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EX-23.A - AUDITOR CONSENT - CREDIT ACCEPTANCE CORPex23.htm
EX-21.A - SUBSIDIARY LISTING - CREDIT ACCEPTANCE CORPex21.htm
EX-32.A - CEO 906 CERTIFICATION - CREDIT ACCEPTANCE CORPex32a.htm
EX-31.A - CEO 302 CERTIFICATION - CREDIT ACCEPTANCE CORPex31a.htm
EX-31.B - CFO 302 CERTIFICATION - CREDIT ACCEPTANCE CORPex31b.htm
EX-32.B - CFO 906 CERTIFICATION - CREDIT ACCEPTANCE CORPex32b.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2010

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 incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
25505 W. Twelve Mile Road
   
Southfield, Michigan
 
48034-8339
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code:  (248) 353-2700

Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock
 
NASDAQ

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes [    ] No [ X ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes [   ] No [ X ]

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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) 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.   [    ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]
Accelerated filer [ X ]
Non-accelerated filer [   ]
Smaller reporting company [   ]
   
(Do not check if a smaller reporting company)
 

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

The aggregate market value of 5,409,951 shares of the Registrant's common stock held by non-affiliates on June 30, 2010 was approximately $263.8 million.  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 17, 2011, there were 27,420,838 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 2011 Annual Meeting of Shareholders (the "Proxy Statement") filed pursuant to Regulation 14A are incorporated herein by reference into Part III of this Annual Report on Form 10-K (this “Form 10-K”).
 


 
 

 

CREDIT ACCEPTANCE CORPORATION
YEAR ENDED DECEMBER 31, 2010

INDEX TO FORM 10-K

Item
 
  Description
 
Page
 
   
PART I
     
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
     
PART II
       
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
     
PART III
       
 
     
 
 
     
 
 
     
 
 
     
 
 
     
 
     
PART IV
       
 
     
 
               
         
 







PART I
  ITEM 1.
 
BUSINESS

General

Since 1972, Credit Acceptance Corporation (referred to as the “Company”, “Credit Acceptance”, “we”, “our” or “us”) has provided auto loans to consumers, regardless of their credit history.  Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

Credit Acceptance was founded to collect retail installment contracts (referred to as “Consumer Loans”) originated by automobile dealerships owned by our founder, majority shareholder and Chairman, Donald Foss.  During the 1980s, we began to market this service to non-affiliated dealers and, at the same time, began to offer dealers a non-recourse cash payment (referred to as an “advance”) against anticipated future collections on Consumer Loans serviced for that dealer.

We refer to dealers who participate in our programs and who share our commitment to changing consumers’ lives as “Dealer-Partners”.  Upon enrollment in our financing programs, the Dealer-Partner enters into a dealer servicing agreement with us that defines the legal relationship between Credit Acceptance and the Dealer-Partner.  The dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on Consumer Loans from the Dealer-Partner to us.  We are an indirect lender from a legal perspective, meaning the Consumer Loan is originated by the Dealer-Partner and assigned to us.

Consumers and Dealer-Partners benefit from our programs as follows:

Consumers. We help change the lives of consumers who do not qualify for conventional automobile financing by helping them obtain quality transportation.  Without our product, consumers are often unable to purchase a vehicle or they purchase an unreliable one.  Further, as we report to the three national credit reporting agencies, an important ancillary benefit of our program is that we provide a significant number of our consumers with an opportunity to improve their lives by improving their credit score and move on to more traditional sources of financing.

Dealer-Partners.  Our program increases Dealer-Partners’ profits in the following ways:

·  
Enables Dealer-Partners to sell cars to consumers who may not be able to obtain financing without our program.  In addition, consumers often become repeat customers by financing future vehicle purchases either through our program or, after they have successfully established or reestablished their credit, through conventional financing.
·  
Allows Dealer-Partners to share in the profit, not only from the sale of the vehicle, but also from its financing.
·  
Enables Dealer-Partners to attract consumers by advertising “guaranteed credit approval”, where allowed by law.  The consumers will often use other services of the Dealer-Partners and refer friends and relatives to them.
 
Enables Dealer-Partners to attract consumers who mistakenly assume they do not qualify for conventional financing.

Business Segment Information

We currently operate in one reportable segment which represents our core business of offering auto loans, and related products and services to consumers through our network of Dealer-Partners.  For information regarding our reportable segment and related entity-wide disclosures, see Note 12 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.



Principal Business

We have two programs:  the Portfolio Program and the Purchase Program.  Under the Portfolio Program, we advance money to Dealer-Partners (referred to as a “Dealer Loan”) in exchange for the right to service the underlying Consumer Loans.  Under the Purchase Program, we buy the Consumer Loans from the Dealer-Partner (referred to as a “Purchased Loan”) and keep all amounts collected from the consumer.  Dealer Loans and Purchased Loans are collectively referred to as “Loans”.  The following table shows the percentage of Consumer Loans assigned to us based on unit volumes under each of the programs for each of the last 12 quarters:

Quarters Ended
 
 Portfolio Program
 
 Purchase Program
March 31, 2008
 
70.2%
 
29.8%
June 30, 2008
 
65.4%
 
34.6%
September 30, 2008
 
69.2%
 
30.8%
December 31, 2008
 
78.2%
 
21.8%
March 31, 2009
 
82.3%
 
17.7%
June 30, 2009
 
86.0%
 
14.0%
September 30, 2009
 
89.0%
 
11.0%
December 31, 2009
 
90.8%
 
9.2%
March 31, 2010
 
90.9%
 
9.1%
June 30, 2010
 
90.5%
 
9.5%
September 30, 2010
 
90.5%
 
9.5%
December 31, 2010
 
91.8%
 
8.2%

Portfolio Program

As payment for the vehicle, the Dealer-Partner generally receives the following:

·  
a down payment from the consumer;
·  
a cash advance from us; and
·  
after the advance has been recovered by us, the cash from payments made on the Consumer Loan, net of certain collection costs and our servicing fee (“Dealer Holdback”).

We record the amount advanced to the Dealer-Partner as a Dealer Loan, which is classified within Loans receivable in our consolidated balance sheets.  Cash advanced to Dealer-Partners is automatically assigned to the originating Dealer-Partner’s open pool of advances.  We require Dealer-Partners to group advances into pools of at least 100 Consumer Loans.  At the Dealer-Partner’s option, a pool containing at least 100 Consumer Loans can be closed and subsequent advances assigned to a new pool.  All advances within a Dealer-Partner’s pool are secured by the future collections on the related Consumer Loans assigned to the pool.  For Dealer-Partners with more than one pool, the pools are cross-collateralized so the performance of other pools is considered in determining eligibility for Dealer Holdback.  We perfect our security interest in the Dealer Loans by taking possession of the Consumer Loans, which list us as lien holder on the vehicle title.

The dealer servicing agreement provides that collections received by us during a calendar month on Consumer Loans assigned by a Dealer-Partner are applied on a pool-by-pool basis as follows:

·  
First, to reimburse us for certain collection costs;
·  
Second, to pay us our servicing fee, which generally equals 20% of collections;
·  
Third, to reduce the aggregate advance balance and to pay any other amounts due from the Dealer-Partner to us; and
·  
Fourth, to the Dealer-Partner as payment of Dealer Holdback.


If the collections on Consumer Loans from a Dealer-Partner’s pool are not sufficient to repay the advance balance and any other amounts due to us, the Dealer-Partner will not receive Dealer Holdback.

Dealer-Partners have an opportunity to receive an accelerated Dealer Holdback payment at the time a pool of 100 or more Consumer Loans is closed.  The amount paid to the Dealer-Partner is calculated using a formula that considers the forecasted collections and the advance balance on the closed pool.

Since typically the combination of the advance and the consumer’s down payment provides the Dealer-Partner with a cash profit at the time of sale, the Dealer-Partner’s risk in the Consumer Loan is limited.  We cannot demand repayment of the advance from the Dealer-Partner except in the event the Dealer-Partner is in default of the dealer servicing agreement.  Advances are made only after the consumer and Dealer-Partner have signed a Consumer Loan contract, we have received the original Consumer Loan contract and supporting documentation, and we have approved all of the related stipulations for funding.  The Dealer-Partner can also opt to repurchase Consumer Loans that have been assigned to us under the Portfolio Program, at their discretion, for a fee.

For accounting purposes, the transactions described under the Portfolio Program are not considered to be loans to consumers.  Instead, our accounting reflects that of a lender to the Dealer-Partner.  The classification as a Dealer Loan for accounting purposes is primarily a result of (1) the Dealer-Partner’s financial interest in the Consumer Loan and (2) certain elements of our legal relationship with the Dealer-Partner.

Purchase Program

The Purchase Program differs from our Portfolio Program in that the Dealer-Partner receives a one-time payment from us at the time of assignment to purchase the Consumer Loan instead of a cash advance at the time of assignment and future Dealer Holdback payments.  New Purchase Loan unit and dollar volume as a percentage of total unit and dollar volume decreased during 2010 and 2009 due to pricing and program enrollment changes we implemented in order to increase the profitability of the Purchase Program.  For accounting purposes, the transactions described under the Purchase Program are considered to be originated by the Dealer-Partner and then purchased by us.

Program Enrollment

Dealer-Partners that enroll in our programs have two enrollment options available to them.  The first enrollment option allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time fee of $9,850.  The second enrollment option, which became effective September 1, 2009, allows Dealer-Partners to assign Consumer Loans under the Portfolio Program and requires payment of an upfront, one-time fee of $1,950 and an agreement to allow us to keep 50% of their first accelerated Dealer Holdback payment.  Prior to September 1, 2009, we offered Dealer-Partners an enrollment option that allowed us to keep 50% of their first accelerated Dealer Holdback payment with no upfront fee.  For all Dealer-Partners enrolling in our program after August 31, 2008, access to the Purchase Program is typically only granted after the first accelerated Dealer Holdback payment has been made under the Portfolio Program.

Revenue Sources

Credit Acceptance derives its revenues from the following principal sources:

·  
Finance charges, which are comprised of: (1) servicing fees earned as a result of servicing Consumer Loans assigned to us by Dealer-Partners under the Portfolio Program, (2) finance charge income from Purchased Loans, (3) fees earned from our third party ancillary product offerings, (4) monthly program fees of $599, charged to Dealer-Partners under the Portfolio Program; and (5) fees associated with certain Loans;
·  
Premiums earned on the reinsurance of vehicle service contracts; and
·  
Other income, which primarily consists of: dealer support products and services, marketing income, vehicle service contract and Guaranteed Asset Protection (“GAP”) profit sharing income, and dealer enrollment fees.  For additional information, see Note 2 to the consolidated financial statements contained in Item 8 to this Form 10-K, which is incorporated herein by reference.



The following table sets forth the percent relationship to total revenue from continuing operations of each of these sources:

   
 For the Years Ended December 31,
 Percent of Total Revenue from Continuing Operations
 
 2010
 
 2009
 
 2008
 Finance charges
 
87.8%
 
86.6%
 
91.8%
 Premiums earned
 
7.4%
 
8.8%
 
1.3%
 Other income
 
4.8%
 
4.6%
 
6.9%
 Total revenue from continuing operations
 
100.0%
 
100.0%
 
100.0%

Our business is seasonal with peak Consumer Loan acceptances and collections occurring during the first quarter of the year.  However, this seasonality does not have a material impact on our interim results.

