1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-20202
CREDIT ACCEPTANCE CORPORATION
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1999511
(State or other jurisdiction of (IRS Employer Identification)
incorporation or organization)
25505 WEST TWELVE MILE ROAD, SUITE 3000
SOUTHFIELD, MICHIGAN 48034-8339
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: 248-353-2700
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/. No / /.
Indicate the number of shares outstanding of the issuer's class of
common stock, as of the latest practicable date.
The number of shares outstanding of Registrant's Common Stock, par
value $.01, on May 12, 1998 was 46,113,115.
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TABLE OF CONTENTS
PAGE
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PART I.--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
As of December 31, 1997 and March 31, 1998. . . . . . . . 1
Consolidated Income Statements -
Three months ended March 31, 1997 and March 31, 1998 . . 2
Consolidated Statements of Cash Flows -
Three months ended March 31, 1997 and March 31,1998 . . . 3
Consolidated Statement of Shareholders' Equity -
Three months ended March 31, 1998 . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . 6
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . 14
PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . 15
ITEM 6. EXHIBIT AND REPORTS ON FORM 8-K . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF AS OF
(Dollars in thousands) 12/31/97 3/31/98
- -------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS:
Cash and cash equivalents ...................... $ 349 $ 11,989
Investments .................................... 9,973 10,266
Installment contracts receivable ............... 1,049,818 957,979
Allowance for credit losses .................... (13,119) (10,473)
----------- -----------
Installment contracts receivable, net .... 1,036,699 947,506
Floor plan receivables ......................... 19,800 19,674
Notes receivable ............................... 1,231 1,422
Property and equipment, net .................... 20,839 20,488
Other assets, net .............................. 26,719 6,694
----------- -----------
TOTAL ASSETS .......................................... $ 1,115,610 $ 1,018,039
=========== ===========
LIABILITIES:
Senior notes ................................... $ 175,150 $ 175,150
Lines of credit ................................ 212,717 172,164
Mortgage loan payable to bank .................. 3,799 3,741
Income taxes payable ........................... -- 7,049
Accounts payable and accrued liabilities ....... 22,851 29,487
Deferred dealer enrollment fees, net ........... 421 89
Dealer holdbacks, net .......................... 437,065 361,260
Deferred income taxes, net ..................... 14,616 13,329
----------- -----------
TOTAL LIABILITIES ..................................... 866,619 762,269
----------- -----------
SHAREHOLDERS' EQUITY
Common stock ................................... 461 461
Paid-in capital ................................ 128,336 128,336
Retained earnings .............................. 118,023 124,910
Cumulative translation adjustment .............. 2,171 2,063
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................ 248,991 255,770
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............ $ 1,115,610 $ 1,018,039
=========== ===========
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CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED
----------------------------
(Dollars in thousands, except per share data) 3/31/97 3/31/98
- -----------------------------------------------------------------------------------
REVENUE:
Finance charges ............................ $ 30,691 $ 28,055
Vehicle service contract fees
and other income ........................ 6,905 6,882
Dealer enrollment fees ..................... 1,790 1,450
Premiums earned ............................ 2,383 2,923
------------ ------------
Total revenue ....................... 41,769 39,310
COSTS AND EXPENSES:
Salaries and wages ......................... 3,810 4,922
General and administrative ................. 4,179 7,242
Provision of credit losses ................. 7,053 5,796
Sales and marketing ........................ 1,898 2,457
Provision for claims ....................... 803 1,035
Interest ................................... 5,669 7,346
------------ ------------
Total costs and expenses ............... 23,412 28,798
------------ ------------
Operating income .................................. 18,357 10,512
------------ ------------
Foreign exchange gain(loss) ................ (20) 12
------------ ------------
Income before provision for income taxes .......... 18,337 10,524
Provision for income taxes ................. 6,299 3,637
------------ ------------
Net income ........................................ $ 12,038 $ 6,887
============ ============
Net income per common share:
Basic ...................................... $ 0.26 $ 0.15
============ ============
Diluted .................................... $ 0.26 $ 0.15
============ ============
Weighted average shares outstanding:
Basic ...................................... 46,076,448 46,113,115
============ ============
Diluted .................................... 46,902,492 46,949,673
============ ============
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CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
------------------------
(Dollars in thousands) 3/31/97 3/31/98
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ............................................. $ 12,038 $ 6,887
Adjustments to reconcile net income to net
cash provided by operating activities
Credit for deferred income taxes .............. (763) (1,287)
Depreciation and amortization ................. 478 923
Provision for credit losses ................... 7,053 5,796
Change in operating assets and liabilities
Accounts payable and accrued liabilities ...... (2,075) 6,636
Income taxes payable .......................... 5,465 7,049
Unearned insurance premiums, insurance
reserves, and fees ......................... 925 (214)
Deferred dealer enrollment fees, net .......... (29) (332)
Other assets .................................. (313) 20,025
--------- ---------
Net cash provided by operating activities . 22,779 45,483
========= =========
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on installment contracts
receivable .......................................... 95,967 103,122
Purchase of marketable securities ...................... (353) (293)
(Increase)decrease in floor plan receivables ........... (174) 126
(Increase)decrease in notes receivable ................. 917 (191)
Purchase of property and equipment ..................... (2,073) (572)
--------- ---------
Net cash provided by investing activities . 94,284 102,192
========= =========
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgage loan payable to bank ............. (37) (58)
Advances to dealers and payments of dealer
holdback ............................................ (155,580) (95,316)
Net repayments under line of credit agreement .......... (34,125) (40,553)
Proceeds from sale of senior notes ..................... 71,750 --
Proceeds from stock options exercised .................. 2,648 --
--------- ---------
Net cash used in financing activities ..... (115,344) (135,927)
--------- ---------
Effect of exchange rate changes on cash ... (1,762) (108)
--------- ---------
Net increase(decrease) in cash and
cash equivalents ....................... (43) 11,640
Cash and cash equivalents - beginning of period ........ 229 349
--------- ---------
Cash and cash equivalents - end of period .............. $ 186 $ 11,989
========= =========
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CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
Cumulative
Common Paid-In Retained Translation
(Dollars in thousands) Stock Capital Earnings Adjustment
- --------------------------------------------------------------------------------
Balance as of December 31, 1997 ... $ 461 $128,336 $118,023 $ 2,171
Net income ........................ -- -- 6,887 --
Foreign currency translation
adjustment ..................... -- -- -- (108)
-------- -------- -------- --------
Balance as of March 31, 1998 ..... $ 461 $128,336 $124,910 $ 2,063
======== ======== ======== ========
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CREDIT ACCEPTANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The unaudited consolidated operating results have been prepared on the
same basis as the audited financial statements and, in the opinion of
management, include all adjustments, consisting of normal recurring items,
necessary for a fair presentation of the periods. The results of operations for
interim periods are not necessarily indicative of actual results achieved for
full fiscal years.
As contemplated by the Securities and Exchange Commission under rule
10-01 of Regulation S-X, the accompanying consolidated financial statements and
related notes have been condensed and do not contain certain information
included in the Company's annual consolidated financial statements and notes
thereto. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
2. NET INCOME PER SHARE
Basic net income per share amounts are based on the weighted average
number of common shares outstanding. Diluted net income per share amounts are
based on the weighted average number of common shares and common stock
equivalents outstanding. Common stock equivalents included in the computation
represent shares issuable upon assumed exercise of stock options which would
have a dilutive effect. All per share amounts have been adjusted to reflect all
stock splits declared by the Company.
3. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standard No. 130, Reporting Comprehensive Income (SFAS 130). SFAS 130
establishes standards for reporting and displaying comprehensive income and its
components in annual financial statements. Application of SFAS 130 is not
expected to have a significant impact on the financial statement disclosures of
the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
TOTAL REVENUE. Total revenue decreased from $41.8 million for the three months
ended March 31, 1997 to $39.3 million for the same period in 1998, representing
a decrease of 5.9%. This decrease is primarily due to a decrease in finance
charge revenue resulting from a decrease in installment contracts receivable.
