Selection. No selection procedure believed by CAC to be adverse to the
interests of Funding has been or will be used in selecting the Loans or any Dealer Agreements.
(z) Use of Proceeds. No proceeds of any sale of Conveyed Property will be used (i)
for a purpose that violates, or would be inconsistent with, Regulation T, U or X promulgated by the
Board of Governors of the Federal Reserve System from time to time or (ii) to acquire any security
in any transaction which is subject to Section 12, 13 or 14 of the Securities Exchange Act of 1934,
as amended.
Section 4.2 Reaffirmation of Representations and Warranties by CAC; Notice of Breach.
The representations and warranties set forth in Section 4.1 shall survive the conveyance of the
Loans to Funding, and termination of the rights and obligations of Funding and CAC under this
Agreement. Upon discovery by Funding or CAC of a breach of any of the foregoing representations
and warranties, the party discovering such breach shall give prompt written notice to the other
within three Business Days of such discovery.
ARTICLE V
COVENANTS OF CAC
Section 5.1 Affirmative Covenants. So long as this Agreement is in effect, and until
all Loans, which have been conveyed to Funding pursuant hereto, shall have been paid in full or
written-off as uncollectible, and all amounts owed by CAC pursuant to this Agreement have been paid
in full, unless Funding and the Agent otherwise consent in writing, CAC hereby covenants and agrees
as follows:
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(a) Preservation of Corporate Existence; Conduct of Business. CAC will preserve and
maintain its existence, rights, franchises and privileges in the jurisdiction of its formation, and
qualify and remain qualified in good standing as a foreign corporation in each jurisdiction where
the failure to preserve and maintain such existence, rights, franchises, privileges and
qualification has had, or could reasonably be expected to have, a material adverse effect on the
Conveyed Property. CAC will carry on and conduct its business in substantially the same manner and
in substantially the same fields of enterprise as it is presently conducted and do all things
necessary to remain duly incorporated, validly existing and in good standing as a domestic
corporation in its jurisdiction of incorporation and CAC will maintain all requisite authority to
conduct its business in each jurisdiction in which its business is conducted.
(b) Compliance with Laws. CAC will comply in all material respects with all
Applicable Laws.
(c) Furnishing of Information and Inspection of Records. CAC will furnish to Funding
from time to time such information with respect to the Loans as Funding may reasonably request,
including, without limitation, listings identifying the Obligor and the Outstanding Balance for
each Loan. CAC will at any time and from time to time during regular business hours permit
Funding, or its agents or representatives, (i) to examine and make copies of and abstracts from all
Records and (ii) to visit the offices and properties of CAC for the purpose of examining such
Records, and to discuss matters relating to Loans or CACs performance hereunder with any of the
officers, directors, employees or independent public accountants of CAC having knowledge of such
matters.
(d) Keeping of Records and Books of Account. CAC will maintain and implement
administrative and operating procedures (including without limitation, an ability to recreate
records evidencing the Loans and the Contracts in the event of the destruction of the originals
thereof), and keep and maintain all documents, books, records and other information reasonably
necessary or advisable for the collection of all Loans.
(e) Performance and Compliance with Dealer Agreements and Purchase Agreements. CAC,
at its expense, will timely and fully perform and comply with all provisions, covenants and other
promises required to be observed by it under the Loans, Dealer Agreements, Purchase Agreements and
Contracts, and all other agreements related thereto in all material respects.
(f) Credit and Collection Policies. As long as it is the Servicer, CAC will comply in
all material respects with the Credit Guidelines (as in effect on the Closing Date) and the
Collection Guidelines in regard to each Loan and any related Dealer Agreement.
(g) Collections Received. CAC shall hold in trust, and deposit to the Collection
Account, not later than the close of business on the second Business Day following the Date of
receipt, all Collections received from time to time by CAC or the Servicer.