Operations

Sales and Marketing.  Our target market is approximately 55,000 independent and franchised automobile dealers in the United States.  We have market area managers located throughout the United States that market our programs to prospective Dealer-Partners, enroll new Dealer-Partners, and support active Dealer-Partners.  The number of Dealer-Partner enrollments and active Dealer-Partners for each of the last five years are presented in the table below:

For the Years Ended December 31,
 
Dealer-Partner Enrollments
   
Active Dealer-Partners (1)
 
2006
   
1,172
     
2,214
 
2007
   
1,835
     
2,827
 
2008
   
1,646
     
3,264
 
2009
   
1,338
     
3,168
 
2010
   
1,263
     
3,206
 

(1)  
Active Dealer-Partners are Dealer-Partners who have received funding for at least one Loan during the period.

Once Dealer-Partners have enrolled in our programs, the market area managers work closely with the newly enrolled Dealer-Partners to help them successfully launch our programs within their dealerships.  Market area managers also provide active Dealer-Partners with ongoing support and consulting focused on improving the Dealer-Partners’ success on our programs, including assistance with increasing the volume and performance of Consumer Loan assignments.

Dealer Servicing Agreement. As a part of the enrollment process, a new Dealer-Partner is required to enter into a dealer servicing agreement with Credit Acceptance that defines the legal relationship between Credit Acceptance and the Dealer-Partner.  The dealer servicing agreement assigns the responsibilities for administering, servicing, and collecting the amounts due on Consumer Loans from the Dealer-Partners to us.  Under the typical dealer servicing agreement, a Dealer-Partner represents that it will only assign Consumer Loans to us that satisfy criteria established by us, meet certain conditions with respect to their binding nature and the status of the security interest in the purchased vehicle, and comply with applicable state, federal and foreign laws and regulations.

The typical dealer servicing agreement may be terminated by us or by the Dealer-Partner upon written notice.  We may terminate the dealer servicing agreement immediately in the case of an event of default by the Dealer-Partner.  Events of default include, among other things:

·  
the Dealer-Partner's refusal to allow us to audit its records relating to the Consumer Loans assigned to us;
·  
the Dealer-Partner, without our consent, is dissolved; merges or consolidates with an entity not affiliated with the Dealer-Partner; or sells a material part of its assets outside the course of its business to an entity not affiliated with the Dealer-Partner; or
·  
the appointment of a receiver for, or the bankruptcy or insolvency of, the Dealer-Partner.



While a Dealer-Partner can cease assigning Consumer Loans to us at any time without terminating the dealer servicing agreement, if the Dealer-Partner elects to terminate the dealer servicing agreement or in the event of a default, we have the right to require that the Dealer-Partner immediately pay us:

·  
any unreimbursed collection costs on Dealer Loans;
·  
any unpaid advances and all amounts owed by the Dealer-Partner to us; and
·  
a termination fee equal to 15% of the then outstanding amount of the Consumer Loans assigned to us.

Upon receipt of such amounts in full, we reassign the Consumer Loans and our security interest in the financed vehicles to the Dealer-Partner.

In the event of a termination of the dealer servicing agreement by us, we may continue to service Consumer Loans assigned by Dealer-Partners accepted prior to termination in the normal course of business without charging a termination fee.

Consumer Loan Assignment.  Once a Dealer-Partner has enrolled in our programs, the Dealer-Partner may begin assigning Consumer Loans to us.  For accounting purposes, a Consumer Loan is considered to have been assigned to us after all of the following has occurred:

·  
the consumer and Dealer-Partner have signed a Consumer Loan contract;
·  
we have received the original Consumer Loan contract and supporting documentation;
·  
we have approved all of the related stipulations for funding; and
·  
we have provided funding to the Dealer-Partner in the form of either an advance under the Portfolio Program or one-time purchase payment under the Purchase Program.

A Consumer Loan is originated by the Dealer-Partner when a consumer enters into a contract with a Dealer-Partner that sets forth the terms of the agreement between the consumer and the Dealer-Partner for the payment of the purchase price of the vehicle.  The amount of the Consumer Loan consists of the total principal and interest that the consumer is required to pay over the term of the Consumer Loan.  In the majority of states, Consumer Loans are written on a contract form provided by us.  Although the Dealer-Partner is named in the Consumer Loan contract, the Dealer-Partner generally does not have legal ownership of the Consumer Loan for more than a moment and we, not the Dealer-Partner, are listed as lien holder on the vehicle title.  Consumers are obligated to make payments on the Consumer Loan directly to us, and any failure to make such payments will result in us pursuing payment through collection efforts.

Virtually all Consumer Loans submitted to us for assignment are processed through our Credit Approval Processing System (“CAPS”).  CAPS allows Dealer-Partners to input a consumer’s credit application and view the response from us via the Internet.  CAPS allows Dealer-Partners to: (1) receive a quick approval from us; and (2) interact with our proprietary credit scoring system to optimize the structure of each transaction prior to delivery.  All responses include the amount of funding (advance for a Dealer Loan or purchase price for a Purchased Loan), as well as any stipulations required for funding.  The amount of funding is determined using a formula which considers a number of factors including the timing and amount of cash flows expected on the related Consumer Loan and our target return on capital at the time the Consumer Loan is submitted to us for assignment.  The estimated future cash flows are determined based upon our proprietary credit scoring system, which considers numerous variables, including attributes contained in the consumer’s credit bureau report, data contained in the consumer’s credit application, the structure of the proposed transaction, vehicle information and other factors, to calculate a composite credit score that corresponds to an expected collection rate.  Our proprietary credit scoring system forecasts the collection rate based upon the historical performance of Consumer Loans in our portfolio that share similar characteristics.  The performance of our proprietary credit scoring system is evaluated monthly by comparing projected to actual Consumer Loan performance.  Adjustments are made to our proprietary credit scoring system as necessary.  For additional information on adjustments to forecasted collection rates, please see the Critical Accounting Estimates section in Item 7 of this Form 10-K, which is incorporated herein by reference.


While a Dealer-Partner can submit any legally compliant Consumer Loan to us for assignment, the decision whether to provide funding to the Dealer-Partner and the amount of any funding is made solely by us.  Through our Dealer-Partner Service Center (“DPSC”) department, we perform all significant functions relating to the processing of the Consumer Loan applications and bear certain costs of Consumer Loan assignment, including the cost of assessing the adequacy of Consumer Loan documentation, compliance with underwriting and legal guidelines and the cost of verifying employment, residence and other information provided by the Dealer-Partner.  We use a company in India to support the DPSC in reviewing Consumer Loan documentation for legal compliance.

We audit Consumer Loan files for legal and underwriting guidelines on a daily basis in order to assess whether our Dealer-Partners are operating in accordance with the terms and conditions of our dealer servicing agreement.  We occasionally identify breaches of the dealer servicing agreement and depending upon the circumstances, and at our discretion, we may change pricing or charge the Dealer-Partner fees for future Consumer Loan assignments; require the Consumer Loan(s) to be repurchased; or terminate our relationship with the Dealer-Partner.

Our business model allows us to share the risk and reward of collecting on the Consumer Loans with the Dealer-Partners.  Such sharing is intended to motivate the Dealer-Partner to assign better quality Consumer Loans, follow our underwriting guidelines, comply with various legal regulations, meet our credit compliance requirements, and provide appropriate service and support to the consumer after the sale.  In addition, the DPSC works closely with Dealer-Partners to assist them in resolving any documentation deficiencies or funding stipulations.  We believe this arrangement aligns our interests with the interests of the Dealer-Partner and the consumer.

We measure various criteria for each Dealer-Partner against other Dealer-Partners in their area as well as the top performing Dealer-Partners.  Dealer-Partners are assigned a dealer rating based upon the performance of their Consumer Loans in both the Portfolio and Purchase Programs as well as other criteria.  The dealer rating is one of the factors used to determine the amount paid to Dealer-Partners as an advance or to acquire a Purchased Loan.  We provide each Dealer-Partner a monthly statement summarizing all activity that occurred on their Consumer Loan assignments.

Information on our Consumer Loans is presented in the following table:

   
For the Years Ended December 31,
 
 Average Consumer Loan Data
 
2010
   
2009
   
2008
   
2007
   
2006
 
 Average size of Consumer Loan accepted
 
$
14,480
   
$
12,689
   
$
14,518
   
$
13,878
   
$
12,722
 
 Percentage growth (decline) in average size of Consumer Loan
   
14.1
%
   
-12.6
%
   
4.6
%
   
9.1
%
   
5.9
%
 Average initial term (in months)
   
41
     
38
     
42
     
41
     
37
 

Servicing.  Our largest group of collectors service Consumer Loans that are in the early stages of delinquency.  These collectors are organized into teams comprised of two job types: (1) loan collectors; and (2) senior loan collectors.  Collection efforts typically consist of placing a call to the consumer within one day of the missed payment due date, although efforts may begin later for some segments of accounts.  Loan collectors are assigned Consumer Loans that are segmented into dialing pools by various phone contact profiles in an effort to maximize contact with the consumer.  Our senior loan collectors have a higher skill level and access to additional tools.  These collectors, in addition to securing payment arrangements, locate consumers by finding new contact information to assist in their team’s collection efforts.  The senior loan collectors service Consumer Loans with the following characteristics:

·  
no valid phone contact information;
·  
valid contact information without any contact in seven days; or
·  
various specialty segments (such as military personnel, abandoned vehicles, voluntary surrenders, and accounts requiring investigation).


The decision to repossess a vehicle is based on statistical models or policy based criteria.  When a Consumer Loan is approved for repossession, the account is transferred to our repossession team.  Repossession personnel continue to service the Consumer Loan as it is being assigned to a third party repossession contractor, who works on a contingency fee basis.  Once a vehicle has been repossessed, the consumer can negotiate to redeem the vehicle, whereupon the vehicle is returned to the consumer in exchange for paying off the Consumer Loan balance; or, where appropriate or if required by law, the vehicle is returned to the consumer and the Consumer Loan is reinstated in exchange for a payment that reduces or eliminates the past due balance.  If neither process is successful, the vehicle is sold at a wholesale automobile auction.  Prior to sale, the vehicle is typically inspected by a representative at the auction who provides repair and reconditioning recommendations.  Alternatively, our remarketing representatives may inspect the vehicle directly.  Our remarketing representatives then authorize any repair and reconditioning work in order to maximize the net sale proceeds at auction.

If the vehicle sale proceeds are not sufficient to satisfy the balance owing on the Consumer Loan, the Consumer Loan is serviced by either: (1) our internal collection team, in the event the consumer is willing to make payments on the deficiency balance; or (2) where permitted by law, our external collection team, if it is believed that legal action is required to reduce the deficiency balance owing on the Consumer Loan.  Our external collection team generally assigns Consumer Loans to third party collection attorneys who work on a contingency fee basis.  Additionally, we may sell or assign Consumer Loans to third party collection companies.

Collectors rely on two systems; the Collection System (“CS”) and the Loan Servicing System (“LSS”).  The CS interfaces with a predictive dialer and records all activity on a Consumer Loan, including details of past phone conversations with the consumer, collection letters sent, promises to pay, broken promises, repossession orders and collection attorney activity.  The LSS maintains a record of all transactions relating to Consumer Loans assigned after July 1990 and is a primary source of data utilized to:

·  
determine the outstanding balance of the Consumer Loans;
·  
forecast future collections;
·  
establish the amount of revenue recognized by us;
·  
calculate Dealer Holdback payments;
·  
analyze the profitability of our program; and
·  
evaluate our proprietary credit scoring system.

