CREDIT ACCEPTANCE CORPORATION - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THIS FISCAL YEAR ENDED DECEMBER 31, 2002

COMMISSION FILE NUMBER 000-20202
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CREDIT ACCEPTANCE CORPORATION
(Exact Name of Registrant as Specified in its Charter)

MICHIGAN 38-1999511
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

25505 W. TWELVE MILE ROAD, SUITE 3000 48034-8339
SOUTHFIELD, MICHIGAN (Zip Code)
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(248) 353-2700

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK

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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ]

The aggregate market value of 12,362,864 shares of the Registrant's common
stock held by non-affiliates on June 28, 2002 was approximately $155,401,200.
For purposes of this computation all officers, directors and 10% beneficial
owners of the Registrant are assumed to be affiliates. Such determination should
not be deemed an admission that such officers, directors and beneficial owners
are, in fact, affiliates of the Registrant.

At February 28, 2003 there were 42,331,615 shares of the Registrant's
Common Stock issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement pertaining to the
2003 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to
Regulation 14A are incorporated herein by reference into Part III.
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CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2002

INDEX TO FORM 10-K

1

PART I

ITEM 1. BUSINESS

GENERAL

Credit Acceptance Corporation (the "Company" or "Credit Acceptance"),
incorporated in Michigan in 1972, is a financial services company specializing
in products and services for a network of automobile dealers. Credit Acceptance
provides participating dealers with financing sources for consumers with limited
access to credit by offering "guaranteed credit approval." The Company delivers
credit approvals through the Internet. Other services include marketing, sales
training and a wholesale purchasing cooperative. Through its financing program,
Credit Acceptance helps consumers change their lives by providing an opportunity
to strengthen and reestablish their credit standing by making timely monthly
payments. The Company refers to participating dealers who share its commitment
to changing customers' lives as "dealer-partners."

Credit Acceptance was founded to service and collect retail installment
contracts (referred to as "Contracts" or "Loans") originated and funded by
automobile dealerships owned by the Company's founder and current Chairman,
Donald Foss. During the 1980's, the Company began to market this service to non-
affiliated dealers and, at the same time, began to offer financing in the form
of a cash payment to the dealer-partner (an "advance") secured by the future
collections on the Loans serviced for that dealer-partner. Today, the Company's
program is offered in the United States, Canada and the United Kingdom.

The Company's Internet address is www.creditacceptance.com. The Company
makes available, free of charge on the web site, copies of reports it files with
the Securities and Exchange Commission as soon as reasonably practicable after
the Company electronically files such reports.

PRINCIPAL BUSINESS

A customer who does not qualify for conventional automobile financing can
purchase a vehicle from a Credit Acceptance dealer-partner and finance the
purchase through the Company. As payment for the vehicle the dealer-partner
receives the following:

(i) a down payment from the customer;

(ii) a cash advance from the Company; and

(iii) after the advance has been recovered, the cash from payments
made on the Loan, net of certain collection costs and the
Company's servicing fee.

The Company's servicing fee is equal to a fixed percentage (typically 20%) of
each payment collected. In addition, the Company receives fees for other
products and services. Customers and dealer-partners benefit as follows:

Customers. The Company helps change the lives of customers who do not
qualify for conventional automobile financing by helping them obtain quality
transportation and, equally important, rehabilitate their credit through the
timely repayment of their Loan.

Dealer-Partners. The Company's program increases dealer-partners' profits
in the following ways:

- The Company enables dealer-partners to sell cars to customers who may not
be able to obtain financing without the Company's program. In addition,
customers often become repeat customers by financing future vehicle
purchases either through the Company's program or, after they have
successfully rehabilitated their credit, through conventional financing.

- The ability to advertise "guaranteed credit approval" attracts many
customers who mistakenly assume they do not qualify for conventional
financing, but who can actually qualify.

- The customers attracted to dealer-partners by "guaranteed credit
approval" often use other services the dealerships offer and refer
friends and relatives to them.

2

- As part of the Company's unique business model, dealer-partners share in
the profits not only from the sale of the vehicle, but also from its
financing.

The Company is organized into three primary business segments: North
America, United Kingdom and Automobile Leasing. In early 2002, the Company
stopped originating automobile leases and is in the process of liquidating the
lease portfolio. See Note 12 to the consolidated financial statements for
information regarding the Company's reportable segments.

Credit Acceptance derives its revenues from the following principal
sources:

(i) servicing fees (recorded as finance charges) earned as a result of
servicing Loans originated and assigned to the Company by
dealer-partners;

(ii) lease revenue from investments in operating leases; and

(iii) other income, which primarily consists of fees earned from the
Company's third party service contract programs, premiums earned
on service contract and credit life insurance programs, monthly
fees from the Internet origination system, interest income and
fees from loans made directly to dealer-partners for floor plan
financing and working capital purposes, revenue from secured
line of credit loans offered to certain dealer-partners, and
fees charged to dealer-partners at the time they enroll in the
Company's program.

The following table sets forth the percent relationship to total revenue of
each of these sources.

The Company's business is seasonal with peak Loan originations occurring
during February and March. However, this seasonality does not have a material
impact on the Company's interim results.

OPERATIONS

NORTH AMERICA AND UNITED KINGDOM

Sales and Marketing. The Company's target market is a select group of the
more than 90,000 independent and franchised automobile dealers in the United
States, Canada, and the United Kingdom. The Company's market development process
identifies high quality dealers in each geographic market and limits the number
of automobile dealers in each geographic market that can participate in the
Company's program. The selective marketing of the Company's program is intended
to: (i) result in a network consisting of the highest quality dealer-partners
who share the Company's commitment to changing lives; and (ii) increase the
value of the Company's program to the Company's dealer-partners. Dealer-partners
pay a one time enrollment fee to join the Company's program. A new
dealer-partner is required to execute a Servicing Agreement, which defines the
legal relationship between the Company and the dealer-partner.

Under the typical Servicing Agreement, a dealer-partner represents that it
will only submit Loans to Credit Acceptance which satisfy criteria established
by the Company, meet certain conditions with respect to the binding nature and
the status of the security interest in the purchased vehicle, and comply with
applicable state, federal and foreign laws and regulations. Dealer-partners
receive a monthly statement from the Company, summarizing all transactions on
Loans originated by such dealer-partner.

3

The typical Servicing Agreement may be terminated by the Company or by the
dealer-partner upon written notice. The Company may terminate the Servicing
Agreement immediately in the case of an event of default by the dealer-partner.
Events of default include, among other things:

(i) the dealer-partner's failure to perform or observe covenants in the
Servicing Agreement;

(ii) the dealer-partner's breach of a representation in the Servicing
Agreement;

(iii) a misrepresentation by the dealer-partner relating to a Loan
submitted to the Company; or

(iv) the appointment of a receiver for, or the bankruptcy or insolvency
of, the dealer-partner.

While a dealer-partner can cease submitting Loans to the Company at any
time without terminating the Servicing Agreement, if the dealer-partner elects
to terminate the Servicing Agreement or in the event of a default, the
dealer-partner must immediately pay the Company:

(i) any unreimbursed collection costs;

(ii) any unpaid advances and all amounts owed by the dealer-partner to
the Company; and

(iii) a termination fee equal to 20% of the then outstanding amount of
the Loans accepted by the Company.

Upon receipt in full of such amounts, the Company will reassign the Loan
receivable and its security interest in the financed vehicle to the
dealer-partner. In the event of a termination by the Company (or any other
termination if the Company and the dealer-partner agree), the Company may
continue to service Loans accepted prior to termination in the normal course of
business without charging a termination fee.

