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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 September 30, 2002
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 each of the issuer's class
of common stock, as of the latest practicable date.
The number of shares outstanding of Common Stock, par value $.01, on November 1,
2002 was 42,382,344.
TABLE OF CONTENTS
PART I. - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Income Statements -
Three and nine months ended September 30, 2002
and September 30, 2001 1
Consolidated Balance Sheets -
As of September 30, 2002 and December 31, 2001 2
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and
September 30, 2001 3
Notes to Consolidated Financial Statements 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 9
AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS 26
ITEM 4. CONTROLS AND PROCEDURES 26
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
SIGNATURE 28
CERTIFICATIONS 29
INDEX OF EXHIBITS 31
EXHIBITS
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED INCOME STATEMENTS
(Dollars in thousands, except per share data) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
REVENUE:
Finance charges $ 23,783 $ 23,289 $ 74,190 $ 66,183
Lease revenue 3,614 5,728 13,201 16,368
Other income 15,036 7,850 32,489 26,332
------------ ------------ ------------ ------------
Total revenue 42,433 36,867 119,880 108,883
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Operating expenses 16,389 15,585 49,446 46,208
Provision for credit losses 7,048 2,632 13,599 8,352
Depreciation of leased assets 2,251 3,172 7,758 9,270
Interest 2,364 3,887 7,126 11,708
------------ ------------ ------------ ------------
Total costs and expenses 28,052 25,276 77,929 75,538
------------ ------------ ------------ ------------
Operating income 14,381 11,591 41,951 33,345
Foreign exchange gain (loss) (25) (9) 2 (41)
------------ ------------ ------------ ------------
Income before provision for income taxes 14,356 11,582 41,953 33,304
Provision for income taxes 4,925 3,937 17,658 11,341
------------ ------------ ------------ ------------
Net income $ 9,431 $ 7,645 $ 24,295 $ 21,963
============ ============ ============ ============
Net income per common share:
Basic $ 0.22 $ 0.18 $ 0.57 $ 0.52
============ ============ ============ ============
Diluted $ 0.22 $ 0.18 $ 0.56 $ 0.51
============ ============ ============ ============
Weighted average shares outstanding:
Basic 42,363,895 41,997,434 42,457,425 42,153,090
Diluted 43,122,046 43,594,725 43,517,380 43,027,573
See accompanying notes to consolidated financial statements.
1
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) AS OF
-------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
ASSETS: (Unaudited)
Cash and cash equivalents $ 12,443 $ 15,773
Investments -- held to maturity 175 173
Automobile loans receivable 795,581 762,031
Allowance for credit losses (5,479) (4,745)
--------- ---------
Automobile loans receivable, net 790,102 757,286
--------- ---------
Floor plan receivables, net 5,261 6,446
Notes receivable, net 8,492 11,167
Investment in operating leases, net 23,222 42,774
Property and equipment, net 20,532 19,646
Other assets 6,080 8,169
--------- ---------
Total Assets $ 866,307 $ 861,434
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Lines of credit $ 96,811 $ 73,215
Secured financing 30,257 122,396
Mortgage note 6,381 6,918
Capital lease obligations 1,029 -
Accounts payable and accrued liabilities 32,496 39,307
Dealer holdbacks, net 361,177 315,393
Deferred income taxes, net 18,059 10,668
Income taxes payable 2,489 5,098
--------- ---------
Total Liabilities 548,699 572,995
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock 417 422
Paid-in capital 107,571 109,000
Retained earnings 209,451 185,156
Accumulated other comprehensive income (loss)-cumulative translation adjustment 169 (6,139)
--------- ---------
Total Shareholders' Equity 317,608 288,439
--------- ---------
Total Liabilities and Shareholders' Equity $ 866,307 $ 861,434
========= =========
See accompanying notes to consolidated financial statements.
2
CREDIT ACCEPTANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2002 2001
--------- ---------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 24,295 $ 21,963
Adjustments to reconcile net cash provided by operating activities:
Provision for credit losses 13,599 8,352
Depreciation 3,719 3,276
Depreciation of leased assets 7,758 9,270
Gain on securitization clean-up - (1,082)
Loss on retirement of property and equipment 276 -
Provision (credit) for deferred income taxes 7,391 (1,455)
Tax benefit from exercise of stock options 1,571 -
Change in operating assets and liabilities:
Accounts payable and accrued liabilities (6,758) 8,762
Income taxes payable (2,609) 7,365
Income taxes receivable - 351
Lease payment receivable 872 (486)
Unearned insurance premiums, insurance reserves and fees (2,314) (467)
Deferred dealer enrollment fees, net (53) 933
Other assets 2,089 (1,360)
--------- ---------
Net cash provided by operating activities 49,836 55,422
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal collected on automobile loans receivable 255,038 228,811
Advances to dealers (223,591) (288,189)
Payments of dealer holdback (25,746) (22,716)
Operating lease acquisitions (874) (21,399)
Deferred costs from lease acquisitions (201) (2,866)
Operating lease liquidations 7,977 8,743
Decreases in floor plan receivables 1,185 1,379
Decrease (increase) in notes receivable 2,675 (4,477)
Purchases of property and equipment (4,881) (4,748)
--------- ---------
Net cash provided by (used in) investing activities 11,582 (105,462)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds under lines of credit, net 23,596 25,146
Proceeds from secured financings 28,551 165,412
Repayments of secured financings (120,690) (107,782)
Net proceeds under capital lease obligation 1,029 -
Repayment of senior notes and mortgage note (537) (8,453)
Repurchase of common stock (6,588) (3,224)
Proceeds from stock options exercised 3,583 1,094
--------- ---------
Net cash (used in) provided by financing activities (71,056) 72,193
--------- ---------
Effect of exchange rate changes on cash 6,308 (1,051)
--------- ---------
Net (decrease) increase in cash and cash equivalents (3,330) 21,102
Cash and cash equivalents, beginning of period 15,773 21,316
--------- ---------
Cash and cash equivalents, end of period $ 12,443 $ 42,418
========= =========
See accompanying notes to consolidated financial statements.
3
CREDIT ACCEPTANCE CORPORATION
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, 2001 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
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain amounts have been reclassified to conform to the 2002 presentation.
The Company changed its accounting methods in the United Kingdom with
respect to certain ancillary products. This change was the result of a complete
review of the Company's revenue recognition policies. This review confirmed the
Company's revenue recognition methods in North America and determined that,
while conservative, the policies relative to ancillary product revenue
recognition in the United Kingdom were inconsistent with those employed in North
America.
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
2. ACCOUNTING STANDARDS
Pursuant to SFAS No. 144, an impairment analysis is performed on the
net asset value of the leasing operation on a quarterly basis. This analysis
compares the undiscounted forecasted future net cash flows relating to the
automobile leasing operation to the net asset value of this operation at the
balance sheet date. Due to the Company's limited experience in the leasing
business, a substantial amount of uncertainty exists in the forecast of the
future net cash flows that will be generated by this operation. Based upon
management's analysis, no write down of the net asset value of the leasing
operation was necessary at September 30, 2002. In future periods, if
management's analysis indicates that future cash flows from the leasing
operation are less than the leasing operation's net asset value, an expense to
reduce the net asset value of the operation will be recorded.