We outsource a portion of our collection function to companies in India and in Costa Rica.  These outsourced collectors service accounts using the CS and typically service accounts that are less than sixty days past due.

Ancillary Products

We provide Dealer-Partners the ability to offer vehicle service contracts to consumers.  A vehicle service contract provides the consumer protection by paying for the repair or replacement of certain components of the vehicle in the event of a mechanical failure.  Buyers Vehicle Protection Plan, Inc. (“BVPP”), our wholly-owned subsidiary, has relationships with third party administrators (“TPAs”) whereby the TPAs process claims on vehicle service contracts that are underwritten by third party insurers.  BVPP receives a commission for all vehicle service contracts sold by our Dealer-Partners when the vehicle is financed by us.  The commission is included in the retail price of the vehicle service contract which is added to the Consumer Loan.  We provide Dealer-Partners with an additional advance based on the retail price of the vehicle service contract.  We recognize our commission from the vehicle service contracts as part of finance charges on a level-yield basis based upon forecasted cash flows.  We bear the risk of loss for claims on certain vehicle service contracts that are reinsured by us.  Effective January 1, 2010, the commission received by BVPP increased due to a change in our relationship with the TPAs.  Prior to 2010, we relied on the TPAs to market their vehicle service contracts to our Dealer-Partners.  Effective January 1, 2010, we now market the vehicle service contracts directly to our Dealer-Partners.


During the fourth quarter of 2008, we formed VSC Re Company (“VSC Re”), our wholly-owned subsidiary that is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by Dealer-Partners on vehicles financed by us.  Prior to October 31, 2009, VSC Re reinsured vehicle service contracts that were underwritten by two of our three third party insurers.  Effective October 31, 2009, we terminated our arrangement with one of our three third party insurers.  VSC Re currently reinsures vehicle service contracts that are underwritten by one of our two third party insurers.  Vehicle service contract premiums, which represent the selling price of the vehicle service contract to the consumer, less commissions and certain administrative costs, are contributed to trust accounts controlled by VSC Re.  These premiums are used to fund claims covered under the vehicle service contracts.  VSC Re is a bankruptcy remote entity.  As such, our exposure to fund claims is limited to the trust assets controlled by VSC Re and our net investment in VSC Re.  We formed VSC Re in order to enhance our control and security of the trust assets that are used to pay future vehicle service contract claims.  The amount of income we earn from the vehicle service contracts over time is not impacted by the formation of VSC Re, as both before and after the formation, the income we recognize, excluding our commissions, is based on the amount by which vehicle service contract premiums exceed claims.  The only change in our risk associated with adverse claims experience relates to our net investment in VSC Re, which is now at risk in the event claims exceed premiums.  Under the prior structure, our risk was limited to the amount of premiums contributed to the trusts.

Prior to the formation of VSC Re, our agreements with two of our vehicle service contract TPAs allowed us to receive profit sharing payments depending upon the performance of the vehicle service contract programs.  The agreements also required that vehicle service contract premiums be placed in trust accounts.  Funds in the trust accounts were utilized by the TPA to pay claims on the vehicle service contracts.  Upon the formation of VSC Re during the fourth quarter of 2008, the unearned premiums on the majority of the vehicle service contracts that had been written through these two TPAs were ceded to VSC Re along with any related trust assets.  Vehicle service contracts written prior to 2008 through one of the TPAs remain under this profit sharing arrangement.  Profit sharing payments, if any, on the vehicle service contracts are distributed to us periodically after the term of the vehicle service contracts have substantially expired provided certain loss rates are met.  We are considered the primary beneficiary of the remaining trust and as a result, the assets and the related liabilities have been consolidated on our balance sheet.

BVPP also has a relationship with a TPA that allows Dealer-Partners to offer a GAP product to consumers whereby the TPA processes claims that are underwritten by a third party insurer.  GAP provides the consumer protection by paying the difference between the loan balance and the amount covered by the consumer's insurance policy in the event of a total loss of the vehicle due to severe damage or theft.  We receive a commission for all GAP contracts sold by our Dealer-Partners when the vehicle is financed by us, and do not bear any risk of loss for claims.  The commission is included in the retail price of the GAP contract which is added to the Consumer Loan.  We provide Dealer-Partners with an additional advance based on the retail price of the GAP contract.  We recognize our commission from the GAP contracts as part of finance charges on a level-yield basis based upon forecasted cash flows.  We are eligible to receive profit sharing payments depending on the performance of the GAP program.  Profit sharing payments from the third party are received once a year, if eligible.

During 2006, we began to provide Dealer-Partners in certain states the ability to purchase Global Positioning Systems (“GPS”) with Starter Interrupt Devices (“SID”).  Through this program, Dealer-Partners can install a GPS-based SID (“GPS-SID”) on vehicles financed by us that can be activated if the consumer fails to make payments on their account, and can result in the prompt repossession of the vehicle.  Dealer-Partners purchase the GPS-SID directly from third parties.  The third parties pay us a marketing fee for each device sold and installed, at which time the marketing fee revenue is recognized in other income within our consolidated statements of income.

Discontinued Operations

Effective June 30, 2003, we stopped originating Consumer Loans in the United Kingdom and we sold the remainder of the portfolio on December 30, 2005.  The United Kingdom business was formally dissolved in 2010.  The results for the United Kingdom business are reported as a discontinued operation in the consolidated statements of income for all periods presented.


Competition

The market for consumers who do not qualify for conventional automobile financing is large and highly competitive.  The market is currently served by “buy here, pay here” dealerships, 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 us.  We compete by offering a profitable and efficient method for Dealer-Partners to finance customers who would be more difficult or less profitable to finance through other methods.  In addition, we compete on the basis of the level of service provided by our DPSC and sales personnel.



Customer and Geographic Concentrations

No single Dealer-Partner accounted for more than 10% of total revenues during any of the last three years.  Additionally, no single Dealer-Partner’s Loans receivable balance accounted for more than 10% of total Loans receivable balance as of December 31, 2010 or 2009.  The following tables provide information regarding the five states that were responsible for the largest dollar volume of Consumer Loan assignments and the related number of active Dealer-Partners during 2010, 2009, and 2008:


   
For the Year Ended December 31, 2010
 
(In thousands)
 
Consumer Loan Assignments
   
Active Dealer-Partners (2)
 
   
Dollar Volume (1)
   
% of Total
   
Number
   
% of Total
 
Michigan
 
$
92,694
     
10.4
%
   
224
     
7.0
%
New York
   
74,072
     
8.4
%
   
190
     
5.9
%
Texas
   
54,406
     
6.1
%
   
250
     
7.8
%
Ohio
   
51,271
     
5.8
%
   
201
     
6.3
%
Mississippi
   
45,369
     
5.1
%
   
81
     
2.5
%
All other states
   
569,527
     
64.2
%
   
2,260
     
70.5
%
Total
 
$
887,339
     
100.0
%
   
3,206
     
100.0
%

   
For the Year Ended December 31, 2009
 
(In thousands)
 
Consumer Loan Assignments
   
Active Dealer-Partners (2)
 
   
Dollar Volume (1)
   
% of Total
   
Number
   
% of Total
 
Michigan
 
$
63,960
     
10.3
%
   
197
     
6.2
%
New York
   
45,129
     
7.3
%
   
178
     
5.6
%
Texas
   
44,912
     
7.3
%
   
250
     
7.9
%
Ohio
   
36,186
     
5.8
%
   
187
     
5.9
%
Alabama
   
32,933
     
5.3
%
   
126
     
4.0
%
All other states
   
396,256
     
64.0
%
   
2,230
     
70.4
%
Total
 
$
619,376
     
100.0
%
   
3,168
     
100.0
%

   
For the Year Ended December 31, 2008
 
(In thousands)
 
Consumer Loan Assignments
   
Active Dealer-Partners (2)
 
   
Dollar Volume (1)
   
% of Total
   
Number
   
% of Total
 
Texas
 
$
69,435
     
8.8
%
   
240
     
7.4
%
Michigan
   
56,983
     
7.3
%
   
198
     
6.1
%
Ohio
   
53,698
     
6.8
%
   
182
     
5.6
%
Alabama
   
53,033
     
6.8
%
   
120
     
3.7
%
New York
   
41,797
     
5.3
%
   
174
     
5.3
%
All other states
   
511,450
     
65.0
%
   
2,350
     
71.9
%
Total
 
$
786,396
     
100.0
%
   
3,264
     
100.0
%

(1)  
Represents advances paid to Dealer-Partners on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealer-Partners to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
(2)  
Active Dealer-Partners are Dealer-Partners who have received funding for at least one Loan during the year.



Geographic Financial Information

For the three years ended December 31, 2010, 2009 and 2008, revenues from continuing operations were primarily derived from operations in the United States and long-lived assets were primarily located in the United States.  For additional geographic financial information, see Note 12 to the consolidated financial statements contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Regulation

Our business is subject to laws and regulations, including the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act and other various state and federal laws and regulations.  These laws and regulations, among other things, require licensing and qualification; limit interest rates, fees and other charges associated with the Consumer Loans assigned to us; require specified disclosures by Dealer-Partners to consumers; govern the sale and terms of ancillary products; and define the rights to repossess and sell collateral.  Failure to comply with these laws or regulations could have a material adverse effect on us by, among other things, limiting the jurisdictions in which we may operate, restricting our ability to realize the value of the collateral securing the Consumer Loans, making it more costly or burdensome to do business or resulting in potential liability.  The volume of new or modified laws and regulations has increased in recent years and has increased significantly in response to issues arising with respect to consumer lending.  From time to time, legislation and regulations are enacted which increase the cost of doing business, limit or expand permissible activities or affect the competitive balance among financial services providers.  Proposals to change the laws and regulations governing the operations and taxation of financial institutions and financial services providers are frequently made in the U.S. Congress, in the state legislatures and by various regulatory agencies.  This legislation may change our operating environment in substantial and unpredictable ways and may have a material adverse effect on our business.  For example, on July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which significantly changes the regulation of financial institutions and the financial services industry.  Among other things, the Dodd-Frank Act establishes as an independent entity within the Federal Reserve, the Bureau of Consumer Financial Protection (the “BCFP”), which will be given the authority to promulgate consumer protection regulations applicable to all entities offering consumer financial services or products, including non-bank commercial companies in the business of extending credit and servicing consumer loans.  The scope and substance of the regulations that may be adopted by the BCFP will not be known until the BCFP is organized and begins functioning.  The Dodd-Frank Act contains numerous other provisions affecting financial industry participants of all types, many of which may have an impact on our operating environment in substantial and unpredictable ways.  The Dodd-Frank Act and regulations promulgated thereunder, including by the BCFP, are likely to affect our cost of doing business, may limit or expand our permissible activities, may affect the competitive balance within our industry and market areas and could have a material adverse effect on us.  Our management continues to assess the Dodd-Frank Act’s probable impact on our business, financial condition and results of operations, and to monitor developments involving the entities charged with promulgating regulations thereunder.  However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and on us in particular, is uncertain at this time.  The nature and extent of future legislative and regulatory changes affecting financial institutions and non-bank commercial companies, including as a result of the Dodd-Frank Act, is very unpredictable at this time, and any changes could have a material adverse effect on us.  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 us.