The decrease in installment contracts receivable is primarily the result of
collections on installment contracts and charge offs of installment contracts
for the period exceeding contract originations for the period. The Company's
volume of contract originations decreased in the fourth quarter of 1997 and in
the first quarter of 1998 as the Company has implemented more conservative
advance programs and has limited business with marginally profitable and
unprofitable dealers. These changes were made as a result of the Company's
enhanced analysis made possible by a new loan servicing system which became
operational in the third quarter of 1997. Based on reviews of dealer
profitability, the Company has discontinued relationships with several dealers
and continues to monitor its relationships with dealers and make adjustments to
these relationships as required. It is expected that the volume of contract
originations will continue at lower levels than those experienced prior to the
implementation of these changes.
The average yield on the Company's installment contract portfolio, calculated
using finance charge revenue divided by average net installment contracts
receivable, was approximately 11.3% and 11.2% for the three months ended March
31, 1997 and 1998, respectively.
Vehicle service contract fees and other income increased, as a percent of total
revenue, from 16.5% for the three months ended March 31, 1997 to 17.5% for the
same period in 1998. The increase is primarily due to a higher penetration rate
of third party service contract products offered by dealers on installment
contracts, as the Company earns a fee on the sale of these products. Also
contributing to the increase, as a percent of revenue, in vehicle service
contract fees and other income, is an increase in interest earned on floor plan
financing which results from increased floor plan balances.
Earned dealer enrollment fees decreased, as a percent of total revenue, from
4.3% for the three months ended March 31, 1997 to 3.7% for the same period in
1998. The decrease is due to a decline in the number of new dealers enrolling in
the Company's financing program. The Company has become more selective with
respect to the enrollment of new dealers in an effort to improve the
performance of its portfolio of installment contracts receivable.
Premiums earned increased, as a percent of total revenue, from 5.7% for the
three months ended March 31, 1997 to 7.4% for the same period in 1998.
Premiums on the Company's service contract program are earned on a straight-line
basis over the life of the service contracts. Premiums reinsured under the
Company's credit life and collateral protection insurance programs are earned
over the life of the contracts using the pro rata and sum-of-digits methods.
SALARIES AND WAGES. Salaries and wages, as a percent of total revenue, increased
from 9.1% for the three months ended March 31, 1997 to 12.5% for the same period
in 1998. The increase is primarily due to increases in employee headcount,
particularly collection personnel added to service the Company's installment
contract portfolio. To a lesser extent, the increase is due to an increase in
the Company's average wage rates.
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GENERAL AND ADMINISTRATIVE. General and administrative expenses, as a percent
of total revenue, increased from 10.0% for the three months ended March 31,
1997 to 18.4% for the same period in 1998. Increases in general and
administrative expenses include increases in (i) legal fees and settlement
provisions resulting from an increase in the frequency and magnitude of
litigation against the Company; (ii) depreciation and amortization primarily
resulting from the addition of new computer systems in 1997 and (iii) an
increase in audit fees charged by the Company's former independent accountants.
PROVISION FOR CREDIT LOSSES. The amount provided for credit losses, as a
percent of total revenue, decreased from 16.9% for the three months ended March
31, 1997 to 14.7% for the same period in 1998. The provision for credit losses
consists of two components: (i) a provision for loan losses for the earned but
unpaid servicing fee or finance charge recognized on contractually delinquent
installment contracts and (ii) a provision for losses on advances to dealers
that are not expected to be recovered through collections on the related
installment contract receivable portfolio. The decrease is due to a decrease in
the provision for loan loss component, primarily resulting from a decrease in
the percent of non-accrual installment contracts receivable, which were 35.1%
and 33.2% of receivables as of March 31, 1997 and 1998, respectively. The
decrease was partially offset by an increase in the amount provided for advance
losses. Advance balances are continually reviewed by management utilizing the
Company's new loan servicing system which allows management to estimate future
collections for each dealer pool using historical loss experience and a dealer
by dealer static pool analysis.
SALES AND MARKETING. Sales and marketing expenses, as a percent of total
revenue, increased from 4.5% during the three months ended March 31, 1997 to
6.3% during the same period in 1998. This increase is primarily the result of
increased sales commissions for dealer enrollments, which are deferred and
amortized to expense over the estimated repayment term of the outstanding dealer
advance. In addition, the increase is also the result of increases in
advertising associated with the Company's customer lead generating program.
PROVISION FOR CLAIMS. The amount provided for insurance and service contract
claims, as a percent of total revenue, increased from 1.9% during the three
months ended March 31, 1997 to 2.6% during the same period in 1998. This
increase corresponds with an increase, as a percent of total revenue, in
premiums earned from 5.7% for the three months ended March 31, 1997 to 7.4% for
the same period in 1998.
INTEREST EXPENSE. Interest expense, as a percent of total revenue, increased
from 13.6% for the three months ended March 31, 1997 to 18.7% for the same
period in 1998. The increase is primarily a result of an increase in the amount
of average outstanding borrowings. To a lesser extent, interest expense
increased due to higher average interest rates. The increase in the average
interest rate is primarily the result of the sale of $71.75 million in senior
notes, at a fixed rate of interest, in March 1997. The increase was also
attributable to the downgrade of the Company's credit rating with Moody's
Investor Service from Baa3 to Ba2 and with Standard and Poor's from BBB- to BB
effective October 22, 1997. As a result of these downgrades, the Company's
Eurocurrency based borrowing margins under the $250 million credit agreement
were increased from 82.5 basis points to 120 basis points in accordance with the
terms of the credit agreement. The Company expects to continue to borrow in
future periods, as needed, to assist in funding the Company's operations, and
may continue to convert portions of its floating rate debt to longer term fixed
rates, which may be higher than rates available on shorter term floating rate
borrowings. See "Liquidity and Captial Resources".
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OPERATING INCOME. As a result of the aforementioned factors, operating income
decreased from $18.4 million for the three months ended March 31, 1997 to $10.5
million for the same period in 1998, representing a decrease of 42.7%.
FOREIGN EXCHANGE LOSS. The Company incurred a foreign exchange loss of $20,000
for the three months ended March 31, 1997 and a foreign exchange gain of $12,000
for the same period in 1998. The losses result from the effect of exchange rate
fluctuations between the U.S. dollar and foreign currencies on unhedged
intercompany balances between the Company and its subsidiaries which operate
outside the United States.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased from $6.3
million during the three months ended March 31, 1997 to $3.6 million during the
same period in 1998. The decrease is due to a lower level of pretax income in
1998. For the three months ended March 31, the effective tax rate was 34.5% in
1997 and 34.6% in 1998.
INSTALLMENT CONTRACTS RECEIVABLE
The following table summarizes the composition of installment contracts
receivable at the dates indicated:
AS OF AS OF
(Dollars in thousands) 12/31/97 3/31/98
- --------------------------------------------------------------------------------
(UNAUDITED)
Gross installment contracts receivable ........... $ 1,254,858 $ 1,143,469
Unearned finance charges ......................... (196,357) (177,021)
Unearned insurance premiums, insurance
reserves, and fees ............................ (8,683) (8,469)
----------- -----------
Installment contracts receivable ................. $ 1,049,818 $ 957,979
=========== ===========
A summary of changes in gross installment contracts receivable is as follows:
THREE MONTHS ENDED
-----------------------------
(Dollars in thousands) 3/31/97 3/31/98
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
Balance - beginning of period ................................................. $ 1,251,139 $ 1,254,858
Gross amount of installment contracts
accepted ................................................................... 290,981 202,965
Cash collections on installment contracts
receivable ................................................................. (127,973) (139,104)
Charge offs (a) ............................................................... (46,277) (174,889)
Currency translation .......................................................... (6,971) (361)
----------- -----------
Balance - end of period ....................................................... $ 1,360,899 $ 1,143,469
(a) 1998 charge offs based on nine month recency method; 1997 based on one year
recency method.