Loan Origination. Once a dealer-partner has enrolled in the Company's
program, the dealer-partner may begin submitting Loans to the Company for
approval and funding. In North America, applications are submitted to the
Company either by facsimile or through the Company's Internet based Credit
Application Processing System ("CAPS"). CAPS was installed on a pilot basis in
August 2000 and was offered to all dealer-partners located in the United States
beginning in January 2001. In 2002, approximately 88.1% of the Company's Loans
were approved through CAPS. CAPS allows dealer-partners to input a credit
application and view the response from the Company on-line. CAPS, which is
patent pending, allows dealer-partners to: (i) receive an approval from the
Company much faster than with traditional methods; and (ii) interact with the
Company's credit scoring system to improve the structure of each transaction
prior to delivery. Applications not submitted through CAPS receive a response
from the Company via facsimile. All responses include the amount of the advance,
as well as any stipulations required for funding. The amount of the advance is
determined by the Company's proprietary credit score, which considers data
contained in the customer's credit application, the customer's credit bureau
report, the structure of the proposed transaction, and vehicle information.

CAPS interfaces with the Company's application and contract system ("ACS").
ACS has been used by the Company to originate Loans in North America since May
1997. Loan information is entered into ACS either manually or through a download
from CAPS. ACS provides credit scoring capability as well as the ability to
process Loan packages. ACS compares Loan data against information provided
during the approval process and allows the funding analyst to check that all
stipulations have been met prior to funding. The Company's credit scoring system
predicts the probability of default based upon the historical performance of
Loans in the Company's portfolio that share similar characteristics. The
performance of the credit scoring system is evaluated monthly by comparing
projected to actual Loan performance. Adjustments are made to the credit scoring
system when necessary.

In 2002, the United Kingdom utilized a manual Loan origination process that
mirrors automated processes utilized in North America. In January 2003, the
United Kingdom implemented a credit scoring system and began offering an on-line
application system ("OASYS"), which is similar to CAPS in North America, to
dealer-partners.

4

As advances are originated, they are automatically assigned to the
originating dealer-partner's open pool of advances. Periodically, pools are
closed and subsequent advances are assigned to a new pool. All advances due from
a dealer-partner are secured by the future collections on the dealer-partner's
portfolio of Loans. Collections on all related Loans within the pool, after
payment of the Company's servicing fee and reimbursement of certain collection
costs, are applied to reduce the aggregate advance balance owing against those
Loans. Once the advance balance has been repaid, the dealer-partner is entitled
to receive future collections from Loans within that pool, after payment of the
Company's servicing fee and reimbursement of certain collection costs. The
Company's acceptance of Loans is generally without recourse to the general
assets of the dealer-partner. Each advance to a dealer-partner is secured by a
lien on the financed vehicle.

Upon acceptance of the Loan, the Company records the gross amount of the
Loan as a gross Loan receivable and the amount of its servicing fee as an
unearned finance charge which, for balance sheet purposes, is netted from the
gross amount of the Loan. The Company records the remaining portion of the Loan
(the gross amount of the Loan less the unearned finance charge) as a dealer
holdback. For balance sheet purposes, dealer holdbacks are shown net of the
current advance balance.

Information on the Company's Loan originations for each of the last five
years is presented in the following table:

Servicing and Collections. In North America, the Company's
pre-repossession collectors are organized into teams. The Company's first
payment miss team services Loans of customers who have failed to make one of
their first three payments on time. A collection call is generally placed to
these customers three days after the payment is due. Once a customer has made
their first three payments, a regional collection team services their Loan.
Regional teams service all Loans originated by dealer-partners within their
geographic area. The Company has implemented an incentive system to encourage
collectors to collect the full amount due and eliminate the delinquency on Loans
assigned to their team. Collectors may recommend repossession of the vehicle
based on a variety of factors including the amount of the delinquency and the
estimated value of the vehicle. All recommendations are approved by a collection
team supervisor.

When a Loan is approved for repossession, the account is transferred to the
repossession department. Repossession personnel continue to service the Loan as
it is being assigned to a third party repossession agent, who works on a
contingency fee basis. Once a vehicle has been repossessed, the customer can
negotiate a redemption with the Company, whereby the vehicle is returned to the
customer in exchange for paying off the Loan balance, or where appropriate or if
required by law, the vehicle is returned to the customer and the Loan
reinstated, in exchange for reducing or eliminating the past due balance. If the
redemption process is not successful, the vehicle is shipped to a wholesale
automobile auction and scheduled for sale. Prior to sale, the vehicle is usually
inspected by the Company's remarketing representatives who authorize repair and
reconditioning work in order to increase the sale proceeds at auction.

If the vehicle sale proceeds are not sufficient to satisfy the balance
owing on the Loan, the Loan is assigned either to: (i) the Company's senior
collection team, in the event that the customer is willing to make payments on
the deficiency balance; or (ii) the Company's legal team, if it is believed that
legal action is required to reduce the deficiency balance owing on the Loan. The
Company's legal team assigns Loans to third party collection attorneys who file
a claim and upon obtaining a judgment, garnish wages or other assets.

5

Collectors rely on two systems to service accounts in North America, the
Collection System ("CS") and the Loan Servicing system ("LSS"). LSS and CS are
connected through a batch interface. The present CS has been in service since
June 2002. The system interfaces with a predictive dialer and records all
activity on a Loan, including details of past phone conversations with the
customer, collection letters sent, promises to pay, broken promises,
repossession orders and collection attorney activity. LSS was installed in 1997.
The system maintains a record of all transactions relating to Loans originated
after July 1990 and is the primary source of management reporting including data
utilized to:

(i) evaluate the Company's proprietary credit score;

(ii) forecast future collections;

(iii) establish the Company's reserve for advance losses; and

(iv) analyze the profitability of the Company's program.

The Company utilizes one major computer system in the United Kingdom that
combines functionality included in LSS and CS. The collection process is less
automated in the United Kingdom than in North America. The system in the United
Kingdom provides data utilized to:

(i) forecast future collections;

(ii) establish the Company's reserve for advance losses; and

(iii) analyze the profitability of the Company's program.

ANCILLARY PRODUCTS AND OTHER SERVICES

Service Contracts and Insurance Products. In North America, the Company
maintains relationships with certain insurance carriers which provide
dealer-partners the ability to offer customers credit life and disability
insurance. Should the consumer elect to purchase this insurance, the premium on
the insurance policy is added to the amount due under the Loan and to the
advance balance. The Company is not involved in the actual sale of the
insurance; however, the insurance carrier cedes the premiums, less a fee, to a
wholly-owned subsidiary of the Company, which reinsures the coverage under the
policy. As a result, the Company, through its subsidiary, bears the risk of
loss, and earns revenues from premiums ceded and the investment of such funds.

The Company also provides North American dealer-partners the ability to
offer a service contract product to customers through a wholly-owned subsidiary.
In states that do not consider service contracts to be insurance products or
require they be backed by a contractual liability insurance policy, the service
contract is written directly through a wholly-owned subsidiary. The
administration of this program has been subcontracted to a third party
experienced in administering such programs. The Company, through its subsidiary,
bears all risk of loss relating to claims. In states that regulate service
contracts as insurance, or require that they be insured by a contractual
liability insurance policy, the Company, through its wholly-owned subsidiary,
contracted with an independent third party qualified to issue such service
contracts, to offer dealer-partners the ability to offer customers service
contracts. These service contracts are written by this independent third party,
however, the Company, through its subsidiary, bears all risk of loss relating to
claims. In each case, the premium on the service contract is added to the amount
due under the Loan. The cost of the service contract, plus a commission earned
by the dealer-partner on the sale of the service contract is added to the
advance balance.

Additionally, the Company provides North American dealer-partners the
ability to offer a third party service contract program. Under this program, the
premium on the service contract is added to the amount due under the Loan. The
cost of the service contract, plus a commission earned by the dealer-partner on
the sale of the service contract is added to the advance balance. A portion of
the amount added to the advance balance is retained by the Company as a fee. The
third party bears all of the risk of loss on claims relating to these service
contracts.