(h) Sale Treatment. CAC agrees to treat the conveyance of the Conveyed Property made
pursuant to this Agreement for all purposes (including, without limitation, tax and financial
10
accounting purposes) as an absolute contribution and, to the extent any such reporting is
required, shall report the transactions contemplated by this Agreement on all relevant books,
records, tax returns, financial statements and other applicable documents as a complete disposition
of the Contributed Party to Funding.
(i) ERISA. CAC will promptly give Funding written notice upon becoming aware that CAC
is not in compliance in all material respects with ERISA or that any ERISA lien on any of the Loans
exists.
(j) Preservation of Security Interest. CAC will file such financing and continuation
statements and any other documents that may be required by any law or regulation of any
Governmental Authority to preserve and perfect the security interest of Funding in, to and under
the Conveyed Property. CAC will maintain possession of the Dealer Agreements and the Contract
Files and Records, as custodian for the Collateral Agent, as set forth in Section 6.2(c) of the
Loan and Security Agreement. CAC, as Servicer, will comply with its covenants under Section 5.4(d)
of the Loan and Security Agreement.
(k) Separateness. CAC will take such actions that are required on its part to be
performed to cause (i) Funding to be in compliance, at all relevant times, with Section 5.2(o) of
the Loan and Security Agreement, and (ii) all factual assumptions set forth in the most recent
opinion letters delivered by Dykema Gossett PLLC or Skadden, Arps, Slate, Meagher & Flom LLP to the
Collateral Agent with respect to certain bankruptcy matters to remain true at all relevant times.
(l) Notice to Potential Purchasers. At all times before the termination of this
Agreement, if a third party, including a potential purchaser of the Loans, inquires, CAC will
promptly reply that (i) CAC has sold the Loans to Funding and (ii) Funding has granted a security
interest therein to the Collateral Agent for the benefit of the Lenders, and CAC will not claim any
ownership interest in the Loans.
Section 5.2 Negative Covenants. During the term of this Agreement, unless Funding and
the Agent shall otherwise consent in writing:
(a) No Sales, Liens, Etc. Except as otherwise provided herein, CAC will not sell,
assign (by operation of law or otherwise) or otherwise dispose of, or create or suffer to exist any
Lien upon (or the filing of any financing statement) or with respect to (i) any of the Loans, the
Related Security, Collections or other Conveyed Property, (ii) any goods (other than inventory),
the sale, which may give rise to any Loan, Related Security or Collections or other Conveyed
Property or (iii) any account to which any Collections of any Loan are sent, or, in each case,
assign any right to receive income in respect thereof. CAC shall, and will cause each of its
Subsidiaries to, specifically exclude from the property subject to any Lien granted on inventory
any and all accounts receivable generated by sales of such inventory and the proceeds thereof and
shall provide, upon Fundings request, evidence satisfactory to Funding that any such Lien (and
each related UCC financing statement or other related filing) expressly excludes any such
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accounts receivable. CAC will provide Funding and the Deal Agent with a copy of any inventory
financing agreement at least three Business Days prior to the effectiveness thereof.
(b) No Extension or Amendment of Loans. CAC will not extend, amend or otherwise
modify the terms of any Loan, Dealer Agreement, Purchase Agreement or Contract except as permitted
by any other Transaction Document.
(c) Credit Guidelines and Collection Guidelines. CAC will not amend, modify, restate
or replace, in whole or in part, the Credit Guidelines or Collection Guidelines, which change would
impair the collectibility of any Loan or Contract or otherwise adversely affect the interests or
the remedies of Funding under this Agreement or any other Transaction Document, unless such change
is permitted under the Loan and Security Agreement and unless CAC obtains the prior written consent
of Funding.
(d) Change in Payment Instructions to Obligors. CAC will not make any change in its
instructions to Obligors regarding payments to be made directly or indirectly, unless such change
is permitted under the Loan and Security Agreement and Funding and CAC have each consented to such
change and have received duly executed documentation related thereto.