3. AUTOMOBILE LOANS RECEIVABLE
Automobile loans receivable consisted of the following (in thousands):
AS OF
-----------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------- ----------------------
(Unaudited)
Gross automobile loans receivable $ 941,107 $ 906,808
Unearned finance charges (141,596) (138,533)
Unearned insurance premiums, insurance reserves and fees (3,930) (6,244)
--------- ---------
Automobile loans receivable $ 795,581 $ 762,031
========= =========
Non-accrual automobile loans $ 220,050 $ 181,759
========= =========
Non-accrual automobile loans as a percent of total
gross automobile loans 23.4% 20.0%
========= =========
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. AUTOMOBILE LOANS RECEIVABLE - (CONCLUDED)
A summary of changes in gross automobile loans receivable is as follows
(in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
Balance, beginning of period $ 944,170 $ 807,281 $ 906,808 $ 674,402
Gross amount of automobile loans accepted 146,263 200,698 485,164 612,243
Legal and repossession fees 5,366 5,680 17,710 17,711
Gross automobile loans reacquired from securitization - - - 2,918
Cash collections on automobile loans accepted (113,149) (110,853) (351,852) (322,953)
Charge-offs (46,058) (28,392) (127,582) (97,875)
Currency translation 4,515 8,406 10,859 (3,626)
--------------- -------------- --------------- ---------------
Balance, end of period $ 941,107 $ 882,820 $ 941,107 $ 882,820
=============== ============== =============== ===============
A summary of the allowance for credit losses is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
Balance, beginning of period $ 5,028 $ 3,784 $ 4,745 $ 4,640
Provision for loan losses 1,374 537 2,325 537
Charge-offs (952) (127) (1,685) (926)
Currency translation 29 47 94 (10)
--------------- -------------- --------------- ---------------
Balance, end of period $ 5,479 $ 4,241 $ 5,479 $ 4,241
=============== ============== =============== ===============
4. INVESTMENT IN OPERATING LEASES
The composition of net investment in operating leases consisted of the
following (in thousands):
AS OF
--------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------- --------------------
(Unaudited)
Gross leased assets $ 34,100 $ 50,054
Accumulated depreciation (12,624) (11,657)
Gross deferred costs 4,589 6,831
Accumulated amortization of deferred costs (2,808) (2,786)
Lease payments receivable 2,420 3,308
--------------- ---------------
Investment in operating leases 25,677 45,750
Less: Allowance for lease vehicle losses (2,455) (2,976)
--------------- ---------------
Investment in operating leases, net $ 23,222 $ 42,774
=============== ===============
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVESTMENT IN OPERATING LEASES - (CONCLUDED)
A summary of changes in the investment in operating leases is as
follows (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------- --------------- --------------- ---------------
(Unaudited) (Unaudited)
Balance, beginning of period $ 31,526 $ 49,872 $ 45,750 $ 44,944
Gross operating leases originated - 5,105 1,075 24,265
Depreciation of operating leases (2,251) (3,172) (7,758) (9,270)
Lease payments due 3,670 5,664 13,067 16,125
Collections on operating leases (3,506) (4,925) (12,147) (14,171)
Charge-offs (501) (476) (1,792) (1,468)
Operating lease liquidations (3,054) (3,943) (12,571) (12,329)
Currency translation (207) (164) 53 (135)
-------------- --------------- --------------- ---------------
Balance, end of period $ 25,677 $ 47,961 $ 25,677 $ 47,961
============== =============== =============== ===============
A summary of the allowance for lease vehicle losses (in thousands):
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- ---------------
(Unaudited) (Unaudited)
Balance, beginning of period $ 2,280 $ 2,332 $ 2,976 $ 2,023
Provision for lease vehicle losses 1,250 1,688 4,020 4,498
Charge-offs (1,075) (1,256) (4,541) (3,757)
--------------- -------------- --------------- ---------------
Balance, end of period $ 2,455 $ 2,764 $ 2,455 $ 2,764
=============== ============== =============== ===============
5. DEALER HOLDBACKS AND RESERVE FOR ADVANCE LOSSES
Dealer holdbacks consisted of the following (in thousands):
AS OF
----------------------------------------------
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------- ----------------------
(Unaudited)
Dealer holdbacks $ 752,027 $ 721,365
Less: advances (net of reserve of $12,089 and $9,161
at September 30, 2002 and December 31, 2001, respectively) (390,850) (405,972)
---------------- -----------------
Dealer holdbacks, net $ 361,177 $ 315,393
================ =================
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
5. DEALER HOLDBACKS AND RESERVE FOR ADVANCE LOSSES - (CONCLUDED)
A summary of the change in the reserve for advance losses (classified
with net dealer holdbacks in the accompanying balance sheets) is as follows (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2002 2001 2002 2001
-------------- --------------- -------------- ---------------
(Unaudited) (Unaudited)
Balance, beginning of period $ 10,197 $ 8,050 $ 9,161 $ 6,788
Provision for advance losses 4,424 407 7,254 3,317
Charge-offs (2,604) (43) (4,578) (1,557)
Currency translation 72 83 252 (51)
-------------- --------------- -------------- ---------------
Balance, end of period $ 12,089 $ 8,497 $ 12,089 $ 8,497
============== =============== ============== ===============
6. NET INCOME PER SHARE
Basic net income per share has been computed by dividing net income by
the weighted average number of common shares outstanding. Diluted net income per
share has been computed by dividing net income by the total of the weighted
average number of common shares and common stock equivalents outstanding. Common
stock equivalents included in the computation represent shares issuable upon
assumed exercise of stock options that would have a dilutive effect.
7. RELATED PARTY TRANSACTIONS
In the normal course of its business, the Company regularly accepts
assignments of automobile loans originated by affiliated dealer-partners owned
by: (i) the Company's majority shareholder and Chairman; (ii) the Company's
President; and (iii) a member of the Chairman's family. Automobile loans
accepted from these affiliated dealer-partners were approximately $4.1 million
and $15.6 million or 2.8% and 3.2% of total automobile loan originations for the
three and nine months ended September 30, 2002, respectively, and $5.6 million
and $17.3 million or 2.8% of total automobile loan originations for the same
periods in 2001. Automobile loans receivable from affiliated dealer-partners
represented approximately 2.7% and 2.6% of the gross automobile loans receivable
balance as of September 30, 2002 and December 31, 2001, respectively. The
Company accepts automobile loans from affiliated dealer-partners and
nonaffiliated dealer-partners on the same terms. Based upon management's
analysis, the average return on capital on the business originated by affiliated
dealer-partners is currently higher than the average return on capital for
non-affiliated dealer-partners. Affiliated dealer-partners' advances were $10.8
million or 2.2% of total advances and $10.8 million or 2.3% of total advances as
of September 30, 2002 and December 31, 2001, respectively. The Company received
fees for marketing services provided to affiliated dealer-partners owned by the
Company's majority shareholder and Chairman and the Company's President totaling
$6,000 and $33,000 for the three and nine months ended September 30, 2002,
respectively.