6

In the United Kingdom, a relationship is maintained with third party
providers, who allow dealer-partners in the United Kingdom to offer credit life
and disability insurance, service contracts and guaranteed asset protection
("GAP") insurance to consumers. For each product, the premium is added to the
amount due under the Loan. The cost of each product, plus a commission earned by
the dealer-partner on the sale of each product, is added to the advance balance.
A portion of the amount added to the advance balance is retained by the Company
as a fee. The third party bears all the risk of loss on claims relating to these
products.

Floor Plan Financing. In North America, floor plan financing is offered on
a limited basis to certain dealers, most of which participate in the Company's
financing program. Under these financing arrangements, loans are provided to
finance the dealer's inventory. Dealers are charged documentation fees in
connection with each vehicle financed, plus interest on the unpaid balance at
rates which generally range from 12% to 18% per annum. Security for these loans
generally consists of:

(i) a lien on the financed inventory;

(ii) a security interest in the dealer's assets, including the
dealer-partners' portfolio of Loans serviced by the Company; and

(iii) the personal guaranty of the owner.

In 2002, the Company significantly reduced its investment in the floor plan
portfolio after concluding this business was not likely to generate an
acceptable return on capital. The Company intends to continue to work to reduce
the amount of capital invested in this business.

Secured Working Capital Loans. On a very limited basis, the Company
provides working capital loans to dealer-partners. Dealer-partners are charged
an origination fee when the loan is funded and pay interest on the obligation at
rates ranging from 12% to 18% per annum. These loans are generally secured by a
lien on the dealer-partner's assets, including the dealer-partners' portfolio of
Loans serviced by the Company.

Secured Line of Credit Loans. Beginning in 2000, North America offered
line of credit arrangements to certain dealers who were not participating in the
Company's core program. These lines of credit are secured primarily by Loans,
originated and serviced by the dealer, with additional security provided by the
personal guarantee of the owner. The effective interest rate on these loans
varies based upon the amount advanced to the dealer and the percentage of
collections on the loan portfolio required to be remitted to the Company. During
the third quarter of 2001, the Company discontinued offering this program to new
dealers, and is in the process of reducing the amount of capital invested in
this business.

AUTOMOBILE LEASING

In early 2002, the Company decided to exit the automobile leasing business.
This decision was based upon the conclusion that the automobile leasing business
was unlikely to produce a higher return than the Company's automobile lending
business over the long-term. Prior to this decision, the Company purchased
automobile leases from dealer-partners for an amount based on the value of the
vehicle as determined by an industry guidebook, assumed ownership of the related
vehicle from the dealer-partner and received title to the vehicle. This program
differed from the Company's principal business in that, as leases were purchased
outright, the Company assumed no liability to the dealer-partner for dealer
holdback payments. Additionally, the customer was required to remit a security
deposit to the Company. Customer payments are applied toward the customer's
outstanding lease receivable. At lease termination, the Company is responsible
for the ultimate disposal of the vehicle, which is sold directly to the
dealer-partner, to the customer or at auction. Leases generally have an original
term ranging from 24 to 48 months, with an average of 37 months.

CREDIT LOSS POLICY

NORTH AMERICA AND UNITED KINGDOM

The Company maintains: (i) a reserve for advance losses; and (ii) a reserve
for earned but unpaid servicing fees called the allowance for credit losses.

7

Reserve for advance losses. The Company maintains a reserve against
advances that are not expected to be recovered through collections on the
related Loan portfolio. For purposes of establishing the reserve, the present
value of estimated future collections for each dealer-partner's Loan portfolio
is compared to the related advance balance. The discount rate used for present
value purposes is equal to the rate of return expected at the origination of the
advance. To the extent that the present value of future collections is less than
the advance balance due from a dealer-partner, the Company records a reserve
equal to the difference between the advance and the present value of the
estimated future collections. The Company maintains historical loss experience
for each dealer-partner on a static pool basis and uses this information to
forecast the timing and amount of future collections on each dealer-partner's
portfolio. Proceeds from one dealer-partner's portfolio cannot be used to offset
losses relating to another dealer-partner. Effective January 1, 2003, the
Company modified its policy for charging off advances. Advances are charged off
when the Company's analysis forecasts no future collections relating to such
advance balance.

Advance losses represent the Company's primary credit risk. The risk of
advance losses increases as the spread between the collection rate and advance
rate narrows. The Company's primary protection against future losses relates to
managing this spread appropriately.

Allowance for credit losses. The Company maintains an allowance for credit
losses that covers earned but unpaid servicing fees on Loans receivable in
non-accrual status. Servicing fees, which are recorded as finance charges, are
recognized under the interest method of accounting until the underlying
obligation is 90 days past due on a recency basis (no payments received for 90
days). At such time, the Company suspends the recognition of revenue and records
a provision for credit losses equal to the earned but unpaid revenue. Once a
Loan is classified in non-accrual status, it remains in non-accrual status for
the remaining life of the Loan. Revenue on non-accrual Loans is recognized on a
cash basis. Loans on which no payment has been received for nine months are
charged off.

AUTOMOBILE LEASING

The Company maintains: (i) a reserve for repossession losses; and (ii) a
reserve for residual losses.

Reserve for repossession losses. The repossession reserve covers losses
resulting from the difference between sale proceeds and the net investment in
operating leases. For purposes of establishing the reserve, the Company
estimates the expected losses, based on its historical loss experience, on its
inventory of repossessed vehicles and vehicles being repossessed.

Reserve for residual losses. The residual reserve covers losses resulting
from the disposal of vehicles at the end of the lease term. The Company
established its residual values based upon an industry guidebook and data from
repossessed vehicles sold at auction. Realization of the residual values is
dependent on the Company's future ability to market the vehicles under then
prevailing market conditions. Adverse changes in market conditions from those
upon which the estimates were based could have an adverse effect on the
Company's ability to realize the values estimated and require an increase in the
reserve, which may materially and adversely affect the Company's results of
operations.

COMPETITION

The market for customers who do not qualify for conventional automobile
financing is large and highly competitive. The market is currently served by
banks, captive finance affiliates of automobile manufacturers, credit unions and
independent finance companies both publicly and privately owned. Many of these
companies are much larger and have greater resources than the Company. These
companies typically target higher credit tier customers within the Company's
market. While the Company currently is not aware of any other company offering
guaranteed credit approval on a national scale, there can be no assurance that
direct competition will not emerge and that the Company will be able to compete
successfully.

8

CUSTOMER AND GEOGRAPHIC CONCENTRATIONS

Generally. As of December 31, 2002, approximately 48.0% of North American
dealer-partners were located in Michigan, Ohio, New York, Virginia, Maryland,
Illinois, and Tennessee. These dealer-partners accounted for approximately 51.8%
of the number of Loans accepted in North America in 2002. As of December 31,
2002, approximately 15.0% of the Company's dealer-partners were located in the
United Kingdom. These dealer-partners accounted for approximately 5.7% of the
new Loans accepted by the Company. No single dealer-partner accounted for more
than 10% of total revenues during any of the last three years. However, two
dealer-partner groups in the United Kingdom accounted for approximately 41.6%
and 66.1% and 53.3% of new Loans accepted in the United Kingdom in 2002, 2001,
and 2000, respectively.

Affiliated Parties. The Company regularly accepts assignments of 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. Loans accepted from these affiliated dealer-partners were
approximately $19.1 million, $21.2 million and $11.3 million in 2002, 2001 and
2000, respectively. Loans receivable from affiliated dealer-partners represented
approximately 2.8%, 2.6% and 3.5% of the gross Loans receivable balance as of
December 31, 2002, 2001 and 2000, respectively. The Company accepts Loans from
affiliated dealer-partners and nonaffiliated dealer-partners on the same terms.