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DEALER HOLDBACKS
The following table summarizes the composition of dealer holdbacks at
the dates indicated:
AS OF AS OF
(Dollars in thousands) 12/31/97 3/31/98
- ------------------------------------------------------------------------------------
(UNAUDITED)
Dealer holdbacks ...................................... $ 1,002,033 $ 912,981
Less: Advances (net of reserves of $16,369 and
$21,262 at December 31, 1997 and
March 31, 1998, respectively) .................. (564,968) (551,721)
----------- -----------
Dealer holdbacks, net ................................. $ 437,065 $ 361,260
=========== ===========
CREDIT POLICY AND EXPERIENCE
When an installment contract is acquired, the Company generally pays a
cash advance to the dealer. These advance balances represent the Company's
primary risk of loss related to the funding activity with the dealers.
The Company maintains a reserve against advances to dealers that are
not expected to be recovered through collections on the related installment
contract portfolio. For purposes of establishing the reserve, future
collections are reduced to present-value in order to achieve a level yield over
the remaining term of the advance equal to the expected yield at the
origination of the impaired advance. During 1997, the Company implemented a new
loan servicing system which allows the Company to better estimate future
collections for each dealer pool using historical loss experience and a dealer
by dealer static pool analysis. Future reserve requirements will depend in part
on the magnitude of the variance between management's prediction of future
collections and the actual collections that are realized. Ultimate losses may
vary from current estimates and the amount of the provision, which is a current
expense, may be either greater or less than actual charge offs. The Company
charges off dealer advances against the reserve at such time and to the extent
that the Company's static pool analysis determines that the advance is
completely or partially impaired.
The Company also maintains an allowance for credit losses which, in the
opinion of management, adequately reserves against expected future losses in the
portfolio of receivables. The risk of loss to the Company related to the
installment contracts receivable balances relates primarily to the earned but
unpaid servicing fee or finance charge recognized on contractually delinquent
accounts.
Servicing fees, which are booked as finance charges, are recognized
under the interest method of accounting until the underlying obligation is 90
days past due on a recency basis. At such time, the Company suspends the accrual
of revenue and makes a provision for credit losses equal to the earned but
unpaid revenue. In all cases, contracts on which no material payment has been
received for nine months are charged off against dealer holdbacks, unearned
finance charges and the allowance for credit losses.
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During the third quarter of 1997, the Company changed its non-accrual
policy from 120 days on a contractual basis to 90 days on a recency basis and,
during the fourth quarter of 1997, changed its charge off policy to nine months
on a recency basis from one year. The Company believes these changes allow for
earlier identification of under performing dealer pools.
The following tables set forth information relating to charge offs, the
allowance for credit losses, the reserve on advances, and dealer holdbacks.
THREE MONTHS ENDED
------------------------
(Dollars in thousands) 3/31/97 3/31/98
- --------------------------------------------------------------------------------
(UNAUDITED)
Provision for credit losses-installment contracts ........ $ 2,553 $ 1,030
Provision for credit losses-advances ..................... 4,500 4,766
Charged against dealer holdbacks (a) ..................... 36,986 139,869
Charged against unearned finance charges (a) ............. 8,257 31,348
Charged against allowance for credit losses (a) .......... 1,034 3,672
-------- --------
Total contracts charged off (a) .......................... $ 46,277 $174,889
======== ========
Net charge offs against the reserve on advances .......... $ 327 --
(a) 1998 charge offs based on nine month recency method; 1997 based on one year
recency method.
THREE MONTHS ENDED
------------------------
(Dollars in thousands) 3/31/97 3/31/98
- --------------------------------------------------------------------------------
(UNAUDITED)
ALLOWANCE FOR CREDIT LOSSES
Balance - beginning of period .......................... $ 12,194 $ 13,119
Provision for loan losses .............................. 2,553 1,030
Charge offs ............................................ (1,034) (3,672)
Currency translation ................................... (48) (4)
-------- --------
Balance - end of period ................................ $ 13,665 $ 10,473
======== ========
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THREE MONTHS ENDED
------------------------
(Dollars in thousands) 3/31/97 3/31/98
- --------------------------------------------------------------------------------
(UNAUDITED)
RESERVE ON ADVANCES
Balance - beginning of period .......................... $ 8,754 $ 16,369
Provision for advance losses ........................... 4,500 4,766
Advance reserve fees ................................... 1,330 152
Charge offs ............................................ (327) --
Currency translation ................................... (89) (25)
-------- --------
Balance - end of period ................................ $ 14,168 $ 21,262
======== ========
THREE MONTHS ENDED
------------------------
(Dollars in thousands) 3/31/97 3/31/98
- ------------------------------------------------------------------------------------
(UNAUDITED)
Allowance for credit losses as a percent of gross
installment contracts receivable ........................ 1.0% 0.9%
Reserve on advances as a percent of advances ............... 2.5% 3.7%
Gross dealer holdbacks as a percent of gross
installment contracts receivable ........................ 79.9% 79.8%
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal need for capital is to fund cash advances
made to dealers in connection with the acceptance of installment contracts and
for the payment of dealer holdbacks to dealers who have repaid their advance
balances. These cash outflows to dealers decreased from $155.6 million during
the three months ended March 31, 1997 to $95.3 million in 1998. These amounts
have historically been funded from cash collections on installment contracts,
cash provided by operating activities and draws under the Company's credit
agreements. During the first three months of 1998, the Company paid down
approximately $40.6 million on its $250 million credit agreement. The positive
cash flow during the period is primarily a result of refunds received from the
overpayment of 1997 U.S. federal income taxes and principal collections on
installment contracts receivable exceeding cash advances to dealers and payments
of dealer holdbacks. During the fourth quarter of 1997 and first quarter of
1998, the Company implemented more conservative advance programs and began to
reduce business with marginally profitable and unprofitable dealers in order to
improve the performance of its portfolio of installment contracts. These changes
have resulted in reduced levels of originations and cash advances to dealers, a
trend which is expected to continue in future periods. To the extent that such
growth is reduced to lower levels, the Company could experience a proportionate
decrease in its need for capital in future periods.
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At March 31, 1998, the Company had a $250 million credit agreement
with a commercial bank syndicate. The agreement consisted of a $150 million
line of credit facility with a commitment period through May 15, 1998 and a
$100 million revolving credit facility with a commitment period through May 15,
2000. Both facilities were subject to annual extension for additional one year
periods at the request of the Company with the consent of each of the banks in
the facility. The borrowings under the credit agreement are unsecured with
interest payable at the Eurocurrency rate plus a minimum of 61.25 basis points
and a maximum of 140 basis points (currently 120 basis points) dependent on the
Company's debt ratings, or at the prime rate. The Eurocurrency borrowings may
be fixed for periods up to one year. The credit agreement has certain
restrictive covenants, including limits on the ratio of debt to equity, debt to
advances, debt to gross installment contracts receivable, advances to
installment contracts receivable, and fixed charges to net income, limits on
the Company's investment in its foreign subsidiaries and requirements that the
Company maintain a specified minimum level of net worth. As of March 31, 1998,
there was approximately $169.7 million outstanding under these facilities.