The Company receives interest income and fees from: (i) a note
receivable of $1.5 million as of September 30, 2002 and December 31, 2001,
respectively, from the Company's President; and (ii) a working capital loan to
the Company's majority shareholder and Chairman with a balance of zero and
$66,000 as of September 30, 2002 and December 31, 2001, respectively. Total
income earned on the note receivable and working capital loan was $19,000 and
$58,000 for the three and nine months ended September 30, 2002 and $13,000 and
$37,000 for the same periods in 2001.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONCLUDED)
8. INCOME TAXES
The Company's effective tax rate was 34.3% and 42.1% for the three and
nine months ended September 30, 2002 compared to 34.0% and 34.1% for the same
periods in 2001. For the three and nine months ended September 30, 2002, this
increase is primarily due to the amount recorded for additional income taxes
that would be due upon the repatriation of the cumulative undistributed earnings
of the Company's United Kingdom business unit. For the three months ended
September 30, 2002, the increase was also a result of a re-characterization of
the Company's revenue for state tax reporting purposes.
9. BUSINESS SEGMENT INFORMATION
The Company is organized into three primary business segments: the
North America Operation ("North America"), the United Kingdom Operation ("United
Kingdom") and the Automobile Leasing Operation ("Automobile Leasing"). Selected
segment information is set forth below (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
2002 2001 2002 2001
------------- ------------- -------------- --------------
(Unaudited) (Unaudited)
Revenue:
North America $ 31,809 $ 24,898 $ 88,542 $ 73,707
United Kingdom 6,688 5,878 17,132 17,841
Automobile Leasing 3,936 6,091 14,206 17,335
------------- ------------- -------------- --------------
Total revenue $ 42,433 $ 36,867 $ 119,880 $ 108,883
============= ============= ============== ==============
Income before provision for income taxes:
North America $ 10,776 $ 9,054 $ 36,127 $ 28,321
United Kingdom 4,285 3,242 7,897 7,853
Automobile Leasing (705) (714) (2,071) (2,870)
------------- ------------- -------------- --------------
Total income before provision for income taxes $ 14,356 $ 11,582 $ 41,953 $ 33,304
============= ============= ============== ==============
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's business model relies on its ability to forecast loan
performance. The Company's forecasts impact loan pricing and structure as well
as the required reserve for advance losses. The following table presents
forecasted collection rates, advance rates, the spread (the forecasted
collection rate less the advance rate), and the percentage of the forecasted
collections which have been realized through September 30, 2002. The amounts
presented are expressed as a percent of total loan value by year of loan
origination.
September 30, 2002
------------------------------------------------------------------
Forecasted % of Forecast
Year Collection % Advance % Spread % Realized
- --------- ---------------- --------------- -------------- ----------------
1992 81% 35% 46% 100%
1993 75% 37% 38% 100%
1994 62% 42% 20% 100%
1995 56% 46% 10% 99%
1996 56% 49% 7% 98%
1997 59% 49% 10% 98%
1998 68% 50% 18% 98%
1999 72% 54% 18% 94%
2000 72% 53% 19% 83%
2001 69% 49% 20% 50%
The risk of a forecasting error declines as loans age. For example, the
risk of a forecasting error for business written in 1995 is very small, with
98.7% of the total amount forecasted already realized. In contrast, the
Company's forecast for recent loan originations is much less precise. If the
Company produces disappointing operating results, it will likely be because the
Company overestimated future loan performance.
The spread between the forecasted collection rate and the advance rate
reduces the Company's risk of advance losses. Because collections are applied to
advances on an individual dealer-partner basis, a wide spread does not eliminate
the risk of advance losses, but it does reduce them significantly.
The Company first published forecasted collection rates in its 2001
Annual Report. One method for evaluating the reasonableness of the Company's
forecast is to examine the trends in forecasted collection rates over time. The
following table compares the Company's current forecast with the forecast
published at year end.
December 31, 2001 September 30, 2002
Year Forecasted Collection % Forecasted Collection % Variance
- --------- -------------------------- --------------------------- ----------
1992 81% 81% 0%
1993 76% 75% (1%)
1994 62% 62% 0%
1995 56% 56% 0%
1996 57% 56% (1%)
1997 60% 59% (1%)
1998 69% 68% (1%)
1999 73% 72% (1%)
2000 73% 72% (1%)
2001 70% 69% (1%)
During the quarter the Company experienced a decline in loan
performance in North America. The Company believes the decline is temporary and
is primarily due to the installation of a new collection system late in the
second quarter of 2002. However, it is impossible to determine whether external
factors, such as economic conditions, also may have contributed to the decline.
The Company regularly forecasts future collections on its portfolio of loans.
Based on current forecasts, the Company believes that future collections on the
Company's portfolio of loans in North America which were originated prior to the
quarter
9
declined by approximately 5% from approximately $620 million to approximately
$598 million from that expected at the start of the quarter.
The Company believes the new collection system will ultimately provide
operational efficiencies which could not have occurred without the new system.
The Company has identified and corrected a large number of issues which, while
outstanding, very likely had a meaningful impact on recent loan performance.
Provided that future collection results equal the Company's forecast, the
decline will result in a reduction in future finance charges of approximately
$6.0 million in addition to any advance losses which occur. There can be no
assurance that the Company's collections will meet or exceed forecasted amounts.
To the extent that the Company's forecast of future collections continues to
decline, the Company's financial condition and results of operations may be
materially and adversely affected. (Refer to "Results of Operations -- North
America -- Provision for Credit Losses" and "Forward Looking Statements")
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 2001
For purposes of assisting shareholders in interpreting the current and
year to date financial results, the Company presents income statement and
limited balance sheet data on a consolidated basis as well as for the Company's
three operating units, North America, United Kingdom and Automobile Leasing. The
presentation includes the results as reported under generally accepted
accounting principles ("GAAP") and also includes the Company's results after
adjusting for current and prior period items that the Company believes are
important to consider when evaluating the results. The Company's presentation of
financial results and subsequent analysis is based on analyzing the income
statement as a percent of capital invested and are presented on an annualized
basis.