Prior to the decision to exit the leasing business, the Company regularly
accepted automobile leases originated by affiliated dealer-partners owned by:
(i) the Company's majority shareholder and Chairman; and (ii) the Company's
President. Automobile leases accepted from affiliated dealer-partners were
$11,000, $1.4 million and $10.1 million in 2002, 2001 and 2000, respectively.
Affiliated dealer-partners originated approximately 1.0%, 4.6% and 22.6% of the
value of automobile leases accepted and approximately 0.8%, 4.2% and 24.8% of
the number of automobile leases accepted by the Company during 2002, 2001 and
2000, respectively. The Company accepted automobile leases from affiliated
dealer-partners and nonaffiliated dealer-partners on the same terms.

GEOGRAPHIC FINANCIAL INFORMATION

The following table sets forth, for each of the last three years for the
Company's domestic and foreign operations, the amount of revenues from customers
and long-lived assets (in thousands):

The Company's operations are structured to achieve consolidated objectives.
As a result, significant interdependencies and overlaps exist among the
Company's domestic and foreign operations. Accordingly, the revenue and
identifiable assets shown may not be indicative of the amounts which would have
been reported if the domestic and foreign operations were independent of one
another.

9

REGULATION

The Company's businesses are subject to various state, federal and foreign
laws and regulations, which:

(i) require licensing and qualification,

(ii) regulate interest rates, fees and other charges,

(iii) require specified disclosures by automobile dealer-partners to
customers,

(iv) govern the sale and terms of the ancillary products; and

(v) define the Company's rights to collect the Loans and repossess and
sell collateral.

Failure to comply with, or an adverse change in, these laws or regulations could
have a material adverse effect on the Company by, among other things, limiting
the states or countries in which the Company may operate, restricting the
Company's ability to realize the value of the collateral securing the Loans and
leases, or resulting in potential liability related to Loans and leases accepted
from dealer-partners. In addition, governmental regulations which would deplete
the supply of used vehicles, such as environmental protection regulations
governing emissions or fuel consumption, could have a material adverse effect on
the Company. The Company is not aware of any such legislation currently pending.

The sale of insurance products in connection with Loans and leases assigned
to the Company by dealer-partners is also subject to state laws and regulations.
As the holder of the Loans and leases that contain these products, some of these
state laws and regulations may apply to the Company's servicing and collection
of the Loans and leases. However, as the Company does not deal directly with
consumers in the sale of insurance products, it does not believe that such laws
and regulations significantly affect its business. Nevertheless, there can be no
assurance that insurance regulatory authorities in the jurisdictions in which
such products are offered by dealer-partners will not seek to regulate the
Company or restrict the operation of the Company's business in such
jurisdictions. Any such action could materially adversely affect the income
received from such products. The Company's credit life and disability
reinsurance and property and casualty insurance subsidiaries are licensed and
subject to regulation in the state of Arizona and in the Turks and Caicos
Islands.

The Company's operations in the United Kingdom and Canada are also subject
to various laws and regulations. Generally, these requirements tend to be no
more restrictive than those in effect in the United States.

Management believes that the Company maintains all material licenses and
permits required for its current operations and is in substantial compliance
with all applicable laws and regulations. The Company's Servicing Agreement with
dealer-partners provides that the dealer-partner shall indemnify the Company
with respect to any loss or expense the Company incurs as a result of the
dealer-partner's failure to comply with applicable laws and regulations.

EMPLOYEES

As of February 28, 2003, the Company employed 717 persons. The Company's
employees have no union affiliations and the Company believes its relationship
with its employees is good. The table below presents employees by department:

10

ITEM 2. PROPERTIES

NORTH AMERICA AND AUTOMOBILE LEASING

The Company's headquarters are located at 25505 West Twelve Mile Road,
Southfield, Michigan 48034. The Company purchased the office building in 1993
and has a mortgage loan from a commercial bank that is secured by a first
mortgage lien on the property. The office building includes approximately
118,000 square feet of space on five floors. The Company occupies approximately
65,000 square feet of the building, with most of the remainder of the building
leased to various tenants. The Company plans to continue to lease excess space
in the building until such time as the Company's expansion needs require it to
occupy additional space.

The Company leases approximately 9,300 square feet of office space in
Henderson, Nevada. The lease expires in February 2004.

UNITED KINGDOM

The Company leases space in an office building in Worthing, West Sussex, in
the United Kingdom. The Company occupies approximately 10,000 square feet of the
building under a lease expiring in September 2007.

ITEM 3. LEGAL PROCEEDINGS

In the normal course of business and as a result of the consumer-oriented
nature of the industry in which the Company operates, industry participants are
frequently subject to various consumer claims and litigation seeking damages and
statutory penalties. The claims allege, among other theories of liability,
violations of state, federal and foreign truth in lending, credit availability,
credit reporting, consumer protection, warranty, debt collection, insurance and
other consumer-oriented laws and regulations, including claims seeking damages
for physical and mental damages relating to the Company's repossession and sale
of the consumer's vehicle and other debt collection activities. The Company, as
the assignee of Loans originated by dealer-partners, may also be named as a
co-defendant in lawsuits filed by consumers principally against dealer-
partners. Many of these cases are filed as purported class actions and seek
damages in large dollar amounts. An adverse ultimate disposition in any such
action could have a material adverse impact on the Company's financial position,
liquidity and results of operations.

The Company is currently a defendant in a class action proceeding commenced
on October 15, 1996 in the United States District Court for the Western District
of Missouri seeking money damages for alleged violations of a number of state
and federal consumer protection laws. On October 9, 1997, the District Court
certified two classes on the claims brought against the Company, one relating to
alleged overcharges of official fees, the other relating to alleged overcharges
of post-maturity interest. On August 4, 1998, the District Court granted partial
summary judgment on liability in favor of the plaintiffs on the interest
overcharge claims based upon the District Court's finding of certain violations
but denied summary judgment on certain other claims. The District Court also
entered a number of permanent injunctions, which among other things, restrained
the Company from collecting on certain class accounts. The Court also ruled in
favor of the Company on certain claims raised by class plaintiffs. Because the
entry of an injunction is immediately appealable, the Company appealed the
summary judgment order to the United States Court of Appeals for the Eighth
Circuit. Oral argument on the appeals was heard on April 19, 1999. On September
1, 1999, the United States Court of Appeals for the Eighth Circuit overturned
the August 4, 1998 partial summary judgment order and injunctions against the
Company. The Court of Appeals held that the District Court lacked jurisdiction
over the interest overcharge claims and directed the District Court to sever
those claims and remand them to state court. On February 18, 2000, the District
Court entered an order remanding the post-maturity interest class to Missouri
state court while retaining jurisdiction on the official fee class. The Company
then filed a motion requesting that the District Court reconsider that portion
of its order of August 4, 1998, in which the District Court had denied the
Company's motion for summary judgment on the federal Truth-In-Lending Act
("TILA") claim. On May 26, 2000, the District Court entered summary judgment in
favor of the Company on the TILA claim and directed the Clerk of the Court to
remand the remaining state law official fee claims to the appropriate state
court. On September 18, 2001, the Circuit Court of Jackson County, Missouri
mailed an order assigning this matter to a judge. On October 28, 2002, the
plaintiffs filed a fourth amended complaint. The Company

11

filed a motion to dismiss the plaintiff's fourth amended complaint on November
4, 2002. On November 18, 2002, the Company filed a memorandum urging the
decertification of the classes. On January 15, 2003, the case was assigned to a
new judge. On February 21, 2003 the plaintiffs filed a brief opposing the
Company's November 4, 2002 motion to dismiss the case. The Company will continue
its vigorous defense of all remaining claims. However, an adverse ultimate
disposition of this litigation could have a material negative impact on the
Company's financial position, liquidity and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

12

PART II

ITEM 5. MARKET PRICE AND DIVIDEND INFORMATION

The Company's Common Stock is traded on The Nasdaq Stock Market(R) under
the symbol CACC. The high and low sale prices for the Common Stock for each
quarter during the two year period ending December 31, 2002 as reported by The
Nasdaq Stock Market(R) are set forth in the following table.