Our Dealer-Partners must also comply with credit and trade practice statutes and regulations.  Failure of our Dealer-Partners to comply with these statutes and regulations could result in consumers having rights of rescission and other remedies that could have a material adverse effect on us.

The sale of vehicle service contracts and GAP by Dealer-Partners in connection with Consumer Loans assigned to us from Dealer-Partners is also subject to state laws and regulations.  As we are the holder of the Consumer Loans that may, in part, finance these products, some of these state laws and regulations may apply to our servicing and collection of the Consumer Loans.  Although these laws and regulations do not significantly affect our business, there can be no assurance that insurance or other regulatory authorities in the jurisdictions in which these products are offered by Dealer-Partners will not seek to regulate or restrict the operation of our business in these jurisdictions.  Any regulation or restriction of our business in these jurisdictions could materially adversely affect the income received from these products.



We believe that we maintain all material licenses and permits required for our current operations and are in substantial compliance with all applicable laws and regulations.  Our agreements with Dealer-Partners provide that the Dealer-Partner shall indemnify us with respect to any loss or expense we incur as a result of the Dealer-Partner’s failure to comply with applicable laws and regulations.

Team Members

Our team members are organized into three operating functions: Originations, Servicing, and Support.

Originations. The originations function includes team members that are responsible for marketing our programs to prospective Dealer-Partners, enrolling new Dealer-Partners, and supporting active Dealer-Partners.  Originations also includes team members responsible for processing new Consumer Loan assignments.

Servicing.  The servicing function includes team members that are responsible for servicing the Consumer Loans.  Collectors, our largest group of servicing team members, service Consumer Loans that are in the early stages of delinquency.  Servicing also includes team members responsible for repossession, remarketing, redemption, and recovery activities.

Support.  The support function includes team members in our finance, information technology, operations improvement, analytics, corporate legal, and human resources departments.

As of December 31, 2010, we had 862 full and part-time team members.  Our team members have no union affiliations and we believe our relationship with our team members is in good standing.  The table below presents team members by operating function:

   
Number of Team Members
 
   
As of December 31,
 
Operating Function
 
2010
   
2009
 
Originations
   
245
     
224
 
Servicing
   
411
     
462
 
Support
   
206
     
225
 
Total
   
862
     
911
 

Available Information

Our Internet address is creditacceptance.com.  We make available, free of charge on the web site, copies of reports we file with or furnish to the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after we electronically file or furnish such reports.


RISK FACTORS

Our inability to accurately forecast and estimate the amount and timing of future collections could have a material adverse effect on results of operations.

Substantially all of the Consumer Loans assigned to us are made to individuals with impaired or limited credit histories or higher debt-to-income ratios than are permitted by traditional lenders.  Consumer Loans made to these individuals generally entail a higher risk of delinquency, default and repossession and higher losses than loans made to consumers with better credit.  Since most of our revenue and cash flows from operations are generated from these Consumer Loans, our ability to accurately forecast Consumer Loan performance is critical to our business and financial results.  At the time of assignment, we forecast future expected cash flows from the Consumer Loan.  Based on these forecasts, which include estimates for wholesale vehicle prices in the event of vehicle repossession and sale, we make an advance or one-time purchase payment to the related Dealer-Partner at a level designed to achieve an acceptable return on capital.  These forecasts also serve as a critical assumption in our accounting for recognizing finance charge income and determining our allowance for credit losses.  Please see the Critical Accounting Estimates – Finance Charge Revenue & Allowance for Credit Losses section in Item 7 of this Form 10-K, which is incorporated by reference herein.  If Consumer Loan performance equals or exceeds original expectations, it is likely our target return on capital will be achieved.  However, actual cash flows from any individual Consumer Loan are often different than cash flows estimated at the time of assignment.  There can be no assurance that our forecasts will be accurate or that Consumer Loan performance will be as expected.  Recent economic conditions have made forecasts regarding the performance of Consumer Loans more difficult.  In the event that our forecasts are not accurate, our financial position, liquidity and results of operations could be materially adversely affected.

We may be unable to execute our business strategy due to current economic conditions.

Our financial position, liquidity and results of operations depend on management’s ability to execute our business strategy.  Key factors involved in the execution of our business strategy include achieving our desired Consumer Loan assignment volume, continued and successful use of CAPS and pricing strategy, the use of effective credit risk management techniques and servicing strategies, continued investment in technology to support operating efficiency and continued access to funding and liquidity sources.  Although we recently implemented pricing changes that were intended to have a positive impact on unit volume, in exchange for mostly lower returns on capital, there can be no assurance that this change will have its intended effect or that lower returns on capital will be modest.  Please see the Consumer Loan Volume section in Item 7 of this Form 10-K, which is incorporated by reference herein.  Our failure or inability to execute any element of our business strategy could materially adversely affect our financial position, liquidity and results of operations.

We may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow our business.

We use debt financing to fund new Loans and pay Dealer Holdback.  We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit with a commercial bank syndicate; (2) revolving secured warehouse facilities with institutional investors; (3) asset-backed secured financings (“Term ABS”) with qualified institutional investors; and (4) Senior Secured Notes due 2017 issued pursuant to Rule 144A and Regulation S of the Securities Act of 1933, as amended (“Senior Notes”).  We cannot guarantee that the revolving secured line of credit or the revolving secured warehouse facilities will continue to be available beyond their current maturity dates on acceptable terms or at all, or that we will be able to obtain additional financing on acceptable terms or at all.  The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit and our credit ratings and capacity for additional borrowing under our existing financing arrangements.  If our various financing alternatives were to become limited or unavailable, we may be unable to maintain or grow Consumer Loan volume at the level that we anticipate and our operations could be materially adversely affected.


The terms of our debt limit how we conduct our business.

The agreements that govern our debt contain covenants that restrict our ability to, among other things:
·  
incur and guarantee debt;
·  
pay dividends or make other distributions on or redeem or repurchase our stock;
·  
make investments or acquisitions;
·  
create liens on our assets;
·  
sell assets;
·  
merge with or into other companies;
·  
enter into transactions with stockholders and other affiliates; and
·  
make capital expenditures.

Some of our debt agreements also impose requirements that we maintain specified financial measures not in excess of, or not below, specified levels.  In particular, our revolving credit facility requires, among other things, that we maintain (i) at all times a ratio of consolidated net assets to consolidated funded debt equal to or greater than a specified minimum; (ii) as of the end of each fiscal quarter, a ratio of consolidated funded debt to consolidated tangible net worth at or below a specified maximum; (iii) as of the end of each fiscal quarter calculated for the two fiscal quarters then ending, consolidated net income of not less than a specified minimum; and (iv) as of the end of each fiscal quarter, a ratio of consolidated income available for fixed charges for the period of four consecutive fiscal quarters most recently ended to consolidated fixed charges for that period of not less than a specified minimum.  These covenants limit the manner in which we can conduct our business and could prevent us from engaging in favorable business activities or financing future operations and capital needs and impair our ability to successfully execute our strategy and operate our business.

A breach of any of the covenants in our debt instruments would result in an event of default thereunder if not promptly cured or waived. Any continuing default would permit the creditors to accelerate the related debt, which could also result in the acceleration of other debt containing a cross-acceleration or cross-default provision. In addition, an event of default under our revolving credit facility would permit the lenders thereunder to terminate all commitments to extend further credit under our revolving credit facility. Furthermore, if we were unable to repay the amounts due and payable under our revolving credit facility or other secured debt, the lenders thereunder could cause the collateral agent to proceed against the collateral securing that debt.  In the event our creditors accelerate the repayment of our debt, there can be no assurance that we would have sufficient assets to repay that debt, and our financial condition, liquidity and results of operations would suffer.

A violation of the terms of our Term ABS facilities or revolving secured warehouse facilities could have a materially adverse impact on our operations.

Under our Term ABS facilities and the revolving secured warehouse facilities, (1) we have various obligations and covenants as servicer and custodian of the Consumer Loans contributed thereto and in our individual capacity and (2) the special purpose subsidiaries to which we contribute Consumer Loans have various obligations and covenants.  A violation of any of these obligations or covenants by us or the special purpose subsidiaries, respectively, may result in us being unable to obtain additional funding under these securitization facilities, the termination of our servicing rights and the loss of servicing fees, and may result in amounts outstanding under these securitization facilities becoming immediately due and payable.  In addition, the violation of any financial covenant under our revolving secured line of credit facility is an event of default or termination event under the securitization facilities.  The lack of availability from any or all of these securitization facilities may have a material adverse effect on our financial position, liquidity, and results of operations.


The conditions of the U.S. and international capital markets may adversely affect lenders with which we have relationships, causing us to incur additional costs and reducing our sources of liquidity, which may adversely affect our financial position, liquidity and results of operations.

Over the past several years, there has been turbulence in the global capital markets and the overall economy.  Such turbulence can result in disruptions in the financial sector and affect lenders with which we have relationships.  Disruptions in the financial sector may increase our exposure to credit risk and adversely affect the ability of lenders to perform under the terms of their lending arrangements with us.  Failure by our lenders to perform under the terms of our lending arrangements could cause us to incur additional costs that may adversely affect our liquidity, financial condition and results of operations.  While overall market conditions have improved, there can be no assurance that future disruptions in the financial sector will not occur that could have similar adverse effects on our business.

Our substantial debt could negatively impact our business, prevent us from satisfying our debt obligations and adversely affect our financial condition.

 
We have a substantial amount of debt.  The substantial amount of our debt could have important consequences, including the following:
 
·  
our ability to obtain additional financing for Consumer Loan assignments, working capital, debt refinancing or other purposes could be impaired;
·  
a substantial portion of our cash flows from operations will be dedicated to paying principal and interest on our debt, reducing funds available for other purposes;
·  
we may be vulnerable to interest rate increases, as some of our borrowings, including those under our revolving credit facility, bear interest at variable rates;
·  
we could be more vulnerable to adverse developments in our industry or in general economic conditions;
·  
we may be restricted from taking advantage of business opportunities or making strategic acquisitions; and
·  
we may be limited in our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate.

Due to competition from traditional financing sources and non-traditional lenders, we may not be able to compete successfully.

The automobile finance market for consumers who do not qualify for conventional automobile financing is large and highly competitive.  The market is served by a variety of companies including "buy here, pay here" dealerships.  The market is also 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 financial resources than are available to us, and many have long standing relationships with automobile dealerships.  Providers of automobile financing have traditionally competed based on the interest rate charged, the quality of credit accepted, the flexibility of loan terms offered and the quality of service provided to dealers and consumers.  There is potential that significant direct competition could emerge and that we may be unable to compete successfully.  Additionally, if we are unsuccessful in maintaining and expanding our relationships with Dealer-Partners, we may be unable to accept Consumer Loans in the volume and on the terms that we anticipate.

We may not be able to generate sufficient cash flows to service our outstanding debt and fund operations and may be forced to take other actions to satisfy our obligations under such debt.

Our ability to make payments of principal and interest on indebtedness will depend in part on our cash flows from operations, which are subject to economic, financial, competitive and other factors beyond our control.  We cannot assure you that we will maintain a level of cash flows from operations sufficient to permit us to meet our debt service obligations.  If we are unable to generate sufficient cash flows from operations to service our debt, we may be required to sell assets, refinance all or a portion of our existing debt or obtain additional financing.  There can be no assurance that any refinancing will be possible or that any asset sales or additional financing can be completed on acceptable terms or at all.