Consolidated
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------------------------- -----------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
------------- ------------ --------------- ------------- ------------- ------------
REVENUE:
Finance charges $ 23,783 $ 23,783 19.0% $ 23,289 $ 23,289 18.1%
Lease revenue 3,614 3,614 2.9 5,728 5,728 4.5
Other income (1) 15,036 8,720 7.0 7,850 7,850 6.1
------------- ------------ -------------- -------------- ------------- ------------
Total revenue 42,433 36,117 28.9 36,867 36,867 28.7
COSTS AND EXPENSES:
Operating expenses (2) 16,389 17,144 13.7 15,585 15,585 12.1
Provision for credit losses (3) 7,048 6,608 5.3 2,632 2,632 2.0
Depreciation of leased assets 2,251 2,251 1.8 3,172 3,172 2.5
Interest 2,364 2,364 1.9 3,887 3,887 3.0
------------- ------------ -------------- -------------- ------------- ------------
Total costs and expenses 28,052 28,367 22.7 25,276 25,276 19.6
------------- ------------ -------------- -------------- ------------- ------------
Operating income 14,381 7,750 6.2 11,591 11,591 9.1
Foreign exchange loss (25) (25) - (9) (9) -
------------- ------------ -------------- -------------- ------------- ------------
Income before provision for income taxes 14,356 7,725 6.2 11,582 11,582 9.1
Provision for income taxes (4) 4,925 2,658 2.1 3,937 3,937 3.1
------------- ------------ -------------- -------------- ------------- ------------
Net income $ 9,431 $ 5,067 4.1% $ 7,645 $ 7,645 6.0%
============= ============ ============== ============= ============= ============
Return on capital ("ROC") (5) 5.3% 7.9%
Weighted average cost of capital ("WACC") (6) 9.6% 9.7%
------------ -------------
Spread (4.3%) (1.8%)
Average capital (7) $ 500,322 $ 513,992
Economic loss (8) $ (5,443) $ (2,301)
Adjusted weighted average shares outstanding (9) 46,964,660 47,062,038
------------ -------------
Economic loss per share (10) $ (0.12) $ (0.05)
10
(Dollars in thousands, except per share data) NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
--------------------------------------------- -----------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
--------------- ------------ -------------- ------------ ------------- ------------
REVENUE:
Finance charges $ 74,190 $ 74,190 19.4% $ 66,183 $ 66,183 18.1%
Lease revenue 13,201 13,201 3.5 16,368 16,368 4.5
Other income (1) 32,489 26,173 6.9 26,332 25,250 6.9
--------------- ------------ -------------- ------------ ------------- -----------
Total revenue 119,880 113,564 29.8 108,883 107,801 29.5
COSTS AND EXPENSES:
Operating expenses (2) 49,446 49,775 13.0 46,208 45,559 12.5
Provision for credit losses (3) 13,599 13,159 3.4 8,352 8,352 2.3
Depreciation of leased assets 7,758 7,758 2.0 9,270 9,270 2.5
Interest 7,126 7,126 1.9 11,708 11,708 3.2
--------------- ------------ -------------- ------------ ------------- -----------
Total costs and expenses 77,929 77,818 20.3 75,538 74,889 20.5
--------------- ------------ -------------- ------------ ------------- -----------
Operating income 41,951 35,746 9.5 33,345 32,912 9.0
Foreign exchange gain (loss) 2 2 - (41) (41) -
--------------- ------------ -------------- ------------ ------------- -----------
Income before credit for income taxes 41,953 35,748 9.5 33,304 32,871 9.0
Provision for income taxes (4) 17,658 12,726 3.3 11,341 11,189 3.1
--------------- ------------ -------------- ------------ ------------- -----------
Net income $ 24,295 $ 23,022 6.2% $ 21,963 $ 21,682 5.9%
=============== ============ ============== ============ ============= ===========
ROC (5) 7.2% 8.0%
WACC (6) 9.5% 10.0%
------------ -------------
Spread (2.3%) (2.0%)
Average capital (7) $ 509,217 $ 487,040
Economic loss (8) $ (8,698) $ (7,243)
Adjusted weighted average shares outstanding (9) 47,058,190 47,217,694
Economic loss per share (10) $ (0.18) $ (0.15)
(1)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported other income $ 15,036 $ 7,850 $ 32,489 $ 26,332
Interest income from Internal Revenue Service (4,810) - (4,810) -
Ancillary product revenue recognition policy change (1,506) - (1,506) -
Gain on securitization related to clean-up call - - - (1,082)
----------- ------------ ------------ -----------
Adjusted other income $ 8,720 $ 7,850 $ 26,173 $ 25,250
=========== ============ ============ ===========
(2)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported operating expense $ 16,389 $ 15,585 $ 49,446 $ 46,208
State tax expense resulting from re-characterization
of income - - 329 -
Executive severance expense - - - (649)
Stock option expense (i) 755 - - -
----------- ------------ ------------ -----------
Adjusted operating expense $ 17,144 $ 15,585 $ 49,775 $ 45,559
=========== ============ ============ ===========
i) Refer to "Stock Options".
(3)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported provision for credit losses $ 7,048 $ 2,632 $ 13,599 $ 8,352
Ancillary product revenue recognition policy change (440) - (440) -
----------- ------------ ------------ -----------
Adjusted provision for credit losses $ 6,608 $ 2,632 $ 13,159 $ 8,352
=========== ============ ============ ===========
11
(4)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported provision for income taxes $ 4,925 $ 3,937 $ 17,658 $ 11,341
United Kingdom repatriation tax expense - - (3,564) -
State tax expense resulting from re-characterization
of income - - 634 -
Tax impact of adjustments described in footnotes (1) - (3) (2,267) - (2,002) (152)
----------- ------------ ------------ -----------
Adjusted provision for income taxes $ 2,658 $ 3,937 $ 12,726 $ 11,189
=========== ============ ============ ===========
(5) Return on capital is equal to net income plus interest expense after
tax divided by average capital.
(6) Weighted average cost of capital is equal to the sum of: (i) the
after-tax cost of debt multiplied by the ratio of average debt to
average capital, plus (ii) the cost of equity multiplied by the ratio
of average equity to average capital. The cost of equity is assumed to
be equal to the 30-year Treasury bond rate plus 6% plus two times the
ratio of the Company's interest bearing debt to equity. For purposes of
computing economic profit, the Company has added to shareholders'
equity as reported under GAAP $34,319,000 and $34,535,000 in the three
and nine months ended September 30, 2002, respectively, and $34,438,000
and $32,904,000 in the three and nine months ended September 30, 2001,
respectively. The amounts added to shareholders' equity represent the
average options outstanding for the period multiplied by the weighted
average exercise price.
(7) Average capital is equal to the average amount of debt and equity
during the period.
(8) Economic loss equals the Spread (ROC minus WACC) multiplied by average
capital.
(9) Includes actual weighted average shares outstanding plus total stock
options outstanding. Differs from shares used for GAAP earnings per
share, which include only a portion of options outstanding.
(10) Economic loss per share equals the economic loss divided by the
adjusted weighted average shares outstanding.
The Company's profitability models indicate that business originated
year to date in 2002 will generate greater returns on capital for the Company
than business originated for the same periods in prior years. The Company's 2002
reported results do not reflect this profitability for reasons discussed in the
North America and United Kingdom sections. The Company's profitability models
are based in part on forecasts of future events. Actual results could differ
materially from these forecasts.
The Company's economic loss increased to ($5,443,000) and ($8,698,000)
or ($0.12) and ($0.18) per adjusted share for the three and nine months ended
September 30, 2002 compared to ($2,301,000) and ($7,243,000) or ($0.05) and
($0.15) per adjusted share for the same periods in 2001. These increases in
economic loss were a result of the decrease in the return on capital to 5.3% and
7.2% for the three and nine months ended September 30, 2002 compared to 7.9% and
8.0% for the same periods in 2001. The decrease in return on capital for the
three months ended September 30, 2002 is primarily the result of a decrease in
the return on capital in North America. The decrease in return on capital for
the nine months ended September 30, 2002 is the result of a decrease in the
return on capital in North America and the United Kingdom. These decreases in
return on capital were partially offset by the lower weighted average cost of
capital, which was a result of lower interest rates during the period.