As of February 28, 2003, the number of beneficial holders and shareholders
of record of the Common Stock was approximately 1,800 based upon securities
position listings furnished to the Company.

The Company has not paid any cash dividends during the periods presented.
The Company intends to retain its earnings to finance the growth and development
of its business and currently has no plans to pay any cash dividends on its
Common Stock. The Company's credit agreements contain financial covenants
pertaining to the Company's ratio of liabilities to tangible net worth and
amount of tangible net worth, which may indirectly limit the payment of
dividends on Common Stock.

EQUITY COMPENSATION PLANS

The Company has three stock option plans pursuant to which it grants stock
options with time or performance-based vesting requirements to employees,
officers, directors and dealer-partners. The Company's 1992 Stock Option Plan
(the "1992 Plan") was approved by shareholders in 1992 prior to the Company's
initial public offering. The Company's Director Stock Option Plan (the "Director
Plan") was approved by shareholders in 2002. The Company's Stock Option Plan for
Dealers (the "Dealer Plan") was not approved by shareholders. Effective January
1, 1999, the Company suspended the granting of future options under the Dealer
Plan. The following table sets forth, with respect to each of the option plans,
(i) the number of shares of common stock to be issued upon the exercise of
outstanding options, (ii) the weighted average exercise price of outstanding
options, and (iii) the number of shares remaining available for future issuance,
as of December 31, 2002.

- ---------------

(a) Excludes securities reflected in the first column, "Number of Securities to
be issued upon exercise of outstanding options and rights".

13

Pursuant to the Dealer Plan, the Company reserved 1.0 million shares of its
common stock for the future granting of options to participating
dealer-partners. Effective January 1, 1999, the Company suspended the granting
of future options under the Dealer Plan. Under the Dealer Plan, a dealer-partner
received a grant of an option to purchase 1,000 shares of Common Stock as of the
last day of the calendar quarter in which the Company processed and accepted the
100th Loan accepted from such dealer-partner during the calendar year, and a
dealer-partner received an additional option to purchase 200 shares of Common
Stock for each additional 100 Loans processed and accepted by the Company during
the calendar year as of the last day of the calendar quarter in which the
Company processed and accepted from the dealer-partner the Loan which is an
integral multiple of 100 (i.e. the 200th, 300th, 400th etc.). The Board also had
the power to grant options from time to time to dealer-partners without regard
to the number of Loans accepted. The exercise price of the options was equal to
the fair market value on the date of grant. The options, which were
non-transferable, became exercisable over a three year period. Nonvested options
are forfeited upon the termination of the dealer-partner's Servicing Agreement
by the Company or the dealer-partner and otherwise expire five years from the
date of grant.

14

ITEM 6. SELECTED FINANCIAL DATA

The selected income statement and balance sheet data presented below are
derived from the Company's audited consolidated financial statements and should
be read in conjunction with the Company's consolidated audited financial
statements and notes thereto and "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations," included elsewhere in this
Report.

- ---------------
(A) In 1999, the Company increased the provision for credit losses as the result
of higher provisions needed for losses on advances to dealer-partners with
respect to Loan pools originated primarily in 1995, 1996, and 1997. In
addition, in 1999 the Company recorded a valuation adjustment on the
retained interest in its July 1998 securitization relating to these Loan
pools. During the third and fourth quarters of 2002, the Company's forecast
of future collections on its North America portfolio of Loans declined
approximately 5% and 2%, respectively. As a result, the Company recorded
larger than expected provisions for losses on advances to dealer-partners.
See "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
(B) In 1999, the Company recorded a gain from the sale of its credit reporting
services subsidiary.
(C) No dividends were paid during the periods presented.

15

ITEM 7. 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 December 31, 2002. The amounts
presented are expressed as a percent of total Loan value by year of Loan
origination.

The risk of a forecasting error declines as Loans age. For example, the
risk of a material forecasting error for business written in 1995 is very small,
with 98% 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 the risk significantly.

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 forecast as of December 31, 2002 with the forecast
as of December 31, 2001.

During 2002, 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

16

second quarter of 2002. However, it is impossible to determine whether external
factors, such as economic conditions, also may have contributed to the decline.
As a result of the decline in Loan performance, the Company's forecast of future
collections on its North America portfolio of Loans declined approximately 5%
and 2% during the third and fourth quarters of 2002, respectively. The Company
believes that significant improvement was made during the fourth quarter of
2002. Collection activity returned to pre-system conversion levels as measured
by calls and contacts per delinquent account. The level of charge offs was
unsatisfactory in October, but improved significantly in November and December.
The Company believes that it is too early to conclude what effect these
improvements will have on the provision for losses on advances in 2003. The
Company believes the new collection system will ultimately provide operational
efficiencies, and improvements in collection rates, which could not have
occurred without the new system.

RESULTS OF OPERATIONS

The following tables present income statement data on a consolidated basis
as well as for the Company's three business segments, North America, United
Kingdom and Automobile Leasing.

CONSOLIDATED

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.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Interest. Interest expense decreased to $9.1 million in 2002 from $14.7
million in 2001. The decrease in interest expense was primarily the result of:
(i) the impact of a decrease in average outstanding debt and (ii) the decrease
in the weighted average interest rate to 5.4% in 2002 from 7.5% in 2001, which
was the result

17

of a decrease in the average interest rate on the Company's variable rate debt,
including lines of credit and secured financings, and repayment of the senior
note debt.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Interest. Interest expense decreased to $14.7 million in 2001 from $16.4
million in 2000. The decrease in interest expense was primarily the result of a
decrease in the weighted average interest rate to 7.5% in 2001 from 10.1% in
2000, which was the result of: (i) a decrease in the average interest rate on
the Company's variable rate debt, including lines of credit and secured
financing, and the reduction in the amount of senior note debt; and (ii) the
impact of fixed borrowing fees and costs on average interest rates when average
outstanding borrowings are increasing.

NORTH AMERICA

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Finance Charges. Finance charges increased to $80.1 million in 2002 from
$68.4 million in 2001 primarily due to an increase in the average size of the
Loan portfolio due to an increase in Loan originations in 2001. This increase
was partially offset by a reduction in the average annualized yield on the
Company's Loan portfolio to 12.6% in 2002 from 13.4% in 2001. The decrease in
the average yield was primarily due to an increase in the percent of non-accrual
Loans to 22.7% as of December 31, 2002 from 19.3% for the same period in 2001
due primarily to a reduction in Loan originations in 2002.

Other Income. Other income increased to $35.8 million in 2002 from $31.2
million in 2001 primarily due to: (i) interest income of $4.8 million from the
Internal Revenue Service received in connection with a change in tax accounting
methods that affected the characterization and timing of revenue recognition for
tax purposes and (ii) an increase of $1.2 million in monthly fees paid by
dealer-partners for the use of the Company's Internet origination system. These
increases were partially offset by the one-time gain of $1.1 million in 2001 on
a clean-up call relating to the July 1998 securitization of advance receivables.

Operating Expenses. Operating expenses consist of salaries and wages,
general and administrative expenses, sales and marketing expenses, and a
provision for insurance and service contract claims. Operating expenses
increased to $55.9 million in 2002 from $45.8 million in 2001. The increase was
primarily due to: (i) the reversal in 2001 of Michigan single business taxes of
$4.7 million, which were paid from 1993 to 2000,
18

resulting from a re-characterization of the Company's revenue as a result of an
Internal Revenue Service examination; (ii) an increase in salaries and wages of
$2.9 million resulting primarily from increased spending on corporate
infrastructure; (iii) losses of $1.4 million on the disposal of computer
hardware in 2002; and (iv) an increase of $900,000 in the provision for floor
plan and dealer-partner loan losses.