On May 11, 1998, an amendment was made to the Company's credit
agreement which extended the maturity date of its line of credit facility from
May 15, 1998 to July 31, 1998. As part of the amendment, the maturity date of
the Company's revolving credit facility was changed from May 15, 2000 to May 15,
1999. The amendment also reduced the amount of the line of credit facility from
$150 million to $120 million and the revolving credit facility from $100 million
to $80 million. Additionally, the amendment modified certain financial covenants
governing both facilities, including the ratio of maximum total indebtedness to
tangible net worth, the ratio of total debt to dealer advances and the minimum
required level of tangible net worth. Other significant terms and conditions
of both unsecured facilities, including interest rate, remain unchanged.
As the Company's $120 million line of credit facility expires on July
31, 1998, the Company is required to refinance any amounts outstanding
under this facility on or before such date. The Company continues to evaluate
alternatives, including the securitization of assets and the issuance of senior
notes, for refinancing amounts outstanding under the $120 million credit
facility and is continuing its efforts with a large commercial bank for
financing of up to $50 million in a securitization transaction involving the
contribution of assets, including dealer advances and the related installment
contracts receivable, by the Company to a special purpose subsidiary. The
transaction may require the approval of holders of the Company's senior notes.
If consummated the net proceeds of such transaction would be used to reduce
amounts outstanding under the Company's credit facilities. The Company
anticipates extending the existing credit facility with modified terms and
reduced commitment amounts prior to July 31, 1998. Whether or not the
securitization transaction is consummated, based upon anticipated cash flows,
management believes that amounts available under its credit facilities and
other available alternatives will provide sufficient financing for future
operations.
If the Company experiences difficulties in obtaining additional or
alternative financing, the Company may reduce its capital needs by reducing the
volume of installment contract originations. The Company believes that it
will be successful in refinancing any amounts outstanding under this credit
agreement. Failure to complete such refinancing or to obtain alternative
financing, however, may have a
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material adverse effect on the Company's operations.
The Company also has a L2.0 million British pound sterling ($3.3
million U.S. dollars) line of credit agreement with a commercial bank in the
United Kingdom, which is used to fund the day to day cash flow requirements of
the Company's United Kingdom subsidiary. The borrowings are secured by a letter
of credit issued by the Company's principal commercial bank with interest
payable at the United Kingdom bank's base rate (7.25% at March 31, 1998) plus 65
basis points or at the LIBOR rate plus 56.25 basis points. The rates may be
fixed for periods up to six months. As of March 31, 1998, there was
approximately L1.5 million British pounds ($2.5 million U.S. dollars)
outstanding under this facility, which becomes due on August 31, 1998.
When borrowing to fund the operations of its foreign subsidiaries,
the Company's policy is to borrow funds denominated in the currency of the
country in which the subsidiary operates, thus mitigating the Company's exposure
to foreign exchange fluctuations.
The Company maintains a significant dealer holdback on installment
contracts accepted which assists the Company in funding its long-term cash flow
requirements. In future periods, the Company's short and long-term cash flow
requirements will continue to be funded primarily through cash flow from the
collection of installment contracts, cash provided by operating activities and
the Company's credit facilities. The Company will continue to utilize various
sources of financing available from time to time to fund the operations of the
Company. Should such financing become limited, the Company's ability to maintain
or increase loan originations will be funded through earnings from operations
and cash flow from the collection of installment contracts.
YEAR 2000
The Company employs three major computer systems in its U.S.
operations: (i) the Application and Contract System ("ACS") which is used from
the time a dealer faxes an application to the Company until the contract is
received and funded, (ii) the Loan Servicing System ("LSS") which contains all
loan and payment information and is the primary source for management
information reporting, and (iii) the Collection System ("CS") which is used by
the Company's collections personnel to track and service all active customer
accounts. The ACS and LSS systems went into production in 1997 and were
developed by the Company in Oracle 7.3 and Oracle Forms 4.5 which are year 2000
compliant. The CS system is a third party software package. The vender has
indicated that it has a version of the software that is year 2000 compliant,
which the Company plans to upgrade to. The Company utilizes certain other
software that will be affected by the year 2000 date change. The Company
expects that all other software installations or other modifications to its
computer systems will be completed by the year 2000. Anticipated spending for
modifications will be expensed as incurred, while the cost for new software
will be capitalized and amortized over the software's useful life. At this
time, the Company does not expect that the cost of these modifications or
software will have a material effect on its financial position, liquidity, or
results of operations.
FORWARD LOOKING STATEMENTS
The foregoing discussion and analysis contains a number of forward
looking statements within the meaning of the Securities Act of 1933 and the
Securities Exchange Act of 1934, both as amended, with respect to expectations
for future periods which are subject to various uncertainties, including
competition from traditional financing sources and from non-traditional lenders,
availability of funding at competitive rates of interest, adverse changes in
applicable laws and regulations, adverse changes in economic conditions, adverse
changes in the automobile or finance industries or in the non-prime consumer
finance market, the Company's ability to increase or maintain the volume of
installment contracts accepted and historical collection rates and the
Company's ability to complete various financing alternatives.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II.--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, the Company and certain officers and
directors of the Company have been named as defendants in a number of putative
class action complaints filed in the United States District Court for the
Eastern District of Michigan seeking money damages for alleged violations of
the federal securities laws. Since the filing of the Form 10-K, two additional
complaints have been filed in that court. The additional complaints contain
allegations substantially the same as those disclosed in the Form 10-K. The
Company intends to vigorously defend these actions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index of Exhibits following the signature page.
(b) Reports on Form 8-K
The Company was not required to file a current report on
Form 8-K during the quarter ended March 31, 1998 and none
were filed during that period. A Form 8-K was filed on
April 23, 1998 disclosing certain information under Item
4 "Changes in Registrant's Certifying Accountant". No
financial statements were filed therewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
(REGISTRANT) CREDIT ACCEPTANCE CORPORATION
BY (SIGNATURE) /s/ BRETT A. ROBERTS
- ------------------------ -----------------------------------------
(NAME) BRETT A. ROBERTS
(TITLE) Executive Vice President and
Chief Financial Officer
(DATE) May 13, 1998
(Duly Authorized Officer and
Principal Financial Officer)
BY (SIGNATURE) /s/ JOHN P. CAVANAUGH
- ------------------------ -----------------------------------------
(NAME) JOHN P. CAVANAUGH
(TITLE) Corporate Controller and
Assistant Secretary
(DATE) May 13, 1998
(Principal Accounting Officer)
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INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -------------------------------------------------------------
4(c)(3) Third Amendment dated May 11, 1998 to Second Amended
and Restated Credit Agreement dated as of December 4,
1996
11 Statement of Computation of Net Income Per Common Share
27 Financial Data Schedule
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Exhibit 4(c)(3)
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment to Credit Agreement ("Third Amendment") is made as
of this 11th day of May, 1998 by and among Credit Acceptance Corporation, a
Michigan corporation ("Company"), the Permitted Borrowers signatory hereto
(each, a "Permitted Borrower" and collectively, the "Permitted Borrowers"),
Comerica Bank and the other banks signatory hereto (individually, a "Bank" and
collectively, the "Banks") and Comerica Bank, as agent for the Banks (in such
capacity, "Agent").
RECITALS
A. Company, Permitted Borrowers, Agent and the Banks entered into that
certain Second Amended and Restated Credit Agreement dated as of December 4,
1996, as amended by that First Amendment and Consent dated as of June 4, 1997
and that Second Amendment dated as of December 12, 1997 (the "Credit Agreement")
under which the Banks renewed and extended (or committed to extend) credit to
the Company and the Permitted Borrowers, as set forth therein.
B. The Company and the Permitted Borrowers have requested that Agent
and the Banks agree to make certain amendments to the Credit Agreement and to
extend the Line of Credit Maturity Date presently in effect, and Agent and the
Banks are willing to do so, but only on the terms and conditions set forth in
this Third Amendment.