Interest rate fluctuations may adversely affect our borrowing costs, profitability and liquidity.

Our profitability may be directly affected by the level of and fluctuations in interest rates, whether caused by changes in economic conditions or other factors, which affect our borrowing costs.  Our profitability and liquidity could be materially adversely affected during any period of higher interest rates.  We monitor the interest rate environment and employ hedging strategies designed to mitigate the impact of increases in interest rates.  We can provide no assurance, however, that hedging strategies will mitigate the impact of increases in interest rates.

Reduction in our credit rating could increase the cost of our funding from, and restrict our access to, the capital markets and adversely affect our liquidity, financial condition and results of operations.

Credit rating agencies evaluate us, and their ratings of our debt and creditworthiness are based on a number of factors.  These factors include our financial strength and other factors not entirely within our control, including conditions affecting the financial services industry generally.  In light of the recent difficulties that faced the financial services industry and the financial markets, there can be no assurance that we will maintain our current ratings.  Failure to maintain those ratings could, among other things, adversely limit our access to the capital markets and affect the cost and other terms upon which we are able to obtain financing.

We may incur substantially more debt and other liabilities.  This could exacerbate further the risks associated with our current debt levels.

We may be able to incur substantial additional debt in the future.  Although the terms of our debt instruments contain restrictions on our ability to incur additional debt, these restrictions are subject to exceptions that could permit us to incur a substantial amount of additional debt.  In addition, our debt instruments do not prevent us from incurring liabilities that do not constitute indebtedness as defined for purposes of those debt instruments.  If new debt or other liabilities are added to our current debt levels, the risks associated with our having substantial debt could intensify.

The regulation to which we are or may become subject could result in a material adverse effect on our business.

Reference should be made to Item 1. Business  “Regulation” for a discussion of regulatory risk factors.

Adverse changes in economic conditions, the automobile or finance industries, or the non-prime consumer market could adversely affect our financial position, liquidity and results of operations, the ability of key vendors that we depend on to supply us with services, and our ability to enter into future financing transactions.

We are subject to general economic conditions which are beyond our control. Recently, concerns over the availability and cost of credit, the U.S. mortgage market, a declining real estate market and geopolitical issues have contributed to increased volatility and diminished expectations for the economy and financial markets going forward.  During periods of economic slowdown or recession, delinquencies, defaults, repossessions and losses may increase on our Consumer Loans and Consumer Loan prepayments may decline.  These periods are also typically accompanied by decreased consumer demand for automobiles and declining values of automobiles securing outstanding Consumer Loans, which weakens collateral coverage and increases the amount of a loss in the event of default.  Significant increases in the inventory of used automobiles during periods of economic recession may also depress the prices at which repossessed automobiles may be sold or delay the timing of these sales.  Additionally, higher gasoline prices, declining stock market values, unstable real estate values, resets of adjustable rate mortgages to higher interest rates, increasing unemployment levels, general availability of consumer credit or other factors that impact consumer confidence or disposable income could increase loss frequency and decrease consumer demand for automobiles as well as weaken collateral values of automobiles.  Because our business is focused on consumers who do not qualify for conventional automobile financing, the actual rates of delinquencies, defaults, repossessions and losses on these Consumer Loans could be higher than that of those experienced in the general automobile finance industry, and could be more dramatically affected by a general economic downturn.


We rely on Dealer-Partners to originate Consumer Loans for assignment under our programs.  High levels of Dealer-Partner attrition, due to a general economic downturn or otherwise, could materially adversely affect our operations.  In addition, we rely on vendors to provide us with services we need to operate our business.  Any disruption in our operations due to the untimely or discontinued supply of these services could substantially adversely affect our operations.  Finally, during an economic slowdown or recession, our servicing costs may increase without a corresponding increase in finance charge revenue.  Any sustained period of increased delinquencies, defaults, repossessions or losses or increased servicing costs could also materially adversely affect our financial position, liquidity and results of operations and our ability to enter into future financing transactions.

Litigation we are involved in from time to time may adversely affect our financial condition, results of operations and cash flows.

As a result of the consumer-oriented nature of the industry in which we operate and uncertainties with respect to the application of various laws and regulations in some circumstances, we are subject to various consumer claims and litigation seeking damages and statutory penalties, based upon, among other things, usury, disclosure inaccuracies, wrongful repossession, violations of bankruptcy stay provisions, certificate of title disputes, fraud and breach of contract.  As the assignee of Consumer Loans originated by Dealer-Partners, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealer-Partners.  We may also have disputes and litigation with Dealer-Partners relating to our dealer servicing and related agreements, including claims for, among other things, breach of contract or other duties purportedly owed to the Dealer-Partners. The damages and penalties that may be claimed by consumers or Dealer-Partners in these types of matters can be substantial.  The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages, and plaintiffs may seek treatment as purported class actions.  A significant judgment against us in connection with any litigation or arbitration could have a material adverse effect on our financial position, liquidity and results of operations.

Changes in tax laws and the resolution of uncertain income tax matters could have a material adverse effect on our results of operations and cash flows from operations.

We are subject to income tax in many of the various jurisdictions in which we operate.  Increases in statutory income tax rates and other adverse changes in applicable law in these jurisdictions could have an adverse effect on our results of operations.  In the ordinary course of business, there are transactions and calculations where the ultimate tax determination is uncertain.  At any one time, multiple tax years are subject to audit by various taxing jurisdictions. We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions.  Please see the Critical Accounting Estimates – Uncertain Tax Positions section in Item 7 of this Form 10-K, which is incorporated by reference herein.  We adjust these liabilities as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.  Such payments could have a material adverse effect on our results of operations and cash flows from operations. 

Our operations are dependent on technology.

Virtually all Consumer Loans submitted to us for assignment are processed through our internet-based CAPS application, which enables our Dealer-Partners to interact with our proprietary credit scoring system.  Our Consumer Loan servicing platform is also technology based.  We rely on these systems to record and process significant amounts of data quickly and accurately and believe that these systems provide us with a competitive advantage.  All of these systems are dependent upon computer and telecommunications equipment, software systems and Internet access.  The temporary or permanent loss of any components of these systems through hardware failures, software errors, the vulnerability of the Internet, operating malfunctions or otherwise could interrupt our business operations, harm our business and adversely affect our competitive advantage.  In addition, our competitors could create or acquire systems similar to ours, which would adversely affect our competitive advantage.

We rely on a variety of measures to protect our technology and proprietary information, including copyrights, trade secrets and patents.  However, these measures may not prevent misappropriation or infringement of our intellectual property or proprietary information, which would adversely affect us.  In addition, our competitors or other third parties may allege that our systems, processes or technologies infringe their intellectual property rights.


Our ability to integrate computer and telecommunications technologies into our business is essential to our success.  Computer and telecommunications technologies are evolving rapidly and are characterized by short product life cycles.  We may not be successful in anticipating, managing or adopting technological changes on a timely basis.  While we believe that our existing information systems are sufficient to meet our current demands and continued expansion, our future growth may require additional investment in these systems.  We cannot assure that adequate capital resources will be available to us at the appropriate time.

Reliance on third parties to administer our ancillary product offerings could adversely affect our business and financial results.

We have relationships with third parties to administer vehicle service contract and GAP products underwritten by third party insurers and financed by us.  We depend on these TPAs to evaluate and pay claims in an accurate and timely manner.  We also have relationships with third parties to sell and administer GPS-SID.  If our relationships with the TPAs were modified, disrupted, or terminated, we would need to obtain these services from an alternative administrator or provide them using our internal resources.  We may be unable to replace these TPAs with a suitable alternative in a timely and efficient manner on terms we consider acceptable, or at all.  In the event we were unable to effectively administer our ancillary products offerings, we may need to eliminate or suspend our ancillary product offerings from our future business, we may experience a decline in the performance of our Consumer Loans, our reputation in the marketplace could be undermined, and our financial position, liquidity and results of operations could be adversely affected.

We are dependent on our senior management and the loss of any of these individuals or an inability to hire additional team members could adversely affect our ability to operate profitably.

Our senior management average over 11 years of experience with us.  Our success is dependent upon the management and the leadership skills of this team.  In addition, competition from other companies to hire our team members possessing the necessary skills and experience required could contribute to an increase in team member turnover.  The loss of any of these individuals or an inability to attract and retain additional qualified team members could adversely affect us.  There can be no assurance that we will be able to retain our existing senior management or attract additional qualified team members.

Our reputation is a key asset to our business, and our business may be affected by how we are perceived in the marketplace.

Our reputation is a key asset to our business.  Our ability to attract consumers through our Dealer-Partners is highly dependent upon external perceptions of our level of service, trustworthiness, business practices and financial condition.  Negative publicity regarding these matters could damage our reputation among existing and potential consumers and Dealer-Partners, which could make it difficult for us to attract new consumers and Dealer-Partners and maintain existing Dealer-Partners.  Adverse developments with respect to our industry may also, by association, negatively impact our reputation or result in greater regulatory or legislative scrutiny or litigation against us.

The concentration of our Dealer-Partners in several states could adversely affect us.

 
We are partnered with Dealer-Partners throughout the United States.  During the year ended December 31, 2010, our five largest states (measured by advances paid to Dealer-Partners on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealer-Partners to purchase Consumer Loans assigned under our Purchase Program) contained approximately 29.5% of our Dealer-Partners. While we believe we have a diverse geographic presence, for the near term, we expect that significant amounts of Consumer Loan assignments will continue to be generated by Dealer-Partners in these five states due to the number of Dealer-Partners in these states and currently prevailing economic, demographic, regulatory, competitive and other conditions in these states. Changes to conditions in these states could lead to an increase in Dealer-Partner attrition or a reduction in demand for our service that could materially adversely affect our financial position, liquidity and results of operations.
 


 
Failure to properly safeguard confidential consumer information could subject us to liability, decrease our profitability and damage our reputation.
 

If third parties or our team members are able to breach our network security or otherwise misappropriate our customers’ personal information or loan information, or if we give third parties or our team members improper access to our customers’ personal information or loan information, we could be subject to liability.  This liability could include identity theft or other similar fraud-related claims.  This liability could also include claims for other misuses or losses of personal information, including for unauthorized marketing purposes.  Other liabilities could include claims alleging misrepresentation of our privacy and data security practices.

We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to secure online transmission of confidential consumer information.  Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments may result in a compromise or breach of the algorithms that we use to protect sensitive customer transaction data.  A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations.  We may be required to expend capital and other resources to protect against security breaches or to alleviate problems caused by security breaches.  Our security measures are designed to protect against security breaches, but our failure to prevent security breaches could subject us to liability, decrease our profitability and damage our reputation.

Our founder controls a majority of our common stock, has the ability to control matters requiring shareholder approval and has interests which may conflict with the interests of our other security holders.

Our founder owns a large enough stake of the Company to control matters presented to shareholders, including the election and removal of directors, the approval of significant corporate transactions, such as any reclassification, reorganization, merger, consolidation or sale of all or substantially all of our assets, and the control of our management and affairs, including executive compensation arrangements.  His interests may conflict with the interests of our other security holders.

Reliance on our outsourced business functions could adversely affect our business.