The results of operations for the Company as a whole are attributable
to changes described in the North America, United Kingdom, and Automobile
Leasing business segments. The following discussion of the results of operations
for interest expense is provided on a consolidated basis, as the explanation is
not meaningful by business segment.
Interest expense. Interest expense, as a percent of average capital,
decreased to 1.9% for the three and nine months ended September 30, 2002 from
3.0% and 3.2% for the same periods in 2001. The decrease in interest expense, as
a percent of average capital, was primarily the result of the decrease in the
weighted average interest rate to 5.7% and 5.3% for the three and nine months
ended September 30, 2002 from 7.5% and 8.4% for the same periods in 2001, which
was the result of a decrease in the average interest rate on the Company's
variable rate debt, including the lines of credit and secured financing, and the
repayment of the senior note debt.
12
North America
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------------------------- --------------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
------------- ------------ --------------- ------------ ------------- ---------------
REVENUE:
Finance charges $ 19,351 $ 19,351 19.8% $ 17,903 $ 17,903 8.7%
Other income (1) 12,458 7,648 7.8 6,995 6,995 7.3
------------- ------------ -------------- ------------ ------------- --------------
Total revenue 31,809 26,999 27.6 24,898 24,898 26.0
COSTS AND EXPENSES:
Operating expenses (2) 14,069 14,824 15.2 12,594 12,594 13.2
Provision for credit losses 5,069 5,069 5.2 735 735 0.8
Interest 1,881 1,881 1.9 2,509 2,509 2.6
------------- ------------ -------------- ------------ ------------- --------------
Total costs and expenses 21,019 21,774 22.3 15,838 15,838 16.6
------------- ------------ -------------- ------------ ------------- --------------
Operating income 10,790 5,225 5.3 9,060 9,060 9.4
Foreign exchange loss (14) (14) - (6) (6) -
------------- ------------ -------------- ------------ ------------- --------------
Income before provision for income taxes 10,776 5,211 5.3 9,054 9,054 9.4
Provision for income taxes (3) 3,978 2,030 2.1 3,214 3,214 3.4
------------- ------------ -------------- ------------ ------------- --------------
Net income $ 6,798 $ 3,181 3.2% $ 5,840 $ 5,840 6.0%
============= ============ ============== ============ ============= ==============
ROC * 4.5% 7.8%
WACC * 9.6% 9.6%
------------ -------------
Spread (5.1%) (1.8%)
Average capital (4) $ 391,392 $ 382,147
Economic loss * $ (4,877) $ (1,664)
Adjusted weighted average shares outstanding * 46,964,660 47,062,038
Economic loss per share * $ (0.10) $ (0.04)
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
-------------------------------------------- --------------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
------------- ------------ --------------- ------------ ------------- ---------------
REVENUE:
Finance charges $ 60,249 $ 60,249 20.5% $ 50,095 $ 50,095 18.8%
Other income (1) 28,293 23,483 8.0 23,612 22,530 8.4
------------- ------------- ------------- ------------- ------------- -------------
Total revenue 88,542 83,732 28.5 73,707 72,625 27.2
COSTS AND EXPENSES:
Operating expenses (2) 41,262 41,591 14.1 36,629 36,629 13.7
Provision for credit losses 6,265 6,265 2.1 1,543 1,543 0.6
Interest 4,887 4,887 1.7 7,177 7,177 2.7
------------- ------------- ------------- ------------- ------------- -------------
Total costs and expenses 52,414 52,743 17.9 45,349 45,349 17.0
------------- ------------- ------------- ------------- ------------- -------------
Operating income 36,128 30,989 10.6 28,358 27,276 10.2
Foreign exchange loss (1) (1) - (37) (37) -
------------- ------------- ------------- ------------- ------------- -------------
Income before provision for income taxes 36,127 30,988 10.6 28,321 27,239 10.2
Provision for income taxes (3) 16,230 11,617 3.9 10,002 9,623 3.6
------------- ------------- ------------- ------------- ------------- -------------
Net income $ 19,897 $ 19,371 6.7% $ 18,319 $ 17,616 6.6%
============= ============= ============= ============= ============= =============
ROC * 7.7% 8.3%
WACC * 9.4% 9.9%
------------- -------------
Spread (1.7%) (1.6%)
Average capital (4) $ 392,419 $ 356,067
Economic loss * $ (4,810) $ (4,190)
Adjusted weighted average shares outstanding * 47,058,190 47,217,694
Economic loss per share * $ (0.10) $ (0.09)
* For further explanation see corresponding footnotes in the Consolidated
section.
(1)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ---------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported other income $ 12,458 $ 6,995 $ 28,293 $ 23,612
Interest income from Internal Revenue Service (4,810) - (4,810) -
Gain on securitization related to clean-up call - - - (1,082)
----------- ------------ ------------ -----------
Adjusted other income $ 7,648 $ 6,995 $ 23,483 $ 22,530
=========== ============ ============ ===========
13
(2)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported operating expense $ 14,069 $ 12,594 $ 41,262 $ 36,629
State tax expense resulting from re-
characterization of income - - 329 -
Stock option expense (i) 755 - - -
----------- ------------ ------------ -----------
Adjusted operating expense $ 14,824 $ 12,594 $ 41,591 $ 36,629
=========== ============ ============ ===========
i) Refer to "Stock Options".
(3)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported provision for income taxes $ 3,978 $ 3,214 $ 16,230 $ 10,002
United Kingdom repatriation tax expense
- - (3,564) -
State tax expense resulting from re-
characterization of income - - 634 -
Tax impact of adjustments described in
footnotes (1) - (2) (1,948) - (1,683) (379)
----------- ------------ ------------ -----------
Adjusted provision for income taxes $ 2,030 $ 3,214 $ 11,617 $ 9,623
=========== ============ ============ ===========
(4) Average capital is equal to the average amount of debt and equity during
the period. For purposes of computing economic profit, the Company has
added to shareholders' equity as reported under GAAP $32,946,000 and
$33,362,000 in the three and nine months ended September 30, 2002,
respectively, and $34,183,000 and $32,802,000 in the three and nine months
ended September 30, 2001, respectively. The amounts added to shareholders'
equity represent the average options outstanding for the period multiplied
by the weighted average exercise price.
Finance charges. Finance charges, as a percent of average capital,
increased to 19.8% and 20.5% for the three and nine months ended September 30,
2002 from 18.7% and 18.8% for the same periods in 2001. The increase was
primarily due to a reduction in the amount advanced to dealer-partners as a
percent of the gross loan amount. This increase was partially offset by an
increase in the percent of non-accrual loans to 22.2% as of September 30, 2002
from 17.7% for the same period in 2001. For the three months ended September 30,
2002 the increase was also partially offset by a decrease in collections on
non-accrual loans.