(e) Change of Name, Etc. CAC will not change its name, identity, jurisdiction of
organization or structure or location of its chief executive office, unless at least ten (10) days
prior to the effective date of any such change CAC delivers to Funding and the Deal Agent such
documents, instruments or agreements, including, without limitation, appropriate financing
statements under the UCC, executed by CAC, as are necessary to reflect such change and to continue
the perfection of Fundings and any assignees interest in the Loans.
(f) Separate Business. CAC will not: (i) fail to maintain separate books, financial
statements, accounting records and other corporate documents from those of Funding; (ii) commingle
any of its assets or the assets of any of its Affiliates with those of Funding (except to the
extent that CAC acts as the Servicer of the Loans); (iii) pay from its own assets any obligation or
indebtedness of any kind incurred by Funding; (iv) directly, or through any of its Affiliates,
borrow funds or accept credit or guaranties from Funding.
Section 5.3 Indemnities by CAC.
(a) Without limiting any other rights that any such Person may have hereunder or under
Applicable Law, CAC hereby agrees to indemnify Funding, or its assignee, and each of their
respective Affiliates and officers, directors, employees and agents thereof (collectively, the
Indemnified Parties), forthwith on demand, from and against any and all damages, losses,
claims, liabilities and related costs and expenses, including attorneys fees and disbursements
(all of the foregoing being collectively referred to as the Indemnified Amounts) awarded
against or incurred by such Indemnified Party arising out of or as a result of this Agreement or in
respect of any Loan or any Contract, excluding, however, (a) Indemnified Amounts to
the extent resulting from gross negligence or willful misconduct on the part of such Indemnified
Party or (b) Indemnified Amounts that arise as a result of non-payment of Loans due to credit
problems of
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the Dealers or Obligors. If CAC has made any indemnity payment pursuant to this Section
5.3 and such payment fully indemnified the recipient thereof and the recipient thereafter
collects any payments from others in respect of such Indemnified Amounts then, the recipient shall
repay to CAC an amount equal to the amount it has collected from others in respect of such
indemnified amounts. Without limiting the foregoing, CAC shall indemnify each Indemnified Party
for Indemnified Amounts relating to or resulting from:
(i) any Contract or Loan treated as or represented by CAC to be an Eligible Contract or
Eligible Loan that is not at the applicable time an Eligible Contract or Eligible Loan;
(ii) reliance on any representation or warranty made or deemed made by CAC or any of its
officers under or in connection with this Agreement, which shall have been false or incorrect in
any material respect when made or deemed made or delivered;
(iii) the failure by CAC to comply with any term, provision or covenant contained in this
Agreement or any agreement executed in connection with this Agreement, or with any Applicable Law,
with respect to any Loan, Dealer Agreement, any Contract, or the nonconformity of any Loan, Dealer
Agreement, Purchase Agreement or Contract with any such Applicable Law;
(iv) the failure to vest and maintain vested in Funding, or its assignees, a first priority
perfected security interest in the Conveyed Property, free and clear of any Lien;
(v) the failure to file, or any delay in filing, financing statements or other similar
instruments or documents under the UCC of any applicable jurisdiction or other Applicable Laws with
respect to the Conveyed Property, whether on the Initial Funding Date or at any subsequent time;
(vi) any dispute, claim, offset or defense (other than the discharge in bankruptcy of the
Dealer or Obligor) of the relevant Dealer or Obligor to the payment of any Loan or Contract
(including, without limitation, a defense based on such Loan or Contract not being a legal, valid
and binding obligation of such Obligor enforceable against it in accordance with its terms);
(vii) any failure of CAC to perform its duties or obligations in accordance with the
provisions of this Agreement or any failure by CAC to perform its respective duties under the
Loans;
(viii) the failure by CAC to pay when due any Taxes for which CAC is liable, including without
limitation, sales, excise or personal property taxes payable in connection with the Conveyed
Property;
(ix) the commingling of Collections of the Loans and Contracts at any time with other funds
(except to the extent that CAC acts as the Servicer of the Loans);
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(x) (viii) any investigation, litigation or proceeding related to this Agreement or in
respect of any Loan or Contract;
(xi) the failure of CAC, in its individual capacity, or any of its agents or representatives
to remit to the Servicer, the Deal Agent, or the Collateral Agent Collections of the Loans and
Contracts remitted to CAC, in its individual capacity, or any such agent or representative; and
(xii) the failure of a Contract File to contain the relevant original Contract.