NOW, THEREFORE, Company, Permitted Borrowers, Agent and the Banks
agree:
l. Section 1 of the Credit Agreement is hereby amended, as follows:
(a) The definition of "Advances to Dealers" is amended and
restated in its entirety, as follows:
"'Advances to Dealers' shall mean, as of any applicable date
of determination, the dollar amount of advances, as such
amount would appear in the footnotes to the financial
statements of the Company and its Subsidiaries prepared in
accordance with GAAP (and if such amount is not shown net of
such reserves, then net of any reserves established by the
Company as an allowance for credit losses related to such
advances not expected to be recovered), provided that Advances
to Dealers shall not include (a) any such advances (and the
related Installment Contracts) transferred or encumbered
pursuant to a Permitted Securitization, (b) Excess New Dealer
Advances or (c) Charged-Off Advances, to the extent that such
Charged-Off Advances exceed the portion of the Company's
allowance for credit losses related to reserves against
advances not expected to be recovered, as such allowance would
appear in the footnotes to the financial statements of the
Company and its Subsidiaries prepared in accordance with GAAP
at such time. For purposes of this definition, (i)
"Charged-Off Advances" shall mean those Advances to Dealers
which the Company or any of its Subsidiaries has determined,
based on the application of a static pool analysis or
otherwise, are completely or partially impaired, to the extent
of such impairment, (ii) "Excess New Dealer Advances" shall
mean, at any time, the aggregate amount of advances to New
Dealers to the extent such amount exceeds 10% of Gross
Advances to Dealers; and
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(iii) "'New Dealer' shall mean, at any time, a Dealer who
participates in the Company"s program of financing and
collecting installment contract receivables, whose oldest
pool of Installment Contracts held by the Company is dated
as of a date which is not more than six months prior to such
time and who has an advance balance in excess of Ten
Thousand Dollars ($10,000) at such time."
(b) The definition of "Aggregate Commitment" is added, as
follows:
"'Aggregate Commitment' shall mean the Line of Credit Maximum
Amount and the Revolving Credit Maximum Amount, as in effect
from time to time."
(c) The definition of "Cleanup Call(s)" is added, as follows:
"'Cleanup Call(s)' shall mean (a) in the case of an
optional cleanup call, a cleanup call to be exercised at
the option of the Company or a Special Purpose
Subsidiary under the terms of the applicable Permitted
Securitization, in an amount not in excess of Five
Percent (5%) of the initial proceeds received by the
Company from the applicable Permitted Securitization,
and (b) in the case of a mandatory cleanup call, a
mandatory cleanup call to be exercised at the option of
the investors under the terms of the applicable
Permitted Securitization, in an amount not in excess of
Two and One-Half Percent (2 1/2%) of the initial
proceeds received by the Company from the applicable
Permitted Securitization, in either case, such Cleanup
Call to be exercisable only at such time as (both before
and after giving effect thereto) no Default or Event of
Default has occurred and is continuing hereunder and
being accompanied by the repurchase of or release of
encumbrances on Advances to Dealers previously
transferred or encumbered pursuant to such Permitted
Securitization in the amount of such cleanup call."
(d) The definition of "Consolidated Income Available for Fixed
Charges" is amended to add, in the third line thereof
(following the word "amortization") the parenthetical phrase
"(including the amortization of any excess servicing asset)."
(e) The definition of "Consolidated Net Income" is amended to
add the following words to the end of subparagraph (c)
thereof:
"(including, without limitation, any gain on sale
generated by a Permitted Securitization except to the
extent the Company has received a cash benefit therefrom
in the applicable reporting period); and any interest
income generated by a Permitted Securitization, except
to the extent the Company has received a cash benefit
therefrom in the applicable reporting period".
(f) The definition of "Consolidated Tangible Net Worth" is
amended to add the following clause at the end of such
definition, following the word "GAAP":
"(but excluding from the determination thereof, without
duplication, any capitalized gain on sales of Advances
to Dealers pursuant to a Permitted Securitization, the
equity interest in any Special Purpose Subsidiary, any
interest income generated by a Permitted Securitization
and any excess servicing asset except to the extent the
Company has
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received a cash benefit therefrom in the applicable
reporting period)".
(g) The definition of "Consolidated Total Assets" is amended to
add the following clause at the end of such definition,
following the word "GAAP":
"(but excluding from the determination thereof, without
duplication, any capitalized gain on sales of Advances
to Dealers pursuant to a Permitted Securitization, the
equity interest in any Special Purpose Subsidiary, any
interest income generated by a Permitted Securitization
and any excess servicing asset, except to the extent the
Company has received a cash benefit therefrom in the
applicable reporting period)".
(h) The definition of "Eurocurrency-Interest Period" is amended
and restated in its entirety as follows:
"'Eurocurrency-Interest Period' shall mean, (a) for
Swing Line Advances, an Interest Period of one month (or
any lesser number of days agreed to in advance by
Company or a Permitted Borrower, Agent and the Swing
Line Bank) and (b) for all other Eurocurrency-based
Advances, an Interest Period of seven days or one, two,
three or six months and, in addition, in the case of
Advances of the Revolving Credit only, twelve months (or
any other number of days or months agreed to in advance
by Agent and the Banks) as selected by Company or such
Permitted Borrower, as applicable, for a
Eurocurrency-based Advance pursuant to Section 2.3, 3.3,
or 3.5 hereof, as the case may be."
(i) The definition of "Funding Conditions" is amended by amending
and restating in its entirety subparagraph (d) thereof as
follows:
"(d) concurrently with the incurring of such additional
Debt, the Company shall be obligated (i) to permanently
reduce the Aggregate Commitment then in effect by an
amount not less than Eighty Percent (80%) of the
proceeds of such Debt, net of reasonable and customary
third party expenses incurred by the Company in
connection with the issuance of such Debt, reducing the
Line of Credit Maximum Amount and the Revolving Credit
Maximum Amount on a pro rata basis to the extent both
such facilities are in effect, each such reduction in
the Aggregate Commitment to be accompanied by the
prepayments of principal and other sums required under
Section 2.14 or 3.15, as the case may be (using the
proceeds of such additional Debt to make such
prepayments), and otherwise in compliance with this
Agreement and (ii) to apply the remaining proceeds of
such additional Debt (net of expenses, as aforesaid) to
the principal balance outstanding under the Line of
Credit and the Revolving Credit (to the extent then
outstanding, after giving effect to the mandatory
prepayments required under clause (i) of this
subparagraph), subject to the right to reborrow in
accordance with the terms hereof, after taking into
account the mandatory reductions of the Aggregate
Commitment under clause (i) of this subparagraph."
(j) The definition of "Future Debt" is amended to add, after the
reference to Three Hundred Million Dollars ($300,000,000) in
the
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preamble thereof, the words "less the aggregate
amount received by the Company or its Subsidiaries
from dispositions of Advances to Dealers made
pursuant to Permitted Securitizations" and to add,
after the phrase "except for acceleration on default"
at the end of paragraphs (x) and (y) thereof the
words "or following a change in control".
(k) The definition of "Installment Contract(s)" is
amended and restated in its entirety, as follows:
"'Installment Contract(s)' shall mean retail
installment contracts for the sale of used
motor vehicles assigned by Dealers to
Company or a Subsidiary of Company, as
nominee for the Dealer, for administration,
servicing, and collection pursuant to an
applicable Dealer Agreement; provided,
however, that to the extent the Company or
any Subsidiary transfers or encumbers its
interest in any Installment Contracts (or
any Advances to Dealers related thereto)
pursuant to a Permitted Securitization, such
Installment Contracts shall, from and after
the date of such transfer or encumbrance,
cease to be considered Installment Contracts
under this Agreement unless and until such
installment contracts are reassigned to the
Company or a Subsidiary of the Company or
such encumbrances are discharged."
(l) The definition of "Line of Credit Maturity Date" is
amended to extend the maturity date of the Line of
Credit from the date presently in effect (May 15,
1998) to July 31, 1998.