Provision for Credit Losses. Provision for credit losses increased to
$11.1 million in 2002 from $2.4 million 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 Loan portfolio and (ii) a provision for earned but unpaid revenue on
Loans which were transferred to non-accrual status during the period. The
increases in the provision for credit losses for the year ended December 31,
2002 compared to the year ended December 31, 2001 were primarily due to: (i) an
increase of $6.1 million in the provision for losses on advances due to a
reduction in forecasted future collections which the Company believes is
primarily the result of a decline in collection results relating to the
installation of a new collection system late in the second quarter of 2002 (see
"Critical Accounting Policies and Loss Experience -- North America and United
Kingdom -- Reserve for Advance Losses"); and (ii) an increase of $2.6 million in
the provision for earned but unpaid revenue due to an increase in the percent of
non-accrual Loans to 22.7% as of December 31, 2002 from 19.3% for the same
period in 2001.

Provision for Income Taxes. Provision for income taxes decreased to $17.5
million in 2002 from $17.6 million in 2001 due to a decrease in the effective
tax rate to 41.2% in 2002 from 41.7% in 2001. In 2001, the Internal Revenue
Service examination for the years 1993-2001 was completed. As a result of this
examination, in 2001 the Company recorded an expense of $3.9 million to reflect
estimated state taxes due as a result of the re-characterization of the
Company's revenue. The decrease in the effective tax rate in 2002 was a result
of the Company reducing its estimate of state income taxes due for the years
1993-2001 by $1.6 million. This reduction in the effective tax rate was
partially offset by an increase of $3.6 million in the provision for income
taxes in 2002 resulting from an expense to record the estimated taxes due upon
repatriation of earnings in the United Kingdom.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Finance Charges. Finance charges increased to $68.4 million in 2001 from
$61.7 million in 2000 primarily as the result of the increase in the average
size of the Loan portfolio due to an increase in Loan originations in 2001. Loan
originations increased to $659.5 million in 2001 from $384.8 million in 2000,
representing an increase of 71.4%. The increase in Loan originations was
primarily the result of: (i) participating dealer-partners' expanded usage of
the Company's internet origination system; (ii) improved production from the
Company's field sales force, which was expanded in 2000; and (iii) favorable
market conditions.

This increase in finance charges was partially offset by a reduction in the
average annualized yield on the Company's Loan portfolio to 13.4% in 2001 from
14.4% in 2000. The decrease in the average yield was primarily due to an
increase in the average initial Loan term to 35 months in 2001 from 30 months in
2000. The effect of the increase in initial term was partially offset by a
reduction in the percentage of Loans that were in non-accrual status to 19.3% in
2001 from 22.8% in 2000. The decrease in the non-accrual Loan percentage was
primarily due to growth in the Loan portfolio in 2001.

Other Income. Other income increased to $31.2 million in 2001 from $27.2
million in 2000 primarily due to: (i) an increase of $2.2 million from interest
income on secured line of credit loans offered to certain dealers, which the
Company began extending at the end of the first quarter of 2000; (ii) an
increase of $1.7 million from the monthly fees paid by dealer-partners for the
use of the Company's Internet origination system; and (iii) a one-time gain of
$1.1 million on the termination and clean-up call relating to the July 1998
securitization of advance receivables. The gain represents the difference
between the value of advance receivables reacquired and the Company's carrying
amount of the retained interest in securitization plus the amount paid to
exercise the clean-up call. These increases were partially offset by decreases
in income of $500,000 from the July 1998 securitization of advance receivables
due to the termination and clean-up call of this securitization in May 2001.

19

In 2000, the Company changed accounting methods to recognize income and
related expense for the Company's service contract program on an accelerated
basis over the life of the service contract. Previously, the income and related
expenses were recorded on a straight-line basis over the life of the service
contracts. The change was based on an analysis of historical claims experience
and resulted in a more precise match of the income and expenses pertaining to
the service contracts. The change in accounting method was immaterial to the
current financial statements and is not expected to have a material impact on
subsequent periods.

Operating Expenses. Operating expenses consist of salaries and wages,
general and administrative expenses, sales and marketing expenses, and a
provision for insurance and service contract claims. Operating expenses
increased to $45.8 million in 2001 from $42.9 million in 2000. The increase was
primarily due to an increase in: (i) information systems expenses of $1.9
million relating to the development of Company's Internet origination system and
continued enhancements to the Company's major operating systems; (ii) salaries
and wages of $1.7 million due to increased spending on corporate infrastructure;
(iii) sales and marketing expenses of $1.6 million due to an increase in the
Company's sales force; and (iv) provision for notes receivable of $1.4 for
impaired working capital loans to dealer-partners based upon the Company's
impairment analysis. These increases were partially offset by a decrease in
Michigan single business taxes of $4.7 million due to a re-characterization of
the Company's revenue for tax reporting purposes as a result of the Internal
Revenue Service examination. As a result of this change, in 2001, the Company
recorded refunds of Michigan single business taxes, which had been expensed,
from 1993 to 2000, through general and administrative expense. The effect on the
income statement of these refunds is partially offset by the increase in state
income taxes owed to states other than Michigan and recorded in provision for
income taxes. Amounts owed represent the cumulative amount of taxes owed to
these states for the years 1993 to 2001.

Provision for Credit Losses. Provision for credit losses decreased to $2.4
million in 2001 from $2.8 million in 2000. 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 Loan portfolio and (ii) a provision for earned but unpaid revenue on
Loans which were transferred to non-accrual status during the period. The
decrease in the provision for credit losses for the year ended December 31, 2001
compared to the year ended December 31, 2000 was primarily due to a decrease of
$900,000 in the provision for earned but unpaid revenue due to a decrease in the
percent of non-accrual Loans to 19.3% as of December 31, 2001 from 22.8% for the
same period in 2000.

Provision for Income Taxes. Provision for income taxes increased to $17.6
million in 2001 from $10.9 million in 2000 due to an increase in pre-tax income
in 2001 and an increase in the effective tax rate. The increase in the effective
tax rate to 41.7% in 2001 from 35.3% in 2000 was due to an increase in state
income tax expense of $3.9 million resulting from the re-characterization of the
Company's revenue as a result of the Internal Revenue Service examination. The
additional state provision is a cumulative amount of taxes owed to various
states for the years 1993 to 2001. The effect on the income statement of the
additional state income taxes is offset by refunds recorded relating to Michigan
single business taxes.

20

UNITED KINGDOM

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Finance Charges. Finance charges decreased to $17.7 million in 2002 from
$21.8 million in 2001 primarily as the result of: (i) a decrease in the average
size of the Loan portfolio due to a decrease in Loan originations in 2002 and
(ii) a reduction in the average annualized yield on the Company's Loan portfolio
to 12.5% in 2002 from 13.6% in 2001. The decrease in the average yield was
primarily due to an increase in the percent of non-accrual Loans to 31.5% as of
December 31, 2002 from 22.6% for the same period in 2001 due to a reduction in
Loan originations in 2002. Loan originations decreased in 2002 to $43.3 million
from $122.8 million in 2001 as the result of the United Kingdom decreasing the
amount advanced to dealer-partners and discontinuing its relationship with
certain dealer-partners whose business did not meet the Company's return on
capital objectives.

Other Income. Other income increased to $3.4 million in 2002 from $2.8
million in 2001 primarily due to an increase of $1.1 million in ancillary
product revenue resulting from a change in revenue recognition. This change was
the result of a complete review of the Company's revenue recognition policies,
which determined that, while conservative, the policies relative to ancillary
product revenue recognition in the United Kingdom were inconsistent with those
employed in North America. Therefore, the Company adopted the accounting
treatment that was appropriate and consistent with the policies employed in
North America. This increase was partially offset by a $270,000 decrease in
revenue under an ancillary products profit sharing agreement with an insurance
provider.