Other income. Other income, as a percent of average capital, increased
to 7.8% for the three months ended September 30, 2002 from 7.3% for the same
period in 2001. This increase was primarily due to an increase in: (i) revenue
from fees paid by dealer-partners for the use of the Company's internet based
origination system due to an increase in the number of dealer-partners using the
system and (ii) revenue earned from service contract products offered by
dealer-partners. These increases were partially offset by a decrease in (i)
revenue from secured lines of credit offered to certain dealer-partners, due to
the Company beginning to reduce its investment in this product in the third
quarter of 2001.
Other income, as a percent of average capital, decreased to 8.0% for
the nine months ended September 30, 2002 from 8.4% for the same period in 2001.
This decrease was primarily due to a decrease in: (i) premiums earned on the
Company's credit life insurance programs due to a decrease in loan originations;
(ii) premiums earned on the Company's collateral protection program, which was
discontinued in April 2001; and (iii) revenue from secured lines of credit
offered to certain dealer-partners, due to the Company beginning to reduce its
investment in this product in the third quarter of 2001. These decreases were
partially offset by an increase in revenue from fees paid by dealer-partners for
the use of the Company's internet origination system due to an increase in the
number of dealer-partners using the system.
Operating expenses. Operating expenses, as a percent of average
capital, increased to 15.2% and 14.1% for the three and nine months ended
September 30, 2002 from 13.2% and 13.7% for the same periods in 2001. These
increases were primarily due to an increase in the provision for floorplan and
dealer-partner loan losses to $1.8 million and $2.4 million for the three and
nine months ended September 30, 2002 from $900,000 and $1.4 million for the same
periods in 2001. As a percent of average capital, the provision for floorplan
and dealer-partner loan losses increased to 1.8% and 0.8% for the three and nine
months ended September 30, 2002 from 0.9% and 0.5% for the same periods in 2001.
In addition, the increase for the three and nine months ended September 30, 2002
was due to an increase in salaries and wages to $6.0 million and $18.4 million
for the three and nine months ended September 30, 2002 compared to $5.3 million
and $14.3 million for the same periods in 2001. As a percent of average capital,
salaries and wages increased to 6.1% and 6.3% for the three and nine months
ended September 30, 2002 from 5.5% and 5.4% for the same periods in 2001. These
increases were primarily due to increased spending on infrastructure such as
Information Technology, Human Resources, Accounting, Risk, Corporate Legal,
Internal Audit and a new Six Sigma initiative. The Company believes that these
investments will (i) support a much larger organization and (ii) enable the
Company to achieve its long-term return on capital goals.
14
As of September 30, 2002, the Company had $12.2 million of floorplan
and dealer-partner loans outstanding. The Company has significantly reduced its
investment in floorplan and dealer loan portfolios since the start of 2002 after
concluding such businesses were not likely to generate acceptable returns on
capital. The Company intends to continue to work to reduce the amount of capital
committed to these businesses.
Provision for credit losses. Provision for credit losses, as a percent
of average capital, increased to 5.2% and 2.1% for the three and nine months
ended September 30, 2002 from 0.8% and 0.6% for the same periods in 2001. The
provision for credit losses consists of two components: (i) a provision for
losses on advances to dealer-partners that are not expected to be recovered
through collections on the related automobile loan portfolio and (ii) a
provision for earned but unpaid revenue on automobile loans which were
transferred to non-accrual status during the period. The increases in the
provision for credit losses, as a percent of average capital, for the three and
nine months ended September 30, 2002 compared the three and nine months ended
September 30, 2001 were primarily due to: (i) an increase in the provision for
advance losses due to a reduction in forecasted future collections which the
Company believes is primarily the result of deterioration in collection results
relating to the installation of a new collection system late in the second
quarter of 2002 and (ii) an increase in the provision for earned but unpaid
revenue due to an increase in the percent of non-accrual loans to 22.2% as of
September 30, 2002 from 17.7% for the same period in 2001.
Additional reductions in the Company's forecast of future collections
will create increased provisions for losses on advances. Should the Company
experience a similar decline in its forecast in the fourth quarter of 2002, an
additional provision for advance losses of approximately $4.5 million would be
required in the fourth quarter. A decline in the Company's forecast of this
magnitude in both the fourth quarter of 2002 and the first quarter of 2003 would
result in increased provisions for advance losses of approximately $13.0
million.
Provision for income taxes. The provision for income taxes, as a
percent of average capital, decreased to 2.1% for the three months ended
September 30, 2002 from 3.4% for the same period in 2001 as a result of a
decrease in pre-tax profitability. This decrease was partially offset by an
increase in the effective tax rate to 39.0% for the three months ended September
30, 2002 from 35.5% for the same period in 2001 as a result of the amount
recorded for additional income taxes that would be due upon the repatriation of
the cumulative undistributed earnings of the Company's United Kingdom business
unit. The provision for income taxes, as a percent of average capital, increased
to 3.9% for the nine months ended September 30, 2002 from 3.6% for the same
period in 2001 as a result of an increase in pre-tax profitability. To a lesser
extent, the increase for the nine months ended September 30, 2002 was due to an
increase in the effective tax rate due to the amount recorded for additional
income taxes that would be due upon the repatriation of the cumulative
undistributed earnings of the Company's United Kingdom business unit.
The Company has completed a restructuring of certain subsidiaries,
which may result in a lower effective tax rate. Since the reduction in the
effective tax rate is contingent upon the completion of certain events, the
Company has not recorded a benefit relating to this restructuring. Once the
contingencies are satisfied, the tax benefit from the restructuring will be
recognized. Recognition of this benefit may have a material favorable impact on
the Company's results of operations.
Return on capital. The return on capital decreased to 4.5% and 7.7% for
the three and nine months ended September 30, 2002 from 7.8% and 8.3% for the
same periods in 2001. This decrease was primarily due to: (i) an increase in the
provision for credit losses, as a percent of average capital, and (ii) an
increase in operating expenses, as a percent of average capital, as described
above.
Average capital. Average capital increased to $391.4 million and $392.4
million for the three and nine months ended September 30, 2002 from $382.1
million and $356.1 million for the same periods in 2001, representing increases
of 2.4% and 10.2%. The increase was a result of increased loan origination
volumes in 2001. While loan origination volumes declined 21.0% and 12.9% during
the three and nine months ended September 30, 2002 compared to the same periods
in 2001, loan origination volumes increased significantly in 2001. The following
is a summary of loan origination volumes and dealer-partner information over the
past three years and the interim periods of 2002 and 2001:
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------- -------- -------- --------------------- ----------------------
1999 2000 2001 2001 2002 2001 2002
--------- -------- -------- -------- -------- -------- --------
Originations $386,713 $384,743 $659,485 $173,708 $137,190 $515,947 $449,188
Number of loans originated 47,759 47,620 62,675 15,329 11,746 50,168 39,838
Dealer-partners:
Number of active dealer-partners (1) 1,236 1,202 1,170 848 588 1,121 779
Loans per active dealer-partner 38.6 39.6 53.6 18.1 20.0 44.8 51.1
Average loan size $ 8.1 $ 8.1 $ 10.5 $ 11.3 $ 11.7 $ 10.3 $ 11.3
(1) Active dealer-partners are dealer-partners who submitted at least one
loan during the period.