(m) The definition of "Line of Credit Maximum Amount" is
amended and restated in its entirety to read as
follows:
"'Line of Credit Maximum Amount' shall mean
One Hundred Twenty Million ($120,000,000),
less any reductions in the Line of Credit
Maximum Amount under Section 2.14 of this
Agreement."
(n) The definition of "Permitted Acquisition" is amended
to add (in the second line thereof following the word
"Subsidiaries") the words "(other than any Special
Purpose Subsidiary)".
(o) The definition of "Permitted Guaranties" is amended
to add, at the end of such definition (following the
word "hereof") the words:
"or any agreement or other undertaking by the
Company, as servicer of the Installment Contracts
covered by a Permitted Securitization, to advance
funds in an aggregate amount at any time outstanding
not to exceed $750,000 to cover the interest
component of obligations issued as part of such
securitization and payable from collections on such
Installment Contracts (such advances to be repayable
to Company on a priority basis from such
collections)."
(p) The definition of "Permitted Merger(s)" is amended to
add, in the second line thereof (following the word
"Guarantor"), the words ", excluding any Special
Purpose Subsidiary," and to add in the fifth line
thereof (following the word "Subsidiary"),
the parenthetical phrase "(excluding any Special
Purpose Subsidiary)".
4
5
(q) The definition of "Permitted Securitization(s)" is
added, as follows:
"'Permitted Securitization(s)' shall mean each
transfer or encumbrance (each a "disposition") of
specific Advances to Dealers (and any interest in or
lien on the Installment Contracts or other rights
relating thereto) by the Company or its Subsidiaries
to a Special Purpose Subsidiary conducted in
accordance with the following requirements:
(a) Each disposition shall identify with reasonable
certainty the specific Advances to Dealers
covered by such disposition; and the Advances
to Dealers (and the Installment Contracts or
other rights relating thereto) shall have
performance and other characteristics so that
the quality of such Advances to Dealers and
related Installment Contracts is comparable to,
but not materially better than, the overall
quality of the Company's Advances to Dealers
(and related Installment Contracts) as a whole,
as determined in good faith by the Company in
its reasonable discretion;
(b) The aggregate amount of all such dispositions
of Advances to Dealers conducted from and after
the date hereof (net of any replacements or
repurchases made in accordance with Section
8.8(i)(y) hereof), shall not exceed One Hundred
Forty Seven Million Dollars ($147,000,000),
less One Hundred and Seventeen Percent (117%)
of the principal amount of Future Debt incurred
from and after the effective date of the Third
Amendment pursuant to a Permitted
Securitization, and the Company shall receive
from each such disposition an amount not less
than eighty-five percent (85%) of the value of
the Advances to Dealers covered thereby;
(c) Each such disposition shall be without recourse
(except to the extent of normal and customary
representations and warranties given as of the
date of each such disposition, and not as
continuing representations and warranties) and
otherwise on normal and customary terms and
conditions for comparable asset-based
securitization transactions, including, any
Cleanup Call provision;
(d) Concurrently with each such disposition, the
Company shall permanently reduce the Aggregate
Commitment then in effect by an amount not less
than Eighty Percent (80%) of the proceeds of
each such disposition (net of reasonable and
customary third party expenses incurred by the
Company in connection therewith), reducing the
Line of Credit Maximum Amount and the Revolving
Credit Maximum Amount on a pro rata basis
(based on the Aggregate Commitment then in
effect) to the extent both such facilities are
in effect, each such reduction in the Aggregate
Commitment to be accompanied by the prepayments
of principal and other sums required under
Section 2.14 or 3.15, as the case may be, and
otherwise in compliance with this Agreement;
(e) Before conducting a Permitted Securitization,
Agent shall have received, to the extent the
applicable Senior Debt Documents require
amendment or consent in order to effect such
Permitted Securitization, copies of amendments
to or consents under the Senior Debt Documents
executed and
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delivered by the Company and the requisite
holders of the Senior Debt reflecting such
amendments or consents; and
(f) Both immediately before and after such
disposition, no Default or Event of Default
(whether or not related to such disposition)
has occurred and is continuing.
In connection with each Permitted Securitization
conducted hereunder, not less than ten (10) Business
Days prior to the date of consummation thereof, the
Company shall provide to the Agent and each of the Banks
(i) a schedule in the form attached hereto as Exhibit K
identifying the specific Advances to Dealers (and
providing collection information regarding the related
Installment Contracts) proposed to be covered by such
transaction (with evidence supporting its determination
under subparagraph (a) of this definition) and (ii)
proposed drafts of the material Securitization Documents
covering the applicable securitization (and the term
sheet or commitment relating thereto) and within five
(5) Business Days following the consummation thereof,
the Company shall have provided to Agent and each Bank
copies of the material Securitization Documents, as
executed, including an updated schedule, substantially
in the form of the schedule delivered under clause (i),
above, identifying the Advances to Dealers actually
covered by such transaction.
(r) The definition of "Revolving Credit Maximum Amount"
is amended and restated in its entirety to read as
follows:
"'Revolving Credit Maximum Amount' shall
mean Eighty Million Dollars ($80,000,000),
less any reductions in the Revolving Credit
Maximum Amount under Section 3.15 of this
agreement."
(s) The definition of "Revolving Credit Maturity Date" is
amended by deleting the date "May 15, 2000" (after
giving effect to the Request for Extension dated May
20, 1997) in the first line thereof and substituting
therefor the date "May 15, 1999";
(t) The definition of "Securitization Documents" is
added, as follows:
"'Securitization Document(s)' shall mean any note
purchase agreement (and any notes issued thereunder),
transfer or security documents, master trust or other
trust agreements, servicing agreement or other
documents, instruments and certificates executed and
delivered, subject to the terms of this Agreement, to
evidence or secure (or otherwise relating to) a
Permitted Securitization, as the same may be amended
from time to time (subject to the terms hereof) and
any and all other documents executed in connection
therefor or replacement or renewal thereof."
(u) The definition of "Significant Subsidiary(ies)" is
amended to add in the first line thereof (following
the word "Subsidiary"), the words "other than any
Special Purpose Subsidiary" and to add, at the end of
the first parenthetical phrase contained in such
definition (following the words "from time to time")
the words "and any assets which are acquired or arise
pursuant to a Permitted Securitization, including any
equity interest in a Special Purpose Subsidiary)."
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(v) The definition of "Special Purpose Subsidiary" is
added, as follows:
"'Special Purpose Subsidiary' shall mean any
wholly-owned direct or indirect subsidiary of the
Company established for the sole purpose of
conducting one or more Permitted Securitizations and
otherwise established and operated in accordance with
customary industry practices.
(w) The definition "Third Amendment" is added, as
follows:
"'Third Amendment' shall mean the Third Amendment to
Credit Agreement dated as of May 11, 1998 executed
and delivered by and among the Company, the Permitted
Borrowers signatory thereto, the Banks and Agent."
2. Sections 2.14 and 3.15 are amended (a) by adding in the third
line thereof, following the words "prior written notice to the
Agent", the words "and, regardless of whether a Default or
Event of Default has occurred and is continuing, shall to the
extent required under the definitions of "Funding Conditions"
and "Permitted Securitization"," and (b) by adding in clause
(iv) thereof, following the words "termination or reduction"
the parenthetical phrase "(except for terminations or
reductions required under the definitions of "Funding
Conditions" and "Permitted Securitization", which shall be
subject to the assessment of breakage charges hereunder)."
3. Sections 2.15 and 3.16 of the Credit Agreement are deleted in
their entirety and replaced with the word "[Reserved]."