We outsource a portion of our collections functions to companies in India and Costa Rica and a portion of our DPSC functions to a company in India.  While we believe there are benefits to these arrangements, outsourcing increases our operational complexity and decreases our control.  We rely on these service providers to provide a high level of service and support, which subjects us to risks associated with inadequate or untimely service.  For example, the outsourcing of collection functions could result in lower collection rates on our Consumer Loans than we would have achieved had we performed the same functions internally.  In addition, if these outsourcing arrangements were not renewed or were terminated or the services provided to us were otherwise disrupted, we would have to obtain these services from an alternative provider or provide them using our internal resources.  We may be unable to replace, or be delayed in replacing these sources and there is a risk that we would be unable to enter into a similar agreement with an alternate provider on terms that we consider favorable or in a timely manner.  In the future, we may outsource other business functions.  If any of these or other risks related to outsourcing were realized, our financial position, liquidity and results of operations could be adversely affected.

Natural disasters, acts of war, terrorist attacks and threats or the escalation of military activity in response to these attacks or otherwise may negatively affect our business, financial condition and results of operations.

Natural disasters, acts of war, terrorist attacks and the escalation of military activity in response to these attacks or otherwise may have negative and significant effects, such as imposition of increased security measures, changes in applicable laws, market disruptions and job losses.  These events may have an adverse effect on the economy in general.  Moreover, the potential for future terrorist attacks and the national and international responses to these threats could affect the business in ways that cannot be predicted.  The effect of any of these events or threats could have a material adverse effect on our business, financial condition and results of operations.


ITEM 1B.
UNRESOLVED STAFF COMMENTS

None.

ITEM 2.
PROPERTIES

Our headquarters is located at 25505 West Twelve Mile Road, Southfield, Michigan 48034.  We purchased the office building in 1993 and have a mortgage loan from a commercial bank that is secured by a first mortgage lien on the property.  The office building includes approximately 136,000 square feet of space on five floors.  We occupy approximately 120,000 square feet of the building, with most of the remainder of the building leased to various tenants.

We lease approximately 14,000 square feet of office space in Southfield, Michigan and approximately 20,000 square feet of office space in Henderson, Nevada.  The lease for the Southfield, Michigan space expires in June 2013 and the lease for the Henderson, Nevada space expires in November 2014.

ITEM 3.
LEGAL PROCEEDINGS

In the normal course of business and as a result of the consumer-oriented nature of the industry in which we operate, industry participants are frequently subject to various consumer claims and litigation.  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 our repossession and sale of the consumer’s vehicle and other debt collection activities.  As we accept assignments of Consumer Loans originated by Dealer-Partners, we may also be named as a co-defendant in lawsuits filed by consumers principally against Dealer-Partners.  We may also have disputes and litigation with Dealer-Partners relating to our dealer servicing and related agreements, including claims for, among other things breach of contract or other duties purportedly owed to the Dealer-Partners.  The damages and penalties that may be claimed by consumers or Dealer-Partners in these types of matters can be substantial.  The relief requested by plaintiffs varies but may include requests for compensatory, statutory and punitive damages, and plaintiffs may seek treatment as purported class actions.  A significant judgment against us in connection with any litigation or arbitration could have a material adverse effect on our financial position, liquidity and results of operations.

ITEM 4.
(REMOVED AND RESERVED).


PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Price

During the year ended December 31, 2010 our common stock was traded on The Nasdaq Global Market® (“Nasdaq”) under the symbol “CACC”.  The following table sets forth the high and low sale prices as reported by the Nasdaq for the common stock for the relevant periods during 2010 and 2009.  Such bid information reflects inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

   
2010
   
2009
 
 Quarters Ended
 
High
   
Low
   
High
   
Low
 
March 31
 
$
53.97
   
$
38.57
   
$
23.99
   
$
13.73
 
June 30
   
49.65
     
41.24
     
25.00
     
19.01
 
September 30
   
63.45
     
47.18
     
33.96
     
22.10
 
December 31
   
63.58
     
54.12
     
44.93
     
30.56
 


As of February 16, 2011, we had 138 shareholders of record and approximately 3,000 beneficial holders of our common stock based upon securities position listings furnished to us.

Dividends

We have not paid any cash dividends during the periods presented.  Our debt agreements contain financial covenants which may indirectly limit the payment of dividends on common stock.


Stock Performance Graph

The following graph compares the percentage change in the cumulative total shareholder return on our common stock during the period beginning January 1, 2006 and ending on December 31, 2010 with the cumulative total return on the Nasdaq Market Index and a peer group index based upon approximately 100 companies included in the Dow Jones – US General Financial Index.  The comparison assumes that $100 was invested on January 1, 2006 in our common stock and in the foregoing indices and assumes the reinvestment of dividends.




Stock Repurchases

In 1999, our board of directors approved a stock repurchase program which authorizes us to repurchase common shares in the open market or in privately negotiated transactions at price levels we deem attractive.  As of December 31, 2010, we had authorization to repurchase up to $29.1 million of our common stock.  On February 9, 2011, we commenced a tender offer to purchase up to 1,904,761 shares of our common stock at a price of $65.625 per share.  The tender offer is scheduled to expire at 5:00 p.m., Eastern Standard Time, on March 10, 2011, subject to our right to extend the offer.  The tender offer is conditioned upon, among other things, consummation of a new debt financing (the “Debt Financing”) on terms reasonably satisfactory to us.  We anticipate that we will obtain all of the funds necessary to purchase shares in the tender offer, and to pay related fees and expenses, through a combination of the proceeds of the Debt Financing and by borrowing under our $170.0 million revolving secured line of credit facility.  The tender offer is being made pursuant to an offer to purchase issued in connection with the tender offer, and this Form 10-K is not an offer to purchase any of our shares of common stock.

The following table summarizes our stock repurchases for the three months ended December 31, 2010:

Period
 
Total Number of Shares Purchased
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Maximum Dollar Value that May Yet Be Used to Purchase Shares Under the Plans or Programs
 
October 1 through October 31, 2010
   
-
   
$
-
     
-
   
$
29,113,295
 
November 1 through November 30, 2010
   
124
*
   
-
     
-
     
29,113,295
 
December 1 through December 31, 2010
   
-
     
-
     
-
     
29,113,295
 
     
-
   
$
-
     
-
         


*Amount represents shares of common stock released to us by team members as payment of tax withholdings due to us upon the vesting of restricted stock.


ITEM 6.
SELECTED FINANCIAL DATA

The selected income statement and balance sheet data presented below are derived from our audited consolidated financial statements and should be read in conjunction with our consolidated financial statements as of and for the years ended December 31, 2010, 2009, and 2008, and notes thereto and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere in this Form 10-K, which is incorporated herein by reference.

(In thousands, except per share data)
 
Years Ended December 31,
 
   
2010
   
2009
   
2008
   
2007
   
2006
 
Income Statement Data:
                             
Revenue
 
$
442,135
   
$
380,664
   
$
312,186
   
$
239,927
   
$
219,332
 
Costs and expenses:
                                       
Salaries and wages
   
61,327
     
66,893
     
68,993
     
55,396
     
41,015
 
General and administrative (A)
   
26,432
     
30,391
     
27,536
     
27,202
     
36,491
 
Sales and marketing
   
19,661
     
14,808
     
16,776
     
17,493
     
16,624
 
Provision for credit losses
   
10,037
     
(12,164
)
   
46,029
     
19,947
     
11,006
 
Interest
   
47,752
     
32,399
     
43,189
     
36,669
     
23,330
 
Provision for claims
   
23,429
     
19,299
     
2,651
     
39
     
226
 
Total costs and expenses
   
188,638
     
151,626
     
205,174
     
156,746
     
128,692
 
Income from continuing operations before provision for income taxes
   
253,497
     
229,038
     
107,012
     
83,181
     
90,640
 
Provision for income taxes
   
83,390
     
82,992
     
39,944
     
29,567
     
31,793
 
Income from continuing operations
   
170,107
     
146,046
     
67,068
     
53,614
     
58,847
 
(Loss) gain from operations of discontinued United Kingdom operations
   
(30
)
   
137
     
307
     
(562
)
   
(297
)
(Credit) provision for income taxes
   
-
     
(72
)
   
198
     
(1,864
)
   
(90
)
(Loss) gain from discontinued operations
   
(30
)
   
209
     
109
     
1,302
     
(207
)
Net income
 
$
170,077
   
$
146,255
   
$
67,177
   
$
54,916
   
$
58,640
 
                                         
Net income per share:
                                       
Basic
 
$
5.79
   
$
4.78
   
$
2.22
   
$
1.83
   
$
1.78
 
Diluted
 
$
5.67
   
$
4.62
   
$
2.16
   
$
1.76
   
$
1.66
 
Income from continuing operations per share:
                                       
Basic
 
$
5.79
   
$
4.77
   
$
2.22
   
$
1.78
   
$
1.78
 
Diluted
 
$
5.67
   
$
4.61
   
$
2.16
   
$
1.72
   
$
1.67
 
(Loss) gain from discontinued operations per share:
                                       
Basic
 
$
-
   
$
0.01
   
$
-
   
$
0.04
   
$
(0.01
)
Diluted
 
$
-
   
$
0.01
   
$
-
   
$
0.04
   
$
(0.01
)
Weighted average shares outstanding:
                                       
Basic
   
29,393
     
30,590
     
30,250
     
30,053
     
33,036
 
Diluted
   
29,985
     
31,669
     
31,105
     
31,154
     
35,283
 
                                         
Balance Sheet Data:
                                       
Loans receivable, net
 
$
1,218,013
   
$
1,050,013
   
$
1,017,917
   
$
810,553
   
$
625,780
 
All other assets
   
125,502
     
126,223
     
121,437
     
131,629
     
99,433
 
Total assets
 
$
1,343,515
   
$
1,176,236
   
$
1,139,354
   
$
942,182
   
$
725,213
 
                                         
Total debt
 
$
685,667
   
$
506,979
   
$
641,714
   
$
532,130
   
$
392,175
 
Other liabilities
   
183,374
     
171,047
     
159,889
     
144,602
     
122,691
 
Total liabilities
   
869,041
     
678,026
     
801,603
     
676,732
     
514,866
 
Shareholders' equity (B)
   
474,474
     
498,210
     
337,751
     
265,450
     
210,347
 
Total liabilities and shareholders' equity
 
$
1,343,515
   
$
1,176,236
   
$
1,139,354
   
$
942,182
   
$
725,213
 

(A)  
2006 includes $11.2 million of additional legal expenses related to an increase in our loss related to a class action lawsuit in the state of Missouri.
(B)  
No dividends were paid during the periods presented.


ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes contained in Item 8 of this Form 10-K, which is incorporated herein by reference.

Overview

We provide auto loans to consumers regardless of their credit history.  Our product is offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing; from repeat and referral sales generated by these same customers; and from sales to customers responding to advertisements for our product, but who actually end up qualifying for traditional financing.

For the year ended December 31, 2010, consolidated net income was $170.1 million, or $5.67 per diluted share, compared to $146.3 million, or $4.62 per diluted share, for the same period in 2009 and $67.2 million, or $2.16 per diluted share, for the same period in 2008.  The growth in 2010 consolidated net income was primarily due to (1) an increase in the size of our Loan portfolio and (2) an improvement in the performance of our Loan portfolio.  The growth in 2009 consolidated net income was primarily due to (1) an improvement in the performance of our Loan portfolio, (2) higher yields on new Consumer Loan assignments, and (3) an increase in the size of our Loan portfolio.