15
The reduction in loan origination volume in North America was a result
of the Company's increased focus on improving the return on capital. As a
result, the Company has experienced reduced loan originations due to a reduction
in the number of active dealer-partners, partially offset by an increase in the
number of loans per active dealer-partner. The reduction in active
dealer-partners was primarily due to the Company exiting dealer-partner
relationships that did not meet its return on capital goals. This occurred most
dramatically in the fourth quarter of 2001 and first quarter of 2002. The number
of active dealer-partners remained relatively constant during the second and
third quarters of 2002.
The Company's profitability models indicate that business originated
year to date in 2002 will generate greater returns on capital for the Company
than business originated for the same periods in prior years. The Company's 2002
reported results do not reflect this profitability due to: (i) the Company's
reported results reflecting the profitability of the Company's portfolio of
automobile loans which includes both 2002 originations and less profitable loans
originated prior to 2002, (ii) the reported results including losses from
businesses which the Company is exiting or reducing its investment in, (iii) the
impact of the collection system conversion, which the Company believes will not
have a long term adverse impact on the Company's results, and (iv) investments
which the Company has made in corporate infrastructure which have produced very
little short term financial benefit but are necessary to enable the Company to
meet its long term goals.
The Company has recently shifted from primarily focusing on the return
on capital to an effort to improve both returns and volume simultaneously. The
Company intends to continue to be disciplined with respect to terminating its
relationship with unprofitable dealer-partners. Loan origination growth in
future periods will occur only if return on capital objectives are being met.
16
United Kingdom
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------------------------------- --------------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
------------ ------------ --------------- ------------- ------------ ---------------
REVENUE:
Finance charges $ 4,432 $ 4,432 20.4 % $ 5,386 $ 5,386 22.4 %
Other income (1) 2,256 750 3.5 492 492 2.0
------------ ------------ --------------- ------------- ------------ ---------------
Total revenue 6,688 5,182 23.9 5,878 5,878 24.4
COSTS AND EXPENSES:
Operating expenses 1,587 1,587 7.3 1,851 1,851 7.7
Provision for credit losses (3) 728 288 1.3 209 209 0.9
Interest 87 87 0.4 576 576 2.4
------------ ------------ --------------- ------------- ------------ ---------------
Total costs and expenses 2,402 1,962 9.0 2,636 2,636 11.0
------------ ------------ --------------- ------------- ------------ ---------------
Operating income 4,286 3,220 14.9 3,242 3,242 13.4
Foreign exchange loss (1) (1) - - - -
------------ ------------ --------------- ------------- ------------ ---------------
Income before credit for income taxes 4,285 3,219 14.9 3,242 3,242 13.4
Provision for income taxes (4) 1,215 896 4.1 964 964 4.0
------------ ------------ --------------- ------------- ------------ ---------------
Net income $ 3,070 $ 2,323 10.8 % $ 2,278 $ 2,278 9.4 %
============ ============ =============== ============= ============ ===============
ROC * 11.0% 11.1%
WACC * 10.3% 10.4%
------------ ------------
Spread 0.7% 0.7%
Average capital (5) $ 86,869 $ 96,309
Economic profit * $ 140 $ 190
Adjusted weighted average shares outstanding * 46,964,660 47,062,038
Economic profit per share * $ 0.00 $ 0.00
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------------------------------- --------------------------------------------
REPORTED ADJUSTED % OF CAPITAL REPORTED ADJUSTED % OF CAPITAL
------------ ------------ --------------- ------------- ------------ ---------------
REVENUE:
Finance charges $ 13,941 $ 13,941 21.1% $ 16,088 $ 16,088 22.6%
Other income (1) 3,191 1,685 2.5 1,753 1,753 2.5
------------- ------------ --------------- ------------ ------------- -----------
Total revenue 17,132 15,626 23.6 17,841 17,841 25.1
COSTS AND EXPENSES:
Operating expenses (2) 5,361 5,361 8.1 5,974 5,325 7.5
Provision for credit losses (3) 3,234 2,794 4.2 2,311 2,311 3.2
Interest 642 642 1.0 1,703 1,703 2.4
------------- ------------ --------------- ------------ ------------- -----------
Total costs and expenses 9,237 8,797 13.3 9,988 9,339 13.3
------------- ------------ --------------- ------------ ------------- -----------
Operating income 7,895 6,829 10.3 7,853 8,502 12.0
Foreign exchange gain 2 2 - - - -
------------- ------------ --------------- ------------ ------------- -----------
Income before credit for income taxes 7,897 6,831 10.3 7,853 8,502 12.0
Provision for income taxes (4) 2,206 1,887 2.8 2,346 2,573 3.6
------------- ------------ --------------- ------------ ------------- ----------
Net income $ 5,691 $ 4,944 7.5% $ 5,507 $ 5,929 8.4%
============= ============ ============== ============ ============= ===========
ROC * 8.1% 10.0%
WACC * 10.5% 10.3%
------------ -------------
Spread (2.4%) (0.3%)
Average capital (5) $ 88,299 $ 95,019
Economic loss * $ (1,562) $ (247)
Adjusted weighted average shares outstanding * 47,058,190 47,217,694
Economic loss per share * $ (0.03) $ (0.01)
* For further explanation see corresponding footnotes in the Consolidated
section.
(1)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported other income $ 2,256 $ 492 $ 3,191 $ 1,753
Ancillary product revenue recognition
policy change (1,506) - (1,506) -
----------- ------------ ------------ -----------
Adjusted other income $ 750 $ 492 $ 1,685 $ 1,753
=========== ============ ============ ===========
17
(2)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported operating expense $ 1,587 $ 1,851 $ 5,361 $ 5,974
Executive severance expense - - - (649)
----------- ------------ ------------ -----------
Adjusted operating expense $ 1,587 $ 1,851 $ 5,361 $ 5,325
=========== ============ ============ ===========
(3)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported provision for credit losses $ 728 $ 209 $ 3,234 $ 2,311
Ancillary product revenue recognition
policy change (440) - (440) -
----------- ------------ ------------ -----------
Adjusted provision for credit losses $ 288 $ 209 $ 2,794 $ 2,311
=========== ============ ============ ===========
(4)
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ------------ ------------ -----------
Reported provision for income taxes $ 1,215 $ 964 $ 2,206 $ 2,346
Tax impact of adjustments described in
footnotes (1) - (3) (319) - (319) 227
----------- ------------ ------------ -----------
Adjusted provision for income taxes $ 896 $ 964 $ 1,887 $ 2,573
=========== ============ ============ ===========
(5) Average capital is equal to the average amount of debt and equity during
the period. For purposes of computing economic profit, the Company has
added to shareholders' equity as reported under GAAP $1,373,000 and
$1,173,000 in the three and nine months ended September 30, 2002,
respectively, and $255,000 and $102,000 in the three and nine months ended
September 30, 2001, respectively. The amounts added to shareholders' equity
represent the average options outstanding for the period multiplied by the
weighted average exercise price.