4. Section 7 of the Credit Agreement is amended, as follows:
(a) The preamble to Section 7 is amended to add,
following the word "Subsidiaries" (in the second line
thereof), the parenthetical phrase "(but excluding,
for purposes of Sections 7.3 through 7.10, 7.19, 7.20
and 7.22 hereof, any Special Purpose
Subsidiary)".
(b) Section 7.3(c)(iii) is amended and restated in its
entirety, as follows:
"(iii) a "static pool analysis" substantially in the
form of Exhibit L attached hereto and in any event
satisfactory in form and substance to the Majority
Banks, which analyzes the performance of Company's
and each Permitted Borrower's Installment Contracts
on a quarterly basis, certified by an authorized
officer of the Company as to consistency with prior
such analyses, accuracy and fairness of presentation
and a comparable "static pool analysis" which
analyzes the performance of any installment contracts
related to any Advances to Dealers transferred or
encumbered pursuant to a Permitted Securitization;"
(c) Section 7.3(f) is amended to replace the phrase
"within five (5) Business Days from each incurrence
thereof" (in the third line thereof following the
words "Subsidiaries; and") with the phrase
"concurrently with each incurrence thereof".
(d) Section 7.3(h) is amended to add, at the end of said
Section (following the word "projections"), the
words: "and which shall
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reflect any Future Debt or Permitted Securitizations
contemplated to be incurred or made".
(e) Section 7.4 is amended and restated in its entirety
as follows:
"7.4 Maintain Total Debt Level. On a Consolidated
basis, maintain as of the end of each fiscal quarter,
Consolidated Total Debt at a level equal to or less than each
of the following tests:
(a) Two Hundred Percent (200%) of Company"s
Consolidated Tangible Net Worth from the
effective date of the Third Amendment until
such time (but in no event prior to December
31, 1998) as the Company has maintained a
Fixed Charge Coverage Ratio, pursuant to
Section 7.9 hereof, of not less than 2.00 to
1.00 for two consecutive fiscal quarters,
then Two Hundred Seventy-Five Percent (275%)
of Company's Consolidated Tangible Net
Worth; provided however that for the
purposes of this test, Consolidated Total
Debt shall be calculated by including all
Debt incurred by a Special Purpose
Subsidiary, whether or not included therein
under GAAP;
(b) Eighty Five Percent (85%) of Advances to
Dealers; and
(c) Sixty Percent (60%) of Gross Current
Installment Contract Receivables."
(f) Section 7.5 is amended and restated in its entirety,
as follows:
"7.5 Maintain Senior Funded Debt Level. On a
Consolidated basis, maintain as of the end of each fiscal
quarter Consolidated Senior Funded Debt in an amount not in
excess of Net Installment Contract Receivables less Net Dealer
Holdbacks, divided by 1.10."
(g) Section 7.7 is amended to change the reference to
"One Hundred Fifty Million Dollars ($150,000,000)" in
the second line thereof to "Two Hundred Million
Dollars ($200,000,000)" and to change the reference
to "January 1, 1996" to "January 1, 1998".
5. Section 8 of the Credit Agreement is hereby amended, as
follows:
(a) The preamble to Section 8 is amended to add,
following the word "Subsidiaries" (in the fifth line
thereof), the parenthetical phrase "(but excluding,
for purposes of Sections 8.10, 8.13, 8.14 hereof, any
Special Purpose Subsidiary)".
(b) Section 8.1 is amended to add a new clause (iii)
immediately prior to the words ", shall not
constitute" as follows:
"or (iii) securities issued by a Special Purpose
Subsidiary pursuant to a Permitted Securitization,"
(c) Section 8.3 is amended to add, at the end of said
section, the words "and Permitted Securitization(s)."
(d) Section 8.5 is amended to delete the word "and" at
the end of subparagraph (d) thereof, to redesignate
subparagraph (e) as subparagraph (f) and to add new
subparagraph (e), as follows:
"(e) non-recourse Debt incurred by a Special
Purpose Subsidiary pursuant to a Permitted
Securitization; and".
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(e) Subparagraph (c) of Section 8.6 is amended to add, at
the end of said subparagraph (after the word "Liens,"
but prior to the semicolon) the words "and any Lien
encumbering property interests, rights or proceeds
which are the subject of a transfer or encumbrance
pursuant to a Permitted Securitization".
(f) Section 8.7 is amended to add immediately following
the words "any Permitted Acquisition" in the first
line thereof, the words "or any acquisition of any
rights or property pursuant to a Permitted
Securitization".
(g) Section 8.8 is amended to delete the word "and" at
the end of subparagraph (h) thereof, to redesignate
subparagraph (i) thereof as subparagraph (j) and to
add a new subparagraph (i), as follows:
(i) "Investments in any Subsidiary (including,
without limitation, any Special Purpose
Subsidiary) from and after the date hereof,
consisting of (w) dispositions of specific
Advances to Dealers (and its interest in the
Installment Contracts relating thereto) made
pursuant to a Permitted Securitization and
any resultant Debt issued by a Special
Purpose Subsidiary to another Subsidiary as
part of a Permitted Securitization, in each
case to the extent constituting Investments
hereunder; (x) advances by Company (as
servicer) which are permitted under the
definition of Permitted Guaranties; (y) the
repurchase or replacement from and after the
date hereof of an aggregate amount not to
exceed $2,000,000 in Advances to Dealers
(and the Installment Contracts or other
rights relating thereto) subsequently
determined not to satisfy the eligibility
standards contained in the applicable
Securitization Documents relating to a
Permitted Securitization, so long as (i)
such replacement is accompanied by the
repurchase of or release of encumbrances on
Advances to Dealers previously transferred
or encumbered pursuant to such
securitization and in the amount thereof,
(ii) any replacement Advances to Dealers
(and the related Installment Contracts) are
selected by Company according to the
requirements set forth in clause (a) of the
definition of Permitted Securitization and
(iii) such replacements are made at a time
when (both before and after giving effect
thereto) no Default or Event of Default has
occurred and is continuing; and (z) amounts
required to fund any Cleanup Call under the
terms of such Permitted Securitization,
exercised at a time when (both before and
after giving effect thereto) no Default or
Event of Default has occurred and is
continuing; and"
(h) Section 8.9 is amended to add, in the first line
thereof (following the word "Banks"), the phrase "or
pursuant to a Permitted Securitization".
(i) Section 8.11 is amended to add, at the end of the
parenthetical phrase in the ninth line thereof
(following the word "Debt"), the words:
"and other than pursuant to any of the
Securitization Documents, but only to the extent of
the Advances to Dealers, and the other rights and
property transferred or encumbered in connection with
the Permitted Securitization covered by such
Securitization Documents)".
9
10
(j) Section 8.12 is amended by adding at the end of such
subsection immediately before the "." the words "or,
with respect only to Permitted Securitizations, any
payment pursuant to a Cleanup Call."
(k) Section 8.15 is amended to add, in clause (i) thereof
(following the word "Subsidiary") the words "(other
than any Special Purpose Subsidiary)".
(l) New Section 8.16 is added, as follows:
"8.16 Amendment of Securitization Documents.
Once executed and delivered pursuant to a Permitted
Securitization, amend, modify or otherwise alter any of the
material terms and conditions of any Securitization Documents
or waive (or permit to be waived) any such provision thereof
in any material respect, without the prior written approval of
Agent and the Majority Banks. For purposes of such documents
and instruments, "material" and "materially" shall be deemed
to relate solely to recourse, Cleanup Calls or any change in
or waiver of conditions contained therein which are required
under or necessary for compliance with this Agreement."
6. Section 9.1(f) is amended to add, at the end of such section
(following the word "obligation"), the words "or, with respect
to the Securitization Documents, (i) the occurrence (beyond
any applicable period of grace or cure) of any "servicer event
of default" thereunder or (ii) the occurrence of any other
default (beyond any applicable period of grace or cure) by
Company or any of its Subsidiaries, including any Special
Purpose Subsidiary, under the Securitization Documents, which
can be reasonably expected to result in recourse liability
against the Company or any of its Subsidiaries (other than a
Special Purpose Subsidiary) in an aggregate amount exceeding
$2,000,000.