Notwithstanding the foregoing, CAC shall have no indemnification obligation hereunder with
respect to any Loan or Contract in respect of which CAC shall have paid the Release Price under the
Loan and Security Agreement after the date of such payment.
(b) Any amounts subject to the indemnification provisions of this Section 5.3 shall be paid by
CAC to the Indemnified Party within five (5) Business Days following the the Indemnified Partys
demand therefor.
(c) The obligations of CAC under this Section 5.3 shall survive the termination of this
Agreement.
ARTICLE VI
REPURCHASE OBLIGATION
Section 6.1 Mandatory Repurchase upon Breach of Warranty. If any Loan, which has been
conveyed to Funding by CAC hereunder and which has been reported by CAC to be an Eligible Dealer
Loan or Eligible Purchased Loan, shall fail to meet the conditions set forth in the definition of
Eligible Dealer Loan or Eligible Purchased Loan, as applicable, on the date of such report or
for which any representation or warranty made herein in respect of such Loan shall fail to be true
on the date so made, CAC shall be deemed to have received on such day a Collection of such Loan in
full and shall on such day pay to Funding an amount equal to the Release Price of such Loan. If on
any day any Dealer Loan Contract, which has been conveyed to Funding by CAC hereunder and which has
been reported by CAC to be an Eligible Dealer Loan Contract, shall fail to meet the conditions set
forth in the definition of Eligible Dealer Loan Contract on the date of such report or for which
any representation or warranty made herein in respect of such Dealer Loan Contract shall fail to be
true on the date so made, CAC shall be deemed to have received on such day a Collection in the
amount of the Release Price of such Dealer Loan Contract and shall on such day pay to Funding an
amount equal to the Release Price of such Contract. For purposes of this Section 6.1, Release
Price shall be calculated as of the last day of the immediately preceding collection period. Upon
the request of CAC, Funding shall execute and deliver to CAC any assignments, termination
statements and any other releases and instruments as CAC may reasonably request in order to effect
and evidence the release of Fundings security interest on the Loans and the Dealer Loan Contracts
for which payment has been made in accordance with this Section 6.1 and the transfer of such Loans
to CAC.
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Section 6.2 No Recourse. Except as otherwise provided in this Article VI, the
purchase and sale of the Loans under this Agreement shall be without recourse to CAC or the
Servicer.
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.1 Conditions to Fundings Obligations Regarding Loans. Consummation of the
transactions contemplated hereby on the Closing Date, the Initial Funding Date and, where
applicable, on the date of each Incremental Funding, shall be subject to the satisfaction of the
following conditions:
(a) All representations and warranties of CAC contained in this Agreement shall be true and
correct on the Closing Date, the Initial Funding Date and the date of each Incremental Funding with
the same effect as though such representations and warranties had been made on such date and the
date of each Incremental Funding;
(b) With respect to those Loans contributed on the Initial Funding Date and the date of each
Incremental Funding, all information concerning such Loans provided to Funding shall be true and
correct in all material respects as of the Initial Funding Date and the date of each Incremental
Funding;
(c) CAC shall have substantially performed all other obligations required to be performed by
the provisions of this Agreement;
(d) CAC shall have filed or caused to be filed, or shall have delivered for filing, the
financing statement(s) required to be filed pursuant to Section 2.1(e);
(e) All corporate and legal proceedings and all instruments in connection with the
transactions contemplated by this Agreement shall be satisfactory in form and substance to Funding,
and Funding shall have received from CAC copies of all documents (including, without limitation,
records of corporate proceedings) relevant to the transactions herein contemplated as Funding may
reasonably have requested; and
(f) On the Initial Funding Date, CAC shall deliver to Funding and the Deal Agent a Monthly
Report as of the Initial Funding Date.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.1 Amendment. This Agreement and the rights and obligations of the parties
hereunder may not be changed orally, but only by an instrument in writing signed by Funding and CAC
and consented to in writing by the Deal Agent.