Finance charges. Finance charges, as a percent of average capital,
decreased to 20.4% and 21.1% for the three and nine months ended September 30,
2002 from 22.4% and 22.6% for the same periods in 2001. This decrease was
primarily due to an increase in the percent of non-accrual loans to 29.3% as of
September 30, 2002 from 20.4% for the same period in 2001 due to a reduction in
automobile loan originations in 2002.
Other income. Other income, as a percent of average capital, increased
to 3.5% for the three months ended September 30, 2002 from 2.0% for the same
period in 2001. This increase, as a percent of average capital, was due
primarily to an increase in revenue under an ancillary products profit sharing
agreement with an insurance provider. Other income, as a percent of average
capital, remained consistent at 2.5% for the nine months ended September 30,
2002 compared to the same period in 2001.
Operating Expenses. Operating expenses, as a percent of average
capital, decreased to 7.3% for the three months ended September 30, 2002 from
7.7% for the same period in 2001. This decrease was due primarily to a decrease
in salaries and wages, as a percent of average capital. Operating expenses, as a
percent of average capital, increased to 8.1% for the nine months ended
September 30, 2002 from 7.5% for the same period in 2001. This increase was
primarily due to: (i) an increase in unrecoverable value added tax expense due
to the timing of refunds and (ii) an increase in legal expense due to additional
fees relating to the restructuring of legal entities within this business
segment in 2001.
Provision for credit losses. Provision for credit losses, as a percent
of average capital, increased to 1.3% and 4.2% for the three and nine months
ended September 30, 2002 from 0.9% and 3.2% for the same periods in 2001. The
provision for credit losses consists of two components: (i) a provision for
losses on advances to dealer-partners that are not expected to be recovered
through collections on the related automobile loan portfolio; and (ii) a
provision for earned but unpaid revenue on automobile loans which were
transferred to non-accrual status during the period. The increases in the
provision for the three and nine months ended September 30, 2002 were primarily
due to an increase in the provision for losses on advances to dealer-partners.
The increase in advance provisions was due to the deterioration in credit
quality of loans originated in 2001. As a result of this deterioration, the
Company stopped originating automobile loans in Ireland and decreased the amount
advanced to dealer-partners in the United Kingdom.
Provision for income taxes. The provision for income taxes, as a
percent of average capital, remained relatively consistent at 4.1% for the three
months ended September 30, 2002 compared to 4.0% for the same period in 2001.
The provision for income taxes, as a percent of average capital, decreased to
2.8% for the nine months ended September 30, 2002 from 3.6% for
18
the same period in 2001 due primarily to a decrease in pre-tax profitability for
the nine months ended September 30, 2002 compared to the same period in 2001.
Refer to "North America - Provision for income taxes"
Return on capital. The return on capital decreased to 11.0% and 8.1%
for the three and nine months ended September 30, 2002 from 11.1% and 10.0% for
the same periods in 2001. These decreases were primarily due to a reduction in
finance charge revenue, as a percent of average capital, as described above.
Average capital. Average capital decreased to $86.9 million and $88.3
million for the three and nine months ended September 30, 2002 from $96.3
million and $95.0 million for the same periods in 2001, representing decreases
of 9.8% and 7.1%, respectively. The decrease in average capital was a result of
decreased loan origination volumes. As a result, the United Kingdom has repaid
its outstanding debt and has begun to repatriate previously undistributed
earnings to North America. The following is a summary of loan origination
volumes and dealer-partner information over the past three years and for the
interim periods of 2002 and 2001:
(Dollars in thousands) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- ---------------------- ---------------------
1999 2000 2001 2001 2002 2001 2002
-------- -------- -------- -------- -------- -------- --------
Originations $121,999 $142,228 $122,817 $ 26,990 $ 9,073 $ 96,296 $ 35,976
Number of loans originated 9,432 10,664 9,121 1,938 605 7,201 2,560
Dealer-partners:
Number of active dealer-partners (1) 196 205 215 126 69 204 138
Loans per active dealer-partner 48.1 52.0 42.4 15.4 8.8 35.3 18.6
Average loan size $ 12.9 $ 13.3 $ 13.5 $ 13.9 $ 15.0 $ 13.4 $ 14.1
(1) Active dealer-partners are dealer-partners who submitted at least
one loan during the period.
The reduction in loan origination volume for the three and nine months
ended September 30, 2002 was a result of the Company's increased focus on
improving return on capital. To improve the United Kingdom's return on capital
the Company has increased the spread between the advance rate and the forecasted
collection rate and stopped accepting business from a large dealer group whose
business did not meet the Company's return on capital objectives. In order for
these changes to result in improved returns on capital, increased unit volume
will be required in order to absorb fixed operating expenses.
19
Automobile Leasing
(Dollars in thousands, except per share data) THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------------------------ -----------------------------------
REPORTED % OF CAPITAL REPORTED % OF CAPITAL
--------------- ---------------- --------------- ---------------
REVENUE:
Lease revenue $ 3,614 65.5 % $ 5,728 64.5
Other income 322 5.8 363 4.1
--------------- ---------------- --------------- ----------------
Total revenue 3,936 71.3 6,091 68.6
COSTS AND EXPENSES:
Operating expenses 733 13.3 1,140 12.8
Provision for credit losses 1,251 22.7 1,688 19.0
Depreciation of leased assets 2,251 40.8 3,172 35.7
Interest 396 7.2 802 9.0
--------------- ---------------- --------------- ----------------
Total costs and expenses 4,631 84.0 6,802 76.5
--------------- ---------------- --------------- ----------------
Operating loss (695) (12.7) (711) (7.9)
Foreign exchange loss (10) (0.2) (3) -
--------------- ---------------- --------------- ----------------
Loss before credit for income taxes (705) (12.9) (714) (7.9)
Credit for income taxes (268) (4.9) (241) (2.7)
--------------- ---------------- --------------- ----------------
Net loss $ (437) (8.0) % $ (473) (5.2) %
=============== ================ =============== ================
ROC * (3.3%) 0.6%
WACC* 9.5% 9.9%
--------------- ---------------
Spread (12.8%) (9.3%)
Average capital * $ 22,061 $ 35,536
Economic loss * $ (706) $ (827)
Adjusted weighted average shares outstanding * 46,964,660 47,062,038
Economic loss per share* $ (0.02) $ (0.02)
(Dollars in thousands, except per share data) NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
2002 2001
------------------------------------ -----------------------------------
REPORTED % OF CAPITAL REPORTED % OF CAPITAL
--------------- ---------------- --------------- ---------------
REVENUE:
Lease revenue $ 13,201 61.8 % $ 16,368 60.7 %
Other income 1,005 4.7 967 3.6
--------------- ---------------- --------------- ---------------
Total revenue 14,206 66.5 17,335 64.3
COSTS AND EXPENSES:
Operating expenses 2,823 13.2 3,605 13.4
Provision for credit losses 4,100 19.2 4,498 16.7
Depreciation of leased assets 7,758 36.3 9,270 34.4
Interest 1,597 7.5 2,828 10.5
--------------- ---------------- --------------- ---------------
Total costs and expenses
16,278 76.2 20,201 75.0
--------------- ---------------- --------------- ---------------
Operating loss (2,072) (9.7)