7. Section 13.8(c) is amended to delete from the first sentence
thereof, the entire second proviso beginning with the words
"and provided further that" and ending with the words
"original interest therein" and replacing the semicolon after
the words "Federal Reserve Bank" with a period.
8. This Third Amendment shall become effective (according to the
terms and as of the date hereof) upon satisfaction by the
Company and the Permitted Borrowers, on or before May 14,
1998, of the following conditions:
(a) Agent shall have received counterpart originals of
this Third Amendment, in each case duly executed and
delivered by Company, the Permitted Borrowers and the
requisite Banks, in form satisfactory to Agent and
the Banks; and
(b) Agent shall have received from the Company and each
of the Permitted Borrowers a certification (i) that
all necessary actions have been taken by such parties
to authorize execution and delivery of this Third
Amendment, supported by such resolutions or other
evidence of corporate authority or action as
reasonably required by Agent and the Majority Banks
and that no consents or other authorizations of any
third parties are required in connection therewith;
and (ii) that, after giving effect to this Third
Amendment, no Default or Event of Default has
occurred and is continuing on the proposed effective
date of the Third Amendment.
10
11
If the foregoing conditions have not been satisfied or waived
on or before May 14, 1998, this Third Amendment shall lapse
and be of no further force and effect. Furthermore, within
five (5) Business Days from the effective date of this Third
Amendment, as aforesaid, Company shall pay to the Agent, for
distribution to each of the Banks, an amendment fee in the
amount of ten basis points on each such Bank's Percentage of
the Aggregate Commitment, as applicable, in effect as of the
date of this Third Amendment (after giving effect thereto) and
failure to comply with this provision shall be an Event of
Default under the Credit Agreement.
9. New Exhibits K (Advances to Dealers/Permitted Securitization)
and L (Form of Static Pool Analysis) attached hereto as
Attachment 1 and 2, respectively, are added to the Credit
Agreement; and new Schedule 6.15 (Litigation) attached hereto
as Attachment 3 shall replace existing Schedule 6.15 in its
entirety.
10. Each of the Company and the Permitted Borrowers ratifies and
confirms, as of the date hereof and after giving effect to the
amendments contained herein, each of the representations and
warranties set forth in Sections 6.1 through 6.22, inclusive,
of the Credit Agreement and acknowledges that such
representations and warranties are and shall remain continuing
representations and warranties during the entire life of the
Credit Agreement.
11. Except as specifically set forth above, this Third Amendment
shall not be deemed to amend or alter in any respect the terms
and conditions of the Credit Agreement, any of the Notes
issued thereunder or any of the other Loan Documents, or to
constitute a waiver by the Banks or Agent of any right or
remedy under or a consent to any transaction not meeting the
terms and conditions of the Credit Agreement, any of the Notes
issued thereunder or any of the other Loan Documents.
12. Unless otherwise defined to the contrary herein, all
capitalized terms used in this Third Amendment shall have the
meaning set forth in the Credit Agreement.
13. This Third Amendment may be executed in counterpart in
accordance with Section 13.10 of the Credit Agreement.
14. This Third Amendment shall be construed in accordance with and
governed by the laws of the State of Michigan.
[signatures follow on succeeding pages]
12
12
WITNESS the due execution hereof as of the day and year first above
written.
COMERICA BANK, CREDIT ACCEPTANCE CORPORATION
as Agent
By: Jaitinder Kalia By: Brett A. Roberts
------------------------------- ---------------------------
Its: Corporate Finance Officer Its: Chief Financial Officer
------------------------------- ---------------------------
One Detroit Center
500 Woodward Avenue
Detroit, Michigan 48226
Attention: Michael P. Stapleton
CREDIT ACCEPTANCE CORPORATION
UK LIMITED
By: Brett A. Roberts
---------------------------------------
Its: Secretary
---------------------------------------
CAC OF CANADA LIMITED
By: Brett A. Roberts
---------------------------------------
Its: Chief Financial Officer
---------------------------------------
CREDIT ACCEPTANCE CORPORATION IRELAND LIMITED
By: Brett A. Roberts
---------------------------------------
Its: Secretary
---------------------------------------
12
13
COMERICA BANK
By: Timothy P. Ashley
--------------------------------
Its: 1st Vice President
--------------------------------
14
LASALLE NATIONAL BANK
By: Ben Schreiner
-----------------------------
Its: Loan Officer
-----------------------------
15
THE FIRST NATIONAL BANK OF
CHICAGO
By: Toral G. Stack
-----------------------------
Its: Vice President
-----------------------------
16
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By: Herb Redding
------------------------------
Its: V.P. & Mgr.
------------------------------
and
By: Stan Marciniak
------------------------------
Its: V.P. & Mgr.
------------------------------
17
HARRIS TRUST AND SAVINGS BANK
By: Michael Cameli
-----------------------------
Its: V.P.
-----------------------------
18
THE BANK OF NEW YORK
By: William Barnum
-----------------------------
Its: Vice President
-----------------------------
19
THE FIFTH THIRD BANK OF NORTHWESTERN
OHIO, N.A.
By: Brent J. Lochbihler
-----------------------------
Its: Vice President
-----------------------------
20
U.S. BANK NATIONAL ASSOCIATION, as
successor by merger to United
States National Bank of Oregon
By: Joseph Andersen
-------------------------
Its: Vice President
-------------------------
21
THE BANK OF TOKYO-MITSUBISHI, LTD.
(CHICAGO BRANCH)
By: Hajime Watanabe
-------------------------
Its: Deputy General Mgr.
-------------------------
22
BANQUE PARIBAS
By: Ann B. McAloon
--------------------
Its: Vice President
--------------------
and
By: Karen E. Coons
-------------------
Its: Vice President
-------------------
23
CREDIT LYONNAIS
NEW YORK BRANCH
By: W. Jay Buckley
------------------
Its: Vice President
------------------
24
FIRST UNION NATIONAL BANK
By: Jane W. Workman
--------------------------
Its: Senior Vice President
--------------------------
25
FIRSTAR BANK MILWAUKEE, N.A.
By: Dale Guenther
-----------------------
Its: Vice President
-----------------------
26
NATIONSBANK, N.A.
By: Elizabeth Kurilecz
-----------------------
Its: Senior Vice President
-----------------------
27
THE BANK OF NOVA SCOTIA
By: M.D. Smith
-------------------------
Its: Agent Operations
-------------------------
28
CIBC INC.
By: Gerald Girarti
-------------------------
Its: Executive Director
-------------------------
1
EXHIBIT 11
CREDIT ACCEPTANCE CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME
PER COMMON SHARE
(UNAUDITED)
THREE MONTHS ENDED
------------------------
(Dollars in thousands, except per share data) 3/31/97 3/31/98
- --------------------------------------------------------------------------------
ACTUAL
Net income ......................................... $ 12,038 $ 6,887
----------- -----------
Weighted average number of common shares
outstanding during the period ................... 46,076,448 46,113,115
Common stock equivalents ........................... 826,044 836,558
Weighted average number of common shares
and common stock equivalents .................... 46,902,492 46,949,673
----------- -----------
Net earnings per share:
Basic ........................................... $ .26 $ .15
=========== ===========
Diluted ......................................... $ .26 $ .15
=========== ===========
5
1000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
11,989
10,266
957,979
10,473
0
0
27,494
7006
1,018,039
0
178,891
0
0
461
255,309
1,018,039
0
39,310
0
14,609
1,035
5,796
7,346
10,524
3,637
6,887
0
0
0
6,887
.15
.15