Section 8.2 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
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Section 8.3 Notices. Except where telephonic instructions or notices are authorized
herein to be given, all notices, demands, instructions and other communications required or
permitted to be given to or made upon any party hereto shall be in writing and shall be sent by
facsimile transmission with a confirmation of the receipt thereof and shall be deemed to be given
for purposes of this Agreement on the day that the receipt of such facsimile transmission is
confirmed in accordance with the provisions of this Section 8.3. Unless otherwise specified in a
notice sent or delivered in accordance with the foregoing provisions of this Section, notices,
demands, instructions (including payment instructions) and other communications in writing shall be
given to or made upon the respective parties hereto at their respective addresses and accounts
indicated below, and, in the case of telephonic instructions or notices, by calling the telephone
number or numbers indicated for such party below:
(a) in the case of Funding:
CAC Warehouse Funding Corporation II
Silver Triangle Building
25505 West Twelve Mile Road
Southfield, Michigan 48034-8339
Attention: Jeff Soutar
Telephone: (248) 353-2700 (ext. 5646)
Telecopy: (877) 320-1576
with a copy to:
Wells Fargo Securities, LLC
301 South College Street
Charlotte, North Carolina 28202
Attention: Conduit Administrator
Telephone: (704) 374-2520
Facsimile: (704) 383-3282
(b) in the case of CAC and in the case of the Servicer (for so long as the Servicer is CAC):
Credit Acceptance Corporation
Silver Triangle Building
25505 West Twelve Mile Road
Southfield, Michigan 48034-8339
Attention: Jeff Soutar
Telephone: (248) 353-2700 (ext. 5646)
Telecopy: (877) 320-1576
or, as to each party, at such other address as shall be designated by such party in a written
notice to each other party.
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Section 8.4 Severability of Provisions. If any one or more of the covenants,
agreements, provisions or terms of this Agreement shall for any reason whatsoever be held invalid,
then such covenants, agreements, provisions, or terms shall be deemed severable from the remaining
covenants, agreements, provisions, or terms of this Agreement and shall in no way affect the
validity or enforceability of the other provisions of this Agreement.
Section 8.5 Assignment. This Agreement may not be assigned by the parties hereto,
except that Funding may assign its rights hereunder pursuant to the Loan and Security Agreement to
the Collateral Agent or the Deal Agent, for the benefit of VFCC and any Additional Conduits and the
Investors, and that VFCC and any Additional Conduits may assign any or all of its rights to any
Liquidity Bank. Funding hereby notifies CAC (and CAC hereby acknowledges) that Funding, pursuant
to the Loan and Security Agreement, has assigned its rights hereunder to the Deal Agent. All
rights of Funding hereunder may be exercised by the Deal Agent or its assignees, to the extent of
their respective rights pursuant to such assignments.
Section 8.6 Further Assurances. Funding, CAC and the Servicer agree to do and
perform, from time to time, any and all acts and to execute any and all further instruments
required or reasonably requested by the other parties in order to more fully effect the purposes of
this Agreement, including, without limitation, the execution of any financing statements or
continuation statements or equivalent documents relating to the Loans for filing under the
provisions of the UCC or other laws of any applicable jurisdiction.
Section 8.7 No Waiver; Cumulative Remedies. No failure to exercise and no delay in
exercising, on the part of Funding, CAC or the Deal Agent, any right, remedy, power or privilege
hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. The rights, remedies, powers and
privileges herein provided are cumulative and not exhaustive of any rights, remedies, powers and
privilege provided by law.
Section 8.8 Counterparts. This Agreement may be executed in two or more counterparts
including telecopy transmission thereof (and by different parties on separate counterparts), each
of which shall be an original, but all of which together shall constitute one and the same
instrument.