Critical Success Factors

Critical success factors include our ability to access capital on acceptable terms, accurately forecast Consumer Loan performance, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit.  Economic profit is a financial metric we use to evaluate our financial results and determine incentive compensation.  Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.

Access to Capital

Our strategy for accessing capital on acceptable terms needed to maintain and grow the business is to: (1) maintain consistent financial performance; (2) maintain modest financial leverage; and (3) maintain multiple funding sources.  Our funded debt to equity ratio is 1.4:1 as of December 31, 2010.  We currently utilize the following primary forms of debt financing: (1) a revolving secured line of credit with a commercial bank syndicate; (2) revolving secured warehouse facilities with institutional investors; (3) Term ABS financings with qualified institutional investors; and (4) Senior Notes.

Consumer Loan Performance

At the time the Consumer Loan is submitted to us for assignment, we forecast future expected cash flows from the Consumer Loan.  Based on these forecasts, an advance or one-time purchase payment is made to the related Dealer-Partner at a price designed to achieve an acceptable return on capital.  If Consumer Loan performance equals or exceeds our original expectation, it is likely our target return on capital will be achieved.


We use a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment.  We continue to evaluate the expected collection rate of each Consumer Loan subsequent to assignment.  Our evaluation becomes more accurate as the Consumer Loans age, as we use actual performance data in our forecast.  By comparing our current expected collection rate for each Consumer Loan with the rate we projected at the time of assignment, we are able to assess the accuracy of our initial forecast.  The following table compares our forecast of Consumer Loan collection rates as of December 31, 2010, with the forecasts as of December 31, 2009, as of December 31, 2008, and at the time of assignment, segmented by year of assignment:

   
 Forecasted Collection Percentage as of
 
 Variance in Forecasted Collection
Percentage from
Consumer Loan Assignment Year
 
 December 31, 2010
 
 December 31,
2009
 
 December 31,
2008
 
 Initial
Forecast
 
 December 31,
2009
 
 December 31,
2008
 
 Initial
Forecast
2001
 
67.5%
 
67.5%
 
67.4%
 
70.4%
 
0.0%
 
0.1%
 
-2.9%
2002
 
70.5%
 
70.4%
 
70.4%
 
67.9%
 
0.1%
 
0.1%
 
2.6%
2003
 
73.7%
 
73.7%
 
73.8%
 
72.0%
 
0.0%
 
-0.1%
 
1.7%
2004
 
73.0%
 
73.1%
 
73.4%
 
73.0%
 
-0.1%
 
-0.4%
 
0.0%
2005
 
73.7%
 
73.7%
 
74.1%
 
74.0%
 
0.0%
 
-0.4%
 
-0.3%
2006
 
70.2%
 
70.3%
 
70.3%
 
71.4%
 
-0.1%
 
-0.1%
 
-1.2%
2007
 
67.9%
 
68.3%
 
67.9%
 
70.7%
 
-0.4%
 
0.0%
 
-2.8%
2008
 
69.9%
 
70.0%
 
67.9%
 
69.7%
 
-0.1%
 
2.0%
 
0.2%
2009
 
78.5%
 
75.6%
 
 -
 
71.9%
 
2.9%
 
 -
 
6.6%
2010
 
75.8%
 
 -
 
 -
 
73.6%
 
 -
 
 -
 
2.2%

Consumer Loans assigned in 2002, 2003, 2008, 2009 and 2010 have performed better than our initial expectations while Consumer Loans assigned in 2001, 2005, 2006 and 2007 have performed worse.  During the year ended December 31, 2010, forecasted collection rates increased for Consumer Loans assigned in 2009 and 2010, decreased for 2007 Consumer Loan assignments, and were generally consistent with expectations at the start of the period for the other assignment years.

Forecasting collection rates precisely at Loan inception is difficult.  With this in mind, we establish advance rates that are intended to allow us to achieve acceptable levels of profitability, even if collection rates are less than we currently forecast.

The following table presents forecasted Consumer Loan collection rates, advance rates, the spread (the forecasted collection rate less the advance rate), and the percentage of the forecasted collections that had been realized as of December 31, 2010.  All amounts, unless otherwise noted, are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).  The table includes both Dealer Loans and Purchased Loans.

   
 As of December 31, 2010
 Consumer Loan Assignment Year
 
 Forecasted Collection %
 
 Advance %(1)
 
 Spread %
 
 % of Forecast Realized (2)
2001
 
67.5%
 
46.0%
 
21.5%
 
99.5%
2002
 
70.5%
 
42.2%
 
28.3%
 
99.3%
2003
 
73.7%
 
43.4%
 
30.3%
 
99.2%
2004
 
73.0%
 
44.0%
 
29.0%
 
98.9%
2005
 
73.7%
 
46.9%
 
26.8%
 
98.6%
2006
 
70.2%
 
46.6%
 
23.6%
 
97.1%
2007
 
67.9%
 
46.5%
 
21.4%
 
91.4%
2008
 
69.9%
 
44.6%
 
25.3%
 
77.6%
2009
 
78.5%
 
43.9%
 
34.6%
 
57.0%
2010
 
75.8%
 
44.7%
 
31.1%
 
18.6%

(1)  
Represents advances paid to Dealer-Partners on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealer-Partners to purchase Consumer Loans assigned under our Purchase Program as a percentage of the contractual amounts of the Consumer Loans.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
(2)  
Presented as a percentage of total forecasted collections.



The risk of a material change in our forecasted collection rate declines as the Consumer Loans age.  For 2007 and prior Consumer Loan assignments, the risk of a material forecast variance is modest, as we have currently realized in excess of 90% of the expected collections.  Conversely, the forecasted collection rates for more recent Consumer Loan assignments are less certain as a significant portion of our forecast has not been realized.

The spread between the forecasted collection rate and the advance rate declined during the 2004 through 2007 period as we increased advance rates during this period in response to a more difficult competitive environment.  During 2008 and 2009, the spread increased as the competitive environment improved, and we reduced advance rates.  In addition, during 2009, the spread was positively impacted by better than expected Consumer Loan performance.  We increased advance rates during the last four months of 2009, the first quarter of 2010, and the fourth quarter of 2010.  The decline in the spread for 2010 reflects these increases.

The following table presents forecasted Consumer Loan collection rates, advance rates, and the spread (the forecasted collection rate less the advance rate) as of December 31, 2010 for Dealer Loans and Purchased Loans separately.  All amounts are presented as a percentage of the initial balance of the Consumer Loan (principal + interest).

 
 Consumer Loan Assignment Year
 
 Forecasted Collection %
 
 Advance % (1)
 
 Spread %
Dealer Loans
2007
 
67.9%
 
45.8%
 
22.1%
 
2008
 
70.5%
 
43.3%
 
27.2%
 
2009
 
78.5%
 
43.5%
 
35.0%
 
2010
 
75.7%
 
44.4%
 
31.3%
               
Purchased Loans
2007
 
68.0%
 
49.1%
 
18.9%
 
2008
 
69.0%
 
46.7%
 
22.3%
 
2009
 
78.4%
 
45.5%
 
32.9%
 
2010
 
76.1%
 
47.1%
 
29.0%


(1)  
Represents advances paid to Dealer-Partners on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealer-Partners to purchase Consumer Loans assigned under our Purchase Program as a percentage of the contractual amounts of the Consumer Loans.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.
 
The advance rates presented for each Consumer Loan assignment year change over time due to the impact of transfers between Dealer and Purchased Loans.  Under our Portfolio Program, certain events may result in Dealer-Partners forfeiting their rights to Dealer Holdback.  We transfer the Dealer-Partner’s Consumer Loans from the Dealer Loan portfolio to the Purchased Loan portfolio in the period this forfeiture occurs.

Although the advance rate on Purchased Loans is higher as compared to the advance rate on Dealer Loans, Purchased Loans do not require us to pay Dealer Holdback.


Consumer Loan Volume

The following table summarizes changes in Consumer Loan assignment volume in each of the last 12 quarters as compared to the same period in the previous year:

   
 Year over Year Percent Change
 Three Months Ended
 
 Unit Volume
 
 Dollar Volume (1)
March 31, 2008
 
16.0%
 
23.0%
June 30, 2008
 
26.1%
 
40.1%
September 30, 2008
 
26.9%
 
21.5%
December 31, 2008
 
-13.4%
 
-27.5%
March 31, 2009
 
-13.0%
 
-28.9%
June 30, 2009
 
-16.2%
 
-33.5%
September 30, 2009
 
-5.7%
 
-13.0%
December 31, 2009
 
7.6%
 
5.9%
March 31, 2010
 
11.2%
 
21.6%
June 30, 2010
 
22.7%
 
42.2%
September 30, 2010
 
26.9%
 
51.5%
December 31, 2010
 
37.7%
 
66.9%

(1)  
Represents advances paid to Dealer-Partners on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealer-Partners to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

Consumer Loan assignment volumes depend on a number of factors including (1) the overall demand for our product, (2) the amount of capital available to fund new Loans and (3) our assessment of the volume that our infrastructure can support.  Our pricing strategy is intended to maximize the amount of economic profit we generate, within the confines of capital and infrastructure constraints.  Our success in renewing our debt facilities and securing additional financing during 2009 and 2010 positioned us to grow year over year unit volumes.  During the last four months of 2009, the first quarter of 2010, and the fourth quarter of 2010, we increased advance rates, which had a positive impact on unit volumes.  While the advance increases also reduced the return on capital we expect to earn on new assignments, we believe it is very likely the advance increases had a positive impact on economic profit.  Unit volume for the one month ended January 31, 2011 increased by 35.8% as compared to the same period in 2010.


The following tables summarize the changes in Consumer Loan unit volume and active Dealer-Partners:

   
For the Years Ended December 31,
 
   
2010
   
2009
   
% Change
 
Consumer Loan unit volume
   
136,813
     
111,029
     
23.2
%
Active Dealer-Partners (1)
   
3,206
     
3,168
     
1.2
%
Average volume per active Dealer-Partner
   
42.7
     
35.0
     
22.0
%
                         
Consumer Loan unit volume from Dealer-Partners active both periods
   
118,586
     
97,919
     
21.1
%
Dealer-Partners active both periods
   
2,218
     
2,218
     
-
 
Average volume per Dealer-Partners active both periods
   
53.5
     
44.1
     
21.1
%
                         
Consumer Loan unit volume from new Dealer-Partners
   
17,023
     
18,789
     
-9.4
%
New active Dealer-Partners (2)
   
926
     
1,055
     
-12.2
%
Average volume per new active Dealer-Partners
   
18.4
     
17.8
     
3.4
%
                         
Attrition (3)
   
-11.8
%
   
-16.7
%
       


   
For the Years Ended December 31,
 
   
2009
   
2008
   
% Change
 
Consumer Loan unit volume
   
111,029
     
121,282
     
-8.5
%
Active Dealer-Partners (1)
   
3,168
     
3,264
     
-2.9
%
Average volume per active Dealer-Partner
   
35.0
     
37.2
     
-5.9
%
                         
Consumer Loan unit volume from Dealer-Partners active both periods
   
91,647
     
101,063
     
-9.3
%
Dealer-Partners active both periods
   
2,075
     
2,075
     
-
 
Average volume per Dealer-Partners active both periods
   
44.2
     
48.7
     
-9.3
%
                         
Consumer Loan unit volume from new Dealer-Partners
   
18,789
     
21,659
     
-13.3
%
New active Dealer-Partners (2)
   
1,055
     
1,202
     
-12.2
%
Average volume per new active Dealer-Partners
   
17.8
     
18.0
     
-1.1
%
                         
Attrition (3)
   
-16.7
%
   
-10.9
%
       

 
(1)
Active Dealer-Partners are Dealer-Partners who have received funding for at least one Loan during the period.
 