Operating Expenses. Operating expenses decreased to $7.0 million in 2002
from $8.7 million in 2001. The decrease was primarily due to executive severance
agreement expenses of approximately $735,000 incurred in 2001 and a reduction in
salaries and wages as a result of a reduction in staffing levels.

Provision for Credit Losses. Provision for credit losses increased to $4.5
million in 2002 from $3.4 million 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 Loan portfolio; and (ii) a provision for earned but unpaid revenue on
Loans which were transferred to non-accrual status during the period. The
increase was primarily due to an increase of $1.4 million in the provision for

21

losses on advances to dealer-partners due to a decline in credit quality of
Loans originated in 2001, partially offset by a decrease of $300,000 in the
provision for earned but unpaid revenue. As a result of the decline in credit
quality of Loans originated in 2001, the Company stopped originating Loans in
Ireland and decreased the amount advanced to dealer-partners in the United
Kingdom.

Provision for Income Taxes. Provision for income taxes decreased to $2.5
million in 2002 from $3.1 million in 2001, due to a decrease in pre-tax income
in 2002 and a decrease in the effective tax rate compared to the same period in
2001. The decrease in the effective tax rate to 27.3% in 2002 from 29.5% in 2001
was due to a restructuring of legal entities within this business segment.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Finance Charges. Finance charges increased to $21.8 million in 2001 from
$18.8 million in 2000 primarily as the result of an increase in the average size
of the Loan portfolio due to an increase in Loan originations in 2000. This
increase was partially offset by an increase in the percent of non-accrual Loans
to 22.6% as of December 31, 2001 from 18.3% as of December 31, 2000 for the same
period due primarily to a reduction in Loan originations in 2001. Loan
originations decreased in 2001 to $122.8 million from $142.2 million in 2000 as
the result of the United Kingdom discontinuing its relationship with certain
dealer-partners whose business did not meet the Company's return on capital
objectives.

Other Income. Other income increased to $2.8 million in 2001 from $2.1
million in 2000 primarily due to a $600,000 increase in revenue under an
ancillary products profit sharing agreement with an insurance provider.

Operating Expenses. Operating expenses increased to $8.7 million in 2001
from $6.8 million in 2000. The increase was primarily due to an increase in: (i)
salaries and wages resulting from approximately $735,000 in executive severance
agreement expenses incurred in 2001 and (ii) accounting and legal expenses of
$370,000 relating to the restructuring of legal entities within this business
segment.

Provision for Credit Losses. Provision for credit losses decreased to $3.4
million in 2001 from $5.4 million in 2000. 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 Loan portfolio; and (ii) a provision for earned but unpaid revenue on
Loans which were transferred to non-accrual status during the period. The
decrease was primarily due to a decrease of $2.3 million in the provision for
losses on advances to dealer-partners due to a reduction in the amount advanced
to dealer-partners as a percent of the gross Loan amount.

Provision for Income Taxes. Provision for income taxes increased to $3.1
million in 2001 from $2.2 million in 2000, due to an increase in pre-tax income
in 2001.

22

AUTOMOBILE LEASING

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Lease Revenue. Lease revenue decreased to $16.1 million in 2002 from $21.9
million in 2001 primarily due to the decrease in the dollar value of the
Company's lease portfolio. This decrease was the result of the Company's
decision to stop originating automobile leases in the first quarter of 2002.

Other Income. Other income remained consistent at $1.3 million in 2002 and
2001.

Operating Expenses. Operating expenses decreased to $3.5 million in 2002
from $5.3 million in 2001 primarily due to a decrease in general and
administrative expenses due to the $725,000 expense recorded in 2001 relating to
the discontinuance of the leasing operations. This decrease was offset by an
increase of $200,000 in the provision for uncollectible receivables from
dealer-partners for ancillary product charge backs on repossessed leased
vehicles.

Provision for Credit Losses. Provision for credit losses decreased to $5.1
million in 2002 from $6.1 million in 2001 primarily due to a decrease in the
dollar value of the Company's lease portfolio. This decrease was the result of
the Company's decision to stop originating automobile leases in the first
quarter of 2002.

Depreciation of Leased Assets. Depreciation of leased assets, including
the amortization of indirect lease costs, is recorded on a straight-line basis
to the residual value of leased vehicles over their scheduled lease terms.
Depreciation expense decreased to $9.7 million in 2002 from $12.5 million in
2001. The decrease was primarily due to a decrease in the dollar value of the
Company's lease portfolio. This decrease was the result of the Company's
decision to stop originating automobile leases in the first quarter of 2002.

Credit for Income Taxes. The credit for income taxes decreased to $1.1
million in 2002 from $1.5 million in 2001 as a result of the decrease in pre-tax
loss.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Lease Revenue. Lease revenue increased to $21.9 million in 2001 from $13.0
million in 2000. This increase was the result of an increase in the dollar value
of the Company's lease portfolio.

23

Other Income. Other income increased to $1.3 million in 2001 from $700,000
in 2000. This increase was primarily the result of an increase of $400,000 in
gains recognized on leases terminated before their maturity date.

Operating Expenses. Operating expenses increased to $5.3 million in 2001
from $3.1 million in 2000 primarily due to an increase in the dollar value of
the Company's lease portfolio.

Provision for Credit Losses. Provision for credit losses increased to $6.1
million in 2001 from $3.0 million in 2000. The increase was primarily due to the
increase in the dollar value of the Company's lease portfolio. To a lesser
extent, an increase in the provision was required to reflect increased lease
repossession rates.

Depreciation of Leased Assets. Depreciation of leased assets, including
the amortization of indirect lease costs, is recorded on a straight-line basis
to the residual value of leased vehicles over their scheduled lease terms.
Depreciation expense increased to $12.5 million in 2001 from $7.0 million in
2000. This increase was primarily the result of an increase in the dollar value
of the Company's lease portfolio. To a lesser extent, the increase was due to a
reduction in the average residual value, as a percent of original lease value,
in the lease portfolio.

Credit for Income Taxes. The credit for income taxes increased to $1.5
million in 2001 from $800,000 in 2000 as a result of the increase in pre-tax
loss.

24

AVERAGE CAPITAL ANALYSIS

The following presentation of financial results and subsequent analysis is
based on analyzing the income statement as a percent of capital invested. This
information is presented to provide an additional perspective on the financial
performance of the Company in addition to the presentation of the Company's
results as a percent of revenue.

CONSOLIDATED

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(1) Average capital is equal to the average amount of debt and equity during the
period. For purposes of computing average capital, the Company has added to
shareholders' equity as reported under GAAP $34,297,000, $33,226,000 and
$35,121,000 for the years ended December 31, 2002, 2001 and 2000,
respectively. The amounts added to shareholders' equity represent the
average options outstanding for the period multiplied by the weighted
average exercise price.

(2) Return on capital is equal to net operating profit after-tax (net income
plus interest expense after-tax) divided by average capital.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Revenue, as a percent of average capital, increased to 30.8% in 2002 from
29.6% in 2001. The increase was primarily due to an increase in finance charges,
as a percent of average capital, due primarily to a reduction in the amount
advanced to dealer-partners as a percent of the gross Loan amount. The increase
was partially offset by an increase in the percent of non-accrual Loans to 24.0%
as of December 31, 2002 from 20.0% for the same period in 2001 due primarily to
a reduction in Loan originations in 2002.