Section 8.9 Binding Effect; Third-Party Beneficiaries. This Agreement shall inure to
the benefit of and be binding upon the parties hereto and their respective successors and permitted
assigns. The Deal Agent, the Collateral Agent on behalf of VFCC and the Investors, and any
Liquidity Bank are intended by the parties hereto to be third-party beneficiaries of this
Agreement.
Section 8.10 Merger and Integration. Except as specifically stated otherwise herein,
this Agreement sets forth the entire understanding of the parties relating to the subject matter
hereof, and all prior understandings, written or oral, are superseded by this Agreement. This
Agreement may not be modified, amended, waived or supplemented except as provided herein.
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Section 8.11 Headings. The headings herein are for purposes of reference only and
shall not otherwise affect the meaning or interpretation of any provision hereof.
Section 8.12 Exhibits. The schedules and exhibits referred to herein shall constitute
a part of this Agreement and are incorporated into this Agreement for all purposes.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
18
IN WITNESS WHEREOF, Funding and CAC each have caused this Contribution Agreement to be duly
executed by their respective officers as of the day and year first above written.
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FUNDING: |
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CAC WAREHOUSE FUNDING
CORPORATION II |
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By: |
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/s/ Douglas W. Busk |
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Name:
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Douglas W. Busk |
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Title:
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Treasurer |
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CAC Warehouse Funding Corporation II
Silver Triangle Building
25505 West Twelve Mile Road
Southfield, Michigan 48034-8339
Attention: Jeff Soutar
Telephone: (248) 353 2700 (ext. 5646)
Telecopy: (877) 320-1576 |
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CAC: |
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CREDIT ACCEPTANCE CORPORATION |
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By: |
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/s/ Douglas W. Busk |
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Name:
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Douglas W. Busk |
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Title:
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Treasurer |
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CAC Warehouse Funding Corp.
Silver Triangle Building
25505 West Twelve Mile Road
Southfield, Michigan 48034-8339
Attention: Jeff Soutar
Telephone: (248) 353 2700 (ext. 5646)
Telecopy: (877) 320-1576 |
Exhibit A
List of Conveyed Property
exv31wa
EXHIBIT 31 (a)
Credit Acceptance Corporation
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Brett A. Roberts, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Credit Acceptance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Date: August 3, 2010 |
/s/ Brett A. Roberts
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Brett A. Roberts |
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Chief Executive Officer
(Principal Executive Officer) |
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exv31wb
EXHIBIT 31 (b)
Credit Acceptance Corporation
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
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I, Kenneth S. Booth, certify that: |
1. I have reviewed this quarterly report on Form 10-Q of Credit Acceptance Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
4. The registrants other certifying officer(s) and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls
and procedures to be designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
(d) Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter
(the registrants fourth quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the registrants auditors
and the audit committee of the registrants board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
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Date: August 3, 2010 |
/s/ Kenneth S. Booth
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Kenneth S. Booth |
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Chief Financial Officer
(Principal Financial Officer) |
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exv32wa
EXHIBIT 32 (a)
Credit Acceptance Corporation
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Credit Acceptance Corporation (the
Company) for the quarterly period ending June 30, 2010 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Brett A. Roberts, as Chief Executive Officer of
the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: August 3, 2010 |
/s/ Brett A. Roberts
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Brett A. Roberts |
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Chief Executive Officer
(Principal Executive Officer) |
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exv32wb
EXHIBIT 32 (b)
Credit Acceptance Corporation
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Credit Acceptance Corporation (the
Company) for the quarterly period ending June 30, 2010 as filed with the Securities and Exchange
Commission on the date hereof (the Report), I, Kenneth S. Booth, as Chief Financial Officer of
the Company, hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the
financial condition and results of operations of the Company.
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Date: August 3, 2010 |
/s/ Kenneth S. Booth
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Kenneth S. Booth |
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Chief Financial Officer
(Principal Financial Officer) |
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