(2)
New active Dealer-Partners are Dealer-Partners who enrolled in our program and have received funding for their first Loan from us during the periods presented.
 
(3)
Attrition is measured according to the following formula: decrease in Consumer Loan unit volume from Dealer-Partners who have received funding for at least one Loan during the comparable period of the prior year but did not receive funding for any Loans during the current period divided by prior year comparable period Consumer Loan unit volume.


Consumer Loans are assigned to us as either Dealer Loans through our Portfolio Program or Purchased Loans through our Purchase Program.  The following table summarizes the portion of our Consumer Loan volume that was assigned to us as Dealer Loans:

 
For the Years Ended December 31,
 
 2010
 
 2009
 
 2008
New Dealer Loan unit volume as a percentage of total unit volume
90.9%
 
86.6%
 
70.2%
New Dealer Loan dollar volume as a percentage of total dollar volume (1)
88.7%
 
83.3%
 
64.4%

(1)  
Represents advances paid to Dealer-Partners on Consumer Loans assigned under our Portfolio Program and one-time payments made to Dealer-Partners to purchase Consumer Loans assigned under our Purchase Program.  Payments of Dealer Holdback and accelerated Dealer Holdback are not included.

New Dealer Loan unit and dollar volume as a percentage of total unit and dollar volume increased during 2010 and 2009 due to pricing and program enrollment changes we implemented in order to increase the profitability of the Purchase Program.

As of December 31, 2010 and 2009, the net Dealer Loans receivable balance was 79.5% and 72.5%, respectively, of the total net Loans receivable balance.


Results of Operations

The following is a discussion of our results of operations and income statement data on a consolidated basis:

(Dollars in thousands, except per share data)
       
% Change
 
   
For the Years Ended December 31,
   
2010 to
   
2009 to
 
   
2010
   
2009
   
2008
   
2009
   
2008
 
Revenue:
                             
Finance charges
 
$
388,050
   
$
329,437
   
$
286,823
     
17.8
%
   
14.9
%
Premiums earned
   
32,659
     
33,605
     
3,967
     
-2.8
%
   
747.1
%
Other income
   
21,426
     
17,622
     
21,396
     
21.6
%
   
-17.6
%
Total revenue
   
442,135
     
380,664
     
312,186
     
16.1
%
   
21.9
%
Costs and expenses:
                                       
Salaries and wages
   
61,327
     
66,893
     
68,993
     
-8.3
%
   
-3.0
%
General and administrative
   
26,432
     
30,391
     
27,536
     
-13.0
%
   
10.4
%
Sales and marketing
   
19,661
     
14,808
     
16,776
     
32.8
%
   
-11.7
%
Provision for credit losses
   
10,037
     
(12,164
)
   
46,029
     
182.5
%
   
-126.4
%
Interest
   
47,752
     
32,399
     
43,189
     
47.4
%
   
-25.0
%
Provision for claims
   
23,429
     
19,299
     
2,651
     
21.4
%
   
628.0
%
Total costs and expenses
   
188,638
     
151,626
     
205,174
     
24.4
%
   
-26.1
%
Income from continuing operations before provision for income taxes
   
253,497
     
229,038
     
107,012
     
10.7
%
   
114.0
%
Provision for income taxes
   
83,390
     
82,992
     
39,944
     
0.5
%
   
107.8
%
Income from continuing operations
   
170,107
     
146,046
     
67,068
     
16.5
%
   
117.8
%
Discontinued operations
                                       
(Loss) gain from discontinued United Kingdom operations
   
(30
)
   
137
     
307
     
-121.9
%
   
-55.4
%
(Credit) provision for income taxes
   
-
     
(72
)
   
198
     
-100.0
%
   
-136.4
%
(Loss) gain from discontinued operations
   
(30
)
   
209
     
109
     
-114.4
%
   
91.7
%
Net income
 
$
170,077
   
$
146,255
   
$
67,177
     
16.3
%
   
117.7
%
                                         
Net income per share:
                                       
Basic
 
$
5.79
   
$
4.78
   
$
2.22
                 
Diluted
 
$
5.67
   
$
4.62
   
$
2.16
                 
Income from continuing operations per share:
                                       
Basic
 
$
5.79
   
$
4.77
   
$
2.22
                 
Diluted
 
$
5.67
   
$
4.61
   
$
2.16
                 
(Loss) gain from discontinued operations per share:
                                       
Basic
 
$
-
   
$
0.01
   
$
-
                 
Diluted
 
$
-
   
$
0.01
   
$
-
                 
Weighted average shares outstanding:
                                       
Basic
   
29,393
     
30,590
     
30,250
                 
Diluted
   
29,985
     
31,669
     
31,105
                 



Continuing Operations

The following table highlights changes in income from continuing operations for the year ended December 31, 2010, as compared to 2009:

(In thousands)
 
Change
 
 Income from continuing operations for year ended December 31, 2009
 
$
146,046
 
 Increase in finance charges
   
58,613
 
 Decrease in premiums earned
   
(946
)
 Increase in other income
   
3,804
 
 Decrease in operating expenses (1)
   
4,672
 
 Increase in provision for credit losses
   
(22,201
)
 Increase in interest
   
(15,353
)
 Increase in provision for claims
   
(4,130
)
 Increase in provision for income taxes
   
(398
)
 Income from continuing operations for year ended December 31, 2010
 
$
170,107
 

(1) Operating expenses consist of salaries and wages, general and administrative, and sales and marketing expenses.

Finance Charges.  For the year ended December 31, 2010, finance charges increased $58.6 million, or 17.8%, as compared to 2009.  The increase was the result of an increase in the average yield on our Loan portfolio and an increase in the average net Loans receivable balance, as follows:

(Dollars in thousands)
 
For the Years Ended December 31,
 
   
2010
   
2009
   
Change
 
Average yield on our Loan portfolio
   
34.4
%
   
31.5
%
   
2.9
%
Average net Loans receivable balance
 
$
1,128,012
   
$
1,046,378
   
$
81,634
 


The following table summarizes the impact each component had on the increase in finance charges for the year ended December 31, 2010:

(In thousands)
 
For the Year Ended
 
Impact on finance charges:
 
December 31, 2010
 
Due to an increase in the average yield
 
$
32,912
 
Due to an increase in the average net Loans receivable balance
   
25,701
 
Total increase in finance charges
 
$
58,613
 

The increase in the average yield on our Loan portfolio for the year ended December 31, 2010 was due to improvements in forecasted collection rates on Loans assigned in 2009 and 2010 as well as higher yields on Consumer Loans assigned during the first quarter of 2010.  The increase in the average net Loans receivable balance was primarily due to growth in new Loan volume throughout 2010.

Premiums Earned.  For the year ended December 31, 2010, premiums earned decreased $0.9 million, or 2.8%, as compared to 2009.  The decrease was primarily due to a decline in the size of our reinsurance portfolio, which resulted from the termination of our arrangement with one of our third party insurers during the fourth quarter of 2009.  Prior to the fourth quarter of 2009, VSC Re reinsured vehicle service contracts that were underwritten by two of our three third party insurers.  VSC Re currently reinsures vehicle service contracts that are underwritten by one of our two third party insurers.



Other Income.  For the year ended December 31, 2010, other income increased $3.8 million, or 21.6%, as compared to 2009.  The increase in other income was primarily a result of $3.4 million of income recognized during the second quarter of 2010 related to an arrangement with one of our third party vehicle service contract providers.  This arrangement was discontinued in 2008 and no additional income is expected beyond the amount recognized to date.  While we continue to generate income from vehicle service contracts, such amounts are captured through VSC Re and recorded over the life of the contracts as premiums earned less provision for claims.

Salaries and Wages.  For the year ended December 31, 2010, salaries and wages decreased $5.6 million, or 8.3%, as compared to the same period in 2009.  The decrease was primarily the result of:

·  
Reduced expenses related to stock compensation due to the timing of expense related to long-term incentive compensation;
·  
Reduced expenses related to information technology primarily due to an approximately 25% reduction in information technology headcount, partially offset by the expensing of internal information technology salaries during the third quarter of 2010 that were previously capitalized as software developed for internal use; and
·  
Reduced expenses related to collections primarily due to efficiencies realized through the implementation of strategic initiatives and fewer delinquent accounts which reduce the amount of collection effort.

These decreases were partially offset by increased expenses related to medical claims and an increase in our 401(k) matching contributions.

General and Administrative.  For the year ended December 31, 2010, general and administrative expense decreased $4.0 million, or 13.0%, as compared to 2009.  The decrease primarily resulted from (1) decreased legal costs, (2) decreased consulting fees primarily related to the Internal Revenue Service (“IRS”) examination which is now complete, (3) decreased sales tax expense, and (4) decreased depreciation expense primarily related to a reduction in capital expenditures, partially offset by (5) increased consulting fees primarily related to the development of software.

Sales and Marketing.  For the year ended December 31, 2010, sales and marketing expense increased $4.9 million, or 32.8%, as compared to the same period in 2009.  The increase was due primarily to the expansion of our field sales force and increased sales commissions resulting from an increase in the commission per Consumer Loan assignment and an increase in the number of Consumer Loan assignments.

Provision for Credit Losses.  For the year ended December 31, 2010, the provision for credit losses increased $22.2 million, or 182.5%, as compared to 2009.  Under accounting principles generally accepted in the United States of America (“GAAP”), when forecasted future cash flows decline relative to the cash flows expected at the time of assignment, a provision for credit losses is recorded immediately as a current period expense and a corresponding allowance for credit losses is established.  For purposes of calculating the required allowance, Dealer Loans are grouped by Dealer-Partner and Purchased Loans are grouped by month of purchase.  As a result, regardless of the overall performance of the portfolio of Consumer Loans, a provision can be required if any individual Loan pool performs worse than expected.  Conversely, a previously recorded provision can be reversed if any previously impaired individual Loan pool experiences an improvement in performance.

During the year ended December 31, 2010, overall Consumer Loan performance exceeded our expectations at the start of the period.  However, impaired Loan pools within our portfolio experienced net declines in forecasted cash flows, resulting in provision for credit losses of $10.0 million for the year ended December 31, 2010.  During the year ended December 31, 2009, overall Consumer Loan performance also exceeded our expectations at the start of the period.  Consistent with the overall performance of the portfolio, impaired Loan pools experienced net improvements in forecasted cash flows, resulting in a reversal of provision for credit losses of $12.2 million for the year ended December 31, 2009.


Interest.  For the year ended December 31, 2010, interest expense increased $15.4 million, or 47.4%, as compared to 2009.  The following table shows interest expense, the average outstanding debt balance, and the pre-tax average cost of debt for the year ended December 31, 2010:

(Dollars in thousands)
 
For the Years Ended December 31,
 
   
2010
   
2009
 
Interest expense
 
$
47,752
   
$
32,399
 
Average outstanding debt balance
 
$
581,074
   
$
575,482
 
Pre-tax average cost of debt
   
8.2