25

Costs and expenses, as a percent of average capital, increased to 21.0% in
2002 from 19.8% in 2001. The increase was primarily due to an increase in the
provision for credit losses, as a percent of average capital, to 4.1% in 2002
from 2.4% in 2001. The increase was due primarily to an increase in the
provision for losses on advances due to a reduction in forecasted future
collections in North America which the Company believes is primarily the result
of a decline in collection results relating to the installation of a new
collection system late in the second quarter of 2002. The increase was also due
to an increase in operating expenses, as a percent of average capital, to 13.2%
in 2002 from 12.0% in 2001. This increase was primarily due to (i) the reversal
in 2001 of Michigan single business taxes, which were paid from 1993 to 2000,
resulting from a re-characterization of the Company's revenue due to an Internal
Revenue Service examination; (ii) an increase in salaries and wages resulting
from increased spending on corporate infrastructure; (iii) losses on the
disposal of computer hardware in 2002; and (iv) an increase in the provision for
floor plan and dealer-partner loan losses.

As a result of these factors, the Company's return on capital declined to
7.1% in 2002 from 7.8% in 2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Revenue, as a percent of average capital, increased to 29.6% in 2001 from
26.7% in 2000. The increase was primarily due to an increase in lease revenue,
as a percent of average capital, to 4.4% in 2002 from 2.8% in 2001 due to an
increase in the percentage of total capital invested in Automobile Leasing. The
increase was also due to an increase in finance charges, as a percent of average
capital, due primarily to a reduction in the amount advanced to dealer-partners
as a percent of the gross Loan amount. The increase was partially offset by a
decrease in the percent of non-accrual Loans to 20.0% as of December 31, 2001
from 21.6% for the same period in 2000 due primarily to an increase in loan
originations in 2001.

Costs and expenses, as a percent of average capital, increased to 19.8% in
2001 from 18.8% in 2001. The increase was primarily due to an increase in
depreciation of leased assets, as a percent of average capital, to 2.5% in 2002
from 1.5% in 2001 due to an increase in the percentage of total capital invested
in Automobile Leasing. The increase was also due to an increase in operating
expenses, as a percent of average capital, to 12.0% in 2002 from 11.4% in 2001
due to: (i) an increase in information systems expenses relating to the
development of Company's Internet origination system and continued enhancements
to the Company's major operating systems; (ii) salaries and wages increasing
faster than average capital due to increased spending on corporate
infrastructure; (iii) sales and marketing increasing faster than average capital
due to an increase in the Company's sales force; and (iv) an increase in the
provision for notes receivable for impaired working capital loans to
dealer-partners. These increases were partially offset by a decrease in Michigan
single business taxes due to a re-characterization of the Company's revenue for
state tax reporting purposes as a result of the Internal Revenue Service
examination which was completed in 2001.

As a result of these factors, the Company's return on capital increased to
7.8% in 2001 from 7.4% in 2000.

ECONOMIC PROFIT

Economic profit or loss represents net operating profit after tax less an
imputed cost of equity. Management has assumed a cost of equity equal to 10% of
average shareholders' equity in its economic profit or loss calculations.
Economic profit or loss is a measurement of how efficiently the Company utilizes
its capital. The Company has used economic profit internally since January 1,
2000 to evaluate its performance. The Company's goal is to maximize the amount
of economic profit per share generated. The Company's economic loss increased to
($4,387,000), or ($0.09) per adjusted share, in 2002 compared to ($1,372,000),
or ($0.03) per adjusted share, in 2001.

26

The following presents the calculation of the Company's economic loss and
return on capital for the periods indicated (dollars in thousands, except per
share data):

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(1) Consolidated net income from the Consolidated Statement of Income. See "Item
8. Financial Statements and Supplementary Data."

(2) Cost of equity is equal to 10% of average shareholders' equity, which was
$340,880,000 and $305,750,000 for the years ended December 31, 2002 and
2001, respectively. The Company has added to shareholders' equity as
reported under generally accepted accounting principles ("GAAP") $34,297,000
and $33,226,000 for the years ended December 31, 2002 and 2001,
respectively. The amounts added to shareholders' equity represent the
average options outstanding for the period multiplied by the weighted
average exercise price. Refer to "Stock Options".

(3) 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.

(4) Economic loss per share equals the economic loss divided by the adjusted
weighted average shares outstanding.

(5) Return on capital is equal to net income plus interest expense after tax
divided by average capital. Average capital is equal to the average amount
of debt and equity during the period, which includes the additions to
shareholders' equity as reported under GAAP discussed in footnote (2).

STOCK OPTIONS

In 1999, the Company began granting performance-based stock options to
employees. Performance-based options are options that vest solely based on the
achievement of performance targets, in the Company's case targets based on
either earnings per share or economic profit. Generally accepted accounting
principles ("GAAP") in the United States of America requires companies to
expense performance-based options when it is likely that performance targets
will be met and a measurement date can be established. The amount of the
reported expense is the price of the Company's stock at the end of each
reporting period less the exercise price of the options. The Company's
non-performance options are not required to be expensed under GAAP.

Regardless of the accounting, options represent a significant cost to
shareholders. The true cost is the business value transferred to the employee in
stock, less the exercise proceeds, a number that is difficult to calculate since
it depends on when options are exercised and the future performance of the
business. GAAP provides several alternatives for accounting for this cost. In
the Company's opinion, none of these alternatives provide a method that
accurately captures the true cost of options in all circumstances.

27

Because the Company believes that accurately understanding and managing the
cost of options is essential, the Company has developed the following practices
regarding stock options:

- Beginning in 2002, options are issued only after shares have first been
repurchased in the open market. In all cases, the option is priced at or
above the higher of the fair market value on the date of grant and the
average price of the repurchased shares. For shareholders, the impact of
options therefore is that capital used to repurchase shares is no longer
available to invest in income producing assets. This cost, the
opportunity cost of the capital used to repurchase shares until the
capital is returned upon option exercise, reduces the Company's reported
earnings. Option grants are predominantly performance-based, with
appropriately aggressive vesting targets. The Company believes that these
options properly align the interests of management and shareholders by
rewarding management only for exceptional business performance.

- The Company's reported economic profit (loss) includes three adjustments
to the Company's results reported under GAAP to reflect the cost of
options. First, to avoid double counting, the GAAP expense recorded for
performance options is added back. Second, all options outstanding are
included in the Company's fully diluted share base. Finally, economic
profit (loss) includes a charge for the capital used to repurchase shares
covering options grants. The Company's method of measuring options in the
calculation of economic profit (loss) is conservative in two respects.
First, the tax benefits of future option exercises have not been included
in the Company's calculation. Because option expense is deducted for tax
purposes upon exercise, more capital will be returned to the Company upon
exercise than is invested in repurchased shares. Second, options may be
cancelled due to turnover or the failure to meet performance targets.
Cancellations will be factored in as they occur. One additional risk is
assumed. Should options be issued and shares repurchased above intrinsic
value, and the options subsequently expire unexercised, a loss equal to
the amount paid above intrinsic value would be incurred.

- The practice of repurchasing shares to cover option grants has evolved
over time. To date the Company has repurchased shares covering all
options granted since 1995. Because the Company's option program
pre-dates the current practice of repurchasing shares, as of December 31,
2002 options to purchase approximately 1.6 million shares granted prior
to 1995 have not been covered by repurchases. Depending upon capital
availability and other investment opportunities, the Company may
repurchase shares covering some or all of these uncovered options. For
purposes of computing economic profit, the Company includes a capital
charge as if these options had been repurchased at the option exercise
price at the date of grant.

The Company views options as a significant but necessary cost. In the
Company's opinion, this cost is accurately measured and charged to economic
profit per share, the performance measure on which the Company's management
incentive compensation system is based. The Company believes the ability to
measure the cost of options, combined with an incentive compensation system that
includes this cost, enhances the probability that the Company's option program
will produce favorable results for shareholders.

CRITICAL ACCOUNTING POLICIES AND LOSS EXPERIENCE

The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, the Company evaluates its estimates,
including th